Philips 2008 Annual Report Download - page 104

except for the embedded derivatives in the convertible
bond already mentioned.
Philips is also a shareholder in several privately is
owned companies including NXP. As a result, Philips
is exposed to potential value adjustments.
Commodity price risk
Philips is a purchaser of certain base metals, precious
metals and energy. Philips hedges certain commodity
price risks using derivative instruments to minimize
significant, unanticipated earnings fluctuations caused
by commodity price volatility. The commodity price
derivatives that Philips enters into are accounted for
as cash flow hedges to offset forecasted purchases.
Currently, a loss of EUR 11 million is deferred in
equity as a result of these hedges. A 10% increase in
the market price of all commodities as at December
31, 2008, would increase the fair value of the
derivatives by EUR 1 million.
Credit risk
Credit risk represents the loss that would be recognized
at the reporting date if counterparties failed completely
to perform their payment obligations as contracted.
Credit risk is present within Philips trade receivables.
To reduce exposure to credit risk, Philips performs
ongoing evaluations of the financial condition of its
customers and adjusts payment terms and credit limits
when appropriate.
Philips invests available cash and cash equivalents
with various financial institutions and is exposed
to credit risk with these counterparties. Philips is
also exposed to credit risks in the event of non-
performance by counterparties with respect
to financial derivative instruments.
Philips actively manages concentration risk and on
a daily basis measures the potential loss under certain
stress scenarios, should a financial counterparty
default. These worst-case scenario losses are monitored
and limited by the company. As of December 31, 2008
Philips had credit risk exceeding EUR 25 million with
the following number of counterparties:
Philips does not currently hedge the foreign
exchange exposure arising from equity interests in
non-functional currency equity-accounted investees
and available-for-sale financial assets.
Interest rate risk
Philips has outstanding debt of EUR 4,158 million,
which creates an inherent interest rate risk. Failure
to effectively hedge this risk could negatively impact
financial results. At year-end, Philips held EUR 3,620
million in cash and cash equivalents and had total
long-term debt of EUR 3,441 million and total short-
term debt of EUR 717 million. At December 31, 2008,
Philips had a ratio of fixed-rate long-term debt to total
outstanding debt of approximately 76%, compared
to 34% one year earlier.
A sensitivity analysis shows that if long-term interest
rates were to decrease instantaneously by 1% from
their level of December 31, 2008, with all other
variables (including foreign exchange rates) held
constant, the fair value of the long-term debt would
increase by approximately EUR 208 million. If there
was an increase of 1% in long-term interest rates, this
would reduce the market value of the long-term debt
by approximately EUR 207 million.
If interest rates were to increase instantaneously by
1% from their level of December 31, 2008, with all
other variables held constant, the annualized net
interest expense would increase by approximately
EUR 24 million. This impact is based on the
outstanding net debt position at December 31, 2008.
Equity price risk
Philips is a shareholder in several publicly
listed companies, including 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
investees amounted to approximately EUR 659 million
at year-end 2008 (2007: EUR 4,464 million including
shares that were sold during 2008). Philips also holds
options on the shares of TPV through a convertible
bond issued to Philips in September 2005, the face
value of the bond being the USD equivalent of EUR 149
million and the fair value of the option at year-end
EUR 10 million. Furthermore, Philips also holds
options on the shares of CBay through a convertible
bond issued to Philips in August 2008, the face value
of the bond being the USD equivalent of EUR 65 million
and the fair value of the option at year-end less than
EUR 1 million. Philips does not hold derivatives in its
own stock or in the above-mentioned listed companies
Philips Annual Report 2008104
42
Our group performance
18
We care about...
8
Message from
the President
6
Performance highlights
14
Who we are