Quarterly Report • Jul 21, 2014
Quarterly Report
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"In the second quarter we continued to face headwinds, including ongoing softness in certain markets, unfavorable currency exchange rates and the voluntary suspension of production at our health care facility in Cleveland. At the same time, we are taking decisive action to accelerate value creation, improve performance and capitalize on higher growth opportunities in our businesses. This is demonstrated by our announcementto create a stand-alone company within Philips for the combined Lumileds (LED components) and Automotive lighting businesses and the implementation of the new management structure in Healthcare.
While 2014 is expected to be a challenging year overall, we anticipate EBITA for the Group, excluding restructuring and acquisition-related charges and other items, in the second half of the year to exceed the level of the same period last year. We continue to increase efficiency and drive profitable growth through the execution of our multiyear Accelerate! transformation and are firmly committed to reaching our 2016 targets."
"In the second quarter, we continued to see results of our focus to win large-scale multi-year partnerships – such as the recently announced agreement with New Karolinska Hospital in Solna, Sweden – designed to structurally improve patient care at lower and more predictable costs. Further, our strategic alliance with salesforce.com on a new cloud-based health care IT platform demonstrates our holistic innovation approach to health care, enabling us to rapidly launch new clinical applications for home care and care coordination. Our recently announced new management structure will further drive operational excellence and agility to restore performance over the next several quarters.
"While the voluntary temporary suspension of production at our Cleveland facility continued to impact our performance this quarter, our corrective actions are progressing according to plan and shipments are expected to resume gradually in the course of Q3 2014. In light ofthis and the recent strong equipment order intake in China and Europe, we expect the performance improvement in the second half of the year to be back-end loaded. "
Healthcare comparable sales showed a 4% decline year-on-year. The EBITA margin, excluding restructuring and acquisition-related charges, declined to 10.5%, a decrease of 3.8 percentage points year-on-year. Equipment order intake in Europe and growth geographies showed a high-single-digit increase, while North America posted a double-digit decline.
"In Consumer Lifestyle, we have implemented a strategic shift to leverage our strengths in the growing area of personal health and well-being, which is empowering millions of consumers to make healthier choices every day. This has resulted in more than 10 consecutive quarters of strong comparable sales growth. With the sale of WOOX Innovations completed at the end of June, Consumer Lifestyle is now fully focused on realizing the great potential in its portfolio by oering locally relevant products while leveraging its global scale."
Consumer Lifestyle comparable sales increased by 7%, with above-average sector growth coming from Health & Wellness and Domestic Appliances. Sales in Personal Care were flat due to market dynamics in China and North America. In growth geographies, comparable sales showed double-digit growth, while mature geographies achieved low-single-digit growth. The EBITA margin, excluding restructuring and acquisition-related charges and other items, increased to 9.4%, a year-on-year improvement of 1.6 percentage points.
Philips Consumer Lifestyle has rationalized its portfolio to focus on personal health and well-being. Accordingly, Philips is expanding its market reach, building the Philips brand in business adjacencies such as the beauty and air categories and expanding its geographic distribution in China, Philips' second-largest market. Moreover, Philips is capturing the digital opportunity by growing its online presence and developing its connected products portfolio.
"In Lighting, we are intensifying ourfocus on connected LED lighting systems and services, LED luminaires, and LED lamps for the professional and consumer markets. Our decision to combine the Lumileds and Automotive lighting businesses into a stand-alone company within Philips will allow it to extend its leading portfolio of digital lighting components and achieve robust growth, serving even more customers in the industry, as well as Philips Lighting. Lighting is taking advantage of the many opportunities in the growing LED space, driven by increased demand for energy efficiency and digital controls. We are also making good progress in Professional Lighting Solutions North America, and we anticipate improvement in Q3 and a return to profitability in the second half of the year."
Lighting comparable sales increased 1% year-on-year. LED-based sales grew 43% and now represent 36% of total Lighting sales, compared to 25% in Q2 2013. The EBITA margin, excluding restructuring and acquisition-related charges and other items, improved to 8.6%, an increase of 0.5 percentage points year-on-year.
Philips is taking actions to improve profitability in its Lighting business while also accelerating the drive to LED. The Company's strong and continuous focus on optimizing its manufacturing footprint and the overall cost base has resulted in the 8th consecutive quarter of year-on-year improved operational profitability. The recovery in Consumer Luminaires in Europe is progressing, and the Company aims to make this business break-even for the full year.
In the second quarter, we continued to see strong momentum in LED-based sales, which grew 43% and now represent 36% of total Lighting sales. At the same time, we saw a 13% decline in our conventional lighting sales in the quarter. TheCompany is therefore accelerating actions to ensure the continued profitability of conventional lighting over the coming years and plans to pull forward the ongoing industrial footprint rationalization program for the Lighting sector, raising charges in the second half of 2014 from EUR 100 million to approximately EUR 170 million.
"The favorable performance in IG&S, supported by increased royalties from intellectual property, is the result of our continued investments in industry-leading technology platforms and innovative research and development."
Excluding restructuring charges and past-service pension cost gains, EBITA was a net cost of EUR 44 million, compared to a net cost of EUR 60 million in Q2 2013. The improvement was mainly due to lower costs in the IT Service Units and higher IP royalties, partly offset by higher investments by Group Innovation in emerging business areas.
We continue to execute on our multi-year transformation program Accelerate!, as we are strengthening our innovation pipeline through ourfocus on reducing time to market, increasing localrelevance, improving quality, and better prioritization of investments. Moreover, the Company continued to make good progress on its three cost savings programs in the second quarter. The overhead cost savings were EUR 34 million for the quarter, bringing the cumulative annualized overhead cost savings in the first half of the year to EUR 190 million. The Design for Excellence (DfX) program generated EUR 44 million of incremental savings in the bill of material in the quarter, and the End-to-End productivity program generated EUR 5 million of savings. With these actions, we are continuing to deliver on our promise to improve operational and financial performance company-wide, as we transform Philips into a leading technology company in health and well-being.
As of June 30 2014, Philips had completed 26% of the EUR 1.5 billion share buy-back program.
Frans van Houten, CEO, and Ron Wirahadiraksa, CFO, will host a conference call for investors and analysts at 10:00 am CET to discuss the results. A live audio webcast of the conference call will be available by visting the Philips Investor Relations website.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| Sales | 5,632 | 5,293 |
| EBITA | 601 | 415 |
| as a % of sales | 10.7 | 7.8 |
| EBIT | 507 | 332 |
| as a % of sales | 9.0 | 6.3 |
| Financial income (expenses) | (78) | (74) |
| Income taxes | (121) | (40) |
| Results investments in associates | 14 | 2 |
| Net income from continuing operations | 322 | 220 |
| Discontinued operations | (5) | 23 |
| Net income | 317 | 243 |
| Net income attributable to shareholders per common share (in euros) - diluted |
0.35 | 0.26 |
in millions of euros unless otherwise stated
| Q2 | Q2 | % change | ||
|---|---|---|---|---|
| 2013 | 2014 | nominal | compar able |
|
| Healthcare | 2,362 | 2,137 | (10) | (4) |
| Consumer Lifestyle | 1,083 | 1,073 | (1) | 7 |
| Lighting | 2,048 | 1,943 | (5) | 1 |
| Innovation, Group | ||||
| & Services | 139 | 140 | 1 | 3 |
| Philips Group | 5,632 | 5,293 | (6) | 0 |
| in millions of euros unless otherwise stated | ||||||
|---|---|---|---|---|---|---|
| Q2 | Q2 | % change | ||||
| 2013 | 2014 | nominal | compar able |
|||
| Western Europe | 1,328 | 1,327 | 0 | 0 | ||
| North America | 1,782 | 1,598 | (10) | (4) | ||
| Other mature geographies | 441 | 414 | (6) | 2 | ||
| Total mature geographies | 3,551 | 3,339 | (6) | (2) | ||
| Growth geographies | 2,081 | 1,954 | (6) | 4 | ||
| Philips Group | 5,632 | 5,293 | (6) | 0 |
in millions of euros unless otherwise stated
| 2nd quarter | ||||
|---|---|---|---|---|
| 2014 | ||||
| amount | as a % of sales |
amount | as a % of sales |
|
| Healthcare | 420 | 17.8 | 225 | 10.5 |
| Consumer Lifestyle | 82 | 7.6 | 100 | 9.3 |
| Lighting | 153 | 7.5 | 138 | 7.1 |
| Innovation, Group & Services |
(54) | – | (48) | – |
| Philips Group | 601 | 10.7 | 415 | 7.8 |
in millions of euros unless otherwise stated
| 2nd quarter | |||||
|---|---|---|---|---|---|
| 2013 | |||||
| amount | as a % of sales |
amount | as a % of sales |
||
| Healthcare | 338 | 14.3 | 224 | 10.5 | |
| Consumer Lifestyle | 84 | 7.8 | 101 | 9.4 | |
| Lighting | 166 | 8.1 | 168 | 8.6 | |
| Innovation, Group & Services |
(60) | – | (44) | – | |
| Philips Group | 528 | 9.4 | 449 | 8.5 |
in millions of euros unless otherwise stated
| Q2 | Q2 |
|---|---|
| 2013 | 2014 |
| 379 | 186 |
| 69 | 86 |
| 115 | 111 |
| (56) | (51) |
| 507 | 332 |
| 9.0 | 6.3 |
| in millions of euros | ||
|---|---|---|
| Q2 | Q2 | |
| 2013 | 2014 | |
| Net interest expenses | (71) | (61) |
| Other | (7) | (13) |
| Philips Group | (78) | (74) |
in millions of euros
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| Beginning cash balance | 3,066 | 1,727 |
| Free cash flow | (105) | 261 |
| Cash flows from operating activities | 141 | 487 |
| Net capital expenditures | (246) | (226) |
| Acquisitions, divestments of businesses | 96 | (57) |
| Other cash flow from investing activities | (7) | (72) |
| Treasury shares transactions | (265) | (235) |
| Changes in debt/other | (137) | − |
| Dividend paid | (231) | (248) |
| Net cash flow discontinued operations | (110) | 59 |
| Ending cash balance | 2,307 | 1,435 |
• Financial income and expenses amounted to a net expense of EUR 74 million, an improvement of EUR 4 million compared with Q2 2013. This was mainly attributable to lower interest expenses on reduced debt.
• Operating activities resulted in a cash inflow of EUR 487 million, compared to a cash inflow of EUR 141 million in Q2 2013. The increase was mainly driven by higher accounts payable and lower accounts receivable.
in millions of euros
Inventories
1) Sales calculated over the preceding 12 months
in billions of euros
• Gross capital expenditures on property, plant and equipment were EUR 17 million lower than in Q2 2013, mainly due to lower investments at Lighting.
1) Number of employees excludes discontinued operations. Discontinued operations, comprising the Audio, Video, Multimedia and Accessories business divested at the end of Q2 2014, had 2,245 employees in Q2 2013 and 2,195 employees in Q1 2014.
2) Number of employees includes 13,065 third-party workers in Q2 2014 (Q1 2014: 12,314, Q2 2013 12,283).
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| Sales | 2,362 | 2,137 |
| Sales growth | ||
| % nominal | (2) | (10) |
| % comparable | 0 | (4) |
| EBITA | 420 | 225 |
| as a % of sales | 17.8 | 10.5 |
| EBIT | 379 | 186 |
| as a % of sales | 16.0 | 8.7 |
| Net operating capital (NOC) | 7,684 | 7,457 |
| Number of employees (FTEs)1) | 37,270 | 37,157 |
1) Number of employees includes 2,599 third-party workers in Q2 2014 (Q2 2013: 2,525).
in millions of euros
Equipment order intake in growth geographies showed a high-single-digit increase, with strong growth in Latin America and Russia & Central Asia, while China posted mid-single-digit growth. Western Europe recorded high-single-digit growth and other mature geographies showed low-single-digit growth, while North America posted a double-digit decline.
Healthcare comparable sales showed a 4% decrease year-on-year. Home Healthcare Solutions posted mid-single-digit growth, Customer Services achieved low-single-digit growth, while Patient Care & Clinical Informatics showed a mid-single-digit decline. Imaging Systems recorded a double-digit decline.
• Restructuring and acquisition-related charges in Q3 2014 are expected to total approximately EUR 20 million.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| Sales | 1,083 | 1,073 |
| Sales growth | ||
| % nominal | 13 | (1) |
| % comparable | 13 | 7 |
| EBITA | 82 | 100 |
| as a % of sales | 7.6 | 9.3 |
| EBIT | 69 | 86 |
| as a % of sales | 6.4 | 8.0 |
| Net operating capital (NOC) | 1,182 | 1,271 |
| Number of employees (FTEs)1) | 16,544 | 16,886 |
1) Number of employees includes 3,953 third-party workers in Q2 2014 (Q2 2013: 3,261).
in millions of euros
EBITA
EBITA amounted to EUR 100 million, or 9.3% of sales, compared to EUR 82 million, or 7.6% of sales, in Q2 2013.
Excluding restructuring and acquisition-related charges and a EUR1 million past-service pension cost gain in the US in Q2 2013, EBITA was EUR 101 million, or 9.4% of sales, compared to EUR 84 million, or 7.8% of sales, in Q2 2013. The improvement was largely attributable to higher gross margins across all businesses.
• Restructuring and acquisition-related charges in Q3 2014 are expected to total approximately EUR 5 million.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| Sales | 2,048 | 1,943 |
| Sales growth | ||
| % nominal | 1 | (5) |
| % comparable | 2 | 1 |
| EBITA | 153 | 138 |
| as a % of sales | 7.5 | 7.1 |
| EBIT | 115 | 111 |
| as a % of sales | 5.6 | 5.7 |
| Net operating capital (NOC) | 4,732 | 4,558 |
| Number of employees (FTEs)1) | 49,148 | 45,447 |
1) Number of employees includes 5,137 third-party workers in Q2 2014 (Q2 2013: 5,883).
in millions of euros
EBITA amounted to EUR 138 million, or 7.1% of sales, compared to EUR 153 million, or 7.5% of sales, in Q2 2013.
EBITA, excluding restructuring and acquisitionrelated charges and a EUR 10 million past-service pension cost gain in the US in 2013, was EUR 168 million, or 8.6% of sales, compared to EUR 166 million, or 8.1% of sales, in Q2 2013. The year-on-year EBITA increase was driven by higher gross margins.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| Sales | 139 | 140 |
| Sales growth | ||
| % nominal | (6) | 1 |
| % comparable | (14) | 3 |
| EBITA of: | ||
| Group Innovation | (34) | (47) |
| IP Royalties | 56 | 62 |
| Group and Regional Costs | (33) | (37) |
| Accelerate! investment | (40) | (32) |
| Pensions | (1) | (3) |
| Service Units and Other | (2) | 9 |
| EBITA | (54) | (48) |
| EBIT | (56) | (51) |
| Net operating capital (NOC) | (3,414) | (2,786) |
| Number of employees (FTEs)1) | 12,162 | 13,344 |
1) Number of employees includes 1,375 third-party workers in Q2 2014 (Q2 2013: 614).
in millions of euros
in millions of euros
EBITA of Service Units and Other included EUR 8 million of net costs formerly reported in the Audio, Video, Multimedia and Accessories business (Q2 2013: EUR 15 million).
Net operating capital, excluding a positive currency translation effect of EUR 83 million, increased by EUR 545 million year-on-year, mainly due to a decrease in pension liabilities and an increase in the value of currency hedges.
• Restructuring charges in Q3 2014 are expected to total approximately EUR 10 million.
| Q2 | Q2 | |
|---|---|---|
| 2013 | 2014 | |
| EBITA | (10) | − |
| Disentanglement costs | (7) | (8) |
| Former AVM&A net costs allocated to | ||
| Consumer Lifestyle | 7 | 3 |
| Former AVM&A net costs allocated to IG&S | 15 | 8 |
| EBIT discontinued operations | 5 | 3 |
| Gain on sale of business | – | 5 |
| Operational result | 5 | (2) |
| Financial income and expenses | (1) | (2) |
| Income taxes | (1) | 12 |
| Deal result related income tax | – | 12 |
| Operational income tax | (1) | − |
| Net income from discontinued operations | 3 | 13 |
| Number of employees (FTEs) | 2,245 | 2,0961) |
1) Divested as of June 29, 2014
The Audio, Video, Multimedia and Accessories (AVM&A) business is reported as discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows. The applicable assets and liabilities of this business were, prior to divestment, reported under Assets and Liabilities classified as held for sale in the Consolidated balance sheet.
In November 2013, Philips separated the AVM&A business into a stand-alone legal entity underthe name WOOX Innovations. On June 29, 2014, WOOX Innovations was divested to Gibson Brands, Inc.
The net income of discontinued operations attributable to the AVM&A business improved from EUR 3 million in Q2 2013 to EUR 13 million in Q2 2014. In Q2 2014, Philips recorded a gain on the sale of the business to Gibson Brands of EUR 17 million, which included an income tax benefit of EUR 12 million.
The Q2 2014 EBITA of Consumer Lifestyle includes net costs of EUR 3 million formerly reported as part of the results of this business, compared to EUR 7 million in Q2 2013. The EBITA of Innovation, Group & Services includes net costs of EUR 8 million formerly reported as part of this business.
| 2013 | 2014 | |||||||
|---|---|---|---|---|---|---|---|---|
| 1st quarter 2nd quarter | 3rd quarter | 4th quarter | 1st quarter 2nd quarter | 3rd quarter | 4th quarter | |||
| Sales | 5,245 | 5,632 | 5,595 | 6,785 | 5,013 | 5,293 | ||
| comparable sales growth % | 1 | 3 | 3 | 7 | 0 | 0 | ||
| Gross margin | 2,124 | 2,363 | 2,369 | 2,891 | 2,018 | 2,180 | ||
| as a % of sales | 40.5 | 42.0 | 42.3 | 42.6 | 40.3 | 41.2 | ||
| Selling expenses | (1,214) | (1,274) | (1,245) | (1,460) | (1,195) | (1,248) | ||
| as a % of sales | (23.1) | (22.6) | (22.3) | (21.5) | (23.8) | (23.6) | ||
| G&A expenses | (188) | (208) | (221) | (231) | (177) | (181) | ||
| as a % of sales | (3.6) | (3.7) | (3.9) | (3.4) | (3.5) | (3.4) | ||
| R&D expenses | (434) | (426) | (449) | (468) | (420) | (426) | ||
| as a % of sales | (8.3) | (7.6) | (8.0) | (6.9) | (8.4) | (8.0) | ||
| EBIT | 306 | 507 | 466 | 710 | 227 | 332 | ||
| as a % of sales | 5.8 | 9.0 | 8.3 | 10.5 | 4.5 | 6.3 | ||
| EBITA | 403 | 601 | 564 | 881 | 315 | 415 | ||
| as a % of sales | 7.7 | 10.7 | 10.1 | 13.0 | 6.3 | 7.8 | ||
| Net income | 162 | 317 | 281 | 412 | 137 | 243 | ||
| Net income attributable to shareholders | 161 | 317 | 282 | 409 | 138 | 242 | ||
| Net income - shareholders per common share in euros - diluted |
0.17 | 0.35 | 0.31 | 0.44 | 0.15 | 0.26 |
all amounts in millions of euros unless otherwise stated
| 2013 | 2014 | |||||||
|---|---|---|---|---|---|---|---|---|
| January March |
January June |
January September |
January December |
January March |
January June |
January September |
January December |
|
| Sales comparable sales growth % |
5,245 1 |
10,877 2 |
16,472 2 |
23,257 3 |
5,013 0 |
10,306 0 |
||
| Gross margin | 2,124 | 4,487 | 6,856 | 9,747 | 2,018 | 4,198 | ||
| as a % of sales | 40.5 | 41.3 | 41.6 | 41.9 | 40.3 | 40.7 | ||
| Selling expenses | (1,214) | (2,488) | (3,733) | (5,193) | (1,195) | (2,443) | ||
| as a % of sales | (23.1) | (22.9) | (22.7) | (22.3) | (23.8) | (23.7) | ||
| G&A expenses | (188) | (396) | (617) | (848) | (177) | (358) | ||
| as a % of sales | (3.6) | (3.6) | (3.7) | (3.6) | (3.5) | (3.5) | ||
| R&D expenses | (434) | (860) | (1,309) | (1,777) | (420) | (846) | ||
| as a % sales | (8.3) | (7.9) | (7.9) | (7.6) | (8.4) | (8.2) | ||
| EBIT | 306 | 813 | 1,279 | 1,989 | 227 | 559 | ||
| as a % of sales | 5.8 | 7.5 | 7.8 | 8.6 | 4.5 | 5.4 | ||
| EBITA as a % of sales |
403 7.7 |
1,004 9.2 |
1,568 9.5 |
2,449 10.5 |
315 6.3 |
730 7.1 |
||
| Net income | 162 | 479 | 760 | 1,172 | 137 | 380 | ||
| Net income attributable to shareholders | 161 | 478 | 760 | 1,169 | 138 | 380 | ||
| Net income - shareholders per common | ||||||||
| share in euros - diluted | 0.17 | 0.52 | 0.83 | 1.27 | 0.15 | 0.41 | ||
| Net income from continuing operations as | ||||||||
| a % of shareholders' equity | 5.9 | 9.0 | 9.4 | 10.6 | 5.8 | 7.2 | ||
| period ended 2013 | period ended 2014 | |||||||
| Number of common shares outstanding | ||||||||
| (after deduction of treasury shares) at the end of period (in thousands) |
905,381 | 913,874 | 915,095 | 913,338 | 913,485 | 923,933 | ||
| Shareholders' equity per common share | ||||||||
| in euros | 12.33 | 11.78 | 11.93 | 12.28 | 12.06 | 11.63 | ||
| Inventories as a % of sales1) | 15.5 | 15.7 | 16.4 | 13.9 | 14.9 | 16.0 | ||
| Inventories excluding discontinued | ||||||||
| operations | 3,616 | 3,680 | 3,815 | 3,226 | 3,433 | 3,637 | ||
| Net debt : group equity ratio | 12:88 | 16:84 | 16:84 | 11:89 | 15:85 | 18:82 | ||
| Net operating capital | 9,969 | 10,184 | 10,249 | 10,238 | 10,381 | 10,500 | ||
| Total employees2) of which discontinued operations |
118,085 2,355 |
117,369 2,245 |
115,858 2,187 |
116,082 2,226 |
114,268 2,195 |
112,834 − |
||
1) Sales is calculated over the preceding 12 months
2) Number of employees includes third-party workers
Certain non-GAAP financial measures are presented when discussing the Philips Group's performance. In the following tables, reconciliations to the most directly comparable IFRS measures are presented.
| 2nd quarter | January to June | |||||||
|---|---|---|---|---|---|---|---|---|
| comparable growth |
currency effects |
consolid ation changes |
nominal growth |
comparable growth |
currency effects |
consolid ation changes |
nominal growth |
|
| 2014 versus 2013 | ||||||||
| Healthcare | (3.8) | (5.4) | (0.3) | (9.5) | (3.0) | (5.2) | (0.4) | (8.6) |
| Consumer Lifestyle | 6.5 | (7.4) | 0.0 | (0.9) | 6.5 | (6.4) | 0.0 | 0.1 |
| Lighting | 1.2 | (6.3) | 0.0 | (5.1) | 0.8 | (5.5) | 0.0 | (4.7) |
| IG&S | 2.8 | (2.1) | 0.0 | 0.7 | (2.2) | (1.2) | 3.4 | 0.0 |
| Philips Group | 0.2 | (6.1) | (0.1) | (6.0) | 0.3 | (5.4) | (0.1) | (5.2) |
| 2nd quarter | January to June | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Philips Group |
Healthcare | Consumer Lifestyle |
Lighting | Innovation, Group & Services |
Philips Group |
Healthcare | Consumer Lifestyle |
Lighting | Innovation, Group & Services |
|
| 2014 EBITA excluding restructuring and acquisition-related charges and other items |
449 | 224 | 101 | 168 | (44) | 818 | 397 | 209 | 339 | (127) |
| Restructuring and acquisition-related charges |
(34) | 1 | (1) | (30) | (4) | (88) | (20) | (1) | (63) | (4) |
| EBITA (or Adjusted income from operations) |
415 | 225 | 100 | 138 | (48) | 730 | 377 | 208 | 276 | (131) |
| Amortization of intangibles1) |
(83) | (39) | (14) | (27) | (3) | (168) | (81) | (26) | (55) | (6) |
| Impairment of goodwill |
− | − | − | − | − | (3) | (1) | − | (2) | − |
| Income from operations (or EBIT) |
332 | 186 | 86 | 111 | (51) | 559 | 295 | 182 | 219 | (137) |
| 2013 EBITA excluding restructuring and acquisition-related charges and other items |
528 | 338 | 84 | 166 | (60) | 950 | 562 | 183 | 332 | (127) |
| Other items | 99 | 82 | 1 | 10 | 6 | 99 | 82 | 1 | 10 | 6 |
| Restructuring and acquisition-related charges |
(26) | − | (3) | (23) | − | (45) | (2) | (4) | (42) | 3 |
| EBITA (or adjusted income from operations) |
601 | 420 | 82 | 153 | (54) | 1,004 | 642 | 180 | 300 | (118) |
| Amortization of intangibles1) |
(94) | (41) | (13) | (38) | (2) | (191) | (87) | (27) | (75) | (2) |
| Income from operations (or EBIT) |
507 | 379 | 69 | 115 | (56) | 813 | 555 | 153 | 225 | (120) |
1) Excluding amortization of software and product development
| Philips Group | Healthcare | Consumer Lifestyle |
Lighting | IG&S | |
|---|---|---|---|---|---|
| June 29, 2014 | |||||
| Net operating capital (NOC) | 10,500 | 7,457 | 1,271 | 4,558 | (2,786) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities | 8,527 | 2,585 | 1,392 | 1,761 | 2,789 |
| - intercompany accounts | − | 117 | 64 | 66 | (247) |
| - provisions | 2,495 | 285 | 181 | 428 | 1,601 |
| Include assets not comprised in NOC: | |||||
| - investments in associates | 171 | 75 | − | 19 | 77 |
| - other current financial assets | 125 | − | − | − | 125 |
| - other non-current financial assets | 438 | − | − | − | 438 |
| - deferred tax assets | 1,832 | − | − | − | 1,832 |
| - cash and cash equivalents | 1,435 | − | − | − | 1,435 |
| 25,523 | 10,519 | 2,908 | 6,832 | 5,264 | |
| Assets classified as held for sale | 136 | ||||
| Total assets | 25,659 | ||||
| December 31, 2013 | |||||
| Net operating capital (NOC) | 10,238 | 7,437 | 1,261 | 4,462 | (2,922) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities | 8,453 | 2,541 | 1,275 | 1,672 | 2,965 |
| - intercompany accounts | − | 124 | 75 | 105 | (304) |
| - provisions | 2,554 | 278 | 221 | 452 | 1,603 |
| Include assets not comprised in NOC: | |||||
| - investments in associates | 161 | 85 | − | 20 | 56 |
| - other current financial assets | 10 | − | − | − | 10 |
| - other non-current financial assets | 496 | − | − | − | 496 |
| - deferred tax assets | 1,675 | − | − | − | 1,675 |
| - cash and cash equivalents | 2,465 | − | − | − | 2,465 |
| 26,052 | 10,465 | 2,832 | 6,711 | 6,044 | |
| Assets classified as held for sale | 507 | ||||
| Total assets | 26,559 | ||||
| June 30, 2013 | |||||
| Net operating capital (NOC) | 10,184 | 7,684 | 1,182 | 4,732 | (3,414) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities | 9,371 | 2,751 | 1,424 | 1,781 | 3,415 |
| - intercompany accounts | − | 122 | 71 | 105 | (298) |
| - provisions | 2,699 | 307 | 220 | 526 | 1,646 |
| Include assets not comprised in NOC: | |||||
| - investments in associates | 164 | 81 | − | 21 | 62 |
| - other current financial assets | 1 | − | − | − | 1 |
| - other non-current financial assets | 567 | − | − | − | 567 |
| - deferred tax assets | 1,886 | − | − | − | 1,886 |
| - cash and cash equivalents | 2,307 | − | − | − | 2,307 |
| 27,179 | 10,945 | 2,897 | 7,165 | 6,172 | |
| Assets classified as held for sale | 446 | ||||
| Total assets | 27,625 | ||||
Composition of net debt to group equity
| June 30, | December 31, | June 29, | |
|---|---|---|---|
| 2013 | 2013 | 2014 | |
| Long-term debt | 3,501 | 3,309 | 3,336 |
| Short-term debt | 910 | 592 | 432 |
| Total debt | 4,411 | 3,901 | 3,768 |
| Cash and cash equivalents | 2,307 | 2,465 | 1,435 |
| Net debt (cash) (total debt less cash and cash equivalents) | 2,104 | 1,436 | 2,333 |
| Shareholders' equity | 10,763 | 11,214 | 10,747 |
| Non-controlling interests | 39 | 13 | 11 |
| Group equity | 10,802 | 11,227 | 10,758 |
| Net debt and group equity | 12,906 | 12,663 | 13,091 |
| Net debt divided by net debt and group equity (in %) | 16 | 11 | 18 |
| Group equity divided by net debt and group equity (in %) | 84 | 89 | 82 |
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | |
| Cash flows provided by (used for) operating activities | 141 | 487 | (86) | 310 |
| Cash flows used for investing activities | (157) | (355) | (442) | (546) |
| Cash flows before financing activities | (16) | 132 | (528) | (236) |
| Cash flows provided by (used for) operating activities | 141 | 487 | (86) | 310 |
| Net capital expenditures: | (246) | (226) | (450) | (399) |
| Purchase of intangible assets | (6) | (21) | (8) | (32) |
| Expenditures on development assets | (100) | (82) | (180) | (156) |
| Capital expenditures on property, plant and equipment | (145) | (128) | (270) | (221) |
| Proceeds from sale of property, plant and equipment | 5 | 5 | 8 | 10 |
| Free cash flows | (105) | 261 | (536) | (89) |
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 and future developments in Philips' organic business. 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 and to integrate those acquisitions into the business, the ability to successfully exit certain businesses or restructure operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. 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 2013.
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 financial position, operating results and cash flows, 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. 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 2013.
In presenting the Philips 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 2013. Independent valuations may have been obtained to support management's determination of fair values.
All amounts are in millions of euros unless otherwise stated. All reported data is unaudited. This interim financial report is prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union and the accounting policies are the same as stated in the Annual Report 2013, unless otherwise stated.
Prior-period financial statements have been restated to reflect two voluntary accounting policy changes and a change in the divestment of the AVM&A business. For more details see note 1, Significant accounting policies, section Other changes.
This report contains the semi-annual report of Koninklijke Philips N.V. ('the Company'), 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 note 5, Segment information.
The semi-annual report for the six months ended June 29, 2014 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 semi-annual report is unaudited.
The semi-annual condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Company's consolidated IFRS financial statements for the year ended December 31, 2013.
The Board of Management of the Company hereby declares that to the best of their knowledge, the semiannual report for the six month period ended 29 June 2014, which has been prepared in accordance with IAS 34 Interim Financial Reporting, gives 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 the semiannual management report for the six month period ended 29 June 2014 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 21, 2014
Board of Management
Frans van Houten Ron Wirahadiraksa
Pieter Nota
in millions of euros unless otherwise stated
| January to June | ||
|---|---|---|
| 2013 | 2014 | |
| Sales | 10,877 | 10,306 |
| EBITA | 1,004 | 730 |
| as a % of sales | 9.2 | 7.1 |
| EBIT | 813 | 559 |
| as a % of sales | 7.5 | 5.4 |
| Financial income and expenses | (161) | (143) |
| Income taxes | (190) | (80) |
| Results investments in associates | 15 | 23 |
| Net income from continuing operations | 477 | 359 |
| Discontinued operations | 2 | 21 |
| Net income | 479 | 380 |
| Net income attributable to shareholders per common share (in euros) - diluted |
0.52 | 0.41 |
in millions of euros unless otherwise stated
| January to June | % change | ||||
|---|---|---|---|---|---|
| 2013 | 2014 | nominal | compar able |
||
| Healthcare | 4,489 | 4,103 | (9) | (3) | |
| Consumer Lifestyle |
2,086 | 2,089 | 0 | 7 | |
| Lighting | 4,023 | 3,835 | (5) | 1 | |
| Innovation, Group & Services |
279 | 279 | 0 | (2) | |
| Philips Group | 10,877 | 10,306 | (5) | 0 |
in millions of euros unless otherwise stated
| January to June | ||||||
|---|---|---|---|---|---|---|
| 2013 | 2014 | |||||
| amount | as a % of sales |
amount | as a % of sales |
|||
| Healthcare | 642 | 14.3 | 377 | 9.2 | ||
| Consumer Lifestyle | 180 | 8.6 | 208 | 10 | ||
| Lighting | 300 | 7.5 | 276 | 7.2 | ||
| Innovation, Group & Services |
(118) | – | (131) | – | ||
| Philips Group | 1,004 | 9.2 | 730 | 7.1 |
in millions of euros unless otherwise stated
| January to June | ||||
|---|---|---|---|---|
| 2013 | 2014 | |||
| amount | as a % of sales |
amount | as a % of sales |
|
| Healthcare | 562 | 12.5 | 397 | 9.7 |
| Consumer Lifestyle | 183 | 8.8 | 209 | 10 |
| Lighting | 332 | 8.3 | 339 | 8.8 |
| Innovation, Group & Services |
(127) | – | (127) | – |
| Philips Group | 950 | 8.7 | 818 | 7.9 |
• Sales amounted to EUR 2,089 million. Excluding currency effects and portfolio changes, comparable sales increased by 7% year-on-year. Double-digit comparable sales growth was seen at Health & Wellness, Domestic Appliances recorded highsingle-digit growth, while Personal Care showed low-single-digit growth. From a geographical perspective, a double-digit comparable sales increase in growth geographies was tempered by low-single-digit growth in mature geographies.
• EBITA amounted to EUR 208 million, or 10.0% of sales, a year-on-year increase of EUR 28 million. EBITA included restructuring and acquisition-related charges of EUR1 million, compared to EUR4 million in the first half of 2013. EBITA, excluding restructuring and acquisition-related charges and past-service pension cost gains, showed a year-on-year increase of EUR 26 million, driven by higher sales and gross margin improvements across all businesses.
• EBITA amounted to a net cost of EUR 131 million, including EUR 4 million of net restructuring charges. EBITA in the first half of 2013 included a EUR 3 million net release of restructuring provisions and a EUR 6 million past-service pension cost gain in the US. EBITA, excluding restructuring charges, release of restructuring provisions and past-service pension cost gains, amounted to EUR 127 million, in line with the first half of 2013.
Looking ahead to the second half of 2014, Philips remains concerned about economic uncertainties around the world.
Also, Philips operates in a highly regulated product safety and quality environment and Philips products are subject to regulation by various government agencies. Philips is taking comprehensive measures to raise the efficacy of the quality management system within the Healthcare sector to Philips Excellence standards in close collaboration with industry experts. As announced on January 28, 2014, Philips voluntarily suspended production at the Cleveland, Ohio facility.The remediation process and mitigation plans so far have been progressing according to plan and the factory is expected to gradually resume production in the course of the third quarter. However, unexpected difficulties could occur which may result in a delay or an inability to resume production as planned. Such event could have a material adverse effect on the business and results.
in millions of euros unless otherwise stated
| 2nd quarter | January to June | ||||
|---|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | ||
| Sales | 5,632 | 5,293 | 10,877 | 10,306 | |
| Cost of sales | (3,269) | (3,113) | (6,390) | (6,108) | |
| Gross margin | 2,363 | 2,180 | 4,487 | 4,198 | |
| Selling expenses | (1,274) | (1,248) | (2,488) | (2,443) | |
| General and administrative expenses | (208) | (181) | (396) | (358) | |
| Research and development expenses | (426) | (426) | (860) | (846) | |
| Impairment of goodwill | − | − | − | (3) | |
| Other business income | 56 | 9 | 82 | 19 | |
| Other business expenses | (4) | (2) | (12) | (8) | |
| Income from operations | 507 | 332 | 813 | 559 | |
| Financial income | 18 | 15 | 36 | 31 | |
| Financial expenses | (96) | (89) | (197) | (174) | |
| Income before taxes | 429 | 258 | 652 | 416 | |
| Income tax expense | (121) | (40) | (190) | (80) | |
| Income after taxes | 308 | 218 | 462 | 336 | |
| Results relating to investments in associates | 14 | 2 | 15 | 23 | |
| Net income from continuing operations | 322 | 220 | 477 | 359 | |
| Discontinued operations - net of income tax | (5) | 23 | 2 | 21 | |
| Net income | 317 | 243 | 479 | 380 | |
| Attribution of net income for the period | |||||
| Net income attributable to shareholders | 317 | 242 | 478 | 380 | |
| Net income attributable to non-controlling interests | − | 1 | 1 | − | |
| Earnings per common share attributable to shareholders | |||||
| Weighted average number of common shares outstanding (after deduction of treasury shares) during the period (in thousands): |
|||||
| - basic | 906,446 | 908,343 | 911,622 | 911,166 | |
| - diluted | 916,345 | 916,511 | 921,941 | 920,433 | |
| Net income attributable to shareholders per common share in euros: | |||||
| - basic | 0.35 | 0.27 | 0.52 | 0.42 | |
| - diluted | 0.35 | 0.26 | 0.52 | 0.41 | |
all amounts in millions of euros
| 2nd quarter January to June |
||||
|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | |
| Net income for the period | 317 | 243 | 479 | 380 |
| Other comprehensive income items that will not be reclassified to profit or loss: |
||||
| Pensions and other post-employment plans: | ||||
| Remeasurement | (11) | (82) | (26) | (367) |
| Income tax effect on remeasurements | 3 | 20 | 7 | 92 |
| Revaluation reserve: | ||||
| Release revaluation reserve | (4) | (3) | (8) | (5) |
| Reclassification directly into retained earnings | 4 | 3 | 8 | 5 |
| Total of items that will not be reclassified to profit or loss | (8) | (62) | (19) | (275) |
| Other comprehensive income items that are or may be reclassified to profit or loss: |
||||
| Currency translation dierences: | ||||
| Net current period change, before tax | (151) | 84 | (97) | 66 |
| Income tax effect | 10 | 16 | 4 | 18 |
| Reclassification adjustment for gain realized | (8) | (4) | (8) | (4) |
| Available-for-sale financial assets: | ||||
| Net current period change, before tax | (15) | 13 | (5) | 2 |
| Income tax effect | 3 | (3) | − | (2) |
| Reclassification adjustment for loss realized | 1 | 0 | 2 | 8 |
| Cash flow hedges: | ||||
| Net current period change, before tax | 23 | (14) | 32 | (19) |
| Income tax effect | − | 4 | (2) | 8 |
| Reclassification adjustment for gain realized | (25) | (5) | (31) | (13) |
| Total of items that are or may be reclassified to profit or loss | (162) | 91 | (105) | 64 |
| Other comprehensive income (loss) for the period | (170) | 29 | (124) | (211) |
| Total comprehensive income for the period | 147 | 272 | 355 | 169 |
| Total comprehensive income attributable to: | ||||
| Shareholders | 147 | 271 | 354 | 169 |
| Non-controlling interests | − | 1 | 1 | − |
in millions of euros unless otherwise stated
| June 30, | December 31, | June 29, | |
|---|---|---|---|
| 2013 | 2013 | 2014 | |
| Non-current assets: | |||
| Property, plant and equipment | 2,902 | 2,780 | 2,708 |
| Goodwill | 6,878 | 6,504 | 6,579 |
| Intangible assets excluding goodwill | 3,567 | 3,262 | 3,157 |
| Non-current receivables | 172 | 144 | 186 |
| Investments in associates | 164 | 161 | 171 |
| Other non-current financial assets | 567 | 496 | 438 |
| Deferred tax assets | 1,886 | 1,675 | 1,832 |
| Other non-current assets | 71 | 63 | 60 |
| Total non-current assets | 16,207 | 15,085 | 15,131 |
| Current assets: | |||
| Inventories | 3,699 | 3,240 | 3,638 |
| Other current financial assets | 1 | 10 | 125 |
| Other current assets | 446 | 354 | 448 |
| Derivative financial assets | 157 | 150 | 76 |
| Income tax receivable | 82 | 70 | 121 |
| Receivables | 4,280 | 4,678 | 4,549 |
| Assets classified as held for sale | 446 | 507 | 136 |
| Cash and cash equivalents | 2,307 | 2,465 | 1,435 |
| Total current assets | 11,418 | 11,474 | 10,528 |
| Total assets | 27,625 | 26,559 | 25,659 |
| Shareholders' equity Non-controlling interests |
10,763 39 |
11,214 13 |
10,747 11 |
| Group equity | 10,802 | 11,227 | 10,758 |
| Non-current liabilities: | |||
| Long-term debt | 3,501 | 3,309 | 3,336 |
| Long-term provisions | 2,015 | 1,903 | 1,773 |
| Deferred tax liabilities | 62 | 76 | 62 |
| Other non-current liabilities | 1,829 | 1,568 | 1,491 |
| Total non-current liabilities | 7,407 | 6,856 | 6,662 |
| Current liabilities: | |||
| Short-term debt | 910 | 592 | 432 |
| Derivative financial liabilities | 505 | 368 | 382 |
| Income tax payable | 165 | 143 | 92 |
| Accounts and notes payable | 2,716 | 2,462 | 2,827 |
| Accrued liabilities | 3,049 | 2,830 | 2,643 |
| Short-term provisions | 684 | 651 | 722 |
| Dividend payable | 42 | − | 45 |
| Liabilities directly associated with assets held for sale | 238 | 348 | 4 |
| Other current liabilities | 1,107 | 1,082 | 1,092 |
| Total current liabilities | 9,416 | 8,476 | 8,239 |
| Total liabilities and group equity | 27,625 | 26,559 | 25,659 |
in millions of euros
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | |
| Cash flows from operating activities: | ||||
| Net income | 317 | 243 | 479 | 380 |
| Result of discontinued operations - net of income tax | 5 | (23) | (2) | (21) |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||
| Depreciation, amortization, and impairments of fixed assets | 311 | 298 | 616 | 598 |
| Impairment of goodwill and other non-current financial assets | 2 | 4 | 3 | 17 |
| Net gain on sale of assets | (36) | (3) | (40) | (9) |
| Interest income | (11) | (12) | (21) | (20) |
| Interest expense on debt, borrowings and other liabilities | 66 | 56 | 132 | 107 |
| Income tax expense | 121 | 40 | 190 | 80 |
| Income from investments in associates | (13) | (2) | (15) | (23) |
| (Increase) decrease in working capital: | (440) | 140 | (837) | 10 |
| (Increase) decrease in receivables and other current assets | (115) | 143 | 12 | 172 |
| I ncrease in inventories | (188) | (168) | (394) | (406) |
| (Decrease) increase in accounts payable, accrued and other liabilities | (137) | 165 | (455) | 244 |
| Increase in non-current receivables, other assets and other liabilities | (85) | (101) | (121) | (472) |
| Decrease in provisions | (69) | (46) | (167) | (64) |
| Other items | 89 | (5) | 49 | 17 |
| Interest paid Interest received |
(37) 11 |
(25) 11 |
(139) 20 |
(114) 19 |
| Dividends received from investments in associates | 6 | 14 | 6 | 14 |
| Income taxes paid | (96) | (102) | (239) | (209) |
| Net cash provided by (used for) operating activities | 141 | 487 | (86) | 310 |
| Cash flows from investing activities: | ||||
| Net capital expenditures | (246) | (226) | (450) | (399) |
| Purchase of intangible assets | (6) | (21) | (8) | (32) |
| Expenditures on development assets | (100) | (82) | (180) | (156) |
| Capital expenditures on property, plant and equipment | (145) | (128) | (270) | (221) |
| Proceeds from sale of property, plant and equipment | 5 | 5 | 8 | 10 |
| Cash to derivatives and current financial assets | (10) | (4) | (82) | (2) |
| Purchase of other non-current financial assets | (4) | (68) | (4) | (72) |
| Proceeds from other non-current financial assets | 7 | − | 9 | 2 |
| Purchase of businesses, net of cash acquired | 4 | (2) | (6) | (19) |
| Net proceeds from (used for) sale of interest in businesses | 92 | (55) | 91 | (56) |
| Net cash used for investing activities | (157) | (355) | (442) | (546) |
| Cash flows from financing activities: | ||||
| Proceeds from issuance (payments) of short-term debt | (108) | 18 | (127) | 96 |
| Principal payments on long-term debt | (19) | (20) | (41) | (293) |
| Proceeds from issuance of long-term debt | 17 | 12 | 34 | 26 |
| Treasury shares transactions | (265) | (235) | (487) | (342) |
| Dividend paid | (231) | (248) | (231) | (248) |
| Net cash used for financing activities | (606) | (473) | (852) | (761) |
| Net cash used for continuing operations | (622) | (341) | (1,380) | (997) |
| 2nd quarter | January to June | ||||
|---|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | ||
| Cash flows from discontinued operations: | |||||
| Net cash used for operating activities | (99) | (40) | (149) | (104) | |
| Net cash (used for) provided by investing activities | (11) | 99 | (11) | 99 | |
| Net cash (used for) provided by discontinued operations | (110) | 59 | (160) | (5) | |
| Net cash used for continuing and discontinued operations | (732) | (282) | (1,540) | (1,002) | |
| Effect of change in exchange rates on cash and cash equivalents | (27) | (10) | 13 | (28) | |
| Cash and cash equivalents at the beginning of the period | 3,066 | 1,727 | 3,834 | 2,465 | |
| Cash and cash equivalents at the end of the period | 2,307 | 1,435 | 2,307 | 1,435 |
For a number of reasons, principally the eects of translation dierences, certain items in the statements of cash flows do not correspond to the dierences between the balance sheet amounts for the respective items.
in millions of euros
| common shares |
capital in excess of par value |
retained earnings |
revaluation reserve |
currency translation differences |
available - for-sale financial assets |
cash flow hedges |
treasury shares at cost |
total share holders' equity |
non controlling interests |
total equity |
|
|---|---|---|---|---|---|---|---|---|---|---|---|
| January-June 2014 | |||||||||||
| Balance as of December 31, 2013 |
188 | 1,796 | 10,415 | 23 | (569) | 55 | 24 | (718) | 11,214 | 13 | 11,227 |
| Total comprehensive income |
110 | (5) | 80 | 8 | (24) | 169 | − | 169 | |||
| Dividend distributed | 3 | 433 | (729) | (293) | (293) | ||||||
| Movement non-controlling interest |
– | – | (2) | (2) | |||||||
| Purchase oftreasury shares | (26) | (440) | (466) | (466) | |||||||
| Re-issuance of treasury shares |
(124) | (69) | 289 | 96 | 96 | ||||||
| Share-based compensation plans |
39 | 39 | 39 | ||||||||
| Income tax share-based compensation plans |
(12) | (12) | (12) | ||||||||
| Total other equity movements |
3 | 336 | (824) | (151) | (636) | (2) | (638) | ||||
| Balance as of June 29, 2014 |
191 | 2,132 | 9,701 | 18 | (489) | 63 | 0 | (869) | 10,747 | 11 | 10,758 |
| January-June 2013 | |||||||||||
| Balance as of December, 2012 |
191 | 1,304 | 10,724 | 54 | (93) | 54 | 20 | (1,103) | 11,151 | 34 | 11,185 |
| Total comprehensive income |
467 | (8) | (101) | (3) | (1) | 354 | 1 | 355 | |||
| Dividend distributed | 4 | 402 | (678) | (272) | (272) | ||||||
| Movement non-controlling interest |
− | 4 | 4 | ||||||||
| Purchase oftreasury shares | (38) | (531) | (569) | (569) | |||||||
| Re-issuance of treasury shares |
(37) | (46) | 133 | 50 | 50 | ||||||
| Share-based compensation plans |
46 | 46 | 46 | ||||||||
| Income tax share-based compensation plans |
3 | 3 | 3 | ||||||||
| Total other equity movements |
4 | 414 | (762) | (398) | (742) | 4 | (738) | ||||
| Balance as of June 30, 2013 | 195 | 1,718 | 10,429 | 46 | (194) | 51 | 19 | (1,501) | 10,763 | 39 | 10,802 |
| 2nd quarter | ||||||
|---|---|---|---|---|---|---|
| 2013 | 2014 | |||||
| Netherlands | other | total | Netherlands | other | total | |
| Defined-benefit plans | ||||||
| Pensions | ||||||
| Current service cost | 48 | 21 | 69 | 47 | 17 | 64 |
| Past service cost (incl. curtailments) | − | (78) | (78) | − | − | − |
| Interest expense | − | 16 | 16 | − | 14 | 14 |
| Interest income | (1) | − | (1) | (1) | − | (1) |
| Total | 47 | (41) | 6 | 46 | 31 | 77 |
| of which discontinued operations | 1 | − | 1 | 1 | − | 1 |
| Retiree Medical | ||||||
| Current service cost | − | − | − | − | − | − |
| Interest expense | − | 3 | 3 | − | 3 | 3 |
| Total | − | 3 | 3 | − | 3 | 3 |
| Defined-contribution plans | ||||||
| Cost | 2 | 31 | 33 | 2 | 31 | 33 |
| of which discontinued operations | − | 1 | 1 | − | 1 | 1 |
| January to June | |||||||
|---|---|---|---|---|---|---|---|
| 2013 | 2014 | ||||||
| Netherlands | other | total | Netherlands | other | total | ||
| Defined-benefit plans | |||||||
| Pensions | |||||||
| Current service cost | 96 | 41 | 137 | 92 | 35 | 127 | |
| Past service cost (incl. curtailments) | − | (78) | (78) | − | − | − | |
| Interest expense | − | 32 | 32 | − | 28 | 28 | |
| Interest income | (2) | − | (2) | (5) | − | (5) | |
| Total | 94 | (5) | 89 | 87 | 63 | 150 | |
| of which discontinued operations | 1 | − | 1 | 1 | − | 1 | |
| Retiree Medical | |||||||
| Current service cost | − | 1 | 1 | − | − | − | |
| Interest expense | − | 6 | 6 | − | 6 | 6 | |
| Total | − | 7 | 7 | − | 6 | 6 | |
| Defined-contribution plans | |||||||
| Costs | 4 | 71 | 75 | 4 | 68 | 72 | |
| of which discontinued operations | − | 1 | 1 | − | 1 | 1 |
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2013 | 2014 | 2013 | 2014 | |
| Contributions and benefits paid by the Company | (134) | (173) | (332) | (651) |
| Significant accounting policies 1 |
39 |
|---|---|
| Information by sector and main countries 2 |
40 |
| Estimates 3 |
41 |
| 4 Financial risk management |
41 |
| Segment information 5 |
41 |
| Seasonality 6 |
41 |
| Discontinued operations and other assets 7 |
41 |
| classified as held for sale | |
| Income taxes 8 |
42 |
| Property, plant and equipment 9 |
42 |
| 10 Goodwill |
42 |
| Intangible assets excluding goodwill 11 |
44 |
| Other current and non-current financial assets 12 |
44 |
| Shareholders' equity 13 |
44 |
| Short-term and long-term debt 14 |
44 |
| Provisions 15 |
45 |
| Pensions 16 |
45 |
| 17 Contingent assets and liabilities |
45 |
| Share-based compensation 18 |
46 |
| Fair value of financial assets and liabilities 19 |
47 |
| Subsequent events 20 |
48 |
This report contains the semi-annual report of Koninklijke Philips N.V. ('the Company'), a company with limited liability, headquartered in Amsterdam, the Netherlands. The principal activities of the Company and its group companies (the Philips Group) are described in note 5, Segment information.
The semi-annual condensed consolidated financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union.
The significant accounting policies applied in these semi-annual condensed consolidated financial statements are consistent with those applied in the Company's consolidated IFRS financial statements as at and for the year ended December 31, 2013, except for the accounting policy changes following from the adoption of the new Standards and Amendments to Standards which are also expected to be reflected in the Company's consolidated IFRS financial statements as at and for the year ending December 31, 2014, and certain other changes. Those new and amended standards which may be the most relevant to the Company are set out below.
IFRIC 21 provides guidance on the accounting for certain outflows imposed on entities by governments in accordance with laws and/or regulations (levies). The Interpretation identifies the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. This Interpretation does not have a material impact on these semi-annual condensed financial statements.
Changes to other standards, following from Amendments and the Annual Improvement Cycles, do not have a material impact on the Company's semiannual condensed consolidated financial statements.
Prior-period financial statements have been restated for two voluntary accounting policy changes applied as of January 1, 2014:
Following the completion of the divestment of the AVM&A business to Gibson Brands, Inc., on June 29, 2014, related remaining net assets in IG&S have been transferred to discontinued operations in Q2 2014. As a consequence, prior results and cash flows have been adjusted accordingly as per the table below.
Restatement impact of transfers to discontinued operations
| January to June | |
|---|---|
| 2013 | |
| Sales | (35) |
| Income from operations | (1) |
| Discontinued operations, net of tax | 1 |
| Cash flow from operating activities | 18 |
| Cash flow from investing activities | (1) |
| Cash flows from discontinued operations | (17) |
| Number of employees (FTEs) | 287 |
all amounts in millions of euros unless otherwise stated
| 2nd quarter | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | |||||||
| sales including inter company |
sales | income from operations | sales including inter company |
sales | income from operations | |||
| amount | as a % of sales |
amount | as a % of sales |
|||||
| Healthcare | 2,369 | 2,362 | 379 | 16.0 | 2,142 | 2,137 | 186 | 8.7 |
| Consumer Lifestyle | 1,087 | 1,083 | 69 | 6.4 | 1,075 | 1,073 | 86 | 8.0 |
| Lighting | 2,053 | 2,048 | 115 | 5.6 | 1,949 | 1,943 | 111 | 5.7 |
| Innovation, Group & Services | 220 | 139 | (56) | – | 219 | 140 | (51) | – |
| Inter-sector eliminations | (97) | (92) | ||||||
| Philips Group | 5,632 | 5,632 | 507 | 9.0 | 5,293 | 5,293 | 332 | 6.3 |
| January to June | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2013 | 2014 | |||||||
| sales including inter company |
sales | income from operations | sales including inter company |
sales | income from operations | |||
| amount | as a % of sales |
amount | as a % of sales |
|||||
| Healthcare | 4,501 | 4,489 | 555 | 12.4 | 4,112 | 4,103 | 295 | 7.2 |
| Consumer Lifestyle | 2,093 | 2,086 | 153 | 7.3 | 2,093 | 2,089 | 182 | 8.7 |
| Lighting | 4,032 | 4,023 | 225 | 5.6 | 3,845 | 3,835 | 219 | 5.7 |
| Innovation, Group & Services | 433 | 279 | (120) | – | 430 | 279 | (137) | – |
| Inter-sector eliminations | (182) | (174) | ||||||
| Philips Group | 10,877 | 10,877 | 813 | 7.5 | 10,306 | 10,306 | 559 | 5.4 |
| sales | total assets | total liabilities excluding debt |
||||
|---|---|---|---|---|---|---|
| January to June | June 30, | June 29, | June 30, | June 29, | ||
| 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | |
| Healthcare | 4,489 | 4,103 | 10,945 | 10,519 | 3,180 | 2,987 |
| Consumer Lifestyle | 2,086 | 2,089 | 2,897 | 2,908 | 1,715 | 1,637 |
| Lighting | 4,023 | 3,835 | 7,165 | 6,832 | 2,412 | 2,255 |
| Innovation, Group & Services | 279 | 279 | 6,172 | 5,264 | 4,867 | 4,250 |
| 27,179 | 25,523 | 12,174 | 11,129 | |||
| Assets classified as held for sale | 446 | 136 | 238 | 4 | ||
| Philips Group | 10,877 | 10,306 | 27,625 | 25,659 | 12,412 | 11,133 |
| sales | tangible and intangible assets1) | |||
|---|---|---|---|---|
| January to June | June 30, | June 29, | ||
| 2013 | 2014 | 2013 | 2014 | |
| Netherlands | 292 | 273 | 874 | 910 |
| United States | 3,136 | 2,865 | 7,932 | 7,286 |
| China | 1,328 | 1,307 | 1,127 | 1,047 |
| Germany | 608 | 612 | 279 | 287 |
| Japan | 527 | 478 | 463 | 413 |
| France | 420 | 391 | 85 | 75 |
| United Kingdom | 327 | 332 | 553 | 576 |
| Other countries | 4,239 | 4,048 | 2,034 | 1,850 |
| Philips Group | 10,877 | 10,306 | 13,347 | 12,444 |
1) Includes property, plant and equipment, intangible assets excluding goodwill, and goodwill
The preparation of the semi-annual condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.
In preparing these semi-annual condensed consolidated financial statements, the significant estimates and judgments 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, 2013.
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, 2013.
Philips' activities are organized on a sector basis, with operational sectors – Healthcare, Consumer Lifestyle and Lighting – each being responsible for the management of its business worldwide, and Innovation, Group & Services (IG&S).
Reportable segments for the purpose of the segmental disclosures required by IAS 34 Interim Financial Statements are: Healthcare, Consumer Lifestyle and Lighting.
3 Estimates Significant segment information can be found in the Sectors and Reconciliation of non-GAAP performance measures sections of this semi-annual report.
Under normal economic conditions, the Group's sales are impacted by seasonal fluctuations, particularly at Consumer Lifestyle and Healthcare, typically resulting in higher revenues and earnings in the second half-year results. At Healthcare, sales are generally higher in the second half of the year, largely due to the timing of new product availability and customers attempting to spend their annual budgeted allowances before the end ofthe year. At Consumer Lifestyle, sales are generally higher in the second half-year due to the holiday sales. Sales in the Lighting businesses are generally not materially affected by seasonality.
5 Segment information For the 12 months ended June 30, 2014, Healthcare, Consumer Lifestyle and Lighting had revenues of EUR 9,190 million, EUR 4,609 million and EUR 8,224 million respectively (12 months ended July 1, 2013, Healthcare, Consumer Lifestyle and Lighting had revenues of EUR 9,850 million, EUR 4,522 million and EUR 8,424 million, respectively).
Discontinued operations included in the Consolidated statements ofincome and the Consolidated statements of cash flows consists of the Audio, Video, Multimedia and Accessories (AVM&A) business, the Television business and certain divestments formerly reported as discontinued operations.
As announced on April 28, 2014, the AVM&A business has been divested to Gibson Brands, Inc. The transfer was effectuated on June 29, 2014.
The following table summarizes the results of the AVM&A business included in the Consolidated statements of income as discontinued operations.
| January to June | ||
|---|---|---|
| 2013 | 2014 | |
| Sales | 545 | 470 |
| Costs and expenses | (526) | (473) |
| Gain on sale of business | − | 5 |
| Income before taxes | 19 | 2 |
| Income taxes | (8) | 12 |
| Results from discontinued operations | 11 | 14 |
At June 29, 2014, the release of currency translation differences, part of Other reserves in Shareholders' equity, recognized in the Consolidated statement of income amounted to EUR nil million.
The following tables shows the components of the gain on the sale of the AVM&A business on June 29, 2014:
| June 29, | |
|---|---|
| 2014 | |
| Net consideration | 85 |
| Carrying value of net assets disposed | (73) |
| Cost of disposal | (7) |
| Gain on sale of business | 5 |
| Income taxes | 12 |
| Net gain on sale of business | 17 |
Balances retained by Philips relating to the divested business, such as certain accounts receivable, accounts payable and provisions, are reported on the respective balance sheet captions and within the Consumer Lifestyle sector.
The Television business had in the first half of 2014 a gain, net of income tax, of EUR 11 million (first half of 2013: a loss of EUR 10 million).
Assets and liabilities directly associated with assets held for sale relate to property, plant and equipment for an amount of EUR 20 million, business divestments of EUR 68 million and other non-current financial assets of EUR 44 million at June 29, 2014.
Income tax expense in the first half of 2014 was lower compared with the previous year, largely due to lower earnings and the impact of the application of the Dutch Innovation Box tax rule, which has been retroactively applied since 2013.
During the first six months ended June 29, 2014, there was no significant net movement in Property, plant and equipment. The main movements consist of additions of EUR 228 million (six months ended June 30, 2013: EUR 286 million) offset by depreciation and impairment charges of EUR 295 million (six months ended June 30, 2013: EUR 297 million).
Goodwill is summarized as follows:
| Balance as of December 31, 2013: | |
|---|---|
| Cost | 8,596 |
| Amortization and impairments | (2,092) |
| Book value | 6,504 |
| Changes in book value: | |
| Purchase price allocation adjustment | 8 |
| Impairments | − |
| Divestments and transfers to assets classified as held for sale |
(16) |
| Translation differences | 83 |
| Balance as of June 29, 2014: | |
| Cost | 8,689 |
| Amortization and impairments | (2,111) |
| Book value | 6,579 |
Divestments and transfer to assets classified as held for sale relate to the sectors Healthcare and Lighting.
For impairment testing, goodwill is allocated to (groups of) cash-generating units (typically one level below operational sector level), which represents the lowest level at which the goodwill is monitored internally for management purposes.
In 2014, a cash-generating unit Healthcare Informatics Services & Solutions was created in the Healthcare sector. As a result of the change, a portion of the goodwill associated with the unit Patient Care & Clinical Informatics and the unit Home Monitoring was allocated to Healthcare Informatics Services & Solutions. The name of the cash-generating unit Patient Care & Clinical Informatics was changed in 2014 to Patient Care & Monitoring Solutions.
Goodwill allocated to the cash-generating units Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Monitoring Solutions and Professional Lighting Solutions is considered to be significant in comparison to the total book value of goodwill for the Group at June 29, 2014. The amounts associated as of June 29, 2014, are presented below:
| June 29, 2014 |
|
|---|---|
| Respiratory Care & Sleep Management | 1,579 |
| Imaging Systems | 1,426 |
| Patient Care & Monitoring Solutions | 1,180 |
| Professional Lighting Solutions | 1,265 |
| Other (non-significant units) | 1,129 |
| Total book value | 6,579 |
The basis of the recoverable amount used in the annual and trigger-based impairment tests for the units disclosed in this note is the value in use. In the annual impairment test performed in the second quarter, the estimated recoverable amounts of the cash-generating units tested approximated or exceeded the carrying value of the units, therefore no impairment loss was recognized. Key assumptions used in the impairment tests for these units were sales growth rates, income from operations and the rates used for discounting the projected cash flows. These cash flow projections were determined using management's internal forecasts that cover an initial period from 2014 to 2018 that matches the period used for Philips' strategic process. Projections were extrapolated with stable or declining growth rates for a period of 5 years, after which a terminal value was calculated. For terminal value calculation, growth rates were capped at a historical long-term average growth rate.
The sales growth rates and margins used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages.
Income from operations in all units is expected to increase overthe projection period as a result of volume growth and cost efficiencies.
Cash flow projections of Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Monitoring Solutions and Professional Lighting Solutions for 2014 were based on the following key assumptions (used in the annual impairment test performed in the second quarter):
| in % | ||||
|---|---|---|---|---|
| compound sales growth rate1) | ||||
| initial forecast period |
extra polation period2) |
used to calculate terminal value |
pre-tax discount rates |
|
| Respiratory Care & Sleep Management |
4.2 | 3.6 | 2.7 | 11.4 |
| Imaging Systems | 3.3 | 3.1 | 2.7 | 12.8 |
| Patient Care & Monitoring Solutions |
4.9 | 3.8 | 2.7 | 12.8 |
| Professional Lighting Solutions |
9.9 | 6.3 | 2.7 | 13.7 |
1) Compound sales growth rate is the annualized steady growth rate over the forecast period
2) Also referred to later in the text as compound long-term sales growth rate
Among the mentioned units, Respiratory Care & Sleep Management has the highest amount of goodwill and the lowest excess of the recoverable amount over the carrying amount. The headroom of Respiratory Care & Sleep Management was estimated at EUR 820 million. The following changes could, individually, cause the value in use to fall to the level of the carrying value:
| increase in pre tax discount rate, basis points |
decrease in compound long-term sales growth rate, basis points |
decrease in terminal value amount, % |
|
|---|---|---|---|
| Respiratory Care & Sleep Management |
380 | 680 | 49 |
The results of the annual impairment test of Imaging Systems, Patient Care & Monitoring Solutions and Professional Lighting Solutions indicate that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.
In addition, other units are sensitive to fluctuations in the assumptions as set out above.
Based on the annual impairment test, it was noted that the headroom for the cash-generating unit Home Monitoring was EUR 80 million. An increase of 400 points in the pre-tax discounting rate, a 630 basis points decline in the compound long-term sales growth rate or a 51% decrease in terminal value would cause its value in use to fall to the level of its carrying value. The goodwill allocated to Home Monitoring at June 29, 2014 amounts to EUR 33 million.
Based on the annual impairment test, it was noted that with regard to the headroom for the cash-generating unit Consumer Luminaires the estimated recoverable amount approximates the carrying value of this cashgenerating unit. Consequently, any adverse change in key assumptions would, individually, cause an impairment loss to be recognized. The goodwill allocated to Consumer Luminaires at June 29, 2014 amounts to EUR 106 million.
The changes in intangible assets excluding goodwill in 2014 are summarized as follows:
| Book value as of December 31, 2013 | 3,262 |
|---|---|
| Changes in book value: | |
| Additions | 188 |
| Purchase price allocation adjustment | (8) |
| Amortization | (294) |
| Impairment losses | (9) |
| Divestments and transfers to assets classified as held for sale |
(15) |
| Translation differences | 33 |
| Total changes | (105) |
| Book value as of June 29, 2014 | 3,157 |
The additions for 2014 mainly comprise internally generated assets of EUR 155 million for product development costs. Divestments and transfers to assets classified as held for sale relate to the sectors Healthcare and Lighting.
Changes in Other current and non-current financial assets mainly relate to changes in the asset category Loans and receivables which are included in this caption. The decrease in Loans and receivables is the net effect of loan facilities drawn by TPV Technology
Limited (TPV) of EUR 60 million and the reclassification of loans maturing within one year to Other current financial assets (EUR 121 million).
The drawdown of the loan facility by TPV was enabled by an agreement concluded between Philips and TPV on March 25, 2014, which - amongst others – involved the transfer of the existing loan agreements between Philips and TP Vision Holding B.V. (at that moment a television venture owned 70% by TPV and 30% by Philips) to TPV. As part of this agreement TPV assumed full ownership of TP Vision Holding.
11 Intangible assets excluding goodwill In June 2014, Philips settled a dividend of EUR 0.80 per common share, representing a total value of EUR 729 million. Shareholders could elect for a cash dividend or a share dividend. Approximately 60% of the shareholders elected for a share dividend, resulting in the issuance of 18,811,534 new common shares. The settlement of the cash dividend involved an amount of EUR 293 million.
As of June 29, 2014, the issued and fully-paid share capital consists of 956,657,323 common shares, each share having a par value of EUR 0.20.
During the first six months of 2014, a total of 9,591,833 treasury shares were delivered as a result of stock option exercises, restricted share deliveries and other employee-related share plans, and a total of 5,822,559 shares were acquired in connection with the LTI coverage program started in January 2014. Furthermore, a total of 11,985,891 shares were acquired for cancellation purposes in connection with the EUR 1.5 billion share buy-back program started in October 2013. On June 29, 2014 the total number of treasury shares amounted to 32,724,639, which were purchased at an average price of EUR 26.57 per share.
At the end of Q2 2014, Philips had total debt of EUR 3,768 million, a decrease of EUR 133 million compared to December 31, 2013. Long-term debt was EUR 3,336 million, an increase of EUR 27 million, and short-term debt was EUR 432 million, a decrease of EUR 160 million compared to December 31, 2013. The movement of debt was mainly due to repayment of a EUR 250 million bilateral loan in Q1 2014. Total remaining longterm debt consists mainly of USD 4,117 million of public bonds. The weighted average interest rate of long-term USD bonds was 5.59% at the end of Q2 2014.
Provisions are summarized as follows:
| December 31, 2013 |
June 29, 2014 | |||
|---|---|---|---|---|
| long term |
short term |
long term |
short term |
|
| Provisions for defined-benefit plans |
754 | 51 | 746 | 51 |
| Other post-retirement benefits | 200 | 14 | 205 | 14 |
| Post-employment benefits and obligatory severance payments |
41 | 25 | 33 | 20 |
| Product warranty | 59 | 207 | 60 | 204 |
| Environmental provisions | 249 | 62 | 267 | 63 |
| Restructuring-related provisions |
75 | 128 | 62 | 110 |
| Onerous contract provisions | 40 | 53 | 42 | 41 |
| Other provisions | 485 | 111 | 358 | 219 |
| 1,903 | 651 | 1,773 | 722 |
The decrease in provisions is mainly attributable to the reduction in restructuring-related provisions due to usage (primarily in Healthcare, Lighting and IG&S) and releases (mainly in Healthcare and Lighting) which partly offset the additions (mainly in Healthcare and Lighting).
In accordance with IAS 34, actuarial gains and losses are reported in the semi-annual condensed consolidated financial statements only if there have been significant changes in financial markets. In the first six months of 2014, no actuarial gains and losses were recorded as the changes in financial markets during that period were considered not significant.
As part of the changed pension funding agreement in the Netherlands, Philips agreed to make a one-off EUR 600 million contribution to Philips Pensioenfonds, the Company's Dutch pension fund. In the first half of 2014 an amount of EUR 338 million of the total EUR 600 million was settled, including a EUR33 million non-cash transfer. The prepaid pension cost asset created by these contributions has been fully written off through Other comprehensive income due to the asset ceiling test. The remainder of the EUR 600 million must be settled before July 2015.
For information regarding contingent assets, please refer to the Annual Report 2013. Significant developments regarding contingent assets that have occurred since the publication of the Annual Report 2013 are described below:
On June 20, 2014, the High Court of Justice in England issued a decision in a patent infringement case against Nintendo, confirming patent infringement in respect of two Philips patents. Damages for the unauthorized use of Philips' patents will have to be assessed separately. Nintendo has announced they will request permission to appeal this decision. Three other lawsuits against Nintendo (in Germany, France and the US) are still pending.
In the end of June 2014, the 'Superior Tribunal de Justiça' upheld a court decision to reject SUFRAMA's appeal. SUFRAMA has until August 2014 to file a Bill of Review and another appeal to 'Supremo Tribunal Federal'. Final decision is expected in two years.
Philips' policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. At the end of Q2 2014, the total fair value of guarantees recognized on the balance sheet was EUR nil million (December 31, 2013: EUR nil million). Remaining off-balance-sheet business and credit-related guarantees provided on behalf of third parties and associates decreased by EUR 12 million during the first half of 2014 to EUR 22 million. Offbalance-sheet guarantees for year-end 2013 have been restated to EUR 34 million to reflect guarantees related to associates and third parties only.
The Company and its subsidiaries are subject to environmental laws and regulations. Under these laws, the Company and/or its subsidiaries may be required to remediate the effects of the release or disposal of certain chemicals on the environment. The Company accrues for losses associated with environmental obligations when such losses are probable and reliably estimable. Such amounts are recognized on a discounted basis since they reflect the present value of estimated future cash flows.
Provisions for environmental remediation can change significantly due to the emergence of additional information regarding the extent or nature of the contamination, the need to utilize alternative technologies, actions by regulatory authorities and changes in judgments, assumptions, and discount rates.
The Company and/or its subsidiaries have recognized environmental remediation provisions for sites in various countries. In the United States, subsidiaries of the Company have been named as potentially responsible parties in state and federal proceedings for the clean-up of various sites.
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, commercial transactions, product liability, participations and environmental pollution. In respect of antitrust laws, the Company and certain of its (former) group companies are involved in investigations by competition law authorities in several jurisdictions and are engaged in litigation in this respect. Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. For certain legal proceedings, information required under IAS 37 is not disclosed, if the Company concludes that the disclosure can be expected to prejudice seriously the outcome of the legal proceeding.
For information regarding legal proceedings in which the Company is involved, please refer to the Annual Report 2013. Significant developments regarding legal proceedings that have occurred since the publication of the Annual Report 2013 are described below:
In February 2014, the Company responded to allegations made by the Brazilian authorities in the ongoing investigation into possible anticompetitive activities in the CRT industry. In addition, the authorities in Hungary are continuing to pursue the matter against Philips and other defendants. The appeal against the fine imposed by the European Commission is pending with the General Court of the European Union.
In the proposed class proceedings in Canada, a class certification motion for Ontario has been scheduled for April 2015.
On February 18, 2014 the Delaware Chancery Court ruled in favor of the Company in the case filed by Mr. Carlo Vichi in which he claimed repayment of a EUR 200 million loan made to the CRT joint venture LG.Philips Displays (LPD), alleging that the Company should have disclosed LPD's participation in a CRT cartel as determined by the European Commission. Mr. Vichi has appealed the decision with the Delaware Supreme Court.
The European Commission is continuing its investigation into alleged anti-competitive conduct by Philips in the period September 2003 to September 2004 relating to the former Philips smart card chips business. Based on its current knowledge, the Company does not believe that this investigation will have a materially adverse effect on the Company's consolidated financial position, results of operations or cash flows.
Share-based compensation costs were EUR 41 million and EUR 49 million in the first six months of 2014 and 2013 respectively.
During the first six months of 2014 the Company granted 5,624,050 performance shares and 206,834 restricted shares.
Restricted shares issued and options exercised
In the first six months of 2014 a total of 1,273,289 restricted shares were issued to employees and 1,914,925 EUR-denominated options and 1,123,943 USD-denominated options were exercised at a weighted average exercise price of EUR 21.47 and USD 28.36 respectively.
Under the Accelerate! program, in the first six months of 2014, a total of 3,616,917 restricted shares were issued to employees and 887,117 EUR-denominated options
and 280,600 USD-denominated options were exercised at a weighted average exercise price of EUR 15.24 and USD 20.02 respectively.
The table below analyses financial instruments carried at fair value by different hierarchy levels:
| Other plans | level 1 level 2 level 3 total |
|---|---|
| Under the employee stock purchase plans 668,754 | |
| shares were purchased at an average price of EUR | June 29, 2014 |
| 25.53. | Available-for-sale |
| financial assets - non | |
| current 47 − 54 101 |
|
| For further information on the characteristics of all | Available-for-sale |
| plans, please refer to the Annual Report 2013, note 31. | financial assets - current − 4 − 4 |
| Securities classified as | |
| Fair value of financial assets and liabilities 19 |
assets held for sale 69 − − 69 |
| Financial assets | |
| The estimated fair value of financial instruments has | designated at fair value − through profit and loss 22 2 24 |
| been determined by the Company using available | Derivative financial |
| market information and appropriate valuation | instruments - assets − 76 − 76 |
| methods. The estimates presented are not necessarily | Current loans and |
| indicative of the amounts that will ultimately be | receivables − 121 − 121 |
| realized by the Company upon maturity or disposal. | Non-current loans and |
| The use of different market assumptions and/or | receivables − 83 − 83 |
| estimation methods may have a material effect on the | Receivables - non-current − 186 − 186 |
| Total financial assets 138 470 56 664 |
|
| estimated fair value amounts. | |
| Financial liabilities | |
| For cash and cash equivalents, current receivables, | designated at fair value |
| accounts payable, interest accrual and short-term | − − − − through profit and loss |
| debts, the carrying amounts approximate fair value, | Derivative financial instruments - liabilities − (382) − (382) |
| because of the short maturity of these instruments. | Debt (3,498) (199) − (3,697) |
| (3,498) (581) − (4,079) Total financial liabilities |
|
| December 31, 2013 | |
| Available-for-sale | |
| financial assets - non current 42 − 54 96 |
|
| Available-for-sale | |
| financial assets - current 6 4 − 10 |
|
| Securities classified as | |
| − − assets held for sale 62 62 |
|
| Financial assets | |
| designated at fair value − |
|
| through profit and loss 22 7 29 |
|
| Derivative financial instruments - assets − 150 − 150 |
|
| Non-current loans and | |
| receivables − 143 − 143 |
|
| Receivables - non-current − 144 − 144 |
|
| 132 441 61 634 Total financial assets |
|
| Financial liabilities | |
| designated at fair value | |
| − − through profit and loss (13) (13) |
|
| Derivative financial | |
| instruments - liabilities − (368) − (368) |
|
| Debt (3,345) (200) − (3,545) |
|
| Total financial liabilities (3,345) (568) (13) (3,926) |
Instruments included in level 1 are comprised primarily of listed equity investments classified as available-forsale 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 Philips' bond is estimated on the basis of the quoted market prices for certain issues. Accrued interest is not included.
The fair value of financial instruments that are not traded in an active market (for example, over-thecounter derivatives) 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 flows based on observable interest yield curves and foreign exchange rates.
In connection with transfer of the remaining 30% stake in the TP Vision venture to TPV Technology, a new loan has been issued with a nominal value of EUR 60 million. Together with remaining TP Vision loans it was transferred to TPV Technology, with a book value for total loans of EUR 204 million, which approximates the fair value of these loans, within which EUR 121 million will mature in 2015.
If one or more of the significant inputs are not based on observable market data, the instrument is included in level 3.
As part of the transfer of the remaining 30% stake in the TP Vision venture to TPV Technology, certain derivative options calculated under level 3 assumptions, with a book value of EUR 13 million as of December 31, 2013, expired.
The arrangement with the UK Pension Fund in conjunction with the sale of NXP is a financial instrument carried atfair value classified as level 3. As of June 29, 2014, the fair value of this instrument is estimated to be EUR 2 million, with the changes of fair value recorded to financial income and expense.
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 | financial liabilities | |
|---|---|---|
| Balance at January 1, 2014 | 61 | (13) |
| Total gains and losses recognized in: |
||
| - profit or loss - other comprehensive income |
(5) | 13 |
| Balance at June 29, 2014 | 56 | − |
On June 30, 2014 Philips announced that it is in the process to combine its Lumileds (LED components) and Automotive lighting businesses into a stand-alone company within the Philips Group. Philips will explore strategic options to attract capital from third-party investors for this business. Philips intends to remain a shareholder and customer of the new company, and will continue the existing innovation collaboration.
http://www.philips.com/investorrelations © 2014 Koninklijke Philips N.V. All rights reserved.
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