6-K 1 u10531e6vk.htm FORM 6-K 6-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 6-K
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934
February 18, 2011
 
KONINKLIJKE PHILIPS ELECTRONICS N.V.
(Exact name of registrant as specified in its charter)
Royal Philips Electronics
(Translation of registrant’s name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F þ            Form 40-Fo
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule101(b)(7): o
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yeso            No þ
Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission:
E.P. Coutinho
Koninklijke Philips Electronics N.V.
Amstelplein 2
1096 BC Amsterdam — The Netherlands
 
 

 


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This report comprises a copy of the Annual Report of the Philips Group for the year ended December 31, 2010, dated February 17, 2011, as well as a copy of the following press releases:
  -   “Philips publishes 2010 Annual Report”, dated February 17, 2011;
 
  -   “Jeroen van der Veer to succeed Jan-Michiel Hessels as Chairman of the Supervisory Board of Royal Philips Electronics”, dated February 17, 2011;
 
  -   “Philips to invest EUR 2 billion in green innovation by 2015”, dated February 18, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized at Amsterdam, on the 18th day of February 2011.
         
  KONINKLIJKE PHILIPS ELECTRONICS N.V.
 
 
  /s/ E.P. Coutinho    
  (General Secretary)   
     
 

 


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Annual Report 2010
Financial, social and environmental performance
simply
making a
difference
     
    (PHILIPS LOGO)
   

 


 

Contents
             
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3.1       15  
3.2       20  
3.3       23  
3.4       27  
3.5       31  
3.6       35  
   
 
       
4       40  
4.1       40  
4.2       43  
4.3       46  
4.4       49  
4.5       52  
4.6       55  
   
 
       
5       58  
5.1       58  
5.2       66  
5.3       71  
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5.5       79  
5.6       80  
   
 
       
6       81  
6.1       83  
6.2       89  
6.3       95  
6.4       101  
   
 
       
7       104  
7.1       104  
7.2       107  
7.3       108  
7.4       109  
7.5       111  
7.6       112  
   
 
       
8       116  
   
 
       
9       118  
   
 
       
10       119  
   
 
       
11       120  
11.1       123  
11.2       124  
11.3       129  
   
 
       
12       131  
12.1       131  
12.2       133  
12.3       135  
12.4       136  
12.5       137  

IFRS basis of presentation
The financial information included in this document is based on IFRS, unless otherwise indicated.
Forward-looking statements and other information
Please refer to chapter 20, 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).
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13   Group financial statements     141  
13.1   Management’s report on internal control     141  
13.2   Reports of the independent auditor     142  
13.3   Auditors’ report on internal control over financial reporting     142  
13.4   Consolidated statements of income     143  
13.5   Consolidated statements of comprehensive income     145  
13.6   Consolidated balance sheets     146  
13.7   Consolidated statements of cash flows     148  
13.8   Consolidated statements of changes in equity     150  
13.9   Information by sector and main country     151  
13.10   Significant accounting policies     154  
13.11   Notes     161  
    1       161  
    2       162  
    3       162  
    4       166  
    5       167  
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    34       198  
       
 
       
13.12   Independent auditor’s report — Group     199  
       
 
       
14   Company financial statements     200  
14.1   Balance sheets before appropriation of results     201  
14.2   Statements of income     202  
14.3   Statements of changes in equity     202  
14.4   Notes     203  
       
 
       
    A       203  
    B       203  
    C       203  
    D       203  
    E       205  
    F       205  
    G       205  
    H       205  
    I       205  
    J       205  
    K       205  
       
 
       
14.5   Independent auditor’s report — Company     206  
       
 
       
15   Sustainability statements     207  
15.1   Economic indicators     210  
15.2   EcoVision5     210  
15.3   EcoVision4     211  
15.4   Green Manufacturing 2015     212  
15.5   Social indicators     215  
15.6   Supplier indicators     217  
15.7   Independent assurance report     221  
15.8   Global Reporting Initiative (GRI) table     222  
       
 
       
16   Reconciliation of non-GAAP information     229  
       
 
       
17   Five-year overview     233  
       
 
       
18   Investor Relations     236  
18.1   The Philips investment proposition     236  
18.2   The year 2010     237  
18.3   Share information     239  
18.4   Risk management     241  
18.5   Performance in relation to market indices     242  
18.6   Philips’ acquisitions     243  
18.7   Financial calendar     244  
18.8   Investor contact     244  
       
 
       
19   Definitions and abbreviations     246  
       
 
       
20   Forward-looking statements and other information     248  
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Performance highlights
Performance highlights
Financial table
all amounts in millions of euros unless otherwise stated
                         
    2008     2009     2010  
 
                       
Sales
    26,385       23,189       25,419  
 
                       
EBITA1)
    744       1,050       2,552  
as a % of sales
    2.8       4.5       10.0  
 
                       
EBIT1)
    54       614       2,065  
as a % of sales
    0.2       2.6       8.1  
 
                       
Net income (loss)
    (92 )     424       1,452  
per common share in euros
                       
- basic
    (0.09 )     0.46       1.54  
- diluted
    (0.09 )     0.46       1.53  
 
                       
Net operating capital1)
    14,069       12,649       12,071  
 
                       
Free cash flows1)
    773       863       1,333  
 
                       
Shareholders’ equity
    15,544       14,595       15,046  
 
                       
Employees at December 31
    121,398       115,924       119,001  
 
1)   For a reconciliation to the most directly comparable GAAP measures, see chapter 16. Reconciliation of non-GAAP information, of this Annual Report.
 
2)   For a definition of emerging and mature markets, see chapter 19, Definitions and abbreviations, of this Annual Report
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Performance highlights
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President’s message
President’s message
(Gerard Kleisterlee photo)
“We posted our best earnings margin in a decade, and retained our strong balance sheet.” Gerard Kleisterlee, President
                 
€ 25 billion
    10 %   59%
sales
  EBITA as a% of sales   (co-) leadership Net Promoter Score
Dear stakeholder
2010 was a year in which you saw Philips rebounding strongly from the decline caused by the global financial crisis in 2009. Within the constraints of a much weaker economy we successfully implemented a major part of our Vision 2010 strategic plan, rounding out our transformation into a customer-focused, market-driven health and well-being company with a strong brand. We announced our new plan, Vision 2015, setting out the roadmap to growth. And we posted our best earnings margin in a decade, while retaining a strong balance sheet supported by robust cash flows from operating activities.
However, economic recovery and consumer confidence remained fragile in 2010, particularly in mature markets. Following a strong rebound in the first six months of the year, sales growth slowed in the second half, ending at 10% nominal for the full year. This growth was driven by all operating sectors, particularly Lighting, and our growing presence in emerging markets. On a comparable basis, sales were up 4.3% for the year.
We also recorded an EBITA margin of 10.0%, meeting our Vision 2010 target. I am especially pleased to report that this profitability improvement was driven by all our operating sectors, in particular Lighting, conclusively demonstrating the value of our portfolio. Our return on invested capital rose to 11.7%, compared to a cost of capital slightly in excess of 8%,putting us on the right path to achieve our Vision 2015 goals. And building upon that momentum, we continued to make strategically aligned acquisitions in each sector — no fewer than 11 in total.
During 2010 we also made good progress with the deployment of our EcoVision5 program. We brought care to the lives of some 420 million people, improved the
6     Annual Report 2010

 


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President’s Message
energy efficiency of our product portfolio by 4% and launched a series of programs to increase the recycled content of our products. After achieving our EcoVision4 Green Product sales target of 30% last year, we achieved our Green Innovation target in 2010, two years ahead of schedule.
We are proposing to the upcoming General Meeting of Shareholders to increase this year’s dividend to EUR 0.75 per common share, in cash or shares —resulting in a yield (as of December 31, 2010) of 3.3% for shareholders.
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1)   Subject to approval by the 2011 Annual General Meeting of Shareholders
How did we do against our Management Agenda 2010?
Drive performance
Drive top-line growth and market share
Sales amounted to EUR 25.4 billion, or 10% nominal growth. Our 4.3% comparable sales growth was driven by a strong 9% increase at Lighting and growth of 4% at Healthcare, tempered by only 1% growth at Consumer Lifestyle due to weak consumer confidence in developed markets and ongoing portfolio pruning. Regionally, the US and Europe continued to face very challenging market conditions, though we were able to drive growth through emerging markets, which accounted for 33% of revenues, up from 30% in 2009. On average, market shares remained steady.
Continue to reduce costs and improve cost agility
We have finalized most of our organization transformation programs to optimize our industrial footprint and organizational effectiveness. As a result, productivity in 2010 improved by an impressive 20%. Our fixed cost reduction, as well as our focus on managing discretionary spend, contributed to our best EBITA performance since 2000. At the same time, we have continued to invest in Research and Development and increased our Advertising and Promotion spend in preparation for our Vision 2015 growth targets.
Further increase cash flow by managing cash aggressively
We generated EUR 470 million more free cash flow than in 2009, an increase to 5.2% of sales, on the back of higher cash earnings.
Accelerate change
Increase customer centricity by empowering local markets and customer-facing staff
We realized that we cannot truly empower local markets if our strategic and financial planning processes do not allow for a voice from the market and a granular, fact-based insight into the opportunities available in these markets. We therefore decided to apply a simple three-step approach where market opportunities precede financial planning. This involves explicit dialog on growth opportunities between market organizations and business groups, allocating funds to priority opportunities, and empowering market organizations to act within the overall framework without complex decision procedures. With this process in place, we should be better placed to capture the opportunities for profitable growth in our markets.
Increase number of businesses with NPS (co-) leadership positions
Outstanding customer and consumer loyalty is critical to achieving growth. In 2010, our Consumer Lifestyle business increased its NPS leadership in a time of fragile consumer confidence in many markets. Healthcare maintained a strong position, and performed very well in China. Lighting noted a slight decrease, yet remains a clear leader in its industry, with 83% of leadership positions in 2010. The overall result is stable, with 59% of our businesses currently holding industry leadership positions, down one point from 2009. The result was negatively impacted by supply chain constraints during the year, and this will very much have our attention going forward. In line with our Vision 2015 growth targets, in 2011 we will continue to drive for further outright leadership in NPS in key markets.
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President’s message
(PERFORMANCE GRAPH)
Increase employee engagement to high-performance level
I am very pleased to say we made significant progress over the past year. Our overall Employee Engagement Index score reached 75%, up seven points from the previous year and one point above the worldwide high- performance benchmark. At 76%, our People Leadership Index improved by three points — clear evidence that our leaders are encouraging interaction and dialog. One of the most heartening aspects of this year’s results was that the biggest advances in our scores were in areas identified as needing improvement in the previous year’s survey. So our teams’ hard work really paid off. Nevertheless, there are still parts of the organization where we have a lot of work to do, and our growth ambitions can only be realized if we continue to challenge ourselves.
Implement strategy
Increase our market position in emerging markets
We have a strong presence in the emerging economies. We generate around one-third of our sales there, and aim to drive this figure up to at least 40% by 2015. To this end, we continue to invest in building our local organizations, competencies and resources in these markets.
In China, we made the first shipments from our industrial campus for imaging systems at Suzhou. Scheduled for completion in 2012, this state-of-the-art facility expands our presence in China’s high-growth healthcare market with a complete portfolio that serves both the needs of the value segment as well as more advanced specialized applications.
We also moved the global headquarters of our Domestic Appliances business to Shanghai — building our business creation capabilities in this important market and taking a step toward making China a “home” market.
In 2010, we entered into a full-cycle innovative partnership with Electron, Russia’s market leader in developing and manufacturing medical equipment.
Drive key strategy initiatives for each sector
We continued to invest in smaller, but strategically aligned and fast-growing businesses in 2010. In Healthcare, we made a series of acquisitions designed to strengthen our offering in clinical informatics, and in China we acquired ultrasound equipment manufacturer Shanghai Apex, enhancing our position in value-segment imaging solutions for emerging markets. Other acquisitions included Siesta’s Somnolyzer business, reinforcing our position in sleep diagnostics and OSA therapy in the strategic growth area of home healthcare.
We also unveiled our new Imaging 2.0 platform, which is set to drive innovation and efficiency in radiology. Imaging 2.0 is all about integration and collaboration — and new levels of patient focus that can help clinicians achieve what was unimaginable just a few short years ago.
In Consumer Lifestyle, we acquired Discus Holdings, the leading manufacturer of professional tooth-whitening products, complementing our existing Sonicare electric toothbrush portfolio and further building our relationship with dental professionals.
With regard to Television, we took further action to reduce our exposure, extending our brand licensing partnerships with Videocon (India) and TPV (China), which are both expected to contribute positively in 2011.
In Lighting we continued to drive the transition to LED, expanding our portfolio of LED-based solutions for both consumer and professional applications, with sales growing to 13% of sector revenues.
Value-adding acquisitions in 2010 included iconic Italian design luminaire brand Luceplan. We also acquired Burton, a leading provider of specialized lighting solutions for healthcare facilities, and Amplex’s street lighting controls activity, supporting growth of our outdoor lighting business. Toward the end of the year we bought NCW Holdings, a leading Chinese designer, manufacturer and distributor of LED and conventional entertainment lighting and lighting control solutions.
Leverage Sustainability as an integral part of our strategy
In 2010 we increased our Green Product sales to 38% of Group revenues (far ahead of our 30% target), with strong contributions from all sectors, Lighting in particular. We increased the energy efficiency of our operations by 6% and reduced our operational carbon footprint by 7% — on track to achieve our EcoVision4 reduction target for 2012. We also developed roadmaps to phase out PVC and BFR from new consumer products introduced onto the market in 2011.
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President’s message
Simply making a difference
In September 2010 we announced our Vision 2015 strategic plan, which focuses on fuelling growth, increasing brand preference and strengthening our market leadership in the domain of health and well-being.
This new five-year plan builds upon the achievements of Vision 2010. Through Vision 2010 we transformed Philips into a health and well-being company with a stronger focus on emerging markets. We built a strong, balanced portfolio of businesses, simplified the company in order to capitalize upon market opportunities, invested in marketing and innovation to drive future growth, and structurally lowered our cost base, thereby boosting profitability.
Now we are ready for the next step — growth. We want to become the preferred health and well-being brand in most of our chosen markets, as we leverage major global trends to expand our leadership in key businesses such as home healthcare, LED lighting solutions and healthy living and personal care. We will also focus even more strongly on emerging markets — as the number of middle-class households in these markets rises, we expect demand for our products to increase as people have more money to spend on feeling and staying healthy. Last but not least, we remain committed to leading the way in the area of sustainability through the execution of our EcoVision5 program.
With our understanding of global trends and people’s needs and aspirations, as well as our strong brand, solid financial foundation and engaged workforce, I believe we will continue to simply make a difference to people’s lives with meaningful, sustainable innovations — and so deliver structural top-line growth and consistently healthy profit margins.
In concrete terms, we have set ourselves the following challenging, yet realistic medium-term goals for the 2011-2015 period:
    Comparable sales growth on annual average basis at least 2 percentage points higher than real GDP growth
 
    Reported EBITA margin between 10% and 13% of sales
 
    Growth of EPS at double the rate of comparable annual sales growth
 
    Return on invested capital at least 4 percentage points above weighted average cost of capital
Management Agenda 2011 — Accelerating growth
Our overall challenge for 2011 is to accelerate growth. This year we will take a series of firm steps towards implementing our longer-term Vision 2015 objectives. This will require us to accelerate our current course and performance in order to seize the great opportunities we have in most of our markets.
Under Drive performance we stress the need to urgently accelerate the pace of growth, to take market share and deliver on our financial and sustainability objectives.
Under Improve capabilities we outline what is required to grow faster: a customer-centric culture of growth, with granular business/market plans and the resources to realize them, enabled by pragmatic teamwork across the organization. If we succeed in bringing these elements together, we will deliver, with excellence and faster time-to-market.
The final column Implement strategy refers to the strategic battles we want to win and underscores how crucial it is to succeed in the rapidly growing emerging markets.
Final thoughts
Upon approval by the Annual General Meeting of Shareholders, Frans van Houten will succeed me as President of Philips as of April 1,2011. Frans knows Philips very well and brings strong qualities to the post — energy, strong leadership and a deep understanding of both professional and consumer markets. Under his leadership Philips’ future is in very good hands.
I would like to take this opportunity to thank Pierre-Jean Sivignon for his valuable contribution to Philips in his six years as our CFO. He has been a great colleague and business partner to work with, and I wish him the very best for the future. I am delighted that in Ron Wirahadiraksa we have found a highly qualified successor from within our own ranks.
I would also like to express my deep gratitude to Jan-Michiel Hessels, who is stepping down as Chairman of our Supervisory Board, for his counsel and support during my tenure as President.
On a sadder note, toward the end of the year we lost a fine colleague with the passing of Gerard Ruizendaal, our Chief Strategy Officer. Gerard played a key role in defining the strategic focus of the company and in strengthening our business portfolio. He is deeply missed.
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President’s message
It has been an honor to serve this great company as President and CEO. As I prepare to hand over the reins to my successor, I see a people-focused, market-driven Philips providing innovative, simplicity-led solutions to key global issues — the demand for affordable healthcare, the desire for personal well-being and the need for energy efficiency. I see a financially sound Philips with a strong brand and leading market positions, especially in emerging markets, as well as highly engaged employees. In short, I see a Philips that is in good shape — and ready to fulfill its ambition of becoming a global leader in health and well-being.
In conclusion, I would like to thank our customers and suppliers for their loyalty and support over the past ten years, and our employees for their unstinting dedication and efforts. I would particularly like to thank our shareholders for their continued endorsement of our strategic direction. In executing our Vision 2015 program, I know that Frans van Houten and his team will do everything within their power to maximize Philips’ full potential and so grow the value of our shareholders’ investment.
-s- Gerard Kleisterlee
Gerard Kleisterlee, President
Management Agenda 2011
Accelerate growth to achieve Vision 2015
Drive performance
    Make the turn to faster growth and gain market share
 
    Deliver on financial returns
 
    Deliver on our EcoVision sustainability commitments
Improve capabilities
    Champion customer responsiveness and adopt culture of growth
 
    Improve speed and execution to market
 
    “Resource to win” now to ensure achievement of Vision 2015
Implement strategy
    Strengthen and grow in all emerging markets — make China a “home” market
 
    Execute “must win” strategic battles in key business-market combinations
 
    Pursue value-creating acquisitions and invest in growth to strengthen our portfolio
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1 Our company 1 - 1
1   OUR COMPANY
Philips is a people-focused, market-driven company that is organized around customers and markets. By understanding trends in society and obtaining deep insight into issues confronting people in their daily lives, we ensure that people’s needs remain at the heart of everything we do.
Our mission

We improve the quality of people’s lives through the timely introduction of meaningful innovations
Innovation does not only mean “new technology”. It can also mean an exciting application, a new business model or a unique customer proposition brought about by an innovative partnership. In other words, an innovation is not the same as an invention. Technology remains very important, but insight into the needs and aspirations of consumers and customers is equally, if not more important and must always be our starting point.
Our vision

In a world where complexity increasingly touches every aspect of our daily lives, we will lead in bringing “sense and simplicity” to people
Our corporate vision describes what we see as one of the biggest challenges facing people today — and how we can help them meet that challenge. We have identified the difficulty of coping with complexity as a major challenge for people in our time. One of the things that makes life today so complex is the fact that technological progress comes to us very often in a way that is too difficult to experience. We believe that this situation can be changed, and that we can help to make the benefits of our products and solutions easier to access and more relevant people’s needs and aspirations.
Our domain

We operate in the health and well-being domain
“We seek to improve the quality of people’s lives through focusing on their health and well-being. Quite simply, we want to help people live a healthy, fulfilled life.
By “health” we mean not only medical aspects of health, but also keeping fit, having a healthy diet, and generally living a healthy lifestyle. By “well-being” we mean a general sense of fulfillment, feeling good and at ease. “Well-being” also refers to the sense of comfort, safety and security people feel in their environment — at home, at work, when shopping or on the road. Our focus on health and well-being automatically implies that we contribute to building a sustainable society.
Our brand promise

We promise “sense and simplicity”
We differentiate ourselves through our brand promise “sense and simplicity”. Our brand promise is comprised of three pillars:
  We design our solutions around the needs of people.
 
  We apply advanced thinking and technology to deliver a better solution.
 
  We ensure our solutions are easy to experience.
Our values

Our values, the four Ds, are like a compass — guiding us in how we behave every day, and reminding us of the attitude we should have towards our work, our customers and our colleagues
Delight customers

We anticipate and exceed customer expectations

Deliver great results

We continually raise the bar
Develop people

We get the best from ourselves and each other
Depend on each other

We deliver more value by working as One Philips
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1 Our company 1-1
(MAP)
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2 Vision 2015 - our strategic focus 2 - 2
2   Vision 2015 - our strategic focus
In 2007, Philips launched Vision 2010: a strategy to create a focused and globally leading health and well-being company. With a clear idea of many of the longer-term challenges our world faces, from aging populations to the need for efficient energy usage, we set out to round off the transformation of our company from a high-volume electronics group to a focused, market-driven global player in healthcare, lighting and lifestyle — businesses in which many of today’s key challenges intersect. Vision 2015 is an evolution of this strategy. By further expanding our existing leadership positions, strengthening our brand and leading in sustainability, we believe we can continue to make a profitable contribution to people’s lives. Our clearly articulated mission, our strong position in many exciting and promising markets, coupled with a highly engaged workforce and a deep desire to do right thing for our world, puts us in an excellent position for the future.
Our ambition for 2015
Philips wants to be a global leader in health and well-being, becoming the preferred brand in the majority of our chosen markets. We believe Philips is uniquely positioned for growth through its ability to simply make a difference to people’s lives with meaningful, sustainable innovations.
Our sectors
Our health and well-being offering is powered by our three operating sectors: Healthcare, Consumer and Lighting.
Healthcare: The future of healthcare is one of the most pressing global issues of our time. Our Healthcare sector’s vision is to improve the quality of clinicians’ and patients’ lives by simplifying the delivery of healthcare, improving clinical outcomes and reducing healthcare system costs around the world. This includes improve the diagnosis, treatment and management of many of today’s deadly and debilitating diseases, such as cancer and heart disease.
By approaching healthcare from the perspective of a patient or a physician, we believe we can better understand clinical needs and create more innovative and meaningful solutions. By understanding a medical condition through the entire “cycle of care” — from prevention and screening, through diagnosis and treatment, to recovery and, where needed, long-term management — we can create more effective solutions. By focusing on enabling care in the hospital, in the home, or wherever else the patient might be, we can improve the quality of life for patients and their care providers. Through our consistent focus on all of these aspects of care, we can ultimately create the best solutions — solutions that improve outcomes, save lives and reduce costs.
Consumer Lifestyle: Consumers are looking for solutions and products that are easy to use and help them to live a better and healthier life. They are more appearance-conscious and want to boost self-confidence: they want to be in charge of their health and lifestyle; they want to create a home environment where they can escape life’s complexities; they want to share moments with their family and friends. To achieve these goals, they need technology that is advanced and easy to use and designed around their specific needs. Our Consumer Lifestyle sector builds on a deep understanding of people’s needs and aspirations to create innovations that help them achieve their lifestyle ambitions.
Lighting: Human life revolves around light. Light effects our mood, improves our well-being, and enables us experience and achieve more. It is a vital part of making our lives fuller, more productive and safer. Our lighting sector focuses on innovative ways of using light to simply enhance people’s lives where they live and work — in the home, at school, at work, in shops and public places, as well as on the road. Recognizing how resource conservation and climate protection will play an increasingly significant part in human health and well-being, we pay special attention to maximizing the effect of lighting while minimizing the energy required to produce it.
Our key priorities for 2015
Be the preferred brand in health and well-being in the majority of our chosen markets: We want to be the preferred brand in health and well-being around the world in the majority of our chosen markets, with simplicity as our competitive edge. After five years cumulative growth in our brand value, we currently rank as one of the most valued brands in the world. We are committed to further strengthening our position and building Philips into a leading health and well-being brand that delivers on our brand promise of “sense and simplicity”. We will measure our success by carefully monitoring our brand value and the Net Promoter Score or of our products and solutions.
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Portfolio leverages critical global trends
Fundamental growth trends

       
Global trends
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  Population growth, aging, higher healthcare aspirations and lifestyle-related diseases mean that healthcare costs will become unsustainable
 
   
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  Increased welfare and changing lifestyles will drive consumer focus on health and well-being
 
   
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  The fundamental need to reduce our eco-footprint drives demand for energy efficiency and sustainability
 
   
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  The lighting industry will face a massive shift from conventional to digital, dynamic lighting and the entry of new, non-traditional players
 
   
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  The relative importance of emerging markets in the world economy continues to rise

Our opportunities


  Efficient health diagnostics and treatment
 
  Home healthcare
 
  Healthy lifestyle and preventive health
 
  Personal well-being
 
  Light for health and well-being
 
  Energy-efficient lighting
 
  Emerging markets
 
  Sustainability


Strengthen existing leadership positions while expanding promising businesses to become leaders: In our three sectors, we aim to strengthen our existing leadership positions while developing promising businesses to become leaders. In 2015, we want to be the market share leader in at least half of all our businesses. In Healthcare, we will further differentiate our portfolio, continue with our care-cycle approach and expand home healthcare. In Lighting, we will further strengthen our leading position in LED to capture the opportunities of a fast-changing market. In Consumer Lifestyle, we will continue to expand those businesses that provide higher growth and profitability potential.
Continued focus on emerging markets: Emerging markets are becoming more and more important to Philips. As the number of middle-class households in these markets grows, we expect demand for our products will increase as people have more money to spend on feeling and staying healthy. Therefore, we will continue to focus on emerging markets by making sure we address local needs effectively and continue to invest in having the right capabilities in place to win in these fast-growing economies. We aim to generate at least 40% of sales in emerging markets by 2015.
We want to be seen as clear leaders in sustainability: We are committed to being a leading company in matters of sustainability. We look at sustainability through the lenses of our sectors and define specific ambitions for each of them: bring care to 500 million people; improve the energy efficiency of our overall portfolio by 50%; double the amount of recycled materials in our products as well as double the collection and recycling of Philips products.
Our Vision 2015 aspirations
  Comparable sales growth on annual average basis at least 2 percentage points higher than real GDP growth
 
  Reported EBITA margin between 10% and 13% of sales
 
  Growth of EPS at double the rate of comparable annual sales growth
 
  Return on invested capital at least 4 percentage points above weighted average cost of capital
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3   Our strategy in action
3.1   Professional Healthcare
Global demographic and environmental trends, such as aging populations and the spread of chronic diseases like obesity and diabetes to the developing world, will require a fundamental shift in the way healthcare is provided.
In the professional domain, we are driven to improve the way both patients and professionals experience healthcare, to improve clinical outcomes, and to enable the delivery of quality healthcare at lower cost.
By focusing on the range of medical issues associated with oncology, cardiology and women’s health, we can deliver better, more differentiated solutions that are more clinically relevant.
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Opening the door to a new era in radiology
Today, people expect quality healthcare, yet invariably there is less money to treat them. So we are helping radiologists to go further — with a new way of working.
Based on feedback from clinicians across the globe, our answer to the dilemma of increased demand and fewer resources is simple: smarter teamwork through innovation.
Just as Web 2.0 redefined the way people connect, share and use the internet, Philips has coined “Imaging 2.0” to refer to the new era in radiology science, which is opening up a world of possibilities for clinicians and patients. Imaging 2.0 encompasses the launch of a brand new portfolio of Philips imaging solutions across multiple modalities.
For instance, with the IntelliSpace Portal, the radiologist can now integrate information from CT, MR and Nuclear Medicine to increase diagnostic confidence. Plus, it includes a feature called Collaborator — an intelligent, rapid tool linking the radiologist to colleagues and peers virtually anywhere in the world, enabling them to share images and data, and to discuss cases in real-time.
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Efficient, personalized patient care — one of the key benefits delivered by Imaging 2.0.
This level of collaboration and integration, combined with increased patient focus and improved economic value, is helping clinicians achieve what was unimaginable just a few
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short years ago — faster and more accurate diagnoses and treatment, as well as lower costs for the healthcare system.
Teamwork in all dimensions
Throughout our activities in radiology we aim to facilitate and enhance clinical collaboration. For example, our 3D imaging systems are bringing surgeons and radiologists increasingly close together in daily interaction. Functioning like a ‘human GPS’, the highly detailed 3D images mean that radiologists can supply clear ‘roadmaps’ that surgeons depend on to make accurate interventions. As Osman Ratib, M.D. Professor & Chair, Nuclear Medicine in Geneva says, “If an image is worth a thousand words, then a 3D image is worth a million. We can now convey those images to our referring physicians in a way that we never could before.”
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Imaging 2.0 facilitates new levels of collaboration between radiologists and referring physicians.
Host of new innovations
At the 96th annual meeting of the Radiological Society of North America (RSNA) in Chicago in November 2010, we launched Imaging 2.0 with the unveiling of a wealth of pioneering, innovative and cost-effective solutions for radiology. These include our Ingenuity CT and Ingenuity TF PET/CT, a premium hybrid imaging modality combining PET (positron emission tomography) and CT. Both the CT and PET/CT incorporate new innovations to lower radiation and contrast dose. For instance, Ingenuity CT can provide up to 80% less dose, up to 15% less injected contrast, high image quality and fast reconstruction in seconds rather than minutes.
Other introductions designed to advance diagnosis and radiology workflow include our revolutionary whole- body Ingenuity TF PET/MR solution*, which integrates the molecular imaging capabilities of PET with the superior soft tissue contrast of MR. Another groundbreaking introduction was our Ingenia MR solution*, the first-ever digital broadband MRI system. Ingenia can improve signal- to-noise ratio by up to 40%. This enables the delivery of crisp image clarity that clinicians need to make informed decisions in a wide range of procedures, including traditional applications like neuro and musculoskeletal and fast-growing applications like body and cardiac.
When combined with other new solutions in Ultrasound and Diagnostic X-Ray, these innovations provide a powerful illustration of how Imaging 2.0 is opening up a new era in radiology. As Steven Braff, M.D. Professor and Chairman of Radiology at Fletcher Allen Health Care says, “I’d seen the advent of CAT scanning, PET scanning and MRI scanning. And I was beginning to think, ‘Well maybe that’s it, there’s not going to be anything that exciting anymore’. But I’m very pleased to say that I was wrong.”
* 510(k) pending; not available for sale in the USA
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Our imaging technology is opening up richer views, so clinicians can perform procedures that are less invasive while delivering the information they need.
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Confidence and speed in clinical diagnosis
All solutions start with insight. But groundbreaking ones start with truly deep, expert understanding — as in the case of the Stroke Navigator.
In the event of a stroke, some 2 million brain cells start to die every minute. Fast diagnosis and treatment is essential, as captured by the slogan ‘time is brain’. The best possible care requires hospitals to provide 24/7 access to neurological services. Small, rural hospitals however can often not afford to have neurologists on staff around the clock. Such hospitals increasingly make use of telemedicine centers that provide remote, 24/7 neurological services to subscribers. To minimize time-to-treatment, and to help prevent clinical errors due to miscommunication, efficient and reliable collaboration between bedside care providers and telemedicine center is needed.
Both hospitals and telemedicine centers can now benefit from Stroke Navigator, a new clinical decision support tool developed by Philips Research in close cooperation with Philips Healthcare Visicu. As a collaborative tool, it provides contextual forms that allow care providers on both sides to efficiently access and exchange patient data.
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A doctor performs on initial assessment of the presence/severity of stroke.
It also assists them in following stroke care protocols, for example, by helping to make sure that all relevant data is collected and is known when, where and by whom it is
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needed; and progress bars indicate how much time is left for critical steps. In short, Stroke Navigator helps to improve a stroke patient’s chances of successful recovery.
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Stroke Navigator helps clinicians diagnose the correct stroke sub-type.
For several years our researchers worked closely with the Philips business and healthcare professionals in Europe and the United States, designing the system and testing the results in the field. It was a long and detailed process, a journey of discovery and understanding.
“Sometimes groundbreaking solutions don’t require new technology,” says Charles Lagor of Philips Research. “What they do require is a thorough understanding of users’ needs.”
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Medical staff conduct a patient re-assessment after treatment for ischemic stroke.
Visicu utilized the diagnostic and therapeutic timers, societal guidelines and back-end reporting structure in Stroke Navigator to develop its first version of eConsultant. Visicu clients now have the best multiple user software for managing remote stroke care that is integrated into the elCU center and provides for a coordinated tele-stroke network.
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3.2   Home Healthcare
Overburdened hospitals with limited resources and challenging financial circumstances will be hard pressed to care effectively for the growing numbers of long-term patients with chronic ailments such as sleep disorders and heart disease. New solutions must be found.
Addressing the growing demographic need for care in the home, we provide both equipment — for sleep-disordered breathing, home respiratory care and respiratory drug delivery — and home monitoring services to support cardiac and elderly care.
We work together with our clinical provider customers to improve the quality of life for at-risk individuals in the home through better awareness, diagnosis, treatment, monitoring and management of their conditions.
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An extra level of reassurance
This year, millions of older people will suffer a fall and some may be unable to press their help button. That’s why we developed a new way to access help.
For an elderly person, a fall can have devastating consequences. Without immediate help, they may be incapacitated for hours — suffering physical pain, emotional distress, or serious secondary medical problems such as dehydration or hypothermia. For many of these people, it takes just a single press on one of our Lifeline pendants to raise the alarm. But some fallers will be disoriented, unconscious, immobilized, or otherwise unable to push the help button.
To ensure that everyone is able to access help when needed, we developed the AutoAlert option for our Philips Lifeline medical alert service. Lifeline with AutoAlert provides an added layer of protection by automatically placing a call for help if a fall is detected.
Sensing falls — not everyday movement
AutoAlert distinguishes between normal movements and falls by monitoring not just movement but also the associated acceleration and change in height. This ensures that daily activities such as sitting down or walking down stairs are not falsely interpreted as a fall.
The AutoAlert option is just one of many ways we are helping older people to continue living independently — by helping to provide the backup and support they need as soon as it’s required
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Helping people in India get a good night’s sleep
In enabling healthcare institutes to diagnose and treat sleeping disorders, we are having a positive impact on people’s quality of life — and much more.
Sleep is not optional — it is absolutely essential to people’s health and well-being. There is growing evidence that lack of sleep affects our mental and physical health, work performance, mood and personal relationships. So when a nationwide survey in India found that 95% of the working population was sleep-deprived, we decided to take action.
Over the last year we helped establish around 120 sleep labs across the country. Each lab contains a complete diagnostic system, with various sensors for attachment to the head and chest of a patient, who is monitored during sleep. The collected data is then used to determine the type and severity of the sleep disorder. Patients diagnosed with Obstructive Sleep Apnea (OSA), for example, are often given a Philips CPAP (Continuous Positive Airway Pressure) device, which ensures continual airflow throughout the night and thereby a healthier sleep.
As a global leader in the sleep management market and the treatment of OSA, Philips assists hospitals and clinics across the globe in setting up sleep labs. We provide not only the required equipment, but also the specific training.
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3.3   Healthy Life & Personal Care
We look for opportunities where “sense and simplicity” can truly make a difference.
Our Healthy Life platform takes a holistic approach to enhancing consumers’ health, addressing the need for mental and physical health and for healthy relationships.
Our Personal Care platform addresses consumers’ need to look and feel their best, and so helps people feel more confident.
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Wake up the town
A unique initiative to help residents of an Arctic town wake up more naturally improves their moods and energy levels through the long months of Polar Night.
Few of us relish getting out of bed during the dark winter months, but most of us have at least a few hours of sunlight to look forward to, even on the shortest of days. But imagine living in the Arctic Circle, where almost four months of continuous darkness makes waking in the morning all that much tougher. It is total darkness when you wake up, when you go to work, and when you come home again. Getting up in winter is difficult in normal circumstances, but when there is absolutely no natural indication of night-time turning to day, the task of waking up can be even more challenging.
That is why in October 2010 we launched a special experiment called Wake up the town to help the residents of Longyearbyen — the world’s most northerly town, on the Norwegian archipelago of Svalbard — wake up more refreshed and ready to take on the day. We provided many of them with a Philips Wake-up Light, which simulates sunrise by gradually increasing light output over a half-hour period.
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From October 28, to February 14, the sun never peaks over the horizon and Longyearbyen enters a period of total darkness.
This sunrise simulation has a profound effect, as Daniel Adams, light therapy expert and Senior Application Scientist at Philips, explains. “From our research we know that every person’s body clock is sensitive to light. When it is introduced naturally and slowly in the morning it effectively helps to ‘wash away’ our sleep hormones. People wake up feeling more refreshed and with higher energy levels. This is in stark contrast to the jilting effect of
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an alarm clock, which sometimes causes what we call sleep inertia, which quite literally means difficulty in getting going because your body still thinks it is sleeping time.”
High expectations fulfilled
Before the experiment, three quarters of the volunteer subjects (72%) said that they found it difficult to get out of bed during the winter darkness. Some 65% also said that their energy levels are lower during this season.
Adams continues, “Light is essential to our well-being as humans, and with the absence of natural sunlight on winter mornings, it can be challenging to wake up to a normal schedule and feel alert, in a good mood and ready for the tasks of the day ahead. The residents of Longyearbyen were acutely aware of the challenges darkness poses to waking up in the morning, which made them perfect candidates to trial the Wake-up Light.”
At the end of the six-week trial — the world’s largest light therapy field experiment-87% of respondents found that they awake feeling more refreshed, alert and ready for the day. One resident even said that the Wake-up Light made her feel as though actual sunlight came into her bedroom each morning — exactly what she needed during the season of perpetual darkness. 86% confirmed the Wake-up Light’s positive impact on their mood. And the vast majority (98%) stated that they will continue to use the Wake-up Light in preference to their previous method of waking up.
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The project volunteers used Wake-up Light model HF3470, which combines advanced ‘sun rising simulation’ light technology with new, personalized sound options.
Svalbard calling the world
Designed to raise awareness of the potential of light therapy, the Wake up the town experience wasn’t just limited to those living in Longyearbyen. The residents were able to share their experiences with consumers worldwide via Facebook and the campaign website www.philips.com/wakeup, which also features a documentary by award-winning film maker Doug Pray.
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“Earlier I used to snooze for at least 30 minutes before I dragged myself out of bed, now I am actually awake when I wake up.”
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Fulfilling lifestyle aspirations in emerging markets
As the growth of the urban middle class in emerging markets continues to accelerate, we are supporting their well-being with innovative lifestyle products.
With an estimated 200 million middle-class households in emerging markets by the year 2015, spending power for lifestyle products is set to explode — especially in China. Demand is expected to be high for lifestyle products that offer quality and style in answering the needs of this consumer group, which is increasingly focused on individual self-expression. This was borne out by reaction to the recent launch of our new SensoTouch 3D electric shaver.
Building upon Philips’ 70-year heritage in electric shaving, the stylish SensoTouch 3D is our most advanced shaver yet, minimizing skin irritation. It was met with tremendous enthusiasm at its launch onto the key Chinese market in October last year. Road shows featuring 3D movies ensured high impact for thousands of consumers in department stores, while web-based and broadcast marketing initiatives communicated the product benefits to millions more across the country.
As always, during face-to-face touch-point events, we gathered a wealth of customer insight. Special product demonstrations and interviews confirmed that our brand scores high in consumer perception, and we are well placed to continue answering lifestyle needs in the dynamic emerging markets.
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3.4   Home Living & Lifestyle Entertainment
Our Home Living platform addresses consumers’ pressing need to have more time to spend on themselves or with family and friends. We do this by creating high-quality solutions that enable quick and convenient cooking, preparation of beverages, cleaning, caring and home comfort.
Lifestyle Entertainment is about enjoying entertainment and the little events in everyday life: sharing time with family and friends, having time off from a hectic schedule, and moments of comfort, fun and caring.
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Making business sense with sustainable TVs
As increasing numbers of people demand sustainable products and services, we continue to make simple, but highly effective, green changes to the way we operate.
Being a leading global company in health and well-being, we are naturally committed to the principles of sustainability — after all, sustainability is essentially about the health and well-being of our planet. But in addition, we also firmly believe that minimizing our impact on the environment leads to substantial business opportunities. Firstly, because people prefer brands with a proven sustainability record, and increasingly they are placing sustainability issues at the center of their purchase decisions. Secondly, by reducing energy consumption and waste during manufacturing, we also reduce our own operating costs, which obviously makes good business sense.
That’s why more than 25 years ago we started to systematically address the challenge of environmental care. At first we implemented waste management and energy efficiency programs in our manufacturing processes, but soon after we became active in designing energy-saving products, including of course TVs. All this was combined with advanced processes that, where possible, used recycled materials.
40% reduction in TV energy consumption
In recent years we have made substantial progress in the energy efficiency of our TVs — an average 40% reduction compared to previous models. This reduction in energy consumption has been achieved through, for instance, the introduction of LED backlight technology. And it is not just when the TV is switched on that energy savings are made: in standby mode, advanced technology has driven power consumption down to less than 20% of the EU’s legal requirements — one of the lowest standby energy consumption rates available on the market today.
37,500 trees saved every year
Our Television business saves huge quantities of paper by using recycled packaging, and we also use biodegradable polystyrene. And, in addition to using recycled paper in
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our packaging, we also avoid using it in our marketing materials — for instance, by developing electronic point-of-sale information that is displayed on the TVs in each shop, and incorporating electronic user manuals within the TVs themselves. These and other measures save a total of 15 million kilos of paper, equivalent to 37,500 trees, every year.
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As a leader in sustainability, Philips continuously strives to make it simple for consumers to reduce their impact on the environment.
A holistic approach to product design
A powerful example of our commitment to sustainability is the award-winning Econova LED TV. This performance LED TV consumes 60% less power than its predecessor, an impressive energy efficiency that is further enhanced by its innovative ‘zero power switch’. Even the remote control is efficient — powered by solar energy. The TV is also completely free of PVC and brominated flame retardants. Add to that the fact that 60% of the aluminum used in the set is recycled and it’s not surprising that the Econova LED TV (42PFL6805) won the prestigious EISA award ‘European Green TV 2010-2011’.
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The remote control is charged via a solar cell, which works even in indoor light conditions.
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A fine blend
One year on from the acquisition of Saeco, consumers are enjoying the wonderful taste of espresso from the first dual-branded products
The acquisition of Saeco in 2009 fitted perfectly with our ambition to expand our coffee portfolio. One of the central themes during the merger has been applying the concept of simplicity — in everything, from creating new products to interacting with customers. “Saeco’s strength has always been the taste of the coffee its machines produce,” says Iwald Mons, Post-Merger Integration Leader. “This is something we obviously want to preserve. And when you mix this with simplicity, and with innovation based on real consumer insights, you get the best of both worlds. That’s a very exciting prospect.”
The same approach — combining strengths — is being taken on brand level. Over the years, Saeco has built up an excellent reputation, and it is important to leverage on this value. As a result, the first products with dual branding — Philips Saeco — were launched in 2010. Each coffee machine is a combination of exclusive design, innovative technology and cutting-edge materials: together they guarantee great-tasting espresso and ease of use. Clearly Philips and Saeco share common values: bringing “sense and simplicity” to the lives of consumers!
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3.5   Home Lighting
Our innovative home lighting solutions beautify and inspire, empowering consumers to define the ambience in their personal spaces.
Lighting can enhance form and function, improve people’s sense of well-being and enable them to express their identity and style.
We believe that making homes more beautiful, comfortable and functional — and doing so responsibly — enhances lives.
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A lighting revolution in the home
Home lighting is no longer only about practical illumination — increasingly it’s about the power of lighting to enable people to personalize their interiors.
At the end of a hard day, home is the place most of us want to go to unwind. That’s where we can be ourselves — and relax, energize or socialize. It’s where we’re surrounded by the objects we treasure, the things that reflect our identity and personality.
Transforming a house into a home is all about creating the right atmosphere. The color of the walls, the way in which a room is furnished and the amount of natural light that flows in through the windows, are all factors that contribute to the atmosphere of individual spaces.
In the home, light has traditionally been seen as something to switch on or off as needed for sight. But light is so much more than this. Today, light is no longer static. It is no longer about dimming or switching on and off a single tone of light. We have entered a new era, in which lighting can do more — much more — than simply illuminate.
Our lighting industry is in the midst of a revolution, driven by the demand for energy efficiency, the shift from components toward connected lighting systems, and the transition from analog to digital lighting. Digital or LED lighting offers unprecedented freedom in terms of color, dynamics, miniaturization, architectural integration and energy efficiency, opening up exciting new ways for consumers to use and experience light.
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Lighting — expressing who we are and how we feel
LEDs provide a palette of millions of colors or a thousand shades of white light and dynamic effects that conventional lighting cannot match in terms of scene-setting and ambiance. Our LED-based home lighting solutions enable
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consumers to move from homogeneous white light to variable color temperature, and from static light effects to dynamic ‘light scenes’. Thanks to the emergence of LED- based solutions, such as our Living Ambiance wireless system, they can enhance and personalize their home spaces by changing the color, brightness and dynamics of the light — creating the ideal ambiance to match the occasion or mood.
And there is even more on the horizon. Increasingly, design is an important factor in a consumer’s choice of lighting. With LEDs being so small, new designs can be created that were never possible before, as designers are no longer constricted by the form factor of legacy light sources. And this design freedom will open up new possibilities — with newly shaped luminaires enabling consumers to further define their individual style and identity.
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Reflecting the growing importance of design as a differentiating factor in the consumer luminaires segment, we acquired Milan-based Luceplan, an iconic design brand in the premium design segment, in 2010. Luceplan’s portfolio includes table, suspension, wall and ceiling luminaires for residential applications, with a number also used in professional applications.
New ‘light experiences’
Our innovative LED-based home lighting solutions are designed to beautify and inspire, while empowering people to define their personal environments through design and style. The result? A completely new experience of light. Life at home will never be the same again.
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Breakthrough LED bulb for ambience and economy
At Light+Building 2010 we announced the market introduction of our new dimmable 12 W lamp — the industry’s first LED replacement for the 60 W incandescent bulb.
With this new lamp, marketed in the United States as EnduraLED A19, facility managers and property owners now have an alternative to the most common incandescent bulb — one that delivers the same warm white light they are familiar with, and that has excellent dimming properties.
Replacing a standard 60 W bulb with EnduraLED A19, which uses just 12 watts of power and delivers an industry benchmark of 806 lumens, could save a business or commercial property up to USD 120 over the course of the life of the lamp.
Fending off the competition
This breakthrough lamp first came to prominence at the end of 2009, when it was named as the 3rd best invention of the year by TIME Magazine. “With the flick of a switch, Philips may have just dramatically lowered America’s electric bill,” TIME commented.
And at its annual conference in September, the American Lighting Association recognized EnduraLED as the best LED replacement solution in the US A19 class. Twelve other lamp companies were vying for this coveted award, so this was a particular feather in our cap — especially as the award was judged by independent US lighting industry experts such as the Pacific Northwest National Laboratory and the California Lighting Technology Center.
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3.6   Professional Lighting
The professional lighting market is in the midst of a radical transformation, driven by the energy efficiency imperative, the LED lighting revolution and the increasing focus on application-based lighting solutions.
In our endeavor to meet the needs of our customers in the office, outdoor, industry, retail, hospitality, entertainment, healthcare and automotive segments, we are delivering new, responsible forms of lighting — customer-centric, simplicity-led innovations that enhance people’s experience of light.
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Better light, better learning
Children are no different from adults — they feel better, and perform better, in an environment that is attractive, stimulating and designed around their specific needs.
We have conducted extensive research, together with leading German and Dutch universities, which shows that our dedicated classroom lighting can promote learning by boosting children’s concentration, motivation and behavior and supporting their general feeling of well- being.
SchoolVision is an innovative classroom lighting solution, which allows teachers to adjust both the brightness and warmth of the light. Settings for different lighting moods can be activated by a single button on a control panel. The teachers can choose between four settings — Energy, Calm, Standard or Concentration. Energy corresponds to the light of a bright, cloudless summer day around noon, while Calm is the equivalent of gentle evening sunshine.
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“Both teachers and children now enjoy working in the classrooms”, says Jane van der Heijden, Principal of Wintelre Primary School.
Dedicated lighting enhancing performance
In collaboration with the Netherlands’ University of Twente we carried out a pilot project in two classes at Wintelre Primary School. The cool-white high-intensity light in the Energy scene was used in the morning and after lunch to give the children a boost. The standard light levels in the Standard scene were used for regular classroom activities. For more challenging tasks, the Concentration
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scene, with its cool-white, very bright light, created the right atmosphere to help the pupils focus. Finally, the warm color and lower intensity of the Calm scene helped to calm children down and encouraged them to work well together.
Both teachers and children enjoy working in the classrooms lit with SchoolVision. “We begin in the morning with bright lighting that generates energy,” explains Jane van der Heijden, Principal of Wintelre Primary School, “and we normally end the day with warm lighting that offers calm and tranquility, and in which a good discussion can be held or creative activities can be carried out.” This change in lighting is appreciated by both pupils and teachers. “We are noticing an increase in the level of concentration and calm in the class, and the pupils even let us know if they would prefer to carry out a certain type of activity under a certain type of lighting.”
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Good lighting con create a sense of well-being and help pupils to stay alert and concentrated.
Additional benefit — substantial energy savings
Besides having a positive impact on the learning environment and pupil performance, our innovative school lighting offers a further, extremely significant benefit — substantial energy savings. At Elouges Primary School in the Belgian district of Dour, for example, the combination of intelligent lighting controls and the latest low-energy light sources is helping to save as much as 80% of the electricity used by the old system. With budgets everywhere under tremendous pressure, this is potentially very good news for all schools.
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With SchoolVision, different lighting moods can be activated at the push of a button.
Win-win, today and going forward
Our future increasingly depends on our ability to generate and manage knowledge and innovation. This all starts with our children in schools. Our dedicated school lighting helps teachers create the ideal learning atmosphere in the classroom. In this way, we are helping deliver a dual gain for this and future generations — better learning results for children, while at the same time saving energy.
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Creating livable cities with light
Our innovative, energy-efficient lighting solutions can help municipal authorities create towns and cities that are safe and enjoyable to live, work and relax in.
The challenge of growing urbanization
Less than a century ago, fewer than 10% of the world’s population lived in cities. Today, that figure stands at over 50%, and it is estimated that by 2030 nearly six billion people — three quarters of the world’s population — will be living in cities, as some 130 million people move into urban areas every year.
Urban growth and transformation on this scale presents new social, economic and environmental challenges for those who live, work and do business in cities. Quality of life (safety, security, health and well-being), the promotion of commerce, entrepreneurism and tourism, and historic preservation are all high on municipal agendas. At the same time, towns and cities are looking to reduce their ecological impact: urban environments contribute heavily to the consumption and cost of energy, while also disturbing the balance of nature through artificial light, pollution and waste.
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In the emerging markets, we are seeing a rapid expansion of the number of conurbations with 20 million or more inhabitants.
Safer, more attractive urban spaces
Quite simply, light helps make a city safer and more attractive, enhancing its brand identity — the distinctive signature that defines its appeal and differentiates it from other cities. This is important not only for civic pride, but also to ensure that the city remains viable and competitive in the global marketplace.
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3 Our strategy in action 3.6 - 3.6
To retain both private and corporate citizens, cities must maintain safety and security, by preventing crime, and by providing safer streets for both motorists and pedestrians. Choosing the right lighting can make a world of difference. For example, at the same light level, more than 80% of people feel safer with bright, white light than with traditional yellow street-lighting solutions. White light’s high levels of perceived brightness and superior color rendering help people feel safer and make it easier to distinguish objects, colors, shapes and other details.
Well-designed urban lighting not only provides city residents with safe, livable environments, but also urban spaces that are unique and beautiful, and that welcome recreation. This enriches the city fabric, attracting new residents, new businesses and inward investment that boosts tourism, retailing and other boons to economic growth and employment.
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Commuters in Hong Kong enjoy brighter and safer journeys at night thanks to our LED and ceramic metal-halide lighting on the new Stonecutters Bridge.
The right light — no less, and no more
Lighting must play a balanced role in the urban landscape. We believe that our lighting solutions, powered by innovative technologies such as LED, can create more value, more beauty, more safety and more visibility — and yet can do so with less consumed power and less environmental impact. City authorities could, for example, save around EUR 3 billion in energy costs and 10 million tons of C02 a year, just by switching from older road lighting to our latest energy-efficient technology. No less important, light is encroaching upon our natural habits — affecting both our human sleep patterns (and therefore our health and well-being), as well as the reproductive and migratory patterns of animals. Night skies in densely populated cities can, for example, be as much as 500 times brighter than our ‘natural’ night skies. We don’t want light all the time, everywhere, so our flexible solutions offer exactly the right amount of light, in the right places, at the right time.
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“To me, lighting design is not about just giving light to a space. It’s about giving the best light to the people, to give them love of their own space.”
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4 Our planet, our partners, our people 4 - 4.1
4   Our planet, our partners, our people
4.1   Climate change
Recognizing that energy efficiency is one essential answer to climate change, we have made a serious commitment to develop, promote and market more energy-efficient solutions for people in all markets.
We meet this challenge with our Green Products and Green Innovations and by inspiring individuals to make simple changes that can have profound results. We seek to facilitate new solutions to drive responsible energy practices, and have long focused on the energy efficiency of our products and production processes.
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    Bringing life-enhancing innovations to Africa
 
    From May to July, our ‘Cairo to Cape Town’ roadshow demonstrated how our solar-powered LED lighting and innovative medical solutions can improve life for millions of people in Africa.
 
    Our journey took us to 15 cities in nine countries, clocking up a total of 9,000 km. On the way, we hosted a number of Lighting and Healthcare events and roundtable discussions with media, stakeholders and other key decision-makers from government, industry and NGOs.
 
    These fruitful dialogs gave us many valuable insights that we can now feed into our innovation pipeline — to ensure we meet African needs even more effectively.
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    Extending the day
 
    In Africa, it gets dark at about 7.00 pm all year round. As some 560 million people in Africa have no effective lighting at night, this darkness holds countries back, both socially
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4 Our planet, our partners, our people 4.1 - 4.1
    and economically, Sustainable solar lighting has the potential to transform Africa’s economic, social, educational and cultural life.
 
    We have developed solar lighting solutions to help people in Africa extend the day, including a small LED reading light that enables children to do their homework at night or adults to follow evening classes. These lights are affordable and offer the potential for a major boost in literacy across the continent.
 
    We have also developed the world’s first solar-powered LED floodlighting solution that allows people with little or no access to electricity to enjoy playing or watching sport long into the night — while at the same time increasing safety outdoors. On the tour, we partnered with Dutch soccer legend Ruud Gullit and the Right To Play Foundation, which works to improve the lives of children in some of the most disadvantaged areas of the world through sport and play. Matthijs Huizing, director of Right To Play Netherlands, said: “We are pleased to join forces in communicating the power of sport and play for development, health and peace, strengthened by the new opportunities that solar LED lighting offers.”
 
    As Ruud Gullit explains: “For us, floodlight is normal: as a kid you play with it, you can do training in the evening after school, ... it’s part of our life. If Africa now had this opportunity they could have the same thing, the same opportunities that I had, to use it to my advantage, to use it in the evening after school so that I could do all my sport activities.”
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    Saving energy — and winning friends
 
    “There is significant growth potential in Africa. Philips sees partnership opportunities in Africa for innovation, solution supply, and knowledge sharing. We want to provide meaningful lighting and healthcare solutions across the continent,” says Gottfried Dutiné, Global Head of Markets & Innovation, and member of the Board of Management.
 
    Across the continent, our messages around solar-powered lighting and healthcare provision clearly resonated with audiences. For instance, Simon D’Ujanga, Uganda’s Minister of State for Energy, commented: “In the country, as many of our people strive for energy, we’ve been promoting renewable energy and efficiency in the use of energy, so this seems to be the right answer for our problems. This is what we have been waiting for.”
 
    As Young & Rubicam’s Chris Harrison said: “Just imagine how future innovation in Philips products will be received in rural communities who know that Philips brought them soccer after dark.”
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4 Our planet, our partners, our people 4.2 - 4.2
4.2   Our environmental footprint
 
    The significant issues for our company — and our industry — in the environmental area continue to be energy efficiency, chemical content of products, and collection and recycling. We remain committed to giving our full attention to these challenges.
 
    To reduce our ecological footprint we are maintaining our focus on overall environmental performance improvement, driven by our EcoVision programs.
 
    Working with stakeholders, we aim to share expertise and co-create innovative solutions that will make a difference to future generations.
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    Improving our footprint
 
    We believe that addressing the effects of mankind’s environmental footprint, such as climate change, requires meaningful, sustainable innovation.
 
    ‘Lead in Sustainability’ is one of the key objectives of our Vision 2015 strategic plan — a goal we pursue systematically through our EcoVision programs. In the EcoVision5 program, leadership is profiled with three Key Performance Indicators (KPIs), which track our activities in the areas of Green and Social Innovation, the building blocks for Sustainable Innovation. Green Innovation focuses on reducing the Environmental or Ecological Footprint of our products. Social Innovation comprises contributions to the improvement of the Human Development Index (HDI), for instance by delivering products and services for accessible and affordable healthcare in emerging markets.
 
    Sustainability at the heart of health and well-being
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    The Human Development Index is a United Nations parameter and incorporates three elements, life expectancy, purchasing power and education level.
 
    Leadership KPIs
 
    In our EcoVision5 program, the first leadership KPI — ‘care’ — drives Social Innovation, while the other two — ‘energy efficiency’ and ‘materials’ — drive Green Innovation.
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4 Our planet, our partners, our people 4.2 - 4.2
    Examples of such innovations can be found throughout this report, such as solar-powered LED lighting, EnduraLED and the Econova LED TV.
 
    Greening our operations
 
    With energy, waste, water and emission reduction as performance indicators, we drive a reduction of our environmental footprint in our operations.
 
    Philips was recognized as a leader in carbon disclosure and carbon performance by the Carbon Disclosure Project (CDP) 2010 Global 500 report. The CDP collects emissions data from over 3,000 organizations in 60 countries. Philips received a score of 94 (out of 100) for carbon disclosure results and was awarded an ‘A’ for its overall carbon performance, making it a company with “both higher degrees of maturity in their climate change initiatives and achievement of their objectives” according to the CDP.
 
    Green Products and Green Innovation
 
    In 2010, Green Products represented 38% of our revenues globally, compared to 20% in 2007, as a result of investments of more than EUR 1 billion in Green Innovation during the last three years.
 
    In 2010 we set a target to further increase the share of Green Products to 50% of Group sales by 2015. We use the Philips Green logo to identify an increasing number of our Green Products. To further raise awareness and encourage individuals to make smart daily choices, we have expanded the reach of our asimpleswitch.com website.
 
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    Collection and recycling
 
    In 2009 we collected and recycled over 100,000 tons of Waste Electrical and Electronic Equipment (WEEE). More than 90% of WEEE was collected and recycled in Europe due to the widespread implementation of product take-back legislation. We have also expanded our voluntary collection and recycling activities in countries such as the United States, Argentina, Brazil and India. Furthermore, we continued to actively advise on and support the introduction or revision of product take-back legislation in countries like Argentina, Brazil, China, the European Union, India, Russia, Thailand, Turkey and the United States.
 
    Chemical content of products
 
    In 2010, Philips asked more than 3,000 suppliers to declare their compliance with REACH, RoHS and other chemical substances requirements by making BOMcheck declarations. BOMcheck is an online industry platform that systematically collects declarations from suppliers in order to fulfill REACH and other regulations.
 
    Philips introduced a large number of consumer products that are free of polyvinyl chloride (PVC) and brominated flame retardants (BFR) in 2010, including the Econova LED TV, the first PVC/BFR-free television in the world. The lessons learned from the introduction of these products in 2010 allowed us to create a detailed roadmap for new PVC/BFR-free consumer products for 2011 and clearly identify where PVC/BFR-free alternatives are not yet possible due to technical, safety or regulatory requirements.
 
    “The Econova TV puts Philips on track to meet its commitment to phase out these hazardous substances by the end of 2010, well ahead of other TV manufacturers.” Tom Dowdall, Greener electronics campaign co-ordinator, Greenpeace
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4 Our planet, our partners, our people 4.3 - 4.3
4.3    Partnerships for progress
 
    World leaders from rich and poor countries alike, representing all United Nations member states, have pledged to achieve the eight Millennium Development Goals (MDGs) by the year 2015 — to significantly reduce poverty, illiteracy, inequity, diseases and improve environmental quality in poor countries.
 
    Our experience has shown that developing these markets requires tailor-made solutions, a different approach to marketing and distribution, and multi-sector partnerships. Multi-stakeholder engagement is needed to improve working conditions in the supply chain — another important contribution towards the MDGs.
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    Driving sustainability in the supply chain
 
    We are committed to partnering with governmental and civil society organizations and business partners to further embed sustainability in the supply chain.
 
    As a responsible corporate citizen, we strive to conduct our business with a high level of integrity. And, in keeping with our brand values, we also support our suppliers to help them achieve higher standards. To this end, we actively seek dialog with industry partners, civil society and governmental organizations, and we are an active member of a number of initiatives implementing sustainability programs.
 
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    For example, we are a member of the Electronic Industry Citizenship Coalition (EICC), an important sustainability alliance for the electronics industry. The EICC was established in 2004 and promotes an industry code of conduct for global supply chains to improve working and environmental conditions. Today, it includes more than 50 global electronics companies and their suppliers.
 
    Another initiative in which we are involved is the Dutch Sustainable Trade Initiative (IDH). IDH brings together government, frontrunner companies, civil society organizations and labor unions. The mission of IDH is to accelerate and up-scale sustainable trade in mainstream commodity markets from the emerging countries to Western Europe. In this way, IDH is working on the Millennium Development Goals for poverty reduction, environmental protection and an open trading and financial system.
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4 Our planet, our partners, our people 4.3 - 4.3
    Philips is participating in the IDH Electronics Program, which has set itself the target of improving the working conditions of 500,000 workers in China’s Pearl River delta. This multi-stakeholder program expects to engage with local civil society organizations, authorities, and management and workers of companies in the supply chain. It aims to identify needs related to a number of key themes, including workplace health and safety and communication between workers and management, and to implement improvement plans, using available best practices.
 
    Additional stakeholder activities
 
    Other stakeholder engagement activities in 2010 included workshops with representatives from civil society organizations and labor unions, such as Amnesty International, GoodElectronics, MakelTfair, FNV Global and FNV Allies. As a member of the UN Global Compact Advisory group we also provided input to the UN Global Compact Office in their development of a guidance tool for Supply Chain Sustainability. And we financially sponsored the pilot by the tin branch association ITRI to improve supply chain transparency on conflict minerals — metals that can be mined in the Democratic Republic of Congo (DRC), where profits from the minerals trade may be fueling conflict and human rights abuses. We further addressed the issue of conflict minerals via the EICC extractives working group, and by maintaining a dialog with politicians and civil society organizations, as well as requesting our relevant suppliers to ensure that they are not sourcing conflict minerals from the DRC.
 
    Pauline Overeem, GoodElectronics: “The GoodElectronics Network welcomes the increasingly open and collaborative stance of Philips concerning genuine engagement with civil society stakeholders. For the coming year(s), GoodElectronics encourages Philips to go that extra mile, in working towards full compliance with international labor standards, in its own operations as well as throughout its supply chain. Significant progress can be made by engaging with trade unions at the global level, and by practicing full supply chain transparency.”
 
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    Transparency on emissions
 
    To further increase transparency on greenhouse gas emissions and climate strategy in our supply chain, we became a member of the Carbon Disclosure Project 2010 Supply Chain program. This program provides a tried-and-tested, standardized methodology to support effective collaboration with the company’s suppliers and peers around climate change and greenhouse gas emissions. We will use the program to create awareness and drive action in our supply chain. Furthermore, we will continue to increase the number of suppliers that we invite to participate in the years to come.
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4 Our planet, our partners, our people 4.4 - 4.4
4.4    Supplier sustainability
    We believe in engaging with our suppliers to encourage them to share our commitment to sustainability. This includes sound environmental and ethical standards as well as providing working conditions for their employees that reflect both the Philips General Business Principles and the Electronic Industry Citizenship Coalition (EICC) Code of Conduct.
 
    We continue to focus on the Philips Supplier Sustainability Involvement Program, closely collaborating with our supplier partners and relevant stakeholders to drive progress. It’s about improving conditions in the chain.
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    Helping to identify areas for improvement
 
    Our suppliers play a pivotal role in helping us achieve our EcoVision5 objectives. We continue to support them in their efforts to improve the overall sustainability of their business.
 
    As a leading health and well-being company taking an integrated approach to sustainability, we are committed to helping our suppliers achieve high standards that benefit their employees, the environment and, where possible, their profitability.
 
    Supplier Sustainability and the road to Vision 2015
 
    In October 2010 our Purchasing Leadership Board made a strategic change to the Supplier Sustainability Involvement Program — towards a more collaborative approach with our strategic and preferred suppliers. This has resulted in a more diversified approach on the reach and depth of a joint supplier compliance program, as well as exploration of areas of (joint) sustainable innovation. At the same time, the Program remains firm on the need for suppliers to show continued sustainable performance.
 
    Going forward, coaching our suppliers will become an increasingly important part of the Program, in order to further increase its effectiveness. “Within the next five years we want to have not only strengthened our reputation as a leader in supplier sustainability, but also to have engaged our global supply base to help us achieve our EcoVision5 and other sustainability objectives as defined in Vision 2015,” says Sonny Kwok, Head of Supplier Sustainability.
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4 Our planet, our partners, our people 4.4 - 4.4
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    Raising the audit bar
 
    To enable our suppliers to continuously improve their sustainability performance, we upgraded our auditing process in 2010.
 
    For the past few years we have audited our suppliers in high-risk countries based on the Electronic Industry Citizenship Coalition (EICC) code of conduct, which we also supplemented with stricter requirements on freedom of association and collective bargaining.
 
    In 2010, in addition to auditing suppliers from acquisitions and other newly introduced suppliers, we started auditing suppliers that had already been audited in the past in order to validate their continued conformance to the code. Almost half the total number of audits conducted in 2010 were such follow-up audits.
 
    The main areas of non-compliance — and therefore areas for improvement — remain working hours, emergency preparedness, and the management of hazardous substances. However, thanks to our follow-up audit initiative, these shortcomings are being addressed and remedial action taken.
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    Repeat recognition
 
    In recognition of our efforts in the area of responsible supply chain management, the Dutch Association of Investors for Sustainable Development (VBDO) ranked us first among the forty largest publicly-listed Dutch companies benchmarked for performance in this area. Our scores have showed continual improvement over the last four years, increasing from 62% in 2006 to 93% in 2010.
 
    We were commended for thorough and transparent reporting, dedication to supporting suppliers in improving their sustainability performance, and embedding supplier sustainability within the company strategy.
 
    Mr Alexander Rinnooy Kan, President of the Netherlands’ Social and Economic Council (SER) and chairman of the jury, commented: “Philips achieved the highest score in the benchmark for the fourth consecutive year. That is an unprecedented achievement. The sustainability strategy is focused both on the reduction of risks as well as the pursuit of market opportunities. Philips’ supplier sustainability program goes beyond audits and truly supports suppliers in improving their sustainability performance. Philips is leading in many areas.”
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4 Our planet, our partners, our people 4.5 - 4.5
4.5   Working at Philips
 
    To become an even more market-driven and people-centric company, we have been working to increase organizational effectiveness and simplify our structure.
 
    We believe it is important that employees are engaged — that they feel part of a team, know their ideas and suggestions count, trust their manager, and value diverse perspectives.
 
    It is crucial that everyone is given full opportunity to use their individual talents — and to grow with Philips, enabling them to secure their future.
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    Grow with Philips
 
    Developing our people is one of our core values, so in 2010 we launched ‘Grow with Philips’, a program that opens up more opportunities for change and growth.
 
    We have always sought to develop our employees’ skills, so that they can maximize and reach their potential and increase their contribution to the company’s success. We start by encouraging staff to annually discuss and plan their ambitions with their departmental and HR managers. Employees are then encouraged to develop themselves by gaining new skills and competences on the job, using our extensive training programs and supported by coaching and mentoring programs.
 
    The new ‘Grow with Philips’ program adds to those efforts, with two new important components. The first makes it easier for our employees to grow their careers across functions, business units and geographies. By simply ticking a special box on their online employee profile they indicate that they are interested in changing jobs within Philips. This enables our recruiters to pro-actively search for suitable people within our organization before conducting an external search. Although vacancies are still posted online for all Philips people to see, this new approach makes internal recruiting faster and more thorough, with less dependence on people reacting to job postings. By allowing every employee to easily indicate they are available for a move, we create a transparent internal labor market and promote internal mobility.
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    The second main component of ‘Grow with Philips’ is the new training possibilities that are now available. After researching the training needs of our people, we found that they prefer informal ‘bite-size’ training modules, which give them advice and information when they need it. Hence, in 2010 we created our Learning@Philips web portal, a wide-ranging database of training modules that
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4 Our planet, our partners, our people 4.5 — 4.5
    are practical and aligned with our business needs. The modules range from five-minute videos to one-minute action tips and easy-to-read PDFs. This makes it easier than ever for Philips people at all levels to develop new skills and move their careers forward.
 
    Securing a better future
 
    These latest initiatives to help our people develop and reach their potential are part of our global activities in the area of corporate social responsibility. In the Netherlands, for instance, we have for many years played a pioneering role with our national Vocational Qualification Program (CV) and the Philips Employment Scheme (WGP).
 
    The CV project has been running since 2004 and targets Philips employees who know their trade well, but do not have a diploma to prove it. That makes them vulnerable in today’s volatile labor market, where a job for life is a thing of the past. CV provides a solution by awarding these people a recognized qualification. To date, more than 1,500 participants have obtained a qualification that will help set them up for the future — either within Philips or elsewhere.
 
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    Via WGP, we offer vulnerable groups of external jobseekers work experience placements, usually combined with some form of training, in order to increase their chances of finding and retaining a job. Over the 25 years that we have been running WGP, an average of 70% of the participants have found paid work within one year of completing our WGP program. Moreover, a recent doctoral research carried out by the University of Maastricht has revealed that it is still the best-performing employment scheme in the Netherlands.
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4 Our planet, our partners, our people 4.6 - 4.6
4.6 Working in our communities
    We at Philips have long been active in the communities where we live and work. Initiatives around the world bring “sense and simplicity” to people’s health and well- being in a number of local projects.
 
    SimplyHealthy@Schools is the global community program we have been rolling out, with strong employee engagement, to inspire and educate children to improve their health and well-being.
 
    By linking our social investment initiatives with the scope of our business, we make our core competencies available to simply make a difference in people’s lives.
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    SimplyHealthy@Schools
 
    Our SimplyHealthy@Schools program was born out of a desire to make our health and well-being expertise and resources available to a wider community.
 
    Growing and aging populations, increasing healthcare demands and the growing pressure of lifestyle-related diseases make current healthcare systems unsustainable. Some of us do not have a choice, simply having no access to the essentials that many take for granted — clean air and water, adequate nutrition, basic sanitation and access to healthcare. Others do have a choice — to eat a diet lower in saturated fats, do more exercise or give up smoking, and so reduce our risk of suffering cardiovascular disease, diabetes or cancer. But for most, old habits die hard, requiring innovative lifestyle solutions to help us change.
 
    For the next generation we can make it much easier. By educating them from an early age about their lifestyle and what it takes to stay healthy — and hopefully nurturing attitudes and habits that will stay with them into adulthood.
 
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    Inspiring schoolchildren around the world
 
    Our SimplyHealthy@Schools community program builds on past experience where employees applied their knowledge and volunteered in local schools to upgrade lighting and educate children on energy efficiency. In 2010, we expanded the program into 38 countries, reaching almost 63,000 students, going to over 660 schools and actively involving more than 3,500 employees from around the world on the ground and many thousands more online.
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4 Our planet, our partners, our people 4.6 - 4.6
    The SimplyHealthy@Schools Healthy Heroes toolkit is aimed at children aged 8-12 years old and illustrates simple ways of increasing your health and well-being by paying special attention to air, light, water and oral hygiene, as well as to exercise and environmental care. When these factors are improved, children perform better and their overall mental and physical well-being also improves. Simultaneously, the Healthy Heroes program makes children aware of the positive influence that they can have themselves on their lifestyle and their environment. The participating schools around the world also receive a free upgrade of the lighting in their classrooms to energy-efficient solutions that reduce energy consumption while enhancing teachers’ and pupils’ sense of well-being.
 
    In Taiwan, De-Hong Tseng, principal of Shi-Lei elementary school, enthused: “We are so happy to have Philips’ volunteers come all the way up to the mountain and engage our children with such fun and meaningful activities. Philips really cares about a sustainable society and contributes with real action.”
 
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    Everyone benefits
 
    Our employee volunteers also get a lot out of the SimplyHealthy@Schools experience. 71% of all employees responded favorably to the Employee Engagement Survey question: “Philips does a good job of contributing to the communities we live in (e.g. social investment programs such as SimplyHealthy@Schools)”. When employees who had participated in the program were asked the same question, the favorable response advanced to 91%. When asked if they would recommend participation to a colleague, 58 out of 60 people replied “Yes, absolutely!”
 
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    To be continued...
 
    The program’s success means it will be continued and expanded in 2011 to include more schools, extra activities and countries such as South Africa, Botswana and Ghana.
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5 Group performance 5 - 5.1
5   Group performance
(GROUP PERFORMANCE IMAGE)
    “ Our return on invested capital rose to 11.7%, and that compares to a cost of capital slightly in excess of 8% for the Group. That puts us on the path to achieve our Vision 2015 goals.”
 
    Pierre-Jean Sivignon, Chief Financial Officer
             
 
  € 2,552 million   € 1,454 million   € 7.8 billion
 
  EBITA   cash flows before financing activities   liquidity
5.1   Management discussion and analysis
 
    Management summary

The year 2010
    In 2010, despite experiencing a recovery in certain markets, overall worldwide market conditions remained challenging, particularly in developed countries. We recorded moderate 4% comparable sales growth; however, as a result of continued focus on cost management, significant improvements in EBIT, EBITA and Net income were achieved. Additionally, our cash flow from operating activities was higher than in 2009.
 
    EBIT of EUR 2,065 million, or 8.1% of sales, was significantly higher than the EUR 614 million, or 2.6% of sales, achieved in 2009. Significant EBIT improvement, led by Lighting, was achieved in all sectors. As a percentage of sales, 2010 EBIT and EBITA were at the highest levels since 2000.
 
    Following a strong rebound in the first six months of the year, sales growth slowed in the second half, ending at 10% nominal for the full year. Adjusted for favorable currency effects, comparable sales were 4% higher than in 2009, attributable to growth in all sectors, notably Lighting. Within Lighting, growth in automotive and LED markets was strong, partly mitigated by limited growth at Professional Luminaires due to weak construction markets in the US and Western Europe; Healthcare sales grew 4%, supported by 6% growth in
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5 Group performance 5.1 - 5.1
      all businesses except Imaging Systems, which was broadly in line with 2009. Growth at Consumer Lifestyle was limited to 1%, as solid growth at Health & Wellness and Personal Care was tempered by limited growth at Television and sales declines at Audio & Video Multimedia and Accessories.
 
    12% comparable sales growth was achieved in emerging markets, while mature markets grew 1%. Emerging markets accounted for 33% of total sales, up from 30% in 2009.
 
    We continued to invest in strategically aligned, high-growth companies to strengthen our portfolio. In 2010, we completed 11 acquisitions, contributing to all three sectors, notably Discus Holdings in Consumer Lifestyle. The cash outflow related to acquisitions amounted to EUR 239 million.
 
    During the year, particularly in the first three quarters, Television showed a significant year-on-year improvement in EBITA. However, with high inventory in retail, and severe price erosion in the fourth quarter, the Television business did not achieve break-even for the year. To improve profitability in the business and reduce exposure, we concluded brand licensing agreements in India and China. We will take further action to address the profitability issue in the business in 2011.
 
    We generated EUR 2.2 billion of cash flow from operating activities, EUR 611 million higher than in 2009. Our cash flows before financing activities were EUR 128 million higher than 2009, as higher cash flow from operating activities was partly offset by lower proceeds from the sale of stakes.
Key data
 
in millions of euros unless otherwise stated
                         
    2008     2009     2010  
 
                       
Sales
    26,385       23,189       25,419  
EBITA1)
    744       1,050       2,552  
as a % of sales
    2.8       4.5       10.0  
EBIT1)
    54       614       2,065  
as a % of sales
    0.2       2.6       8.1  
Financial income and expenses
    88       (166 )     (122 )
Income tax expense
    (256 )     (100 )     (509 )
Results of investments in associates
    19       76       18  
     
Income (loss) from continuing operations
    (95 )     424       1,452  
Income (loss) from discontinued operations
    3              
     
Net income (loss)
    (92 )     424       1,452  
 
                       
Net income (loss):
                       
Per common share — basic
    (0.09 )     0.46       1.54  
Per common share — diluted
    (0.09 )     0.46       1.53  
 
                       
Net operating capital (NOC)1)
    14,069       12,649       12,071  
Cash flows before financing activities1)
    (1,606 )     1,326       1,454  
Employees (FTEs)
    121,398       115,924       119,001  
 
1)    For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
Annual Report 2010     59

 


Table of Contents

5 Group performance 5.1.1 - 5.1.2
5.1.1   Sales
 
    The composition of sales growth in percentage terms in 2010, compared to 2009, is presented in the table below.
 
    Sales growth composition 2010 versus 2009 in %
                                 
    comparable     currency     consolidation     nominal  
    growth     effects     changes     growth  
Healthcare
    3.9       6.0       (0.2 )     9.7  
Consumer Lifestyle
    1.2       4.7       (0.7 )     5.2  
Lighting
    8.7       6.0       0.7       15.4  
GM&S
    6.4       3.0       (2.6 )     6.8  
     
Philips Group
    4.3       5.5       (0.2 )     9.6  
    Group sales amounted to EUR 25,419 million in 2010,10% nominal growth compared to 2009. Excluding a 6% favorable currency effect, comparable sales were 4% above 2009. Comparable sales were 9% higher at Lighting and 4% higher at Healthcare, though were tempered by 1% higher sales at Consumer Lifestyle.
 
    Healthcare sales amounted to EUR 8,601 million, which was 4% higher than in 2009 on a comparable basis, driven by 6% growth at Patient Care & Clinical Informatics, Home Healthcare Solutions, and Customer Services. Sales at Imaging Systems were broadly in line with 2009, as growth in emerging markets was largely offset by lower sales in North America.
 
    Consumer Lifestyle reported sales of EUR 8,906 million, which was EUR 439 million higher than in 2009, or 1% higher on a comparable basis. We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care. This was tempered by 1% comparable growth at Television and year-on-year sales declines at Audio & Video Multimedia and Accessories.
 
    Lighting sales amounted to EUR 7,552 million, which was EUR 1 billion higher than in 2009, or 9% higher on a comparable basis. Growth was largely driven by double- digit growth at Lumileds, Automotive Lighting, and Lighting Systems & Controls. Ongoing weakness in residential and commercial construction markets meant our Luminaires businesses yielded little growth.
 
5.1.2   Earnings
 
    In 2010, Philips’ gross margin was EUR 9,546 million, or 37.6% of sales, compared to EUR 8,079 million, or 34.8% of sales, in 2009. Gross margin in 2010 included EUR 111 million restructuring and acquisition-related charges, whereas 2009 included EUR 268 million of restructuring and acquisition-related charges and net asbestos-related recoveries of EUR 57 million. Gross margin percentage was higher than in 2009 in all operating sectors, notably Lighting.
 
    Selling expenses increased from EUR 5,159 million in 2009 to EUR 5,246 million in 2010. 2010 included EUR 88 million of restructuring and acquisition-related charges, compared to EUR 185 million in 2009. The year-on-year increase was mainly attributable to higher expenses aimed at supporting higher sales, and increased investments in advertising and promotion. In relation to sales, selling expenses decreased from 22.2% to 20.6%. Expenses were lower than in 2009 in all sectors.
 
    General and administrative expenses amounted to EUR 735 million in 2010, compared to EUR 734 million in 2009. As a percentage of sales, costs improved from 3.2% in 2009 to 2.9%.
 
    Research and development costs declined from EUR 1,631 million in 2009 to EUR 1,576 million in 2010. The year-on-year decline was largely attributable to lower restructuring and acquisition-related charges, which amounted to EUR 13 million in 2010, compared to EUR 73 million in 2009, and to the discontinuation of certain activities in the field of Molecular Healthcare and 3D Displays. As a percentage of sales, research and development costs decreased from 7.0% in 2009 to 6.2%.
 
    The overview below shows sales, EBIT and EBITA according to the 2010 sector classifications.
 
 
    Sales, EBIT and EBITA 2010
in millions of euros unless otherwise stated      
                                         
    sales     EBIT     %     EBITA1)     %  
Healthcare
    8,601       922       10.7       1,186       13.8  
Consumer Lifestyle
    8,906       595       6.7       639       7.2  
Lighting
    7,552       695       9.2       869       11.5  
GM&S
    360       (147 )           (142 )      
     
Philips Group
    25,419       2,065       8.1       2,552       10.0  
 
1)    For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
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Table of Contents

5 Group performance 5.1.2 - 5.1.3
Sales, EBIT and EBITA 2009
 
in millions of euros unless otherwise stated
                                         
    sales     EBIT1)     %     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  
GM&S
    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 16, Reconciliation of non-GAAP information, of this Annual Report
    In 2010, EBIT increased by EUR 1,451 million compared to 2009, to EUR 2,065 million, or 8.1% of sales. 2010 included EUR 233 million of restructuring and acquisition-related charges, compared to EUR 551 million in 2009. In addition to lower restructuring and acquisition-related charges, the year-on-year improvement was mainly driven by higher sales and a higher gross margin percentage in each of the operating sectors, and lower costs in Group Management & Services.
 
    Amortization of intangibles, excluding software and capitalized product development, amounted to EUR 487 million in 2010, compared to EUR 436 million in 2009. Amortization charges were higher than in 2009 due to acquisitions.
 
    EBITA increased from EUR 1,050 million, or 4.5% of sales, in 2009 to EUR 2,552 million, or 10.0% of sales, in 2010. Higher EBITA was visible in all sectors, notably Lighting.
 
    Healthcare
 
    EBITA increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. EBITA improvements were realized across all businesses, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges totaled EUR 77 million, compared to EUR 106 million in 2009.
 
    Consumer Lifestyle
 
    EBITA improved from EUR 339 million, or 4.0% of sales, in 2009 to EUR 639 million, or 7.2% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 61 million in 2010, compared to EUR 136 million in 2009. The year-on-year EBITA improvement was largely driven by higher sales, fixed cost savings, EUR 48 million product recall related charges in 2009, and lower restructuring charges. EBITA was higher than in 2009 in all businesses. Notable improvements were achieved in Domestic Appliances, Television, and Licenses.
 
    Lighting
 
    EBITA amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. EUR 247 million of restructuring and acquisition-related charges were included in 2009. The EBITA improvement was also driven by higher sales, improved gross margin and fixed cost savings from restructuring programs.
 
    Group Management & Services
 
    EBITA improved from a loss of EUR 282 million in 2009 to a loss of EUR 142 million in 2010. EBITA in 2009 included a EUR 134 million gain related to curtailment for retiree medical benefit plans, EUR 57 million of net asbestos- related recoveries, and EUR 46 million of asset write-offs. 2009 also included EUR 63 million restructuring charges. 2010 results included a EUR 119 million gain from a change in a pension plan. The year-on-year EBITA improvement was largely attributable to higher license revenue, discontinuation of Molecular Healthcare, and lower costs in the global service units.
 
    For further information regarding the performance of the sectors, see chapter 6, Sector performance, of this Annual Report.
 
5.1.3   Pensions
 
    The net periodic pension costs of defined-benefit pension plans amounted to a credit of EUR 103 million in 2010, compared to a cost of EUR 3 million in 2009. The defined- contribution pension cost amounted to EUR 118 million, EUR 11 million higher than in 2009, mainly due to a gradual shift from defined-benefit to defined-contribution pension plans.
 
    The 2010 costs were impacted by the recognition of EUR 119 million of negative prior-service costs. These resulted from a reduction of pension benefits expected to be paid in the future, in part due to a change in indexation. In 2010, a curtailment gain of EUR 9 million on one of our retiree medical plans was recognized due to the partial closure of a US site.
 
    In 2009, curtailment gains totaling EUR 134 million, relating to changes in retiree medical plans, positively impacted the result. These curtailment gains are the result of changes in the benefit level and the scope of eligible participants of a retiree medical plan, which became effective and irreversible in 2009.
 
    For further information, refer to note 28.
Annual Report 2010     61

 


Table of Contents

5 Group performance 5.1.4 - 5.1.5
5.1.4   Restructuring and impairment charges
 
    In 2010, EBIT included net charges totaling EUR 162 million for restructuring and related asset impairments. 2009 included EUR 450 million of restructuring and related asset impairment charges. In addition to the annual goodwill impairment tests for Philips, trigger-based impairment tests were performed during the year, resulting in no goodwill impairments.
 
    For further information on sensitivity analysis, please refer to note 8.
 
    Restructuring and related charges
 
    in millions of euros
                         
    2008     2009     2010  
Restructuring charges per sector:
                       
Healthcare
    63       42       48  
Consumer Lifestyle
    198       120       42  
Lighting
    245       225       74  
GM&S
    35       63       (2 )
     
 
    541       450       162  
 
                       
Cost breakdown of restructuring charges:
                       
Personnel lay-off costs
    374       399       155  
Release of provision
    (2 )     (81 )     (77 )
Restructuring-related asset impairment
    116       84       19  
Other restructuring-related costs
    53       48 1)     65  
     
 
    541       450       162  
 
1)     Includes EUR 22 million of costs which were expensed as incurred
 
    The restructuring charges in 2010 were mainly attributable to the operating sectors. Within Healthcare, the largest projects related to the reorganization of the commercial organization in Imaging Systems (Germany, Netherlands, and the US). Consumer Lifestyle restructuring charges were mainly in Television, particularly in China due to the brand licensing agreement with TPV. Restructuring projects in Lighting were focused on reduction of production capacity in traditional lighting technologies, such as incandescent. The largest projects were initiated in Brazil, France, and the US.
 
    In 2009, the most significant restructuring projects related to Lighting and Consumer Lifestyle. Restructuring projects at Lighting 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 Belgium and France), 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 (Netherlands), Home Healthcare Solutions and Patient Care & Clinical Informatics (various locations in the US).
 
    Other restructuring projects focused on reducing the fixed cost structure of Corporate Technologies, Philips Information Technology, Philips Design, and Corporate Overheads within Group Management & Services.
 
    For further information on restructuring, refer to note 19.
 
5.1.5   Financial income and expenses
 
    A breakdown of Financial income and expenses is presented in the table below.
 
    Financial income and expenses
 
    in millions of euros
                         
    2008     2009     2010  
Interest expense (net)
    (105 )     (252 )     (225 )
Sale of securities
    1,406       126       162  
Value adjustments on securities
    (1,148 )     (58 )     (2 )
Other
    (65 )     18       (57 )
     
 
    88       (166 )     (122 )
    The net interest expense in 2010 was EUR 27 million lower than in 2009, mainly as a result of lower interest expense.
 
    Sale of securities
 
    in millions of euros
                         
    2008     2009     2010  
Gain on sale of NXP shares
                154  
Gain on sale of TSMC shares
    1,205              
Gain on sale of LG Display shares
    158       69        
Gain on sale of D&M shares
    20              
Gain on sale of Pace shares
          48        
Others
    23       9       8  
     
 
    1,406       126       162  
    In 2010, income from the sale of securities of EUR 162 million was mainly attributable to the sale of NXP shares. In 2009, income from the sale of securities totaled EUR 126 million. This included a EUR 69 million gain from the sale of the remaining shares in LG Display, and a EUR 48 million gain from the sale of the remaining shares in Pace Micro Technology.
62     Annual Report 2010

 


Table of Contents

5 Group performance 5.1.5 - 5.1.10
    Value adjustments on securities
 
    in millions of euros
                         
    2008     2009     2010  
NXP
    (599 )     (48 )      
LG Display
    (448 )            
TPO Display
    (71 )            
Pace Micro Technology
    (30 )            
Prime Technology
          (6 )     (2 )
Other
          (4 )      
     
 
    (1,148 )     (58 )     (2 )
    2009 was impacted by impairment charges amounting to EUR 58 million, mainly from shareholdings in NXP.
 
    Other financial expenses amounted to a EUR 57 million expense in 2010, compared to EUR 18 million income in 2009. 2010 primarily consisted of a EUR 21 million loss related to the revaluation of the convertible bonds received from TPV Technology and CBay Systems Holdings (CBAY), and a EUR 20 million accretion expense mainly associated with discounted provisions.
 
    Other financial expenses 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.
 
    For further information, refer to note 2.
 
5.1.6   Income taxes
 
    Income taxes amounted to EUR 509 million, compared to EUR 100 million in 2009. The year-on-year increase was largely attributable to higher taxable earnings.
 
    The tax burden in 2010 corresponded to an effective tax rate of 26.2%, compared to 22.3% in 2009. The increase in the effective tax rate was attributable to a change in the country mix of income tax rates and a change in the mix of profits and losses in the various countries, as well as 2009’s recognition of a deferred tax asset for Lumileds previously not recognized. This was partly offset by a number of tax settlements.
 
    For 2011, the effective tax rate excluding incidental non-taxable items is expected to be between 30% and 32%.
 
    For further information, refer to note 3.
 
5.1.7   Results of investments in associates
 
    The results related to investments in associates declined from EUR 76 million in 2009 to EUR 18 million in 2010.
 
    Results of investments in associates
 
    in millions of euros
                         
    2008     2009     2010  
Company’s participation in income
    81       23       14  
Results on sale of shares
    (2 )           5  
Gains arising from dilution effects
    12              
(Reversal of) investment impairment and guarantee charges
    (72 )     53       (1 )
     
 
    19       76       18  
    The company’s participation in income declined from EUR 23 million in 2009 to EUR 14 million in 2010, mainly due to the sale of our remaining stake in TPV Technology.
 
    In 2009, following recovery of the TPV share price, 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 in 2009 was mainly attributable to results on Intertrust.
 
    For further information, refer to note 4.
 
5.1.8   Non-controlling interests
 
    Net income attributable to non-controlling interests amounted to EUR 6 million in 2010, compared to EUR 14 million in 2009.
 
5.1.9   Net income
 
    Net income increased from EUR 424 million in 2009 to EUR 1,452 million. The improvement was driven by EUR 1,451 million higher EBIT and EUR 44 million lower costs in Financial income and expenses, partly offset by EUR 409 million higher income tax charges and EUR 58 million lower income from our investments in associates.
 
    Net income attributable to shareholders per common share increased from EUR 0.44 per common share in 2009 to EUR 1.54 per common share in 2010.
 
5.1.10   Acquisitions and divestments
 
    In 2010 Philips completed eleven strategically-aligned acquisitions, benefiting all three operating sectors.
 
    In 2010, acquisitions resulted in integration and purchase- accounting charges totaling EUR 70 million: Healthcare EUR 29 million, Consumer Lifestyle EUR 19 million, and Lighting EUR 22 million.
Annual Report 2010     63

 


Table of Contents

5     Group performance 5.1.10 - 5.1.11
    In 2009, acquisitions led to integration and purchase- accounting charges totaling EUR 101 million: Healthcare EUR 63 million, Consumer Lifestyle EUR 16 million, and Lighting EUR 22 million.
    For further information, refer to note 6.
    Acquisitions
    Within Healthcare, we completed six acquisitions to expand our global presence, particularly in emerging markets: Somnolyzer, Tecso Informatica, Shanghai Apex Electronics, CDP Medical, Wheb Sistemas, and medSage Technologies.
    Tecso Informatica in Brazil was our first acquisition in healthcare informatics in an emerging market. This acquisition was complemented by our subsequent acquisition of Wheb Sistemas in Brazil. These acquisitions position us to be one of the leading clinical informatics companies in Brazil, further strengthening our offering toward high-growth markets. In China, we purchased Shanghai Apex Electronics, a leading manufacturer of ultrasound transducers, strengthening our portfolio of high-quality transducers aimed specifically towards emerging markets.
    Within mature markets in Healthcare, we acquired Israel- based CDP Medical, a provider of Picture Archiving and Communication Systems (PACS) and in Austria we acquired Somnolyzer, an automated scoring solutions business which will help improve the productivity of sleep centers. Our final acquisition of 2010 was medSage Technologies, a US-based provider of patient interaction and management applications, which will allow Philips to offer a web-based solution to aid home care providers.
    Within Consumer Lifestyle, Philips acquired Discus Holdings, the leading manufacturer of professional tooth whitening products, complementing our oral healthcare portfolio and further building our relationship with professional dentists.
    Within Lighting, Philips completed four acquisitions. In Italy, we acquired Luceplan SpA, a leading consumer luminaires company in the lighting design segment in Europe. In Norway, we acquired Burton Medical Products, provider of specialized lighting solutions for healthcare facilities. In Denmark, we acquired Street Controls from Amplex A/S, an energy-efficient solutions provider. Additionally, in Hong Kong, we acquired NCW Holdings, a leading designer, manufacturer and distributor of LED and conventional entertainment lighting and lighting control solutions for global markets.
    Acquisitions in 2009
    In 2009 we completed eight acquisitions. Healthcare acquisitions included Meditronics, Traxtal, and InnerCool. Within Lighting, Philips completed the acquisition of four companies: Dynalite, Teletrol Systems, llti Luce, and Selecon. Within Consumer Lifestyle, Philips acquired Saeco International.
    Divestments
    In 2010, Philips divested 9.4% of the shares in TPV Technology Ltd (TPV). The TPV shares were sold to CEIC Lrd, a Hong Kong-based technology company, for a cash consideration of EUR 98 million.
    Divestments in 2009
    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 its strategy to divest non-core activities and focus on expanding its growth platforms.
    For details, please refer to note 6.
5.1.11   Performance by market cluster
    In 2010, sales grew 4% on a comparable basis, driven by growth in all sectors, notably in emerging markets.
    (GRAPHICS)
 
    1) For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
    Sales in mature markets were EUR 824 million higher than in 2009, or 1% higher on a comparable basis. Sales in Western Europe were below the 2009, mainly due to lower sales at Consumer Lifestyle, which more than offset growth at Healthcare. Sales in North America were slightly higher than in 2009, attributable to low single-digit growth in Lighting and Consumer Lifestyle. Healthcare

64     Annual Report 2010


Table of Contents

5     Group performance 5.1.11 - 5.1.12
    sales in North America were on par with 2009 on a comparable basis. Sales in other mature markets, however, grew by double-digits in all sectors.
    In emerging markets, sales grew by 12%, driven by growth in all sectors, notably Lighting (more than 20%). Solid double-digit growth was visible in China, driven by Healthcare and Lighting. Sales in Russia also showed double-digit growth, attributable to strong sales performance at Consumer Lifestyle and Lighting.
    (GRAPHICS)
 
1)    Revised to reflect an adjusted market cluster allocation
5.1.12   Employment
    The total number of employees of the Philips Group was 119,001 at the end of 2010, compared to 115,924 at the end of 2009. Approximately 45% were employed in the Lighting sector, due to the continued relatively strong vertical integration in this business. Some 30% were employed in the Healthcare sector and approximately 15% of the workforce was employed in the Consumer Lifestyle sector.
    (GRAPHICS)
    The increase in headcount in 2010 was mainly attributable to acquisitions and an increase in temporary employees in Lighting to support higher levels of activity. The number of employees increased in all sectors except Consumer Lifestyle, which was lower, mainly due to a reduction of temporary employees in Television.
    Approximately 55% of the Philips workforce is located in mature markets, and about 45% in emerging markets. In 2010, the number of employees in mature markets slightly declined as additional headcount from acquisitions was more than offset by headcount reduction from organizational right-sizing projects. Emerging market headcount increased by 3,195, mainly from increases at Lighting to support higher factory production.
    Employees per sector
in FTEs at year-end
                         
    2008     2009     2010  
 
                       
Healthcare
    35,551       34,296       35,479  
Consumer Lifestyle
    17,145       18,389       17,706  
Lighting
    57,367       51,653       53,888  
GM&S
    11,335       11,586       11,928  
     
 
    121,398       115,924       119,001  
    Employees per market cluster
in FTEs at year-end
                         
    2008     2009     2010  
 
                       
Western Europe
    36,966       35,496       34,613  
North America
    31,336       27,069       27,883  
Other mature markets
    2,119       3,095       3,046  
     
Total mature markets
    70,421       65,660       65,542  
Emerging markets
    50,977       50,264       53,459  
     
 
    121,398       115,924       119,001  
    Employment
in FTEs
                         
    2008     2009     2010  
 
                       
Position at beginning of year
    123,801       121,398       115,924  
 
                       
Consolidation changes:
                       
- new consolidations
    12,673       2,432       1,457  
- deconsolidations
    (1,571 )     (276 )     (307 )
Comparable change
    (13,505 )     (7,630 )     1,927  
     
Position at year-end
    121,398       115,924       119,001  
Annual Report 2010     65

 


Table of Contents

5     Group performance 5.2 - 5.2.1
5.2    Liquidity and capital resources
    Philips’ diverse liquidity sources and strong management ensure maximum flexibility in meeting changing business needs.
5.2.1   Cash flows provided by continuing operations
    Cash flows from operating activities
    Net cash flow from operating activities amounted to EUR 2,156 million in 2010, compared to EUR 1,545 million in 2009. The year-on-year improvement was largely attributable to higher earnings across all sectors and last year’s EUR 485 million final asbestos settlement payment, partly offset by higher working capital requirements.
    Condensed consolidated statements of cash flows for the years ended December 31, 2008, 2009 and 2010 are presented below:
    Condensed consolidated cash flow statements1)
in millions of euros
                         
    2008     2009     2010  
 
                       
Cash flows from operating activities:
                       
 
                       
Net income (loss)
    (92 )     424       1,452  
 
                       
Adjustments to reconcile net income to net cash provided by operating activities
    1,740       1,121       704  
     
 
                       
Net cash provided by operating activities
    1,648       1,545       2,156  
 
                       
Net cash (used for) provided by investing activities
    (3,254 )     (219 )     (702 )
     
 
                       
Cash flows before financing activities2)
    (1,606 )     1,326       1,454  
 
                       
Net cash used for financing activities
    (3,575 )     (545 )     (96 )
     
 
                       
Cash (used for) provided by continuing operations
    (5,181 )     781       1,358  
 
                       
Net cash (used for) discontinued operations
    (37 )            
 
                       
Effect of changes in exchange rates on cash and cash equivalents
    (39 )     (15 )     89  
     
 
                       
Total change in cash and cash equivalents
    (5,257 )     766       1,447  
 
                       
Cash and cash equivalents at the beginning of year
    8,877       3,620       4,386  
     
 
                       
Cash and cash equivalents at the end of year - continuing operations
    3,620       4,386       5,833  
 
1)     Please refer to section 13.7, Consolidated statements of cash flows, of this Annual Report
 
2)     Please refer to chapter 16, Reconciliation of non-GAAP information, of this Annual Report
    (GRAPHICS)
    Cash flows from investing activities
    Cash flows from investing activities resulted in a net outflow of EUR 702 million, attributable to EUR 823 million cash used for net capital expenditures and EUR 239 million used for acquisitions, chiefly for Discus Holdings, NCW Holdings LTD and medSage. This was partly offset by EUR 385 million proceeds from divestment, including the sale of 9.4% of the shares in TPV and the redemption of the TPV and CBAY convertible bonds.
    2009 cash flows from investing activities resulted in a net outflow of EUR 219 million, 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).
    Net capital expenditures
    Net capital expenditures totaled EUR 823 million, which was EUR 141 million higher than 2009. Higher investments were visible in all sectors, notably additional growth-focused investments in Lighting.
    (GRAPHICS)
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5 Group performance 5.2.1 - 5.2.4
    Acquisitions
    Net cash impact of acquisitions in 2010 was a total of EUR 239 million, mainly Discus Holdings (EUR 129 million), NCW Holdings LTD (EUR 13 million) and medSage Technologies (EUR 14 million).
    In 2009, a total of EUR 300 million cash was used for acquisitions, mainly Saeco (EUR 171 million), Dynalite (EUR 31 million) and Traxtal (EUR 18 million).
    Divestments and derivatives
    Cash proceeds of EUR 385 million were received from divestments, including EUR 98 million from the sale of 9.4% shares in TPV, EUR165 million and EUR 74 million from the redemption of the TPV and CBAY convertible bonds respectively. The transaction related to the sale of the remaining NXP shares to Philips UK pension fund which was cash-neutral. Cash flows used for derivatives led to a EUR 25 million outflow.
    In 2009, 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.
    Cash flows from financing activities
    Net cash used for financing activities in 2010 was EUR 96 million. Philips’ shareholders were paid EUR 650 million in the form of a dividend of which cash dividend amounted to EUR 296 million. The net impact of changes in debt was an increase of EUR 135 million, including a EUR 214 million increase from finance lease and bank loans, partially offset by repayments on short-term debts and other long-term debt amounting to EUR 79 million. Additionally, net cash inflows for share delivery totaled EUR 65 million.
    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.
5.2.2   Cash flows from discontinued operations
    During 2010 and 2009 there was no cash used for discontinued operations.
5.2.3   Financing
    Condensed consolidated balance sheets for the years 2008, 2009 and 2010 are presented below:
Condensed consolidated balance sheet information1)
in millions of euros
                         
    2008     2009     2010  
Intangible assets
    11,757       11,523       12,233  
Property, plant and equipment
    3,496       3,252       3,265  
Inventories
    3,491       2,913       3,865  
Receivables
    7,548       7,188       6,296  
Accounts payable and other liabilities
    (9,292 )     (9,166 )     (10,180 )
Provisions
    (2,837 )     (2,450 )     (2,339 )
Other financial assets
    1,705       984       596  
Investments in associates
    293       281       181  
     
 
    16,161       14,525       13,917  
 
                       
Cash and cash equivalents
    3,620       4,386       5,833  
Debt
    (4,188 )     (4,267 )     (4,658 )
     
Net cash (debt)
    (568 )     119       1,175  
Non-controlling interests
    (49 )     (49 )     (46 )
Shareholders’ equity
    (15,544 )     (14,595 )     (15,046 )
     
 
    (16,161 )     (14,525 )     (13,917 )
 
1)   Please refer to section 13.6, Consolidated balance sheets, of this Annual Report
5.2.4   Cash and cash equivalents
    In 2010, cash and cash equivalents increased by EUR 1,447 million to EUR 5,833 million at year-end. Cash inflow from operations amounted to EUR 2,156 million, a total outflow on net capital expenditure of EUR 823 million, and there was EUR 385 million proceeds from divestments including EUR 268 million from the sale of stakes. This was partly offset by an outflow of EUR 296 million related to the cash dividend payout, EUR 239 million for acquisitions and favorable currency translation effects of EUR 89 million.
    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.
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5 Group performance 5.2.4 - 5.2.7
(PERFORMANCE GRAPH)
 
1)   Includes the redemption of convertible bonds from TPV Technology and CBAY and the sale of 9.4% shares in TPV
 
2)   Please refer to chapter 16, Reconciliation of non-GAAP information, of this Annual Report
 
3)   Includes cash outflow for derivatives and currency effect
 
4)   Includes the acquisitions of Discus Holdings, NCW Holdings LTD and medSage
5.2.5   Debt position
    Total debt outstanding at the end of 2010 was EUR 4,658 million, compared with EUR 4,267 million at the end of 2009.
    Changes in debt
in millions of euros
                         
    2008     2009     2010  
New borrowings
    (2,088 )     (312 )     (214 )
Repayments
    1,708       252       79  
Consolidation and currency effects
    (245 )     (19 )     (256 )
     
Total changes in debt
    (625 )     (79 )     (391 )
    In 2010, total debt increased by EUR 391 million. The increase in borrowings including finance leases was EUR 214 million. Repayments under finance leases amounted to EUR 50 million, while EUR 29 million was used to reduce other long-term debt. Other changes resulting from consolidation and currency effects led to an increase of EUR 256 million.
    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 finance leases amounted to EUR 42 million, while EUR 9 million was used to reduce other long-term debt. Furthermore Philips repaid short-term debt of EUR 201 million. Other changes resulting from consolidation and currency effects led to an increase of EUR 19 million.
    Long-term debt as a proportion of the total debt stood at 60% at the end of 2010 with an average remaining term of 10.8 years, compared to 85% at the end of 2009.
5.2.6   Net debt to group equity
    Philips ended 2010 in a net cash position (cash and cash equivalents, net of debt) of EUR 1,175 million, compared to a net cash position of EUR 119 million at the end of 2009.
(PERFORMANCE GRAPH)
 
1)   For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
 
2)   Shareholders’ equity and non-controlling interests
5.2.7   Shareholders’ equity
    Shareholders’ equity increased by EUR 451 million in 2010 to EUR 15,046 million at December 31, 2010. The increase was mainly as a result of a EUR 630 million improvement within total comprehensive income. The dividend payment to shareholders in 2010 reduced equity by EUR 304 million. The decrease was partially offset by a EUR 111 million increase related to delivery of treasury shares and net share-based compensation plans.
    Shareholders’ 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
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5 Group performance 5.2.7 - 5.2.8
    reduced equity by EUR 647 million. The decrease was partially offset by a EUR 102 million increase related to re-issuance of treasury shares and net share-based compensation plans.
    The number of outstanding common shares of Royal Philips Electronics at December 31, 2010 was 947 million (2009: 927 million).
    At the end of 2010, the Company held 37.7 million shares in treasury to cover the future delivery of shares (2009: 43.1 million shares). This was in connection with the 54.9 million rights outstanding at the end of 2010 (2009: 62.1 million rights) under the Company’s long-term incentive plan and convertible personnel debentures. At the end of 2010, the Company held 1.9 million shares for cancellation (2009: 1.9 million shares).
5.2.8   Liquidity position
    Including the Company’s net debt (cash) position (cash and cash equivalents, net of debt), listed available-for-sale financial assets, listed investments in associates, as well as its EUR 1.8 billion revolving credit facility, and EUR 200 million committed undrawn bilateral loan, the Company had access to net available liquid resources of EUR 3,445 million as of December 31, 2010, compared to EUR 2,412 million one year earlier.
    Liquidity position
in millions of euros
                         
    2008     2009     2010  
Cash and cash equivalents
    3,620       4,386       5,833  
Committed revolving credit facility/ CP program/Bilateral loan
    2,274       1,936       2,000  
     
Liquidity
    5,894       6,322       7,833  
Available-for-sale financial assets at market value
    599       244       270  
Main listed investments in associates at market value
    60       113        
Short-term debt
    (722 )     (627 )     (1,840 )
Long-term debt
    (3,466 )     (3,640 )     (2,818 )
     
Net available liquidity resources
    2,365       2,412       3,445  
    The fair value of the Company’s available-for-sale financial assets, based on quoted market prices at December 31, 2010, amounted to EUR 270 million. Philips disposed 9.4% of the shareholdings in TPV technology in 2010 as the main listed investments in associates, and reclassified the remaining 3% shareholdings to available-for-sale financial assets.
    Philips has a EUR 1.8 billion committed revolving credit facility due in 2015 that can be used for general corporate purposes. In addition, Philips also has a EUR 200 million committed undrawn bilateral loan in place that can be drawn before April 2011. Furthermore 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. As at December 31, 2010, Philips did not have any loans outstanding under these facilities.
    Philips’ existing long-term debt is rated A3 (with stable outlook) by Moody’s and A- (with stable outlook) by Standard & Poor’s. It is Philips’ objective to manage our financial ratios to be in line with A. There is no assurance that we will be able to achieve this goal. Ratings are subject to change at any time. Outstanding long-term bonds and credit facilities do not have a material adverse change clause, financial covenants or credit-rating-related acceleration possibilities.
    As at December 31, 2010, Philips had total cash and cash equivalents of EUR 5,833 million. Philips pools cash from subsidiaries to the extent legally and economically feasible. Cash not pooled remains available for local operational or investment needs. Philips had a total gross debt position of EUR 4,658 million at year-end 2010 within which EUR 1,012 million bonds will mature in Q1 and Q2 2011.
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5 Group performance 5.2.8 - 5.2.9
5.2.9   Cash obligations
 
    Contractual cash obligations
 
    Presented below is a summary of the Group’s contractual cash obligations and commitments at December 31, 2010.
 
    Contractual cash obligations at December 31, 2010
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)
    3,808       1,111       493       254       1,950  
Finance lease obligations1)
    178       44       65       29       40  
Short-term debt1.2)
    686       686                    
Operating leases1)
    640       173       234       123       110  
Derivative assets and liabilities1)
    472       47       374       51        
Interest on debt3)
    1,596       161       207       190       1,038  
Trade and other payables4)
    3,691       3,691                    
     
 
    11,071       5,913       1,373       647       3,138  
 
1)   Short-term debt, long-term debt, lease obligations and derivatives are included in the Company’s consolidated balance sheet
 
2)   Excluding current portion of long-term debt
 
3)   Approximately 45% of the debt bears interest at a floating rate. Interest on debt has been estimated based upon average rates in 2010
 
4)   Excluding derivatives, shown separately
    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.
 
    Certain Philips suppliers factor their trade receivables from Philips with third parties through supplier finance arrangements. At December 31,2010 approximately EUR 330 million of the Philips accounts payables were known to have been sold onward under such arrangements whereby Philips confirms invoices. Philips continues to recognize these liabilities as trade payables and will settle the liabilities in line with the original payment terms of the related invoices.
 
    The estimated total purchase obligations as of December 31, 2010, amount to EUR 365 million. This amount can be split in EUR 324 million with a payment due in less than 1 year, EUR 17 million due in 1-3 years, EUR 6 million due in 3-5 years and EUR 18 million due in more than 5 years.
 
    As part of the recovery plan for the UK pension fund, Philips Electronics UK has committed to a contingent cash contribution scheme as a back-up for liability savings to the UK fund to be realized through a member choice program. If this member choice program fails to deliver part or all of the expected liability savings with a net present value of GBP 250 million, Philips Electronics UK will pay cash contributions into the UK pension fund to make up for the difference during the years 2015 and 2022. No cash (further) payments will be made under the scheme when the UK pension fund is fully funded.
 
    Other cash commitments
 
    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 regulatory deficits in pension plans in the US and UK. Refer to note 28 for a discussion of the plans and expected cash outflows.
 
    The company had EUR 226 million restructuring-related provisions by the end of 2010, of which EUR 177 million is expected to result in cash outflows in 2011. Refer to note 19 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 0.75 per common share (up to EUR 710 million), in cash or shares at the option of the shareholder, against the net income for 2010 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 2010, the total fair value of guarantees recognized by Philips in other non-current liabilities was EUR 9 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 2010.
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5 Group performance 5.2.9 - 5.3.1
Expiration per period 2010
in millions of euros
                                 
    total                    
    amounts     less than 1              
    committed     year     1-5 years     after 5 years  
Business- related guarantees
    302       100       133       69  
Credit- related guarantees
    49       22       8       19  
     
 
    351       122       141       88  
Expiration per period 2009
in millions of euros
                                 
    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  
5.3   Other performance measures
 
    The section Other performance measures provides an insight into the performance of key cross-sector functions — brand, marketing, research and development and supply management — in 2010.
 
 
5.3.1   Marketing
 
    Brand and NPS
 
    A consistent focus on building brand loyalty amongst both professionals and consumers led to the 7% increase in the value of the Philips brand value to USD 8.7 billion, outpacing the average increase of 4% shown by brands measured in the 2010 Interbrand ranking. Additionally, Philips’ brand value has doubled in 6 years and it remains one of the top 50 most valuable brands in the world, measured by the Interbrand ranking of the 100 best global brands.
 
    Philips’ total 2010 marketing expenses approximated EUR 934 million, a 16% increase compared to 2009. The additional spend was primarily to support the company’s marketing strategy of more focused growth in emerging and other strategic markets. In line with this, the company increased its 2010 marketing spend in key emerging markets by 48% compared to 2009. Additionally, the company continued its focus on organizing around customers and markets, resulting in more local marketing investment as a percentage of sales. Total 2010 marketing investment in emerging markets approximated 22% of sales, compared to 17% of sales in 2009.
 
    In 2010, we have continued to expand our coverage of Net Promoter Score (NPS) program to include additional markets strategic to Philips’ growth. Philips stayed the course despite tough economic times, having improved our NPS leadership score in Consumer Lifestyle and maintaining a strong performance in Healthcare. While Lighting performance noted a decrease, it remains a clear leader in its industry. In particular, we achieved strong performance in BRIC markets and in Western Europe, most notably with BRIC outright leadership positions increasing by 18 points. Whilst we noted a decrease in North America and the rest of EMEA, Philips continues to occupy strong leadership positions in these
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5 Group performance 5.3.1 - 5.3.2
    regions. Overall, the result is stable, and 59% of our businesses currently hold industry leadership positions (60% in 2009). In line with our growth targets in Vision 2015, in 2011 we will continue to drive for further leadership in NPS in key markets. The implementation of this measure has confirmed that outstanding customer and consumer loyalty is critical to achieving growth.
 
 
    Online
 
    Philips continued to build brand loyalty and promoters via its online marketing strategies in 2010. Within the Lighting sector, the company launched a new social media-enabled platform designed to showcase the company’s leadership in the lighting industry and more importantly, drive meaningful dialog among existing and prospective customers and stakeholders.
 
    Additionally, in 2010, the company developed several online communities, which, supported by social media capabilities, enabled the company to facilitate dialog and networking with its professional audiences in both Lighting and Healthcare. Going forward, the company will continue to drive its online marketing efforts with the use of new enabling technologies and communication platforms and leveraging the platform as a sales enabler. In 2010, Philips’ online sales reached EUR 570 million, a 41% increase from 2009 where online sales reached EUR 405 million. Online sales in from emerging markets represented approximately 30% of total online sales in 2010 and grew by 94% over the prior year.
 
    In further support of sustainability and corporate responsibility, the company continued its efforts with asimpleswitch.com, its online platform that promotes smart energy efficiency and consumption. Since its launch in 2009, the site has gained in momentum and popularity, building an online supporter base of over 100,000 individuals by year-end.
(BAR GRAPH)
 
5.3.2   Research & development
 
    R&D spending declined as a percentage of sales from 7.0% in 2009 to 6.2%. Philips has continued to expand its vast knowledge and intellectual property base. Early and continuous 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, innovation is managed at board level in the Markets & Innovation function, underlining our focus on market-driven innovation. Innovation leading to new businesses in incubators and internal ventures is managed separately from the traditional business to ensure focus on these growth initiatives. The effectiveness of innovation has been improved by streamlining our organization in Corporate Technologies, leading to more focus, alignment and enhanced offering of value propositions. The scope of the new organization covers early innovation and pre- development activities, supplemented by small series production.
(BAR GRAPH)
    Healthcare R&D expenses increased EUR 19 million in 2010, reflecting our continued investment in emerging markets and home healthcare, though declined as a percentage of sales. Lighting’s expenses were broadly in line with 2009, with an increase in digital lighting and a reduction in traditional lighting. In Consumer Lifestyle, R&D spend was lower than in 2009, mainly due to a focus on fewer, but bigger projects and lower restructuring charges. GM&S lowered its R&D expenses through discontinuation of certain activities in the field of Molecular Healthcare and in the field of 3D Displays.
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5 Group performance 5.3.2 - 5.3.3
Research and development expenses per sector
in millions of euros
                         
    2008     2009     2010  
 
                       
Healthcare
    672       679       698  
Consumer Lifestyle
    513       395       369  
Lighting
    345       351       355  
GM&S
    247       206       154  
     
Philips Group
    1,777       1,631       1,576  
    Our new product sales — products introduced within 2010 (for B2C products) or three years (for B2B products) — increased from 48% of total sales in 2009 to 52% in 2010. 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.
 
5.3.3   Supply management
 
    Executing Vision 2015 and strengthening our health and well-being leadership requires enhancing our Supply strategy and governance approach. Our vision is to create a Customer Value Chain that enables better customer solutions, boosts our NPS, and powers growth. Customer Value Chain is a series of activities that collectively provide greater value than their sum. A more integrated Supply community will ensure that every part of the value chain works seamlessly together to benefit our customers and our company.
 
    The Supply organization encompasses three focused functions: Commercial and Service Supply Chain, Operations, and Purchasing. Collectively, they comprise approximately 58,000 Philips employees and are responsible for sourcing, making and delivering products and solutions.
 
    Management of shortages and management of commodity price increases
 
    The recovery of the global economy led to tight supply of especially semiconductor components in the course of 2010. The scarcity and increased commodity prices led to upward price pressure. We have been able to delay price increases and smoothened out volatility through commodity hedging and negotiations with our component suppliers. The raw material price trends have also further accelerated the wide deployment of Value Engineering throughout the company, in close cooperation between Supply and R&D.
 
    We achieved Bill of Material (BOM) savings of 4.9% and Non Product Related (NPR) savings of 5.2%.
 
    In order to minimize the impact on our customer service levels and sales, a number of initiatives have been taken. Actions have been taken to rapidly improve our forecast reliability and sales and operational planning processes, both short term and longer term, in order to reduce such risks for the future. Additional investments were made in the emerging markets to ensure optimal local presence of the supply function.
 
    Concentration and consolidation of supply base
 
    In line with our brand promise of “sense and simplicity”, Philips Supply continued its focus on leveraging the supply base by bringing more spend to fewer, selected suppliers. In the area of BOM the number of suppliers has been reduced by approximately 25%, whereas in the area of NPR approximately 15% reduction has been realized. Creating long term strategic partnerships with suppliers is an important enabler of Philips’growth ambitions. In 2010 the number of suppliers to cover 80% of spend has been reduced by approximately 10% on BOM and by approximately 25% on NPR. Standardization of payment terms has helped us to create uniformity and positively influence Days Payable Outstanding.
 
    Supplier risk management
 
    We are monitoring our top 400 suppliers on a constant basis. Risks are measured and, if required, contingency plans are prepared.
 
    Innovation with the supply base
 
    Philips is putting a lot of emphasis on Open Innovation programs by increasingly using the innovative power of our suppliers. In the Supplier Forum 2010 with our top suppliers Open Innovation was one of the key themes. Combining Philips innovation with the innovative capabilities and capacities of the supply base is expected to deliver acceleration of profitable growth.
 
    Sustainability in the supply chain
 
    Philips remains focused on improving working conditions and environmental performance in its supply chain and encourages its suppliers to have the same focus. For more information, refer to sub-section 5.4.5, Supplier performance, of this Annual Report.
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5 Group performance 5.4 - 5.4.2
5.4     Sustainability
    Management summary
 
    Results in 2010
 
    In 2010 we made good progress against our Sustainability targets, focusing on:
    driving the implementation of our EcoVision programs,
 
    strengthening the Green Product and Green Innovation approach at both Healthcare and Consumer Lifestyle, leveraging the experience of our Lighting sector, and
 
    driving sustainability in the supply chain, including suppliers of recent acquisitions, through our Supplier Sustainability Involvement Program.
    In the company’s Vision 2015, that was launched in 2010, “Lead in Sustainability” has been identified as a strategic objective, of which the implementation will be driven by the EcoVision programs.
 
    Results are summarized on the following pages and detailed in chapter 15, Sustainability statements, of this Annual Report.
 
5.4.1   EcoVision5
 
    Leveraging sustainability as an integral part of our strategy and additional growth driver
 
    At Philips, sustainability is all about enhancing the health and well-being of individuals and the communities they live in. At the same time we constantly endeavor to improve the environmental performance of our products and processes, and to drive sustainability throughout the supply chain.
 
    In 2010, we made leveraging sustainability an integral part of our strategy and an additional driver of growth, as reflected in the Philips Management Agenda. In February 2010, we announced our EcoVision5 program, which includes three sustainability leadership key performance indicators where we can bring our competencies to bear, namely ‘care’, ‘energy efficiency’ and ‘materials’:
    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 by 2015 compared to 2009.
    In 2010, we did touch over 420 million lives, mainly driven by our Healthcare sector. Further, the energy efficiency of our products improved by 4%. The sector that contributed most to this improvement was Lighting. With regard to ‘Closing the materials loop’, we determined the baseline for global collection and recycling amounts at over 100,000 tons and the amount of recycled materials in our products at 7,500 tons, and developed plans to double these in the years to come. More information on these parameters can be found in chapter 15, Sustainability statements, of this Annual Report.
 
5.4.2   EcoVision4
 
    With our environmental action program EcoVision4, launched in 2007, 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 C02 emissions by 25%, all compared with the base year of 2007.
    Green Product sales
 
    In 2010, sales from Green Products increased 35% to EUR 9.5 billion, contributing significantly to the total revenue stream. As a percentage of the Group total, Green Product sales rose to 37.5%, up from 30.5% in 2009, and on track to reach the new target of 50% in 2015.
 
    Sales of Green Products
as a % of total sales
 
    (BAR CHART)
 
    All sectors contributed to the overall sales increase, but the increase at Consumer Lifestyle was most significant, closely followed by Lighting. Consumer Lifestyle introduced 150 new Green Products in 2010. Healthcare
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    and Lighting increased the share of Green Product sales with the introduction of 5 and 1,300 new Green Products respectively.
 
    Overall, environmental improvements have been predominantly realized in energy efficiency of products, one of the Green Focal Areas in our EcoDesign process.
 
    (PIE CHART)
 
    Green Innovations
 
    In 2010, Philips invested over EUR 450 million in Green Innovations-the Research & Development spend related to the development of new generations of Green Products and Green Technologies. This was the highest amount invested since we started EcoVision4 in 2007 - and as a result we achieved the 2012 target of EUR 1 billion cumulative invested in Green Innovations two years ahead of schedule. To maintain our Green Innovations momentum, we strive to invest a cumulative EUR 2 billion during the coming five years.
 
    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 radiation 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 amounted to EUR 115 million and the sector worked on the voluntarily phase-out of polyvinyl chloride (PVC) and brominated flame retardants (BFR), enabling our Lifestyle Entertainment and Personal Care businesses to launch products which are completely free of these substances. Another result of Consumer Lifestyle’s Green Innovation activities is, for example, the award-winning Econova LED TV.
 
    The Lighting sector accounts for over half of the total spend on Green Innovations and also contributes to some 45% 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.
 
    Corporate Technologies invested approximately EUR 46 million on a Green Innovation activity portfolio mainly focused on energy efficiency, and reduction of waste and water consumption.
 
    (PIE CHART)
 
    Operational carbon footprint and energy efficiency
 
    In 2010, we took another good step in reaching our target of 25% C02 reduction, as operational C02 emissions decreased 7%. C02 emissions from manufacturing decreased 17% due to a number of reasons, such as our ongoing energy efficiency program, the changing industrial footprint and mainly by the increase in purchased electricity from renewable sources. C02 emissions from non-industrial sites decreased 26%, partly because of our continued focus on the most efficient use of facility space, for instance with our Work Place Innovation program (which enables flex-working), but also due to the increased share of purchased electricity from renewable sources.
 
    With sales picking up, the number of travel movements increased as well, resulting in an increase of C02 emissions from business travel of 13%. We continue promoting videoconferencing and maintaining our green lease car policy. Therefore, emissions from business travel are still 11% below the level of 2007, the base year for our target setting. C02 emissions from logistics increased 8%, because the number of products transported was higher than in 2009. Nonetheless, the emissions are 7% lower than in 2007, because of our continued focus on efficient container utilization, reducing mileage in road freight, and the shift from air to sea freight.
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    Our operational energy efficiency improved 6%, from 1.35 terajoules per million euro sales in 2009 to 1.26 terajoules per million euro sales in 2010.
 
    (BAR CHART)
 
    (BAR CHART)
 
5.4.3   Green Manufacturing 2015
 
    Our EcoVision III environmental action program ended in 2009. EcoVision III mainly called for improvements in all major environmental parameters.
 
    In 2010, we developed our Green Manufacturing 2015 program in order to continue our efforts to improve our environmental performance in manufacturing. The program focuses on most contributors to climate change, recycling of waste, reduction of water consumption, and reduction of restricted and hazardous substances, and will run in parallel with EcoVision4 and 5. Full details, including our 2015 targets, can be found inchapter 15, Sustainability statements, of this Annual Report.
 
5.4.4   Social performance
 
    Employee engagement
 
    In 2010, 86% of our employees took part in the Philips Engagement Survey. The Employee Engagement Index- the single measure of the overall level of employee engagement at Philips — reached 75%, marking a 7 point increase compared to last year and exceeding the external high performance norm. The target for 2010 was to reach the high-performance score of 70%.
 
    (BAR CHART)
 
    Equally important is the insight we gained into ways we can improve. The biggest advancements in our EES scores were seen where teams worked on areas identified in 2009 as needing improvement.
 
    Diversity and inclusion
 
    In 2010, 35% of the Philips workforce was female; 25% of newly appointed executives were female, a significant increase compared to 2009, illustrating our focus on diversity and inclusion. Due to the recruitment of more female executives, the total number increased to 11%. Our ambition for the Philips group is to employ 15% female executives in 2012, a target the Healthcare sector already achieved in 2010.
 
    (BAR CHART)
 
    Overall, the 549 Philips executives at year-end represented more than 30 nationalities and the percentage of executives with BRIC nationality remained at 5%.
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    Moreover, 24% of our top potentials and 30% of our high potentials were female in 2010, an increase of 1% in both categories compared to 2009. The percentage of top potentials with BRIC nationality stood at 11%, with high potentials at 15%.
 
    Developing our people
 
    Our new learning strategy focuses on building skills that are strongly aligned with business needs. In 2010, we streamlined our class-room offerings in close alignment with businesses and functions to focus on their key priorities. The second important driver of our learning strategy is providing employees with free and unlimited access to a wide range of online learning options to drive their personal development and growth.
 
    Participation in these priority programs increased significantly, with over 20,000 employees participating in programs in our Core Curriculum during 2010, compared with 5,500 in 2009. Functional Core Curricula enrollment was over 15,500 in 2010, an increase from 11,000 in 2009. These Core Curricula have been developed for functions such as Marketing, Sales, Customer Services, IT, HRM, Supply Management and Finance. Additionally, approximately 35,000 executives and sales and marketing employees completed the anti-corruption training program.
 
    Our flagship leadership development programs for our talent pool are run in collaboration with leading business schools with a strong emphasis on blended learning. In 2010, our Inspire program for high potentials facilitated the completion of 20 project assignments. Top potentials in the Octagon program completed 5 business projects. These business projects are sponsored by senior business leaders and are designed to contribute to the realization of Philips’ strategic goals.
 
    Participation in our curriculum of internal and external programs for Executives remained stable.
 
    In line with our ‘Grow with Philips’ program, 65% of newly appointed executives were promotions and 35% external hires.
 
    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 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.
 
    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. Details can be found at www.philips.com/gbp.
 
    Ongoing training
 
    The global roll-out of the updated version of the mandatory web-based GBP training, which is designed to reinforce awareness of the need for compliance with the GBP, was completed in 23 languages.
 
    More information on the Philips GBP can be found inchapter 7, Risk management, of this Annual Report. Results of the monitoring in place are provided in the Sustainability statements section.
 
    Health and safety
 
    In 2010 we recorded 482 Lost Workday Injuries cases, occupational injury cases where the injured person is unable to work the day after the injury. This is a 11% increase compared with 2009. The rate of Lost Workday Injuries also increased to 0.50 per 100 FTEs, compared with 0.44 in 2009.
 
    The increase in Lost Workday Injuries was particularly caused by new acquisitions which are included in our reporting for the first time in 2010. We started a number of health and safety initiatives in 2010 to drive down injury levels.
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    (BAR CHART)
 
5.4.5   Supplier performance
 
    The trend in outsourcing manufacturing activities continued in 2010, in addition to the increased focus on emerging countries. This implies an increased effort in managing our impact on our supply chain, as this impact is stronger in emerging countries, and will lead to an increase of risk suppliers, requiring a related increase in efforts in our supplier sustainability program.
 
    Our suppliers
 
    Philips remains focused on improving working conditions and environmental performance in its supply chain and encourages its suppliers to have the same focus. Recognizing that this is a huge challenge requiring industry-wide efforts, as well as active involvement of other societal stakeholders, we continue to be active in the Electronic Industry Citizenship Coalition (EICC). We encourage our strategic and preferred suppliers to join the EICC as well. We will continue to seek active cooperation with other societal stakeholders either directly or through institutions like the EICC or the multi- stakeholder program from the Dutch Sustainable Trade Initiative.
 
    Supplier Sustainability Involvement
 
    Program
 
    The Philips Supplier Sustainability Involvement Program is built on five pillars: setting out our requirements; getting suppliers to understand these and commit themselves; monitoring identified risks uppliers through audits; working with suppliers to resolve issues; and engaging stakeholders. For more details see section 15.6, Supplier indicators, of this Annual Report.
2010 supplier audits
    Philips conducted 273 initial and continued conformance audits in 2010. During these audits an external specialized company visited the supplier sites in risk countries for a 2 to 4 man-days audit.
 
    (BAR CHART)
 
    The most frequently observed areas of non-compliance were:
    Working hours, wages and benefits: excessive overtime, continual seven-day workweeks, record keeping of standard and overtime working hours, payment of overtime premiums.
 
    Emergency preparedness: fire detection and suppression systems, blocked emergency exits, fire drills.
 
    Occupational safety: immediate threat to health and safety.
 
    Industrial hygiene: appropriate controls for worker exposures to chemical, biological and physical agents.
 
    Hazardous substances: improper disposal of hazardous waste.
 
    Lack of adequate management systems to safeguard compliance with the EICC code for labor and ethics, health and safety, and environment.
    (BAR CHART)
 
    At the end of 2010 the identified zero-tolerance non compliances were either resolved or still within the agreed deadline for resolution. For more details on audit results, please refer to section 15.6, Supplier indicators, of this Annual Report.
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    Roll-out in the supply chain
 
    The EICC code requests suppliers to roll-out the code in the supply chain to their next-tier suppliers. During the audits at risk suppliers, it is checked whether the facility implemented an effective process to ensure that their next-tier suppliers implemented the Code and are aware of their ethical and legal requirements. A limited number of second-tier suppliers were identified as high risk suppliers and audited in the 2010 program.
 
    ‘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 Congo (DRC) where proceeds from the extractives sector are sometimes used to finance rebel conflicts in the region.
 
    Although Philips does not directly source minerals from the DRC and the mines are typically seven or more tiers removed from our direct suppliers, we address the issue through the means and influencing mechanisms available to us. For more details, please refer to section 15.6, Supplier indicators, of this Annual Report.
5.5    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, 2010, 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 2011 Annual General Meeting of Shareholders to declare a dividend of EUR 0.75 per common share (up to EUR 710 million), in cash or in shares at the option of the shareholder, against the net income for 2010.
 
    Shareholders will be given the opportunity to make their choice between cash and shares between April 7, 2011 and April 29, 2011. If no choice is made during this election period the dividend will be paid in shares. On April 29, 2011 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 27, 28 and 29 April 2011. 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 May 4, 2011. 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 Bankon May 2, 2011.
 
    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

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    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 2010, a dividend of EUR 0.70 per common share was paid in cash or shares, at the option of the shareholder. Approximately 53% elected for a share dividend resulting in the issue of 13,667,015 new common shares, leading to a 1.5% percent dilution. The remainder of the dividend was paid in cash (EUR 296 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 31,2010, is before dividend, which is subject to shareholder approval after year-end.
5.6   Outlook
    2011 will be a year of progress on our way to achieve the Vision 2015 objectives. Our strong order book provides confidence in our Healthcare business for the year ahead. We see first leading indicators of positive momentum in construction markets, which is expected to benefit Lighting sales in the latter half of 2011, supported by the increase adoption of LED products. We expect emerging markets to continue to support growth in all three sectors, while consumer sentiment in mature markets remains subdued. We will continue our initiatives to ignite growth in Consumer Lifestyle.
 
    Amsterdam, February 17, 2011
 
    Board of Management

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6   Sector performance
         
 
       
(GRAPHIC)
  (GRAPHIC)   (GRAPHIC)
Imaging Systems Home Healthcare Solutions Patient Care and Clinical Informatics Customer Services 
  Television Personal Care Audio & Video Multimedia Domestic Appliances Health & Wellness Accessories    Lamps Consumer Luminaires Professional Luminaires Lighting Electronics and Controls Automotive Lighting Packaged LEDs LED solutions 
 
       
 
       
 
       
Group Management & Services
    Corporate Technologies Overhead Cost Pensions Global Service Units Corporate Investments New Venture Integration Design
 
    Our structure
 
    Koninklijke Philips Electronics N.V. (the ‘Company’) is the parent company of the Philips Group (‘Philips’ or the ‘Group’).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 pensions.
 
    Organizational chart
(GRAPHIC)
    The Board of Management and a number of heads of Corporate Staff departments and senior sector executives together form the Group Management Committee.
 
    Also included under Group Management & Services are the activities through which Philips invests 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 2010, Philips had 118 production sites in 27 countries, sales and service outlets in approximately 100 countries, and 119,001 employees.

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(GRAPHIC)
    Sales, EBIT and EBITA 2010
 
    in millions of euros unless otherwise stated
                                         
    sales   EBIT   %   EBITA1)   %
 
                                       
Healthcare
    8,601       922       10.7       1,186     13.8  
Consumer Lifestyle
    8,906       595       6.7       639       7.2  
Lighting
    7,552       695       9.2       869       11.5  
GM&S
    360       (147 )           (142 )      
     
Philips Group
    25,419       2,065       8.1       2,552       10.0  
 
1)     For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report.
(PIE CHART)
(PIE CHART)
 
1)    For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
(PIE CHART)
(PIE CHART)

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6.1    Healthcare
 
    (GRAPHIC)
 
    “In 2010 we continued to introduce more intuitive, affordable and effective solutions. We also made a number of value-adding acquisitions and expanded our presence in emerging markets. In still-challenging market conditions, we posted solid financial results, thanks to our ongoing focus on winning business and controlling cost.” Steve Rusckowski, CEO Philips Healthcare
             
 
  € 8.6 billion   13.8%   € 1.1 billion
 
  sales   EBITA as a % of sales   cash flows before financing activities
    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
    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.
 
    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.
 
6.1.1   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
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    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.
 
6.1.2   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.
 
6.1.3   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 four businesses:
    Imaging Systems: interventional X-ray, diagnostic X-ray, computed tomography (CT), magnetic resonance (MR), nuclear medicine (NM) and ultrasound imaging equipment, as well as women’s health
 
    Patient Care & Clinical Informatics: cardiology informatics, including diagnostic electrocardiography (ECG); enterprise imaging informatics, including radiology information systems (RIS) and picture archiving and communication systems (PACS); patient monitoring and clinical informatics; perinatal care, including fetal monitoring and Philips Children’s Medical Ventures; and therapeutic care, which includes cardiac resuscitation, emergency care solutions, therapeutic temperature management, hospital respiratory systems, and ventilation
 
    Home Healthcare Solutions: sleep management and respiratory care, medical alert services, remote cardiac services, remote patient management
 
    Customer Services: consultancy, site planning and project management, clinical services, Ambient Experience, education, equipment financing, asset management and equipment maintenance and repair
(PIE CHART)
    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.
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    The United States is the largest healthcare market, currently representing close to 43% of the global market, followed by japan and Germany. Approximately 20% 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 35,500 employees worldwide. With regard to sourcing, please refer to sub-section 5.3.3, Supply management, of this Annual Report.
 
6.1.4   Progress against targets
 
    The Annual Report 2009 set out a number of key targets for Philips Healthcare in 2010. The advances made in addressing these are outlined below.
 
    Drive performance
    Continue to drive operational excellence and improve margins: We are building on successful initiatives to structurally reduce our overall cost structure and improve our organizational effectiveness. We are improving our margins through better product reliability, improved pricing initiatives, optimization of low-cost country sourcing, and increases in our service productivity and operational efficiency.
 
      In 2010 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 continued to manage costs and reorganize 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.
 
    Drive emerging market growth: We continue to make key acquisitions to meet the diverse and growing needs of the different markets around the world. For example, our acquisition of Shanghai Apex Electronics in 2010 provides high-quality value ultrasound transducers, enabling Philips to further support the use of ultrasound, a widely used diagnostic procedure that provides a critical yet affordable and mobile modality for early diagnosis and real-time imaging. The acquisition marks another step in Philips’ expanding presence in emerging markets, complementing the acquisition of healthcare informatics company Tecso Informatica in Brazil and the expansion of our clinical informatics portfolio with the acquisition of Wheb Sistemas, a leading Brazilian provider of clinical information systems.
 
    Continue to pursue integration of our recent acquisitions: In 2010 we successfully completed steps to integrate prior-year acquisitions including InnerCool Therapies Inc., a pioneer in the field of therapeutic hypothermia, and Traxtal, a medical technology innovator in image-guided procedures. This included the launch of the Philips InnerCool RTx Endovascular System to help enhance patient care by managing therapeutic hypothermia.
    Accelerate change
 
    Our organic growth will be driven by continued expansion into emerging markets, more significant development of mid- and low-end products for customers around the world, increased brand preference, ongoing enhancement of our customer experience, and optimization of our care cycle approach.
    Drive transformational activities to improve the customer experience: We are leveraging our product and services portfolio in innovative ways. We offer innovative financing and business modeling solutions to our customers to simplify and ease purchasing decisions. Additionally, we recently added consulting offerings, a further contributor to the continued growth of our Customer Services business. We have also introduced new low- and mid-range products, boosting growth in these market segments in both mature and emerging markets.
 
    Organize around customers and markets to bring decision-making closer to the customer: We have improved operational excellence and increased our customer focus by aligning our sales and services organizations to better serve our customers and markets in which they operate. Creating smaller, more empowered teams of sales and services professionals will help us to react faster to customers’ requirements and offer better, broader solutions to the marketplace.
 
    Accelerate introductions of low- and mid-end products as a platform for new growth opportunities: As part of our efforts to better serve our customers in key markets, we are looking for ways to improve how we design, develop and deliver products. We have partnered with Electron, a leading Russian medical equipment manufacturer, to develop and produce innovative imaging products for the Russian market. The partnership will initially focus on the development of CT scanners, with potential opportunities for future expansion with other healthcare products such as magnetic resonance, X-ray and ultrasound systems. In
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      October we completed Russia’s first installation of a domestically made CT scanner at the Hospital of War Veterans in St. Petersburg.
 
      We have also made significant progress in developing products that meet the varied needs of customers around the world. In fact, since 2009, companies we have acquired (primarily in emerging markets) introduced 15 new products. An example is the Allura FC catherization lab launched in India in 2010—the first product developed and manufactured by Alpha X-ray, a recent Philips acquisition in India.
    Implement strategy
    Move toward leadership position in imaging: In 2010 we unveiled a new approach to clinical collaboration that will drive innovation and efficiency in radiology: Imaging 2.0. Just as Web 2.0 redefined the way people connect, share and use the internet, Imaging 2.0 represents a new world of possibilities for radiology science. It is about integration and collaboration, and new levels of patient focus and safety that can help clinicians achieve what was unimaginable just a few short years ago.
 
      The introduction of Imaging 2.0 coincided with an unprecedented number of new product introductions in radiology, all designed to facilitate innovation and collaboration, focus on patient care and safety, and improve economic value. This year, Philips introduced the Ingenuity CT platform, which is designed to provide equivalent diagnostic image quality at up to 80% less dose. This advanced technology has also been incorporated into a new hybrid imaging system, the Ingenuity PET/CT, used to conduct studies in oncology imaging, cardiac perfusion and diagnostic CT.
 
      Other innovations in imaging include:
    Ingenia MR, the first digital broadband MR system that improves image quality while shortening MR exam times by up to 30%
 
    Ingenuity PET/MR, the first new imaging modality introduced in 10 years, which integrates the molecular imaging capabilities of PET with the superior soft tissue contrast of MR (magnetic resonance imaging)
 
    IntelliSpace Portal, a new multimodality, multivendor workstation that, for the first time, uses advanced networking capabilities to facilitate collaboration between radiologists and referring clinicians anytime, anywhere, no matter the modality or vendor, ultimately helping to fuel improved patient outcomes
 
    iU22 xMATRIX Ultrasound, a new ultrasound system that allows clinicians to capture twice as much clinical information in the same amount of time without moving, turning or rotating the transducer, helping clinicians make more informed care decisions, and potentially minimizing the frequent repetitive stress injuries experienced in the field of sonography.
    Grow Home Healthcare: Philips is expanding its Home Healthcare business both by introducing new solutions, as well as by expanding its footprint around the globe.
 
      Seniors are living longer and remaining in their own homes; however, falls have become an epidemic problem that jeopardizes their chances to live independently. In order to help enable continued independence for seniors by improving access to help in the event of a fall, we introduced the breakthrough medical alert service, Philips Lifeline with AutoAlert. Available in the US, Lifeline with AutoAlert can detect falls — with a high rate of detection and low rate of false alarms — and automatically call for help. We also announced plans to make this enhanced service available in Japan in 2011.
 
      Additionally, there are more than one billion people suffering from chronic respiratory diseases worldwide. Of this group, an estimated 210 million people have Chronic Obstructive Pulmonary Disease (COPD). Three million people died from COPD in 2005, and 90% of those deaths were in low and middle-income countries, where effective strategies for prevention and control are not always implemented or accessible. Philips will train 2,000 physicians in emerging markets on respiratory disease like sleep apnea and COPD. In India, Philips recently supported the set-up of sleep labs in hospitals to help diagnose sleep disorders and help get affected patients the treatment needed to live a healthier life.
    Continue to execute our care cycle strategy around women’s health, cardiology and oncology: we are concentrating our effort, investment and research on some of the most significant diseases and conditions within those areas. With a growing presence in these fields, we focus on the fundamental health problems with which people are confronted today — diseases such as congestive heart failure, breast and other cancers, coronary artery disease.
 
    Leverage Sustainability as a driver of growth: 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. In 2010, we invested EUR 60 million in Green Innovation and the share of Green Product sales increased from 23% in 2009 to 25% in 2010. We continue to focus our Green Innovation projects on lowering energy usage, weight, radiation
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6 Sector performance 6.1.4 - 6.1.5
      dose, and hazardous material content. We play an active role in developing environmental legislation, such as EU legislation on chemical substances (RoHS and REACH), EcoDesign of products (e.g. energy efficiency; EuP directive) and electronic waste (WEEE).
  6.1.5   2010 financial performance
 
      In 2010, sales amounted to EUR 8,601 million, 10% higher than in 2009 on a nominal basis, driven by higher sales in all businesses. Excluding a 6% favorable impact of currency effects, comparable sales were 4% higher. Mid-single-digit comparable sales growth was achieved by Patient Care & Clinical Informatics, Home Healthcare Solutions and Customer Services. Imaging Systems comparable sales were in line with 2009. Green Product sales amounted to EUR 2,136 million, a19% year-on-year increase.
 
      Geographically, comparable sales in mature markets were higher than in 2009 in all businesses except Imaging Systems. The year-on-year sales increase was largely attributable to Western Europe. Comparable sales in North America were broadly in line with 2009. In emerging markets we achieved 7% growth, largely driven by strong, double-digit growth in China and India.
 
      EBITA increased from EUR 848 million, or 10.8% of sales, in 2009 to EUR 1,186 million, or 13.8% of sales, in 2010. EBITA improvements were realized across all businesses in Healthcare, largely as a result of higher sales, favorable currency impact and cost-saving programs. Restructuring and acquisition-related charges were EUR 77 million, compared with EUR 106 million in 2009.
 
      EBIT amounted to EUR 922 million, or 10.7% of sales, and included EUR 263 million of charges related to amortization of intangible fixed assets.
 
      Net operating capital in 2010 increased by EUR 474 million to EUR 8.9 billion. Excluding a EUR 713 million currency impact, net operating capital decreased by EUR 239 million.
 
      Cash flows before financing activities increased from an inflow of EUR 889 million in 2009 to an inflow of EUR 1,139 million in 2010, mainly attributable to higher earnings.
      Key data
in millions of euros
                         
 
    2008       2009       2010  
Sales
    7,649       7,839       8,601  
Sales growth
                       
% increase, nominal
    15       2       10  
% increase, comparable1)
    6       (3 )     4  
EBITA1
    839       848       1,186  
as a % of sales
    11.0       10.8       13.8  
EBIT1)
    621       591       922  
as a % of sales
    8.1       7.5       10.7  
Net operating capital (NOC)1)
    8,785       8,434       8,908  
Cash flows before financing activities1,2)
    (2,478 )     889       1,139  
Employees (FTEs)
    35,551       34,296       35,479  
 
1)      For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
 
2)      Prior period amounts have been revised to reflect an adjusted sector allocation 
 
      Sales per market cluster
in millions of euros
 
      (GRAPH)
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6 Sector performance 6.1.5 - 6.1.7
(GRAPH)
 
1)    For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report.
6.1.6   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.
6.1.7   Strategy and 2011 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 2011:
    Drive performance
    Deliver cost innovation and margin initiatives
 
    Expand service portfolio
 
    Continue to build the Philips Healthcare brand
 
    Deliver on our EcoVision sustainability commitments
    Improve capabilities
    Organize around customers and markets
 
    Simplify the way we work to create more customer focus
 
    Improve customer business administrative process
 
    Improve service delivery
 
    Achieve breakthrough cost innovation in product design
 
    Drive growth and leadership in oncology
 
    Extend our leadership in cardiology
    Implement strategy
    Advance towards global leadership position in Imaging Systems
 
    Grow Home Healthcare
 
    Grow best-in-class clinical decision support, patient care and clinical informatics solution business
 
    Grow in emerging markets faster than competition
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6 Sector performance 6.2 - 6.2
 
6.2   Consumer Lifestyle
    (GRAPHIC)
    “In 2010 we continued to increase our profitability, driven by our leading positions in health and well-being, our global footprint and our strong brand. We set out on a journey to sharpen our focus, taking a granular approach to key categories and markets to ignite top-line growth.” Pieter Nota, CEO Philips Consumer Lifestyle
             
€8.9 billion
    7.2 %   €404 million
sales
  EBITA as a % of sales   cash flows before financing activities
  Leading positions in categories such as male shaving and grooming, coffee appliances and oral healthcare
 
  Further decisive action taken to reduce our exposure in the Television business
 
  Increased focus on growth, taking a granular approach by making clear investment choices
 
  Expanded business creation capabilities in emerging markets and investment in key enablers to accelerate growth
 
    Introduction
 
    Across the world, consumers aspire to improve their health and feeling of well-being, but struggle to balance this with the increasing complexity of their lives. This trend is creating a large and growing market in the developed and especially in the emerging economies, where Consumer Lifestyle can benefit by delivering health and well-being solutions with advanced technology that meet people’s needs.
 
    We strive to understand consumer needs and translate those insights into breakthrough, meaningful innovations. Our competitive advantage is our solutions that are easy to experience, advanced and designed around the consumer. This strength is galvanized by our powerful global brand, our understanding of the markets we operate in and the many synergies with our channels, partners and supply chain.
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6 Sector performance 6.2.1 - 6.2.3
6.2.1   Lifestyle retail landscape
 
    The fragile economic environment in 2010 continued to affect demand for many categories of consumer goods in developed markets. Whilst emerging markets saw consumer demand impacted by the economic environment, they demonstrated greater resilience.
 
    However, underlying consumer trends driving our innovation remained stable:
    People are increasingly appearance-conscious and want to boost their self-confidence and self-identity through health and beauty regimes
 
    People want to prepare food and drinks that are healthy and of good quality, and to do so quickly and without hassle
 
    More and more consumers want to take control by monitoring their health and lifestyle
 
    People want to create a home ‘haven’ — a space that provides a sense of well-being and comfort
 
    Consumers want to create a digital command center at home, which performs the role of a social digital hub
6.2.2   Helping people achieve a healthier and better life
    Consumer Lifestyle makes a difference to people’s lives by making it easier for them to achieve a healthier and better lifestyle. We believe that “sense and simplicity” can be the goal of technology and apply that principle to create life- enhancing solutions.
 
    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 its heart are validated consumer insights, which show that the propositions meet a market need. The combination of insight, simplicity and innovation differentiates us from our competition and creates a platform for sustainable business success.
 
    Where we play
 
    We are active in our four value spaces in health and well- being: Healthy Life, Personal Care, Home Living and Lifestyle Entertainment, complemented by Accessories. This portfolio is aligned with our brand equity and enables us to provide our retail customers with a highly relevant and attractive product portfolio. We focus on premium propositions with our differentiating brand promise of “sense and simplicity”, relevant to the target group.
 
    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.
 
    Healthy Life
 
    The Healthy Life value space takes a holistic approach to enhancing consumers’ health, addressing the needs for mental and physical health and for healthy relationships.
 
    Personal Care
 
    The Personal Care value space addresses the consumer need to “look and feel your best” and so helps people feel more confident.
 
    Home Living
 
    The Home Living value space addresses consumers’ pressing need to have more time to spend on themselves or with family and friends. We do this by creating high- quality solutions that enable quick and convenient cooking, preparation of beverages, cleaning, caring and home comfort.
 
    Lifestyle Entertainment
 
    Lifestyle Entertainment is about enjoying entertainment and the little events in everyday life: sharing time with family and friends, having time off from a hectic schedule, and moments of comfort, fun and caring.
 
6.2.3   About Consumer Lifestyle
 
    The Philips Consumer Lifestyle sector is organized around its markets, customers and consumers, and is focused on value creation through category development and 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 2010 the sector consisted of the following areas of business:
    Health & Wellness: mother and child care, oral healthcare
 
    Personal Care: shaving and grooming, female depilation, haircare, vitalight, skincare
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6 Sector performance 6.2.3 - 6.2.4
    Domestic Appliances: kitchen appliances, beverages/ espresso, garment care, floor care, water, air
 
    Television
 
    Audio & Video Multimedia: home audio, home video, home cinema sound, portable audio and video
 
    Accessories: on-the-go accessories, together@home accessories, personal displays, speech processing
 
    (PIE CHART)
    We also partner with leading companies from other fields, such as Sara Lee/Douwe Egberts and Beiersdorf (NIVEA), in order to deliver customer-focused appliance/ consumable combinations. Consumer Lifestyle continues to focus on international key accounts, particularly in emerging markets. We have pioneered innovative approaches in online and social media to build our brand and drive sales.
 
    We offer a broad range of products from high to low price/value quartiles, necessitating a diverse distribution model. We are expanding our portfolio to increase its accessibility, particularly for lower-tier cities in emerging markets. We are also developing new retail channels, for instance selling our innovative Intense Pulsed Light depilation solution, Philips Lumea, in branches of Douglas, the pan-European beauty retailer.
 
    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 17,700 people worldwide. 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 sub-section 5.3.3, Supply management, of this Annual Report.
 
6.2.4   Progress against targets
 
    The Annual Report 2009 set out a number of key targets for Philips Consumer Lifestyle in 2010. The progress made in addressing these targets is outlined below.
 
    Drive performance      
    Further increase cash flow by aggressively managing cash targets: We strictly managed working capital, which has been negative in many recent quarters. We effectively managed our credit and risk, including significantly reducing overdue customer payments. There was an increase in the number of suppliers using supplier finance, which reduced total cost in the supply chain. As part of Philips’ drive to harmonize supplier terms, we improved overall payment terms by 7 days.
 
    Continue to reduce fixed costs and improve the overall agility of the cost base: We acted fast in the downturn and are benefiting from improved gross margin and a lower cost base, supporting year-on-year EBITA margin improvement. We continued to manage costs via our Earn 2 Invest Program, reinvesting savings to drive growth.
 
    Strengthen excellence in execution and further develop “sense and simplicity” as a competitive edge: We have implemented an improved management decision support system with granular insight into integral performance per business, market and customer down to product level. We are also striving to install a return on investment (ROI) culture in order to drive, and increase resources for, more effective advertising and promotional campaigns.
 
    Accelerate change      
    Continually optimize the business portfolio, while prioritizing profitable growth and success in selected new value spaces: We have driven double-digit growth in our Health & Wellness business and high single-digit growth in Personal Care, as well as low single-digit growth in Domestic Appliances. We have taken a granular approach to ignite growth, focusing investments at a category/country level.
 
    Nourish existing leadership positions, and increase leadership positions in other categories by delighting consumers and winning their preference: We have market share leadership or co-leadership positions in 45% of our businesses in emerging markets and 32% in mature markets. We have Net Promoter Score leadership — a key leading indicator for sales growth — in mother and child care, power toothbrushes and male shaving and grooming, as well as across a range of categories and countries.
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6 Sector performance 6.2.4 - 6.2.5
    Implement strategy
 
  Grow Health & Wellness: The Health & Wellness business grew in every quarter of 2010. The acquisition of Discus Holdings expands our oral healthcare portfolio and creates synergies with the established dental professional relationships we have through Philips Sonicare. We continue to focus on marketing innovation and expansion in emerging markets to capture this large growth opportunity.
 
  Manage TV to profitability: We successfully extended our brand licensing partnerships with Videocon (India) and TPV (China). We continued to reduce costs, and we established forward integration and co-location partnerships with TPV, LG Display and Sharp. However, due to high stock levels in retail and strong price erosion, as well as a deterioration of results in China as a consequence of a delay in closing local licensing agreement, TV was not profitable over the full year. Year-on-year improvement in profitability generated an EBITA loss of EUR 95 million, excluding restructuring charges of EUR 30 million.
 
  Improve geographical coverage and strengthen position in Brazil, Russia, India and China through managerial focus and investment: We substantially increased our advertising and promotion spend in emerging markets, and continued to invest in local talent. We announced our intention to move the global headquarters of our Domestic Appliances business to Shanghai, as well as investing in local business creation capabilities for kitchen appliances across four local innovation centers. Three of these centers are located in emerging markets.
 
  Accelerate excellence in key strategic capabilities: leadership, professional endorsement, new channels, online, category management and new business models: We pioneered online and social media, including the Philips AVENT support center for mothers, an impartial resource supported by healthcare professionals. We also implemented a major online and social media campaign for our Wake-up Light, which featured residents of the most northerly town on Earth, where almost four months of darkness makes waking in the morning all that much tougher. We grew our online sales by more than 20% year-on-year.
 
  Drive profitable growth through Green Products: We introduced more than 150 new Green Products to our portfolio in 2010, resulting in total Green Product sales of 34% of sector sales. While the increase in Green Product sales was achieved across all business areas, the green focal area that saw the greatest improvement was energy efficiency. We have also worked on the voluntary phase-out of polyvinyl chloride (PVC) and brominated flame retardants (BFR), enabling our Lifestyle Entertainment and Personal Care businesses to launch products which are completely free of these substances. We launched the Econova LED TV, Europe’s greenest LED TV, with a solar remote control. Named “European Green TV 2010-2011” by the European Imaging & Sound Association (EISA), Econova LED TV addresses people’s concerns about the environment without compromising on performance. It reduces energy consumption by 60% — the lowest in its category — and is made from 60% recycled aluminum. Its packaging is 100% paper-based cardboard, and it is completely PVC- and BFR-free.
6.2.5   2010 financial performance
 
    2010 proved to be a challenging year for driving sales growth in Consumer Lifestyle. We began the year with strong comparable sales growth in the first two quarters, though we experienced sales declines in the last two quarters, with high stock levels in retail and, consequently, strong price erosion, particularly in Television. For the year, our sales increased by EUR 439 million, or nominal growth. However, adjusted for favorable currency and unfavorable portfolio changes, comparable sales growth was limited to 1%.
 
  Key data
  in millions of euros
                         
    2008     2009     2010  
Sales
    10,889       8,467       8,906  
of which Television
    4,724       3,122       3,155  
Sales growth
                       
% increase (decrease), nominal
    (17 )     (22 )     5  
% increase (decrease), comparable1)
    (9 )     (17 )     1  
Sales growth excl. Television
                       
% increase (decrease), nominal
    (13 )     (13 )     8  
% increase (decrease), comparable1)
    (6 )     (12 )     1  
EBITA 1)
    126       339       639  
of which Television
    (436 )     (179 )     (125 )
as a % of sales
    1.2       4.0       7.2  
EBIT1)
    110       321       595  
of which Television
    (436 )     (179 )     (130 )
as a % of sales
    1.0       3.8       6.7  
Net operating capital (NOC)1)
    798       625       911  
of which Television
    (238 )     (386 )     (299 )
Cash flows before financing activities1,2)
    238       598       404  
of which Television
    (487 )     (16 )     (117 )
Employees (FTEs)
    17,145       18,389       17,706  
of which Television
    4,742       4,766       3,613  
 
1)   For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
 
2)   Prior period amounts have been revised to reflect an adjusted sector allocation
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    We achieved double-digit growth at Health & Wellness and high single-digit growth at Personal Care, driven by our increased investment in advertising and promotion. Sales at Domestic Appliances showed low single-digit growth, as strong growth in emerging markets, notably China, was partly offset by lower sales in mature markets. Comparable sales grow that Television was limited to 1%, while sales declined at Audio & Video Multimedia and Accessories.
 
    From a geographical perspective, we recorded 6% comparable sales growth in emerging markets, which was partly offset by a 2% decline in mature markets, Western Europe. Sales growth in emerging markets was driven by solid growth in Latin America and Russia, though this was tempered by a sales decline in China. The decline in China was substantially due to a delay in the implementation of the brand licensing agreement for Television with TPV. Emerging markets’ share of sector sales increased from 37% in 2009 to 41% in 2010. Green Product sales amounted to over EUR 3 billion and increased from 23% of total sales in 2009 to 34% in 2010.
 
    EBITA significantly improved from EUR 339 million, or 4.0% of sales, in 2009 to EUR 639 million, or 7.2% of sales, in 2010. Restructuring and acquisition-related charges amounted to EUR 61 million in 2010, compared to EUR 136 million in 2009. The year-on-year EBITA improvement was largely driven by improved gross margin, fixed cost savings, the previous year’s EUR 48 million product recall-related charges, and lower restructuring charges. EBITA was higher than in 2009 in all businesses, notably Domestic Appliances and Television.
 
    EBIT amounted to EUR 595 million, or 6.7% of sales, which included EUR 44 million of amortization charges, mainly related to amortization of intangible fixed assets at Health & Wellness and Domestic Appliances.
 
    Net operating capital increased from EUR 625 million in 2009 to EUR 911 million in 2010, primarily due to higher inventories at Television and an increase in assets following the acquisition of Discus Holdings.
 
    Cash flows before financing activities declined from an inflow of EUR 598 million in 2009 to an inflow of EUR 404 million. The decline was mainly attributable to lower cash inflow from changes in working capital, partly offset by higher earnings.
 
(Bar Chart)
(Bar Chart)
(Bar Chart)
 
1)     For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report.
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6 Sector performance 6.2.5 - 6.2.6
6.2.6   Strategy and 2011 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 2011:
 
    Drive performance
 
    Accelerate top-line growth, growing market shares and increasing market penetration in selected business/ market combinations
 
    Maintain market share and optimize profitability in selected other business/market combinations
 
    Increase outright leadership positions in Net Promoter Score, underpinned by a strong focus on product performance and quality
 
    Drive operational excellence end-to-end through the value chain
 
    Deliver on our EcoVision sustainability commitments
 
    Improve capabilities
 
    Champion consumer and retailer responsiveness, organizing around customers and markets and moving decision-making closer to markets
 
    Develop new go-to-market channels and opportunities
 
    Accelerate high-impact innovation relevant to local consumer needs to beat competition
 
    Drive an agile organization with fast decision-making and clear accountabilities
 
    Implement strategy
 
    Grow Personal Care, Health & Wellness, Domestic Appliances and Coffee businesses
 
    Continue to strengthen Television business and manage it towards profitability
 
    Maintain position in Audio & Video Multimedia and Accessories while driving growth in selected market business/market combinations
 
    Grow emerging markets and make China a global home, building business creation capabilities
 
    Strengthen our portfolio with targeted mergers and acquisitions
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6 Sector performance 6.3 - 6.3
6.3     Lighting
(Graphic)
“Interms of performance, 2010 was a record year for Lighting, with significant growth of our top line and our profitability. As an organization, we are becoming much more customer-centric, and this is enabling us to capture attractive oppurtunities in both professional and consumer markets.” Rudy Provoost, CEO Philips Lighting.
             
€ 7.6 billion
    11.5 %   €590 million
sales
  EBITA as a % of sales   cash Flows before financing activities
  Lighting industry undergoing a radical transformation
 
  Important global trends underpinning strategy
 
  Winning in LED
 
    Introduction
 
    A number of global trends are changing the way people use light. Lighting solutions are transforming urban environments, creating livable cities through the use of light to enhance safety, municipal identity and well-being; consumers are increasingly applying lighting to create their own ambience at home as a statement of their lifestyle; building owners and retailers are recognizing the benefits of energy-efficient lighting in reducing their operational costs; and schools are learning how lighting can improve education.
 
    At the same time, more and more people are keen to help tackle the issues of climate change and rising energy costs. Many countries and regions have introduced legislative measures to address energy consumption and the emission of greenhouse gases, which are linked to climate change. In particular, 2010 saw further legislation to phase out old, incandescent lighting and other energy-inefficient forms of electric lighting. Philips will continue to play a significant role in encouraging and enabling the switch to energy-efficient lighting solutions, helping our customers to save on energy costs while making a positive contribution to the environment.
 
    Another key development is the ongoing 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
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6 Sector performance 6.3 - 6.3.3
    customize their indoor and outdoor environments as and when they desire. Flexible and dynamic, our LED lighting solutions allow a much higher degree of customization and provide significantly greater possibilities for ambience creation than solutions based on conventional technologies.
 
6.3.1   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 (LEDs). 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, LED 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 2015, we expect the value of the global lighting market to grow by 7% on a compound annual basis, assuming global economic growth (GDP) of around 4%. The majority of the value will be in LED-based solutions and products — heading towards 50% by 2015. As one of the global leaders 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 as a whole has been recovering in 2010 from the global economic developments in 2009, though recovery is unevenly spread, with demand picking up in emerging markets in particular. For example, the Chinese authorities are expected to calibrate policy to ensure that the economy continues to grow at around 8% in 2011, despite the slowdown in the West. Emerging markets have rebounded strongly (with the exception of much of Eastern Europe, which is constrained by an ongoing public- and private-sector balance-sheet adjustment), but indicators suggest that most of the rebound is now over, with expansion expected to settle into a more sustainable trajectory.
 
    Automotive and Lumileds markets benefited most from regained confidence and economic growth. Luminaires markets are still slow, particularly in the mature markets. Total world construction spend is expected to increase at a compound annual growth rate of about 5% over the period 2010-15. Early signs of revival in 2010 could be observed in the infrastructure sector, with 1.5% growth year-on-year.
 
6.3.2   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.
 
6.3.3   About Philips Lighting
 
    Philips Lighting is a 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 market segments. 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.
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6 Sector performance 6.3.3 - 6.3.4
    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
 
    Consumer Luminaires: functional, decorative, lifestyle, scene-setting
 
    Professional Luminaires: city beautification, road lighting, sports lighting, office lighting, shop/hospitality lighting, industry lighting
 
    Lighting Systems & Controls: electronic and electromagnetic gear, controls, modules and drivers
 
    Automotive Lighting: car headlights, car signaling, interior
 
    Packaged LEDs
 
    LED solutions: modules, LED replacement lamps
(TOTAL SALES GRAPH)
    The Lamps business conducts its sales and marketing activities through the professional, 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, systems and services). 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 Systems & Controls, Special Lighting Applications and Packaged LEDs/LED solutions conduct their sales and marketing through both the OEM and professional channels.
 
    The conventional lamps industry is highly consolidated, with GE and Siemens/Osram as key competitors. The LED lamps and fluorescent retrofit industry is in its early days, with a huge number of competitors entering the marketplace. The luminaires industry is fragmented, with our competition varying per region and per segment. Our Lighting Systems & Controls and Automotive Lighting businesses are again more consolidated. In the world of digital lighting, a wide range of new entrants are active in the transition to LED lighting as well as in the transition to applications and solutions.
 
    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 53,000 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 sub-section 5.3.3, Supply management, of this Annual Report.
 
6.3.4   Progress against targets
 
    The Annual Report 2009 set out a number of key targets for Philips Lighting in 2010. The advances made in addressing these are outlined below.
    Drive performance
    Drive our performance through capturing growth while managing cost and cash: Nominal sales grew by 15%, delivering a significant improvement in profitability and cash flow.
 
    Win with customers in key markets: Our market share remained steady, and over two-thirds of our business/ market combinations have a leadership position in NPS.
 
    Improve our relative position in emerging markets, especially China, India and Latin America: Comparable sales in emerging markets grew from 34% to 38% of total sales, driven by double-digit growth in 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: Significant progress was made in growing LED as a percentage of sales from 8% in 2009 to 13% in 2010. We also 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. We added a number of acquisitions to our portfolio to strengthen our ability to offer LED solutions across segments. These include Burton, a leading provider of specialized
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6 Sector performance 6.3.4 - 6.3.5
      lighting solutions for healthcare facilities, and NCW Holdings, a leading Chinese provider of entertainment lighting and lighting control solutions.
 
    Continue to invest in extending technological leadership in LED: We made significant R&D and capital investments in LED, including Lumileds, and made considerable progress in creating an integrated LED value chain across Lighting.
    Implement strategy
    Become the lighting solutions leader in the Outdoor segment: We significantly expanded our LED road lighting portfolio in all regions. We have a healthy project pipeline for LED road lighting in China and continue to invest in R&D and our sales force to enhance our offering into turnkey projects. In 2010 we also acquired Amplex’s street lighting controls business to further expand our street lighting offering.
 
    Grow our Consumer Luminaires business: We made considerable progress in expanding the business outside Europe. Overall, sales remained broadly in line with 2009 due to ongoing weakness in the residential market in Europe, the business’s core market. The acquisition of Luceplan, a leading high-end design brand in consumer lighting has further strengthened our portfolio.
 
    Implement our new Lighting mission,identity and sustainability story — “Simply enhancing life with light”: We have trained more than 85% of all our employees on our new Lighting mission and have seen the uptake reflected in our Employee Engagement Survey and in the positive reactions of external stakeholders, e.g. at Light + Building 2010 and our Capital Markets Day.
 
      In 2010 we invested EUR 230 million in Green Innovation, compared to EUR 185 million in 2009. The energy efficiency of our total product portfolio improved by 9%.
6.3.5   2010 financial performance
 
    Sales amounted to EUR 7,552 million, a nominal increase of 15% compared to 2009, driven by a rebound in sales of general and automotive lamps as well as on going growth of our Lumileds LED business. Excluding a 6% favorable currency impact and a 1% contribution from acquisitions, comparable sales increased by 9%.
 
    The year-on-year sales increase was substantially driven by growth in emerging markets, which grew over 20% on a comparable basis. Emerging market sales grew to over 38% of total Lighting sales, driven by China, India and Brazil, compared to 34% in 2009. In mature markets, sales growth was limited to low single-digits due to lower demand in North America and Western Europe, particularly for Professional and Consumer Luminaires.
 
    A rebound in the global automotive market supported solid, double-digit sales growth in this business. Our general Lamps business also grew strongly compared to 2009, buoyed by demand for high-end lamps in retail and emerging geographies. Ongoing softness in both the residential and commercial construction markets — particularly in mature geographies — meant that sales in our Luminaires businesses remained broadly in line with 2009. Sales of LED-based products grew to over 13% of total sales, up from 8% in 2009, driven by Lumileds, Lamps and Professional Luminaires. Sales of energy-efficient Green Products exceeded EUR 4 billion, or 58% of sector sales.
 
    EBITA amounted to EUR 869 million, or 11.5% of sales, which included EUR 96 million of restructuring and acquisition-related charges. This compared to EUR 247 million of restructuring and acquisition-related charges in 2009. The EBITA improvement was driven by higher sales, improved gross margin and fixed cost savings from restructuring programs.
 
    EBIT amounted to EUR 695 million, or 9.2% of sales, which included EUR 174 million of amortization of intangible fixed assets, mainly from Lumileds and Genlyte.
 
    Net operating capital increased by EUR 457 million to EUR 5.6 billion, due to unfavorable currency translation, higher activity levels and additional LED-related capital expenditures.
 
    Cash flows before financing activities declined from EUR 624 million in 2009 to EUR 590 million, reflecting higher cash earnings which were more than offset by higher working capital requirements and additional growth- focused investments in capital expenditures.
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6     Sector performance     6.3.5 - 6.3.6
    Key data
in millions of euros
                         
    2008     2009     2010  
Sales
    7,362       6,546       7,552  
Sales growth
                       
% increase, nominal
    16       (11 )     15  
% increase, comparable1)
    3       (13 )     9  
EBITA1)
    480       145       869  
as a % of sales
    6.5       2.2       11.5  
EBIT1)
    24       (16 )     695  
as a % of sales
    0.3       (0.2 )     9.2  
Net operating capital (NOC)1)
    5,712       5,104       5,561  
Cash flows before financing activities1,2)
    (1,181 )     624       590  
Employees (FTEs)
    57,367       51,653       53,888  
 
1)   For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
 
2)   Prior period amounts have been revised to reflect an adjusted sector allocation
(BAR GRAPH)
(BAR GRAPH)
(BAR GRAPH)
6.3.6   Strategy and 2011 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 2011:
 
    Drive performance
    Accelerate growth and gain market share in:
  -   LED lighting
 
  -   Segment-specific solutions
 
  -   Emerging markets
    Enhance customer service levels
 
    Increase outright NPS leadership positions and brand preference
 
    Continue to optimize profit, minimize cost, maximize cash
    Improve capabilities
    Reinforce a growth culture based on:
  -   Speed
 
  -   Customer responsiveness
 
  -   Empowerment
    Improve market impact through integral business models and end-to-end value chain execution
 
    Drive innovation effectiveness
  -   Faster innovation cycles
 
  -   Better time-to-market
 
  -   Seamless strategy/design/marketing/technology cooperation
    “Resource to win” through strategic workforce planning and by enhancing diversity, talent and competency management
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6     Sector performance     6.3.6 - 6.3.6
    Implement strategy
    Lead in LED light sources while further optimizing conventional lighting
 
    Win in LED-powered lighting solutions, focusing on:
  -   Professional applications in Outdoor, Retail, Office, and specific local priorities
 
  -   Philips brand expansion in consumer lighting
    Deliver on our EcoVision sustainability ambitions
 
    Strengthen emerging markets
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6     Sector performance     6.4 - 6.4.1
6.4   Group Management & Services
(PHOTO OF GOTTFRIED DUTINé)
“In 2010 we continued to shift resources to emerging markets, expanding our commercial and industrial footprint, increasing our innovation and sourcing capabilities, and developing local competences and talent.” Gottfried Dutiné, Member of the Board of Management
         
6.2% 
  33%    45% 
R&D spend as a % of sales
  of sales from emerging markets   of employees located in emerging markets
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
    Introduction
 
    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 shared business services for purchasing, finance, human resources, IT, real estate and supply are reported in this sector.
6.4.1   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 3,900 professionals around the globe.
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6     Sector performance     6.4.1 - 6.4.3
    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 Netherlands, the Philips Innovation Campus in Bangalore, India, and Research Shanghai, China, are prime examples of environments enabling open innovation. In this way, we ensure proximity of innovation activities to emerging markets.
 
    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 the ground for the creation of adjacent businesses in the sectors based on technology-enabled innovation in strategically aligned application areas.
 
    In 2010, scientists from Philips Research developed the first-ever organic light-emitting diode (OLED) module that can be powered directly from a mains electricity supply. The prototype opens the door to OLED systems that can be directly plugged into standard power outlets without the need for bulky power management circuitry. This will reduce the bill of materials and simplify luminaire design for future OLED-based systems aimed at mass-market general illumination applications. In the Healthcare area, Philips Research is developing a Radio Frequency Ablation Cockpit, which covers preparation, planning and execution of minimally invasive tumor ablation procedures by clinicians. For therapy planning, the cockpit leverages the tumor visualization capabilities of pre-operative CT and/or PET imaging plus automated generation of target ablation plans. For targeted needle placement, it combines these with the real-time imaging capabilities of ultrasound and precision needle-tip navigation technology based on electromagnetic tracking.
 
    Philips has three incubation organizations: the Healthcare, Consumer 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. In Healthcare, Philips made an anchor investment in the healthcare technology fund Gilde Healthcare III, which has a target size of EUR 200 million. In Consumer Lifestyle, DirectLife, launched in 2009, now has over 30,000 active users losing weight, getting fit and staying healthy. In the second half of 2010, a new Skin Care venture became operational to help women who are confused about their skin type and the products they should use. Our novel Crystalize imaging technology gives women factual, objective information and better knowledge about their skin so they can make smarter choices and achieve a more beautiful skin.
 
    Philips further developed digital pathology solutions to ease the workload and support decision making in central and hospital-based pathology departments.
 
    Philips 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. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability. Philips’ IP portfolio currently consists of about 50,000 patent rights, 36,000 trademarks, 63,000 design rights and 3,900 domain name registrations. Philips filed approximately 1,300 patents in 2010, 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. A substantial portion of revenue and costs is allocated to the operating 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.
6.4.2   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. In 2010 we announced our attention to sell a majority stake in Assembléon to H2 Equity Partners, an independent private equity firm. Philips will retain a 20% stake in Assembléon once the transaction is completed.
6.4.3   New Venture Integration
    The New Venture Integration group focuses on the integration of newly acquired companies across all sectors.
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6.4.4   Philips Design
    Philips Design is one of the longest-established design organizations of its kind in the world. It is headquartered in Eindhoven, the 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.
6.4.5   2010 financial performance
    In 2010, sales were EUR 23 million higher than in 2009, mainly due to higher license revenues and higher sales at Assembléon.
 
    EBITA in 2010 amounted to a loss of EUR 142 million, compared to a loss of EUR 282 million in 2009. The year-on-year improvement in EBITA was mainly attributable to higher revenue, lower overhead costs and the discontinuation of Molecular Healthcare.
 
    EBITA at Corporate Technologies was EUR 99 million higher than in 2009, attributable to higher license revenue, the discontinuation of Molecular Healthcare and 2009’s asset write-offs.
 
    Corporate & Regional costs were EUR 32 million lower than in 2009, attributable to lower restructuring charges and continuous focus on cost reduction.
 
    EBITA at Pensions was EUR 42 million lower than in 2009, in part due to that year’s EUR 134 million curtailment gain on retiree medical benefit plans, partly offset by a EUR 119 million gain in 2010, in part due to a change in indexation.
 
    EBITA at Service Units and other improved from a loss of EUR 88 million in 2009 to a loss of EUR 37 million. The improvement was largely driven by lower restructuring charges in our global service units.
 
    Net operating capital declined to negative EUR 3.3 billion, mainly attributable to lower prepaid pension cost related to the pension plan in Netherlands, which is no longer recognized as an asset.
 
    Cash flows before financing activities improved from an outflow of EUR 785 million in 2009 to an outflow of EUR 679 million, mainly attributable to higher cash earnings and the EUR 485 million of final asbestos payments in 2009. This was partly offset by lower proceeds on the sale of stakes, mainly reflecting the sale of LG Display and Pace Micro Technology in 2009.
Key data
in millions of euros
                         
    2008     2009     2010  
Sales
    485       337       360  
Sales growth
                       
% increase (decrease), nominal
    (34 )     (31 )     7  
% increase (decrease), comparable1)
    (26 )     (30 )     6  
EBITA Corporate Technologies
    (126 )     (162 )     (63 )
EBITA Corporate & Regional costs
    (234 )     (174 )     (142 )
EBITA Pensions
    14       142       100  
EBITA Service Units and other
    (355 )     (88 )     (37 )
     
EBITA1)
    (701 )     (282 )     (142 )
EBIT1)
    (701 )     (282 )     (147 )
Net operating capital (NOC)1)
    (1,226 )     (1,514 )     (3,309 )
Cash flows before financing activities1,2)
    1,815       (785 )     (679 )
Employees (FTEs)
    11,335       11,586       11,928  
 
1)   For a reconciliation to the most directly comparable GAAP measures, see chapter 16, Reconciliation of non-GAAP information, of this Annual Report
 
2)   Prior period amounts have been revised to reflect an adjusted sector allocation
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7     Risk management     7 - 7.1
7     Risk management
    Introduction
 
    The following section presents an overview of Philips’ approach to risk management and business controls 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 section 7.2, 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 20, Forward-looking statements and other information, of this Annual Report and the risk factors described in section 7.2, Risk categories and factors, of this Annual Report.
7.1   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.
(GRAPHIC)
    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.
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7     Risk management     7.1 - 7.1
    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 the corporate level (Finance and IT/Supply) and the sector level (Healthcare, Lighting, Consumer Lifestyle, Group Management & Services) meet quarterly to address weaknesses in the business controls infrastructure as reported by internal and external auditors or revealed by self-assessment of management, 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 12, 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 the BCF, Philips has 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 internal control over financial reporting, can be found in section 13.1, 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 to corporate actions and the behavior of individual employees. They incorporate the fundamental principles within Philips for doing business.
 
    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.
 
    The global implementation of the One Philips Ethics hotline seeks to ensure that alleged violations are registered and dealt with consistently within a 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, refer to www.philips.com/gbp).
 
    In January 2010 an updated and extended version of the GBP Directives came into force, reflecting the latest developments in codes of conduct and business integrity legislation. Key new elements in this edition include a more detailed and explicit definition of the anti-corruption/anti-bribery guidelines and directives (in accordance with the latest FCPA and OECD requirements) and a number of changes designed to further clarify the existing GBP Directives. All employees performing important financial functions must comply with the Financial Code of Ethics which contains, amongst other things, standards to promote honest and ethical conduct, as well as full, accurate and timely disclosure
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7     Risk management     7.1 - 7.1
    procedures in order to avoid conflicts of interest. Philips did not grant any waivers of the Financial Code of Ethics in 2010.
 
    Philips implemented a global internal communication program to support local management in their communications about the updated and extended GBP Directives, thereby focusing on a consistent “tone at the top”. A risk-based blueprint for the Compliance Officers organization, which specifies — at country and operational unit level — the time and profile (experience, seniority, functional expertise) required for the Compliance Officer function, was developed for implementation worldwide.
 
    In the course of 2010 significant progress was made with the roll-out of dedicated anti-corruption programs at business and regional level:
    Standard guidelines for anti-corruption due diligence procedure for the selection of dealers, agents and distributors: a mandatory procedure is in place and deployment is nearing completion.
 
    Company-wide anti-corruption training program: the anti-corruption (FCPA) e-learning course was completed by the entire target audience of approx. 35,000 executives and sales and marketing employees.
 
    Inventory of dealers/agents/distributors: risk-based, sector-specific processes have been developed for inventorying current agents and distributors, including contracts (terms of agreement) and policies for commission payment and supervision thereof.
    The global roll-out of the updated version of the mandatory web-based GBP training, which is designed to reinforce awareness of the need for compliance with the GBP, was completed.
 
    As of 2010, a GBP self-assessment process is fully embedded in the Philips ICS tool, a workflow application supporting sector/function management in monitoring internal controls. Management of reporting units (with > 10 employees) need to answer the questions in the ICS before year-end and report their findings via a dedicated control. Embedding GBP self-assessments in ICS ensures that GBP compliance is now part of sector/function management’s quarterly ICS/SOx monitoring process and that GBP non-compliance issues, if significant, are reported to the Board of Management via the Quarterly Certification Statement process.
 
    For further details, please refer to the General Business Principles paragraph in chapter 15, Sustainability statements, of this Annual Report.
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7 Risk management     7.2 - 7.2
7.2   Risk categories and factors
(GRAPHIC
    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 and opportunities 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. The 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 and opportunities may affect 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 implement, 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 and opportunities it considers more prominent than others at present. The risk overview highlights the main risks and opportunities 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. 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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7     Risk management     7.3 - 7.3
7.3   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. The high degree of unemployment in certain countries, the level of public debt in the US and certain European countries, as well as uncertainties with respect to the long-term high growth stability of the Chinese economy, may result in lower demand and more challenging market environments across our Sectors. Political developments, for example Healthcare reforms in various countries — such as the US Healthcare Reform — may impose additional uncertainties by redistributing sector spending, changing reimbursement models and fiscal changes.
 
    Numerous other factors, such as fluctuation of energy and raw material prices, as well as global political conflicts, including North Africa, 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, 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, is too inflexible to rapidly adjust its business models, or if circumstances arise, such as pricing actions of competitors, growth ambitions, financial condition and operating 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 adversely affect Philips’ earnings, particularly in Healthcare and Lighting which have significant amounts of goodwill (see also note 8).
 
    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 adversely impact Philips’ financial condition and operating results.
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7     Risk management     7.3 - 7.4
    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 ambitions, financial condition and operating results could be affected materially.
7.4   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 financial condition and operating results.
 
    If Philips is unable to ensure effective supply chain management, e.g. facing an interruption of its supply chain, including the inability of third parties to deliver parts, components and services on time, and if it is subject to rising raw material prices, 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
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7     Risk management     7.4 - 7.4
    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.
 
    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 attraction and 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. This is particularly valid in times of economic recovery. The loss of specialized skills could also result in business interruptions. There can be no assurance that Philips will continue to be successful in attracting and retaining all the highly qualified employees and key personnel needed in the future.
 
    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. Nevertheless, Philips’ systems, networks, products, solutions and services remain potentially vulnerable to attacks, which could potentially lead to the leakage of confidential information, improper use of its systems and networks or defective products, which could in turn adversely affect Philips’ financial condition and operating results. Additionally, 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 condition and operating 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 condition and operating results.
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7     Risk management     7.5 - 7.5
7.5   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.
 
    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 80 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 the Philips General Business Principles, in particular anti-bribery provisions. 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. (See also note 24.)
 
    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. Ineffective compliance procedures relating to the use of resources could have an adverse effect on the financial condition and operating results.
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7     Risk management     7.5 - 7.6
    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 which in turn could adversely affect Philips’ financial condition and operating results.
7.6   Financial risks
 
    Philips is exposed to a variety of treasury risks including liquidity risk, currency risk, interest rate risk, commodity price risk, credit risk, country risk and other insurable risk.
 
    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, it could increase our cost of borrowing, reduce our potential investor base and adversely affect our business.
 
    Philips is exposed to fluctuations in exchange rates, especially between the US dollar and the euro, because a high percentage of its business volume is conducted in the US and as exports from Europe. In addition, Philips is exposed to currency effects involving the currencies of emerging markets such as China, India and Brazil.
 
    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 condition and operating results.
 
    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 an adverse impact on its financial condition and operating results.
 
    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 adverse effect on Philips’ financial condition and operating results.
 
    For further analysis, please refer to note 33.
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7     Risk management     7.6 - 7.6
    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 sales-related accruals, warranty provisions, tax assets and liabilities, pension benefits, and business combinations
 
    complex sales transactions regarding multi-element deliveries (combination of goods and services)
 
    valuation procedures with respect to assets (including goodwill and inventories)
 
    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 and IT 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 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, tax uncertainties due to losses carried forward and tax credits carried forward and potential changes in tax law that could result in higher tax expense and payments. Those uncertainties may have a significant impact on local tax results which in turn could adversely affect Philips’ financial condition and operating results.
 
    The value of the losses carried forward is not only subject to having sufficient taxable income available within the loss-carried-forward period, but also subject to having sufficient taxable income within the foreseeable future in the case of losses carried forward with an indefinite carryforward 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.
 
    For further details, please refer to the fiscal risks paragraph in note 3.
 
    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.
 
    Details of pension risks
 
    With pension obligations in more than thirty countries, Philips has devoted considerable attention and resources to ensure disclosure, awareness and control of the resulting exposures.
 
    Dependent on the investment policy of the respective pension plans, developments in financial markets may have significant effects on pension liabilities (DBO), pension assets (MVA), resulting Funded Status and net periodic
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    pension costs (NPPC) of Philips’ pension plans. The pension plans in the Netherlands, the UK, the US and Germany cover approximately 95% of the Philips’ total pension liabilities. To monitor their exposure to the respective risk factors, Philips periodically performs sensitivity analysis of the pension accounting figures. The sensitivity analysis presented and described here is solely based on accounting figures and does not cover funded status or pension cost analysis on an economic or a plan-specific regulatory basis.
 
    Sensitivity analysis
 
    An appropriate overview of Philips’ pension risk exposures can be obtained by a sensitivity analysis of the Funded Status and NPPC for the above mentioned pension plans. The bar charts in the next eight graphs show the sensitivity of the Funded Status and NPPC to changes in interest rates, inflation expectations, equity price levels and longevity. The changes applied in this analysis represent approximately one annual standard deviation, which is based on long-term historical time-series; except for longevity, where one year is added to the average life expectancy. The size of the changes of each of the respective risk factors, which are used in the analysis, are shown in the graphs. The graphs show how much the Funded Status and NPPC change relative to their year-end 2010 levels, if equity price levels, interest rates, inflation expectations and longevity trends deviate from the year-end position.
 
    The sensitivity of the DBO for the Dutch pension plan is dominated by interest rate sensitivity. The liability hedging strategy of the Dutch Pension Plan significantly reduces the interest rate exposure of the Funded Status. Highest sensitivity of the Funded Status of the Dutch plan is caused by changes in inflation expectation.
(BAR GRAPH)
(BAR GRAPH)
(BAR GRAPH)
(BAR GRAPH)
    The Dutch pension plan has maintained a strategic allocation to global equity markets. As a result the Funded Status of the Dutch plan is sensitive to changes in equity prices.
 
    For the UK pension plan, the interest rate and inflation expectation sensitivity of the Funded Status is opposite to the sensitivity in the other countries. This is a result of the liability hedging strategy adopted by the plan, which matches the sensitivities of the pension liabilities on a local valuation basis instead of the accounting basis. The
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    exposure to equity is dominated by the NXP equity stake which was sold to the UK pension plan as part of the recovery plan.
 
    Although a liability-driven investment strategy has been implemented for the US pension plans, the Funded Status for these plans still shows a significant exposure to interest rates changes. These US plans also show sensitivity to equity returns.
 
    The German pension plans are the smallest of the four main countries, which is also reflected in the sensitivity of the DBO. The majority of these pension plans are book reserved and therefore the German pension plans are only partially funded. As a result, most of the DBO sensitivity directly translates into Funded Status sensitivity.
 
    The NPPC basically consists of three components: Service Cost (SC), Interest Cost (IC) and Expected Return on Assets (EROA). The sensitivity analyses of the 2011 NPPC show a breakdown into these three components. For the NPPC sensitivity an opposite interest rate change has been applied, since an increase in discount rate causes an increase in NPPC. The NPPC shows for all pension plans the highest sensitivity to interest rate changes. For most pension plans, a higher inflation expectation results in a higher NPPC. The UK plan is an exception to that observation, because the plan has implemented an inflation hedge.
(BAR GRAPH)
(BAR GRAPH)
(BAR GRAPH)
(BAR GRAPH)
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8     Board of Management     8 - 8
8   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 chapter 12, Corporate governance, of this Annual Report.
(PHOTO OF GERARD KLEISTERLEE)
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: Design, Human Resources Management, Internal Audit, Legal/Compliance/GBP, Marketing & Communication, Strategy
(PHOTO OF PIERRE-JEAN SIVIGNON)
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
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8     Board of Management     8 - 8
(PHOTO OF GOTTFRIED DUTINé)
Gottfried Dutiné
1952, German
Executive Vice-President and 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, Emerging Markets, Government Relations, Technology Management
(PHOTO OF RUDY PROVOOST)
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
(PHOTO OF STEVE RUSCKOWSKI)
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
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9     Group Management Committee     9 - 9
9   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.
(PHOTO OF ERIC COUTINHO)
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
(PHOTO OF  HAYKO KROESE)
Hayko Kroese
1955, Dutch
Member of the GMC since February 2007, responsible for Human Resources Management since 2007
Corporate responsibilities: Human Resources Management
(PHOTO OF MAARTEN DE VRIES)
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
(PHOTO OF MARC DE JONG)
Marc de Jong
1961, Dutch
Member of the GMC since April 2009 and General Manager of Professional Luminaires since April 2009
(PHOTO OF PIETER NOTA)
Pieter Nota
1964, Dutch
Member of the GMC since August 2010 and CEO of Consumer Lifestyle since September 2010
(PHOTO OF FRANS VAN HOUTEN)
Frans van Houten
1960, Dutch
Member of the GMC since October 2010
Gerard Ruizendaal — In Memoriam
On December 1, 2010 the Company received the saddening news of the passing away of Mr Gerard Ruizendaal, Chief Strategy Officer and member of the Group Management Committee. Gerard served our company for 27 years. He will be remembered as a fine person, sincere, straightforward with exceptional conceptual capabilities. With his powerful analyses and insights he was able to play a key role in shaping the strategic direction of the company as well as helping to prune and strengthen our business portfolio. Those who worked with him will take pride in having done so. We owe him a great debt of gratitude for his knowledge and insight and we will cherish his memory.

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10     Supervisory Board     10 - 10
10     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 details on the activities of the Supervisory Board, see chapter 11, Supervisory Board report, of this Annual Report.
(PHOTO OF J-M. HESSELS)
J-M. Hessels
1942, Dutch** ***
Chairman
Member of the Supervisory Board since 1999; third term expires in 2011. Chairman of Corporate Governance and Nomination & Selection Committee
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.
(PHOTO OF J.M. THOMPSON)
J.M. Thompson
1942, Canadian** ***
Vice-Chairman and Secretary
Member of the Supervisory Board since 2003; second term expires in 2011
Former Executive Vice-Chairman of the Board of Directors of IBM, and director of Hertz and Robert Mondavi; currently member of the Boards of Directors of Toronto Dominion Bank and Thomson Reuters Corporation
(PHOTO OF C.J.A. VAN LEDE)
C.J.A. van Lede
1942, Dutch**
Member of the Supervisory Board since 2003; second term expires in 2011. Chairman of Remuneration Committee
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 and Senior Advisor JP Morgan Plc.
(PHOTO OF E. KIST)
E. Kist
1944, Dutch*
Member of the Supervisory Board since 2004; second term expires in 2012. Chairman of Audit Committee
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
(PHOTO OF J.J. SCHIRO)
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 Chairman of the audit committee, PepsiCo as presiding director of the Supervisory Board and Reva Medical as member of the Supervisory Board and audit committee
(PHOTO OF H. VON PRONDZYNSKI)
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 Boards of HTL Strefa and Nobel Biocare Holding. Member of the Supervisory Boards of various private and listed companies including Qiagen and Hospira
(PHOTO OF C.A. POON)
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 and Regeneron
(PHOTO OF J. VAN DER VEER)
J. van der Veer
1947, Dutch* ***
Member of the Supervisory Board since 2009; first term expires in 2013
Former Chief Executive and currently Non-executive Director of Royal Dutch Shell; Vice-Chairman and Senior Independent Director of Unilever and Vice-Chairman of the Supervisory Board of ING. Member of the Supervisory Board of Concertgebouw N.V.
 
*   Member of the Audit Committee
 
**   Member of the Remuneration Committee
 
***   Member of the Corporate Governance and Nomination & Selection Committee

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11     Supervisory Board report     11 - 11
11    Supervisory Board report
 
    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 are not a member of the Board of Management or 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 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 chapter 10, 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 12, Corporate governance, of this Annual Report.
 
    Activities of the Supervisory Board
 
    Six regular meetings were held in 2010. All members were frequently present at the regular meetings of the Supervisory Board. In addition to the regular meetings an ad hoc meeting took place in November to discuss the succession of the Chief Financial Officer of the Company. The Audit Committee met five times. The Corporate Governance and Nomination & Selection Committee had four regular meetings and several ad hoc meetings in connection with succession matters. The Remuneration Committee had four regular meetings.
 
    During 2010 the Supervisory Board devoted considerable time to discuss the Company’s strategy and discussed the performance and, more in particular, the strategy of the three Sectors. The discussions in respect of the Sectors took place during visits of the Supervisory Board to each Sector, where in-depth discussions were held with the Sector management teams. Furthermore, the Supervisory Board discussed the performance and integration of acquisitions, 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 2009, the management agenda 2010 of the Board of Management, the new strategy for BU Health & Wellness and the agenda for the 2010 General Meeting of Shareholders, including the proposed dividend to shareholders, the dividend policy and recommendations for (re)appointment of candidates for the Board of Management. Moreover, the Supervisory Board received an update on the M&A activities of the Company, and made amendments to the Rules of Procedure of the Supervisory Board.
 
    In February the Supervisory Board discussed the report of the external auditor of the Company and approved the Annual Report 2009. Furthermore, the Supervisory Board approved revisions made to the General Business Principles and Directives of the Company.
 
    In March the Supervisory Board received an update on the M&A activities and the sustainability policy of the Company. The Remuneration Committee gave an update to the full Supervisory Board on remuneration topics.
 
    In June the Vision 2015 strategy of the Company and the Sectors, including risks and opportunities, and a variety of growth scenarios in mature and emerging markets, were discussed during a one and a half day meeting.
 
    In August the Supervisory Board discussed the financial results and received an update with respect to the Company’s M&A activities and ongoing legal proceedings. Further, the members of the Supervisory Board spent two days with the Philips India leadership team and major customers and business partners in New Delhi, India, where they discussed, among other things, the performance and set-up of the Company’s activities in India and the local strategy going forward.

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11     Supervisory Board report     11 - 11
    In October the Supervisory Board discussed the third quarter 2010 financial results, and pension developments and their effect on the Group.
 
    In November the succession of the CFO of the Company was discussed by the Supervisory Board.
 
    In December the Supervisory Board discussed the management agenda 2011, the Annual Operating Plan 2011, the operational performance of the TV business and received an update on supply management within the Company.
 
    Other discussion topics included:
    financial performance of the Philips Group and the Sectors
 
    status of merger and acquisition projects
 
    management development and succession planning, especially with respect to the President/CEO and the CFO as well as the CEO of the Consumer Lifestyle Sector
 
    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 Survey
 
    financial scenarios for 2011 and beyond
 
    legal proceedings, including antitrust proceedings
 
    the situation at the 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
 
    The Supervisory Board currently consists of eight 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 section Corporate governance. Members are appointed for fixed terms of four years and may be reappointed for two additional four-year terms.
 
    All members of the Supervisory Board completed a questionnaire to verify compliance in 2010 with applicable corporate governance rules and the Rules of Procedure of the Supervisory Board. Based on written feedback from each Supervisory Board member, the Chairman of the Supervisory Board discussed the functioning of the Supervisory Board and its members in private discussions. He shared common themes and conclusions in a private session of the Supervisory Board; items discussed include the follow-up to the evaluation regarding 2009, 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.
 
    Mr Hessels, who joined the Supervisory Board in 1999 and has been Chairman since 2008, will resign as Chairman and as a member of the Supervisory Board at the 2011 General Meeting of Shareholders. We are thankful for his valuable contribution to Philips during his 12-year term as a member of our Board. The Supervisory Board has appointed Mr Van der Veer as its Chairman as from the closing of the 2011 General Meeting of Shareholders.
 
    Further, we would like to express our sincere appreciation to Mr Kleisterlee and Mr Sivignon, who will resign as President/CEO and CFO respectively and as members of the Board of Management at the 2011 General Meeting of Shareholders. Our Board would like to thank them for their vision and outstanding leadership in driving both strategic change and operational improvement within Philips. We wish them both all the best for the future.

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11     Supervisory Board report     11 - 11
    Changes Supervisory Board and committees 2010
    Sir Richard Greenbury resigned as member of the Supervisory Board as from the closing of the 2010 General Meeting of Shareholders.
 
    Ms Poon became a member of the Audit Committee as from April 1, 2010.
 
    Mr Schiro relinquished his position as member of the Audit Committee and became a member of the Remuneration Committee as from April 1, 2010.
 
    Mr Van der Veer became a member of the Corporate Governance and Nomination & Selection Committee as from April 1, 2010.
    Changes and reappointments Supervisory Board 2011
    Mr Hessels will resign as Chairman and member of the Supervisory Board as from the closing of the 2011 General Meeting of Shareholders.
 
    The Supervisory Board has appointed Mr Van der Veer as its Chairman as from the closing of the 2011 General Meeting of Shareholders.
 
    It is proposed to reappoint Mr Thompson.*
 
    It is proposed to reappoint Mr Van Lede.*
 
    It is proposed to reappoint Mr Von Prondzynski.*
 
*   Subject to approval by the General Meeting of Shareholders
    Changes Board of Management and Group Management Committee 2010
    On December 1, 2010 the Company received the sad news of the passing away of Mr Ruizendaal, member of the Group Management Committee and Chief Strategy Officer.
 
    Mr Provoost has been reappointed as member of the Board of Management.
 
    Mr Rusckowski has been reappointed as member of the Board of Management.
 
    Mr Dutiné has been reappointed as member of the Board of Management.
 
    Mr Ragnetti has relinquished his position as member of the Board of Management as from September 1, 2010.
 
    Mr Harwig has resigned as member of the Group Management Committee as from April 1, 2010, in connection with his retirement.
 
    Mr Nota has been appointed as member of the Group Management Committee as from August 1, 2010.
 
    Mr Van Houten has been appointed as member of the Group Management Committee as from October 1, 2010.

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11     Supervisory Board report     11 - 11.1
    Changes Board of Management and Group Management Committee 2011
    Mr Kleisterlee will retire as President/CEO and as member of the Board of Management as from the closing of the 2011 General Meeting of Shareholders.
 
    Mr Sivignon has decided to relinquish his position as CFO and as member of the Board of Management as from the closing of the 2011 General Meeting of Shareholders.
 
    It is proposed to appoint Mr Van Houten as President/CEO and as member of the Board of Management.*
 
    It is proposed to appoint Mr Wirahadiraksa as member of the Board of Management.*
 
    It is proposed to appoint Mr Nota as member of the Board of Management.*
 
*   Subject to approval by the General Meeting of Shareholders
11.1   Report of the Corporate Governance and Nomination & Selection Committee
 
    The Corporate Governance and Nomination & Selection Committee, currently consisting of four members, reviews the corporate governance principles applicable to the Company and the selection criteria and appointment procedures for the Board of Management, the Group Management Committee and the Supervisory Board and advises the Supervisory Board thereon. Furthermore, it supervises the policy of the Board of Management on the selection criteria and appointment procedures for Philips’ senior management.
 
    In 2010 the Committee discussed developments in the area of corporate governance and relevant legislative changes. It also discussed possible agenda items for the upcoming 2011 General Meeting of Shareholders.
 
    The Committee consulted with the President/CEO and other members of the Board of Management on the appointment or reappointment of candidates to fill current and future vacancies on the Board of Management, the Group Management Committee and the Supervisory Board, and prepared decisions and advised the Supervisory Board on the candidates for appointment. The Committee devoted specific attention to the succession of Mr Kleisterlee, who will resign as CEO and President of the Company as per the closing of the 2011 General Meeting of Shareholders, the succession of Mr Sivignon who will resign as CFO and Executive Vice President as per the same date, and the succession of Mr Ragnetti who resigned per August 31, 2010.
 
    For the succession of Mr Kleisterlee, the Committee recommended the procedure for the appointment of the successor. This procedure was initiated in 2009 and included the following steps: profiling the role and the

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11     Supervisory Board report     11.1 - 11.2.1
    ideal candidate, identifying qualified and available candidates from inside the Company and externally, assessing and selecting the best suitable candidate, and communicating the recommendation. Following the recommendation of the Committee the Supervisory Board came to a consensus on the candidate to be proposed for appointment by the shareholders. The decision was communicated mid 2010.
11.2   Report of the Remuneration Committee
 
    Introduction
 
    The Remuneration Committee, currently consisting of four members, is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Group Management Committee. In performing its duties and responsibilities the Remuneration Committee is assisted by an in-house remuneration expert acting on the basis of a protocol which ensures that he acts on the instructions of the Remuneration Committee and maintains an independent position in which conflicts of interest are avoided. The Remuneration Committee’s tasks are laid down in the Charter of the Remuneration Committee that forms part of the Rules of Procedure of the Supervisory Board. Currently, no member of the Remuneration Committee is a member of the management board of another listed company.
 
11.2.1    General remuneration policy
 
    The objective of the remuneration policy for members of the Board of Management is in line with that for executives throughout the Philips Group: to attract, motivate and retain qualified senior executives of the highest caliber, with an international mindset and background essential for the successful leadership and effective management of a large global company. The Board of Management remuneration policy is benchmarked regularly against companies in the general industry and aims at the median market position.
 
    One of the goals behind the policy is to focus on improving the performance of the company and enhance the value of the Philips Group. Consequently, the remuneration package includes a variable part in the form of an annual cash incentive and a long-term incentive consisting of restricted share rights and stock options. Philips has short-term and long-term incentives, the latter predominantly linked to Philips’ long-term strategy. The policy does not encourage inappropriate risk-taking.
 
    The performance targets for the members of the Board of Management are determined annually at the beginning of the year. The Supervisory Board determines whether performance conditions have been met and can adjust the

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11     Supervisory Board report     11.2.1 - 11.2.3
    pay-out of the annual cash incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an “unfair” result in extraordinary circumstances. The authority for such adjustments exists on the basis of the ultimum remedium- and claw back clauses (in accordance with best practice provisions II.2.10 and II.2.11 of the Dutch Corporate Governance Code). Further information on the performance targets is given in the chapters on the Annual Incentive and the Long-Term Incentive Plan respectively.
 
11.2.2    Contracts of employment
 
    The main elements of the contracts are made public no later than the date of the notice convening the General Meeting of Shareholders at which the appointment of the member of the Board of Management will be proposed.
 
    Term of appointment
 
    The members of the Board of Management are appointed for a period of 4 years.
 
    Contract terms for current members1)
     
    end of term
G.J. Kleisterlee
  April 1, 2011
P-J. Sivignon
  April 1, 2013
G.H.A. Dutiné
  April 1, 2014
R.S. Provoost
  April 1, 2014
S.H. Rusckowski
  April 1, 2014
 
1)   Reference date for board membership is December 31, 2010
    Notice period
 
    Termination of employment by a member of the Board of Management is subject to three months’ notice. A notice period of six months will be applicable in the case of termination by the Company.
 
    Severance payment
 
    The severance payment is set at a maximum of one year’s salary, or in case this is ‘manifestly unreasonable’ for a member of the Board of Management in his first appointment period, the amount is maximized at two times the annual salary.
 
    Share Ownership
 
    To further align the interests of the members of the Board of Management and shareholders, restricted share rights granted to members of the Board of Management shall be retained for a period of at least five years or until at least the end of their employment, if this period is shorter.
 
    Scenario analysis
 
    The Remuneration Committee annually conducts scenario analysis. This includes the calculation of remuneration under different scenarios, whereby different Philips performance assumptions and corporate actions are looked at.
 
11.2.3    Remuneration costs
 
    The table below gives an overview of the costs incurred by the Company in the financial year in relation to the remuneration of the Board of Management. Costs related to stock option and restricted share right grants are taken by the Company over a number of years. As a consequence, the costs mentioned below in the columns stock options and restricted share rights are the accounting cost of multi-year grants given to members of the Board of Management during their board membership.
 
    Information on the individual remuneration of the (former) members of the Board of Management is shown in the tables below as well as in the table in note 31.
 
    The previously granted stock options and restricted share rights of Mr A. Ragnetti continue to vest in accordance with the terms and conditions of the Long-Term Incentive Plan.

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11     Supervisory Board report     11.2.3 - 11.2.6
    Remuneration costs Board of Management 20101)
in euros
                                                 
            realized annual             restricted share             other  
    base salary     incentive2)     stock options     rights     pension costs     compensation  
G.J. Kleisterlee
    1,100,000       962,720       328,485       444,005       (255,757 )3)     321,778  
P-J. Sivignon
    711,250       459,480       187,763       255,398       240,051       28,122  
G.H.A. Dutiné
    643,750       410,250       185,364       252,057       203,404       135,459  
R.S. Provoost
    646,250       416,814       185,364       251,225       193,194       30,919  
S.H. Rusckowski
    646,250       416,814       187,763       255,228       216,814       76,713  
 
1)   Reference date for board membership is December 31, 2010
 
2)   Annual incentive amount paid relates to performance in 2009
 
3)   No further accrual of pension benefits after having reached the age of 60 in September 2006, leading to a negative cost
11.2.4    Base salary
 
    The salaries of the members of the Board of Management have been increased in a moderate way on the yearly review date in April 2010, in line with the policy for other employees.
 
11.2.5    Annual Incentive
 
    Each year, a variable cash incentive (Annual Incentive) can be earned, based on the achievement of specific and challenging targets. The Annual Incentive criteria are for 80% the financial indicators of the Company (net income, comparable sales growth and free cash flow). In 2010 the highest weighting was for comparable sales growth. The comparable sales growth calculation focuses on organic growth of the businesses and excludes currency translation effects and impact of acquisitions/divestments. The 20% team targets comprise the major elements of the management agenda, including sustainability elements such as Employee Engagement Score and Green Product sales.
 
    The on-target Annual Incentive percentage is set at 60% of the base salary for members of the Board of Management and 80% of the base salary for the President/CEO, and the maximum Annual Incentive achievable is 120% of the annual base salary for members of the Board of Management and for the President/CEO it is 160% of the annual base salary.
 
    The Annual Incentive pay-out in any year relates to the achievements of the preceding financial year in relation to agreed targets. As a result, Annual Incentives paid in 2011 relate to the salary levels and the performance in the year 2010. The amounts in the table below will be paid to the members of the Board of Management in April 2011.
 
    Pay-out in 20111)
in euros
                 
    realized annual     as a % of base salary  
    incentive     (2010)  
G.J. Kleisterlee
    962,720       87.5 %
P-J. Sivignon
    469,326       65.6 %
G.H.A. Dutiné
    426,660       65.6 %
R.S. Provoost
    426,660       65.6 %
S.H Rusckowski
    426,660       65.6 %
 
1)   Reference date for board membership is December 31, 2010
11.2.6    Long-Term Incentive Plan
 
    The LTIP consists of a mix of stock options and restricted share rights. It aims to align the interests of the participating employees with the shareholders’ interests and to attract, motivate and retain participating employees.
 
    The stock option plan vests three years after grant, dependent upon employment on the vesting date. The exercise price is the share price upon grant, and the total option term is 10 years.
 
    A restricted share right is a right to receive a share, subject to being employed with Philips on the vesting date. Vesting occurs in three equal tranches 1, 2 and 3 years respectively after grant. An additional 20% of the restricted share rights grant is deferred, subject to the condition that released shares are held for three years after vesting, and employment with Philips is continued during this period.
 
    The actual number of stock options and restricted share rights to be granted to the board members is performance-related and depends on the ranking of Philips in the Total Shareholder Return (TSR) peer group and the realization of the team targets of the Board of Management. The peer group comprises the following companies: Electrolux, Emerson Electric, General

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11     Supervisory Board report     11.2.6 - 11.2.6
    Electric, Hitachi, Honeywell International, Johnson & Johnson, Matsushita, Philips, Schneider, Siemens, Toshiba and 3M.
 
    The TSR ranking is the basis for the two different multipliers that apply to the grant of stock options and restricted share rights. The multipliers are determined in line with the table below.
                                                 
TSR multiplier
                                               
Philips’ position ranking
    1       2       3       4       5       6  
restricted share rights
    2.0       1.8       1.6       1.4       1.2       1.0  
stock options
    1.2       1.2       1.2       1.2       1.0       1.0  
 
                                               
TSR multiplier
                                               
Philips’ position ranking
    7       8       9       10       11       12  
restricted share rights
    1.0       0.8       0.6       0.4       0.2       0.0  
stock options
    1.0       1.0       0.8       0.8       0.8       0.8  
    Based on Philips’ share performance over the period December 2006 — December 2009, Philips ranked 9th in its peer group.
 
    In 2010, members of the Board of Management were granted 276,000 stock options and 69,000 restricted share rights under the LTIP (excluding 20% premium shares deferred for a three-year holding period).
 
    The following tables provide an overview of stock option grants made, but not yet vested (locked up), and of restricted share rights granted but not yet released. The reference date for board membership is December 31, 2010.
 
    Stock options
in euros
                                         
            number of stock                     value at end of lock  
    grant date     options     value at grant date     end of lock up period     up period  
G.J. Kleisterlee
    2007       73,926       644,635       2010       179,655  
 
    2008       67,203       370,961       2011       n.a.  
 
    2009       67,200       186,144       2012       n.a.  
 
    2010       72,000       356,400       2013       n.a.  
P-J. Sivignon
    2007       42,903       374,114       2010       104,263  
 
    2008       38,403       211,985       2011       n.a.  
 
    2009       38,400       106,368       2012       n.a.  
 
    2010       40,800       201,960       2013       n.a.  
G.H.A. Dutiné
    2007       39,600       345,312       2010       96,236  
 
    2008       38,403       211,985       2011       n.a.  
 
    2009       38,400       106,368       2012       n.a.  
 
    2010       40,800       201,960       2013       n.a.  
R.S. Provoost
    2007       39,600       345,312       2010       96,236  
 
    2008       38,403       211,985       2011       n.a.  
 
    2009       38,400       106,368       2012       n.a.  
 
    2010       40,800       201,960       2013       n.a.  
S.H. Rusckowski
    2007       42,903       374,114       2010       104,263  
 
    2008       38,403       211,985       2011       n.a.  
 
    2009       38,400       106,368       2012       n.a.  
 
    2010       40,800       201,960       2013       n.a.  

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11     Supervisory Board report     11.2.6 - 11.2.9
    Restricted share rights
in euros
                                         
                            number of restricted        
            number of restricted             share rights released     value at release date  
    grant date     share rights     value at grant date     in 2010     in 2010  
G.J. Kleisterlee
    2007       24,642       762,916       8,214       203,954  
 
    2008       22,401       517,687       7,467       185,331  
 
    2009       17,922       226,355       5,974       148,275  
 
    2010       18,000       448,200       n.a.       n.a.  
P-J. Sivignon
    2007       14,301       442,759       4,767       118,365  
 
    2008       12,801       295,831       4,267       105,907  
 
    2009       10,242       129,356       3,414       84,735  
 
    2010       10,200       253,980       n.a.       n.a.  
G.H.A. Dutiné
    2007       13,200       408,672       4,400       109,252  
 
    2008       12,801       295,831       4,267       105,907  
 
    2009       10,242       129,356       3,414       84,735  
 
    2010       10,200       253,980       n.a.       n.a.  
R.S. Provoost
    2007       13,200       408,672       4,400       109,252  
 
    2008       12,801       295,831       4,267       105,907  
 
    2009       10,242       129,356       3,414       84,735  
 
    2010       10,200       253,980       n.a.       n.a.  
S.H. Rusckowski
    2007       14,301       442,759       4,767       118,365  
 
    2008       12,801       295,831       4,267       105,907  
 
    2009       10,242       129,356       3,414       84,735  
 
    2010       10,200       253,980       n.a.       n.a.  
    For more details of the LTIP, see note 29.
 
11.2.7    Pensions
 
    Eligible members of the Board of Management participate in the Executives Pension Plan in the Netherlands consisting of a combination of a defined-benefit (career average) and defined-contribution plan. The target retirement age under the plan is 62.5. The plan does not require employee contributions.
 
11.2.8     Additional arrangements
 
    In addition to the main conditions of employment, a number of additional arrangements apply to members of the Board of Management. These additional arrangements, such as expense and relocation allowances, medical insurance, accident insurance and company car arrangements, are broadly in line with those for Philips executives in the Netherlands. In the event of disablement, members of the Board of Management are entitled to benefits in line with those for other Philips executives in the Netherlands.
 
    Unless the law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the Company for various costs and expenses, like reasonable costs of defending claims, as formalized in the articles of association. Under certain circumstances, described in the articles of association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (“opzettelijk”), intentionally reckless (“bewust roekeloos”) or seriously culpable (“ernstig verwijtbaar”), there will be no entitlement to this reimbursement. The Company has also taken out liability insurance (D&O - Directors & Officers) for the persons concerned.
 
11.2.9     Remuneration Supervisory Board
 
    The table below gives an overview of the remuneration structure, which has remained unchanged since 2008.
 
    Remuneration 20101)
in euros per year
                 
    Chairman     Member  
Supervisory Board
    110,000       65,000  
Audit Committee
    15,000       10,000  
Remuneration Committee
    12,500       8,000  
Corporate Governance and Nomination & Selection Committee
    12,500       6,000  
Fee for intercontinental traveling per trip
    3,000       3,000  
 
1)   For more details, see note 31

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11     Supervisory Board report      11.2.10 - 11.3
11.2.10    2011
 
    The Remuneration Committee continues to monitor trends and changes in the market. It keeps a watching brief on the continuing alignment between Philips’ strategic objectives and the remuneration policy for the Board of Management.
11.3   Report of the Audit Committee
 
    The Audit Committee, currently consisting of four members, assists the Supervisory Board in fulfilling its supervisory responsibilities for the integrity of the Company’s financial statements, the financial reporting process, the system of internal business controls and risk management, the internal and external audit process, the internal and external auditor’s findings and recommendations, independence and performance, as well as the Company’s process for monitoring compliance with laws and regulations and the General Business Principles (GBP). Moreover, the Audit Committee evaluates the performance of the external auditor every 3 years, in accordance with the Philips Policy on Auditor Independence.
 
    The Audit Committee met five times in 2010 and reported its findings to the plenary Supervisory Board. The President/CEO, the CFO, the Internal Auditor, the Group Controller and the External Auditor attended all regular meetings. Furthermore, the Audit Committee met each quarter separately with each of the President/CEO, the Chief Financial Officer, the Internal Auditor and the External Auditor.
 
    In accordance with its charter, which is part of the Rules of Procedure of the Supervisory Board, the Audit Committee in 2010 reviewed the Company’s annual and interim financial statements, including non-financial information, prior to publication thereof. It also assessed in its quarterly meetings the adequacy and appropriateness of internal control policies and internal audit programs and their findings.
 
    In its 2010 meetings, the Audit Committee periodically reviewed matters relating to accounting policies, financial risks and compliance with accounting standards. Compliance with statutory and legal requirements and regulations, particularly in the financial domain, was also reviewed. Important findings, identified risks and follow-up actions were examined thoroughly in order to allow appropriate measures to be taken.
 
    With regard to the internal audit, the Audit Committee reviewed, and if required approved, the internal audit charter, audit plan, audit scope and its coverage in relation to the scope of the external audit, as well as the staffing, independence and organizational structure of the internal

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Table of Contents

11     Supervisory Board report     11.3 - 11.3
    audit function. With regard to the external audit, the Audit Committee reviewed the proposed audit scope, approach and fees, the independence of the external auditors, non-audit services provided by the external auditors in conformity with the Philips Policy on Auditor Independence, as well as any changes to this policy. The Audit Committee has assessed the performance of the External Auditor and advised to the Supervisory Board to re-appoint the External Auditor in 2011 for another period of three years.
 
    Fees KPMG
in millions of euros
                         
    2008     2009     2010  
Audit fees
    17.3       16.3       16.4  
- consolidated financial statements
    12.5       11.1       10.6  
- statutory financial statements
    4.8       5.2       5.8  
 
                       
Audit-related fees
    4.4       1.2       2.3  
- acquisitions and divestments
    2.3       0.2       1.0  
- other
    2.1       1.0       1.3  
 
                       
Tax fees
    1.2       0.9       0.4  
- tax compliance services
    1.2       0.9       0.4  
 
                       
Other fees
    2.5       1.3       1.3  
- royalty investigation
    1.8       0.6       0.3  
- sustainability and other services
    0.7       0.7       1.0  
         
Total
    25.4       19.7       20.4  
    This table ‘Fees KPMG’ forms an integral part of the Company financial statements, please refer to note J.
 
    In 2010, the Audit Committee periodically discussed the company’s policy on business controls, the GBP including the deployment thereof and amendments thereto, and Philips’ major areas of risk, including the internal auditor’s reporting thereon. The Audit Committee was informed on, discussed and monitored closely the company’s internal control certification processes, in particular compliance with section 404 of the US Sarbanes-Oxley Act and its requirements regarding assessment, review and monitoring of internal controls. It also discussed risk management, tax issues, IT strategy, litigation and related provisions, environmental exposures and financing and liquidity of the company, dividend, pensions (including the developments at the Philips Pension Fund in the Netherlands and the governance and financial position of other major pension funds), valuation and performance of financial holdings and recent acquisitions, developments in regulatory investigations, including several investigations into possible anticompetitive activities, as well as a financial evaluation of the investments made in 2007.
 
    Financial statements 2010
 
    The financial statements of Koninklijke Philips Electronics N.V. for 2010, as presented by the Board of Management, have been audited by KPMG Accountants N.V., independent auditors. Their reports have been included in the section Group financial statements; section 13.12, Independent auditor’s report — Group, of this Annual Report and the section Company financial statement; section 14.5, Independent auditor’s report — Company, of this Annual Report. We have approved these financial statements, and all individual members of the Supervisory Board (together with the members of the Board of Management) have signed these documents.
 
    We recommend to shareholders that they adopt the 2010 financial statements. We likewise recommend to shareholders that they adopt the proposal of the Board of Management to pay a dividend of EUR 0.75 per common share (up to EUR 710 million), in cash or in shares at the option of the shareholder, against the net income for 2010.
 
    Finally, we would like to express our thanks to the members of the Board of Management, the Group Management Committee and all other employees for their continued contribution during the year.
 
    February 17, 2011
 
    The Supervisory Board

130     Annual Report 2010


Table of Contents

12     Corporate governance     12 - 12.1
12   Corporate governance
 
    Corporate governance of the Philips group
 
    Introduction
 
    Koninklijke Philips Electronics N.V., a company organized under Dutch law (the ‘Company’), is the parent company of the Philips Group (‘Philips’ or the ‘Group’). The Company, which started as a limited partnership with the name Philips & Co in 1891, was converted into the company with limited liability N.V. Philips’ Gloeilampenfabrieken on September 11, 1912. On May 6, 1994, the name was changed to Philips Electronics N.V., and on April 1, 1998, the name was changed to Koninklijke Philips Electronics N.V. Its shares have been listed on the Amsterdam Stock Exchange, Euronext Amsterdam, since 1913. The shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.
 
    Over the last decades the Company has pursued a consistent policy to enhance and improve its corporate governance in line with Dutch, US and international (codes of) best practices. The Company has incorporated a fair disclosure practice in its investor relations policy, has strengthened the accountability of its executive management and its independent supervisory directors, and has increased the rights and powers of shareholders and the communication with investors. The Company is required to comply with, inter alia, Dutch Corporate Governance rules, the US Sarbanes-Oxley Act, New York Stock Exchange rules and related regulations, insofar as applicable to the Company. A summary of significant differences between the Company’s corporate governance structure and the New York Stock Exchange corporate governance standards is published on the Company’s website (www.philips.com/investor).
 
    In this report, the Company addresses its overall corporate governance structure and states to what extent it applies the provisions of the Dutch Corporate Governance Code of December 10, 2008 (the ‘Dutch Corporate Governance Code’). This report also includes the information which the Company is required to disclose pursuant to the governmental decree on Article 10 Takeover Directive and the governmental decree on Corporate Governance. The Supervisory Board and the Board of Management, which are responsible for the corporate governance structure of the Company, are of the opinion that the principles and best practice provisions of the Dutch Corporate Governance Code that are addressed to the Board of Management and the Supervisory Board, interpreted and implemented in line with the best practices followed by the Company, are being applied. Deviations from aspects of the corporate governance structure of the Company, when deemed necessary in the interests of the Company, will be disclosed in the Annual Report. Substantial changes in the Company’s corporate governance structure and in the Company’s compliance with the Dutch Corporate Governance Code are submitted to the General Meeting of Shareholders for discussion under a separate agenda item.
12.1    Board of Management
 
    Introduction
 
    The executive management of Philips is entrusted to its Board of Management under the chairmanship of the President/Chief Executive Officer and consists of at least three members (currently five). The members of the Board of Management have collective powers and responsibilities. They share responsibility for the management of 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 indicating the functional and business areas monitored and reviewed by the individual members. According to 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 Board of Management follows its own Rules of Procedure, which set forth procedures for meetings, resolutions, minutes and (vice-) chairmanship. These Rules of Procedure are published on the Company’s website.
 
    (Term of) Appointment, individual data and conflicts of interests
 
    Members of the Board of Management and the President/CEO are elected by the General Meeting of Shareholders upon a binding recommendation drawn up by the Supervisory Board after consultation with the President/CEO. This binding recommendation may be overruled by a resolution of the General Meeting of Shareholders adopted by a simple majority of the votes cast and representing at least one-third of the issued share capital. If a simple majority of the votes cast is in favor of the resolution to overrule the binding recommendation, but such majority does not represent at least one-third of the issued share capital, a new meeting may be convened at which the resolution may be passed by a simple majority of the votes cast, regardless of the portion of the issued share capital represented by such majority.
 
    Members of the Board of Management and the President/CEO are appointed for a term of four years, it being understood that this term expires at the end of the General Meeting of Shareholders to be held in the fourth year after the year of their appointment. Reappointment is possible for consecutive terms of four years or, if applicable, until a later retirement date or other contractual termination date in the fourth year, unless the General Meeting of Shareholders resolves otherwise. Members may be suspended by the Supervisory Board and the General Meeting of Shareholders and dismissed by the latter.
 
    Individual data on the members of the Board of Management are published in chapter 8, Board of Management, of this Annual Report. The acceptance by a member of the Board of Management of membership of the supervisory board of another company requires the approval of the Supervisory Board. The Supervisory Board is required to be notified of other important positions (to be) held by a member of the Board of Management. No member of the Board of Management holds more than two supervisory board memberships of listed companies, or is a chairman of such supervisory board, other than of a Group company or participating interest of the Company, with the exception of Mr. Kleisterlee, who holds three board positions in listed companies in anticipation of his resignation as of April 1, 2011.
 
    The Company has formalized its rules to avoid conflicts of interests between the Company and members of the Board of Management. The articles of association state that in the event of a legal act or a lawsuit between the Company and a member of the Board of Management, certain of such member’s relatives, or certain (legal) entities in which a member of the Board of Management has an interest, and insofar as the legal act is of material significance to the Company and/or to the respective member of the Board of Management, the respective member of the Board of Management shall not take part in the decision-making in respect of the lawsuit or the legal act. Resolutions concerning such legal acts or lawsuits require the approval of the Supervisory Board.
 
    Legal acts as referred to above shall be mentioned in the Annual Report for the financial year in question. The Rules of Procedure of the Board of Management establish further rules on the reporting of (potential) conflicts of interests. No legal acts as referred to above have occurred during the financial year 2010.
 
    Relationship between Board of Management and Supervisory Board
 
    The Board of Management is supervised by the Supervisory Board and provides the latter with all information the Supervisory Board needs to fulfill its own responsibilities. Major decisions of the Board of Management require the approval of the Supervisory Board; these include decisions concerning (a) the operational and financial objectives of the Company, (b) the strategy designed to achieve the objectives, (c) if necessary, the parameters to be applied in relation to the strategy and (d) corporate social responsibility issues that are relevant to the Company.