Earnings Release • Jul 27, 2015
Earnings Release
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Philips reports Q2 comparable sales growth of 3% to EUR 6 billion and operational results of EUR 501 million
"We are encouraged by the continuing improvement in our operational results in the second quarter of 2015, driven by strong comparable sales growth in Healthcare and strong margin improvements in Consumer Lifestyle and Lighting. While we are pleased with our progress overall and our Healthcare performance in the US in particular, we are increasingly concerned about the global macro-economic environment, particularly in China, Russia and Latin America.
In Healthcare, we achieved significant operational margin improvements in the quarter. This was largely offset by a sizable negative foreign exchange impact on the margin, further investment in growth opportunities, and costs related to considerable continued efforts to improve our quality management systems. We also note that the Chinese market is becoming more difficult, which resulted in a drop in orders. We are pleased with the production and shipment ramp-up at our Cleveland manufacturing facility, although more work remains to be done.
In Consumer Lifestyle, we delivered further operational results improvements, driven by excellent performance in Health & Wellness. As previously indicated, phasing of new product introductions drove exceptionally strong growth in the first quarter, leading to the lower growth rate in the second quarter. In aggregate, comparable sales growth in the first half of 2015 was well within the range of mid to high single-digit growth.
In Lighting, we continued to drive strong sales growth and improve profitability levels in our LED business. Simultaneously, we sustained our conventional lighting business' attractive cash and profitability profile by pro-actively optimizing our manufacturing footprint and tight cost control, despite significant market decline. As the world leader in lighting, we are confident in our ability to lead the transformation in this industry.
Looking ahead, we continue to expect modest sales growth for 2015, as well as improved operational performance for the year. While we are concerned about the impact the more challenging global macro-economic environment is having on results, we expect continued operational performance improvement in 2016, reinforcing the underlying strength of our businesses. We intend to provide more details about the performance trajectory for HealthTech and Lighting Solutions at our Capital Markets Day on September 15."
"Our Accelerate! program continues to drive improvements across the organization. In Healthcare, we optimized the end-to-end processes at one of our Volcano manufacturing facilities by running continuous-improvement Kaizen events that led to a more than 80% reduction in lead time and a 50% reduction in work-in-progress inventory for the improved lines. In Consumer Lifestyle, through our customer-centric innovation approach, we successfully launched a high-performance range of rice cookers in China with 30% faster time-to-market. This locally relevant value proposition drove strong customer preference, resulting in a 4-point market share increase since the launch. In Lighting, we reduced supply chain complexity and optimized the processes in the UK, which led to a 60% reduction in lead times for product configuration and delivery. This also drove a 50% increase in the total value of opportunities in the sales funnel and high-single-digit growth in orders volume."
Overhead cost savings amounted to EUR 60 million in the second quarter. The Design for Excellence (DfX) program generated EUR 84 million of incremental savings in procurement in the quarter. Our End2End productivity program achieved EUR 36 million in productivity improvements.
Philips expects to finalize the transition of the Lighting business into its own legal structure within the Philips Group by February 2016 in order to complete the separation in the first half of 2016. Philips had previously estimated that the separation costs would amount to EUR 300-400 million in 2015. Now that the Company is halfway through the separation process, it anticipates lower separation costs of EUR 200-300 million in 2015 and estimates that separation costs, including related restructuring, will amount to EUR 200-300 million in 2016. As previously stated, Philips is reviewing all strategic options for the Lighting business, including an initial public offering and a private sale.
As additional time is required for regulatory approvals, Philips is now working towards closing the sale of a majority interest in the combined LED components and Automotive lighting business to a consortium led by GO Scale Capital in the fourth quarter of 2015.
As of June 30, 2015, Philips had completed 59% of the EUR 1.5 billion share buy-back program.
Healthcare comparable sales grew 8% year-on-year. Excluding restructuring and acquisition-related charges and other items, EBITA margin increased by 20 basis points to 10.7% as strong operational improvements were largely offset by a significant negative currency impact. Currency-comparable order intake showed a mid-single-digit decline year-on-year, with double-digit growth in North America offset by declines in China, Latin America and Western Europe.
"We are pleased that Healthcare continues to improve its sales growth and profitability, with North America making a significant and positive contribution as we increase order fulfillment out of our Cleveland facility. We again secured strategically important multi-year contracts, including a USD 500 million partnership with Westchester Medical Center Health Network. Highlighting our leadership in ultrasound imaging and advanced informatics, we introduced the Philips Lumify app-based ultrasound solution in the US. The solution combines a dedicated Philips ultrasound transducer, a compatible smart device and application, and secure cloud-enabled services with an innovative subscription model that will generate recurring revenues."
Consumer Lifestyle comparable sales increased by 3% year-on-year, with double-digit growth at Health & Wellness and high-singledigit growth at Personal Care, in part offset by a decline at Domestic Appliances. EBITA margin, excluding restructuring and acquisitionrelated charges and other items, increased by 130 basis points to 10.7% year-on-year. The increase was largely driven by a positive mix effect and cost productivity, which were partially offset by negative currency effects.
"Consumer Lifestyle continues to perform well. We posted double-digit growth in Oral Healthcare, expanding market share in North America, China and Europe. We expanded leadership positions in multiple geographies, including market share gains in Mother & Child Care. Our strategic focus on innovation is illustrated by the positive reception in North America, China, and Europe for our new Philips Sonicare toothbrushes as well as the Sonicare AirFloss Pro."
Lighting comparable sales declined 3% year-on-year. Growth in LED lighting sales of 21% was offset by a decline in overall conventional lighting sales of 16%. LED sales now represent 40% of total Lighting sales, compared to 34% in Q2 2014. EBITA margin, excluding restructuring and acquisition-related charges and other items, improved by 140 basis points to 9.6% year-on-year, despite a significant
negative currency impact on the margin. This increase was driven by the continued improvement in LED lighting margins, continued cost management, and ongoing pro-active optimization of the manufacturing footprint.
"We are pleased to have further improved our EBITA margin despite a sizable decline in comparable conventional lighting sales. We continue to take action to mitigate the impact of unfavorable end-market conditions in countries like China and underperformance in Professional Lighting Solutions North America. We are excited by the reception of our new, innovative products and systems in the market place. For example, we installed our intelligent connected LED system at a Carrefour supermarket in Lille, France, which will reduce the total lighting-based electricity consumption by 50% and enable our customer to provide location-based services, such as promotions, to shoppers' smartphones. We also introduced the Warm Glow Clear LED bulb, which resembles traditional glass incandescent bulbs. We will outfit the New NY Bridge, which will replace the Tappan Zee bridge, with cloud-based connected LED lighting which features dynamic colorful effects that can be programmed remotely."
Sales amounted to EUR 136 million in the second quarter of 2015, a decline from EUR 142 million in the second quarter of 2014, mainly because higher revenues from IP Royalties and Group Innovation were offset by the divestment of the OEM remote controls business. EBITA was a net cost of EUR 124 million, reflecting increased innovation investments and costs of EUR 27 million related to the separation of the Lighting business, compared to a net cost of EUR 68 million in the second quarter of 2014.
"The fast growing Digital Pathology business is driving the digital transformation in pathology. As a world first, Philips has enabled Netherlands-based LabPON to become the first clinical pathology laboratory in the world to have transitioned completely to digital diagnosis. Philips' ultrafast pathology scanner, information management system and services will improve laboratory efficiency, quality and service levels."
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 on the Philips Investor Relations website.
| Net income in millions of EUR unless otherwise stated | |||
|---|---|---|---|
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Sales | 4,969 | 5,974 |
| EBITA | 368 | 450 |
| as a % of sales | 7.4% | 7.5% |
| EBIT | 291 | 349 |
| as a % of sales | 5.9% | 5.8% |
| Financial income (expenses) | (74) | (74) |
| Income taxes | (32) | (48) |
| Results investments in associates | 3 | (1) |
| Net income from continuing operations | 188 | 226 |
| Discontinued operations | 55 | 48 |
| Net income | 243 | 274 |
| Net income attributable to shareholders per common share (in EUR) - diluted |
0.26 | 0.30 |
Sales by sector in millions of EUR unless otherwise stated
| % change | ||||
|---|---|---|---|---|
| Q2 2014 | Q2 2015 | nomi nal |
compar able |
|
| Healthcare | 2,137 | 2,754 | 29% | 8% |
| Consumer Lifestyle | 1,073 | 1,248 | 16% | 3% |
| Lighting | 1,617 | 1,836 | 14% | (3)% |
| Innovation, Group & Services |
142 | 136 | (4)% | 5% |
| Philips Group | 4,969 | 5,974 | 20% | 3% |
Sales per geographic cluster in millions of EUR unless otherwise stated
| % change | |||||
|---|---|---|---|---|---|
| Q2 2014 | Q2 2015 | nomi nal |
compar able |
||
| Western Europe | 1,283 | 1,351 | 5% | 1% | |
| North America | 1,570 | 2,032 | 29% | 3% | |
| Other mature geographies |
382 | 474 | 24% | 9% | |
| Total mature geographies |
3,235 | 3,857 | 19% | 3% | |
| Growth geographies | 1,734 | 2,117 | 22% | 3% | |
| Philips Group | 4,969 | 5,974 | 20% | 3% |
| Q2 2014 | Q2 2015 | |||
|---|---|---|---|---|
| amount | % | amount | % | |
| Healthcare | 225 | 10.5% | 275 | 10.0% |
| Consumer Lifestyle | 100 | 9.3% | 135 | 10.8% |
| Lighting | 111 | 6.9% | 164 | 8.9% |
| Innovation, Group & Services |
(68) | – | (124) | – |
| Philips Group | 368 | 7.4% | 450 | 7.5% |
| in millions of EUR unless otherwise stated | |||||
|---|---|---|---|---|---|
| Q2 2014 | Q2 2015 | ||||
| amount | % | amount | % | ||
| Healthcare | 224 | 10.5% | 296 | 10.7% | |
| Consumer Lifestyle | 101 | 9.4% | 134 | 10.7% | |
| Lighting | 133 | 8.2% | 176 | 9.6% | |
| Innovation, Group & Services |
(64) | – | (105) | – | |
| Philips Group | 394 | 7.9% | 501 | 8.4% |
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Healthcare | 186 | 219 |
| Consumer Lifestyle | 86 | 121 |
| Lighting | 90 | 136 |
| Innovation, Group & Services | (71) | (127) |
| Philips Group | 291 | 349 |
| as a % of sales | 5.9% | 5.8% |
Cash balance in millions of EUR
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Beginning cash balance | 1,727 | 1,667 |
| Free cash flow | 214 | (30) |
| Net cash flow from operating activities |
410 | 186 |
| Net capital expenditures | (196) | (216) |
| Acquisitions and divestments of businesses |
(57) | 26 |
| Other cash flow from investing activities |
(72) | (47) |
| Treasury shares transactions | (235) | (107) |
| Changes in debt | 10 | 4 |
| Dividend paid | (248) | (253) |
| Other cash flow items | (10) | (51) |
| Net cash flow discontinued operations | 106 | (74) |
| Ending balance | 1,435 | 1,135 |
Gross capital expenditures1) in millions of EUR
1) Capital expenditures on property, plant and equipment only
▪ Operating activities resulted in a cash inflow of EUR 186 million, compared to an inflow of EUR 410 million in Q2 2014. An increase in working capital was partly offset by higher earnings.
▪ Gross capital expenditures on property, plant and equipment were EUR 10 million above the level of Q2 2014, with increases in the operating sectors and higher investments at IG&S.
1) Sales is calculated over the preceding 12 months
2) Inventories as a % of sales excludes inventories and sales related to acquisitions, divestments and discontinued operations
in billions of EUR unless otherwise stated
1) Number of employees excludes discontinued operations. Discontinued operations had 8,689 employees in Q2 2015 (Q1 2015: 8,334, Q2 2014: 8,256).
2) Number of employees includes 13,796 third-party workers in Q2 2015 (Q1 2015: 13,930, Q2 2014: 12,483).
| Key data in millions of EUR unless otherwise stated | ||||
|---|---|---|---|---|
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Sales | 2,137 | 2,754 |
| Sales growth | ||
| % nominal | (10)% | 29% |
| % comparable | (4)% | 8% |
| EBITA | 225 | 275 |
| as a % of sales | 10.5% | 10.0% |
| EBIT | 186 | 219 |
| as a % of sales | 8.7% | 8.0% |
| Net operating capital (NOC) | 7,457 | 9,213 |
| Number of employees (FTEs)1) | 37,157 | 39,523 |
1) Number of employees includes 2,898 third-party workers in Q2 2015 (Q2 2014: 2,599).
in millions of EUR unless otherwise stated
▪ Restructuring and acquisition-related charges in Q3 2015 are expected to total approximately EUR 35 million.
*Inventories as a % of sales excludes inventories and sales related to acquisitions, divestments and
discontinued operations
| Key data in millions of EUR unless otherwise stated | |
|---|---|
| ----------------------------------------------------- | -- |
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Sales | 1,073 | 1,248 |
| Sales growth | ||
| % nominal | (1)% | 16% |
| % comparable | 7% | 3% |
| EBITA | 100 | 135 |
| as a % of sales | 9.3% | 10.8% |
| EBIT | 86 | 121 |
| as a % of sales | 8.0% | 9.7% |
| Net operating capital (NOC) | 1,271 | 1,674 |
| Number of employees (FTEs)1) | 16,886 | 16,547 |
1) Number of employees includes 4,041 third-party workers in Q2 2015 (Q2 2014: 3,953).
charges and other items in millions of EUR unless otherwise stated
▪ Restructuring and acquisition-related charges in Q3 2015 are expected to be less than EUR 5 million.
*Inventories as a % of sales excludes inventories and sales related to acquisitions, divestments and discontinued operations
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Sales | 1,617 | 1,836 |
| Sales growth | ||
| % nominal | (8)% | 14% |
| % comparable | (2)% | (3)% |
| EBITA | 111 | 164 |
| as a % of sales | 6.9% | 8.9% |
| EBIT | 90 | 136 |
| as a % of sales | 5.6% | 7.4% |
| Net operating capital (NOC) | 4,558 | 4,070 |
| Number of employees (FTEs)1) | 37,191 | 35,962 |
1) Number of employees includes 5,149 third-party workers in Q2 2015 (Q2 2014: 4,556)
in millions of EUR unless otherwise stated
▪ Restructuring and acquisition-related charges in Q3 2015 are expected to total approximately EUR 30 million, mainly driven by industrial footprint rationalization.
*Inventories as a % of sales excludes inventories and sales related to acquisitions, divestments and discontinued operations
The combined businesses of Lumileds and Automotive are reported as discontinued operations in the Consolidated statements of income and cash flows. As a result, Lumileds and Automotive sales and EBITA are no longer included in the Lighting and Group results of continuing operations. The applicable assets and liabilities of the combined businesses are reported under Assets and Liabilities classified as held for sale in the Condensed consolidated balance sheets as per November 2014.
As announced on March 31, 2015, Philips has signed an agreement with a consortium led by GO Scale Capital, through which they will acquire an 80.1% interest in Philips' combined LED components and Automotive lighting business, with Philips retaining the remaining 19.9%* interest. As additional time is required for regulatory approvals, Philips is now working towards closing the sale in the fourth quarter of 2015.
In Q2 2015, the net income of discontinued operations attributable to the combined businesses of Lumileds and Automotive increased to EUR 49 million from EUR 32 million in Q2 2014. EBITA in Q2 2015 included disentanglement costs of EUR 14 million, compared to nil in Q2 2014.
Overhead and other indirect costs of Philips that were previously allocated to Lumileds and Automotive and were not affected by the transfer to Discontinued operations have been allocated to Lighting and IG&S (Former net costs allocated to Lighting and IG&S).
*including a 34% interest in Lumileds' US operations
| Q2 2014 | Q2 2015 | |
|---|---|---|
| EBITA as previously reported in Lighting | 28 | 16 |
| Adjustment of amortization and depreciation following assets held for sale reclassification |
– | 49 |
| Disentanglement costs | – | (14) |
| Former net costs allocated to Lighting | – | (1) |
| Former net costs allocated to IG&S | 19 | 20 |
| Amortization of other intangibles added back |
(6) | – |
| EBIT of discontinued operations | 41 | 70 |
| Income taxes | (9) | (21) |
| Net income of discontinued operations | 32 | 49 |
| Number of employees (FTEs) | 8,256 | 8,689 |
| Q2 2014 | Q2 2015 | |
|---|---|---|
| Sales | 142 | 136 |
| Sales growth | ||
| % nominal | 3% | (4)% |
| % comparable | 3% | 5% |
| EBITA of: | ||
| Group Innovation | (47) | (62) |
| IP Royalties | 62 | 70 |
| Group and Regional Costs | (37) | (85) |
| Accelerate! investments | (32) | (29) |
| Pensions | (3) | (4) |
| Service Units and Other | (11) | (14) |
| EBITA | (68) | (124) |
| EBIT | (71) | (127) |
| Net operating capital (NOC) | (2,786) | (3,560) |
| Number of employees (FTEs)1) | 13,344 | 13,885 |
1) Number of employees includes 1,709 third-party workers in Q2 2015 (Q2 2014: 1,375)
EBITA excluding restructuring and acquisition-related charges and other items in millions of EUR
▪ Restructuring and separation charges in Q3 2015 are expected to total approximately EUR 85 million.
| 2014 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |
| Sales | 4,692 | 4,969 | 5,194 | 6,536 | 5,339 | 5,974 | ||
| comparable sales growth % | (1)% | (1)% | 0% | (2)% | 2% | 3% | ||
| Gross margin | 1,900 | 2,075 | 1,702 | 2,529 | 2,116 | 2,495 | ||
| as a % of sales | 40.5% | 41.8% | 32.8% | 38.7% | 39.6% | 41.8% | ||
| Selling expenses | (1,166) | (1,214) | (1,245) | (1,499) | (1,341) | (1,440) | ||
| as a % of sales | (24.9)% | (24.4)% | (24.0)% | (22.9)% | (25.1)% | (24.1)% | ||
| G&A expenses | (167) | (176) | (191) | (213) | (214) | (224) | ||
| as a % of sales | (3.6)% | (3.5)% | (3.7)% | (3.3)% | (4.0)% | (3.7)% | ||
| R&D expenses | (396) | (400) | (372) | (467) | (436) | (483) | ||
| as a % of sales | (8.4)% | (8.0)% | (7.2)% | (7.1)% | (8.2)% | (8.1)% | ||
| EBIT | 172 | 291 | (139) | 162 | 139 | 349 | ||
| as a % of sales | 3.7% | 5.9% | (2.7)% | 2.5% | 2.6% | 5.8% | ||
| EBITA | 253 | 368 | (62) | 262 | 230 | 450 | ||
| as a % of sales | 5.4% | 7.4% | (1.2)% | 4.0% | 4.3% | 7.5% | ||
| Net income (loss) | 137 | 243 | (103) | 134 | 100 | 274 | ||
| Net income (loss) attributable to shareholders |
138 | 242 | (104) | 139 | 99 | 272 | ||
| Net income (loss) - shareholders per common share in EUR - diluted |
0.15 | 0.26 | (0.11) | 0.15 | 0.11 | 0.30 |
| 2014 | 2015 | |||||||
|---|---|---|---|---|---|---|---|---|
| January March |
January June |
January September |
January December |
January March |
January June |
January September |
January December |
|
| Sales | 4,692 | 9,661 | 14,855 | 21,391 | 5,339 | 11,313 | ||
| comparable sales growth % | (1)% | (1)% | (1)% | (1)% | 3% | 3% | ||
| Gross margin | 1,900 | 3,975 | 5,677 | 8,206 | 2,116 | 4,611 | ||
| as a % of sales | 40.5% | 41.1% | 38.2% | 38.4% | 39.6% | 40.8% | ||
| Selling expenses | (1,166) | (2,380) | (3,625) | (5,124) | (1,341) | (2,781) | ||
| as a % of sales | (24.9)% | (24.6)% | (24.4)% | (24.0)% | (25.1)% | (24.6)% | ||
| G&A expenses | (167) | (343) | (534) | (747) | (214) | (438) | ||
| as a % of sales | (3.6)% | (3.6)% | (3.6)% | (3.5)% | (4.0)% | (3.9)% | ||
| R&D expenses | (396) | (796) | (1,168) | (1,635) | (436) | (919) | ||
| as a % sales | (8.4)% | (8.2)% | (7.9)% | (7.6)% | (8.2)% | (8.1)% | ||
| EBIT | 172 | 463 | 324 | 486 | 139 | 488 | ||
| as a % of sales | 3.7% | 4.8% | 2.2% | 2.3% | 2.6% | 4.3% | ||
| EBITA | 253 | 621 | 559 | 821 | 230 | 680 | ||
| as a % of sales | 5.4% | 6.4% | 3.8% | 3.8% | 4.3% | 6.0% | ||
| Net income | 137 | 380 | 277 | 411 | 100 | 374 | ||
| Net income attributable to shareholders | 138 | 380 | 276 | 415 | 99 | 371 | ||
| Net income - shareholders per common share in EUR - diluted |
0.15 | 0.41 | 0.30 | 0.45 | 0.11 | 0.40 | ||
| Net income from continuing operations as a % of shareholders' equity |
4.0% | 5.7% | 2.0% | 2.0% | 2.4% | 5.3% | ||
| Number of common shares outstanding (after deduction of treasury shares) at the end of period (in thousands) |
913,485 | 923,933 | 919,973 | 914,389 | 910,616 | 925,277 | ||
| Shareholders' equity per common share in EUR |
12.06 | 11.63 | 11.86 | 11.88 | 12.50 | 12.32 | ||
| Inventories as a % of sales 1,2) | 14.8% | 15.9% | 17.1% | 15.3% | 17.3% | 17.0% | ||
| Net debt : group equity ratio | 15:85 | 18:82 | 19:81 | 17:83 | 26:74 | 28:72 | ||
| Net operating capital | 10,381 | 10,500 | 10,841 | 8,838 | 10,977 | 11,397 | ||
| Total employees | 114,268 | 112,834 | 115,261 | 113,678 | 115,970 | 114,606 | ||
| of which discontinued operations | 9,957 | 8,256 | 8,489 | 8,313 | 8,334 | 8,689 |
1) Sales is calculated over the preceding 12 months
2) Inventories as a % of sales excludes inventories and sales related to acquisitions, divestments and discontinued operations
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.
| Q2 | January to June | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| comparable growth |
currency effects |
consolid ation changes |
nominal growth |
comparable growth |
currency effects |
consolid ation changes |
nominal growth |
||
| 2015 versus 2014 | |||||||||
| Healthcare | 7.7 | 17.1 | 4.1 | 28.9 | 4.7 | 14.3 | 3.2 | 22.2 | |
| Consumer Lifestyle | 3.3 | 13.0 | 0.0 | 16.3 | 6.4 | 10.3 | 0.0 | 16.7 | |
| Lighting | (3.3) | 12.9 | 3.9 | 13.5 | (3.1) | 10.9 | 3.7 | 11.5 | |
| IG&S | 5.0 | 1.8 | (11.0) | (4.2) | 10.5 | 2.7 | (4.3) | 8.9 | |
| Philips Group | 3.2 | 14.4 | 2.6 | 20.2 | 2.7 | 12.0 | 2.4 | 17.1 |
EBITA excluding restructuring and acquisition-related charges and other items to Income from operations (or EBIT) in millions of EUR unless otherwise stated
| Q2 | January to June | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Philips Group |
Healthcare | Consumer Lifestyle |
Lighting | Innovation, Group & Services |
Philips Group |
Healthcare | Consumer Lifestyle |
Lighting | Innovation, Group & Services |
|
| 2015 | ||||||||||
| EBITA excluding restructuring and acquisition-related charges and other items |
501 | 296 | 134 | 176 | (105) | 828 | 419 | 270 | 320 | (181) |
| Other items | (27) | (27) | (66) | (28) | (38) | |||||
| Restructuring and acquisition-related charges |
(24) | (21) | 1 | (12) | 8 | (82) | (51) | (37) | 6 | |
| EBITA (or Adjusted income from operations) |
450 | 275 | 135 | 164 | (124) | 680 | 340 | 270 | 283 | (213) |
| Amortization of intangibles1) |
(101) | (56) | (14) | (28) | (3) | (192) | (104) | (27) | (54) | (7) |
| Income from operations (or EBIT) |
349 | 219 | 121 | 136 | (127) | 488 | 236 | 243 | 229 | (220) |
| 2014 | ||||||||||
| EBITA excluding restructuring and acquisition-related charges and other items |
394 | 224 | 101 | 133 | (64) | 698 | 397 | 209 | 259 | (167) |
| Restructuring and acquisition-related charges |
(26) | 1 | (1) | (22) | (4) | (77) | (20) | (1) | (52) | (4) |
| EBITA (or adjusted income from operations) |
368 | 225 | 100 | 111 | (68) | 621 | 377 | 208 | 207 | (171) |
| Amortization of intangibles1) |
(77) | (39) | (14) | (21) | (3) | (155) | (81) | (26) | (42) | (6) |
| Impairment of goodwill |
(3) | (1) | (2) | |||||||
| Income from operations (or EBIT) |
291 | 186 | 86 | 90 | (71) | 463 | 295 | 182 | 163 | (177) |
1) Excluding amortization of software and product development
Net operating capital to total assets in millions of EUR unless otherwise stated
| Philips Group | Healthcare | Consumer Lifestyle |
Lighting | IG&S | |
|---|---|---|---|---|---|
| June 30, 2015 | |||||
| Net operating capital (NOC) | 11,397 | 9,213 | 1,674 | 4,070 | (3,560) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities | 9,835 | 3,106 | 1,311 | 1,631 | 3,787 |
| - intercompany accounts | – | 152 | 20 | 103 | (275) |
| - provisions | 3,288 | 828 | 199 | 475 | 1,786 |
| Include assets not comprised in NOC: | |||||
| - investments in associates | 182 | 51 | – | 22 | 109 |
| - other current financial assets | 4 | 4 | |||
| - other non-current financial assets | 510 | 510 | |||
| - deferred tax assets | 2,838 | 2,838 | |||
| - cash and cash equivalents | 1,135 | 1,135 | |||
| Total assets excluding assets classified as held for sale | 29,189 | 13,350 | 3,204 | 6,301 | 6,334 |
| Assets classified as held for sale | 1,698 | ||||
| Total assets | 30,887 | ||||
| December 31, 2014 | |||||
| Net operating capital (NOC) | 8,838 | 7,565 | 1,353 | 3,638 | (3,718) |
| Exclude liabilities comprised in NOC: | |||||
| - payables/liabilities | 9,379 | 2,711 | 1,411 | 1,422 | 3,835 |
| - intercompany accounts | – | 125 | 65 | 129 | (319) |
| - provisions | 3,445 | 793 | 220 | 530 | 1,902 |
| Include assets not comprised in NOC: | |||||
| - investments in associates | 157 | 80 | – | 20 | 57 |
| - other current financial assets | 125 | 125 | |||
| - other non-current financial assets | 462 | 462 | |||
| - deferred tax assets | 2,460 | 2,460 | |||
| - cash and cash equivalents | 1,873 | 1,873 | |||
| Total assets excluding assets classified as held for sale | 26,739 | 11,274 | 3,049 | 5,739 | 6,677 |
| Assets classified as held for sale | 1,613 | ||||
| Total assets | 28,352 | ||||
| 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 | |||
| Total assets excluding assets classified as held for sale | 25,523 | 10,519 | 2,908 | 6,832 | 5,264 |
| Assets classified as held for sale | 136 | ||||
| Total assets | 25,659 |
Composition of net debt to group equity in millions of EUR unless otherwise stated
| June 29, | December 31, | June 30, | |
|---|---|---|---|
| 2014 | 2014 | 2015 | |
| Long-term debt | 3,336 | 3,712 | 4,048 |
| Short-term debt | 432 | 392 | 1,632 |
| Total debt | 3,768 | 4,104 | 5,680 |
| Cash and cash equivalents | 1,435 | 1,873 | 1,135 |
| Net debt (cash) (total debt less cash and cash equivalents) | 2,333 | 2,231 | 4,545 |
| Shareholders' equity | 10,747 | 10,867 | 11,396 |
| Non-controlling interests | 11 | 101 | 115 |
| Group equity | 10,758 | 10,968 | 11,511 |
| Net debt and group equity | 13,091 | 13,199 | 16,056 |
| Net debt divided by net debt and group equity (in %) | 18% | 17% | 28% |
| Group equity divided by net debt and group equity (in %) | 82% | 83% | 72% |
| Q2 | January to June | |||||
|---|---|---|---|---|---|---|
| 2014 | 2015 | 2014 | 2015 | |||
| Cash flows provided by (used for) operating activities | 410 | 186 | 137 | (70) | ||
| Cash flows used for investing activities | (325) | (237) | (501) | (1,507) | ||
| Cash flows before financing activities | 85 | (51) | (364) | (1,577) | ||
| Cash flows provided by (used for) operating activities | 410 | 186 | 137 | (70) | ||
| Net capital expenditures: | (196) | (216) | (354) | (403) | ||
| Purchase of intangible assets | (21) | (27) | (32) | (55) | ||
| Expenditures on development assets | (73) | (83) | (141) | (155) | ||
| Capital expenditures on property, plant and equipment | (107) | (117) | (189) | (209) | ||
| Proceeds from sale of property, plant and equipment | 5 | 11 | 8 | 16 | ||
| Free cash flows | 214 | (30) | (217) | (473) |
This document and the related oral presentation, including responses to questions following the presentation, contain certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items. Examples of forward-looking statements include statements made about the strategy, estimates of sales growth, future EBITA, future developments in Philips' organic business and the completion of acquisitions and divestments. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.
These factors include but are not limited to domestic and global economic and business conditions, developments within the euro zone, the successful implementation of Philips' strategy and the ability to realize the benefits of this strategy, the ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, the ability to identify and complete successful acquisitions, including Volcano, and to integrate those acquisitions into the business, the ability to successfully exit certain businesses or restructure the operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. 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 2014.
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. Non-GAAP financial measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-GAAP measures to the most directly comparable IFRS measures is contained in this document. Further information on non-GAAP measures can be found in the Annual Report 2014.
In presenting the Philips Group financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices or observable market data are not readily available, fair values are estimated using appropriate valuation models and unobservable inputs. Such fair value estimates require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in the Annual Report 2014. 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 2014, unless otherwise stated.
In 2014, we announced plans to establish two standalone companies focused on the HealthTech and Lighting Solutions opportunities. The proposed separation of the Lighting business impacts all businesses and markets as well as all supporting functions and all assets and liabilities of the Group. Philips expects the separation will take approximately 12-18 months. We expect to continue reporting in the existing structure until the changes in the way we allocate resources and analyze performance in the new structure have been completed.
This report contains the semi-annual report of Koninklijke Philips N.V. ('the Company' or 'Philips'), a company with limited liability, headquartered in Amsterdam, the Netherlands. The principal activities of the Company and its group companies ('the Group') are described in note 5, Segment information.
The semi-annual report for the six months ended June 30, 2015 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, 2014.
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 30 June 2015, which has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union, 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 for the six month period ended 30 June 2015 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 27, 2015
Board of Management
Frans van Houten Ron Wirahadiraksa
Pieter Nota
| January to June | |||
|---|---|---|---|
| 2014 | 2015 | ||
| Sales | 9,661 | 11,313 | |
| EBITA | 621 | 680 | |
| as a % of sales | 6.4% | 6.0% | |
| EBIT | 463 | 488 | |
| as a % of sales | 4.8% | 4.3% | |
| Financial income and expenses | (143) | (141) | |
| Income taxes | (60) | (79) | |
| Results investments in associates | 24 | 22 | |
| Net income from continuing operations |
284 | 290 | |
| Discontinued operations | 96 | 84 | |
| Net income | 380 | 374 | |
| Net income attributable to shareholders per common share (in EUR) - diluted |
0.41 | 0.40 |
Sales by sector in millions of EUR unless otherwise stated
| January to June | % change | ||||
|---|---|---|---|---|---|
| 2014 | 2015 | nominal | compar able |
||
| Healthcare | 4,103 | 5,015 | 22% | 5% | |
| Consumer Lifestyle |
2,089 | 2,438 | 17% | 6% | |
| Lighting | 3,189 | 3,555 | 11% | (3)% | |
| Innovation, Group & Services |
280 | 305 | 9% | 10% | |
| Philips Group | 9,661 | 11,313 | 17% | 3% |
EBITA in millions of EUR unless otherwise stated
| January to June | ||||||
|---|---|---|---|---|---|---|
| 2014 | 2015 | |||||
| amount | % | amount | % | |||
| Healthcare | 377 | 9.2% | 340 | 6.8% | ||
| Consumer Lifestyle | 208 | 10.0% | 270 | 11.1% | ||
| Lighting | 207 | 6.5% | 283 | 8.0% | ||
| Innovation, Group & Services |
(171) | – | (213) | – | ||
| Philips Group | 621 | 6.4% | 680 | 6.0% | ||
| January to June | |||||
|---|---|---|---|---|---|
| 2014 | 2015 | ||||
| amount | % | amount | % | ||
| Healthcare | 397 | 9.7% | 419 | 8.4% | |
| Consumer Lifestyle | 209 | 10.0% | 270 | 11.1% | |
| Lighting | 259 | 8.1% | 320 | 9.0% | |
| Innovation, Group & Services |
(167) | – | (181) | – | |
| Philips Group | 698 | 7.2% | 828 | 7.3% |
• Sales amounted to EUR 2,438 million. Excluding currency effects and portfolio changes, comparable sales increased by 6% year-on-year. Double-digit comparable sales growth was seen at Health & Wellness, Personal Care achieved high-single-digit growth, while Domestic Appliances was in line with the first half of 2014. From a geographical perspective, a high-single-digit increase was seen in growth geographies, while mid-single-digit growth was recorded in mature geographies.
▪ In the Annual Report 2014, certain risk categories and risks are described which could have a material adverse effect on Philips' financial position and results. Those categories and risks remain valid and should be read in conjunction with this semi-annual report.
Condensed consolidated statements of income in millions of EUR unless otherwise stated
| Q2 | January to June | ||||
|---|---|---|---|---|---|
| 2014 | 2015 | 2014 | 2015 | ||
| Sales | 4,969 | 5,974 | 9,661 | 11,313 | |
| Cost of sales | (2,894) | (3,479) | (5,686) | (6,702) | |
| Gross margin | 2,075 | 2,495 | 3,975 | 4,611 | |
| Selling expenses | (1,214) | (1,440) | (2,380) | (2,781) | |
| General and administrative expenses | (176) | (224) | (343) | (438) | |
| Research and development expenses | (400) | (483) | (796) | (919) | |
| Impairment of goodwill | – | – | (3) | – | |
| Other business income | 9 | 26 | 19 | 48 | |
| Other business expenses | (3) | (25) | (9) | (33) | |
| Income from operations | 291 | 349 | 463 | 488 | |
| Financial income | 15 | 28 | 31 | 59 | |
| Financial expenses | (89) | (102) | (174) | (200) | |
| Income before taxes | 217 | 275 | 320 | 347 | |
| Income tax expense | (32) | (48) | (60) | (79) | |
| Income after taxes | 185 | 227 | 260 | 268 | |
| Results relating to investments in associates | 3 | (1) | 24 | 22 | |
| Net income from continuing operations | 188 | 226 | 284 | 290 | |
| Discontinued operations - net of income tax | 55 | 48 | 96 | 84 | |
| Net income | 243 | 274 | 380 | 374 | |
| Attribution of net income for the period | |||||
| Net income attributable to Koninklijke Philips N.V. shareholders |
242 | 272 | 380 | 371 | |
| Net income (loss) attributable to non-controlling interests | 1 | 2 | – | 3 | |
| 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 | 908,343 | 909,478 | 911,166 | 910,768 | |
| - diluted | 916,511 | 914,726 | 920,433 | 916,373 | |
| Net income attributable to shareholders per common share in EUR: |
|||||
| - basic | 0.27 | 0.30 | 0.42 | 0.41 | |
| - diluted | 0.26 | 0.30 | 0.41 | 0.40 |
| Q2 | January to June | |||
|---|---|---|---|---|
| 2014 | 2015 | 2014 | 2015 | |
| Net income for the period | 243 | 274 | 380 | 374 |
| Pensions and other post-employment plans: | ||||
| Remeasurement | (82) | 2 | (367) | (175) |
| Income tax effect on remeasurements | 20 | (1) | 92 | 41 |
| Revaluation reserve: | ||||
| Release revaluation reserve | (3) | (2) | (5) | (4) |
| Reclassification directly into retained earnings | 3 | 2 | 5 | 4 |
| Total of items that will not be reclassified to profit or loss | (62) | 1 | (275) | (134) |
| Currency translation differences: | ||||
| Net current period change, before tax | 84 | (105) | 66 | 599 |
| Income tax effect | 16 | 170 | 18 | 170 |
| Reclassification adjustment for gain realized | (4) | (2) | (4) | (2) |
| Available-for-sale financial assets: | ||||
| Net current period change, before tax | 13 | 15 | 2 | 22 |
| Income tax effect | (3) | – | (2) | – |
| Reclassification adjustment for results realized | – | – | 8 | (6) |
| Cash flow hedges: | ||||
| Net current period change, before tax | (14) | 8 | (19) | (53) |
| Income tax effect | 4 | (3) | 8 | 8 |
| Reclassification adjustment for results realized | (5) | 29 | (13) | 34 |
| Total of items that are or may be reclassified to profit or loss | 91 | 112 | 64 | 772 |
| Other comprehensive income (loss) for the period | 29 | 113 | (211) | 638 |
| Total comprehensive income for the period | 272 | 387 | 169 | 1,012 |
| Shareholders | 271 | 385 | 169 | 1,009 |
| Non-controlling interests | 1 | 2 | – | 3 |
Condensed consolidated statements of comprehensive income in millions of EUR unless otherwise stated
Condensed consolidated balance sheets in millions of EUR unless otherwise stated
| June 29, 2014 | December 31, 2014 | June 30, 2015 | |
|---|---|---|---|
| Non-current assets: | |||
| Property, plant and equipment | 2,708 | 2,095 | 2,308 |
| Goodwill | 6,579 | 7,158 | 8,428 |
| Intangible assets excluding goodwill | 3,157 | 3,368 | 3,855 |
| Non-current receivables | 186 | 177 | 193 |
| Investments in associates | 171 | 157 | 182 |
| Other non-current financial assets | 438 | 462 | 510 |
| Non-current derivative financial assets | 73 | 15 | 42 |
| Deferred tax assets | 1,832 | 2,460 | 2,838 |
| Other non-current assets | 60 | 69 | 77 |
| Total non-current assets | 15,204 | 15,961 | 18,433 |
| Current assets: | |||
| Inventories | 3,638 | 3,314 | 3,973 |
| Other current financial assets | 125 | 125 | 4 |
| Other current assets | 448 | 411 | 544 |
| Current derivative financial assets | 3 | 192 | 205 |
| Income tax receivable | 121 | 140 | 118 |
| Receivables | 4,549 | 4,723 | 4,777 |
| Assets classified as held for sale | 136 | 1,613 | 1,698 |
| Cash and cash equivalents | 1,435 | 1,873 | 1,135 |
| Total current assets | 10,455 | 12,391 | 12,454 |
| Total assets | 25,659 | 28,352 | 30,887 |
| Equity | |||
| Shareholders' equity | 10,747 | 10,867 | 11,396 |
| Non-controlling interests | 11 | 101 | 115 |
| Group equity | 10,758 | 10,968 | 11,511 |
| Non-current liabilities: | |||
| Long-term debt | 3,336 | 3,712 | 4,048 |
| Non-current derivative financial liabilities | 283 | 551 | 652 |
| Long-term provisions | 1,773 | 2,500 | 2,504 |
| Deferred tax liabilities | 62 | 107 | 173 |
| Other non-current liabilities | 1,491 | 1,838 | 2,009 |
| Total non-current liabilities | 6,945 | 8,708 | 9,386 |
| Current liabilities: | |||
| Short-term debt | 432 | 392 | 1,632 |
| Current derivative financial liabilities | 99 | 306 | 377 |
| Income tax payable | 92 | 102 | 118 |
| Accounts and notes payable | 2,827 | 2,499 | 2,580 |
| Accrued liabilities | 2,643 | 2,692 | 2,785 |
| Short-term provisions | 722 | 945 | 784 |
| Dividends payable | 45 | – | 33 |
| Liabilities directly associated with assets held for sale | 4 | 349 | 367 |
| Other current liabilities | 1,092 | 1,391 | 1,314 |
| Total current liabilities | 7,956 | 8,676 | 9,990 |
| Total liabilities and group equity | 25,659 | 28,352 | 30,887 |
Condensed consolidated statements of cash flows in millions of EUR unless otherwise stated
| Q2 | January to June | ||||
|---|---|---|---|---|---|
| 2014 | 2015 | 2014 | 2015 | ||
| Cash flows from operating activities | |||||
| Net income | 243 | 274 | 380 | 374 | |
| Results of discontinued operations - net of income tax | (55) | (48) | (96) | (84) | |
| Adjustments to reconcile net income to net cash of operating activities: | |||||
| Depreciation, amortization, and impairments of fixed assets | 256 | 331 | 516 | 614 | |
| Impairment of goodwill and other non-current financial assets | 4 | 4 | 17 | 4 | |
| Net gain on sale of assets | (3) | (12) | (9) | (46) | |
| Interest income | (11) | (12) | (19) | (26) | |
| Interest expense on debt, borrowings and other liabilities | 57 | 69 | 108 | 135 | |
| Income tax expense | 32 | 48 | 60 | 79 | |
| Results from investments in associates | (2) | 2 | (23) | – | |
| Decrease (increase) in working capital: | 182 | (313) | 51 | (331) | |
| Decrease in receivables and other current assets | 191 | 298 | 198 | 380 | |
| Increase in inventories | (138) | (148) | (363) | (391) | |
| Increase (decrease) in accounts payable, accrued and other liabilities | 129 | (463) | 216 | (320) | |
| (Increase) decrease in non-current receivables, other assets, other liabilities | (138) | (40) | (518) | 2 | |
| Decrease in provisions | (50) | (116) | (66) | (278) | |
| Other items | (6) | 135 | 19 | (230) | |
| Interest paid | (25) | (28) | (114) | (129) | |
| Interest received | 11 | 13 | 19 | 27 | |
| Dividends received from investments in associates | 14 | 6 | 14 | 6 | |
| Income taxes paid | (99) | (127) | (202) | (187) | |
| Net cash provided by (used for) operating activities | 410 | 186 | 137 | (70) | |
| Cash flows from investing activities | |||||
| Net capital expenditures | (196) | (216) | (354) | (403) | |
| Purchase of intangible assets | (21) | (27) | (32) | (55) | |
| Expenditures on development assets | (73) | (83) | (141) | (155) | |
| Capital expenditures on property, plant and equipment | (107) | (117) | (189) | (209) | |
| Proceeds from sale of property, plant and equipment | 5 | 11 | 8 | 16 | |
| Net proceeds used for derivatives and current financial assets | (4) | (43) | (2) | (80) | |
| Purchase of other non-current financial assets | (68) | (2) | (72) | (2) | |
| Proceeds from other non-current financial assets | – | (2) | 2 | 18 | |
| Purchase of businesses, net of cash acquired | (2) | (1) | (19) | (1,104) | |
| Net proceeds (used for) from sale of interest in businesses | (55) | 27 | (56) | 64 | |
| Net cash used for investing activities | (325) | (237) | (501) | (1,507) | |
| Cash flows from financing activities | |||||
| Proceeds from issuance (payments) of short-term debt | 18 | (2) | 96 | 1,190 | |
| Principal payments on long-term debt | (20) | (19) | (293) | (39) | |
| Proceeds from issuance of long-term debt | 12 | 25 | 26 | 43 | |
| Re-issuance of treasury shares | 31 | 30 | 96 | 65 | |
| Purchase of treasury shares | (266) | (137) | (438) | (280) | |
| Dividend paid | (248) | (253) | (248) | (253) | |
| Net cash (used for) provided by financing activities | (473) | (356) | (761) | 726 | |
| Net cash used for continuing operations | (388) | (407) | (1,125) | (851) | |
| Cash flows from discontinued operations | |||||
| Net cash provided by (used for) operating activities | 7 | (74) | 24 | (10) | |
| Net cash provided by investing activities | 99 | – | 99 | – | |
| Net cash provided by (used for) discontinued operations | 106 | (74) | 123 | (10) | |
| Net cash used for continuing and discontinued operations | (282) | (481) | (1,002) | (861) | |
| Effect of change in exchange rates on cash and cash equivalents | (10) | (51) | (28) | 123 | |
| Cash and cash equivalents at the beginning of the period | 1,727 | 1,667 | 2,465 | 1,873 | |
| Cash and cash equivalents at the end of the period | 1,435 | 1,135 | 1,435 | 1,135 |
For a number of reasons, principally the effects of translation differences, certain items in the statements of cash flows do not correspond to the differences between the balance sheet amounts for the respective items.
| Condensed consolidated statement of changes in equity in millions of EUR unless otherwise stated | |
|---|---|
| -------------------------------------------------------------------------------------------------- | -- |
| available- for-sale financial assets currency translation differences capital in excess of par value revaluation reserve retained earnings cash flow hedges common shares |
total shareholders' equity non-controlling interests treasury shares at cost Group equity |
|---|---|
| January to June 2015 Balance as of December 31, 2014 187 2,181 8,790 13 229 27 (13) |
(547) 10,867 101 10,968 |
| Total comprehensive income 241 (4) 767 16 (11) |
1,009 3 1,012 |
| Dividend distributed 3 429 (730) Movement non-controlling interest |
(298) (298) – 11 11 |
| Purchase of treasury shares (12) Re-issuance of treasury shares (21) (44) |
(278) (290) (290) 130 65 65 |
| Share-based compensation plans 44 Income tax share-based |
44 44 |
| compensation plans (1) Total other equity movements 3 451 (786) |
(1) (1) (148) (480) 11 (469) |
| Balance as of June 30, 2015 190 2,632 8,245 9 996 43 (24) |
(695) 11,396 115 11,511 |
| January to 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) Movement non-controlling interest |
(293) (293) – (2) (2) |
| Purchase of treasury shares (26) Re-issuance of treasury shares (124) (69) |
(440) (466) (466) 289 96 96 |
| Share-based compensation plans 39 – Income tax share-based |
39 39 |
| (12) (12) |
Specification of pension costs in millions of EUR unless otherwise stated
| Q2 2014 | Q2 2015 | ||||||
|---|---|---|---|---|---|---|---|
| Netherlands | other | total | Netherlands | other | total | ||
| Defined-benefit plans | |||||||
| Pensions | |||||||
| Current service cost | 47 | 17 | 64 | 20 | 24 | 44 | |
| Past service cost (incl. curtailments) | – | – | – | – | (2) | (2) | |
| Interest expense | – | 14 | 14 | – | 14 | 14 | |
| Interest income | (1) | – | (1) | – | – | – | |
| Total | 46 | 31 | 77 | 20 | 36 | 56 | |
| of which discontinued operations | 1 | – | 1 | 1 | – | 1 | |
| Retiree Medical | |||||||
| Current service cost | – | – | – | – | 1 | 1 | |
| Interest expense | – | 3 | 3 | – | 3 | 3 | |
| Total | – | 3 | 3 | – | 4 | 4 | |
| Defined-contribution plans | |||||||
| Cost | 2 | 31 | 33 | 32 | 41 | 73 | |
| of which discontinued operations | – | 1 | 1 | – | 2 | 2 |
Specification of pension costs in millions of EUR unless stated otherwise
| 2014 | |||||
|---|---|---|---|---|---|
| 2015 | |||||
| Netherlands | other | total | Netherlands | other | total |
| 92 | 35 | 127 | 80 | 45 | 125 |
| – | – | – | – | (2) | (2) |
| – | – | – | – | – | – |
| – | 28 | 28 | – | 27 | 27 |
| (5) | – | (5) | (1) | – | (1) |
| 87 | 63 | 150 | 79 | 70 | 149 |
| 1 | 1 | 2 | 1 | 1 | 2 |
| – | – | – | – | 1 | 1 |
| – | 6 | 6 | – | 6 | 6 |
| – | 6 | 6 | – | 7 | 7 |
| 4 | 68 | 72 | 32 | 82 | 114 |
| – | 2 | 2 | – | 3 | 3 |
Pension cash flows in millions of EUR unless stated otherwise
| Q2 | January to June | ||||
|---|---|---|---|---|---|
| 2014 | 2015 | 2014 | 2015 | ||
| Contributions and benefits paid by the Company | (173) | (159) | (651) | (468) |
| Significant accounting policies 1 |
35 |
|---|---|
| Information by sector and main countries 2 |
36 |
| Estimates 3 |
37 |
| Financial risk management 4 |
37 |
| Segment information 5 |
37 |
| Seasonality 6 |
37 |
| Discontinued operations and other assets 7 |
37 |
| classified as held for sale | |
| Acquisitions and Divestments 8 |
38 |
| Income taxes 9 |
39 |
| Property, plant and equipment 10 |
39 |
| Goodwill 11 |
39 |
| Intangible assets excluding goodwill 12 |
40 |
| Inventories 13 |
41 |
| Other current and non-current financial assets 14 |
41 |
| Shareholders' equity 15 |
41 |
| Short-term and long-term debt 16 |
41 |
| Provisions 17 |
41 |
| Pensions 18 |
41 |
| Contingent assets and liabilities 19 |
42 |
| Share-based compensation 20 |
42 |
| Fair value of financial assets and liabilities 21 |
43 |
This report contains the semi-annual report of Koninklijke Philips N.V. ('the Company'), a company with limited liability, headquartered in Amsterdam, the Netherlands, and its subsidiaries ('the Group').
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, 2014, except for the accounting policy changes following from the adoption of 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, 2015, and certain other changes mentioned below. The new and amended standards did not have a material impact on the Company's semi-annual condensed consolidated financial statements.
Prior-period financial statements have been restated for two changes applied as of January 1, 2015:
| 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 | 2,150 | 2,137 | 186 | 8.7% | 2,770 | 2,754 | 219 | 8.0% |
| Consumer Lifestyle | 1,076 | 1,073 | 86 | 8.0% | 1,253 | 1,248 | 121 | 9.7% |
| Lighting | 1,633 | 1,617 | 90 | 5.6% | 1,846 | 1,836 | 136 | 7.4% |
| Innovation, Group & Services |
143 | 142 | (71) | – | 137 | 136 | (127) | – |
| Inter-sector eliminations | (33) | (32) | ||||||
| Philips Group | 4,969 | 4,969 | 291 | 5.9% | 5,974 | 5,974 | 349 | 5.8% |
| Information by sector and main countries Sales and income (loss) from operations in millions of EUR unless otherwise stated |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| sales | Q2 2014 | sales | Q2 2015 | ||||||||
| including | including | ||||||||||
| inter company |
sales | income from operations | inter company |
sales | income from operations | ||||||
| amount | as a % of sales |
amount | as a % of sales |
||||||||
| Healthcare | 2,150 | 2,137 | 186 | 8.7% | 2,770 | 2,754 | 219 | 8.0% | |||
| Consumer Lifestyle | 1,076 | 1,073 | 86 | 8.0% | 1,253 | 1,248 | 121 | 9.7% | |||
| Lighting | 1,633 | 1,617 | 90 | 5.6% | 1,846 | 1,836 | 136 | 7.4% | |||
| Innovation, Group & | |||||||||||
| Services Inter-sector eliminations |
143 (33) |
142 | (71) | – | 137 (32) |
136 | (127) | – | |||
| Philips Group | 4,969 | 4,969 | 291 | 5.9% | 5,974 | 5,974 | 349 | 5.8% | |||
| Sales and income (loss) from operations in millions of EUR unless otherwise stated | |||||||||||
| January to June | |||||||||||
| 2014 | 2015 | ||||||||||
| sales including |
sales including |
||||||||||
| inter company |
sales | income from operations | inter company |
sales | income from operations | ||||||
| amount | as a % of | amount | as a % of | ||||||||
| sales | sales | ||||||||||
| Healthcare Consumer Lifestyle |
4,128 2,094 |
4,103 2,089 |
295 182 |
7.2% 8.7% |
5,045 2,446 |
5,015 2,438 |
236 243 |
4.7% 10.0% |
|||
| Lighting | 3,220 | 3,189 | 163 | 5.1% | 3,577 | 3,555 | 229 | 6.4% | |||
| Innovation, Group & | |||||||||||
| Services | 283 | 280 | (177) | – | 308 | 305 | (220) | – | |||
| Inter-sector eliminations Philips Group |
(64) 9,661 |
9,661 | 463 | 4.8% | (63) 11,313 |
11,313 | 488 | 4.3% | |||
| sales | total assets | total liabilities excluding debt |
|||||||||
| January to June | June 29, | June 30, | June 29, | June 30, | |||||||
| Healthcare | 2014 4,103 |
2015 5,015 |
2014 10,519 |
2015 13,350 |
2014 2,987 |
2015 4,086 |
|||||
| Consumer Lifestyle | 2,089 | 2,438 | 2,908 | 3,204 | 1,637 | 1,530 | |||||
| Lighting | 3,189 | 3,555 | 6,832 | 6,301 | 2,255 | 2,209 | |||||
| Innovation, Group & Services | 280 | 305 | 5,264 | 6,334 | 4,250 | 5,504 | |||||
| Sector totals | 25,523 | 29,189 | 11,129 | 13,329 | |||||||
| Assets classified as held for sale Philips Group |
9,661 | 11,313 | 136 25,659 |
1,698 30,887 |
4 11,133 |
367 13,696 |
|||||
| 36 Press Release Q2 2015 |
| sales | total assets | total liabilities excluding debt |
||||
|---|---|---|---|---|---|---|
| January to June | June 29, | June 30, | June 29, | June 30, | ||
| 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | |
| Healthcare | 4,103 | 5,015 | 10,519 | 13,350 | 2,987 | 4,086 |
| Consumer Lifestyle | 2,089 | 2,438 | 2,908 | 3,204 | 1,637 | 1,530 |
| Lighting | 3,189 | 3,555 | 6,832 | 6,301 | 2,255 | 2,209 |
| Innovation, Group & Services | 280 | 305 | 5,264 | 6,334 | 4,250 | 5,504 |
| Sector totals | 25,523 | 29,189 | 11,129 | 13,329 | ||
| Assets classified as held for sale | 136 | 1,698 | 4 | 367 | ||
| Philips Group | 9,661 | 11,313 | 25,659 | 30,887 | 11,133 | 13,696 |
| sales | tangible and intangible assets1) | |||||
|---|---|---|---|---|---|---|
| January to June | June 29, | June 30, | ||||
| 2014 | 2015 | 2014 | 2015 | |||
| Netherlands | 270 | 286 | 910 | 961 | ||
| United States | 2,816 | 3,510 | 7,286 | 9,346 | ||
| China | 1,112 | 1,331 | 1,047 | 1,223 | ||
| Germany | 597 | 609 | 287 | 151 | ||
| Japan | 448 | 484 | 413 | 405 | ||
| India | 297 | 378 | 126 | 139 | ||
| France | 381 | 373 | 75 | 49 | ||
| Other countries | 3,740 | 4,342 | 2,300 | 2,317 | ||
| Philips Group | 9,661 | 11,313 | 12,444 | 14,591 |
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, 2014.
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, 2014.
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.
In 2014, Philips announced plans to establish two stand-alone companies focused on the HealthTech and Lighting Solutions opportunities. Philips expects to continue reporting in the existing structure until the changes in the way it allocates resources and analyzes performance in the new structure have been completed.
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 of the 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, 2015, Healthcare, Consumer Lifestyle and Lighting had revenues of EUR 10,098 million, EUR 5,080 million and EUR 7,235 million respectively (12 months ended June 29, 2014, Healthcare, Consumer Lifestyle and Lighting had revenues of EUR 9,190 million, EUR 4,609 million and EUR 6,866 million, respectively).
Discontinued operations included in the Consolidated statements of income and the Consolidated statements of cash flows consist of the combined Lumileds and Automotive businesses and certain other divestments reported as discontinued operations.
Philips announced on March 31, 2015 that it has signed an agreement with a consortium led by GO Scale Capital, through which they will acquire an 80.1% interest in Philips' combined LED components and Automotive lighting businesses, with Philips retaining the remaining 19.9%, including a 34% interest in
Lumileds' US operations. As additional time is required for regulatory approvals, Philips is now working towards closing the sale in the fourth quarter of 2015.
The combined businesses of Lumileds and Automotive were reported as discontinued operations in the Consolidated statements of income and Consolidated statements of cash flows, with the related assets and liabilities as per the end of November 2014 included as Assets classified as held for sale and Liabilities directly associated with assets held for sale in the Consolidated balance sheet.
The following table summarizes the results of the combined businesses of Lumileds and Automotive included in the Consolidated statements of income as discontinued operations.
| January to June | ||||
|---|---|---|---|---|
| 2014 | 2015 | |||
| Sales | 646 | 806 | ||
| Costs and expenses | (551) | (658) | ||
| Income before taxes | 95 | 148 | ||
| Income taxes | (21) | (62) | ||
| Results from discontinued operations | 74 | 86 |
Upon disposal, the associated currency translation differences, part of Shareholders' equity, will be recognized in the Consolidated statement of income. At June 30, 2015, the estimated release amounted to a EUR 27 million gain.
The following table presents the assets and liabilities of the combined Lumileds and Automotive businesses as Assets classified as held for sale and Liabilities directly associated with assets classified as held for sale in the Consolidated balance sheet as per end of November.
| December 31, | June 30, | |
|---|---|---|
| 2014 | 2015 | |
| Property, plant and equipment | 666 | 695 |
| Intangible assets including goodwill | 295 | 348 |
| Inventories | 248 | 313 |
| Accounts receivable | 278 | 289 |
| Other assets | 14 | 22 |
| Assets classified as held for sale | 1,501 | 1,667 |
| Accounts payable | (134) | (186) |
| Provisions | (34) | (31) |
| Other liabilities | (149) | (136) |
| Liabilities directly associated with assets held for sale |
(317) | (353) |
Non-transferrable balance sheet positions, such as certain accounts receivable, accounts payable, accrued liabilities and provisions, are reported on the respective balance sheet captions.
Assets and liabilities directly associated with assets held for sale relate to property, plant and equipment for an amount of EUR 30 million and a business of EUR (14) million at June 30, 2015.
Philips completed two acquisitions in the first six months of 2015. These acquisitions involved an aggregated cash consideration of EUR 1,253 million, with Volcano Corporation (Volcano) being the most notable acquisition.
On February 17, 2015, Philips completed the acquisition of Volcano for a total cash consideration of EUR 1,250 million. This amount involved the purchase price of shares (EUR 822 million), the payoff of certain debt (EUR 405 million) and the settlement of outstanding stock options (EUR 23 million). The overall cash position of Volcano on the transaction date was EUR 158 million, resulting in a net cash outflow related to this acquisition of EUR 1,092 million.
Volcano is a US-based global leader in catheter-based imaging and measurement solutions for cardiovascular applications and is very complementary to the Philips vision, strategy, and portfolio in image-guided therapy.
Acquisition-related costs that were recognized in General and administrative expenses amounted to EUR 15 million. As of February 17, 2015, Volcano is 100% consolidated as part of the Healthcare sector. The condensed balance sheet of Volcano immediately before and after the acquisition is as follows:
| before acquisition date |
after acquisition date |
|
|---|---|---|
| Goodwill | 133 | 615 |
| Other intangible assets | 87 | 364 |
| Property, plant and equipment | 105 | 105 |
| Other assets | 80 | 60 |
| Other liabilities | (41) | (154) |
| Working capital | 112 | 126 |
| Cash | 158 | 158 |
| Total assets and liabilities | 634 | 1,274 |
| Group equity | (219) | (1,250) |
| Loans | (415) | (24) |
| Financed by | (634) | (1,274) |
The fair value of assets and liabilities after the acquisition is provisional pending a final assessment in the course of 2015. The goodwill is primarily related to the synergies expected to be achieved from integrating
| amount | period in years | |
|---|---|---|
| Installed base | 123 | 8 |
| Developed technology - Systems | 122 | 8 |
| Developed technology - Disposables |
103 | 8 |
| Trade names | 16 | 8 |
| Total other intangible assets | 364 |
9 Income taxes 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.
10 Property, plant and equipment In 2015, the activities of Imaging Systems in the sector Healthcare was split over three new cash-generating units: Image-Guided Therapy, Ultrasound and Diagnostic Imaging. As a result of the change, the goodwill associated with Imaging Systems was allocated over these three new units.
Goodwill allocated to the cash-generating units in millions of EUR
| June 30, 2015 |
|
|---|---|
| Respiratory Care & Sleep Management | 1,856 |
| Image-Guided Therapy | 1,042 |
| Patient Care & Monitoring Solutions | 1,439 |
| Professional Lighting Solutions | 1,597 |
| Others (units carrying a non-significant goodwill balance) |
2,494 |
| Total book value | 8,428 |
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 2015 to 2019 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 the units mentioned is expected to increase over the projection period as a result of volume growth and cost eciencies.
Cash flow projections of Respiratory Care & Sleep Management, Image-Guided Therapy, Patient Care & Monitoring Solutions and Professional Lighting Solutions for 2015 were based on the following key assumptions (used in the annual impairment test performed in the second quarter):
| compound sales growth rate1) | ||||||
|---|---|---|---|---|---|---|
| initial forecast period |
extra polation period2) |
used to calculate terminal value |
pre-tax discount rates |
|||
| Respiratory Care & Sleep Management |
6.9 | 5.6 | 2.7 | 11.5 | ||
| Image-Guided Therapy |
3.0 | 2.4 | 2.7 | 12.2 | ||
| Patient Care & Monitoring Solutions |
6.0 | 4.8 | 2.7 | 13.4 | ||
| Professional Lighting Solutions |
6.6 | 5.2 | 2.7 | 15.1 |
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, Professional Lighting Solutions has the lowest excess of the recoverable amount over the carrying amount. The headroom of Professional Lighting Solutions was estimated at EUR 600 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, % |
|||
|---|---|---|---|---|---|
| Professional Lighting |
|||||
| Solutions | 270 | 730 | 37 |
The results of the annual impairment test of Respiratory Care & Sleep Management, Patient Care & Monitoring Solutions and Image-Guided Therapy 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 30 million. An increase of 130 points in the pre-tax discounting rate, a 320 basis points decline in the compound long-term sales growth rate or a 19% 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, 2015 amounts to EUR 36 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 30, 2015 amounts to EUR 126 million.
The changes in intangible assets excluding goodwill in 2015 are summarized as follows:
| in millions of EUR unless otherwise stated | |
|---|---|
| Book value as of December 31, 2014 | 3,368 |
| Changes in book value: | |
| Additions | 209 |
| Acquisitions | 367 |
| Amortization | (330) |
| Impairment losses | (20) |
| Divestments and transfers to assets classified as held for sale |
(2) |
| Translation differences | 263 |
| Total changes | 487 |
| Book value as of June 30, 2015 | 3,855 |
The additions for 2015 mainly comprise internally generated assets of EUR 154 million for product development costs. Other intangible assets increased by EUR 367 million in the first half of 2015, mainly due to the acquisition of Volcano. The movement of EUR 263 million in translation differences was mainly due to the increase in the USD/EUR rate, which impacted the intangibles denominated in USD.
In the first half of 2015, inventories increased by EUR 659 million (first half of 2014: EUR 398 million). The change was largely driven by translation differences of EUR 241 million (first half of 2014: EUR 27 million) and the improved operational performance of the sectors.
In June 2015, 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 59% of the shareholders elected for a share dividend, resulting in the issuance of 17,671,990 new common shares. The settlement of the cash dividend involved an amount of EUR 298 million.
As of June 30, 2015, the issued and fully-paid share capital consists of 952,491,403 common shares, each share having a par value of EUR 0.20.
During the first six months of 2015, a total of 4,271,860 treasury shares were delivered as a result of stock option exercises and restricted share deliveries. Furthermore, a total of 11,055,816 shares were acquired for cancellation purposes in connection with the EUR 1.5 billion share buy-back program started in October 2013. On June 30, 2015 the total number of treasury shares amounted to 27,214,500, which were purchased at an average price of EUR 25.54 per share.
At the end of Q2 2015, Philips had total debt of EUR 5,680 million, an increase of EUR 1,576 million compared to December 31, 2014. Long-term debt was EUR 4,048 million, an increase of EUR 336 million, and short-term debt was EUR 1,632 million, an increase of EUR 1,240 million compared to December 31, 2014. The movement of debt was mainly due to a new borrowing of a USD 1,300 million bridge loan used for the Volcano acquisition, together with a currency translation effect on USD bonds. The majority of the long-term debt consists of USD 4,117 million of public bonds with a weighted average interest rate of 5.59% at the end of Q2 2015.
Provisions are summarized as follows:
Provisions in millions of EUR
| EUR 241 million (first half of 2014: EUR 27 million) and the improved operational performance of the sectors. |
December 31, 2014 |
June 30, 2015 | ||||
|---|---|---|---|---|---|---|
| long | short | long | short | |||
| 14 | Other current and non-current financial assets | Provisions for defined-benefit | term | term | term | term |
| Changes in Other current and non-current financial | plans | 881 | 52 | 887 | 51 | |
| assets mainly relate to changes in the asset category | Other post-retirement benefits | 226 | 16 | 247 | 17 | |
| Product warranty | 77 | 225 | 62 | 224 | ||
| Loans and receivables which are included in this | Environmental provisions | 301 | 59 | 306 | 50 | |
| caption. The decrease in Current financial assets is related to repayment of a EUR 121 million loan by TPV |
Restructuring-related provisions |
150 | 230 | 99 | 202 | |
| Technology Limited. | Litigation provisions | 480 | 173 | 521 | 62 | |
| Other provisions | 385 | 190 | 382 | 178 | ||
| 15 | Shareholders' equity | Total provisions | 2,500 | 945 | 2,504 | 784 |
The decrease in provisions was attributable to:
16 Short-term and long-term debt In accordance with IAS 34, remeasurements are reported in the semi-annual condensed consolidated financial statements if there have been significant market fluctuations. With the exception of the settlement of the Dutch pension plan referred to below, no actuarial gains and losses were recorded in the first six months of 2015 since there were no significant market fluctuations, and no further significant one-off events such as plan amendments or curtailments occurred.
In Q1 2015 the Company completed its EUR 600 million one-off contribution as part of the de-risking of the Dutch pension plan initiated in 2014 through a final payment to the Dutch plan of EUR 171 million including interest.
In May 2015 the Company waived its right to receive discounts on future pension contributions, thereby settling the defined benefit obligation and giving up the plan assets, both amounting to EUR 19.2 billion, after which it applied a change to Defined Contribution (DC) accounting for the Dutch pension plan. The full plan settlement triggered by this change did not have an effect on the income statement or balance sheet as the
Company's surplus (plan assets exceeding the defined benefit obligation) was not recognized due to the asset ceiling restrictions. As a result of the change to DC, the pension costs for the remainder of 2015 will be reduced by approximately EUR 26 million as the contribution under DC accounting, which is recorded in the income statement, is lower than the service costs under previous Defined Benefit (DB) accounting.
For information regarding contingent assets, please refer to the Annual Report 2014. Significant developments regarding contingent assets that have occurred since the publication of the Annual Report 2014 are described below:
Additional Zoll products (i.e. Zoll's Advanced Life Support (ALS) products) were subsequently added to the lawsuit by Philips as infringing Philips' defibrillatorrelated patents. Resolution of the amount ultimately owed to Philips in the Zoll lawsuit is contingent upon both the CAFC arming the December 2013 jury decision on liability (expected no earlier than the second half of 2015) and the subsequent damages trial (expected to take place during the second half of 2016).
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 2015, the total fair value of guarantees recognized on the balance sheet amounted to less than EUR 1 million (December 31, 2014: less than EUR 1 million). Remaining offbalance-sheet business and credit-related guarantees provided on behalf of third parties and associates decreased by EUR 1 million during the first half of 2015 to EUR 20 million.
The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, intellectual property, commercial transactions, product liability, participations and environmental pollution. 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 information regarding legal proceedings in which the Company is involved, please refer to the Annual Report 2014. Significant developments regarding legal proceedings that have occurred since the publication of the Annual Report 2014 are described below:
19 Contingent assets and liabilities In the civil litigation pending before the United States District Court for the Northern District of California, further settlements have been reached with individual plaintiffs. In effect, all cases originally scheduled for trial in 2015 have now been resolved, leaving unresolved only those cases that were consolidated in the California case for pre-trial purposes and have to be transferred back to their original venue for further proceedings.
In the proposed class proceeding in Canada, the class certification motion for Ontario has been rescheduled from April 2015 to January 2016 due to the unavailability of the plaintiffs' expert.
Finally, as expected and previously referred to in the Annual Report 2014, the Company became involved in further civil CRT antitrust cases with previous CRT customers in the United Kingdom and Denmark in addition to the cases already pending in the Netherlands and Israel.
In February 2015 the United States District Court for the District of Delaware held a bench trial regarding the enforceability of one of Masimo's patents and a hearing addressing several post-trial motions following the October 2014 jury decision. In May 2015, the Court decided that the Masimo patent was not held unenforceable, denied Philips' motions to reverse the October 2014 jury decision regarding the validity of the Masimo patents-in-suit and/or the damages awarded by the jury to Masimo and denied Philips' request for a new trial. The Court also denied Masimo's motion to dismiss Philips' complaint directed to antitrust violations and patent misuse by Masimo. The antitrust and patent misuse phase of the litigation will now proceed to the merits phase. An additional ongoing phase of the litigation addresses the alleged infringement of certain patents of Philips and Masimo which were not included in the first phase of the litigation. Philips continues to pursue all avenues of appeal regarding the October 2014 decision before the Appellate courts in the US.
Share-based compensation costs were EUR 44 million and EUR 38 million in the first six months of 2015 and 2014 respectively.
Performance and restricted shares granted
During the first six months of 2015 the Company granted 4,752,566 performance shares and 189,954 restricted shares.
In the first six months of 2015 a total of 782,585 restricted shares were issued to employees and 2,345,092 EUR-denominated options and 731,883 USD-denominated options were exercised at a weighted average exercise price of EUR 18.96 and USD 21.56 respectively.
Under the Accelerate! program, in the first six months of 2015 a total of 341,300 EUR-denominated options and 71,000 USD-denominated options were exercised at an exercise price of EUR 15.24 and USD 20.02 respectively.
Under the employee stock purchase plans, a total of 820,767 shares were purchased at an average price of EUR 24.65.
For further information on the characteristics of all plans, please refer to the Annual Report 2014, note 28.
The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the Company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.
For cash and cash equivalents, current receivables, accounts payable, interest accrual and short-term debts, the carrying amounts approximate fair value, because of the short maturity of these instruments.
The table below analyses financial instruments carried at fair value by different hierarchy levels:
| Fair value of financial assets and liabilities in millions of EUR | ||||
|---|---|---|---|---|
| ------------------------------------------------------------------- | -- | -- | -- | -- |
| Balance as of December 31, 2014 | Balance as of June 30, 2015 | |||||
|---|---|---|---|---|---|---|
| carrying amount | estimated fair value | carrying amount | estimated fair value | |||
| Financial assets | ||||||
| Carried at fair value: | ||||||
| Available-for-sale financial assets - non-current | 115 | 115 | 165 | 165 | ||
| Securities classified as assets held for sale | 38 | 38 | 1 | 1 | ||
| Fair value through profit and loss - non-current | 24 | 24 | 25 | 25 | ||
| Derivative financial instruments | 207 | 207 | 247 | 247 | ||
| Financial assets carried at fair value | 384 | 438 | ||||
| Carried at (amortized) cost: | ||||||
| Cash and cash equivalents | 1,873 | 1,135 | ||||
| Loans and receivables: | ||||||
| Loans - current | 125 | 125 | 4 | 4 | ||
| Non-current loans and receivables | 86 | 86 | 87 | 87 | ||
| Other non-current loans and receivables | 140 | 154 | ||||
| Receivables - current | 4,723 | 4,777 | ||||
| Receivables - non-current | 177 | 177 | 193 | 193 | ||
| Held-to-maturity investments | 2 | 3 | ||||
| Available-for-sale financial assets | 95 | 76 | ||||
| Financial assets carried at (amortized) costs | 7,221 | 6,429 | ||||
| Financial liabilities | ||||||
| Carried at fair value: | ||||||
| Derivative financial instruments | (857) | (857) | (1,029) | (1,029) | ||
| Financial liabilities carried at fair value | (857) | (1,029) | ||||
| Carried at (amortized) cost: | ||||||
| Accounts payable | (2,499) | (2,580) | ||||
| Interest accrual | (56) | (62) | ||||
| Debt (Corporate bond and finance lease) | (3,551) | (4,164) | (3,891) | (4,306) | ||
| Debt (Bank loans, overdrafts etc.) | (553) | (1,789) | ||||
| Financial liabilities carried at (amortized) costs | (6,659) | (8,322) |
| level 1 | level 2 | level 3 | total | |
|---|---|---|---|---|
| Balance as of June 30, 2015 | ||||
| Available-for-sale financial assets - non-current | 113 | 2 | 50 | 165 |
| Securities classified as assets held for sale | 1 | – | – | 1 |
| Financial assets designated at fair value through profit and loss - non-current |
25 | – | – | 25 |
| Derivative financial instruments - assets | – | 247 | – | 247 |
| Loans - current | – | 4 | – | 4 |
| Non-current loans and receivables | – | 87 | – | 87 |
| Receivables - non-current | – | 193 | – | 193 |
| Total financial assets | 139 | 533 | 50 | 722 |
| Derivative financial instruments - liabilities | – | (1,029) | – | (1,029) |
| Debt | (4,097) | (209) | – | (4,306) |
| Total financial liabilities | (4,097) | (1,238) | – | (5,335) |
| Balance as of December 31, 2014 | ||||
| Available-for-sale financial assets - non-current | 51 | 43 | 21 | 115 |
| Securities classified as assets held for sale | 1 | – | 37 | 38 |
| Financial assets designated at fair value through profit and loss - non-current |
24 | – | – | 24 |
| Derivative financial instruments - assets | – | 207 | – | 207 |
| Loans - current | – | 125 | – | 125 |
| Non-current loans and receivables | – | 86 | – | 86 |
| Receivables - non-current | – | 177 | – | 177 |
| Total financial assets | 76 | 638 | 58 | 772 |
| Derivative financial instruments - liabilities | – | (857) | – | (857) |
| Debt | (3,969) | (195) | – | (4,164) |
| Total financial liabilities | (3,969) | (1,052) | – | (5,021) |
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 2015 a EUR 121 million loan matured and has been repaid by TPV Technology Limited.
If one or more of the significant inputs are not based on observable market data, the instrument is 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.
Reconciliation of the fair value hierarchy in millions of EUR
| financial assets | financial liabilities | |||||
|---|---|---|---|---|---|---|
| Balance at December 31, 2014 |
58 | 0 | ||||
| Total gains and losses recognized in: |
||||||
| - profit or loss | 7 | |||||
| - transfer into level 3 | 13 | |||||
| - other comprehensive income |
(28) | |||||
| Balance at June 30, 2015 | 50 | 0 |
http://www.philips.com/investorrelations © 2015 Koninklijke Philips N.V. All rights reserved.
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