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Annual Report 2007
Simpler, stronger, better

Table of contents

  • Page 1
    Simpler, stronger, better Annual Report 2007

  • Page 2
    ... Imaging & Sound Association (EISA). The 47PFL9732D FlatTV with Ambilight was named European Full-HD LCD TV 2007-2008, while the HTS8100 SoundBar DVD Home Theater with Ambisound technology was named European Home Theater Compact System 2007-2008. Simplicity Event 2007 Philips' Simplicity Events use...

  • Page 3
    ... financial statements of prior years are available on the Company's website. As of January 2007, the following key portfolio changes have been applied to the Philips Group structure: Other Activities was renamed Innovation & Emerging Businesses; Unallocated was renamed Group Management & Services...

  • Page 4
    ...equity Information by sectors and main countries Significant accounting policies Notes to the group financial statements 62 64 70 76 82 88 95 The Philips sectors Our structure Medical Systems Domestic Appliances and Personal Care Consumer Electronics Lighting Innovation & Emerging Businesses Group...

  • Page 5
    ....5 9.97 6.25 11.60 20.36 Dividend per common share in euros 0.8 0.70 0.6 0.44 0.60 0.4 0.36 0.40 0.2 0 2003 2004 2005 2006 2007 0 2004 1) 2005 2006 2007 20081) 8 Philips Annual Sustainability Report Report 2007 2007 Subject to approval by the 2008 Annual General Meeting of Shareholders

  • Page 6
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements 5% comparable sales growth 20 17.9 1.7 15 3.1 6.6 10 â,¬1.90 7.7% EBITA per common share EBITA as a % of sales Medical Systems 18.1 2.0 3.1 6.8 DAP CE 18.0 1.5 3.2 6.8 Lighting 18.9 1.2 3.6 7.0 I&...

  • Page 7
    ... Respironics will boost our leadership position in Lighting and Home Healthcare respectively. At the same time, we also tightened the focus of our portfolio with, among others, the sale of our mobile phone operation, as well as the projected divestment of our set-top box activity and our ownership...

  • Page 8
    ... Our leadership 116 Report of the Supervisory Board 126 Financial Statements "We delivered once again on our Group targets, thanks to good execution, a strong innovation pipeline and a balanced portfolio that proved its robustness in a weakening economic environment. " Philips Annual Report 2007...

  • Page 9
    ... EBITA margin. At Medical Systems we were impacted by the slowdown of the US imaging market. The shortfall in the US could not be compensated entirely by a good operational performance of the nonimaging businesses and in the rest of the world, which 12 Philips Annual Report 2007 resulted in slight...

  • Page 10
    ... management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements "Our sectors share a common brand that stands for innovation delivered with 'sense and simplicity'." this combination of accretive acquisitions and share buy-backs is the best way to create shareholder...

  • Page 11
    ... The Philips Group 62 The Philips sectors Healthcare Our new Healthcare sector brings together Medical Systems and our growing Home Healthcare Solutions business - formerly Consumer Healthcare Solutions. We now deliver innovative solutions - based on the combination of human insights and clinical...

  • Page 12
    ...Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements We completed the acquisition of Partners in Lighting International, the leading European manufacturer of home luminaires, an area where solid-state lighting (SSL) will bring major benefits in terms of...

  • Page 13
    ...businesses through acquisitions, innovation and brand injections, as well as returning capital to shareholders through tax-efficient share buy-backs and dividends. In 2007 we took another major step forward with the announcement of our Vision 2010 strategic blueprint. Vision 2010 places the customer...

  • Page 14
    ... management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements As we strive to enhance the quality of people's lives, our 7 strategic drivers are helping us become a simpler, stronger and better company. Vision 2010 - ambition to significantly increase shareholder...

  • Page 15
    ..., products and services The 2007 wave of our brand campaign showcased a range of simplicity solutions that empower consumers, particularly families, to manage their health and wellbeing. These advertisements underscore the deep consumer knowledge and insights that set Philips apart in the healthcare...

  • Page 16
    Philips Sustainability Report 2007 22

  • Page 17
    ...-use personal response service that lets you summon help any time of the day or night - even if you can't speak. All you have to do is press your personal help button, worn on a wristband or pendant, and a trained response center associate will ensure you get help fast. Philips Annual Report 2007 23

  • Page 18
    ... acceptable imaging environment for claustrophobic or anxious patients. 24 Philips Annual Report 2007 Anytime, anywhere Philips iSite PACS is an enterprise-wide medical image and information management system. From an easy-to-use interface to having all images archived online and available at the...

  • Page 19
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Addressing daily challenges With its image quality, ease of use, automated quantification and workflow solutions, the Philips iU22 intelligent ultrasound system gives clinicians tools that increase...

  • Page 20
    26 Philips Sustainability Report 2007

  • Page 21
    ... (e.g. color, tones of white, intensity), addressing different shopping moods and supporting retail communication strategies. AmbiScene comprises a broad portfolio of luminaires and controls, including solid-state lighting, allowing dynamic lighting and special effects. Philips Annual Report 2007 27

  • Page 22
    ... light. Living streets Philips CosmoPolis delivers a very high-quality white light and uses 50% less energy than the mercury-vapor street-lighting systems still in use all over the world, saving more than 100 kg of CO2 per year per lamp. 28 Philips Annual Report 2007 Simply irresistible Philips...

  • Page 23
    ... the world's first sports-lighting system specifically designed to increase dramatically the theatrical and emotional value of sports for TV audiences, spectators and players alike. Home comforts Philips Mini Softone is the first range of energy-saving lamps with the size, shape, warm light quality...

  • Page 24
    30 Philips Sustainability Report 2007

  • Page 25
    ... minerals and vitamins to our daily diet." Juicing cleanses, flushes, alkalizes and revitalizes the body. With its extra-large feeding tube and powerful motor, the Philips Juicer can turn any fruit or vegetable - chopped or whole - into juice instantly. Philips Annual Report 2007 31

  • Page 26
    ... go Philips GoGear players can store thousands of MP3 music files, WMV videos and JPEG pictures, making it easy for consumers to enjoy their personal multimedia libraries while on the move. Total immersion Philips Ambilight FlatTVs project a soft glow of light onto the walls around the TV set which...

  • Page 27
    ...wireless music systems allow consumers to store their entire CD collections, and then stream that music throughout the home via WiFi. Rest easy Philips Avent DECT baby monitors are completely interferencefree, offering excellent sound quality and total peace of mind. Philips Annual Report 2007 33

  • Page 28
    ... information, statutory financial statements and management report, and reclassifications. The analysis of the 2006 financial results compared to 2005, and the discussion of the critical accounting policies, have not been included in this Annual Report. These sections are included in Philips' Form...

  • Page 29
    ... present the MedQuist business as a discontinued operation In 2007 the Philips Group achieved comparable sales growth of 5%. However, because of a 3% negative currency effect and the impact of acquisitions and divestments, nominal sales remained stable compared to 2006. Philips Annual Report 2007...

  • Page 30
    ... Appliances, and was visible throughout all market clusters, with especially strong growth rates in emerging markets. The increase in Lighting sales was mainly attributable to solid growth in energy-efficient lighting within the Lamps and Luminaires businesses. 36 Philips Annual Report 2007

  • Page 31
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Medical Systems' growth (3.6%) was led by Ultrasound & Monitoring and Customer Services. Overall sales growth was tempered by a decline at Imaging Systems, primarily due to a softening of the ...

  • Page 32
    ...Group Management & Services' result improved by EUR 146 million due to reduced corporate and regional costs as well as lower pension and brand campaign costs. Medical Systems' EBITA of EUR 875 million represented a slight increase compared to 2006, both in absolute value and as a percentage of sales...

  • Page 33
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements EBITA at Group Management & Services improved by EUR 402 million compared to 2006, when the EUR 256 million product liability charge was recognized. The improvement in EBITA was also driven by a ...

  • Page 34
    ... 2008, the effective tax rate excluding non-taxable items is expected to be around 30%, broadly in line with 2007. For further information, please refer to note 6 of the notes to the Group financial statements. Results of equity-accounted investees The results relating to equity-accounted investees...

  • Page 35
    ..., the Netherlands and the UK. Minority interests The share of minority interests in the income of Group companies reduced income by EUR 5 million, compared to EUR 4 million in 2006. Discontinued operations In this Annual Report, Philips reports the results of Mobile Display Systems, Semiconductors...

  • Page 36
    ... per common share, in 2006. key emerging markets 26% mature markets 40% other emerging markets 34% Key emerging markets showed strong comparable growth, primarily driven by Lighting, Medical Systems and DAP, partly offset by a sales decline at CE, mainly due to Connected Displays in Latin America...

  • Page 37
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements In North America, sales on a comparable basis remained stable compared to 2006. A strong performance by DAP, driven by the successful introduction of new shaving and oral healthcare products, and ...

  • Page 38
    ... short-term commercial prospects and projects creating new options for medium and long-term value-creation. Philips' R&D activities are shared across Corporate Technologies and the operating divisions. The Chief Technology Officer (CTO) of Philips manages the enabling technologies across the Company...

  • Page 39
    ... 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements In 2007, Philips' invested EUR 1.6 billion, or 6.1% of sales, in research and development, slightly less than in 2006. Higher investments in Medical Systems, Lighting, DAP and Innovation & Emerging Businesses were...

  • Page 40
    ... in 2007 occurred due to the sale of business interests in Innovation & Emerging Businesses (most notably Optical Storage), in CE (primarily the Mobile Phones business) and in Group Management & Services (principally the Financial Shared Services operations). 46 Philips Annual Report 2007

  • Page 41
    ...of Philips' workforce is located in mature markets, and some 40% in emerging markets. In 2007, key emerging markets saw a nominal employee decline compared to 2006, largely due to the sale of the Financial Shared Services operations in India and the divestment of Mobile Phones within CE. The sale of...

  • Page 42
    ... reduction of our financial holding in TSMC, which yielded EUR 3,895 million. Restated to present the MedQuist business as a discontinued operation. Please refer to the consolidated statements of cash flows which are part of the chapter Group financial statements. 48 Philips Annual Report 2007

  • Page 43
    ...1) Cash flow from discontinued operations In 2007, EUR 115 million cash was used by discontinued operations, the majority of which related to tax payments in connection with the 2006 sale of Philips' majority stake in the Semiconductors business and operating cash flows of MedQuist in 2007. In 2006...

  • Page 44
    8 Financial highlights 10 Message from the President 16 The Philips Group Liquidity and capital resources 62 The Philips sectors hedging of obligations under the long-term employee incentive and employee stock purchase programs, and a total of EUR 2,367 million of share repurchases for ...

  • Page 45
    ... long-term incentive and employee stock purchase programs, and by EUR 523 million due to the dividend payment to shareholders in 2006. There was a net decrease of EUR 263 million related to pension liabilities, including the effect of adoption of SFAS No. 158. The number of outstanding common shares...

  • Page 46
    ... business as a discontinued operation The fair value of the Company's listed available-for-sale securities, based on quoted market prices at December 31, 2007, amounted to EUR 1,776 million, of which EUR 1,699 million related to TSMC. Philips' shareholdings in its main listed equity-accounted...

  • Page 47
    ..., to provide sufficient assets to meet future benefits payable to plan participants. These contributions are determined by various factors, including funded status, legal and tax considerations and local customs. The Company currently expects cash outflows in relation to employee benefits which are...

  • Page 48
    ... is the world's largest observation wheel at nearly 135 metres high. A new LED-based lighting system brings dynamic, visually appealing color to the structure while at the same time alleviating the maintenance costs and requirements of the previous fluorescent system. 54 Philips Annual Report 2007

  • Page 49
    ... Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Medical Systems VMI-Sistemas Medicos In professional healthcare, Philips acquired Brazil's leading general X-ray manufacturer, VMI-Sistemas Medicos. XIMIS Philips also acquired US-based healthcare IT...

  • Page 50
    ... double as a percentage of the total population over the next 25 years in Western Europe and the US, are factors underpinning Philips' drive to become a global player in the home healthcare market. Health Watch In 2007, Philips acquired personal emergency response company Health Watch, a US-based...

  • Page 51
    ... 19, 2007, Philips announced it has reached an agreement in principle to sell its Set-Top Boxes and Connectivity Solutions activities, currently part of its Home Networks business unit within Consumer Electronics, to Pace Micro Technology. After completion, Philips will become shareholder of some...

  • Page 52
    ...to the 2008 Annual General Meeting of Shareholders. In accordance with Dutch 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...

  • Page 53
    ...annual financial information prepared in accordance with International Financial Reporting Standards (IFRS). The US Securities and Exchange Commission (SEC) has issued a final ruling that eliminates the requirement that 'Foreign Private Issuers' such as Philips file US GAAPbased financial statements...

  • Page 54
    ... articles of association of Royal Philips Electronics, and with the approval of the Supervisory Board, the remainder of the net income for the financial year 2007 has been retained by way of reserve. The balance sheet presented in this report, as part of the consolidated financial statements for the...

  • Page 55
    ... the emerging markets, a strong innovation pipeline, a balanced portfolio and synergies from our acquisitions will allow us to continue on our improvement path through 2008 and to meet our targets as set out in Vision 2010. Amsterdam, February 18, 2008 Board of Management Philips Annual Report 2007...

  • Page 56
    ... management supports 2007 value creation, connecting Philips with key stakeholders, especially our employees, customers, government and society. In 2007, Philips' activities were organized on a divisional basis: Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics, Lighting...

  • Page 57
    ... activities. 2008 Healthcare Lighting Consumer Lifestyle Innovation & Emerging Businesses Group Management & Services Sales and EBITA margin operating sectors 2007 1) 2) bubble size represents nominal EBITA value 20 Healthcare Medical Systems Lighting Consumer Lifestyle Consumer Electronics...

  • Page 58
    ... President 16 The Philips Group 62 The Philips sectors Medical Systems Medical Systems Philips' innovative healthcare solutions are designed to make a difference in how clinicians diagnose, treat and monitor disease, and allow them to focus more on their patients. 64 Philips Annual Report 2007

  • Page 59
    ... on November 2, 2007, of Philips' intention to dispose of its majority stake in MedQuist, this business is presented as a discontinued operation in this Annual Report and not consolidated with the results of Medical Systems. Products and services are sold to healthcare providers around the...

  • Page 60
    ...Philips Group 62 The Philips sectors Medical Systems With regard to sourcing, please refer to the business description of Philips Supply Management that begins on page 96 of this Annual Report. Support care providers throughout the entire care cycle by developing disease-based product and service...

  • Page 61
    ... customer-loyalty programs to better understand how our products and services are viewed in the marketplace. Cultivate leadership talent In order to support our business excellence we continued to build the strategic leadership capabilities of our people. It is our goal to be one of the best places...

  • Page 62
    ... Biomedical. Excluding these acquisition-related disbursements, cash flows before financing activities were EUR 186 million below 2006, mainly due to higher working capital requirements and increased capital expenditures. 2007 financial performance Sales in 2007 totaled EUR 6,470 million, a stable...

  • Page 63
    ...Our leadership 116 Report of the Supervisory Board 126 Financial Statements For 2008, strong sales growth is anticipated in Patient Monitoring, Cardiac Care, Home Healthcare Solutions and Customer Services, tempered by limited growth in Imaging Systems. Regulatory requirements Medical Systems is...

  • Page 64
    8 Financial highlights 10 Message from the President 16 The Philips Group 62 The Philips sectors Domestic Appliances and Personal Care Domestic Appliances and Personal Care More than 15 million consumers around the world already use a Philips Sonicare toothbrush. With the launch of the FlexCare...

  • Page 65
    ...management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements 28% comparable sales growth in emerging markets for DAP "The domestic appliances and personal care retail landscape continues to evolve, with major emerging markets such as Brazil, Russia, China and India...

  • Page 66
    8 Financial highlights 10 Message from the President 16 The Philips Group 62 The Philips sectors Domestic Appliances and Personal Care Building on the successful healthy living positioning, the Domestic Appliances business completed its juicer range in 2007, with the Alu model becoming a global ...

  • Page 67
    ...via the YourEncore online experts network). Posting the right technology questions in expert communities outside Philips increases the chances of getting better answers faster. In June 2007, the Health & Wellness business organized the Avent Innovation Wave, at which all DAP employees worldwide were...

  • Page 68
    ...Value Proposition House into a technical product specification. In addition, dedicated research was done on returned products to better understand consumer requirements, thereby augmenting the consumer insight knowledge base from which new products will be developed. 2007 financial performance 2007...

  • Page 69
    ...flows before financing activities, broadly in line with last year, excluding the EUR 689 million net cash payment for the acquisition of Avent. Higher earnings were largely offset by increased working capital needs. For 2008 and beyond, Consumer Lifestyle has put in place a number of specific value...

  • Page 70
    ...Innovation Awards for Consumer Electronics We have taken the notion of immersive technology a dramatic step further with our new Aurea FlatTV. Aurea radiates light, color and sound from its unique 'active' frame, creating a truly seductive ambient viewing experience. 76 Philips Annual Report 2007

  • Page 71
    ... leadership 116 Report of the Supervisory Board 126 Financial Statements "With value creation - and margin management - our main objective, our 2007 activities centered on leveraging the strength of our asset-light operating model, as well as driving differentiation in the marketplace." Placing...

  • Page 72
    ... business description of Philips Supply Management that begins on page 96 of this Annual Report. Progress against targets With value creation - and margin management - our main objective, our 2007 activities centered on leveraging the strength of our asset-light operating model, as well as driving...

  • Page 73
    ... Connectivity Solutions activities, part of the Home Networks business unit, to Pace Micro Technology of the UK. Upon completion of the deal, Philips will become a shareholder of some 23% in the combined business. 'Relevant innovation' continues to be a key driver of our business. Major 2007 product...

  • Page 74
    .... CE has also worked directly with retailers in addressing the environmental impact of electrical consumer appliances. Major retail partners have sought Philips' expertise in this area, leveraging the company's EcoVision product creation strategy. Furthermore, the launch, in 2007, of a 'green logo...

  • Page 75
    ...Cash flows before financing activities improved from EUR 248 million in 2006 to EUR 357 million in 2007, primarily driven by tight working capital management at Connected Displays. In December 2007, Philips agreed to sell its Set-Top Boxes and Connectivity Solutions activities to UK-based technology...

  • Page 76
    ... Group 62 The Philips sectors Lighting Lighting 48% of Lighting sales attributable to Green Products The LED-based Living Colors lets people create whatever atmosphere they like in their room by choosing from 16 million LED colors with a simple remote control. 82 Philips Annual Report 2007

  • Page 77
    ... creation. Our customers are mainly in the professional market. The Lamps business operates its sales and marketing activities through the professional, OEM and consumer channels, the latter also being used by our consumer luminaires business. Professional Luminaires is organized in a Trade business...

  • Page 78
    ... the President 16 The Philips Group 62 The Philips sectors Lighting Progress against targets In the Annual Report 2006, Lighting identified a number of key objectives for 2007. The progress made in addressing these is discussed below. Emerging markets We continue to build on our strong position...

  • Page 79
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements organizations and utilities). In 2007, sales of our Green products rose further and now account for 48% of Lighting sales. Solid-state lighting In 2007 we strengthened our position as the leader in...

  • Page 80
    .... In line with this, we have organized our country sales groups around the customer channels - wholesale, projects, OEM and mass retail - and leveraged our back-office activities across our businesses as shared service departments. We made significant progress in 2007 in our drive for supply chain...

  • Page 81
    ... leadership 116 Report of the Supervisory Board 126 Financial Statements growth across all businesses except for Special Lighting Applications in Asia, related to the rapid contraction of the rear-projection TV market. Sales growth was notably strong in China (18%) and India (16%). EBITA in 2007...

  • Page 82
    8 Financial highlights 10 Message from the President 16 The Philips Group 62 The Philips sectors Innovation & Emerging Businesses Innovation & Emerging Businesses Philips Design's Skin Probes, winner of the Red Dot 'best of the best' 2007. 88 Philips Annual Report 2007

  • Page 83
    ... the Supervisory Board 126 Financial Statements Introduction In 2007 this sector comprised Corporate Technologies, Corporate Investments, Design and Consumer Healthcare Solutions. The latter - renamed Home Healthcare Solutions - became part of the Healthcare sector as of January 1, 2008. Key data...

  • Page 84
    ..., emerging businesses are incubated until they are ready for transfer to a sector or spin-out, in part or in whole, to a third-party investor. In total, Corporate Technologies employs around 4,200 professionals at some 20 locations worldwide. Research Philips Research supports Philips' operating...

  • Page 85
    ... portfolio in line with its new strategic focus on Healthcare, Lighting and Consumer Lifestyle. Incubating new businesses The Philips Incubators are separate business units within Corporate Technologies. In 2007 there was public presence for 3D Solutions, amBX, Handshake Solutions, Lumalive, Content...

  • Page 86
    ...making the Philips brand promise of "sense and simplicity" tangible. Philips believes it is only by appreciating the values and motivations of end-users that it can create sustainable propositions that are simple to experience and enrich the quality of people's lives. 92 Philips Annual Report 2007

  • Page 87
    ...Consumer Healthcare Solutions - renamed Home Healthcare Solutions - has been incorporated in the new Philips Healthcare sector. In February 2007, Philips again headed the ranking of the World Intellectual Property Organization with 2,495 patent applications published in 2006. Philips Annual Report...

  • Page 88
    ... devices and web-based clinical review software, as well as a suite of services such as data review, program development and deployment support designed to help customers build or improve their telehealth programs. In 2008, Philips Remote Patient Management will continue to focus on the home care...

  • Page 89
    ...corporate center including Philips' global brand management and sustainability programs, as well as country and regional overhead costs, and costs of pension and other postretirement benefit plans. Additionally, the Global Service Units such as Philips General Purchasing and Real Estate are reported...

  • Page 90
    ... purchasing function into strategic supply management. 2007 marks the fourth year of a comprehensive change program. Supply Management plays a key role in value creation, and 74% of Philips' spend is now centralized or center-led. From 2003 until 2007 the total number of active suppliers...

  • Page 91
    ... In 2007 a central-led Supply Market Intelligence and Services group (SMIS) was created with presence in key supply markets (China, India, Korea, Japan and Taiwan). The SMIS teams work closely together with businesses to identify supply market opportunities. Philips Annual Report 2007 97

  • Page 92
    ...management is a well-established part of Philips' corporate governance structure. The quality of Philips' systems of business controls and the findings of internal and external audits are reported to and discussed in the Audit Committee of the Supervisory Board. Internal auditors monitor the quality...

  • Page 93
    ... with the management of each business. Every country organization and each main production site has a compliance officer. Confirmation of compliance with the GBP is an integral part of the annual Statement on Business Controls that has to be issued by the management Philips Annual Report 2007 99

  • Page 94
    ... running of each business (examples are product creation and supply chain management). Within the area of Financial risks, Philips identifies risks related to Treasury, Pensions, Fiscal and Legal. Compliance risks cover unanticipated failures to enact appropriate policies and procedures. Strategic...

  • Page 95
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Strategic risks Market risks Operational risks Corporate Governance Financial risks Compliance risks Philips Business Control Framework Philips General Business Principles Concurrently, it is...

  • Page 96
    .... Philips' commitment to "sense and simplicity" is not restricted to new products; it also covers the wide range of support facilities Philips offers to its customers. An example of this is the provision of category management solutions to key retailers for supporting consumers in their decision...

  • Page 97
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements supports close cooperation with suppliers to enhance, amongst others, time to market and quality. In addition, Philips is continuing its initiatives to reduce assets through outsourcing. These ...

  • Page 98
    ... and product security issues may arise with respect to remote access or monitoring of patient data or loss of data on customers' systems. Compliance risks Exposure to non-compliance with general business principles in emerging markets. Corporate governance systems, including information structures...

  • Page 99
    ... management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Strategic risks Market risks Operational risks Corporate Governance Financial risks - Treasury - Pensions - Fiscal - Legal Compliance risks Philips Business Control Framework Philips General Business...

  • Page 100
    ... of net investment hedges. Philips does not currently hedge the foreign exchange exposure arising from equity interests in non functional currency equity-accounted investees and available-forsale financial assets. Interest rate risk Philips has significant outstanding debt, which creates an inherent...

  • Page 101
    ... equity price exposure of publicly listed investments in its main available-for-sale securities, trading securities and listed equity-accounted investees amounted to approximately EUR 4,464 million at year end 2007 (2006: EUR 9,524 million including shares that were sold during 2007). Philips...

  • Page 102
    ...Swap Dealers Association master agreement or otherwise prior to trading, and whenever possible, to have a strong credit rating from Standard & Poor's and Moody's Investor Services. Philips also regularly monitors the development of credit default swap prices of its financial counterparties. Wherever...

  • Page 103
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Fair value measurement The company calculates the fair value of derivatives and sensitivities based on observed liquid market quotations. Where the instrument is not directly observable, the ...

  • Page 104
    ... may be expected from the additional portfolio changes in the Netherlands and the US to fully implement their new investment strategies. 1) 2) 3) adjusted economic modeling including plan and investment policy changes in 2007 including target investment policy 2008 110 Philips Annual Report 2007

  • Page 105
    ... review the implementation of GSAs, often auditing on benefit test for a particular country or the use of tax credits attached to GSAs and royalty payments, and may reject Legal Please refer to note 27 for additional disclosure relating to specific legal proceedings. Philips Annual Report 2007...

  • Page 106
    ... of the Board of Management since April 2006, member of the Group Management Committee since August 2003 and CEO of the Consumer Electronics division since 2004 Corporate responsibilities: Consumer Electronics, International Retail Board Management, LG.Philips LCD 112 Philips Annual Report 2007

  • Page 107
    ..., Strategy, Technology Management, Consumer Healthcare Solutions Steve Rusckowski 1957, American Executive Vice-President Member of the Board of Management since April 2007 and CEO of Philips Medical Systems since November 2006 Corporate responsibilities: Medical Systems, Healthcare New Business...

  • Page 108
    ... Officer since May 2006 Corporate responsibilities: Legal, Company Secretary, Company Manual, General Business Principles Maarten de Vries 1962, Dutch Member of the GMC and Chief Information Officer since September 2007 Corporate responsibilities: Information Technology 114 Philips Annual Report...

  • Page 109
    ... a Director of Thomson Corporation 1942, Dutch** E. Kist 1944, Dutch* Member of the Supervisory Board since 2004; first term expires in 2008 Former Chairman of the Executive Board of ING Group and currently member of the Supervisory Boards of the Dutch Central Bank, DSM, Moody's Investor Service...

  • Page 110
    ... tasks and setting the direction of the Philips Group's business. It is empowered to recommend to the General Meeting of Shareholders persons to be appointed as members of the Supervisory Board or the Board of Management. Major management decisions, including the Philips Group strategy, require the...

  • Page 111
    98 Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements The Supervisory Board also discussed the capital structure of the Philips Group and approved the share repurchase program announced in 2007 as well as the sale of part of the Company's shares in ...

  • Page 112
    ... the Medical Systems division, was appointed as member of Board of Management. 118 Philips Annual Report 2007 On September 10, 2007, the Company announced its plan to simplify its business structure by creating three core sectors: Philips Healthcare, Philips Ligthing and Philips Consumer Lifestyle...

  • Page 113
    ... on the achievement of specific and challenging targets. The Annual Incentive criteria are for 80% the financial indicators of the Company and for 20% team targets in the areas of responsibility monitored by the individual members of the Board of Management. The related targets for the individual...

  • Page 114
    ...board membership is December 31, 2007 Pay-out related to period April 1 - December 31, 2006 No pay-out related to period of board membership Reference date for board membership is December 31, 2007 Pay-out related to period of board membership April 1 - December 31, 2007 120 Philips Annual Report...

  • Page 115
    ... Risk management 112 Our leadership 116 Report of the Supervisory Board 126 Financial Statements Long-Term Incentive Plan For many years Philips has operated a Long-Term Incentive Plan (LTIP), which has served to align the interests of the participating employees with the shareholders' interests...

  • Page 116
    ... 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 exercise of stock options) during 'windows' of ten business days following the publication of annual and quarterly...

  • Page 117
    ... leadership 116 Report of the Supervisory Board 126 Financial Statements 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...

  • Page 118
    ... Chief Financial Officer, the Internal Auditor and the External Auditor. In accordance with its charter, which is part of the Rules of Procedure of the Supervisory Board, the Audit Committee in 2007 reviewed the Company's annual and interim financial statements, including non-financial information...

  • Page 119
    ... Philips Electronics N.V. for 2007, as presented by the Board of Management, have been audited by KPMG Accountants N.V., independent auditors. Their reports have been included in the chapter IFRS financial statements on page 239 and the chapter Company financial statements on page 245 of this Annual...

  • Page 120
    ... Balance sheets Statements of income Statement of equity Notes to the Company financial statements Auditor's report 246 Reconciliation of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information 126 Philips Annual Report 2007

  • Page 121
    ... liabilities 28 Stockholders' equity 29 Cash from derivatives 30 Proceeds other non-current financial assets 31 Assets in lieu of cash from sale businesses 32 Related-party transactions 33 Share-based compensation 34 Information on remuneration 35 Fair value of financial assets and liabilities 36...

  • Page 122
    ...reporting as of December 31, 2007, as included in this chapter Group financial statements, has been audited by KPMG Accountants N.V., an independent registered public accounting firm, as stated in their report which follows hereafter. Board of Management February 18, 2008 128 Philips Annual Report...

  • Page 123
    ...reporting of the Acquired Companies. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Koninklijke Philips Electronics N.V. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations...

  • Page 124
    ... 8 Discontinued operations (11) 4,482 (433) Net income The years 2005 and 2006 are restated to present the MedQuist business as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 2,868 5,383 4,168 130 Philips Annual Report 2007

  • Page 125
    246 Reconciliation of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Earnings per share 2005 2006 2007 Weighted average number of common shares outstanding (after deduction of treasury stock) during the year (in thousands) ...

  • Page 126
    ...2,154 17 Goodwill 3,723 4,135 Total non-current assets 23,535 18,512 38,497 The year 2006 is restated to present the MedQuist business as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 36,343 132 Philips Annual Report 2007

  • Page 127
    ... of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Liabilities and stockholders' equity 2006 2007 Current liabilities 32 Accounts and notes payable: - Trade creditors - Accounts payable to related parties 3,172 271 3,443...

  • Page 128
    ...197) 5,293 6,023 137 5,886 (153) 38 âˆ' (115) 2,966 (112) 6,023 8,877 108 8,769 The years 2005 and 2006 are restated to present the MedQuist business as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 134 Philips Annual Report 2007

  • Page 129
    ... 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Supplemental disclosures to the consolidated statements of cash flows 2005 2006 2007 Net cash paid during the year for Interest Income taxes 178 302 211 632 49 493 Net gain on sale of assets Cash...

  • Page 130
    ...in stockholders' equity of the Philips Group in millions of euros unless otherwise stated accumulated other comprehensive income (loss) outstanding number of shares in thousands unrealized gain (loss) on availablefor-sale securities change in fair value of cash flow hedges common stock capital in...

  • Page 131
    ... development expenses income from operations as a % of sales results relating to equityaccounted investees cash flow before financing activities sales income from operations 2007 Medical Systems DAP Consumer Electronics Lighting Innovation & Emerging Businesses Group Management & Services Inter...

  • Page 132
    ... information 240 Company financial statements Sectors net operating capital total liabilities excl. debt long-lived assets capital expenditures depreciation of property, plant and equipment total assets 2007 Medical Systems DAP Consumer Electronics Lighting Innovation & Emerging Businesses Group...

  • Page 133
    ...US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Main countries net operating capital long-lived assets capital expenditures depreciation of property, plant and equipment sales total assets 2007 Netherlands United States Germany...

  • Page 134
    ... the operating segments. Reportable segments comprise the Company's business sectors: Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics, Lighting and Innovation & Emerging Businesses, and Group Management & Services. The sectors are organized based on the type of products...

  • Page 135
    ... of sales or a fixed amount per product sold, is recognized on an accrual basis. Government grants, other than those relating to purchases of assets, are recognized as income as qualified expenditures are made. Benefit accounting The Company accounts for the cost of pension plans and postretirement...

  • Page 136
    128 Group financial statements Significant accounting policies 188 IFRS information 240 Company financial statements 2005 Changes in tax rates are reflected in the period in which such change is enacted. Uncertain tax position Income tax benefit from an uncertain tax position is recognized only ...

  • Page 137
    ... available-for-sale or for trading purposes. Trading securities are acquired and held principally for the purpose of selling them in the short term and are presented as 'Other current assets'. Trading securities are recorded at fair value with changes in the fair value going to financial income...

  • Page 138
    ...flows. The review for impairment is carried out at the level where discrete cash flows occur that are largely independent of other cash flows. Assets held for sale are reported at the lower of the carrying amount or fair value, less cost to sell. Goodwill and indefinite lived intangibles The Company...

  • Page 139
    ... attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for Philips). The Company has evaluated this Standard and at present does not plan to avail itself of this option. Philips Annual Report 2007 145

  • Page 140
    ... its divestment on September 29, 2006. The 2007 results mainly relate to the settlement of pensions and income taxes. 2005 2006 2007 Sales Costs and expenses Impairment charge Income (loss) before taxes Income tax Result of equity- accounted investees Minority interests Results from discontinued...

  • Page 141
    ... liabilities acquired on February 5, 2007: February 5, 2007 1 2 Total purchase price (net of cash) 561 Allocated to: Property, plant and equipment Other non-current financial assets Working capital Deferred tax liabilities 97 1 114 (67) (50) (34) (14) 217 297 561 Sales Costs and expenses Income...

  • Page 142
    ... net income from continuing operations of the acquired companies for 2006. As Philips finances its acquisitions with own funds, the pro forma adjustments exclude the cost of external funding incurred in 2006. The pro forma adjustments also reflect the impact of the purchase-price accounting effects...

  • Page 143
    ..., a provider of personal emergency response services. Philips acquired a 100% interest in Lifeline by paying USD 47.75 per share in cash. As of the date of acquisition, Lifeline has been consolidated, as part of Consumer Healthcare Solutions, within the Innovation & Emerging Businesses sector. The...

  • Page 144
    ... Unaudited Total purchase price (net of cash) 993 January-December 2006 pro forma pro forma adjustments1) Philips Group Allocated to: Property, plant and equipment Working capital Deferred tax liabilities Provisions Long-term debt Short-term debt In-process R&D Other intangible assets Goodwill 45...

  • Page 145
    ...2005 Total purchase price (net of cash) 788 Allocated to: Property, plant and equipment Goodwill Working capital Deferred tax assets Intangible assets In-process R&D Long-term debt 62 554 (78) 17 262 6 (35) 788 goodwill The amount of purchased in-process research and development assets acquired...

  • Page 146
    ...Pension costs Other social security and similar charges: âˆ' Required by law âˆ' Voluntary 4,403 216 4,613 155 4,607 111 Connected Displays (Monitors) In September 2005, Philips sold certain activities within its monitors and flat TV business to TPV Technologies (TPV), a Hong Kong listed company...

  • Page 147
    ... statement: 2005 2006 2007 Results on disposal of businesses Results on disposal of fixed assets Remaining business income (expense) 175 152 90 417 103 107 24 234 1 92 53 146 Cost of sales Selling expenses G&A expenses R&D expenses 74 32 4 16 126 63 8 6 5 82 24 4 4 5 37 Philips Annual Report...

  • Page 148
    ...lamp-based LCD backlighting activities. • Within Group Management & Services: Philips Electronics North America moving from New York to Andover. The movements in the provisions and liabilities for restructuring costs in 2007 are presented by sector as follows: Dec. 31, 2006 additions other Dec. 31...

  • Page 149
    ... and lower interest costs on derivatives related to hedging of Philips foreign currency denominated cash balances and intercompany funding positions. In 2007, income from non-current financial assets totaled EUR 2,697 million, and included EUR 2,528 million from the sale of shares in TSMC, EUR...

  • Page 150
    ... Company financial statements The effective tax rate is lower than the weighted average statutory income tax rate in 2007, mainly due to non-taxable income related to dividend and the sale of shares of TSMC, and releases in the valuation allowance due to re-assessment by management, which is partly...

  • Page 151
    ... tax benefits are related to tax years that remain subject to examination by the relevant tax authorities. The following table summarizes these open years by major jurisdictions: Major jurisdiction Open tax years Results on sales of shares 2005 2006 2007 FEI Company NAVTEQ TSMC LG.Philips...

  • Page 152
    ... fair value of Philips' shareholdings in the publicly listed company LG.Philips LCD, based on quoted market prices at December 31, 2007 was EUR 2,556 million. The investments in equity-accounted investees are mainly included in the sector Group Management & Services. 158 Philips Annual Report 2007

  • Page 153
    ...current deferred tax asset of EUR 399 million (2006: EUR 489 million), derivative instruments assets of EUR 275 million (2006: EUR 298 million), prepaid expenses of EUR 346 million (2006: EUR 279 million) and held-for-trading securities of EUR nil (2006: EUR 192 million). Philips Annual Report 2007...

  • Page 154
    ... securities. On March 12, 2007, Philips and TSMC jointly announced that the companies agreed to a multi-phased plan to facilitate an orderly exit by Philips from its shareholding in TSMC. The plan comprised a private sale transaction to long-term financial investors in Taiwan, the offering of shares...

  • Page 155
    ...250 Corporate governance 258 The Philips Group in the last ten years 260 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...

  • Page 156
    ... 188 IFRS information 240 Company financial statements 16 Intangible assets excluding goodwill The changes during 2007 were as follows: other intangible assets The additions acquired through business combinations in 2007 consist of the acquired intangible assets of Partners in Lighting of EUR...

  • Page 157
    ... Corporate governance 258 The Philips Group in the last ten years 260 Investor information 18 Accrued liabilities Accrued liabilities are summarized as follows: 2006 2007 Product warranty The provision for product warranty reflects the estimated costs of replacement and free-of-charge services...

  • Page 158
    ... as local customs. 2005 Summary of pre-tax costs for pension plans and retiree healthcare plans Defined - benefit plans Defined - contribution plans incl. multi-employer plans Medical retiree cost (see note 21) 157 56 (101) 112 75 80 39 194 27 84 36 147 2006 2007 The Company funds certain defined...

  • Page 159
    ... information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information 2006 Netherlands other total Netherlands other 2007 total Amounts recognized in the consolidated balance sheet Prepaid pension costs under other non-current assets Accrued pension costs...

  • Page 160
    ... statements 188 IFRS information 240 Company financial statements The components of net periodic pension costs and other amounts recognized in Other comprehensive income were as follows: Netherlands 2007 Service cost Interest cost on the projected benefit obligation Expected return on plan assets...

  • Page 161
    ... of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Cash flows The Company expects considerable cash outflows in relation to employee benefits which are estimated to amount to EUR 314 million in 2008 (2007: EUR 433 million...

  • Page 162
    ... to the group financial statements 188 IFRS information 240 Company financial statements SFAS No. 158 In September 2006, SFAS No. 158 was issued. This statement requires an employer to recognize the funded status of a benefit plan measured as the difference between plan assets at fair value and...

  • Page 163
    ... of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Netherlands 2007 Accumulated postretirement benefit obligation Projected benefit obligation at beginning of year Service cost Interest cost Actuarial gains Settlements...

  • Page 164
    128 Group financial statements Notes to the group financial statements 188 IFRS information 240 Company financial statements The components of the net periodic cost of postretirement benefits other than pensions are: total 2007 Service cost Interest cost on accumulated postretirement benefit ...

  • Page 165
    246 Reconciliation of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed ...

  • Page 166
    ... to the group financial statements 188 IFRS information 240 Company financial statements 24 Long-term debt average remaining term (in years) range of interest rates average rate of interest amount outstanding 2007 due in 1 year due after 1 year due after 5 years amount outstanding 2006...

  • Page 167
    ... benefit of unconsolidated companies and third parties as at December 31, 2007. Expiration per period businessrelated credit-related guarantees guarantees Accrued pension costs Sale-and-leaseback deferred income Income tax payable Asset retirement obligations Liabilities for employee stock options...

  • Page 168
    128 Group financial statements Notes to the group financial statements 188 IFRS information 240 Company financial statements At December 31, 2007, there were 5,084 cases pending, representing 9,906 claimants (compared to 4,370 cases pending, representing 9,020 claimants, at December 31, 2006 and ...

  • Page 169
    ... in a United States court against LG.Philips LCD and certain current and former employees and directors of LG.Philips LCD for damages based on alleged violations of U.S. federal securities laws. No Philips group company is named as a defendant in these actions. Philips Annual Report 2007 175

  • Page 170
    ... is part of cash flow from operating activities. During 2007 there was a cash outflow in relation to these derivatives of EUR 2 million (in 2006 EUR 1 million cash outflow). 30 Proceeds from other non-current financial assets In 2007, the sale of TSMC shares, Nuance Communications shares and...

  • Page 171
    ...-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information In June 2006, the merger of Philips Mobile Display Systems with Toppoly Optoelectronics Corporation of Taiwan to form a new company named Toppoly Display Corporation was completed...

  • Page 172
    ... 240 Company financial statements The following tables summarize information about Philips stock options as of December 31, 2007 and changes during the year: Fixed option plans, EUR-denominated weighted average exercise price 28.68 30.97 22.20 35.05 âˆ' weighted average remaining contractual term...

  • Page 173
    ... Corporate governance 258 The Philips Group in the last ten years 260 Investor information Variable option plans, USD-denominated weighted average exercise price weighted average remaining contractual term (in years) aggregate intrinsic value (in millions) shares Outstanding at January 1, 2007...

  • Page 174
    ...; 2005: 48,006 restricted share rights). At year-end 2007, the members of the Board of Management held 1,771,097 stock options (year-end 2006: 1,355,765; 2005: 923,551) at a weighted average exercise price of EUR 28.05 (year-end 2006: EUR 27.70; 2005: EUR 28.33). 180 Philips Annual Report 2007

  • Page 175
    ... of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Remuneration of individual members of the Board of Management in euros salary annual incentive1) special payment2) total cash other compensation3) 2007 G.J. Kleisterlee...

  • Page 176
    ... members of the Board of Management under the restricted share rights plans and the stock option plans of the Company: amounts in euros (unless stated otherwise) as of Jan. 1, 2007 granted during 2007 number of options exercised during 2007 as of Dec. 31, 2007 share (closing) price on exercise date...

  • Page 177
    ... Including costs related to employer contribution in defined contribution pension plan As Mr Kleisterlee and Mr Van Deursen were born before January 1, 1950, they continued to be a member of the final pay plan with a pensionable age of 60. No further accrual takes place. Philips Annual Report 2007...

  • Page 178
    ...,625 Main listed investments in equity-accounted investees Derivative instruments assets Trading securities Liabilities Accounts payable Debt Derivative instruments liabilities (3,443) (3,869) (101) (3,443) (4,009) (101) (3,372) (3,557) (144) (3,372) (3,640) (144) 184 Philips Annual Report 2007

  • Page 179
    ...19, 2007, Philips announced it has reached an agreement in principle to sell its Set-Top Boxes (STB) and Connectivity Solutions (CS) activities, currently part of its Home Networks business unit within the Consumer Electronics division, to Pace Micro Technology (Pace), a UK-based technology provider...

  • Page 180
    ...unaudited January 22, 2008 Total purchase price Less: cash acquired Net purchase price 1,888 (75) 1,813 Allocated to: Property, plant and equipment Working capital Current financial assets Deferred tax liabilities Other long-term liabilities and assets (net) Long-term debt Restructuring provision...

  • Page 181
    246 Reconciliation of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Philips Annual Report 2007 187

  • Page 182
    ... dividend to shareholders on page 60 of this Annual Report, and note 70 for subsequent events. The IFRS management commentary is based on the IFRS consolidated financial statements and should be read in conjunction with these statements. The term EBIT has the same meaning as Income from operations...

  • Page 183
    ..., mainly attributable to Lighting (mostly due to acquisitions) and Medical Systems. Research and development costs (EUR 1,617 million, or 6.0% of sales) were broadly in line with 2006 (EUR 1,603 million, or 6.0% of sales). Net operating capital (NOC) Cash flows before financing activities Employees...

  • Page 184
    ..., the Netherlands and the UK. Minority interests The share of minority interests in the income of Group companies reduced income by EUR 7 million, compared to EUR 4 million in 2006. Discontinued operations In this Annual Report, Philips reports the results of Mobile Display Systems, Semiconductors...

  • Page 185
    ... financing activities, broadly in line with 2006, excluding the EUR 689 million net cash payment for the acquisition of Avent. Higher earnings were largely offset by increased working capital requirements. Restated to present the MedQuist business as a discontinued operation Sales in 2007 totaled...

  • Page 186
    ... and Luminaires. Sales of Solid192 Philips Annual Report 2007 EBITA at Group Management & Services improved by EUR 288 million compared to 2006, when the EUR 182 million asbestos-related product liability charge was recognized. The improvement in EBITA was also driven by a reduction in Corporate...

  • Page 187
    ...Corporate governance 258 The Philips Group in the last ten years 260 Investor information Reconciliation from IFRS to US GAAP The Company provides for transparency purposes for the users of the financial statements, the following reconciliations from IFRS to US GAAP. Reconciliation of net income...

  • Page 188
    ... interests Net income for the period The years 2005 and 2006 are restated to present the MedQuist business as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 3,374 (2) 3,372 4,664 4 4,668 4,655 3 4,658 194 Philips Annual Report 2007

  • Page 189
    246 Reconciliation of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Earnings per share 2005 2006 2007 Weighted average number of common shares outstanding (after deduction of treasury stock) during the year (in thousands) ...

  • Page 190
    ... 2,835 3,800 53 Goodwill 3,406 Total non-current assets 22,277 16,732 36,730 The year 2006 is restated to present the MedQuist business as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. 34,145 196 Philips Annual Report 2007

  • Page 191
    ... of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Liabilities and equity 2006 2007 Current liabilities 67 Accounts and notes payable: - Trade creditors - Accounts payable to related parties 3,172 271 3,443 3,083...

  • Page 192
    ... non-current financial assets Purchase of businesses, net of cash acquired Proceeds from sale of interests in businesses Net cash provided by (used for) investing activities Cash flows from financing activities Increase (decrease) in short-term debt Principal payments on long-term debt Proceeds...

  • Page 193
    ... stock transactions Shares acquired Exercise of stock options (1,836) 75 (2,899) 144 (1,609) 161 The years 2005 and 2006 are restated to present the MedQuist business as a discontinued operation. The accompanying notes are an integral part of these consolidated financial statements. For a number...

  • Page 194
    ... equity 240 Company financial statements IFRS Consolidated statements of changes in equity of the Philips Group in millions of euros unless otherwise stated outstanding number of shares in thousands Balance as of Dec. 31, 2004 Conversion of priority shares into common stock Net income Net current...

  • Page 195
    ... GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 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 flow hedges total...

  • Page 196
    ... development expenses income from operations as a % of sales results relating to equityaccounted investees cash flow before financing activities sales income from operations 2007 Medical Systems DAP Consumer Electronics Lighting Innovation & Emerging Businesses Group Management & Services Inter...

  • Page 197
    ...260 Investor information Sectors net operating capital total liabilities excl. debt long-lived assets capital expenditures depreciation of property, plant and equipment total assets 2007 Medical Systems DAP Consumer Electronics Lighting Innovation & Emerging Businesses Group Management & Services...

  • Page 198
    ... information - Information by sectors and main countries - Significant IFRS accounting policies 240 Company financial statements Main countries net operating capital long-lived assets capital expenditures depreciation of property, plant and equipment sales total assets 2007 Netherlands United...

  • Page 199
    ... liabilities from employee benefit plans, other provisions and tax and other contingencies. The fair values of acquired identifiable intangibles are based on an assessment of future cash flows. Impairment analyses of goodwill and indefinite-lived intangible assets are performed annually and whenever...

  • Page 200
    ...the Company's business sectors: Medical Systems, Domestic Appliances and Personal Care, Consumer Electronics, Lighting, Innovation & Emerging Businesses, and Group Management & Services. The sectors are organized based on the type of products produced and nature of markets served. Segment accounting...

  • Page 201
    ... equity. The dilution gains or losses are presented on a separate line in the income statement if they relate to consolidated subsidiaries. Dilution gains and losses related to equity-accounted investees are presented under Results relating to equity-accounted investees. Philips Annual Report 2007...

  • Page 202
    ... available-for-sale or for trading purposes. Trading securities are acquired and held principally for the purpose of selling them in the short term and are presented as 'Other current assets'. Trading securities are recorded at fair value with changes in the fair value recorded in financial income...

  • Page 203
    ... on the Company's consolidated financial statements as the Company capitalizes borrowing costs relating to assets that take a substantial period of time to get ready for use or sale. IFRS 2 (Amendments) Share-based Payment The amendments to IFRS 2, which become effective for annual reports beginning...

  • Page 204
    ...that arise in accounting for public-to-private service concession arrangements. IFRIC 12 is not expected to have any material impact on the Company's consolidated financial statements. IFRIC Interpretation 13 'Customer Loyalty Programmes' IFRIC 13 becomes effective for annual reports beginning on or...

  • Page 205
    ... results of the MedQuist business included in the consolidated statements of income as discontinued operations for 2005, 2006 and 2007: 2005 2006 2007 Sales Costs and expenses Impairment charge Income (loss) before taxes Income taxes Result of equity-accounted investees Minority interests Results...

  • Page 206
    ... the release of cumulative translation differences Partners in Lighting (PLI) On February 5, 2007, Philips acquired PLI, a leading European manufacturer of home luminaires. Philips acquired 100% of the shares of PLI from CVC Capital Partners, a private equity investment company, at a net cash...

  • Page 207
    ... 1, 2006: Unaudited Philips Group pro forma pro forma adjustments1) Philips Group 39 Assets and liabilities Goodwill Other intangible assets Property, plant and equipment Working capital Deferred tax Cash âˆ' âˆ' 7 10 âˆ' 71 88 357 187 7 16 (52) 71 1) Sales Income from operations Net income...

  • Page 208
    ..., a leader in personal emergency response services. Philips acquired a 100% interest in Lifeline by paying USD 47.75 per share in cash. As of the date of acquisition, Lifeline is consolidated as part of Consumer Healthcare Solutions, within the Innovation & Emerging Business sector. The condensed...

  • Page 209
    ... intangible assets Property, plant and equipment Working capital Provisions Deferred tax liabilities Cash 132 34 35 67 âˆ' (6) 19 281 730 313 45 66 (6) (96) 24 1,076 Sales Income from operations Financed by Group equity Loans 137 144 281 1,017 59 1) The following table presents the year-to-date...

  • Page 210
    ... of net assets divested Stentor In August 2005, Philips acquired all shares of Stentor, a US-based company. The related cash outflow was EUR 194 million. Stentor was founded in 1998 to provide a solution for enterprise-wide medical image and information management. Since the date of acquisition...

  • Page 211
    ...461 4,607 434 593 (145) 5,289 636 91 5,801 634 89 5,764 Connected Displays (Monitors) In September 2005, Philips sold certain activities within its monitors and flat TV business to TPV Technologies, a Hong Kong listed company for a 15% ownership interest in TPV and a convertible bond of EUR 220...

  • Page 212
    ... of: 2005 2006 2007 Automotive Playback Modules Philips Sound Solutions CryptoTec Connected Displays (Monitors) Philips Pension Competence Center Other âˆ' âˆ' âˆ' 158 43 (3) 198 âˆ' 12 26 23 âˆ' 5 66 (30 30) 2007 The result on disposal of businesses in 2007 mainly related to the sale of...

  • Page 213
    ... related to dividend and the sale of shares of TSMC, releases due to re-assessment by management, which is partly offset by reductions of deferred tax assets due to tax rate changes, and by 'other' including re-assesment of uncertain tax positions and prior-year tax returns. Philips Annual Report...

  • Page 214
    128 Group financial statements 188 IFRS information Notes to the IFRS financial statements 240 Company financial statements Deferred tax assets and liabilities Net deferred tax assets relate to the following balance sheet captions and tax loss carryforwards (including tax credit carryforwards) of...

  • Page 215
    ... liabilities Income tax payable âˆ' under non-current liabilities 105 25 (519) (36) 52 14 (154) (1) 43 Investments in equity-accounted investees Results relating to investments in equity-accounted investees 2005 2006 2007 Company's participation in income and loss Results on sales of shares...

  • Page 216
    128 Group financial statements 188 IFRS information Notes to the IFRS financial statements 240 Company financial statements 2007 The company had a share in income, mainly related to LG.Philips LCD. Philips is represented on the board of directors and continued to exercise influence by ...

  • Page 217
    ... value of Philips' shareholdings in the publicly listed company LG.Philips LCD, based on quoted market prices at December 31, 2007, was EUR 2,556 million respectively. The investments in equity-accounted investees are mainly included in the sector Group Management & Services. Summarized information...

  • Page 218
    ...as follows: 2006 2007 A large part of the overdues of trade accounts receivable relates to public sector customers with slow payment approval processes but no or limited credit risk. Provisions have been made mainly for overdues above 180 days. Income taxes receivable (current portion) totaling EUR...

  • Page 219
    ...for-sale securities consist of investments in common stock of companies in various industries. Other non-current assets in 2007 are comprised of prepaid pension costs of EUR 331 million (2006: EUR 343 million) and prepaid expenses of EUR 53 million (2006: EUR 47 million). Philips Annual Report 2007...

  • Page 220
    ... Company financial statements 51 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, 2007: Cost Accumulated depreciation Book value...

  • Page 221
    246 Reconciliation of non-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information 52 Intangible assets excluding goodwill The changes during 2007 were as follows: other intangible product assets development The estimated amortization ...

  • Page 222
    ..., as necessary, to provide assets sufficient to meet the benefits payable to definedbenefit pension plan participants. These contributions are determined based upon various factors, including funded status, legal and tax considerations as well as local customs. 228 Philips Annual Report 2007

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    ...250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Summary of pre-tax costs for pension plans and retiree healthcare plans Classification of the net balance 2006 2007 2007 2005 2006 Prepaid pension costs under other non-current assets Accrued pension...

  • Page 224
    ...Actual return on plan assets 2,495 1,050 645 The unrecognized net assets are primarily related to the prepaid pension asset in the Netherlands. The pension expense of defined-benefit plans is recognized in the following line items: 2005 2006 2007 * 3.4% * 3.5% Cost of sales Selling expenses...

  • Page 225
    ... discontinued operations (23) The expense for other postretirement benefits is recognized in the following line items in the income statement: 2005 2006 2007 57 Other current liabilities Other current liabilities are summarized as follows: 2006 2007 Cost of sales Selling expenses General and...

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    128 Group financial statements 188 IFRS information Notes to the IFRS financial statements 240 Company financial statements 58 Short-term debt 2006 2007 Short-term bank borrowings Other short-term loans Current portion of long-term debt 622 34 215 871 464 32 1,854 2,350 During 2007, the ...

  • Page 227
    ...as follows: 2006 2007 Accrued pension costs Income tax payable Asset retirement obligations Liabilities for employee stock-options of subsidiaries Other tax liability Other liabilities 298 36 7 99 âˆ' 155 595 261 1 21 49 429 35 796 As of December 31, 2007, Philips had outstanding public bonds of...

  • Page 228
    ...end of 2007, the total fair value of guarantees was EUR 3 million (2006: 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 unconsolidated companies and third parties as...

  • Page 229
    ... 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information According to the Study, as of September 25, 2006, the estimated cost of disposing of pending and estimated future claims filed through 2016, excluding future defense and processing costs, totaled USD...

  • Page 230
    ... place in 2007: Shares acquired Average market price Amount paid Total shares in treasury Total cost 25,813,898 EUR 31.78 EUR 823 million 25,813,898 EUR 823 million Net income and dividend A dividend of EUR 0.70 per common share will be proposed to the 2008 Annual General Meeting of Shareholders...

  • Page 231
    ... of business, Philips purchases and sells goods and services to various related parties in which Philips typically holds a 50% or less equity interest and has significant influence. These transactions are generally conducted with terms comparable to transactions with third parties. 2005 2006 2007...

  • Page 232
    ...19, 2007, Philips announced it has reached an agreement in principle to sell its Set-Top Boxes (STB) and Connectivity Solutions (CS) activities, currently part of its Home Networks business unit within the Consumer Electronics division, to Pace Micro Technology (Pace), a UK-based technology provider...

  • Page 233
    ...and equipment Working capital Current financial assets Deferred tax liabilities Other long-term liabilities and assets (net) Cash 256 102 131 90 7 âˆ' (16) 75 645 1,092 762 193 145 7 (291) (16) 75 1,967 To the Supervisory Board and Shareholders of Koninklijke Philips Electronics N.V.: Report on the...

  • Page 234
    ... IFRS information 240 Company financial statements - 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 2006 2007 Assets Current assets: Cash...

  • Page 235
    ... 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 legal reserves common stock capital in excess of par value revaluation affiliated...

  • Page 236
    ... begins on page 205 of this Annual Report. Subsidiaries are accounted for using the net equity value in these Company financial statements. Presentation of Company financial statements The balance sheet presentation deviates from Dutch regulations and is more in line with common practice in the US...

  • Page 237
    ...258 The Philips Group in the last ten years 260 Investor information Notes to the Company financial statements all amounts in millions of euros unless otherwise stated A B C D A C Receivables 2006 2007 Other non-current financial assets investments other receivables total E F Trade accounts...

  • Page 238
    ...common share will be proposed to the 2008 Annual General Meeting of Shareholders. An amount of EUR 3,940 million is expected to be added to retained earnings. Legal reserves As of December 31, 2007, the item 'Legal reserve revaluation', relates to unrealized gains on available-for-sale securities of...

  • Page 239
    ... Corporate governance 258 The Philips Group in the last ten years 260 Investor information J Auditor's report Employees The number of persons employed by the Company at year-end 2007 was 13 (2006: 10) and included the members of the Board of Management and most members of the Group Management...

  • Page 240
    ... the capital efficiency of the Philips Group and its operating divisions. NOC is defined as: total assets excluding assets from discontinued operations less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other non-current financial assets, (d) investments in equity-accounted investees...

  • Page 241
    ... 2004 Medical Systems DAP Consumer Electronics Lighting Innovation & Emerging Businesses Group Management & Services Philips Group 7.8 5.9 4.7 4.0 (3.9) (20.1) 4.5 0.6 1.4 1.6 1.1 0.3 0.2 1.1 0.6 âˆ' (1.2) 0.4 (7.4) (40.2) (1.7) 9.0 7.3 5.1 5.5 (11.0) (60.1) 3.9 Philips Annual Report 2007 247

  • Page 242
    ... Cash flows before financing activities 1,147 1,694 2,841 2006 330 (2,802) (2,472) 2007 1,519 3,930 5,449 EBITA to Income from operations or EBIT Philips Group Medical Systems Consumer DAP Electronics Lighting I&EB GMS 2007 EBITA Amortization of intangibles (excl. software) Write off of acquired...

  • Page 243
    ... to total assets Philips Group Medical Systems DAP Consumer Electronics Lighting I&EB GMS 2007 Net operating capital (NOC) Eliminate liabilities comprised in NOC: - payables/liabilities - intercompany accounts - provisions1) Include assets not comprised in NOC: - investments in equity-accounted...

  • Page 244
    ... the New York Stock Exchange corporate governance standards is published on the 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...

  • Page 245
    ... information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Individual data on the members of the Board of Management are published in the chapter Our Leadership that begins on page 112 of this Annual Report. The acceptance by a member of the Board...

  • Page 246
    ... a Long-Term Incentive Plan ('LTIP' or the 'Plan') consisting of a mix of restricted shares rights 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...

  • Page 247
    ... Supervisory Board are published in the Annual Report, and updated on the Company's website. After their appointment, all members of the Supervisory Board shall follow an introductory program, which covers general financial and legal affairs, financial reporting by the Company, any specific aspects...

  • Page 248
    ... well as the Company's process for monitoring compliance with laws and regulations 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...

  • Page 249
    ...of the articles of association and Dutch law and in the manner as described in this corporate governance report. The Board of Management and Supervisory Board are also accountable, at the Annual General Meeting of Shareholders, for the policy on the additions to reserves and dividends (the level and...

  • Page 250
    ... Board and are published together with the final opinion of the external auditor. The Board of Management is responsible, under the supervision of the Supervisory Board, for the quality and completeness of such publicly disclosed financial reports. The annual financial statements are presented...

  • Page 251
    ...'s website. be paid by the Company to parties for 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, 2007, no person...

  • Page 252
    ... are not directly comparable. General data Sales Percentage increase over previous year Income (loss) from continuing operations Discontinued operations 1) 2) 3) 4) Cumulative effect of a change in accounting principle Net income (loss) Turnover rate of net operating capital Total employees at year...

  • Page 253
    ...US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Capital employed Cash and cash equivalents Receivables and other current assets Assets of discontinued operations Inventories Non-current financial assets/ equity-accounted investees...

  • Page 254
    ...' shares will be traded ex-dividend as of March 28, 2008. In compliance with the listing requirements of the New York Stock Exchange and the stock market of Euronext Amsterdam, the record date will be April 1, 2008. The dividend as proposed to the 2008 General Meeting of Shareholders will be payable...

  • Page 255
    ...-US GAAP information 250 Corporate governance 258 The Philips Group in the last ten years 260 Investor information Dividend policy Philips' present dividend policy is based on an annual pay-out ratio of 40 to 50% of continuing net income, which was revised in 2007 from an average annual pay-out...

  • Page 256
    ... statements 188 IFRS information 240 Company financial statements 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 in Amsterdam, 2007 share price...

  • Page 257
    ...0 Jan '03 Dec '07 Relative performance of the Philips share on the New York Stock Exchange (PHG) is measured against the Dow Jones index. Due to foreign exchange developments, the Philips share experienced a better price development on the NYSE than on the Euronext. Philips Annual Report 2007 263

  • Page 258
    ... trading line. On the Investor Relations website you can find the details of the current and previous share repurchase programs. For more information see the section Other information that begins on page 58 of this Annual Report. Financial calendar Annual General Meeting of Shareholders Record date...

  • Page 259
    ... major parts of this 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 provides existing shareholders...

  • Page 260

  • Page 261
    ... Philips as a market-driven company with an organizational structure that reflects the needs of its customer base. Healthcare Imaging Systems Clinical Care Systems Healthcare Informatics Home Healthcare Solutions Customer Services Lighting Lamps Professional Luminaires Consumer Luminaires Lighting...

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