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because
health and
well-being
matters
to people
Annual Report 2008
Financial, social and environmental performance

Table of contents

  • Page 1
    Annual Report 2008 Financial, social and environmental performance because health and well-being matters to people

  • Page 2
    ... but rather embedded in the very fabric of our business operations. Our Annual Report 2008 will also be the last to be based on both US GAAP (Generally Accepted Accounting Principles in the United States) and IFRS (International Financial Reporting Standards): as of 2009 we will apply IFRS only. We...

  • Page 3
    ... customers' needs We integrate technology and design into people-centric solutions based on fundamental end-user insights and the brand promise of "sense and simplicity". We care about global challenges We believe we can make a difference in enabling efficient energy use and in making healthcare...

  • Page 4
    ...Our group performance www.philips.com/annualreport2008 This Annual Report is available online - in dynamic interactive form - at the address above. Key financial data are available as Excel downloads. The Report can also be downloaded in full or per chapter in PDF. Analysis of our 2008 performance...

  • Page 5
    ... Liquidity and capital resources Sustainability Proposed distribution to shareholders Outlook 70 Our sector performance 72 78 84 90 93 Healthcare Consumer Lifestyle Lighting Innovation & Emerging Businesses Group Management & Services 266 Investor information 94 Risk management Please refer...

  • Page 6
    ...6.4 0 2004 2005 2006 2007 2008 Equity and EBITA per common share 2) in euros stockholders' equity per common share - basic EBITA per common share - diluted Sales per sector in emerging markets 5) in billions of euros Healthcare Consumer Lifestyle 7.8 0.5 1.9 4.4 Lighting 8.0 2.2 0.2 4.5 4.3 I&EB...

  • Page 7
    ... 11.2 30 12% 2007 2008 15 (0.7) (186) 2008 0 comparable sales growth for Healthcare in emerging markets EBIT and EBITA 2) in millions of euros EBITA EBIT EBITA as a % of sales Employee Engagement Index % favorable  0.70 per share proposed distribution to shareholders in 2009 70 2,500 2,000...

  • Page 8
    ...downturn in the latter part of 2008 affected the Group's top line, particularly at Consumer Lifestyle and in our OEM businesses in Lighting, partly offset by continued healthy growth at Healthcare, leading to a moderate overall sales decline of 2.7%. EBITA was down on 2007, largely due to a decline...

  • Page 9
    ... sector performance 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements " We care about people's needs. We... sustainable society." Gerard Kleisterlee, President +8% brand value We care about our people, our planet and our partners 55% of our businesses ...

  • Page 10
    ... the 2009 Annual General Meeting of Shareholders Dividend yield % as of December 31 of the previous year Return to shareholders We completed EUR 3.3 billion of the current EUR 5 billion share repurchase program announced in December 2007. However, in view of the risks and opportunities presented by...

  • Page 11
    ... in line with the latest 2x world GDP growth estimates. I am particularly pleased with the way our Healthcare and Lighting businesses weathered the economic downturn, with comparable sales growth of 12% and 8% respectively in the emerging markets for the year. Philips Annual Report 2008 11

  • Page 12
    ... that is becoming increasingly relevant for society around the world, and it will be a major driver of growth when the financial and economic turbulence has subsided. It is also the glue that bonds our businesses within Healthcare, Consumer Lifestyle and Lighting. 12 Philips Annual Report 2008

  • Page 13
    ... our shareholders for their continued support in these dif ficult times. We remain wholly committed to increasing the value of the company. Management Agenda 2009 Drive performance • Relentlessly manage cash • Proactively align cost structure with market conditions and increase productivity...

  • Page 14
    ..."sense and simplicity". This brand promise encapsulates our commitment to deliver solutions that are advanced, easy to use, and designed around the needs of all our users. Our organization Headquartered in Amsterdam, Netherlands • Healthcare • Consumer Lifestyle • Lighting 14 Philips Annual...

  • Page 15
    ... market leadership positions 6 We are committed to sustainability and focus on making the difference in ef ficient energy use 7 We drive operational excellence and quality to best-in-class levels, allowing us the above-mentioned strategic investments in our businesses Philips Annual Report 2008...

  • Page 16
    ... by working as One Philips 10% female executives Market leadership We are the global Number 1 in: Home healthcare Lamps Electric shavers Cardiac ultrasound Cardiovascular X-ray Professional luminaires Electric male grooming Patient monitoring systems Lighting electronics Automotive lighting...

  • Page 17
    ..., sleep apnea, respiration, domestic appliances, cardiac CT scans, LED lighting, automotive lighting, home healthcare, patient monitoring, personal care, and sound and vision. 55,000 patent rights 33,000 registered trademarks 49,000 2,600 domain names design rights Philips Annual Report 2008 17

  • Page 18
    ... people-focused approach brings meaningful innovation to simplify healthcare and to give people the best care possible. This includes new ways to empower patients to manage their own health for more independent living at home." Steve Rusckowski, CEO Philips Healthcare 18 Philips Annual Report 2008

  • Page 19
    ... position in emerging markets veillance Sur me nt Pre o nti ve Manage n en t Diagnosis Our solutions span the entire cycle of care, from the hospital to the home 8 trillion Global healthcare costs set to increase to this level with projected population rise Philips Annual Report 2008 19...

  • Page 20
    ... step in strengthening our Home Healthcare business, giving us a leading position in the fast-growing areas of sleep management, respiratory care and non-invasive ventilation. "I was depressed so I talked to my doctor". One woman's story Denise, a 55 year-old former bank employee from the United...

  • Page 21
    ...Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements >450 products and services offered in over 100 countries Designed for emerging markets Our series of new portable, compact patient monitors provides a reliable and affordable means to observe and care for...

  • Page 22
    ...illustrates Philips' evolution from a technology business to one that improves the quality of people's lives by focusing on their health and well-being. Starting from validated consumer insights, and guided by our brand promise of "sense and simplicity", we offer consumers lifestyle experiences that...

  • Page 23
    ... management 110 Our leadership 114 Supervisory Board report 122 Performance statements 18 awards at 2008 CES in Las Vegas >1,000,000 whole fruit juicers sold We address consumers' needs in terms of healthy living, personal care and home life >50 design awards in 2008 Philips Annual Report...

  • Page 24
    ... alarms on clocks, radios or mobile phones," says Christophe Melle, Consumer Marketing Director for Vita-Light. "These results were highly encouraging, and also gave us a lot of positive end-user experience to draw on in developing our second-generation model." 24 Philips Annual Report 2008

  • Page 25
    ... innovation In August 2008, Philips Research presented its new online research environment - SimplicityLabs. This virtual environment allows people worldwide to experiment with new software-based product concepts in the comfort of their own homes. An extension of Philips' consumer-focused research...

  • Page 26
    ... solutions - for streets, home, hospitality, shops, of fices and city beautification - create atmospheres that simply make life better, always in an energy-efficient way. 46 million energy-saving lamps distributed free by British Gas to 11 million UK households 26 Philips Annual Report 2008

  • Page 27
    ... energy-efficient and sustainable solutions and applications based on innovative new technologies, such as solid-state lighting. 40% energy saving achievable on today's installed base - with better-quality light '' It's a simple switch ...with benefits all round '' Philips Annual Report 2008...

  • Page 28
    ...its standard specification, at no extra cost to its customers. Sustainable energy solutions for Africa In 2008, Philips and the Dutch Government signed a public/private partnership agreement, which will see the development of a new generation of sustainable - solar-powered - lighting solutions for...

  • Page 29
    ...94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements 1 in 4 lamps worldwide is a Philips lamp Lighting the National - dramatic impact Philips and the National Theatre in London are some 20 months into a five-year lighting partnership program to replace...

  • Page 30
    ... emerging markets in 2008 #1 in DVD and MP3/4 players in Latin America We are stepping up resource investment in emerging markets to accelerate growth 20% estimated retail market share in India with the Intelligent Water Purifier 31% of sales from emerging markets 30 Philips Annual Report 2008

  • Page 31
    ...é, Member of the Board of Management Within the emerging markets there is a fast-growing middle class, but also the majority of the world population who live on less than $2 a day. For both groups, smart products and solutions tailored to their needs can really improve their lives. We have a long...

  • Page 32
    ...by the World Health Organization in 2007 claimed that in a number of countries - including several emerging economies - indoor air pollution is responsible for a total of 1.2 million deaths a year. Children, WHO noted, were impacted even more than adults in succumbing to acute respiratory conditions...

  • Page 33
    ...'s lives - on their health, environment, security and sense of well-being." Geert van Kuyck, Chief Marketing Of ficer All are technologically viable within a three- to five-year time frame and are designed to address the needs and aspirations of people and society. Philips Annual Report 2008 33

  • Page 34
    ... content of our products and designing them more effectively for collection and recycling. And we consider our suppliers as partners in our sustainability initiatives, taking care of the environment and of workers' lives. '' It's about all of us and the environment '' 34 Philips Annual Report 2008

  • Page 35
    ... and exciting work environment  1 billion  Our Green Products make it simple to make responsible choices cumulative investment in Green Innovations by 2012, double the 2007 level 25% increase in the energy efficiency of our operations by 2012, compared to 2007 Philips Annual Report 2008 35

  • Page 36
    ... an inclusive and high-energy working environment, where all employees are aligned and energized to contribute to our business success. An engaged workforce delivers a competitive advantage - our people are highly motivated to give their best every day. Responsible restructuring In 2008 the global...

  • Page 37
    ... on business ethics is dynamic. A thorough updating process Our mid-2008 update of the GBP Directives is based on many factors. It takes into account experience gained with the previous GBP Directives, trends in legislation and society, and developments in major codes of conduct like the Electronics...

  • Page 38
    ... including our customers and suppliers. With the launch of our latest EcoVision program in 2007, we have therefore committed to reduce CO2 emissions with a sharp focus on energy-efficient products, green innovation and energy efficient day-to-day operations. 38 Philips Annual Report 2008

  • Page 39
    ... 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Energy efficiency Packaging EcoVision4 Green Products We use the Philips Green logo to identify an increasing number of our Green Products, making it simple for our customers and end-users to make...

  • Page 40
    ... with the European Chemicals Agency (ECHA). Additionally, we have requested information on relevant chemicals from our component or finished products suppliers. We are committed to manage our collection and recycling initiatives to continuously advance in this area. 40 Philips Annual Report 2008

  • Page 41
    ... Our leadership 114 Supervisory Board report 122 Performance statements Supplier sustainability We believe achieving a sustainable supply base is a matter of taking care of workers' lives and the environment. As a member company of the Electronic Industry Citizenship Coalition (EICC) we share the...

  • Page 42
    ...Nevertheless, for the full year our top line decreased only slightly, with a steady 31% of sales coming from emerging markets, while many of our businesses continue to hold global leadership positions. We ended 2008 with a strong balance sheet supported by robust operating cash ï¬,ows, and we remain...

  • Page 43
    ...in North America and non-core businesses such as Set-Top Boxes and PC Monitors. • Healthcare sales grew by 6% on a comparable basis; all businesses contributed to this growth. Lighting achieved 3% comparable sales growth, driven by energy-ef ficient lighting solutions. Consumer Lifestyle sales on...

  • Page 44
    ... Consumer Healthcare Solutions) which has been transferred from Innovation & Emerging Businesses. The former Consumer Electronics and Domestic Appliances and Personal Care divisions have been integrated in the Consumer Lifestyle sector. In addition, key financials of the segment Television, part...

  • Page 45
    ... in energy-ef ficient lighting solutions, partly offset by lower sales in OEM automotive and consumer-related lighting markets. Consumer Lifestyle Lighting I&EB GM&S Philips Group Sales, EBIT and EBITA 2008 in millions of euros unless otherwise stated sales Healthcare Consumer Lifestyle Lighting...

  • Page 46
    ... increases were partly offset by lower selling expenses at Group Management & Services. As a percentage of sales, selling expenses increased from 18.6% in 2007 to 20.8% in 2008, mainly due to the aforementioned restructuring charges and the impact of lower sales at Consumer Lifestyle. General and...

  • Page 47
    ... in 2008 were related to Lighting, Consumer Lifestyle and Healthcare. Restructuring projects in Lighting - aimed at further increasing organizational effectiveness and reducing the fixed cost base - mainly centered on Lamps (principally North America and Poland), Professional Luminaires (notably...

  • Page 48
    ... Group, partly offset by lower interest costs on derivatives related to the hedging of Philips' foreign currency funding positions. In 2008, a total gain of EUR 1,197 million was recognized on the sale of stakes, mainly in TSMC, LG Display and D&M Holdings. Also, a EUR 23 million cash dividend was...

  • Page 49
    ... in 2000. In addition, a EUR 43 million loss related to the 2006 sale of a majority stake in the Semiconductors division was recognized, mainly due to pension settlements. Discontinued operations Net income Philips reports the results of Semiconductors and the MedQuist business separately as...

  • Page 50
    ... by businesses leading in their markets and increased sales in emerging markets. Acquisitions Within Healthcare, we acquired nine notable companies. In February, Philips acquired VISICU, a clinical IT system maker which enables critical-care medical staff to actively monitor patients in hospital...

  • Page 51
    ...% of total sales in 2008, a slight increase over 2007. Key emerging markets saw single-digit sales growth, mainly attributable to double-digit growth in India (principally Healthcare and Lighting) and Latin America (largely Healthcare and Consumer Lifestyle), as well as single-digit growth in China...

  • Page 52
    ...millions of euros 2006 Healthcare Consumer Lifestyle Lighting I&EB Philips Group 1) 2007 592 492 276 269 1,629 2008 642 407 305 268 1,622 572 553 269 265 1,659 2) Includes the write-off of acquired in-process research and development of EUR 15 million in 2008 (2007: EUR 13 million, 2006: EUR 33...

  • Page 53
    ...ficient and solid-state lighting solutions. The lower R&D expenditures within Consumer Lifestyle were mainly due to lower expenditures in maturing product categories, such as Television. Furthermore, R&D investments at Innovation & Emerging Businesses were on par with 2007, as higher investments in...

  • Page 54
    ... and, where necessary, a highly accelerated resolution of identified issues. Lighting 57,166 Consumer Lifestyle 17,346 Employees per sector in FTEs at year-end 2006 Healthcare Consumer Lifestyle Lighting I&EB GM&S Discontinued operations 27,223 24,419 47,739 8,832 6,879 6,640 2007 29,191 23,397...

  • Page 55
    ... year, as well as Healthcare and Innovation & Emerging Businesses. The decline was partly mitigated by increases in Lighting and Group Management & Services. Average sales per employee1) in thousands of euros 250 219 200 201 228 224 209 150 100 50 0 2004 1) 2005 2006 2007 2008 Annual sales...

  • Page 56
    ... higher than in 2007, mainly due to acquisition-driven investment increases in Healthcare, as well as higher investments in solid-state lighting at Lighting. These higher investments were partly offset by higher proceeds from the sale of real estate within Group Management & Services. (2,802) 3,930...

  • Page 57
    ..., Philips' shareholders were paid EUR 659 million as a dividend payment. Net cash out ï¬,ows for share repurchases totaled EUR 1,448 million. This included EUR 810 million related to hedging of obligations under the long-term employee incentive and employee stock purchase programs and a total of...

  • Page 58
    ... We care about... 42 Our group performance Liquidity and capital resources Cash balance movements in 2008 in millions of euros 14,000 2,576 10,500 8,769 7,000 (5,316) 3,620 (720) 773 415 380 3,500 (3,257) 0 2007 1) 2) 3) Sale of stakes1) Free cash flow2) Other Debt Acquisitions3) Share buy...

  • Page 59
    ... accounted for as a reduction of stockholders' equity. Liquidity position in millions of euros 2006 Cash and cash equivalents Trading securities Commited revolving credit facility / CP program Short-term debt Short-term available liquidity Available-for-sale securities at market value Main listed...

  • Page 60
    ... sale of TSMC shares contributed the majority of the decrease in availablefor-sale securities. Philips' shareholdings in its main listed equity-accounted investees had a fair value of EUR 60 million based on quoted market prices at December 31, 2008, and consisted primarily of the Company's holdings...

  • Page 61
    ... not stand by other forms of support. The above 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 at December 31, 2008. Philips Annual Report 2008 61

  • Page 62
    ... the energy-ef ficient and Green Product approach at both Healthcare and Consumer Lifestyle, leveraging the experience of our Lighting sector • making our supply chain fully compliant with the Electronic Industry Code of Conduct standard, and • continuing to engage employees on energy ef...

  • Page 63
    ... 20 15 10 5 0 2007 2008 Green Product sales by sector in millions of euros Healthcare 1,527 Lighting 2,970 Consumer Lifestyle 1,478 Green Innovation investment in millions of euros Corporate Technologies 41 Healthcare 54 Consumer Lifestyle 36 Lighting 151 Philips Annual Report 2008 63

  • Page 64
    ...rst Philips location in the Netherlands to run completely on green electricity from renewable sources. The lamps produced at Roosendaal are mainly Green Products - energy-efficient solutions that reduce energy costs and CO2 emissions. In 2008 the facility started an 'adoption plan', donating energy...

  • Page 65
    ... that their ideas and suggestions count, develop themselves and know diverse perspectives are valued. Employee Engagement Index % favorable 80 69 60 59 61 64 40 20 0 2005 2006 2007 2008 Female executives as a % of total 10 8 6 4 2 0 2005 2006 2007 6 5 8 10 2008 Philips Annual Report 2008 65

  • Page 66
    ... extent these originated from employees of a number of recently acquired companies, where the pre-acquisition style of management was in many respects inconsistent with the underlying principles of business conduct defined in the Philips GBP. In 2008 the GBP most associated with alleged violations...

  • Page 67
    ... 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Supplier performance We continued to drive progress in our Supplier Sustainability Involvement Program in 2008. A total of 572 audits of Bill of Material (BOM) and nonproduct related (NPR) identi...

  • Page 68
    ... of reserve, subject to the approval of the Supervisory Board. Pursuant to article 35 of the articles of association of Royal Philips Electronics, a proposal will be submitted to the 2009 Annual General Meeting of Shareholders to declare a distribution in cash of EUR 0.70 per common share from the...

  • Page 69
    ... drive down (fixed) costs and ensure we start this year with a strong balance sheet position. In line with our prudent financial management, we will stop the share repurchase program until further notice. During 2009, we will continue to closely manage our businesses relative to both the market...

  • Page 70
    ...& Standards • Applied Technologies • Healthcare, Lifestyle and Lighting & Cleantech Incubators • New Venture Integration • Design Group Management & Sevices Corporate center • Countries and regions • Global service units • Shared service centers • Pensions 70 Philips Annual Report...

  • Page 71
    ... 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Our structure Koninklijke Philips Electronics N.V. (the 'Company') is the parent company of the Philips Group ('Philips' or the 'Group'). Its shares are listed on the stock markets of Euronext...

  • Page 72
    ... challenges present us with an enormous opportunity. We focus our business on addressing the evolving needs of the healthcare market by developing innovative products and technologies that contribute to improved healthcare, at lower cost, around the world. A helping hand Designed to meet the needs...

  • Page 73
    ... world GDP, and has also experienced high rates of growth in emerging markets such as China and India. Rising healthcare costs present a major challenge to society. The industry is looking to address this through continued innovation, both in traditional care settings and also in the field of home...

  • Page 74
    ...Ireland-based TOMCAT Systems Ltd., a company that offers a software solution to collect and aggregate data relating to cardiac care. Leveraging the TOMCAT platform, the Philips Cardiovascular Information System launched in the fourth quarter of 2008 helps hospitals achieve a high standard of patient...

  • Page 75
    ... performance Healthcare 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Expand presence in emerging markets In 2008, Philips strengthened its presence in emerging markets by acquiring the following businesses: Indiabased Alpha X-Ray Technologies...

  • Page 76
    ... Green Product sales amounted to EUR 1,527 million in 2008, up from EUR 1,452 million in 2007, representing 20% of sector sales. Geographically, double-digit comparable sales growth was achieved in the key emerging markets, notably in China and Latin America, driven by growth in all businesses. Also...

  • Page 77
    ..., cash ï¬,ow before financing activities was EUR 557 million higher than in 2007, largely thanks to improved working capital requirements, notably lower inventory. Sales per market cluster in millions of euros Western Europe North America other mature key emerging other emerging 9,000...

  • Page 78
    ... consumer businesses. It is creating a market in both developed and emerging economies, is growing at a faster pace than the overall consumer goods market, and therefore represents a formidable platform for sustainable growth. Simply sensational In 2008, Philips extended its highly successful...

  • Page 79
    ... in order to deliver customer-focused appliance/consumable combinations. Consumer Lifestyle has continued its business with international key accounts, particularly in emerging markets. The introduction of ' ï¬, agship' online stores for Consumer Lifestyle products has added a key touch-point to the...

  • Page 80
    ...placed on differentiated design and experiences. Across many of our businesses, we tightened our focus in Europe and North America, while expanding our presence in emerging markets like Brazil, India, China and Russia. Within the North American market, Philips entered into a five-year minimum brand...

  • Page 81
    ... sector performance Consumer Lifestyle 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Progress against targets The Annual Report 2007 set out a number of key targets for Philips Consumer Lifestyle in 2008. The advances made in addressing these are...

  • Page 82
    ... market conditions for Consumer Lifestyle. Sales amounted to EUR 11,145 million, a nominal decline of 16% compared to 2007. Adjusted for unfavorable currency effects of 3% and portfolio changes, mainly the divestment of Television in North America and the sale of the Set-Top Boxes and Mobile Phones...

  • Page 83
    ... as well as research and development • Maintain rigorous cost and organizational discipline, measured against external and internal benchmarks. Sales per market cluster in millions of euros Western Europe North America other mature key emerging other emerging 16,000 11,963 1,497...

  • Page 84
    ...A variety of ceiling, wall and ï¬,oor fittings offers endless possibilities to complement any room in any home. EcoMoods is a product of Philips' business group Consumer Luminaires, which grew out of PLI, the leading European home luminaires company acquired in 2007. 84 Philips Annual Report 2008

  • Page 85
    ... Philips MASTER LED range opens up a whole new world of spot and general lighting solutions. The energy efficiency and long lifetime of LEDs have now been applied to meet the need for a long-lasting, cost-efficient lamp in functional applications. MASTER LED particularly benefits hospitality and...

  • Page 86
    ... the transition to applications and solutions. Win-win in Lesotho In 2008 Philips announced plans to participate in a joint venture to set up a manufacturing facility, as well as a recycling plant, for energy-saving Compact Fluorescent Lamp integrated (CFLi) light bulbs in Lesotho, Southern Africa...

  • Page 87
    ... solutions company also acquired in 2007, has been fully embedded and leveraged across the value chain. Progress against targets In the 2007 Annual Report, Lighting identified a number of key objectives for 2008. The progress made in addressing these is discussed below. Emerging markets and energy...

  • Page 88
    ... to offset a major part of the commodity price inï¬,ation in 2008. Key data in millions of euros 2006 Sales Sales growth % increase, nominal % increase, comparable EBITA as a % of sales EBIT as a % of sales Net operating capital (NOC) Cash ï¬,ows before financing activities Employees (FTEs) 5,466...

  • Page 89
    ... working capital requirements. Net capital expenditures increased by EUR 54 million compared to 2007, largely due to higher investments in solid-state lighting solutions. Sales per market cluster in millions of euros Western Europe North America other mature key emerging other emerging...

  • Page 90
    ... markets and also concluded a patent licensing agreement with Osram for key LED technology. Both events are next steps in making basic Philips LED intellectual property broadly available to the industry, accelerating the development of the LED-based lighting market. 90 Philips Annual Report 2008

  • Page 91
    ... performance Innovation & Emerging Businesses 94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Philips Research is a key innovation partner for Philips' business sectors. It has three main roles. Firstly, it creates new technologies that help to...

  • Page 92
    ... imaginative yet feasible solutions. Key data in millions of euros 2006 Sales Sales growth % decrease, nominal % increase (decrease), comparable EBITA Corporate Technologies EBITA Corporate Investments/ Other EBITA as a % of sales EBIT as a % of sales Net operating capital (NOC) Cash ï¬,ows before...

  • Page 93
    ... of pension and other postretirement benefit plans. Additionally, the global service units such as Philips General Purchasing, real estate, and shared financial services are reported in this sector. In 2008, the EBITA of corporate & regional overheads was EUR 15 million lower than 2007, mainly due...

  • Page 94
    ... and high ethical standards. Risk 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...

  • Page 95
    ...94 Risk management 110 Our leadership 114 Supervisory Board report 122 Performance statements Strategic risks Market risks Operational risks Compliance risks Financial risks Corporate Governance Philips Business Control Framework Philips General Business Principles Furthermore, as part of...

  • Page 96
    ...political - emerging markets - competition - governmental investigations - regulatory Operational risks - solution creation - supply chain - global accounts - personnel - information technology - product liability - reputation Corporate Governance Compliance risks - business principles - reporting...

  • Page 97
    ... have a material adverse impact on its financial condition and results. Paradigmatic shifts in the industry or market, like the transition from traditional lighting to energy-saving and LED lighting, may drastically change the business environment. If Philips is unable to recognize these changes in...

  • Page 98
    ... political developments in countries across the world that could adversely impact its revenues and income. Philips' business environment is inï¬,uenced by economic conditions globally and in individual countries where Philips conducts business. During 2008, the capital and credit markets experienced...

  • Page 99
    ... Philips' solution and product creation process, ensuring timely delivery of new solutions and products at lower cost and upgrading of customer service levels to create sustainable competitive advantages, are important in realizing Philips' profitable growth ambitions. The emergence of new low-cost...

  • Page 100
    ... with Philips General Business Principles. This risk is heightened in emerging markets as corporate governance systems, including information structures and the monitoring of ethical standards, are less developed in emerging markets compared to mature markets. Examples include commission payments to...

  • Page 101
    ... of this Annual Report. Philips has defined-benefit pension plans in a number of countries. The funded status and the cost of maintaining these plans are inï¬,uenced by financial market and demographic developments, creating volatility in Philips' financials. The majority of employees in Europe...

  • Page 102
    ... short-term financing requirements that would normally be satisfied through the Commercial Paper Program. Additionally EUR 659 million of investments in its available-for-sale securities and listed equity-accounted investees (market value at December 31, 2008) are available. Furthermore, Philips...

  • Page 103
    ... fair value of the hedges related to these exposures, are reported in the income statement under cost of sales. Hedges related to forecasted transactions are accounted for as cash ï¬,ow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that...

  • Page 104
    ... LG Display and TPV Technology Ltd. As a result, Philips is exposed to potential financial loss through movements in the share prices. The aggregate equity price exposure of publicly listed investments in its main available-for-sale securities, trading securities and listed equity-accounted...

  • Page 105
    ... netting agreements under an International 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...

  • Page 106
    ... prices left in Germany, where equity holdings were swapped for cash and fixed income assets in 2008 in anticipation of the implementation of a liability-driven investment (LDI) strategy in 2009. Figure 2 Sensitivity of funded status to inflation and longevity in millions of euros Netherlands...

  • Page 107
    ... Kingdom total risk United States Germany 2,000 1,500 1,000 500 0 (500) (1,000) 2007 2008 Figure 7 Country decomposition of the 5% NPPC-at-Risk in millions of euros diversification Netherlands United Kingdom total risk United States Germany 225 150 75 0 (75) 2007 2008 Philips Annual Report 2008...

  • Page 108
    ... transfer pricing directives. Tax uncertainties on general service agreements and specific allocation contracts Due to the centralization of certain activities in a limited number of countries (such as research and development, centralized IT, and corporate functions and head of fice), costs are...

  • Page 109
    ...110 Our leadership 114 Supervisory Board report 122 Performance statements Tax uncertainties due to permanent establishments In countries where Philips starts new operations, the issue of permanent establishment may arise. This is due to the fact that when operations in new countries are led from...

  • Page 110
    ... and the Group Management Committee since June 2005 Corporate responsibilities: Control, Treasury, Fiscal, Mergers & Acquisitions, Investor Relations, Information Technology, Pensions, Real Estate, Corporate Investments, Supply Management, New Venture Integration 110 Philips Annual Report 2008

  • Page 111
    ... Lighting since April 2008 Corporate responsibilities: Lighting Sector, Sales Leadership Board, Sustainability Andrea Ragnetti 1960, Italian Executive Vice-President and Chief Executive Of ficer of Philips Consumer Lifestyle Member of the Board of Management since April 2006, member of the Group...

  • Page 112
    ..., Company Manual, General Business Principles Maarten de Vries 1962, Dutch Member of the GMC and Chief Information Of ficer since September 2007 and Global Head of Purchasing since September 2008 Corporate responsibilities: Information Technology, Purchasing 112 Philips Annual Report 2008

  • Page 113
    ... Governance and Nomination & Selection Committee J.J. Schiro 1946, American* *** Member of the Supervisory Board since 2005; first term expires in 2009 CEO of Zurich Financial Services and Chairman of the Group Management Board. Also serves on various boards of private and listed companies...

  • Page 114
    ... reports of these committees are part of this report and are published below. The members (of the committees) of the Supervisory Board are listed in the chapter Our leadership that begins on page 110 of this Annual Report. For further information on the Company's corporate governance structure...

  • Page 115
    ... in relation to the global and multi-product character of Philips' businesses. Consequently the Supervisory Board aims for an appropriate level of experience in marketing, technological, manufacturing, financial, economic, social and legal aspects of international business and government and public...

  • Page 116
    ... part in the form of an annual cash incentive and a long-term incentive in the form of restricted share rights and stock options. Scenario analyses are conducted annually and serve as an input for the review of the remuneration policy. Contracts of employment Members of the Board of Management...

  • Page 117
    .... Costs related to stock option and restricted share rights grants are taken by the Remuneration costs Board of Management 20081) in euros Company over a number of years. As a consequence, the costs mentioned below in the columns stock options and restricted share rights are the accounting cost of...

  • Page 118
    ... number of stock options and restricted share rights that will be granted to members of the Board of Management is performance-related and depends on Philips' Total Shareholder Return (TSR) and the team targets of the Board of Management. The 2007 General Meeting of Shareholders approved a new list...

  • Page 119
    ... new Dutch Corporate Governance Code, as presented by the Corporate Governance Code Monitoring Committee in its report of December 2008, is applicable to Annual Incentive payments and LTIP grants over the year 2009 onwards to all members of the Board of Management. Philips Annual Report 2008 119

  • Page 120
    ...of the company, dividend, pensions (including the situation at Philips Pension Fund in the Netherlands and the governance of the other major pension funds), valuation of financial holdings (and related impairments), the investigations into possible anticompetitive activities in the CRT industry, as...

  • Page 121
    ... share from the retained earnings. Finally, we would like to express our thanks to the members of the Board of Management, the Group Management Committee and all other employees for their continued contribution during the year. February 23, 2009 The Supervisory Board Philips Annual Report 2008...

  • Page 122
    ... statements of income Consolidated balance sheets Consolidated statements of cash ï¬,ows Consolidated statements of equity Information by sector and main country Significant IFRS accounting policies Notes to the IFRS financial statements Auditor's report 122 Philips Annual Report 2008

  • Page 123
    ... 27 Contingent liabilities 28 Stockholders' equity 29 Cash from derivatives 30 Proceeds from other non-current financial assets 31 Assets received in lieu of cash from the sale of businesses 32 Related-party transactions 33 Share-based compensation 34 Information on remuneration 35 Fair value of...

  • Page 124
    ... Act 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...

  • Page 125
    ..., effective December 31, 2006, Koninklijke Philips Electronics N.V. and subsidiaries adopted the provisions of SFAS No. 158, 'Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans'. KPMG Accountants N.V. Amsterdam, February 23, 2009 Philips Annual Report 2008 125

  • Page 126
    ... of euros unless otherwise stated 2006 2007 2008 Sales Cost of sales 26,682 (18,435) 26,793 (17,570) 26,385 (17,890) Gross margin 8,247 9,223 8,495 Selling expenses General and administrative expenses Research and development expenses Impairment of goodwill Other business income and...

  • Page 127
    ...US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information Earnings per share 2006 2007 2008 Weighted average number of common shares outstanding (after deduction of treasury stock) during the year (in thousands) Adjusted weighted average number of shares (after...

  • Page 128
    ... balance sheets of the Philips Group as of December 31 in millions of euros unless otherwise stated Assets 2007 2008 Current assets Cash and cash equivalents 8,769 3,620 9 32 Receivables: - Accounts receivable - net - Accounts receivable from related parties - Other receivables 4,209 26...

  • Page 129
    ... notes payable: - Trade creditors - Accounts payable to related parties 1 18 27 21 20 19 22 24 23 Total current liabilities 9,633 8,928 Non-current liabilities 26 24 27 21 20 19 1 25 Long-term debt Long-term provisions Non-current liabilities and minority interests of discontinued operations...

  • Page 130
    ... of euros 2006 2007 2008 Cash ï¬,ows from operating activities Net income (loss) (Income) loss from discontinued operations Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Impairment of goodwill, equity-accounted investees...

  • Page 131
    ... GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information Supplemental disclosures to the consolidated statements of cash ï¬,ows 2006 2007 2008 Net cash paid during the year for Pensions Interest Income taxes 1,144 211 632 449 49 493 379 123 352 Net gain on sale...

  • Page 132
    ... 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 ï¬,ow hedges common stock capital in...

  • Page 133
    ... ï¬,ow before financing activities sales research and development expenses income from operations income from operations as a % of sales 2008 Healthcare Consumer Lifestyle of which Television Lighting Innovation & Emerging Businesses Group Management & Services 7,649 11,145 4,980 7,106 337 148...

  • Page 134
    ...206 174 64 303 6 82 771 139 170 68 328 31 57 725 2007 Healthcare Consumer Lifestyle of which Television Lighting Innovation & Emerging Businesses Group Management & Services 6,779 4,313 1,303 5,133 606 19,122 35,953 Discontinued operations 333 36,286 4,802 890 (255) 3,886 246 705 10,529 1,909 3,423...

  • Page 135
    ... information 254 Corporate governance 262 Ten-year overview 266 Investor information Main countries net operating capital long-lived assets capital expenditures depreciation of property, plant and equipment sales total assets 2008 Netherlands United States Germany France United Kingdom China...

  • Page 136
    ... rates, expected investment returns on plan assets, rates of increase in health care costs, rates of future compensation increases, turnover rates, and life expectancy. Accounting changes The Company applies the retrospective method for reporting a change in accounting principle in the absence of...

  • Page 137
    ... by the chief operating decision-maker (the Board of Management of the Company). The Board of Management decides how to allocate resources and assesses performance. Reportable segments comprise: Healthcare, Consumer Lifestyle, Lighting, and Television. Segment accounting policies are the same...

  • Page 138
    ... fair value of equity instruments granted to employees as compensation expense over the vesting period on a straight-line basis, taking into account estimated forfeitures. The fair value of the amount payable to employees in respect of share-based payments which are settled in cash is recognized as...

  • Page 139
    ... and cost-method investments. The Company classifies its investments in equity securities that have readily determinable fair values as either available-for-sale or for trading purposes. Trading securities acquired and held principally for the purpose of selling them in the short term are presented...

  • Page 140
    ... for impairment is carried out at the level where discrete cash ï¬,ows occur that are largely independent of other cash ï¬,ows. 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 accounts for...

  • Page 141
    ... the Company upon its adoption of SFAS 157 on January 1, 2008. Standards after 2008 Philips has decided to move to International Financial Reporting Standards as its sole accounting standard from January 1, 2009 onwards. The use of US GAAP will be discontinued as from the same date. Philips Annual...

  • Page 142
    ... of pensions and income taxes. The 2008 results mainly related to the settlement of income taxes, largely operational in nature. 2006 2007 2008 Sales Costs and expenses Gain on sale of discontinued operations Impairment charge Income (loss) before taxes Income tax Result of equity- accounted...

  • Page 143
    ... of energy-saving and green lighting technology. The acquisition created a leading position for Philips in the North American luminaires market. Philips paid a total net cash consideration of EUR 1,894 million. This amount includes the cost of 331,627 shares previously acquired in August 2007, the...

  • Page 144
    ... IT company which develops remote patient monitoring systems. The acquisition of VISICU will facilitate the creation of products to provide increased clinical decision support to hospital staff, while allowing them to monitor a greater number of critically ill patients. Philips paid a net cash...

  • Page 145
    ... differences Sales Income from operations Net income Basic earnings per share - in euros 1) 26,793 1,841 4,160 3.83 2,142 69 59 28,935 1,910 4,219 3.88 Partners in Lighting (PLI) On February 5, 2007, Philips acquired 100% of the shares of PLI, a leading European manufacturer of home luminaires...

  • Page 146
    ... January-December 2006 Total purchase price (net of cash) 515 Philips Group 7 16 (52) 186 1 357 1) Allocated to: Property, plant and equipment Working capital Deferred tax Intangible assets In-process R&D Goodwill Sales Income from operations Net income Basic earnings per share - in euros pro...

  • Page 147
    ... information 254 Corporate governance 262 Ten-year overview 266 Investor information Lifeline On March 22, 2006, Philips completed its acquisition of Lifeline, a provider of personal emergency response services. Philips acquired a 100% interest in Lifeline by paying USD 47.75 per share in cash...

  • Page 148
    ... and development comprise: amortization period in years For information related to sales and income from operations on a geographical and sector basis, see Information by sector and main country that begins on page 133 of this Annual Report. Sales composition 2006 2007 2008 Goods Services Licenses...

  • Page 149
    ... related to research and development expenses on a sector basis, see the section Information by sector and main country that begins on page 133 of this Annual Report. The results on the sale of businesses in 2008 are mainly related to the sale of the Set-Top Boxes (STB) and Connectivity Solutions...

  • Page 150
    ...in 2007 • Within Lighting: restructuring of the Oss plant in the Netherlands, from mass manufacturing to a competence center, and the closure of ï¬,uorescent lamp-based LCD backlighting activities. • Within Group Management & Services: the US country organization headquarters were moved from New...

  • Page 151
    ...Investor information The movements in the provisions and liabilities for restructuring costs in 2006 are presented by sector as follows: Dec. 31, 2005 additions other Dec. 31, changes1) 2006 5 Financial income and expenses 2006 2007 2008 utilized released Healthcare Consumer Lifestyle Lighting...

  • Page 152
    ... decreased in 2008 compared to 2007 due to a significant change in the country mix of income tax rates, due to losses in countries with higher income tax rates and profits in countries with relatively lower income tax rates, combined with a lower income before tax. 152 Philips Annual Report 2008

  • Page 153
    ...on its share in TPV Technology (TPV), a Hong Kong based manufacturer of ï¬,at panels. Detailed information on the other aforementioned individual line items is set out below. Company's participation in income (loss) 2006 2007 2008 The amount presented as 'provisional payment' represents a reduction...

  • Page 154
    ... are mainly included in the sector Group Management & Services. Summarized information of equity-accounted investees Summarized financial information on the Company's investments in equity-accounted investees, on a combined basis, is presented below: 2006 2007 2008 LG.Philips Displays Others...

  • Page 155
    ... 254 Corporate governance 262 Ten-year overview 266 Investor information 8 Earnings per share The earnings per share (EPS) data have been calculated as follows: 2006 2007 2008 Net income (loss) Income (loss) from continuing operations Income (loss) from discontinued operations Net income (loss...

  • Page 156
    ...for-sale securities primarily as a result of the reclassification of LG Display from equity-accounted investees. Additionally, shares of Pace Micro Technology were received in conjunction with the divesture of our Set-Top Boxes and Connectivity Solutions activities. 156 Philips Annual Report 2008

  • Page 157
    ... of non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information EUR 77 million in 2006, recognized in Financial income and expense. The impairment review in 2008 was triggered by the deteriorating economic environment of the connected displays industry and the...

  • Page 158
    ... years is: 2009 2010 2011 2012 2013 391 372 334 308 279 Home Healthcare Solutions and Professional Luminaires increased by the acquisitions of Respironics and Genlyte, respectively (see note 2) and are the most sensitive to ï¬,uctuations in the key assumptions used in the impairment tests as set...

  • Page 159
    ...266 Investor information consequence of weaker demand for LED solutions in the automotive, display and cell phone markets. The pre-tax discount rate used for the Lumileds impairment test was 14.6%. Please refer to Information by sector and main country that begins on page 133 of this Annual Report...

  • Page 160
    ... well as local customs. 2006 Summary of pre-tax costs for pension plans and retiree healthcare plans Defined-benefit plans Defined-contribution plans incl. multi-employer plans Retiree medical plans (see note 21) 75 80 39 194 27 84 36 147 10 96 47 153 2007 2008 The Company funds certain defined...

  • Page 161
    250 Reconciliation of non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information 2007 Netherlands other total Netherlands other 2008 total Amounts recognized in the consolidated balance sheet Prepaid pension costs under other non-current assets Accrued ...

  • Page 162
    ... financial statements 244 Company financial statements The components of net periodic pension costs and amounts recognized in Other comprehensive income were as follows: Netherlands 2008 Service cost Interest cost on the projected benefit obligation Expected return on plan assets Net actuarial...

  • Page 163
    .... The long-term rate of return on total plan assets is expected to be 5.95% per annum, based on expected long-term returns on equity securities, debt securities, real estate and other investments of 8.3%, 4.0%, 6.5% and 5.0%, respectively. Philips Pension Fund in the Netherlands On November 13, 2007...

  • Page 164
    ...180 Sustainability performance 192 IFRS financial statements 244 Company financial statements Netherlands 2008 Accumulated postretirement benefit obligation Accumulated benefit obligation at beginning of year Service cost Interest cost Actuarial gains Benefits paid Exchange rate differences...

  • Page 165
    ... Reconciliation of non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information The components of the net periodic cost of postretirement benefits other than pensions are: total 2008 Service cost Interest cost on accumulated postretirement benefit obligation...

  • Page 166
    ...on total of service and interest cost Effect on postretirement benefit obligation 5 36 (4) (32) Estimated future postretirement benefit payments The following postretirement benefit payments are expected: 2009 2010 2011 2012 2013 Years 2014 - 2018 24 25 26 27 28 172 166 Philips Annual Report...

  • Page 167
    ... of long-term debt, as at December 31, 2008, are due in the next five years: 2009 2010 2011 2012 2013 Total Corresponding amount of previous year 131 75 1,020 14 459 1,699 2,645 The following table provides additional details regarding the outstanding bonds. effective rate 2007 2008 Unsecured...

  • Page 168
    ... payments for 2008 totaled EUR 16 million (2007: EUR 14 million, 2006: EUR 20 million). The remaining minimum payments are as follows: 2009 2010 2011 2012 2013 Thereafter 16 12 8 8 8 41 27 Contingent liabilities Guarantees Philips' policy is to provide only guarantees and other letters of support...

  • Page 169
    ...In addition, in February 2007, certain plaintiffs filed purported class actions in a United States court against LG Display and certain current and former employees and directors of LG Display for damages based on alleged violations of U.S. federal securities laws. No Philips group company is named...

  • Page 170
    ...the General Meeting of Shareholders in 1989 adopted amendments to the Company's articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, 2008, no preference shares have been issued. Option...

  • Page 171
    ... stock price volatility USD-denominated 2006 2007 2008 Share-based compensation The Company has granted stock options on its common shares and rights to receive common shares in the future (restricted share rights) to members of the Board of Management and other members of the Group Management...

  • Page 172
    ... compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1.8 years. Cash received from option exercises under the Company's option plans amounted to EUR 24 million, EUR 140 million and EUR 120 million in 2008, 2007, and 2006...

  • Page 173
    .... In 2008, no (additional) pension benefits were granted to former members of the Board of Management. In 2008, the present members of the Board of Management were granted 259,218 stock options (2007: 318,132 stock options, 2006: 198,027 stock options) and 86,406 restricted share rights (2007: 106...

  • Page 174
    ... company car), then the share is both valued and accounted for here. The method employed by the fiscal authorities in the Netherlands is the starting point for the value stated. Salary amount and amount under under 'other compensation' relates to period January 1 - March 31, 2008. Annual incentive...

  • Page 175
    ... Corporate governance 262 Ten-year overview 266 Investor information The tables below give an overview of the interests of the members of the Board of Management under the restricted share rights plans and the stock option plans of the Company: Number of restricted share rights as of Jan. 1, 2008...

  • Page 176
    ...share reduction program effected mid-2000 Awarded under US stock option plan See note 33 for further information on stock options and restricted share rights. The total pension charges of the members of the Board of Management in 2008 amount to EUR 725,462 (pension charge in 2007: EUR 505,208; 2006...

  • Page 177
    ...euros): Supervisory Board members' and Board of Management members' interests in Philips shares Members of the Supervisory Board and of the Board of Management are not allowed to hold any interests in derivative Philips securities. Number of shares 1) as of December 31, 2007 as of December 31, 2008...

  • Page 178
    ... as cash ï¬,ow hedges to offset forecasted purchases. Changes in the value of foreign currency accounts receivable/payable as well as the changes in the fair value of the hedges of accounts receivable/payable are reported in the income statement under cost of sales. The hedges related to forecasted...

  • Page 179
    250 Reconciliation of non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information 36 37 Philips Annual Report 2008 179

  • Page 180
    ... for Sustainable Development, World Economic Forum and World Health Organization. As a member of organizations like the World Business Council for Sustainable Development and the Electronic Industry Code of Conduct, we participate in meetings and task forces, bringing new learning to bear. Our work...

  • Page 181
    ...US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information These events drove us to create the complementary, more focused EcoVision4 program. Launched in September 2007, this latest EcoVision program focuses on reducing the energy consumption of our products and...

  • Page 182
    ...ts in millions of euros 2008 2006 2007 2008 Suppliers: goods and services Employees: wages and pensions Shareholders: dividend Government: corporate income taxes Capital providers: net interest 17,890 5,098 720 286 106 Philips Group as a percentage of total published sales as a percentage of...

  • Page 183
    ... one of the major challenges has been customer acceptance of white LED light for general lighting. Philips Lumileds Advanced Laboratories in San Jose and Philips Research in Europe have addressed this issue, jointly developing a new technology that ensures consistent delivery of uniformly high color...

  • Page 184
    ... of production at Lighting resulted in a 5% decrease in this sector, representing nearly 80% of the total Group. In one of the major Lighting sites, the soda-lime furnace was shut down, resulting in less electricity use. Total energy consumption in manufacturing in terajoules 2005 2006 2007 2008...

  • Page 185
    ...are available. Lead The increase in 2008 is related to the addition of two new production lines in one major Lighting site, as well as the test of a new lead solder recycling process. Toluene The increase in 2008 is caused by a change in production mix in one major Lighting site. Xylene The decrease...

  • Page 186
    ... countries, to monitor progress more closely. Developing our people Employees across the world can access detailed information about our Global Learning Curricula and register for courses online via our Global Learning Portal, Learning @ Philips. number of employees participating 2005 2006 2007 2008...

  • Page 187
    ... Management and the Audit Committee of the Supervisory Board, which assess any possible impact on Philips' businesses and compliance with applicable laws. Working conditions In 2005 the number of reported (alleged) violations related to GBP 4 (Commitment towards employees) stood at 48% of the total...

  • Page 188
    ...'s site is conducted to identify critical issues where possible. This increases the supplier's understanding of our sustainability requirements and standards. In 2008 we performed more than 100 scans in our supply base. A total of 572 audits of Bill of Material (BOM) and non-product related (NPR...

  • Page 189
    ... procedures included reviewing systems and processes for data management, assessing the appropriateness of the accounting policies used, assessing the data collection and reporting process at a limited number of sites and evaluating the overall presentation of sustainability information within our...

  • Page 190
    ... that are recycled input materials Direct energy consumption by primary energy source Indirect energy consumption by primary source Total water withdrawal by source 185 EN11 Location and size of land owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value...

  • Page 191
    ... non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information not applicable addressed not addressed page number Product responsibility Customer health and safety PR1 Life cycle stages in which health and safety impacts of products and services are assessed...

  • Page 192
    ... of the business. Please refer to page 44 of this Annual Report for more information about forward-looking statements, third-party market share data, fair value information, and revisions and reclassifications. The Board of Management of the Company hereby declares that, to the best of their...

  • Page 193
    ... in emerging markets and across all businesses, notably Customer Services, Clinical Care Systems, and Healthcare Informatics and Patient Monitoring. Additionally, Lighting saw a 3% comparable sales increase, mainly attributable to strong growth in energy-efficient lighting solutions, partly offset...

  • Page 194
    ... non-cash value adjustment on the equity stake in TPV Technology. During 2008, as a result of the reduction in both Philips' shareholding and the number of Philips board members, LG Display was accounted for as an available-for-sale security instead of an equity-accounted investee. In 2007, the...

  • Page 195
    ... market conditions for Consumer Lifestyle. Sales amounted to EUR 11,145 million, a nominal decline of 16% compared to 2007. Adjusted for unfavorable currency effects of 3% and portfolio changes, mainly the divestment of Television in North America and the sale of the Set-Top Boxes and Mobile Phones...

  • Page 196
    ... solutions, notably within the Lamps and Professional Luminaires businesses. Sales were broadly in line with 2007 in the remaining businesses as a result of the deteriorating economic climate in the latter part of 2008 within the automotive, consumer and construction industries. Green Product sales...

  • Page 197
    ... of capitalized product development cost - Reversal of amortization and impairments of product development costs - Reversal of additional net pensions and other charges - Impairment of goodwill - Amortization of intangible assets - Financial income and expenses - Adjustment of results of equity...

  • Page 198
    ... of euros unless otherwise stated 2006 2007 2008 Sales Cost of sales 26,682 (18,402) 26,793 (17,603) 26,385 (17,918) Gross margin 8,280 9,190 8,467 Selling expenses General and administrative expenses Research and development expenses Impairment of goodwill Other business income Other...

  • Page 199
    ...-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information IFRS Consolidated statements of recognized income and expenses of the Philips Group for the years ended December 31 in millions of euros 2006 2007 2008 Revaluation reserve Release revaluation reserve...

  • Page 200
    ... balance sheets of the Philips Group as of December 31 in millions of euros unless otherwise stated Assets 2007 2008 Current assets Cash and cash equivalents 8,769 3,620 45 67 Receivables: - Accounts receivable - net - Accounts receivable from related parties - Other receivables 4,209 26...

  • Page 201
    ... notes payable: - Trade creditors - Accounts payable to related parties 38 54 62 56 55 57 59 58 Total current liabilities 9,634 8,913 Non-current liabilities 61 59 62 56 55 42 38 60 Long-term debt Long-term provisions Deferred tax liabilities Non-current liabilities of discontinued operations...

  • Page 202
    ... and amortization Impairment of goodwill, equity-accounted investees and available-for-sale securities Net gain on sale of assets Loss (income) from equity-accounted investees Dividends received from equity-accounted investees Dividends paid to minority shareholders (Increase) decrease in...

  • Page 203
    ...Significant accounting policies, Reclassifications and revisions). Supplemental disclosures to the consolidated statements of cash ï¬,ows 2006 2007 2008 Net cash paid during the year for Pensions Interest Income taxes 1,144 211 632 449 49 493 379 123 352 Net gain on sale of assets Cash proceeds...

  • Page 204
    ... Balance as of Dec. 31, 2006 1,106,893 228 âˆ' 19,065 167 4,562 (923) 23,099 135 23,234 Total recognized income and expense Dividend paid Purchase of treasury stock Re-issuance of treasury stock Share-based compensation plans Income tax share-based compensation plans (42,000) âˆ' (53,141...

  • Page 205
    ...non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information Changes in other reserves in millions of euros currency translation differences available-for-sale securities Actuarial gains (losses) on pension plans total other reserves cash ï¬,ow hedges Balance...

  • Page 206
    ... main country in millions of euros Sectors results relating to equityaccounted investees cash ï¬,ow before financing activities sales research and development expenses income from operations income from operations as a % of sales 2008 Healthcare Consumer Lifestyle of which Television Lighting...

  • Page 207
    ...253 206 173 64 302 5 84 770 139 170 68 329 31 60 729 2007 Healthcare Consumer Lifestyle of which Television Lighting Innovation & Emerging Businesses Group Management & Services 6,744 4,535 1,350 5,287 626 18,803 35,995 Discontinued operations 319 36,314 4,758 1,113 (208) 4,059 270 602 10,802 1,911...

  • Page 208
    ...cant IFRS accounting policies Goodwill assigned to sectors carrying value at January 1 acquisitions impairment translation differences and other changes carrying value at December 31 2008 Healthcare Consumer Lifestyle Lighting Innovation & Emerging Businesses Group Management & Services 2,235 425...

  • Page 209
    ... requirements for new accounting pronouncements, the Company accounts for any change in accounting principle retrospectively. Change in accounting policy As of January 1, 2008, the Company changed its pension accounting policy by adopting the option available under IAS 19 'Employee Benefits...

  • Page 210
    ...Board of Management decides how to allocate resources and assesses performance. Reportable segments comprise: Healthcare, Consumer Lifestyle, Lighting, and Television. Segment accounting policies are the same as the accounting policies as applied to the Group. Earnings per share The Company presents...

  • Page 211
    ... on a straight-line basis, taking into account expected forfeitures. The Company uses the Black-Scholes option-pricing model to determine the fair value of the equity instruments. The fair value of the amount payable to employees in respect of share appreciation rights, which are settled in cash, is...

  • Page 212
    ... realized on sale and operating leaseback transactions that are concluded based upon market conditions is recognized at the time of the sale. The Company capitalizes interest as part of the cost of assets that take a substantial period of time to get ready for use. 212 Philips Annual Report 2008

  • Page 213
    ... or as part of the business combination are capitalized at cost and amortized over their remaining useful lives. The Company expenses all research costs as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or...

  • Page 214
    ...IFRS 2008 The improvements published under the IASB's annual improvement process are intended to deal with non-urgent, minor amendments to the standards. Most of the improvements are applicable to the Company on January 1, 2010, some on January 1, 2009. The improvements to IFRS 2008 relate mainly to...

  • Page 215
    ... information 254 Corporate governance 262 Ten-year overview 266 Investor information IFRIC Interpretation 15 'Agreements for the Construction of Real Estate' IFRIC 15 applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly...

  • Page 216
    ... letter of intent to merge Philips' Mobile Display Systems (MDS) business with Toppoly. The Company was named TPO, and the transaction was completed in the first half of 2006. Philips separately reported the results of the MDS business as a discontinued operation. 216 Philips Annual Report 2008

  • Page 217
    ...area of energy-saving and green lighting technology. The acquisition created a leading position for Philips in the North American luminaires market. Philips paid total net cash consideration of EUR 1,894 million. This amount includes the cost of 331,627 shares previously acquired in August 2007, the...

  • Page 218
    ... IT company which develops remote patient monitoring systems. The acquisition of VISICU will facilitate the creation of products to provide increased clinical decision support to hospital staff, while allowing them to monitor a greater number of critically ill patients. Philips paid a total net cash...

  • Page 219
    ...Unaudited Philips Group pro forma adjustments1) pro forma Philips Group 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...

  • Page 220
    ...Philips Group pro forma adjustments1) pro forma Philips Group 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) 71 586 Sales Income from operations Net income Earnings per share - in euros...

  • Page 221
    ...GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information Lifeline On March 22, 2006, Philips completed its acquisition of Lifeline, a leader in personal emergency response services. Philips acquired a 100% interest in Lifeline by paying USD 47.75 per share in cash...

  • Page 222
    ... in years Salaries and wages 2006 2007 2008 amount Core and existing technology In-process R&D Trademarks and trade names Customer relationships Miscellaneous 181 39 8 81 4 313 6 3 10 9 2 Salaries and wages Pension costs Other social security and similar charges: - Required by law - Voluntary...

  • Page 223
    ... and some releases of provisions. 41 Healthcare Consumer Lifestyle Lighting Innovation & Emerging Businesses Group Management & Services 257 317 255 82 79 990 333 303 332 44 71 1,083 486 365 540 68 69 1,528 Financial income and expenses 2006 2007 2008 Impairment of goodwill In 2008, EUR 301...

  • Page 224
    ... 2006, a EUR 77 million impairment of TPO was recorded. This is offset by other financial income of EUR 293 million, which included a cash dividend of EUR 223 million from TSMC, a gain of EUR 97 million upon designation of the TSMC shares received through a stock dividend as trading securities and...

  • Page 225
    ...). balance Dec. 31, 2006 recognized in income recognized in equity acquisitions/ deconsolidations balance Dec. 31, 2007 other Intangible assets Property, plant and equipment Inventories Prepaid pension costs Other receivables Other assets Provisions: - pensions - guarantees - termination benefits...

  • Page 226
    ... as follows: 2009 9 2010 14 2011 58 2012 11 2013 8 2014 /2018 35 later 77 unlimited 1,192 Classification of the income tax payable and receivable is as follows: 2007 2008 assets 2007 Intangible assets Property, plant & equipment Inventories Prepaid pension costs Other receivables Other...

  • Page 227
    ... mainly included in the Group Management & Services sector. Summarized information of investments in equity-accounted investees Summarized financial information on the Company's investments in equity-accounted investees, on a combined basis, is presented below: 2006 2007 2008 LG.Philips Displays...

  • Page 228
    ...201) 3,371 A large part of the overdues of trade accounts receivable relates to public sector customers with slow payment approval processes. Provisions primarily relate to items overdue for more than 180 days. Income taxes receivable (current portion) totaling EUR 133 million (2007: EUR 52 million...

  • Page 229
    ... shares were sold in a capital market transaction to third parties. The EUR 158 million gain on this transaction was presented in Financial income and expense. At December 31, 2008, Philips owned 13.2% of LG Display's share capital. At year-end the fair value based on the stock price of LG Display...

  • Page 230
    ... million in 2006, recognized in Financial income and expense. The impairment review in 2008 was triggered by the deteriorating economic environment of the connected displays industry and the weakening financial performance of TPO. The valuation was based on the 'over-the-counter' stock price of TPO...

  • Page 231
    ...finalization of purchase price accounting related to acquisitions in prior years. A significant part of goodwill is allocated to the following businesses: 2007 2008 Home Healthcare Solutions Professional Luminaires Imaging Systems 385 348 1,141 2,804 1,427 1,197 Philips Annual Report 2008 231

  • Page 232
    ... demand for LED solutions in the automotive, display and cell phone markets. The pre-tax discount rate used for the Lumileds impairment test was 14.6%. Please refer to the Information by sector and main country that begins on page 206 of this Annual Report for a specification of goodwill by sector...

  • Page 233
    ... of euros effect of accounting policy changes previous policy December 31, 2006 Cost of sales Selling expenses General and administrative expenses Research and development expenses Discontinued operations Income tax expense Net income December 31, 2007 Cost of sales Selling expenses General and...

  • Page 234
    ... Company's pension plan asset allocation in the Netherlands at December 31, 2007 and 2008 was as follows: 2007 actual % Matching portfolio: - Debt securities Return portfolio: - Equity securities - Real estate - Other 41 28 8 5 100 59 59 25 13 4 8 100 75 75 2008 actual % 234 Philips Annual Report...

  • Page 235
    .... The long-term rate of return on total plan assets is expected to be 5.95% per annum, based on expected long-term returns on equity securities, debt securities, real estate and other investments of 8.3%, 4.0%, 6.5% and 5.0%, respectively. Philips Pension Fund in the Netherlands On November 13, 2007...

  • Page 236
    ... in the following line items in the income statement: 2006 2007 2008 Cost of sales Selling expenses General and administrative expenses Research and development expenses 3 3 24 âˆ' 30 2 2 24 1 29 4 3 24 âˆ' 31 Present value of funded obligations at end of year Present value of unfunded...

  • Page 237
    ... of non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information The weighted average assumptions used to calculate the net cost for years ended December 31: 2007 2008 58 Short-term debt 2007 2008 Discount rate Compensation increase (where applicable...

  • Page 238
    ... amounts of long-term debt as of December 31, 2008, are due in the next five years: 2009 2010 2011 2012 2013 Total Corresponding amount of previous year 136 75 1,020 14 465 1,710 2,651 The provisions applicable to all corporate bonds that have been issued by the Company in March 2008, contain...

  • Page 239
    ... payments for 2008 totaled EUR 16 million (2007: EUR 14 million, 2006: EUR 20 million). The remaining minimum payments are as follows: 2009 2010 2011 2012 2013 Thereafter 16 12 8 8 8 41 environmental pollution. In respect of antitrust laws, the Company and certain of its (former) group companies...

  • Page 240
    ...In addition, in February 2007, certain plaintiffs filed purported class actions in a United States court against LG Display and certain current and former employees and directors of LG Display for damages based on alleged violations of U.S. federal securities laws. No Philips group company is named...

  • Page 241
    ... Display Systems with Toppoly Optoelectronics Corporation of Taiwan to form a new company named TPO. Philips obtained a 17.5% stake in TPO as a consideration for the transaction valued at EUR 180 million. 67 63 64 65 66 67 Shares acquired Average market price Amount paid Reduction of capital stock...

  • Page 242
    ... as cash ï¬,ow hedges to offset forecasted purchases. Changes in the value of foreign currency accounts receivable/payable as well as the changes in the fair value of the hedges of accounts receivable/payable are reported in the income statement under cost of sales. The hedges related to forecasted...

  • Page 243
    ..., that the Management report as set out on page 192 to 197 is consistent with the consolidated financial statements as required by 2:391 sub 4 of the Netherlands Civil Code. Amsterdam, February 23, 2009 KPMG Accountants N.V. M.A. Soeting RA Subsequent events Share repurchase program On January 26...

  • Page 244
    ...of par value Legal reserve: revaluation Legal reserve: available-for-sale securities Legal reserve: cash ï¬,ow hedges Legal reserve: affiliated companies Legal reserve: currency translation differences Retained earnings Net income (loss) Treasury shares, at cost: 49,429,913 shares (2007: 77,933,509...

  • Page 245
    ... changes in equity of Koninklijke Philips Electronics N.V. in millions of euros unless otherwise stated legal reserves outstanding number of capital in available currency net treasury shares in common excess of for-sale cash ï¬,ow affiliated translation retained income shares at thousands stock par...

  • Page 246
    ... June 2008, cash transactions with US-based group companies were executed through Koninklijke Philips Electronics N.V. (KPENV), which resulted in significant individual short-term intercompany receivables and payables. As from that date, and in line with the standard practice in other countries...

  • Page 247
    ...B). Sales/redemptions reï¬,ect the reduction of Philips' interest in TSMC, LG Display and D&M Holdings. Value adjustments/impairments mainly relate to the interests in LG Display, TPO Displays, Pace Micro Technology and NXP. D Other current liabilities 2007 2008 Income tax payable Other short-term...

  • Page 248
    ...the General Meeting of Shareholders in 1989 adopted amendments to the Company's articles of association that allow the Board of Management and the Supervisory Board to issue (rights to acquire) preference shares to a third party. As of December 31, 2008, no preference shares have been issued. Option...

  • Page 249
    ...873 million). J Employees The number of persons employed by the Company at year-end 2008 was 11 (2007: 13) and included the members of the Board of Management and most members of the Group Management Committee. For the remuneration of past and present members of both the Board of Management and the...

  • Page 250
    ... cash from operating activities and net cash from investing activities, and free cash ï¬,ow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader's understanding of the Company's funding requirements. 250 Philips Annual Report...

  • Page 251
    ... governance 262 Ten-year overview 266 Investor information Sales growth composition per sector in % comparable growth currency effects consolidation changes nominal growth 2008 versus 2007 Healthcare Consumer Lifestyle Lighting Innovation & Emerging Businesses Group Management & Services Philips...

  • Page 252
    ...) (1,606) 1,495 (722) 773 EBITA to Income from operations or EBIT Philips Group Healthcare Consumer Lifestyle Lighting I&EB GM&S 2008 EBITA Amortization of intangibles (excl. software) Write off of acquired in-process R&D Impairment of goodwill Income from operations (or EBIT) 931 (365) (15) (234...

  • Page 253
    ... 254 Corporate governance 262 Ten-year overview 266 Investor information Net operating capital to total assets Philips Group Healthcare Consumer Lifestyle Lighting I&EB GM&S 2008 Net operating capital (NOC) Eliminate liabilities comprised in NOC: - payables/liabilities - intercompany accounts...

  • Page 254
    ... and international (codes of) best practices. The Company has incorporated a fair disclosure practice in its investor relations policy, has strengthened the accountability of its executive management and its independent supervisory directors, and has increased the rights and powers of shareholders...

  • Page 255
    ... lastly amended by the 2008 General Meeting of Shareholders and is published on the Company's website. A full and detailed description of the composition of the remuneration of the individual members of the Board of Management is included in the chapter Supervisory Board report that begins on page...

  • Page 256
    ..., Philips adopted 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...

  • Page 257
    ... company by a member of the Supervisory Board and the unnecessary administrative burden, the Supervisory Board considers an annual notification of changes in a member's holdings of securities related to Dutch listed companies to the Philips Compliance Officer to be in line with best practices...

  • Page 258
    ... 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 259
    ...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 260
    ... Annual General Meeting of Shareholders, to be convened subsequently. Philips, under US securities regulations, separately files its Annual Report on Form 20-F, incorporating major parts of the Annual Report as prepared under the requirements of Dutch law. Internal controls and disclosure policies...

  • Page 261
    ... by means of a press release and on the Company's website or can be followed in real time. For this reason the Company cannot fully apply the literal text of recommendation IV.3.I. of the Dutch Corporate Governance Code. Only bearer shares are traded on the stock market of Euronext Amsterdam. Only...

  • Page 262
    ...directly comparable. General data 1999 Sales Percentage increase over previous year Income (loss) from continuing operations Discontinued operations1) 2) 3) Cumulative effect of a change in accounting principle Net income (loss) Free cash ï¬,ow Turnover rate of net operating capital Total employees...

  • Page 263
    ... non-US GAAP information 254 Corporate governance 262 Ten-year overview 266 Investor information Income 1999 EBIT as a % of sales EBITA as a % of sales Income taxes as a % of income before taxes Income (loss) from continuing operations as a % of stockholders' equity (ROE) Net income (loss) 1,553...

  • Page 264
    ... 3:97 12,765 Sustainability 1999 Green Product sales, as a % of total sales Green Innovation spending, in millions of euros Operational carbon footprint, in kilotons CO2-e Energy consumption, in TJ 6) 2000 2001 2002 2003 2004 2005 2006 2007 2008 âˆ' âˆ' âˆ' 16,537...

  • Page 265
    ... Corporate governance 262 Ten-year overview 266 Investor information Key figures per share 1999 Sales per common share EBITA per common share - diluted Income (loss) from continuing operations per share Dividend paid per common share Total shareholder return per common share Stockholders' equity...

  • Page 266
    ... per common share compared to the level of 2007 is supported by a number of specific financial objectives as follows: • Realize average annual comparable sales growth of 6% • Increase Group EBITA margin to 10-11% of sales of which - Healthcare 15-17% - Consumer Lifestyle 8-10% - Lighting 12-14...

  • Page 267
    ... increase in sales of energy-ef ficient lighting, including LED solutions, and the repurchase of EUR 3.3 billion of our own shares. During the second half of the year we have taken proactive measures to address the deteriorating market conditions. We increased our focus on cash and risk management...

  • Page 268
    ... treasury amounted to 49.4 million shares, of which 47.6 million are held by Philips to cover long-term incentive and employee stock purchase plans. No person or group, other than the Company, is known to Philips to be the owner of more than 5% of the common shares. 268 Philips Annual Report 2008

  • Page 269
    ...Investor Relations website. For more information see the section Corporate governance of the Philips Group that begins on page 254 of this Annual Report. In 2008 the Company started the procedure for the cancellation of Philips shares acquired pursuant to the EUR 5.0 billion share repurchase program...

  • Page 270
    ... statements 244 Company financial statements Philips' acquisitions Closing of major acquisitions announced in 2007 January 22, 2008 February 20, 2008 March 10, 2008 Genlyte VISICU Respironics Professional Luminaires Healthcare IT Home Healthcare Create #1 lighting company in North America and...

  • Page 271
    ... Market capitalization at year-end 2008 Industry classification MSCI: Capital Goods ICB1): Consumer Electronics Members of indices AEX, NYSE, DJSI, STOXX50, and others 1) 5-year relative performance: Philips and AEX base 100 = Jan 2, 2004 Philips Amsterdam closing share price AEX monthly traded...

  • Page 272
    ... incorporates major parts of this Annual Report) is filed electronically with the US Securities and Exchange Commission. International direct investment program There is a dividend reinvestment and direct stock purchase plan designed for the US market. This program provides existing shareholders...

  • Page 273
    ...nal confirmation How to reach us Investor Relations contact Royal Philips Electronics Breitner Center, HBT 11-8 P.O. Box 77900, 1070 MX Amsterdam, Netherlands Telephone: +31-20-59 77221 Website: www.philips.com/investor E-mail: [email protected] Stewart McCrone Senior Vice President...

  • Page 274
    ..., results relating to equity-accounted investees, income taxes, financial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized development expenses). Philips believes that EBITA information makes the underlying performance of its businesses more...

  • Page 275
    ... printed copy of our Annual Report 2009. Stay up to date! Go to News or Feeds for up-to-the-minute news about Philips. Like to know more about Philips? Visit our Investor Relations site to find out the latest developments regarding your investment. Interested in working for Philips? Check out our...

  • Page 276
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