Earnings Release • Jul 23, 2013
Earnings Release
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Philips reports second-quarter comparable sales growth of 3% to EUR 5.7 billion; operational results improve by 30% to EUR 530 million
"We are pleased that in the second quarter our operational results improved year-on-year for the fifth quarter in a row and sales grew by 3% in a challenging economic environment, thanks to our highly engaged employees. The Accelerate! transformation program continues to drive performance improvement, resulting in a better product portfolio, higher gross margins, faster time to market, reduced inventory levels and a structurally lower cost base.
At Healthcare, order intake grew by 7%, supported by new product launches and significant customer wins. Sales were flat year-on-year, due to the weaker order intake growth in the previous quarters in the United States and Europe. Comparable sales at Consumer Lifestyle increased an impressive 13%, as locally relevant product launches and better operational execution helped to drive growth. At Lighting, all businesses delivered better operational results. We continued to see strong traction in LED, with LED-based sales growing 28% over the previous year.
Looking ahead to the second half of 2013, we are concerned about economic uncertainties around the world; however, we remain committed to reach our financial targets this year."
Healthcare currency-comparable equipment order intake increased by 7% year-on-year, with both Imaging Systems and Patient Care & Clinical Informatics showing growth. Comparable sales were flat year-on-year as the growth at Customer Services, Patient Care & Clinical Informatics and Home Healthcare Solutions was offset by a decline at Imaging Systems due to soft order intake in the previous quarters. In growth geographies, comparable sales showed a double-digit increase. EBITA margin excluding restructuring and acquisition-related charges and the past-service pension cost gain in the US increased by 1.2 percentage points year-on-year to 14.3%.
Consumer Lifestyle comparable sales increased by 13%, driven by good growth in all businesses, i.e. Domestic Appliances, Personal Care, as well as Health & Wellness. In growth geographies, comparable sales showed a strong double-digit increase. EBITA margin excluding restructuring and acquisition-related charges and the past-service pension cost gain in the US increased to 7.8%, a year-on-year improvement of 2.8 percentage points.
Lighting comparable sales increased by 2%, led by Automotive, Lumileds and Consumer Luminaires. LED-based sales grew by 28%, representing 25% of total Lighting sales. In growth geographies, comparable sales showed a double-digit increase. EBITA margin excluding restructuring and acquisition-related charges and the past-service pension cost gain in the US was 8.1%, a year-on-year improvement of 2.4 percentage points.
We have completed the EUR 2 billion share buy-back program that started in July 2011.
Now in its third year, our change and performance improvement program Accelerate! continues to drive better results across the organization. The program, which runs through 2017, has five streams to enhance customer relevance, change company culture, reduce overhead costs, streamline our End2End customer value chains, and reallocate resources to profitable growth opportunities.
In the second quarter, Accelerate! initiatives to enhance customer relevance resulted in encouraging success in our markets. For example, we established an innovative alliance with Georgia Regents Medical Center, through which Philips will provide a comprehensive range of consulting services, advanced medical technologies, and operational performance, planning and maintenance services with pre-determined monthly operational costs over a 15-year term.
At Domestic Appliances, we have leveraged our Povos acquisition to make locally relevant and successful products, such as the Noodle Maker in China and the Multicooker in Russia. And underlining our leadership in innovative, energyefficient lighting, we installed new lighting systems in Brazil and at The Change Initiative's retail space in Dubai, supporting its claim that it is the most sustainable commercial building in the world.
Over 1,200 senior leaders and 600 middle managers have participated in change programs to create a highperformance culture. Additionally, more than 1,300 people have received specialized Lean training to drive End2End transformation of customer value chains. Our overhead cost reduction program has resulted in EUR 673 million total gross savings to date, including EUR 202 million realized in the first half of 2013. In the quarter, we reduced inventory by 1.5 percentage points of sales year-on-year.
Please refer to page 18 of this press release for more information about forward-looking statements, third-party market share data, use of non-GAAP information and use of fair-value measurements.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Sales | 5,570 | 5,654 |
| EBITA | 339 | 603 |
| as a % of sales | 6.1 | 10.7 |
| EBIT | 229 | 509 |
| as a % of sales | 4.1 | 9.0 |
| Financial income and expenses | (99) | (78) |
| Income taxes | (59) | (121) |
| Results investments in associates | (9) | 14 |
| Income from continuing operations | 62 | 324 |
| Discontinued operations | 40 | (7) |
| Net income | 102 | 317 |
| Net income attributable to shareholders per common share (in euros) - basic |
0.11 | 0.35 |
in millions of euros unless otherwise stated
| Q2 | Q2 | % change | ||
|---|---|---|---|---|
| 2012 | 2013 | nominal | comparable | |
| Healthcare | 2,413 | 2,362 | (2) | 0 |
| Consumer Lifestyle | 960 | 1,083 | 13 | 13 |
| Lighting | 2,026 | 2,048 | 1 | 2 |
| Innovation, Group | ||||
| & Services | 171 | 161 | (6) | (14) |
| Philips Group | 5,570 | 5,654 | 2 | 3 |
in millions of euros unless otherwise stated
| Q2 | Q2 | % change | ||
|---|---|---|---|---|
| 2012 | 2013 | nominal comparable | ||
| Western Europe | 1,336 | 1,328 | (1) | (1) |
| North America | 1,881 | 1,782 | (5) | (5) |
| Other mature geographies | 449 | 441 | (2) | 7 |
| Total mature geographies | 3,666 | 3,551 | (3) | (2) |
| Growth geographies | 1,904 | 2,103 | 10 | 12 |
| Philips Group | 5,570 | 5,654 | 2 | 3 |
in millions of euros
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Healthcare | 308 | 420 |
| Consumer Lifestyle | 40 | 82 |
| Lighting | 78 | 153 |
| Innovation, Group & Services | (87) | (52) |
| Philips Group | 339 | 603 |
as a % of sales
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Healthcare | 12.8 | 17.8 |
| Consumer Lifestyle | 4.2 | 7.6 |
| Lighting | 3.8 | 7.5 |
| Innovation, Group & Services | (50.9) | (32.3) |
| Philips Group | 6.1 | 10.7 |
in millions of euros
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Healthcare | (8) | − |
| Consumer Lifestyle | (8) | (3) |
| Lighting | (38) | (23) |
| Innovation, Group & Services | (40) | − |
| Philips Group | (94) | (26) |
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Healthcare | 259 | 379 |
| Consumer Lifestyle | 27 | 69 |
| Lighting | 34 | 115 |
| Innovation, Group & Services | (91) | (54) |
| Philips Group | 229 | 509 |
| as a % of sales | 4.1 | 9.0 |
| in millions of euros | ||
|---|---|---|
| Q2 | Q2 | |
| 2012 | 2013 | |
| Net interest expenses | (87) | (71) |
| Value adjustment to option in the UK pension plan |
(2) | 5 |
| Other | (10) | (12) |
| (99) | (78) |
in millions of euros
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Beginning cash balance | 4,225 | 3,066 |
| Free cash flow | (162) | (122) |
| Net cash flow from operating activities | 81 | 124 |
| Net capital expenditures | (243) | (246) |
| Acquisitions and divestments of businesses |
8 | 96 |
| Other cash flow from investing activities | (23) | (7) |
| Treasury shares transactions | (288) | (265) |
| Dividend paid | (256) | (231) |
| Changes in debt/other | (274) | (137) |
| Net cash flow discontinued operations | (96) | (93) |
| Ending balance | 3,134 | 2,307 |
in millions of euros
• Financial income and expenses amounted to a net expense of EUR 78 million, an improvement of EUR 21 million compared with Q2 2012. This was partly attributable to lowerinterest expenses on pensions and debt, and a value adjustment to the option in the UK pension plan.
• Operating activitiesresulted in a cash inflow of EUR 124 million, higher than the inflow of EUR 81 million in Q2 2012, mainly as a result of higher earnings.
in millions of euros
Inventories as a % of sales1)
Net debt and group equity
• Gross capital expenditures on property, plant and equipment were EUR 23 million lower than in Q2 2012, mainly due to lower investments at Lighting and Consumer Lifestyle.
Compared to Q2 2012, inventories as a percentage of sales improved by 1.5 percentage points. This was attributable to all sectors, but mainly driven by inventory improvements at Healthcare and Lighting.
At the end of Q2 2013, Philips had a net debt position of EUR 2.1 billion, compared to EUR 1.8 billion at the end of Q2 2012. During the quarter, the net debt position increased by EUR 568 million, mainly due to treasury shares transactions and the distribution of the annual dividend in Q2 2013.
1) Number of employees excludes discontinued operations. Discontinued operations, comprising the Audio, Video, Multimedia and Accessories business, had 1,958 employees at the end of Q2 2013 (Q2 2012: 2,166; Q1 2013: 1,970).
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Sales | 2,413 | 2,362 |
| Sales growth | ||
| % nominal | 16 | (2) |
| % comparable | 7 | 0 |
| EBITA | 308 | 420 |
| as a % of sales | 12.8 | 17.8 |
| EBIT | 259 | 379 |
| as a % of sales | 10.7 | 16.0 |
| Net operating capital (NOC) | 8,542 | 7,684 |
| Number of employees (FTEs) | 37,887 | 37,270 |
in millions of euros
EBITA
Healthcare comparable sales remained flat year-onyear. Customer Services recorded mid-single-digit growth, while Patient Care & Clinical Informatics and Home Healthcare Solutions achieved low-single-digit growth. Imaging Systems saw a high-single-digit decline.
From a regional perspective, comparable sales in growth geographies increased by 10% year-on-year, with strong growth in China and Latin America. Sales in mature geographies declined 3% year-on-year, with North America and Western Europe showing midsingle-digit and low-single-digit declines respectively.
• Restructuring and acquisition-related charges in Q3 2013 are expected to total approximately EUR 5 million.
* Excluding the Audio, Video, Multimedia and Accessories business
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Sales | 960 | 1,083 |
| Sales growth | ||
| % nominal | 15 | 13 |
| % comparable | 8 | 13 |
| EBITA | 40 | 82 |
| as a % of sales | 4.2 | 7.6 |
| EBIT | 27 | 69 |
| as a % of sales | 2.8 | 6.4 |
| Net operating capital (NOC) | 1,514 | 1,182 |
| Number of employees (FTEs) | 16,540 | 16,414 |
in millions of euros
EBITA
Excluding restructuring and acquisition-related charges and the US past-service pension cost gain, EBITA was EUR 84 million, or 7.8% of sales, compared to EUR 48 million, or 5.0% ofsales, in Q2 2012. The 2.8 percentage points improvement was largely attributable to higher sales and improved gross margins across all businesses.
EBITA included EUR 7 million of costs formerly reported as part of the Audio, Video, Multimedia and Accessories business in Consumer Lifestyle (Q2 2012 included EUR 9 million of costs related to the Audio, Video, Multimedia and Accessories business and EUR 9 million of costs related to the Television business).
• Restructuring and acquisition-related charges in Q3 2013 are expected to total approximately EUR 5 million.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Sales | 2,026 | 2,048 |
| Sales growth | ||
| % nominal | 14 | 1 |
| % comparable | 6 | 2 |
| EBITA | 78 | 153 |
| as a % of sales | 3.8 | 7.5 |
| EBIT | 34 | 115 |
| as a % of sales | 1.7 | 5.6 |
| Net operating capital (NOC) | 5,287 | 4,732 |
| Number of employees (FTEs) | 52,749 | 49,148 |
in millions of euros
EBITA
EBITA amounted to EUR 153 million, compared to EUR 78 million in Q2 2012, and included restructuring and acquisition-related charges of EUR 23 million (Q2 2012: EUR 38 million), as well as a past-service pension cost gain in the US of EUR 10 million.
Excluding restructuring and acquisition-related charges and the past-service pension cost gain in the US, EBITA was EUR 166 million, or 8.1% of sales, compared to EUR 116 million, or 5.7% of sales, in Q2 2012. The yearon-year EBITA increase was driven by revenue growth and gross margin improvements. All businesses contributed to the EBITA improvement.
• Restructuring and acquisition-related charges in Q3 2013 are expected to total approximately EUR 40 million.
in millions of euros unless otherwise stated
| Q2 | Q2 | |
|---|---|---|
| 2012 | 2013 | |
| Sales | 171 | 161 |
| Sales growth | ||
| % nominal | 1 | (6) |
| % comparable | (2) | (14) |
| EBITA of: | ||
| Group Innovation | (41) | (34) |
| IP Royalties | 51 | 56 |
| Group and Regional Costs | (29) | (34) |
| Accelerate! investment | (34) | (40) |
| Pensions | 25 | (1) |
| Service Units and Other | (59) | 1 |
| EBITA | (87) | (52) |
| EBIT | (91) | (54) |
| Net operating capital (NOC) | (3,858) | (3,414) |
| Number of employees (FTEs) | 12,459 | 12,449 |
in millions of euros
in millions of euros
• Net operating capital increased by EUR 444 million year-on-year, mainly due to an increase in the value of currency hedges held at Group level as well as the reclassification of real estate assets from the sectors to Service Units.
| Q2 | Q2 |
|---|---|
| 2012 | 2013 |
| 29 | (10) |
| − | (7) |
| 9 | 7 |
| 9 | 13 |
| (4) | − |
| 43 | 3 |
| − | (1) |
| (10) | (2) |
| 33 | − |
| 2,166 | 1,958 |
Following the agreement with Funai Electric Co. Ltd, as mentioned in the Q1 2013 press release, the results of the Audio, Video, Multimedia and Accessories (AVM&A) business are reported as discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows. Prior-period comparative figures have been restated accordingly. Consequently, Audio, Video, Multimedia and Accessories sales and EBITA are no longer included in the Consumer Lifestyle and Group results of continuing operations.
The net income of discontinued operations attributable to the Audio, Video, Multimedia and Accessories business declined from EUR 33 million in Q2 2012 to zero in Q2 2013. The year-on-year decline in income was attributable to a EUR 20 million gain on the Speech Processing divestment in Q2 2012 and lower results related to the Audio, Video, Multimedia and Accessories business.
Since Q1 2013, the applicable net operating capital of this business is reported under Assets and Liabilities classified as held for sale in the Consolidated balance sheet.
The EBITA of Consumer Lifestyle includes net costs of EUR 7 million formerly reported as part of the results of this business. The EBITA of Innovation, Group & Services includes net costs of EUR 13 million formerly reported as part of this business.
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 our strategy, estimates of sales growth, future EBITA and future developments in our 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 our strategy and our ability to realize the benefits of this strategy, our 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, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our 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 our Annual Report 2012.
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 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 our Annual Report 2012.
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 our Annual Report 2012. 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. Financial reporting is in accordance with the accounting policies as stated in the Annual Report 2012, unless otherwise stated.
Prior-period financials have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations, the adoption of IAS 19R, which mainly relates to pension reporting, and adjustments to the quarterly figures of 2012, which have already been included in the Annual Report 2012 (for an explanation refer to Annual Report 2012 section 12.10 "Significant Accounting Policies"). An overview of the revised 2012 figures per quarter is available on the Philips website, in the Investor Relations section.
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 4, Segment information.
The semi-annual report for the six months ended June 30, 2013 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, 2012.
The Board of Management of the Company hereby declares that to the best of their knowledge, the semiannual report, which has been prepared in accordance with the applicable financial reporting standards for 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 semi-annual management report gives a fair review of the information required pursuant to section 5:25d(8)/(9) of the Dutch Financial Markets Supervision Act (Wet op het Financieel toezicht).
Amsterdam, July 22, 2013
Board of Management
Frans van Houten Ron Wirahadiraksa
Pieter Nota
in millions of euros unless otherwise stated
| January to June | |||||
|---|---|---|---|---|---|
| 2012 | 2013 | ||||
| Sales | 10,877 | 10,912 | |||
| EBITA | 790 | 1,005 | |||
| as a % of sales | 7.3 | 9.2 | |||
| EBIT | 570 | 814 | |||
| as a % of sales | 5.2 | 7.5 | |||
| Financial income and expenses | (174) | (161) | |||
| Income taxes | (121) | (190) | |||
| Results investments in associates | (12) | 15 | |||
| Income from continuing operations | 263 | 478 | |||
| Discontinued operations | 22 | 1 | |||
| Net income | 285 | 479 | |||
| Net income attributable to shareholders per common share (in euros) - basic |
0.31 | 0.52 | |||
in millions of euros unless otherwise stated
| January to June | % change | |||
|---|---|---|---|---|
| 2012 | 2013 | nominal comparable | ||
| Healthcare | 4,622 | 4,489 | (3) | (1) |
| Consumer Lifestyle |
1,883 | 2,086 | 11 | 12 |
| Lighting | 4,041 | 4,023 | (0) | 1 |
| Innovation, Group & Services |
331 | 314 | (5) | (9) |
| Philips Group | 10,877 | 10,912 | 0 | 2 |
in millions of euros
| January to June | ||||
|---|---|---|---|---|
| 2012 | 2013 | |||
| Healthcare | 510 | 642 | ||
| Consumer Lifestyle | 251 | 180 | ||
| Lighting | 124 | 300 | ||
| Innovation, Group & Services | (95) | (117) | ||
| Philips Group | 790 | 1,005 | ||
as a % of sales
| January to June | |||||
|---|---|---|---|---|---|
| 2012 | 2013 | ||||
| Healthcare | 11.0 | 14.3 | |||
| Consumer Lifestyle | 13.3 | 8.6 | |||
| Lighting | 3.1 | 7.5 | |||
| Innovation, Group & Services | (28.7) | (37.3) | |||
| Philips Group | 7.3 | 9.2 |
• EBITA amounted to a net cost of EUR 117 million, including a EUR 6 million past-service pension cost gain in the US. EBITA in the first half of 2012 included a EUR 37 million gain on the High Tech Campus real estate transaction and a EUR 25 million past-service cost gain related to a medical retiree benefit plan, resulting in a year-on-year net cost increase of EUR 22 million. Excluding these gains and restructuring and acquisitionrelated charges (EUR 39 million in 2012 and EUR 3 million release in 2013), EBITA was a EUR 8 million higher cost than in the first half of 2012. The EBITA decline compared to the first half of 2012 was largely due to higher costs in Service Units.
all amounts in millions of euros unless otherwise stated
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2012 | 2013 | 2012 | 2013 | |
| Sales Cost of sales |
5,570 (3,431) |
5,654 (3,307) |
10,877 (6,730) |
10,912 (6,464) |
| Gross margin | 2,139 | 2,347 | 4,147 | 4,448 |
| Selling expenses | (1,314) | (1,245) | (2,510) | (2,435) |
| General and administrative expenses | (151) | (230) | (350) | (430) |
| Research and development expenses | (440) | (416) | (890) | (840) |
| Other business income | 17 | 56 | 232 | 82 |
| Other business expenses | (22) | (3) | (59) | (11) |
| Income from operations | 229 | 509 | 570 | 814 |
| Financial income | 12 | 18 | 49 | 36 |
| Financial expenses | (111) | (96) | (223) | (197) |
| Income before taxes | 130 | 431 | 396 | 653 |
| Income tax expense | (59) | (121) | (121) | (190) |
| Income after taxes | 71 | 310 | 275 | 463 |
| Results relating to investments in associates Net income from continuing operations |
(9) 62 |
14 324 |
(12) 263 |
15 478 |
| Discontinued operations - net of income tax | 40 | (7) | 22 | 1 |
| Net income | 102 | 317 | 285 | 479 |
| Attribution of net income for the period | ||||
| Net income attributable to shareholders | 102 | 317 | 284 | 478 |
| Net income attributable to non-controlling interests | − | − | 1 | 1 |
| Weighted average number of common shares outstanding (after deduction of treasury shares) during the period (in thousands): |
||||
| - basic | 922,8621) | 906,446 | 923,0371) | 911,622 |
| - diluted | 926,9681) | 916,345 | 926,5691) | 921,941 |
| Net income attributable to shareholders per common share in euros: | ||||
| - basic | 0.11 | 0.35 | 0.31 | 0.52 |
| - diluted | 0.11 | 0.35 | 0.31 | 0.52 |
| Ratios | ||||
| Gross margin as a % of sales | 38.4 | 41.5 | 38.1 | 40.8 |
| Selling expenses as a % of sales | (23.6) | (22.0) | (23.1) | (22.3) |
| G&A expenses as a % of sales | (2.7) | (4.1) | (3.2) | (3.9) |
| R&D expenses as a % of sales | (7.9) | (7.4) | (8.2) | (7.7) |
| EBIT | 229 | 509 | 570 | 814 |
| as a % of sales | 4.1 | 9.0 | 5.2 | 7.5 |
| EBITA | 339 | 603 | 790 | 1,005 |
| as a % of sales | 6.1 | 10.7 | 7.3 | 9.2 |
1) Adjusted to make 2012 comparable for the bonus shares (273 thousand) issued in June 2013
all amounts in millions of euros
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2012 | 2013 | 2012 | 2013 | |
| Net income for the period | 102 | 317 | 285 | 479 |
| Other comprehensive income items that will not be reclassified to profit or loss: |
||||
| Pensions and other postemployment plans: | ||||
| Net current period change, before tax | 8 | (11) | 12 | (26) |
| Actuarial gains and losses | 14 | − | 29 | − |
| Changes in the effect of the asset ceiling | (6) | (11) | (17) | (26) |
| Income tax on net current period change | (3) | 3 | (9) | 7 |
| Revaluation reserve: | ||||
| Release revaluation reserve | (4) | (4) | (8) | (8) |
| Reclassification into retained earnings | 4 | 4 | 8 | 8 |
| Total Other comprehensive income items that will not be reclassified to profit or loss |
5 | (8) | 3 | (19) |
| Other comprehensive income items that are or may be reclassified to | ||||
| profit or loss: | ||||
| Currency translation differences: | ||||
| Net current period change, before tax | 327 | (151) | 172 | (97) |
| Income tax on net current period change | − | 10 | (2) | 4 |
| Reclassification adjustment for (loss) gain realized | (3) | (8) | (1) | (8) |
| Available-for-sale financial assets: | ||||
| Net current period change, before tax | 1 | (15) | 4 | (5) |
| Income tax on net current period change | − | 3 | (1) | − |
| Reclassification adjustment for (loss) gain realized | − | 1 | − | 2 |
| Cash flow hedges: Net current period change, before tax |
(42) | 23 | (26) | 32 |
| Income tax on net current period change | 10 | − | 6 | (2) |
| Reclassification adjustment for (loss) gain realized | 10 | (25) | 8 | (31) |
| Total Other comprehensive income items that are or may be | ||||
| reclassified to profit or loss | 303 | (162) | 160 | (105) |
| Other comprehensive income (loss) for the period | 308 | (170) | 163 | (124) |
| Total comprehensive income for the period | 410 | 147 | 448 | 355 |
| Total comprehensive income attributable to: | ||||
| Shareholders | 410 | 147 | 447 | 354 |
| Non-controlling interests | − | − | 1 | 1 |
in millions of euros unless otherwise stated
| July 1, | December 31, | June 30, | |
|---|---|---|---|
| 2012 | 2012 | 2013 | |
| Non-current assets: | |||
| Property, plant and equipment | 3,040 | 2,959 | 2,902 |
| Goodwill | 7,290 | 6,948 | 6,878 |
| Intangible assets excluding goodwill | 4,061 | 3,731 | 3,567 |
| Non-current receivables | 148 | 176 | 172 |
| Investments in associates | 203 | 177 | 164 |
| Other non-current financial assets | 576 | 549 | 567 |
| Deferred tax assets | 1,809 | 1,919 | 1,886 |
| Other non-current assets | 77 | 94 | 71 |
| Total non-current assets | 17,204 | 16,553 | 16,207 |
| Current assets: | |||
| Inventories - net | 3,973 | 3,495 | 3,699 |
| Other current financial assets | − | − | 1 |
| Other current assets | 418 | 337 | 446 |
| Derivative financial assets | 172 | 137 | 157 |
| Income tax receivable | 137 | 97 | 82 |
| Receivables | 4,429 | 4,585 | 4,280 |
| Assets classified as held for sale | 48 | 43 | 446 |
| Cash and cash equivalents | 3,134 | 3,834 | 2,307 |
| Total current assets | 12,311 | 12,528 | 11,418 |
| Total assets | 29,515 | 29,081 | 27,625 |
| Shareholders' equity | 12,114 | 11,151 | 10,763 |
| Non-controlling interests | 35 | 34 | 39 |
| Group equity | 12,149 | 11,185 | 10,802 |
| Non-current liabilities: | |||
| Long-term debt | 4,123 | 3,725 | 3,501 |
| Long-term provisions | 1,890 | 2,119 | 2,015 |
| Deferred tax liabilities | 153 | 92 | 62 |
| Other non-current liabilities | 1,962 | 2,005 | 1,829 |
| Total non-current liabilities | 8,128 | 7,941 | 7,407 |
| Current liabilities: | |||
| Short-term debt | 777 | 809 | 910 |
| Derivative financial liabilities | 845 | 517 | 505 |
| Income tax payable | 149 | 200 | 165 |
| Accounts and notes payable | 2,717 | 2,839 | 2,716 |
| Accrued liabilities | 2,990 | 3,171 | 3,049 |
| Short-term provisions | 691 | 837 | 684 |
| Dividend payable | − | − | 42 |
| Liabilities directly associated with assets held for sale | 53 | 27 | 238 |
| Other current liabilities | 1,016 | 1,555 | 1,107 |
| Total current liabilities | 9,238 | 9,955 | 9,416 |
| Total liabilities and group equity | 29,515 | 29,081 | 27,625 |
| July 1, | December 31, | June 30, | |
|---|---|---|---|
| 2012 | 2012 | 2013 | |
| Number of common shares outstanding (after deduction of treasury shares) at the end of period (in thousands) |
931,391 | 914,591 | 913,874 |
| Ratios | |||
| Shareholders' equity per common share in euros | 13.01 | 12.19 | 11.78 |
| Inventories as a % of sales1) | 17.2 | 14.3 | 15.7 |
| Net debt : group equity | 13:87 | 6:94 | 16:84 |
| Net operating capital | 11,485 | 9,316 | 10,184 |
| Employees at end of period | 121,801 | 118,087 | 117,239 |
| of which discontinued operations | 2,166 | 2,005 | 1,958 |
1) sales is calculated over the preceding 12 months
all amounts in millions of euros
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2012 | 2013 | 2012 | 2013 | |
| Cash flows from operating activities: Net income |
102 | 317 | 285 | 479 |
| (Income) loss from discontinued operations | (40) | 7 | (22) | (1) |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | ||||
| Depreciation and amortization | 334 | 311 | 670 | 616 |
| Impairment of other non-current financial assets | 3 | 2 | 3 | 3 |
| Net gain on sale of assets | (8) | (36) | (192) | (40) |
| (Income) loss from investments in associates | 6 | (13) | 6 | (15) |
| Dividends received from investments in associates | 7 | 6 | 7 | 6 |
| Decrease in working capital: | (319) | (427) | (373) | (890) |
| Decrease (increase) in receivables and other current assets | (153) | (128) | 97 | 7 |
| Increase in inventories | (65) | (192) | (286) | (397) |
| Decrease in accounts payable, accrued and other liabilities | (101) | (107) | (184) | (500) |
| Increase in non-current receivables, other assets and other liabilities | (44) | (62) | (129) | (139) |
| Increase (decrease) in provisions | 29 | (69) | 56 | (167) |
| Other items | 11 | 88 | 67 | 44 |
| Net cash provided by (used for) operating activities | 81 | 124 | 378 | (104) |
| Cash flows from investing activities: | ||||
| Purchase of intangible assets | (8) | (6) | (14) | (8) |
| Proceeds from sale of intangible assets | − | − | 160 | − |
| Expenditures on development assets | (88) | (100) | (164) | (180) |
| Capital expenditures on property, plant and equipment | (168) | (145) | (305) | (269) |
| Proceeds from disposals of property, plant and equipment | 21 | 5 | 409 | 8 |
| Cash to derivatives and securities | (21) | (10) | (45) | (82) |
| Purchase of other non-current financial assets | (2) | (4) | (154) | (4) |
| Proceeds from other non-current financial assets | − | 7 | − | 9 |
| Purchase of businesses, net of cash acquired | 10 | 4 | (231) | (6) |
| Proceeds from sale of interests in businesses, net of cash disposed of | (2) | 92 | 9 | 91 |
| Net cash used for investing activities | (258) | (157) | (335) | (441) |
| Cash flows from financing activities: | ||||
| Proceeds from issuance of (payments on) short-term debt | 147 | (108) | 188 | (127) |
| Principal payments on long-term debt | (459) | (19) | (483) | (41) |
| Proceeds from issuance of long-term debt | 36 | 17 | 1,173 | 34 |
| Treasury shares transactions | (288) | (265) | (442) | (487) |
| Dividends paid | (256) | (231) | (256) | (231) |
| Net cash (used for) provided by financing activities | (820) | (606) | 180 | (852) |
| Net cash (used for) provided by continuing operations | (997) | (639) | 223 | (1,397) |
| Cash flows from discontinued operations: | ||||
| Net cash used for operating activities | (247) | (82) | (203) | (132) |
| Net cash provided by (used for) investing activities | 151 | (11) | 3 | (11) |
| Net cash used for discontinued operations | (96) | (93) | (200) | (143) |
| Net cash provided by (used for) continuing and discontinued operations | (1,093) | (732) | 23 | (1,540) |
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2012 | 2013 | 2012 | 2013 | |
| Effect of change in exchange rates on cash and cash equivalents | 2 | (27) | (36) | 13 |
| Cash and cash equivalents at the beginning of the period | 4,225 | 3,066 | 3,147 | 3,834 |
| Cash and cash equivalents at the end of the period | 3,134 | 2,307 | 3,134 | 2,307 |
| Ratio | ||||
| Cash flows before financing activities | (177) | (33) | 43 | (545) |
| Net cash paid during the period for | ||||
| Pensions | (147) | (134) | (341) | (332) |
| Interest | (32) | (26) | (108) | (119) |
| Income taxes | (102) | (96) | (183) | (239) |
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.
in millions of euros
| other reserves | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| com mon shares |
capital in ex cess of par val ue |
re tained earn ings |
revalu ation re serve |
curren cy transla tion dif feren ces |
unreal ized gain (loss) on available for-sale financial assets |
changes in fair value of cash flow hedges |
total | treas ury shares at cost |
total share hold ers' equity |
non con trolling inter ests |
total equity |
|
| January to June 2013 | ||||||||||||
| Balance as of December 31, 2012 | 191 | 1,304 | 10,724 | 54 | (93) | 54 | 20 | (19) | (1,103) 11,151 | 34 | 11,185 | |
| Total comprehensive income | 467 | (8) | (101) | (3) | (1) | (105) | 354 | 1 | 355 | |||
| Dividend distributed | 4 | 402 | (678) | (272) | − | (272) | ||||||
| Movement non-controlling interest | − | 4 | 4 | |||||||||
| Purchase of treasury 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 | |||||||||
| 4 | 414 | (762) | (398) | (742) | 4 | (738) | ||||||
| Balance as of June 30, 2013 | 195 | 1,718 | 10,429 | 46 | (194) | 51 | 19 | (124) | (1,501) 10,763 | 39 | 10,802 | |
| January to June 2012 | ||||||||||||
| Balance as of December 31, 2011 | 202 | 813 | 12,890 | 70 | 7 | 45 | (9) | 43 | (1,690) 12,328 | 34 | 12,362 | |
| Total comprehensive income | 295 | (8) | 169 | 3 | (12) | 160 | 447 | 1 | 448 | |||
| Dividend distributed | 6 | 422 | (687) | (259) | − | (259) | ||||||
| Purchase of treasury shares | (47) | (416) | (463) | (463) | ||||||||
| Re-issuance of treasury shares | (19) | (20) | 60 | 21 | 21 | |||||||
| Share-based compensation plans | 41 | 41 | 41 | |||||||||
| Income tax share-based compensation plans |
(1) | (1) | (1) | |||||||||
| 6 | 443 | (754) | (356) | (661) | − | (661) | ||||||
| Balance as of July 1, 2012 | 208 | 1,256 | 12,431 | 62 | 176 | 48 | (21) | 203 | (2,046) 12,114 | 35 | 12,149 |
all amounts in millions of euros unless otherwise stated
| 2nd quarter | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | |||||||||||
| sales including inter |
sales including inter |
||||||||||
| company | sales | income from operations | company | sales | income from operations | ||||||
| amount as a % of sales | amount as a % of sales | ||||||||||
| Healthcare | 2,418 | 2,413 | 259 | 10.7 | 2,369 | 2,362 | 379 | 16.0 | |||
| Consumer Lifestyle | 962 | 960 | 27 | 2.8 | 1,087 | 1,083 | 69 | 6.4 | |||
| Lighting | 2,031 | 2,026 | 34 | 1.7 | 2,053 | 2,048 | 115 | 5.6 | |||
| Innovation, Group & Services | 233 | 171 | (91) | − | 241 | 161 | (54) | − | |||
| Inter-sector eliminations | (74) | (96) | |||||||||
| 5,570 | 5,570 | 229 | 4.1 | 5,654 | 5,654 | 509 | 9.0 |
| January to June | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2012 | 2013 | ||||||||||
| 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 | 4,632 | 4,622 | 410 | 8.9 | 4,501 | 4,489 | 555 | 12.4 | |||
| Consumer Lifestyle | 1,888 | 1,883 | 224 | 11.9 | 2,093 | 2,086 | 153 | 7.3 | |||
| Lighting | 4,050 | 4,041 | 36 | 0.9 | 4,032 | 4,023 | 225 | 5.6 | |||
| Innovation, Group & Services | 456 | 331 | (100) | − | 463 | 314 | (119) | − | |||
| Inter-sector eliminations | (149) | (177) | |||||||||
| 10,877 | 10,877 | 570 | 5.2 | 10,912 | 10,912 | 814 | 7.5 |
in millions of euros
| sales | total assets total liabilities excluding debt |
|||||
|---|---|---|---|---|---|---|
| January to June | July 1, | June 30, | July 1, | June 30, | ||
| 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | |
| Healthcare | 4,622 | 4,489 | 11,760 | 10,945 | 3,130 | 3,180 |
| Consumer Lifestyle | 1,883 | 2,086 | 3,419 | 2,897 | 1,905 | 1,715 |
| Lighting | 4,041 | 4,023 | 7,394 | 7,165 | 2,085 | 2,412 |
| Innovation, Group & Services | 331 | 314 | 6,894 | 6,172 | 5,293 | 4,867 |
| 10,877 | 10,912 | 29,467 | 27,179 | 12,413 | 12,174 | |
| Assets classified as held for sale | 48 | 446 | 53 | 238 | ||
| 29,515 | 27,625 | 12,466 | 12,412 |
| sales | tangible and intangible assets1) | |||
|---|---|---|---|---|
| January to June | July 1, | June 30, | ||
| 2012 | 2013 | 2012 | 2013 | |
| Netherlands | 280 | 292 | 894 | 874 |
| United States | 3,273 | 3,136 | 8,591 | 7,932 |
| China | 1,187 | 1,328 | 1,169 | 1,127 |
| Germany | 590 | 608 | 261 | 279 |
| Japan | 545 | 527 | 625 | 463 |
| France | 440 | 420 | 95 | 85 |
| India | 343 | 331 | 148 | 134 |
| Other countries | 4,219 | 4,270 | 2,608 | 2,453 |
| 10,877 | 10,912 | 14,391 | 13,347 |
1) Includes property, plant and equipment, intangible assets excluding goodwill, and goodwill
in millions of euros
| 2nd quarter | ||||||
|---|---|---|---|---|---|---|
| 2012 | 2013 | |||||
| Netherlands | other | total | Netherlands | other | total | |
| Defined-benefit plans | ||||||
| Pensions | ||||||
| Current service cost | 43 | 22 | 65 | 48 | 21 | 69 |
| Past-service cost (incl. curtailments) | − | − | − | − | (78) | (78) |
| Interest expense | − | 19 | 19 | − | 16 | 16 |
| Interest income | (1) | − | (1) | (1) | − | (1) |
| Total | 42 | 41 | 83 | 47 | (41) | 6 |
| of which discontinued operations | 1 | − | 1 | − | − | − |
| Retiree Medical | ||||||
| Past-service cost (incl. curtailments) | − | (25) | (25) | − | − | − |
| Interest expense | − | 3 | 3 | − | 3 | 3 |
| Total | − | (22) | (22) | − | 3 | 3 |
| Defined-contribution plans | ||||||
| Cost | 2 | 30 | 32 | 2 | 31 | 33 |
| of which discontinued operations | − | 1 | 1 | − | 1 | 1 |
| January to June | |||||||
|---|---|---|---|---|---|---|---|
| 2012 | |||||||
| Netherlands | other | total | Netherlands | other | total | ||
| Defined-benefit plans | |||||||
| Pensions | |||||||
| Current service cost | 87 | 44 | 131 | 96 | 41 | 137 | |
| Past-service cost (incl. curtailments) | − | − | − | − | (78) | (78) | |
| Interest expense | − | 38 | 38 | − | 32 | 32 | |
| Interest income | (2) | − | (2) | (2) | − | (2) | |
| Total | 85 | 82 | 167 | 94 | (5) | 89 | |
| of which discontinued operations | 1 | 1 | 2 | 1 | − | 1 | |
| Retiree Medical | |||||||
| Current service cost | − | 1 | 1 | − | 1 | 1 | |
| Past-service cost (incl. curtailments) | − | (25) | (25) | − | − | − | |
| Interest expense | − | 6 | 6 | − | 6 | 6 | |
| Total | − | (18) | (18) | − | 7 | 7 | |
| Defined-contribution plans | |||||||
| Costs | 5 | 67 | 72 | 4 | 71 | 75 | |
| of which discontinued operations | 1 | 2 | 3 | − | 1 | 1 |
all amounts in millions of euros unless otherwise stated.
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 | ||||||||
|---|---|---|---|---|---|---|---|---|
| comparable growth |
currency effects |
consolid ation changes |
nominal growth |
comparable growth |
currency effects |
consolid ation changes |
nominal growth |
|
| 2013 versus 2012 | ||||||||
| Healthcare | (0.1) | (1.9) | (0.1) | (2.1) | (0.7) | (2.2) | 0.0 | (2.9) |
| Consumer Lifestyle | 13.3 | (0.5) | − | 12.8 | 11.6 | (0.8) | − | 10.8 |
| Lighting | 1.9 | (0.7) | (0.1) | 1.1 | 0.7 | (1.0) | (0.1) | (0.4) |
| IG&S | (13.7) | 0.4 | 7.5 | (5.8) | (9.0) | (0.0) | 3.9 | (5.1) |
| Philips Group | 2.5 | (1.2) | 0.2 | 1.5 | 1.7 | (1.5) | 0.1 | 0.3 |
| 2nd quarter | January to June | |||||
|---|---|---|---|---|---|---|
| Income from operations (or EBIT) |
Amortization of intangibles1) |
EBITA (or Adjusted income from operations) |
Income from operations (or EBIT) |
Amortization of intangibles1) |
EBITA (or Adjusted income from operations) |
|
| 2013 | ||||||
| Healthcare | 379 | (41) | 420 | 555 | (87) | 642 |
| Consumer Lifestyle | 69 | (13) | 82 | 153 | (27) | 180 |
| Lighting | 115 | (38) | 153 | 225 | (75) | 300 |
| IG&S | (54) | (2) | (52) | (119) | (2) | (117) |
| Philips Group | 509 | (94) | 603 | 814 | (191) | 1005 |
| 2012 | ||||||
| Healthcare | 259 | (49) | 308 | 410 | (100) | 510 |
| Consumer Lifestyle | 27 | (13) | 40 | 224 | (27) | 251 |
| Lighting | 34 | (44) | 78 | 36 | (88) | 124 |
| IG&S | (91) | (4) | (87) | (100) | (5) | (95) |
| Philips Group | 229 | (110) | 339 | 570 | (220) | 790 |
1) Excluding amortization of software and product development
all amounts in millions of euros
| Consumer | |||||
|---|---|---|---|---|---|
| Philips Group | Healthcare | Lifestyle | Lighting | IG&S | |
| 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 | ||||
| December 31, 2012 | |||||
| Net operating capital (NOC) | 9,316 | 7,976 | 1,205 | 4,635 | (4,500) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities |
10,287 | 2,760 | 1,718 | 1,695 | 4,114 |
| - intercompany accounts |
− | 71 | 42 | 37 | (150) |
| - provisions |
2,956 | 355 | 315 | 581 | 1,705 |
| Include assets not comprised in NOC: | |||||
| - investments in associates |
177 | 86 | − | 22 | 69 |
| - other non-current financial assets |
549 | − | − | − | 549 |
| - deferred tax assets |
1,919 | − | − | − | 1,919 |
| - cash and cash equivalents |
3,834 | − | − | − | 3,834 |
| 29,038 | 11,248 | 3,280 | 6,970 | 7,540 | |
| Assets classified as held for sale | 43 | ||||
| Total assets | 29,081 | ||||
| July 1, 2012 | |||||
| Net operating capital (NOC) | 11,485 | 8,542 | 1,514 | 5,287 | (3,858) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities |
9,679 | 2,775 | 1,541 | 1,700 | 3,663 |
| - intercompany accounts |
− | 68 | 31 | 54 | (153) |
| - provisions |
2,581 | 287 | 333 | 331 | 1,630 |
| Include assets not comprised in NOC: | |||||
| - investments in associates |
203 | 88 | − | 22 | 93 |
| - other non-current financial assets |
576 | − | − | − | 576 |
| - deferred tax assets |
1,809 | − | − | − | 1,809 |
| - cash and cash equivalents |
3,134 | − | − | − | 3,134 |
| 29,467 | 11,760 | 3,419 | 7,394 | 6,894 | |
| Assets classified as held for sale | 48 | ||||
| Total assets | 29,515 |
all amounts in millions of euros
| July 1, | December 31, | June 30, | |
|---|---|---|---|
| 2012 | 2012 | 2013 | |
| Long-term debt | 4,123 | 3,725 | 3,501 |
| Short-term debt | 777 | 809 | 910 |
| Total debt | 4,900 | 4,534 | 4,411 |
| Cash and cash equivalents | 3,134 | 3,834 | 2,307 |
| Net debt (cash) (total debt less cash and cash equivalents) | 1,766 | 700 | 2,104 |
| Shareholders' equity | 12,114 | 11,151 | 10,763 |
| Non-controlling interests | 35 | 34 | 39 |
| Group equity | 12,149 | 11,185 | 10,802 |
| Net debt and group equity | 13,915 | 11,885 | 12,906 |
| Net debt divided by net debt and group equity (in %) | 13 | 6 | 16 |
| Group equity divided by net debt and group equity (in %) | 87 | 94 | 84 |
| 2nd quarter | January to June | |||
|---|---|---|---|---|
| 2012 | 2013 | 2012 | 2013 | |
| Cash flows provided by (used for) operating activities | 81 | 124 | 378 | (104) |
| Cash flows used for investing activities | (258) | (157) | (335) | (441) |
| Cash flows before financing activities | (177) | (33) | 43 | (545) |
| Cash flows provided by (used for) operating activities | 81 | 124 | 378 | (104) |
| Net capital expenditures: | (243) | (246) | 86 | (449) |
| Purchase of intangible assets | (8) | (6) | (14) | (8) |
| Proceeds from sale of intangible assets | − | − | 160 | − |
| Expenditures on development assets | (88) | (100) | (164) | (180) |
| Capital expenditures on property, plant and equipment | (168) | (145) | (305) | (269) |
| Proceeds from disposals of property, plant and equipment | 21 | 5 | 409 | 8 |
| Free cash flows | (162) | (122) | 464 | (553) |
all amounts in millions of euros unless otherwise stated
| 2012 | 2013 | |||||||
|---|---|---|---|---|---|---|---|---|
| 1st quarter | 2nd quarter | 3rd quarter | 4th quarter | 1st quarter | 2nd quarter | 3rd quarter | 4th quarter | |
| Sales | 5,307 | 5,570 | 5,821 | 6,759 | 5,258 | 5,654 | ||
| % increase | 8 | 15 | 16 | 9 | (1) | 2 | ||
| EBITA | 451 | 339 | 366 | (50) | 402 | 603 | ||
| as a % of sales | 8.5 | 6.1 | 6.3 | (0.7) | 7.6 | 10.7 | ||
| EBIT | 341 | 229 | 254 | (176) | 305 | 509 | ||
| as a % of sales | 6.4 | 4.1 | 4.4 | (2.6) | 5.8 | 9.0 | ||
| Net income (loss) | 183 | 102 | 105 | (420) | 162 | 317 | ||
| Net income (loss) attributable to | ||||||||
| shareholders per common share (in | ||||||||
| euros) - basic | 0.20 | 0.11 | 0.11 | (0.46) | 0.18 | 0.35 | ||
| January | January | January | January | January | January | January | January | |
| March | June | September | December | March | June | September | December | |
| Sales | 5,307 | 10,877 | 16,698 | 23,457 | 5,258 | 10,912 | ||
| % increase | 8 | 11 | 13 | 12 | (1) | 0 | ||
| EBITA | 451 | 790 | 1,156 | 1,106 | 402 | 1,005 | ||
| as a % of sales | 8.5 | 7.3 | 6.9 | 4.7 | 7.6 | 9.2 | ||
| EBIT | 341 | 570 | 824 | 648 | 305 | 814 | ||
| as a % of sales | 6.4 | 5.2 | 4.9 | 2.8 | 5.8 | 7.5 | ||
| Net income (loss) | 183 | 285 | 390 | (30) | 162 | 479 | ||
| Net income (loss) attributable to | ||||||||
| shareholders per common share (in euros) - basic |
0.20 | 0.31 | 0.42 | (0.04) | 0.18 | 0.52 | ||
| Net income (loss) from continuing | ||||||||
| operations as a % of shareholders' equity | 6.3 | 4.3 | 4.0 | (0.6) | 5.8 | 9.0 | ||
| period ended 2012 | period ended 2013 | |||||||
| Inventories as a % sales1) | 16.9 | 17.2 | 16.9 | 14.3 | 15.5 | 15.7 | ||
| Inventories excluding discontinued | ||||||||
| operations | 3,623 | 3,812 | 3,877 | 3,359 | 3,629 | 3,696 | ||
| Net debt : group equity ratio | 6:94 | 13:87 | 11:89 | 6:94 | 12:88 | 16:84 | ||
| Total employees (in thousands) | 122 | 122 | 121 | 118 | 118 | 117 | ||
| of which discontinued operations | 2 | 2 | 2 | 2 | 2 | 2 |
1) sales is calculated over the preceding 12 months
Information also available on Internet, address: www.philips.com/investorrelations
| Significant accounting policies 1 |
39 |
|---|---|
| Estimates 2 |
40 |
| Financial risk management 3 |
41 |
| Segment information 4 |
41 |
| Seasonality 5 |
41 |
| Discontinued operations and other assets 6 |
41 |
| classified as held for sale | |
| Acquisitions and divestments 7 |
42 |
| Income taxes 8 |
42 |
| Property, plant and equipment 9 |
42 |
| Goodwill 10 |
43 |
| Intangible assets excluding goodwill 11 |
44 |
| Shareholders' equity 12 |
44 |
| Short-term and long-term debt 13 |
44 |
| Provisions 14 |
45 |
| Pensions 15 |
45 |
| Contingent liabilities 16 |
45 |
| Related-party transactions 17 |
46 |
| Share-based compensation 18 |
47 |
| Fair value of financial assets and liabilities 19 |
47 |
all amounts in millions of euros unless otherwise stated
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 4, 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.
Prior-period financial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note 6), the adoption of IAS 19R, which mainly relates to pension reporting (see note 1) and minor items.
The significant accounting policies applied in these semiannual condensed financial statements are consistent with those applied in the Company's consolidated IFRS financial statements as at and for the year ended December 31, 2012, 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, 2013:
The new amendment requires separation of items presented in Other comprehensive income into two groups, based on whether or not they can be recycled into the Statement of income in the future. Items that will not be recycled in the future are presented separately from items that may be recycled in the future. The application of this amendment impacts presentation and disclosures only. Comparative information has been represented.
As a result of the introduction of IAS 19 (2011) - or IAS 19R/Revised - the Company has changed its accounting policy with regard to the accounting of defined benefit pension plans. The main change impacts the basis of
determining the income or expense for the period related to these pension plans. Under the new standard the Company determines a net interest expense (income) by applying the discount rate used to measure the definedbenefit obligation (DBO) at the beginning of the annual period to the net defined-benefit liability (asset) at the beginning of the annual period, taking into account any changes in the net defined-benefit liability (asset) during the period as a result of contributions and benefit payments. As a result, this net interest now comprises:
1 Significant accounting policies Previously, the Company determined interest income on plan assets based on their long-term rate of expected return. Furthermore, as from January 1, 2013 the Company presents net interest expenses related to defined benefits in Financial income and expense rather than Income from operations.
The new standard no longer allows for accrual of future pension administration costs as part of the DBO. Such costs should be expensed as incurred. Previously, for the Dutch pension plan the Company accrued a surcharge for pension administration costs as part of the service costs into the DBO. With the adoption of the new standard this accrual was eliminated, resulting in an exclusion of EUR 200 million from the DBO, thereby improving the funded status. This funded status improvement is offset by the impact of the asset ceiling test regarding the Dutch pension plan's surplus, and hence there is no further impact on the Company's balance sheet figures.
Other impact from the IAS 19 (2011) accounting policy change is as follows:
| December 31, | June 30, | |
|---|---|---|
| 2012 | 2013 | |
| Decrease in the net defined benefit obligation (non-current, after asset ceiling restriction) |
10 | 9 |
| Increase in deferred tax assets (non | ||
| current) | 1 | 1 |
| Net impact on equity | 9 | 8 |
| Split to: | ||
| Equity holders of the parent | 9 | 8 |
| Non-controlling interest | − | − |
The limited impact on the balance sheet mainly relates to some unrecognized past-service cost gains and losses which must be recognized immediately under IAS 19 (2011). The limited impact is explained by the fact that the Company already applied immediate recognition of actuarial gains and losses in Other comprehensive income.
The amendment to IAS 34 clarifies that the Company needs to disclose the measures of total assets and liabilities for a particular reportable segment only if the amounts are regularly provided to the Company's chief operating decision maker. As a result of this amendment, the Company has added disclosure of segment liabilities in the Sector information section.
IFRS 10 introduces a single control model to determine whether an investee should be consolidated. The new standard includes guidance on control with less than half of the voting rights ('de facto' control), participating and protective voting rights and agent/principal relationships. Based on a reassessment of the control conclusion for the investees at January 1, 2013, the adoption of IFRS 10 does not have a material impact on the Company's consolidated financial statements.
Under IFRS 11, the structure of the joint arrangement, although still an important consideration, is no longer the main factor in determining the type of joint arrangement and therefore the subsequent accounting. Instead:
• The Company's interest in a joint operation, which is an arrangement in which the parties have rights to the assets and obligations for the liabilities, will be accounted for on the basis of the Company's interest in those assets and liabilities.
• The Company's interest in a joint venture, which is an arrangement in which the parties have rights to the net assets, will be equity-accounted.
Up to 2012 the Company accounted for jointly controlled entities using the equity method. The adoption therefore does not have a material impact on the Company's consolidated financial statements.
This standard contains the disclosure requirements for interests in subsidiaries, joint ventures, associates and other unconsolidated interests. None of these disclosure requirements are applicable for interim financial statements, unless significant events and transactions in the interim period require that they are provided. Accordingly, the Company has not made such disclosures.
The Company early-adopted IFRS 10, 11 and 12 and the consequential amendments to IAS 27 and 28 to align with the IASB effective date of January 1, 2013.
IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. More specifically, the definition of fair value was clarified to be the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. The standard also replaces and expands disclosure requirements about fair value measurements in other IFRSs, of which some of these are required in interim financialstatementsrelated to financial instruments. The Company therefore has included additional disclosures in note 19. IFRS 13 has no material impact on the measurements of the Company's assets and liabilities.
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 financialstatements as at and forthe year ended December 31, 2012.
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, 2012.
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). A short description of these sectors is as follows:
Reportable segments for the purpose of the segmental disclosures required by IAS 34 Interim Financial Statements are: Healthcare, Consumer Lifestyle and Lighting.
Significant segment information can be found in the Sectors, Sectors and main countries and Reconciliation of non-GAAP performance measures sections of this semiannual 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
3 Financial risk management results. Within 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 of the year. Within Consumer Lifestyle, sales are generally higher in the second half-year due to the holiday sales. Salesin the Lighting businesses are generally not materially affected by seasonality.
4 Segment information For the 12 months ended June 30, 2013, Healthcare, Consumer Lifestyle and Lighting had revenues of EUR 9,850 million, EUR 4,522 million and EUR 8,424 million respectively (12 months ended July 1, 2012, Healthcare, Consumer Lifestyle and Lighting had revenues of EUR 9,423 million, EUR 3,997 million and EUR 7,999 million, respectively).
Discontinued operations included in the Consolidated statements of income and the Consolidated statements of cash flows mainly consists of the Audio, Video, Multimedia and Accessories (AVM&A) business and the Television business.
Following the agreement which was announced in the Q1 2013 press release with Funai Electric Co. Ltd, the results of the Audio, Video, Multimedia and Accessories (AVM&A) business that will be divested are reported as discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows. Assets classified as held for sale and Liabilities directly associated with assets held for sale are reported in the Consolidated balance sheet as of the moment of the announcement.
The closing of the deal is expected at the end of the third quarter of 2013.
The following table summarizes the results of the AVM&A business included in the Consolidated statements of income as discontinued operations.
| non-GAAP performance measures sections of this semi | |||
|---|---|---|---|
| annual report. Seasonality 5 |
January to June | ||
| 2012 | 2013 | ||
| Sales | 623 | 510 | |
| Under normal economic conditions, the Group's sales are | Costs and expenses | (553) | (477) |
| impacted by seasonal fluctuations, particularly at | Disentanglement costs | − | (15) |
| Consumer Lifestyle and Healthcare, typically resulting in | Income taxes | (22) | (8) |
| Results from discontinued operations | 48 | 10 |
When the deal is closed and the related balance sheet positions are transferred, the associated currency translation differences, part of Other reserves in Shareholders' equity, will be recognized in the Consolidated statement of income. At June 30, 2013, the estimated release of Other reserves amounts to a EUR 9 million gain.
The following table presents the assets and liabilities of the AVM&A business, classified as Assets held for sale and Liabilities directly associated with the assets held for sale in the Consolidated balance sheets.
| June 30, 2013 |
|
|---|---|
| Property, plant and equipment | 12 |
| Intangible assets including goodwill | 34 |
| Inventories | 156 |
| Accounts receivable | 200 |
| Assets classified as held for sale | 402 |
| Accounts payable | 202 |
| Provisions | 25 |
| Other liabilities | 1 |
| Liabilities directly associated with assets held for sale | 228 |
Non-transferrable balance sheet positions, such as certain accounts receivable, accounts payable and provisions, are reported on the respective balance sheet captions and within the Consumer Lifestyle sector.
As announced in the Q1 2012 press release, the Television business's long-term strategic partnership agreement with TPV was signed on April 1, 2012. With regard to the Television business the first half of 2013 showed a loss of EUR 10 million (first half of 2012: a loss of EUR 26 million).
Assets and liabilities directly associated with assets held for sale relate to property, plant and equipment for an amount of EUR 8 million (December 31, 2012 EUR 1 million) and business divestments of EUR 26 million at June 30, 2013 (December 31, 2012 EUR 15 million).
In the first half of 2013 the main divestment reported under Assets held for sale was the sale of a part of the Home Healthcare Solutions business in Healthcare. For more details see note 7, Acquisitions and divestments.
On March 29, 2012, Philips announced the completion of the High Tech Campus transaction with proceeds of EUR 425 million, consisting of a EUR 373 million cash transaction and an amount of EUR 52 million that will be received in future years. The gain from the transaction, after deducting expenses related to other real estate efficiency measures which are part of the EUR 800 million cost reduction program announced in 2011, will be EUR 65 million, EUR 37 million of which was recognized in the first quarter of 2012 in Income from operations while EUR 28 million was deferred to future periods and is recognized periodically starting as of April 2012. The deferral of the gain relates to the finance lease element in the sale and lease-back arrangement part of the deal.
There were no acquisitions in the first half of 2013 that were deemed material to disclose in respect of IAS 34 disclosure requirements.
Philips completed two divestments reported in the Home Healthcare Solutions business of the Healthcare sector in the second quarter of 2013. The transactions involved an aggregate consideration of EUR 100 million and resulted in a gain of EUR 33 million, recognized in Other business income.
Income tax expense isrecognized based on management's best estimate of the full-year effective tax rate applied to the pre-tax income of the interim period. Income tax expense in the first half of 2013 is higher compared with the previous year, mainly due to higher taxable earnings.
During the first six months ended June 30, 2013, there was no significant net movement in Property, plant and equipment. The main movements consist of additions of EUR 286 million (six months ended July 1, 2012: EUR 416 million) offset by depreciation and impairment charges of EUR 297 million (six months ended July 1, 2012: EUR 317 million).
Goodwill is summarized as follows:
| Balance as of December 31, 2012: | |
|---|---|
| Cost | 9,119 |
| Amortization and impairments | (2,171) |
| Book value | 6,948 |
| Changes in book value: | |
| Purchase price allocation adjustment | (15) |
| Impairments | − |
| Divestments and transfer to assets classified as held for sale |
(55) |
| Translation differences | − |
| Balance as of June 30, 2013: | |
| Cost | 9,047 |
| Amortization and impairments | (2,169) |
| Book value | 6,878 |
In 2013 the goodwill changed due to the finalization of purchase price accounting related to the acquisition of Indal in 2012, with a net effect of EUR (15) million. The movement of EUR (55) million in Divestments and transfer to assets classified as held for sale mainly relates to two divestments in the Healthcare sector.
Goodwill allocated to the cash-generating units Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional Lighting Solutions are considered to be significant in comparison to the total book value of goodwill for the Group at June 30, 2013. The amounts associated as of June 30, 2013, are presented below:
| June 30, 2013 |
|
|---|---|
| Respiratory Care & Sleep Management | 1,639 |
| Imaging Systems | 1,494 |
| Patient Care & Clinical Informatics | 1,345 |
| Professional Lighting Solutions | 1,334 |
The basis of the recoverable amount used in the annual (performed in the second quarter) and trigger-based impairment tests for the units in the table above is the value in use. 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, which cover an initial period from 2013 to 2017 that matches the period used for our strategic process. Projections were extrapolated with stable or declining growth rates
10 Goodwill 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 operationsin all unitsis expected to increase over the projection period as a result of volume growth and cost efficiencies.
Cash flow projections of Respiratory Care & Sleep Management, Imaging Systems, Patient Care & Clinical Informatics and Professional Lighting Solutions for 2013 were based on the following key assumptions (based on 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 |
4.9 | 3.7 | 2.7 | 11.3 |
| Imaging Systems | 3.9 | 3.4 | 2.7 | 12.4 |
| Patient Care & Clinical Informatics |
4.1 | 3.5 | 2.7 | 13.2 |
| Professional Lighting Solutions |
7.4 | 5.4 | 2.7 | 12.8 |
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 and Professional Lighting Solutions have 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 660 million, the headroom of Professional Lighting Solutions at EUR 670 million. The increase in the headroom of Professional Lighting Solutions compared to the annual impairment test 2012, in which the headroom approximated the carrying value, is mainly explained by increased forecasted profitability
assumptions driven by gross margin improvements. 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 |
290 | 550 | 39 |
| Professional Lighting Solutions |
290 | 520 | 39 |
The results of the annual impairment test of Imaging Systems and Patient Care & Clinical Informatics have indicated 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, to which a lower amount of goodwill is allocated, 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 76 million. An increase of 280 points in the pre-tax discounting rate, a 560 basis points decline in the compound long-term sales growth rate or a 38% 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 30, 2013 amounts to EUR 37 million.
Based on the annual impairment test, it was noted that with regard to the headroom forthe cash-generating units Consumer Luminaires and Lumileds, the estimated recoverable amount approximates the carrying value of these cash-generating units. Consequently, any adverse change in key assumptions would, individually, cause an impairment loss to be recognized. Consumer Luminaires as well as Lumileds recorded an allocated goodwill amount of EUR 134 million at June 30, 2013.
The changes in intangible assets excluding goodwill in 2013 are summarized as follows:
| Book value as of December 31, 2012 | 3,731 |
|---|---|
| Changes in book value: | |
| Additions | 188 |
| Acquisitions | 1 |
| Amortization/deductions | (319) |
| Impairment losses | (7) |
| Reversal of impairment | 5 |
| Divestments and transfer to assets classified as held for sale |
(38) |
| Translation differences | 6 |
| Total changes | (164) |
| Book value as of June 30, 2013 | 3,567 |
Divestments and transfer to assets classified as held for sale relate to the sectors Healthcare and Consumer Lifestyle.
In June 2013, Philips settled a dividend of EUR 0.75 per common share, representing a total value of EUR 678 million. Shareholders could elect for a cash dividend or a share dividend. Approximately 59.8% of the shareholders elected for a share dividend, resulting in the issuance of 18,491,337 new common shares. The settlement of the cash dividend involved an amount of EUR 272 million.
As of June 30, 2013, the issued and fully-paid share capital consists of 975,624,299 common shares, each share having a par value of EUR 0.20.
During the first six months of 2013, a total of 4,744,982 treasury shares were delivered as a result of stock option exercises,restricted share deliveries and other employeerelated share plans, and a total of 23,949,777 shares were acquired for cancellation purposes in connection with the EUR 2 billion share buy-back program started in July 2011. On June 30, 2013 the total number of treasury shares amounted to 61,750,424, which were purchased at an average price of EUR 24.31 per share.
At the end of Q2 2013, Philips had total debt of EUR 4,411 million, a decrease of EUR 123 million compared to December 31, 2012. Long-term debt was EUR 3,501 million, a decrease of EUR 224 million, and short-term debt was EUR 910 million, an increase of EUR 101 million compared to December 31, 2012. The movement of debt was mainly due to repayment of debt in Brazil and the reclassification of a EUR 250 million bilateral loan from long-term debt to short-term debt. 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 2013.
Provisions are summarized as follows:
| December 31, 2012 |
June 30, 2013 | |||
|---|---|---|---|---|
| long term |
short term |
long term |
short term |
|
| Provisions for defined-benefit plans |
808 | 52 | 795 | 52 |
| Other postretirement benefits | 233 | 17 | 228 | 17 |
| Postemployment benefits and obligatory severance payments |
56 | 26 | 46 | 25 |
| Product warranty | 90 | 229 | 77 | 193 |
| Environmental provisions | 330 | 45 | 285 | 43 |
| Restructuring-related provisions | 108 | 277 | 106 | 186 |
| Onerous contract provisions | 67 | 61 | 50 | 53 |
| Other provisions | 427 | 130 | 428 | 115 |
| 2,119 | 837 | 2,015 | 684 |
The decrease in provisions is largely attributable to the reduction in restructuring-related provisions due to usage (primarily in Healthcare and Lighting) and releases (mainly in Healthcare) which offset the additions (mainly in 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 2013, no actuarial gains and losses were recorded as the changes in financial markets during that period were considered not significant.
The 2012 comparative figures in the Consolidated statements of comprehensive income show actuarial gains which are fully related to the restatement of IAS 19. The higher pension costs under IAS 19 (2011) in 2012 lead to equal sized favorable adjustments of the actuarial gains or losses and asset ceiling movements on pension surpluses. The Company recognized these adjustments of the actuarial gains and losses on a quarterly basis similar to the asset ceiling movements on pension surpluses.
The 2013 first half year results contain a past-service cost gain of EUR 78 million related to a change in the Group's US pension plan rules.
14 Provisions In Q3 2013, EBITA will include a settlementresult which is related to a lump sum offering to terminated vested employees in the same US pension plan. The lump sum offering is expected to decrease the plan liabilities and assets materially. The settlement result, which depends on the discount rate on the payment date in September, relates to inactive members and therefore will be reported in IG&S.
Philips Netherlands and the Dutch trade unions announced the results of their negotiations for the collective labor agreement for Philips' workforce in the Netherlands. The negotiation results, which are subject to approvals, include changes in Philips' Dutch pension plan, which is the Company's largest pension plan. The proposed changes in the Dutch pension plan comprise a change in the retirement age (from 65 yearsto 67 years), a fixed annual company cash contribution rate for the next 5 years and the introduction of an employee contribution. In connection with these changes, the broad outline of a new funding agreement has been agreed upon as part of which Philips will no longer be liable for the funding of potential future deficits of the plan. As part of this change in funding, Philips intends to make a one-off EUR 600 million contribution to Philips Pensioenfonds, the company's Dutch pension fund. The new funding agreement and its implementation are subject to approval by the Trustees of the Dutch pension fund, and if approved will become effective on January 1, 2014.
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 2013, the total fair value of guarantees recognized on the balance sheet was EUR nil million (December 31, 2012: EUR nil million). Remaining off-balance-sheet business and credit-related guarantees provided to third parties and associates increased by EUR 5 million during the first half of 2013 to EUR 326 million.
The Company and its subsidiaries are subject to environmental laws and regulations. Underthese 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 and consolidated results of operations for a particular period. 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 our Annual Report 2012. Significant developments regarding legal proceedings that have occurred since the publication of our Annual Report 2012 are described below:
In the first half of 2013 the Company paid the EUR 509 million fine to the European Commission that it received in December 2012 for its and LG.Philips Displays' participation in the CRT-cartel covering the period 1996-2006. On February 15, 2013 the Company filed its appeal against the European Commission decision. This appeal is now pending before the General Court of the European Union. Public investigations in Brazil and Hungary are ongoing.
In respect of the pending civil litigation in the US, in the first half of 2013, in addition to the existing Indirect Purchaser claims, Direct Purchaser claims and State AG claims, all parties that opted out of the Direct Purchaser settlement have now filed their individual claims.
The case filed by Italian investor Mr. Carlo Vichi for the repayment of a EUR 200 million loan (plus interest and damages) that was given to an affiliate of the CRT joint venture LG.Philips Displays, has now been fully submitted to the Delaware Chancery Court and a decision is expected in Q3 2013.
Philips is part of an investigation by the European Commission into alleged anti-competitive conduct in the period September 2003 to September 2004 relating to the former Philips smart card chips business. This business was part of Philips' former Product Division Semiconductors, which was divested in 2006. The European Commission issued its Statement of Objections on April 22, 2013. Philips is currently in the process of preparing its response to the Statement of Objections.
On May 13, 2013, Dell filed a complaint against all of the defendants in the ODD case. The Dell complaint was filed in the Western District of Texas but has been transferred to the Northern District of California and has been consolidated with the other ODD class action cases for all pretrial purposes.
Following the discussions with the US authorities, the US Securities and Exchange Commission imposed a Ceaseand-Desist Order and Disgorgement on April 5, 2013, resulting in a payment by Philips of USD 4.5 million.
In the normal course of business, Philips purchases and sells goods and services from/to various related parties in which Philips typically holds a 50% or less equity interest and has significant influence. These transactions are generally conducted on terms comparable to transactions with third parties.
Related-party transactions are summarized as follows:
| January to June | ||
|---|---|---|
| 2012 | 2013 | |
| Purchases of goods and services | 124 | 124 |
| Sales of goods and services | 63 | 58 |
| Balance outstanding | ||
| July 1, 2012 | June 30, 2013 | |
| Receivables from related parties | 11 | 32 |
| Payables to related parties | 4 | 5 |
Philips made various commitments, upon signing the agreement with TPV Technology Limited (TPV), to provide further funding to the venture (TP Vision):
A subordinated shareholder loan of EUR 51 million has been provided to TP Vision based on Philips' share of 30% of the venture. EUR 21 million of this loan is due April 2015 and EUR 30 million due April 2017. Both loans can be extended depending on the venture's funding needs;
Senior 12-month EUR 30 million bridge loan to TP Vision, based on Philips' share of 30% in the venture, that can be extended until April, 2017 depending on the venture's funding needs. This bridge loan replaced the 9 month EUR 100 million senior bridge loan to the venture which was not drawn upon during 2012 and the first half of 2013;
Payment of EUR 172 million non-refundable one-off advertising and promotion support for the venture in two installments: EUR 122 million which was disbursed in 2012, and EUR 50 million which was disbursed in 2013 (with EUR 39 million in July);
EUR 100 million loan has been provided to TPV, due April 2015.
In addition, depending on the funding needs of the venture, Philips has committed to provide EUR 60 million based on its 30% share in TP Vision. This additional funding is considered to have only a remote possibility of occurring.
Share-based compensation expense amounted to EUR 49 million and EUR 43 million in the first six months of 2013 and 2012 respectively.
A new long-term incentive plan was approved at the Annual General Meeting of Shareholders in May 2013, granting performance shares to members of the Board of Management and other members of the Executive Committee, executives and certain selected employees. This long-term incentive plan contains two performance conditions, relative Total Shareholders Return in a peer group of 21 companies and adjusted Earnings per Share, both measured over a three-year performance period. The performance shares vest three years after the grant date. The number of performance shares that will vest is dependent on achieving the two performance conditions, which are equally weighted, and provided that the grantee is still employed with the Company. In May 2013, the Company granted 5,656,338 performance shares. USDdenominated performance shares are granted to employees in the United States only.
During the first six months of 2013, the Company offered 152,000 Accelerate! options and 152,000 Accelerate! share rights under the Accelerate! grant. The Accelerate! options ultimately vest on December 31, 2013 and expire 10 years after grant date. The Accelerate! share rights ultimately vest on December 31, 2013 and the majority of these Accelerate! share rights have a five-year holding period after the date of grant.
In the first six months of 2013 a total of 1,711,084 restricted shares were issued to employees and 1,289,072 EUR-denominated options and 890,275 USDdenominated options were exercised at a weighted average exercise price of EUR 16.20 and USD 19.24 respectively.
Under the employee stock purchase plans 775,641 shares were purchased at an average price of EUR 21.64.
For further information on the characteristics of these plans, please refer to the Annual Report 2012, note 30.
18 Share-based compensation 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, current payables, interest accrual and short-term debt, the carrying amounts approximate fair value, because of the short maturity of these instruments.
The fair value of Philips' debt is estimated either on the basis of the quoted market prices or on the basis of discounted cash flows using market rates plus Philips' spread for the particular tenors of the borrowing arrangements. Accrued interest is not included in the carrying amount or estimated fair value of debt.
| December 31, | 2012 | June 30, 2013 | ||
|---|---|---|---|---|
| carry ing amou nt |
esti mated fair value |
carry ing amou nt |
esti mated fair value |
|
| Financial assets | ||||
| Carried at fair value: | ||||
| Available-for-sale financial assets - non-current |
153 | 153 | 159 | 159 |
| Available-for-sale financial assets - current |
− | − | 1 | 1 |
| Fair value through profit and loss - non-current |
47 | 47 | 47 | 47 |
| Fair value through profit and loss - current |
− | − | − | − |
| Derivative financial instruments | 137 | 137 | 157 | 157 |
| 337 | 337 | 364 | 364 | |
| Carried at (amortized) cost: | ||||
| Cash and cash equivalents | 3,834 | 3,834 | 2,307 | 2,307 |
| Other current financial assets | − | − | 1 | 1 |
| Loans and receivables: | ||||
| Other non-current loans and receivables including guarantee deposits |
267 | 267 | 267 | 267 |
| Loans to investments in associates |
− | − | − | − |
| Receivables - current | 4,585 | 4,585 | 4,280 | 4,280 |
| Receivables - non-current | 176 | 176 | 172 | 172 |
| Held-to-maturity investments | 3 | 3 | 2 | 2 |
| Available-for-sale financial assets | 79 | 79 | 92 | 92 |
| 8,944 | 8,944 | 7,121 | 7,121 | |
| Financial liabilities | ||||
| Carried at fair value: | ||||
| Fair value through profit and loss - non-current |
(11) | (11) | (10) | (10) |
| Derivative financial instruments | (517) | (517) | (505) | (505) |
| Carried at (amortized) cost: | ||||
| Accounts payable | (2,839) (2,839) (2,716) (2,716) | |||
| Interest accrual | (75) | (75) | (66) | (66) |
| Debt | (4,534) (5,532) (4,411) (4,850) | |||
| (7,448) (8,446) (7,193) (7,632) | ||||
The table below analyses financial instruments carried at fair value, by different hierarchy levels:
| Fair value hierarchy | ||
|---|---|---|
| level 1 | level 2 | level 3 | total | |
|---|---|---|---|---|
| June 30, 2013 | ||||
| Available-for-sale financial assets - non-current |
106 | 53 | 159 | |
| Available-for-sale financial assets - current |
1 | 1 | ||
| Financial assets designated at fair value through profit and loss - non current |
21 | 26 | 47 | |
| Financial asses designated at fair value through profit and loss - current |
− | − | ||
| Derivative financial instruments - assets |
157 | 157 | ||
| Total financial assets carried at fair value |
128 | 157 | 79 | 364 |
| Financial liabilities designated at fair value through profit and loss - non current |
(10) | (10) | ||
| Derivative financial instruments - liabilities |
(505) | (505) | ||
| December 31, 2012 | ||||
| Available-for-sale financial assets - non-current |
110 | 43 | 153 | |
| Available-for-sale financial assets - current |
− | − | ||
| Financial assets designated at fair value through profit and loss - non current |
28 | 19 | 47 | |
| Financial asses designated at fair value through profit and loss - current |
− | − | ||
| Derivative financial instruments - assets |
137 | 137 | ||
| Total financial assets carried at fair value |
138 | 137 | 62 | 337 |
| Financial liabilities designated at fair value through profit and loss - non current |
(11) | (11) | ||
| Derivative financial instruments - liabilities |
(517) | − | (517) | |
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, investments in associates 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 entityspecific estimates. If all significant inputs required to fairvalue 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, 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, the instrument is included in level 3. The arrangement with the UK Pension Fund in conjunction with the sale of NXP is a financial instrument carried at fair value classified as level 3. At the end of June 2013, the fair value of this instrument was estimated to be EUR 21 million, with the changes of fair value recorded in Financial income and expense.
Furthermore, deferred consideration and loan extension options to TP Vision are also included in level 3.
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, 2013 |
62 | (11) |
| Total gains and losses recognized in: |
||
| - profit or loss | 7 | 1 |
| - other comprehensive income |
10 | − |
| Balance at June 30, 2013 |
79 | (10) |
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