Earnings Release • Jul 24, 2017
Earnings Release
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Amsterdam, July 24, 2017
"Philips' performance in the second quarter of 2017 was solid, with 4% comparable sales growth in our HealthTech portfolio driven by Western Europe, North America and China, and a strong 8% increase in our order intake. We achieved a 90-basis-point increase in the Adjusted EBITA margin, driven by higher volumes, operational improvements and cost productivity.
Our Personal Health businesses delivered another strong quarter, with 6% comparable sales growth and a 120-basis-point improvement in the Adjusted EBITA margin. In a soft market, our Diagnosis & Treatment businesses showed a robust 3% comparable sales growth, strong order intake growth and an 80-basis-point operational improvement. Our Connected Care & Health Informatics businesses recorded a 90-basis-point increase in the Adjusted EBITA margin, and I am confident that the performance of these businesses will continue to improve in the second half of the year, based on the strength of their order book.
In the second quarter, we extended our portfolio with targeted acquisitions that we identified in the past two years. For example, to strengthen the leading position of our Image-Guided Therapy business and expand its portfolio of therapy devices, we signed an agreement to acquire Spectranetics, a leader in vascular intervention and lead management solutions. We also acquired CardioProlific, a US-based start-up company that develops catheter-based thrombectomy technology to treat peripheral vascular disease. I am also pleased with the progress of several of our organic growth initiatives, such as the FDA clearance of our comprehensive Digital Pathology solution for primary diagnostic use in the US. Furthermore, we completed the Lumileds transaction and reduced our stake in Philips Lighting to 41.16% net.
In line with our Capital Allocation policy, which aims at a balanced mix of investments in organic and inorganic growth opportunities, actions to drive balance sheet efficiency and returns to shareholders, we also announced a new EUR 1.5 billion share buyback program to be launched in the third quarter of 2017. This program will more than offset the share dilution in connection with Philips' long-term incentive programs and dividend in shares.
Despite continued volatility in the markets in which we operate, our outlook for 2017 remains unchanged as we expect further operational improvements and comparable sales growth in the year to be back-end loaded, supported by a strong order book. We are on track to deliver 4-6% comparable sales growth and an improvement in Adjusted EBITA margin of around 100 basis points per year."
The 6% comparable sales growth of the Personal Health businesses was driven by double-digit growth in Health & Wellness, highsingle-digit growth in Personal Care and mid-single-digit growth in Sleep & Respiratory Care; the Adjusted EBITA margin improved by 120 basis points. The 3% comparable sales growth of the Diagnosis & Treatment businesses was driven by mid-single-digit growth in Ultrasound and Image-Guided Therapy, while the Adjusted EBITA margin improved by 80 basis points. Comparable order intake increased by 7%, with all business groups contributing. In the Connected Care & Health Informatics businesses, comparable sales increased by 1%, reecting low-single-digit growth in Patient Care & Monitoring Solutions. The Adjusted EBITA margin was 90 basis points higher than in the same period last year. Comparable order intake increased by 8%.
Philips' ongoing focus on innovation through organic and inorganic growth initiatives resulted in the following highlights in the quarter:
In the second quarter, procurement savings amounted to EUR 61 million. Other productivity programs resulted in savings of EUR 48 million.
As announced on June 28, 2017, Philips will launch a share buyback program for an amount of EUR 1.5 billion in the third quarter of 2017, to be completed in two years. As the program will be initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program. Philips intends to execute part of the program through a series of individual forward transactions, unevenly distributed over the two-year period.
In July 2017, Philips made a contribution of USD 250 million to the Philips US pension fund to further improve the funding ratio. This will further decrease Philips' interest costs going forward.
As previously reported, Philips continues to be in discussions on a civil matter with the US Department of Justice representing the FDA, arising from past inspections by the FDA in and prior to 2015, focusing primarily on the external defibrillator business in the US.
On April 25, 2017, Philips sold 22.25 million shares in Philips Lighting, of which 3.5 million shares were acquired by Philips Lighting and were cancelled. Philips' shareholding in Philips Lighting decreased to 40.97% of Philips Lighting's issued and outstanding share capital, down from 55.18% prior to the transaction. In addition, in Q2 2017, Philips Lighting acquired 0.65 million of its own shares in connection with its long-term incentive programs. As of June 30, 2017, Philips' shareholding in Philips Lighting was 41.16% of the issued and outstanding share capital. Philips continues to consolidate Philips Lighting under International Financial Reporting Standards (IFRS). As loss of control is highly probable within one year due to further sell-downs, Philips Lighting is presented as a discontinued operation in the financial statements of Philips as of the second quarter of 2017. Full details about the financial performance of Philips Lighting in the second quarter were published on July 21, 2017. The related report can be accessed here.
Frans van Houten, CEO, and Abhijit Bhattacharya, CFO, will host a conference call for investors and analysts at 10:00 am CET today to discuss the results. A live audio webcast of the conference call will be available on the Philips Investor Relations website and can be accessed here.
Key data in millions of EUR unless otherwise stated
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Sales | 4,132 | 4,294 |
| Nominal sales growth | 0% | 4% |
| Comparable sales growth* | 5% | 4% |
| Income from operations (EBIT) | 265 | 252 |
| as a % of sales | 6.4% | 5.9% |
| Financial expenses, net | (86) | (43) |
| Investments in associates | 2 | (4) |
| Income taxes | (63) | (44) |
| Income from continuing operations | 118 | 161 |
| Discontinued operations | 313 | 128 |
| Net income | 431 | 289 |
| Net income attributable to shareholders per common share (in EUR) - diluted |
0.46 | 0.27 |
| EBITA* | 326 | 329 |
| as a % of sales | 7.9% | 7.7% |
| Adjusted EBITA* | 383 | 439 |
| as a % of sales | 9.3% | 10.2% |
| Adjusted EBITDA* | 555 | 611 |
| as a % of sales | 13.4% | 14.2% |
| Sales per geographic cluster in millions of EUR unless otherwise stated | |||
|---|---|---|---|
| % change | ||||||
|---|---|---|---|---|---|---|
| Q2 2016 | Q2 2017 | nominal | comparable* | |||
| Western Europe | 883 | 930 | 5% | 8% | ||
| North America | 1,482 | 1,570 | 6% | 4% | ||
| Other mature geographies |
415 | 397 | (4)% | (7)% | ||
| Total mature geographies |
2,781 | 2,897 | 4% | 4% | ||
| Growth geographies | 1,351 | 1,397 | 3% | 3% | ||
| Philips Group | 4,132 | 4,294 | 4% | 4% |
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Beginning cash balance | 1,385 | 2,731 |
| Free cash ow* | 7 | (89) |
| Net cash flow from operating activities | 177 | 73 |
| Net capital expenditures | (169) | (162) |
| Other cash ows from investing activities | (63) | (69) |
| Treasury shares transactions | (185) | (2) |
| Changes in debt | (1,225) | (914) |
| Dividend paid to shareholders of the Company | (280) | (326) |
| Sale of shares of Philips Lighting, net | 844 | 537 |
| Other cash ow items | 9 | (91) |
| Net cash ows from discontinued operations | 1,433 | 1,056 |
| Ending cash balance | 1,926 | 2,832 |
| of which discontinued operations | 612 | |
| of which continuing operations | 1,926 | 2,220 |
• Net cash ows from operating activities decreased by EUR 104 million, mainly due to higher working capital and higher tax paid.
Key data in millions of EUR unless otherwise stated
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Sales | 1,661 | 1,761 |
| Sales growth | ||
| Nominal sales growth | 4% | 6% |
| Comparable sales growth* | 9% | 6% |
| Income from operations (EBIT) | 199 | 235 |
| as a % of sales | 12.0% | 13.3% |
| EBITA* | 233 | 269 |
| as a % of sales | 14.0% | 15.3% |
| Adjusted EBITA* | 234 | 270 |
| as a % of sales | 14.1% | 15.3% |
| Adjusted EBITDA* | 294 | 328 |
| as a % of sales | 17.7% | 18.6% |
Key data in millions of EUR unless otherwise stated
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Sales | 1,600 | 1,671 |
| Sales growth | ||
| Nominal sales growth | (3)% | 4% |
| Comparable sales growth* | 1% | 3% |
| Income from operations (EBIT) | 111 | 111 |
| as a % of sales | 6.9% | 6.6% |
| EBITA* | 124 | 120 |
| as a % of sales | 7.8% | 7.2% |
| Adjusted EBITA* | 131 | 151 |
| as a % of sales | 8.2% | 9.0% |
| Adjusted EBITDA* | 176 | 193 |
| as a % of sales | 11.0% | 11.5% |
Key data in millions of EUR unless otherwise stated
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Sales | 767 | 768 |
| Sales growth | ||
| Nominal sales growth | 2% | 0% |
| Comparable sales growth* | 6% | 1% |
| Income from operations (EBIT) | 46 | 16 |
| as a % of sales | 6.0% | 2.1% |
| EBITA* | 57 | 27 |
| as a % of sales | 7.4% | 3.5% |
| Adjusted EBITA* | 58 | 65 |
| as a % of sales | 7.6% | 8.5% |
| Adjusted EBITDA* | 94 | 99 |
| as a % of sales | 12.3% | 12.9% |
| Key data in millions of EUR | ||
|---|---|---|
| Q2 2016 | Q2 2017 | |
| Sales | 105 | 96 |
| Income from operations (EBIT) | (18) | (61) |
| EBITA* | (17) | (39) |
| Adjusted EBITA* | (14) | (32) |
| IP Royalties | 66 | 49 |
| Innovation | (56) | (53) |
| Central costs | (23) | (17) |
| Other | (1) | (10) |
| Adjusted EBITDA* | 18 | 6 |
Income from operations (EBIT) in millions of EUR
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Separation costs | (45) | (7) |
| Other | (28) | (42) |
| Income from operations (EBIT) | (73) | (49) |
Net income of discontinued operations in millions of EUR
| Q2 2016 | Q2 2017 | |
|---|---|---|
| Lighting | 114 | 110 |
| The combined Lumileds and Automotive businesses |
60 | 17 |
| Other | 139 | - |
| Net income of discontinued operations | 313 | 128 |
EBITA* in millions of EUR unless otherwise stated
EBITA* in millions of EUR unless otherwise stated
EBITA* in millions of EUR unless otherwise stated
Adjusted EBITA* in millions of EUR unless otherwise stated
* Non-GAAP financial measure. Refer to Reconciliation of non-GAAP information, of this document.
Quarterly report Q2 2017 9
Certain non-GAAP financial measures are presented when discussing the Philips Group's performance:
The term EBIT has the same meaning as Income from operations.
Adjusted EBITA is defined as Income from operations (EBIT) excluding amortization of intangible assets (excluding software and development expenses), impairment of goodwill and other intangible assets, restructuring charges, acquisition-related costs and other significant items.
Adjusted EBITDA is defined as Income from operations (EBIT) excluding amortization and impairment of intangible assets, impairment of goodwill and, depreciation and impairment of property, plant and equipment, and restructuring charges, acquisition-related costs and other significant items.
Free cash ow is defined as Net cash from operating activities minus net capital expenditures. Net capital expenditures are comprised of the purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposal of property, plant and equipment.
Comparable order intake is reported for equipment and software and is defined as the total contractually committed amount to be delivered within a specified timeframe excluding the effects of currency movements and changes in consolidation. Comparable order intake does not derive from the financial statements and thus a quantitative reconciliation is not provided.
For the definitions of the remaining non-GAAP financial measures listed above, refer to the Annual Report 2016.
In the following tables, reconciliations to the most directly comparable IFRS measures are presented.
| Q2 2017 | January to June 2017 | |||||||
|---|---|---|---|---|---|---|---|---|
| nominal growth | consolidation changes |
currency effects | comparable growth |
nominal growth | consolidation changes |
currency effects | comparable growth |
|
| 2017 versus 2016 | ||||||||
| Personal Health | 6.0% | 1.1% | (0.9)% | 6.2% | 6.4% | 0.8% | (1.5)% | 5.7% |
| Diagnosis & Treatment |
4.4% | 0.0% | (1.6)% | 2.8% | 4.7% | 0.0% | (2.2)% | 2.5% |
| Connected Care & Health Informatics |
0.1% | 2.3% | (1.7)% | 0.7% | 2.7% | 0.9% | (2.5)% | 1.1% |
| HealthTech Other | (8.6)% | 0.6% | (0.3)% | (8.3)% | (9.6)% | 0.3% | (0.2)% | (9.5)% |
| Philips Group | 3.9% | 0.9% | (1.3)% | 3.5% | 4.6% | 0.5% | (1.9)% | 3.2% |
| Connected Care | ||||||
|---|---|---|---|---|---|---|
| Philips Group | Personal Health | Diagnosis & Treatment |
& Health Informatics |
HealthTech Other | Legacy Items | |
| Q2 2017 | ||||||
| Net Income | 289 | |||||
| Discontinued operations, net of income taxes | (128) | |||||
| Income taxes | 44 | |||||
| Investments in associates | 4 | |||||
| Financial expenses | 67 | |||||
| Financial income | (24) | |||||
| Income from operations (EBIT) | 252 | 235 | 111 | 16 | (61) | (49) |
| Amortization of acquired intangible assets | 67 | 34 | 9 | 11 | 13 | |
| Impairment of goodwill | 9 | 9 | ||||
| EBITA | 329 | 269 | 120 | 27 | (39) | (48) |
| Restructuring and aquisition-related charges | 65 | 1 | 31 | 25 | 7 | |
| Other items | 46 | 12 | - | 34 | ||
| Adjusted EBITA | 439 | 270 | 151 | 65 | (32) | (15) |
| January to June 2017 | ||||||
| Net income | 548 | |||||
| Discontinued operations, net of income taxes | (259) | |||||
| Income taxes | 107 | |||||
| Investments in associates | 7 | |||||
| Financial expenses | 140 | |||||
| Financial income | (47) | |||||
| Income from operations (EBIT) | 495 | 466 | 154 | 4 | (49) | (80) |
| Amortization of acquired intangible assets | 129 | 69 | 18 | 23 | 19 | |
| Impairment of goodwill | 9 | 9 | ||||
| EBITA | 634 | 535 | 172 | 28 | (21) | (80) |
| Restructuring and aquisition-related charges | 89 | 3 | 42 | 33 | 10 | |
| Other items | 15 | 29 | (59) | 44 | ||
| Adjusted EBITA | 737 | 538 | 214 | 90 | (70) | (35) |
| Q2 2016 | ||||||
| Net income | 431 | |||||
| Discontinued operations, net of income taxes | (313) | |||||
| Income tax | 63 | |||||
| Investments in associates | (2) | |||||
| Financial expenses | 96 | |||||
| Financial income | (10) | |||||
| Income from operations (EBIT) | 265 | 199 | 111 | 46 | (18) | (73) |
| Amortization of acquired intangible assets | 60 | 34 | 13 | 10 | 1 | 2 |
| Impairment of goodwill | 1 | 1 | ||||
| EBITA | 326 | 233 | 124 | 57 | (17) | (71) |
| Restructuring and aquisition-related charges | 8 | 1 | 7 | (3) | 3 | |
| Other Items | 49 | 4 | 45 | |||
| Adjusted EBITA | 383 | 234 | 131 | 58 | (14) | (26) |
| January to June 2016 | ||||||
| Net income | 468 | |||||
| Discontinued operations, net of income taxes | (317) | |||||
| Income tax | 59 | |||||
| Investments in associates | (5) | |||||
| Financial expenses | 222 | |||||
| Financial income | (35) | |||||
| Income from operations (EBIT) | 391 | 389 | 121 | 57 | (27) | (149) |
| Amortization of acquired intangible assets | 122 | 69 | 26 | 22 | 3 | 2 |
| Impairment of goodwill | 1 | 1 | ||||
| EBITA | 147 | 80 | (24) | (147) | ||
| 514 | 458 | |||||
| Restructuring and aquisition-related charges | 21 | 3 | 16 | 1 | 1 | |
| Other items | 101 | 4 | 97 |
| Diagnosis & | Connected Care & Health |
|||||
|---|---|---|---|---|---|---|
| Philips Group | Personal Health | Treatment | Informatics | HealthTech Other | Legacy Items | |
| Q2 2017 | ||||||
| Net Income | 289 | |||||
| Discontinued operations, net of income taxes | (128) | |||||
| Income taxes | 44 | |||||
| Investment in associates | 4 | |||||
| Financial expenses | 67 | |||||
| Financial income | (24) | |||||
| Income from operations (EBIT) | 252 | 235 | 111 | 16 | (61) | (49) |
| Depreciation, amortization and impairments of fixed assets |
243 | 92 | 52 | 48 | 51 | 1 |
| Impairment of goodwill | 9 | 9 | ||||
| Restructuring and aquisition-related charges | 65 | 1 | 31 | 25 | 7 | |
| Other items | 46 | 12 | - | 34 | ||
| Adding back impairment of fixed assets included in restructuring and acquisition-related charges and other items |
(4) | (2) | (2) | - | ||
| Adjusted EBITDA | 611 | 328 | 193 | 99 | 6 | (15) |
| January to June 2017 | ||||||
| Net Income | 548 | |||||
| Discontinued operations, net of income taxes | (259) | |||||
| Income taxes | 107 | |||||
| Investment in associates | 7 | |||||
| Financial expenses | 140 | |||||
| Financial income | (47) | |||||
| Income from operations (EBIT) | 495 | 466 | 154 | 4 | (49) | (80) |
| Depreciation, amortization and impairments of fixed assets |
472 | 184 | 105 | 92 | 89 | 1 |
| Impairment of goodwill | 9 | 9 | ||||
| Restructuring and aquisition-related charges | 89 | 3 | 42 | 33 | 10 | |
| Other items | 15 | 29 | (59) | 44 | ||
| Adding back of impairment of fixed assets included in restructuring and acquisition-related charges and other items |
(6) | (2) | (3) | - | ||
| Adjusted EBITDA | 1,074 | 653 | 299 | 156 | - | (34) |
| Diagnosis & | Connected Care & Health |
|||||
|---|---|---|---|---|---|---|
| Philips Group | Personal Health | Treatment | Informatics | HealthTech Other | Legacy Items | |
| Q2 2016 | ||||||
| Net Income | 431 | |||||
| Discontinued operations, net of income taxes | (313) | |||||
| Income taxes | 63 | |||||
| Investment in associates | (2) | |||||
| Financial expenses | 96 | |||||
| Financial income | (10) | |||||
| Income from operations (EBIT) | 265 | 199 | 111 | 46 | (18) | (73) |
| Depreciation, amortization and impairments of fixed assets |
233 | 94 | 59 | 46 | 33 | 1 |
| Impairment of goodwill | 1 | 1 | ||||
| Restructuring and aquisition-related charges | 8 | 1 | 7 | (3) | 3 | |
| Other items | 49 | 4 | 45 | |||
| Adding back of impairment of fixed assets included in restructuring and acquisition-related charges and other items |
(1) | (1) | ||||
| Adjusted EBITDA | 555 | 294 | 176 | 94 | 18 | (27) |
| January to June 2016 | ||||||
| Net Income | 468 | |||||
| Discontinued operations, net of income taxes | (317) | |||||
| Income taxes | 59 | |||||
| Investment in associates | (5) | |||||
| Financial expenses | 222 | |||||
| Financial income | (35) | |||||
| Income from operations (EBIT) | 391 | 389 | 121 | 57 | (27) | (149) |
| Depreciation, amortization and impairments of fixed assets |
468 | 189 | 116 | 94 | 68 | 1 |
| Impairment of goodwill | 1 | 1 | ||||
| Restructuring and aquisition-related charges | 21 | 3 | 16 | 1 | 1 | |
| Other items | 101 | 4 | 97 | |||
| Adding back of impairment of fixed assets included in restructuring and acquisition-related charges and other items |
(6) | - | (2) | (3) | ||
| Adjusted EBITDA | 976 | 581 | 251 | 154 | 42 | (51) |
Composition of cash flows in millions of EUR
| January to June | |||
|---|---|---|---|
| 2016 | 2017 | ||
| Cash ows provided by (used for) operating activities | 153 | 373 | |
| Cash ows used for investing activities | (494) | (376) | |
| Cash flows before financing activities | (341) | (3) | |
| Cash ows provided by (used for) operating activities | 153 | 373 | |
| Net capital expenditures: | (340) | (208) | |
| Purchase of intangible assets | (40) | (36) | |
| Expenditures on development assets | (142) | (163) | |
| Capital expenditures on property, plant and equipment | (166) | (179) | |
| Proceeds from sale of property, plant and equipment | 8 | 171 | |
| Free cash flows | (187) | 165 |
Composition of net debt to group equity in millions of EUR unless otherwise stated
| June 30, 2016 | December 31, 2016 | June 30, 2017 | |
|---|---|---|---|
| Long-term debt | 5,269 | 4,021 | 2,599 |
| Short-term debt | 539 | 1,585 | 297 |
| Debt reported as liabilties associated with assets held for sale | 1,309 | ||
| Total debt | 5,808 | 5,606 | 4,205 |
| Cash and cash equivalents | 1,926 | 2,334 | 2,220 |
| Cash and cash equivalents reported as assets held for sales | 612 | ||
| Total Cash and cash equivalents | 1,926 | 2,334 | 2,832 |
| Net debt (total debt less cash and cash equivalents) | 3,882 | 3,272 | 1,373 |
| Shareholders' equity | 11,488 | 12,601 | 12,246 |
| Non-controlling interests | 853 | 907 | 1,501 |
| Group equity | 12,341 | 13,508 | 13,747 |
| Net debt and group equity | 16,223 | 16,780 | 15,120 |
| Net debt divided by net debt and equity (in %) | 24% | 19% | 9% |
| Equity divided by net debt and equity (in %) | 76% | 81% | 91% |
in millions of EUR unless otherwise stated
| 2016 | 2017 | |||||||
|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |
| Sales | 3,826 | 4,132 | 4,157 | 5,306 | 4,035 | 4,294 | ||
| Comparable sales growth* | 5% | 5% | 5% | 5% | 3% | 4% | ||
| Gross margin | 1,644 | 1,860 | 1,953 | 2,482 | 1,777 | 1,925 | ||
| as a % of sales | 43.0% | 45.0% | 47.0% | 46.8% | 44.1% | 44.8% | ||
| Selling expenses | (989) | (999) | (988) | (1,166) | (1,024) | (1,091) | ||
| as a % of sales | (25.9)% | (24.2)% | (23.8)% | (22.0)% | (25.4)% | (25.4)% | ||
| G&A expenses | (145) | (181) | (158) | (173) | (151) | (146) | ||
| as a % of sales | (3.8)% | (4.4)% | (3.8)% | (3.3)% | (3.8)% | (3.4)% | ||
| R&D expenses | (380) | (412) | (428) | (449) | (431) | (421) | ||
| as a % of sales | (9.9)% | (10.0)% | (10.3)% | (8.5)% | (10.7)% | (9.8)% | ||
| Income from operations (EBIT) | 126 | 265 | 381 | 693 | 243 | 252 | ||
| as a % of sales | 3.3% | 6.4% | 9.2% | 13.1% | 6.0% | 5.9% | ||
| Net income | 37 | 431 | 383 | 640 | 259 | 289 | ||
| Net income - shareholders per common share in EUR - diluted |
0.03 | 0.46 | 0.40 | 0.67 | 0.25 | 0.27 | ||
| EBITA* | 188 | 326 | 441 | 753 | 304 | 329 | ||
| as a % of sales | 4.9% | 7.9% | 10.6% | 14.2% | 7.5% | 7.7% | ||
| Adjusted EBITA* | 253 | 383 | 474 | 811 | 298 | 439 | ||
| as a % of sales | 6.6% | 9.3% | 11.4% | 15.3% | 7.4% | 10.2% | ||
| Adjusted EBITDA* | 422 | 555 | 646 | 991 | 463 | 611 | ||
| as a % of sales | 11.0% | 13.4% | 15.5% | 18.7% | 11.5% | 14.2% |
| 2016 | 2017 | |||||||
|---|---|---|---|---|---|---|---|---|
| January March |
January June |
January September |
January December |
January March |
January June |
January September |
January December |
|
| Sales | 3,826 | 7,959 | 12,116 | 17,422 | 4,035 | 8,329 | ||
| Comparable sales growth* | 5% | 5% | 5% | 5% | 3% | 3% | ||
| Gross margin | 1,644 | 3,504 | 5,457 | 7,939 | 1,777 | 3,703 | ||
| as a % of sales | 43.0% | 44.0% | 45.0% | 45.6% | 44.0% | 44.5% | ||
| Selling expenses | (989) | (1,988) | (2,976) | (4,142) | (1,024) | (2,115) | ||
| as a % of sales | (25.9)% | (25.0)% | (24.6)% | (23.8)% | (25.4)% | (25.4)% | ||
| G&A expenses | (145) | (327) | (485) | (658) | (151) | (297) | ||
| as a % of sales | (3.8)% | (4.1)% | (4.0)% | (3.8)% | (3.7)% | (3.6)% | ||
| R&D expenses | (380) | (792) | (1,220) | (1,669) | (431) | (852) | ||
| as a % sales | (9.9)% | (10.0)% | (10.1)% | (9.6)% | (10.7)% | (10.2)% | ||
| Income from operations (EBIT) | 126 | 391 | 772 | 1,464 | 243 | 495 | ||
| as a % of sales | 3.3% | 4.9% | 6.4% | 8.4% | 6.0% | 5.9% | ||
| Net income | 37 | 468 | 851 | 1,491 | 259 | 548 | ||
| Net income - shareholders per common share in EUR - diluted |
0.03 | 0.49 | 0.89 | 1.56 | 0.25 | 0.51 | ||
| EBITA* | 188 | 514 | 955 | 1,707 | 304 | 634 | ||
| as a % of sales | 4.9% | 6.5% | 7.9% | 9.8% | 7.5% | 7.6% | ||
| Adjusted EBITA* | 253 | 636 | 1,110 | 1,921 | 298 | 737 | ||
| as a % of sales | 6.6% | 8.0% | 9.2% | 11.0% | 7.4% | 8.8% | ||
| Adjusted EBITDA* | 422 | 976 | 1,622 | 2,613 | 463 | 1,074 | ||
| as a % of sales | 11.0% | 12.3% | 13.4% | 15.0% | 11.5% | 12.9% | ||
| Number of common shares outstanding (after deduction of treasury shares) at the end of period (in thousands) |
913,011 | 927,316 | 924,271 | 922,437 | 920,278 | 937,045 | ||
| Shareholders' equity per common share in EUR | 12.35 | 12.39 | 12.57 | 13.66 | 13.80 | 13.07 | ||
| Net debt : group equity ratio* | 27:73 | 24:76 | 24:76 | 19:81 | 16:84 | 9:91 | ||
| Total employees | 114,021 | 113,356 | 113,627 | 114,731 | 114,188 | 115,474 | ||
| of which discontinued operations | 45,263 | 44,262 | 43,783 | 43,763 | 43,758 | 43,997 | ||
| of which third-party workers | 8,190 | 7,885 | 8,079 | 8,212 | 7,795 | 8,306 |
This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include statements made about the strategy, estimates of sales growth, future EBITA, future developments in Philips' organic business and the completion of acquisitions and divestments, including the tender offer for and merger with Spectranetics. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.
These factors include but are not limited to: domestic and global economic and business conditions; developments within the euro zone; the successful implementation of Philips' strategy and the ability to realize the benefits of this strategy; the ability to develop and market new products; changes in legislation; legal claims; changes in exchange and interest rates; changes in tax rates; pension costs and actuarial assumptions; raw materials and employee costs; the ability to identify and complete successful acquisitions, including Spectranetics, and to integrate those acquisitions into the business; the ability to successfully exit certain businesses or restructure the operations; the rate of technological changes; political, economic and other developments in countries where Philips operates; industry consolidation and competition; and the state of international capital markets as they may affect the timing and nature of the disposition by Philips of its interests in Philips Lighting. As a result, Philips' actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see the Risk management chapter included in the Annual Report 2016.
Statements regarding market share, including those regarding Philips' competitive position, contained in this document are based on outside sources such as research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.
In presenting and discussing the Philips Group financial position, operating results and cash ows, management uses certain non-GAAP financial measures. These non-GAAP financial measures should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used in conjunction with the most directly comparable IFRS measures. Non-GAAP financial measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-GAAP measures
to the most directly comparable IFRS measures is contained in this document. Further information on non-GAAP measures can be found in the Annual Report 2016. Comparable order intake and Adjusted EBITDA are measures included to enhance comparability with other companies.
In presenting the Philips Group financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs. Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the Annual Report 2016. Independent valuations may have been obtained to support management's determination of fair values.
All amounts are in millions of euros unless otherwise stated. Due to rounding, amounts may not add up precisely to totals provided. All reported data is unaudited. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2016, unless otherwise stated.
In addition, we have simplified our Q1 and Q3 reporting by excluding the cash ow statement, the statement of changes in equity and certain other tables in the detailed financial information section not required to be disclosed. In our semiannual and annual reporting we will continue to present these statements and tables. Summary cash ow information is provided in the Philips performance section of this document.
Prior-period financial statements have been restated for the treatment of the segment Lighting as discontinued operations.
This press release contains inside information within the meaning of Article 7(1) of the EU Market Abuse Regulation.
This report contains the semi-annual report of Koninklijke Philips N.V. ('the Company' or 'Philips'), a company with limited liability, headquartered in Amsterdam, the Netherlands. The principal activities of the Company and its group companies ('the Group') are described in the Annual Report 2016 and in Segment information, of this document. The semi-annual report for the six months ended June 30, 2017 consists of the semi-annual condensed consolidated financial statements, the semi-annual management report and responsibility statement by the Company's Board of Management. The information in this semiannual report is unaudited.
The Board of Management of the Company hereby declares that to the best of their knowledge, the semi-annual financial statements for the six-month period ended June 30, 2017, which have been prepared in accordance with IAS 34 Interim Financial Reporting as endorsed by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole, and that the semi-annual management report for the six-month period ended June 30, 2017 gives a fair view of the information required pursuant to article 5:25d paragraph 8 and 9 of the Dutch Financial Markets Supervision Act (Wet op het Financieel toezicht).
Amsterdam, July 24, 2017
Board of Management
Frans van Houten Abhijit Bhattacharya Pieter Nota
Key data in millions of EUR unless otherwise stated
| January to June | ||
|---|---|---|
| 2016 | 2017 | |
| Sales | 7,959 | 8,329 |
| Nominal sales growth | 3% | 5% |
| Comparable sales growth* | 5% | 3% |
| Income from operations (EBIT) | 391 | 495 |
| as a % of sales | 4.9% | 5.9% |
| Financial expenses, net | (187) | (93) |
| Results investments in associates | 5 | (7) |
| Income taxes | (59) | (107) |
| Income from continuing operations | 151 | 289 |
| Discontinued operations | 317 | 259 |
| Net income | 468 | 548 |
| Net income attributable to shareholders per common share (in EUR) - diluted |
0.49 | 0.51 |
| EBITA* | 514 | 634 |
| as a % of sales | 6.5% | 7.6% |
| Adjusted EBITA* | 636 | 737 |
| as a % of sales | 8.0% | 8.8% |
| Adjusted EBITDA* | 976 | 1,074 |
| as a % of sales | 12.3% | 12.9% |
Key data in millions of EUR unless otherwise stated
| January to June | |||
|---|---|---|---|
| 2016 | 2017 | ||
| Sales | 3,271 | 3,480 | |
| Sales growth | |||
| Nominal sales growth | 5% | 6% | |
| Comparable sales growth* | 7% | 6% | |
| Income from operations (EBIT) | 389 | 466 | |
| as a % of sales | 11.9% | 13.4% | |
| EBITA* | 458 | 535 | |
| as a % of sales | 14.0% | 15.4% | |
| Adjusted EBITA* | 461 | 538 | |
| as a % of sales | 14.1% | 15.5% | |
| Adjusted EBITDA* | 581 | 653 | |
| as a % of sales | 17.8% | 18.8% |
Key data in millions of EUR unless otherwise stated
| January to June | ||||
|---|---|---|---|---|
| 2016 | 2017 | |||
| Sales | 3,019 | 3,162 | ||
| Sales growth | ||||
| Nominal sales growth | 2% | 5% | ||
| Comparable sales growth* | 3% | 2% | ||
| Income from operations (EBIT) | 121 | 154 | ||
| as a % of sales | 4.0% | 4.9% | ||
| EBITA* | 147 | 172 | ||
| as a % of sales | 4.9% | 5.4% | ||
| Adjusted EBITA* | 163 | 214 | ||
| as a % of sales | 5.4% | 6.8% | ||
| Adjusted EBITDA* | 251 | 299 | ||
| as a % of sales | 8.3% | 9.5% |
Key data in millions of EUR unless otherwise stated
| January to June | |||
|---|---|---|---|
| 2016 | 2017 | ||
| Sales | 1,461 | 1,500 | |
| Sales growth | |||
| Nominal sales growth | 6% | 3% | |
| Comparable sales growth* | 7% | 1% | |
| Income from operations (EBIT) | 57 | 4 | |
| as a % of sales | 3.9% | 0.3% | |
| EBITA* | 80 | 28 | |
| as a % of sales | 5.5% | 1.9% | |
| Adjusted EBITA* | 85 | 90 | |
| as a % of sales | 5.8% | 6.0% | |
| Adjusted EBITDA* | 154 | 156 | |
| as a % of sales | 10.5% | 10.4% |
Key data in millions of EUR
| January to June | |||
|---|---|---|---|
| 2016 | 2017 | ||
| Sales | 208 | 188 | |
| Income from operations (EBIT) | (27) | (49) | |
| EBITA* | (24) | (21) | |
| Adjusted EBITA* | (23) | (70) | |
| IP Royalties | 123 | 99 | |
| Innovation | (100) | (107) | |
| Central costs | (44) | (49) | |
| Other | (2) | (13) | |
| Adjusted EBITDA* | 42 | - |
Income from operations (EBIT) in millions of EUR
| January to June | ||||
|---|---|---|---|---|
| 2016 | 2017 | |||
| Separation costs | (97) | (20) | ||
| Other | (52) | (60) | ||
| Income from operations (EBIT) | (149) | (80) |
Net income of discontinued operations in millions of EUR
| January to June | |||
|---|---|---|---|
| 2016 2017 |
|||
| Lighting | 94 | 177 | |
| The combined Lumileds and Automotive businesses |
92 | 83 | |
| Other | 131 | (1) | |
| Net income of discontinued operations | 317 | 259 |
The Annual Report 2016 describes certain risk categories and risks (including risk appetite) which could have a material adverse effect on Philips' financial position and results. Those categories and risks remain valid and should be read in conjunction with this semi-annual report.
Looking ahead to the second half of 2017, financial markets continue to be highly volatile due to political and macroeconomic issues in most major regions such as Europe (including Brexit), United States, China, Russia, Middle East & Turkey and Latin America. Such conditions in financial markets may adversely affect the timing of and revenues from the ongoing divestment of Philips Lighting.
Also, Philips operates in a highly regulated product safety and quality environment. Philips products and facilities are subject to regulation and ongoing inspections by various government agencies, including, in particular, the FDA (US) and comparable non-US agencies. Philips is undertaking considerable efforts to improve quality and management systems in all of its operations. The remediation work in this area will continue to affect the Company's results.
Additional risks not known to Philips, or currently believed not to be material, could later turn out to have a material impact on Philips' business, objectives, revenues, income, assets, liquidity or capital resources.
Condensed consolidated statements of income in millions of EUR unless otherwise stated
| Q2 | January to June | |||
|---|---|---|---|---|
| 2016 | 2017 | 2016 | 2017 | |
| 4,132 | 4,294 | 7,959 | 8,329 | |
| (2,272) | (2,369) | (4,455) | (4,627) | |
| 1,860 | 1,925 | 3,504 | 3,703 | |
| (999) | (1,091) | (1,988) | (2,115) | |
| (181) | (146) | (327) | (297) | |
| (412) | (421) | (792) | (852) | |
| - | (9) | (1) | (9) | |
| 5 | 33 | 4 | 107 | |
| (7) | (38) | (9) | (41) | |
| 265 | 252 | 391 | 495 | |
| 10 | 24 | 35 | 47 | |
| (96) | (67) | (222) | (140) | |
| 2 | (4) | 5 | (7) | |
| 181 | 204 | 210 | 396 | |
| (63) | (44) | (59) | (107) | |
| 118 | 161 | 151 | 289 | |
| 313 | 128 | 317 | 259 | |
| 431 | 289 | 468 | 548 | |
| 420 | 250 | 452 | 482 | |
| 11 | 39 | 16 | 66 | |
| 910,496 | 924,084 | 912,212 | 922,493 | |
| 917,744 | 939,528 | 919,086 | 936,733 | |
| 0.46 | 0.27 | 0.50 | 0.52 | |
| 0.46 | 0.27 | 0.49 | 0.51 | |
| 0.13 | 0.17 | 0.17 | 0.31 | |
| 0.13 | 0.17 | 0.16 | 0.31 | |
Condensed consolidated statements of comprehensive income in millions of EUR unless otherwise stated
| Q2 | January to June | ||||
|---|---|---|---|---|---|
| 2016 | 2017 | 2016 | 2017 | ||
| Net income for the period | 431 | 289 | 468 | 548 | |
| Revaluation reserve: | |||||
| Release revaluation reserve | (2) | (4) | |||
| Reclassification directly into retained earnings | 4 | ||||
| Total of items that will not be reclassified to profit or loss | (2) | ||||
| Currency translation differences: | |||||
| Net current-period change, before tax | 176 | (640) | (74) | (800) | |
| Income tax effect | 7 | (87) | (6) | 21 | |
| Reclassification adjustment for gain realized | 19 | (87) | |||
| Available-for-sale financial assets: | |||||
| Net current-period change, before tax | 1 | 4 | (38) | 22 | |
| Reclassification adjustment for results realized |
1 | 20 | - | ||
| Cash ow hedges: | |||||
| Net current-period change, before tax | (23) | 40 | (24) | 17 | |
| Income tax effect | 8 | (10) | 3 | (5) | |
| Reclassification adjustment for results realized | (4) | (1) | (2) | 2 | |
| Total of items that are or may be reclassified to profit or loss | 166 | (675) | (121) | (830) | |
| of which continued operations | 44 | (536) | (33) | (649) | |
| of which discontinued operations | 122 | (139) | (88) | (181) | |
| Other comprehensive income (loss) for the period | 164 | (675) | (121) | (830) | |
| Total comprehensive income for the period | 595 | (386) | 347 | (282) | |
| Shareholders | 584 | (345) | 331 | (273) | |
| Non-controlling interests | 11 | (41) | 16 | (9) |
Condensed consolidated balance sheets in millions of EUR
| June 30, 2016 | December 31, 2016 | June 30, 2017 | |
|---|---|---|---|
| Non-current assets: | |||
| Property, plant and equipment | 2,235 | 2,155 | 1,520 |
| Goodwill | 8,462 | 8,898 | 6,613 |
| Intangible assets excluding goodwill | 3,523 | 3,552 | 2,577 |
| Non-current receivables | 166 | 155 | 129 |
| Investments in associates | 206 | 190 | 138 |
| Other non-current financial assets | 368 | 335 | 684 |
| Non-current derivative financial assets | 59 | 59 | 39 |
| Deferred tax assets | 2,728 | 2,792 | 2,150 |
| Other non-current assets | 71 | 92 | 81 |
| Total non-current assets | 17,818 | 18,228 | 13,931 |
| Current assets: | |||
| Inventories | 3,688 | 3,392 | 2,564 |
| Other current financial assets | 105 | 101 | - |
| Other current assets | 631 | 486 | 497 |
| Current derivative financial assets | 86 | 101 | 61 |
| Income tax receivable | 129 | 154 | 119 |
| Receivables | 4,763 | 5,327 | 3,185 |
| Assets classified as held for sale | 1,939 | 2,180 | 6,852 |
| Cash and cash equivalents | 1,926 | 2,334 | 2,220 |
| Total current assets | 13,267 | 14,075 | 15,498 |
| Total assets | 31,085 | 32,303 | 29,429 |
| Equity | |||
| Shareholders' equity | 11,488 | 12,601 | 12,246 |
| Non-controlling interests | 853 | 907 | 1,501 |
| Group equity | 12,341 | 13,508 | 13,747 |
| Non-current liabilities: | |||
| Long-term debt | 5,269 | 4,021 | 2,599 |
| Non-current derivative financial liabilities | 501 | 590 | 274 |
| Long-term provisions | 3,284 | 2,926 | 2,026 |
| Deferred tax liabilities | 49 | 66 | 36 |
| Other non-current liabilities | 773 | 719 | 364 |
| Total non-current liabilities | 9,876 | 8,322 | 5,298 |
| Current liabilities: | |||
| Short-term debt | 539 | 1,585 | 297 |
| Current derivative financial liabilities | 329 | 283 | 209 |
| Income tax payable | 126 | 146 | 91 |
| Accounts payable | 2,568 | 2,848 | 1,711 |
| Accrued liabilities | 2,707 | 3,034 | 2,317 |
| Short-term provisions | 654 | 680 | 380 |
| Dividends payable | 50 | 58 | |
| Liabilities directly associated with assets held for sale | 469 | 525 | 4,317 |
| Other current liabilities | 1,426 | 1,372 | 1,003 |
| Total current liabilities | 8,868 | 10,473 | 10,384 |
| Total liabilities and group equity | 31,085 | 32,303 | 29,429 |
Condensed consolidated statements of cash flows in millions of EUR
| January to June | ||
|---|---|---|
| 2016 | 2017 | |
| Cash flows from operating activities | ||
| Net income | 468 | 548 |
| Results of discontinued operations - net of income tax | (317) | (259) |
| Adjustments to reconcile net income (loss) to net cash provided by (used for) of operating activities: | ||
| Depreciation, amortization and impairments of fixed assets | 468 | 472 |
| Impairment of goodwill and other non-current financial assets | 20 | 14 |
| Net loss (gain) on sale of assets | (106) | |
| Interest income | (21) | (27) |
| Interest expense on debt, borrowings and other liabilities | 145 | 99 |
| Income taxes | 59 | 107 |
| Results from investments in associates | (5) | 3 |
| Decrease (increase) in working capital: | (93) | (82) |
| Decrease (increase) in receivables and other current assets | 175 | 621 |
| Decrease (increase) in inventories | (216) | (246) |
| Increase (decrease) in accounts payable, accrued and other current liabilities | (52) | (456) |
| Decrease (increase) in non-current receivables, other asset and other liabilities | (193) | (309) |
| Increase (decrease) in provisions | (208) | (39) |
| Other items | 85 | 216 |
| Interest paid | (145) | (124) |
| Interest received | 20 | 27 |
| Dividends received from investments in associates | 6 | 6 |
| Income taxes paid | (136) | (173) |
| Net cash provided by (used for) operating activities | 153 | 373 |
| Cash flows from investing activities | ||
| Net capital expenditures | (340) | (208) |
| Purchase of intangible assets | (40) | (36) |
| Expenditures on development assets | (142) | (163) |
| Capital expenditures on property, plant and equipment | (166) | (179) |
| Proceeds from sale of property, plant and equipment | 8 | 171 |
| Net proceeds from (cash used for) derivatives and current financial assets | (98) | (155) |
| Purchase of other non-current financial assets | (18) | (32) |
| Proceeds from other non-current financial assets | 6 | 5 |
| Purchase of businesses, net of cash acquired | (43) | (48) |
| Net proceeds from sale of interests in businesses, net of cash disposed of | - | 62 |
| Net cash used for investing activities | (494) | (376) |
| Cash flows from financing activities | ||
| Proceeds from issuance (payments) of short-term debt | (1,178) | 20 |
| Principal payments on short-term portion of long-term debt | (30) | (1,250) |
| Proceeds from issuance of long-term debt | 48 | 56 |
| Re-issuance of treasury shares | 24 | 121 |
| Purchase of treasury shares | (366) | (180) |
| Proceeds from sale of Philips Lighting shares | 863 | 1,065 |
| Transaction costs paid for sale of Philips Lighting shares | (19) | (5) |
| Dividend paid to shareholders of Koninklijke Philips N.V. | (280) | (326) |
| Net cash provided by (used for) financing activities | (937) | (500) |
| Net cash provided by (used for) continuing operations | (1,278) | (503) |
| Net cash provided by (used for) discontinued operations | 1,469 | 1,121 |
| Net cash provided by (used for) continuing and discontinued operations | 191 | 618 |
| Effect of change in exchange rates on cash and cash equivalents | (31) | (120) |
| Cash and cash equivalents at the beginning of the period | 1,766 | 2,334 |
| Cash and cash equivalents at the end of the period | 1,926 | 2,832 |
| Cash and cash equivalents of discountinued operations at the end of the period | 612 | |
| Cash and cash equivalents of continuing operations at the end of the period | 1,926 | 2,220 |
For a number of reasons, principally the effects of translation differences, certain items in the statements of cash flows do not correspond to the differences between the balance sheet amounts for the respective items.
Condensed consolidated statements of changes in equity in millions of EUR
| capital in excess of par value common shares |
revaluation reserve retained earnings |
available-for-sale financial assets currency translation differences cash flow hedges |
treasury shares at cost | total shareholders' equity non-controlling interests total equity |
||
|---|---|---|---|---|---|---|
| January to June 2017 | ||||||
| Balance as of December 31, 2016 |
186 3,083 8,233 |
1,234 | 36 10 |
(181) 12,601 |
907 13,508 |
|
| Total comprehensive income (loss) |
482 | (792) | 22 14 |
(274) | (9) (283) |
|
| Dividend distributed | 2 356 (742) |
(384) | (93) (477) |
|||
| Sales of shares of Philips Lighting |
350 | (19) | 331 | 713 1,044 |
||
| Re-purchase of shares by Philips Lighting |
(5) | (5) | (17) (22) |
|||
| Purchase of treasury shares | (19) (19) |
(19) | ||||
| Re-issuance of treasury shares | (180) 18 |
238 76 |
76 | |||
| Forward contracts | (61) | (20) (81) |
(81) | |||
| Share call options | 45 | (134) (89) |
(89) | |||
| Share-based compensation | 82 | 82 | 82 | |||
| Income tax share-based | ||||||
| compensation plans | 9 | 9 | 9 | |||
| Total other equity movements Balance as of June 30, 2017 |
2 267 (396) 188 3,350 8,319 |
(19) 423 |
58 24 |
65 (81) (116) 12,246 |
603 522 1,501 13,747 |
|
| January to June 2016 | ||||||
| Balance as of December 31, | 186 2,669 8,040 |
4 1,058 |
56 12 |
(363) 11,662 |
118 11,780 |
|
| Total comprehensive income | ||||||
| 456 | (4) (80) |
(18) (23) |
331 | 16 347 |
||
| Dividend distributed IPO Philips Lighting |
4 398 (732) 128 |
(19) | (330) 109 |
(330) 716 825 |
||
| Movement non-controlling | ||||||
| interest - Other | 3 3 |
|||||
| Purchase of treasury shares | (356) (356) |
(356) | ||||
| Re-issuance of treasury shares Share call options |
(106) (23) (75) |
151 22 70 (5) |
22 (5) |
|||
| Share-based compensation | ||||||
| plans | 56 | 56 | 56 | |||
| Income tax share-based compensation plans |
(1) | (1) | (1) | |||
| Total other equity movements | 4 347 (702) |
(19) | (135) (505) |
719 214 |
||
| Balance as of June 30, 2016 | 190 3,016 7,794 |
959 | 38 (11) |
(498) 11,488 |
853 12,341 |
Prior-period financial statements have been restated for the treatment of the segment Lighting as a discontinued operation (see note Discontinued operations and other assets classified as held for sale). Movement schedules of balance sheet items include items from continuing and discontinued operations and therefore cannot be reconciled to income from continuing operations and cash ow from continuing operations only.
The note Discontinued operations and other assets classified as held for sale will, in addition to the IFRS requirements, contain a table on material assets and liabilities that have been transferred from the respective balance sheet caption to Assets held for sale or to Liabilities associated with assets held for sale reported in the balance sheet. If not deemed necessary these transfers will not be mentioned in the notes of the balance sheet caption disclosed. If for a balance sheet caption this is the only relevant change compared with the Annual Report 2016, this material change will only be disclosed in the note Discontinued operations and other assets classified as held for sale.
The significant accounting policies applied in these semi-annual condensed consolidated financial statements are consistent with those applied in the Annual Report 2016, except for the accounting policy changes following from the adoption of new Standards and Amendments to Standards which are also expected to be reected in the Company's consolidated IFRS financial statements as at and for the year ending December 31, 2017 as disclosed in the Annual Report 2016. These new and amended standards did not have a material impact on the Company's semi-annual condensed consolidated financial statements.
The Company has the following updates to information provided in the Annual Report 2016 about the standards issued but not yet effective which may be the most relevant to the Company's consolidated IFRS financial statements.
IFRS 9 Financial Instruments brings together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39 Financial Instruments: Recognition and Measurement. No changes to the assessment on the transition to IFRS 9 have taken place compared with the Annual Report 2016 disclosure.
At this moment the Company has assessed that the new classification requirements will not have a material impact on its accounting for trade receivables, loans, investments in debt securities and investments in equity securities that are managed on a fair value basis. On the classification of financial liabilities under IFRS 9, the Company's current assessment did not indicate any material impact.
The Company performed a detailed analysis on how its impairment provisions would be impacted by the new impairment model under IFRS 9 and no material differences were identified.
The Company's current plan is that it will elect to apply the new hedge accounting requirements of IFRS 9 rather than to make the accounting policy choice to continue the IAS 39 requirements.
The Company's current assessment indicated that the types of hedge accounting relationships that the Company currently designates should be capable of meeting the requirements of IFRS 9 if the Company completes certain planned changes to its internal documentation and monitoring processes. Accordingly, the Company does not expect a significant impact on the accounting for its hedging relationships.
The Company performed a subsequent analysis on topics which were initially assessed as not having material differences under IFRS 15 in comparison with current accounting standards. These topics were related to the measurement of revenue related to separately identifiable components (current relative fair value approach compared to relative standalone selling prices under IFRS 15) and the timing of revenue recognition for the sale of goods and rendering of services (current transfer of risks and rewards compared to new transfer of control). As anticipated in the Annual Report 2016, no material differences have been identified so far as result of this analysis.
As previously disclosed in the Annual Report 2016, the Company has identified a potential impact on revenues originating from its IP royalties (segment HealthTech Other). A detailed investigation into contracts existing at the date of this report is still ongoing. Up to now, the Company estimates the transition impact to be approximately EUR 30 million of deferred revenue that will be recorded as a retained earnings increase in equity, while the annual impact on future IP revenue is not material.
The Company identified that certain sales commissions paid to third parties and internal employees are qualified as incremental costs of obtaining a contract. These costs are mostly paid and capitalized upon issuance of sales orders and recognition of revenue related to the sale of goods or rendering of services. Such costs are commonly expensed in line with the revenue recognition pattern of the related goods or services. Based on further investigation performed on these sales commissions, it was noted that these are largely amortized within a year and therefore Philips currently intends to implement the practical expedient of expensing sales commissions when incurred. When following this practical expedient, an estimated adjustment of
approximately EUR 70 million will be recorded as a retained earnings decrease in equity on transition, while the annual impact on future sales commission costs is not material.
The Company has decided to apply the cumulative effect transition method when adopting IFRS 15 in its Consolidated financial statements for the year ending December 31, 2018, applying the new standard to those contracts that are not considered completed contracts at the date of initial application. This means that comparative figures will not be restated and will be presented in accordance with current accounting standards.
IFRS 16 must be adopted for periods beginning on or after January 1, 2019, with earlier adoption permitted if the abovementioned IFRS 15 has also been adopted. The Company is currently assessing the impact of the new standard, and there are no new developments compared to what was disclosed in the Annual Report 2016.
| Q2 2016 | Q2 2017 | |||||||
|---|---|---|---|---|---|---|---|---|
| sales | sales including intercompany |
income from operations | sales including intercompany |
income from operations | ||||
| as a % of sales | as a % of sales | |||||||
| Personal Health | 1,661 | 1,663 | 199 | 12.0% | 1,761 | 1,763 | 235 | 13.3% |
| Diagnosis & Treatment | 1,600 | 1,614 | 111 | 6.9% | 1,671 | 1,690 | 111 | 6.6% |
| Connected Care & Health Informatics |
767 | 781 | 46 | 6.0% | 768 | 775 | 16 | 2.1% |
| HealthTech Other | 105 | 159 | (18) | 96 | 135 | (61) | ||
| Legacy Items | 5 | (73) | 2 | (49) | ||||
| Inter-segment eliminations | (89) | (70) | ||||||
| Philips Group | 4,132 | 4,132 | 265 | 6.4% | 4,294 | 4,294 | 252 | 5.9% |
Sales and income (loss) from operations in millions of EUR unless otherwise stated
| January to June | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | 2017 | |||||||
| sales | sales including intercompany |
income from operations | sales | sales including intercompany |
income from operations | |||
| as a % of sales | as a % of sales | |||||||
| Personal Health | 3,271 | 3,277 | 389 | 11.9% | 3,480 | 3,489 | 466 | 13.4% |
| Diagnosis & Treatment | 3,019 | 3,044 | 121 | 4.0% | 3,162 | 3,186 | 154 | 4.9% |
| Connected Care & Health Informatics |
1,461 | 1,484 | 57 | 3.9% | 1,500 | 1,519 | 4 | 0.3% |
| HealthTech Other | 208 | 312 | (27) | 188 | 258 | (49) | ||
| Legacy Items | 5 | (149) | 1 | 2 | (80) | |||
| Inter-segment eliminations | (163) | (125) | ||||||
| Philips Group | 7,959 | 7,959 | 391 | 4.9% | 8,329 | 8,329 | 495 | 5.9% |
During the first half of 2017, Philips entered into Money Market Funds, which are part of the cash and cash equivalent balance. Due to this, the definition of cash and cash equivalents from the Annual Report 2016 has been updated to the following: Cash and cash equivalents include all cash balances, money market funds and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash.
As part of the financial reporting improvement process, the presentation of the line item Investments in associates was moved into the subtotal Income before taxes in the Condensed consolidated statements of income. This change did not impact the results of operations or financial position.
| sales1) | tangible and intangible assets2) | ||||
|---|---|---|---|---|---|
| January to June | June 30, | June 30, | |||
| 2016 | 2017 | 2016 | 2017 | ||
| Netherlands | 181 | 239 | 986 | 882 | |
| United States | 2,764 | 2,905 | 9,026 | 6,756 | |
| China | 1,039 | 1,118 | 1,143 | 979 | |
| Japan | 530 | 521 | 533 | 473 | |
| Germany | 422 | 442 | 183 | 201 | |
| France | 235 | 240 | 45 | 28 | |
| United Kingdom | 203 | 189 | 563 | 522 | |
| Other countries | 2,585 | 2,675 | 1,741 | 869 | |
| Philips Group | 7,959 | 8,329 | 14,220 | 10,710 |
1) Sales are reported based on country of destination
2) Includes property, plant and equipment, intangible assets excluding goodwill, and goodwill
As required by IFRS 8, Operating Segments are Personal Health businesses, Diagnosis & Treatment businesses and Connected Care & Health Informatics businesses, each being responsible for the management of its business worldwide. Additionally, HealthTech Other and Legacy Items are included. More segment information can be found in Note 2 Information by segment and main country in the Annual Report 2016.
In 2017, Philips moved the reportable segment Lighting to discontinued operations. Discontinued operations included in the Condensed consolidated statements of income and cash ows now consists of Lighting, the combined Lumileds and Automotive businesses and certain divestments formerly reported as discontinued operations. Please refer to Discontinued operations and other assets classified as held for sale in this document for further details.
The preparation of the semi-annual condensed consolidated financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting principles and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates under different assumptions or conditions.
In preparing these semi-annual condensed financial statements, the significant estimates and judgements made by management in applying the Company's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements as at and for the year ended December 31, 2016. In addition, estimates were made and judgement was applied on certain valuations related to the combined Lumileds and Automotive businesses sale, as well as the Lighting discontinued operations classification and control assessment.
The Group's financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at and for the year ended December 31, 2016.
Under normal economic conditions, the Group's sales are impacted by seasonal uctuations, particularly at the Personal Health businesses, Diagnosis & Treatment businesses and Connected Care & Health Informatics businesses, typically resulting in higher revenues and earnings in the second half-year results. At Diagnosis & Treatment businesses and Connected Care & Health Informatics businesses, sales are generally higher in the second half-year, largely due to the timing of new product availability and customers attempting to spend their annual budgeted allowances before the end of the year. At Personal Health businesses, sales are generally higher in the second halfyear due to the holiday sales. HealthTech Other is generally not materially affected by seasonality.
Discontinued operations included in the Condensed consolidated statements of income and cash ows consist of the segment Lighting, the combined Lumileds and Automotive businesses and certain divestments formerly reported as discontinued operations.
As from April 28, 2017, Philips' shareholding in Philips Lighting was 39.058%. As loss of control is highly probable within one year due to further sell-downs, Philips Lighting is presented as a discontinued operation and as assets and liabilities associated with assets held for sale in the consolidated financial statements as from April 28, 2017. In order to give effect to this presentation in accordance with IFRS, prior-year results have been restated.
The following table summarizes the results of Philips Lighting included in the Consolidated statements of income as discontinued operations.
| 2016 - 2017 | |
|---|---|
| ------------- | -- |
| January to June | ||
|---|---|---|
| 2016 | 2017 | |
| Sales | 3,419 | 3,386 |
| Costs and expenses | (3,261) | (3,144) |
| Income before taxes | 158 | 242 |
| Income tax expense | (64) | (65) |
| Results from discontinued operations | 94 | 177 |
Upon loss of control, Other comprehensive income items related to Philips Lighting will be recognized in the Consolidated statements of income. As per June 30, 2017, the estimated release amounts to a loss of approximately EUR 276 million.
The following table presents the assets and liabilities of Lighting, as Assets classified as held for sale and Liabilities directly associated with assets classified as held for sale in the Consolidated balance sheet.
| June 30, 2017 | |
|---|---|
| Goodwill | 1,767 |
| Intangible assets excluding goodwill | 689 |
| Property, plant and equipment | 545 |
| Deferred tax assets | 478 |
| Other non-current assets | 83 |
| Total non-current assets | 3,561 |
| Liquid assets | 612 |
| Current accounts receivable | 1,392 |
| Inventories | 1,082 |
| Current income tax receivable | 61 |
| Other current assets | 102 |
| Total current assets | 3,250 |
| Assets classified as held for sale | 6,811 |
| Long-term provisions | (838) |
| Long-term interest-bearing liabilities | (1,186) |
| Deferred income tax liabilities | (34) |
| Other non-current liabilities | (88) |
| Total non-current liabilities | (2,147) |
| Current accounts payable | (1,003) |
| Short-term provisions | (205) |
| Short-term interest-bearing liabilities | (123) |
| Current income tax payable | (67) |
| Accrued liabilities | (434) |
| Other current liabilities | (339) |
| Total current liabilities | (2,170) |
| Liabilities directly associated with assets held for sale | (4,317) |
In addition, Group equity includes a non-controlling interest related to Philips Lighting of EUR 1,484 million as per June 30, 2017.
On June 30, 2017, Philips completed the sale of an 80.1% interest in the combined Lumileds and Automotive businesses to certain funds managed by aliates of Apollo Global Management, LLC. The combined businesses of Lumileds and Automotive are reported as discontinued operations in the Condensed consolidated statements of income and Condensed consolidated statements of cash ows, with the related assets and liabilities as per the end of November 2014 included as Assets classified as held for sale and Liabilities directly associated with assets held for sale in the Consolidated balance sheet.
In the first six months ended June 2017, the combined businesses of Lumileds and Automotive reported a gain of EUR 83 million, which included a loss of EUR 66 million after tax related to the sale of the combined businesses of Lumileds and Automotive.
This after-tax loss mainly comprises proceeds associated with the sale, including the fair value of a retained 19.9% interest in the combined Lumileds and Automotive businesses, a contingent consideration and tax gains, offset by the book value of businessrelated assets and liabilities, the release of cumulative translation differences, disentanglement costs and various other expenses. Furthermore,a gain related to the sale of real estate was recognized in income from continuing operations in Q1 2017. In addition, trademark license revenue will be recognized in income from continuing operations in the future, resulting in an overall net gain on the sale of the combined businesses.
The following table summarizes the results of the combined businesses of Lumileds and Automotive in the Condensed consolidated statements of income as discontinued operations for the six months ended June 30, 2017.
Results of combined Lumileds and Automotive businesses in millions of EUR 2016 - 2017
| January to June | ||
|---|---|---|
| 2016 | 2017 | |
| Sales | 748 | 804 |
| Costs | (646) | (630) |
| Result on the sale of discontinued operations | (90) | |
| Income before taxes | 102 | 84 |
| Operational income tax | (10) | (25) |
| Income tax on the sale of discontinued operations | 24 | |
| Results from discontinued operations | 92 | 83 |
The following table presents the net cash ows of operating, investing and financing activities reported in the condensed consolidated cash ow statements.
| January to June | ||
|---|---|---|
| 2016 | 2017 | |
| Cash ows from operating activities | 397 | 205 |
| Cash ows from investing activities | (128) | 1,056 |
| Cash ows from financing activities | 1,200 | (141) |
| Total discontinued operations cash flows | 1,469 | 1,121 |
In 2017, cash ows from investing activities includes the net proceeds of EUR 1.1 billion received from the sale of the combined Lumileds and Automotive businesses.
In 2016, cash ows from investing activities includes EUR 144 million related to the Funai arbitration and cash ows from financing activities includes the loan facility of EUR 1.2 billion taken out by Lighting.
Assets and liabilities directly associated with assets held for sale relate to property, plant and equipment for an amount of EUR 38 million and businesses of EUR 3 million at June 30, 2017.
In the six months ended June 30, 2017, Philips completed three acquisitions, which involved an aggregated consideration of EUR 113 million.
CardioProlific Inc. (CardioProlific), a US-based, privately-held company that is developing catheter-based thrombectomy approaches to treat peripheral vascular disease, was the most notable acquisition. Philips completed this acquisition on June 29, 2017.
Futhermore, prior to the publication date of this semi-annual report Philips announced several acquisitions. These acquisitions are highlighted in Subsequent events, of this document.
Philips completed three divestments in the six months ended June 30, 2017.
The most notable divestment was the sale of an 80.1% interest in Lumileds to certain funds managed by aliates of Apollo Global Management, LLC. For details of this transaction reference is made to Discontinued operations and other assets classified as held for sale, of this document.
The two remaining divestments involved an aggregated consideration of EUR 53 million.
In this section we discuss changes since December 31, 2016, in the nature of, and risks associated with, the Company's interests in its consolidated entities and associates, and the effects of those interests on the Company's financial position and financial performance.
In February and April 2017, the Company sold 32.167% of its interest in Philips Lighting through two accelerated bookbuild offerings to institutional investors, reducing its remaining interest in Philips Lighting from 71.225% to 39.058%. As part of these offerings, Philips Lighting repurchased 7 million shares. These divestment transactions did not impact the profit and loss account of the Company, as Philips Lighting continues to be fully consolidated because it is controlled by Royal Philips. After the buy-back of 7 million shares and 653,373 shares (refer to Noncontrolling interests section in this note), Royal Philips' shareholding in Philips Lighting's issued and outstanding share capital increased to 41.158 % as of June 30, 2017.
The two offerings had a positive impact on Shareholders' equity of the Company of EUR 331 million. This amount includes (1) the difference between the proceeds and the carrying value of 32.167% of the shares in Philips Lighting (increase of EUR 356 million), (2) costs related to the accelerated bookbuild offering which were directly recognized in Shareholders' equity (decrease of EUR 6 million) and (3) certain reallocations of Comprehensive income items to Non-controlling interests (decrease of EUR 19 million).
Sales and Income from operations of Philips Lighting are reected in Discontinued operations and other assets classified as held for sale, of this document.
As a result of these offerings, Non-controlling interests increased by EUR 713 million. This amount includes (1) the carrying value of the shares in Philips Lighting (increase of EUR 694 million) and (2) certain reallocations of Other comprehensive income items from Shareholders' equity (increase of EUR 19 million). Please refer also to Equity, of this document.
In May 2017, Philips Lighting distributed dividend of EUR 157 million. Royal Philips received EUR 64 million whereas EUR 93 million has been recognized in Non-controlling interests. In May and June 2017, Philips Lighting purchased an additional 653,373 shares in market transactions. The transactions involved an amount of EUR 22 million, of which EUR 17 million was deducted from Non-controlling interests and EUR 5 million was directly recognized in Shareholder's equity.
Net income attributable to Non-controlling interests was EUR 66 million for the six months ended June 30, 2017 and mainly relates to entitlements of non-controlling interest holders to net income of Philips Lighting.
The main increase in property, plant and equipment consists of additions of EUR 254 million (six months ended June 30, 2016: EUR 260 million). This was offset by depreciation and impairment charges of EUR 245 million (six months ended June 30, 2016: EUR 284 million).
For information regarding the most recent impairment test of the different cash-generating units, including Home Monitoring, reference is made to Note 11 Goodwill in the 2016 Financial Statements. No events have been identified by management in the first half of 2017 that required management to perform an update of the mentioned impairment tests.
The changes in intangible assets excluding goodwill in 2017 are summarized as follows:
| Intangible assets excluding goodwill in millions of EUR unless otherwise stated | |||
|---|---|---|---|
| --------------------------------------------------------------------------------- | -- | -- | -- |
| Book value as of December 31, 2016 | 3,552 |
|---|---|
| Changes in book value: | |
| Additions | 215 |
| Acquisitions | 4 |
| Amortization | (291) |
| Impairment losses | (22) |
| Divestments and transfers to assets classified as held for sale | (710) |
| Translation differences | (171) |
| Total changes | (975) |
| Book value as of June 30, 2017 | 2,577 |
The additions for 2017 mainly comprise internally generated assets of EUR 169 million for product development costs (six months ended June 30, 2016: EUR 149 million).
Current financial assets decreased mainly due to redemption of loans to TPV Technology Limited for the amount of EUR 90 million.
As further described in Discontinued operations and other assets classified as held for sale, of this document, the Company sold the majority stake in the combined Lumileds and Automotive businesses on June 30, 2017. The Company retained a 19.9% membership interest in Luminescence Coöperatief U.A., a Dutch cooperative with excluded liability (coöperatie met uitgesloten aansprakelijkheid), which is classified as an available-for-sale financial asset. The retained investment for the amount of EUR 318 million is the main component of other non-current financial assets at June 30, 2017.
In June 2017, Philips settled a dividend of EUR 0.80 per common share, representing a total value of EUR 742 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 48% of the shareholders elected for a share dividend, resulting in the issuance of 11,264,163 new common shares. The cash dividend involved an amount of EUR 384 million (including costs).
As of June 30, 2017, the issued and fully-paid share capital consists of 940,909,027 common shares, each share having a par value of EUR 0.20.
During the first six months of 2017, a total of 9,208,880 treasury shares were delivered as a result of restricted share deliveries, performance share deliveries and stock option exercises.
A total of 5,864,526 shares were acquired in connection with Philips' Long Term Incentive (LTI) Program through (1) a daily share buy-back program (ended in January 2017), (2) a forward share buy-back program (started in January 2017) and (3) the unwinding of options which were previously acquired to cover LTI commitments. During inception of the forward share buyback contract in the first quarter of 2017, which involved 3 million shares, EUR 81 million was deducted from Retained earnings and was recorded against Short-term liabilities. The first exercise under the forward share buy-back contract involving 750,000 shares took place in June 2017, resulting in a EUR 20 million increase in Retained earnings against a decrease in Treasury shares. In the first half of 2017, the Company unwound 3,261,914 EUR-denominated and 1,206,017 USD-denominated call options against the transfer of a same number of Royal Philips shares (4,467,931 shares) and an additional EUR 89 million cash payment to the buyer of the call options.
On June 30, 2017, the total number of treasury shares amounted to 3,863,947, which were purchased at an average price of EUR 29.94 per share.
The Company sold 32.167% of its interest in Philips Lighting in two transactions that occurred in February and April 2017, reducing its remaining interest in this group company to 39.058%. This partial divestment transaction had a positive impact on Shareholders' equity of the Company of EUR 331 million. For further details please refer to Interest in entities, of this document.
For details on changes in Non-controlling interests (which mainly relate to transactions in Philips Lighting shares) refer to Interest in entities, of this document.
As of June 30, 2017, non-controlling interests mainly relate to Philips Lighting N.V. (Non-controlling interest 58.842%) and General Lighting Company (non-controlling interest 49%).
At the end of Q2 2017, Philips had total debt of EUR 2,896 million, a decrease of EUR 2,710 million compared to December 31, 2016. Long-term debt was EUR 2,599 million, a decrease of EUR 1,422 million, and short-term debt was EUR 297 million, a decrease of EUR 1,288 million compared to December 31, 2016.
The movement of debt was mainly due to the early redemption of the 5.750% Notes due 2018 in the aggregate principal amount of USD 1,250 million, together with a currency translation effect on remaining USD bonds. EUR 1,379 million relates to the reclassification of Lighting to Liabilities directly associated with assets held for sale.
At the end of Q2 2017, the majority of the long-term debt consisted of USD 2,582 million of public bonds with a weighted average interest rate of 5.35%.
In January 2017, Philips entered into a USD 1,000 million and EUR 300 million credit facility with a consortium of international banks. Under this credit facility Philips drew USD 1,000 million in January 2017. The facility was used for the early redemption of the aforementioned 5.750% Notes. In Q2 2017, the drawn amount was repaid in full and the facility was cancelled.
Effective April 21, 2017, Royal Philips signed a new EUR 1.0 billion committed standby revolving credit facility for general corporate purposes, replacing the former EUR 1.8 billion facility of the Company. The new facility has a tenor of five years and contains two 1-year extension options. In line with the previous facility, it does not have a material adverse change clause, has no financial covenants and no credit-rating-related acceleration possibilities. The Company has not drawn on this facility.
The decrease in provisions by EUR 1.2 billion was attributable to:
Philips' policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. Remaining off-balance-sheet business and creditrelated guarantees provided on behalf of third parties and associates decreased by EUR 12 million during the first six months of 2017.
The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, intellectual property, commercial transactions, product liability, participations and environmental pollution. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal proceedings, regulatory and governmental proceedings, the Company is of the opinion that the cases described below may have, or have had in the recent past, a significant impact on the Company's consolidated financial position, results of operations and cash ows.
For information regarding legal proceedings in which the Company is involved, please refer to the Annual Report 2016. Significant developments regarding legal proceedings that have occurred since the publication of the Annual Report 2016 are described below:
In the CRT-related civil antitrust litigation pending in the United States the Company has now reached settlements with all individual private plaintiffs, resolving all outstanding CRT-related civil antitrust litigation in the United States except for the action brought by the state attorney general of Washington. The CRTrelated civil antitrust actions reported in other jurisdictions are still pending.
The Company continues to be in advanced discussions on resolving a civil matter with the US Department of Justice representing the US Food and Drug Administration (FDA), arising from past inspections by the FDA in and prior to 2015. The discussions focus primarily on the Company's compliance with the FDA's Quality System Regulations in the Company's Emergency Care and Resuscitation (ECR) business in the United States. While discussions have not yet concluded, the Company anticipates that the actions necessary to address the FDA's compliance concerns will have a meaningful impact on the operations of its ECR business.
In December 2013, the European Commission commenced an investigation into alleged restrictions of online sales of consumer electronics products and small domestic appliances. The Company was one of several companies involved in the investigation. In February 2017, the European Commission completed its preliminary investigation and opened its formal proceedings.
Share-based compensation costs were EUR 60 million and EUR 46 million in the first six months of 2017 and 2016 respectively. This includes the employee stock purchase plan of 3 million (2016: 3 million), which is not a share-based compensation that affects equity. Share-based compensation costs exclude the cost for discontinued operations of EUR 28 million.
In addition, during the first six months of 2017 the Company granted 2,353,846 performance shares and 1,378,508 restricted shares. In 2017, Philips Lighting introduced its own LTI plan.
In the first six months of 2017 a total of 5,126,534 performance and 528,226 restricted shares were delivered to employees, and 1,790,767 EUR-denominated options and 1,417,071 USDdenominated options were exercised at a weighted average exercise price of EUR 20.33 and USD 27.17 respectively.
Under the Accelerate! program, in the first six months of 2017 a total of 228,500 EUR-denominated options and 62,000 USDdenominated options were exercised at an exercise price of EUR 15.24 and USD 20.02 respectively.
The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the Company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.
For cash and cash equivalents, current receivables, accounts payable, interest accrual and short-term debt, the carrying amounts approximate fair value because of the short maturity of these instruments, and therefore fair value information is not included in the table below.
The fair value of Philips' debt is estimated on the basis of the quoted market prices for certain issues, or on the basis of discounted cash ow analysis based upon market rates plus Philips' spread for the particular tenors of the borrowing arrangement. Accrued interest is not included within the carrying amount or estimated fair value of debt.
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value.
Fair value of financial assets and liabilities in millions of EUR
| Balance as of December 31, 2016 | Balance as of June 30, 2017 | |||
|---|---|---|---|---|
| carrying amount | estimated fair value | carrying amount | estimated fair value | |
| Financial assets | ||||
| Carried at fair value: | ||||
| Available-for-sale financial assets | 172 | 172 | 538 | 538 |
| Securities classified as assets held for sale | 1 | 1 | - | - |
| Fair value through profit and loss | 27 | 27 | 28 | 28 |
| Derivative financial instruments | 160 | 160 | 100 | 100 |
| Financial assets carried at fair value | 360 | 666 | ||
| Carried at (amortized) cost: | ||||
| Cash and cash equivalents | 2,334 | 2,220 | ||
| Loans and receivables: | ||||
| Loans - current | 101 | 101 | - | - |
| Other non-current loans and receivables | 134 | 118 | ||
| Receivables - current | 5,327 | 3,185 | ||
| Receivables - non-current | 155 | 129 | ||
| Held-to-maturity investments | 2 | 1 | ||
| Financial assets carried at (amortized) costs | 8,053 | 5,653 | ||
| Financial liabilities | ||||
| Carried at fair value: | ||||
| Derivative financial instruments | (873) | (873) | (483) | (483) |
| Financial liabilities carried at fair value | (873) | (483) | ||
| Carried at (amortized) cost: | ||||
| Accounts payable | (2,848) | (1,711) | ||
| Interest accrual | (68) | (42) | ||
| Debt (Corporate bond and finance lease) | (5,095) | (5,474) | (2,511) | (2,914) |
| Debt (Bank loans, overdrafts, etc.) | (511) | (384) | ||
| Financial liabilities carried at (amortized) costs | (8,522) | (4,649) | ||
| Fair value hierarchy in millions of EUR | ||||||
|---|---|---|---|---|---|---|
| ----------------------------------------- | -- | -- | -- | -- | -- | -- |
| level 1 | level 2 | level 3 | total | |
|---|---|---|---|---|
| Balance as of June 30, 2017 | ||||
| Available-for-sale financial assets | 66 | 29 | 443 | 538 |
| Financial assets designated at fair value through profit and loss - non-current |
25 | 3 | 28 | |
| Derivative financial instruments - assets | - | 100 | - | 100 |
| Total financial assets | 66 | 154 | 446 | 666 |
| Derivative financial instruments - liabilities | (483) | - | (483) | |
| Debt | (2,640) | (274) | - | (2,914) |
| Total financial liabilities | (2,640) | (756) | (3,397) | |
| Balance as of December 31, 2016 | ||||
| Available-for-sale financial assets | 36 | 29 | 107 | 172 |
| Securities classified as assets held for sale | 1 | 1 | ||
| Financial assets designated at fair value through profit and loss - non-current |
24 | 3 | 27 | |
| Derivative financial instruments - assets | 160 | 160 | ||
| Loans - current | 101 | 101 | ||
| Total financial assets | 36 | 314 | 111 | 461 |
| Derivative financial instruments - liabilities | (873) | (873) | ||
| Debt | (3,990) | (1,484) | (5,474) | |
| Total financial liabilities | (3,990) | (2,357) | (6,347) | |
The table above represents categorization of measurement of the estimated fair values of financial assets and liabilities.
Specific valuation techniques used to value financial instruments include:
Instruments included in level 1 are comprised primarily of listed equity investments classified as available-for-sale financial assets, investees and financial assets designated at fair value through profit and loss.
The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives or convertible bond instruments) are determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are based on observable market data, the instrument is included in level 2.
The fair value of derivatives is calculated as the present value of the estimated future cash ows based on observable interest yield curves, basis spread and foreign exchange rates.
The valuation of convertible bond instruments uses observable market-quoted data for the options and present value calculations using observable yield curves for the fair value of the bonds.
If one or more of the significant inputs are not based on observable market data, such as third-party pricing information without adjustments, the instrument is included in level 3.
The retained investment in Luminescence Coöperatief U.A. is classified as an available-for-sale financial asset recognized at fair value, based on a valuation model with inputs, including discount rates and multiples, which are market-corroborated to the extent possible, and hence classified as Level 3 in the fair value hierarchy.
The table below shows the reconciliation from the beginning balance to the end balance for fair value measured in Level 3 of the fair value hierarchy.
| Financial assets |
|---|
| 111 |
| - |
| (5) |
| (3) |
| 343 |
| 446 |
On May 22, 2017, Philips announced that it has signed an agreement to acquire Respiratory Technologies, Inc. (RespirTech), a US-based provider of an innovative airway clearance solution for patients with chronic respiratory conditions. The transaction is expected to be completed in the coming months, subject to customary closing conditions.
On June 22, 2017, Philips announced an agreement to acquire Electrical Geodesics, Inc. (EGI), a US-based medical device company that designs, develops and commercializes a range of non-invasive technologies used to monitor and interpret brain activity. EGI is based in Eugene, Oregon (US) .
The transaction was closed on July 21, 2017. Under the terms of the agreement, EGI stockholders received, in cash, 105.4 pence per EGI share, totalling approximately EUR 33 million.
On June 28, 2017, Philips and The Spectranetics Corporation (Spectanetrics), a US-based global leader in vascular intervention and lead management solutions, announced that they have entered into a definitive merger agreement. Pursuant to the agreement, Philips commenced a tender offer on July 12, 2017 to acquire all of the issued and outstanding shares of Spectranetics for USD 38.50 per share, to be paid in cash upon completion, representing an amount of approximately 1.5 billion.
The transaction is structured as a cash tender offer by Philips for all of the issued and outstanding shares of Spectranetics. Pursuant to the merger agreement, the transaction is subject to customary closing conditions, including certain regulatory clearances in the US and in certain non-US jurisdictions.
On June 30, 2017, Philips announced that it has entered into an agreement with Profound Medical Corp. (Profound), based in Canada, to deepen the existing collaboration and increase the scale of its MR-guided High Intensity Focused Ultrasound business. As part of the agreement, Philips will obtain a minority interest of approximately 12% based on the issued and outstanding Profound shares upon completion of the transaction. The transaction is subject to customary closing conditions, including the relevant regulatory approvals, and is expected to close in the second half of 2017.
On July 4, 2017, Philips announced that it has acquired Health & Parenting Ltd, a leading UK-based developer of healthcare and family-related mobile applications for expectant and new parents.
On July 18, 2017, Philips announced that it has signed an agreement to acquire TomTec Imaging Systems GmbH (TomTec), a leading provider of intelligent image-analysis software, especially for diagnostic ultrasound. TomTec is headquartered in Munich, Germany.
In July 2017, Philips made a contribution of USD 250 million to the Philips US pension fund to further improve the funding ratio. This will further decrease Philips' interest costs going forward.
http://www.philips.com/investorrelations © 2017 Koninklijke Philips N.V. All rights reserved.
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