EX-15(B)

Exhibit 15 (b)

Annual Report to shareholders for 2009

See attachment.

Note: The Annual Report to Shareholders for 2009 (except for the omitted portions thereof identified in the following sentences) is furnished hereby as an exhibit to the Securities and Exchange Commission for information only. The Annual Report to Shareholders is not filed except for such specific portions that are expressly incorporated by reference in this Report on Form 20-F. Furthermore, the Sustainability performance on pages 215 through 233 of the Annual Report to Shareholders 2009 and the unconsolidated Company financial statements, including the notes thereto on pages 209 through 214 of the Annual Report to Shareholders, have been omitted from the version of such Report being furnished as an exhibit to this Report on Form 20-F. The Sustainability performance and Company financial statements have been omitted because Philips is not required to include in this Report on Form 20-F any portion of the Sustainability performance and unconsolidated Company financial statements.

Contents


	Performance highlights	4

	President’s message	6

1	Who we are	11
1.1	Our company	11
1.2	Our strategic focus	12
1.3	Our ambitions	14

2	Our strategy in action	15
2.1	Professional Healthcare	15
2.2	Home Healthcare	19
2.3	Healthy Life & Personal Care	23
2.4	Home Living & Interactive Living	27
2.5	Home Lighting	31
2.6	Professional Lighting	35

3	Our planet, our partners, our people	39
3.1	Climate change	39
3.2	Our environmental footprint	42
3.3	Partnerships for progress	45
3.4	Supplier sustainability	48
3.5	Working at Philips	51
3.6	Working in our communities	54

4	Our group performance	57
4.1	Management discussion and analysis	58
4.2	Liquidity and capital resources	68
4.3	Sustainability	74
4.4	Proposed distribution to shareholders	80
4.5	Outlook	81

5	Our sector performance	82
5.1	Our structure	82
5.2	Healthcare	84
5.3	Consumer Lifestyle	89
5.4	Lighting	95
5.5	Group Management & Services	100

6	Risk management	103
6.1	Introduction	103
6.2	Our approach to risk management and business control	103
6.3	Risk categories and factors	106
6.4	Strategic risks	107
6.5	Operational risks	108
6.6	Compliance risks	110
6.7	Financial risks	111

7	Investor information	120
7.1	The Philips investment proposition	120
7.2	The year 2009	121
7.3	Share information	123
7.4	Risk management	124
7.5	Performance in relation to market indices	125
7.6	Philips’ acquisitions	126
7.7	Financial calendar	126
7.8	Five-year overview	127

8	Our leadership	130
8.1	Board of Management	130
8.2	Group Management Committee	132
8.3	Supervisory Board	133

9	Supervisory Board report	134
9.1	Introduction	134
9.2	Corporate Governance and Nomination and Selection Committee report	136
9.3	Report of the Remuneration Committee	137
9.4	Report of the Audit Committee	141

10	Corporate governance	143
10.1	Corporate governance of the Philips Group	143
10.2	Board of Management	143
10.3	Supervisory Board	145
10.4	General Meeting of Shareholders	147
10.5	Logistics of the General Meeting of Shareholders	148
10.6	Investor Relations	149

IFRS basis of presentation

Philips moved to International Financial Reporting Standards (IFRS) as its sole accounting standard from January 1, 2009 onwards. The use of US GAAP has been discontinued per the same date.

The financial information included in this document is based on IFRS, unless otherwise indicated.

Forward-looking statements

Please refer to chapter 17, Forward-looking statements and other information, of this Annual Report for more information about forward-looking statements, third-party market share data, fair value information, IFRS basis of preparation, use of non-GAAP information, statutory financial statements and management report, and reclassifications.

Dutch Financial Markets Supervision Act

This document comprises regulated information within the meaning of the Dutch Financial Markets Supervision Act (Wet op het Financieel Toezicht).

Statutory financial statements and management report

The chapters Group financial statements and Company financial statements contain the statutory financial statements of the Company. The introduction to the chapter Group financial statements sets out which parts of this Annual Report form the management report within the meaning of Section 2:391 of the Dutch Civil Code (and related Decrees).

2 Philips Annual Report 2009

Performance highlights

Financial table

all amounts in millions of euros unless otherwise stated


	2007		2008			2009
Sales		26,793		26,385			23,189
EBITA¹⁾		2,094		744			1,050
as a % of sales		7.8		2.8			4.5
EBIT		1,867		54			614
as a % of sales		7.0		0.2			2.6
Net income (loss)		4,880		(92	)		424
per common share in euros
- basic		4.49		(0.09	)		0.46
- diluted		4.43		(0.09	)		0.46
Net operating capital¹⁾		10,802		14,069			12,649
Free cash flows¹⁾		824		773			863
Stockholders’ equity		21,741		15,544			14,595
Employees at December 31²⁾		123,801		121,398			115,924


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see the chapter Reconciliation of non-GAAP information

²⁾		Includes discontinued operations 5,703 at December 31, 2007

³⁾		Comprises of Western Europe, North America, Japan, Korea, Israel, Australia and New Zealand

⁴⁾		Comprises of Asia Pacific (excluding Japan, Korea, Australia and New Zealand) Latin America, Central & Eastern Europe, Middle East (excluding Israel) and Africa

4 Philips Annual Report 2009

President’s message

Dear stakeholder

Looking back at what was a testing year for Philips, I am very pleased with the progress we made in 2009. In the most challenging economic environment in decades, we acted swiftly and decisively to adjust our cost structure and working capital to market conditions — while continuing to invest in our future. We did this to make sure we emerge from the recession as a stronger company, well positioned to capitalize on future economic growth. The effects of our actions became increasingly visible in our earnings, our cash flow performance and our stronger position with customers, especially in the second half of the year.

Philips today is a simpler, more agile company. Compared to previous downturns, our new Health and Well-being portfolio proved its intrinsic quality and increased resilience through sustained profitability.

For the full year, comparable sales were down 11% on 2008. While Healthcare revenues were almost on par with 2008, Consumer Lifestyle saw the biggest drop in sales, due to a very weak consumer market and active portfolio pruning. Lighting rebounded strongly in the course of the year, though it continued to feel the impact of the ongoing decline in commercial construction. Emerging markets accounted for a steady 30% of revenues, with strong growth at Healthcare offsetting declines at Consumer Lifestyle.

EBITA as a percentage of sales rose from 2.8% to 4.5%. Our performance in the second half of the year reflected our proactive cost management and strong fundamentals, delivering an adjusted profitability of 9.9% for that period and a record 12.3% for a fourth quarter.

We tackled the recession without sacrificing our longer-term strategic ambitions. We continued to invest in marketing and innovation and to reallocate resources to emerging markets and high-margin, sustainable growth initiatives, while maintaining a strong balance sheet supported by robust operating cash flows. Examples include our acquisition of coffee-machine maker Saeco and the expansion of our Philips-branded stores for Consumer Lighting in China and India.

As a responsible corporate citizen committed to helping build a sustainable society, we continued to drive the implementation of our EcoVision programs. Green Products generated 31% of total sales, up from 23% in 2008, and our investment in Green Innovations is ahead of target to reach a cumulative EUR 1 billion by 2012.

As a sign of confidence in our future, we are proposing to the upcoming General Meeting of Shareholders to maintain this year’s dividend at EUR 0.70 per common share, in cash or stock — resulting in a yield (as of December 31, 2009) of 3.4% for shareholders.

How did we do against our Management Agenda 2009

Drive performance

Relentlessly manage cash

On the back of improved operating performance and strongly reduced working capital, we improved free cash flow to 3.7% of sales, more than offsetting the EUR 485 million cash-out for the final settlement of asbestos claims.

Proactively align cost structure with market conditions and increase productivity

We took swift action to adjust our cost structure to lower revenues. We substantially reduced our fixed costs through decisive but responsible actions to optimize our industrial footprint and organizational structure, and we tightly managed our discretionary expenses.

In 2009, in spite of 11% lower revenues, overall productivity improved by 5.6%, driven by the positive effect of our ongoing efficiency programs in all sectors. The restructuring and change programs across our sectors have put us in a stronger position, and we will continue to drive productivity improvement going forward.

Manage risks and opportunities in a balanced way to strengthen our market positions

In the face of the ongoing uncertainty, we focused on cash flow and profitability when making decisions regarding mix and pricing. Nevertheless we broadly managed to maintain our shares in the market, with gains for Healthcare and Lighting in emerging markets.

Philips Annual Report 2009 7

President’s message

At Healthcare, we strengthened our position in image-guided intervention with the acquisition of Traxtal. At Consumer Lifestyle, we extended our leadership in the market for coffee appliances into the high-growth high-margin espresso machine segment with the acquisition of Italian manufacturer Saeco. And at Lighting, we further reinforced our position across the solid-state lighting value chain, for instance through the acquisition of lighting controls companies Dynalite and Teletrol.

Accelerate change

Organize around customers and markets, thereby improving Net Promoter Score

In today’s highly competitive business environment, customer intimacy and flexibility are essential, and we are continually adapting our organization to the changing needs of the marketplace — in both mature and emerging economies. In 2009 this translated to a 9% improvement in our Net Promoter Score to 60% (co-)leadership, up from 51% last year.

Increase Employee Engagement to high-performance level and implement ‘Leading to Win’

Compared to 2008, our Employee Engagement Index fell one point to 68, two points short of our high-performance target of 70. Though disappointed by this slight decline, it is encouraging to see that our engagement levels remain high despite such difficult times, and have indeed improved in several of our businesses. In fact, the participation rate increased to 91%.

The Employee Engagement survey is a key element of ‘Leading to Win’, the new way our people are evaluated and rewarded at year-end, which we drove deeper into the organization in 2009. Employees are no longer assessed solely on what they achieve (results), but also on how they achieve it (behavior). ‘Leading to Win’ is designed to develop a strong customer and performance- oriented culture that encourages employees to strive for results, not just in their own area, but for Philips as a whole.

Accelerate sector transformation programs

In view of macro-economic developments, we accelerated planned initiatives to increase organizational effectiveness, lower our fixed and discretionary cost base and simplify our structure. Within Healthcare we focused on de-layering our management structure to increase our speed of execution and lower operating costs. We effected further changes in Consumer Lifestyle in our drive for strong market-focused execution. And within Lighting we organized our sales force along channels and applications while continuing to reduce our fixed cost base through various restructuring projects.

Implement strategy

Further build the brand in the Health and Well-being space

We continue to invest heavily in our key differentiators — our brand and our end-user-driven innovation and design. In 2009 we again improved our position in the annual Interbrand ranking of the top-100 global brands, rising to 42^nd place. This clearly demonstrates we are translating our brand promise of “sense and simplicity” into a positive customer experience designed around their needs.

Continue to re-allocate resources to growth opportunities and emerging markets, including selective mergers and acquisitions

Despite the recession, we sustained our investment in growth in 2009. One of our key endeavors was to step up our resource investment in emerging markets so that we are even better placed to meet the needs of local people — and to develop solutions for these countries that can also transfer to more mature markets throughout the rest of the world.

8 Philips Annual Report 2009

President’s message

We acquired a number of strategically aligned high-growth businesses in 2009. As outlined above, these included coffee machine maker Saeco, healthcare company Traxtal in the growth area of image-guided intervention and therapy, and Dynalite and Teletron, two specialists in lighting controls — technology that is key to the unfolding LED lighting revolution.

Increase revenue derived from leadership positions

In spite of worldwide market downturns, some 60% of our revenue was generated by businesses with global leadership positions in 2009.

Building the leading company in Health and Well-being

Based on fundamental customer and end-user insights, we integrate technology and design into people-centric solutions that deliver on our promise of “sense and simplicity”. We believe the current economic crisis is likely to have the effect of accelerating the fundamental trends underpinning our strategy, thereby intensifying demand for healthcare (especially outside the hospital), a healthy lifestyle and solutions with a better ecological footprint, such as energy-efficient high-quality lighting.

With strong leadership positions in both clinical and home healthcare, as well as a growing presence in emerging markets, we will continue to simplify healthcare by focusing on the people in the care cycle — patients and care providers — in order to improve patient outcomes while easing the financial pressure on the healthcare system.

Building upon market-leading positions based on differentiation and profitability rather than scale, we will also continue to focus on innovative lifestyle solutions that enhance consumers’ sense of personal well-being. Where appropriate, we will enter new value spaces.

And, supported by the growing demand for energy-saving solutions and the trend toward solid-state lighting, we will continue to drive the transition from lighting products to application-based solutions.

We have responded to the economic downturn by stepping up our efforts to become a more customer-focused, agile and simpler company. I remain confident we will come out of this difficult economic period as a leader in the field of health and well-being. We have the strategy, financial resources and human capital that are required for success. Clearly, aspiring to improve people’s health and well-being automatically implies that sustainability will remain integral to everything we do.

Management Agenda 2010

Our Management Agenda 2010 is our compass for the next year of our journey to bring “sense and simplicity” to health and well-being markets.

In the column Drive performance we stress the importance of returning to growth and increasing market share. At the same time, we must continue to manage cost and cash aggressively, as that is essential to enable healthy growth.

Under Accelerate change we have made the empowerment of our people in local markets and customer-facing staff a key priority, so that we can help our customers more quickly and effectively and thus gain a competitive edge. Increasing the number of Philips promoters and driving engagement levels remain crucial objectives.

As well as referring to key strategic initiatives in our sectors, the final column, Implement strategy, reaffirms our vital ambition to strengthen our position in emerging markets and the importance of leveraging sustainability as an integral part of our strategy and an additional driver of growth.

Final thoughts

In the current climate we cannot reliably predict future developments. Visibility beyond the short term remains low. However, we are very confident about our prospects when the economy does recover.

We have a portfolio of strong businesses that provide innovative, simplicity-led solutions to many of the issues associated with important global trends — the demand for affordable healthcare, the desire for personal well-being and the need for greater energy efficiency.

We have a solid balance sheet and a good cash position, an increasingly strong brand and leading market positions, especially in emerging markets, as well as a committed, highly motivated workforce.

We will continue to stay focused on cost and cash flow and to act decisively to capture growth opportunities. I believe 2010 will be a year of solid progress towards our EBITA profitability target of 10% or better. During the past 12 months we have rigorously managed cash and cost while retaining the capability to ramp up production to meet demand when sales do rebound. Across our sectors we have substantially lowered our fixed costs and our break-even point. At the same time, we continue to invest in emerging markets and acquisitions while maintaining our spending on innovation and marketing.

Philips Annual Report 2009 9

President’s message

We have weathered the storm and prepared the ground for a future of profitable growth. Going forward, I am convinced that relentless focus on our customers’ needs, along with rigorous execution of our strategy, will enable us to realize our ambition of becoming the leading company in Health and Well-being.

In conclusion, I would like to thank our customers and suppliers for their loyalty and support in these tough economic times. Once again, our employees — including those from our 2009 acquisitions — have responded to adversity with resilience and creative endeavor. Their efforts are greatly appreciated.

Finally, on behalf of the entire Board of Management, I would like to thank our shareholders for their continuing support. They can rest assured that we remain fully committed to increasing the value of their investment.

Gerard Kleisterlee, President

Management Agenda 2010

The leading company in Health and Well-being

Drive performance

•		Drive top-line growth and market share

•		Continue to reduce costs and improve cost agility

•		Further increase cash flow by managing cash aggressively

Accelerate change

•		Increase customer centricity by empowering local markets and customer facing staff

•		Increase number of businesses with NPS (co-) leadership positions

•		Increase employee engagement to high performance level

Implement strategy

•		Increase our market position in emerging markets

•		Drive key strategy initiatives for each sector

•		Leverage Sustainability as an integral part of our strategy

10 Philips Annual Report 2009

1 Who we are 1.2 - 1.2

^1.2 Our strategic focus

Philips is a global company which delivers meaningful innovations that improve people’s health and well-being.

Our health and well-being focus extends beyond our products and services to include the way we work: engaging our employees; focusing our social investment in communities on education in energy efficiency and healthy lifestyles; reducing the environmental impact of our products and processes; and driving sustainability throughout our supply chain.

Our health and well-being offering is powered by our three sectors: Healthcare, Consumer Lifestyle and Lighting.

Meeting people’s needs with “sense and simplicity”

People’s needs form the starting point for everything we do. By tracking trends in society and obtaining fundamental insights into the issues people face in their daily lives, we are able to identify opportunities for innovative solutions that meet their needs and aspirations.

Our “sense and simplicity” brand promise expresses a commitment to put people at the center of our thinking, to eliminate unnecessary complexity and to deliver the meaningful benefits of technology. Our adoption of Net Promoter Score (NPS), which measures people’s willingness to recommend a company/product to a friend or colleague, shows how we are doing in this respect.

Capturing value in mature and emerging markets

Despite the global financial and economic crisis, we still see enormous potential in both mature and emerging markets, and we apply our competence in marketing, design and innovation to capture value from major economic, social and demographic trends.

These include the need of a growing and longer-living population for more and affordable healthcare, the demand for energy-efficient solutions to help combat climate change and promote sustainable development, the emergence of empowered consumers with high health and well-being aspirations, and, last but not least, the growing importance of emerging markets in the world economy.

We have a long-established presence, strong brand equity and large workforce in the emerging economies. This gives us the home-grown insights needed to produce sustainable solutions that meet the needs of local people. We already realize one-third of our sales in the emerging markets, and this figure could conceivably rise to around 50% by the middle of this decade. In order to capture the growth opportunities that are available, we continue to invest in building our local organizations, competencies and resources in these markets.

The current economic crisis is likely to have the effect of accelerating the fundamental trends outlined above, increasing demand for healthcare (especially outside the hospital), a healthy lifestyle and energy-efficient high-quality lighting.

Building the leading company in Health and Well-being

Delivering on our promise of “sense and simplicity”, our sectors deliver solutions that create value for our customers — healthcare and lighting professionals and end-consumers.

People-focused, healthcare simplified

In Healthcare, we are building businesses with strong leadership positions in both professional and home healthcare, as well as a growing presence in emerging markets. We simplify healthcare by focusing on the people in the care cycle — patients and care providers — rather than technologies or products. By combining human insights and clinical expertise, we deliver innovative solutions that help improve patient outcomes while lowering the financial burden on the healthcare system.

Enabling people to enjoy a healthy lifestyle

The pursuit of personal well-being is a universal trend, equally relevant in mature and emerging markets. With a strong market-driven, insight-led culture, coupled with technological expertise and excellent design, Consumer Lifestyle focuses on innovative lifestyle solutions that enhance consumers’ sense of personal well-being. With simplicity providing our competitive edge, we continue to build upon existing market-leading positions based on differentiation and profitability rather than scale, as well as entering new value spaces.

Simply enhancing life with light

Supported by the growing demand for energy-saving solutions and the structural shift toward solid-state lighting, our Lighting sector is strengthening its global leadership in fast-growing areas, such as LEDs and energy-efficient lighting, by driving the transition from products

12 Philips Annual Report 2009

1 Who we are 1.2 - 1.2

and components to life-enhancing applications and solutions. Our strong IP position across the LED value chain will further reinforce this leadership.

One Philips focus on Health and Well-being

Synergies across the portfolio

One mission

Improving people’s lives

One promise

“sense and simplicity”

One company

-		Common, end-user-driven innovation process

-		Strong global brand

-		Channel access and global presence

-		Engaged workforce

-		Technology, know-how and strong IP positions

-		Economies of scale, e.g. shared service centers

Strategic priorities

We have simplified our organization, tightened our focus and defined six platforms — Professional Healthcare, Home Healthcare, Healthy Life / Personal Care, Home Living / Interactive Living, Home Lighting and Professional Lighting — all with drivers for growth.

Together, these six platforms create a coherent portfolio. We see many opportunities to leverage capabilities and synergies across the platforms, as they are united in different combinations by customer segments, channels, key processes and capabilities, and technology platforms.

For the coming period we have set the following strategic priorities:

•		Increase our market position in emerging markets

•		Drive key strategy initiatives for each sector:

	-		Move towards leadership position in imaging

	-		Grow Home Healthcare

	-		Grow Health & Wellness

	-		Manage TV to profitability

	-		Become the lighting solutions leader in Outdoor

	-		Grow Consumer Luminaires

	-		Optimize the lamps lifecycle

•

Leverage Sustainability as an integral part of our strategy

Achieving our objectives

Our goals have become even more challenging with the economic downturn. We intend to realize our ambitions by continuing to focus relentlessly on people’s needs and aspirations. This means:

•		creating meaningful innovations based on validated user insights

•		developing and maintaining strong relationships with our customers

•		nurturing talent and unlocking the full potential of our own highly engaged Philips people, as measured by our Employee Engagement Index.

Any strategy is only as good as its execution. We believe that if we maintain our focus and continue to execute swiftly and decisively, we will succeed in making Philips the leading company in Health and Well-being.

Philips Annual Report 2009 13

In Healthcare we continue to pursue small, tuck-in acquisitions to support our focused growth initiatives.

Image-guided intervention and therapy is a natural extension of our imaging business and bridges our care cycle strengths in diagnosis and management. In 2009 we announced the acquisition of Canada-based Traxtal, an innovator in the field of minimally invasive instruments and software for image-guided intervention and therapy. Traxtal’s soft-tissue navigation solution functions as a GPS for medical instruments, making interventional radiology procedures more accurate while aiming to reduce contrast, radiation dose and intervention time. Coupled with our strong position in medical imaging, this acquisition has made Philips one of the leading solution providers for image-guided procedures.

“The acquisition of Traxtal opens up great opportunities for further cutting-edge, minimally invasive intervention and therapy solutions in combination with our other leading diagnostic and imaging products in Ultrasound, CT and MR,” said Steve Rusckowski, CEO of Philips Healthcare.

Expanding emergency healthcare offering

In 2009 we also acquired US-based InnerCool Therapies, a leader in body temperature management. “This transaction will allow us to broaden our offering in emergency care, and also enable us to provide leadership in promising future applications which could further preserve heart and brain tissue in the event of Sudden Cardiac Arrest,” said Steve Rusckowski.

16 Philips Annual Report 2009

Rising wealth and population growth will dramatically increase demand for quality healthcare in emerging markets. We have reinforced our healthcare presence and growth ambitions in these markets.

Over the last five years we have extended our industrial and commercial footprint in the emerging markets by acquiring several companies and establishing a manufacturing joint venture. We see a clear need for both state-of-the-art equipment and value products. For example, in 2009 we sold more of our cutting-edge iCT scanners in China than in any other country. At the same time we are leveraging our supply chain capabilities in China, India and Brazil to enrich our portfolio of value-priced products and services adapted to local needs. We have now introduced more than 10 new healthcare systems — across several modalities — that we built locally and sell globally.

Localize care cycles and care settings

Emerging markets are set to become the chronic disease centers of the world. By 2015, China and India will be the largest cardiac markets, and by 2020 three-quarters of all cancer deaths will occur in emerging markets. Our focus is on cardiology, oncology and women’s health.

New business models

We are also developing new services and business models — including unique financial, clinical and turnkey solutions — to help local care providers address the specific and often complex healthcare challenges in their markets.

Investing in the future

Our new imaging systems campus in Suzhou, which will manufacture our value range CT and MR systems, reflects Philips’ commitment to gain leadership in the imaging market, particularly in China. In India, we plan to set up a plant for the manufacture of cardiovascular and general X-Ray systems to cater to healthcare infrastructure needs of smaller hospitals and care providers in that country. And we will continue to leverage small local-for-local and local-for-global acquisition opportunities for supply chain, product portfolio and channel improvements.

Philips Annual Report 2009 17

Our Healthcare Solutions group helps care providers to meet the challenges of modern healthcare, thereby enabling better care at lower cost.

Today’s hospitals face multiple challenges. How to provide enhanced services without increasing the burden on a system that is already pushed to its limits? How to make care cost-effective at a time when the cost of healthcare is rising? How best to use resources and support front-line staff to reduce errors and improve quality of care?

Enabling quality healthcare

Philips Healthcare Solutions helps care providers manage the uncertainty surrounding the investments, resources and technology that are so vital to quality healthcare provision. Extending far beyond the supply of equipment, our portfolio of healthcare services includes finance solutions (MediGo), turnkey project solutions (MediQuip) and managed services (MediServ). These allow hospitals to plan, implement and manage their long-term technology provision with solutions tailored to their specific needs, thereby meeting clinical expectations and business and operational imperatives. This leaves them free to concentrate on what matters most — their patients.

Benefits all round

We help our clients increase their return on investment through cost reductions and improved process efficiencies. And by keeping them up to date with the most modern and innovative medical technologies, we help them achieve faster patient throughput, cutting cost per patient and reducing the number of units and staff required to service patients. For patients, this translates to shorter waiting times, fewer rescheduled appointments, faster examinations and less anxiety associated with the care process.

2009 highlights for Philips Healthcare Solutions included projects in Mexico, Spain, India, China, Japan and the Philippines.

18 Philips Annual Report 2009

With an estimated 80% of sleep apnea sufferers still undiagnosed, we see excellent opportunities to improve patient health and reduce the cost of healthcare.

Lack of sleep has a significant impact on health and well-being and has been associated with diminished cognitive performance and vigilance, weight gain, insulin resistance (diabetes), increased incidence of heart attacks, decreased immune function and shorter life expectancy.

Drawing upon our home healthcare strengths and scientific knowledge in the field of sleep, as well as our access to professional channels, we are uniquely positioned to address this near-epidemic problem with scientifically based sleep management solutions.

New sleep therapy platform

Our Philips Respironics Sleep Therapy System uses advanced intelligence to deliver optimum care while making patient management easier for our provider customers. Customer input was a key element in the development of this new platform, delivering an even higher level of sophistication in sleep therapy for Obstructive Sleep Apnea. Through advances in software algorithms, humidification management and the marriage of proven technologies, the Sleep Therapy System thinks for itself, carefully monitoring patients and recognizing when therapy needs are changing.

20 Philips Annual Report 2009

More and more patients require oxygen, ventilation or nebulization therapy at home. What better example of our health and well-being focus than simply helping them to breathe?

Chronic diseases account for 70% of all deaths in the US and consume 75% of US healthcare expenditure. Worldwide, they represent 60% of all deaths, and the percentage is growing as developing nations begin to develop greater incidences of ‘western’ diseases. In the home respiratory market there is an increased incidence of chronic diseases like COPD, asthma, etc., resulting in more patients requiring dedicated respiratory treatments at home.

Making life more livable

We enjoy market leadership in home respiratory care, including oxygen-generation products for the ambulatory patient, home ventilation and airway clearance devices. Solutions like our new Trilogy100 portable at-home life-support ventilator are designed to be simple to use and live with, as well as providing clinically effective therapy. Patients who use them often experience greater freedom, mobility and independence in their daily lives.

When developing the Trilogy100 ventilator, we focused on areas for clinicians and caregivers that are most important in delivering home respiratory care — ease of use, versatility and portability. The integration of the three makes Trilogy100 a significant advancement in home respiratory care.

Philips Annual Report 2009 21

With demand for care outgrowing the number of healthcare practitioners, we are partnering in innovation to help patients better manage their health at home.

Globally, fewer care professionals are having to handle more patients, in less time and at a lower cost. In 2009, Philips and Achmea Health, the Netherlands’ largest healthcare insurer, signed a five-year agreement to cooperate on the development of innovative care solutions that will enable chronic disease sufferers to manage their health at home, reducing the need for hospital stays.

Insight-based solutions

“The insights of patients and healthcare professionals captured by Achmea Health are an important tool for us in our efforts to develop solutions that genuinely meet people’s needs,” commented Walter van Kuijen, General Manager Home Monitoring, Philips Healthcare.

“This will not only benefit patients: by reducing the number of hospital stays and shortening those that do take place, the burden on the healthcare system can also be reduced. In the long term we believe that this approach will enable us to reduce the costs of health insurance for our customers,” added Roelof Konterman, Chairman of the Board of Management of Achmea Health.

22 Philips Annual Report 2009

With Sonicare For Kids, we are driving growth in our Oral Healthcare business while helping youngsters toward a lifetime of good oral health.

It’s a daily challenge for parents everywhere — how do you make sure your children clean their teeth properly? We all know it’s essential that children develop effective brushing habits early. So, to help meet this goal, we have launched Sonicare For Kids.

A true case of “sense and simplicity"

“In developing Philips Sonicare For Kids, we combined our patented sonic technology with kid-friendly features to create a toothbrush that delivers maximum effectiveness for children at every age, whether they can brush by themselves or need parental help,” explains Vivienne Palmer, Marketing Manager, Philips Sonicare.

Sonicare For Kids is designed for children aged four to ten. It has an innovative ‘KidTimer’ that helps children reach the recommended two-minute brushing time by progressively increasing brushing time over 90 days. Plus, there are fun musical tones to indicate when it’s time to move to another section of the mouth. The ergonomic handle fits easily in a small hand and has two gripping locations so that the parent can hold the brush with the child to start with and then the child can hold it on its own for independent brushing.

24 Philips Annual Report 2009

To make a difference in emerging markets we have to focus even more on understanding local needs and adapting our portfolio to address these needs.

Consumer needs, spending power and many other important factors are often different in the emerging markets than in the mature markets. And the emerging markets themselves differ from each other. Key to success is the ability to attract, develop and retain talent in our emerging markets, improving the transfer of know-how and increasing our speed in adapting to fast-moving market conditions.

Making cooking a joy — every day

Our Healthy Variety rice cooker demonstrates our commitment to addressing emerging market needs in a manner true to “sense and simplicity”. Fully run by local talent with a deep understanding of consumer needs, the proposition addresses the dilemma experienced by many consumers who are looking for inspiration and guidance when cooking.

The Healthy Variety rice cooker offers Chinese consumers not only cooking inspiration, but also a new user experience in navigation. It is the world’s first rice cooker to provide visual and audio step-by-step guidance, and bundles a nest of dedicated accessories for consumers to enjoy 30 different cooking experiences.

Philips Annual Report 2009 25

We are building a platform for technology-enabled personal health management — making it easier for people to get active, fit and healthy.

Modern life, with all its conveniences, also has its challenges. The technology that helps us fit more into a day also renders us less physically active. Collectively, as our activity level goes down and our weight up, there are dangerous consequences: cancer and heart disease, already the two most common and deadly diseases, are on the rise.

Most of us know we need to be more active, but how do we find the time, energy and motivation? Our DirectLife program could be the answer.

Innovative new approach to fitness

DirectLife is “sense and simplicity”, quite literally, “in action”. It combines smart technology with proven coaching methods to make our busy lifestyles more active. And it creates awareness on how active you are and helps you set balanced and achievable goals to increase your daily activity levels.

The discreet, wearable Activity Monitor records your daily movements and transfers the information to a webpage that keeps track of your progress against your longer-term goals. It motivates, gives feedback and provides support to help people make sustainable changes in their lifestyles. It focuses on making everyday life more active, rather than expecting people to have dedicated times at which they work out, play sports or exercise.

26 Philips Annual Report 2009

The ground-breaking Cinema 21:9 television reflects our ambition to enable consumers to share pleasurable life experiences — free of any restrictions.

We don’t just watch films at the cinema, we experience them. The 21:9 aspect ratio of a cinema screen was developed to mimic our own peripheral vision, providing a totally immersive viewing experience. Such is its power that we frequently ‘lose ourselves’ when watching a film in a cinema.

Films fill a cinema screen. The images reach right out to the very limits of the screen and of our peripheral vision, enveloping us so completely in the action that we actively ‘feel’ along with the characters in front of us. This cannot be achieved on a conventional 16:9 widescreen TV at home without moving to a ‘letterbox’ view or losing the full scope of the original shot.

World premiere

With a 21:9 aspect ratio, our Cinema 21:9 — introduced at the 2009 IFA in Berlin — is the world’s first cinema-proportioned LCD TV. In combination with Ambilight technology, which accurately matches on-screen content to extend the picture beyond the confines of the screen, Cinema 21:9 is the first TV to deliver a genuine cinematic viewing experience to movie lovers in their own home.

Cinema 21:9 was named European Home Theater Innovation 2009-2010 (along with our BD9100 Blu-ray player) by the European Imaging and Sound Association.

28 Philips Annual Report 2009

Saeco acquisition allows Philips to expand in the high-growth, high-margin espresso machine market with a strong range of products.

In July 2009 we closed the acquisition of Saeco International Group S.p.A. of Italy, one of the world’s leading espresso machine makers. The espresso machine segment is generally regarded as the most valuable market space within the global coffee appliances market, as it typically achieves double-digit sales growth and profit margins.

The acquisition of Saeco has significantly boosted Philips’ coffee machines business, which already held a leading position in drip-filter and single-serve (Senseo) products, by adding an exciting and technologically advanced range of espresso-making solutions.

“Through this acquisition, we are creating a new, dynamic market leader in coffee machines with excellent growth prospects for the future,” commented Andrea Ragnetti, CEO of Philips Consumer Lifestyle. “The enjoyment of quality coffee, along with the pleasant and positive experience this can create for consumers, ties this acquisition to the very heart of Philips’ strategy to become the leading company in Health and Well-being. At the same time, the acquisition of Saeco is a real step forward in further positioning the Consumer Lifestyle sector for the future.”

Philips Annual Report 2009 29

Air treatment is a fast-growing market, especially in China. We aim to become the trusted brand for air purification.

A simple breath keeps us alive. Yet in this single breath, we take in more than just life-giving oxygen. In the course of a day, we may inhale up to two tablespoons of airborne particles, including allergens such as pollen and mold spores, pet dander and dust mite by-products. Figures released by the World Health Organization in 2007 claimed that in a number of countries — including several emerging economies — indoor air pollution is responsible for a total of 1.2 million deaths a year. As children breathe up to twice as much air as adults, they will inhale even higher levels of airborne contaminants and are even more exposed to acute respiratory conditions.

In emerging markets like China, people living in cities face the same indoor air pollution issues as anywhere else, but the expanding economy has created additional environmental challenges as a result of, for example, things like construction projects and increased car ownership.

Taking control of air quality

To combat this problem, we have developed the Philips Clean Air System, which removes all allergens, odors and gases, reducing exposure to particles that may cause allergic reactions. A simple solution families can rely on — filling the room with fresh, healthy air.

30 Philips Annual Report 2009

In 2009 we introduced a complete range of energy-efficient LED light bulbs for the home — another milestone in establishing leadership in solid-state lighting.

September 2009 saw the start of the phase-out of incandescent lamps within the European Union, a move that will significantly reduce energy consumption and carbon emissions.

We have developed a host of alternative solutions that help consumers achieve the desired ambience in their home while still cutting their electricity usage. These include — for the first time — an extensive selection of attractive LED light bulbs. Consumers no longer have to compromise on style, quality and contemporary home ambience in order to save energy.

Elegance and efficiency

The uniqueness of our LED lamp range lies in the combination of beautifully designed lamps for standard-type fittings and the quality of lighting that people want in their homes, whether for functional or ambient lighting. And the lamps last up to 25 times longer than incandescent bulbs while consuming only a fraction of the energy! They pay for themselves in as little as 18 months — meanwhile, the contribution to the environment starts right away.

32 Philips Annual Report 2009

In China and India we are using new, customer-centric approaches to make sure we fully meet consumers’ lighting needs.

In China we have opened 80 Philips-branded lighting stores that uniquely address customer demand for energy-efficient, value-added lighting solutions for the home. The interior layout is based on rooms in the home rather than product categories. We also have 800 Home Lighting Centers within multi-branded lighting shops, extending distribution even further. Both formats will be further rolled out in 2010.

In order to reach the Indian consumer, we have developed the customer-centric concept of Light Lounges — experience centers that show Philips solutions in home decorative lighting and offer consumers a unique ‘see, touch and feel’ experience. In addition to these special Light Lounges in shopping malls, on high streets and at stand-alone locations, we are also partnering with retailers to create shop-in-shop sales outlets. By year-end 2009 we had 28 Light Lounges and 125 shop-in-shop outlets in 28 cities across India, with many more planned for 2010.

Philips Annual Report 2009 33

In 2009 we unveiled the first-ever OLED-based interactive lighting concepts for both consumer and professional applications — the next phase in the solid-state lighting revolution.

An OLED (organic LED) is an extremely flat, lightweight panel. When switched off, it resembles a mirror. But as soon as current is applied, the whole panel lights up, dispersing a gentle glow of light. OLED technology is complementary to, not a replacement for, point-source LED technology and is now entering the stage that it can be turned into meaningful applications.

Beyond illumination

“Our OH...LED! concepts demonstrate a new light ambience, novel design possibilities and unique interactivity of light and human gesture,” says Rudy Provoost, CEO of Philips Lighting. “Economic and environmental concerns are driving all of us to make the move to cleaner, more energy-efficient solutions as quickly as we can. What’s particularly exciting is that LEDs and OLEDs offer the possibility to create new lighting designs and experiences that weren’t achievable in the past. With these new concepts Philips is adding a whole new dimension to lighting and the way it can enhance people’s lives.”

34 Philips Annual Report 2009

In 2009, a number of acquisitions reinforced our transformation from a product champion to a provider of application-based solutions.

Over the past few years we have been taking careful and deliberate steps to position ourselves to deliver across the lighting value chain, especially in solid-state. We have not acquired these businesses simply to expand. We have set out to capture value in specific market segments by offering total solutions.

Creating and controlling attractive, sustainable environments

In 2009 we acquired lighting controls businesses Dynalite (Australia) and Teletrol Systems (US), allowing us to capitalize on the trend toward solid-state lighting and the demand for greater energy efficiency. One of the primary benefits of lighting controls is their ability to monitor and manage lighting (and connected) resources — enabling energy savings of around 50%. At the same time, they can enhance the ambience and comfort of an indoor or outdoor environment.

Architectural lighting

We also acquired Italy-based llti Luce, one of Europe’s leading LED design companies for architectural indoor lighting, and luminaire manufacturer Selecon of New Zealand, which makes specialist luminaires for the entertainment and high-performance architectural lighting market.

36 Philips Annual Report 2009

The growing demand for energy-efficient lighting presents an opportunity to expand our business with value-added services.

With growing awareness of the savings they can make by switching to energy-efficient lighting solutions — not to mention the increasing legislative pressure to do so — many customers want to replace their installed base. And with new construction and infrastructure limited by financing constraints, the renovation opportunity is tremendous. Philips can leverage this trend through new ways of going to market, such as energy services — ranging from energy audits to full-fledged consultancy and systems integration.

Philips Lightolier Energy Services Group’s comprehensive toolbox encompasses energy audits, upgrades and full turnkey solutions. Recent projects include the Weyerhaeuser King County Aquatic Center, Washington. The problems of high energy and maintenance costs, antiquated system appearance and inadequate light levels were resolved by changing to new Wide-Lite arena fixtures and a Lightolier controls package to utilize programmability and daylight harvesting. The result? Annual energy savings of over USD 60,000.

First-of-its-kind audit and upgrade program

As of 2009, the Energy Services Group is leading an unprecedented commercial energy audit and lighting upgrade program aimed at replacing inefficient lighting systems currently found in 85% of existing buildings. A key element of the program is a contractual guarantee that the energy audit will deliver measurable energy cost reduction, defined projected return on investment, and itemized economic payback, among other benefits.

“It’s important to note that we are improving the quality of light at the same time as helping a building become more energy-efficient,” said Zia Eftekhar, CEO, Philips Lightolier. “We know that reducing energy use and operational costs cannot come at the expense of properly illuminating the facility, and we believe we are in the unique position to deliver both efficiencies and quality of light.”

Philips Annual Report 2009 37

Outdoor lighting can play a vital role in enhancing the quality of urban life, making cities safer and more enjoyable to live in and visit.

Municipal authorities the world over are embracing the benefits that energy-efficient outdoor lighting has to offer in making their towns and cities more attractive and sustainable.

Of course, safety, security and orientation remain essential requirements. But now, with its flexibility and scope for dynamics, outdoor lighting can also be used to enliven, entertain and captivate — making it an extremely effective image builder for any city.

Grand Canal, Hangzhou

Running from Hangzhou in the south of China to Beijing in the north, the Grand Canal — 1,764 km in length — is the world’s longest man-made waterway. In combination with the natural hydrosphere, our floodlighting solutions create a beautiful, soft lighting ambience — icy blue in winter and blue-green in summer — impressing city residents and visitors alike. The Grand Canal lighting project has created an impactful landmark for Hangzhou, reinforcing the city’s identity as a whole.

The project came second at the 2009 city.people.light awards, an annual competition organized by the Lighting Urban Community International Association (LUCI) and Philips to reward projects which demonstrate the contribution lighting can make to the well-being of those visiting or living in a city or town.

38 Philips Annual Report 2009

To combat climate change, Philips calls upon mayors and municipal leaders to accelerate sustainability in infrastructure projects and building renovation.

We believe there is opportunity for a robust and comprehensive follow-up agreement to the Kyoto Treaty, with existing technology solutions offering an achievable path to reducing harmful emissions.

At the UN climate conference in New York, Philips CEO Gerard Kleisterlee said: “If an ambitious and effective global climate change program can be agreed, it will create the conditions for transformational change of our world economy and deliver the signals that companies need to speed up investment of billions of dollars in energy-efficient products, services, technologies and infrastructure such as LED lighting technology.”

We put weight behind this appeal by partnering with the World Green Building Council, committing to improving the energy efficiency of cities by 40% in the next 10 years.

Transforming the global market

Along with OSRAM we are participating in a global initiative to accelerate the uptake of low-energy light bulbs and efficient lighting systems by the Global Environment Facility and the United Nations Environment Programme.

The aim is to reduce the bills of electricity consumers in developing economies while delivering cuts in emissions of greenhouse gases. The goal is also to replace fuel-based lighting systems, such as kerosene, which are linked with health-hazardous indoor air pollution.

Breakthrough idea

We submitted the first entry in the US Department of Energy’s L Prize competition, which seeks high-quality, high-efficiency solid-state lighting products to replace the 60W incandescent light bulb. Named one of the “best inventions of 2009” by TIME Magazine, our LED bulb emits the same amount of light as its incandescent equivalent but uses less than 10W and lasts for 25,000 hours — or 25 times as long.

40 Philips Annual Report 2009

Philips is working to help the Indonesian government meet its goal to reduce global warming caused by excessive energy consumption.

With economic growth of 5-6% annually, Indonesia faces the challenge of fast-rising domestic energy demand with declining oil and gas production. Encouraging the simple switch to energy-efficient lighting can help ease that pressure, particularly in the country’s kampongs, villages with native houses.

Knowing that 60% of the people in the world’s fourth most populous nation live in kampongs where inefficient costly-to-operate traditional lighting is still used, we launched the Philips Bright Energy Saving Kampong program.

A helping hand

Our employees volunteer to explain the advantages of energy-efficient lighting: brighter light, enhanced safety, and reduced electricity bills and CO₂ emissions. During 2009 we educated villagers in 50 kampongs across Java, Sumatra, Kalimantan and Sulawesi to become Bright Energy Saving Kampongs. We also provided 1,000 energy-saving lamps for each village and 100 fluorescent lamps for public facilities like roads, schools and town halls, and offered support during the switchover.

Simply a success

Sukamaju village is just one kampong enjoying the benefits of this program. One of those benefits is that the new brighter lighting is safer for midwives who no longer have to travel in the dark. Plus, electricity bills dropped a hefty 33%.

Philips Annual Report 2009 41

Philips is dedicated to improving the ecological performance of its products and processes, setting stretch targets to meet these challenges.

With our EcoVision4 program we focus on energy and material efficiency over the entire product lifecycle, as well as in our daily operations. By 2012, Philips will generate 30% of total revenues from Green Products, have doubled investment in Green Innovations to a cumulative EUR 1 billion, and improved our operational energy efficiency by 25% and reduced CO₂ emissions by 25%, all compared with the base year 2007.

Green Products

In the third year of EcoVision4, Green Products already represent a significant share of our revenues in all the markets we serve. In fact Green Products grew 19% in 2009, during a time of declining overall sales. To raise the bar we are going beyond our original target, aiming for 50% in 2015.

We use the Philips Green logo to identify an increasing number of our Green Products. To further increase awareness and encourage individuals to make smart daily choices, we relaunched our asimpleswitch.com website.

Green Innovations

Because sustainability is a strategic innovation driver for Philips, we regularly review our research portfolio from a sustainability angle. A few examples: the world’s first OLED (Organic Light-Emitting Diode)-based, interactive lighting concepts for consumer and professional use; TVs that carry the EU Ecolabel; and our DoseWise radiation management that ensures optimal image quality while protecting people in X-ray environments.

Operational energy efficiency

2009 saw a step change in our efforts to reduce operational CO₂ emissions. In addition to continuing our systematic Energy Potential Scans, green lease car policy and global green IT program, new initiatives include a green purchasing policy and investigating options to buy and generate renewable energy.

Philips Annual Report 2009 43

We are committed to continuously improve the ecological performance of our products throughout their lifespan.

Knowing that our influence on the environmental performance of our products does not end at the time of sale, we are focused on effectively managing collection and recycling initiatives; exploring the concept of Cradle to Cradle, searching for innovative products, processes and services that (re)use materials effectively; and protecting human health and the environment through earlier identification and targeted phase-out of certain chemical substances.

Collection and recycling

We consider end-of-life during our EcoDesign process and are active in improving the environmental performance of collection and recycling compliance schemes, particularly in the EU. We expanded the voluntary collection and recycling services started in 2008 in India and Brazil, and also launched them in Argentina during 2009.

Philips supports the development of Waste Electrical and Electronic Equipment (WEEE) legislation that creates a level playing field based on fair and transparent financing mechanisms, and stimulates maximum collection and responsible recycling. We support the general concept of Individual Producer Responsibility and collaborate with stakeholders to find practical and fair solutions for its implementation. We also support legislative processes in countries like India and China, and we signed a Memorandum of Understanding in Thailand supporting WEEE legislation.

Cradle to Cradle

We launched our first Cradle to Cradle-inspired product, the Performer Energy Care vacuum cleaner, made partly from recycled and bio-based plastics.

Chemical content of products

To support EU REACH (Registration, Evaluation, Authorization and Restriction of Chemical) compliance, Philips participated in developing ‘Bill of Material (BOM) check’, an industry platform for suppliers to provide chemical information on the items they sell. BOMcheck also facilitates RoHS (Restriction of the use of certain Hazardous Substances in electrical and electronic equipment) compliance. By providing full material declaration, BOMcheck also supports EcoDesign and our phase-out of BFRs and PVC in consumer products. Following a pilot in 2009 we plan a full roll-out to suppliers in 2010.

44 Philips Annual Report 2009

Philips and Project HOPE are partnering to improve chronic disease management and patient outcomes in China, and reduce the burden on the country’s healthcare system.

Launched in Shanghai, Beijing, Guangzhou and Wuhan, this program is the first of its kind to target three chronic disease areas in China: heart disease, stroke and respiratory disease. It will link leading hospitals, community healthcare centers and home-based rehabilitative services in those four cities to enhance the care patients receive locally.

Chronic diseases are major causes of death and disability in China, and their related healthcare services account for a significant portion of total healthcare expenditures. On average, chronic disease patients visit doctors three times a year. About 55% of them choose municipal hospitals, which are relatively crowded, inconvenient and expensive, while only 25% choose community healthcare centers.

Sharing expertise, providing affordable care

“By participating in the program, we hope to transfer our clinical expertise to community healthcare centers and enhance communication between big hospitals, secondary hospitals and community healthcare centers,” says Professor Deng Weiwu, Chief Physician, Honorable Director, Institute of Ruijin Infectious and Respiratory Diseases, Shanghai Jiao Tong University School of Medicine.

“Under the new integrated model, patients will receive better education for self-care and risk factor reduction, in addition to easy access to more efficient and affordable care at community healthcare centers,” he explains.

Philips will provide funding and technical support to this three-year program, announced in June 2009. Project HOPE (Health Opportunities for People Everywhere) will bring to the team more than 50 years of experience in international public health and developing healthcare training programs.

46 Philips Annual Report 2009

We are making affordable, high-quality energy-efficient lighting available to people living without electricity.

To meet the basic need for lighting it is essential that governments and international institutions, NGOs and companies like Philips work together. That’s why we have a public-private partnership with the Dutch government. Known as SESA (Sustainable Energy Solutions for Africa), this initiative is designed to provide affordable, appropriate and sustainable energy-saving solutions to off-grid consumers in sub-Saharan Africa. We also support projects with NGOs like World Vision and Light Up The World (LUTW).

We presented our Uday Mini Solar lantern in September to the Dutch government as part of our SESA program. Developed in India, this robust product features enhanced battery and lamp life, fast battery charging and portability — all based on insights from rural consumers. The first SESA pilot was launched in Ghana and is slated for completion in early 2010, with roll-out to other sub-Saharan countries including Kenya, Uganda, Tanzania and Mali.

Lighting for literacy

World Vision distributed the Uday Mini as part of its initiative to provide girls in deprived outskirts of Bangalore, India, with access to education and literacy training — cornerstones of women’s development. And as the largest supporter of LUTW to date, we are helping provide solar lighting for learning and literacy programs in developing countries. LUTW helped us test solar reading solutions in Sierra Leone and Honduras, providing valuable input to develop an optimal lighting solution for education in off-grid areas. More than 10,000 people in total now have access to solar lighting thanks to the LUTW-Philips collaboration.

Philips Annual Report 2009 47

We believe achieving a sustainable supply base is about taking care of workers’ lives and the environment.

As a member company of the Electronic Industry Citizenship Coalition (EICC) our goal is to improve conditions in the electronics supply chain. To do just that, we conducted a record total of 858 supplier audits to identify and resolve issues in 2009.

Our approach

The Philips Supplier Sustainability Involvement Program is built on five pillars: setting out our requirements; building understanding and agreement; monitoring identified risk suppliers through audits using the EICC checklist (90% of initial audits are now conducted by specialized external auditing bodies); working with suppliers to resolve issues quickly; and engaging stakeholders.

To focus our efforts, we developed an approach based on a risk profile related to spend, country of production, business risk and type of supplier relationship. Where risk is identified we conduct awareness training with suppliers to prepare for third-party audits.

Corrective action plans are agreed upon within 30 days of an audit. Sustainability officers follow up monthly and can escalate the issue to the responsible purchasing manager as necessary to ensure zero-tolerance issues are resolved within three months. In this way the vast majority of zero-tolerances from 2009 have been resolved.

Continual conformance audits show that a multi-year approach to training and auditing is essential to ingrain sustainability in the supply chain.

New initiatives

Mirroring our supplier approach, we audited 12 internal sites in risk countries using the EICC checklist.

We selected 10 pilot products whose components are being analyzed to assess CO₂ emissions throughout the supply chain. Our goal is to identify large sources of emissions and implement abatement measures with our suppliers.

Philips Annual Report 2009 49

We seek constructive dialogue and the opportunity to engage with stakeholders in the supply chain and beyond.

This work is done in close cooperation with our suppliers, in bilateral meetings with investors and NGOs, and via projects with the Electronic Industry Citizenship Coalition (EICC). We also believe that cooperation with local governments is the way to truly achieve sustainable change.

Integrating new suppliers

With the acquisition of Partners in Lighting, 140 new suppliers were added to the Philips Supplier Sustainability Involvement Program. “To determine our audit schedule we built a plan around two priority axes — supplier size and commodity profile because some industries have more difficult working conditions than others,” explained Geert Tuytens, Chief Operations Officer, Philips Consumer Luminaires.

Frameway Glass in Guangdong China is a large Philips supplier and, as a glass factory, it faces safety challenges. “It was the first time we experienced an EICC audit” said Ryan Law, Project Engineer, Frameway Industries Limited. “We learned a lot about how we can improve our internal systems on labor, environment and safety. Our factory is now a safer, cleaner, more comfortable place to work for our 350 employees.”

Listening to investors

The Dutch Association of Investors for Sustainable Development (VBDO) awarded Philips with top sustainability scores in its 2009 Responsible Supply Chain Management Benchmark, ranking the company highest among the 40 large publicly listed Dutch companies benchmarked. Our scores have improved over the benchmark’s four years, reaching 90% in 2009, up substantially from 62% in 2006, 77% in 2007 and 85% in 2008.

“This is quite a performance, as Philips managed to even further improve their already high score,” said Giuseppe van der Helm, Executive Director VBDO.

Asked how the company could build on this momentum, the VBDO’s recommendations include rolling out similar auditing processes for second-tier suppliers, enhancing recycling possibilities in cooperation with suppliers, and improving energy efficiency in the supply chain.

50 Philips Annual Report 2009

Philips employees are engaged and have proven resilient during a year of restructuring and economic uncertainty.

We accelerated planned initiatives to increase organizational effectiveness and simplify our structure. Within Healthcare, for example, we focused on de-layering our management structure to increase speed of execution and lower operating costs.

In addition to less layers and costs, simplifying Philips means culture change. Reducing management layers brings people ‘on the shop floor’ closer to the Board of Management and gives managers a broader span of control. As a result they delegate more and focus more on getting the right people on their teams.

Unfortunately transformation necessitates job cuts. As a people-centric organization, we support those affected responsibly and with respect.

While engagement remains high, we aim higher

We seek honest feedback from our employees and are pleased that 91% of them participated in the 2009 Employee Engagement Survey. At 68 the overall engagement index is two points short of our high-performance target of 70. Although we aim higher, it is encouraging to see that our engagement levels remain high and have improved in several of our businesses.

The survey offers valuable insights into how we can improve. Teams talk about results in open, honest ‘Deep Dive’ sessions. In this way root causes of any issues arising from the survey are addressed and corrective actions put in place.

Diversity and inclusion continues to evolve

Diversity allows us to better understand our customers and meet their needs. While the percentage of female executives across our company has remained stable at 10%, we continue to focus on achieving our goal of increasing that number to 15% by 2012.

Because we recognize it is vital to have local staff to organize around customers and markets, we will grow the number of executives with BRIC (Brazil, Russia, India, China) nationality.

Philips Pride, our network for gays, lesbians and gay-friendly colleagues, has grown to over 150 members, mainly based in the Netherlands and US.

52 Philips Annual Report 2009

We are strengthening the alignment between individual objectives and overall company goals, and emphasizing the importance of how we work.

Given today’s challenging economic climate, it’s more important than ever that we keep working to achieve our aim of becoming a people-focused, market-driven company with a strong, performance-oriented culture.

To make this a reality, we are unleashing a One Philips mentality, inspiring leaders to strive for results not just in their own business or function, but for Philips as a whole.

We also are encouraging a way of working that’s much more in line with the four Philips Values — Delight customers, Deliver great results, Depend on each other, Develop people — which summarize the behavior we think is vital to our success as a company.

Changing how we manage performance

We are changing the way we evaluate and reward our people. To emphasize how important it is to live the values in everything we do, with ‘Leading to Win’, our employees are assessed not just on what they achieve (results) — but also on how they achieve it (behavior).

‘Leading to Win’ is about aligning the way we set targets, manage and reward performance with our ambition to become a high-performance growth company.

Philips Annual Report 2009 53

Encouraging healthy, active lifestyles, we are proud to be a signature sponsor of the American Heart Association’s Start! Heart Walk.

There’s no question actions speak louder than words. That’s why we have taken an important step to reinforce our desire to be the leading company in Health and Well-being by sponsoring the American Heart Association’s largest multi-city event and fundraiser called the Start! Heart Walk.

Through a special website, employees created walking teams with colleagues to participate in a local Heart Walk in cities across the United States or virtually through our Philips Virtual Team. By taking part, over 1,900 employees found a great way to exercise and have fun with colleagues, while raising more than EUR 223,000 to support research, find answers and save lives.

Fighting a global killer

Cardiovascular diseases, which include heart disease and stroke, are the world’s leading cause of death, claiming more than 17 million lives annually, with over 864,000 of those in the US alone.

“Philips is helping our mission of fighting heart disease and stroke by providing support to this important cause so that more resources can be made available to those looking for tips on how to get more physical activity into their day,” said Neil Meltzer, American Heart Association Board Chairman and President and Chief Operating Officer, Sinai Hospital of Baltimore.

Philips Annual Report 2009 55

Building on our heritage of working with the communities where we operate, we have launched our first global social investment program. It’s called SimplyHealthy@Schools.

With SimplyHealthy@Schools, Philips employees are going to classrooms around the world to upgrade lighting to enhance learning and energy saving. And they’re working with teachers to show children simple ways to improve their health and well-being with light, water, air, sleep, oral hygiene and exercise. All employees can volunteer to improve school lighting or help 9 to 12 year-olds become ‘Health Warriors’.

The program got off to a flying start in eight countries — India, Indonesia, Japan, Malaysia, Philippines, Russia, Singapore and Thailand — reaching about 5,000 students in 37 schools. It’s slated to expand globally in 2010.

Building on our work with students worldwide

Community involvement is not new to Philips. We have been running programs in all regions for many years.

In Brazil, for example, hundreds of employees have reached out to tens of thousands of students since 2001 when they began raising awareness about HIV/AIDS and teen pregnancy through the ‘Donate Life’ project. Our volunteers have taught young people about the environment since they started ‘Learning with Nature’ in 2002. Then, with the support of the São Paulo Municipal Secretariat of Education, we began ‘Speaking from the heart’ in 2006 to educate students about cardiovascular health. These are just a few of the many projects in Brazil where Philips is well-known for its social investments focusing on global issues.

Students who attended our Eco-Camps in Malaysia in 2009 learned about energy efficiency and how they can reduce their ‘Footprint in Nature’ by making simple changes in their everyday lives. The goal always is to plant the seed for a mindset that will preserve the environment for future generations.

56 Philips Annual Report 2009

4 Our group performance 4.1 - 4.1.1

4.1 Management discussion and analysis

4.1.1		Management summary

		The year 2009

		In 2009, we saw continued deterioration of our markets. Despite these challenging economic conditions, we acted quickly and decisively to further accelerate restructuring programs and implement cost-saving measures, while still investing in acquisitions, marketing, and research and development, and continuing to focus on cash flow. Compared to 2008, EBIT, EBITA, Net income and Cash flow before financing activities improved.

		Full-year comparable sales were 11% below last year, which reflected sales declines in both mature and emerging markets. However, sales improved in the second half of the year with fourth-quarter comparable sales on par with the same quarter in 2008.

		Group sales were impacted by 17% lower comparable sales at Consumer Lifestyle due to the severe downturn in consumer markets and proactive portfolio pruning; Lighting sales declined 13%, with ongoing weakness in end-markets, particularly in the construction sector; Healthcare proved more resilient, with a sales decline limited to 3%, as strong growth in the emerging markets was more than offset by declines in the US.

		Despite difficult economic conditions, we continued to make selective acquisitions of high-margin, high-growth businesses in 2009, adding eight companies to our portfolio, benefiting all three operating sectors and resulting in a cash outflow of EUR 294 million. Additionally, we divested the non-core businesses of Monitors and FIMI (medical display units).

		We sold our remaining stake in LG Display and Pace Micro Technology, generating EUR 704 million cash proceeds and a gain of EUR 117 million. The economic downturn resulted in a EUR 48 million non-cash impairment charge for NXP. However, following the recovery of the TPV Technology share price in 2009, the accumulated non-cash impairment charge recognized in 2008 was reversed by an amount of EUR 55 million.

		EBIT included EUR 450 million of restructuring charges and related asset impairments, EUR 101 million of acquisition-related charges, and EUR 48 million of product recall charges at Consumer Lifestyle, partly offset by a EUR 131 million curtailment gain for retiree medical benefit plans, a EUR 103 million tax benefit mainly related to a deferred tax asset in Lumileds, previously not recognized, and EUR 57 million net insurance recoveries.

		Despite lower sales, EBITA improved from EUR 744 million in 2008 to EUR 1,050 million, despite the severe decline in sales. The increase was driven by fixed cost reductions, lower restructuring and acquisition-related charges, portfolio changes and strict cost control.

		We generated cash flows from operating activities of EUR 1,545 million, or 6.7% of sales, as we continued our focus on stringent working capital management.

Key data
in millions of euros unless otherwise stated


	2007			2008			2009
Sales		26,793			26,385			23,189
EBITA¹⁾		2,094			744			1,050
as a % of sales		7.8			2.8			4.5
EBIT		1,867			54			614
as a % of sales		7.0			0.2			2.6
Financial income and expenses		2,849			88			(166	)
Income tax expense		(582	)		(256	)		(100	)
Results of equity-accounted investees		884			19			76

Income (loss) from continuing operations		5,018			(95	)		424
Income (loss) from discontinued operations		(138	)		3			—

Net income (loss)		4,880			(92	)		424

Net income (loss):
Per common share — basic		4.49			(0.09	)		0.46
Per common share — diluted		4.43			(0.09	)		0.46

Net operating capital (NOC)¹⁾		10,802			14,069			12,649
Cash flows before financing activities¹⁾		5,452			(1,606	)		1,326
Employees (FTEs)		123,801			121,398			115,924
of which discontinued operations		5,703			—			—


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

58 Philips Annual Report 2009

4 Our group performance 4.1.2 - 4.1.3

4.1.2		Sales

		In percentage terms, the composition of sales growth in 2009, compared to 2008, is presented in the table below.

		Sales growth composition 2009 versus 2008 in %


	comparable			currency			consolidation			nominal
	growth			effects			changes			growth
Healthcare		(2.7	)		2.6			2.6			2.5
Consumer Lifestyle		(16.5	)		(0.7	)		(5.0	)		(22.2	)
Lighting		(12.6	)		1.0			0.5			(11.1	)
GM&S		(30.2	)		(0.1	)		(0.2	)		(30.5	)

Philips Group		(11.4	)		0.7			(1.4	)		(12.1	)

		Group sales amounted to EUR 23,189 million in 2009, a 12% decline compared to 2008. Adjusted for a favorable 1% currency effect and an unfavorable impact of portfolio changes, comparable sales were 11% below 2008. The decline in comparable sales was largely attributable to the challenging economic environment, particularly in the consumer markets and in North America.

		Consumer Lifestyle reported a 17% comparable sales decline largely due to weakened consumer markets, visible in both mature and emerging markets, and selective portfolio pruning, mainly the exit of certain markets and products, such as DVD recorders. Comparable sales declines were seen in all businesses except Health & Wellness.

		Sales at Lighting were 13% lower than in 2008, impacted by weakness in the commercial construction environment and automotive market. This resulted in year-on-year declines in all businesses.

		Healthcare sales declined 3% on a comparable basis, largely impacted by the economic recession and the uncertainty around healthcare reform in the US. Lower sales were visible at Healthcare Informatics, Clinical Care Systems, and Imaging Systems, partly tempered by moderate growth at Customer Services and Home Healthcare Solutions.

4.1.3		Earnings

		In 2009, Philips’ gross margin was EUR 8,079 million, or 34.8% of sales, compared to EUR 8,447 million, or 32.0% of sales, in 2008. Gross margin in 2009 included restructuring and acquisition-related charges of EUR 268 million and net asbestos-related recoveries of EUR 57 million. 2008 included EUR 360 million restructuring and acquisition-related charges and EUR 264 million of asbestos-related settlement charges. The improvement in 2009 was mainly driven by higher margins at Consumer Lifestyle, partly offset by declines at Lighting and Healthcare.

		Selling expenses decreased from EUR 5,518 million in 2008 to EUR 5,159 million in 2009. 2008 included EUR 215 million of restructuring and acquisition-related charges, compared to EUR 185 million in 2009. In relation to sales, selling expenses increased from 20.9% to 22.2%, largely due to lower sales levels. This percentage increase was mainly due to higher costs relative to sales at Consumer Lifestyle and Lighting, partly offset by Healthcare.

		General and administrative expenses (G&A expenses) amounted to EUR 734 million, a decrease of EUR 238 million compared to 2008, mainly due to a EUR 131 million curtailment gain for retiree medical benefit plans and lower restructuring charges in 2009. As a percentage of sales, G&A expenses decreased from 3.7% in 2008 to 3.2%, driven by the aforementioned items and lower costs in relation to sales at Consumer Lifestyle and Healthcare, partly offset by Lighting.

		Research and development costs declined from EUR 1,777 million in 2008 to EUR 1,631 million in 2009. 2008 included EUR 40 million of restructuring charges, compared to EUR 73 million in 2009. The decline in research and development spend was largely driven by the lower costs at Consumer Lifestyle, partly offset by higher costs at Healthcare and Lighting. As a percentage of sales, research and development costs increased from 6.7% to 7.0%, largely due to Lighting.

		The overview below shows sales, EBIT and EBITA according to the 2009 sector classifications.

		Sales, EBIT and EBITA 2009 in millions of euros unless otherwise stated


	sales		EBIT			%			EBITA¹⁾			%
Healthcare		7,839		591			7.5			848			10.8
Consumer Lifestyle		8,467		321			3.8			339			4.0
Lighting		6,546		(16	)		(0.2	)		145			2.2
Group Management & Services		337		(282	)		—			(282	)		—

Philips Group		23,189		614			2.6			1,050			4.5


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

Philips Annual Report 2009 59

4 Our group performance 4.1.3 - 4.1.5

Sales, EBIT and EBITA 2008
in millions of euros unless otherwise stated


	sales		EBIT			%		EBITA¹⁾			%
Healthcare		7,649		621			8.1		839			11.0
Consumer Lifestyle		10,889		110			1.0		126			1.2
Lighting		7,362		24			0.3		480			6.5
Group Management & Services		485		(701	)		—		(701	)		—

Philips Group		26,385		54			0.2		744			2.8


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

		In 2009, EBIT increased by EUR 560 million compared to 2008, to EUR 614 million, or 2.6% of sales. 2009 included EUR 450 million of restructuring charges, EUR 101 million of acquisition-related charges, and a EUR 131 million gain related to curtailment for retiree medical benefit plans. EBIT in 2008 included a EUR 301 million non-cash goodwill impairment charge mainly related to Lumileds. EBIT and EBITA in 2008 were both impacted by a EUR 264 million asbestos-related settlement charge, EUR 541 million of restructuring charges and EUR 131 million of acquisition-related charges.

		Amortization of intangibles, excluding software and capitalized product development, amounted to EUR 436 million, an increase of EUR 47 million compared with EUR 389 million in 2008.

		EBITA increased from EUR 744 million in 2008 to EUR 1,050 million in 2009. Lower EBITA at Lighting was offset by improved earnings at Consumer Lifestyle, GM&S and Healthcare. As a percentage of sales, EBITA increased from 2.8% in 2008 to 4.5% in 2009.

		Healthcare

		Healthcare’s EBITA of EUR 848 million was EUR 9 million higher than in 2008 and included EUR 42 million of restructuring charges and EUR 64 million of acquisition-related charges. EBITA in 2008 included EUR 63 million of restructuring charges, EUR 90 million of acquisition-related charges and a EUR 45 million gain on the sale of Philips Speech Recognition Services. As a percentage of sales, EBITA declined from 11.0% in 2008 to 10.8% in 2009.

		Consumer Lifestyle

		Consumer Lifestyle’s EBITA increased from EUR 126 million in 2008 to EUR 339 million in 2009, mainly as result of lower non-manufacturing cost. The impact of lower sales on profitability was largely offset by an improved gross margin percentage in most businesses, notably Television, mainly driven by the divestment of Television in North America and a higher Ambilight share of sales. EBITA in 2008 included EUR 198 million of restructuring charges and a EUR 42 million gain on the sale of the Set-Top Boxes activity. 2009 was impacted by EUR 120 million of restructuring charges, EUR 48 million of product recall-related charges and EUR 16 million of acquisition-related charges. EBITA as a percentage of sales improved from 1.2% in 2008 to 4.0%, driven primarily by portfolio management and cost control.

		Lighting

		Lighting’s EBITA declined from EUR 480 million in 2008 to EUR 145 million. EBITA in 2008 included EUR 245 million of restructuring charges and EUR 41 million of acquisition-related and other charges. EBITA in 2009 was impacted by EUR 225 million of restructuring charges and EUR 22 million of acquisition-related charges. As a percentage of sales, EBITA declined from 6.5% in 2008 to 2.2% due to lower sales and margin pressures in most businesses.

		Group Management & Services

		The EBITA loss at Group Management & Services was EUR 282 million in 2009, compared to a loss of EUR 701 million in 2008. EBITA in 2008 included a EUR 264 million asbestos-related settlement charge, whereas 2009 was mainly impacted by a EUR 131 million gain related to curtailment for retiree medical benefit plans and EUR 57 million of net asbestos-related recoveries. Restructuring charges at Group Management & Services in 2009 amounted to EUR 63 million.

		For further information regarding the performance of the sectors, see chapter 5, Our sector performance, of this Annual Report.

4.1.4		Pensions

		The net periodic pension costs of defined-benefit pension plans amounted to a cost of EUR 3 million in 2009 compared to EUR 21 million credit in 2008, due to lower expected returns on lower assets in 2009. The defined-contribution pension cost amounted to EUR 107 million, EUR 11 million higher than in 2008, mainly due to a gradual shift from defined-benefit to defined-contribution pension plans. 2009 included a curtailment gain for retiree medical benefit plans totaling EUR 131 million. For further information, refer to note 18 in the Group financial statements.

4.1.5		Restructuring and impairment charges

		In 2009, EBIT included net charges totaling EUR 450 million for restructuring and related asset impairments. 2008 included EUR 541 million of restructuring and related asset impairment charges.

60 Philips Annual Report 2009

4 Our group performance 4.1.5 - 4.1.6

		In addition to the annual goodwill impairment tests for Philips, due to the economic circumstances trigger-based impairment tests were performed during the year, resulting in no goodwill impairments. For further information on sensitivity analysis, please refer to note 15 in the Group financial statements. In 2008 there were EUR 301 million of non-cash goodwill impairment charges, mainly related to Lumileds.

		Restructuring and related charges in millions of euros


	2007			2008			2009
Restructuring charges per sector:
Healthcare		1			63			42
Consumer Lifestyle		7			198			120
Lighting		24			245			225
GM&S		5			35			63

		37			541			450

Cost breakdown of restructuring charges:
Personnel lay-off costs		35			374			399
Release of provision		(5	)		(2	)		(81	)
Restructuring-related asset impairment		4			116			84
Other restructuring-related costs		3			53			48	¹⁾

		37			541			450


¹⁾		Includes EUR 22 million of costs which were expensed as incurred

		The most significant restructuring projects in 2009 related to Lighting and Consumer Lifestyle. Restructuring projects at Lighting aimed at further increasing organizational effectiveness, and centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US. Consumer Lifestyle restructuring projects focused on Television (primarily in Belgium and France), Peripherals & Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China). Healthcare initiated various restructuring projects aimed at reduction of the fixed cost structure, mainly impacting Imaging Systems (the Netherlands), Home Healthcare Solutions and Clinical Care Systems (various locations in the US).

		Other restructuring projects focused on reducing the fixed cost structure of Corporate Research Technologies, Philips Information Technology, Philips Design, and Corporate Overheads within Group Management & Services.

		In 2009, restructuring provisions of EUR 81 million were released, mainly as a result of placing employees in different positions within the company and the release of a restructuring provision in conjunction with the sale of Hoffmeister (Lighting).

		In 2008, the most significant restructuring projects related to Lighting, Consumer Lifestyle and Healthcare. Restructuring projects at Lighting mainly centered on Lamps (principally North America and Poland), Professional Luminaires (notably Germany), Special Lighting Applications (primarily the Netherlands and Belgium), Automotive (mainly Korea and Germany) and Lighting Electronics (primarily the Netherlands).

		Consumer Lifestyle restructuring projects in 2008 concentrated on the integration of the former Domestic Appliances and Consumer Electronics businesses, the exit of Television from North America, restructuring of the Television operation in Juarez (Mexico) and restructuring charges taken to re-align the European industrial footprint. Healthcare restructuring costs spanned many locations, including sites in Hamburg (Germany), Helsinki (Finland) and Andover (US). For further information on restructuring, please refer to note 17 in the Group financial statements.

4.1.6 Financial income and expenses

		A breakdown of the Financial income and expenses is shown in the table below.

		Financial income and expenses in millions of euros


	2007			2008			2009
Interest expense (net)		(43	)		(105	)		(252	)
Sale of securities		2,804			1,406			126
Value adjustments on securities		(36	)		(1,148	)		(58	)
Other		124			(65	)		18

		2,849			88			(166	)

The net interest expense in 2009 was EUR 147 million higher than in 2008, as a result of lower interest income due to lower interest rates applied to an average lower liquid asset position of the Group and higher interest costs associated with hedging.

Philips Annual Report 2009 61

4 Our group performance 4.1.6 - 4.1.8

Sale of securities
in millions of euros


	2007			2008		2009
Gain on sale of TSMC shares		2,783			1,205		—
Gain on sale of LG Display shares		—			158		69
Gain on sale of D&M shares		—			20		—
Gain on sale of Nuance shares		31			—		—
Loss on sale of JDS Uniphase shares		(10	)		—		—
Gain on sale of Pace shares		—			—		48
Others		—			23		9

		2,804			1,406		126

		In 2009, income from the sale of securities totaled EUR 126 million. This included a EUR 69 million gain from the sale of remaining shares in LG Display, and a EUR 48 million gain from the sale of remaining shares in Pace Micro Technology. These gains were partially offset by impairment charges amounting to EUR 58 million, mainly from shareholdings in NXP. Other financial income in 2009 primarily consisted of a EUR 19 million gain related to the revaluation of the convertible bonds received from TPV Technology and CBAY, and dividend income totaling EUR 16 million, EUR 12 million of which related to holdings in LG Display. Other financial expenses included EUR 15 million accretion expenses mainly associated with discounted asbestos provisions.

		Value adjustments on securities in millions of euros


	2007			2008			2009
NXP		—			(599	)		(48	)
LG Display		—			(448	)		—
TPO Display		—			(71	)		—
Pace Micro Technology		—			(30	)		—
Prime Technology		—			—			(6	)
JDS Uniphase		(36	)		—			—
Other		—			—			(4	)

		(36	)		(1,148	)		(58	)

		2008 included a gain of EUR 1,406 million, mainly on the sale of shares in TSMC, LG Display and D&M. 2008 also included EUR 23 million dividend from TSMC. These were partly offset by EUR 1,148 million non-cash impairment losses at NXP, LG Display, and Pace Micro Technology. Additionally, 2008 included a EUR 37 million loss related to the revaluation of the TPV Technology convertible bond.

		For further information, refer to note 4 in the Group financial statements.

4.1.7		Income taxes

		Income taxes amounted to EUR 100 million, compared to EUR 256 million in 2008.

		The tax burden in 2009 corresponded to an effective tax rate of 22.3% on pre-tax income, compared to 180% in 2008. The 2009 effective tax rate was impacted by EUR 103 million of net tax benefits, mainly the recognition of a deferred tax asset for Lumileds previously not recognized, various non-deductible value adjustments, and a number of tax settlements. The 2008 effective tax rate was affected by non-deductible impairment and value adjustments, increased valuation allowances, higher provisions for uncertain tax positions and foreign withholding taxes for which a credit could not be realized. These were partially offset by non-taxable gains resulting from the sale of securities.

		For 2010, the effective tax rate excluding non-taxable items is expected to be between 27% and 29%. For further information, please refer to note 5in the Group financial statements.

4.1.8		Results of equity-accounted investees

		The results related to equity-accounted investees increased from EUR 19 million in 2008 to EUR 76 million in 2009.

		Results of equity-accounted investees in millions of euros


	2007			2008			2009
Company’s participation in income (loss)		246			81			23
Results on sale of shares		660			(2	)		—
Gains arising from dilution effects		—			12			—
(Reversal of) investment impairment and guarantee charges		(22	)		(72	)		53

		884			19			76

		Following recovery of the TPV share price in 2009, the accumulated value adjustment of the shareholding in TPV recognized in 2008 was reversed by EUR 55 million. The company’s participation in income of EUR 23 million was mainly attributable to results on Intertrust.

		During 2008, as a result of the reduction in both the Philips shareholding and the number of Philips board members, LG Display was accounted for as an available-for-sale financial asset and no longer as an equity-accounted investee.

		For further information, refer to note 6 in the Group financial statements.

62 Philips Annual Report 2009

4 Our group performance 4.1.9 - 4.1.13

4.1.9		Minority interests

		The share of minority interests in the net income of the Group amounted to EUR 14 million in 2009. In 2008, a EUR 1 million net loss was attributable to minority interests.

4.1.10		Discontinued operations

		The results from discontinued operations in 2008 included a EUR 10 million net gain on the results of MedQuist and a net loss of EUR 7 million on the sales of Semiconductors.

		For further information, refer to note 1 in the Group financial statements.

4.1.11		Net income

		Income from continuing operations increased from a loss of EUR 95 million in 2008 to a profit of EUR 424 million. The improvement was largely driven by EUR 560 million higher EBIT, EUR 57 million higher earnings from equity-accounted investees and lower income tax expense, partly offset by higher costs in Financial income and expenses.

		Net income for the Group including discontinued operations amounted to a profit of EUR 424 million, or EUR 0.46 per common share, in 2009, compared to a loss of EUR 92 million, or 0.09 per common share, in 2008.

4.1.12		Acquisitions and divestments

		Despite the global recession, in 2009 Philips continued to invest in innovative, high-growth companies that are in line with our strategy to become the leading company in Health and Well-being. During the year, Philips acquired eight strategically-aligned companies, benefiting all three operating sectors, while divesting the unprofitable IT Displays business within Consumer Lifestyle and FIMI medical displays.

		In 2009, acquisitions resulted in integration and purchase-accounting charges totaling EUR 101 million: Healthcare EUR 63 million, Consumer Lifestyle EUR 16 million, and Lighting EUR 22 million.

		In 2008, acquisitions led to integration and purchase-accounting charges totaling EUR 130 million, mainly in Healthcare and Lighting.

		For further information, refer to note 2 in the Group financial statements.

		Acquisitions

		Within Healthcare, we acquired three key companies. In March, we acquired Meditronics, a manufacturer of general X-ray systems targeting the economy segment in India. In April, we added Traxtal to our portfolio, enabling Philips to become one of the leading healthcare solutions providers for image-guided procedures. InnerCool, a pioneer in the field of therapeautic hypothermia, was acquired in July, reinforcing our leadership position in the emergency care market by adding body temperature management solutions to our existing product offering in this field.

		Within Consumer Lifestyle, Philips acquired Saeco International Group S.p.A. of Italy, one of the world’s leading espresso machine makers, positioning us to achieve our goal of becoming a global leader in coffee machines.

		Within Lighting, Philips added four companies to its portfolio. Further strengthening our position to lead the global switch to energy-efficient lighting solutions, we acquired Dynalite in Australia and Teletrol Systems in the US. Additionally, we acquired llti Luce, one of Europe’s leading LED design companies for innovative architectural indoor lighting, and Selecon, a prominent global designer, manufacturer and distributor of professional theatrical and architectural lighting fixtures.

		Acquisitions in 2008 In 2008 we acquired a number of notable companies. Healthcare acquisitions included VISICU, Respironics, TOMCAT, Medel SpA, Dixtal Biomédica e Tecnologia, Shenzhen Goldway and Alpha X-Ray Technologies. Within Lighting, Philips completed the acquisition of luminaires company Genlyte, a leader in North American construction luminaires market.

		Divestments

		In 2009, Philips continued to transform the Television business from one based on scale to one based on innovation and differentiation by transferring the IT Displays business to TPV Technology Limited in a brand licensing agreement. Within Healthcare, Philips sold its shares in FIMI to Barco NV, in line with Philips’ strategy to divest non-core activities and focus on expanding its growth platforms.

		Divestments in 2008

		In 2008, Philips also sold several non-core business interests. These divestments included the sale of the Set-Top Boxes activities; the brand license agreement with respect to the North America television, audio and video businesses; the sale of Philips Speech Recognition Services (PSRS); and the divestment of High Tech Plastic-Optics; the sale of Philips’ approximate 70% ownership stake in MedQuist.

Philips Annual Report 2009 63

4 Our group performance 4.1.13 - 4.1.14

4.1.13		Performance by market cluster

		In 2009, sales declined 11% on a comparable basis, impacted by the global recession, with double-digit sales declines visible in both mature and emerging markets.



		The comparatively lower sales in mature markets were the result of lower sales in all three sectors. In Western Europe, the sharp sales decline was largely attributable to lower sales at Consumer Lifestyle, partly due to managed portfolio pruning, and in Lighting. A double-digit decline was visible in North America, with lower sales in all sectors, due to the recession and uncertainty surrounding the pending US Healthcare Reform Act.

		Sales in emerging markets declined 11%, largely impacted by a double-digit decline in Latin America (Consumer Lifestyle and Lighting) and a low single-digit decline in China as growth at Lighting and Healthcare was more than offset by lower sales at Consumer Lifestyle. Sharp declines were also visible in Russia, which were partly offset by slight growth in India and the Middle East.



		EBITA in mature markets improved by EUR 115 million compared to 2008 as lower EBITA in Western Europe was more than offset by higher EBITA in North America, mainly reflecting the effect of a EUR 264 million asbestos-related settlement charge in 2008. The EBITA decline in Western Europe was mainly attributable to lower sales at Consumer and Lifestyle. EBITA improved compared with 2008 in the emerging markets, mainly due to growth at Healthcare in Latin America and China, lower restructuring charges and a EUR 131 million curtailment gain for retiree medical benefit plans.

		EBITA per market cluster^1,2) in millions of euros


	2007		2008		2009
Western Europe		1,169		283		94
North America		433		219		466
Other mature markets		63		14		71

Total mature markets		1,665		516		631
Emerging markets		429		228		419

		2,094		744		1,050


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report

²⁾		As reported on a geographical basis

EBIT per market cluster¹⁾
in millions of euros


	2007		2008			2009
Western Europe		1,146		258			73
North America		233		(402	)		105
Other mature markets		63		14			63

Total mature markets		1,442		(130	)		241
Emerging markets		425		184			373

		1,867		54			614


¹⁾		As reported on a geographical basis

4.1.14		Performance by key function

		Marketing

		Throughout 2009, Philips continued to deliver on its brand promise of “sense and simplicity”. Driving thought leadership in Health and Well-being, combined with a continued focus on Net Promoter Score (NPS) to improve customer experiences across all touchpoints, was central to Philips’ marketing strategy in 2009. As a result, the company moved up to 42^nd place on the Interbrand ranking of the 100 best global brands. This progression is continued evidence that the promise of

64 Philips Annual Report 2009

4 Our group performance 4.1.14 - 4.1.14

		“sense and simplicity” resonates with stakeholders and customers. Since the launch of “sense and simplicity” five years ago, Philips’ brand value has increased 85%.

		Philips’ total 2009 marketing expenses declined nominally to EUR 804 million, but as percentage of sales remained broadly in line with 2008 levels. In 2009, Philips’ marketing strategy showed an increased focus on organizing around customers and markets. To that end, global investment was tailored more substantially to strategic markets.

		The corporate focus on thought leadership in Health and Well-being also extended to Philips’ online marketing strategies in 2009, where several new initiatives were launched. Within the Healthcare sector, Philips expanded its online presence via the launch of GetlnsideHealth.com, an e-service that delivers the latest news, views and updates on technology innovation in health and well-being.

		In support of its sustainability campaign, the company launched ASimpleSwitch.com to business stakeholders. This online platform promotes smart energy efficiency and consumption in the business and consumer space. The company also leveraged social media capabilities to drive marketing messaging and brand awareness via the launch of Philips.Live.com, an internal and external video platform that enables consumers, customers and employees to share short video clips on their experiences with Philips products and services.

		In 2010, Philips will continue to leverage online and social media to drive thought leadership in Health and Well-being. Greater emphasis will be placed on increasing our online presence in emerging and growth markets.

		Driving sustainable customer engagement in concert with our brand promise is essential to our company goals and aspirations. We have used the Net Promoter Score (NPS) since 2006 to drive our company’s efforts to improve customer experiences at all touchpoints. The implementation of this measure has confirmed that outstanding customer and consumer loyalty are critical to achieving growth. We continue to leverage NPS insights to drive customer centricity and direct our market strategy.

		Our NPS has continued to grow each year. In 2009, we achieved increased NPS leadership across our businesses and as a result 60% of our businesses currently have industry leadership positions. We noted strong performance in the emerging markets China and India. In more established markets such as the US and Germany improvements were also achieved. In 2010, we will continue to expand our coverage of NPS to include additional strategic markets and cross-sector business domains.



		Research & development

		Our Research & Development teams create innovative, meaningful products and solutions for customers — a critical driver of Philips’ competitiveness in its markets. By maintaining our substantial R&D investments in 2009, Philips has continued to expand its vast knowledge and intellectual property base. Early involvement of customers in new technologies, application and business concepts ensures deep insight into their needs — the foundation for our innovations. To better capitalize on opportunities in fast-growing emerging markets, Philips is in the process of reallocating EUR 250 million to innovation projects in high-growth market segments. In 2009, approximately one third of this reallocation was completed. Underlining our focus on market-driven innovation, we have created a Board function managing Markets and Innovation, incorporating the role of Chief Technology Officer and the responsibility for managing Corporate Technologies.

Philips Annual Report 2009 65

4 Our group performance 4.1.14 - 4.1.15

Research and development expenses per sector
in millions of euros


	2007		2008		2009
Healthcare		594		672		679
Consumer Lifestyle		504		513		395
Lighting		282		345		351
GM&S		221		247		206

Philips Group		1,601		1,777		1,631

		In 2009, Philips’ investment in R&D activities amounted to EUR 1,631 million (7.0% of sales), compared with EUR 1,777 million (6.7% of sales) in 2008.

		Since the Incubator activities are now maturing and increasingly aligned with the growth plans of our individual sectors, the early-stage incubation costs, which were originally covered at Group Management & Services, are now allocated to the Research and Development costs of the respective sectors. R&D expenses for prior years have been reclassified to reflect the allocation of the Incubator costs to the business sectors. Healthcare R&D expenses increased slightly in 2009, reflecting our continued investments in emerging markets and home healthcare. Lighting’s expenses were broadly in line with 2008, although with a reduction in traditional lighting and an increase in solid-state lighting applications. At Consumer Lifestyle, we maintained R&D investment as a percentage of sales at the level of 2008, while reducing spend in mature areas like TV.

		The global recession affected demand for new product, and our new product sales — products introduced within the last year (for B2C products) or three years (for B2B products) — dropped from 58% of total sales in 2008 to 48% in 2009. Philips aims to maintain this ratio at around 50%, while at the same time focusing on the profitability of new products and reallocating innovation spend more towards new business creation.

		Supply management

		The Supply Management function has been designed to create value for Philips by leveraging the scale of the company, thereby creating a single point of management and accountability for our supply base and supply chain activities. It covers non-product-related purchasing through the dedicated shared service Philips General Purchasing, and bill-of-material purchasing leveraged for Philips via commodity teams working across the sectors.

		Our approach in turbulent markets

		The turbulent global economic climate made it essential to have in place proactive risk management and mitigation strategies aimed at ensuring continuity of supply and competitiveness of sourcing. Our initiatives included enhanced monitoring of the financial stability of the key supplier base and, where necessary, early intervention to reduce Philips’ exposure.

		Supply Management also assisted in managing the sourcing risk through a pro-active approach towards key and sole source suppliers.

		We have emphasized improving competitiveness through negotiation events, such as the “sooner & more” program, as well as improving cash flow through extended payment terms. Various value engineering activities were started in all sectors to help secure longer-term competitiveness.

		A number of projects were started in 2009 to re-define the Philips warehousing and distribution footprint as One Philips so as to provide better customer service at lower cost. The Supply Management organization in emerging countries has been strengthened further to support Philips’ ambition in these countries. In 2009, 47% of spend originated from low-cost countries.

		Our supplier network

		The Global Supplier Rating System (GSRS) was further deployed in 2009, providing structured measurement of supplier performance and rigorous tracking of improvement actions. GSRS covered over 85% of Philips’ total spend in 2009.

		In 2009, Philips continued to develop the Partners for Growth strategic supplier network, bringing together its top 36 suppliers to identify and exploit joint business opportunities with a focus on together coming out of the crisis stronger. This initiative accompanies our supplier sustainability initiative, which ensures mandatory auditing of all suppliers with spend above EUR 100,000 in risk areas. This involves tracking all supplier sustainability issues in risk areas and, where necessary, a highly accelerated resolution of identified issues.

4.1.15		Employment

		The total number of employees of the Philips Group was 115,924 at the end of 2009, compared to 121,398 at the end of 2008. Approximately 45% were employed in the Lighting sector, due to the still relatively strong vertical integration in this business. Some 30% were employed in the Healthcare sector and approximately 16% of the workforce was employed in the Consumer Lifestyle sector.

66 Philips Annual Report 2009

4 Our group performance 4.1.15 - 4.1.15



		The decrease in headcount in 2009 was mainly due to organizational right-sizing to align with the challenging economic conditions. The declines were partly offset by acquisitions, mainly at Consumer Lifestyle. Group Management & Services headcount was slightly higher than in 2008 due to a gradual shift of support functions such as IT from the operating sectors.

		Approximately 57% of Philips’ workforce is located in mature markets, and about 43% in emerging markets. In 2009, the number of employees in mature markets decreased, largely as a result of organizational right-sizing. Emerging markets also saw a reduction in employee numbers as the additional headcount from Healthcare acquisitions in China, India and Brazil was offset largely by the sale of the Television factory in Juarez (Mexico) and a headcount reduction due to lower factory production within Lighting.

		Despite the lower sales, employee productivity for the Group improved compared to 2008, driven by the positive effect of ongoing efficiency and transformation programs in all sectors.

		Employees per sector in FTEs at year-end


	2007		2008		2009
Healthcare		29,191		35,551		34,296
Consumer Lifestyle		23,280		17,145		18,389
Lighting		54,440		57,367		51,653
GM&S		11,187		11,335		11,586

		118,098		121,398		115,924
Discontinued operations		5,703		—		—

		123,801		121,398		115,924

Employees per market cluster
in FTEs at year-end


	2007		2008		2009
Western Europe		39,747		36,966		35,496
North America		21,682		31,336		27,069
Other mature markets		2,347		2,119		3,095

Total mature markets		63,776		70,421		65,660
Emerging markets		54,322		50,977		50,264

		118,098		121,398		115,924
Discontinued operations		5,703		—		—

		123,801		121,398		115,924

Employment
in FTEs


	2007			2008			2009
Position at beginning of year		121,732			123,801			121,398
Consolidation changes:
- new consolidations		6,654			12,673			2,432
- deconsolidations		(3,535	)		(1,571	)		(276	)
Comparable change		(1,050	)		(13,505	)		(7,630	)

Position at year-end		123,801			121,398			115,924
of which:
continuing operations		118,098			121,398			115,924
discontinued operations		5,703			—			—

Philips Annual Report 2009 67

4 Our group performance 4.2 - 4.2.1

4.2

Liquidity and capital resources

4.2.1		Cash flows provided by continuing operations

		Cash flows from operating activities

		Net cash from operating activities amounted to EUR 1,545 million in 2009, which was EUR 103 million lower than the operating cash flows generated in 2008. Higher earnings and lower working capital requirements in most sectors were more than offset by the final asbestos settlement payment.

		Condensed consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009 are presented below:

		Condensed consolidated cash flow statements in millions of euros


	2007			2008			2009
Cash flows from operating activities:
Net income (loss) attributable to stockholders		4,873			(91	)		410
(Income) loss from discontinued operations		138			(3	)		—
Adjustments to reconcile net income to net cash provided by operating activities		(3,259	)		1,742			1,135

Net cash provided by operating activities		1,752			1,648			1,545
Net cash (used for) provided by investing activities		3,700			(3,254	)		(219	)

Cash flows before financing activities		5,452			(1,606	)		1,326
Net cash used for financing activities		(2,371	)		(3,575	)		(545	)

Cash (used for) provided by continuing operations		3,081			(5,181	)		781
Net cash (used for) discontinued operations		(115	)		(37	)		—
Effect of changes in exchange rates on cash and cash equivalents		(112	)		(39	)		(15	)

Total change in cash and cash equivalents		2,854			(5,257	)		766
Cash and cash equivalents at the beginning of year		6,023			8,877			3,620
Less cash and cash equivalents at the end of year — discontinued operations		108			—			—

Cash and cash equivalents at the end of year — continuing operations		8,769			3,620			4,386

Please refer to the consolidated statements of cash flows.



		Cash flows from investing activities

		Cash flows from investing activities resulted in a net outflow of EUR 219 million in 2009, due to EUR 682 million cash used for net capital expenditures, EUR 300 million used for acquisitions, and EUR 39 million outflow related to derivatives and securities, partly offset by EUR 802 million inflows received mostly from the sale of other non-current financial assets (mainly LG Display and Pace Micro Technology).

		2008 cash flows from investing activities resulted in a net outflow of EUR 3,254 million, due to EUR 5,316 million cash used for acquisitions and EUR 875 million used for net capital expenditures, partly offset by EUR 2,600 million of inflows received mainly from the sale of other non-current financial assets (mainly TSMC and LG Display) and EUR 337 million inflow related to derivatives.

		Net capital expenditures

		Net capital expenditures totaled EUR 682 million in 2009, EUR 193 million lower than in 2008, mainly due to lower investments across all sectors, notably Lighting.

68 Philips Annual Report 2009

4 Our group performance 4.2.1 - 4.2.4

		Acquisitions

		In 2009, a total of EUR 300 million cash was used for acquisitions, mainly for Saeco (EUR 171 million), Dynalite (EUR 31 million) and Traxtal (EUR 18 million).

		In 2008, a total of EUR 5,316 million cash was used for acquisitions, mainly for Respironics (EUR 3,196 million), Genlyte (EUR 1,894 million) and VISICU (EUR 198 million).

		Divestments and derivatives

		Cash proceeds of EUR 628 million and EUR 76 million were received from the final sale of stakes in LG Display and Pace Micro Technology respectively. Cash flows from derivatives and securities led to a net cash outflow of EUR 39 million.

		In 2008, cash proceeds of EUR 1,831 million and EUR 37 million were received from the final sale of stakes in TSMC and D&M Holdings respectively. Additionally, the sale of shares in LG Display generated EUR 670 million cash. Cash flows from derivatives led to a net cash inflow of EUR 337 million.

		Cash flows from financing activities

		Net cash used for financing activities in 2009 was EUR 545 million. Philips’ shareholders were paid EUR 647 million in the form of a dividend payment. The net impact of changes in debt was an increase of EUR 60 million, including the drawdown of a EUR 250 million loan, EUR 62 million increase from finance lease and bank loans, offset by repayments on short-term debts and other long-term debt amounting to EUR 252 million. Additionally, net cash inflows for share delivery totaled EUR 29 million.

		Net cash used for financing activities in 2008 was EUR 3,575 million. The impact of changes in debt was an increase of EUR 380 million, including the issuance of EUR 2,053 million of bonds, offset by bond repayments amounting to EUR 1,691 million. Also, Philips’ shareholders were paid EUR 720 million in the form of a dividend payment. Additionally, net cash outflows for share repurchases totaled EUR 3,257 million. This included a total of EUR 3,298 million related to the repurchases of shares for cancellation. The cash outflows were partially offset by a net cash inflow of EUR 41 million due to the exercise of stock options.

4.2.2		Cash flows from discontinued operations

		In 2008, EUR 37 million cash was used by discontinued operations, the majority of which related to tax payments in connection with the 2006 sale of Philips’ majority stake in the Semiconductors business.

4.2.3		Financing

		Consolidated balance sheet for the years 2009, 2008 and 2007 is presented below:

		Condensed consolidated balance sheet information in millions of euros


	2007			2008			2009
Intangible assets		6,635			11,757			11,523
Property, plant and equipment		3,194			3,496			3,252
Inventories		3,213			3,491			2,913
Receivables		9,251			7,922			7,481
Accounts payable and other liabilities		(7,817	)		(8,708	)		(8,636	)
Provisions		(3,055	)		(3,421	)		(2,980	)
Other non-current financial assets		3,183			1,331			691
Equity-accounted investees		1,817			293			281
Assets of discontinued operations		319			—			—
Liabilities of discontinued operations		(78	)		—			—

		16,662			16,161			14,525

Cash and cash equivalents		8,769			3,620			4,386
Debt		(3,563	)		(4,188	)		(4,267	)

Net cash (debt)		5,206			(568	)		119
Minority interests		(127	)		(49	)		(49	)
Stockholders’ equity		(21,741	)		(15,544	)		(14,595	)

		(16,662	)		(16,161	)		(14,525	)


		Please refer to the consolidated balance sheets.

4.2.4		Cash and cash equivalents

		In 2009, cash and cash equivalents increased by EUR 766 million to EUR 4,386 million at year-end. Cash inflow from operations amounted to EUR 1,545 million, and there was EUR 802 million proceeds from divestments including EUR 718 million from the sale of stakes. This was partly offset by an outflow of EUR 647 million related to the annual dividend, EUR 300 million for acquisitions and small unfavorable currency translation effects of EUR 15 million.

		In 2008, cash and cash equivalents declined by EUR 5,149 million to EUR 3,620 million at year-end. The share buyback program led to a cash outflow of EUR 3,298 million while a dividend of EUR 720 million was paid. Furthermore, cash outflows for acquisitions were EUR 5,316 million, partially compensated by EUR 2,600 million in cash proceeds from divestments. In addition, cash flow from operations amounted to EUR 1,648 million, partly offset by unfavorable currency translation effects within cash and cash equivalents of EUR 39 million.

Philips Annual Report 2009 69

4 Our group performance 4.2.4 - 4.2.7

4.2.5		Debt position

		Total debt outstanding at the end of 2009 was EUR 4,267 million, compared with EUR 4,188 million at the end of 2008.

		Changes in debt in millions of euros


	2007			2008			2009
New borrowings		(29	)		(2,088	)		(312	)
Repayments		313			1,708			252
Consolidation and currency effects		31			(245	)		(19	)

Total changes in debt		315			(625	)		(79	)

		In 2009, total debt increased by EUR 79 million. In January, Philips drew upon a EUR 250 million bank loan. The increase in other borrowings including finance leases was EUR 62 million. Repayments under capital leases amounted to EUR 42 million, while EUR 9 million was used to reduce other long-term debt. Furthermore Philips repaid EUR 201 million of short-term debt. Other changes resulting from consolidation and currency effects led to an increase of EUR 19 million.

		In 2008, total debt increased by EUR 625 million. During the year, Philips issued EUR 2,053 million of corporate bonds and repaid EUR 1,691 million of bonds. New borrowings under capital leases totaled EUR 31 million and repayments under capital leases amounted to EUR 28 million in the year. Remaining EUR 5 million was used to reduce other long-term debt. Other changes resulting from consolidation and currency effects led to an increase of EUR 245 million.

		Long-term debt as a proportion of the total debt stood at 85% at the end of 2009 with average remaining term of 9.6 years, compared to 83% at the end of 2008.

4.2.6

Net debt to group equity

Philips ended 2009 in a net cash position (cash and cash equivalents, net of debt) of EUR 119 million, compared to a net debt position of EUR 568 million at the end of 2008.

4.2.7		Stockholders’ equity

		Stockholders’ equity declined by EUR 949 million in 2009 to EUR 14,595 million at December 31, 2009. The decrease was mainly as a result of a EUR 404 million reduction from total comprehensive income. The dividend payment to shareholders in 2009 further reduced equity by EUR 647 million. The decrease was partially offset by a EUR 102 million increase related to re-issuance of treasury stock and net share-based compensation plans.

		Stockholders’ equity declined by EUR 6,197 million in 2008 to EUR 15,544 million at December 31, 2008. The decrease was mainly attributable to share repurchase programs for capital reduction purposes, as well as the hedging of long-term incentive and employee stock

70 Philips Annual Report 2009

4 Our group performance 4.2.7 - 4.2.8

		purchase programs, reducing equity by EUR 3,298 million. The dividend payment to shareholders in 2008 further reduced equity by EUR 720 million. Additionally a EUR 2,302 million decrease related to total changes in comprehensive income, net of tax. The decrease was partially offset by EUR 123 million related to re-issuance of treasury stock and net share-based compensation plans.

		The number of outstanding common shares of Royal Philips Electronics at December 31, 2009 was 927 million (2008: 923 million).

		At the end of 2009, the Company held 43.1 million shares in treasury to cover the future delivery of shares (2008: 47.6 million shares). This was in connection with the 62.1 million rights outstanding at the end of 2009 (2008: 65.5 million rights) under the Company’s long-term incentive plan and convertible personnel debentures. At the end of 2009, the Company held 1.9 million shares for cancellation (2008: 1.9 million shares).

4.2.8		Liquidity position

		Including the Company’s net debt (cash) position (cash and cash equivalents, net of debt), listed available for-sale financial assets, listed equity-accounted investees, as well as its USD 2.5 billion commercial paper program supported by the revolving credit facility, and EUR 200 million committed undrawn bilateral loan, the Company had access to net available liquidity resources of EUR 2,412 million as of December 31, 2009, compared to EUR 2,365 million one year earlier.

		Liquidity position in millions of euros


	2007			2008			2009
Cash and cash equivalents		8,769			3,620			4,386
Committed revolving credit facility/CP program		1,698			2,274			1,936

Liquidity		10,467			5,894			6,322
Available-for-sale financial assets at market value		1,776			599			244
Main listed investments in equity-accounted investees at market value		2,688			60			113
Short-term debt		(2,350	)		(722	)		(627	)
Long-term debt		(1,213	)		(3,466	)		(3,640	)

Net available liquidity resources		11,368			2,365			2,412

		The fair value of the Company’s listed available-for-sale financial assets, based on quoted market prices at December 31, 2009, amounted to EUR 244 million. The sale of remaining LG Display and Pace Micro Technology shares contributed the majority of the decrease in available-for-sale financial assets.

		Philips’ shareholdings in its main listed equity-accounted investees had a fair value of EUR 113 million based on quoted market prices at December 31, 2009, and consisted primarily of the Company’s holdings in TPV Technology.

		Philips has a USD 2.5 billion commercial paper program, under which it can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. There is a panel of banks, in Europe and in the US, which service the program. The interest is at market rates prevailing at the time of issuance of the commercial paper. There is no collateral requirement in the commercial paper program. Also, there are no limitations on Philips’ use of the program.

		Philips also has USD 2.5 billion committed revolving credit facilities that could act as back-up for short-term financing requirements that normally would be satisfied through the commercial paper program. As of December 31, 2009, Philips did not have any commercial paper outstanding nor did Philips draw under the revolving credit facilities.

		In addition to the USD 2.5 billion revolving credit facilities, Philips had a new EUR 200 million committed undrawn bilateral loan in place as of October 30, 2009. As of December 31, 2009, Philips did not have any loans outstanding under these facilities.

		Outstanding long-term bonds do not have a material adverse change clause, financial covenants or credit-rating-related acceleration possibilities.

		As at December 31, 2009, Philips had total cash and cash equivalents of EUR 4,386 million; Philips pools cash from subsidiaries to the extent legally and economically feasible. Cash in subsidiaries is not necessarily freely available for alternative uses due to possible legal or economic restrictions. The amount of cash not immediately available is not considered material for Philips to meet its cash obligations. Philips had a total debt position of EUR 4,267 million at year-end 2009.

		Philips’ existing long-term debt is rated A3 (with negative outlook) by Moody’s and A- (with stable outlook) by Standard & Poor’s. It is our objective to manage our financial ratios to be in line with A3/A-. There is no assurance that we will be able to achieve this goal. Ratings are subject to change at any time.

		On February 18, 2010 Philips signed a new 5-year EUR 1.8 billion revolving credit facility to replace the existing USD 2.5 billion facility.

Philips Annual Report 2009 71

4 Our group performance 4.2.9 - 4.2.9

4.2.9		Cash obligations

		Contractual cash obligations

		Presented below is a summary of the Group’s contractual cash obligations and commitments at December 31, 2009.

		Contractual cash obligations at December 31, 2009 in millions of euros


	payments due by period

			less
			than 1		1-3		3-5		after 5
	total		year		years		years		years
Long-term debt¹⁾		3,648		115		1,022		704		1,807
Finance lease obligations¹⁾		138		31		47		19		41
Short-term debt^1,4)		481		481		—		—		—
Operating leases¹⁾		666		175		237		123		131
Derivative liabilities¹⁾		276		90		8		178		—
Interest on debt²⁾		2,295		195		331		265		1,504
Trade and other payables³⁾		2,870		2,870		—		—		—

		10,374		3,957		1,645		1,289		3,483


¹⁾		Short-term debt long-term debt lease obligations and derivatives are included in the Company’s consolidated balance sheet.

²⁾		Approximately 27% of the debt bears interest at a floating rate. Interest on debt has been estimated based upon average rates in 2009.

³⁾		Excluding derivatives, shown separately.

⁴⁾		Excluding current portion of long-term debt

		Philips has no material commitments for capital expenditures.

		On December 1, 2009, Philips entered into an outsourcing agreement to acquire IT services from T-Systems GmbH over a period of 5 years at a total cost of approximately EUR 300 million. The agreement, which is effective January 1, 2010, provides that penalties may be charged to the Company if Philips terminates the agreement prior to its expiration. The termination penalties range from EUR 40 million, if the agreement is cancelled within 12 months to EUR 6 million if the agreement is cancelled within 36 months.

		Additionally, Philips has a number of commercial agreements, such as supply agreements, which provide that certain penalties may be charged to the Company if it does not fulfill its commitments.

		The above table excludes any potential uncertain income tax liabilities that may become payable upon examination of the Group’s income tax returns by fiscal authorities. Such amounts and periods of payment cannot be reliably estimated.

		Other cash commitments

		In 2009, following Court ruling on a Plan of Reorganization filed by a US subsidiary of the Company, an amount of USD 900 million (EUR 597 million) was settled to an Asbestos Personal Injury Trust including EUR 114 million held in a restricted trust account. For further information with respect to this and other contingent liabilities, refer to note 24.

		The Company and its subsidiaries sponsor pension plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. Additionally, certain postretirement benefits are provided in certain countries. The Company is reviewing the future funding of the existing deficits in its pension plans in the US and UK. Refer to note 18 for a discussion of the plans and expected cash outflows.

		The company has EUR 396 million restructuring-related provisions by the end of 2009, of which EUR 318 million is expected to result in cash outflows in 2010. Refer to note 17 for details of restructuring provisions and potential cash flow impact for 2010 and further.

		A proposal will be submitted to the General Meeting of Shareholders to pay a dividend of EUR 0.70 per common share (up to EUR 650 million), in cash or shares at the option of the shareholder, against the net income for 2009 and the retained earnings of the Company.

		Guarantees

		Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not provide other forms of support. At the end of 2009, the total fair value of guarantees recognized by Philips was EUR 14 million. The following table outlines the total outstanding off-balance sheet credit-related guarantees and business-related guarantees provided by Philips for the benefit of unconsolidated companies and third parties as at December 31, 2009 and 2008.

72 Philips Annual Report 2009

4 Our group performance 4.3 - 4.3.4

4.3		Sustainability

4.3.1		Management summary

		Results in 2009

		In 2009 we made good progress against our Sustainability targets, focusing on:

	•		driving the implementation of our EcoVision programs,

	•		strengthening the energy-efficient and Green Product approach at both Healthcare and Consumer Lifestyle, leveraging the experience of our Lighting sector,

	•		making our supply chain fully compliant with the Electronic Industry Code of Conduct standard, and

	•		including suppliers of our recent acquisitions into the Supplier Sustainability Involvement Program.

		Results are detailed on the following pages and in the Sustainability performance section.

4.3.2		EcoVision III

		Our EcoVision III environmental action program began in 2006 and ended in 2009. EcoVision III mainly called for improvements in all major environmental parameters in manufacturing, compared to the base year 2005.

		EcoVision III covers the contributors to climate change (energy, PFCs and other greenhouse gases), water, waste and a selection of the most relevant restricted and hazardous substances. We exceeded our Global Warming Potential reductions, as well as the water and waste targets. For restricted substances, we reduced the total amount by 88% compared with 2005, but did not meet the targets for some substances. For hazardous substances, the total amount decreased significantly. (Full details can be found in the Sustainability performance section.)

		In order to continue our efforts to improve our environmental performance in manufacturing, we will evaluate new targets as part of our new Chemicals Management program introduction later in 2010.

4.3.3		EcoVision4

		With our latest environmental action program, EcoVision4, we have committed to realize the following by 2012:

	•		generate 30% of total revenues from Green Products

	•		double investment in Green Innovations to a cumulative EUR 1 billion

	•		improve our operational energy efficiency by 25% and reduce CO₂ emissions by 25%, all compared with the base year of 2007.

		We are well on track to reach the above targets. In 2009, 31% of total sales were from Green Products, meeting the first target three years ahead of plan. Over EUR 400 million was invested in Green Innovations in 2009, and we expect to meet the second target in 2010. Our operational carbon footprint decreased 10% compared to 2008, putting us on track to reach the third target as well. Results for each target are highlighted from section Green Product sales onwards.

4.3.4		EcoVision5

		Leveraging sustainability as an integral part of our strategy and additional growth driver

		Sustainability at Philips is all about improving the health and well-being of individuals and the communities they live in. At the same time we strive relentlessly to improve the environmental performance of our products and processes, and to drive sustainability throughout the supply chain.

		In 2009 we evaluated our sustainability strategy and resolved to fully leverage sustainability as an integral part of our overall strategy and an additional driver of growth, as reflected in the Philips Management Agenda.

		To deliver on our brand promise of “sense and simplicity” and at the same time provide the company direction for the longer term in this area, we announced on February 22, 2010 three sustainability leadership key performance indicators where we can bring our competencies to bear ‘care’, ‘energy efficiency’ and ‘materials’ including targets for 2015:

	•		Bringing care to people

			Target: 500 million lives touched by 2015

	•		Improving energy efficiency of Philips products

			Target: 50% improvement by 2015 (for the average total product portfolio) compared to 2009

	•		Closing the materials loop

			Target: Double global collection and recycling amounts and recycled materials in products in 2015 compared to 2009

74 Philips Annual Report 2009

		Each sector will take the lead on one of the leadership key performance indicators with Healthcare leading ‘care’, Lighting ‘energy efficiency’ and Consumer Lifestyle ‘materials’.

		In addition, we defined a set of complementary performance indicators to accelerate change and drive performance, including the EcoVision4 parameters. This new program is called EcoVision5 and we will report on our progress going forward.

4.3.5		Green Product sales

		Sales from Green Product sales increased 19% in 2009 to EUR 7.1 billion, contributing significantly to the total revenue stream. As a percentage of the Group total, Green Product sales rose to 30.6%, up from 22.6% in 2008, meeting our 2012 target three years ahead of plan. As a result, we have increased our target to 50% in 2015.

		Consumer Lifestyle contributed most to the overall sales increase with the introduction of 81 Green Products in 2009. Further progress was also achieved in the Healthcare and Lighting sectors, where the share of Green Product sales increased substantially with the introduction of 15 and 700 new Green Products respectively.

		Overall, improvements have been predominantly realized in energy efficiency, one of the Green Focal Areas in our EcoDesign process.

4.3.6		Green Innovations

		In 2009 Philips invested more than EUR 400 million in Green Innovations — the Research & Development spend related to the development of new generations of Green Products and Green Technologies.

		Philips Healthcare innovation projects consider all of the Green Focal Areas and aim to reduce total life cycle impact. In particular, the sector focuses on reducing energy consumption, weight and dose.

		Consumer Lifestyle’s investment in Green Innovations is dedicated to the development of new Green Products, focusing on further enhancing energy efficiency and on closing material loops. Green Innovations at Consumer Lifestyle increased significantly in 2009, and with visible results. For example, 90% of our TV portfolio has been awarded the EU Ecolabel after verification that the products meet the EU’s high environmental and performance standards.

		The Lighting sector accounts for almost half of the total spend on Green Innovations and also contributes to more than 50% of Philips Green Product sales. The focus is on developing new energy-efficient lighting solutions, further enhancing current Green Products and driving toward technological breakthroughs, such as solid-state lighting.

		Within Corporate Technologies, Philips Research invested approximately EUR 44 million, spread over Green Innovation projects focused on innovations mainly related to water, air, waste and energy.

Philips Annual Report 2009 75

4 Our group performance 4.3.7 — 4.3.8

4.3.7		Operational energy efficiency

		CO₂ emissions dropped 10% in 2009, due to the economic downturn, but also to our ongoing CO₂reduction programs. CO₂ emissions from manufacturing decreased 6% due to lower volumes and improved energy efficiency. The effects of some of these improvement programs will become more visible when production volumes pick up as most industrial activities require a so-called base load independent of volumes. (A glass furnace, for example, requires a minimum amount of energy, even if not fully used.)

		As we employed fewer staff, CO₂ emissions from non-industrial sites (offices, warehouses, laboratories, etc.) were 12% less than 2008.

		We purchased 15% of electricity from renewable sources.

		As a result of our ongoing promotion of videoconferencing and our green lease car policy, CO₂emissions from business travel further decreased by 17%. CO₂ emissions from logistics decreased 14% as a result of lower volumes, as well as a number of CO₂ reduction measures including a continued shift from air to sea freight and further improved container utilization.

4.3.8		Social performance

		Employee engagement

		In 2009, 91% of our employees took the Philips Engagement Survey. The Employee Engagement Index — the single measure of the overall level of employee engagement at Philips — decreased slightly to 68% in 2009, from 69% in the previous year. Overall our engagement levels remained high during difficult economic circumstances. The target for 2010 is to reach the high-performance score of 70%.

		Equally important is the insight we gained into ways we can improve. We continue to place emphasis on connecting all of our people with the long-term ambition of Philips, supported by the solid results over 2009.

		Diversity and inclusion

		In 2009, 35% of the Philips workforce was female, while 17% of newly appointed executives were female, illustrating our sharp focus on diversity and inclusion. Due to an outflow of female executives, the total number remained unchanged at 10%. Our ambition is to employ 15% female executives in 2012, a target the Healthcare sector exceeded in 2009.

76 Philips Annual Report 2009

4 Our group performance 4.3.8 - 4.3.8

		Overall, the 593 Philips executives at year-end represented more than 30 nationalities and the percentage of executives with BRIC nationality stood at 5%.

		Moreover, 23% of our top potentials and 29% of our high potentials were female in 2009. The percentage of top potentials with BRIC nationality stood at 10%, with high potentials at 17%.

		Developing our people

		With nearly 5,500 employees participating in programs in our Core Curriculum during 2009, enrollment decreased compared with 10,000 the previous year. Functional Core Curricula enrollment was some 11,000 in 2009, an increase from 8,664 in 2008. The overall decrease is a result of travel restrictions partly offset by intensified web-based training courses and “virtual class-room” trainings. Almost 43,000 employees participated in ‘Leading to Win’ training in 2009.

		In 2009, our Inspire program for high potentials facilitated the completion of 24 project assignments. Top potentials in the Octagon program completed eight projects.

		In the face of the economic downturn, participation in our curriculum of internal and external programs for executives reduced compared to 2008.

		General Business Principles

		The Philips General Business Principles (GBP) are central to how we operate, enabling us to maintain an ethically responsible attitude in all countries and cultures. To meet challenges in a changing world, we update our policies and directives as well as GBP training and communications programs. The global One Philips Ethics hotline seeks to ensure that alleged violations are registered and dealt with consistently within one company-wide system.

		From Whistleblower Policy to GBP Reporting Policy

		The Philips Whistleblower Policy was updated in 2009 based on a benchmark study and advice from outside experts. Our policy has been renamed the GBP Reporting Policy to avoid any possible negative connotations related to ‘whistleblowing’. Additional changes include:

	•		More clearly defined reporting channels for reporting: our GBP Compliance Officers and One Philips Ethics Line.

	•		Employees are more strongly encouraged to first discuss issues with management.

	•		Indication of preference for more specific grievance channels if available.

		Updated global privacy framework

		We added two additional sets of Privacy Rules to our global privacy framework as part of the General Business Principles: The Privacy Rules for Employee Data and the Privacy Rules for Customer, Supplier and Business Partner Data. These Rules specify the privacy principles defined in the Philips Privacy Code by requiring certain rules and procedures to be followed with regard to data privacy in Philips, if necessary in addition to applicable legal requirements. The Privacy Rules are intended to function as ‘Binding Corporate Rules’ for Philips as defined by the European data protection regulators, thus creating a ‘Safe Haven’ for personal data in Philips globally. The roll-out of the new Privacy Rules is coordinated by the Philips Global Privacy Council, in which Consumer Lifestyle, Lighting and Healthcare, as well as several corporate functions and countries are represented.

		Updated GBP Directives

		The updated edition of the GBP Directives was adopted by the Board of Management in December, for worldwide launch as of January 2010.

		Improving communication

		In March 2009 we rolled out a GBP communication and awareness toolkit to the Country Compliance Officers and local communication staff. Materials can be further localized and communicated with relevant cultural and business/functional examples.

		Ongoing training

		In 2009 an updated and refreshed version of the global web-based business ethics training tool was developed in 23 languages for Philips employees with an internet/intranet account. Employees without internet access will be provided with classroom training in their local language. The first phase of implementation was

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4 Our group performance 4.3.8 - 4.3.9

		completed with a roll-out to approximately 30,000 employees in the US, the Netherlands and India. The other regions and countries are scheduled for 2010.

		Seven training courses were conducted in 2009 (one each in Latin America, US/Canada and APAC, and four in EMEA). The courses provided detailed insight into conducting investigations.

		The Compliance Officer network

		We developed a new, more dedicated business ethics risk analysis and assessment tool in 2009. The tool includes a number of control parameters as well as internal and external risk parameters, including a number of more subjective parameters per country, for which the respective GBP Country Compliance Officers were asked to provide input.

		We implemented Rules of Conduct for GBP investigations with mandatory procedures to be adhered to in all GBP investigations around the world. This includes a clear distinction between local responsibility and matters where the responsibility for investigation has to be delegated to the respective functional owners at corporate level.

		Health and safety

		In 2009 we recorded 427 Lost Workday Injuries cases, occupational injury cases where the injured person is unable to work the day after the injury. This is a 34% decrease compared with 2008. The rate of Lost Workday Injuries also decreased substantially to 0.44 per 100 FTEs, compared with 0.68 in 2008.

		Reductions were particularly realized in the Lighting sector, which continued to make progress with a dedicated action program started three years ago to drive down injury levels.

4.3.9		Supplier performance

		The trend in outsourcing manufacturing activities continued in 2009. Philips remains focused on improving working conditions and environmental performance in its supply chain.

		Recognizing that this is a huge challenge requiring industry-wide effort, we continue to be active in the Electronic Industry Citizenship Coalition (EICC), whose members share the goal to improve conditions in the electronics supply chain. Philips also believes that cooperation with other stakeholders, such as governments and NGOs, is essential. Accordingly we continue to work with our stakeholders.

		Updated Supplier Sustainability Declaration

		In 2009 we updated the Philips Supplier Sustainability Declaration in accordance with the updated EICC Code of Conduct, while maintaining the Philips appendix with stricter requirements on freedom of association/collective bargaining. This is in keeping with our General Business Principles and is expected by our stakeholders. Where freedom of association/collective bargaining is restricted by law, we look to see if there are other means of open communication between the supplier’s management and workers. Our Supplier Sustainability Declaration is an integral part of our contractual agreement with suppliers.

		2009 supplier audits

		Philips conducted a record total of 858 supplier sustainability audits to identify and solve issues in 2009. While we have made significant improvements among our first tier suppliers, there are still challenges to encourage our suppliers to pass on sustainability standards to their suppliers.

		The average number of non-compliances per audit in the risk countries (selection based on the Maplecroft Human Rights Risk Indexes) varies between 22 in India down to 3 in Thailand and Indonesia.

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We require our suppliers to pay for the third-party audits, believing this is an effective way of embedding our requirements in the supply chain.

		Follow-up audits to check corrective actions are conducted by Philips personnel. This approach is well accepted and appreciated by our suppliers as it helped improving their performance. Where no improvements could be achieved, 12 suppliers were phased out.

		Strengthening the organization

		In 2009 we moved the functional responsibility for the Supplier Sustainability Involvement Program to China to embed the program in the Asian procurement organization. With our personnel working directly with suppliers and buyers, we can address issues more effectively in a local context.

		Auditing Philips sites

		Mirroring our supplier approach, 12 internal Philips sites in risk countries were audited by a third party using the EICC checklist. All non-conformities have been resolved or are being resolved in accordance with Philips’ strict resolution timelines.

		Supply chain carbon footprint

		In 2008 we selected six products and assessed CO₂emission of their components throughout the supply chain. The goal of this pilot project was to create awareness in our supply base, identify large sources of emissions per product type and implement abatement measures collaboratively with our suppliers. We continued this exercise in 2009 by analyzing four more products. Additionally, to further improve measurement and increase understanding of supply chain CO₂emissions, we subscribed to the EICC Carbon Reporting System. This online system allows companies in the electronics industry to calculate their greenhouse gas emissions and share the data with other companies in the industry.

		‘Conflict’ minerals: issues further down the chain

		Philips acknowledges the issues concerning working conditions at the base of the supply chain, specifically in the extractives sector for metals such as tin, tantalum and tungsten. In particular, we are concerned about the situation in the east of the Democratic Republic of the Congo where proceeds from the extractives sector are sometimes used to finance rebel conflicts in the region.

		EICC members stated in February 2009 that mineral extraction and transport activities that fuel conflict are not acceptable. Philips participates in the EICC Extractives Work Group, which initiated an industry project in April 2009 to develop supply chain transparency, with a particular focus on cobalt, tin, and tantalum. The project will attempt to identify participants in these supply chains and to obtain information from suppliers relating to conformance to the EICC Code of Conduct and similar programs.

		Along with several other leading electronics companies, we convened a multi-stakeholder workshop in San Francisco in October 2009 to engage other sectors and interested stakeholders. We also have had meetings with the Dutch government to see what role government and other institutions can play in resolving the issue of conflict minerals.

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44		Proposed distribution to shareholders

		Pursuant to article 34 of the articles of association of Royal Philips Electronics, a dividend will first be declared on preference shares out of net income. The remainder of the net income, after reservations made with the approval of the Supervisory Board, shall be available for distribution to holders of common shares subject to shareholder approval after year-end. As of December 31, 2009, the issued share capital consists only of common shares; no preference shares have been issued. Article 33 of the articles of association of Royal Philips Electronics gives the Board of Management the power to determine what portion of the net income shall be retained by way of reserve, subject to the approval of the Supervisory Board.

		A proposal will be submitted to the 2010 Annual General Meeting of Shareholders to declare a dividend of EUR 0.70 per common share, in cash or in shares at the option of the shareholder, against the net income for 2009 and the retained earnings of the Company. Such dividend is expected to result in a payment of up to EUR 650 million.

		Shareholders will be given the opportunity to make their choice between cash and shares between April 1, 2010 and April 23, 2010. If no choice is made during this election period the dividend will be paid in shares. On April 23, 2010 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average price of all traded common shares Koninklijke Philips Electronics N.V. at Euronext Amsterdam on 21, 22 and 23 April 2010. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 3% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from April 28, 2010. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on April 26, 2010.

		Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in case of dividend in shares will be borne by Philips.

		In 2009, a distribution in cash was paid of EUR 0.70 per common share (EUR 647 million) against the retained earnings of the Company.

		The balance sheet presented in this report, as part of the Company financial statements for the period ended December 31, 2009, is before dividend, which is subject to shareholder approval after year-end.

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4.5		Outlook

		We expect the upward trend in emerging markets to continue, supporting all three operating sectors. In the US we anticipate that the market headwind caused by the uncertainty around potential healthcare reform will ease off. A significant part of our Lighting business — particularly Professional Luminaires — is highly correlated to commercial construction, a market we have yet to see recover.

		This said, visibility beyond the short term remains low and so we will continue our focus on cost (we expect limited restructuring in the range of EUR 150-250 million for the year 2010, predominantly in Lighting) and on cash. At the same time we will ensure that our businesses are well placed to capture growth when it comes, not least by maintaining investments in innovation, marketing and emerging markets.

		We remain very much committed to delivering an EBITA profitability of 10% or better. We were encouraged by our performance in the fourth quarter of 2009 — in what was still a tough economic climate — and are confident that 2010 will represent another solid step towards this target. Naturally, the magnitude of the improvement over the full year is dependent — in part at least — on the developments in the global economy.

		Amsterdam, February 22, 2010

		Board of Management

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5 Our sector performance

Corporate center • Countries and regions • Global service units • Research • Intellectual Property & Standards • Applied Technologies • NewVenture Integration • Design

5.1

Our structure

		Koninklijke Philips Electronics N.V. (the ‘Company’) is the parent company of the Philips Group (‘Philips’ or the ‘Group’). Its shares are listed on the stock markets of Euronext Amsterdam and the New York Stock Exchange. The management of the Company is entrusted to the Board of Management under the supervision of the Supervisory Board.

		Philips’ activities in the field of health and well-being are organized on a sector basis, with each operating sector — Healthcare, Consumer Lifestyle and Lighting — being responsible for the management of its businesses worldwide.

		The Group Management & Services sector provides the operating sectors with support through shared service centers. Furthermore, country management organization supports the creation of value, connecting Philips with key stakeholders, especially our employees, customers, government and society. The sector also includes global service units and pensions.

		Organizational chart

The Board of Management and a number of heads of Corporate Staff departments and senior sector executives together form the Group Mangement Commitee.

In 2009, the activities related to Innovation & Emerging Businesses were reported under Group Management & Services. Through these businesses, Philips aims to invest

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5 Our sector performance 5.2 - 5.2.1

5.2

Healthcare

“In 2009 our focus was very much on pro-actively managing our way through the economic downturn. Despite challenging market conditions, we delivered solid financial results thanks to an intense focus on winning business and controlling cost.”

Steve Rusckowski, CEO Philips Healthcare

•		Healthcare challenges present major opportunities in the long term

•		Addressing the care cycle — our unique differentiator

•		Home healthcare is a core part of our healthcare strategy

•		Improved market leadership in core businesses

5.2.1

Introduction

The future of healthcare is one of the most pressing global issues of our time. Around the world, societies are facing the growing reality and burden of increasing and in some cases aging populations, as well as the upward spiraling costs of keeping us in good health. Worldwide, many more people live longer with chronic disease — such as cardiovascular diseases, cancer, diabetes — than in the past. Aging and unhealthy lifestyles are also contributing to the rise of chronic diseases, putting even more pressure on healthcare systems. At the same time the world is facing a global and growing deficit of healthcare professionals.

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In the long term, these challenges present Philips with an enormous opportunity. We focus our business on addressing the evolving needs of the healthcare market by developing meaningful innovations that contribute to better healthcare, at lower cost, around the world.

5.2.2

Healthcare landscape

		The global healthcare market is dynamic and growing. Over the past three decades, the healthcare industry has grown faster than Western world GDP, and has also experienced high rates of growth in emerging markets such as China and India. Rising healthcare costs present a major challenge to society. The industry is looking to address this through continued innovation, both in traditional care settings and also in the field of home healthcare. This approach will not only help to lighten the burden on health systems, but will also help to provide a more comforting and therapeutic environment for patient care.

		The healthcare market has not been immune from recent developments in the macro-economic environment. The lengthening downturn has had a significant impact on the healthcare industry, primarily in North America, Japan and Western Europe. Hospitals are facing dramatic declines in their operating margins, and many are cutting or delaying capital purchases and medical technology expenditures.

		These rapidly changing market dynamics adversely affected us and our competitors in 2009 and will continue to have an impact in 2010. Though it remains uncertain when recovery in the market will become visible, and what the exact implications of pending US legislation will be, we do see certain demand drivers that offset reimbursement and profitability pressures. At the same time we are anticipating government stimulus packages in China and the US that should help drive recovery in the healthcare market.

5.2.3		People-focused, healthcare simplified

		Philips’ distinctive approach to healthcare starts by looking beyond the technology to the people — patients and care providers — and the medical problems they face. By gaining deep insights into how patients and clinicians experience healthcare, we are able to identify market and clinical needs. In response, we can develop more intuitive, more affordable, and in the end more meaningful innovations to help take some of the complexity out of healthcare. This results in better diagnosis, more appropriate treatment planning, faster patient recovery and long-term health. We try to simplify healthcare by combining our clinical expertise with human insights to develop innovations that ultimately help to improve the quality of people’s lives. We believe that we are well-positioned for the long term as global healthcare needs will continue to increase and our care cycle approach will drive towards better patient outcomes and reduced healthcare system costs.

		With a strong presence in cardiology, oncology and women’s health, we focus on many of the fundamental health problems with which people are confronted, such as congestive heart failure, lung and breast cancers and coronary artery disease. Our focus is on understanding the complete cycle of care — from disease prevention to screening and diagnosis through to treatment, monitoring and health management — and choosing to participate in the areas where we can add significant value. Philips is dedicated to making an impact wherever care is provided, within the hospital — critical care, emergency care and surgery — and, as importantly, in the home.

		The high-growth sector of home healthcare is a core part of Philips’ healthcare strategy. We provide innovative products and services for the home that connect patients to their healthcare providers and support individuals at risk in the home through better awareness, diagnosis, treatment, monitoring and management of their conditions. We also provide solutions that improve the quality of life for aging adults, for people with chronic illnesses and for their caregivers, by enabling healthier, independent living at home.

5.2.4		About Philips Healthcare

		Philips is one of the top-tier players in the healthcare technology market (based on sales) alongside General Electric (GE) and Siemens. Our Healthcare sector has global leadership positions in areas such as cardiac care, acute care and home healthcare.

		Philips Healthcare’s current activities are organized across five businesses:

	•		Imaging Systems — X-ray, computed tomography (CT), magnetic resonance (MR) and nuclear medicine imaging equipment

	•		Clinical Care Systems — ultrasound imaging, hospital respiratory systems, cardiac care systems and children’s medical ventures

	•		Home Healthcare Solutions — sleep management and respiratory care, medical alert services, remote cardiac services, remote patient management

	•		Healthcare Informatics — healthcare informatics, patient monitoring systems and image management services

	•		Customer Services — consultancy, clinical services, education, equipment financing, asset management and equipment maintenance and repair.

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5 Our sector performance 5.2.4 - 5.2.5

		In 2009 we continued to improve the efficiency and effectiveness of our organization, not only in response to the current economic climate but, even more importantly, to further strengthen our position for the future. We aggressively managed costs and reorganized our business, both to meet customer and market demands, as well as to enable profitable growth. In addition, we continue to drive the pace of operational improvement. Our Quote to Cash program has driven fundamental changes within our organization, focusing on process standardization and simplification. A direct result of those efforts was the formation of a centralized Commercial Operations organization — with the primary goal of making it easier for our customers to do business with us.

		Products and services are sold to healthcare providers around the world, including academic, enterprise and stand-alone institutions, clinics, physicians, home healthcare agencies and consumer retailers. Marketing, sales and service channels are mainly direct.

		The United States is the largest healthcare market, currently representing close to 50% of the global market, followed by Japan and Germany. Approximately 19% of our annual sales are generated in emerging markets, and we expect these to continue to grow faster than the markets in Western Europe and North America.

		Philips Healthcare employs approximately 34,000 employees worldwide.

		With regard to sourcing, please refer to the section Supply management under section 4.1.14, Performance by key function, of this Annual Report.

5.2.5

Progress against targets

The Annual Report 2008 set out a number of key targets for Philips Healthcare in 2009. The advances made in addressing these are outlined below.

		Improve margins through acceleration of operational improvements

		The fast-changing healthcare market accelerated a need to aggressively adjust our cost structure to become much more competitive in all markets. We succeeded in structurally reducing our fixed and discretionary costs. A new approach to optimizing our investments in innovation also lowered our costs. At the same time we introduced a sector-wide program to structurally improve our operational excellence. This program covers five specific areas — quote to cash, supply base optimization, integrated customer services, pricing and post-merger integration.

		Grow faster than our market in key market segments

		We continue to invest in critical capabilities to strengthen our commercial organization in key markets. We are improving the quality of our channels by focusing on strategically valuable target segments, which include imaging, clinical decision support and home healthcare. Philips continues to make key strategic investments in emerging technologies in these areas, either through organic growth or acquisitions, aiming to better serve our customers’ needs, improve clinical outcomes, reduce healthcare costs and create new revenue opportunities. For example, our acquisition of Traxtal in 2009 provides foundational device navigation technology allowing Philips to further support minimally-invasive surgical procedures by expanding our presence in the rapidly growing image-guided intervention and therapy market.

		Philips is also leveraging its product and services portfolio in innovative ways to create integrated solutions for customers. We offer innovative financing and business modeling solutions to our customers to simplify and ease purchasing decisions. Additionally, we continue to expand our presence in market-leading Ambient Experience and healing environment solutions, a further contributor to the continued growth of our highly profitable Customer Services business.

		We have introduced new low and mid-range products, boosting growth in these market segments in both mature and emerging markets. We received certification in China for one such product, the latest addition to the HD family of ultrasound systems, which deliver high-quality imaging in an affordable package. In addition, we are making significant strategic investments in our industrial footprint in emerging markets in order to drive growth by better serving local customers and to reduce our overall cost position.

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		Deliver value to our customers and shareholders by effective integration of our acquisitions

		In 2009 we successfully completed the next steps in the integration of major prior-year acquisitions, notably Respironics. At the same time we continued to expand our portfolio with some modest acquisitions. For instance, we acquired InnerCool Therapies Inc., a pioneer in the field of therapeutic hypothermia, strengthening our position in the emergency care market by adding body temperature management solutions. We also acquired Traxtal, a medical technology innovator in image-guided procedures, to strengthen our position as a leading provider of minimally invasive therapy solutions. Integration of both acquisitions is progressing well.

		Enhance engagement of our workforce

		The challenges our sector is currently facing are reflected, to a degree, in our 2009 employee engagement score. Overall employee engagement went down to 62% favorable, from 67% in 2008. However our index measuring the leadership effectiveness of managers — as perceived by employees — continued to improve, rising from 68% in 2008 to 69% in 2009. Furthermore, we have further strengthened our focus on talent inflow and leadership development in our emerging markets, one of the main focus areas for our long-term growth plans.

5.2.6		2009 financial performance

		Sales in 2009 amounted to EUR 7,839 million, 2% higher than in 2008 on a nominal basis, largely thanks to the contributions from acquired companies (Respironics full-year sales) and growth at Customer Services. Excluding the 3% positive impact of portfolio changes and the 3% favorable impact of currency effects, comparable sales were lower by 3%. Sales declines were seen at Imaging Systems, Healthcare Informatics and Clinical Care Systems while Customer Service and Home Healthcare Systems grew compared to 2008. Imaging Systems sales were lower across most modalities except Computed Tomography. Green Product sales amounted to EUR 1,791 million in 2009, up from EUR 1,527 million in 2008, representing 23% of sector sales.

		Geographically, mature market sales were lower than in 2008, led by declines in North America due to the recession and uncertainty surrounding US healthcare reform. Emerging markets showed double-digit comparable sales growth, driven by all businesses. This growth was attributable to Central and Eastern Europe, India, the Middle East and China.

		EBITA amounted to EUR 848 million, or 10.8% of sales, in line with 2008 earnings of EUR 839 million. 2009 was impacted by EUR 42 million of restructuring charges and EUR 64 million of acquisition-related charges. Earnings in 2008 included EUR 63 million of restructuring charges and EUR 90 million acquisition-related charges, which were partly offset by a EUR 45 million gain on the sale of Philips Speech Recognition Systems. EBITA was driven by additional income from Customer Services and Home Healthcare Solutions, offsetting lower earnings at Clinical Care Systems and Healthcare Informatics. Despite lower sales, Imaging Systems’ earnings were broadly in line with 2008 as result of strict cost management in the second part of the year.

		Compared to 2008, EBIT declined by EUR 30 million to EUR 591 million.

		Cash flow before financing activities totaled EUR 876 million, an increase of EUR 3,315 million compared with 2008. Last year included net payments totaling EUR 3,456 million, mainly for the acquisitions of Respironics, VISICU, TOMCAT, Dixtal Biomédica, Shenzhen Goldway, Medel and Alpha X-Ray Technologies. Excluding acquisition-related outflows in 2008 and EUR 43 million of cash proceeds from divestments in 2009, cash flow before financing activities was EUR 184 million lower than in 2008. The decrease was largely due to lower inflow from working capital, particularly accounts payable.

Key data
in millions of euros


	2007		2008			2009
Sales		6,638		7,649			7,839
Sales growth
% increase, nominal		1		15			2
% increase, comparable		4		6			(3	)
EBITA		846		839			848
as a % of sales		12.7		11.0			10.8
EBIT		709		621			591
as a % of sales		10.7		8.1			7.5
Net operating capital (NOC)		4,758		8,785			8,434
Cash flows before financing activities		212		(2,439	)		876
Employees (FTEs)		29,191		35,551			34,296


		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

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5.2.7

Regulatory requirements

Philips Healthcare is subject to extensive regulation. It strives for full compliance with regulatory product approval and quality system requirements in every market it serves by addressing specific terms and conditions of local ministry of health or federal regulatory authorities, including agencies like the US FDA, EU Competent Authorities and Japanese MLHW. Environmental and sustainability requirements like the European Union’s Waste from Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) directives are met with comprehensive EcoDesign and manufacturing programs to reduce the use of hazardous materials.

Philips Healthcare participates in COCIR, the European trade association for the Radiological, Electro-medical and Healthcare IT industry, which has committed to participate in the Energy-using Products Directive through a Self-Regulatory Initiative for imaging equipment.

5.2.8

Strategy and 2010 objectives

		Philips Healthcare will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of Health and Well-being.

		Healthcare has defined the following key business objectives for 2010:

Drive performance

	•		Continue to drive operational excellence and improve margins

	•		Drive emerging market growth

	•		Continue to pursue integration of our recent acquisitions

Accelerate change

	•		Drive transformational activities to improve the customer experience

	•		Organize around customers and markets to bring decision-making closer to the customer

	•		Accelerate introductions of low and mid-end products as a platform for new growth opportunities

Implement strategy

	•		Move toward leadership position in imaging

	•		Grow Home Healthcare

	•		Continue to execute our care cycle strategy around women’s health, cardiology and oncology

	•		Leverage Sustainability as a driver of growth

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5.3 Consumer Lifestyle

“In 2009 we focused relentlessly on managing cost and cash in order to cushion the impact of the global downturn, while at the same time building for a profitable future. Our acquisition of Saeco showed that we are serious about growth.”

Andrea Ragnetti, CEO Philips Consumer Lifestyle

•		Stringent cost management helps cushion impact of global downturn

•		Acquisition of Saeco brings global leadership position in coffee appliances

•		Four strategic platforms identified, all with growth drivers

•		Even greater emphasis on health and well-being

5.3.1

Introduction

		In a year characterized by a continuing global economic downturn and lower levels of consumer confidence and spending power, there were nonetheless a number of encouraging signs.

		Many people’s behavior has changed in light of the crisis, with a greater emphasis on entertaining, relaxing and personal care in the home rather than outside it. In addition, there is an ongoing focus on personal health and well-being; more and more people are becoming aware that they have to actively address this issue in order to improve the quality of their lives. And consumers are limited far less than before by traditional boundaries

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between products and categories. They don’t think in terms of ‘boxes’, but instead go looking for value and an enhanced experience.

5.3.2

Lifestyle retail landscape

		The global economic downturn in 2009 had an impact on the demand for consumer goods. On the one hand, consumers have been slower to buy new or replace existing electronic goods. On the other hand, behavioral shifts have created opportunities for growth, as people choose to stay at home and watch movies on TV, cook for friends or give themselves grooming and beauty treatments; all of these are areas in which we offer solutions.

		Emerging markets such as Russia and Latin America, where growth was anticipated, were also affected by the downturn. However, these markets have shown continued improvement over time.

5.3.3

Enabling people to enjoy a healthy lifestyle

Understanding consumers

		In everything we do, we aim to improve the quality of people’s lives through the timely delivery of meaningful innovations delivered with the promise of “sense and simplicity”. At Consumer Lifestyle the starting point for this is developing a complete understanding of people’s health and well-being needs, beliefs and attitudes.

		In 2009 we carried out a number of activities to support this, including a global survey of over 8,000 consumers, 4,000 of whom were in the emerging markets of Brazil, Russia, India and China. This was one of the largest-ever consumer surveys carried out on health and well-being. The results of the survey will help us develop an even deeper understanding of what consumers are looking for.

Tracking trends and identifying opportunities

Consumer Lifestyle works together with Philips Design to monitor trends ranging from consumer tastes to design aesthetics. With its global footprint, Consumer Lifestyle is well positioned to understand emerging needs in local markets. Country organizations are our interface with the consumer, allowing us to accurately identify local needs, tastes and commercial opportunities.

Applying insights to develop innovative solutions

We apply a rigorous product development process when creating new value propositions. At the heart of this process are validated consumer insights, which show that the propositions meet a latent market need or needs. The combination of insight, simplicity and innovation helps differentiate us from the competition and create a platform for sustainable business success.

Key platforms

		In focusing on the domain of health and well-being, we are tapping into significant trends — such as consumer empowerment, growth in emerging markets and aging populations — that will have a major impact on society in the future.

		In order to harness the available opportunities we have identified four key platforms, each with drivers for innovation and growth:

Healthy Life

Taking a holistic approach to enhancing consumers’ well-being (both mental and physical).

Personal Care

Addressing people’s desire to look good and feel their best so they can approach life with a greater feeling of confidence.

Home Living

Making the home a more comforting, inviting and exciting place to be, reflecting people’s personal identity and preferences.

Interactive Living

Sharing life experiences without boundaries, addressing the rapidly changing ways we interact with and access media and entertainment.

5.3.4

About Consumer Lifestyle

		The Philips Consumer Lifestyle sector is organized around its markets, customers and consumers, with its businesses focused on value creation through category development, and its functions concentrating on value delivery through operational excellence.

		The market-driven approach is applied with particular emphasis at local level, enabling Consumer Lifestyle to address a variety of market dynamics and allowing the sales organizations to operate with shorter lines of communication with the sector’s six businesses. This also promotes customer-centricity in day-to-day operations.

		In 2009 the sector consisted of the following areas of business:

•

Television — experience television (including the 2009 Aurea and Ambilight range and the Cinema 21:9 model, the world’s first cinema-proportioned LCD television

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			that gives true cinematic viewing in the home) plus lifestyle television

	•		Shaving & Beauty — electric shavers, female depilation appliances, haircare and male grooming products, vitality solutions and skincare

	•		Audio & Video Multimedia — home and portable audio and video entertainment, including Blu-ray Disc playback, MP3 and MP4 players, and docking stations for portable entertainment devices

	•		Domestic Appliances — kitchen appliances, floor care, garment care, water and air purifiers, beverage appliances. In 2009 this area of business was considerably strengthened through the acquisition of Saeco International Group S.p.A. of Italy, making Philips a global leader in coffee machines

	•		Health & Wellness — oral healthcare, mother and childcare, relationship care

	•		Peripherals & Accessories — mobility accessories (including headphones, portable audio accessories), remote controls, PC peripherals, digital picture frames, audio and video communications (including DECT and VoIP digital cordless phones).

		We also partner with leading companies from other fields, such as Sara Lee/Douwe Egberts and Nivea Beiersdorf, in order to deliver customer-focused appliance/consumable combinations. Consumer Lifestyle has continued its business with international key accounts, particularly in emerging markets. The introduction of more ‘flagship’ online stores for our products has added further key touch-points to the consumer brand experience.

		We offer a broad range of products from high to low price/value quartiles, necessitating a diverse distribution model that includes mass merchants, retail chains, independents and small specialty stores often represented by buying groups, as well as online retailers and distributors/wholesalers.

		Under normal economic conditions, the Consumer Lifestyle business experiences seasonality, with higher sales in the fourth quarter resulting from the holiday sales.

		Consumer Lifestyle employs approximately 18,400 people worldwide. This increase on the 2008 level of 17,000 was mainly due to the acquisition of Saeco, which brought around 2,000 new employees — and a lot of valuable experience and expertise — to our sector. Our global sales and service organization covers more than 50 mature and emerging markets. In addition, we operate manufacturing and business creation organizations in the Netherlands, France, Belgium, Austria, Hungary, Singapore, Argentina, Brazil and China.

		Consumer Lifestyle strives for full compliance with relevant regulatory requirements.

		With regard to sourcing, please refer to the section Supply management under section 4.1.14, Performance by key function, of this Annual Report.

5.3.5

Progress against targets

		The Annual Report 2008 set out a number of key targets for Philips Consumer Lifestyle in 2009. The advances made in addressing these are outlined below.

		Further optimize the business portfolio to focus on higher growth, higher-margin product categories and to build on global and regional leadership positions

		In 2009, Consumer Lifestyle placed particular emphasis on ensuring the right product/market combinations exist across its portfolio, as it progressively shifts focus to consolidate global and regional leadership positions. For example, the Television business has achieved market co-leadership positions in selected product-market combinations in Europe primarily due to its focus on higher-margin categories. Audio & Video Multimedia implemented portfolio choices to shift from traditional lower-margin propositions to emerging value spaces in home cinema and home audio & video.

		Consumer Lifestyle is also making bold choices in many markets regarding which categories to pursue and grow. For example, Television has evolved from a business based on scale to one driven by differentiation, especially in its channel/market mix. Traditional world-class competencies in areas like picture quality and technical performance have been maintained, while additional focus has been placed on differentiated design and experiences. As part of this strategic shift, Philips and TPV Technology concluded a brand licensing agreement for Philips’ PC monitors business that came into effect in the second quarter of 2009.

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		Selectively strengthen the portfolio through opening up new value spaces, including pursuing external opportunities such as strategic acquisitions and alliances

		The acquisition of Saeco International Group S.p.A. of Italy, one of the world’s leading espresso machine makers, has helped us consolidate our leadership position in the coffee-making equipment market.

		We focus on the four key platforms of Healthy Life, Personal Care, Home Living and Interactive Living, identifying new value spaces within these platforms where we see considerable scope for growth: Lifestyle Management, Skin Care, Sleep, Relationship Care, Water and Air. These value spaces are already showing great potential as we tap into consumer needs and trends in the health and well-being domain, while growing our presence in key categories and channels.

		Focus on geographic areas — in particular emerging markets — with the highest return on marketing investment

		The emerging markets offer higher growth potential than mature markets. We can leverage our strong brand presence and equity in these countries — often as high or even higher than our brand equity in mature markets — to help capture the available opportunities. We have also organized accelerator teams around consumer markets to increase contact with — and responsiveness to — the local markets.

		We are innovating locally to cater for the tastes and preferences of national and/or regional consumers, while aiming to ensure that successful ideas can be rolled out globally. Examples of this include our entry into water purification in India and air purification in China. We are currently exploring how to apply these solutions in mature markets. Another example is the Healthy Variety rice cooker, designed in China to meet the cooking requirements of millions in the local market, and launched in China in November 2009 as a healthy way of preparing meals.

		Increase effectiveness and investment in advertising and promotion as well as research and development

		Our Test to Invest approach has been applied across various markets in order to determine where we should focus our spending. We successfully implemented our Value Campaign, which used various media platforms to present simple storylines that elaborated on “sense and simplicity” and gave quantifiable reasons why people across the globe should buy our products. This was accompanied by an in-store excellence day, in which all employees left their desks to ensure the stores were well stocked.

		In order to deliver meaningful and timely propositions to consumers, running effective and creative innovation & development programs is vital. We have therefore concentrated our general innovation & development efforts in three main sites: two in Asia and one in Europe, supported by several specialized facilities (e.g. Saeco in Italy for espresso).

		Maintain rigorous cost and organizational discipline, measured against external and internal benchmarks

		We have a continuous business transformation program in place, called Earn To Invest (E2I). E2I bases performance measurement on up-to-date internal and external benchmarks and best practices to achieve best-in-class performance levels in all functions. Since its inception the total E2I program has delivered well beyond the initial target of EUR 200 million in synergies across the former Consumer Electronics and Domestic Appliances and Personal Care divisions.

		Through E2I we have been able to increase investment in advertising & promotion and innovation & development while lowering our sales break-even point. The program will continue into 2010 as we respond to the economic environment.

		Throughout 2009 we have also optimized our manufacturing, supply and innovation & development footprint on an ongoing basis. We have also lowered our operational break-even point in order to create more possibilities for future investments and also to increase the flexibility of our organization to respond quickly to changing economic conditions.

5.3.6

2009 financial performance

In 2009, Consumer Lifestyle experienced very challenging market conditions as a result of the global economic recession. Sales amounted to EUR 8,467 million, a nominal decline of 22%. Adjusted for unfavorable currency effects of 1% and portfolio changes, mainly the divestment of Television in North America and the sale of Set-Top Boxes in 2008 as well as the acquisition of Saeco and sale of IT Monitors in 2009, comparable sales declined 17%.

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Key data
in millions of euros


	2007			2008			2009
Sales		13,102			10,889			8,467
of which Television		6,042			4,724			3,122
Sales growth
% increase (decrease), nominal		2			(17	)		(22	)
% increase (decrease), comparable¹⁾		4			(9	)		(17	)
Sales growth excl. Television
% increase (decrease), nominal		8			(13	)		(13	)
% increase (decrease), comparable¹⁾		10			(6	)		(12	)
EBITA¹⁾		805			126			339
of which Television		(98	)		(436	)		(179	)
as a % of sales		6.1			1.2			4.0
EBIT		789			110			321
of which Television		(98	)		(436	)		(179	)
as a % of sales		6.0			1.0			3.8
Net operating capital (NOC)¹⁾		1,122			798			625
of which Television		(199	)		(238	)		(386	)
Cash flows before financing activities¹⁾		714			242			587
of which Television		(68	)		(483	)		(23	)
Employees (FTEs)		23,280			17,145			18,389
of which Television		6,738			4,742			4,766


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

		From a geographical perspective, double-digit declines were visible in all markets. Sales in mature markets, which accounted for 63% of sales in 2009, fell by 15% due to sharp declines in both North America and Western Europe. Sales in key emerging markets suffered double-digit declines, impacted by lower sales in China, India and Latin America. Sales in other emerging markets were below last year’s level due to lower sales in nearly all countries. Green Product sales totaled EUR 1,915 million, a nominal increase of 30% compared to 2008, amounting to 23% of sector sales.

		Comparable sales declines were visible in all businesses except Health & Wellness, which achieved 4% growth. The largest sales declines were at Television, Audio & Video Multimedia and Peripherals & Accessories, which all suffered double-digit declines. Domestic Appliances and Shaving & Beauty were more resilient, resulting in low single-digit sales declines.

		EBITA improved from EUR 126 million, or 1.2% of sales, in 2008 to EUR 339 million, or 4.0% of sales, in 2009. The improvement was driven by fixed cost reductions, portfolio changes at Television and Audio & Video Multimedia, cost control measures and EUR 78 million lower restructuring charges which more than offset the impact of the lower sales, the EUR 48 million product recall charges and the EUR 42 million gain on the sale of Set-Top boxes in 2008. Higher EBITA was visible in nearly all businesses, notably Television and Peripherals & Accessories.

		EBIT amounted to EUR 321 million, or 3.8% of sales, which included EUR 18 million of amortization of intangible fixed assets, mainly in Health & Wellness and Peripherals & Accessories.

		Net operating capital declined by EUR 173 million, primarily due to rigorous reduction of inventories and improved accounts receivable management.

		Cash flows before financing activities improved from an inflow of EUR 242 million in 2008 to an inflow of EUR 587 million. The increase was attributable to higher earnings, higher inflows from working capital and lower capital expenditures.

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5.3.7

Strategy and 2010 objectives

		Philips Consumer Lifestyle will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of Health and Well-being.

		Consumer Lifestyle has defined the following key business objectives for 2010:

Drive performance

	•		Further increase cash flow by aggressively managing cash targets

	•		Continue to reduce fixed costs and improve the overall agility of the cost base

	•		Strengthen excellence in execution and further develop “sense and simplicity” as a competitive edge

Accelerate change

	•		Continually optimize the business portfolio, while prioritizing profitable growth and success in selected new value spaces

	•		Nourish existing leadership positions, and increase leadership positions in other categories by delighting consumers and winning their preference

Implement strategy

	•		Grow Health & Wellness

	•		Manage TV to profitability

	•		Improve geographical coverage and strengthen position in Brazil, Russia, India and China through managerial focus and investment

	•		Accelerate excellence in key strategic capabilities: leadership, professional endorsement, new channels, online, category management and new business models

	•		Drive profitable growth through Green Products

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5.4 Lighting

“2009 was a very challenging, but also a very encouraging year. We got our hands around our cost structure, we drove good cash flow, and, more than ever the customer was at the center of our activities.”

Rudy Provoost, CEO Philips Lighting

•		Lighting industry undergoing a radical transformation

•		Important global trends underpinning strategy

•		Impact of recession on performance

5.4.1

Introduction

		Several key global trends are changing the way people use light, and what they want lighting solutions to be able to deliver for them and the environment.

		Around the world, people are increasingly concerned about the effects of climate change and rising energy costs. In many countries a substantial body of ‘green’ legislation is in place or imminent — much of which has a direct impact on the lighting industry. For example, 2009 saw the start of the phase-out of incandescent lamps within the European Union. We will continue to play a significant role in encouraging and enabling the switch to energy-efficient lighting and helping combat climate change.

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Another key development is the trend toward custom solutions. Increasingly aware of the possibilities beyond standard solutions, consumers, businesses and national and municipal authorities demand highly adaptable lighting solutions which they can use to customize their indoor and outdoor environments as and when they desire. Flexible and dynamic, our LED solutions allow a much higher degree of customization and provide significantly greater possibilities for ambience creation than solutions based on conventional technologies.

5.4.2

Lighting landscape

		We see three main transitions that will affect the lighting industry in the years to come. The first is a move towards energy-efficient light sources, in response to rising energy prices and increased awareness of climate change.

		The second transition is the move from traditional vacuum-based technologies to solid-state lighting technology. Solid-state or LED lighting is the most significant development in lighting since the invention of electric light well over a century ago. Offering unprecedented freedom in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, solid-state lighting is opening up exciting new possibilities.

		The third transition is from bulbs and components as the point of value creation to end-user-driven applications and solutions. Increasingly, these applications and solutions will include lighting controls. We believe that, going forward, a key differentiator among lighting suppliers will be the innovative strength to create systems and solutions that are truly customer-centric.

		Between now and 2020, we expect the value of the global lighting market to grow by 6% on a compound annual basis. The vast majority of the value will be in LED-based solutions and products — possibly as much as 80% by 2020. As the global leader in LED components, applications and solutions, with a strong global presence across the LED value chain, we believe we are well positioned for the changes at hand.

		The lighting industry has been severely impacted by global economic developments in 2009. In particular, we have seen a dramatic slowdown in demand, partly on the back of tighter availability of credit and weaker spending on public infrastructure projects and partly because of reduced general consumer spending. Though we saw the most profound impact of the recession in the automotive and construction sectors, other business segments have also been affected. While overall economic visibility remains limited, we expect some of our markets to remain under pressure in 2010.

5.4.3

Simply enhancing life with light

		Philips Lighting is dedicated to enhancing life with light through the introduction of innovative and energy-efficient solutions or applications for lighting. Our approach is based on obtaining direct input both from customers and from end-users/consumers. Through a market segment-based approach, we can assess customer needs in a targeted way, track changes over time and define new insights that fuel our innovation process and ultimately increase the success rate of new propositions introduced onto the market.

		We aim to be the true front-runner in design-led, market- and consumer-driven innovation — both in conventional lighting and in solid-state lighting — while continuing to contribute to responsible energy use and sustainable growth.

		We believe the rise of LED, coupled with our global leadership, positions us well to continue to deliver on our mission to simply enhance life with light.

5.4.4

About Philips Lighting

		Philips Lighting is the global market leader, with recognized expertise in the development, manufacturing and application of innovative lighting solutions. We have pioneered many of the key breakthroughs in lighting over the past 100 years, laying the basis for our current position.

		We address people’s lighting needs across a full range of environments. Indoors, we offer specialized lighting solutions for homes, shops, offices, schools, hotels, factories and hospitals. Outdoors, we provide lighting for public spaces, residential areas and sports arenas. We also help to make roads and streets safer for traffic and other road users (car lights and street lighting). In addition, we address the desire for light-inspired experiences through architectural projects. Finally, we offer specific applications of lighting in specialized areas, such as horticulture, refrigeration lighting and signage, as well as heating, air and water purification, and healthcare.

		Philips Lighting spans the entire lighting value chain — from lighting sources, electronics and controls to full applications and solutions — via the following businesses:

•

Lamps: incandescent, halogen, (compact) fluorescent, high-intensity discharge

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	•		Consumer Luminaires: functional, decorative, lifestyle, scene-setting

	•		Professional Luminaires: city beautification, road lighting, sports lighting, office lighting, shop/hospitality lighting, industry lighting

	•		Lighting Electronics and Controls: electronic gear, electromagnetic gear, controls

	•		Automotive Lighting: car headlights, car signaling, interior

	•		Special Lighting Applications: projection, entertainment, purification, comfort heating, light & health

	•		Solid-State Lighting components: LUXEON, SnapLED, SuperFlux

	•		Solid-State Lighting modules: modules, retrofits, new applications

		Our customers are mainly in the professional market. The Lamps business conducts its sales and marketing activities through the wholesale, OEM and consumer channels, the latter also being used by our Consumer Luminaires business. Professional Luminaires is organized in a trade business (commodity products) and a project solutions business (project luminaires and solutions). For the latter, the main focus is on specifiers, lighting designers, architects and urban planners. Automotive Lighting is organized in two businesses: OEM and After-market. Lighting Electronics and Controls, Special Lighting Applications and Solid-State Lighting components and modules conduct their sales and marketing through both the OEM and wholesale channels.

		The lamps industry is highly consolidated, with GE and Siemens/Osram as key competitors. The luminaires industry, on the other hand, is more fragmented. Our competition varies per region and per segment. Our Lighting Electronics and our Automotive Lighting businesses are again more consolidated. Chinese companies are entering Western markets with energy-saving solutions, and there are a range of companies active in the transition to solid-state lighting as well as in the transition to applications and solutions. With the arrival of LED we are increasingly seeing many other businesses enter the lighting space, either on the components side or on the (niche) applications side.

5.4.5

Driving transformation

		In 2009 we continued to invest in extending our technological leadership, through investments in R&D and acquisitions — controls businesses Dynalite and Teletrol, LED design company llti Luce and luminaire manufacturer Selecon. At the same time we went to great lengths to further prepare our organization for the new age of lighting — which will be all about LED-based solutions. We undertook significant restructuring and rightsizing efforts aimed at gearing up our organization to take full advantage of the LED-driven future opportunities in the lighting industry and adjusting our cost structure to current market conditions.

		Philips Lighting has manufacturing facilities in some 25 countries in all regions of the world and sales organizations in more than 60 countries. Commercial activities in other countries are handled via dealers working with our International Sales organization. Lighting has approximately 51,000 employees worldwide.

		Lighting strives for compliance with relevant regulatory requirements, including the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS), Energy using Products (EuP) and Energy Performance of Buildings (EPBD) directives.

		With regard to sourcing, please refer to the section Supply management under section 4.1.14, Performance by key function, of this Annual Report.

5.4.6

Progress against targets

		The Annual Report 2008 set out a number of key targets for Philips Lighting in 2009. The advances made in addressing these are outlined below.

		Growth

		We fuelled future growth by continuing to invest in acquisitions as outlined above, with particular focus on the applications and services part of the lighting value chain, and by continuing to invest in R&D with a specific focus on further solidifying our leading position in LED.

		Segment leadership

		With its clear focus on the Office, Outdoor, Industry, Retail, Hospitality, Entertainment, Healthcare and Automotive professional segments, as well as Homes in

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		the consumer domain, Philips has leveraged the strengths of its segmented sales, marketing and R&D organizations, driving leadership in its key markets.

		We see tremendous value in partnership, both with clients and suppliers, based on trust and mutual benefit. For example, we work closely with individual retailers to make sure that our on-shelf product placement not only enhances the customer experience, but also improves sales by utilizing specific point-of-purchase materials and purpose-designed shelf layouts.

Brand franchise

Philips Lighting increased its brand franchise by leveraging category management and brand equity in 2009. In the consumer space, for example, Philips Consumer Luminaires addresses different consumer needs at different price points with a number of brands and concepts. The focus is on Philips as the master brand, bringing all-new innovations, based on LED, in product range solutions such as LivingColors, Ledino and EcoMoods. These portfolios enable consumers to transform their home environment and create ambience with lighting. In the premium space, led by design, Philips is marketing its product range under the name ‘Lirio by Philips’.

New business models

The changing industry landscape presents opportunities for new ways of working and new forms of revenue generation, for instance by expanding our business with value-added service offerings. Philips Lighting strengthened its proposition as a services-solutions provider with Philips Lightolier, one of the businesses acquired through the 2008 acquisition of Genlyte, launching a commercial energy audit and lighting upgrade program in the US aimed at replacing inefficient lighting systems currently found in 85% of buildings. A key element of the program, which is being led by the Philips Lightolier Energy Services Group, is a guarantee that the energy audit will deliver measurable energy cost reduction, defined projected return on investment and itemized economic payback, among other benefits. The program is built around the principle of both improving the quality of light and delivering energy efficiencies.

Intellectual property

		Philips makes its patent portfolio for LED systems and controls available to third parties via a licensing program in order to foster industry growth. Philips reached license agreements with several lighting peers including Acuity and Zumtobel in 2009; a similar agreement with Osram has been in place since 2008.

		A good example of Philips Lighting’s technological prowess and intellectual property strength is that Philips was the first entrant to the Bright Tomorrow Lighting Prize (L Prize) competition organized by the US Department of Energy. As part of this industry-wide challenge, Philips has developed, manufactured and will bring to market an LED replacement for the common 60W incandescent light bulb. “With the flick of a switch, Philips may have just dramatically lowered America’s electric bill,” TIME Magazine commented after naming this LED lamp the 3rd best invention of 2009.

5.4.7

2009 financial performance

		Sales in 2009 amounted to EUR 6,546 million, a nominal decline of 11% compared to 2008, impacted by weakened automotive, construction, consumer and OEM markets. Excluding a 1% favorable currency impact and a 1% favorable effect of portfolio changes, comparable sales declined 13%.

		The year-on-year sales decline was visible in all markets. In mature markets, sales were 15% below the level of 2008 due to double-digit declines in North America and Western Europe, particularly at Professional Luminaires, which was impacted by weakened construction markets. The emerging markets, which accounted for 34% of Lighting sales compared to 32% in 2008, declined 7% mainly due to lower sales in Latin America and Russia, partly offset by single-digit growth in China and India.

		Sales declines were most severe at Professional Luminaires, Lighting Electronics and Automotive, which experienced double-digit decreases. Sequential improvement was seen throughout the year with fourth-quarter comparable sales being on par with the fourth quarter in 2008. Green Product sales totaled EUR 3,393 million, a nominal increase of 14% compared to 2008, amounting to 52% of sales.

		EBITA amounted to EUR 145 million, which included EUR 247 million of restructuring and acquisition-related charges. This compared to EUR 480 million in 2008, which included EUR 285 million of restructuring and acquisition-related charges. The decline in EBITA was largely attributable to lower sales and gross margin.

		EBIT declined from a profit of EUR 24 million in 2008 to a loss of EUR 16 million due to lower sales. 2008 included EUR 301 million of non-cash goodwill impairments, mainly related to Lumileds.

		Net operating capital decreased by EUR 608 million to EUR 5.1 billion, mainly driven by improved working capital management and lower capital investments.

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Cash flow before financing activities improved from an outflow of EUR 1,143 million in 2008 to an inflow of EUR 591 million, reflecting the impact of cash disbursements of EUR 1,826 million in 2008, mainly related to the acquisition of Genlyte. Cash inflow from working capital improved on 2008, but was largely offset by lower earnings.

Key data
in millions of euros


	2007			2008			2009
Sales		6,321			7,362			6,546
Sales growth
% increase, nominal		12			16			(11	)
% increase, comparable¹⁾		7			3			(13	)
EBITA¹⁾		738			480			145
as a % of sales		11.7			6.5			2.2
EBIT		664			24			(16	)
as a % of sales		10.5			0.3			(0.2	)
Net operating capital (NOC)¹⁾		4,050			5,712			5,104
Cash flows before financing activities¹⁾		(625	)		(1,143	)		591
Employees (FTEs)		54,440			57,367			51,653


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

5.4.8

Strategy and 2010 objectives

		Philips Lighting will continue to play an important role in the realization of Philips’ strategic ambitions in the domain of Health and Well-being.

		Lighting has defined the following key business objectives for 2010:

		Drive performance

	•		Drive our performance through capturing growth while managing cost and cash

	•		Win with customers in key markets

	•		Improve our relative position in emerging markets, especially China, India and Latin America

Accelerate change

	•		Further drive the transitions needed to retain the industry lead in the LED era; optimize the lamps lifecycle, expand share of leading LED solutions in professional and consumer segments

	•		Continue to invest in extending technological leadership in LED

Implement strategy

	•		Become the lighting solutions leader in the Outdoor segment

	•		Grow our Consumer Luminaires business

	•		Implement our new Lighting mission, identity and sustainability story — “Simply enhancing life with light”

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5.5 Group Management & Services

“The global economic crisis has underlined the importance of innovation and emerging markets for Philips’ future growth. In 2009 we continued to develop dedicated competences and local talent, as well as shifting resources to these markets.”

Gottfried Dutiné, Member of the Board of Management

Philips’ performance by market cluster is based on the following:

•		Emerging markets, including key markets in China, India, and Latin America and other markets including Central and Eastern Europe, Russia, Ukraine and Central Asia, the Middle East and Africa, Turkey and ASEAN zone

•		Mature markets, including Western Europe, North America, Japan, Korea, Israel, Australia and New Zealand.

5.5.1

Introduction

		For 2009, the activities of the former Innovation & Emerging Businesses sector and of Group Management & Services are reported under one reporting segment: Group Management & Services.

		Group Management & Services comprises the activities of the corporate center including Philips’ global management and sustainability programs, country and regional management costs, and costs of pension and other postretirement benefit plans, as well as Corporate Technologies, Corporate Investments, New Venture Integration and Philips Design. Additionally, the global

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service units such as Philips General Purchasing, real estate and shared financial services are reported in this sector.

5.5.2

Corporate Technologies

		Corporate Technologies feeds the innovation pipeline, enabling its business partners — the three Philips operating sectors and external companies — to create new business options through new technologies, venturing and intellectual property development; improve time-to-market efficiency; and increase innovation effectiveness via focused research and development activities. Corporate Technologies encompasses Corporate Research, the Incubators, Intellectual Property & Standards (IP&S), the Philips Innovation Campus as well as Applied Technologies. In total, Corporate Technologies employs about 4,100 professionals around the globe.

		Corporate Technologies actively participates in ‘open innovation’ through relationships with academic and industrial partners, as well as via European and regional projects, in order to improve innovation efficiency and share the related financial exposure. The High Tech Campus in Eindhoven, the Philips Innovation Campus in Bangalore, India, Research Shanghai China, the Cambridge lab and InnoHub are prime examples of environments enabling open innovation. In this way, we ensure proximity of innovation activities to local markets and needs.

		Philips Research is a key innovation partner for Philips’ business sectors. It has three main roles. Firstly, it creates new technologies that help to spur the growth of the Philips businesses. Secondly, it develops unique intellectual property (IP), which will enable longer-term business and creates standardization opportunities for Philips. Lastly, it prepares ventures that can grow into new adjacent businesses for the sectors.

		In 2009, Research introduced magnetic particle imaging, a new imaging technology that generates anatomical and functional images of the heart, from which quantitative information, ideally required for diagnosis and therapy selection, can be extracted. This was demonstrated in a pre-clinical study. Another breakthrough innovation is the new digital pathology scanner that is being developed together with the Healthcare Incubator. Its unique properties can be compared to “resolving individual blades of grass in a football pitch while scanning at a data rate of 600 Mb/s.” Philips has adopted a people-centric approach to research in order to ensure that our innovations offer experiences that fully meet people’s needs and aspirations. In dedicated ExperienceLabs, ideas and concepts are tested using experience prototypes in a natural — but controlled — setting. This provides us with knowledge and insights that we could not otherwise obtain, thereby increasing the likelihood of developing innovations that are meaningful and commercially successful.

		Philips has three incubation organizations: the Healthcare, Lifestyle and Lighting & Cleantech Incubators. The main purpose of the Incubators is to create strategic growth opportunities for Philips. In some cases, spin-out or technology licensing is considered. 2009 saw the introduction of DirectLife, an activity-monitoring program designed to help you improve your daily activity level without dramatically changing your lifestyle. Philips also announced the development of digital pathology solutions to ease the workload and support decision making in central and hospital-based pathology departments.

		IP&S proactively pursues the creation of new intellectual property in close co-operation with Philips’ operating sectors and the other departments within Corporate Technologies. Philips’ IP portfolio currently consists of about 48,000 patent rights, 35,000 trademarks, 56,000 design rights and 3,100 domain name registrations. Philips filed approximately 1,550 patents in 2009 with a strong focus on the growth areas in health and well-being. IP&S participates in the setting of standards to create new business opportunities for the Healthcare, Consumer Lifestyle and Lighting sectors. Philips believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents and licenses.

		Applied Technologies is a showcase for our open innovation approach, supporting customers both inside and outside Philips through new technologies, new business ideas, consultancy and new product development and introduction services. Applied Technologies is an active player in solutions for the healthcare sector and energy solutions, including solar cells and energy management.

5.5.3

Corporate Investments

The remaining business within Corporate Investments — Assembléon — is a wholly owned subsidiary that develops, assembles, markets and distributes a diverse range of surface-mount technology placement equipment.

5.5.4

New Venture Integration

The New Venture Integration group focuses on the integration of newly acquired companies across all sectors.

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5.5.5

Philips Design

		Philips Design is one of the longest-established design organizations of its kind in the world. It is headquartered in Eindhoven, Netherlands, with branch studios in Europe, the US and Asia Pacific. Its creative force comprises designers, psychologists, ergonomists, sociologists, philosophers and anthropologists working together to understand people’s needs and desires, in order to generate designs which support people in accomplishing and experiencing things in natural, intuitive ways.

		Philips Design’s forward-looking exploration projects deliver vital insights for new business development, supporting the transformation towards a Health and Well-being company.

5.5.6

2009 financial performance

		Our Incubator activities are now maturing and increasingly aligned with the growth plans of our individual sectors. As a result, in 2009, charges related to the early-stage ventures are included in the Research and Development costs of the respective sectors.

		In 2009, EBITA amounted to a loss of EUR 282 million compared to EUR 701 million in 2008. EBITA in 2009 included a EUR 131 million curtailment gain for retiree medical benefit plans, EUR 57 million of net asbestos-related recoveries, EUR 62 million of restructuring charges and EUR 46 million of asset write-offs.

		In 2008, EBITA was impacted by a EUR 264 million asbestos-related settlement charge, EUR 35 million restructuring charges, and a EUR 13 million loss on the divestment of HTP Optics.

		EBITA at Corporate Technologies was EUR 36 million lower than in 2008, largely due to lower revenues from licenses and higher costs in molecular healthcare.

		Corporate & Regional costs declined from EUR 234 million in 2008 to EUR 174 million, driven by restructuring savings and stringent cost management.

		Pensions EBITA amounted to EUR 142 million compared to EUR 14 million in 2008. The increase was largely attributable to the EUR 131 million curtailment gain for retiree medical benefit plans.

		EBITA at Service Units & Other was impacted by a EUR 264 million asbestos-related settlement charge in 2008.

		Cash flows before financing activities amounted to an outflow of EUR 728 million in 2009 compared to an inflow of EUR 1,734 million in 2008. The decline was largely attributable to EUR 485 million of final asbestos payments in 2009 and cash receipts related to the sale of shares in TSMC and LG Display in 2008.

Key data
in millions of euros


	2007			2008			2009
Sales		732			485			337
Sales growth
% increase (decrease), nominal		(53	)		(34	)		(31	)
% increase (decrease), comparable¹⁾		36			(26	)		(30	)
EBITA Corporate Technologies¹⁾		(42	)		(126	)		(162	)
EBITA Corporate & regional costs¹⁾		(267	)		(234	)		(174	)
EBITA Pensions¹⁾		43			14			142
EBITA Services Units and other¹⁾		(29	)		(355	)		(88	)

EBITA¹⁾		(295	)		(701	)		(282	)
EBIT		(295	)		(701	)		(282	)
Net operating capital (NOC)¹⁾		872			(1,226	)		(1,514	)
Cash flows before financing activities¹⁾		5,151			1,734			(728	)
Employees (FTEs)		11,187			11,335			11,586


¹⁾		For a reconciliation to the most directly comparable GAAP measures, see chapter 14, Reconciliation of non-GAAP information, of this Annual Report.

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6 Risk management

6.1		Introduction

		The following sections present an overview of Philips’ approach to risk management and business control and a description of the nature and the extent of its exposure to risks. Philips risk management focuses on the following risk categories: Strategic, Operational, Compliance and Financial risks. These are further described in the section ‘Risk categories and factors’ of this Annual Report. The risk overview highlights the main risks known to Philips, which could hinder it in achieving its strategic and financial business objectives. The risk overview may, however, not include all the risks that may ultimately affect Philips. Some risks not yet known to Philips, or currently believed not to be material, could ultimately have a major impact on Philips’ businesses, objectives, revenues, income, assets, liquidity or capital resources.

		All oral and written forward-looking statements made on or after the date of this Annual Report and attributable to Philips are expressly qualified in their entirety by the factors described in the cautionary statement included in chapter 17, Forward-looking statements and other information, of this Annual Report and the risk factors described in the section below entitled ‘Risk categories and factors’.

6.2		Our approach to risk management and business control

		Risk management forms an integral part of the business planning and review cycle. The company’s risk and control policy is designed to provide reasonable assurance that objectives are met by integrating management control into the daily operations, by ensuring compliance with legal requirements and by safeguarding the integrity of the company’s financial reporting and its related disclosures. It makes management responsible for identifying the critical business risks and for the implementation of fit-for-purpose risk responses. Philips’ risk management approach is embedded in the areas of corporate governance, Philips Business Control Framework and Philips General Business Principles.

		Corporate governance

		Corporate governance is the system by which a company is directed and controlled. Philips believes that good corporate governance is a critical factor in achieving business success. Good corporate governance derives from, amongst other things, solid internal controls and high ethical standards. Risk management is a well-established part of Philips’ corporate governance structure.

		The quality of Philips’ systems of business controls and the findings of internal and external audits are reported to and discussed in the Audit Committee of the Supervisory Board. Internal auditors monitor the quality of the business controls through risk-based operational audits, inspections of financial reporting controls and compliance audits. Audit committees at corporate level (Finance and IT/Supply) and sector level (Healthcare, Lighting, Consumer Lifestyle, Group Management & Services) meet quarterly to address weaknesses in the business control infrastructure as reported by internal and external auditors or revealed by self-assessment of management,

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and to take corrective action where necessary. These audit committees are also involved in determining the desired company-wide internal audit planning as approved by the Audit Committee of the Supervisory Board. An in-depth description of Philips’ corporate governance structure can be found in chapter 10, Corporate governance, of this Annual Report.

		Philips Business Control Framework

		The Philips Business Control Framework (BCF), derived from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework on internal control, sets the standard for risk management and business control in Philips. The objectives of the BCF are to maintain integrated management control of the company’s operations, in order to ensure integrity of the financial reporting, as well as compliance with laws and regulations.

		As part of BCF, Philips implemented a global standard for internal control over financial reporting (ICS). The ICS, together with Philips’ established accounting procedures, is designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect transactions necessary to permit preparation of financial statements, that policies and procedures are carried out by qualified personnel, and that published financial statements are properly prepared and do not contain any material misstatements. ICS has been deployed in all main reporting units, where business process owners perform an extensive number of controls, document the results each quarter, and take corrective action where necessary. ICS supports sector and functional management in a quarterly cycle of assessment and monitoring of its control environment. Findings of management’s evaluation are reported to the Board of Management.

		As part of the Annual Report process, management’s accountability for business controls is enforced through the formal issuance of a Statement on Business Controls and a Letter of Representation by sector and functional management to the Board of Management. Any deficiencies noted in the design and operating effectiveness of controls over financial reporting which were not completely remediated are evaluated at year-end by the Board of Management. The Board of Management’s report, including its conclusions, regarding the effectiveness of its internal control over financial reporting, can be found in section 11.2, Management’s report on internal control, of this Annual Report.

		Philips General Business Principles

		The Philips General Business Principles (GBP) govern Philips’ business decisions and actions throughout the world, applying equally to corporate actions and the behavior of individual employees. They incorporate the fundamental principles within Philips for doing business. The intention of the GBP is to ensure compliance with laws and regulations, as well as with Philips’ norms and values.

		The GBP are available in most of the local languages and are an integral part of the labor contracts in virtually all countries where Philips has business activities. Responsibility for compliance with the principles rests primarily with the management of each business. Every country organization and each main production site has a compliance officer. Confirmation of compliance with the GBP is an integral part of the annual Statement on Business Controls that has to be issued by the management of each business unit. The GBP incorporate a whistleblower policy, standardized complaint reporting and a formal escalation procedure.

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		The global implementation of the One Philips Ethics hotline seeks to ensure that alleged violations are registered and dealt with consistently within one company-wide system.

		To drive the practical deployment of the GBP, a set of directives has been published, which are applicable to all employees. There are also separate directives which apply to specific categories of employees (e.g. the Supply Management Code of Ethics and Financial Code of Ethics www.philips.com/gbp).

		At the end of 2009 an updated and extended version of the GBP directives was approved and adopted, reflecting developments in codes of conduct and business integrity legislation. The Financial Code of Ethics contains, applicable to all employees performing important financial functions amongst other things, standards to promote honest and ethical conduct, as well as full, accurate and timely disclosure procedures in order to avoid conflicts of interest. Philips did not grant any waivers of the Financial Code of Ethics in 2009.

		Comprehensive Rules of Conduct containing mandatory protocols governing the investigation of GBP complaints were finalized and distributed throughout the organization worldwide in 2009. A global internal communication program tailored to the respective businesses with the aim of strengthening employee awareness of the importance of the Philips GBP and GBP Directives was rolled out in 2009.

		The implementation of a clearly structured procedure for appointment of GBP compliance officers (responsibilities and authority, hierarchical structure and organizational mandate/independence) was completed in 2009. Furthermore, the functional job assessment of compliance officers is now mandatorily included in their annual ‘People Performance Management’ appraisal. An updated version of the mandatory web-based GBP training, which is designed to reinforce awareness of the need for compliance with the GBP, was rolled out in the US, the Netherlands and India in 2009. The rest of the global rollout (a total of 23 languages) will take place in the first half of 2010. In 2009, a total of seven tailor-made regional GBP training programs were rolled out in the framework of the mandatory annual (refresher) training of compliance officers.

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6.3

Risk categories and factors

		Taking risks is an inherent part of entrepreneurial behavior. A structured risk management process encourages management to take risks in a controlled manner. In order to provide a comprehensive view of Philips business activities, risks are identified in a structured way combining elements of a top-down and bottom-up approach. Risks are reported on a regular basis as part of the ‘Business Performance Management’ process. All relevant risks and opportunities are prioritized in terms of impact and likelihood, considering quantitative and/or qualitative aspects. The bottom-up identification and prioritization process is supported by workshops with the respective management at Sector and Corporate Function level. This top-down element ensures that potential new risks and opportunities are discussed on management level and are included in the subsequent reporting process, if found to be applicable. Reported risks and opportunities are analyzed regarding potential cumulative effects and are aggregated on Sector, Cross-Sector/Region and Corporate level. Philips has a structured risk management process to address different risk categories: Strategic, Operational, Compliance and Financial risks.

		Strategic risks are threats and opportunities that influence Philips’ strategic ambitions. Operational risks include adverse unexpected developments resulting from internal processes, people and systems, or from external events that are linked to the actual running of each business (examples are solution and product creation, and supply chain management). Compliance risks cover unanticipated failures to enact, or comply with, appropriate policies and procedures. Within the area of Financial risks, Philips identifies risks related to Treasury, Accounting and reporting, Pensions and Tax.

		Philips describes the risk factors within each risk category in order of Philips’ current view of expected significance, to give stakeholders an insight into which risks it considers more prominent than others at present. Describing risk factors in their order of expected significance within each risk category does not mean that a lower listed risk factor may not have a material and adverse impact on Philips’ business, strategic objectives, revenues, income, assets, liquidity or capital resources. Furthermore, a risk factor described after other risk factors may ultimately prove to have more significant adverse consequences than those other risk factors. Over time Philips may change its view as to the relative significance of each risk factor. Philips does not classify the risk categories themselves in order of importance.

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6.4		Strategic risks

		As Philips’ business is global, its operations are exposed to economic and political developments in countries across the world that could adversely impact its revenues and income.

		Philips’ business environment is influenced by economic conditions globally and in individual countries where Philips conducts business. In 2009, the global economic situation continued to worsen, leading to a decline in consumer and business confidence, increased unemployment and reduced levels of capital expenditure, resulting in lower demand and more challenging market environments across our Sectors. Political developments, for example the pending US Healthcare reform, have also introduced significant uncertainties that may adversely affect the sectors in 2010.

		Although in recent months, certain indices and economic data have began to show first signs of stabilization in the macroeconomic environment, there can be no assurance that these improvements will be broad-based and sustainable, nor is it clear how, if at all, they will affect the markets relevant to Philips.

		Numerous other factors, such as fluctuation of energy and raw material prices, as well as global political conflicts, including the Middle East and other regions, could continue to impact macroeconomic factors and the international capital and credit markets. Economic and political uncertainty may have a material adverse impact on Philips’ financial condition or results of operations and can also make Philips’ budgeting and forecasting more difficult.

		Philips may encounter difficulty in planning and managing operations due to unfavorable political factors, including unexpected legal or regulatory changes such as foreign exchange import or export controls, increased healthcare regulation, nationalization of assets or restrictions on the repatriation of returns from foreign investments and the lack of adequate infrastructure. As emerging markets are becoming increasingly important in Philips’ operations, the above-mentioned risks are also expected to grow and could have an adverse impact on Philips’ financial condition and operating results.

		Philips may be unable to adapt swiftly to changes in industry or market circumstances, which could have a material adverse impact on its financial condition and results.

		Fundamental shifts in the industry or market, like the transition from traditional lighting to LED lighting, may drastically change the business environment. If Philips is unable to recognize these changes in good time, or is too inflexible to rapidly adjust its business models, growth ambitions and financial results could be affected materially.

		Acquisitions could expose Philips to integration risks and challenge management in continuing to reduce the complexity of the company.

		Philips has recently completed acquisitions, and may continue to do so in the future, exposing Philips to integration risks in areas such as sales and service force integration, logistics, regulatory compliance, information technology and finance. Integration difficulties and complexity may adversely impact the realization of an increased contribution from acquisitions. Philips may incur significant acquisition, administrative and other costs in connection with these transactions, including costs related to the integration of acquired businesses.

		Furthermore, organizational simplification and resulting cost savings may be difficult to achieve. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill. Write-downs of these assets due to unforeseen business developments may materially and adversely affect Philips’ earnings, particularly in Healthcare and Lighting which have significant amounts of goodwill (see also note 15).

		Philips’ inability to secure and retain intellectual property rights for products, whilst maintaining overall competitiveness, could have a material adverse effect on its results.

		Philips is dependent on its ability to obtain and retain licenses and other intellectual property (IP) rights covering its products and its design and manufacturing processes. The IP portfolio results from an extensive patenting process that could be influenced by, amongst other things, innovation. The value of the IP portfolio is dependent on the successful promotion and market acceptance of standards developed or co-developed by Philips. This is particularly applicable to Consumer Lifestyle where third- party licenses are important and a loss or impairment could negatively impact Philips’ results.

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		Philips’ ongoing investments in the “sense and simplicity” brand campaign, with a focus on simplifying the interaction with its customers, translating awareness into preference and improving its international brand recognition, could have less impact than anticipated.

		Philips has made large investments in the reshaping of the Group into a more market-driven company focusing on delivering advanced and easy-to-use products and easy relationships with Philips for its customers. The brand promise of “sense and simplicity” is important for both external and internal development. If Philips fails to deliver on its “sense and simplicity” promise, its growth opportunities may be hampered, which could have a material adverse effect on Philips’ revenue and income.

		Philips’ overall performance in the coming years is dependent on realizing its growth ambitions in emerging markets.

		Emerging markets are becoming increasingly important in the global market. In addition, Asia is an important production, sourcing and design center for Philips. Philips faces strong competition to attract the best talent in tight labor markets and intense competition from local companies as well as other global players for market share in emerging markets. Philips needs to maintain and grow its position in emerging markets, invest in local talents, understand developments in end-user preferences and localize the portfolio in order to stay competitive. If Philips fails to achieve this, its growth ambition and financial results could be affected materially.

6.5

Operational risks

		Failure to achieve improvements in Philips’ solution and product creation process and/or increased speed in innovation-to-market could hamper Philips’ profitable growth ambitions.

		Further improvements in Philips’ solution and product creation process, ensuring timely delivery of new solutions and products at lower cost and upgrading of customer service levels to create sustainable competitive advantages, are important in realizing Philips’ profitable growth ambitions. The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the product creation process. The success of new solution and product creation, however, depends on a number of factors, including timely and successful completion of development efforts, market acceptance, Philips’s ability to manage the risks associated with new products and production ramp-up issues, the availability of products in the right quantities and at appropriate costs to meet anticipated demand, and the risk that new products and services may have quality or other defects in the early stages of introduction. Accordingly, Philips cannot determine in advance the ultimate effect that new solutions and product creations will have on its financial condition and operating results. If Philips fails to accelerate its innovation-to-market processes and fails to ensure that end-user insights are fully captured and translated into solution and product creations that improve product mix and consequently contribution, it may face an erosion of its market share and competitiveness, which could have a material adverse affect on its results.

		If Philips is unable to ensure effective supply chain management, it may be unable to sustain its competitiveness in its markets.

		Philips is continuing the process of creating a leaner supply base with fewer suppliers, while maintaining dual sourcing strategies where possible. This strategy very much requires close cooperation with suppliers to enhance, amongst other things, time to market and quality. In addition, Philips is continuing its initiatives to reduce assets through outsourcing. These processes may result in increased dependency. Although Philips works closely with its suppliers to avoid supply-related problems, there can be no assurance that it will not encounter supply problems in the future or that it will be able to replace a supplier that is not able to meet its demand. Shortages or delays could materially harm its business. Philips maintains a regular review of its strategic and critical suppliers to assess financial stability.

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		Philips’ supply chain is also exposed to fluctuations in energy and raw material prices. In recent times, commodities such as oil have been subject to volatile markets and significant price increases from time to time. If Philips is not able to compensate for or pass on its increased costs to customers, such price increases could have a material adverse impact on its financial results.

		Most of Philips’ activities are conducted outside of the Netherlands, and international operations bring challenges. For example, production and procurement of products and parts in Asian countries are increasing, and this creates a risk that production and shipping of products and parts could be interrupted by a natural disaster in that region.

		Due to the fact that Philips is dependent on its personnel for leadership and specialized skills, the loss of its ability to attract and retain such personnel would have an adverse effect on its business.

		The retention of talented employees in sales and marketing, research and development, finance and general management, as well as of highly specialized technical personnel, especially in transferring technologies to low-cost countries, is critical to Philips’ success. The loss of specialized skills could also result in business interruptions.

		Diversity in information technology (IT) could result in ineffective or inefficient business management. IT outsourcing and off-shoring strategies could result in complexities in service delivery and contract management. Furthermore, we observe a global increase in IT security threats and higher levels of professionalism in computer crime, posing a risk to the confidentiality, availability and integrity of data and information.

		Philips is engaged in a continuous drive to create a more open, standardized and, consequently, more cost-effective IT landscape. This is leading to an approach involving further outsourcing, off-shoring, commoditization and ongoing reduction in the number of IT systems. The global increase in security threats and higher levels of professionalism in computer crime have raised the company’s awareness of the importance of effective IT security measures, including proper identity management processes to protect against unauthorized systems access. The integration of new companies and successful outsourcing of business processes are highly dependent on secure and well-controlled IT systems.

		Warranty and product liability claims against Philips could cause Philips to incur significant costs and affect Philips’ results as well as its reputation and relationships with key customers.

		Philips is from time to time subject to warranty and product liability claims with regard to product performance and effects. Philips could incur product liability losses as a result of repair and replacement costs in response to customer complaints or in connection with the resolution of contemplated or actual legal proceedings relating to such claims. In addition to potential losses arising from claims and related legal proceedings, product liability claims could affect Philips’ reputation and its relationships with key customers, both customers for end products and customers that use Philips’ products in their production process. As a result, product liability claims could materially impact Philips’ financial position and results.

		Any damage to Philips’ reputation could have an adverse effect on its businesses.

		Philips is exposed to developments which could affect its reputation. Such developments could be of an environmental or social nature, or connected to the behavior of individual employees or suppliers and could relate to adherence with regulations related to labor, health and safety, environmental and chemical management. Reputational damage could materially impact Philips’ financial position and results.

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6.6

Compliance risks

		Legal proceedings covering a range of matters are pending in various jurisdictions against Philips and its current and former group companies. Due to the uncertainty inherent in legal proceedings, it is difficult to predict the final outcome. Adverse outcomes might impact Philips’ financial position and results.

		Philips, including a certain number of its current and former group companies, is involved in legal proceedings relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution. Since the ultimate outcome of asserted claims and proceedings, or the impact of any claims that may be asserted in the future, cannot be predicted with certainty, Philips’ financial position and results of operations could be affected materially by adverse outcomes.

		Please refer to note 24 for additional disclosure relating to specific legal proceedings.

		Philips is exposed to governmental investigations and legal proceedings with regard to increased scrutiny of possible anti-competitive market practices.

		Philips is facing increased scrutiny by national and European authorities of possible anti-competitive market practices, especially in product segments where Philips has significant market shares. For example, Philips and certain of its (former) affiliates are involved in investigations by competition law authorities in several jurisdictions into possible anti-competitive activities in the Cathode-Ray Tubes (CRT) industry and are engaged in litigation in this respect. Philips’ financial position and results could be materially affected by an adverse final outcome of these investigations and litigation, as well as any potential claims relating to this matter. Furthermore, increased scrutiny may hamper planned growth opportunities provided by potential acquisitions (see also note 24).

		Philips’ global presence exposes the company to regional and local regulatory rules which may interfere with the realization of business opportunities and investments in the countries in which Philips operates.

		Philips has established subsidiaries in over 60 countries. These subsidiaries are exposed to changes in governmental regulations and unfavorable political developments, which may limit the realization of business opportunities or impair Philips’ local investments. Philips’ increased focus on the healthcare sector increases the exposure to highly regulated markets, where obtaining clearances or approvals for new products is of great importance, and the dependency on the funding available for healthcare systems. In addition, changes in reimbursement policies may affect spending on healthcare.

		Philips is exposed to non-compliance with general business principles.

		Philips’ attempts to realize its growth targets could expose it to the risk of non-compliance with Philips General Business Principles. This risk is heightened in emerging markets as corporate governance systems, including information structures and the monitoring of ethical standards, are less developed in emerging markets compared to mature markets. Examples include commission payments to third parties, remuneration payments to agents, distributors, commissioners and the like (‘Agents’), or the acceptance of gifts, which may be considered in some markets to be normal local business practice.

		Defective internal controls would adversely affect our financial reporting and management process.

		The reliability of reporting is important in ensuring that management decisions for steering the businesses and managing both top-line and bottom-line growth are based on top-quality data. Flaws in internal control systems could adversely affect the financial position and results and hamper expected growth.

		The correctness of disclosures provides investors and other market professionals with significant information for a better understanding of Philips’ businesses. Imperfections or lack of clarity in the disclosures could create market uncertainty regarding the reliability of the data presented and could have a negative impact on the Philips share price.

		The reliability of revenue and expenditure data is key for steering the business and for managing top-line and bottom-line growth. The long lifecycle of healthcare sales, from order acceptance to accepted installation, together with the complexity of the accounting rules for when revenue can be recognized in the accounts presents a challenge to ensure there is consistency of application of the accounting rules over Philips Healthcare’s global business.

		Compliance procedures have been adopted by management to ensure that the use of resources is consistent with laws, regulations and policies, and that resources are safeguarded against waste, loss and misuse.

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		Ineffective compliance procedures relating to the use of resources could have an adverse effect on the financial results.

		Philips is exposed to non-compliance with data privacy and product safety laws.

		Philips’ brand image and reputation would be adversely impacted by non-compliance with the various (patient) data privacy and (medical) product security laws. Privacy and product safety issues may arise with respect to remote access or monitoring of patient data or loss of data on customers’ systems. Philips Healthcare is further subject to various data privacy and safety laws. Privacy and product security issues may arise, especially with respect to remote access or monitoring of patient data or loss of data on our customers’ systems, although Philips Healthcare contractually limits liability, where permitted.

		Philips Healthcare operates in a highly regulated product safety and quality environment. Philips Healthcare’s products are subject to regulation by various government agencies, including the FDA (US) and comparable foreign agencies. Obtaining their approvals is costly and time-consuming, but a prerequisite for market introduction. A delay or inability to obtain the necessary regulatory approvals for new products could have a material adverse effect on its business. The risk exists that product safety incidents or user concerns could trigger FDA business reviews which if failed could lead to business interruption.

6.7

Financial risks

6.7.1

General

		Philips is exposed to a variety of treasury risks including liquidity risk, currency risk, interest rate risk, equity price risk, commodity price risk, credit risk, country risk and other insurable risk.

		During 2008 Philips re-financed a significant proportion of its long-term debt commitments, thereby significantly extending the overall maturity profile of its funding. Furthermore, additional credit lines were arranged to act as additional back-up for the liquidity needs of the group. Further negative developments impacting the global liquidity markets could affect the ability to raise or re-finance debt in the capital markets, or could also lead to significant increases in the cost of such borrowing in the future. If the market expected a downgrade or downgrades by the rating agencies, or if such a downgrade has actually taken place, this could increase our cost of borrowing, reduce our potential investor base and negatively affect our business.

		Philips is a global company and as a direct consequence the financial results of the group may be impacted through currency fluctuations. The majority of the currency risk to which Philips is exposed relates to transaction exposure within the business of on-balance and forecasted foreign currency purchases or sales and translation exposure of foreign currency denominated financing positions.

		Philips is also exposed to interest rate risk particularly in relation to its long-term debt position; this risk can take the form of either fair value or cash flow risk. Failure to effectively hedge this risk can impact Philips’ financial results.

		Philips is exposed to equity price risk through holdings in publicly listed and other companies. A downturn in equity markets can materially impact the realizable value of such securities and can lead to material financial losses and impairment charges for the Group.

		Credit risk of counterparties that have outstanding payment obligations creates exposure for Philips, particularly in relation to accounts receivable and liquid assets and fair values of derivatives and insurance contracts with financial counterparties. A default by counterparties in such transactions can have a material and adverse effect on Philips’ financial condition.

		For further analysis, please refer to section 6.7.2, Details of treasury risks, of this Annual Report.

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		Corporate Control, together with Sector and Functional management, performs an assessment of financial reporting risks at least annually.

		For each risk identified a risk rating is assigned based on the likelihood of occurrence and the potential impact of the risk on the financial statements and related disclosures. In determining the probability that a risk will result in a misstatement of a more than inconsequential amount or material nature, the following factors are considered to be critical: complexity of the associated accounting activity or transaction process, history of accounting and reporting errors, likelihood of significant (contingent) liabilities arising from activities, exposure to losses, existence of related party transaction, volume of activity and homogeneity of the individual transactions processed and changes to the prior period in accounting characteristics.

		Important critical reporting risk areas identified within Philips following the risk assessment are:

	•		Complex accounting for deferred tax liabilities, pension benefits, and asset impairments

	•		Complex sales transactions regarding multi-element deliveries (combination of goods and services)

	•		Past experience of control failures regarding segregation of duties

	•		Significant (contingent) liabilities such as environmental claims and other litigation

	•		Outsourcing of high volume/homogeneous transactional finance operations to third-party service providers.

		Processes and controls related to the identified critical risk areas will be subject to a more detailed set of requirements regarding control documentation and control evaluation (monitoring) by Sector and Functional management due to their importance for the reliability of the financial statements and disclosures of the Group.

		Philips has defined-benefit pension plans in a number of countries. The funded status and the cost of maintaining these plans are influenced by financial market and demographic developments, creating volatility in Philips’ financials.

		The majority of employees in Europe and North America are covered by defined-benefit pension plans. The accounting for defined-benefit pension plans requires management to determine discount rates, expected rates of compensation and expected returns on plan assets. Changes in these variables can have a significant impact on the projected benefit obligations and net periodic pension costs. A negative performance of the financial markets could have a material impact on funding requirements and net periodic pension costs and also affect the value of certain financial assets and liabilities of the company.

		For further analysis of pension-related exposure to changes in financial markets, please refer to section 6.7.3, Details of pension risks, of this Annual Report and for quantitative and qualitative disclosure of pensions, please refer to note 18.

		Philips is exposed to a number of different fiscal uncertainties which could have a significant impact on local tax results.

		Philips is exposed to a number of different tax uncertainties which could result in double taxation, penalties and interest payments. These include, amongst others, transfer pricing uncertainties on internal cross-border deliveries of goods and services, tax uncertainties related to acquisitions and divestments, tax uncertainties related to the use of tax credits and permanent establishments, and tax uncertainties due to losses carried forward and tax credits carried forward. Those uncertainties may have a significant impact on local tax results.

		For further details, please refer to section 6.7.4, Details of fiscal risks, of this Annual Report.

6.7.2

Details of treasury risks

		Philips is, as mentioned before, exposed to several types of financial risk. This section further analyzes financial risks. Philips does not purchase or hold derivative financial instruments for speculative purposes. Information regarding financial instruments is included in note 32 and note 33.

		This section ‘Details of treasury risks’ up to and including ‘Other insurable risks’ forms an integral part of the Group financial statements.

		Liquidity risk

		Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

		The rating of the Company’s debt by major rating services may improve or deteriorate. As a result, Philips’ future borrowing capacity may be influenced and its financing costs may fluctuate. Philips has various sources to mitigate the liquidity risk for the group. As of December 31, 2009, Philips had EUR 4,386 million in cash and cash equivalents, a USD 2.5 billion Commercial Paper Program, and a USD 2.5 billion committed revolving facility that could serve as back-up for short-term financing requirements that would

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		normally be satisfied through the Commercial Paper Program. Additionally EUR 357 million of investments in its available-for-sale financial assets and listed equity-accounted investees (fair value at December 31, 2009) were available. Furthermore, Philips had a committed undrawn bilateral loan of EUR 200 million. As of December 31, 2009 Philips did not have any loans outstanding under any of these facilities.

		On February 18 , 2010 Philips signed a new 5-year EUR 1.8 billion revolving credit facility to replace the existing USD 2.5 billion facility.

		Currency risk

		Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Currency fluctuations may impact Philips’ financial results. Philips is exposed to currency risk in the following areas:

	•		Transaction exposures, related to forecasted sales and purchases and on-balance-sheet receivables/payables resulting from such transactions

	•		Translation exposure of net income in foreign entities

	•		Translation exposure of foreign-currency intercompany and external debt and deposits

	•		Translation exposure of foreign-currency-denominated equity invested in consolidated companies

	•		Translation exposure to equity interests in non-functional-currency equity-accounted investees and available-for-sale financial assets.

		It is Philips’ policy that significant transaction exposures are hedged by the businesses. Accordingly, all businesses are required to identify and measure their exposures resulting from material transactions denominated in currencies other than their own functional currency. Philips’ policy generally requires committed foreign currency exposures to be fully hedged using forwards. Anticipated transactions may be hedged using forwards or options or a combination thereof. The amount hedged as a proportion of the total exposure identified varies per business and is a function of the ability to project cash flows, the time horizon for the cash flows and the way in which the businesses can adapt to changed levels of foreign-currency exchange rates. As a result, hedging activities may not eliminate all currency risks for these transaction exposures. Generally, the maximum tenor of these hedges is 18 months.

		The following table outlines the estimated nominal value in millions of euros for transaction exposure and related hedges for Philips’ most significant currency exposures as of December 31, 2009:

		Estimated transaction exposure and related hedges in millions of euros


	maturity 0-60 days						maturity over 60 days
	exposure			hedges			exposure			hedges
Receivables
GBP vs. EUR		50			(46	)		212			(120	)
PLN vs. EUR		34			(30	)		83			(50	)
USD vs. EUR		473			(408	)		1,186			(844	)
USD vs. CNY		4			(4	)		—			—
EUR vs. USD		115			(98	)		616			(330	)
JPY vs. EUR		26			(28	)		134			(116	)
EUR vs. CNY		4			(3	)		24			(17	)
Others		216			(218	)		592			(333	)

Payables
USD vs. BRL		(58	)		34			(137	)		62
PLN vs. EUR		(43	)		34			(152	)		84
USD vs. EUR		(660	)		507			(1,052	)		590
EUR vs. CNY		(1	)		1			(35	)		19
CNY vs. USD		(52	)		52			(143	)		76
MYR vs. USD		(8	)		5			(34	)		13
Others		(273	)		177			(419	)		231

		The first currency displayed is the exposure that is being hedged followed by the functional currency of the hedging entity.

		The derivatives related to transactions are, for hedge accounting purposes, split into hedges of on-balance-sheet accounts receivable/payable and forecasted sales and purchases. Changes in the value of on-balance-sheet foreign-currency accounts receivable/payable, as well as the changes in the fair value of the hedges related to these exposures, are reported in the income statement under income from operations. Hedges related to forecasted transactions, where hedge accounting is applied, are accounted for as cash flow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that the hedge is effective. As of December 31, 2009, a gain of EUR 10 million was deferred in equity as a result of these hedges. The result deferred in equity will be released to earnings mostly during 2010 at the time when the related hedged transactions affect the income statement. During 2009, a net gain of EUR 7 million was recorded in the income statement as a result of ineffectiveness of cash flow hedges.

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6 Risk management 6.7.2 - 6.7.2

		The total net fair value of hedges related to transaction exposure as of December 31, 2009 was an unrealized gain of EUR 15 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to an increase of EUR 28 million in the value of the derivatives; including a EUR 16 million increase related to foreign exchange transactions of the euro against the pound sterling, a EUR 11 million increase related to foreign exchange transactions of the euro against the Japanese yen, and a EUR 15 million decrease related to foreign exchange transactions of the euro against the US dollar. The EUR 28 million increase includes a loss of EUR 1 million that would impact the income statement, which would largely offset the opposite revaluation effect on the underlying accounts receivable and payable, and the remaining gain of EUR 29 million would be recognized in equity to the extent that the cash flow hedges were effective.

		Philips does not hedge the translation exposure of net income in foreign entities.

		Foreign exchange exposure also arises as a result of intercompany loans and deposits. Where the Company enters into such arrangements the financing is generally provided in the functional currency of the subsidiary entity. The currency of the Company’s external funding and liquid assets is matched with the required financing of subsidiaries either directly through external foreign currency loans and deposits, or synthetically by using foreign exchange derivatives. In certain cases where group companies may also have external foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange derivatives. Changes in the fair value of hedges related to this translation exposure are recognized within financial income and expenses in the income statement and are largely offset by the revaluation of the hedged items. The total net fair value of these derivatives as of December 31, 2009, was an unrealized loss of EUR 190 million. An instantaneous 10% increase in the value of the euro against all currencies would lead to an increase of EUR 303 million in the value of the derivatives, including a EUR 297 million increase related to the US dollar.

		Translation exposure of foreign-currency equity invested in consolidated entities is partially hedged. If a hedge is entered into, it is accounted for as a net investment hedge. As of December 31, 2009, Philips had no outstanding derivatives accounted for as net investment hedges. During 2009, Philips recorded a gain of less than EUR 1 million in other comprehensive income under currency translation differences as a result of net investment hedges.

		Philips does not currently hedge the foreign exchange exposure arising from equity interests in non-functional-currency equity-accounted investees and available-for-sale financial assets.

		Interest rate risk

		Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Philips had outstanding debt of EUR 4,267 million, which created an inherent interest rate risk. Failure to effectively hedge this risk could negatively impact financial results. At year-end, Philips held EUR 4,386 million in cash and cash equivalents, total long-term debt of EUR 3,640 million and total short-term debt of EUR 627 million. At December 31, 2009, Philips had a ratio of fixed-rate long-term debt to total outstanding debt of approximately 73%, compared to 76% one year earlier.

		A sensitivity analysis shows that if long-term interest rates were to decrease instantaneously by 1% from their level of December 31, 2009, with all other variables (including foreign exchange rates) held constant, the fair value of the long-term debt would increase by approximately EUR 222 million. If there was an increase of 1% in long-term interest rates, this would reduce the market value of the long-term debt by approximately EUR 221 million.

		If interest rates were to increase instantaneously by 1% from their level of December 31, 2009, with all other variables held constant, the annualized net interest expense would decrease by approximately EUR 31 million. This impact was based on the outstanding net cash position at December 31, 2009.

		Equity price risk

		Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in equity prices.

		Philips is a shareholder in several publicly listed companies, including TCL Corporation and TPV Technology Ltd. As a result, Philips is exposed to potential financial loss through movements in their share prices. The aggregate equity price exposure of publicly listed investments in its main available-for-sale financial assets and listed equity-accounted investees amounted to approximately EUR 357 million at year-end 2009 (2008: EUR 659 million including shares that were sold during 2009). As of December 31, 2009, Philips also held options on the shares of TPV through a convertible bond issued to Philips in September 2005, the face value of the bond being the USD equivalent of EUR 146 million and the fair value of the option at year-end EUR 25 million. Furthermore,

114 Philips Annual Report 2009

6 Risk management 6.7.2 - 6.7.2

		Philips also held options on the shares of CBAY through a convertible bond issued to Philips in August 2008, the face value of the bond being the USD equivalent of EUR 67 million and the fair value of the option at year-end EUR 2 million. Philips does not hold derivatives in its own stock or in the above-mentioned listed companies except for the embedded derivatives in the convertible bonds already mentioned.

		Philips is also a shareholder in several privately owned companies including NXP. As a result, Philips is exposed to potential value adjustments.

		Commodity price risk

		Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices.

		Philips is a purchaser of certain base metals, precious metals and energy. Philips hedges certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. The commodity price derivatives that Philips enters into are accounted for as cash flow hedges to offset forecasted purchases. As of December 2009, a gain of less than EUR 1 million was deferred in equity as a result of these hedges. A 10% increase in the market price of all commodities as of December 31, 2009 would increase the fair value of the derivatives by less than EUR 1 million.

		Credit risk

		Credit risk represents the loss that would be recognized at the reporting date if counterparties failed completely to perform their payment obligations as contracted. Credit risk is present within Philips trade receivables. To have better insights into the credit exposures, Philips performs ongoing evaluations of the financial and non-financial conditions of its customers and adjusts credit limits when appropriate. In instances where the creditworthiness of a customer is determined not to be sufficient to grant the credit limit required, there are a number of mitigation tools that can be utilized to close the gap including reducing payment terms, cash on delivery, pre-payments and pledges on assets.

		Philips invests available cash and cash equivalents with various financial institutions and is exposed to credit risk with these counterparties. The analysis below includes short-term deposits which were the main component of cash and cash equivalents totaling EUR 3,740 million as of December 31, 2009 (2008: 2,847 million). Philips is also exposed to credit risks in the event of non-performance by financial institutions with respect to financial derivative instruments.

		Philips actively manages concentration risk and on a daily basis measures the potential loss under certain stress scenarios, should a financial institution default. These worst-case scenario losses are monitored and limited by the company. As of December 31, 2009 Philips had credit risk exceeding EUR 25 million with the following number of financial institutions:

		Credit risk with number of counterparties


	25-100		100-500		500-2,000
	million		million		million
AAA-rated governments		—		—		1
AAA-rated government banks		—		—		2
AAA-rated bank counterparties		—		—		1
AA-rated bank counterparties		2		—		—
A-rated bank counterparties		3		1		—

		5		1		4

		The company does not enter into any financial derivative instruments to protect against default by financial institutions. However, where possible the company requires all financial institution with whom it deals in derivative transactions to complete legally enforceable netting agreements under an International Swap Dealers Association master agreement or otherwise prior to trading, and whenever possible, to have a strong credit rating from Standard & Poor’s and Moody’s Investor Services. Philips also regularly monitors the development of the credit risk of its financial counterparties. Wherever possible, cash is invested and financial transactions are concluded with financial institutions with strong credit ratings or with governments or government-backed institutions. For an overview of the overall maximum credit exposure of the group’s financial assets, please refer to note 32 for details of carrying amounts and fair value.

		Country risk

		Country risk is the risk that political, legal, or economic developments in a single country could adversely impact our performance. The country risk per country is defined as the sum of the equity of all subsidiaries and associated companies in country cross-border transactions, such as intercompany loans, accounts receivable from third parties and intercompany accounts receivable. The country risk is monitored on a regular basis.

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6 Risk management 6.7.2 - 6.7.3

		As of December 31, 2009, the company had country risk exposure in the United States of EUR 9 billion and in the Netherlands of EUR 8 billion. Other countries exceeding EUR 1 billion but less than EUR 3 billion are China (including Hong Kong) and Belgium. Countries where the risk exceeded EUR 500 million but was less than EUR 1 billion are Germany and Japan. Countries where the risk exceeded EUR 200 million but was less than EUR 500 million are Poland, Italy, Canada and France. The degree of risk of a country is taken into account when new investments are considered. The company does not, however, use financial derivative instruments to hedge country risk.

		Other insurable risks

		Philips is covered for a range of different kinds of losses by global insurance policies in the areas of property damage, business interruption, general and product liability, transport, directors’ and officers’ liability, employment practice liability, fraud, and aviation product liability.

		To lower exposures and to avoid potential losses, Philips has a worldwide Risk Engineering program in place. The main focus in this program is on property damage and business interruption risks, which also include interdependencies. Philips sites, and also a limited number of sites of key suppliers, are inspected on a regular basis by the Risk Engineering personnel of the insurer. Inspections are carried out against predefined Risk Engineering standards which are agreed between Philips and the insurers. Recommendations are made in a Risk Management report and are reviewed centrally. This is the basis for decision-making by the local management of the business as to which recommendations will be implemented. For all policies, deductibles are in place, which vary from EUR 250,000 to EUR 500,000 per occurrence and this variance is designed to differentiate between the existing risk categories within Philips. Above this first layer of working deductibles, Philips operates its own re-insurance captive, which during 2009 retained EUR 2.5 million per occurrence for the property damage and business interruption losses and EUR 5 million in the aggregate per year. For general and product liability claims, the captive retained EUR 1.5 million per claim and EUR 6 million in the aggregate. New contracts were signed on December 31, 2009 for the coming year, whereby the reinsurance captive retentions remained unchanged.

6.7.3		Details of pension risks

		This section further analyzes the pension exposure and possible risks thereof.

		Pension-related exposure to changes in financial markets

		With pension obligations in more than thirty countries, Philips has devoted considerable attention and resources to ensuring disclosure, awareness and control of the resulting exposures.

		Depending on the investment policies and the membership composition of the respective pension funds, developments in financial markets and changes in life expectancy may have significant effects on the Funded Status and net periodic pension costs (NPPC) of Philips’ pension plans. The pension plans in Germany, the Netherlands, the UK and the US cover approximately 95% of the Company’s total pension liabilities. To monitor their exposure to the respective risk factors, Philips uses a stochastic model. Amongst other things, the model allows both sensitivity analysis and stochastic simulations of the pension accounting figures of Philips. The sensitivity analysis presented and described in this chapter does not cover funding status or cost analysis on an economic or regulatory valuation basis.

		Sensitivity analysis

		An indication of Philips’ accounting risk exposures related to pensions can be obtained by a sensitivity analysis of the Funded Status and NPPC for the above-mentioned countries. The bar charts in figures 1 and 2 show the sensitivities of the Funded Status to changes in equity price levels, interest rates, inflation expectations and longevity. Figures 3 and 4 show the same sensitivities for the NPPC. The changes applied in this analysis represent approximately one standard deviation and the absolute numbers of the impact for each factor/assumption are mentioned in the graphs. The risk numbers show how much the Funded Status and NPPC change relative to their (expected) levels at year-end 2010 if equity price levels, interest rates, inflation expectation and longevity trend deviate from their (expected) values at the end of 2010.

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6 Risk management 6.7.3 - 6.7.3

		The sensitivity to changes in equity valuations is largest in the Dutch plan, even though in relative terms there is a larger percentage of equity exposure in the US. The size of the overall sensitivity to longevity is comparable to the sensitivity to equity prices. The plan in the Netherlands contributes most, which is due to its relative size. The aggregate Funded Status is less sensitive to interest rates. This reflects the impact of Liability Driven Investment (LDI) strategies in most countries. The interest rate sensitivity for the Dutch plan is opposite to the sensitivity in the other plans, because the LDI strategy adopted by the plan matches the higher value of the pension liabilities on a local valuation basis and not the lower value of the accounting liabilities as reported by the Company. Although an LDI strategy has been implemented in the US, this plan shows the highest sensitivity to interest rates. The aggregate Funded Status is least sensitive to changes in the inflation assumption. This is due to the fact that the Company has set its assumption for inflation for the Netherlands and Germany at the long-term target of the European Central Bank.

		The aggregate NPPC is particularly sensitive to changes in interest rates for the NPPC in the Netherlands. NPPC is to a lesser extent sensitive to changes in equity valuations and longevity. Due to the absolute size of the exposure to equities, the highest sensitivity to equities still exists in the Netherlands. The highest sensitivity to longevity also exists in the Netherlands. The aggregate NPPC is least sensitive to changes in inflation assumption due to the selection of the inflation assumption for the Netherlands as referred to in the previous paragraph.

		Stochastic analysis

		The sensitivities described above reflect the impacts of separate changes in equity prices, interest rates, etc. As such changes are historically unlikely to happen simultaneously, a simple summation of the above-mentioned sensitivities would overestimate the total risk exposure. The difference between the total risk and the summation represents the so-called diversification effect. It results from the less than perfect (or even negative) correlation between the respective risk factors. The diversification effect may be captured by a stochastic analysis, i.e. by analyzing the outcomes of a large number of simulations.

		These simulations are based on the volatility of and correlations between the respective risk factors over the past 30 years. The bar charts below show the maximum deviations from the expected aggregate Funded Status at year-end 2009 and year-end 2010 and the expected NPPC for 2010 and 2011, if the 5% worst possible outcomes are excluded. These ‘Funded-Status-at-risk’ and ‘NPPC-at-Risk’ measures are based on the valuations of plan assets and liabilities on December 31, 2008 and December 31, 2009, respectively, and may therefore be seen as indicators of the accounting risks on these same dates. Figure 5 shows both the contribution of the separate risk factors and the diversification effect. Contrary to figures 1 and 2, it excludes the impact of longevity risk, but it includes the impact of credit risk and foreign exchange risk. Figures 6 and 7 show both the contributions of the risk exposures in the four biggest pension countries and the diversification between them.

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6 Risk management 6.7.3 - 6.7.4

		The differences between the first and second bars in figures 5, 6 and 7 reflect plan changes, changes in assumptions for discounting future liabilities and changes in financial market conditions during 2009. The Funded-Status-at-Risk has increased compared to 2008. The credit risk, which is mainly driven by the volatility in credit spreads, has increased substantially, due to the increased market perception of credit risk. Credit risk results from the mismatch between the credit spread risk exposure of liabilities (i.e. in the discount rate curve used for accounting valuation) and the credit exposure of assets (through defaults, downgrades and changing credit spreads). On the other hand, the inflation element in the funded status calculation has decreased significantly by adoption of the ECB long-term target as the inflation assumption for the Netherlands and Germany. The contribution of equity risk has increased due to a higher absolute exposure resulting from the improved funding ratio of the Dutch plan and the increased volatility of equity prices. The steps taken during 2009 in Germany and the US to implement their new LDI driven investment strategies have led to lower contributions of interest rate risk. The contribution of interest rate risk results from the remaining interest rate mismatch between assets and liabilities. Both in absolute and relative terms, it is the highest in the US. The diversification effect is largely attributable to the small correlation between credit spread and equity returns.

		The Dutch fund still contributes most to NPPC-at-Risk. This is a reflection of its size.

6.7.4

Details of fiscal risks

		Philips is, as mentioned before, exposed to fiscal uncertainties. This section further describes this exposure. Please refer to note 5 for additional disclosure relating to income taxes.

		Transfer pricing uncertainties

		Philips has issued transfer pricing directives, which are in accordance with guidelines of the Organization of Economic Co-operation and Development. As transfer pricing has a cross-border effect, the focus of local tax authorities on implemented transfer pricing procedures in a country may have an impact on results in another country. In order to mitigate the transfer pricing uncertainties, audits are executed by Corporate Fiscal and Internal Audit on a regular basis to safeguard the correct implementation of the transfer pricing directives.

		Tax uncertainties on general service agreements and specific allocation contracts

		Due to the centralization of certain activities in a limited number of countries (such as research and development, centralized IT, corporate functions and head office), costs are also centralized. As a consequence, for tax reasons these costs and/or revenues must be allocated to the beneficiaries, i.e. the various Philips entities. For that purpose, apart from specific allocation contracts for costs and revenues, general service agreements (GSAs) are signed with a large number of entities. Tax authorities review the implementation of GSAs, apply benefit tests for particular countries or audit the use of tax credits attached to GSAs and royalty payments, and may reject the implemented procedures. Furthermore, buy in/out

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6 Risk management 6.7.4 - 6.7.4

		situations in the case of (de)mergers could affect the tax allocation of GSAs between countries. The same applies to the specific allocation contracts.

		Tax uncertainties due to disentanglements and acquisitions

		When a subsidiary of Philips is disentangled, or a new company is acquired, related tax uncertainties arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. These teams consist of specialists from various corporate functions and are formed, amongst other things, to identify hidden tax uncertainties that could subsequently surface when companies are acquired and to reduce tax claims related to disentangled entities. These tax uncertainties are investigated and assessed to mitigate tax uncertainties in the future as much as possible. Several tax uncertainties may surface from M&A activities. Examples of uncertainties are: applicability of the participation exemption, allocation issues, and non-deductibility of parts of the purchase price.

		Tax uncertainties due to permanent establishments

		In countries where Philips starts new operations, the issue of permanent establishment may arise. This is because when operations in new countries are led from other countries, there is a risk that tax claims will arise in the new country as well as in the initial country.

		Tax uncertainties of losses carried forward and tax credits carried forward

		The value of the losses carried forward is not only subject to having sufficient profits available within the loss-carried-forward period, but also subject to having sufficient profits within the foreseeable future in the case of losses carried forward with an indefinite carry-forward period. The ultimate realization of the Company’s deferred tax assets, including tax losses and credits carried forward, is dependent upon the generation of future taxable income in the countries where the temporary differences, unused tax losses and unused tax credits were incurred and during the periods in which the deferred tax assets become deductible. Additionally, in certain instances, realization of such deferred tax assets is dependent upon the successful execution of tax planning strategies. Accordingly, there can be no absolute assurance that all (net) tax losses and credits carried forward will be realized.

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7 Investor information 7 - 7.1

7 Investor information

7.1

The Philips investment proposition

		Our strategy

		Philips’ strategy is to become the leading company in Health and Well-being. We believe that a steadily growing demand for healthcare, a healthy lifestyle and energy-efficient lighting solutions will – driven by an aging population, increased environmental awareness and expanding emerging markets – allow Philips to generate double-digit EBITA margins.

		Our Healthcare sector is a world leader in many businesses including Cardiovascular X-ray, Patient Monitoring and, not least, Home Healthcare which we see playing an increasingly more important role in the years ahead. Equally, our Consumer Lifestyle sector is built on a portfolio of leading businesses – including Philips men’s shaving, Philips Sonicare oral healthcare and Philips Avent mother and childcare. We are the world’s largest Lighting company with a leading position in LED lighting solutions – the future of this industry. We will continue to leverage our brand, with its promise of “sense and simplicity”, our rich technological heritage and our advanced insight into the needs of end-users to bring meaningful innovation to our customers. In doing so, we will make Philips, already one of the oldest and strongest global brands, the leading company in Health and Well-being.

		Our financial targets

•

Comparable sales growth:

well in excess of global GDP

	•		Group EBITA margin: 10% or more

	•		Sector EBITA targets:

	-		Healthcare 15-17%

	-		Consumer Lifestyle 8-10%

	-		Lighting 12-14%

•

Return on invested capital: 12-13%

		Sustainability

		We seek to make constant progress in the sustainability of our business. A clear example of how we are driving business growth through sustainability is evident in our current EcoVision4 program.

		Our EcoVision4 targets

		over the period 2007 — 2012

	•		Double revenues from Green Products to 30% of total sales

	•		Double investment in Green Innovations to a cumulative EUR 1 billion

	•		Improve our operational energy efficiency by 25% and reduce CO₂ emissions by 25%

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7 Investor information 7.2 - 7.2.4

7.2		The year 2009

7.2.1		A challenging year in 2009

		Looking back, 2009 was a testing year for Philips. Nevertheless, in the most challenging economic environment in decades, we acted swiftly and decisively to adjust our cost structure and working capital to market conditions. We did this to maintain profitability and to make sure we emerge from the recession in the best possible shape to capitalize on future economic growth. The effects of our actions became increasingly visible in our earnings and cash flow performance, especially in the second half of the year.

		Despite tough times, we continued to invest in innovation, in our brand and in mergers and acquisitions. These investments are essential for our future competitiveness. In view of macro-economic developments, Philips also accelerated planned initiatives to further increase organizational effectiveness and to lower fixed cost by streamlining operations and simplifying the structure. In 2009 we announced another EUR 450 million of restructuring. Combined with the restructuring of 2008 this will lead to a reduction in our 2010 fixed cost base of well over EUR 700 million compared to the run rate in 2008.

		As our Incubator activities were maturing and increasingly aligned with the growth plans of our individual sectors, all activities of the Incubators, as of Q3 2009, were charged to Research & Development cost of the business sectors. In conjunction with this, the activities of Group Management & Services and the remaining Innovation & Emerging Businesses were reported under one reporting segment: Group Management & Services.

7.2.2		Net income and EPS

		Net income of the Philips Group showed a profit of EUR 424 million, or EUR 0.46 per common share, compared to a loss of EUR 92 million, or EUR 0.09 per common share, in 2008.

7.2.3		Dividend policy

		Our aim is to sustainably grow our dividend over time. Philips’ present dividend policy is based on an annual payout ratio of 40 to 50% of continuing net income.

		Continuing net income, or net income excluding material non-recurring items and discontinued operations, is the base figure used to calculate the dividend payout for the

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7 Investor information 7.2.4 - 7.2.4

		year. For 2009, the key exclusions used to arrive at continuing net income include the gains on the sale of shares in LG Display and Pace Micro Technology, non-cash value decreases in our remaining financial stakes, restructuring and the impact of settlement charges.

7.2.4		Proposed distribution

		A proposal will be submitted to the 2010 Annual General Meeting of Shareholders to declare a dividend of EUR 0.70 per common share, in cash or in shares at the option of the shareholder, against the net income for 2009 and the retained earnings of the Company. Such dividend is expected to result in a payment of up to EUR 650 million.

		Shareholders will be given the opportunity to make their choice between cash and shares between April 1, 2010 and April 23, 2010. If no choice is made during this election period the dividend will be paid in shares. On April 23, 2010 after close of trading, the number of share dividend rights entitled to one new common share will be determined based on the volume weighted average price of all traded common shares Koninklijke Philips Electronics N.V. at Euronext Amsterdam on 21, 22 and 23 April 2010. The Company will calculate the number of share dividend rights entitled to one new common share, such that the gross dividend in shares will be approximately 3% higher than the gross dividend in cash. Payment of the dividend and delivery of new common shares, with settlement of fractions in cash, if required, will take place from April 28, 2010. The distribution of dividend in cash to holders of New York registry shares will be made in USD at the USD/EUR rate fixed by the European Central Bank on April 26, 2010.

		Dividend in cash is in principle subject to 15% Dutch dividend withholding tax, which will be deducted from the dividend in cash paid to the shareholders. Dividend in shares paid out of earnings and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). This withholding tax in case of dividend in shares will be borne by Philips.

		In 2009, a distribution in cash was paid of EUR 0.70 per common share (EUR 647 million) against the retained earnings of the Company.


	ex-dividend
	date	record date		payment date
Amsterdam shares	March 29, 2010		March 31, 2010		April 28, 2010
New York shares	March 29, 2010		March 31, 2010		April 28, 2010

122 Philips Annual Report 2009

7 Investor information 7.3 - 7.3.3

7.3

Share information

7.3.1		Market capitalization

		Philips’ market capitalization was EUR 19.2 billion at year-end 2009. The highest closing price for Philips’ shares in 2009 was EUR 21.03 on December 29, 2009 and the lowest was EUR 10.95 on March 30, 2009, both in Amsterdam.

7.3.2		Share capital structure

		During 2009, Philips’ issued share capital remained at a level of 972 million common shares. The basic shares outstanding increased slightly from 923 million at the end of December 2008 to 927 million shares at the end of 2009. As of December 31, 2009, the shares held in treasury amounted to 45.0 million shares, of which 43.1 million are held by Philips to cover long-term incentive and employee stock purchase plans.

		The Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) imposes a duty to disclose percentage holdings in the capital and/or voting rights in the Company when such holding reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95%. Such disclosure must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the Company.

		On April 20, 2009, the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.02% by Southeastern Asset Management, Inc. in the Company’s common shares, which was subsequently reduced to below 5% as of December 14, 2009. On December 1, 2009, the Company received notification from the AFM that it had received disclosures under the Financial Markets Supervision Act of a substantial holding of 5.03% by BlackRock Inc. in the Company’s common shares.

		Based on a survey in September 2009 and information provided by several large custodians, the following shareholder portfolio information is included in the graphs Shareholder by region and Shareholders by style.

7.3.3		Share repurchase programs for capital reduction purposes

		On July 17, 2006, Philips announced a further EUR 1.5 billion share repurchase program which was expanded to EUR 4.0 billion on August 3, 2006. Philips completed EUR 2.4 billion of this program in 2006.

		Philips planned to execute the remaining EUR 1.6 billion via a program using a second trading line on Euronext Amsterdam, which started on January 22, 2007. Through this second trading line EUR 0.8 billion worth of shares were purchased in 2007.

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7 Investor information 7.3.3 - 7.4

		In December 2007, the Dutch parliament adopted an amendment to Dutch tax legislation, effective January 1, 2008, that increased the amount that companies may spend on repurchasing shares free of withholding tax. Subsequently, Philips announced that it planned to repurchase EUR 5 billion worth of common Philips shares. As a consequence of this new share repurchase program, which includes the portion of the second trading line program that had yet to be completed, Philips terminated its second trading line.

		At the end of 2008 share repurchases totaling EUR 3.3 billion, or two-thirds of the planned EUR 5.0 billion, had been completed. Given the economic conditions in 2008, we announced on January 26, 2009 that, in line with our prudent financial management, we would suspend the share repurchase program until further notice.

		Further details on the share repurchase programs can be found on the Investor Relations website. For more information see the section 10.1, Corporate governance of the Philips Group, of this Annual Report.

		In 2008 the Company started the procedure for the cancellation of Philips shares acquired pursuant to the EUR 5.0 billion share repurchase program. The cancellation has been effected in several tranches.

		Impact of share repurchases on share count

		in millions of shares


	2005		2006		2007		2008		2009
Shares issued		1,316		1,143		1,143		972		972
Shares in treasury		115		36		78		49		45
Shares outstanding		1,201		1,107		1,065		923		927

Shares repurchased		72		102		26		146		—
Shares cancelled		—		173		—		170		—

7.4

Risk management

		Taking risks is an inherent part of entrepreneurial behavior. A structured risk management process encourages management to take risks in a controlled manner. Philips has a structured risk management process in place that recognizes different risk categories at Strategic, Operational, Compliance and Financial level. A more extensive explanation is published in section 6.1, Introduction, of this Annual Report.

		Philips’ rating

		Philips’ existing long-term debt is rated A3 (with negative outlook) by Moody’s and A- (with stable outlook) by Standard & Poor’s. It is our objective to manage our financial ratios to be in line with A3 / A-. There is no assurance that we will be able to achieve this goal and ratings are subject to change at any time.

		Credit rating summary

Long-

Short-

term

Outlook

Standard and Poor’s

A-

A-2

Stable

Moody’s

P-2

Negative

124 Philips Annual Report 2009

7 Investor information 7.5 - 7.5

7.5

Performance in relation to market indices

		Euronext Amsterdam

		Share price development in Amsterdam, 2009 (in euros)


PHIA	Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec
High		15.26		16.05		12.74		13.76		14.77		14.23		15.88		16.54		17.65		18.91		18.84		21.03
Low		12.61		12.58		10.95		11.52		13.26		12.64		12.59		15.61		15.05		15.79		16.99		19.21
Average		14.03		14.34		11.99		12.68		14.01		13.43		14.18		16.15		16.63		17.55		18.13		20.14
Average daily volume*		9.52		9.49		11.60		9.17		5.86		6.21		6.57		5.35		7.21		8.20		5.56		5.92

		New York Stock Exchange

		Share price development in New York, 2009 (in US dollar)


PHG	Jan		Feb		Mar		Apr		May		Jun		Jul		Aug		Sep		Oct		Nov		Dec
High		20.73		20.78		17.13		17.98		19.89		20.30		22.76		23.83		25.82		28.14		28.46		30.19
Low		16.06		15.58		13.98		15.45		18.11		17.61		17.52		22.15		21.35		22.89		25.09		28.58
Average		18.73		18.31		15.66		16.75		19.16		18.81		19.99		23.03		24.19		25.95		27.09		29.29
Average daily volume*		1.21		1.58		1.76		1.60		1.03		0.89		1.32		0.74		0.90		0.73		0.55		0.70


*		in millions of shares


	Amsterdam, New
Share listings	York
Ticker code	PHIA, PHG

No. of shares issued at Dec. 31, 2009	972 million

No. of shares outstanding issued at Dec. 31, 2009	927 million

Market capitalization at year-end 2009	19.2 billion

Industry classification

MSCI: Capital Goods, Diversified Industrials		20105010

ICB: Consumer Electronics¹⁾		3743

Members of indices

AEX, NYSE, DJSI, and others


¹⁾		ICB classification based on 2007 sales split

Philips Annual Report 2009 125

7 Investor information 7.6 - 7.7

7.6

Philips’ acquisitions

Acquisitions announced in 2009


February 24, 2009	Ilti Luce	Professional Luminaires	Enhance ability to offer unique indoor architectural lighting solutions

March 25, 2009	Dynalite	Lighting Electronics	Provide further offering in lighting control systems for integral energy management

April 1, 2009	Selecon¹⁾	Professional Luminaires	Strengthen the breadth of solutions in the theatrical and architectural market

May 4, 2009	Traxtal	Clinical Care Systems	Become one of the leading solution providers for image-guided medical procedures

July 15, 2009	InnerCool¹⁾	Clinical Care Systems	Broaden offering in emergency care by adding body temperature management

July 16, 2009	Teletrol	Lighting Electronics	Adds to portfolio of intelligent light and energy management solutions

July 27, 2009	Saeco	Domestic Appliances	Expand in high-growth, high-margin espresso market with strong products range


¹⁾		Asset transaction

Acquisitions announced in 2008


March 26, 2008	TOMCAT Systems	Healthcare IT	Expand use of IT in cardiology business to improve patient outcome and hospital efficiency

April 11, 2008	Goldway	Patient monitoring	Grow presence in China and platform to other emerging markets

May 13, 2008	Dixtal	Patient monitoring	Further bolster presence in emerging markets and broaden presence in economy to mid-range products

September 8, 2008	Alpha X-ray	Cardiovascular X-ray	Strengthen footprint in emerging markets and add offering in economy segment to portfolio

November 21, 2008	Meditronics	General X-ray	Expansion of industrial and commercial footprint in India

December 15, 2008	Aerosol-therapy business model	Home Healthcare	Building industrial and commercial presence, strengthen emerging market footprint

7.7

Financial calendar


		Financial calendar


Annual General Meeting of Shareholders
Record date Annual General Meeting of Shareholders	March 3, 2010
Annual General Meeting of Shareholders	March 25, 2010
Quarterly reports 2010
First quarterly report 2010	April 19, 2010
Second quarterly report 2010	July 19, 2010
Third quarterly report 2010	October 18, 2010
Fourth quarterly report 2010	January 24, 2011	¹⁾
Sector Capital Markets Days 2010
Capital Markets Day Healthcare	May 6, 2010	¹⁾
Capital Markets Day Lighting	September 15, 2010	¹⁾
Capital Markets Day Consumer Lifestyle	December 1, 2010	¹⁾
2011
Publication of 2010 results	January 24, 2011	¹⁾
Publication of the Annual Report 2010	February 21, 2011	¹⁾
Annual General Meeting of Shareholders	March 24, 2011	¹⁾


¹⁾		Subject to final confirmation

126 Philips Annual Report 2009

7 Investor information 7.8 - 7.8

7.8

Five-year overview

All amounts in millions of euros unless otherwise stated. Due to factors such as consolidations and divestments, the amounts, percentages and ratios are not directly comparable.

General data


	2005^1,2,3)			2006^1,2,3)			2007³⁾			2008			2009
Sales		25,445			26,682			26,793			26,385			23,189
Percentage increase over previous year		4			5			—			(2	)		(12	)

Income (loss) from continuing operations		3,598			1,003			5,018			(95	)		424
Discontinued operations		(6	)		4,154			(138	)		3			—
Net income (loss)		3,592			5,157			4,880			(92	)		424

Free cash flow		661			(348	)		824			773			863
Turnover rate of net operating capital		4.74			3.73			2.71			1.72			1.79
Total employees at year-end (in thousands)		159	⁴⁾		122	⁴⁾		124	⁴⁾		121			116


¹⁾		Discontinued operations reflects the effect of the sale of MDS in 2006, for which previous years have been restated

²⁾		Discontinued operations reflects the effect of the sale of Semiconductors in 2006, for which previous years have been restated

³⁾		Discontinued operations reflects the effect of classifying the MedQuist business as a discontinued operation in 2007, for which previous years have been restated

⁴⁾		Including discontinued operations

⁵⁾		In millions of shares

⁶⁾		In manufacturing excluding new acquisitions

Income


	2005^1,2,3)			2006^1,2,3)			2007³⁾			2008			2009
EBIT		1,810			1,336			1,867			54			614
as a % of sales		7.1			5.0			7.0			0.2			2.6

EBITA		1,899			1,528			2,094			744			1,050
as a % of sales		7.5			5.7			7.8			2.8			4.5

Income taxes		(599	)		(223	)		(582	)		(256	)		(100	)
as a % of income before taxes		(31.2	)		(16.3	)		(12.3	)		(180.2	)		(22.3	)

Income (loss) from continuing operations		3,598			1,003			5,018			(95	)		424
as a % of stockholders’ equity (ROE)		22.3			4.8			22.8			(0.5	)		2.9

Net income (loss)		3,592			5,157			4,880			(92	)		424

Philips Annual Report 2009 127

7 Investor information 7.8 - 7.8

Capital employed


	2005^1,2,3)		2006^1,2,3)		2007³⁾		2008		2009
Cash and cash equivalents		5,143		5,886		8,769		3,620		4,386
Receivables and other current assets		4,961		5,502		5,292		5,038		4,610
Assets of discontinued operations		5,512		427		319		—		—
Inventories		2,843		2,940		3,213		3,491		2,913
Non-current financial assets/equity-accounted investees		5,889		10,924		5,000		1,624		972
Non-current receivables/assets		4,035		3,905		3,959		2,884		2,871
Property, plant and equipment		3,018		3,102		3,194		3,496		3,252
Intangible assets		3,895		5,964		6,635		11,757		11,523

Total assets		35,296		38,650		36,381		31,910		30,527

Property, plant and equipment:
Capital expenditures for the year		624		698		658		770		524
Depreciation for the year		919		990		562		729		746
Capital expenditures : depreciation		0.7		0.7		1.2		1.1		0.7

Inventories as a % of sales		11.2		11.0		12.0		13.2		12.6
Outstanding trade receivables, in days sales		44		45		44		42		40

Financial structure


	2005^1,2,3)		2006^1,2,3)		2007³⁾		2008		2009
Other liabilities		8,717		8,156		7,817		8,708		8,636
Liabilities of discontinued operations		1,719		78		78		—		—
Debt		4,507		3,878		3,563		4,188		4,267
Provisions		2,880		3,304		3,055		3,421		2,980

Total provisions and liabilities		17,823		15,416		14,513		16,317		15,883

Minority interests		353		135		127		49		49
Stockholders’ equity		17,120		23,099		21,741		15,544		14,595


Total equity and liabilities		35,296		38,650		36,381		31,910		30,527

Net debt : group equity ratio		(4):104		(9):109		(31):131		4:96		(1):101

Market capitalization at year-end		31,536		31,624		31,436		12,765		19,170

128 Philips Annual Report 2009

7 Investor information 7.8 - 7.8

Key figures per share


	2005^1,2,3)		2006^1,2,3)		2007³⁾		2008			2009
Sales per common share		20.36		22.71		24.67		26.62			25.07
EBITA per common share — diluted		1.52		1.29		1.91		0.75			1.13
Income (loss) from continuing operations per share		2.88		0.85		4.61		(0.09	)		0.46
Dividend paid per common share		0.40		0.44		0.60		0.70			0.70
Total shareholder return per common share		7.14		2.76		1.55		(14.99	)		7.55
Stockholders’ equity per common share		14.25		20.87		20.41		16.84			15.74
Price/earnings ratio		9.11		33.61		6.40		(153.67	)		44.96
Share price at year-end		26.25		28.57		29.52		13.83			20.68
Highest closing share price during the year		26.70		29.31		32.99		28.94			21.03
Lowest closing share price during the year		18.53		21.89		26.71		12.09			10.95
Average share price		21.59		26.57		29.73		21.42			15.26
Common shares outstanding at year-end⁵⁾		1,201		1,107		1,065		923			927
Weighted average shares outstanding
- basic⁵⁾		1,250		1,175		1,086		991			925
- diluted⁵⁾		1,253		1,184		1,099		997			929

Sustainability


	2005		2006		2007		2008		2009
Green Product sales, as a % of total sales		—		15.0		19.8		22.6		30.6
Green Innovation spending, in millions of euros		—		—		—		282		409
Operational carbon footprint, in kilotons CO₂-equivalent		—		—		2,135		2,139		1,920
Energy consumption, in TJ⁶⁾		—		15,213		15,171		14,585		14,190
CO₂ emissions in manufacturing, in kilotons CO₂-equivalent⁶⁾		—		869		856		825		814
Water intake, in thousands m³ ⁶⁾		—		4,171		4,209		3,962		4,219
Total waste, in kilotons⁶⁾		—		125.4		127.6		113.6		97.6
ISO 14001 certification %⁶⁾		—		92		90		95		92
Engagement Index, % positive score		—		61		64		69		68
Female executives, in % of total		—		6		8		10		10
Lost Workday Injuries, per 100 FTEs		—		0.78		0.81		0.68		0.44

Philips Annual Report 2009 129

8 Our leadership 8 - 8.1

Our leadership

8.1		Board of Management

		The Board of Management operates under the chairmanship of the President/Chief Executive Officer. The members of the Board of Management have collective powers and responsibilities. They share responsibility for the management of Koninklijke Philips Electronics N.V. (the ‘Company’), the deployment of its strategy and policies, and the achievement of its objectives and results. The Board of Management has, for practical purposes, adopted a division of responsibilities reflecting the functional and business areas monitored and reviewed by the individual members. In accordance with the Company’s corporate objectives and Dutch law, the Board of Management is guided by the interests of the Company and its affiliated enterprises within the Group, taking into consideration the interests of the Company’s stakeholders, and is accountable for the performance of its assignment to the Supervisory Board and the General Meeting of Shareholders. The Rules of Procedure of the Board of Management are published on the Company’s website (www.philips.com/investor).

		Corporate Governance

		A full description of the Company’s corporate governance structure is published in the chapter Corporate governance of this Annual Report.

Gerard Kleisterlee

1946, Dutch

President/Chief Executive Officer (CEO) and Chairman of the Board of Management and the Group Management Committee

President/CEO and Chairman of the Board of Management since April 2001, member of the Board of Management since April 2000 and member of the Group Management Committee since January 1999

Corporate responsibilities: Communications, Design, Human Resources Management, Internal Audit, Legal/ Compliance/GBP, Marketing, Strategy, Technology Management

Pierre-Jean Sivignon

1956, French

Executive Vice-President and Chief Financial Officer (CFO)

CFO and member of the Board of Management and the Group Management Committee since June 2005

Corporate responsibilities: Control, Corporate Investments, Fiscal, Information Technology, Investor Relations, Mergers & Acquisitions, New Venture Integration, Pensions, Real Estate, Supply Management, Treasury

130 Philips Annual Report 2009

8 Our leadership 8.1 - 8.1

Gottfried Dutiné

1952, German

Executive Vice-President and as of January 2010 Global Head of Markets & Innovation

Member of the Board of Management since April 2002 and member of the Group Management Committee since February 2002

Corporate responsibilities: Areas and Countries, Corporate Technologies (as of January 2010), Emerging Markets, Government Relations, Strategic Initiatives

Andrea Ragnetti

1960, Italian

Executive Vice-President and Chief Executive Officer of Philips Consumer Lifestyle

Member of the Board of Management since April 2006, member of the Group Management Committee since January 2003 and CEO of Consumer Lifestyle since 2008

Corporate responsibilities: Consumer Lifestyle Sector

Rudy Provoost

1959, Belgian

Executive Vice-President and Chief Executive Officer of Philips Lighting

Member of the Board of Management since April 2006, member of the Group Management Committee since August 2003 and CEO of Philips Lighting since April 2008

Corporate responsibilities: Lighting Sector, Sales Leadership Board, Sustainability

Steve Rusckowski

1957, American

Executive Vice-President and Chief Executive Officer of Philips Healthcare

Member of the Board of Management since April 2007 and CEO of Philips Healthcare since November 2006

Corporate responsibilities: Healthcare Sector

Philips Annual Report 2009 131

8 Our leadership 8.2 - 8.2

8.2		Group Management Committee

		The Group Management Committee consists of the members of the Board of Management and certain key officers. Members other than members of the Board of Management are appointed by the Supervisory Board.

Rick Harwig

1949, Dutch

Member of the GMC and Chief Technology Officer since April 2006

Corporate responsibilities: Applied Technologies, Incubators, Intellectual Property & Standards, Molecular Diagnostics, PIC Bangalore, Research, Technology Management

Gerard Ruizendaal

1958, Dutch

Member of the GMC since February 2007 and Chief Strategy Officer since May 2005

Corporate responsibilities: Business Development and Strategy & Alliances

Maarten de Vries

1962, Dutch

Member of the GMC and Chief Information Officer since September 2007 and Global Head of Purchasing since September 2008

Corporate responsibilities: Information Technology, Purchasing

Hayko Kroese

1955, Dutch

Member of the GMC since February 2007; responsible for Human Resources Management since 2007

Corporate responsibilities: Human Resources Management

Eric Coutinho

1951, Dutch

Member of the GMC since February 2007, Secretary to the Board of Management and Chief Legal Officer since May 2006

Corporate responsibilities: Company Manual, Company Secretary, General Business Principles, Legal

Marc de Jong

1961, Dutch

Member of the GMC since April 2009 and CEO Professional Luminaires since April 2009

Corporate responsibilities: Professional Luminaires

132 Philips Annual Report 2009

8 Our leadership 8.3 - 8.3

8.3		Supervisory Board

		The Supervisory Board supervises the policies of the executive management (the Board of Management) and the general course of affairs of Philips and advises the executive management thereon. The Supervisory Board, in the two-tier corporate structure under Dutch law, is a separate and independent body from the Board of Management. The Rules of Procedure of the Supervisory Board are published on the Company’s website.

		For more details on the activities of the Supervisory Board, see the chapter Supervisory Board report.

J-M. Hessels

1942, Dutch** ***

Chairman

Member of the Supervisory Board since 1999; third term expires in 2011

Former CEO of Royal Vendex KBB and currently Chairman of the Board of NYSE Euronext Inc, member of the Supervisory Board of Heineken and Chairman of the Central Planning Committee, Netherlands Bureau for Economic Policy Analysis

J.M. Thompson

1942, Canadian** ***

Vice-Chairman and Secretary

Member of the Supervisory Board since 2003; second term expires in 2011

Former Vice-Chairman of the Board of Directors of IBM, and director of Hertz and Robert Mondavi; currently Chairman of the Board of Toronto Dominion Bank and a Director of Thomson Reuters Corporation

E. Kist

1944, Dutch*

Member of the Supervisory Board since 2004; second term expires in 2012

Former Chairman of the Executive Board of ING Group and currently member of the Supervisory Boards of the Dutch Central Bank, DSM, Moody’s Investor Service and Stage Entertainment

Sir Richard Greenbury

1936, British**

Member of the Supervisory Board since 1998; third term expires in 2010

Former Chairman and CEO of Marks & Spencer and former Director of Lloyds TSB, British Gas, ICI, Zeneca and Electronics Boutique Plc

C.A. Poon

1952, American

Member of the Supervisory Board since 2009; first term expires in 2013

Former Vice Chairman of Johnson & Johnson’s Board of Directors and Worldwide Chairman of the Pharmaceuticals Group. Currently dean of Ohio State University’s Fisher College of Business and member of the Board of Directors of Prudential

J. van der Veer

1947, Dutch*

Member of the Supervisory Board since 2009; first term expires in 2013

Former Chief Executive and currently Nonexecutive Director of Royal Dutch Shell; Vice-Chairman and Senior Independent Director of Unilever and Vice-Chairman of the Supervisory Board of ING

C.J.A. van Lede

1942, Dutch**

Member of the Supervisory Board since 2003; second term expires in 2011

Former Chairman of the Board of Management of Akzo Nobel and currently Chairman of the Supervisory Board of Heineken, member of the Boards of AirFrance/KLM, Sara Lee Corporation, Air Liquide, member of the Board of Directors of INSEAD and Senior Advisor JP Morgan Plc

J.J. Schiro

1946, American* ***

Member of the Supervisory Board since 2005; second term expires in 2013

Former CEO of Zurich Financial Services and Chairman of the Group Management Board. Also serves on various boards of private and listed companies including Goldman Sachs as member of the Supervisory Board and PepsiCo as Chairman of the Audit Committee and member of the Supervisory Board

H. von Prondzynski

1949, German*

Member of the Supervisory Board since 2007; first term expires in 2011

Former member of the Corporate Executive Committee of the F. Hofmann-La Roche Group and former CEO of Roche Diagnostics, currently chairman of the Supervisory Board of HTL Strefa and member of the Supervisory Boards of various private and listed companies including Qiagen and Epigenomics


*		Member of the Audit Committee

**		Member of the Remuneration Committee

***		Member of the Corporate Governance and Nomination & Selection Committee

Philips Annual Report 2009 133

9 Supervisory Board report 9 - 9.1

Supervisory Board report

9.1

Introduction

		General

		The supervision of the policies and actions of the executive management (the ‘Board of Management’) of Koninklijke Philips Electronics N.V. (the ‘Company’) is entrusted to the Supervisory Board, which, in the two-tier corporate structure under Dutch law, is a separate body and fully independent of the Board of Management. This independence is also reflected in the requirement that members of the Supervisory Board be neither a member of the Board of Management nor an employee of the Company. The Supervisory Board considers all its members to be independent pursuant to the Dutch Corporate Governance Code of December 2008 (the ‘Dutch Corporate Governance Code’) and under the applicable US standards.

		While retaining overall responsibility, the Supervisory Board assigns certain of its tasks to three permanent committees: the Corporate Governance and Nomination & Selection Committee, the Remuneration Committee and the Audit Committee. The separate reports of these committees are part of this report and are published below. The members (of the committees) of the Supervisory Board are listed in section 8.3, Supervisory Board, of this Annual Report.

		For further information on the Company’s corporate governance structure and a more detailed description of the duties and functioning of the Supervisory Board, see chapter 10, Corporate governance, of this Annual Report.

		Activities of the Supervisory Board

		Six regular meetings were held in 2009. All members were frequently present at the regular meetings of the Supervisory Board. In 2009 one meeting took place by means of a conference call to discuss a specific matter. The Audit Committee and the Corporate Governance and Nomination & Selection Committee met four times. The Remuneration Committee met five times at four regular meetings and one meeting with the full Supervisory Board to discuss subjects and developments with respect to remuneration.

		During 2009 the Supervisory Board devoted considerable time to discussing the Company’s strategy and discussed the performance and strategy of the three sectors in detail with the respective management teams, especially during a half day business update meeting with each sector. In particular, the Supervisory Board discussed the performance and integration of recent acquisitions, such as Saeco, Genlyte and Respironics, the economic situation and impact thereof on Philips and the cost reduction and efficiency improvement measures taken to confront the recession, as well as the capital and financing structure of the Philips Group extensively throughout the year.

		In January the Supervisory Board discussed the financial performance of the Philips Group in 2008. The management agenda 2009 of the Board of Management was discussed, especially the steps taken to deal with the unsatisfactory EBITA margins in the Television business. The agenda for the 2009 General Meeting of Shareholders was discussed, including the proposed dividend to shareholders, the dividend policy and the composition of and proposed candidates for the Supervisory Board. Moreover, the charter and the evaluation of the functioning of the Supervisory Board and its members were discussed.

		In February the Supervisory Board discussed the report of the auditors of the Company and approved the Annual Report 2008. The annual incentive targets 2009 were discussed.

		In March the results of the Net Promoter Score 2008 were discussed. The Supervisory Board together with the Chief Technology Officer discussed innovation themes and the shift of R&D spend from existing product categories to new product categories. The Remuneration Committee gave an update to the full Supervisory Board on remuneration topics.

		In June the strategy of the Company and the sectors, including various risks and opportunities scenarios, were discussed during a one and a half day meeting.

		In August the Supervisory Board discussed a financial update including an assessment of the major risks for the company and ways to mitigate these. It received an update with respect to ongoing legal proceedings. Further, the members of the Supervisory Board spent two days at the High Tech Campus in Eindhoven where they discussed

134 Philips Annual Report 2009

9 Supervisory Board 9.1 - 9.1

		amongst other things the impact of the LED revolution, several projects in Incubators and the performance and set-up of the Philips activities in France, Germany and the Netherlands.

		In October topics for the management agenda 2010 of the Board of Management were discussed. The Supervisory Board further discussed plans to better organize around customers and markets.

		In December the Supervisory Board discussed the financial scenarios and the Annual Operating Plan 2010.

		Other discussion topics included:

	•		financial performance of the Philips Group and the sectors

	•		status of merger and acquisition projects, like Saeco

	•		management development and succession planning, especially with respect to the President/CEO

	•		evaluation of the Board of Management and its members

	•		geographic performance and growth opportunities in emerging markets, including the shift of resources from mature to emerging markets

	•		the situation and improvement measures at some businesses that did not perform according to plan

	•		the results of the Employee Engagement Score

	•		financial scenarios for 2010 and beyond

	•		legal proceedings, including the investigations into possible anticompetitive activities in the CRT industry

	•		the situation at Philips Pension Fund in the Netherlands and the governance and financial position of the other major pension funds

	•		restructuring programs in all sectors

Composition and evaluation of the Supervisory Board

On June 23, 2009 the Supervisory Board and the Board of Management received the sad news of the passing away of Prof. K.A.L.M. van Miert, member of the Supervisory Board. Mr van Miert joined the Supervisory Board in 2000. He was a highly committed member, whose efforts were greatly appreciated. We owe him a great debt of gratitude for his knowledge and insight and we will cherish his memory with warmth and respect.

		The Supervisory Board currently consists of nine members. The Supervisory Board aims for an appropriate combination of knowledge and experience among its members in relation to the global and multi-product character of Philips’ businesses. Consequently, the Supervisory Board aims for an appropriate level of experience in marketing, technological, manufacturing, financial, economic, social and legal aspects of international business and government and public administration. The full profile is described in the chapter Corporate governance. Members are appointed for fixed terms of four years and may be re-appointed for two additional four-year terms.

		All members of the Supervisory Board completed a questionnaire to verify compliance in 2009 with applicable corporate governance rules and the Rules of Procedure of the Supervisory Board. The Chairman of the Supervisory Board discussed the functioning of the Supervisory Board and its members in private discussions with all members. He shared common themes and conclusions in a private session of the Supervisory Board; items discussed include the follow-up to the evaluation regarding 2008, the composition and competencies of the Supervisory Board, and the set-up and content of meetings and meeting materials. In the same meeting the relationship with the Board of Management was discussed. The three committees of the Supervisory Board reviewed their charters and their functioning and reported thereon to the full Supervisory Board. Several members of the Supervisory Board attended external training programs, which are often dedicated to specific topics.

		Changes Supervisory Board and committees 2009

	•		On June 23, 2009 the Supervisory Board and the Board of Management received the sad news of the passing away of Mr van Miert.

	•		Mr Schiro has been reappointed as member of the Supervisory Board.

	•		Mr Wong has relinquished his position as member of the Supervisory Board as of the closing of the 2009 General Meeting of Shareholders.

	•


11	Group financial statements		153
11.1	Introduction		153
11.2	Management’s report on internal control		153
11.3	Reports of the independent auditor		154
11.4	Auditors’ report on internal control		154
11.5	Consolidated statements of income		155
11.6	Consolidated statements of comprehensive income		157
11.7	Consolidated balance sheets		158
11.8	Consolidated statements of cash flows		160
11.9	Consolidated statements of changes in equity		162
11.10	Information by sector and main country		163
11.11	Significant accounting policies		166
11.12	Notes		172

	1	Discontinued operations	172
	2	Acquisitions and divestments	172
	3	Income from operations	177
	4	Financial income and expenses	178
	5	Income taxes	179
	6	Investments in equity-accounted investees	181
	7	Receivables	183
	8	Inventories	183
	9	Other current assets	183
	10	Other non-current financial assets	183
	11	Non-current receivables	184
	12	Other non-current assets	184
	13	Property, plant and equipment	185
	14	Intangible assets excluding goodwill	186
	15	Goodwill	187
	16	Accrued liabilities	188
	17	Provisions	188
	18	Pensions and other postretirement benefits	189
	19	Other current liabilities	193
	20	Short-term debt	193
	21	Long-term debt	194
	22	Other non-current liabilities	194
	23	Contractual obligations	194
	24	Contingent liabilities	195
	25	Stockholders' equity	197
	26	Cash from (used for) derivatives and securities	197
	27	Proceeds from other non-current financial assets	198
	28	Assets in lieu of cash from sale of businesses	198
	29	Related-party transactions	198
	30	Share-based compensation	198
	31	Information on remuneration	200
	32	Fair value of financial assets and liabilities	206
	33	Other financial instruments	207
	34	Subsequent events	207

11.13	Auditor’s report — Group		208
12	Company financial statements		209
12.1	Balance sheets		209
12.2	Statements of income		210
12.3	Statements of equity		210
12.4	Introduction		211
12.5	Notes		212

	A	Receivables	212
	B	Investments in affiliated companies	212
	C	Other non-current financial assets	212
	D	Other current liabilities	212
	E	Short-term debt	212
	F	Long-term debt	213
	G	Stockholders' equity	213
	H	Net income	214
	I	Employees	214
	J	Obligations not appearing in the balance sheet	214
	K	Audit fees	214
	L	Subsequent events	214

12.6	Auditor’s report — Company		214

13	Sustainability performance		215
13.1	Approach to sustainability reporting		215
13.2	Economic indicators		218
13.3	Environmental indicators		218
13.4	Social indicators		222
13.5	Supplier indicators		224
13.6	Independent assurance report		226
13.7	Global Reporting Initiative (GRI) table		227

14	Reconciliation of non-GAAP information		234

15	Investor contact		239

16	Definitions and abbreviations		241

17	Forward-looking statements and other information		242


	total
	amounts		less than 1
	committed		year		1 -5 years		after 5 years
Business-related guarantees		266		134		70		62
Credit-related guarantees		42		31		5		6

		308		165		75		68


¹⁾		For comparability purposes, restated to properly reflect external guarantees only

		in projects that are currently not part of the operating sectors, but which could lead to additional organic growth or create value through future spin-offs.

		At the end of 2009, Philips had 127 production sites in 29 countries, sales and service outlets in approximately 100 countries, and 115,924 employees