As filed with the Securities and Exchange Commission on February 23, 2021
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
(Mark one)
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
For the transition period from ___________________________ to ___________________________
Commission file number 001-05146-01
KONINKLIJKE PHILIPS NV
(Exact name of Registrant as specified in its charter)
ROYAL PHILIPS
(Translation of Registrant's name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
Philips Center , Amstelplein 2 , 1096 BC Amsterdam , The Netherlands
(Address of principal executive offices)
Marnix van Ginneken , Chief Legal Officer
+31 20 59 77232 , marnix.van.ginneken@philips.com , Philips Center , Amstelplein 2 , 1096 BC Amsterdam , The Netherlands
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Shares - par value | PHG | New York Stock Exchange | ||
| Euro (EUR) 0.20 per share |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
| Class | Outstanding at December 31, 2020 | |
| KONINKLIJKE PHILIPS NV | ||
| Common Shares par value EUR |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,"accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
Contents
- 1Introduction
- 2Forward-looking statements
- 3Form 20-F cross reference table
- 4Message from the CEO
- 5Board of Management and Executive Committee
- 6Strategy and Businesses
- 7Financial performance
- 8Environmental, Social and Governance
- 9Risk management
- 10Supervisory Board
- 11Supervisory Board report
- 12Corporate governance
- 12.1Introduction
- 12.2Board of Management and Executive Committee
- 12.3Supervisory Board
- 12.4Other Board-related matters
- 12.5General Meeting of Shareholders
- 12.6Annual financial statements and external audit
- 12.7Stichting Preferente Aandelen Philips
- 12.8Major shareholders
- 12.9Corporate information
- 12.10Additional information
- 13Group financial statements
- 13.1Management’s report on internal control
- 13.2Report of the independent auditor
- 13.3Independent auditor’s report on internal control over financial reporting
- 13.4Independent auditor’s report on the consolidated financial statements
- 13.5Consolidated statements of income
- 13.6Consolidated statements of comprehensive income
- 13.7Consolidated balance sheets
- 13.8Consolidated statements of cash flows
- 13.9Consolidated statements of changes in equity
- 13.10Notes
- 14Other information
- 15Exhibits
1Introduction
This document contains information required for the Annual Report on Form 20-F for the year ended December 31, 2020 of Koninklijke Philips N.V. (the 2020 Form 20-F). Reference is made to the Form 20-F cross reference table herein. Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) this introduction and the cautionary statement “forward-looking statements” on the next two pages and (iii) the Exhibits shall be deemed to be filed with the Securities and Exchange Commission for any purpose. Any additional information in this document which is not referenced in the Form 20-F cross reference table, or the Exhibits themselves, shall not be deemed to be so incorporated by reference, shall not be part of the 2020 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
References to Philips
References to the Company or company, to Philips or the (Philips) Group or group, relate to Koninklijke Philips N.V. and its subsidiaries, as the context requires. Royal Philips refers to Koninklijke Philips N.V.
IFRS based information
The audited consolidated financial statements as of December 31, 2020 and 2019, and for each of the years in the three-year period ended December 31, 2020, included in the 2020 Form 20-F have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU). All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective 2020 have been endorsed by the EU; consequently, the accounting policies applied by Philips also comply with IFRS as issued by the IASB. These accounting policies have been applied by group entities.
Use of non-IFRS information
In presenting and discussing the Philips financial position, operating results and cash flows, management uses certain financial measures that are not measures of financial performance or liquidity under IFRS (‘non-IFRS’). These non-IFRS measures should not be viewed in isolation as alternatives to the equivalent IFRS measure and should be used in conjunction with the most directly comparable IFRS measures. Non-IFRS measures do not have standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other issuers. A reconciliation of these non-IFRS measures to the most directly comparable IFRS measures is contained in this document. Reference is made in Reconciliation of non-IFRS information.
Third-party market share data
Statements regarding market share, contained in this document, including those regarding Philips’ competitive position, are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where full year information regarding 2020 is not yet available to Philips, market share statements may also be based on estimates and projections prepared by management and/or based on outside sources of information. Management's estimates of rankings are based on order intake or sales, depending on the business.
Documents on display
Philips’ SEC filings are publicly available through the SEC’s website at www.sec.gov. The SEC website contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Philips’ internet address is www.philips.com/investor. The contents of any websites referred to herein shall not be considered a part of or incorporated by reference into this document.
For definitions and abbreviations reference is made in Definitions and abbreviations
2Forward-looking statements
Pursuant to provisions of the United States Private Securities Litigation Reform Act of 1995, Philips is providing the following cautionary statement.
This document, including the information referred to in the Form 20-F cross reference table, contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items, in particular, among other statements, certain statements in Item 4 “Information on the Company” with regard to management objectives, market trends, market standing, product volumes, business risks, the statements in Item 5 “Operating and financial review and prospects” with regards to trends in results of operations, margins overall market trends, risk management, exchange rates, the statements in Item 8 “Financial Information” relating to legal proceedings and goodwill and statements in Item 11 “Quantitative and qualitative disclosure about market risks” relating to risk caused by derivative positions, interest rate fluctuations and other financial exposure are forward-looking in nature. Forward-looking statements can be identified generally as those containing words such as “anticipates”, “assumes”, “believes”, “estimates”, “expects”, “should”, “will”, “will likely result”, “forecast”, “outlook”, “projects”, “may” or similar expressions. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements.
These factors include but are not limited to: changes in industry or market circumstances; economic, political and societal changes; Philips’ increasing focus on health technology and solutions; the successful completion of divestments such as the disentanglement and divestment of our Domestic Appliances businesses; the realization of Philips’ objectives in growth geographies; business plans and integration of acquisitions; securing and maintaining Philips’ intellectual property rights and unauthorized use of third-party intellectual property rights; COVID-19 and other pandemics; breach of cybersecurity; IT system changes or failures; the effectiveness of our supply chain; challenges to drive operational excellence, productivity and speed in bringing innovations to market; attracting and retaining personnel; future trade arrangements following Brexit; compliance with regulations and standards including quality, product safety and data privacy; compliance with business conduct rules and regulations; treasury risks and other financial risks; tax risks; costs of defined-benefit pension plans and other post- retirement plans; reliability of internal controls, financial reporting and management process.
As a result, Philips’ actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, reference is made to the information in Risk factors.
3Form 20-F cross reference table
Only (i) the information in this document that is referenced in the Form 20-F cross reference table, (ii) the Introduction and the cautionary statements concerning forward-looking statements of this report on pages 5-6, and (iii) the Exhibits shall be deemed to be filed with the Securities and Exchange Commission for any purpose. The content of Philips’ websites and other websites referenced herein should not be considered to be a part of or incorporated into the 2020 Form 20-F. Any additional information which is not referenced in the Form 20-F cross reference table or the Exhibits themselves shall not be deemed to be so incorporated by reference, shall not be part of the 2020 Form 20-F and is furnished to the Securities and Exchange Commission for information only.
The table below sets out the location in this document of the information required by SEC Form 20-F. The exact location is included in the column ‘Location in this document’. The column “Page” refers to the starting page of the section for reference only (and is not intended to refer to the starting page of the specific subsection, if applicable).
4Message from the CEO
Dear Stakeholder,
In 2020, Philips again demonstrated its relevance in bringing meaningful innovation to improve people’s health and well-being, as we responded to the COVID-19 pandemic. As a company, we continue to focus on delivering against our triple duty of care – meeting critical customer needs, safeguarding the health and safety of our employees, and ensuring business continuity.
Our employees displayed flexibility and resourcefulness as we more than quadrupled output of acute care equipment and solutions to help frontline healthcare workers diagnose, treat, monitor and manage COVID-19 patients. We significantly increased production of critical care ventilators, provided ICU monitoring & analytics solutions, and rolled out telehealth solutions to relieve the pressure on scarce resources. And our field service engineers worked round the clock to support healthcare providers in their hour of need.
In parallel, we continued to support health systems with the delivery of regular care, entering into multiple long-term strategic partnerships – all featuring result-oriented business models – to transform healthcare by enhancing patient care and improving productivity. We also found new ways to serve consumers seeking to live a healthy life, prevent disease and proactively manage their own health. In total, our products and solutions improved the lives of 1.75 billion people in 2020, including 207 million people in underserved communities.
Overall, our company performance proved resilient. While some of our businesses were affected by lower demand, others were able to significantly increase deliveries. I would like to express my admiration and gratitude for the way in which the extended Philips family – our employees, our suppliers and partners, the Philips Foundation – pulled together with our customers to address the impact of the pandemic.
Affirmation of our strategy
The developments of the past year validate our strategy to innovate the provision of care along the health continuum – putting the patient at the center, improving diagnosis and treatment pathways, enabling the integration of care across care settings, and increasing care provider productivity. At the same time, we help consumers to live healthier lifestyles and to cope with chronic disease. Increasingly, we are able to connect home and hospital care through telehealth platforms. This approach is resonating more strongly than ever.
Customers appreciate the comprehensive and strategic view we take of the future of health and healthcare. They want innovative solutions – smart combinations of systems, devices, informatics, data and services – that can help them deliver on the Quadruple Aim of better health outcomes, improved patient experience, improved staff experience, and lower cost of care. Given the learnings from COVID-19, they are especially keen to discover how we can support care outside the hospital.
In recent years, we have invested significantly in data science, informatics and cloud technology to enable the delivery of integrated solutions across the health continuum, and across care settings. These investments are now paying off, with a rapid increase in adoption of, for example, e-ICU and telehealth solutions that facilitate collaboration between health professionals and patient engagement.
Designed to address customer needs, our health technology innovations – supporting personal health, precision diagnosis, image-guided therapies and connected care, and leveraging the power of data and informatics – continue to generate a growing proportion of solutions-based sales and recurring revenues, which now stand at around 37% of total sales.
Innovating to address global health challenges
In healthcare the world over, we are seeing an increased focus on productivity and outcome-based models, as well as care outside the hospital. COVID-19 has accelerated the digitalization of care and the adoption of telehealth. This shift is being reinforced by global trends such as aging populations, the rise of chronic diseases, and resource constraints.
Innovative health technology can help health systems address these challenges, as well as extend access to care to those in need. The HealthTech market is a very attractive and sizable one, with considerable growth and margin potential, and Philips already holds strong leadership positions in over 65% of our portfolio.
Inspired by our purpose to improve people’s health and well-being, we invest almost 10% of revenue in Research & Development to innovate solutions that make a difference to our customers and society at large. Helping people to stay healthy and prevent disease, for instance through our expanding teledentistry services. Giving clinicians AI-assisted tools like our new Radiology Workflow Suite that help them make precision diagnoses and select the best care pathway. Helping surgeons deliver personalized, minimally invasive treatment with solutions like our constantly evolving Azurion image-guided therapy platform. And outside the hospital – orchestrating and delivering care in lower-cost care settings, helping people to recover, or live with chronic disease, at home.
All of these require a seamless flow of data, which is enabled by our highly secure connected care solutions, such as our IntelliVue MX750/MX850 patient monitors for the ICU. To unlock the full benefits of data-enabled care, we continue to expand our capabilities in informatics and data science, with around half of our R&D professionals working in these areas.
Doing business responsibly and sustainably
In 2020, we underscored our determination to lead by example by renewing our purpose – to improve people’s health and well-being through meaningful innovation, with the aim of improving 2 billion lives per year by 2025, including 300 million in underserved communities, rising to 2.5 billion and 400 million respectively by 2030.
This is part of an enhanced, fully integrated approach to doing business responsibly and sustainably. Building on our strong heritage in environmental and social responsibility, this new framework comprises a comprehensive set of key commitments across the Environmental, Social and Governance (ESG) dimensions that guide our endeavors. I am convinced this is the best way for Philips to create superior, long-term value for our many stakeholders.
I am pleased that we have delivered on all the targets set out in our Healthy people, Sustainable planet 2016-2020 program. As a purpose-driven company, we are conscious of our responsibility towards society and of the need to continue to embed sustainability ever deeper in the way we do business. Having become carbon-neutral in our own operations in 2020, we are now extending our ambitions and working with our partners to ensure that emissions across our entire value chain are in line to limit global warming to the 1.5 °C scenario.
We received further recognition for our efforts in this area in 2020 – achieving a CDP ‘A List’ rating for the eighth consecutive year for our action on climate change, and securing the second-highest place in both the global Dow Jones Sustainability Indices (DJSI) list and The Wall Street Journal’s new ranking, 100 Most Sustainably Managed Companies in the World.
Our performance in 2020
COVID-19 impacted every part of our business in 2020. Nevertheless, despite the challenging circumstances, we were able to execute our plans and return to growth in the second half of the year. For the full year we delivered 3% comparable sales growth*) and a strong free cash flow*) of EUR 1.9 billion. Comparable order intake**) increased 9% and we made market share gains in a number of our health systems businesses.
Our Diagnosis & Treatment businesses were impacted by the ongoing postponement of capital equipment installations and routine care, including elective procedures, yet continued to deliver a steady flow of innovations designed to help clinicians deliver a precision diagnosis leading to targeted therapies.
Our Connected Care businesses posted exceptional growth, fueled by COVID-19-related demand for our hospital ventilation and monitoring & analytics solutions.
Our Personal Health businesses had to contend with a steep decrease in consumer demand brought about by the onset of COVID-19, yet rebounded strongly by accelerating online growth, increasing digital engagement, entering into partnerships with leading retailers, and scaling direct-to-consumer business models.
We initiated the process to create a separate legal structure for our Domestic Appliances business within the Philips Group, and we expect to complete this process by Q3 2021.
We made several acquisitions in 2020. For instance, we expanded our image-guided therapy devices portfolio, acquiring Intact Vascular to add an industry-first implantable device to treat peripheral artery disease. We also agreed to acquire BioTelemetry (completed on February 9, 2021) and Capsule Technologies to strengthen our Connected Care segment. These acquisitions will further broaden and scale our patient care management solutions for the hospital and the home, enhance patient outcomes, streamline clinical workflows and increase productivity.
Looking ahead, we continue to see uncertainty related to the impact of COVID-19 across the world. For 2021, Philips plans to deliver low-single-digit comparable sales growth*), driven by solid growth in Diagnosis & Treatment and Personal Health, partly offset by lower Connected Care sales, and an Adjusted EBITA margin*) improvement of 60-80 basis points.
Reflecting our confidence in the future course of the company and the importance we attach to dividend stability, we propose to maintain the dividend at EUR 0.85 per share.
Transforming to create greater value
As we continue our transformation into a customer-first solutions company, we are guided by our strategic roadmap, with its three key imperatives:
- Further improving the customer experience and operational excellence
- Boosting growth in the core by innovating to extend category leadership, geographic expansion, and deeper customer partnerships
- Winning with solutions to support consumers with their personal health, and to help professional healthcare customers achieve the Quadruple Aim.
We aim to drive customer preference by getting even closer to our customers and consumers, making Philips easier to do business with, and further improving our quality, operational excellence and productivity. To do this, we are driving the digital transformation in every area of our business, leveraging our integrated IT landscape – from the way we connect and engage with our customers and consumers to seamlessly connecting our solutions, e.g. to enable remote servicing and upgrades.
In our core business we aim to drive growth through innovation by capturing geographic growth opportunities and by continuing the pivot to consultative customer partnerships and business models, which offer a deeper relationship, with recurring revenue streams.
We will also continue the shift towards integrated solutions with demonstrable clinical evidence and health economic benefits that help our customers achieve the Quadruple Aim. In doing so, we will leverage data science and AI at scale. Where appropriate, we will continue to make acquisitions and enter into partnerships to support our organic growth.
By working in accordance with the Philips Business System and executing on these imperatives with urgency and discipline, we will be able to create more value for our stakeholders – driving customer preference, sustained growth, margin expansion, increased cash flow and improved return on invested capital, while delivering on our ESG commitments.
In conclusion
Once again, I would like to thank our customers, suppliers and partners for working together with Philips in the fight against coronavirus. I also want to express my gratitude to our employees for their commitment, resourcefulness and hard work in difficult circumstances. And I wish to thank our shareholders for the confidence they continue to show in Philips.
Our strategic focus and commitment to improvement remain undiminished. Energized by our purpose and buoyed by the resilience and agility I have seen over the past year, I am confident in Philips’ ability to maintain our transformation momentum, truly impact global health challenges through innovation, and deliver sustained value for our many, diverse stakeholders.
Frans van Houten
Chief Executive Officer
5Board of Management and Executive Committee
Royal Philips has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is accountable to the General Meeting of Shareholders for the fulfillment of its respective duties. The Board of Management is entrusted with the management of the company. The other members of the Executive Committee have been appointed to support the Board of Management in the fulfilment of its managerial duties. Please also refer to Board of Management and Executive Committee within the chapter Corporate governance.
Members of the Board of Management
Frans van Houten
Chairman of the Board of Management and the Executive Committee since April 2011
Abhijit Bhattacharya
Born 1961, Indian
Executive Vice President
Member of the Board of Management since December 2015
Chief Financial Officer
Abhijit Bhattacharya first joined Philips in 1987 and has held multiple senior leadership positions across various businesses and functions in Europe, Asia Pacific and the U.S. Through 2010 – 2014, he was the Head of Investor Relations of Philips, and subsequently, CFO of Philips Healthcare, Philips’ largest sector at the time. Prior to 2010, Abhijit was Head of Operations & Quality at ST-Ericsson, the joint venture of ST Microelectronics and Ericsson, and he was CFO of NXP’s largest business group.
Marnix van Ginneken
Born 1973, Dutch/American
Executive Vice President
Member of the Board of Management since November 2017
Chief Legal Officer
Marnix van Ginneken joined Philips in 2007 and became Head of Group Legal in 2010. In this role he was responsible for the various Group Legal departments, including Corporate & Financial Law, Legal Compliance and Legal M&A. In 2014, Marnix became Chief Legal Officer of Royal Philips and Member of the Executive Committee. Before joining Philips, Marnix worked for Akzo Nobel and before that as an attorney in a private practice. Since 2011, he is also Professor of International Corporate Governance at the Erasmus School of Law in Rotterdam.
Other members of the Executive Committee
Sophie Bechu
Chief Operations Officer
Rob Cascella
Strategic Business Development Leader
Andy Ho
Chief Market Leader of Philips Greater China
Roy Jakobs
Chief Business Leader Connected Care
Henk Siebren de Jong
CEO Philips Domestic Appliances
Deeptha Khanna
Chief Business Leader Personal Health
Bert van Meurs
Chief Business Leader Image Guided Therapy and jointly responsible for Diagnosis & Treatment
Edwin Paalvast
Chief of International Markets
Vitor Rocha
Chief Market Leader of Philips North America
Daniela Seabrook
Chief Human Resources Officer
Jeroen Tas
Chief Innovation and Strategy Officer
Kees Wesdorp
Chief Business Leader Precision Diagnosis and jointly responsible for Diagnosis & Treatment
For a current overview of the Executive Committee members, see also https://www.philips.com/a-w/about/executive-committee.html
6Strategy and Businesses
6.1Driven by purpose
At Philips, our purpose to improve people’s health and well-being through meaningful innovation is at the heart of everything we do. Never has this central tenet been more important than it is now, in these challenging times.
As a leading health technology company, we believe that innovation can improve people's health and healthcare outcomes, as well as making care more accessible and affordable. In concrete terms, we aim to improve the lives of 2 billion people a year by 2025, including 300 million in underserved communities, rising to 2.5 billion and 400 million respectively by 2030.
Guided by this purpose, it is our strategy to lead with innovative solutions that combine systems, smart devices, informatics and services, and leverage big data – helping our customers deliver on the Quadruple Aim (better health outcomes, improved patient experience, improved staff experience, lower cost of care) and helping people to take better care of their health at every stage of life.
We strive to deliver superior, long-term value to our customers and shareholders, while acting responsibly towards our planet and society, in partnership with our stakeholders.
We aim to grow Philips responsibly and sustainably. To this end, we have deployed a comprehensive set of commitments across all the Environmental, Social and Governance (ESG) dimensions that guide the execution of our strategy and support our contribution to UN Sustainable Development Goals 3 (Ensure healthy lives and promote well-being for all at all ages), 12 (Ensure sustainable consumption and production patterns) and 13 (Take urgent action to combat climate change and its impacts).
Our view on healthcare
Health technology is a large market, which is expected to grow by around 4% each year*). Besides the natural drivers of growth – aging populations, the rise of chronic diseases, increased spending on healthcare in emerging markets – we believe that health technology will be a major growth driver in the years to come.
At Philips, we see healthcare as a continuum, since it puts people’s health journeys front and center and builds upon the idea of integrated care pathways. Believing that healthcare should, and can, be seamless, efficient and effective, we strive to ‘connect the dots’ for our customers and consumers, supporting the flow of data needed to care for people in real time, wherever they are.
Going forward, the digitalization of healthcare and – accelerated by COVID-19 – the more widespread adoption of telehealth will play an increasing role in helping people to live healthily and cope with disease, and in enabling care providers to meet people’s health needs, deliver better outcomes and improve productivity.
Helping our customers address their healthcare challenges
In the consumer domain, we develop innovative solutions that support healthier lifestyles, prevent disease, and help people to live well with chronic illness, also in the home and community settings.
In addition to leveraging retail trade partnerships and new business models, we are accelerating growth through online channels, delivering products and services direct to consumers, and supporting longer-term relationships to maximize the benefit consumers can derive from our solutions.
In clinics and hospitals, we are teaming up with healthcare providers to innovate and transform the way care is delivered. We listen closely to our customers’ needs and together we co-create solutions that help our customers improve outcomes, patient and staff experience and productivity, and so deliver on the Quadruple Aim of value-based care.
Increasingly, we are working together with our health systems customers in novel business models, including outcome-oriented payment models, that align their interests and ours in long-term partnerships. The combination of compelling solutions and consultative partnership contracts, including a broad range of professional services, drives growth rates above the group average, as well as a higher proportion of recurring revenues.
We are embedding AI and data science in our propositions – for instance, applying the power of predictive data analytics and artificial intelligence at the point of care – to leverage the value of data in the clinical and operational domains, aiding clinical decision making and improving the quality and efficiency of healthcare services.
With our global reach, market leadership positions, deep clinical and technological insights, and innovation capability, we are strongly placed to create further value in a changing healthcare world through our propositions in:
Personal health
Delivering solutions that enable healthier lifestyles, personal hygiene and living with chronic disease.
Diagnosis & Treatment
- Precision Diagnosis – providing smart, connected systems, optimized workflows, and integrated diagnostic insights, leading to clear care pathways and predictable outcomes
- Image Guided Therapy – innovating minimally invasive procedures in a growing number of therapeutic areas, with significantly better outcomes and productivity
Connected Care
Driving better care management by seamlessly connecting patients and caregivers from the hospital to the home.
Our key strategic imperatives and value creation objectives
Our roadmap – with its three strategic imperatives – is our guide as we continue our transformation journey to attain HealthTech industry leadership and drive value creation.
Underpinned by these strategic imperatives, and assuming the world economy will return to growth in 2021, Philips’ targets for accelerated growth, higher profitability and improved cash flow for the 2021–2025 period are:
- An acceleration of the average annual Group comparable sales growth**) to 5-6%, with all business segments within this range. For 2021, Philips aims to deliver low-single-digit Group comparable sales growth**), driven by solid growth in Diagnosis & Treatment and Personal Health, partly offset by lower Connected Care sales.
- An Adjusted EBITA**) margin improvement of 60-80 basis points on average annually from 2021, with a target of the high teens for the Group by 2025; Diagnosis & Treatment is targeted to reach 15-17% Adjusted EBITA**) margin by 2025, Connected Care 17-19%, and Personal Health 19-20%.
- Free cash flow**) above EUR 2 billion by 2025.
- Organic Return on Invested Capital (ROIC)**) of mid-to-high teens by 2025.
The new targets exclude the Domestic Appliances business. As announced in January 2020, Philips is reviewing options for future ownership of its Domestic Appliances business. Philips has started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the third quarter of 2021.
6.2How we create value
Based on the International Integrated Reporting Council framework, and with the Philips Business System at the heart of our endeavors, we use various resources to create value for our stakeholders in the short, medium and long term.
As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines how we work together effectively to achieve our company objectives – the Philips Business System (PBS). The PBS integrates key aspects of how we operate:
- Our strategy defines our path to sustainable value creation for customers and shareholders.
- Clear governance, roles and responsibilities empower people to collaborate and act fast.
- Standard processes, systems and practices enable lean and agile ways of working.
- We value and develop people and teams, rewarding them for sustainable results.
- We live the Philips culture, which sets standards on behaviors, quality and integrity.
- Through disciplined performance management and continuous improvement we achieve our goals.
Having a single business system increases speed and agility, and enhances standardization, quality and productivity, while driving a better, more consistent experience for our customers.
Resource inputs
The resources and relationships that Philips draws upon for its business activities
Human
- Employees 81,592, 120-plus nationalities, 39% female
- Philips University 5,852 courses, 835,575 hours, 763,371 training completions
- 35,188 employees in growth geographies
- Focus on Inclusion & Diversity
Intellectual
- Invested in R&D EUR 1.92 billion (Green Innovation EUR 280 million)
- Employees in R&D 11,129 across the globe including growth geographies
Financial
- Equity EUR 11.9 billion
- Net debt*) EUR 3.7 billion
Manufacturing
- Employees in production 39,770
- Manufacturing sites 32, cost of materials used EUR 5.2 billion
- Total assets EUR 27.7 billion
- Capital expenditure EUR 513 million
Natural
- Energy used in manufacturing 1,297 terajoules
- Water used 777,476 m3
- Recycled plastics in our products 1,930 tonnes
- 'Closing the loop' on all our professional medical equipment by 2025
Social
- Philips Foundation
- Stakeholder engagement
- Volunteering policy
Value outcomes
The result of the application of the various resources to Philips’ business activities and processes as shaped by the Philips Business System
Human
- Employee Engagement Index 79% favorable
- Sales per employee EUR 239,423
- Safety 185 Total Recordable Cases
Intellectual
- New patent filings 876
- Royalties EUR 317 million
- 151 design awards
Financial
- Comparable sales growth*) 2.5%
- 71% Green Revenues
- Adjusted EBITA*) as a % of sales 13.2%
- Free cash flow*) EUR 1.9 billion
Manufacturing
- EUR 14.7 billion revenues from goods sold
Natural
- 15% revenues from circular propositions
- Net CO2 emissions down to zero kilotonnes
- 265,000 tonnes (estimated) materials used to put products on the market
- Waste 35.5 kilotonnes, of which 90% recycled
Social
- Brand value USD 11.7 billion (Interbrand)
- Partnerships with UNICEF, Red Cross, Amref and Ashoka
Societal impact
The societal impact of Philips through its supply chain, its operations, and its products and solutions
Human
- Employee benefit expenses EUR 6,490 million, all staff paid a Living Wage
- Appointed 74% of our senior positions from internal sources
- 27% of Leadership positions held by women
Intellectual
- Around 60% of revenues from new products and solutions introduced in the last three years
- Over 65% of sales from leadership positions
Financial
- Market capitalization EUR 39.6 billion at year-end
- Long-term credit rating A- (Fitch), Baa1 (Moody's), BBB+ (Standard & Poor's)
- Dividend EUR 758 million
Manufacturing
- 100% electricity from renewable sources
Natural
- Environmental impact of Philips operations down to EUR 135 million
- 32 'zero waste to landfill' sites
- First health technology company to have its CO2 reductions assessed and approved by the Science Based Targets initiative
Social
- 1.75 billion Lives Improved, of which 207 million in underserved communities
- 302,000 employees impacted at suppliers participating in the 'Beyond Auditing' program
- Total tax contribution EUR 3.38 billion (taxes paid/withheld)
- Income tax expense EUR 284 million; the effective income tax rate is 19%
6.3Our businesses
Our reporting structure in 2020
Koninklijke Philips N.V. (Royal Philips) is the parent company of the Philips Group. In 2020, the reportable segments were Diagnosis & Treatment businesses, Connected Care businesses, and Personal Health businesses, each having been responsible for the management of its business worldwide. Additionally, Philips identifies the segment Other.
Philips Group
Total sales by reportable segment
| Diagnosis & Treatment | 42% |
| Connected Care | 28% |
| Personal Health | 28% |
| Other | 2% |
6.3.1Diagnosis & Treatment businesses
Our Diagnosis & Treatment businesses create value through their unique portfolio of innovative diagnostic and minimally invasive procedural solutions – suites of systems, smart devices, software and services powered by AI-enabled informatics. With these integrated solutions, we enable our customers to realize the full potential of the Quadruple Aim – better health outcomes, improved patient experience, improved staff experience, and lower cost of care.
In Precision Diagnosis, serving diagnostic enterprise imaging markets globally, there is significant opportunity to enable precise diagnoses while at the same time supporting adjacent needs for guidance into care pathways and increasing departmental productivity. We do this through breakthrough innovations in our smart diagnostic systems, through dynamic workflow solutions that transform departmental operations, through integrated diagnostics insights from different departments, and through care pathway solutions that allow doctors to diagnose with precision and select the optimal treatment path for the individual patient. Over the period 2019-2020, 60% of our product portfolio in this area has been renewed through the discontinuance of former products, the roll-out of new-generation versions of our products, and the addition of new products.
In Image Guided Therapy, we have pivoted from a focus on imaging modalities to integrated procedural solutions combining systems and therapeutic devices, which can drive more effective treatment, better outcomes and higher productivity. Building upon our leading-edge Azurion platform, we continue to innovate and expand our applications for image-guided therapies and improve workflow and integration in the interventional suite. We are also expanding into adjacent therapeutic areas and innovating the way we engage with our customers in new business models across different care settings, including out-of-hospital settings such as office-based labs and ambulatory surgical centers, which offer clear clinical, financial and operational benefits.
In 2020, the Diagnosis & Treatment businesses were impacted by the postponement of capital equipment installations and routine care, including elective procedures and exams, caused by the COVID-19 pandemic. Even so, we continued to make advances in innovation and in strengthening our portfolio. For example, we expanded our remote clinical collaboration and virtual training offerings across our portfolio with the acquisition of Innovative Imaging Technologies (IIT) and its Reacts collaborative platform. Leveraging innovative technologies, such as augmented reality for remote virtual guidance, supervision and training, the platform provides unique interactive tools designed to meet the multi-faceted collaborative needs of healthcare professionals and patients. We also launched the vendor-agnostic Radiology Workflow Suite of end-to-end solutions to drive operational and clinical efficiency through the digitalization, integration, and virtualization of radiology. And we further expanded our Interventional Devices portfolio, acquiring Intact Vascular to add an industry-first implantable device, the Tack Endovascular System, to treat peripheral artery disease.
Through our various businesses, Diagnosis & Treatment is focused on growing market share and profitability by leveraging:
- our strong position in Enterprise Diagnostic Informatics with the successful integration of Carestream Health’s Healthcare Information Systems business, acquired in 2019
- intelligent, AI-enabled clinical and operational applications combined with successful innovations in our systems platforms in Diagnostic Imaging and Ultrasound
- our suite of innovative procedural solutions to support delivery of the right therapy in real-time in Image-Guided Therapy
- enhanced offerings in oncology, cardiology, neurology, and radiology service lines, and expanding our solutions offering, which comprises systems, smart devices, informatics, data and services
In 2020, the Diagnosis & Treatment segment consisted of the following areas of business:
- Diagnostic Imaging: Magnetic Resonance Imaging (MRI), Computed Tomography (CT), Advanced Molecular Imaging, Diagnostic X-Ray, Imaging Components, as well as integrated clinical solutions, which include radiation oncology treatment planning, disease-specific oncology solutions and X-Ray dose management
- Ultrasound: imaging products focused on diagnosis, treatment planning and guidance for cardiology, general imaging, obstetrics/gynecology, and point-of-care applications, as well as proprietary software capabilities to enable advanced diagnostics and interventions
- Enterprise Diagnostic Informatics: a suite of integrated products and services that deliver a comprehensive platform designed to connect clinical capabilities and optimize workflows around every step in the patient’s journey across a range of diagnostic (radiology, point-of-care, laboratory) and clinical (oncology, cardiology, neurology) service lines
- Image Guided Therapy: Systems – integrated interventional systems that combine information from imaging systems, interventional devices, navigation tools and patient health records to provide interventional staff with the control and information they need to perform procedures efficiently; Devices – interventional diagnostic and therapeutic devices to treat coronary artery and peripheral vascular disease, including Intravascular Ultrasound (IVUS), fractional flow reserve (FFR) and instantaneous wave-free ratio (iFR), atherectomy catheters, a dissection repair implant and drug-coated balloons
Diagnosis & Treatment
Total sales by business
| Diagnostic Imaging | 41% |
| Ultrasound | 20% |
| Enterprise Diagnostic Informatics | 8% |
| Image Guided Therapy | 31% |
Revenue is predominantly earned through the sale of products, leasing, customer services fees, recurring per-procedure fees for disposable devices, and software license fees. For certain offerings, per-study fees or outcome-based fees are earned over the contract term.
Sales channels are a mix of a direct sales force, especially in all the larger markets, third-party distributors and an online sales portal. This varies by product, market and price segment. Our sales organizations have an intimate knowledge of technologies and clinical applications, as well as the solutions necessary to solve problems for our customers.
Under normal circumstances, sales at Philips’ Diagnosis & Treatment businesses are generally higher in the second half of the year, largely due to the timing of customer spending patterns.
At year-end 2020 Diagnosis & Treatment had around 32,000 employees worldwide.
2020 business highlights
At the Radiological Society of North America event RSNA 2020, Philips introduced an industry-first vendor-neutral Radiology Operations Command Center as part of the Radiology Workflow Suite of solutions. This multimodality virtual imaging command center enables real-time, remote collaboration to broaden expertise between technologists, radiologists and imaging operations teams across multiple sites via private, secure telepresence capabilities. Proprietary digital technology developed by Philips helps maintain business continuity, increase enterprise-wide radiology productivity, minimize issues with image quality, and expand access to advanced MR- and CT-based diagnosis.
We introduced the next generation of our leading-edge Azurion image-guided therapy platform. An industry first, the Philips Azurion image-guided therapy platform now fully integrates IntraSight to control imaging, physiology, hemodynamic and informatics applications with one intuitive user control at the tableside. With this next-generation Azurion platform, Philips is also introducing a new 3D imaging solution, called SmartCT, to dramatically simplify the acquisition and use of 3D imaging. Next-generation Azurion comprises a new range of configurations – covering more price segments – to innovate procedures in a broad range of therapeutic areas.
We continue to see strong traction for our Ingenia Ambition 1.5T MR, which combines fully sealed BlueSeal magnet technology and workflow innovations for more productive, helium-free operations. As well as virtually eliminating dependency on a commodity with an unpredictable supply, the fully sealed system does not require a vent pipe, significantly reducing the typical MR installation challenges and lowering construction costs.
Philips signed a seven-year strategic partnership agreement with Mandaya Royal Hospital Puri in Indonesia. The turnkey solution includes the next-generation Azurion image-guided therapy system, the Ingenia Ambition MR, and the detector-based IQon Spectral CT, as well as the latest innovations in connected care and informatics.
SimonMed Imaging – one of the largest outpatient medical imaging providers in the US – is partnering with Philips to deploy its most advanced 3T MRI technology, including software and services, at their outpatient practices to enhance diagnoses, from brain injuries, liver and cardiac disease, to orthopedic injuries.
In Germany, Philips signed a 10-year strategic partnership with Marienhospital Stuttgart to deploy our digital healthcare solutions across multiple departments to improve patient care and efficiency. The project will include renewal and ongoing development of the hospital’s diagnostic imaging equipment and associated IT systems, digitization of its pathology department, and enhancement of the hospital’s emergency medicine capabilities.
Philips expanded its dedicated cardiovascular ultrasound offering by launching Affiniti CVx. This system is designed to support cardiology departments in delivering better care to more patients with increased efficiency and throughput.
Philips received an industry-first 510(k) clearance from the FDA to market a wide range of its ultrasound solutions – including our CX50 general imaging system and our Lumify portable ultrasound solution – for the management of COVID-19-related lung and cardiac complications. Portable ultrasound solutions in particular have become valuable tools for clinicians treating COVID-19 patients, due to their imaging capabilities, portability and ease of disinfection.
Philips continued to advance the capabilities of its KODEX-EPD cardiac imaging and mapping system for the treatment of heart rhythm disorders, improving image quality and workflow efficiency for Atrial Fibrillation procedures.
Philips announced a partnership with InSightec to expand access to MR-guided focused ultrasound for incisionless neurosurgery. By developing compatibility between Philips’ advanced MR systems and the Exablate Neuro platform from InSightec, the two companies will support expanded access to MR-guided focused ultrasound for the treatment of Essential Tremor and other neurological disorders.
Philips introduced OmniWire, the world’s first solid core pressure guide wire for physiology measurement in coronary artery interventional procedures; it has been extremely well received by our customers.
In January 2021, Philips announced the final, five-year results of two major randomized controlled trials (RCTs) that show no difference in all-cause mortality between patients treated with the Stellarex drug-coated balloon (DCB) and those treated with percutaneous angioplasty (PTA), the current standard of care. Moreover, the studies showed no difference in mortality between the Stellarex DCB and PTA at every 12-month endpoint over the course of the study.
6.3.2Connected Care businesses
Spanning the entire health continuum, the Connected Care businesses help broaden the reach and deepen the impact of healthcare with solutions that leverage and unite devices, informatics, data and people across networks of care, to enable our customers to deliver on the Quadruple Aim – better health outcomes, improved patient experience, improved staff experience, and lower cost of care.
In 2020, Connected Care played a crucial role in fulfilling customer needs created by the COVID-19 global pandemic, from ramping up production and delivery of our core systems such as ventilators and monitors, to supporting the urgent expansion of telehealth for the ICU, and driving safe, remote patient care.
Although no one was fully prepared for this crisis, Philips had the critical portfolio and the informatics investments in place to rapidly scale up, supporting care in the hospital and the home, even as healthcare delivery models were changing fast.
Philips increased ventilator production multifold to meet the high COVID-19-related demand, and shipped ventilators across the world using a fair and ethical approach to allocate supply to acute patient demands based on COVID-19 data and the available critical care capacity.
This past year showed the value of strong leadership positions and close ties with our customers. Building on Philips’ trusted brand, deep clinical insights and large installed base allowed us to drive impact. Philips combined the right monitoring equipment, respiratory devices, consumables and services to innovate solutions to help tackle COVID-19.
Also critical during COVID-19: the expertise and informatics to help scale and manage scarce resources in the health system. The capabilities in Connected Care are built around Philips’ strength in verticals (monitoring & analytics, sleep & respiratory care, and therapeutic care) and horizontals (connected care informatics and population health) to improve clinical and economic outcomes in all care settings, both inside and outside the hospital.
Philips has a deep understanding of clinical care and the patient experience. When coupled with our consultative approach, this allows us to be an effective partner for transformation, both across the enterprise and at the level of the individual clinician. These services are designed to take the burden off hospital staff with optimized patient and data flow, predictive analytics, improved workflow, customized training and improved accessibility across our application landscape.
This requires a secure common digital platform that connects and aligns consumers, patients, payers and healthcare providers. Philips’ platforms aggregate and leverage information from clinical, personal and historical data to support care providers in delivering precision diagnoses and treatment.
In 2020, the Connected Care segment consisted of the following areas of business:
- Monitoring & Analytics: Integrated patient monitoring systems to drive better patient management and improved outcomes, fueled by real-time clinical insights. Assets include wearable biosensors, advanced intelligence platforms for real-time clinical information at the patient’s bedside; patient analytics, including diagnostic ECG data management; maintenance, clinical and IT services, as well as consumables. While Philips solutions already monitor over 300 million people per year, demand is growing, also for new business models such as Monitoring as a Service.
- Sleep & Respiratory Care: Philips’ cloud-based sleep and respiratory patient management solutions enable the care of more than 10.5 million connected patients, driving adherence, reimbursement and remote patient management. From consumer sleep solutions, including those for disease-state sleep such as obstructive sleep apnea, to end-to-end solutions that encompass consumer engagement, diagnostics, people-centric therapy, cloud-based connected propositions and care management services. The COVID-19 crisis has put respiratory care at the top of the list for delivering critical and chronic care to patients. Respiratory offerings include COPD (Chronic Obstructive Pulmonary Disease) care management, with digital and connected solutions; Hospital Respiratory Care provides invasive and non-invasive ventilators for acute and sub-acute hospital environments; Home Respiratory Care supports chronic care management in the home.
- Therapeutic Care: Emergency Care & Resuscitation (ECR) and patient management solutions play a critical role in connected acute care management, both inside and outside the hospital, including cardiac resuscitation and emergency care solutions (devices, services, and digital/data solutions); consumables across the patient monitoring and therapeutic care businesses; customer service, including clinical, IT, technical and remote customer propositions.
- Connected Care Informatics and Population Health Management*): Connected Care Informatics drives cohesive informatics platforms and innovations across the health continuum. Connecting people, technology and processes, Connected Care Informatics’ capabilities include a fully integrated Electronic Medical Record business, which enables centralized management of clinical, organizational and operational processes across the health enterprise, remote patient management, and real-time monitoring in acute care, including telehealth in the ICU. Philips’ Tele-ICU program played a pivotal role in 2020, enabling clinicians to remotely monitor a scalable amount of ICU beds from a central monitoring facility with predictive analytics and camera-enabled bedside support. Population Health Management provides data, analytics and workflow solutions designed to improve clinical and financial results and increase patient engagement, satisfaction and compliance. This business has been partially merged into Connected Care Informatics effective 2021.
Connected Care
Total sales by business
| Monitoring & Analytics | 40% |
| Sleep & Respiratory Care | 49% |
| Therapeutic Care | 5% |
| Connected Care Informatics and Population Health Management | 6% |
In most of the Connected Care businesses, revenue is earned through the sale of products and solutions, customer services fees and software license fees. Where bundled offerings result in solutions for our customers, or offerings are based on the number of people being monitored, we see more usage-based earnings models. In Sleep & Respiratory Care, revenue is generated both through product sales and through rental models, whereby revenue is generated over time.
Sales channels include a mix of a direct salesforce, partly paired with an online sales portal and distributors (varying by product, market and price segment). Sales are mostly driven by a direct salesforce with an intimate knowledge of the procedures that use our integrated solutions’ smart devices, systems, software and services. Philips works with customers and partners to co-create solutions, drive commercial innovation and adapt to new models such as monitoring-as-a-service.
Sales at Philips’ Connected Care businesses are generally higher in the second half of the year, largely due to customer spending patterns. In 2020 this pattern shifted due to the outbreak of the COVID-19 pandemic.
At year-end 2020, the Connected Care businesses had around 16,000 employees worldwide.
2020 business highlights
In the face of the global shortage of ventilators and patient monitors upon the outbreak of the COVID-19 pandemic, we worked intensively, together with our supply chain partners around the world, to drive a massive ramp-up in production, increasing ventilator manufacturing eightfold and monitor production fivefold.
Philips introduced Rapid Equipment Deployment Kits for ICU ramp-ups, allowing doctors, nurses, technicians and hospital staff to quickly support critical care patients. The kit combines Philips’ advanced patient monitoring technology with predictive, patient-centric algorithms for scale-up within hours.
Philips launched several new monitoring solutions for the Intensive Care Unit (ICU), the general ward and the home that feature remote monitoring capabilities and advanced analytics. These include Philips’ IntelliVue Patient Monitors MX750/MX850 for the ICU, Philips’ Biosensor BX100 for early patient deterioration detection in the general ward, and in collaboration with BioIntelliSense, the BioSticker medical device to help monitor at-risk patients from the hospital to the home, to help avoid hospital re-admissions and to support chronic care management.
Philips introduced several dedicated telehealth solutions to help relieve the tremendous pressure placed on scarce resources by the growing number of COVID-19 patients. Based on its proven Patient Reported Outcomes Management solution, which is being used by more than 100 healthcare institutions globally, Philips enabled Dutch hospitals and GPs to remotely screen and monitor patients with COVID-19.
In December 2020, Philips announced the intended acquisition of BioTelemetry Inc., a leading remote cardiac diagnostics and monitoring company in the US, with solutions comprised of wearable connected heart monitors, AI-based data analytics and a services platform. The transaction was completed on February 9, 2021. The combination of Philips’ leading patient monitoring position in the hospital with BioTelemetry’s leading cardiac diagnostics and monitoring position outside the hospital is expected to result in a global leader in patient care management solutions for the hospital and the home for cardiac and other patients.
In January 2021, Philips announced that it has signed an agreement to acquire Capsule Technologies, Inc., a leading provider of medical device integration and data technologies for hospitals and healthcare organizations. The combination of Philips’ industry-leading portfolio with Capsule’s leading Medical Device Information Platform, connected through Philips’ secure vendor-neutral cloud-based HealthSuite digital platform, will enrich and scale Philips’ patient care management solutions for all care settings in the hospital, as well as remote patient care. The transaction is expected to be completed in the first quarter of 2021.
Highlighting its strength in strategic partnerships to enhance patient care and improve care provider productivity, Philips signed multiple new agreements. For example, Philips and the US Department of Veterans Affairs entered a 10-year agreement to expand their tele-critical care program, creating the world’s largest system to provide veterans with remote access to intensive care expertise, regardless of their location.
University of Kentucky HealthCare teamed up with Philips to implement the company’s tele-ICU technology to enhance patient care and improve utilization and patient flows across 160 ICU beds at the academic medical center’s two hospitals. Leveraging Philips’ acute telehealth platform, eCareManager, UK HealthCare is implementing the state’s first centralized virtual care model to help nurses detect risk of patient deterioration, so they can intervene earlier and help improve care outcomes.
Supporting the increased demand for flexible ICU capacity, Philips introduced its new mobile ICUs in India. The ICUs can be furnished with a range of medical equipment, including ventilators, defibrillators, and patient monitoring.
6.3.3Personal Health businesses
Our Personal Health businesses play an important role on the health continuum – in the healthy living, prevention and home care stages – delivering integrated and connected solutions.
Leveraging our deep consumer expertise and extensive healthcare know-how, we enable people to live a healthy life in a healthy home environment, and to proactively manage their own health.
We aim to drive profitable growth through a relentless focus on innovation across three key areas:
- Reaching more people through consumer-driven product and solutions innovation
- Accelerating online growth and engaging more people through an end-to-end digital approach
- Expanding our ecosystem through partnerships with leading retailers and scaling new business models
In 2020, the Personal Health segment consisted of the following areas of business:
- Oral Healthcare: power toothbrushes for a range of price segments, from entry-level battery-operated toothbrushes for a young audience, to premium intuitive power toothbrushes connected to the Sonicare app with in-app coaching and teledentistry service; brush heads, which are also available as a subscription service; products for interdental cleaning and for teeth whitening
- Mother & Child Care: products to support parents and babies in the first 1,000 days, including infant feeding (breast pumps, baby bottles, sterilizers), digital parental solutions (Pregnancy+ and Baby+ apps)
- Personal Care: products from entry-level to premium for male grooming (shavers, OneBlade, groomers, trimmers, hair clippers), including premium solutions with SkinIQ technology and in-app coaching for a personalized shave, blade subscriptions; beauty solutions (skin care, hair care, hair removal), including solutions with the latest SenseIQ technology that sense and adapt for personalized care, also available through subscription models
- Domestic Appliances*): kitchen appliances from entry-level to premium (juicers, blenders, Airfryer, including with smart sensing technology, food processors), home care products (vacuum cleaners, air purifiers), garment care products (irons, steam generators, hand steamers), coffee machines (appliances and accessories)
Personal Health
Total sales by business
| Oral Healthcare | 21% |
| Mother & Child Care | 6% |
| Personal Care | 32% |
| Domestic Appliances | 41% |
Through our Personal Health businesses, we offer a broad range of solutions in various consumer price segments, always aiming to offer and realize premium value. We continue to rationalize our portfolio of locally relevant innovations and increase its accessibility, particularly in lower-tier cities in growth geographies. A notable aspect of our commercial strategy is driving increased direct-to-consumer relationships and sales through our consumer communities and online store. We believe we are well positioned to capture further growth in online sales and continue to build our digital and e-commerce capabilities.
We are leveraging connectivity to offer new business models, partnering with other players in the health ecosystem, e.g. insurance companies, with the goal of extending opportunities for people to live healthily, prevent or manage disease. We are engaging consumers in their health journey in new and impactful ways through social media and digital innovation.
For example, the Philips Sonicare app acts as a ‘virtual hub’ for personal oral healthcare, helping users to manage their complete oral care on a daily basis and share brushing data with their dental practitioners, putting personalized guidance and advice at their fingertips. In our drive to innovate oral healthcare, we are partnering with leading insurance companies, which are moving to more preventative models of care. To that end, they need to encourage consumers to brush twice per day, for two minutes at a time, as that leads to better health outcomes and lower cost of care. The first results from the pilot program are extremely promising. Solutions and services like this offer a win-win for consumers and insurers: for consumers, because they get better oral care, and for insurance companies, because they have less cost per patient.
We also offer mobile solutions to support parents and parents-to-be for a more informed, more connected and healthier journey to parenthood. Powered by personalized AI and deep analytics, the Pregnancy+ app and Baby+ app offer parents supportive content at every stage of their first 1,000-day journey. Pregnancy+ also offers state-of-the-art, photo-realistic and interactive 3D fetal models to make the experience even more exciting. In 2020, to help expectant mothers navigate pregnancy in times of the pandemic, we introduced an in-app COVID-19 guide. As of year-end 2020, the Pregnancy+ app and Baby+ app combined have almost 2 million daily active users in over 50 countries.
The company’s wide portfolio of connected consumer health platforms leverages Philips HealthSuite, a cloud-enabled connected health ecosystem of devices, apps and digital tools that enable personalized health and continuous care.
The revenue model is mainly based on product sale at the point in time the products are delivered to retailers and online platforms. We are increasingly diversifying the revenue model with new business models, including direct-to-consumer, subscriptions and services.
The Personal Health businesses experience seasonality, with higher sales around key national and international events and holidays.
At year-end 2020, Personal Health employed around 17,000 people worldwide.
2020 business highlights
Broadening its leading portfolio of power toothbrushes, the company launched the Philips One by Sonicare. An entry-level proposition to expand into new consumer segments, Philips One is a battery-operated power toothbrush developed as a step up from manual brushing. Users of this toothbrush can opt into a subscription service for brush head and battery replacements.
A new teledentistry platform for dental professionals – announced together with dental technology company Toothpic – provides a tool to build direct patient engagement, acquisition and retention while improving office efficiency, in-chair time and remote care.
To support parents in their breastfeeding journey, Philips Avent launched a new Electric Breast Pump. This unique expression solution uses Natural Motion Technology to mimic a baby’s suckling, while also adapting to the size and shape of a mother’s nipple for a comfortable and quicker milk flow.
Philips has introduced a series of shavers featuring SkinIQ technology, which senses, guides and adapts to men’s skin and facial hair for a close and comfortable shave. The shaver’s inbuilt Motion Control sensor checks for effective circular motions and provides real-time feedback through the Philips GroomTribe app, allowing men to achieve a more effective and comfortable technique, with fewer passes.
The Philips Lumea hair removal device with Intense Pulsed Light technology continued to grow in 2020 thanks to superior product quality and the coaching app – both well-received with high consumer ratings – and through faster access to product via the new Try & Buy business model.
Philips set an environmental milestone with the launch of the Viva Café Eco coffee machine, our first product to have all visible plastic parts and non-food-contact parts made from recycled materials.
6.3.4Other
In our external reporting on Other we report on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2020, around 17,000 people worldwide were working in these areas.
About Other
Innovation & Strategy
The Innovation & Strategy organization includes the Chief Technology Office (CTO), Research, HealthSuite Platforms, the Chief Medical Office, Product Engineering, Experience Design, Strategy, and Sustainability. Our four largest Innovation Hubs are in Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China).
Innovation & Strategy, in collaboration with the operating businesses and the markets, is responsible for directing the company strategy, in line with our growth and profitability ambitions.
The Innovation & Strategy function facilitates innovation from ‘idea’ to ‘market’ (I2M) as co-creator and strategic partner for the Philips businesses, markets and partners. It does so through cooperation between research, design, medical affairs, marketing, strategy and businesses in interdisciplinary teams along the innovation chain, from exploration and advanced development to first-of-a-kind proposition development. In addition, it opens up new value spaces beyond the direct scope of current businesses, manages the R&D portfolio, and creates synergies for cross-segment initiatives and integrated solutions.
Innovation & Strategy actively participates in Open Innovation through relationships with academic, clinical, industrial partners and start-ups, as well as via public-private partnerships. It does so in order to improve innovation speed, effectiveness and efficiency, to capture and generate new ideas, and to leverage third-party capabilities. This may include sharing the related financial exposure and benefits.
Finally, Innovation & Strategy sets the agenda and drives continuous improvement in the Philips product and solution portfolio, the efficiency and effectiveness of innovation, the creation and adoption of (digital) platforms, and the uptake of high-impact technologies such as Data Science, Artificial Intelligence (AI) and the Internet of Things (IoT). Centers of Excellence – knowledge hubs built around critical capabilities and technology – play a key role in maximizing the impact of innovations for Philips.
Chief Technology Office (CTO) and Philips Research
The Chief Technology Office orchestrates innovation strategy and portfolio management, drives adoption of digital architecture and platforms, as well as excellence in software, Data Science and AI, across Philips’ businesses and markets. Philips Research initiates game-changing innovations that disrupt and cross boundaries in health technology to address opportunities for better clinical and economic outcomes and support the associated transformation of Philips into a digital solutions company. CTO and Research encompass the following organizations:
- Philips Research, the co-creator and strategic partner of the Philips businesses, markets and complementary Open Innovation ecosystem participants, driving front-end innovation and clinical research at sites across the globe. The role of Research increasingly goes beyond early-stage proof-of-concept, including advanced development on the target product and digital platforms, and market-driven innovation with lead customers.
- Innovation Management, responsible for end-to-end innovation strategy and portfolio management, integrated roadmaps linking products, systems and software to solutions, New Business Creation Excellence, R&D competency management, Clinical Research Board, Innovation Transformation and Performance Management and public funding programs.
- The Chief Architect Office defines and drives the HealthSuite System of Engagement, the Philips HealthSuite Reference Architecture and Modular Systems Architecture, applicable for all systems, products, services, solutions and digital IT in Philips.
- The Software and System Engineering Centers of Excellence, driving adoption of industry best practices in creating and maintaining application-level software, modular and configurable system design and model-based system engineering.
- The Data Science and AI Center of Excellence, defining and deploying strategies and best practices for dealing responsibly and in a compliant way with Data Science and AI, developing common tools to facilitate the development process and co-creation of innovative propositions with clinical and business partners.
Product Engineering
The Product Engineering organization is accountable for building world-class Idea to Market (I2M) capabilities and for driving excellence in product engineering across Philips worldwide.
Philips HealthSuite
Philips HealthSuite is at the core of Philips’ digital transformation. It consists of a highly secured, modular set of capabilities that can liberate and integrate data from disparate systems and accelerate the development and deployment of digital propositions across the health continuum in a secure cloud environment, connecting consumer and medical IoT devices safely and reliably, and providing sophisticated care management applications to support care teams and patients alike.
Innovation Hubs
To drive innovation effectiveness and efficiency, and to enable locally relevant solution creation, we have established four Innovation Hubs for the Philips Group: Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China). The four hubs form a global network, together with the other smaller innovation and research sites in their respective regions, to provide access to each other’s capabilities to serve businesses, markets and customers globally.
- Philips Innovation Center Eindhoven is Philips’ largest cross-functional Innovation Hub, hosting the global headquarters of most of our central innovation organizations. Many of the company’s core research programs are also run from here, as well as innovation for solution & services delivery.
- Philips Innovation Center Cambridge, MA is located at the heart of medical innovation within the North America market. It has innovation partnerships with top engineering institutions like MIT, with top clinical sites, and with government funding agencies like NIH (National Institutes of Health) and BARDA (Biomedical Advanced Research and Development Authority). The Research lab in Cambridge focuses on the application of Data Science and AI in radiology, ultrasound, and acute care.
- Philips Innovation Center Bangalore hosts R&D teams from most of our operating businesses, as well as Innovation & Strategy and IT. This is our largest software-focused site, with over 3,400 engineers. The Center also functions as the hub for market-driven innovation in surrounding geographies in Asia Pacific, Africa, and Middle East & Turkey, focusing on scalable solutions.
- Philips Innovation Center Shanghai is at the center of the healthcare and healthy living transformation of China. It combines digital innovation, research and solutions development for the China market, participating in local digital ecosystems, while several of its locally relevant innovations are also finding their way globally. Programs focus on personal health and connected care solutions.
Alongside the hubs, where most of the central Innovation & Strategy organization is concentrated together with selected business R&D and market innovation teams, we continue to have significant, more focused innovation capabilities integrated into key technology centers at our other global business sites.
Chief Medical Office
The Chief Medical Office is responsible for clinical innovation and strategy, healthcare economics, clinical evidence and market access, clinical education, as well as medical thought leadership, with a focus on healthcare governance and organization, the Quadruple Aim and value-based care. This includes engaging with stakeholders across the health continuum to extend Philips’ leadership in health technology and acting on new value-based reimbursement models that benefit the patient, health professional and care provider.
Leveraging the knowledge and expertise of the medical professional community across Philips, the Chief Medical Office includes many healthcare professionals who practice(d) in the world’s leading health systems. Its activities include strategic guidance built on clinical and scientific knowledge, building customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, liaising with medical regulatory bodies, and supporting clinical and marketing evidence development.
Philips Experience Design and Healthcare Transformation Services
Philips Experience Design is the global design function for the company, ensuring that the user experiences of our innovations are meaningful, people-focused and locally relevant. It is also responsible for ensuring that the Philips brand experience is distinctive, consistently expressed across all customer touchpoints, and drives customer preference. A key enabler for this is a consistent and differentiating design language that applies to software, hardware and services across our businesses. Philips Experience Design partners with stakeholders across the organization to develop methodologies and enablers for defining value propositions, as well as to implement data-enabled design tools and processes to create meaning from data. Philips Experience Design received 151 awards for design excellence in 2020.
In partnership with Philips Experience Design, Philips Healthcare Transformation Services (HTS) leverages Co-create methodologies with the aim of creating solutions that are tailored specifically to the challenges facing our customers, as local circumstances and workflows are key ingredients in the successful implementation of solutions. HTS is a team of healthcare transformation practitioners with consulting skills and a portfolio of methods and tools in operational and clinical excellence, environmental and experience design, and technology transformation and analytics.
IP Royalties
Philips Intellectual Property & Standards (IP&S) proactively pursues the creation of new Intellectual Property (IP) in close co-operation with Philips’ operating businesses and Innovation & Strategy. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability.
Royal Philips’ total IP portfolio currently consists of 62,000 patent rights, 37,000 trademarks, 104,000 design rights and 3,200 domain names. Philips filed 876 new patents in 2020, with a strong focus on the growth areas in health technology services and solutions.
Philips earns substantial annual income from license fees and royalties. These are mostly earned on the basis of usage or fixed fees, recognized over the term of the contract or at a point in time.
Philips believes its business as a whole is not materially dependent on any particular third-party patent or license, or any particular group of third-party patents and licenses.
Central costs
We recharge the directly attributable part of the central costs to the business segments. The remaining part is accounted for as central costs, and includes costs related to the Executive Committee and Group functions such as Strategy, Legal and Audit fees.
Real estate
Philips is present in more than 75 countries globally and has its group headquarters in Amsterdam, Netherlands. Our real estate sites are spread around the globe, with key manufacturing and R&D sites in Europe, the Americas and Asia.
In 2020, we opened prime locations in Cambridge and Pittsburgh (USA) and substantially invested in our campus in Eindhoven-North (Netherlands), to create an engaging workplace that will help attract and retain the best talent. We have driven productivity by optimizing our footprint globally and reduced the number of sites through post-acquisition integration programs.
In line with our Environmental ESG commitment towards 2025, as well as our commitment to the UN Sustainable Development Goals, we are actively optimizing our real estate portfolio. Since 2018, our site-related CO2 emissions related to fossil fuel consumption have been reduced by over 10%, and we have met our goal of bringing those CO2 emissions under 35 kilotonnes per year.
The vast majority of our locations consist of leased property, and we manage these closely to keep the overall vacancy rates of our property below 5% and to ensure the right level of space efficiency and flexibility to follow our business dynamic. Occupancy rates in Philips office locations were reduced during 2020 as a result of COVID-19 and this trend is expected to continue in 2021. The net book value of our land and buildings at December 31, 2020, represented EUR 1,374 million; construction in progress represented EUR 65 million. Our current facilities are adequate to meet the requirements of our present and foreseeable future operations.
6.4Our geographies
6.4.1Our Markets
We operate three market groups – North America, Greater China and International Markets (consisting of seven regions) – which are active in more than 100 countries worldwide.
The Markets’ core objective is to understand local market/customer needs, to develop and manage the relationship with existing and new customers, and to deliver orders. As such, the market organizations are also responsible for the market-oriented profit-and-loss account (P&L) and balance sheet. They translate the voice of the customer into the innovation process, bring relevant products and solutions to market, and ensure local (solution) delivery and service execution, as well as managing the (integral) go-to-market approaches to our key customers and indirect channels – all with the aim of maximizing long-term customer value and gaining market share.
To take quick decisions that are locally relevant and as close to the customer as possible, our Businesses and Markets work closely together in Business-Market Combinations (BMCs) – Image Guided Therapy Systems-DACH (Germany, Austria & Switzerland), for example. The BMC makes agreements where to compete and how to win. Businesses and Markets bear joint accountability for managing the operational end-to-end consumer and customer value chain, Quality & Regulatory compliance and the collaborative P&L, while leveraging the functional excellence and shared infrastructure of the company.
6.4.2Macro-economic landscape in 2020
In 2020, the world economy experienced a sharp recession, owing to the lockdown measures taken to combat the coronavirus outbreaks. According to Oxford Economics, global real GDP is estimated to have contracted by 3.9% in 2020, compared with the 2.5% growth estimated in 2019 for 2020. Across Philips’ markets, only Greater China is estimated to have shown growth in 2020, while the rest of the markets all suffered full-year recessions to various degrees. Looking ahead, Oxford Economics expects global real GDP growth to reach 5.0% in 2021.
6.4.32020 highlights from our Market Groups
North America
In a year shaped by the pandemic, Philips helped customers roll out more than 8,000 ICU beds for COVID-19 patients. We quickly introduced the Rapid Equipment Deployment Kit, a self-service 20-bed ICU that can be deployed in hours thanks to remote clinical training, installation, and set-up. We also developed ultrasound solutions for COVID-19 detection at the point of care.
Philips increased ventilator production multifold to meet the high COVID-19-related demand, and shipped ventilators across the world using a fair and ethical approach to allocate supply to acute patient demands based on COVID-19 data and the available critical care capacity. Following Philips’ delivery of 12,300 bundled EV300 ventilator configurations to the US Strategic National Stockpile in line with the contract signed in April 2020, the US Department of Health and Human Services cancelled the delivery of the remaining 30,700 ventilators.
Our commitment to improving lives through meaningful innovation continued in our partnership with the U.S. Department of Defense and Veterans Affairs (VA), where we are working to advance AI technology for early detection of COVID-19 and tele-critical care technologies and services. VA signed a 10-year contract, which enables it to invest up to USD 100 million with Philips to create the world’s largest tele-ICU system and extend access to intensive care expertise for veterans, regardless of their location.
We expanded our strategic relationships with local health systems, including Steward Health Care, which signed a nine-year, multi-vendor services contract with Philips, making us their strategic partner of choice. The University of Kentucky's UK HealthCare worked with Philips to power the state’s only eICU Clinical Command Center, which will help them in care provisioning for COVID-19 patients. In addition, Tampa General signed a seven-year strategic partnership with Philips to provide the hospital with new patient monitoring solutions, imaging equipment, healthcare informatics, workflow solutions and consulting.
Philips Sonicare is the sonic toothbrush brand most recommended by US dental professionals, and our Professional Teledentistry program has made it easier for consumers to maintain wellness from home through the pandemic. Philips maintains a No. 1 market share in male grooming (electric). We are also one of the leading brands in reusable baby bottles and our Pregnancy+ apps are amongst the fastest-growing for new parents.
Greater China
In 2020 we continued our efforts to provide innovative health technology solutions in support of China's national health strategy, Healthy China 2030 – the action program designed to promote the health of China's 1.4 billion people.
We signed a multi-year contract with the First Affiliated Hospital of Zhejiang University, one of China's leading hospitals, to support its expansion and upgrading. Combining clinical, research and education, this deal includes Ultrasound, Image Guided Therapy and Monitoring Analytics & Therapeutic Care solutions.
Philips helped Beijing Ditan Hospital, a top 3A hospital specially designated for COVID-19 care, to upgrade its ICU facility and capability with IntelliSpace Critical Care and Anaesthesia solutions supporting 41 ICU beds.
Philips provided cardiology solutions, including MR, Digital Subtraction Angiography and customer services, to Hong Kong Asia Heart Center, a private medical group dedicated to the treatment, rehabilitation and prevention of heart disease.
For consumers, we introduced our new SkinIQ range shaver, powered by the breakthrough Philips skin technology SkinIQ, recording record-breaking sales of 30,000 units sold on launch day on Tmall (S5000) and increasing total Male Grooming sell-out by 39% on JD (S7000). We also collaborated with Tmall Innovation Center to launch Philips’ first C2B (Consumer to Business) shaver, with 160,000 pieces selling out in a month – a new benchmark in the industry.
International Markets
In our international markets, Philips entered into many new customer partnerships, including the following:
In the United Kingdom, Philips was awarded a 7-year strategic partnership with South Tees Hospitals NHS Foundation Trust, with a workforce of around 9,000 providing a range of specialist regional services to 1.5 million people. This collaboration will utilize Philips’ innovative Vue PACS (Picture Archiving and Communication System) technology and VNA (Vendor-Neutral Archiving) capability to support the Trust in connecting and integrating imaging facilities across multiple regional locations to provide seamless image sharing. Following the outbreak of COVID-19, Philips rapidly arranged for delivery of vital health technology equipment and provided remote simulation-based training sessions that enabled life-saving techniques without putting healthcare professionals at further risk.
In Germany, Philips entered into an 8-year strategic partnership Paracelsus Clinics, offering solutions that maximize the availability of imaging systems and leverage digitalization and process optimization to realize quality and efficiency improvements. And we signed a 10-year strategic partnership with Marienhospital Stuttgart to deploy our digital healthcare solutions across multiple departments to improve patient care and efficiency.
In the Benelux, Philips and Flevo Hospital signed a 10-year strategic partnership agreement to support precision diagnosis and optimize workflows and patient pathways, while driving efficiencies and cost optimization. We also renewed our long-term partnership with Alrijne Hospital in Leiderdorp and agreed a 5-year partnership with the Franciscus Gasthuis and Vlietland hospital in Rotterdam. We worked together with Erasmus University Medical Centre, Jeroen Bosch Hospital and the Ministry of Health, Welfare and Sport to launch the COVID-19 portal – a solution to enable hospitals to digitally exchange patient data and images, when COVID-19 patients are relocated between hospitals. Some 95% of Dutch hospitals are connected to the portal.
In France, the strategic partnership signed in 2015 with Hospices Civils de Lyon (HCL) has once again proven to be productive and fruitful. During the first wave of the COVID-19 pandemic, we teamed up to develop an AI-based CT lung assessment tool, the full version of which was launched at the Radiological Society of North America event RSNA 2020.
In Spain, Philips and the Hospital San Joan de Déu in Barcelona signed an agreement to renew the pediatric surgical block, incorporating the most advanced technology for minimally invasive procedures. In this way, surgeons at the Hospital will have high-resolution images, and even augmented reality in real time, of the area on which they are operating.
In Italy, Philips successfully participated in public tenders to supply hospitals fighting the COVID-19 emergency with ICU equipment – including over 3.000 monitors in the first half of the year alone – as well as Ultrasound and Therapeutic Care devices.
In Denmark, Philips’ Clinical Collaboration Platform supports telehealth and other connectivity initiatives to increase collaboration across hospitals, empowering medical image access for over 5,000 clinicians in the Region of Southern Denmark. The Region now has a single system for storing, retrieving, and viewing clinical images across all the locations and specialties in its extensive healthcare system, serving approximately 300 radiologists and nuclear medicine specialists performing 1.5 million exams yearly.
Supporting the Swedish National Board of Health and Welfare, we sped up delivery of IntelliVue X3 monitors to meet the increased care capacity needs of Swedish hospitals in the face of COVID-19.
In Indonesia, Philips signed a seven-year strategic partnership agreement with Mandaya Royal Hospital Puri, providing a turnkey solution combining the latest innovations in enterprise diagnostic imaging, connected care and informatics, as well as service, maintenance and financing.
In South Korea, Philips secured a deal with Sejong Chungnam National University Hospital (CNUH) to provide an extensive range of Diagnostic Imaging and Image Guided Therapy solutions.
In Japan, we launched our Philips Lumify with Reacts handheld tele-ultrasound solution – with a novel subscription model – to enable powerful diagnostics at the bedside.
In Colombia, we signed our first deal for the implementation of EMR (Electronic Medical Record) and interoperability solutions with Santa Fe de Bogota Foundation. The agreement covers the replacement of its central information system with a comprehensive healthcare informatics solution with interoperable digital technology that improves its operational and administrative infrastructure, and overall patient experience.
In Turkey, Philips is a solutions partner of Basaksehir City Hospital. To help fight the pandemic, we installed more than 2,200 clinical and imaging devices across all modalities within three weeks, two months earlier than planned. We also signed a partnership agreement with one of the country's largest dental hospital chains, Dent Group.
In Saudi Arabia, Philips won a strategic deal to supply almost 3,000 patient monitors to help in the fight against COVID-19.
Supporting the increased demand for flexible ICU capacity, Philips introduced its new mobile ICUs in India. The ICUs can be furnished with a range of medical equipment, including ventilators, defibrillators, and patient monitoring.
6.5Supply chain and procurement
6.5.1Supply chain
Philips runs an Integrated Supply Chain, which encompasses supplier selection and management through procurement, manufacturing across all the industrial sites, logistics and warehousing operations, as well as demand/supply orchestration.
Striving for a balanced ‘regional vs global’ approach, the Integrated Supply Chain supports our business expansion, ensuring adequate capacity and speed while leveraging our global processes, standards and capabilities aligned with our industrial footprint strategy to become more efficient and effective.
In order to improve demand forecasting accuracy and manage inventories more efficiently, we piloted the application of artificial intelligence and machine learning in our North American operations in the Personal Health business. We achieved an improved forecast accuracy of more than 20% and better fill rates, leading to increased customer satisfaction. We are now in the process of rolling this out to the rest of the world.
When selecting and evaluating partners, we consider not only business metrics such as cost, quality and on-time delivery performance, but also environmental, social and governance factors. We use supplier classification models to identify critical suppliers, including those supplying materials, components and services that could influence the safety and performance of our products and solutions.
Since 2017, Philips has been consolidating its manufacturing footprint into versatile ‘multi-modality’ manufacturing sites that produce multiple product categories and are located within or near the regions they serve, for enhanced scale, efficiency, and customer proximity. As of the end of 2020, 25 sites have been closed or divested. During the same period, Philips has acquired 10 sites. We have also started to transform our warehousing and distribution operations into a more customer-centric and agile network that is more responsive to market volatility. In the last two years, we have reduced our warehousing footprint by 28% through, among other things, consolidation and servicing of multiple businesses from a single location.
The COVID-19 pandemic has tested the resilience and ingenuity of our people and partners in every part of our integrated supply chain, as we adjusted production capacity to the fluctuations in market demand. We teamed up with partners such as KLM to establish air corridors to enable us to supply essential healthcare equipment and solutions during the lockdown periods. We worked closely with our manufacturing sites as well our suppliers to deal with local (partial) lockdowns and safeguard a reliable supply of components and parts, prioritizing delivery of critical equipment to those in need.
Philips Group
Supplier spend analysis per region
in %
| Western Europe | 28% |
| North America | 36% |
| Other mature geographies | 6% |
| Total mature geographies | 70% |
| Growth geographies | 30% |
| Philips Group | 100% |
6.5.2Procurement
In 2020, the COVID-19 pandemic resulted in significant disruption to demand and international trade flows. Under these circumstances, the Procurement function was focused on managing uninterrupted supplies to enable Philips to provide critical life-saving healthcare equipment and solutions to our customers all over the world. For example, we had to make a steep ramp-up in the production of ventilators from 1,000 per week to 4,000 per week within a short period of 5 months. This necessitated significant investments in our own plants, as well as close cooperation with our contract manufacturers and parts suppliers, to ensure the availability of the significantly increased capacity. In certain cases, we needed to shift the supplier locations to countries where the impact of the pandemic was low.
For many components, lead times increased significantly, leading to shortages. Market prices for raw materials showed extreme volatility, falling in the first half of the year and recovering from their lows from June onwards, led by a return to manufacturing growth in China. In general, in the second half of the year the economy continued its path to recovery, with manufacturing output and new orders both rising.
6.5.3Supplier sustainability
Philips’ purpose to improve people’s lives applies throughout our value chain. An important area of focus for the Integrated Supply Chain is sustainability, and we are actively working on this together with our partners, be they suppliers or energy or logistics providers. Close cooperation with our suppliers not only helps us deliver health technology innovations, it also supports new approaches that help us minimize our environmental impact and maximize the social and economic value we create.
Since 2003 we have dedicated supplier sustainability programs as part of our sustainability strategy. We have a direct (tier 1) business relationship with approximately 3,300 product and component suppliers and 16,000 service providers. In many cases, social issues deeper in our supply chain require us to intervene beyond tier 1 of the chain.
We want to make a difference through sustainable supply management and responsible sourcing. This is more than simply managing compliance – it is about working together with our supply partners to have a positive and lasting impact. Therefore, the sustainability performance of our suppliers is fully embedded in our procurement organization and strategy.
In 2020, our focus was on further maximizing our positive impact on the supply chain. Through the Supplier Sustainability Performance program, we improved the lives of 302,000 workers in our supply chain. We also explored new ways to leverage the power of data in our sustainability engagements. Through new use-cases, we are utilizing insights from machine learning to strengthen the efficacy and effectiveness of sustainability performance at our suppliers.
Managing our large and complex supply chain in a socially and environmentally responsible way requires a structured and innovative approach, while being transparent and engaging with a wide variety of stakeholders. In 2020, our programs focused specifically on improving suppliers’ sustainability performance, responsible sourcing of minerals, and reducing the environmental footprint of our supply base.
7Financial performance
7.1Performance review
The year 2020
- Sales amounted to EUR 19.5 billion, in line with 2019 on a nominal basis. On a comparable basis*), overall sales growth was 3%, with 22% growth in the Connected Care businesses, a 2% decline in the Diagnosis & Treatment businesses, and a 4% decline in the Personal Health businesses.
- Net income amounted to EUR 1.2 billion, an increase of EUR 22 million compared to 2019, mainly due to lower net financial expenses and lower income tax expenses, partly offset by charges of EUR 144 million related to impairment of goodwill. Net income is not allocated to segments, as certain income and expense line items are recorded on a centralized basis.
- Adjusted EBITA*) amounted to EUR 2.6 billion, or 13.2% of sales, in line with 2019. The productivity programs delivered annual savings of approximately EUR 447 million and included approximately EUR 222 million procurement savings, led by the Design for Excellence (DfX) program, and approximately EUR 225 million savings from other productivity programs. While the Connected Care businesses delivered improved profit expansion, both the Diagnosis & Treatment businesses and Personal Health businesses showed a decline in Adjusted EBITA*) margin. This was primarily due to lower volumes and resulting lower factory fixed cost coverage, an adverse mix impact due to lower sales in Ultrasound and Image-Guided Therapy in the Diagnosis & Treatment businesses, and the decline in sales, partly offset by cost savings, in the Personal Health businesses.
- Operating cash flow amounted to EUR 2.8 billion, an increase of EUR 746 million, mainly due to working capital improvements, in particular better management of outstanding receivables. The 2019 figure was mainly attributable to higher earnings, partly offset by higher working capital outflows and higher tax paid. Free cash flow*) amounted to EUR 1.9 billion, compared to EUR 1.1 billion in 2019.
- In 2020, Philips completed three acquisitions, with Intact Vascular, Inc. (Intact Vascular) being the most notable.
- On January 29, 2019, Philips announced a new EUR 1.5 billion share buyback program for capital reduction purposes. As of the end of 2020, Philips had completed 50.3% of this program. Philips has executed the second half of the program through individual forward transactions with settlement dates extending into the second half of 2021.
- In January 2020, Philips announced that it would review options for future ownership of its Domestic Appliances business, part of the Personal Health segment. Philips has started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the third quarter of 2021. Separation costs of EUR 42 million were incurred in 2020.
Coronavirus disease 2020 (COVID-19) outbreak
In 2020, COVID-19 affected the global economy and the company’s results. In the Diagnosis & Treatment businesses, comparable sales*) declined due to the postponement of installations and elective procedures resulting from the impact of COVID-19. In the Personal Health businesses, COVID-19 led to a decline in comparable sales*) due to lockdowns in several countries. The Connected Care businesses recorded comparable sales growth*), as our innovations in both Monitoring & Analytics and Sleep & Respiratory Care were able to help our customers combat the pandemic.
The year 2019
- Sales rose to EUR 19.5 billion, a nominal increase of 8%, with 10% growth in the Diagnosis & Treatment businesses, 8% growth in the Connected Care businesses and 6% growth in the Personal Health businesses. On a comparable basis*) sales growth was 4.5%, with 5% growth in the Diagnosis & Treatment businesses, 5% growth in the Personal Health businesses, and 3% growth in the Connected Care businesses.
- Net income amounted to EUR 1.2 billion, an increase of EUR 76 million compared to 2018, mainly due to improvements in operational performance, lower net financial expenses and lower charges related to discontinued operations, partly offset by higher income tax expense and charges of EUR 97 million related to impairment of goodwill. Net income is not allocated to segments as certain income and expense line items are recorded on a centralized basis.
- Adjusted EBITA*) increased to EUR 2.6 billion, or 13.2% of sales, an increase of EUR 197 million, or 10 basis points as a % of sales, compared to 2018. The productivity programs delivered annual savings of approximately EUR 480 million, and included approximately EUR 166 million procurement savings, led by the Design for Excellence (DfX) program, and EUR 314 million savings from other productivity programs. While the Diagnosis & Treatment and Personal Health businesses delivered good profit expansion, the Connected Care business showed a decline of 200 basis points, primarily due to tariffs, an adverse currency impact, mix and higher material costs.
- Net cash provided by operating activities amounted to EUR 2.0 billion, an increase of EUR 251 million, mainly due to higher earnings that were partly offset by higher working capital outflows and higher tax paid, while 2018 included an outflow of EUR 130 million related to pension liability de-risking. Free cash flow*) amounted to EUR 1.1 billion compared to EUR 984 million in 2018.
- In the second quarter of 2019, Philips completed its EUR 1.5 billion share buyback program that was announced on June 28, 2017. All of the shares acquired under the program were cancelled.
- On January 29, 2019, Philips announced a new EUR 1.5 billion share buyback program for capital reduction purposes. As of the end of 2019, Philips completed 41.5% of this program.
- During 2019 Philips sold all of its remaining shares (16.5%) in Signify (formerly Philips Lighting).
Philips Group
Key data
in millions of EUR unless otherwise stated
| Sales | 18,121 | 19,482 | 19,535 |
| Nominal sales growth | 1.9% | 7.5% | 0.3% |
| Comparable sales growth1) | 4.7% | 4.5% | 2.5% |
| Income from operations | 1,719 | 1,644 | 1,542 |
| as a % of sales | 9.5% | 8.4% | 7.9% |
| Financial expenses, net | (213) | (117) | (44) |
| Investments in associates, net of income taxes | (2) | 1 | (9) |
| Income tax expense | (193) | (337) | (284) |
| Income from continuing operations | 1,310 | 1,192 | 1,205 |
| Discontinued operations, net of income taxes | (213) | (19) | (10) |
| Net income | 1,097 | 1,173 | 1,195 |
| Adjusted EBITA1) | 2,366 | 2,563 | 2,570 |
| as a % of sales | 13.1% | 13.2% | 13.2% |
| Income from continuing operations attributable to shareholders2) per common share (in EUR) - diluted3) | 1.37 | 1.27 | 1.31 |
| Adjusted income from continuing operations attributable to shareholders2) per common share (in EUR) - diluted1)3)4) | 1.72 | 1.98 | 1.98 |
7.1.1Results of operations
Sales
The composition of sales growth in percentage terms in 2020, compared to 2019 and 2018, is presented in the following table.
Philips Group
Sales
in millions of EUR unless otherwise stated
| Diagnosis & Treatment businesses | 7,726 | 8,485 | 8,175 |
| Nominal sales growth | 4.9% | 9.8% | (3.7)% |
| Comparable sales growth1) | 6.6% | 5.5% | (2.3)% |
| Connected Care businesses | 4,341 | 4,674 | 5,564 |
| Nominal sales growth | 0.2% | 7.7% | 19.1% |
| Comparable sales growth1) | 2.7% | 3.1% | 22.0% |
| Personal Health businesses | 5,524 | 5,854 | 5,407 |
| Nominal sales growth | (2.8)% | 6.0% | (7.6)% |
| Comparable sales growth1) | 2.3% | 5.0% | (4.2)% |
| Other | 530 | 469 | 389 |
| Philips Group | 18,121 | 19,482 | 19,535 |
| Nominal sales growth | 1.9% | 7.5% | 0.3% |
| Comparable sales growth1) | 4.7% | 4.5% | 2.5% |
Group sales amounted to EUR 19,535 million in 2020, in line with 2019 on a nominal basis. Adjusted for a 2.2% negative currency effect and consolidation impact, comparable sales*) increased by 3%. The negative currency effect was mainly due to depreciation of currencies against the euro and affected all business segments.
Group sales amounted to EUR 19,482 million in 2019, 8% higher on a nominal basis. Adjusted for a 3.0% positive currency effect and consolidation impact, comparable sales*) were 4.5% above 2018. The positive currency effect is mainly driven by the appreciation of the US dollar against the euro.
Diagnosis & Treatment businesses
In 2020, sales amounted to EUR 8,175 million, 4% lower than in 2019 on a nominal basis. Excluding a 1.4% negative currency effect and consolidation impact, comparable sales*) decreased by 2%, as low-single-digit growth in Diagnostic Imaging, was more than offset by a high-single-digit decline in Image-Guided Therapy and Ultrasound due to the postponement of installations and elective procedures resulting from the impact of COVID-19.
In 2019, sales amounted to EUR 8,485 million, 10% higher than in 2018 on a nominal basis. Excluding a 4.3% positive currency effect and consolidation impact, comparable sales*) increased by 5%, with double-digit growth in Image-Guided Therapy, high-single-digit growth in Ultrasound and low-single-digit growth in Diagnostic Imaging. The positive currency effect is mainly driven by the appreciation of the US dollar against the euro.
Connected Care businesses
In 2020, sales amounted to EUR 5,564 million, 19% higher than in 2019 on a nominal basis. Excluding a 2.9% negative currency effect and consolidation impact, comparable sales*) increased by 22%, with double-digit growth in both Monitoring & Analytics and Sleep & Respiratory Care, as our innovations in these therapeutic areas were able to help our customers combat the pandemic.
In 2019, sales amounted to EUR 4,674 million, 8% higher on a nominal basis compared to 2018. Excluding a 4.6% positive currency effect and consolidation impact, comparable sales*) increased by 3%, with low-single-digit growth in Sleep & Respiratory Care and Monitoring & Analytics. The positive currency effect is mainly driven by the appreciation of the US dollar against the euro.
Personal Health businesses
In 2020, sales amounted to EUR 5,407 million, 8% lower than in 2019 on a nominal basis. Excluding a 3.4% negative currency effect and consolidation impact, comparable sales*) decreased by 4%, driven by a mid-single-digit decline in Personal Care, and a high-single-digit decline in Oral Healthcare, mainly caused by lockdowns in several countries.
In 2019, sales amounted to EUR 5,854 million, 6% higher on a nominal basis compared to 2018. Excluding a 0.9% positive currency effect and consolidation impact, comparable sales*) were 5% higher year-on-year, driven by double-digit growth in Oral Healthcare.
Other
In 2020, sales amounted to EUR 389 million, compared to EUR 469 million in 2019. The decrease was mainly due to lower royalty income.
In 2019, sales amounted to EUR 469 million, compared to EUR 530 million in 2018. The decrease was mainly due to lower royalty income and the divestment of the Photonics business in Q1 2019.
Performance per geographic cluster
Philips Group
Sales by geographic area
in millions of EUR unless otherwise stated
| Western Europe | 3,990 | 4,134 | 4,613 |
| North America | 6,338 | 6,951 | 6,949 |
| Other mature geographies | 1,892 | 1,905 | 1,860 |
| Total mature geographies | 12,221 | 12,990 | 13,422 |
| Nominal sales growth | 2.5% | 6.3% | 3.3% |
| Comparable sales growth1) | 3.3% | 2.1% | 3.9% |
| Growth geographies | 5,901 | 6,492 | 6,113 |
| Nominal sales growth | 0.7% | 10.0% | (5.8)% |
| Comparable sales growth1) | 7.6% | 9.6% | (0.3)% |
| Philips Group | 18,121 | 19,482 | 19,535 |
Sales in mature geographies in 2020 were 3% higher than in 2019 on a nominal basis and 4% higher on comparable basis*). Sales in Western Europe were 12% higher year-on-year on a nominal basis and 11% higher on a comparable basis*), with double-digit growth in the Connected Care businesses and Personal Health businesses, partly offset by a low-single-digit decline in the Diagnosis & Treatment businesses. Sales in North America were in line with 2019 on a nominal basis, and increased 2% on a comparable basis*), as double-digit growth in the Connected Care businesses and low-single-digit growth in the Personal Health businesses were largely offset by a high-single-digit decline in the Diagnosis & Treatment businesses. Sales in other mature geographies decreased by 2% on both a nominal and comparable basis*). Double-digit comparable sales growth*) in the Connected Care businesses was more than offset by a double-digit decline in the Personal Health businesses and a low-single-digit decline in the Diagnosis & Treatment businesses.
Sales in mature geographies in 2019 were EUR 769 million higher than in 2018, or 6% higher on a nominal basis and 2% higher on comparable basis*). Sales in Western Europe were 4% higher year-on-year on a nominal basis and 2% higher on a comparable basis*), with mid-single-digit growth in the Personal Health businesses and low-single-digit growth in the Connected Care businesses, while the Diagnosis & Treatment businesses were in line with 2018. Sales in North America increased by EUR 613 million, or 10% on a nominal basis, and increased 4% on a comparable basis*), with mid-single-digit growth in the Diagnosis & Treatment businesses and low-single-digit growth in the Personal Health businesses and Connected Care businesses. Sales in other mature geographies increased by 1% on a nominal basis and declined by 3% on a comparable basis*), as lower IP royalty income offset high-single-digit growth in the Personal Health businesses, mid-single-digit growth in the Connected Care businesses and low-single-digit growth in the Diagnosis & Treatment businesses.
Sales in growth geographies in 2020 decreased by 6% on a nominal basis, mainly due to depreciation of their currencies against the euro, but were in line with 2019 on a comparable basis*), with double-digit growth in the Connected Care businesses and mid-single-digit growth in the Diagnosis & Treatment businesses offset by a double-digit decline in the Personal Health businesses. The flat year-on-year comparable sales growth*) was driven by double-digit growth in Central & Eastern Europe and Russia & Central Asia and high-single-digit growth in Latin America, offset by a high-single-digit decline in China.
Sales in growth geographies in 2019 were EUR 591 million higher than in 2018, increased by 10% on both a nominal and a comparable basis*) with double-digit growth in the Diagnosis & Treatment businesses, high-single-digit growth in the Connected Care businesses and mid-single-digit growth in the Personal Health businesses. The increase was driven by double-digit growth in China.
Diagnosis & Treatment businesses
Philips Group
Diagnosis & Treatment businesses sales
in millions of EUR unless otherwise stated
| Western Europe | 1,557 | 1,586 | 1,589 |
| North America | 2,879 | 3,214 | 2,931 |
| Other mature geographies | 797 | 851 | 835 |
| Total mature geographies | 5,232 | 5,651 | 5,355 |
| Growth geographies | 2,494 | 2,834 | 2,820 |
| Sales | 7,726 | 8,485 | 8,175 |
| Nominal sales growth | 5% | 10% | (4)% |
| Comparable sales growth1) | 7% | 5% | (2)% |
From a geographic perspective, nominal sales in growth geographies were in line with 2019, while comparable sales*) showed mid-single-digit growth, driven by double-digit growth in China, Russia & Central Asia and Central & Eastern Europe, partly offset by India and Middle East & Turkey. Sales in mature geographies showed a mid-single-digit decrease on a nominal and comparable basis*). Comparable sales*) declined, with a low-single-digit decline in Western Europe and a high-single-digit decline in North America.
From a geographic perspective, nominal sales in growth geographies increased by 14% in 2019, while comparable sales*) showed double-digit growth, driven by double-digit growth in China and Latin America. Sales in mature geographies increased by 8% on a nominal basis, while comparable sales*) showed low-single-digit growth, with mid-single-digit growth in North America and low-single-digit growth in other mature geographies, while Western Europe remained flat year-on-year.
Connected Care businesses
Philips Group
Connected care businesses sales
in millions of EUR unless otherwise stated
| Western Europe | 751 | 782 | 1,118 |
| North America | 2,448 | 2,624 | 2,882 |
| Other mature geographies | 580 | 646 | 723 |
| Total mature geographies | 3,779 | 4,052 | 4,724 |
| Growth geographies | 562 | 622 | 840 |
| Sales | 4,341 | 4,674 | 5,564 |
| Nominal sales growth | 0% | 8% | 19% |
| Comparable sales growth1) | 3% | 3% | 22% |
From a geographic perspective, sales on a nominal basis increased by 35% in growth geographies in 2020 and on a comparable basis*) showed double-digit growth, with double-digit growth across all regions. Sales in mature geographies increased by 17% on a nominal basis and showed double-digit growth on a comparable basis*), with double-digit growth across all regions.
From a geographic perspective, sales on a nominal basis increased by 11% in growth geographies in 2019, and on a comparable basis*) showed high-single-digit growth, with double-digit growth in China and mid-single-digit growth in Latin America. Sales in mature geographies decreased by 7% on a nominal basis and showed low-single-digit growth on a comparable basis*), with mid-single-digit growth in other mature geographies and low-single-digit growth in Western Europe and North America.
Personal Health businesses
Philips Group
Personal Health businesses sales
in millions of EUR unless otherwise stated
| Western Europe | 1,516 | 1,604 | 1,758 |
| North America | 945 | 1,003 | 996 |
| Other mature geographies | 334 | 367 | 299 |
| Total mature geographies | 2,795 | 2,974 | 3,052 |
| Growth geographies | 2,730 | 2,880 | 2,355 |
| Sales | 5,524 | 5,854 | 5,407 |
| Nominal sales growth | (3)% | 6% | (8)% |
| Comparable sales growth1) | 2% | 5% | (4)% |
Sales in growth geographies decreased 18% on a nominal basis in 2020, and on a comparable basis*) showed a double-digit decline, which was attributable to China. Sales in mature geographies increased 3% on a nominal basis, and on a comparable basis*) showed mid-single-digit growth, driven by double-digit growth in Western Europe, partly offset by other mature geographies.
Sales in growth geographies increased 6% on a nominal basis in 2019 and on a comparable basis*) showed mid-single-digit growth, with double-digit growth in Central & Eastern Europe and mid-single-digit growth in China. Sales in mature geographies increased 6% on a nominal basis and on a comparable basis*) showed mid-single-digit growth, with high-single-digit growth in other mature geographies, mid-single-digit growth in Western Europe, and low-single-digit growth in North America.
Cost of sales
Philips Group
Cost of sales components
in millions of EUR unless otherwise stated
| Costs of materials used | 4,826 | 26.6% | 5,321 | 27.3% | 5,240 | 26.8% |
| Salaries and wages | 2,132 | 11.8% | 2,311 | 11.9% | 2,362 | 12.1% |
| Depreciation and amortization | 447 | 2.5% | 572 | 2.9% | 622 | 3.2% |
| Other manufacturing costs | 2,162 | 11.9% | 2,403 | 12.3% | 2,530 | 12.9% |
| Cost of sales | 9,568 | 52.8% | 10,607 | 54.4% | 10,754 | 55.0% |
Cost of sales includes only expenses directly or indirectly attributable to the production process, such as cost of materials used, salaries and wages, depreciation and amortization of assets used in manufacturing, and other manufacturing costs (such as repair and maintenance costs related to production, expenses incurred for shipping and handling of internal movements of goods, and other expenses related to manufacturing).
Philips’ cost of sales increased by EUR 147 million to EUR 10,754 million in 2020, compared to EUR 10,607 million in 2019. Expressed as a percentage of sales, this represented an increase to 55.0% of sales in 2020 from 54.4% of sales in 2019.
Costs of materials used decreased by EUR 81 million, mainly due to procurement savings of EUR 222 million and a positive foreign currency impact. This was partly offset by higher volume.
Salaries and wages in 2020 increased by EUR 51 million, driven by acquisitions and higher volume, partly offset by productivity measures.
Depreciation and amortization in 2020 increased by EUR 50 million, mainly due to an impairment of a technology asset of EUR 92 million in 2020, compared to EUR 50 million in 2019.
Other manufacturing costs increased by EUR 127 million in 2020, mainly due to a provision of EUR 38 million related to legal matters and charges of EUR 34 million due to changes in ventilator demand.
Gross margin
In 2020, Philips’ gross margin was EUR 8,781 million, or 45.0% of sales, compared to EUR 8,875 million, or 45.6% of sales, in 2019. The year-on-year decrease in gross margin was mainly driven by a EUR 70 million decrease in IP royalty income, as well as lower coverage of fixed costs in our industrial base, mainly due to the impact of COVID-19.
In 2019, Philips’ gross margin increased to EUR 8,875 million compared to EUR 8,554 million in 2018, while the margin decreased to 45.6% of sales from 47.2% of sales in 2018. The year-on-year decrease in the margin was mainly driven by lower IP royalty income and tariffs. Gross margin in 2019 included EUR 191 million of restructuring, acquisition-related and other charges, whereas 2018 included EUR 107 million of restructuring, acquisition-related and other charges. 2019 also includes charges related to the Consent Decree focused on defibrillator manufacturing in the US of EUR 29 million and a provision of EUR 12 million related to legal matters. 2018 also included EUR 28 million of charges related to the Consent Decree.
Selling expenses
Selling expenses amounted to EUR 4,606 million, or 23.6% of sales, in 2020, compared to EUR 4,682 million, or 24.0% of sales, in 2019. The year-on-year decrease in selling expenses of EUR 76 million was driven by savings from productivity improvements, a positive foreign currency impact and lower restructuring costs, partly offset by costs from new acquisitions. Selling expenses in 2020 include EUR 141 million of restructuring, acquisition-related and other charges, compared to EUR 158 million in 2019.
Selling expenses amounted to EUR 4,682 million in 2019, or 24.0% of sales, compared to EUR 4,500 million, or 24.8% of sales, in 2018. Selling expenses in 2019 included EUR 158 million of restructuring, acquisition-related and other charges, compared to EUR 121 million in 2018. 2019 includes charges related to the Consent Decree of EUR 10 million and a provision of EUR 10 million related to legal matters. 2018 also included a EUR 18 million charge related to the conclusion of the European Commission investigation into retail price maintenance, and EUR 16 million related to the Consent Decree.
General and administrative expenses
General and administrative expenses amounted to EUR 668 million, or 3.4% of sales, in 2020, compared to EUR 631 million, or 3.2% of sales, in 2019. The year-on-year increase of EUR 37 million in general and administrative expenses was mainly driven by charges related to the separation of the Domestic Appliances business of EUR 37 million. Higher restructuring, acquisition-related and other charges were largely offset by savings from productivity programs.
General and administrative expenses amounted to EUR 631 million, or 3.2% of sales, in 2019, compared to EUR 631 million, or 3.5% of sales, in 2018. 2019 included EUR 24 million of restructuring, acquisition-related and other charges, compared to EUR 30 million in 2018.
Research and development expenses
Research and development costs were EUR 1,915 million, or 9,8% of sales, in 2020, compared to EUR 1,884 million, or 9.7% of sales, in 2019. The year-on-year increase of EUR 31 million was mainly driven by impairments of technology assets in the Connected Care businesses and Diagnosis & Treatment businesses totaling EUR 54 million, offset by lower restructuring and acquisition-related costs and other charges. 2020 includes EUR 132 million of restructuring, acquisition-related and other charges, compared to EUR 151 million in 2019.
Research and development costs were EUR 1,884 million, or 9,7% of sales, in 2019, compared to EUR 1,759 million, or 9.7% of sales, in 2018. Research and development costs in 2019 included EUR 151 million of restructuring, acquisition-related and other charges, compared to EUR 76 million in 2018. 2019 includes EUR 92 million related to an impairment of development costs. 2018 also included EUR 12 million of charges related to the Consent Decree.
Philips Group
Research and development expenses
in millions of EUR unless otherwise stated| Diagnosis & Treatment | 801 | 928 | 891 |
| Connected Care | 424 | 465 | 550 |
| Personal Health | 300 | 302 | 293 |
| Other | 235 | 189 | 181 |
| Philips Group | 1,759 | 1,884 | 1,915 |
| As a % of sales | 9.7% | 9.7% | 9.8% |
Net income, Income from operations (EBIT) and Adjusted EBITA*)
Net income is not allocated to segments, as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
The overview below shows Income from operations and Adjusted EBITA*) according to the 2020 segment classifications.
Philips Group
Income from operations and Adjusted EBITA 1)
in millions of EUR unless otherwise stated
| 2020 | ||||
| Diagnosis & Treatment | 495 | 6.1% | 816 | 10.0% |
| Connected Care | 708 | 12.7% | 1,195 | 21.5% |
| Personal Health | 619 | 11.4% | 704 | 13.0% |
| Other | (280) | (145) | ||
| Philips Group | 1,542 | 7.9% | 2,570 | 13.2% |
| 2019 | ||||
| Diagnosis & Treatment | 660 | 7.8% | 1,078 | 12.7% |
| Connected Care | 267 | 5.7% | 618 | 13.2% |
| Personal Health | 844 | 14.4% | 943 | 16.1% |
| Other | (127) | (76) | ||
| Philips Group | 1,644 | 8.4% | 2,563 | 13.2% |
| 2018 | ||||
| Diagnosis & Treatment | 629 | 8.1% | 872 | 11.3% |
| Connected Care | 399 | 9.2% | 662 | 15.2% |
| Personal Health | 796 | 14.4% | 860 | 15.6% |
| Other | (105) | (28) | ||
| Philips Group | 1,719 | 9.5% | 2,366 | 13.1% |
Net income increased by EUR 22 million compared to 2019, mainly due to lower net financial expenses and lower income tax expenses, partly offset by charges of EUR 144 million related to impairment of goodwill.
Income from operations in 2020 amounted to EUR 1,542 million, or 7.9% of sales, compared to EUR 1,644 million, or 8.4% of sales, in 2019.
Amortization and goodwill impairment charges in 2020 were EUR 525 million and include a charge of EUR 144 million related to an impairment of goodwill in the Connected Care segment and amortization charges of EUR 92 million related to an impairment of a technology asset. 2019 amortization and goodwill impairment charges were EUR 447 million and included a EUR 147 million impairment of acquired intangible assets.
Restructuring, acquisition-related and other charges in 2020 were EUR 504 million and include EUR 209 million of restructuring charges, EUR 95 million of acquisition-related charges offset by a EUR 101 million gain related to the release of a contingent consideration liability, EUR 31 million related to impairments of capitalized development costs, EUR 43 million charges due to changes in ventilator demand, EUR 42 million of separation costs related to the Domestic Appliances business, a EUR 38 million provision related to legal matters, and EUR 21 million related to pension liability de-risking in the US. 2019 charges were EUR 471 million and included EUR 249 million of restructuring charges (of which EUR 39 million related to impairments of capitalized development costs), EUR 69 million of acquisition-related charges, EUR 22 million charges related to legal matters, EUR 60 million related to an impairment of capitalized development costs, and EUR 44 million of charges related to the Consent Decree, partly offset by a gain of EUR 64 million related to a divestment.
Adjusted EBITA*) in 2020 increased by EUR 7 million to EUR 2,570 million, or 13.2% of sales.
The 2020 performance resulted in an increase in Income from continuing operations attributable to shareholders per common share (in EUR) - diluted of 3%, from EUR 1.27 in 2019 to EUR 1.31 in 2020. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted*) amounted to EUR 1.98 and was in line with 2019.
Net income increased by EUR 76 million compared to 2018, mainly due to improvements in operational performance, lower net financial expenses and lower charges related to discontinued operations, partly offset by higher income tax expense and charges of EUR 97 million related to impairment of goodwill.
In 2019, Income from operations amounted to EUR 1,644 million, or 8.4% of sales, a decrease of EUR 75 million year-on-year. Restructuring, acquisition-related and other charges amounted to EUR 471 million, compared to EUR 299 million in 2018. 2019 includes a gain of EUR 64 million related to a divestment, charges of EUR 99 million related to an impairment of capitalized development costs, a charge related to a litigation provision, charges related to the Consent Decree of EUR 44 million and a provision of EUR 22 million related to legal matters. 2018 included a gain of EUR 43 million related to a divestment. 2018 also included: EUR 56 million of charges related to the Consent Decree; EUR 18 million of the total EUR 30 million provision related to the conclusion of the European Commission investigation into retail pricing, of which the other EUR 12 million was recognized in Discontinued operations.
Adjusted EBITA*) in 2019 amounted to EUR 2,563 million, or 13.2% of sales, and improved by EUR 197 million, or 10 basis points as a percentage of sales, compared to 2018, mainly due to sales growth and productivity, partly offset by lower IP royalty income, tariffs and investments.
The 2019 performance resulted in a decrease in Income from continuing operations attributable to shareholders per common share (in EUR) - diluted of 7% from EUR 1.39 in 2018 to EUR 1.30 in 2019. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted*) increased by 15% from EUR 1.76 in 2018 to EUR 2.02 in 2019.
Diagnosis & Treatment businesses
Income from operations in 2020 decreased to EUR 495 million, compared to EUR 660 million in 2019. This was primarily due to lower volumes resulting in lower factory fixed cost coverage, and an adverse mix impact as a result of lower sales in the higher-margin businesses of Ultrasound and Image-Guided Therapy due to the impact of COVID-19. These factors also impacted Adjusted EBITA*), which was 10.0% of sales in 2020.
Amortization and goodwill impairment charges in 2020 were EUR 209 million and include EUR 92 million of charges related to an impairment of a technology asset in Image-Guided Therapy. 2019 charges were EUR 196 million and included a EUR 69 million impairment of acquired intangible assets.
Restructuring, acquisition-related and other charges in 2020 were EUR 112 million and include EUR 57 million restructuring charges, EUR 73 million of acquisition-related charges offset by a EUR 101 million gain related to the release of a contingent consideration liability, EUR 38 million related to legal matters, a EUR 31 million impairment of capitalized development costs. 2019 charges were EUR 222 million and included EUR 107 million of restructuring charges (of which EUR 39 million related to impairments of capitalized development costs), EUR 42 million of acquisition-related charges and EUR 60 million related to an impairment of capitalized development costs.
Income from operations in 2019 increased to EUR 660 million compared to EUR 629 million in 2018. The year 2019 included EUR 196 million of charges related to amortization and a goodwill impairment, compared to EUR 98 million of amortization charges in 2018. 2019 includes a charge of EUR 19 million related to an impairment of goodwill; the amortization charges mainly relate to intangible assets in Image-Guided Therapy. Restructuring, acquisition-related and other charges to improve productivity were EUR 222 million, compared to EUR 146 million in 2018. 2019 includes charges of EUR 99 million related to impairments of capitalized development costs.
Adjusted EBITA*) in 2019 amounted to EUR 816 million, or 12.7% of sales, and improved mainly due to sales growth and productivity, partly offset by investments and tariffs.
Connected Care businesses
Income from operations in 2020 increased to EUR 708 million, compared to EUR 267 million in 2019. This was mainly due to operating leverage and productivity programs, which more than offset investments to ramp up production. These factors also impacted Adjusted EBITA*), which was 21.5% of sales in 2020.
Amortization and goodwill impairment charges in 2020 were EUR 278 million and include EUR 144 million impairment of goodwill related to the Population Health Management business. 2019 charges were EUR 219 million and included a charge of EUR 78 million impairment of goodwill related to the Population Health Management business.
Restructuring, acquisition-related and other charges in 2020 were EUR 209 million and include restructuring charges of EUR 76 million, acquisition-related charges of EUR 22 million, and charges of EUR 43 million due to changes in ventilator demand. 2019 charges were EUR 131 million and included restructuring charges of EUR 38 million, acquisition-related charges of EUR 26 million, and EUR 44 million of charges related to the Consent Decree.
Income from operations in 2019 amounted to EUR 267 million compared to EUR 399 million in 2018. The year 2019 includes EUR 219 million of charges related to amortization and a goodwill impairment, compared to EUR 140 million of amortization charges in 2018. 2019 includes a charge of EUR 78 million related to an impairment of goodwill; the amortization charges mainly relate to acquired intangible assets in Sleep & Respiratory Care and Population Health Management. Restructuring, acquisition-related and other charges amounted to EUR 131 million in 2019, compared to EUR 122 million in 2018. 2019 included EUR 44 million of charges related to the Consent Decree.
Adjusted EBITA*) in 2019 amounted to EUR 618 million, or 13.2% of sales, and decreased mainly due to tariffs, an adverse currency impact, mix and higher material costs..
Personal Health businesses
Income from operations in 2020 decreased to EUR 619 million, compared to EUR 844 million in 2019. This was mainly due to a decline in sales, partly offset by cost savings. These factors also impacted Adjusted EBITA*), which was 13.0% of sales.
Amortization and goodwill impairment charges in 2020 were EUR 20 million and include amortization charges related to intangible assets in Mother & Child Care and Domestic Appliances. 2019 charges were EUR 25 million and included amortization charges related to intangible assets in Mother & Child Care and Domestic Appliances.
Restructuring, acquisition-related and other charges in 2020 were EUR 65 million and include restructuring charges of EUR 40 million. 2019 charges were EUR 73 million and included restructuring charges of EUR 50 million and a provision of EUR 22 million related to legal matters.
Income from operations in 2019 increased to EUR 844 million compared to EUR 796 million in 2018. The year 2019 included EUR 25 million of amortization charges, compared to EUR 31 million in 2018. These charges mainly relate to intangible assets in Mother & Child Care and Domestic Appliances . Restructuring, acquisition-related and other charges were EUR 73 million, compared to EUR 33 million in 2018. 2019 includes a provision of EUR 22 million related to legal matters.
Adjusted EBITA*) in 2019 amounted to EUR 943 million, or 16.1% of sales, and improved mainly due to sales growth, a positive mix impact and productivity, partly offset by tariffs.
Other
In Other we report on the items Innovation, IP Royalties, Central costs and Other.
Income from operations in 2020 was EUR (280) million, compared to EUR (127) million in 2019. The Adjusted EBITA*) in 2020 was EUR (145) million, compared to EUR (76) million in 2019. The income from operations and the Adjusted EBITA*) were impacted mainly by lower royalty income and charges related to movements in environmental provisions.
Restructuring, acquisition-related and other charges in 2020 were EUR 118 million and include restructuring charges of EUR 37 million, EUR 42 million of separation costs related to the Domestic Appliances business, and EUR 21 million related to pension liability de-risking in the US. 2019 charges were EUR 43 million and included restructuring charges of EUR 54 million and a gain of EUR 64 million related to a divestment.
In 2019, Income from operations totaled EUR (127) million, compared to EUR (105) million in 2018. Restructuring, acquisition-related and other charges amounted to EUR 43 million, compared to EUR 2 million in 2018. 2019 includes a gain of EUR 64 million related to a divestment and a charge related to a litigation provision, while 2018 included a gain of EUR 43 million related to a divestment.
Adjusted EBITA*) in 2019 decreased by EUR 48 million, mainly due to charges related to movements in environmental provisions and other non-recurring items.
Financial income and expenses
A breakdown of Financial income and expenses is presented in the following table.
Philips Group
Financial income and expenses
in millions of EUR
| Interest expense (net) | (157) | (169) | (159) |
| Sale of securities | 6 | 2 | 2 |
| Impairments | - | - | - |
| Other | (62) | 50 | 113 |
| Financial income and expenses | (213) | (117) | (44) |
Net financial expenses decreased by EUR 73 million year-on-year, mainly due to a gain from the increase in value of our investments in limited life funds, while 2019 included dividend income and fair value gains of EUR 67 million. For further information, refer to Financial income and expenses.
Net financial expenses decreased by EUR 96 million year-on-year, mainly due to dividend income from investments, while 2018 included financial charges of EUR 46 million related to bond redemptions. For further information, refer to Financial income and expenses.Financial income and expenses
Income taxes
Income taxes amounted to EUR 284 million. The effective income tax rate in 2020 was 19.0% compared to 22.1% in 2019, mainly due to one-off non-cash benefits from a decrease in tax rate, and higher non-taxable results from participations, partly offset by lower non-cash benefits from business integration, compared to 2019. For 2021, we expect our effective tax rate to be within the 24%-26% range, depending on the geographical mix of taxable income.
Income taxes amounted to EUR 337 million. The effective income tax rate in 2019 was 22.1%, compared to 12.8% in 2018, mainly due to lower non-cash benefits from tax audit resolutions and business integration compared to 2018, partly offset by lower provisions for tax risks. For 2020, we expect our effective tax rate to be within the 24%-26% range, depending on the geographical mix of taxable income.
Investment in associates
Results related to investments in associates decreased from a gain of EUR 1 million in 2019 to a loss of EUR 9 million in 2020, as the majority of associates recorded a loss in 2020.
Results related to investments in associates improved from a loss of EUR 2 million in 2018 to EUR 1 million in 2019.
Discontinued operations
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
| Signify, formerly Philips Lighting | (198) | ||
| The combined Lumileds and Automotive businesses | 12 | (1) | |
| Other | (27) | (19) | (9) |
| Net income of Discontinued operations | (213) | (19) | (10) |
In 2020 and 2019, Discontinued operations consists primarily of certain other divestments that were reported as discontinued operations.
Discontinued operations in 2018 mainly included dividends received of EUR 32 million and a EUR 218 million loss related to a value adjustment of the remaining interest in Signify.
For further information, refer to Discontinued operations and assets classified as held for sale.
Non-controlling interests
Net income attributable to non-controlling interests increased from EUR 5 million in 2019 to EUR 8 million in 2020.
Net income attributable to non-controlling interests decreased from EUR 7 million in 2018 to EUR 5 million in 2019.
7.1.3Acquisitions and divestments
Acquisitions
In 2020, Philips completed three acquisitions, with Intact Vascular, Inc. (Intact Vascular) being the most notable. It also announced the planned acquisitions of BioTelemetry, which was completed on February 9, 2021, and Capsule Technologies. Acquisitions in 2020 and prior years led to acquisition and post-merger integration charges of a gain of EUR 28 million in the Diagnosis & Treatment businesses and charges of EUR 22 million in the Connected Care businesses.
In 2019, Philips completed three acquisitions, with the Healthcare Information Systems business of Carestream Health being the most notable. Acquisitions in 2019 and prior years led to acquisition and post-merger integration charges of EUR 42 million in the Diagnosis & Treatment businesses and EUR 26 million in the Connected Care businesses.
In 2018, Philips completed nine acquisitions, with EPD Solutions Ltd. (EPD) being the most notable. Acquisitions in 2018 and prior years led to acquisition and post-merger integration charges of EUR 72 million in the Diagnosis & Treatment businesses and EUR 26 million in the Connected Care businesses.
Divestments
Philips did not complete any divestments in 2020.
Philips completed two divestments in 2019, which resulted in an aggregated cash consideration of EUR 122 million and a gain of EUR 62 million. The most notable divestment was the Photonics business in Germany.
Philips completed one divestment in 2018. The divestment involved an aggregated consideration of EUR 58 million and resulted in a gain of EUR 44 million. In 2014, Philips announced its plan to sharpen its strategic focus by establishing two standalone companies focused on the HealthTech and Lighting opportunities respectively. After establishing a standalone structure for the lighting activities within the Philips Group, Philips Lighting (renamed Signify in 2018) was listed and started trading on Euronext in Amsterdam under the symbol ‘LIGHT’ on May 27, 2016. Through a series of Accelerated bookbuild offerings (in total five) and open market sales in the course of 2017, 2018 and 2019, Philips’ shareholding was reduced to nil in September 2019.
For details, please refer to Acquisitions and divestments.
7.1.4Changes in cash and cash equivalents, including cash flows
The movements in cash and cash equivalents for the years ended December 31, 2018, 2019 and 2020 are presented and explained below:
Philips Group
Condensed consolidated cash flows statements
in millions of EUR
| Beginning cash and cash equivalents balance | 1,939 | 1,688 | 1,425 |
| Net cash flows from operating activities | 1,780 | 2,031 | 2,777 |
| Net capital expenditures | (796) | (978) | (924) |
| Free cash flow1) | 984 | 1,053 | 1,852 |
| Other cash flows from investing activities | (690) | 376 | (391) |
| Treasury shares transactions | (948) | (1,318) | (298) |
| Changes in debt | 160 | 109 | 783 |
| Dividend paid to shareholders of the Company | (401) | (453) | (1) |
| Other cash flow items | (3) | (4) | (57) |
| Net cash flows discontinued operations | 647 | (25) | (88) |
| Ending cash and cash equivalents balance | 1,688 | 1,425 | 3,226 |
Net cash flows from operating activities
Net cash flows from operating activities amounted to EUR 2,777 million in 2020, compared to EUR 2,031 million in 2019. This increase is mainly due to working capital improvements, in particular better management of receivables. Free cash flow*) amounted to EUR 1,852 million in 2020, compared to EUR 1,053 million in 2019.
Net cash flows from operating activities amounted to EUR 2,031 million in 2019, compared to EUR 1,780 million in 2018. Free cash flow*) amounted to EUR 1,053 million in 2019, compared to EUR 984 million in 2018.
Net cash flows from investing activities
In 2020, other cash flows from investing activities amounted to a cash outflow of EUR 391 million, mainly due to the acquisition of Intact Vascular for EUR 241 million and investments in other non-current financial assets.
In 2019, other cash flows from investing activities amounted to a cash inflow of EUR 376 million, mainly due to proceeds from the sale of the remaining Signify shares of EUR 549 million and net cash proceeds from divestment of businesses amounting to EUR 146 million, received mainly from divested businesses held for sale. Other investing activities mainly included acquisition of businesses (including acquisition of investments in associates) of EUR 255 million and EUR 166 million net cash used for foreign exchange derivative contracts related to activities for Group liquidity management.
In 2018, other cash flows from investing activities amounted to a cash outflow of EUR 690 million, mainly due to acquisition of businesses (including acquisition of investments in associates) amounting to EUR 628 million. EPD was the biggest acquisition in 2018, resulting in a cash outflow of EUR 273 million, including the subsequent payments. Net cash proceeds from divestment of businesses amounted to EUR 70 million and were received mainly from divested businesses held for sale. Other investing activities mainly included EUR 177 million net cash used for foreign exchange derivative contracts related to activities for Group liquidity management.
Net cash flows from financing activities
In 2020, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 298 million net cash outflow. The 2019 dividend was distributed in July 2020 fully in shares. Changes in debt included EUR 991 million cash inflow from the issuance of two new bonds under the EMTN program, partly offset by outflows related to lease payments.
In 2019, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 1,318 million net cash outflow. Philips' shareholders were given EUR 775 million including costs in the form of a dividend; the cash portion of the dividend amounted to EUR 453 million. Changes in debt mainly included the net proceeds from the Green Innovation Bond issued of EUR 744 million, partly offset by outflows related to bond maturity of EUR 500 million and lease payments.
In 2018, treasury shares transactions mainly included the share buy-back activities, which resulted in EUR 948 million net cash outflow. Philips’ shareholders were given EUR 738 million in the form of a dividend, of which the cash portion of the dividend amounted to EUR 401 million. Changes in debt mainly included EUR 866 million cash outflow related to the bond redemption and EUR 990 million cash inflow from bonds issued.
Net cash provided by (used for) discontinued operations
Philips Group
Net cash provided by (used for) discontinued operations
in millions of EUR
| Net cash provided by (used for) operating activities | (15) | (11) | (88) |
| Net cash provided by (used for) investing activities | 662 | (14) | |
| Net cash provided by (used for) discontinued operations | 647 | (25) | (88) |
In 2020, net cash used for discontinued operations mainly related to advance income tax payments amounting to EUR 78 million for which Philips expects to get a refund.
In 2019, net cash used for discontinued operations consisted primarily of a divestment formerly reported as discontinued operations.
In 2018, net cash provided by (used for) discontinued operations amounted to EUR 647 million and mainly included a total of EUR 642 million in relation to the sale of Signify shares and the dividend received from Signify reported in investing activities.
7.1.5Financing
Condensed consolidated balance sheets for the years 2018, 2019 and 2020 are presented below:
Philips Group
Condensed consolidated balance sheets
in millions of EUR
| Intangible assets | 12,093 | 12,120 | 11,012 |
| Property, plant and equipment | 1,712 | 2,866 | 2,682 |
| Inventories | 2,674 | 2,773 | 2,993 |
| Receivables | 4,344 | 4,909 | 4,537 |
| Assets classified as held for sale | 87 | 13 | 173 |
| Other assets | 3,421 | 2,910 | 3,091 |
| Payables | (3,957) | (3,820) | (3,854) |
| Provisions | (2,151) | (2,159) | (1,980) |
| Liabilities directly associated with assets held for sale | (12) | - | (30) |
| Other liabilities | (2,962) | (2,965) | (3,015) |
| Net asset employed | 15,249 | 16,647 | 15,609 |
| Cash and cash equivalents | 1,688 | 1,425 | 3,226 |
| Debt | (4,821) | (5,447) | (6,934) |
| Net debt1) | (3,132) | (4,022) | (3,708) |
| Non-controlling interests | (29) | (28) | (31) |
| Shareholders' equity | (12,088) | (12,597) | (11,870) |
| Financing | (15,249) | (16,647) | (15,609) |
7.1.6Debt position
Total debt outstanding at the end of 2020 was EUR 6,934 million, compared with EUR 5,447 million at the end of 2019.
Philips Group
Balance sheet changes in debt
in millions of EUR
| Additional leases under IFRS16 | (1,059) | (132) | |
| New borrowings/repayments short-term debt | (34) | (23) | (16) |
| New borrowings long-term debt | (1,287) | (847) | (1,065) |
| Repayments long-term debt | 1,161 | 761 | 298 |
| Forward contracts | 124 | 706 | (793) |
| Currency effects, consolidation changes and other | (70) | (170) | 221 |
| Transfer to liabilities classified as held for sale | 6 | ||
| Changes in debt | (105) | (626) | (1,487) |
In 2020, total debt increased by EUR 1,487 million compared to 2019. New borrowings of long-term debt include the net proceeds of EUR 991 million from the issuance of two new bonds under the EMTN program in 2020. Repayments of long-term debt amounted to EUR 298 million, mainly due to the repayment of leases. Changes in payment obligations from forward contracts are mainly related to the forward contracts entered into of EUR 745 million to complete the remainder of the EUR 1.5 billion share buyback program announced on January 29, 2019. In addition, Philips entered into forward contracts of a total amount of EUR 174 million in 2020 related to the long-term incentive and employee stock purchase plans announced on January 29, 2020, and a total amount of EUR 126 million of forward contracts matured relating to the company's long-term incentive and employee stock purchase plans announced on October 22, 2018. These payment obligations are recorded as financial liabilities under long-term debt. Other changes, mainly resulting from currency effects, led to a decrease of EUR 221 million.
In 2019, total debt increased by EUR 626 million compared to 2018. Total debt at December 31, 2019 included additional lease liabilities of EUR 1,059 million which were recorded following the adoption of IFRS 16 lease accounting in 2019; this did not have a cash impact. New borrowings of long-term debt included the net proceeds from the issuance of the Green Innovation Bond of EUR 744 million. Repayments of long-term debt amounted to EUR 761 million, mainly due to the repayment of a EUR 500 million bond at its scheduled maturity. Changes in payment obligations from forward contracts were mainly related to maturing forward contracts for the completed 2017 share buyback program and the share repurchase program announced in November 2018. These payment obligations were recorded as financial liabilities under long-term and short-term debt. Other changes, mainly resulting from currency effects, led to an increase of EUR 170 million.
In 2018, total debt increased by EUR 105 million compared to 2017. New borrowings of long-term debt of EUR 1,287 million were mainly due to the issuance of fixed-rate bonds, EUR 500 million due 2024 and EUR 500 million due 2028, and a new long-term loan of EUR 200 million. Repayments of long-term debt amounted to EUR 1,161 million, mainly due to the early redemption of all the 3.750% USD bonds due 2022 with an aggregate principal amount of USD 1.0 billion, the redemption of 6.875% USD bonds due 2038 with an aggregate principal amount of USD 72 million, and the repayment of a loan of EUR 178 million. Changes in payment obligations from forward contracts are mainly related to maturing forward contracts for the 2017 share buyback program and new forward contracts entered into for the extended share repurchase program for LTI and stock purchase plans announced in November 2018. Other changes, mainly resulting from new leases recognized and currency effects, led to an increase of EUR 70 million.
At the end of 2020, long-term debt as a proportion of the total debt stood at 82.3% with an average remaining term (including current portion) of 6.3 years, compared to 91% and 8.0 years respectively at the end of 2019.
At the end of 2019, long-term debt as a proportion of the total debt stood at 91% with an average remaining term (including current portion) of 8.0 years, compared to 71% and 7.9 years respectively at the end of 2018.
At the end of 2018, long-term debt as a proportion of the total debt stood at 71% with an average remaining term (including current portion) of 7.9 years, compared to 86% and 7.6 years respectively at the end of 2017.
For further information, please refer to Debt.
7.1.7Liquidity position
As of December 31, 2020, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 4,226 million, versus gross debt (including short and long-term) of EUR 6,934 million.
As of December 31, 2019, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 2,425 million, versus gross debt (including short and long-term) of EUR 5,447 million.
As of December 31, 2018, including the cash position (cash and cash equivalents), as well as its EUR 1 billion committed revolving credit facility, the Philips Group had access to available liquidity of EUR 2,688 million, versus gross debt (including short and long-term) of EUR 4,821 million.
Philips Group
Liquidity position
in millions of EUR
| Cash and cash equivalents | 1,688 | 1,425 | 3,226 |
| Committed revolving credit facilities/CP program | 1,000 | 1,000 | 1,000 |
| Liquidity | 2,688 | 2,425 | 4,226 |
| Listed equity investments at fair value | 476 | 15 | 17 |
| Short-term debt | (1,394) | (508) | (1,229) |
| Long-term debt | (3,427) | (4,939) | (5,705) |
| Net available liquidity resources | (1,656) | (3,007) | (2,691) |
Philips has a EUR 1 billion committed revolving credit facility which was signed in April 2017 and will expire in April 2024. The facility can be used for general group purposes, such as a backstop of its Commercial Paper Program.
The Commercial Paper Program amounts to USD 2.5 billion, under which Philips can issue commercial paper up to 364 days in tenor, both in the US and in Europe, in any major freely convertible currency. As of December 31, 2020, Philips did not have any loans outstanding under these facilities.
During the year 2020, Philips established a Euro Medium – Term Note (EMTN) program which facilitates the issuance of notes for a total amount of up to EUR 10.0 billion. As of December 31, 2020, Philips had issued bonds amounting to EUR 1 billion under the program.
Additionally, at December 31, 2020 Philips held EUR 17 million of listed (level 1) equity investments at fair value in common shares of companies in various industries. Refer to Other financial assets and Fair value of financial assets and liabilities.
Philips is exposed to several types of financial risks. In terms of liquidity risk, the company has taken a number of different measures to manage this risk, specifically with relation to the COVID-19 pandemic. In addition to the successful placement of EUR 1,000 million fixed-rate notes in March (of which EUR 500 million Sustainability Innovation notes), the company also completed the remainder of the EUR 1.5 billion share buyback program that was announced on January 29, 2019 through individual forward contracts, with settlement dates extending into the second half of 2021. Furthermore, the 2019 Annual incentive of the Board of Management and the final dividend declared against the net income of 2019 were settled in shares instead of cash. Overall, the company has a solid liquidity position and the company's liquidity risk management procedures have not changed significantly because of COVID-19. No significant concentration risks have been identified as a result of COVID-19 and the company continues to have access to its existing lines of credit. These lines of credits, along with other financial risks to which Philips is exposed, are disclosed in Details of treasury and other financial risks.
Philips’ existing long-term debt is rated A- (with stable outlook) by Fitch, Baa1 (with stable outlook) by Moody’s, and BBB+ (with stable outlook) by Standard & Poor’s. As part of our capital allocation policy, our net debt*) position is managed with the intention of retaining our current investment grade credit rating. Ratings are subject to change at any time and there is no assurance that Philips will be able to achieve this goal. Philips aim when managing the net debt*) position is dividend stability and a pay-out ratio of 40% to 50% of adjusted income from continuing operations attributable to shareholders*). Philips’ outstanding long-term debt and credit facilities do not contain financial covenants. Adverse changes in the company’s ratings will not trigger automatic withdrawal of committed credit facilities or any acceleration in the outstanding long-term debt (provided that the USD-denominated bonds issued by Philips in March 2008 and 2012 contain a ‘Change of Control Triggering Event’ and the EUR-denominated bonds contain a ‘Change of Control Put Event’). A description of Philips’ credit facilities can be found in Debt.
Philips Group
Credit rating summary
| long-term | short-term | outlook | |
| Fitch | A- | Stable | |
| Moody's | Baa1 | P-2 | Stable |
| Standard & Poor's | BBB+ | A-2 | Stable |
Philips pools cash from subsidiaries to the extent legally and economically feasible. Cash not pooled remains available for local operational needs or general purposes. The company faces cross-border foreign exchange controls and/or other legal restrictions in a few countries which could limit its ability to make these balances available on short notice for general use by the group.
Philips believes its current liquidity and direct access to capital markets is sufficient to meet its present financing needs.
7.1.9Cash obligations
Contractual cash obligations
The following table presents a summary of the Group’s fixed contractual cash obligations and commitments at December 31, 2020. These amounts are an estimate of future payments, which could change as a result of various factors such as a change in interest rates, foreign exchange, contractual provisions, as well as changes in our business strategy and needs. Therefore, the actual payments made in future periods may differ from those presented in the following table:
| Long-term debt3) | 7,430 | 1,015 | 876 | 1,365 | 4,174 |
| Lease obligations | 1,325 | 290 | 412 | 239 | 384 |
| Short-term debt | 76 | 76 | |||
| Derivative liabilities | 161 | 75 | 86 | ||
| Purchase obligations4) | 539 | 273 | 223 | 43 | |
| Trade and other payables | 2,119 | 2,119 | |||
| Contractual cash obligations | 11,650 | 3,848 | 1,597 | 1,647 | 4,558 |
Philips has contracts with investment funds where it committed itself to make, under certain conditions, capital contributions to these funds of an aggregated remaining amount of EUR 132 million (2019: EUR 61 million). As at December 31, 2020 capital contributions already made to these investment funds are recorded as non-current financial assets.
Philips offers voluntary supply chain finance programs with third parties which provide participating suppliers with the opportunity to factor their trade receivables at the sole discretion of both the suppliers and the third parties. Philips continues to recognize these liabilities as trade payables and settles them accordingly on the invoice maturity date based on the terms and conditions of these arrangements . At December 31, 2020 approximately EUR 227 million of the Philips accounts payable were transferred under these arrangements.
Other cash commitments
The company and its subsidiaries sponsor post-employment benefit plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. For a discussion of the plans and expected cash outflows, please refer to Post-employment benefits.
The company had EUR 117 million restructuring-related provisions by the end of 2020, of which EUR 100 million is expected to result in cash outflows in 2021. Refer to Provisions for details of restructuring provisions.
Please refer to Dividend for information on the proposed dividend distribution.
As of December 31, 2020, Philips had completed the remainder of its EUR 1.5 billion share buyback program through individual forward contracts with settlement dates extending into the second half of 2021. As the program was initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program.
Please refer to Debt for information on other Long term incentive and employee stock purchase plans.
Guarantees
Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not provide other forms of support. The total fair value of guarantees recognized on the balance sheet amounts to EUR nil million for both 2019 and 2020. Remaining off-balance-sheet business-related guarantees on behalf of third parties and associates decreased by EUR 5 million during 2020 to EUR 16 million (December 31, 2019: EUR 21 million).
7.1.10Dividend
Dividend policy
Philips’ dividend policy is aimed at dividend stability and a pay-out ratio of 40% to 50% of adjusted income from continuing operations attributable to shareholders*). This non-IFRS measure is described in further detail in Reconciliation of non-IFRS information.
Proposed distribution
A proposal will be submitted to the Annual General Meeting of Shareholders, to be held on May 6, 2021, to declare a distribution of EUR 0.85 per common share, in cash or shares at the option of the shareholder, against the net income of 2020.
If the above dividend proposal is adopted, the shares will be traded ex-dividend as of May 10, 2021 at the New York Stock Exchange and Euronext Amsterdam. In compliance with the listing requirements of the New York Stock Exchange and Euronext Amsterdam, the dividend record date will be May 11, 2021.
Shareholders will be given the opportunity to make their choice between cash and shares between May 12 and June 4, 2021. If no choice is made during this election period, the dividend will be paid in cash. 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 N.V. at Euronext Amsterdam on June 2, 3 and 4, 2021. The company will calculate the number of share dividend rights entitled to one new common share (the ratio), such that the gross dividend in shares will be approximately equal to the gross dividend in cash. The ratio and the number of shares to be issued will be announced on June 8, 2021. Payment of the dividend (up to EUR 775 million) and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 9, 2021. The distribution of dividend in cash to holders of New York Registry shares will be made in USD at the USD/EUR rate as per WM/ Reuters FX Benchmark 2 PM CET fixing of June 7, 2021.
| ex-dividend date | record date | payment date | |
| Euronext Amsterdam | May 10, 2021 | May 11, 2021 | June 9, 2021 |
| New York Stock Exchange | May 10, 2021 | May 11, 2021 | June 9, 2021 |
Further details will be given in the agenda for the 2021 Annual General Meeting of Shareholders. The proposed distribution and all dates mentioned remain provisional until then.
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 net income and retained earnings is subject to 15% dividend withholding tax, but only in respect of the par value of the shares (EUR 0.20 per share). Shareholders are advised to consult their tax advisor on the applicable situation with respect to taxes on the dividend received.
In 2020, Philips settled a dividend of EUR 0.85 per common share, representing a total value of EUR 758 million including costs. Shareholders received the dividend in shares only, resulting in the issuance of 18,080,198 new common shares, leading to a 2.0% dilution. The dilution caused by the newly issued dividend shares was partially offset by the cancellation of 3,809,675 shares in June 2020. No cash dividend settlement took place in 2020. On March 23, 2020 Philips announced that the remainder of the EUR 1.5 billion share buyback program would be executed through forward purchases. The delivery of 20,476,023 shares purchased through forward contracts will take place from June 23, 2021 to December 20, 2021. These shares are marked for cancellation.
Dividends and distributions per common share
The following table sets forth in euros the gross dividends on the common shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of shares of the New York Registry:
Philips Group
Gross dividends on the common shares
| in EUR | 0.80 | 0.80 | 0.80 | 0.85 | 0.85 |
| in USD | 0.90 | 0.90 | 0.94 | 0.96 | 0.95 |
7.1.11Future ownership of the Domestic Appliances business
In January 2020, Philips announced that it would review options for future ownership of its Domestic Appliances business, part of the Personal Health segment.
Following the announcement, Philips started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the third quarter of 2021.
As of December 31, 2020, Philips still needs to take some important steps in its internal separation process, especially in the area of Human Resources (establishing a dedicated workforce for the Domestic Appliances business), Information Technology (creation of a dedicated IT environment to support the core processes of the Domestic Appliances business) and Finance (completion of the allocation of assets and liabilities to the Domestic Appliances business asset). Based on the progress we have made so far, we concluded that the Domestic Appliances business as per December 31, 2020 is not available for immediate sale in its present condition to a third party.
The Domestic Appliances business had EUR 2.2 billion sales in 2020 (2019: EUR 2.3 billion). Following the divestment of the Domestic Appliances business, the retained Personal Health businesses will continue to play an important role in the company’s integrated health continuum approach through connected products and solutions to support the health and well-being of people.
7.2Critical accounting policies
The preparation of Philips’ financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses at the date of our financial statements. The policies that management considers both to be most important to the presentation of Philips’ financial condition and results of operations and to make the most significant demands on management’s judgments and estimates about matters that are inherently uncertain, are discussed below. Management cautions that future events often vary from forecasts and that estimates routinely require adjustment. A more detailed description of Philips’ accounting policies appears in Significant accounting policies
Income taxes
As part of the process of preparing consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it conducts business. This process involves estimating actual current tax expense and deferred tax. Temporary differences result in deferred tax assets and liabilities, which are included in the consolidated balance sheet. The Company regularly reviews the deferred tax assets for recoverability and will only recognize these if it is believed that sufficient future taxable profit is available, including income from forecasted operating earnings, the reversal of existing taxable temporary differences and established tax planning relating to the same taxation authority and the same taxable entity. For a discussion of the tax uncertainties, please refer to the information under the heading “Tax risks” in Income taxes.
Revenue recognition
From time to time the Company is engaged in complex sales transactions relating to multi-element deliveries (for example a single sales transaction that combines the delivery of goods and rendering of services). The process of revenue recognition of such multi-element sales transactions involves the identification of the different performance obligations, the allocation of revenue to these performance obligations and the timing of revenue recognition as or when the performance obligation is satisfied. Each of these process steps can be complex and requires judgment. In order to identify whether the performance obligation in a single sales contract are distinct, the Company verifies if the customer can benefit from the good or service, either on its own, or with other readily available resources, and whether the promise to transfer a good or service separate from the other promised goods or services in the contract. Allocation of revenue to the different components is performed based on stand-alone selling prices of each performance obligation. The best evidence of a standalone selling price is the observable price of a good or service sold in similar circumstances and to similar customers. When a standalone selling price is not directly observable, it is estimated, based on either adjusted market assessment approach, expected cost plus margin approach or residual approach. Eventually, revenue for each performance obligation is recognized as or when the performance obligation is satisfied in accordance with IFRS 15.
Provisions
The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, and discussions on potential remedial actions, relating to such matters as antitrust laws, competition issues, commercial transactions, product liabilities, participations and environmental pollution. Since the ultimate disposition of asserted claims and proceedings and investigations cannot be predicted with certainty, an adverse outcome could have a material adverse effect on the Company’s consolidated financial statements.
The Company recognizes a liability when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the outflow will take place can be measured reliably. If the likelihood of the outcome is less than probable and more than remote or a reliable estimate is not determinable, the matter is disclosed as a contingent liability if management concludes that it is material.
In determining the provision for the environmental remediation obligations, significant judgments are necessary. The Company utilizes experts in the estimation process. The Company provides for cost associated with environmental obligations when they are probable and can be estimated reliably. The provisions are adjusted as new information becomes available and they are remeasured at the end of each period using the current discount rate.
Provisions on restructuring represents estimated costs of initiated reorganizations, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization. When such restructurings require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the Company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Before a provision is established, the Company recognized any impairment loss on the assets associated with the restructuring.
The Company provides for warranty costs based on historical trends in product return rates and the expected material and labor costs to provide warranty services. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities.
Impairment of non-financial assets
Goodwill and intangible assets not yet ready for use are not amortized, but tested for impairment annually and whenever impairment indicators require so. The Company reviews non-financial assets (other than goodwill and intangibles not yet ready for use) for impairment, when events or circumstances indicate that carrying amounts may not be recoverable.
In determining impairments for these assets, management must make significant judgments and estimates to determine whether the recoverable amount is lower than the carrying value. Changes in assumptions and estimates included within the impairment reviews and tests could result in significantly different results than those recorded in the Consolidated financial statements.
In 2020 the Company performed and completed goodwill annual impairment tests in the fourth quarter, in line with 2019 and 2018.
Goodwill is allocated to cash-generating units (CGUs). The basis of the recoverable amount used in the impairment tests is the value in use, unless the fair value less cost of disposal exceeds the value in use. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from the sale of an asset in an arm’s length transaction, less costs of disposal. Key assumptions used in the impairment tests were sales growth rates, EBITA*) and the rates used for discounting the projected cash flows. These cash flow projections were determined using the Royal Philips management’s internal forecasts. Please refer to Goodwill and Intangible assets excluding goodwill.
Impairment of financial assets
The Company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables debt investments carried at fair value through Other comprehensive income (FVTOCI) and amortized cost. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted when needed. In determining impairments for these assets, management must make significant judgments and estimates to determine the cash flows it expects to receive, and changes in underlying assumptions could result in significantly different results than those recorded in the Consolidated financial statements.
Discontinued operations and non-current assets held for sale
Non-current assets and disposal groups comprising assets and liabilities that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and (a) represents a separate major line of business or geographical area of operations; (b) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to sell. Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less costs to sell.
Determining whether a non-current asset will be primarily recovered through sale rather than through continuing use requires judgment. The Company assesses whether such asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets or disposal groups, and its sale is assessed to be highly probable. Furthermore, in order to determine if that component qualifies as a discontinued operation, judgment is required when the Company assesses whether a component of an entity represents a major line of business or geographical area compared to the whole of the Company and whether the sale is part of a single coordinated plan. A change in circumstances could result in significantly different results than those recorded in the Consolidated financial statements.
New Accounting Standards
For a description of the new pronouncements, please refer to the information under the heading “IFRS accounting standards adopted as from 2020” in Significant accounting policies.
Off-balance sheet arrangements
Please refer to the information under the heading “Guarantees” in Cash obligations and Contingent assets and liabilities.
7.3Taxation
Dutch taxation
The statements below are only a general summary of certain material Dutch tax consequences for holders of common shares that are non-residents of the Netherlands based on present Dutch tax laws and the Tax Convention of December 18, 1992, as amended by the protocol that entered into force on December 28, 2004, between the United States of America and the Kingdom of the Netherlands (the US Tax Treaty) and are not to be read as extending by implication to matters not specifically referred to herein. As to individual tax consequences, investors in common shares should consult their own professional tax advisor.
With respect to a holder of common shares that is an individual who receives income or derives capital gains from common shares and this income received or capital gains derived are attributable to past, present or future employment activities of such holder, the income of which is taxable in the Netherlands, the Dutch tax position is not discussed in this summary.
Dividend withholding tax
In general, a distribution to shareholders by a company resident in the Netherlands (such as the Company) is subject to a withholding tax imposed by the Netherlands at a rate of 15%. Share dividends paid out of the Company’s paid-in share premium recognized for Dutch tax purposes are not subject to the abovementioned withholding tax. Share dividends paid out of the Company’s retained earnings are subject to dividend withholding tax on the nominal value of the shares issued.
Relief at source is available to certain qualifying corporate holders of common shares if such common shares are attributable to a business carried out in the Netherlands. Relief at source is available for dividend distributions to certain qualifying corporate holders of common shares resident in EU/EEA member states, and to certain qualifying corporate holders of common shares resident in non-EU/EEA states with which the Netherlands has concluded a tax treaty that includes a dividend article, unless such holder holds the common shares of the Company with the primary aim or one of the primary aims to avoid the levy of Dutch dividend withholding tax from another person and the shareholding is put in place without valid commercial reasons that reflect economic reality.
Upon request and under certain conditions, certain qualifying non-resident individual and corporate holders of common shares resident in EU/EEA member states or in a qualifying non-EU/EEA state may be eligible for a refund of Dutch dividend withholding tax to the extent that the withholding tax levied is higher than the personal and corporate income tax which would have been due if they were resident in the Netherlands.
Pursuant to the provisions of the US Tax Treaty, a reduced rate may be applicable in respect of dividends paid by the Company to a beneficial owner holding directly 10% or more of the voting power of the Company, if such owner is a company resident in the United States (as defined in the US Tax Treaty) and entitled to the benefits of the US Tax Treaty.
Pursuant to Dutch anti-dividend stripping legislation, a holder of common shares who is the recipient of dividends will generally not be considered the beneficial owner of the dividends if (i) as a consequence of a combination of transactions, a person other than the recipient benefits, in full or in part, directly or indirectly, from the dividends; (ii) whereby such other person retains, directly or indirectly, an interest similar to that in the common shares on which the dividends were paid; and (iii) that other person is entitled to a credit, reduction or refund of dividend withholding tax that is less than that of the recipient.
Dividends paid to qualifying exempt US pension trusts and qualifying exempt US organizations are, under certain conditions, exempt from Dutch withholding tax under the US Tax Treaty. Qualifying exempt US pension trusts normally remain subject to withholding at the rate of 15% and are required to file for a refund of the tax withheld. Only if certain conditions are fulfilled, such pension trusts may be eligible for relief at source upon payment of the dividend. However, for qualifying exempt US organizations no relief at source upon payment of the dividend is currently available; such exempt US organizations should apply for a refund of the 15% withholding tax withheld. Further, under certain circumstances, certain exempt organizations (e.g. pension funds) may be eligible for a refund of Dutch withholding tax upon their request pursuant to Dutch tax law. Under Dutch tax law (not yet entered into force), provided certain conditions are met, such (US) organizations may be eligible for relief at source upon request.
The Company may, with respect to certain dividends received from qualifying non-Dutch subsidiaries, credit taxes withheld from those dividends against the Dutch withholding tax imposed on certain qualifying dividends that are redistributed by the Company, up to a maximum of the lesser of:
- 3% of the amount of qualifying dividends redistributed by the Company; and
- 3% of the gross amount of certain qualifying dividends received by the Company.
The reduction is applied to the Dutch dividend withholding tax that the Company must pay to the Dutch tax authorities and not to the Dutch dividend withholding tax that the Company must withhold.
Income and capital gains
Income and capital gains derived from the common shares by a non-resident individual or non-resident corporate shareholder are generally not subject to Dutch income or corporation tax, unless (i) such income and gains are attributable to a (deemed) permanent establishment or (deemed) permanent representative of the shareholder in the Netherlands; or (ii) the shareholder is entitled to a share in the profits of an enterprise or (in the case of a non-resident corporate shareholder only) a co-entitlement to the net worth of an enterprise that is effectively managed in the Netherlands (other than by way of securities) and to which enterprise the common shares are attributable; or (iii) such income and capital gains are derived from a direct, indirect or deemed substantial participation in the share capital of the company (such substantial participation not being a business asset), and, in the case of a non-resident corporate shareholder only, it is being held with the primary aim or one of the primary aims to avoid the levy of income tax from another person and is put in place without valid commercial reasons that reflect economic reality; or (iv) in the case of a non-resident corporate shareholder, such shareholder is a resident of Aruba, Curacao or Saint Martin with a permanent establishment or permanent representative in Bonaire, Eustatius or Saba to which the common shares are attributable and certain conditions are met; or (v) in the case of a non-resident individual, such individual derives income or capital gains from the common shares that are taxable as benefits from ‘miscellaneous activities’ in the Netherlands (resultaat uit overige werkzaamheden, as defined in the Dutch Income Tax Act 2001), which includes the performance of activities with respect to the common shares that exceed regular portfolio management.
In general, a holder of common shares has a substantial participation if he holds either directly or indirectly and either independently or jointly with his partner (as defined in the Dutch Income Tax Act 2001), the ownership of, or certain other rights over, at least 5% of the total issued share capital or total issued particular class of shares of the Company or rights to acquire direct or indirect shares, whether or not already issued, that represent at any time 5% or more of the total issued capital (or the total issued particular class of shares) or the ownership of certain profit participating certificates that relate to 5% or more of the annual profit or to 5% or more of the liquidation proceeds. A shareholder will also have a substantial participation in the Company if one or more of certain relatives of the shareholder hold a substantial participation in the Company. A deemed substantial participation amongst others exists if (part of) a substantial participation has been disposed of, or is deemed to have been disposed of, on a nonrecognition basis.
Estate and gift taxes
No estate, inheritance or gift taxes are imposed by the Netherlands on the transfer or deemed transfer of common shares by way of gift by or on the death of a shareholder if, at the time of the death of the shareholder or the gift of the common shares (as the case may be), such shareholder is not a (deemed) resident of the Netherlands.
Inheritance or gift taxes (as the case may be) are due, however, if such shareholder:
- has Dutch nationality and has been a resident of the Netherlands at any time during the ten years preceding the time of their death or gift; or
- does not have Dutch nationality but has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift (for Netherlands gift taxes only).
United States Federal Taxation
This section describes the material United States federal income tax consequences to a US holder (as defined below) of owning common shares. It applies only if the common shares are held as capital assets for United States federal income tax purposes. This discussion addresses only United States federal income taxation and does not discuss all of the tax consequences that may be relevant to a US holder in light of its individual circumstances, including foreign, state or local tax consequences, estate and gift tax consequences, and tax consequences arising under the Medicare contribution tax on net investment income or the alternative minimum tax. This section does not apply to a member of a special class of holders subject to special rules, including:
- a dealer in securities,
- a trader in securities that elects to use a mark-to-market method of accounting for securities holdings,
- a tax-exempt organization,
- a life insurance company,
- a person that actually or constructively owns 10% or more of the combined voting power of our voting stock or of the total value of our stock,
- a person who holds common shares as part of a straddle or a hedging or conversion transaction,
- a person who purchases or sells common shares as part of a wash sale for tax purposes, or
- a person whose functional currency is not the US dollar.
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions, all as currently in effect, as well as on the US Tax Treaty. These laws and regulations are subject to change, possibly on a retroactive basis.
If an entity or arrangement that is treated as a partnership for United States federal income tax purposes holds the common shares, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the common shares should consult its tax advisor with regard to the United States federal income tax treatment of an investment in the common shares.
A US holder is defined as a beneficial owner of common shares that is, for United States federal income tax purposes::
- a citizen or resident of the United States,
- a domestic corporation,
- an estate whose income is subject to United States federal income tax regardless of its source, or
- a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust.
A US holder should consult its own tax advisor regarding the United States federal, state and local tax consequences of owning and disposing of common shares in its particular circumstances.
The tax treatment of common shares will depend in part on whether or not we are classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Except as discussed below under “—PFIC Rules”, this discussion assumes that we are not classified as a PFIC for United States federal income tax purposes.
Taxation of Distributions
Under the United States federal income tax laws, the gross amount of any distribution paid in stock or cash out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes), other than certain pro-rata distributions of our common shares, will be treated as a dividend that is subject to United States federal income taxation. For a non-corporate US holder, dividends paid that constitute qualified dividend income will be taxable at the preferential rates applicable to long-term capital gains, provided that the non-corporate US holder holds the common shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and provided it meets other holding period requirements. Dividends paid with respect to the common shares generally will be qualified dividend income provided that, in the year in which the dividend is received, the common shares are readily tradable on an established securities market in the United States. Our common shares are listed on the New York Stock Exchange and we therefore expect that dividends will be qualified dividend income. A US holder must include any Dutch tax withheld from the dividend payment in this gross amount even though it does not in fact receive it. The dividend is taxable to a US holder when it receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. For dividend payments made in euro, the amount of the dividend distribution that a US holder must include in its income will be the US dollar value of the euro payments made, determined at the spot euro/US dollar rate on the date the dividend distribution can be included in its income, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date a US holder includes the dividend payment in income to the date a US holder converts the payment into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of a US holder’s basis in the common shares and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with United States federal income tax principles. Accordingly, US holders should expect to generally treat distributions we make as dividends.
Subject to certain limitations, the Dutch tax withheld in accordance with the US Tax Treaty and paid over to the Netherlands will be creditable or deductible against a US holder’s United States federal income tax liability. However, Dutch withholding tax may not be creditable or deductible to the extent that we reduce (as described above under “Dutch taxation - Dividend withholding tax”) the amount of withholding tax paid over to the Netherlands by crediting taxes withheld from certain dividends received by us. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent reduction or refund of the tax withheld is available under Dutch law, or under the US Tax Treaty, the amount of tax withheld that could have been reduced or that is refundable will not be eligible for credit against United States federal income tax liability. Dividends will generally be income from sources outside the United States, and will generally be “passive” income for purposes of computing the foreign tax credit allowable to the holder.
Taxation of Capital Gains
A US holder that sells or otherwise disposes of its common shares will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the US dollar value of the amount that it realizes and its tax basis, determined in US dollars, in its common shares. Capital gain of a non-corporate US holder is generally taxed at preferential tax rates where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
Passive Foreign Investment Company Rules
We believe that the common shares should currently not be treated as stock of a PFIC for United States federal income tax purposes, and we do not expect to become a PFIC in the foreseeable future. However, this conclusion is a factual determination that is made annually and thus may be subject to change. It is therefore possible that we could become a PFIC in a future taxable year. If we are treated as a PFIC, gain realized on the sale or other disposition of the common shares would in general not be treated as capital gain. Instead, unless a US holder elects to be taxed annually on a mark-to-market basis with respect to the common shares, a US holder would generally be treated as if it had realized such gain and certain “excess distributions” ratably over the holding period for the common shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, in addition to which an interest charge in respect of the tax attributable to each such year would apply. Any dividends received by a US holder will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to such US holder either in the taxable year of the distribution or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income and subject to the excess distribution regime described above.
8Environmental, Social and Governance
Environmental, Social & Governance (ESG) are the three key dimensions within which a company’s approach to doing business responsibly and sustainably, and its overall societal impact, are defined. They give expression to an increasingly widely held view – that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable, and valuable, in the long term.
Philips is a purpose-driven company aiming to improve the health and well-being of 2.5 billion people annually by 2030. We believe that private-sector companies like ours have a vital role to play in collaborating with other partners across our supply chain, and with private and public organizations in society, to address the major challenges the world is facing.
Taking a multi-stakeholder approach, we draw inspiration from the societal impact we can have through our products and solutions, and through how we operate in the world. Our company is very conscious of our responsibility and our contribution to society and the environment.
As of this Annual Report 2020, we have chosen to align our reporting with the comprehensive and integrated Environmental, Social & Governance (ESG) commitments we introduced for the period 2020-2025, with the aim of better integrating and further raising performance on the three dimensions of ESG.
8.1ESG reporting framework
There is not yet a single objective standard for measurement of ESG performance. Building on our long history and experience of environmental and social impact measurement and of providing transparency on governance, Philips has taken an active role – in collaboration with various organizations – to help drive the evolution towards a standard ESG reporting framework.
In 2007, Philips signed up to the United Nations Global Compact, to advance ten universal principles in the areas of human rights, labor, the environment and anticorruption. In 2017, at the World Economic Forum’s Annual Meeting in Davos, we signed the Compact for Responsive and Responsible Leadership – an initiative (initiated by WEF and Philips) to promote and align the long-term sustainability of corporations and the long-term goals of society, with an inclusive approach for all stakeholders. The WEF secured a commitment from over 140 CEOs to align their corporate values and strategies with the United Nations’ Sustainable Development Goals (SDGs).
At the Annual Meeting of the World Economic Forum in January 2020, the WEF's International Business Council (IBC) launched a project to define common metrics for sustainable value creation, the aim being to improve the ways that companies measure and report on their contributions towards more prosperous, fulfilled societies and a more sustainable relationship with the planet.
In September 2020, the IBC published its core set of Stakeholder Capitalism Metrics and disclosures. These can be used by companies to align their mainstream reporting on performance against environmental, social and governance (ESG) indicators and track their contributions towards the SDGs on a consistent basis. Based where possible on existing standards, the full set is comprised as follows:
• Core metrics: A set of 21 more‑established or critically important metrics and disclosures that focus primarily on activities within an organization’s own boundaries.
• Expanded metrics: A set of 34 metrics and disclosures that tend to be less well‑established in existing practice and have a wider value chain scope or convey impact in a more sophisticated or tangible way, e.g. in monetary terms.
The recommended metrics are organized under four pillars that are aligned with the SDGs and principal ESG domains: Principles of Governance, Planet, People and Prosperity. There is no intention to replace industry- or company-specific metrics (like our Lives Improved metric). Companies are encouraged to report against as many of the core and expanded metrics as they find material and appropriate, on the basis of ‘disclose or explain’.
Philips is also contributing to the IFRS Foundation’s endeavors to drive standardization of non-financial reporting.
In section 5.6 of this Annual Report 2020, we show how Philips performed in 2020 on the above-mentioned 21 Core metrics, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
8.2Philips' ESG commitments
On September 14, 2020, Philips further reinforced its commitments as a purpose-driven company with the announcement of an enhanced and fully integrated approach to doing business responsibly and sustainably. Philips’ new framework comprises a comprehensive set of key commitments across all the Environmental, Social and Governance (ESG) dimensions that guide execution of the company’s strategy. It includes ambitious targets and detailed plans of action.
“As a leading health technology company today, our purpose is to improve people’s health and well-being through meaningful innovation, positively impacting 2 billion lives per year by 2025,” said Frans van Houten, CEO of Philips. “We aim to grow Philips responsibly and sustainably, and we therefore continuously set ourselves challenging environmental and social targets, and live up to the highest standards of governance. Acting responsibly towards the planet and society is part of our DNA. I am convinced that this is the best way for us to create superior, long-term value for Philips’ multiple stakeholders.”
Our key ESG commitments
Environmental
We act responsibly towards our planet in line with UN SDGs 12 and 13.
- We will maintain carbon neutrality and use 75% renewable energy in our operations by 2025.
- We will reduce CO2 emissions in our entire value chain in line with a 1.5 °C global warming scenario (based on Science Based Targets).
- We will generate 25% of our revenue from circular products, services and solutions, offer a trade-in on all professional medical equipment, and take care of responsible repurposing, by 2025.
- We will embed circular practices at our sites and put zero waste to landfill by 2025.
- All new product introductions will fulfill our EcoDesign requirements by 2025, with ‘Eco-Heroes’ accounting for 25% of revenues.
- We work with our suppliers to reduce the environmental footprint of our supply chain in line with a 1.5 °C global warming scenario (based on Science Based Targets).
- We engage with our stakeholders and other companies to drive sustainability efforts addressing the United Nations Sustainable Development Goals.
Social
Our purpose is to improve people’s health and wellbeing through meaningful innovation, in line with UN SDG 3. We act responsibly towards society and partner with our stakeholders
- We aim to improve the health and well-being of 2 billion people per year by 2025, including 300 million people in underserved communities.
- It is our strategy to lead with innovative solutions along the health continuum – helping our customers deliver on the Quadruple Aim (better health outcomes, a better experience for patients and staff, lower cost of care) and helping people take better care of their health.
- We aim to be the best place to work for our employees, providing opportunities for learning and development, embracing diversity and inclusion, and assuring a safe and healthy work environment. We pay at least a living wage and aim for employee engagement above the high-performance norm.
- Through our supplier development program we will improve the lives of 1,000,000 workers in our supply chain by 2025.
- We actively engage with and support the communities in which we operate, e.g. through volunteering, internships, STEM (Science, Technology, Engineering, Mathematics) initiatives.
- We contribute to the Philips Foundation, an independent foundation (stichting) organized under Dutch law, which aims to provide access to quality healthcare for disadvantaged communities.
- We consider our tax payments as a contribution to the communities in which we operate, as part of our social value creation.
Governance
We aim to deliver superior long-term value for our customers and shareholders, and we live up to the highest standards of ethics and governance in our culture and practices
- Our management structure and governance combines responsible leadership and independent supervision.
- The Philips Business System is our integrated operating model. It defines how we work together to delight our customers and achieve our company goals, leveraging our global scale and capabilities.
- We are committed to delivering the highest-quality products, services and solutions compliant with all applicable laws and standards.
- Our remuneration policy is designed to encourage employees to deliver on our purpose and strategy and create stakeholder value, and to motivate and retain them. Our executive long-term incentive plan includes environmental and social commitments.
- We ensure ethical behavior through our General Business Principles, with a strong compliance and reporting framework.
- Our risk management is designed to provide reasonable assurance that strategic and operational objectives are met, legal requirements complied with, and the integrity of the company’s reporting and related disclosures safeguarded.
- We are transparent about our plans, activities, results and contributions to society (e.g. Country activity and Tax report), and engage with shareholders, customers, business partners, governments and regulators through a variety of platforms.
8.3Environmental performance
In 2016, we launched our five-year sustainability program, Healthy people, Sustainable planet, which ended in December 2020. The program addressed both social and environmental challenges and included associated targets. On September 14, 2020 we launched our ESG commitments, with ambitious targets to be achieved by the end of 2025.
Besides our social impact, focusing on SDG 3, described in the next section, we have an environmental impact through our global operations, but even more so through our products and solutions. This is where we contribute to SDG 12 (Ensure sustainable consumption and production patterns) and SDG 13 (Take urgent action to combat climate change and its impacts).
Environmental impact
Since 1990, Philips has been performing Life-Cycle Assessments (LCAs). These LCAs provide insight into the lifetime environmental impact of our products and are used to steer our EcoDesign efforts and to grow our Green and Circular Solutions portfolio. As a logical next step, we have measured our environmental impact on society at large via a so-called Environmental Profit & Loss (EP&L) account, which includes the hidden environmental costs associated with our activities and products. It provides insights into the main environmental hotspots and innovation areas to reduce the environmental impact of our products and solutions.
The EP&L account is based on LCA methodology, in which the environmental impacts are expressed in monetary terms using conversion factors developed by CE Delft. These conversion factors are subject to further refinement and are expected to change over time. We used expert opinions and estimates for some parts of the calculations. The figures reported are Philips’ best possible estimates. As we gain new insights and retrieve more and better data, we will enhance the methodology, use-cases and accuracy of results in the future. For more information we refer to our methodology document.
An important learning that we derived from the 2017-2019 EP&L is that, in addition to the conversion factors, the definition of the use-case scenarios also has a significant impact on the result. This is especially true of consumer products, which have large sales volumes, long lifetimes and frequently high energy consumption (e.g. haircare products and steam irons). Based on new consumer insights, we have changed use-case scenarios, and reduced, for example, the maximum wattage used and/or the daily duration of use. This resulted in a material reduction of EUR 1.16 billion on the EP&L in 2020 (and 1.74 billion on the EP&L in 2019).
Other changes we made to improve the accuracy of our environmental impact are the inclusion of our full Sleep & Respiratory Care portfolio (resulting in 13% additional impact compared to the 2019 result) and the differentiation of the energy mix of the use-phase of our products based on the region of sales. The 2020 impact would have been EUR 150 million higher if we had still used the global average energy mix for all products regardless of where the products are used.
For comparability reasons, we have also applied the new use-cases and additional Sleep & Respiratory Care products to the 2019 EP&L. The table below shows this refined EP&L impact based on 2019 sales volumes.
Philips Group
EP&L refinement
in billions of EUR unless otherwise stated
| Original EP&L 2019 | 7.25 | |
| Changes | New use case scenarios for reference products | -1.74 |
| Addition of full Sleep & Respiratory Care portfolio | +0.57 | |
| Refined EP&L 2019 | 6.08 | |
The current EP&L account only includes the hidden environmental costs. It does not yet include the benefits to society that Philips generates by improving people’s health and well-being through our products and solutions. We have a well-established methodology to calculate the number of lives we positively touch with our products and solutions. We aim to look into valuing these societal benefits in monetary terms as well and include them in our future EP&L account.
Results 2020
In 2020, Philips' environmental impact amounted to EUR 4.91 billion, compared to EUR 6.08 billion in 2019 (refined from EUR 7.25 billion due to the updated use-case scenarios and addition of the full Sleep & Respiratory Care portfolio). This significant reduction was mainly driven by lower unit sales in Personal Health and by our EcoDesign efforts resulting in more energy-efficient products. The main environmental impact, 83% of the total, is related to the usage of our products, which is due to electricity consumption. Particulate matter formation, climate change, and acidification are the main environmental impacts, accounting for 43%, 27% and 18% respectively of the total impact. The environmental costs include the environmental impact of the full lifetime of the products that we put on the market in 2020, e.g. 10 years in the case of a medical system or 7 years of usage in the case of a domestic appliance. As we grow our portfolio of Green Products and Solutions, we expect the environmental impact to reduce.
Of the total 2020 impact, just EUR 135 million (3%) is directly caused by Philips’ own operations, mainly driven by outbound logistics. Compared to EUR 154 million in 2019, this is an 12% reduction, mainly due to reduced business travel (COVID-19) as well as an increased share of green electricity in our non-industrial sites.
Our supply chain currently has an environmental impact of some EUR 693 million, which is 14% of our total environmental impact. The main contributors are the electronic components, cables and steel used in our products. Through our Circular Economy and Supplier Sustainability programs we will continue to focus on reducing the environmental impact caused by the materials we source and apply in our products.
In order to deliver on our carbon neutrality commitment, we have set ambitious reduction targets. In 2018, we were the first health technology company to have its 2020-2040 targets (including the use-phase of our products) approved by the Science Based Targets initiative – a collaboration between CDP (formerly Carbon Disclosure Project), the United Nations Global Compact (UNGC), the World Resources Institute (WRI) and the World Wide Fund for Nature (WWF) aimed at driving ambitious corporate climate action. Approval confirms that Philips’ long-term targets are in line with the level of decarbonization required to keep the global temperature increase below 2 °C. As a next step in our journey to reduce our environmental impact, and part of our ESG commitments launched in September 2020, we committed to reduce our full value chain emissions in line with a 1.5 °C global warming scenario,
8.3.1Green Innovation
According to research from the Potsdam Institute for Climate Impact research, over 4% of global CO2 emissions are caused by the Healthcare sector. Our Green Innovation – the Research & Development spend related to the development of new generations of Green Products and Solutions and Green Technologies, addressing SDG 12 (Ensure sustainable consumption and production patterns) – is focused on addressing that impact.
Sustainable Innovation is the Research & Development spend related to the development of new generations of products and solutions that address the United Nations’ Sustainable Development Goals 3 (Ensure healthy lives and promote well-being for all at all ages) or 12. With regard to Sustainable Innovation spend, Philips set a target of EUR 7.5 billion (cumulative) for the period 2016-2020 as part of the Healthy people, Sustainable planet program.
In 2020, Philips invested EUR 280 million in Green Innovation and some EUR 1.7 billion in Sustainable Innovation. Total Sustainable Innovation spend over the past five years amounted to EUR 7.4 billion, about 1% below the target.
Diagnosis & Treatment businesses
Philips develops innovative diagnosis and treatment solutions that support precision diagnosis and effective, minimally invasive interventions and therapy, while respecting the limits of natural resources. Investments in Green Innovation in 2020 amounted to EUR 122 million, a significant increase compared to 2019.
All Philips Green Focal Areas are taken into account as we aim to reduce environmental impact over the total lifecycle. Energy efficiency is an area of focus, especially for our large imaging systems such as MRI. Philips also pays particular attention to enabling the upgrading of pathways, so our customers can benefit from enhancements in workflow, dose management and imaging quality with the equipment they already own. Our Diagnosis & Treatment businesses actively support a voluntary industry initiative with European trade association COCIR to improve the energy efficiency and material efficiency of medical imaging equipment, as well as lowering its hazardous substances content. Moreover, we are actively partnering with multiple leading care providers to investigate innovative ways to reduce the environmental impact of healthcare, for example by maximizing energy-efficient use of medical equipment and optimizing lifecycle value. Additionally, Philips aimed to close the loop on all large medical equipment that became available to us by the end of 2020, and to extend circular practices to all medical equipment by 2025. To achieve this target, we actively drive trade-ins in markets where de-install, trade-in and reverse logistics capabilities are in place, and build these capabilities in countries that do not yet have them.
Connected Care businesses
Philips’ connected health IT solutions integrate, collect, combine and deliver quality data for actionable insights to help improve access to quality care, while respecting the limits of natural resources. It is our belief that well-designed e-health solutions can reduce the travel-related carbon footprint of healthcare, increase efficiency in hospitals, and improve access to care and outcomes. This has also become apparent during the COVID-19 crisis. Green Innovation investments in 2020 amounted to EUR 51 million, a sizeable increase compared to 2019, and Green Innovation projects in 2020 delivered, among other things, new green patient monitors with lower environmental footprints, reflecting all the Philips Green Focal Areas. Energy efficiency and material reduction are the main areas of focus.
Personal Health businesses
The continued high level of R&D investments at our Personal Health businesses is also reflected in the Green Innovation spend, which amounted to EUR 105 million in 2020, compared with EUR 99 million in 2019. The Personal Health businesses continued their work on improving the energy efficiency of their products, closing the materials loop (e.g. by using recycled materials in products and packaging), and the voluntary phase-out of polyvinyl chloride (PVC), brominated flame retardants (BFR), Bisphenol A (BPA) and phthalates from, among others, food contact products. Mother & Child Care introduced a reusable sterilization box for soothers and breastfeeding accessories, eliminating the need for separate packaging. In our Oral Healthcare portfolio, we have been able to achieve a 40% average packaging reduction for the Protective Clean products for US retail. In our Garment Care portfolio, we launched our first green optimal-temperature pressurized steam generator; this energy-efficient product contains recycled plastic and is free of PVC and BFR.
Other
The segment Other invested EUR 2 million in Green Innovation, spread over projects focused on global challenges relating to water, air, energy, food, circular economy, and access to affordable healthcare.
Circular economy
For a sustainable world, the transition from a linear to a circular economy is essential. A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using these resources more effectively. It is a driver of innovation in the areas of material, component and product re-use, as well as new business models such as system solutions and services. At Philips, we have set ambitious targets to guide this journey. In 2016, as we launched our Healthy people, Sustainable planet program, we aimed, among other things, to generate 15% of our revenues from circular products and services, and to send zero waste to landfill in our own operations, by 2020. At the beginning of 2018, we added a pledge to take back and repurpose all the large medical systems equipment (e.g. MRI and CT scanners) that our customers are prepared to return to us, and to extend those practices across our professional portfolio by 2025. At the end of 2020, we had achieved these ambitious circular economy goals.
8.3.2Green Revenues
Green Revenues are generated through products and solutions that offer a significant environmental improvement in one or more Green Focal Areas - Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability - and thereby deliver a contribution to SDG 12 (Ensure sustainable consumption and production patterns). Green Revenues increased to EUR 13.9 billion in 2020, or 71.0 % of sales (67.2% in 2019), reaching a record level for Philips and exceeding the 2020 target of 70%.
Through our EcoDesign process we aim to create products and solutions that have significantly less impact on the environment over their whole lifecycle. Overall, the most significant improvements have been in energy efficiency, although increased attention was also given to hazardous substances and recyclability in all segments in 2020, the latter driven by our Circular Economy initiatives.
Diagnosis & Treatment businesses
In 2020, our Diagnosis & Treatment businesses expanded their Green Products and Solutions portfolio with new Green Products - the CT Incisive, Mobile X-Ray system Zenition 50 and 70 - and with redesigns of various Green Products offering further environmental improvements such as the MR Ambition and Elition systems. These products improve patient outcomes, provide better value, and enable access to high-quality care, while reducing environmental impact. A good example is BlueSeal magnet technology, which is designed to reduce lengthy and costly disruptions in MRI practice for the MR Ambition, and help healthcare facilities transition to more productive and sustainable, almost helium-free operations. The new Green Products offer an improvement of over 10% in at least one of the Green Focal Areas compared to their predecessor products, e.g. 12-13% lower product weight for the Zenition compared to Veradius/Pulsera and 30% lower packaging weight for the CT Incisive compared to Ingenuity CT.
Connected Care businesses
Our Connected Care businesses continued to develop their Green Products and Solutions portfolio in 2020. Recently launched VS30 and MX850 patient monitors, EV300 and EVO ventilators and the Intrepid HeartStart monitor & defibrillator came onto the market with over 10% lower energy usage and/or product weight compared to their predecessor products. For example, energy savings for the EVO and EV300 ventilators were around 25% compared to their predecessor Trilogy 100 and 202 products.
Personal Health businesses
In our Personal Health businesses, the focus is on Green Products and Solutions that meet or exceed our minimum requirements in the areas of energy consumption, packaging, substances of concern, and application of recycled plastics. Green Revenues in 2020 advanced to 72% of total sales, compared to 63% in 2019. We continue to make progress in developing PVC/BFR-free products. More than 84% of our consumer product sales consist of PVC/BFR-free products, with the exception of power cords, for which there are not yet economically viable alternatives available. In our coffee portfolio we launched the Senseo Viva Café Eco, with over 75% recycled content in non-food-contact plastic parts. in our Kitchen Appliances portfolio, we stepped up the application of recycled plastic for our Eole and Viva/Bond Airfryers, switching over from virgin plastic to recycled plastic for the internal housing parts.
8.3.3Sustainable Operations
Philips’ Sustainable Operations programs focus on the main contributors to climate change, recycling of waste, reduction of water consumption, and reduction of emissions.
Carbon footprint and energy efficiency
At Philips, we see climate change as a serious threat. Therefore, we are taking action to rethink our business models and decouple economic growth from the impact we have on the environment. We believe large corporates should lead the transition to a low-carbon economy. This will not only benefit the environment, but will also positively impact social and economic aspects.
During the COP 21 United Nations Climate Conference in Paris in 2015, we committed to become carbon-neutral in our operations, pursue all efforts to reduce our operational emissions, source all our electricity from 100% renewable sources, and to offset all unavoidable emissions by year-end 2020. We are proud to confirm that as of 2020, Philips is carbon-neutral in its operations. We delivered on this commitment as a result of a comprehensive program that included energy-efficiency improvements, on-site renewables, Power Purchase Agreements, but also business travel reduction and transport mode shifts to low-carbon emitting alternatives, and finally a carbon offset program.
We are proud that our efforts are acknowledged by the CDP (formerly known as the Carbon Disclosure Project), a global NGO that assesses the greenhouse gas (GHG) emission performance and management of reporting companies. In 2020, we were ranked on the CDP Climate Change 'A' List for our continued climate performance and transparency for the eighth year in a row.
Having achieved our 2020 carbon neutrality target, we have raised the bar and set ambitious emission reduction targets to ensure we help limit the impact of global warming, not only in our operations, but throughout our value chain – collaborating with suppliers and customers to amplify our impact. That is why Philips has set new long-term emission reduction targets, which have been assessed and approved by the Science Based Targets initiative (SBTi) – locking down our commitment to drive climate action across the value chain and ensuring that we contribute to the decarbonization required to keep the global temperature increase well below 1.5 °C.
In 2020, our net operational carbon footprint resulted in zero kilotonnes carbon dioxide-equivalent (CO2-e), mainly driven by increased use of electricity from renewable sources, a significant reduction in air travel due to COVID-19, and a reduction in air freight, notwithstanding emergency flights with respiratory and other equipment for hospitals during the COVID-19 crisis. A total of 535 kilotonnes carbon dioxide-equivalent (CO2-e) were compensated via carbon offsets.
Philips reports all its emissions in line with the Greenhouse Gas Protocol (GHGP).
In 2020, our operational carbon intensity (in tonnes CO2e/EUR million sales) improved by 24%, even as our company recorded 2.5% comparable sales growth*). This excludes the acquired carbon offsets.
In our sites we achieved significant reductions in our scope 2 (indirect) emissions, mainly driven by an increase in global renewable electricity share from 95% in 2019 to 100% in 2020. All our US operations were already powered by renewable electricity from the Los Mirasoles wind farm. Then, in 2019, the Krammer and Bouwdokken wind farms in the Dutch province of Zeeland, with which we closed long-term contracts through our renewable electricity purchasing consortium with Nouryon, DSM and Google, powered all our operations in the Netherlands. Combined with the Los Mirasoles wind farm, this covers some 50% of our total electricity demand. Combined with the achieved energy reductions, this led to a 28% reduction in emissions from our energy consumption (scope 1 and scope 2 market-based) in 2020 compared to 2019.
In December 2020, Philips announced its next Power Purchase Agreement, again in a purchasing consortium with Heineken, Nouryon and Signify, to power most of the remaining European sites with renewable electricity.
Our business travel emissions, covering emissions from air travel, lease cars and rental cars, decreased by 54% compared to 2019. We recorded a 78% reduction in our air travel emissions, mainly as a result of COVID-19 and our 'Travel less, travel smarter' campaign. This campaign was initiated to further reduce our business travel emissions by installing more online collaboration rooms as an alternative to travel, stimulating behavioral change via our Global Connect Challenge, and promoting alternative modes of transport. In addition to the emission reduction in air travel, emissions from our lease car fleet decreased by 11%, mainly due to COVID-19 and the working-from-home protocol, partially mitigated by an increase in fleet size. Emissions resulting from rental cars decreased by 54% compared to 2019.
In 2020, we recorded a 15% decrease in emissions in our overall logistics operations compared to 2019. We reduced overall emissions from air freight by 6%. Emissions from ocean freight reduced by 47%, mainly as a result of improved data insights, allowing us to more accurately quantify our ocean freight emissions. Emissions from parcel shipments decreased by 1% as we shipped more parcels, but over a shorter distance compared to previous years. Emissions from road transport decreased by 12%, mainly driven by a decreased demand for Personal Health products in the first half year of 2020. We continued to make transport mode shifts to low-carbon alternatives, but departed from this while addressing the significant and urgent increase in demand for respiratory and other healthcare equipment during the COVID-19 crisis.
Although reduction is key to achieving carbon neutrality, unavoidable carbon emissions required offsetting in order to gradually drive down our emissions to zero by year-end 2020. We did this by financing projects in emerging regions that have a strong link with UN Sustainable Development Goals 3 (Ensure healthy lives and promote well-being for all at all ages) and 12 (Ensure sustainable consumption and production patterns). In 2020, we increased offsets to 535 kilotonnes, equivalent to the annual uptake of approximately 16 million medium-sized oak trees. This covers the total emissions of our entire operations, covering all sites, all business travel and all logistics flows. We do this by financing carbon reduction projects in emerging regions that drive social, economic and additional environmental progress for the local communities, such as:
Providing access to safe drinking water while reducing wood consumption
These carbon-emission reduction projects will provide millions of liters of safe drinking water in Uganda and Ethiopia and will reduce the mortality risk from water-borne diseases. Additionally, less wood will be required for boiling water, leading to less indoor air pollution and slowing down the deforestation rate. To ensure quality, all offsets are verified under the Gold Standard.
Fighting against respiratory diseases and deforestation by means of clean cookstoves
By financing highly efficient cookstoves in Kenya and Uganda, less wood will be required for cooking, leading to lower carbon emissions, a reduction in diseases caused by indoor air pollution, and a lower deforestation rate in these regions. To ensure quality, all offsets are verified under the Gold Standard.
Providing access to clean energy while improving health and education
This project will reduce the demand-supply gap in the Dewas region of India and will provide renewable energy to more than 50,000 households. The project will also provide a mobile medical unit in 24 villages, giving diagnosis and medicines free of charge twice a month. Additional funding will be provided for educational programs and improved sanitation facilities in five local schools in order to maximize the social impact. To ensure quality, all offsets are verified under the Gold Standard.
Philips Group
Operational carbon footprint by scope
in kilotonnes CO2-equivalent unless otherwise stated
| Scope 1 | 42 | 38 | 40 | 35 | 32 |
| Scope 2 (market-based) | 121 | 58 | 25 | 14 | 3 |
| Scope 2 (location-based) | 252 | 225 | 227 | 203 | 182 |
| Scope 3 | 649 | 785 | 721 | 657 | 500 |
| Total (scope 1, 2 (market-based), and 3) | 812 | 881 | 786 | 706 | 535 |
| Emissions compensated by carbon offset projects | - | 220 | 330 | 440 | 535 |
| Net operational carbon emissions | 812 | 661 | 456 | 266 | 0 |
| Operational CO2e efficiency in tonnes CO2e/mln EUR sales | 47.9 | 47.5 | 43.4 | 36.2 | 27.4 |
During 2020, the applied emission factors used to calculate our operational carbon footprint remained unchanged compared to 2019. Philips reports all its emissions in line with the Greenhouse Gas Protocol (GHGP).
Philips Group
Energy consumption1)
in terajoules (TJ) unless otherwise stated
| Total electricity consumption | 1,742 | 1,560 | 1,582 | 1,531 | 1,446 |
| Fuel consumption | 652 | 558 | 603 | 550 | 525 |
| Purchased heat, steam and cooling | 83 | 48 | 61 | 60 | 45 |
| Total energy | 2,477 | 2,166 | 2,246 | 2,141 | 2,016 |
| Renewable electricity | 986 | 1,228 | 1,423 | 1,450 | 1,445 |
| Renewable electricity share | 57% | 79% | 90% | 95% | 100% |
| Renewable energy share | 40% | 57% | 63% | 68% | 72% |
| Sales in millions of EUR | 17,422 | 17,780 | 18,121 | 19,482 | 19,535 |
| Royal Philips revenues | |||||
| Operational energy efficiency in TJ/mln EUR sales | 0.15 | 0.12 | 0.12 | 0.11 | 0.10 |
Water
Philips is not a water-intense company. However, a number of our manufacturing sites are located in water-stressed regions in, for example, India. Total water intake in 2020 was 777,476 m3, a 13% reduction compared to 2019. The government-mandated lockdowns and the working-from-home protocol resulted in a significant reduction in water intake at several sites. Personal Health, which consumes 48% of total water usage, recorded a 16% decrease. The decrease was mainly due to fewer employees working on the sites and production volume decreases at water-intensive manufacturing sites in Asia. Diagnosis & Treatment showed a decrease of 3%, mainly caused by the working-from-home protocol, partially mitigated by the installation of a water-intense technology on a site in North America. Connected Care showed a decrease of 23%, notwithstanding a significant volume ramp-up, due to changes in the organizational footprint and the working-from-home protocol.
Philips Group
Water intake
in thousands of m3
| Diagnosis & Treatment | 269 | 312 | 288 | 295 | 286 |
| Connected Care | 152 | 168 | 161 | 150 | 116 |
| Personal Health | 542 | 408 | 442 | 445 | 375 |
| Philips Group | 963 | 888 | 891 | 890 | 777 |
In 2020, 99.8% of water was purchased and 0.2% was extracted from groundwater wells.
Waste
In 2020, our manufacturing sites generated 35.5 kilotonnes of waste, an increase of 34% compared to 2019, mainly driven by construction activities in different locations across the globe. The Diagnosis & Treatment businesses increased their waste by 103% as a result of various construction activities in Asia and Europe and increased production, now constituting 56% of total waste. Connected Care decreased by 15% due to operational changes and the working-from-home protocol, notwithstanding a sizable production ramp-up; Personal Health decreased by 3% due to operational changes and increased production, now constituting 35% of total waste.
Philips Group
Total waste
in kilotonnes
| Diagnosis & Treatment | 9.2 | 8.3 | 8.4 | 9.7 | 19.7 |
| Connected Care | 3.5 | 3.9 | 4.0 | 4.1 | 3.5 |
| Personal Health | 12.2 | 12.4 | 12.1 | 12.6 | 12.3 |
| Philips Group | 24.9 | 24.6 | 24.5 | 26.4 | 35.5 |
Total waste consists of waste that is delivered for landfill, incineration, waste to energy or recycling. Our sites addressed both the recycling percentage as well as waste sent to landfill as part of the Healthy people, Sustainable planet 2016-2020 program. Materials delivered for recycling via an external contractor amounted to 31.9 kilotonnes, which equals 90% of total waste, a significant improvement compared to 83% in 2019. Philips thereby achieved its 2020 recycling target.
Of the 10% remaining (not recycled) waste, 78% comprised non-hazardous waste and 22% hazardous waste. Our Zero Waste to Landfill KPI excludes one-time-only waste and waste delivered to landfill due to regulatory requirements. According to this definition, in 2020 we reported 0.5 kilotonnes of waste sent to landfill, a reduction of 39% compared to 2019. All our 32 industrial sites achieved Zero Waste to Landfill status by the end of 2020.
Philips Group
Industrial waste delivered for recycling
in %
| Demolition scrap | 36 |
| Paper/cardboard | 19 |
| Wood | 14 |
| Metal scrap | 12 |
| Plastic waste | 6 |
| Chemical waste | 5 |
| General waste | 4 |
| Other | 4 |
Philips included reduction targets for the substances that are most relevant for its businesses in its Healthy people, Sustainable planet 2016-2020 program. In order to provide comparable information at Group level, please find below a summary of the emissions of the formerly targeted substances. Emissions of restricted substances were again zero in 2020. The level of emissions of hazardous substances decreased from 2,521 kilos in 2019 to 616 kilos in 2020 (-76%), mainly driven by the significant reduction in styrene emissions in the Personal Health businesses.
Philips Group
Restricted and hazardous substances
in kilos
| Restricted substances | 1 | 0 | 0 | 0 | 0 |
| Hazardous substances | 10,496 | 5,243 | 3,363 | 2,521 | 616 |
8.3.4Supplier indicators
Philips’ purpose to improve people’s health and well-being extends throughout our value chain. At Philips, we have a direct business relationship with approximately 3,300 product and component suppliers and 16,000 service providers. Our supply chain sustainability strategy is updated annually through a structured process, combined with dedicated multi-stakeholder dialogues. Our most recent stakeholder dialogue took place in June 2019. From this, we have developed multiple programs aimed at driving sustainable improvement. These programs cover compliance with our policies, improvement of our suppliers’ sustainability performance, our approach towards responsible sourcing of minerals, and reducing the environmental impact of our supply base.
Supplier sustainability compliance
Two core policy documents form the basis of our supplier sustainability compliance approach: the Supplier Sustainability Declaration and the Regulated Substances List.
Supplier Sustainability Declaration (SSD)
The SSD sets out the standards and behaviors Philips requires from its suppliers. The SSD is based on the Responsible Business Alliance (RBA) Code of Conduct, in alignment with the UN Guiding Principles on Business and Human Rights and key international human rights standards, including the ILO Declaration on Fundamental Principles and Rights at Work and the UN Universal Declaration of Human Rights. It covers topics such as Labor, Health & Safety, Environment, Ethics, and Management Systems.
Regulated Substances List (RSL)
The RSL specifies the chemical substances regulated by legislation. Suppliers are required to follow all the requirements stated in the RSL. Substances are marked as restricted or declarable.
All suppliers are required to commit to the SSD and RSL. Through integration of a Sustainability Agreement (SA) in our General Purchase Agreement, suppliers declare compliance to both the SSD and RSL. Upon request, they provide additional information and evidence.
Supplier Sustainability Performance (SSP) - 'Beyond Auditing'
In 2016, Philips moved away from its traditional approach to audit suppliers, which it had been taking since 2004. Insights from data analysis showed this old approach was insufficient to drive sustainable improvements. Our SSP approach, first piloted in 2016, focuses on:
- a systematic approach to improve the sustainability of our supply chain
- continuous improvement against a set of recognized and global references
- collaboration, increased transparency, clear commitments, and ensuring suppliers meet the agreed targets
- encouraging our suppliers, industry peers and cross-industry peers to adopt our approach
This systematic approach is shown in the figure below and is a high-level representation of the SSP program.
First, a set of references, international standards and Philips requirements are used to develop the Frame of Reference, which covers management systems, environment, health & safety, business ethics and human rights. For each, the maturity level of suppliers is identified in the Program Execution Wheel, which assesses suppliers against the Plan–Do–Check–Act (PDCA) cycle. Suppliers are then categorized through the Supplier Classification model, which differentiates on the basis of supplier maturity, resulting in supplier-specific proposals for improvement. The SSP process is monitored and adjusted through continuous feedback loops. The outcome of the SSP assessment is a supplier sustainability score ranging from 0 to 100. This score is based on supplier performance in environmental management, health & safety, business ethics, and human rights.
Supplier classification
Supplier selection for the program is initially based on criticality, which is determined through an assessment of the supplier’s associated risks and opportunities, such as strategic importance and annual spend. After this, the engagement strategy is tailored based on the current performance in terms of sustainability.
There are four different engagement approaches: BiC (Best in Class), SSIP (Supplier Sustainability Improvement Plan), DIY (Do It Yourself) and PZT (Potential Zero Tolerance). The PZT status is a temporary status and requires immediate attention and action. Depending on the categorization, suppliers are engaged in different ways to improve their sustainability performance.
If a (Potential) Zero Tolerance is identified, immediate action is taken. If the requested additional information and evidence lead to the conclusion that there is no structural Zero Tolerance, the supplier’s status will be changed and the supplier will go back to the original track in the program. If the conclusion gives rise to a structural Zero Tolerance, the supplier is required to:
- propose a plan to mitigate and/or resolve the identified Zero Tolerance(s)
- commit to structurally resolving the Zero Tolerance
- provide regular updates and evidence
- avoid quick-fixing
Philips defines six Zero Tolerances:
- Fake or falsified records
- Child and/or forced labor
- Immediate threats to the environment
- Immediate threats to worker health and safety
- Failure to comply with regulatory and/or Philips requirements
- Workers’ monthly income (covering salary for regular hours and overtime, tax deductions, social insurance) failing to meet regulatory requirements
For more details on the SSP process, refer to the SSP brochure.
Our 2020 results
In 2020, eight zero tolerances were found across the following categories: health and safety, remuneration, and environmental impact. Most cases related to fire safety risks at our suppliers. Four of the eight cases were successfully closed in 2020. The remaining are still pending closure, while having active mitigation plans in place.
Philips measures the impact of SSP engagements through the number of lives improved in the supply chain. This is derived from the improvements that suppliers make in their performance. To determine improvements, we calculate the pro rata change in performance from one year to the next.
In 2020, the overall year-on-year improvement in performance is 36% for suppliers that entered the program in 2019. The number of employees impacted at suppliers participating in the SSP program was approximately 302,000. For those workers, labor conditions improved, the risk of serious injury reduced, and the negative environmental impact of suppliers was brought down. For a detailed break-down of percentage improvements realized in the past year, refer to the table below.
Philips Group
SSP 2020 performance: pro-rata improvements
in %
| Environment | 6% | 10% | 15% | 8% | 10% | 11% | 11% | 8% | 5% |
| Health and Safety | 3% | 11% | 21% | 8% | 8% | 11% | 9% | 14% | 6% |
| Business Ethics | 1% | 8% | 8% | (8)% | 5% | 7% | 23% | 2% | 1% |
| Human Capital | 6% | 6% | 21% | 12% | 10% | 12% | 14% | 18% | 3% |
Categories which showed the biggest improvement are:
- Implementation of Health & Safety measures: improving consistent use of personal protective equipment, implementation of fire safety measures, and implementation of machine safety measures
- Implementation of Human capital measures: improving fair remuneration, working hours, and management of third-party labor providers
- Target setting and tracking of Business Ethics topics: improving periodic evaluations of grievance mechanisms, setting targets on complaints resolving, and progress reporting mechanisms
In 2020, 20 suppliers were added to the SSP program. Of the population of suppliers that entered the program in the years before 2020, 237 suppliers were still active in 2020.
As part of the 2020 adoption of our new ESG commitments, we have set the target to improve the lives of 1 million workers in our supply chain by 2025. To achieve this, a significant ramp-up is required in the coming years.
Additional progress made in 2020
Apart from the inclusion of additional suppliers annually into the award-winning SSP program, Philips is actively applying the latest insights in data science and machine learning methods to make the SSP program more efficient in determining the sustainability maturity of suppliers, while also increasing the effectiveness of our supplier improvement approach.
In 2020, a machine learning tool was developed, which is able to predict expert scorings on detailed pieces of evidence, thereby reducing the time spent on assessments. This leaves more room for experts to support suppliers in their capability building, by sharing best practices and creating business cases that enable improvements.
In addition, Philips launched its newly developed SSP IT platform, which fully supports the entire engagement process, from onboarding to data analysis. It is set up in such a way that other companies can easily start using the system for their own supplier engagements. The program design also enables various codes of conduct to be included. Through public speaking engagements and 1-on-1 conversations with cross-industry peers, Philips is making the methodology available to other companies that want to make a sustainable impact in their supply chain.
Responsible Sourcing of Minerals
The supply chains for minerals are long and complex. Philips does not source minerals directly from mines as there are typically 7+ tiers between end-user companies like Philips and the mines where the minerals are extracted. The extraction of minerals can take place in conflict-affected and high-risk regions, where mining is often informal and unregulated and carried out at artisanal small-scale mines (ASM). These ASMs are vulnerable to exploitation by armed groups and local traders. Within this context, there is an increased risk of severe human rights violations (forced labor, child labor or widespread sexual violence), unsafe working conditions or environmental concerns.
Philips addresses the complexities of the minerals supply chains through a continuous due diligence process, combined with active participation in multi-stakeholder initiatives to promote the responsible sourcing of minerals.
Conflict minerals due diligence
Each year, Philips investigates its supply chain to identify smelters of tin, tantalum, tungsten and gold in its supply chain and we have committed to not purchasing raw materials, sub-assemblies, or supplies found to contain conflict minerals.
Philips applies collective cross-industry leverage through active engagement via the Responsible Minerals Initiative (RMI, formerly known as the Conflict Free Sourcing Initiative (CFSI)). RMI identifies smelters that can demonstrate, through an independent third-party audit, that the minerals they procure are conflict-free. In 2020, Philips continued to actively direct its supply chain towards these smelters.
The Philips Conflict Minerals Due Diligence framework, measures and outcomes are described in the Conflict Minerals Report that we file annually to the U.S. Securities and Exchange Commission (SEC). The conflict minerals report is also publicly available on Philips’ website.
Each year, we work with our suppliers on the quality of their due diligence reporting by setting minimum criteria for the Conflict Minerals Reporting Templates (CMRT). In addition, we strive to reduce the number of non-identified smelters. The quality of the CMRTs remained the same as the 2019 due diligence results, despite the COVID-19 pandemic. The number of non-listed smelters continued to decline, reaching zero for the first time in our program history (2019: 3).
Philips Group
Conflict Minerals Due Diligence results
| Response rate of suppliers | 95% | 100% | 99% |
| CMRTs that satisfied minimum acceptance criteria | 83% | 86% | 86% |
| Non-listed smelters in our supply chain | 5 | 3 | 0 |
Cobalt
In 2020, Philips expanded the scope of its due diligence program to include cobalt as a new material. We use cobalt predominantly in lithium-ion batteries. As part of this expansion, we engaged suppliers that provide materials containing cobalt. In 2020, we reached a 100% response rate. In addition, we performed smelter outreach on several occasions. Where appropriate, we worked with direct suppliers to facilitate alternative sourcing.
Women’s empowerment through access to credits and savings in the Democratic Republic of Congo
Women represent 45 to 50% of the artisanal small-scale mining workforce. Studies have shown that they often struggle to access formal credit and savings. When they can get credit they often have to accept unfavorable repayment terms, otherwise they have to depend on informal financial practices. The Artisanal Mining Women’s Empowerment Credit & Savings project addressed this issue by supporting the creation of village savings and loans associations for women and men in artisanal gold mining communities, in an effort to promote entrepreneurship and economic security.
In contrast to microfinance institutions, the interest paid on credit go back into the communal fund so members see their savings increase over time. The project also facilitated sensitization on gender equality and led to discussions with female members of associations and their partners about household finances, challenging traditional stereotypes and gender roles. The project provided financial literacy training to women who access credit from their association, to undertake new entrepreneurial activities around mine sites
Making due diligence activities more efficient and effective for miners in Bolivia and Burkina Faso
The CADD Project consists of the development and pilot deployment of an open-source, public framework for upstream supply chain stakeholders to operationalize requirements from the OECD Due Diligence Guidance. Such a framework is an essential implementation mechanism for companies operating in, and procuring from countries covered by European regulation 2017/821 where no upstream due diligence program is established. It provides a solution to systemic constraints on upstream due diligence scalability, sustainability, accountability and reliability — the most significant challenge to responsible mineral procurement globally.
Mining and mineral trade operators in countries covered by EU regulation are enabled to secure compliant access to international markets while minimizing due diligence costs. This in turn is expected to boost due diligence uptake by upstream operators and incentivize formal trade — an important step towards improving the socio-economic conditions of artisanal small-scale mining communities in conflict-affected and high-risk areas
Multi-stakeholder initiatives for responsible sourcing of minerals
We believe that multi-stakeholder collaboration in the responsible sourcing of minerals is the most viable approach for addressing the complexities of minerals value chains.
European Partnership for Responsible Minerals (EPRM)
Philips is a founding partner of EPRM and has been a strategic member since its inception in May 2016. EPRM is a multi-stakeholder partnership between governments, companies, and civil society actors working toward more sustainable minerals supply chains. The goal of EPRM is to create better social and economic conditions for mine workers and local mining communities by increasing the number of mines that adopt responsible mining practices in Conflict-Affected and High-Risk Areas (CAHRAs).
EPRM is an accompanying measure to the EU Conflict Minerals Regulation dedicated to making real change ‘on the ground’. Through EPRM, Philips financially supports activities to improve responsible mining practices in mining areas in CAHRAs and shares our knowledge and practice in conducting due diligence. Since 2018, Philips has actively participated in a working group focused on making the on-the-ground projects financially and strategically effective. From here, the call for new proposals was developed, decisions on co-funding were made, and criteria for scale-up potential were created.
Since January 2019, Philips has been an active board member in EPRM, taking the seat of vice-chair by representing the industrials pillar.
IRBC Responsible Gold Agreement
In June 2017 Philips signed the Responsible Gold Agreement, joining a coalition to work on improving international responsible business conduct across the gold value chain. Signees include goldsmiths, jewelers, recyclers, NGOs, electronics companies, trade unions, and the Dutch government. This partnership intends to bring about cooperation between companies, government, trade unions, and NGOs to prevent abuses within production chains. From September 2019, Philips represents gold and precious metal, recycling, and electronic companies in the steering committee of the Responsible Gold Agreement. From this partnership, Philips co-developed a project with several other parties including civil society actors, to facilitate sourcing of responsible gold from Uganda. The project is aimed specifically at artisanal and small-scale mines (ASM) and works to establish a sustainable, traceable gold supply chain with improved working conditions for miners and free of child labor. The approach is designed to be scaled up and serves as a potential blueprint for mines in other regions. Since 2019, Philips is also an active member of the steering committee of the Responsible Gold Agreement.
Green supply chain program
Since 2003, Philips has looked at ways to improve the environmental performance of its suppliers. When it comes to climate change, we have adopted a multi-pronged approach: reducing the environmental impact of our products, committing to carbon neutrality in our own operations, and engaging with our supply chain to reduce their carbon footprint. Through our partnership with the CDP supply chain program, Philips motivates its suppliers to disclose emissions, embed board responsibility on climate change, and actively work on reduction activities.
Since 2011 we have been partnering with the CDP Supply Chain, through which we invite suppliers to disclose their environmental performance and carbon intensity. This year, there was a response rate of 92% (2019: 80%).
Philips Group
Supplier response rate to CDP questionnaire
| 77% | 80% | 92% |
From this group, 61% engaged in emission reduction initiatives (2019: 66%). In addition, 61% committed to carbon emission targets (2019: 59%). Furthermore, 43% of the responding suppliers have set science-based targets of which 31% was have been formally approved. Our suppliers undertook projects in 2020 that resulted in savings on carbon emissions amounting to 17 million metric tonnes CO2.
As part of 2020 adoption of our new ESG commitments, we have set the target to actively engage 80% of our supply base to:
- disclose scope 1 and 2 carbon emissions annually
- implement de-carbonization strategies in line with the 2015 Paris Agreement
8.4.1Improving people’s lives
At Philips, it is our purpose to improve people’s health and well-being through meaningful innovation. We aim to improve the lives of 2.5 billion people a year by 2030.
To guide our efforts and measure our progress, we take an integrated approach. Products or solutions from our portfolio that directly support the curative or preventive side of people’s health determine the contribution to the social dimension. This is also our contribution to UN Sustainable Development Goal 3 (Ensure healthy lives and promote well-being for all at all ages). As healthy ecosystems are also needed for people to live a healthy life, the contribution to the ecological dimension is determined by means of our steadily growing Green Products and Solutions portfolio, such as the energy-efficient products in our Personal Health businesses. This is our contribution to Sustainable Development Goal 12 (Ensure sustainable consumption and production patterns) and SDG 13 (Take urgent action to combat climate change and its impacts).
Philips improved 1.75 billion lives in 2020, an increase of around 110 million compared to 2019, driven by all segments, mainly in China, the ASEAN countries, North America and the Indian Subcontinent. Through Philips products and solutions that support people’s health and well-being, we improved the lives of 1.53 billion people in 2020 (2019: 1.54 billion), mainly driven by Diagnosis & Treatment businesses and Connected Care businesses. Our Green Products and Solutions that support a healthy ecosystem contributed 1.19 billion lives (2019: 1.07 billion). After the elimination of double counts – people touched multiple times – we arrived at 1.75 billion lives improved.
In 2019, Philips extended its commitment to improve the lives of people in underserved communities to 400 million by 2030. Philips thereby recognized the often critical needs of women and children in many communities, but also the added burden arising from the increase in non-communicable diseases (NCDs) in communities already struggling without adequate access to healthcare. To monitor progress on this extended commitment, we track lives improved in underserved communities. In 2020 our health and well-being solutions improved the lives of 207 million people in underserved markets (an increase of 13 million compared to 2019).
Following the launch of our ESG commitments in September 2020, we will also change the definition of Lives Improved with effect from 2021, to be aligned with our purpose. The new definition will only include products or solutions that contribute to people’s health and well-being.
Lives Improved per market
The following table shows the number of Lives Improved per market.
Philips Group
Lives improved per market
| Africa | 34 | 1,234 | 3% | 2,335 |
| ASEAN & Pacific | 172 | 966 | 18% | 6,580 |
| Benelux | 27 | 29 | 93% | 1,458 |
| Central & Eastern Europe | 82 | 162 | 51% | 1,874 |
| Germany, Austria & Switzerland | 83 | 101 | 82% | 4,928 |
| France | 47 | 68 | 69% | 2,626 |
| Greater China | 471 | 1,436 | 33% | 15,801 |
| Iberia | 31 | 57 | 54% | 1,474 |
| Indian Subcontinent | 88 | 1,601 | 5% | 3,026 |
| Italy, Israel & Greece | 40 | 82 | 49% | 2,465 |
| Japan | 45 | 126 | 36% | 4,911 |
| Latin America | 101 | 639 | 16% | 4,388 |
| Middle East & Turkey | 74 | 379 | 20% | 2,962 |
| Nordics | 19 | 28 | 68% | 1,530 |
| North America | 354 | 368 | 96% | 22,408 |
| Russia & Central Asia | 48 | 251 | 19% | 1,895 |
| UK & Ireland | 36 | 72 | 50% | 3,052 |
8.4.2Workforce of the Future
The challenges presented by the fast-evolving industry landscape demand a networked organization, in which cross-functional teams actively draw on resources across the organization and across the world. Our focus on the Workforce of the Future helps us to attract, develop and retain a workforce that will deliver the strategic capabilities we need to win.
By applying Strategic Workforce Planning, in close alignment with the strategic planning of our businesses, we identify and develop the employee capabilities needed to realize our ambitions as a health technology company. In 2020 we implemented company-wide initiatives to retain and staff our most strategic positions with top performers. At the end of 2020 we had retained 94% of these employees and staffed 49% of our strategic positions with employees who are considered to be top performers. Key drivers of this are our internal development focus, leadership programs and our focused talent search services.
We have continued to embed our Total Workforce Strategy – looking at all sources, channels and locations for skills and capabilities, including employees, contingent workers, freelancers and services. Talent Acquisition has deployed our Right Shoring & Right Sourcing methodology into every business segment and multiple functions. In addition, we are now attracting 42% of our freelancers via our Careers site and building talent pools in US, Germany and the Netherlands.
We continued to devote additional attention to our campus, graduate and early-career hiring in 2020, which resulted in an increase of 29% in the number of campus hires compared to 2019, despite the impact of the pandemic. Our focus on the Workforce of the Future continues in 2021, with emphasis on strategic capabilities.
8.4.3Inclusion & Diversity
To be able to understand and meet customer and patient needs in a complex and continually changing environment, our workforce should reflect the society in which we operate, our customers, and the markets we serve. We believe that an inclusive culture allows our 120-plus nationalities to bring a rich diversity of capabilities, opinions and perspectives to our decision-making processes, thus driving innovation, enabling faster, targeted responses to market changes, and supporting sustainable improvements in team- and business performance.
Driving Inclusion & Diversity, Philips has set a new goal of 30% gender diversity in senior leadership positions (a subset of Management and Executive positions) by the end of 2025, up from the 2020 target of 25% that we met before the end of 2020. This is part of our reinforced commitments as a purpose-driven company. A company-wide training on unconscious bias awareness is part of the long-term program to create an ongoing dialogue in teams that will help us build and foster that inclusive environment.
Philips has also deployed a range of programs to support the health and well-being of its employees, including a global employee assistance program aimed at helping employees with urgent needs. When COVID-19 emerged, Philips provided support in this area without losing sight of longer-term needs, such as a healthy work-life balance, stress management, resilience and prevention of mental health issues.
With regard to appointment and promotion opportunities, we transparently share open positions and endeavor to attract candidates from a diverse range of backgrounds, resulting in a 50/50 hiring ratio when we recruit externally. We increased the number of women in senior positions for the third consecutive year.
Our Inclusion & Diversity scores steadily increased to 39% at year-end, surpassing the global high-performance levels for the first time in the last two years. The number of awards won in 2020 – including appearances on Forbes Best Employers lists for both Women and Diversity, and Financial Times Diversity Leader 2021 – reflect the progress Philips has made in this important area.
Overall gender diversity increased one percentage point to 39% in 2020 whilst gender diversity among Executives increased from 22% to 24% female executives. Philips employed 27% females in leadership positions, exceeding our 2020 goal of 25% gender diversity in leadership positions.
8.4.4Our culture
As we continue our transformation into a focused leader in health technology – shifting from products to solutions and building long-term relationships with our customers – we foster a culture within Philips that will help us achieve operational excellence and extend our solutions capability to address our customers’ unmet needs.
All Philips employees are expected to commit to living our behaviors – Customers first, Quality and integrity always, Team up to win, Take ownership to deliver fast, and Eager to improve and inspire – every step of the way.
Putting our customers first is at the heart of everything we do. Only by engaging deeply with our customers can we understand their unmet needs and deliver superior value. We are also conscious at all times of the high-stakes environment in which we operate. This environment demands that we apply the highest quality and integrity standards – always. To deliver superior value to our customers and ensure quality and integrity, we team up and leverage the skills, capabilities and expertise right across Philips. At the same time, we all need to take personal ownership, enabling us to move with speed and agility, and deliver what we promise, on time. And by applying operational excellence and Lean ways of working, we will keep improving, inspiring each other through the work we do.
We staff our positions based on assessed behavior, potential and capabilities. In 2020, we filled 74% of our Director-level and more senior positions from within the company. For these internal hires, we ensure our candidates are high performers with strong potential. In 2020, 84% of all internal promotions to Director level and more senior positions were realized by appointing top performers. We supplement this internal growth with targeted external hiring, bringing in employees with the behaviors and capabilities we require for our Workforce of the Future.
8.4.5Employee engagement
In times like these, with the pandemic continuing to impact our lives, it is key that our people feel connected and actively listen to each other. High employee engagement is pivotal to the success of our strategy. Our employee survey consistently reports that our employee engagement is on the rise and well exceeding the global high-performance norm of 71%. Our average engagement score for 2020 was 79%, driven by our people feeling proud to live our company purpose, being optimistic about the future of Philips, and energized to contribute with their work.
Philips Group
Employee Engagement index
| Favorable | 74% | 74% | 79% |
| Neutral | 17% | 17% | 14% |
| Unfavorable | 9% | 9% | 7% |
Our quarterly employee surveys help to keep our finger on the pulse of employee sentiment toward the company. We listen to employees’ ideas for improvement, show employees that their feedback is valued, and work to ensure that every person in our company has a role to play in creating lasting value for our customers, shareholders, and other stakeholders.
At Philips, we believe we perform at our best when we feel connected and supported. In these extraordinary circumstances in 2020, we listened actively to our employees to provide them with greater clarity of direction and increased autonomy and flexibility to deal with various work situations. Moreover, we strengthened our Health & Well-being programs, which are designed to engage our employees, help them to adopt a healthier lifestyle, and achieve a better work/life balance.
8.4.6Employment
The total number of Philips Group employees was 81,592 at the end of 2020, compared to 80,495 at the end of 2019, an increase of 1,097 FTE.
Philips Group
Employees per segment
in FTEs at year-end
| Diagnosis & Treatment | 29,546 | 31,311 | 32,193 |
| Connected Care | 15,085 | 14,939 | 15,866 |
| Personal Health | 16,132 | 16,448 | 16,844 |
| Other | 16,637 | 17,797 | 16,689 |
| Philips Group | 77,400 | 80,495 | 81,592 |
Philips Group
Employment
in FTEs
| Balance as of January 1 | 73,951 | 77,400 | 80,495 |
| Consolidation changes: | |||
| Acquisitions | 331 | 900 | 72 |
| Divestments | (107) | (286) | |
| Other changes | 3,225 | 2,481 | 1,025 |
| Balance as of December 31 | 77,400 | 80,495 | 81,592 |
Geographic footprint
Approximately 57% (2019: 59%) of the Philips workforce is located in mature geographies and 43% (2019: 41%) in growth geographies. In 2020, the number of employees in mature geographies decreased by 1,442. The number of employees in growth geographies increased by 2,538.
Philips Group
Employees per geographic cluster
in FTEs at year-end
| Western Europe | 21,399 | 21,645 | 20,614 |
| North America | 21,703 | 21,483 | 21,127 |
| Other mature geographies | 4,236 | 4,718 | 4,664 |
| Mature geographies | 47,338 | 47,846 | 46,404 |
| Growth geographies | 30,062 | 32,650 | 35,188 |
| Philips Group | 77,400 | 80,495 | 81,592 |
Employee turnover
In 2020, employee turnover amounted to 14.0%, of which 7.3% was voluntary, compared to 15.0% (8.6% voluntary) in 2019. External benchmarks show that our voluntary employee turnover remains well below similar-sized companies, and that we are reasonably successful in retaining our employees.
With our focus on increasing gender diversity in leadership positions, voluntary female executive turnover decreased from 4.2% in 2019 to 3.8% in 2020.
Philips Group
Employee turnover
2020
| Female | 20.9% | 11.3% | 10.3% | 13.8% | 16.2% |
| Male | 17.5% | 9.8% | 11.0% | 16.2% | 12.6% |
| Philips Group | 19.2% | 10.3% | 10.8% | 15.6% | 14.0% |
Philips Group
Voluntary turnover
2020
| Female | 8.1% | 7.2% | 5.8% | 3.8% | 7.6% |
| Male | 9.5% | 5.8% | 4.6% | 2.8% | 7.0% |
| Philips Group | 8.8% | 6.3% | 4.9% | 3.1% | 7.3% |
8.4.7Equal opportunities and equal pay
Although Philips has undertaken regular pay analysis at country level, in 2020 we took this to the next stage to gain a globally recognized Certification in Gender Equality. We are working with an independent, external company who analyze our workforce analytical data, HR policies and practices, to holistically target areas both in our systems and processes to ensure gender equity in support of our ambition to build and foster a culture of inclusion.
We started with a pilot in the Netherlands to assess and learn from the audit, which gives us a strong baseline to develop a global framework that benefits all. As part of the Certification, we make an Action Plan to concentrate on areas for development and continue to conduct yearly pay gap assessments, by using a regression analysis and systematically checking the need for corrective measures. For Philips to be continually certified, we have to show tangible evidence that we have completed our Action Plan, and make further improvements on our focus areas that are brought to the surface by the Gender Equality audit.
We will also pro-actively communicate about the organization’s commitment to ensure gender equity including gender pay equity.
8.4.8Living wage
Philips can only achieve its aim to improve the lives of 2.5 billion people per year by 2030 if we support and empower our people, so they can be their best and perform effectively. To this end, we conducted a living wage analysis on the lowest salaries in every country in which we currently operate.
The living wage is a concept defined by Anker and Anker (2017) as “Remuneration received by a worker in a particular place sufficient to afford a decent standard of living for the worker and her or his family. Elements of a decent standard of living include food, water, housing, education, health care, transport, clothing, and other essential needs, including provision for unexpected events”. To develop living wage standards that are complete and have a reliable geographical scope, we combined forces with Valuing Nature, several local NGOs, WageIndicator and other global corporates.
In 2019, we conducted our first analysis of salaries and benefits for employees globally with respect to the living wage. This analysis covered 78 countries and we identified 31 employees in one country for whom wages and benefits were slightly below the defined living wage. Based on these results, our local HR teams made relevant adjustments for the year 2020.
In 2020, we performed the same analysis with the updated living wage data from WageIndicator. This time, all wages and benefits were above the defined living wage levels in all 78 countries.
8.4.9Health and Safety
The COVID-19 global pandemic significantly affected Philips’ global operations in many ways including government-mandated lockdowns, Personal Protective Equipment (PPE) supply chain shortages, travel restrictions, and most importantly ensuring employee health and safety whilst maintaining critical operational commitments. Philips responded by developing a Triple Duty of Care strategy: continuing to fulfill critical customer needs, ensuring the health and safety of employees, and ensuring business continuity. A Group Crisis Operations Team and local Crisis Management Teams were activated to provide a global integrated response. This enabled Philips to disseminate a centralized and consistent message for every employee, regardless of market, business or location. A COVID-19 intranet site with guidance and information was set up and received over 128,000 hits in 2020.
Working as a team across all functions, Philips was able to maintain manufacturing operations (and in some cases significantly increase output) and also ensure support for our customers, including frontline hospitals, to minimize interruption to key service and support activities. During 2020, approximately 1,800 Philips employees were infected by the COVID-19 virus. Whilst most infections were of mild severity, there were unfortunately some more severe outcomes, including a small number of fatalities. However, less than 1% of contamination cases and none of the fatalities resulted from infections acquired during workplace activities.
Unfortunately, one Philips employee was fatally injured in a road traffic accident in India in 2020. This happened when company transport taking employees home after a shift was involved in an accident during bad weather.
At Philips, we strive for an injury-free and illness-free work environment. Since 2016, the Total Recordable Cases (TRC) rate has been defined as a Key Performance Indicator (KPI). A TRC is a case where an injured employee is unable to work for one or more days, has medical treatment, or sustains an industrial illness. We set yearly TRC targets for the company, businesses and industrial sites.
We recorded 185 TRCs in 2020, a 17% decrease compared to 224 in 2019. While our workforce continued to expand in 2020, the TRC rate decreased from 0.30 per hundred FTEs in 2019 to 0.24 in 2020.
In 2020 we recorded 98 Lost Workday Injury Cases (LWIC). These are occupational injury cases where an injured person is unable to work for one or more days after the injury. This represents a 5% decrease compared with 103 in 2019. The LWIC rate decreased to 0.13 per 100 FTEs in 2020, compared with 0.14 in 2019. The number of Lost Workdays caused by injuries decreased by 1,845 days (40%) to 2,788 days in 2020.
8.4.10Philips Foundation
Stichting Philips Foundation, an independent foundation organized under Dutch law, is a registered charity established in 2014. In 2020, Royal Philips supported the Philips Foundation with a contribution of EUR 6.7 million, and provided the operating staff as well as the expert assistance of skilled employees in the execution of the Foundation’s programs.
The Philips Foundation’s mission is to reduce healthcare inequality by providing access to quality healthcare for disadvantaged communities. It does this through the provision and application of Philips’ healthcare expertise, innovation power, talent and resources and by financial support. Together with key partners around the globe (including respected NGOs such as Red Cross organizations, UNICEF, Amref and Save the Children), the Philips Foundation seeks to identify challenges where a combination of Philips expertise and partner experience can be used to create meaningful solutions that have an impact on people’s lives.
8.4.11Working with stakeholders
In organizing ourselves around customers and markets, we conduct dialogues with our stakeholders in order to explore common ground for addressing societal challenges, building partnerships and jointly developing supporting ecosystems for our innovations around the world.
8.5Governance
8.5.1Corporate governance structure
Koninklijke Philips N.V. (Royal Philips), a company organized under Dutch law, is the parent company of the Philips group. Its shares have been listed on the Amsterdam stock exchange (Euronext Amsterdam) since 1912. Furthermore, its shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.
Royal Philips has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is accountable to the General Meeting of Shareholders for the fulfillment of its respective duties.
The company is governed by Dutch corporate and securities laws, its Articles of Association, and the Rules of Procedure of the Board of Management and the Executive Committee and of the Supervisory Board respectively. Its corporate governance framework is also based on the Dutch Corporate Governance Code (dated December 8, 2016) and US laws and regulations applicable to Foreign Private Issuers. Additionally, the Board of Management has implemented the Philips General Business Principles (GBP) and underlying policies, as well as separate codes of ethics that apply to employees working in specific areas of our business, i.e. the Financial Code of Ethics and the Procurement Code of Ethics. Many of the documents referred to are published on the company’s website and more information can be found in Our approach to risk management.
Please also refer to Corporate governance where the main elements of the company’s corporate governance structure have been addressed.
8.5.2Philips Business System
As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines exactly how we want to work – the Philips Business System (PBS).
The PBS integrates key aspects of how we operate – from our strategy, governance, organizational design, processes and systems, to our people and team practices, and our culture and performance management.
It is designed to make Philips a simpler, faster, customer-focused, learning organization, in order to fulfill our purpose of improving the health and well-being of billions of people. One that aspires to the highest standards of quality and integrity in everything we do. Building on standard work and best practices, with clear accountabilities and a culture of continuous improvement and compliance. Applying our creativity to make a competitive difference in serving our customers. Making Philips the best place to work.
8.5.3Quality & Regulatory
Our business success depends on the quality of our products, services and solutions, and compliance with many regulations and standards on a global basis. We continue on our transformation journey to have customer-focused global processes, procedures, standards, and a quality mindset to help us maintain the highest possible level of quality in all our products.
For Philips, as a business with a significant global footprint, compliance with evolving regulations and standards, including data privacy and cybersecurity, involves increased levels of investment along with the demands of increased regulatory enforcement activity. Our business relies on the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property, and other sensitive information related to our customers and workforce. For information on how Philips manages cybersecurity risk, please refer to Operational risks.
Quality
Philips is committed to delivering the highest quality products, services and solutions compliant with all applicable laws and standards. We are investing substantially in embedding quality in our organizational culture as well as consolidating and standardizing our Quality Management Systems. We will continue to raise the performance bar. Quality is an integral part of the evaluation of all levels of management. With consistency of purpose, top-down accountability, consolidation, standardization and leveraging continuous improvement, we aim to drive greater speed in the adoption of a quality mindset as well as improved quality outcomes throughout the enterprise.
Regulatory Compliance
Philips actively maintains Quality Systems globally that establish processes for its product design, manufacturing and distribution processes; these standards are in compliance with Food and Drug Administration (FDA)/International Organization for Standardization (ISO) requirements. Our businesses are subject to compliance with regulatory pre-marketing and quality system requirements in every market we serve, and to specific requirements of local and national regulatory authorities including the US FDA, the European Medicines Agency (EMA), the National Medical Products Administration (NMPA) in China and comparable agencies in other countries. We also must comply with the European Union’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemicals (REACH), Energy-using Products (EuP) and Product Safety Regulations.
We have a growing portfolio of regulated products in our Personal Health and Sleep & Respiratory Care businesses. Through our growing Oral Healthcare, Mother & Child Care and beauty product portfolio, the range of applicable regulations has been extended to include requirements relating to cosmetics and, on a very small scale, pharmaceuticals.
Often, new products that we introduce are subject to a pre-market regulatory processes (e.g. pre-market notification (510[k]), or pre-market approval (PMA) for marketing of FDA-regulated devices in the USA, and CE Marking in the European Union). Failing to comply with the regulatory requirements can have significant legal and business consequences. The number and diversity of regulatory bodies in the various markets we operate in globally adds complexity and time to product introductions.
In the European Union (EU), a new Medical Device Regulation (EU MDR) was published in 2017, which will impose significant additional pre-market and post-market requirements. Since the announcement of the EU MDR, Philips has been executing a comprehensive strategic plan to ensure compliance with the MDR requirements that will come into effect in May 2021. The company has engaged in a top-to-bottom review of our full portfolio of products and solutions that fall under the mandate, and has developed a robust and detailed framework for a seamless transition by the time the Medical Device Regulation is operative. We have accomplished several milestones within the program: completing certifying audits, receiving updated CE Certificates and executing several shipments of MDR compliant products to the EU ahead of the date of application. To achieve these milestones, we made an annual EU MDR investment of around EUR 68 million in 2020 and will expect to have additional compliance costs for the new regulations of around EUR 37 million in 2021. We believe the global regulatory environment will continue to evolve, which could impact the cost, the time needed to approve, and ultimately, our ability to maintain existing approvals or obtain future approvals for our products.
Consent Decree
In October 2017, Philips North America LLC reached agreement on a consent decree with the US Department of Justice, representing the Food and Drug Administration (FDA), related to compliance with current good manufacturing practice requirements arising from past inspections in and before 2015, focusing primarily on Philips’ Emergency Care & Resuscitation (ECR) business operations in Andover (Massachusetts) and Bothell (Washington).
Under the decree, Philips suspended the manufacture and distribution for the US market of external defibrillators, subject to certain exceptions. In January 2020, the Emergency Care & Resuscitation (ECR) business obtained Quality Management System Certification from an independent expert, fulfilling a significant consent decree requirement. Following a successful inspection in Bothell (Washington), in April 2020, FDA determined that Philips had met the conditions for resuming on the manufacture and distribution of defibrillators in the US. The consent decree remains in effect for a number of years, during which the Emergency Care & Resuscitation (ECR) business will be subject to a series of annual assessments by an independent expert.
Substantial progress continues to be made in our compliance efforts. However, we cannot predict the outcome of this matter, and the consent decree authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing ECR or Monitoring & Analytics devices, recall products, pay liquidated damages and take other actions. We also cannot currently predict whether additional monetary investment will be incurred to resolve this matter or the matter’s ultimate impact on our business.
8.5.4Remuneration policy
The objectives of the remuneration policy for members of the Board of Management, as adopted by the General Meeting of Shareholders in 2017, are in line with that for executives throughout the Philips Group. That is, to focus them on improving the performance of the company and enhancing the long-term value of the Philips Group, to motivate and retain them, and to be able to attract other highly qualified executives to enter into Philips’ services, when required.
In order to compete for talent in the health technology market, the Supervisory Board identified a new peer group*) for remuneration benchmarking purposes in 2017 to align the Board of Management’s remuneration levels closer to equivalent positions in this market. These peer companies are either business competitors, with an emphasis on companies in the healthcare, technology related or consumer products area, or companies we compete with for executive talent. These consist of predominantly Dutch and other European companies, plus a minority number (up to 25%) of US based global companies, of comparable size, complexity and international scope. Annual changes to the peer group can be made by the Supervisory Board, for example for reasons of changes in business or competitive nature of the companies involved. Such change will be disclosed if it has a substantial impact on peer group composition. No changes were made to the peer group during 2018.
To support the policy’s objectives, the remuneration package includes a significant variable part in the form of an annual cash bonus incentive and long-term incentive in the form of performance shares. 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 payout of the annual cash bonus incentive and the long-term incentive grant upward or downward if the predetermined performance criteria were to produce an inappropriate result in extraordinary circumstances. The authority for such adjustments exists on the basis of contractual ultimum-remedium and claw-back clauses. In addition, pursuant to Dutch legislation effective January 1, 2014, incentives may, under certain circumstances, be amended or clawed back pursuant to statutory powers. For more information please refer to Corporate governance. Further information on the performance targets is given in the chapters on the Annual Incentive (see 2020 Annual Incentive) and the Long-Term Incentive Plan (see 2018 Long-Term Incentive) respectively.
Key features of our Board of Management Compensation Program
The list below highlights Philips’ approach to remuneration, in particular taking into account Corporate Governance practices in the Netherlands.
What we do
- We pay for performance
- We conduct scenario analyses
- We have robust stock ownership guidelines
- We have claw-back policies incorporated into our incentive plans
- We have a simple and transparent remuneration structure in place
What we do not do
- We do not pay dividend equivalents on stock options, or restricted share units and performance share units that do not vest
- We do not offer executive contracts with longer than 12 months’ separation payments
- We do not have a remuneration policy in place that encourages our Board of Management to take any inappropriate risks or to act in their own interests
- We do not reward failing members of the Board of Management upon termination of contract
- We do not grant loans or give guarantees to members of the Board of Management
8.5.5General Business Principles
While pursuing our business objectives, we aim to be a responsible partner in society, acting with integrity towards our employees, customers, business partners and shareholders, as well as the wider community in which we operate. Everyone at Philips is expected to always act with integrity, and Philips rigorously enforces compliance of its General Business Principles (GBP) throughout the company.
In the highly regulated world of healthcare, integrity requires in-depth knowledge of the applicable rules and regulations and a sensitivity to healthcare-specific issues. The GBP – part of the Philips Business System – incorporate and represent the fundamental principles by which all Philips businesses and employees around the globe must abide. They set the minimum standard for business conduct, both for individual employees and for the company and our subsidiaries. Our GBP also serve as a reference for the business conduct we expect from our business partners and suppliers.
Translations of the GBP text are available in 30 languages, allowing almost every employee to read the GBP in their native language. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work environment. Details can be found at www.philips.com/gbp.
In 2020, a total of 571 concerns were reported via Philips Speak Up (Ethics Line) and through our network of GBP Compliance Officers. The previous reporting period (2019) saw a total of 545 concerns, resulting in an increase of 5% in the number of reports.
While this is a continuation of the upward trend reported since 2014, the year in which Philips updated its General Business Principles and deployed a strengthened global communication campaign, the increase is flattening. Specifically in 2020, we focused on increasing awareness on Integrity and on the importance of speaking up, through and following up on the deployment of our biennial Business Integrity Survey. We still believe the upward trend in reporting remains in line with our multi-year efforts to encourage our employees to express their concerns, but the extraordinary business conditions in 2020 make it imprudent to draw any specific conclusions from these numbers.
More information on the Philips GBP can be found in Risk management.
8.5.6Risk management approach
Risk management and control forms an integral part of the Philips business planning and performance review cycle. The company’s risk management policy and framework are designed to provide reasonable assurance that its strategic and operational objectives are met, that legal requirements are complied with, and that the integrity of the company’s financial reporting and its related disclosures is safeguarded. Please refer to Risk management for a more detailed description of Philips’ approach to risk management (including Internal Control over Financial Reporting), risk categories and factors, and certain specific risks that have been identified.
With respect to financial reporting, a structured self-assessment and monitoring process is used company-wide to assess, document, review and monitor compliance with Internal Control over Financial Reporting. On the basis of the outcome of this process, the Board of Management confirms that: (i) the management report (within the meaning of section 2:391 of the Dutch Civil Code) provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems; (ii) such systems provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies; (iii) based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis; and (iv) the management report states those material risks and uncertainties that are relevant to the expected continuity of the company for a period of 12 months after the preparation of the report. The financial statements fairly represent the financial condition and result of operations of the company and provide the required disclosures.
In view of the above, the Board of Management believes that it is in compliance with best practice 1.4.2 of the Dutch Corporate Governance Code. It should be noted that the above does not imply that the internal risk management and control systems provide certainty as to the realization of operational and financial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud or non- compliances with rules and regulations. The above statement on internal control should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth in . Management’s report on internal control
8.5.7Total tax contribution
To fulfill our company purpose, a responsible tax approach is required. We fully acknowledge our societal role when it comes to paying taxes in the geographies where value is created. We consider our tax payments as a contribution to the communities in which we operate, as part of our social value creation.
Our Approach to Tax sets the standard for our conduct, by which individual employees, the company and its subsidiaries must abide. We consider tax in the context of the broader society, inspired by our stakeholder dialogues, global initiatives of the Organization for Economic Cooperation and Development and United Nations, human rights, international (tax) laws and regulations and relevant codes of conduct.
Under the ultimate responsibility of the Board of Management, the Chief Financial Officer annually reviews, evaluates, approves and where necessary adjusts Philips’ approach to tax. Philips supports and participates in transparency initiatives such as the Dow Jones Sustainability Index (DJSI) and the Tax Transparency Benchmark of the Dutch Association of Investors for Sustainable Development (VBDO).
In 2020, Philips contributed to the communities where we operate through taxes paid (e.g. corporate income tax) and taxes collected (e.g. VAT). As part of its ESG commitments, announced in September 2020, Philips committed to provide more transparency on its taxes paid and collected in the countries it operates in. Our first Country Activity and Tax Report can be found on our website. Philips' total tax contribution in 2020, amounting to EUR 3.38 billion, is described by tax type below:
Philips Group
Total Contribution 2020 per Tax Type
in millions of EUR
| Western Europe | 249 | 300 | 901 | 14 | 35 | 1,498 |
| North America | 86 | 86 | 590 | 30 | 9 | 801 |
| Other mature geographies | 42 | 80 | 124 | 2 | 1 | 249 |
| Growth geographies | 89 | 329 | 247 | 111 | 58 | 834 |
| Philips Group | 466 | 794 | 1,862 | 156 | 102 | 3,381 |
8.6Philips' ESG performance at a glance
Below we show how Philips performed in 2020 on the 21 Core metrics of the WEF ESG reporting framework, mapped to the three dimensions of our ESG commitments, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
Environmental
- Green House Gas (GHG) emissions100% electricity from renewable sources0 kilotonnes CO2-equivalent (net operational carbon footprint)
- TCFD implementationDeveloped 2 and 4 °C global warming scenarios and assessed their impact on our supply chain, Philips and customers
Disclosed in separate report - Land use and ecological sensitivity0.5 kilotonnes waste sent to landfill32/32 sites Zero Waste to Landfill
- Water consumption and withdrawal in water-stressed areas777,476 m3 total water intake276,615 m3 in water-stressed areas
- Circular revenues *)15% of revenues
- Closing the loop *)Closed the loop for all large medical equipment returned to us
Social
- Lives Improved *)1.75 billion, of which 207 million in underserved communities
- Diversity & Inclusion27% gender diversity in senior leadership positions39% gender diversity in total workforce79% Employee Engagement Score *)
- Pay equalityPhilips is conducting a pay equality analysis
Working on recognized Certification in Gender Equality - Wage level6,490 million EUR employee benefit expensesPhilips pays all employees a living wage
- Risk for incidents of child, forced or compulsory laborAddressed in Philips GBP, Supplier Sustainability Declaration and Supplier Sustainability program
- Health & Safety0.24 Total Recordable Case rate per 100 FTEs185 Total Recordable Cases
- Training provided835,575 training hours in Philips University763,371 training completions
- Absolute number and rate of employment81,592 employees14% turnover
- Supplier development program *)257 companies302,000 employees impacted
- Volunteering *)75 new projects in 2020 reaching 7.5 million people
Governance
- Setting purposePhilips’ purpose is to improve the health and well-being of people through meaningful innovation
- Governance body compositionPhilips has a Board of Management and an independent Supervisory Board
- Material issues impacting stakeholdersDetailed Materiality Analysis performed
- Anti-corruption14,000 anti-bribery anti-corruption and 65,000 GBP trainings completed
- Protected ethics advice and reporting mechanismsWhistleblower mechanism in place
- Integrating risk and opportunity in business processesIncluded in Risk Management section
- Economic contribution19,535 million EUR revenues758 million EUR dividend declared6.7 million EUR contribution to Philips Foundation107 million EUR government grants
- Financial investment contribution2,682 million EUR total tangible assets802 million EUR capital expenditure
- Total R&D expenses1.92 billion EUR invested in R&D (9.8% of revenues)
- Total tax contribution3.38 billion EUR
9Risk management
9.1Our approach to risk management
Vision and objectives
Philips believes risk management is a value-creating activity that complements our innovation and entrepreneurship. Philips’ risk management approach is an integral part of the Philips Business System (PBS), and key elements are our Risk management governance, Risk appetite, the Risk Management Process standard, the Philips Business Control Framework, and our General Business Principles (GBP). These are further described in this chapter. The company’s risk management is designed to provide reasonable assurance that strategic and operational objectives are met, legal requirements are complied with, and the integrity of the company’s financial reporting and related disclosures is safeguarded. However, there can be no absolute assurance that our risk management will avoid or mitigate all risks that Philips faces. The material risks are described in Risk factors.
All 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 Forward-looking statements and in the overview of risk factors described in Risk factors.
Risk management governance
The Executive Committee identifies, oversees, and manages the risks Philips faces in realizing its objectives. It defines the Risk Appetite, provides the risk management framework and monitors the effectiveness thereof. The Risk Management Support Team, consisting of experts on various categories of enterprise risk, supports the Executive Committee through regular analysis of the enterprise risk profile and enhancement of the risk management framework. Management is responsible for identifying critical risks and implementing appropriate risk responses within their area of responsibility. Various functions (such as Internal Control, Quality & Regulatory, and Group Security) support management of specific risk areas.
The Internal Audit function assesses the quality of risk management and controls through the execution of a risk-based audit plan, as approved by the Audit Committee of the Supervisory Board. Leadership from our Board of Management, Executive Committee, Businesses, Markets and key Functions meet quarterly with Internal Audit in Audit & Risk Committees to discuss strengths and weaknesses of risk management and controls – as evaluated by internal and external auditors and by means of other (self) assessments – and take corrective action where necessary.
The Disclosure Committee oversees the company’s disclosure activities and assists the Board of Management in fulfilling its responsibilities in this respect. The Committee’s purpose is to ensure that the company implements and maintains internal procedures for the timely collection, evaluation and disclosure, as appropriate, of information potentially subject to public disclosure under the legal, regulatory and stock exchange requirements to which the company is subject.
The Security Steering Committee (SSC) and the Group Security function manage security (including cybersecurity) risks at Philips. The SSC evaluates and sets the Group’s security strategy, issues security policies and evaluates progress and effectiveness. Dedicated security reports are shared with the Executive Committee, Supervisory Board and external auditors. On a quarterly basis, briefings on cybersecurity risks are provided to the IT Audit & Risk Committee.
The Audit Committee and the Quality & Regulatory Committee of the Supervisory Board assist the Supervisory Board in fulfilling its oversight responsibilities in relation to risk. The quality of risk management and controls, and the findings of internal and external audits, are reported to, and discussed with, the Audit Committee of the Supervisory Board. The Quality & Regulatory Committee’s role particularly relates to the quality, including regulatory compliance, of the Company’s products (including software), services and systems and their development, testing, manufacturing, marketing and servicing.
In Corporate governance the Company addresses the main elements of its corporate governance structure, reports on how it applies the principles and best practices of the Dutch Corporate Governance Code, and provides certain other information.
Risk appetite
The Executive Committee and management seek to manage risks consistently within the risk appetite. Risk appetite is set by the Executive Committee and captured in the Risk Management Policy. It is effectuated as an integral part of our PBS, of which various elements – e.g. Strategy, Behaviors, GBP, Authority Schedules, Policies, Process Standards and Performance Management Systems – include or reflect risk-taking guidance.
Philips’ risk appetite differs depending on the type of risk, ranging from an averse to a seeking approach. We believe we must operate within the dynamics of the health technology industry and take the risks needed to ensure we continually revitalize our offerings and the way we work. At the same time, Philips attaches prime importance to integrity, sustainability, product quality and safety, including compliance with regulations and quality standards. Risk appetite for the four main risk categories is visualized below.
Philips does not classify these risk categories in order of importance.
Risk management process
In order to provide a comprehensive view of Philips’ risks, structured risk assessments take place according to the Philips risk management process standard, applying a top-down and bottom-up approach. Our process standard is designed based on the Enterprise Risk Management Framework: Integrating with Strategy and Performance (2017) from the committee of sponsoring organizations of the treadway commission (COSO) and on ISO 31000 - Risk Management. The process is supported by regular risk workshops with management at Group, Business, Market and Function levels. During 2020, several risk management workshops were held to assess and respond to enterprise risks.
Key elements of the Philips Risk Management Policy are:
- Management of Businesses, Markets and key Functions perform a risk assessment at least once a year, with updates of the strategic plan. Risk workshops are conducted across the company to facilitate these risk assessments. Management identifies and prioritizes risk, assigns ownership and implements appropriate risk responses;
- Management discusses and monitors the risk profile and risk response effectiveness at least quarterly in management’s performance reviews and Audit & Risk Committees;
- Developments in the enterprise risk profile and management’s initiatives to improve risk responses are discussed and monitored during the quarterly meeting of the Audit Committee of the Supervisory Board;
- As an integral part of the strategy review, each year the Executive Committee assesses the enterprise risk profile and the potential risk impact versus Group risk appetite. This assessment considers various inputs such as risk assessments from Businesses, Markets and Functions, Philips Internal Audit findings, Legal and Insurance matters, the materiality analysis, and external research. The assessment also covers the effectiveness of the risk management framework and potential improvements thereto;
- The Philips risk profile and the risk management framework are discussed at least once a year with the Supervisory Board.
Examples of measures taken during 2020 to further strengthen risk management:
- Activation of a COVID-19 response program by our Group Crisis Operations team;
- Further development and deployment of the PBS, including explicit requirements for management of risk, compliance and controls;
- Operationalization of a Risk & Compliance Center of Excellence to drive standardization, improvements, knowledge sharing and transparency;
- Benchmarking of our Enterprise Risk Management framework against industry best practices by an external party for continuous improvement;
- Further integration of risk in regular management processes and strategy execution dialogues to further strengthen our performance cycle;
- Continued development of the Information Security Program in view of the increasing exposure to cybercrime and information security requirements resulting from digitalization and our health technology focus;
- Continued improvements and simplification of the Quality Management Systems across the company;
- Various improvements of risk management in our supply chain, including Supplier risk management and our Business continuity management framework;
- Increased use of data analytics and process mining in controls monitoring, and ongoing development of the supporting enterprise, governance, risk and compliance IT platform.
Philips Business Control Framework
The Philips Business Control Framework (PBCF) sets the standard for Internal Control over Financial Reporting at Philips. The objective of the PBCF is to maintain integrated management control of the company’s operations in order to ensure the integrity of the financial reporting, as well as compliance with laws and regulations. Philips has designed its PBCF based on the COSO Internal Control-Integrated Framework (2013).
As part of the PBCF, Philips has implemented a standard set of internal controls over financial reporting. Together with Philips’ established accounting procedures, this standard set of internal controls 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. In each unit, management is responsible for customizing the controls set for their business, risk profile and operations.
Each year, management’s accountability for internal controls for financial reporting is evidenced through the formal certification statement sign-off. Any deficiencies noted in the design and operating effectiveness of Internal 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 Controls over Financial Reporting, can be found in Management’s report on internal control
Philips General Business Principles (GBP)
As part of the Philips Business System, our GBP set the standard for our business conduct as a health technology company. The GBP form an integral part of labor contracts in virtually every country in which Philips operates, and translations are available in 30 languages. Each year, employees reconfirm their commitment to the code of conduct after completing their GBP e-learning, while there is an additional annual sign-off for Executives. A similar sign-off is in place for Finance and Procurement staff for their respective codes of conduct. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work.
The GBP Review Committee is responsible for the effective deployment of the GBP and for generally promoting a culture of compliance and ethics within the company. The Committee is chaired by the Chief Legal Officer, and its members include the Chief Financial Officer, Chief HR Officer and the Chief of International Markets. Furthermore, all our 17 markets have quarterly market compliance committees, which act as local satellites of the GBP Review Committee, dealing with GBP-related matters within the local context. They are also responsible for the design and execution of localized compliance plans that are tailored to their market-specific risks and organizational set-up, and regularly review the relevant compliance metrics for their respective market through dashboards delivered by the legal compliance monitoring team. The Secretariat of the GBP Review Committee, together with a worldwide network of GBP Compliance Officers, supports the organization with the implementation of GBP initiatives.
As part of our continuous effort to raise GBP awareness and foster dialogue throughout the organization, each year a global GBP communications and training plan is deployed, including our annual GBP Dialogue Initiative, aimed at reinforcing a culture of dialogue through the use of ethical dilemma case studies that are relevant to our workforce.
A key control to measure implementation of our GBP is the GBP Self-Assessment, which is part of our Internal Control framework. In addition, we continue to expand the capabilities of our legal compliance monitoring team, serving both our business customers as well as compliance networks with actionable compliance data, thus further improving our compliance control framework.
The GBP are supported by established mechanisms that ensure standardized reporting and enable both employees and third parties to escalate concerns 24/7. Concerns raised are registered consistently in a single database hosted outside of Philips servers to ensure confidentiality and security of identity and information. Encouraging people to speak up through the available channels if they have a concern will continue to be a cornerstone of our GBP communications and awareness campaigns. To further facilitate this, we completely redesigned our web-based intake site in 2020, improving employees’ experience when filing reports. At least twice a year, the GBP Review Committee, as well as the Executive Committee and Audit Committee, are informed on relevant GBP metrics, cases, trends and learnings.
Through the Audit Committee of the Supervisory Board, the company also has procedures in place for the receipt, retention and treatment of complaints specifically relating to accounting, internal accounting controls or auditing matters. The Reporting Policy Accounting and Audit Matters allows the confidential, anonymous submission of complaints regarding questionable accounting or auditing matters.
The GBP and underlying policies, including the Financial and Procurement Code of Ethics, are published on the company website, at www.philips.com/gbp.
9.2Risk factors
Philips believes the risks set out below are the material risks that could impact its ability to achieve its objectives. These risk factors may not, however, include all the risks that ultimately may affect Philips. Some risks not yet known to Philips, or currently believed not to be material, may ultimately have a major impact on Philips’ business, revenues, income, assets, liquidity, capital resources and/or ability to achieve its business objectives. Philips defines risks in four main categories: Strategic, Operational, Compliance and Financial risks. Philips presents the risk factors within each risk category in order of Philips’ current view of their expected significance. This does not mean that a lower-listed risk factor may not have a material and adverse impact on Philips’ business, revenues, income, assets, liquidity, capital resources and/or ability to achieve its business objectives. Furthermore, a risk factor listed below other risk factors may ultimately prove to have more significant adverse consequences than those other risk factors.
9.3Strategic risks
Philips may be unable to adapt swiftly to changes in industry or market circumstances.
Fundamental shifts in the health technology industry, such as the transition to digital and increased emphasis on ESG (Environmental, Social and Governance), may drastically change the business environment in which Philips operates. If Philips fails to recognize these changes in time, adjust business models, or introduce new products and services in response to these changes, or fails to meet its ESG commitments, this could result in a material adverse effect on Philips’ business, financial condition and operating results.
Philips' global operations are exposed to economic, political and societal changes.
Philips’ business environment is influenced by political, economic and societal conditions in individual and global markets. Inevitably there is uncertainty with regard to the levels of (public) capital expenditure in general, unemployment levels, and consumer and business confidence, all of which could adversely affect demand for products and services offered by Philips.
Mature economies are currently the main source of revenues, while emerging economies are an increasing source of revenues. Philips sources its products and services mainly from the US, the EU (primarily the Netherlands) and China, and the majority of Philips’ assets are located in these geographies. Changes in monetary policy and trade and tax laws in the US, China and EU can have a significant adverse impact on other mature economies, emerging economies and international financial markets. Such changes, including tariffs and sanctions, import or export controls, increased healthcare regulation, nationalization of assets or restrictions on the repatriation of returns from foreign investments, may trigger reactions and countermeasures, leading to adverse impacts on global trade levels and flows, economic growth and political stability, all of which may have an adverse effect on business growth and stability on international financial markets.
The factors described above, or other factors which may impact economic and societal conditions relevant to Philips (e.g. COVID-19 and Brexit), are difficult to predict and may have a material adverse impact on Philips’ business, financial condition and operating results. They can also make it more difficult to budget and make reliable financial forecasts or could have a negative impact on Philips’ access to funding.
Philips’ overall risk profile is changing as a result of its focus on health technology and solutions.
As Philips’ business profile continues to further shift focus towards health technology, with a changing products and services portfolio and acquisitions, divestments and partnerships to support the execution of its health technology strategy, Philips is more exposed to developments in the health technology industry. It may therefore have a reduced ability to offset potential negative impacts of those developments through a more diversified portfolio. As Philips transitions from selling health technology products to selling health technology solutions, the nature of our customer relations is also evolving, which raises the long-term risk of (amongst others) customer default and dependency. Philips may pursue divestments from time to time, including divestments consistent with Philips’ focus on health technology, such as the disentanglement and future divestment of Philips’ Domestic Appliances business. These divestments may result in additional costs and divert management attention from other business priorities and risks, and the timing, terms, execution and proceeds of any such divestments are uncertain.
Philips’ overall performance in coming years depends on realization of its objectives in growth geographies.
Growth geographies are becoming increasingly important to Philips’ business plan, and Asia is an important production, sourcing and design center for Philips. Philips faces intense competition from local companies as well as other global players for market share in growth geographies. Philips needs to maintain and grow its position in growth geographies, invest in data-driven services and local talent, understand end-user preferences, and localize its portfolio in order to stay competitive. If Philips fails to achieve these objectives, it could have a material adverse effect on the company’s business, financial condition and operating results.
Acquisitions could fail to deliver on their business plans and expose Philips to integration risks.
Selected acquisitions have been and are expected to be a part of Philips’ growth strategy. Acquisitions may expose Philips to integration risks in areas such as sales and service, logistics, regulatory compliance, information technology and finance. Integration challenges may adversely impact the realization of expected contributions from acquisitions. Philips may incur significant costs in connection with these transactions. Acquisitions may also divert management attention from other business priorities. Cost savings expected to be implemented following an acquisition may be difficult to achieve. Acquisitions may also lead to a substantial increase in long-lived assets, including goodwill, which may later be subject to write-down if an acquired business does not perform as expected, which may have a material adverse effect on Philips’ earnings.
Philips may be unable to secure and maintain intellectual property rights for its products and services or may infringe others' intellectual property rights.
Philips is dependent on its ability to obtain and maintain licenses and other intellectual property (IP) rights covering its products and services and its design and manufacturing processes. The IP portfolio is the result of an extensive patenting process that could be influenced by a number of factors, including 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 the segment Other, where licenses from Philips to third parties generate IP royalties and are important to Philips’ results of operations. The timing of licenses from Philips to third parties and associated revenues from IP royalties are uncertain and may vary significantly from period to period. A loss or impairment in connection with such licenses to third parties could have a material adverse impact on Philips’ financial condition and operating results. Philips is also exposed to the risk that a third party may claim to own the intellectual property rights to technology applied in Philips’ products and services. If any such claims of infringement of these intellectual property rights are successful, Philips may be required to pay damages to such third parties or may incur other costs or losses.
9.4Operational risks
COVID-19 and other pandemics could have an adverse effect on Philips’ operations and employees.
COVID-19 has affected Philips’ operations and results in 2020. Looking ahead, Philips continues to see uncertainty and volatility related to the impact of COVID-19 across the world, driven by, amongst others, the effectiveness of vaccination programs, mutations of COVID-19 and potentially new viruses which may cause new pandemics. Philips expects that COVID-19 may continue to impact the delivery on our triple duty of care in various ways: health and safety of our employees (in various working environments such as production, supply, field service, R&D, and working from home); meeting critical customer needs (for example to our production capacity and our ability to deliver, install and provide service); and business continuity (for example of our functional operations, supply chain, and commercial processes). These will require effort and expense to deal with and may negatively impact results from operations for an uncertain period.
Philips’ customers may not be focused on making new investments or face liquidity issues caused by COVID-19, which may adversely impact Philips’ cash flow generation. COVID-19 may also affect planned divestments consistent with Philips’ focus on health technology, including in relation to Philips’ Domestic Appliances business; the timing, terms, execution and proceeds of any such disposals may become more uncertain. Some further COVID-19 impacts are described in other risk factors.
Philips could be exposed to a significant cybersecurity breach.
Philips relies on information technology to operate and manage its businesses and store confidential data (relating to employees, customers, intellectual property, suppliers and other partners). Philips’ products, solutions and services increasingly contain sophisticated and complex information technology and generate confidential data related to customers and patients. Potential geopolitical conflicts and criminal activity continue to drive increases in the number and severity of cyber-attacks in general. Like many other multinational companies, Philips is therefore inherently and increasingly exposed to the risk of cyber-attacks. Information systems may be damaged, disrupted (including the provision of services to customers) or shut down due to cyber-attacks. In addition, breaches in the security of our systems (or the systems of our customers, suppliers or other partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information (including intellectual property) or personal data belonging to us or to our employees, customers, suppliers or other partners. These risks are particularly significant with respect to patient medical records. Cyber-attacks may result in substantial costs and other negative consequences, which may include, but are not limited to, lost revenues, reputational damage, remediation and enhancement costs, and other liabilities to regulators, customers and other partners, or penalties. While cyber-attacks have not historically resulted in significant damage or caused Philips to incur significant monetary cost in taking corrective action, there can be no assurance that future cyber-attacks will not result in significant or other consequences than described above.
Philips is exposed to risks in connection with IT system changes or failures.
Philips continuously seeks to create a more open, standardized and cost-effective IT landscape, for instance through further outsourcing, offshoring, commoditization and ongoing reduction in the number of IT systems. These changes create third-party dependency risk with regard to the delivery of IT services, the availability of IT systems, and the scope and nature of the functionality offered by IT systems. Although Philips has sought to strengthen security measures and quality controls relating to these systems, these measures may prove to be insufficient or unsuccessful.
Philips may be unable to ensure an effective supply chain.
Philips is continuing the process of creating a leaner supply base and is continuing its initiatives to replace internal capabilities with less costly outsourced products and services. These processes may result in increased dependency on a concentration of external suppliers. 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 causing disruptions or unfavorable conditions.
Shortages or delays could materially harm Philips’ business. Most of Philips’ operations are conducted internationally, which exposes Philips to challenges. For example, Philips depends partly on the production and procurement of products and parts from Asian countries; the production and shipping of products and parts could be interrupted by events such as geopolitical changes (e.g. US-China relations), regional conflicts, pandemics (e.g. COVID-19), natural disasters or extreme weather events caused by climate change. Such changes may lead to adverse impacts on global trade levels and supply chains. COVID-19, more specifically, imposes supply chain challenges due to shifts in demand, need for production capacity adjustments and impacts on the safety of the environments for production, field service, installations, R&D.
A general shortage of materials, (sub) components also poses the risk of fluctuations in prices and demand, which could have a material adverse effect on Philips’ financial condition and operating results. Philips purchases raw materials, including so-called rare earth metals, copper, steel, aluminum, noble gases and oil-related products, which exposes it to fluctuations in energy and raw material prices. Commodities have been subject to volatile markets, and such volatility is expected to continue. If Philips is not able to compensate for increased costs of raw materials, reduce reliance on such raw materials or pass on increased costs to customers, then price increases could have a material adverse impact on Philips’ results.
Philips may face challenges to drive operational excellence, productivity and speed in bringing innovations to market.
To gain sustainable competitive advantage and realize Philips’ ambitions for profitable growth, it is important that the company makes further improvements in its product and solution creation process, ensuring timely delivery of new products and solutions at lower cost and high customer service levels. 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 product and solution creation, however, depends on a number of factors, including timely and successful completion of development, market acceptance, the ability to attract and retain skilled employees, production ramp-up to meet anticipated demand, potential quality issues or other defects in the early stages of introduction. Costs of developing new products and solutions may be reflected on Philips’ balance sheet and may be subject to write-down or impairment as a result of the performance of such products or services; the significance and timing of such write-downs or impairments are uncertain. Accordingly, Philips cannot determine in advance the ultimate effect that new product and solution creation will have on its financial condition and operating results. If Philips fails to create and commercialize products and solutions, it may lose market share and competitiveness, which could have a material adverse effect on its financial condition and operating results.
Philips is dependent on its people for leadership and specialized skills and may be unable to attract and retain such personnel.
The attraction and retention of talented employees in sales and marketing, research and development, finance, and general management, as well as highly specialized technical personnel, especially in transferring operations and enabling functions to low-cost countries, is critical to Philips’ success. The loss of employees with specialized skills could also result in business interruptions. The COVID-19 pandemic places additional challenges on team interactions and the onboarding of new people and brings uncertainty as to what will be the ‘new normal’ way of working after the pandemic. There can be no assurance that Philips will be successful in attracting and retaining highly qualified employees and the key personnel needed in the future.
Trade arrangements following Brexit could have an adverse effect on Philips' operations.
Philips sells products and services in the United Kingdom, although, following footprint adjustments, we no longer have manufacturing in the UK, only configuration. The potential financial impact following the trade arrangements between the UK and the EU or other countries following Brexit, ranges from adverse movements of the pound sterling versus the euro and the US dollar to supply chain disruptions due to the re-introduction of customs controls and the imposition of new tariffs on imports or exports to and from the United Kingdom. An unsuccessful response to trade arrangements may have a material adverse effect on Philips’ financial condition and operating results.
9.5Compliance risks
Philips is exposed to non-compliance of its products and services with various regulations and standards including quality, product safety and data privacy.
Philips operates in a highly regulated product safety and quality environment and its products and services, including parts or materials from suppliers, are subject to regulation by various government and regulatory agencies (e.g. FDA (US), EMA (Europe), NMPA (China), MHRA (UK), ASNM (France), BfArM (Germany), IGZ (the Netherlands)). In the European Union (EU), a new Medical Device Regulation (EU MDR) was published in 2017, which will impose significant additional pre-market and post-market requirements. Examples of other product-related regulations are the EU’s Waste from Electrical and Electronic Equipment (WEEE), Restriction of Hazardous Substances (RoHS) and Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) and Energy-using Products (EuP).
With Philips’ focus on healthcare, new products and services frequently require regulatory approvals for market introduction. The number and diversity of regulatory bodies in the various markets we operate in adds complexity and may negatively impact time to market and implementation costs. Non-compliance with conditions imposed by regulatory authorities could result in product recalls, a temporary ban on products, stoppages at production facilities, remediation costs, fines or claims for damages. Product safety incidents or user concerns, as in the past, could trigger business reviews by the FDA or other regulatory agencies, which, if failed, could trigger these impacts.
The ongoing digitalization of Philips’ products and services, including its holding of personal health data and medical data, increases the importance of compliance with data privacy and similar laws.
Non-compliance could adversely impact Philips’ financial condition or operating result through lost revenue and cost of any required remedial actions, penalties or claims for damages. These issues could also further negatively impact Philips’ reputation, brand, relationship with customers and market share.
Philips is exposed to non-compliance with business conduct rules and regulations.
In the execution of its strategy, Philips could be exposed to the risk of non-compliance with business conduct rules and regulations. This risk is heightened in growth geographies as the legal and regulatory environment is less developed compared to mature geographies. Examples include commission payments to third parties, remuneration payments to agents, distributors, consultants and the like, and the acceptance of gifts, which may be considered in some markets to be normal local business practice. These risks could adversely affect Philips’ financial condition, reputation and brand and trigger the additional risk of exposure to governmental investigations, inquiries and legal proceedings. For further detail see section 'Legal proceedings' within Contingent assets and liabilities.
9.6Financial risks
Philips is exposed to a variety of treasury and financing risks, including liquidity, currency, credit and country risk.
Negative developments impacting the liquidity of global capital markets could affect Philips’ ability to raise or re-finance debt in the capital markets or could lead to significant increases in the cost of such borrowing in the future. If the markets expect a downgrade by the rating agencies, or if such a downgrade has actually taken place, this could increase the cost of borrowing, reduce our potential investor base and adversely affect our business.
Philips operates in over 100 countries and its reported earnings and equity are therefore inevitably exposed to fluctuations in exchange rates of foreign currencies against the euro. Philips’ sales are sensitive in particular to movements in the US dollar, Japanese yen, Chinese renminbi and a wide range of other currencies from developed and emerging economies. Philips’ sourcing and manufacturing spend is concentrated in the European Union, the United States and China. Income from operations is particularly sensitive to movements in currencies of countries where Philips has no or very small-scale manufacturing/local sourcing activities but significant sales of its products or services, such as Japan, Canada, Australia, the United Kingdom and a range of emerging markets such as Russia, South Korea, Indonesia, India and Brazil.
In view of the long lifecycle of health technology solution sales and long-term strategic partnerships, the financial risk of counterparties with outstanding payment obligations creates exposure risks for Philips, particularly in relation to accounts receivable from customers, liquid assets, and the fair value 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.
Philips is exposed to tax risks which could have a significant adverse financial impact.
Philips is exposed to tax risks which could result in double taxation, penalties and interest payments. The source of the risks could originate from local tax rules and regulations as well as international and EU regulatory frameworks. These include transfer pricing risks on internal cross-border deliveries of goods and services, tax risks related to acquisitions and divestments, tax risks related to permanent establishments, tax risks relating to tax loss, interest and tax credits carried forward, and potential changes in tax law that could result in higher tax expenses and payments. The risks may have a significant impact on local financial tax results, which, in turn, could adversely affect Philips’ financial condition and operating results. The value of the deferred tax assets, such as tax losses carried forward, is subject to the availability of sufficient taxable income within the tax loss-carry-forward period, but also to the availability of sufficient taxable income within the foreseeable future in the case of tax losses carried forward with an indefinite carry-forward period. The ultimate realization of the company’s deferred tax assets is uncertain. Accordingly, there can be no absolute assurance that all deferred tax assets, such as (net) tax losses and credits carried forward, will be realized.
Philips has defined-benefit pension and other post-retirement plans in several countries. The funded status and service cost are influenced by movements in financial markets and demographic developments.
A significant proportion of (former) employees in Europe and North and Latin America are covered by defined-benefit pension plans and other post-retirement plans. The accounting for such plans requires management to make estimates on assumptions such as discount rates, inflation, longevity, expected cost of medical care and expected rates of compensation. Changes in these assumptions (e.g. due to movements in financial markets) can have a significant impact on the Defined Benefit Obligation and net interest cost.
Flaws in internal controls could adversely affect our financial reporting and management process.
Accurate disclosures provide investors and other market professionals with significant information for a better understanding of Philips’ businesses. Failures in internal controls or other issues with respect to Philips’ public disclosures, including disclosures with respect to cybersecurity risks and incidents, could create market uncertainty regarding the reliability of the information (including financial data) presented and could have a negative impact on the price of Philips securities. In addition, the reliability of revenue and expenditure data is key for steering the businesses and for managing top-line and bottom-line growth. The long lifecycle of health technology solution sales, from order acceptance to accepted installation and servicing, together with the complexity of the accounting rules for when revenue can be recognized in the accounts, presents a challenge in terms of ensuring consistent and correct application of the accounting rules throughout Philips’ global business. Significant changes in the way of working, such as working from home during a pandemic, may have an adverse impact on the control environment under which controls are executed, monitored, reviewed and tested. Any flaws in internal controls, or regulatory or investor actions in connection with flaws in internal controls, could adversely affect Philips’ financial condition, results of operation, reputation and brand.
10Supervisory Board
In the two-tier corporate structure under Dutch law, the Supervisory Board is a separate body that is independent of the Board of Management and the company. The Supervisory Board supervises the policies and management and the general affairs of Philips, and assists the Board of Management and the Executive Committee with advice. Please also refer to Supervisory Board within the chapter Corporate governance.
Jeroen van der Veer2)3)
Chairman of the Corporate Governance and Nomination & Selection Committee
Member of the Supervisory Board since 2009; third term expires in 2021
Neelam Dhawan1)
Liz Doherty1)
Member of the Supervisory Board since 2019; first term expires in 2023
Orit Gadiesh2)
Marc Harrison4)
Peter Löscher1)4)
Christine Poon2)3)4)
Chairwoman of the Remuneration Committee
Member of the Supervisory Board since 2009; third term expires in 2021
David Pyott1)4)
Member of the Supervisory Board since 2015; second term expires in 2023
Feike Sijbesma3)
Member of the Supervisory Board since 2020; first term expires in 2024
Paul Stoffels2)
11Supervisory Board report
Letter from the Chairman of the Supervisory Board
Dear Stakeholder,
In 2020, Philips demonstrated both resilience and agility in the face of the COVID-19 pandemic and the healthcare and economic challenges it unleashed. The company’s achievements in reconfiguring supply chains, scaling up production and developing new ways of engaging with customers and employees ensured it was able to deliver against its triple duty of care – meeting critical customer needs, safeguarding the health and safety of its employees, and ensuring business continuity.
Strategy working
The events of 2020 validate Philips’ strategy to become the leading provider of health technology and to advance value-based care along the health continuum. Over the past years, Philips has significantly invested in informatics, data science and cloud technology to enable the delivery of integrated solutions across the health continuum and across care settings through telehealth. Philips’ innovations – supporting personal health, precision diagnosis, image-guided therapies and connected care, and leveraging the power of data and informatics – and its strong focus on customer needs continue to generate a growing proportion of solutions-based sales. It is an approach that is resonating more strongly than ever with customers and investors.
ESG commitments
In 2020, Philips continued to reinforce its leadership as a purpose-driven company with the announcement of a fully integrated approach to doing business responsibly and sustainably. Building on the company’s strong heritage in environmental and social responsibility, this framework comprises a comprehensive set of key commitments across the Environmental, Social and Governance (ESG) dimensions that guide execution of the company’s strategy. I share management’s conviction that this approach is the best way for Philips to create superior, long-term value for its multiple stakeholders.
Financial performance and outlook
Despite the challenging circumstances, Philips was able to execute its plans and return to growth and improved profitability in the second half of 2020. This was driven by the successful conversion of a strong order book and a gradual return of consumer demand. Philips continued to maintain a strong balance sheet and robust liquidity position throughout the period. Nevertheless, in view of the likely continued impact of the COVID-19 pandemic, Philips took several measures to further enhance its liquidity position. At its Capital Markets Day with investors and financial analysts in November 2020, the company outlined its strategic plan and performance trajectory for the 2021–2025 period.
Supervisory Board
The Supervisory Board spent several sessions in 2020 reviewing, among other things, Philips’ COVID-19 response, performance, strategy, talent pipeline, business controls, quality, and sustainability programs.
At the Annual General Meeting of Shareholders in April 2020, the Supervisory Board was further strengthened by the addition of Feike Sijbesma and Peter Löscher. Feike Sijbesma is a recognized business and sustainability leader, while Peter Löscher is a seasoned business leader in the medical technology and pharmaceutical industries. Their outstanding experience will be highly valuable to our Board and to Philips, as the company expands its leadership in health technology solutions.
We are also very pleased to propose Indra Nooyi and Chua Sock Koong as new members of the Supervisory Board to the Annual General Meeting of Shareholders, which will be held on May 6, 2021. Indra Nooyi is a proven business leader in the consumer and technology sectors, with a strong track record of delivering sustained profitable growth in a sustainable and responsible way. Chua Sock Koong has deep knowledge of information technologies and digitalization. She is the former CEO of Singapore Telecommunications Limited (Singtel), Asia's leading communications technology group. Their strategic insights will be of great value to Philips, as the company embarks on its next growth phase as a health technology leader.
I consider it a privilege to have served three terms on the Supervisory Board of Philips, of which ten years as Chairman. When I step down at the Annual General Meeting of Shareholders in May 2021, I will hand over the reins to my successor, Feike Sijbesma. Together with our colleagues on the Supervisory Board, he will continue to provide thorough oversight of the company as it delivers on its purpose of improving people’s health and well-being through meaningful innovation.
Jeroen van der Veer
Chairman of the Supervisory Board
Introduction Supervisory Board Report
The Supervisory Board supervises and advises the Board of Management and Executive Committee in performing their management tasks and setting the direction of the business of the Philips Group. The Supervisory Board acts, and we as individual members of the Board act, in the interests of Royal Philips, its businesses and all its stakeholders. This report includes a more specific description of the Supervisory Board’s activities during the financial year 2020 and other relevant information on its functioning.
Activities of the Supervisory Board
The overview below indicates key matters that we reviewed and/or discussed during meetings throughout 2020:
- Regular assessments of the company’s overall strategy to extend its leadership as a health technology company. These included reviews of the strategic priorities for each of the business clusters, the company’s overall innovation strategy and innovation transformation program, Research & Development and the Data and Artificial Intelligence strategy. They also included regular reviews of the company’s acquisitions, divestments and partnerships funnel;
- The performance of the Philips Group and its underlying businesses, as well as the company’s flexibility under its capital structure and credit ratings to pay dividends and to fund capital investments, including share repurchases and other financial initiatives;
- The company's response to the global COVID-19 pandemic, in terms of:
- securing business continuity, reconfiguring Philips’ supply chain, meeting increased demand for hospital ventilators and monitors, innovation, customer engagement;
- the health and safety of Philips’ employees, the engagement of employees and the impact of this pandemic on ways of working going forward;
- measures to further enhance Philips’ liquidity position, as announced on April 20, 2020, in relation to the share buyback program announced on January 29, 2019, the placement of in total EUR 1 billion notes, the distribution of the 2019 dividend in shares, and the pay-out of the 2019 Annual Incentive for the Board of Management in shares;
- an external expert provided the Supervisory Board with an external perspective on the COVID-19 pandemic and the future of the healthcare sector;
- Geopolitical developments and their impact on Philips’ business;
- Philips’ annual management commitments, including the 2021 key performance indicators for the Executive Committee and the annual operating plan for 2021;
- Philips’ new financial targets for the 2021-2025 period as announced on October 19 and November 6, 2020 and the details of the strategic plan and performance trajectory for the 2021–2025 period, as presented during Philips’ Capital Markets Day on November 6, 2020;
- Quality & Regulatory compliance, systems and processes. Also refer to the description of the activities of the Quality & Regulatory Committee in the section Report of the Quality & Regulatory Committee of this Supervisory Board report;
- Capital allocation, including the dividend policy and the M&A framework;
- Selected acquisitions and divestments, including the acquisitions of Intact Vascular, Inc. and BioTelemetry, Inc., the intended acquisition of Capsule Technologies, Inc., and the intended divestment of the Domestic Appliances business;
- Enterprise risk management, which included an update on the enterprise risk management processes, the outcome of the annual risk assessment dialogue with the Executive Committee and a discussion of the top and emerging risks faced by Philips, the control and mitigation measures and the possible impact of such risks. Risk domains covered included strategy, operations and compliance;
- Review of talent management, leadership and talent development, leadership culture, inclusion and diversity and succession planning for senior management;
- Evaluation of the Board of Management and the Executive Committee based on the achievement of specific group and individual targets approved by the Supervisory Board at the beginning of the year;
- Oversight of the adequacy of financial and internal controls;
- Significant civil litigation claims against, and public investigations into, Philips;
- Philips’ Environment, Social and Governance approach, the related 2025 sustainability commitments and Philips’ aim to improve the health and well-being of 2.5 billion people per year by 2030 through meaningful innovation;
- Succession of the current Chairman of the Supervisory Board, whose third term will expire at the end of the 2021 Annual General Meeting of Shareholders.
The Supervisory Board also conducted 'deep dives' into a range of topics including:
- Strategy, performance trajectory, innovation portfolio, innovation roadmap and major innovations (including demonstrations on latest innovations) in Precision Diagnosis, Image Guided Therapy and Connected Care;
- The strategy and performance of Philips North America and Philips Greater China, including market trends, business performance and key strategic and transformation initiatives and priorities;
- Philips Capital, including performance and strategic imperatives;
- Marketing and E-commerce, including brand leadership and preference, reputation, Health Systems and Consumer Marketing.
The Supervisory Board also reviewed Philips’ annual and interim financial statements, including non- financial information, prior to publication.
Supervisory Board meetings and attendance
In 2020, the members of the Supervisory Board convened for seven regular meetings and three extraordinary meetings. Moreover, we collectively and individually interacted with members of the Executive Committee and with senior management outside the formal Supervisory Board meetings. The Chairman of the Supervisory Board and the CEO met regularly for bilateral discussions about the company’s progress on a variety of matters. Feike Sijbesma and Peter Löscher, appointed to the Supervisory Board with effect from April 30, 2020, followed an induction program and interacted with various Executive Committee members for deep-dives on strategy, finance and investor relations, governance and legal affairs.
The Supervisory Board meetings were well attended in 2020. All Supervisory Board members were present during the Supervisory Board meetings in 2020, with the exception of one member not able to attend the April 2020 meeting. The committees of the Supervisory Board also convened regularly (see the separate reports of the committees below) and the committees reported back on their activities to the full Supervisory Board. In addition to the formal meetings of the Board and its committees, the Board members held private meetings. We, as members of the Supervisory Board, devoted sufficient time to engage (proactively if the circumstances so required) in our supervisory responsibilities.
Because of restrictions related to the COVID-19 pandemic, the meetings of the Supervisory Board and its committees were mostly held virtually and no local site visits were organized.
Composition, diversity and self-evaluation by the Supervisory Board
The Supervisory Board is a separate corporate body that is independent of the Board of Management and the company. Its independent character is also reflected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the company. The Supervisory Board considers all its members to be independent under the Dutch Corporate Governance Code. Furthermore, the members of its Audit Committee are independent under the applicable US rules.
The Supervisory Board currently consists of ten members. In 2020, there were a number of changes to the composition of the Board. At the 2020 Annual General Meeting of Shareholders, Neelam Dhawan was re-appointed as a member of the Supervisory Board for an additional term of two years and Feike Sijbesma and Peter Löscher were each appointed as a member of the Supervisory Board for a term of four years. The agenda for the upcoming 2021 Annual General Meeting of Shareholders will include proposals to appoint Indra Nooyi and Chua Sock Koong as members of the Supervisory Board.
The term of appointment of Jeroen van der Veer and Christine Poon will expire at the end of the 2021 Annual General Meeting of Shareholders, after each having served three consecutive terms on the Supervisory Board. Furthermore, Orit Gadiesh will step down from the Supervisory Board at the end of the 2021 Annual General Meeting of Shareholders, after having served seven years on the Supervisory Board. We, as members of the Supervisory Board, would like to take this opportunity to thank Jeroen van der Veer, Christine Poon and Orit Gadiesh for their contributions to our work. After an internal selection process, the Supervisory Board appointed Feike Sijbesma as Chairman of the Supervisory Board, succeeding Jeroen van der Veer, and Paul Stoffels as Vice-Chair of the Supervisory Board, succeeding Christine Poon and Feike Sijbesma. Both appointments will be effective as per the end of the 2021 Annual General Meeting of Shareholders.
The Supervisory Board attaches great value to diversity in its composition and adopted a Diversity Policy for the Supervisory Board, Board of Management and Executive Committee. As laid down in the Diversity Policy, the aim is that the Supervisory Board, Board of Management and Executive Committee comprise members with a European and a non-European background (nationality, working experience or otherwise) and overall at least four different nationalities, and that they comprise at least 30% male and at least 30% female members. The Supervisory Board’s composition furthermore follows the profile included in the Rules of Procedure of the Supervisory Board, which aims for an appropriate combination of knowledge and experience among its members, encompassing marketing, manufacturing, technology and informatics, healthcare, financial, economic, social and legal aspects of international business and government and public administration in relation to the global and multiproduct character of Philips’ businesses. The aim is also to have one or more members with an executive or similar position in business or society no longer than five years ago. The composition of the Supervisory Board shall be in accordance with the best practice provisions on independence of the Dutch Corporate Governance Code, and each member of the Supervisory Board shall be capable of assessing the broad outline of the overall policy of the company. The size of the Supervisory Board may vary as it considers appropriate to support its profile.
The Supervisory Board spent time in 2020 considering its composition, as well as the composition of the Executive Committee (including the Board of Management). Currently, the composition of the Supervisory Board meets the above-mentioned gender diversity goals, as 40% of the Supervisory Board members (4 out of 10) are female. Overall, 28% (7 out of 25) of the positions to which the Diversity Policy applies (Supervisory Board and Executive Committee/Board of Management) are held by women. As explained in the report of the Corporate Governance and Nomination and Selection Committee, the company continues its efforts to enhance inclusion and diversity in the entire organization. The Supervisory Board expects these efforts to contribute to the achievement of the company’s diversity goals, although there may be various pragmatic reasons – such as other relevant selection criteria and the availability of suitable candidates – that could have an impact on the achievement of the diversity goals. The Supervisory Board will continue to devote attention to this topic in 2021.
In 2020, each member of the Supervisory Board completed a questionnaire to verify compliance with the applicable corporate governance rules and the Rules of Procedure of the Supervisory Board. The outcome of this survey was satisfactory.
An independent external party facilitated the 2020 self-evaluation process for the Supervisory Board and its committees. This included drafting the relevant questionnaire and interviewing members of the Supervisory Board as well as reporting on the results. The questionnaire covered topics such as the composition of the Supervisory Board and the required profile of future Supervisory Board members, stakeholder oversight, strategic oversight, risk management, dynamics of Supervisory Board meetings, succession planning and human resources oversight, the relationship between the Supervisory Board and Management and the priorities of the Supervisory Board in 2021. Furthermore, the performance of the Supervisory Board’s committees was reviewed. The Chairman of the Supervisory Board was evaluated through a separate questionnaire and his evaluation was also part of the discussions of the Supervisory Board about the selection of the new Chairman. The responses to the questionnaires were aggregated into reports.
The results of the self-evaluation were shared and discussed in a private meeting of the Supervisory Board. The responses provided by the Supervisory Board members indicated that the Board continues to be a well-functioning team. A number of suggestions were made to further improve the performance of the Supervisory Board over the coming period, with the top priorities being: a smooth transition of the Chair when Jeroen van der Veer steps down from the Supervisory Board, oversight of technology and innovation, the balance between organic and inorganic growth and the oversight of the CEO succession. The functioning of the Supervisory Board committees was rated highly. Furthermore, the Chairman of the Supervisory Board held bilateral meetings early 2021 where the results were also discussed.
The periodic use of an external facilitator to measure the functioning of the Supervisory Board will continue to be considered in the future.
Supervisory Board composition
| Jeroen van der Veer | Neelam Dhawan | Orit Gadiesh | Christine Poon | David Pyott | Paul Stoffels | Marc Harrison | Liz Doherty | Feike Sijbesma1) | Peter Löscher1) | |
| Year of birth | 1947 | 1959 | 1951 | 1952 | 1953 | 1962 | 1964 | 1957 | 1959 | 1957 |
| Gender | Male | Female | Female | Female | Male | Male | Male | Female | Male | Male |
| Nationality | Dutch | Indian | Israeli/American | American | British/American | Belgian | American | British/Irish | Dutch | Austrian |
| Initial appointment date | 2009 | 2012 | 2014 | 2009 | 2015 | 2018 | 2018 | 2019 | 2020 | 2020 |
| Date of (last) (re-)appointment | 2017 | 2020 | 2018 | 2017 | 2019 | n/a | n/a | n/a | n/a | n/a |
| End of current term | 2021 | 2022 | 2022 | 2021 | 2023 | 2022 | 2022 | 2023 | 2024 | 2024 |
| Independent | yes | yes | yes | yes | yes | yes | yes | yes | yes | yes |
| Committee memberships2) | RC & CGNSC | AC | RC | RC, CGNSC & QRC | AC & QRC | RC | QRC | AC | CGNSC | AC & QRC |
| Attendance at Supervisory Board meetings | (10/10) | (10/10) | (10/10) | (10/10) | (10/10) | (10/10) | (9/10) | (10/10) | 7/7 | 7/7 |
| Attendance at Committee meetings | RC (6/6 CGNSC (6/6) | AC (5/5) | RC (6/6) | RC (6/6) CGNSC (6/6) QRC (5/5) | AC (5/5) QRC (5/5) | RC(3/4)3) | QRC (5/5) | AC(5/5) | CGNSC (5/5)4) | AC (2/2)5) QRC (4/4)6) |
| International business | yes | yes | yes | yes | yes | yes | yes | yes | yes | yes |
| Marketing | yes | yes | yes | yes | yes | yes | ||||
| Manufacturing | yes | yes | yes | yes | yes | yes | ||||
| Technology & informatics | yes | yes | yes | yes | yes | yes | yes | yes | ||
| Healthcare | yes | yes | yes | yes | yes | |||||
| Finance | yes | yes | yes | yes | yes | yes | yes |
Supervisory Board committees
The Supervisory Board has assigned certain of its tasks to the three long-standing committees, also referred to in the Dutch Corporate Governance Code: the Corporate Governance and Nomination & Selection Committee, the Remuneration Committee and the Audit Committee. The Supervisory Board also established the Quality & Regulatory Committee. The separate reports of these committees are part of this Supervisory Board report and are published below.
The function of all of the Board’s committees is to prepare the decision-making of the full Supervisory Board, and the committees currently have no independent or assigned powers. The full Board retains overall responsibility for the activities of its committees.
Composition Board of Management
The term of Marnix van Ginneken’s appointment as member of the Board of Management will expire at the end of the upcoming 2021 Annual General Meeting of Shareholders. The Supervisory Board is pleased that Marnix van Ginneken remains available as member of the Board of Management. The agenda for the Annual General Meeting of Shareholders 2021 will therefore include a proposal to re-appoint Marnix van Ginneken as member of the Board of Management.
Financial Statements 2020
The financial statements of the company for 2020, as presented by the Board of Management, have been audited by Ernst & Young Accountants LLP, the independent external auditor appointed by the General Meeting of Shareholders. We have approved these financial statements, and all individual members of the Supervisory Board have signed these documents (as did the members of the Board of Management).
We recommend to shareholders that they adopt the 2020 financial statements. We likewise recommend to shareholders that they adopt the proposal of the Board of Management to make a distribution of EUR 0.85 per common share, in cash or shares at the option of the shareholder, against the net income of 2020.
Finally, we would like to express our thanks to the members of the Board of Management, the Executive Committee and all other employees for their continued contribution throughout 2020.
February 23, 2021
The Supervisory Board
Jeroen van der Veer
Christine Poon
Feike Sijbesma
Neelam Dhawan
Liz Doherty
Orit Gadiesh
Marc Harrison
Peter Löscher
David Pyott
Paul Stoffels
Further information
To gain a better understanding of the responsibilities of the Supervisory Board and the internal regulations and procedures governing its functioning and that of its committees, please refer to Corporate governance and to the following documents published on the company’s website:
- Articles of Association
- Rules of Procedure Supervisory Board, including the Charters of the Board committees
- Diversity Policy for the Supervisory Board, Board of Management and Executive Committee
11.1Report of the Corporate Governance and Nomination & Selection Committee
The Corporate Governance and Nomination & Selection Committee is chaired by Jeroen van der Veer. Its other members are Christine Poon and Feike Sijbesma (who joined in the course of 2020). The Committee is responsible for the review of selection criteria and appointment procedures for the Board of Management, the Executive Committee, certain other key management positions, as well as the Supervisory Board.
In 2020, Corporate Governance and Nomination & Selection Committee members held six meetings and all Committee members attended these meetings.
The Committee devoted time to the appointment or reappointment of candidates to fill current and future vacancies on the Supervisory Board. Following those consultations, it prepared decisions and advised the Supervisory Board on candidates for appointment. This resulted in the re-appointment of Neelam Dhawan and the appointment of Feike Sijbesma and Peter Löscher as members of the Supervisory Board at the 2020 Annual General Meeting of Shareholders. This also resulted in the proposals to appoint Indra Nooyi and Chua Sock Koong as members of the Supervisory Board, at the upcoming 2021 Annual General Meeting of Shareholders.
Under its responsibility for the selection criteria and appointment procedures for Philips’ senior management, the Committee reviewed the functioning of the Board of Management and its individual members, the Executive Committee succession plans and emergency candidates for key roles in the company. The conclusions from these reviews were taken into account in the performance evaluation of the Board of Management and Executive Committee members and the selection of succession candidates.
In 2020, the Committee devoted time to the appointment or reappointment of candidates to fill current and future vacancies on the Board of Management and the Executive Committee. These included the appointments of: Roy Jakobs as Chief Business Leader Connected Care, effective January 2020, succeeding Carla Kriwet who left the company; Kees Wesdorp as Chief Business Leader Precision Diagnosis, effective April 2020 (and in that role also jointly responsible for Diagnosis & Treatment), succeeding Rob Cascella, who transitioned to a role as Strategic Business Development Leader, where he remains a member of the Executive Committee; Deeptha Khanna as Chief Business Leader Personal Health, effective July 2020, succeeding Roy Jakobs; Edwin Paalvast as Chief of International Markets, effective August 2020, succeeding Henk de Jong. Henk de Jong transitioned to the role of CEO of the Domestic Appliances business (which is currently being separated from Philips) and remains a member of the Executive Committee. Furthermore, this resulted in the proposal to re-appoint Marnix van Ginneken as member of the Board of Management at the 2021 Annual General Meeting of Shareholders.
With respect to corporate governance matters, the Committee discussed relevant developments and legislative changes, including pending or expected Dutch legislation on takeovers and shareholder activism and on gender diversity.
Diversity
In 2017, the Supervisory Board adopted a Diversity Policy for the Supervisory Board, Board of Management and Executive Committee, which is published on the company website.
The criteria in the Diversity Policy aim to ensure that the Supervisory Board, Board of Management and Executive Committee have the expertise needed for a good understanding of current affairs and longer-term risks and opportunities related to the company’s business and sufficient diversity of views to provide appropriate challenge. The nature and complexity of the company’s business is taken into account when assessing optimal board diversity, as well as the social and environmental context in which the company operates.
Pursuant to the Diversity Policy, the selection of candidates for appointment to the Supervisory Board, Board of Management and Executive Committee will be based on merit. With due regard to the above, the company shall seek to fill vacancies by considering candidates that bring a diversity of (amongst others) age, gender and educational and professional backgrounds.
The Supervisory Board’s aim is that the Supervisory Board, Board of Management and Executive Committee comprise members with a European and a non-European background (nationality, working experience or otherwise) and overall at least four different nationalities, and that they comprise at least 30% male and at least 30% female members.
Currently, the Supervisory Board and the Board of Management/Executive Committee comprise members with more than 10 different nationalities. The composition of the Supervisory Board currently meets the above-mentioned gender diversity goals, with 40% of the Supervisory Board members (4 out of 10) being female. Overall, 28% (7 out of 25) of the positions to which the Diversity Policy applies (Supervisory Board and Executive Committee/Board of Management) are currently held by women.
The company continues to put in place measures to enhance diversity and inclusion at all levels within the organization, with the aim of retaining and progressing talent and of ensuring diversity and inclusion at senior management levels. To this end, Philips has set a new goal of 30% gender diversity in senior leadership positions by the end of 2025. With diversity being part of Philips’ purpose and one of the three strategic pillars of the global Human Resources strategy, long-term Inclusion & Diversity ambitions are embedded in that strategy. Execution is monitored through a diversity dashboard that is based on a global scorecard with specific goals, but also provides insights into the inflow, advancement and outflow of talent. This ensures clarity, accountability and focus and makes it possible to customize goals and intervene where appropriate. During 2020, further work was done to bring together various initiatives around unconscious bias, health, well-being and identity, to stand up against racism and to drive an ongoing dialogue about inclusion within teams across the company. These initiatives create a more holistic approach and include:
- Building senior women mentoring programs to develop and retain senior female leaders;
- Continuing Philips’ senior women-focused employer brand campaign;
- The global and local celebration of International Women’s Day across 80 locations worldwide;
- Including questions about diversity and inclusion in employee surveys. Results from recent surveys show positive trends, with all employees across all grades becoming more positive about Philips’ commitment to diversity in its widest sense, including background, talent and perspective as well as gender;
- Continuing the deployment, started in 2019, across the organization of tailor-made training designed to address unconscious bias. The training creates awareness of, and an ongoing dialogue around, unconscious bias and its impact on inclusion;
- Increased focus on health and well-being in view of the impact of the COVID-19 pandemic, including, for example, the establishment of an Employee Assistance Program offering counselling support in a number of countries;
- The launch of a global Energy Management Program, addressing work-life balance and helping employees to build resilience;
- Offering active support to employees in setting up their own diverse and inclusive bottom-up networks in the organization. These include women’s networks, the Black Employees Resource Group that was founded in North America, an Asian employees’ network, and revival of the LGBTQ+ community, with the leaders of such networks and communities frequently coming together to ensure an integrated Inclusion & Diversity approach;
- Developing a global framework for a holistic workforce analytics approach to ensure equal opportunities and equity, assisted by an external expert;
- The global virtual celebration of Pride, Coming Out Day and World Mental Health Day, engaging with employees globally through dialogues with internal and external speakers, panel events and webinars;
- The recognition of Hispanic Heritage Month and Black History Month and the introduction of a one-week program of virtual events to celebrate Veterans Day in North America.
Philips’ commitment towards Inclusion & Diversity is furthermore reflected in the company-wide Inclusion & Diversity Policy, the General Business Principles and the Fair Employment Policy. Reference is also made to the section Inclusion & Diversity of this Annual Report for more information.
11.2Report of the Remuneration Committee
11.2.1Letter from the Remuneration Committee Chair
Dear Stakeholder,
On behalf of the Remuneration Committee, I am pleased to report on the Committee’s activities in 2020 and to present the 2020 Remuneration Report on behalf of the Board of Management and the Supervisory Board.
An important milestone in 2020 was the update of the Remuneration Policy for the Board of Management and the Supervisory Board respectively, as approved by our shareholders during the 2020 Annual General Meeting of Shareholders. The relevant proposals followed the implementation of the revised EU Shareholders Rights Directive (2017/828) into Dutch law (effective December 2019). To ensure that the Remuneration Committee was able to properly consider all feedback before submitting final remuneration packages to our shareholders, the Remuneration Committee initiated a dedicated remuneration roadshow in the second half of 2019, engaging with a number of the company’s shareholders (in aggregate representing approximately 35% of the issued share capital) and institutional advisory organizations.
As part of the update of the Remuneration Policy and the Long-Term Incentive Plan for the Board of Management, the following changes were made (compared to the previous 2017 versions):
- Long-Term Incentive - to explicitly link the Remuneration Policy to our purpose and our contribution to society, a sustainability criterion (non-financial) has been introduced in the Long-Term Incentive in addition to the financial criteria TSR and EPS. In addition, the TSR vesting schedule has been changed, reducing pay-out at and around median performance.
- Annual Incentive (individual element) - to enhance transparency, five performance categories have been defined for the individual element of the Annual Incentive (20% weighting). Each year, relevant categories will be chosen and disclosed ex-ante in the Annual Report. Related targets will be set for each of the members of the Board of Management.
- Quantum Peer Group - the Quantum Peer Group for compensation benchmarking purposes changed from 26 to 24 companies. Alcatel Lucent was excluded as it was acquired by Nokia (which was already included in the Quantum Peer Group), and Essilor International was excluded after its merger into a company with a business profile with less relevance for Philips.
During the 2020 Annual General Meeting of Shareholders, our shareholders approved the 2019 Remuneration Report (by a 92.06% for vote). Based on our shareholder engagement, we noted the request for an increased level of transparency in the Remuneration Report, and therefore we further increased disclosures in our 2020 Remuneration Report. For example, we have updated the annual incentive disclosure tables, showing the realized financial performance, the selected individual performance criteria and the assessment of performance for the individual targets of the 2020 annual incentive. During its regular meetings throughout the year, the Remuneration Committee obtained updates on remuneration-related developments and societal trends. Overall, the Remuneration Committee concluded that our Remuneration Policy and its implementation are well aligned with market practice and the prevailing corporate governance requirements, while it enables us to achieve alignment of the remuneration of the Board of Management with Philips’ purpose and strategy.
Impact of COVID-19
As highlighted in the letter from the Chairman of the Supervisory Board within Supervisory Board report, Philips demonstrated resilience and agility in the face of the COVID-19 pandemic and the healthcare and economic challenges it unleashed. The Remuneration Committee is mindful of the measures the company took in the first half of 2020 to further enhance its liquidity position, in view of the possible continued impact of the COVID-19 pandemic. As part of these measures, the 2019 Annual Incentive for the Board of Management was paid out in shares, which will be subject to the 5-year holding period as prescribed by the Dutch Corporate Governance Code. Group-wide, merit and promotional salary increases for senior management were delayed from April 1, 2020 to October 1, 2020.
Looking back, the Remuneration Committee acknowledges that COVID-19 has impacted Philips’ results in the year. Demand for our professional healthcare products and solutions to help diagnose, treat, monitor and manage COVID-19 patients increased strongly. At the same time, COVID-19 led to the postponement of installations and elective procedures in hospitals, which impacted parts of our business, and there was a decline in consumer activity, as a result of which our Personal Health businesses have been impacted. Overall, COVID-19 had an impact on Philips’ business performance in 2020. Management is to be commended strongly for leading the Company through the pandemic and achieving a satisfactory result for the year. Please refer to Strategy and Businesses and Financial performance of our Annual Report 2020 for more information on the effects of COVID-19.
The composition of the Remuneration Committee and its activities
The Remuneration Committee is chaired by Christine Poon. Its other members are Jeroen van der Veer, Orit Gadiesh and (since May 2020) Paul Stoffels. The Committee is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee, as well as the policies governing this remuneration. In performing its duties and responsibilities, the Remuneration Committee is assisted by an external consultant and an in-house remuneration expert. For a full overview of the responsibilities of the Committee, please refer to the Charter of the Remuneration Committee, as outlined in Chapter 3 of the Rules of Procedure of the Supervisory Board (which are published on the company’s website).
Our annual Remuneration Committee cycle enables us to have an effective decision-making process supporting the determination, review and implementation of the Remuneration Policy. The main (recurring) activities during the annual cycle are outlined below:
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The Committee met six times in 2020. All Committee members were present during these meetings.
At Philips, our purpose is to improve people’s health and well-being through meaningful innovation. The Remuneration Committee believes that the Remuneration Policy (and Long-Term Incentive Plan) for the Board of Management supports this purpose. Please refer to the Remuneration Report below, for the way the Remuneration Policy has been implemented in the year 2020.
Christine Poon
Chairwoman of the Remuneration Committee
11.2.2Remuneration report 2020
In this Remuneration Report, the Supervisory Board provides a comprehensive overview, in accordance with article 2:135b of the Dutch Civil Code, of the remuneration paid and owed to the individual members of the Board of Management and the Supervisory Board respectively in the financial year 2020. The report will also be published as a stand-alone document on the company’s website after the 2020 Annual General Meeting of Shareholders, the agenda of which will include an advisory vote on this Remuneration Report.
Board of Management
Summary of Remuneration Policy
The Remuneration Policy and Long-Term Incentive Plan for the Board of Management have been adopted and approved respectively by the Annual General Meeting of Shareholders 2020, which took place on April 30, 2020.
The objectives of the Remuneration Policy for the Board of Management are: to focus them on delivering on our purpose and strategy, to motivate and retain them, and to create stakeholder value.
Thus, the Remuneration Policy:
- Supports improving the company’s overall performance and enhancing the long-term value of the company;
- Directly supports our purpose by:
a) linking a part of remuneration to achieving our strategic imperatives through the criteria and targets included in the Annual and Long-Term Incentives;
b) offering market competitive compensation compared to a peer group of business competitors and companies we compete with for executive talent;
c) enabling us to motivate, retain and attract world-class talent in order to support our purpose of improving people’s health and well-being through meaningful innovation and our goal of addressing our customers’ healthcare challenges (delivering on the Quadruple Aim);
d) stimulating share ownership to create alignment with shareholders and encourage employees to act as stewards and ambassadors of the company; - Encourages the company and its employees to act responsibly and sustainably;
- Delivers value for our stakeholders, such as shareholders, customers, consumers and employees, by continuously engaging with them and make a positive contribution to society at large;
- Leads to fair and internally consistent pay levels by taking into account internal pay ratios.
Main elements of the Remuneration Policy
| Total Direct Compensation | To support the Remuneration Policy’s objectives, the Total Direct Compensation includes a significant variable part in the form of an Annual Incentive (cash bonus) and Long-Term Incentive in the form of performance shares. As a result, a significant proportion of pay is ‘at risk’. | The Supervisory Board ensures that a competitive remuneration package for Board-level executive talent is maintained and benchmarked. The positioning of Total Direct Compensation is reviewed against benchmark data on an annual basis and is recalibrated if and when required. To establish this benchmark, data research is carried out each year on the compensation levels in the Quantum Peer Group. | Total direct remuneration is aimed at or close to, the median of the Quantum Peer Group. |
| Annual Base Compensation | Fixed cash payments intended to attract and retain executives of the highest caliber and to reflect their experience and scope of responsibilities. | Annual Base Compensation levels and any adjustments made by the Supervisory Board are based on factors including the median of Quantum Peer Group data and performance and experience of the individual member. The annual review date for the base salary is typically before April 1. | The individual salary levels are shown in this Remuneration Report. |
| Annual Incentive | Variable cash bonus incentive of which achievement is tied to specific financial and non-financial targets derived from the company’s annual strategic plan. These targets are set at challenging levels and are partly linked to the results of the company (80% weighting) and partly to the contribution of the individual member (20% weighting). | The payout in any year relates to the achievements of the preceding year. Metrics are disclosed ex-ante in the Remuneration Report and there will be no retroactive changes to the selection of metrics used in any given year once approved by the Supervisory Board and disclosed. | President & CEO Other BoM members |
| Long-Term Incentive | Our Long-Term Incentives form a substantial part of total remuneration, with payouts contingent on achievement of challenging EPS targets, relative TSR performance against a high performing peer group and sustainability objectives that are directly aligned with our purpose to make the world healthier and more sustainable through innovation. | The annual award size is set by reference to a multiple of base salary. The actual number of performance shares to be awarded is determined by reference to the average of the closing price of the Royal Philips share on the day of publication of the first quarterly results and the four subsequent trading days. Dependent upon the achievement of the performance conditions, cliff-vesting applies three years after the date of grant. During the vesting period, the value of dividends will be added to the performance shares in the form of shares. These dividend-equivalent shares will only be delivered to the extent that the award actually vests. | President & CEO Other BoM members |
| Mandatory share ownership and holding requirement | To further align the interests of executives to those of stakeholders and to motivate the achievement of sustained performance. | The guideline for members of the Board of Management is to hold at least a minimum shareholding in the company. Until this level has been reached the members of the Board of Management are required to retain all after-tax shares derived from any Long-Term Incentive Plan. All Board of Management members have reached the required share ownership level. The shares granted under the Long-Term Incentive Plan shall be retained for a period of at least 5 years or until at least the end of their contract period if this period is shorter. | The minimum shareholding requirement is 400% of annual base compensation for the CEO and 300% for other members of the Board of Management. |
| Pension | Pension plan and pension contribution intended to result into an appropriate level at retirement. |
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| Additional arrangements | To aid retention and remain competitive within the marketplace | Additional arrangements include expense and relocation allowances, medical insurance, accident insurance and company car arrangements, which are in line with other Philips executives in the Netherlands. The members of the Board of Management also benefit from coverage under the company’s Directors & Officers (D&O) liability insurance. The company does not grant personal loans to members of the Board of Management. | |
Peer Groups
We use a Quantum Peer Group for remuneration benchmarking purposes, and therefore we aim to ensure that it includes business competitors, with an emphasis on companies in the healthcare, technology-related or consumer products area, and other companies we compete with for executive talent. The Quantum Peer Group consists of predominantly Dutch and other European companies, plus a minority (up to 25%) of US-based global companies, of comparable size, complexity and international scope.
Philips Group
Quantum Peer Group
2020
| Atos | Nokia | Ahold Delhaize | Becton Dickinson |
| BAE Systems | Reckitt Benckiser | AkzoNobel | Boston Scientific |
| Capgemini | Roche | ASML | Danaher |
| Electrolux | Rolls-Royce | Heineken | Medtronic |
| Ericsson | Safran | ||
| Essity | Siemens Healthineers | ||
| Fresenius Medical Care | Smith & Nephew | ||
| Henkel & Co | Thales |
In addition, we use a TSR Performance Peer Group to benchmark our relative Total Shareholder Return performance for Long-Term Incentive purposes and against our business peers in the health technology market and other markets in which we compete. The companies we have selected for this peer group include predominantly US-based healthcare companies. Given that a substantial number of relevant competitors are US-headquartered, the weighting of US-based healthcare companies is more notable than for the Quantum Peer Group.
Philips Group
TSR Performance Peer Group
2020
| Becton Dickinson | De’Longhi | Hitachi |
| Boston Scientific | Elekta | Terumo |
| Cerner | Fresenius Medical Care | |
| Danaher | Getinge | |
| General Electric | Groupe SEB | |
| Hologic | Siemens Healthineers | |
| Johnson & Johnson | Smith & Nephew | |
| Medtronic | ||
| Resmed | ||
| Stryker |
The Remuneration Policy and the Long-Term Incentive Plan allow changes to the peer groups to be made by the Supervisory Board without approval from the General Meeting of Shareholders in respect of up to three companies on an annual basis (for instance: following a delisting of a company or, a merger of two peer companies), or six companies in total during the four years following adoption and approval of the Remuneration Policy and the Long-Term Incentive Plan respectively (or, if earlier, until the adoption or approval of a revised Remuneration Policy or revised Long-Term Incentive Plan). In addition to these changes, in view of Philips’ planned portfolio change through the divestment of its Domestic Appliances business, the Supervisory Board may decide to remove Groupe SEB and De’Longhi from the TSR Performance Peer Group and replace them by other business competitors in the health technology market. No changes were made to either peer group during 2020.
Services agreements
The members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht). Termination of the contract by either party is subject to six months’ notice period. The severance payment is set at a maximum of one year’s annual base compensation. No severance payment is due if the agreement is terminated early on behalf of the Board of Management member or in the case of urgent cause (dringende reden) as defined in article 7:678 and further in the Dutch Civil Code. The term of the services agreement is aligned with the term for which the relevant member has been appointed by the General Meeting of Shareholders (which is a maximum period of four years, it being understood that this period expires no later than at the end of the AGM held in the fourth year after the year of appointment).
Philips Group
Contract terms for current members
2020
| Frans van Houten | AGM 2023 |
| Abhijit Bhattacharya | AGM 2023 |
| Marnix van Ginneken | AGM 2021 |
11.2.3Remuneration of the Board of Management in 2020
The Supervisory Board has determined the 2020 pay-outs and awards to the members of the Board of Management, upon the proposal of the Remuneration Committee, in accordance with the Remuneration Policy and Long-Term Incentive Plan as adopted and approved respectively by our shareholders during the 2020 Annual General Meeting of Shareholders. In addition, the Supervisory Board has determined the 2020 pay-out of the 2018 Long-Term Incentive Plan, of which the performance period ended on December 31, 2020. This was done in accordance with the Long-Term Incentive Plan as approved during the 2017 Annual General Meeting of Shareholders.
The Remuneration Committee annually conducts a scenario analysis. This includes the calculation of remuneration under different scenarios, whereby different Philips performance assumptions and corporate actions are examined. The Supervisory Board concluded that the relationship between the strategic objectives and the chosen performance criteria for the 2020 Annual Incentive, as well as 2018 Long-Term Incentive performance criteria, were adequate.
Annual Base Compensation
The annual compensation of the members of the Board of Management has been reviewed as part of the regular remuneration review. In the case of Frans van Houten and Abhijit Bhattacharya, the annual compensation remained unchanged in 2020 compared to 2019 at EUR 1,325,000 and EUR 785,000 respectively. As a result of the review, the annual compensation of Marnix van Ginneken has been increased per October 1, 2020, from EUR 575,000 to EUR 595,000. This increase was made to move the total compensation level closer to the market median level, as well as to reflect internal relativities. Typically, the salary increase is implemented on April 1, however all merit and promotional salary increases for senior management globally were delayed from April 1, 2020 to October 1, 2020.
2020 Annual Incentive
The Annual Incentive performance has been assessed based on:
Company financial results (80% weighting)
To support the performance culture, the financial targets we set are at group level for all members of the Board of Management. EBITA*) and free cash flow*) for Annual Incentive calculation purposes are corrected for restructuring and acquisition related costs as well as specific unexpected events which are outside of management’s control, to the extent they have not been reflected in the original targets. The 2020 realizations, shown in the following table, reflect the performance on the criteria at Group level that apply to the Board of Management. The performance on the comparable sales growth*) and EBITA*) based criteria were below target, whereas the performance on the free cash flow*) based criterion was above target.
| Comparable Sales Growth1) | 30% | 2.3% | 4.3% | 6.3% | 2.5% | 55.0% | 17% |
| EBITA1) | 30% | 10.4% | 12.4% | 14.4% | 10.7% | 57.5% | 17% |
| Free Cash Flow1) | 20% | 1,096 | 1,505 | 1,914 | 1,852 | 185.1% | 37% |
| Total | 80% | 71% |
Individual targets based on area of responsibility (20% weighting)
To determine the payout levels for the individual goals, the Supervisory Board applies a holistic assessment as to the performance against the set goals as well as the relative weighting of the goal categories. Overall, the Supervisory Board commends the Board of Management on their strong performance in 2020, taking into account the exceptional challenges caused by the COVID-19 pandemic.
| Frans van Houten | Strategy execution |
| 27% |
| Quality & operational excellence |
| ||
| People & organization |
| ||
| Abhijit Bhattacharya | Strategy execution |
| 24% |
| Quality & operational excellence |
| ||
| People & organization |
| ||
| Marnix van Ginneken | Strategy execution |
| 21% |
| Quality & operational excellence |
| ||
| People & organization |
|
Overall this leads to the following total Annual Incentive realization and payout (payout in 2021):
Annual Incentive realization 2020
in EUR unless otherwise stated
| Frans van Houten | 100% | 1,325,000 | 71% | 27% | 98% | 1,298,500 |
| Abhijit Bhattacharya | 80% | 628,000 | 71% | 24% | 95% | 596,600 |
| Marnix van Ginneken | 80% | 476,000 | 71% | 21% | 92% | 437,920 |
2021 Annual Incentive
The Annual Incentive criteria consist of:
Financial criteria (80% weighting):
For the year 2021, the following financial indicators of the company’s results are selected to ensure alignment with the key (strategic) priorities in the year:
- Profit/margin
- Revenue/growth
- Cash flow
Individual criteria (20% weighting):
The contribution of the individual member is assessed based on areas of responsibility, for which annually two to a maximum of five performance categories are selected for each Board of Management member from the following list:
- Customer results
- Quality & operational excellence
- Strategy execution
- People & organization
- ESG/Sustainability
For the year 2021, the following performance categories are selected to ensure alignment with the key (strategic) priorities in the year:
| Frans van Houten |
|
| Abhijit Bhattacharya |
|
| Marnix van Ginneken |
|
2018 Long-Term Incentive
The 3-year performance period of the 2018 performance share grant ended on December 31, 2020. The payout results are explained below.
TSR (50% weighting)
A ranking approach to TSR applies with Philips itself included in the TSR Performance Peer Group. TSR scores are calculated based on a local currency approach and by taking a 3-month averaging period prior to the start and end of the 3-year performance period. The performance incentive pay-out zone is outlined in the following table, which results in zero vesting for performance below the 40th percentile and 200% vesting for performance levels above the 75th percentile. The incentive zone range has been constructed such that the average pay-out over time is expected to be approximately 100%.
Philips Group
Performance-incentive zone for TSR
in %
| Payout | 0 | 60 | 80 | 100 | 120 | 140 | 160 | 180 | 190 | 200 |
The TSR achieved by Philips during the performance period was 35.03%, using a start date of October 2017 and end date of December 2020. This resulted in Philips being positioned at rank 9 in the TSR performance peer group shown in the following table, resulting in a TSR achievement of 140%.
TSR results LTI Plan 2018 grant: 35.03%
| Danaher | 150.51% | 1 |
| ResMed | 150.36% | 2 |
| Hologic | 76.98% | 3 |
| Terumo | 70.86% | 4 |
| Elekta | 53.78% | 5 |
| Stryker | 53.70% | 6 |
| Gentige | 50.72% | 7 |
| Medtronic | 47.01% | 8 |
| Philips | 35.03% | 9 |
| Boston Scientific | 30.68% | 10 |
| Siemens Healthineers | 26.15% | 11 |
| Smith & Nephew | 16.65% | 12 |
| Becton Dickinson | 15.72% | 13 |
| De'Longhi | 15.05% | 14 |
| Johnson & Johnson | 14.91% | 15 |
| Cerner | 8.95% | 16 |
| Groupe SEB | (3.31)% | 17 |
| Hitachi | (3.59)% | 18 |
| Fresenius Medical | (13.20)% | 19 |
| General Electric | (51.05)% | 20 |
Adjusted EPS growth (50% weighting)
The LTI Plan EPS payouts and targets set at the beginning of the performance period were as follows:
Philips Group
LTI Plan EPS payouts
| EPS (euro) | <1.23 | 1.23 | 1.43 | 1.63 | 1.45 |
| Payout | 0% | 40% | 100% | 200% | 110% |
LTI Plan EPS is based on the underlying income from continuing operations attributable to shareholders, as included in the Annual Report, adjusted for changes in accounting principles. Furthermore, the Supervisory Board has also deemed it appropriate to make adjustments relating to certain other items that were not contemplated when the targets were set in 2018. These relate to the profit and loss impact of acquisitions and divestitures, impact of foreign exchange variations versus plan and profit and loss impact of legal cases and pension de-risking. The sum of these adjustments increased the achieved LTI Plan EPS by EUR 0.16. The resulting LTI Plan EPS achievement was determined by the Supervisory Board as 110%.
In view of the above, the following performance achievement and vesting levels have been determined by the Supervisory Board in respect of the 2018 grant of performance shares:
Philips Group
Performance achievement and vesting levels
| TSR | 140% | 50% | 70% |
| EPS | 110% | 50% | 55% |
| Total | 125% |
2021 Long-Term Incentive
The vesting of the 2021 Long-Term Incentive grant consisting of performance shares is subject to performance over a period of 3 years and based on two financial criteria and one non-financial criterion:
- 50% weighting: Relative Total Shareholder Return (‘TSR’)
- 40% weighting: Adjusted Earnings per Share growth (‘EPS’)
- 10% weighting: Sustainability objectives
Please refer to the Long-Term Incentive Plan published on the company’s website for more information.
Pension
The following pension arrangement is in place for the members of the Board of Management working under a Dutch contract:
- Flex ES Pension Plan in the Netherlands, which is a Collective Defined Contribution plan with a fixed contribution of (currently) 30.3% (including an own contribution of 2%) of the maximum pensionable salary of EUR 110,111 (effective January 1, 2020) minus the offset. The Flex ES Plan has a target retirement age of 68 and a target accrual rate of 1.85%;
- A gross Pension Allowance equal to 25% of the base compensation exceeding EUR 110,111;
- A temporary gross Transition Allowance, for a maximum period of 8 years (first 5 years in full; year 6: 75%; year 7: 50%, year 8: 25%) for members of the Board of Management who were participants of the former Executive Pension Plan. The level of the allowance is based on the age and salary of the Board member on December 31, 2014.
For further details on the pension allowances and pension scheme costs, please refer to Pensions / section 4.1.2 of the Annual Report.
Total remuneration costs in 2020
The following table gives an overview of the costs incurred by the company in 2020 and 2019 in relation to the remuneration of the Board of Management. Costs related to performance shares and restricted share right grants are recognized by the company over a number of years. Therefore, the costs mentioned below in the performance shares and restricted share rights columns are the accounting cost of multi-year Long-Term Incentive grants to members of the Board of Management.
Philips Group
Remuneration Board of Management1)
in EUR
| F.A. van Houten | 2020 | 1,325,000 | 1,325,000 | 1,298,500 | 2,874,467 | 565,922 | 27,001 | 62,176 | 6,153,067 | 32%-68% |
| 2019 | 1,325,000 | 1,295,000 | 1,091,800 | 2,235,166 | 559,052 | 26,380 | 52,713 | 5,260,111 | 37%-63% | |
| A. Bhattacharya | 2020 | 785,000 | 785,000 | 596,600 | 1,295,996 | 233,126 | 27,001 | 70,267 | 3,007,990 | 37%-63% |
| 2019 | 785,000 | 770,000 | 517,472 | 995,483 | 230,006 | 26,380 | 63,265 | 2,602,606 | 42%-58% | |
| M.J. van Ginneken | 2020 | 595,000 | 580,000 | 437,920 | 952,453 | 158,800 | 27,001 | 46,986 | 2,203,160 | 37%-63% |
| 2019 | 575,000 | 571,250 | 335,685 | 713,815 | 171,018 | 26,380 | 38,278 | 1,856,426 | 43%-57% | |
| Total | 2020 | 2,690,000 | 2,333,020 | 5,122,916 | 957,849 | 81,004 | 179,428 | 11,364,217 | 34%-66% | |
| 2019 | 2,636,250 | 1,944,957 | 3,944,464 | 960,076 | 79,140 | 154,256 | 9,719,143 | 39%-61% |
5-year development of CEO and BoM versus average employee remuneration costs compared to company performance
Internal pay ratios are a relevant input factor for determining the appropriateness of the implementation of the Remuneration Policy, as recognized in the Dutch Corporate Governance Code. For the 2020 financial year, the ratio between the annual total compensation for the CEO and the average annual total compensation for an employee was 71:1. The ratio increased from 60:1 in 2019. Further details on the development of these amounts and ratios over time can be found in the following table.
Philips Group
Remuneration cost
in EUR
| 2016 | 2017 | 2018 | 2019 | 2020 | |
| Remuneration | |||||
| CEO Total Remuneration Costs (A)1) | 4,675,042 | 5,101,429 | 5,391,265 | 5,260,111 | 6,153,067 |
| CFO Total Remuneration Cost | 1,856,175 | 2,247,822 | 2,595,688 | 2,602,606 | 3,007,990 |
| CLO Total Remuneration Cost | 1,861,200 | 1,856,426 | 2,203,160 | ||
| Chief Business Leader Personal Health Total Remuneration Cost | 2,373,642 2) | ||||
| Average Employee (FTE) Total Remuneration Costs (B)3) | 86,074 | 91,288 | 86,136 | 87,321 | 86,523 |
| Ratio A versus B4) | 54:1 | 56:1 | 63:1 | 60:1 | 71:1 |
| Company performance | |||||
| Annual TSR5) | 18.4% | 26.5% | 1.2% | 25.6% | 6.2% |
| Comparable Sales Growth%6) | 4.9% | 3.9% | 4.7% | 4.5% | 2.5% |
| EBITA%6) | 9.8% | 10.1% | 11.4% | 10.7% | 10.6% |
| Free Cash Flow6) | 429 | 1,185 | 984 | 1,053 | 1,852 |
Historical LTI grants and holdings
Number of performance shares (holdings)
Under the LTI Plan the current members of the Board of Management were granted 118,322 performance shares in 2020.
The following table provides an overview at end December 2020 of performance share grants. The reference date for board membership is December 31, 2020.
Philips Group
Number of performance shares (holdings)
in number of shares unless otherwise stated
| F.A. van Houten | 5/11/2017 | 73,039 | 2,410,000 | 5/11/2020 | 5/11/2022 | 78,413 | - | - | 95,663 | 3,764,350 | - |
| 4/27/2018 | 69,005 | 2,410,000 | 4/27/2021 | 4/27/2023 | 72,262 | - | 1,467 | - | - | 73,729 | |
| 5/6/2019 | 70,640 | 2,650,000 | 5/6/2022 | 5/6/2024 | 72,339 | - | 1,468 | - | - | 73,807 | |
| 4/30/2020 | 66,431 | 2,650,000 | 4/30/2023 | 4/30/2025 | - | 66,431 | 1,349 | - | - | 67,780 | |
| A. Bhattacharya | 5/11/2017 | 31,822 | 1,050,000 | 5/11/2020 | 5/11/2022 | 34,163 | - | - | 41,679 | 1,640,071 | - |
| 4/27/2018 | 31,138 | 1,087,500 | 4/27/2021 | 4/27/2023 | 32,608 | - | 662 | - | - | 33,270 | |
| 5/6/2019 | 31,388 | 1,177,500 | 5/6/2022 | 5/6/2024 | 32,143 | - | 652 | - | - | 32,795 | |
| 4/30/2020 | 29,518 | 1,177,500 | 4/30/2023 | 4/30/2025 | - | 29,518 | 599 | - | - | 30,117 | |
| M.J. van Ginneken | 5/11/2017 | 18,5632) | 612,500 | 5/11/2020 | 5/11/2022 | 19,929 | - | - | 24,313 | 956,717 | - |
| 4/27/2018 | 24,052 | 840,000 | 4/27/2021 | 4/27/2023 | 25,187 | - | 511 | - | - | 25,699 | |
| 5/6/2019 | 22,991 | 862,500 | 5/6/2022 | 5/6/2024 | 23,544 | - | 478 | - | - | 24,022 | |
| 4/30/2020 | 22,373 | 892,500 | 4/30/2023 | 4/30/2025 | - | 22,373 | 454 | - | - | 22,827 |
Number of stock options (holdings)
The tables below give an overview of the stock options held by the members of the Board of Management.
Philips Group
Stock options (holdings)
in number of shares unless otherwise stated
2020
| F.A. van Houten | 4/18/2011 | 4/18/2014 | 20.90 | 4/18/2021 | 75,000 | - | 75,000 | 44.87 | - | - |
| 4/23/2012 | 4/23/2015 | 14.82 | 4/23/2022 | 75,000 | - | - | - | - | 75,000 | |
| 1/29/2013 | 1/29/2014 | 22.43 | 1/29/2023 | 55,000 | - | - | - | - | 55,000 | |
| A. Bhattacharya | 4/18/2011 | 4/18/2014 | 20.90 | 4/18/2021 | 16,500 | - | 16,500 | 44.70 | - | - |
| 1/30/2012 | 1/30/2014 | 15.24 | 1/30/2022 | 20,000 | - | - | - | - | 20,000 | |
| 4/23/2012 | 4/23/2015 | 14.82 | 4/23/2022 | 16,500 | - | - | - | - | 16,500 | |
| M.J. van Ginneken | 4/19/2010 | 4/19/2013 | 24.90 | 4/19/2020 | 6,720 | - | 6,720 | 42.96 | - | - |
| 4/18/2011 | 4/18/2014 | 20.90 | 4/18/2021 | 8,400 | - | - | - | - | 8,400 | |
| 1/30/2012 | 1/30/2014 | 15.24 | 1/30/2022 | 10,000 | - | - | - | - | 10,000 | |
| 4/23/2012 | 4/23/2015 | 14.82 | 4/23/2022 | 8,400 | - | - | - | - | 8,400 |
Remuneration of the Supervisory Board in 2020
Summary of the Remuneration Policy
Please find below a brief summary of the Remuneration Policy for the Supervisory Board, as adopted at the Annual General Meeting of Shareholders 2020. The fee levels in this Remuneration Policy are the same as the Supervisory Board fee levels as determined by our shareholders at the 2018 Extraordinary General Meeting of Shareholders.
The overarching objective of the 2020 Remuneration Policy for the Supervisory Board is to enable its members to fulfill their duties, acting independently: supervising the policies and management and the general affairs of Philips, and supporting the Board of Management and the Executive Committee with advice. Also, the members of the Supervisory Board are guided by the company’s long-term interests, with due observance of the company’s purpose and strategy, taking into account the interests of shareholders and all other stakeholders.
To support the objectives mentioned above, the 2020 Remuneration Policy is aimed at attracting and retaining international Supervisory Board members of the highest caliber and with experience and expertise relevant to our health technology businesses.
In compliance with the Dutch Corporate Governance Code, the remuneration for the members of the Supervisory Board is not dependent on the results of the company and does not include any shares (or rights to shares). Members of the Supervisory Board may only hold shares in the company for the purpose of long-term investment and must refrain from short-term transactions in Philips securities. The company does not grant personal loans to members of the Supervisory Board.
The Supervisory Board reviews fee levels in principle every three years in order to monitor and take account of market developments and manage expectations of our key stakeholders. The levels are aimed at broadly median market levels (and around the 25th percentile market level for the Chairman) paid in the Quantum Peer Group (as used in the 2020 Remuneration Policy for the Board of Management).
The table below provides an overview of the current remuneration structure:
Philips Group
Remuneration Supervisory Board
in EUR
2020
| Supervisory Board | 155,000 | 115,000 | 100,000 |
| Audit Committee | 27,000 | n.a. | 18,000 |
| Remuneration Committee | 21,000 | n.a. | 14,000 |
| Corporate Governance and Nomination & Selection Committee | 21,000 | n.a. | 14,000 |
| Quality & Regulatory Committee | 21,000 | n.a. | 14,000 |
| Attendance fee per inter-European trip | 2,500 | 2,500 | 2,500 |
| Attendance fee per intercontinental trip | 5,000 | 5,000 | 5,000 |
| Entitlement to Philips product arrangement | 2,000 | 2,000 | 2,000 |
| Annual fixed net expense allowance | 11,345 | 2,269 | 2,269 |
| Other travel expenses | As reasonably incurred | ||
The members of the Supervisory Board benefit from coverage under the company’s Directors and Officers (D&O) liability insurance.
Remuneration of the Supervisory Board in 2020
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration in 2020:
| 20203) | ||||
| J. van der Veer | 155,000 | 35,000 | 11,345 | 201,345 |
| C.A. Poon | 115,000 | 49,000 | 7,269 | 171,269 |
| N. Dhawan | 100,000 | 18,000 | 7,269 | 125,269 |
| O. Gadiesh | 100,000 | 14,000 | 2,269 | 116,269 |
| D.E.I. Pyott | 100,000 | 42,000 | 12,269 | 154,269 |
| P.A.M. Stoffels | 100,000 | 9,333 | 9,769 | 119,102 |
| A.M. Harrison | 100,000 | 14,000 | 2,269 | 116,269 |
| M.E. Doherty | 100,000 | 24,000 | 9,769 | 133,769 |
| P. Löscher | 66,667 | 21,333 | 1,513 | 89,513 |
| F. Sijbesma4) | 76,667 | 9,333 | 1,513 | 87,513 |
| Total | 1,013,333 | 236,000 | 65,254 | 1,314,587 |
11.3Report of the Audit Committee
The Audit Committee is chaired by Liz Doherty (who succeeded David Pyott in the course of 2020). Its other members are David Pyott, Neelam Dhawan and Peter Löscher (who joined in the course of 2020). Jeroen van der Veer also regularly attends Audit Committee meetings. The Committee assists the Supervisory Board in fulfilling its supervisory responsibilities including ensuring the integrity of the company’s financial statements, reviewing the company’s internal controls and overseeing the enterprise risk management process.
In 2020, the Audit Committee held five meetings, including an education session which all Audit Committee members attended.
The CEO, CFO, Chief Legal Officer, Head of Internal Audit, Chief Accounting Officer and external auditor (Ernst & Young Accountants LLP) were invited to and attended all regular meetings.
The Committee, together with the Chief Legal Officer, also met separately with each of the CEO, CFO, Head of Internal Audit and external auditor after every meeting of the Committee. Prior to the Committee meetings, the Audit Committee chair met one-on-one with the Group Treasurer as well as with each of the Management who regularly attend the Audit Committee meetings (as set out in the previous paragraph) and with the external auditor (Ernst & Young Accountants LLP).
The overview below highlights a number of matters that were reviewed and/or discussed during Committee meetings throughout 2020:
- The company’s 2020 annual and interim financial statements, including non-financial information and guidance given by the company in relation to the impact of the global COVID-19 pandemic on the company’s performance, prior to publication. In its quarterly meetings, the Committee also assessed the adequacy and appropriateness of internal control policies and execution, as well as internal audit programs and findings;
- Matters relating to accounting policies, financial risks, reporting and compliance with accounting standards. Key accounting judgements were discussed in depth and treatments were challenged. Compliance with statutory and legal requirements and regulations, particularly in the financial domain, was also reviewed. Important findings, Philips’ top and emerging areas of risk (including the internal auditor’s reporting thereon, and the Chief Legal Officer’s review of litigation and other claims, and material investigations) and follow-up actions and appropriate measures were examined thoroughly;
- Each quarter, the Committee reviewed the company’s cash flow generation, liquidity and financing headroom, its ability under its capital structure and credit ratings, to pay dividends and to fund capital investments, including share repurchases and other financial initiatives. The Committee also monitored ongoing goodwill impairment indicators and reviewed the goodwill impairment tests performed in the fourth quarter, risk management, information and cybersecurity risks, legal compliance and developments in regulatory investigations as well as legal proceedings including antitrust investigations and related provisions;
- Specific finance topics included dividend policy, share repurchases, capital spending and the company’s debt financing strategy;
- The Committee engaged in a post-investment review of projects in the area of Information Technology, Research & Development, Real Estate and Restructuring and assessed the actual spend and timing of such projects against the original budget and timing;
- The Committee was updated on relevant developments with respect to the company’s IT, including the strategic IT agenda, IT priorities and IT organization. Furthermore, the Committee was updated on the cybersecurity landscape and the related risks and mitigating actions;
- With regard to Internal Audit, the Committee reviewed and approved the revised 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, performance and organizational structure of the Internal Audit function. The Committee also reviewed and concurred in the appointment of a new Head of Internal Audit following the reassignment of the previous incumbent;
- With regard to the external auditor, the Committee reviewed the performance of the external auditor in conducting the group and statutory audits as required by the Auditor Policy and the results of the 2019 EY service quality review program for Philips;
- With regard to the external audit, the Committee reviewed the proposed audit scope, including key audit areas, approach and fees, the non-audit services provided by the external auditor in conformity with the Philips Auditor Policy, as well as any changes to this policy;
- The Committee reviewed the independence as well as the professional fitness and good standing of the external auditor and its engagement partners. It also discussed with the external auditor how EY is addressing certain audit quality issues identified by regulators (unrelated to Philips). For information on the fees of the Group auditor, please refer to ‘Audit fees’ in the note Income from operations;
- The company’s policy on business controls, legal compliance and the General Business Principles (including deployment). The Committee reviewed, 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 on a regular basis the developments in and findings relating to conduct resulting from investigations into alleged violations of the General Business Principles and, if required, any measures taken.
The Committee held an education session on financial supervision by the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten), including the relevant regulatory framework, types of market behavior under supervision and oversight on financial reporting.
In February 2021, the Committee also reviewed the key audit matters and the critical audit matters identified by the Auditor in relation to the 2020 financial statements, included in the Annual Report 2020 and the Annual Report on Form 20-F respectively.
During each Audit Committee meeting, the Committee reviewed the quarterly report from the external auditor, in which the auditor set forth its findings and attention points during the relevant period. Apart from the Audit Committee meetings, the external auditor also attended all private sessions with the Audit Committee, where their observations were, if necessary, further discussed. The Annual Audit Letter was circulated to the full Supervisory Board, and planned actions to address the items raised were discussed with Management in the subsequent Audit Committee meetings as well as in private sessions with Management.
Finally, the Committee reviewed the Audit Committee Charter and concluded it remains appropriate.
11.4Report of the Quality & Regulatory Committee
The Quality & Regulatory Committee was established in view of the importance of the quality of the company’s products, systems, services and software. The Committee provides broad oversight of compliance with the regulatory requirements that govern the development, manufacturing, marketing and servicing of the company’s products, systems, services and software. The Quality & Regulatory Committee assists the Supervisory Board in fulfilling its oversight responsibilities in these areas. It is chaired by David Pyott and its members are Christine Poon, Marc Harrison and Peter Löscher, who joined in the course of 2020.
In 2020, the Quality & Regulatory Committee held five meetings and all Committee members attended these meetings.
The Chief Executive Officer, the Chief Legal Officer, the Chief Operations Officer and the Chief Quality & Regulatory Officer were present during these meetings.
The overview below indicates some of the matters that were discussed during meetings throughout 2020:
- Adherence to the company’s Quality Management Systems, and an update on the global initiatives around the transformation, standardization and simplification of the company’s structuring and organizational set-up of Quality Management Systems and regulated manufacturing sites (Legal Manufacturers);
- Complaint handling and post-market surveillance monitoring of supplier quality performance, management of supplier performance, supply base enhancement and the product development lifecycle management process;
- Trends on compliance and product quality dashboards, which display Quality & Regulatory key performance indicators for businesses and markets, measuring performance and continuous improvement to enhance quality and compliance and deep-dives into some key performance indicators and the root causes of such indicators trending red;
- The proposed changes to some of the key performance indicators and the proposed revised set of Quality & Regulatory key performance indicators for 2021 including the proposed 2021 targets;
- The discretionary Quality & Regulatory multiplier applied to the 2019 Annual Incentive realization of the Executive Committee members, as well as the alignment of performance and rewards throughout the organization;
- The status and outcome of Quality & Regulatory investigations and related matters, including the progress made in line with the terms of the Consent Decree with the US Department of Justice, representing the Food and Drug Administration (FDA), focusing primarily on Philips’ defibrillator manufacturing in the US;
- Regulatory developments, including the company’s preparations, challenges, risks and mitigating actions to implement the EU Medical Device Regulation, in view of the Date of Application being delayed by one year to May 26, 2021, following the global COVID-19 pandemic;
- Review of progress in the development of talent and capabilities in the company’s Quality & Regulatory function, aimed at building a best-in-class Quality & Regulatory organization and related investments in strategic Quality & Regulatory talent;
- Review of Health and Safety data across all sites globally and a deep-dive into accident rates in Diagnosis & Treatment and the related root causes;
- A Quality & Regulatory deep-dive for the Connected Care businesses;
- The 2021 Perform & Transform priorities and financial resources for the company’s Quality & Regulatory function.
12Corporate governance
12.1Introduction
Koninklijke Philips N.V. (Royal Philips), a company organized under Dutch law, is the parent company of the Philips group. Its shares have been listed on the Amsterdam stock exchange (Euronext Amsterdam) since 1912. Furthermore, its shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.
Royal Philips has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is accountable to the General Meeting of Shareholders for the fulfillment of its respective duties.
The company is governed by Dutch corporate and securities laws, its Articles of Association, and the Rules of Procedure of the Board of Management and the Executive Committee and of the Supervisory Board respectively. Its corporate governance framework is also based on the Dutch Corporate Governance Code (dated December 8, 2016) and US laws and regulations applicable to Foreign Private Issuers. Additionally, the Board of Management has implemented the Philips General Business Principles (GBP) and underlying policies, as well as separate codes of ethics that apply to employees working in specific areas of our business, i.e. the Financial Code of Ethics and the Procurement Code of Ethics. Many of the documents referred to are published on the company’s website and more information can be found in Our approach to risk management.
In this section of the Annual Report, the company addresses the main elements of its corporate governance structure, reports on how it applies the principles and best practices of the Dutch Corporate Governance Code and provides the information required by the Dutch governmental Decree on Corporate Governance (Besluit inhoud bestuursverslag) and governmental Decree on Article 10 Takeover Directive (Besluit artikel 10 overnamerichtlijn). When deemed necessary in the interests of the company, the company may deviate from aspects of the company’s corporate governance structure, and any such deviations will be disclosed in the company’s corporate governance report.
In compliance with the Dutch Corporate Governance Code, other parts of the management report (within the meaning of section 2:391 of the Dutch Civil Code) included in the Annual Report address the strategy and culture of Philips aimed at long-term value creation. Philips' strategy is described in more detail in Strategy and Businesses. Here, reference is also made to the Philips Business System, an interdependent, collaborative operating model that covers all aspects of how we operate – strategy, governance, processes, people, culture and performance management. As set out in Social performance, Philips promotes a behavior and competency-driven growth and performance culture, which is anchored by the integrity norms described in the GBP. The Message from the CEO explains how the company’s strategy was executed in 2020; in this regard, please refer also to Financial performance.
12.2Board of Management and Executive Committee
Introduction
The Board of Management is entrusted with the management of the company. Certain key officers have been appointed to support the Board of Management in the fulfilment of its managerial duties. The members of the Board of Management and these key officers together constitute the Executive Committee. In this Corporate Governance report, wherever the Executive Committee is mentioned, this also includes the members of the Board of Management, unless the context requires otherwise. Please refer to Board of Management and Executive Committee for an overview of the current members of the Board of Management and the Executive Committee.
Under the chairmanship of the President/Chief Executive Officer (CEO), and supported by the other members of the Executive Committee, the members of the Board of Management drive the company’s management agenda and share responsibility for the continuity of the Philips group, focusing on long-term value creation. Please refer to the Rules of Procedure of the Board of Management and the Executive Committee, which are published on the company’s website, for a description of further responsibilities and tasks, as well as procedures for meetings, resolutions and minutes.
In fulfilling their duties, the members of the Board of Management and Executive Committee shall be guided by the interests of the company and its affiliated enterprise, taking into account the interests of shareholders and other stakeholders. The Board of Management and the Executive Committee have adopted a division of responsibilities based on the functional and business areas, each of which is monitored and reviewed by the individual members. The Board of Management is accountable for the actions and decisions of the Executive Committee and has ultimate responsibility for the company’s external reporting (including reporting to the shareholders of the company).
The Board of Management and the Executive Committee are supervised by the Supervisory Board. Members of the Board of Management and the Executive Committee will be present in the meetings of the Supervisory Board if so invited. In addition, the CEO and other members of the Board of Management (and if needed, the other members of the Executive Committee) meet on a regular basis with the Chairman and other members of the Supervisory Board. The Board of Management and the Executive Committee are required to keep the Supervisory Board informed of all facts and developments concerning Philips that the Supervisory Board may need to be aware of in order to function as required and to properly carry out its duties.
Certain important decisions of the Board of Management require Supervisory Board approval, including decisions concerning the operational and financial objectives of the company and the strategy designed to achieve these objectives, the issue, repurchase or cancellation of shares, and major acquisitions or divestments.
Appointment and composition
Members of the Board of Management, including the CEO, are appointed by the General Meeting of Shareholders upon a binding recommendation drawn up by the Supervisory Board after consultation with the 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. In the event that a binding recommendation has been overruled, a new binding recommendation shall be submitted to the General Meeting of Shareholders. If such second binding recommendation has been overruled, the General Meeting of Shareholders shall be free to appoint a board member.
The CEO and the other members of the Board of Management are appointed for a term of four years, it being understood that this term expires at the closing of the General Meeting of Shareholders to be held in the fourth calendar year after the year of their appointment or, if applicable, at a later retirement date or other contractual termination date in the fourth year, unless the General Meeting of Shareholders resolves otherwise. The same applies in the case of re-appointment, which is possible for consecutive terms of four years. A (re-)appointment schedule for the Board of Management is published on the company’s website.
Pursuant to Dutch law, the members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht). The term of the services agreement is aligned with the term for which the relevant member has been appointed by the General Meeting of Shareholders. In case of termination of the services agreement by the company, severance payment is limited to a maximum of one year’s base salary. The services agreements provide no additional termination benefits.
Members of the Board of Management may be suspended by the Supervisory Board and by the General Meeting of Shareholders and members of the Board of Management may be dismissed by the General Meeting of Shareholders (in each case in accordance with the Articles of Association). The other members of the Executive Committee are appointed, suspended and dismissed by the CEO, subject to approval by the Supervisory Board.
12.3Supervisory Board
Introduction
The Supervisory Board supervises the policies and management and the general affairs of Philips, and assists the Board of Management and the Executive Committee with advice on general policies related to the activities of the company. In fulfilling their duties, the members of the Supervisory Board shall be guided by the interests of the company and its affiliated enterprise, taking into account the interests of shareholders and other stakeholders.
In the two-tier corporate structure under Dutch law, the Supervisory Board is a separate body that is independent of the Board of Management and the company. Its independent character is also reflected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the company. The Supervisory Board considers all its members to be independent under the Dutch Corporate Governance Code. Furthermore, the members of its Audit Committee are independent under the applicable US rules.
The Supervisory Board must approve certain important decisions of the Board of Management, including decisions concerning the operational and financial objectives of the company and the strategy designed to achieve these objectives, the issue, repurchase or cancellation of shares and major acquisitions or divestments. The Supervisory Board and its individual members each have a responsibility to request from the Board of Management, the Executive Committee and the external auditor all information that the Supervisory Board needs in order to be able to carry out its duties properly as a supervisory body.
Please refer to the Rules of Procedure of the Supervisory Board, which are published on the company’s website, for a description of further responsibilities and tasks, as well as procedures for meetings, resolutions and minutes.
In its report (included in the company’s Annual Report), the Supervisory Board describes the composition and functioning of the Supervisory Board and its committees, their activities in the financial year, the number of committee meetings held and the main items discussed. Please refer to Supervisory Board report. Please also refer to Supervisory Board for an overview of the current members of the Supervisory Board.
Appointment and composition
Members of the Supervisory Board are appointed by the General Meeting of Shareholders upon a binding recommendation drawn up by the Supervisory Board. 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 this new meeting 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. In the event that a binding recommendation has been overruled, a new binding recommendation shall be submitted to the General Meeting of Shareholders. If such second binding recommendation has been overruled, the General Meeting of Shareholders shall be free to appoint a board member.
The term of appointment of members of the Supervisory Board expires at the closing of the General Meeting of Shareholders to be held after a period of four years following their appointment. There is no age limit requiring the retirement of board members.
In line with the Dutch Corporate Governance Code, members of the Supervisory Board are eligible for re-appointment for a fixed term of four years once, and may subsequently be re-appointed for a period of two years, which appointment may be extended by at most two years. The report of the Supervisory Board must state the reasons for any re-appointment beyond an eight-year period. A (re-)appointment schedule for the Supervisory Board is published on the company’s website.
Members of the Supervisory Board may be suspended or dismissed by the General Meeting of Shareholders in accordance with the Articles of Association.
Candidates for appointment to the Supervisory Board are selected taking into account the company’s Diversity Policy, which is published on the company’s website. The Supervisory Board’s composition furthermore follows the profile included in the Rules of Procedure of the Supervisory Board, and the size of the board may vary as it considers appropriate to support its profile. Please refer to Composition, diversity and self-evaluation by the Supervisory Board.
Supervisory Board committees
The Supervisory Board, while retaining overall responsibility, has assigned certain tasks to four committees: the Corporate Governance and Nomination & Selection Committee, the Audit Committee, the Remuneration Committee, and the Quality & Regulatory Committee. Each committee reports to the full Supervisory Board. Please refer to the charters of the respective committees, which are published on the company’s website as part of the Rules of Procedure of the Supervisory Board, for a description of their responsibilities, composition, meetings and working procedures.
The Corporate Governance and Nomination & Selection Committee is responsible for preparing selection criteria and appointment procedures for members of the Supervisory Board, the Board of Management and the Executive Committee. The Committee makes proposals to the Supervisory Board for the (re)appointment of such members, and periodically assesses their functioning. The Committee also periodically assesses the Diversity Policy, and supervises the policy of the Executive Committee on the selection criteria and appointment procedures for Philips executives. At least once a year, the Committee reviews the corporate governance principles applicable to the company, and advises the Supervisory Board on any changes to these principles that it deems appropriate.
The Remuneration Committee is responsible for preparing decisions of the Supervisory Board on the remuneration of individual members of the Board of Management and the Executive Committee. The Committee prepares an annual remuneration report, which is included in the Annual Report. In performing its duties and responsibilities, the Remuneration Committee is assisted by an external consultant and an in-house remuneration expert acting on the basis of a protocol to ensure that the expert acts on the instructions of the Remuneration Committee and on an independent basis in which conflicts of interest are avoided.
The Audit Committee assists the Supervisory Board in fulfilling its oversight responsibilities for: the integrity of the company’s financial statements; the financial reporting process; the effectiveness (also in respect of the financial reporting process) of the system of internal controls and risk management; the internal and external audit process; the internal and external auditor’s qualifications, independence and performance; as well as the company’s process for monitoring compliance with laws and regulations and the GBP (including related manuals, training and tools). It reviews the company’s annual and interim financial statements, including non-financial information, prior to publication and advises the Supervisory Board on the adequacy and appropriateness of internal control policies and internal audit programs and their findings. The Committee furthermore supervises the internal audit function, maintains contact with and supervises the external auditor and prepares the nomination of the external auditor for appointment by the General Meeting of Shareholders.
The composition of the Audit Committee meets the relevant requirements under Dutch law and the applicable US rules. All of the members are considered to be independent and financially literate and the Audit Committee as a whole has the competence relevant to the sector in which the company is operating. In addition, David Pyott and Elizabeth Doherty are each designated as an Audit Committee financial expert, as defined under the regulations of the US Securities and Exchange Commission. The Supervisory Board considers the expertise and experience available in the Audit Committee, in conjunction with the possibility to take advice from internal and external experts and advisors, to be sufficient for the fulfillment of the tasks and responsibilities of the Audit Committee.
The Quality & Regulatory Committee has been established by the Supervisory Board in view of the central importance of the quality of the company’s products, systems, services and software as well as the development, testing, manufacturing, marketing and servicing thereof, and the regulatory requirements relating thereto. The Quality & Regulatory Committee assists the Supervisory Board in fulfilling its oversight responsibilities in this area, whilst recognizing that the Audit Committee assists the Supervisory Board in its oversight of other areas of regulatory, compliance and legal matters.
12.6Annual financial statements and external audit
The annual financial statements are prepared by the Board of Management and reviewed by the Supervisory Board upon the advice of its Audit Committee, taking into account the report of the external auditor. Upon approval by the Supervisory Board, the accounts are signed by all members of both the Board of Management and the Supervisory Board and are published together with the opinion of the external auditor. The Board of Management is responsible, under the supervision of the Supervisory Board, for the quality and completeness of such publicly disclosed financial reports. The annual financial statements are presented for discussion and adoption at the Annual General Meeting of Shareholders, to be convened subsequently.
The external auditor is appointed by the General Meeting of Shareholders in accordance with the Articles of Association. Philips’ current external auditor, Ernst & Young Accountants LLP, was appointed by the General Meeting of Shareholders held on May 7, 2015, for a term of four years starting January 1, 2016 and was re-appointed at the Annual General Meeting of Shareholders held on May 9, 2019 for a term of three years starting January 1, 2020.
Dutch law requires the separation of audit and non-audit services, meaning the company’s external auditor is not allowed to provide non-audit services. This is reflected in the Auditor Policy, which is published on the company’s website. The policy is also in line with (and in some ways stricter than) applicable US rules, under which the appointed external auditor must be independent from the company both in fact and appearance.
The Auditor Policy specifies certain audit services and audit-related services (also known as assurance services) that will or may be provided by the external auditor, and includes rules for the pre-approval by the Audit Committee of such services. Audit services must be pre-approved on the basis of the annual audit services engagement agreed with the External Auditor. Proposed audit-related services may be pre-approved at the beginning of the year by the Audit Committee (annual pre-approval) or may be pre-approved during the year by the Audit Committee in respect of a particular engagement (specific pre-approval). The annual pre-approval is based on a detailed, itemized list of services to be provided, which is designed to ensure that there is no management discretion in determining whether a service has been approved, and to ensure that the Audit Committee is informed of each of the services it is pre-approving. Unless pre-approval with respect to a specific service has been given at the beginning of the year, each proposed service requires specific pre-approval during the year. Any annually pre-approved services where the fee for the engagement is expected to exceed pre-approved cost levels or budgeted amounts will also require specific pre-approval. The term of any annual pre-approval is 12 months from the date of the pre-approval unless the Audit Committee states otherwise. During 2020, there were no services provided to the Company by the external auditor which were not pre-approved by the Audit Committee.
12.7Stichting Preferente Aandelen Philips
Stichting Preferente Aandelen Philips, a Foundation (stichting) organized under Dutch law, has been granted the right to acquire preference shares in the capital of Royal Philips, as stated in the company’s Articles of Association. In addition, the Foundation has the right to file a petition with the Enterprise Chamber of the Amsterdam Court of Appeal to commence an inquiry procedure within the meaning of section 2:344 Dutch Civil Code.
The object of the Foundation is to represent the interests of Royal Philips, the enterprises maintained by the company and its affiliated companies within the company’s group, in such a way that the interests of the company, these enterprises and all parties involved with them are safeguarded as effectively as possible, and that they are afforded maximum protection against influences which, in conflict with those interests, may undermine the autonomy and identity of Philips and those enterprises, and also to do anything related to the above ends or conducive to them. This object includes the protection of Philips against (an attempt at) an unsolicited takeover or other attempt to exert (de facto) control of the company. The arrangement will allow Philips to determine its position in relation to the relevant third party (or parties) and its (their) plans, to seek alternatives and to defend the company’s interests and those of its stakeholders.
The mere notification that the Foundation exercises its right to acquire preference shares will result in such shares being effectively issued. The Foundation may exercise this right for as many preference shares as there are common shares in the company outstanding at that time. No preference shares have been issued as of December 31, 2020.
The members of the self-electing Board of the Foundation are Messrs J.M. Hessels, P.N. Wakkie and J.P. de Kreij. No Philips Supervisory Board or Board of Management members or Philips officers are represented on the board of the Foundation.
Other than the arrangements made with the Foundation referred to above, the company does not have any measures which exclusively or almost exclusively have the purpose of defending against unsolicited public offers for shares in the capital of the company. It should be noted that the Board of Management and the Supervisory Board remain under all circumstances authorized to exercise all powers vested in them to promote the interests of Philips.
The company has issued certain corporate bonds, the provisions of which contain a ‘Change of Control Triggering Event’ or a ‘Change of Control Put Event’. Upon the occurrence of such events, the company might be required to offer to redeem or purchase any outstanding bonds at certain pre-determined prices. Please also refer to Debt.
12.9Corporate information
The company began as a limited partnership with the name Philips & Co in Eindhoven, the Netherlands, in 1891, and was converted into the company with limited liability N.V.Philips’ Gloeilampenfabrieken on September 11, 1912. The company’s name was changed to Philips Electronics N.V. on May 6, 1994, to Koninklijke Philips Electronics N.V. on April 1, 1998, and to Koninklijke Philips N.V. on May 15, 2013.
The majority of the shares in Royal Philips are held through the system maintained by the Dutch Central Securities Depository (Euroclear Nederland). In the past, Philips has also issued (physical) bearer share certificates ("Share Certificates"). A limited number of Share Certificates have not been surrendered yet, although the holders of Share Certificates are still entitled to a corresponding number of shares in Royal Philips. It is noted that, as a result of Dutch legislation that became effective per July 2019, the relevant shares were registered in the name of Royal Philips by operation of law per January 1, 2021. Owners of Share Certificates will continue to be entitled to a corresponding number of shares, but may not exercise the rights attached to such shares until they surrender their Share Certificates. Owners of Share Certificates may come forward to do so and to receive a corresponding number of shares until January 1, 2026 at the latest. As per January 2, 2026, entitlements attached to the Share Certificates not surrendered, will expire by operation of law. For more information, please contact the Investor Relations department by email (investor.relations@philips.com) or telephone (+31-20-59 77222).
The statutory seat of the company is Eindhoven, the Netherlands, and the statutory list of all subsidiaries and affiliated companies, prepared in accordance with the relevant legal requirements (Dutch Civil Code, Book 2, Sections 379 and 414), forms part of the notes to the consolidated financial statements and is deposited at the office of the Commercial Register in Eindhoven, the Netherlands (file no. 17001910). The executive offices of the company are located at the Philips Center, Amstelplein 2, 1096 BC Amsterdam, the Netherlands, telephone +31-20-59 77777.
12.10Additional information
Articles of association
Set forth below is a summary of certain provisions of the Articles of Association of the company, applicable Dutch law and related company policies. This summary does not constitute legal advice regarding those matters and should not be regarded as such.
Object and purpose
The objects of the company are to establish, participate in, administer and finance legal entities, companies and other legal forms for the purpose of the manufacture and trading of electrical, electronic, mechanical or chemical products, the development and exploitation of technical and other expertise, including software, or for the purpose of other activities, and to do everything pertaining thereto or connected therewith, including the provision of security in particular for commitments of business undertakings which belong to its group, all this in the widest sense, as may also be conducive to the proper continuity of the collectivity of business undertakings, in the Netherlands and abroad, which are carried on by the company and the companies in which it directly or indirectly participates. These objects can be found in Article 2 of the Articles of Association.
Share Capital
On December 31, 2020, the issued share capital amounted to EUR 182,210,600.20 divided into 911,053,001 common shares and no preference shares.
Voting rights
All issued and outstanding shares carry voting rights and each share confers the right to cast one vote in a shareholders’ meeting. Pursuant to Dutch law, no votes may be cast at a General Meeting of Shareholders in respect of shares which are held by the company. There are no special statutory rights attached to the shares of the company and no restrictions on the voting rights of the company’s shares exist. Major shareholders do not have different voting rights than other shareholders.
Dividends
A dividend will first be declared on preference shares out of net income. The Board of Management has 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. The remainder of the net income, after reservations made, shall be available for distribution to holders of common shares subject to shareholder approval after year-end.
Liquidation rights
In the event of the dissolution and liquidation of the company, the assets remaining after payment of all debts and liquidation expenses are to be distributed in the following order of priority: to the holders of preference shares, the amount paid thereon; and the remainder to the holders of the common shares.
Preemptive rights
Shareholders have a pro rata preferential right of subscription to any common share issuance unless the right is restricted or excluded. If designated by the General Meeting of Shareholders, the Board of Management has the power to restrict or exclude the preferential subscription rights. A designation of the Board of Management will be effective for a specified period of up to five years and may be renewed. Currently, the Board of Management has been granted the power to restrict or exclude the preferential right of subscription up to and including October 29, 2021. If the Board of Management has not been designated, the General Meeting of Shareholders has the power to restrict or exclude such rights, upon the proposal of the Board of Management, which proposal must be approved by the Supervisory Board. Resolutions by the General Meeting of Shareholders referred to in this paragraph require approval of at least two-thirds of the votes cast if less than half of the issued share capital is represented at the meeting.
The foregoing provisions also apply to the issuance of rights to subscribe for shares.
General Meeting of Shareholders
The Annual General Meeting of Shareholders shall be held each year not later than the thirtieth day of June and, at the Board of Management’s option, in Eindhoven, Amsterdam, The Hague, Rotterdam, Utrecht or Haarlemmermeer (including Schiphol airport); the notice convening the meeting shall inform the shareholders accordingly. Without prejudice to applicable laws and regulations, the Board of Management may resolve to give notice to holders of its listed and traded via a stock exchange shares via the company’s website and/or by other electronic means representing a public announcement, which announcement remains directly and permanently accessible until the General Meeting of Shareholders. Holders of registered shares shall be notified by letter, unless the Board of Management resolves to give notice to holders of registered shares by electronic means of communication by sending a legible and reproducible message to the address indicated by the shareholder to the company for such purpose provided the relevant shareholder has agreed hereto.
In principle, all shareholders are entitled to attend a General Meeting of Shareholders, to address the meeting and to vote, except for shares held in treasury by the company. They may exercise the aforementioned rights at a meeting only for the common shares which on the record date are registered in their name. The record date is published in the above announcement and is, pursuant to Dutch law, set as the 28th day prior to the day of the relevant meeting. Holders of registered shares must advise the company in writing of their intention to attend the General Meeting of Shareholders. Holders of shares listed and traded via a stock exchange who either in person or by proxy wish to attend the General Meeting of Shareholders, should notify ABN AMRO Bank N.V., which is acting as agent for the company. They must submit a confirmation by a participating institution, in which administration they are registered as holders of the shares, that such shares are registered and will remain registered in its administration up to and including the record date, whereupon the holder will receive an admission ticket for the General Meeting of Shareholders. Holders of shares who wish to attend by proxy have to submit the proxy at the same time. A participating institution is a bank or broker which, according to the Dutch Securities Depository Act (Wet giraal effectenverkeer), is an intermediary (intermediair) of the Dutch Central Securities Depository (Euroclear Nederland).
In connection with the General Meeting of Shareholders, the company does not solicit proxies within the United States.
The Articles of Association of the company provide that there are no quorum requirements to hold a General Meeting of Shareholders. Subject to certain exceptions provided by Dutch law and/or the Articles of Association, resolutions of the General Meeting of Shareholders are passed by an absolute majority of votes cast and do not require a quorum.
Limitations on right to hold or vote Common Shares
There are no limitations imposed by Dutch law or by the Articles of Association on the right of non-resident owners to hold or vote the Common Shares.
Exchange controls
Cash dividends paid in euros on Dutch registered shares and bearer shares may be officially transferred from the Netherlands and converted into any other currency without Dutch legal restrictions, except that for statistical purposes such payments and transactions must be reported to the Dutch Central Bank. Furthermore, no payments, including dividend payments, may be made to jurisdictions subject to sanctions adopted by the government of the Netherlands and implementing resolutions of the Security Council of the United Nations.
The Articles of Association of the company provide that cash distributions on New York Registry Shares shall be paid in US dollars, converted at the rate of exchange on the stock market of Euronext Amsterdam at the close of business on the day fixed and announced for that purpose by the Board of Management.
Significant differences in corporate governance practices
The corporate governance rules established by the New York Stock Exchange (NYSE) allow Foreign Private Issuers, like Royal Philips, to follow home country practices on most corporate governance matters instead of those that apply to US domestic issuers, provided that they disclose any significant ways in which their corporate governance practices differ from those applying to listed US domestic issuers under the NYSE listing standards. The following paragraphs summarize what we believe to be the significant differences between certain Dutch practices on corporate governance matters and the corporate governance provisions applicable to US domestic issuers under the NYSE listing standards.
Dutch corporate governance code
The company is a company organized under Dutch law, with its Common Shares listed on Euronext Amsterdam, and is subject to the Dutch Corporate Governance Code of December 8, 2016 (the Dutch Corporate Governance Code). Philips’ New York Registry Shares, representing Common Shares of the company, are listed on the NYSE.
Board structure
The NYSE listing standards prescribe regularly scheduled executive sessions of non-executive directors. The company has a two-tier corporate structure consisting of a Board of Management consisting of executive directors under the supervision of a Supervisory Board consisting exclusively of non-executive directors. Members of the Board of Management and other officers and employees cannot simultaneously act as member of the Supervisory Board. The Supervisory Board must approve specified decisions of the Board of Management.
Independence of members of our Supervisory Board
The Dutch Corporate Governance Code sets forth certain limitations on the number of non-independent members of the Supervisory Board, and its committees. The Supervisory Board considers all its members to be independent under the Dutch Corporate Governance Code. The definitions of independence under the Dutch Corporate Governance Code, however, differ in their details from the definitions of independence under the NYSE listing standards. In some cases the Dutch requirements are stricter than the NYSE listing standards, and in other cases the NYSE listing standards are the stricter of the two. The members of the Audit Committee of the Supervisory Board are independent under the NYSE listing standards.
Committees of our Supervisory Board
The company has established four committees, consisting of members of the Supervisory Board only: the Audit Committee, the Remuneration Committee, the Corporate Governance and Nomination & Selection Committee and the Quality & Regulatory Committee. The roles, responsibilities and composition of these committees reflect the requirements of the Dutch Corporate Governance Code, the company’s Articles of Association and Dutch law, which differ from the NYSE listing standards in these respects. The role of each committee is to advise the Supervisory Board and to prepare the decision-making of the Supervisory Board. In principle, the entire Supervisory Board remains responsible for its decisions even if such decisions were prepared by one of the Supervisory Board’s committees.
The NYSE requires that, when an audit committee member of a listed US domestic issuer serves on four or more audit committees of public companies, the listed company should disclose (either on its website or in its Annual Report on Form 10-K) that the board of directors has determined that this simultaneous service would not impair the director’s service to the listed company. Dutch law does not require the company to make such a determination.
In accordance with the procedures laid down in the Philips Auditor Policy and as mandatorily required by Dutch law, the external auditor of the company is appointed by the General Meeting of Shareholders on the proposal of the Supervisory Board, after the latter has been advised by the Audit Committee and the Board of Management.
Equity compensation plans
The company complies with Dutch legal requirements regarding shareholder approval of equity compensation plans for the members of the Board of Management. Dutch law does not require shareholder approval of certain equity compensation plans for which the NYSE listing standards would require such approval. The company is subject to a Dutch requirement to seek shareholder approval for equity compensation plans for its members of the Board of Management.
Code of business conduct
The listing standards of the NYSE prescribe certain parameters for listed company codes of business conduct and ethics. The company has implemented the Philips General Business Principles, which are applicable to all employees, and a Financial Code of Ethics, which is applicable to all employees performing an accounting or financial function. Waivers granted to Senior (Financial) Officers (as defined in our Financial Code of Ethics) must be disclosed. In 2020 the company did not grant any waivers of the Financial Code of Ethics.
New York Registry Shares
Certain common shares of the company are registered in the register maintained by Deutsche Bank Trust Company Americas, as the New York transfer agent, registrar and dividend disbursing agent (the “New York Transfer Agent”), pursuant to a Transfer Agent Agreement, dated July 16, 2018, between the New York Transfer Agent and the company (such common shares, “New York Registry Shares”). As soon as practicable after receipt from the company, the New York Transfer Agent will provide holders of New York Registry Shares with a notice of any meeting or solicitation of consents or proxies with a notice prepared by the company stating (a) such information as is contained in such notice of meeting and any solicitation materials (or a summary thereof in English provided by the company), (b) that each registered holder at the close of business on the record date set by the company therefor will be entitled, subject to any applicable provisions of Dutch law and the Articles of Association, to exercise the voting rights pertaining to the New York Registry Shares, and (c) the manner in which such voting rights may be exercised. The New York Transfer Agent may, to the extent not prohibited by applicable law or by the requirements of the New York Stock Exchange, in lieu of distribution of the materials provided to it in connection with any meeting of, or solicitation of consents or proxies from, holders of common shares, distribute to the registered holders of New York Registry Shares a notice that provides such holders with, or otherwise publicizes to such holders, instructions on how to retrieve such materials or receive such materials upon request (i.e. by reference to a website containing the materials for retrieval or a contact for requesting copies of the materials).
Major shareholders as filed with SEC
On February 6, 2019, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2018, it beneficially owned 9.9% (92,130,367 shares) of the Company’s common shares. On February 11, 2019, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of January 31, 2019, it beneficially owned 10.1% (93,159,954 shares) of the Company’s common shares. On February 12, 2019, Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP jointly filed a Schedule 13G with the SEC indicating that Wellington Management Group LLP, Wellington Group Holdings LLP and Wellington Investment Advisors Holdings LLP each beneficially owned 7.05% (65,286,127 shares) of the Company’s common shares and Wellington Management Company LLP beneficially owned 6.55% (60,708,945 shares) of the Company’s common shares. On February 5, 2020, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2019, it beneficially owned 9.2% (82,571,656 shares) of the Company’s common shares. On January 27, 2020, Wellington Management Group LLP, Wellington Group Holdings LLP, Wellington Investment Advisors Holdings LLP and Wellington Management Company LLP jointly filed a Schedule 13G with the SEC indicating that, as of December 31, 2019, Wellington Management Group LLP, Wellington Group Holdings LLP and Wellington Investment Advisors Holdings LLP each beneficially owned 7.17% (64,327,165 shares) of the Company’s common shares and Wellington Management Company LLP beneficially owned 6.80% (60,988,928 shares) of the Company’s common shares. On January 29, 2021, BlackRock Inc. filed a Schedule 13G with the SEC indicating that, as of December 31, 2020, it beneficially owned 8.5% (77,552,149 shares) of the Company’s common shares. On February 3, 2021, Wellington Management Group LLP, Wellington Group Holdings LLP, and Wellington Investment Advisors Holdings LLP jointly filed a Schedule 13G with the SEC indicating that, as of December 31, 2020, Wellington Management Group LLP, Wellington Group Holdings LLP and Wellington Investment Advisors Holdings LLP each beneficially owned 1.85% (16,883,298 shares) of the Company’s common shares.
Please also refer to Major shareholders.
13Group financial statements
Introduction
This section of the Annual Report contains the audited consolidated financial statements including the notes thereon that have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code.
All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective 2019 have been endorsed by the EU, consequently, the accounting policies applied by Koninklijke Philips N.V. (Royal Philips) also comply with IFRS as issued by the IASB.
The Group financial statements (together with the Company financial statements, which are not included in the Annual Report on Form 20-F, containing its statutory statements) are subject to adoption by the company’s shareholders at the upcoming 2021 Annual General Meeting of Shareholders.
13.1Management’s report on internal control
Management’s report on internal control over financial reporting pursuant to section 404 of the US Sarbanes-Oxley Act
The Board of Management of Koninklijke Philips N.V. (Royal Philips) is responsible for establishing and maintaining an adequate system of internal control over financial reporting (as such term is defined in Rule 13a15 (f) under the US Securities Exchange Act). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with IFRS as issued by the IASB.
Internal control over financial reporting includes maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Board of Management conducted an assessment of Royal Philips' internal control over financial reporting based on the “Internal Control Integrated Framework (2013)” established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the Board of Management’s assessment of the effectiveness of Royal Philips' internal control over financial reporting as of December 31, 2020, it has concluded that, as of December 31, 2020, Royal Philips' internal control over Group financial reporting is considered effective.
The effectiveness of the Royal Philips' internal control over financial reporting as of December 31, 2020, as included in this section Group financial statements, has been audited by Ernst & Young Accountants LLP, an independent registered public accounting firm, as stated in their report which follows hereafter.
Board of Management
Frans van Houten
Abhijit Bhattacharya
Marnix van Ginneken
February 23, 2021
13.1.1Disclosure controls and procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a15(e) and 15d15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by the Annual Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of December 31, 2020.
13.1.2Changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
13.2Report of the independent auditor
Management’s report on internal control over financial reporting is set out on Management’s report on internal control. The report set out on Independent auditor’s report on internal control over financial reporting, is provided in compliance with standards of the Public Company Accounting Oversight Board in the US and includes an opinion on the effectiveness of internal control over financial reporting as at December 31, 2020, based on COSO criteria.
Ernst & Young Accountants LLP has also issued a report on the consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board in the US, which is set out on Independent auditor’s report on the consolidated financial statements.
13.3Independent auditor’s report on internal control over financial reporting
Report of Independent Registered Public Accounting Firm
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
Opinion on Internal Control over Financial Reporting
We have audited Koninklijke Philips N.V.’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Koninklijke Philips N.V. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 23, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying section ‘Management’s report on internal control’, of this Annual Report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young Accountants LLP
Amsterdam, the Netherlands
February 23, 2021
13.4Independent auditor’s report on the consolidated financial statements
Report of Independent Registered Public Accounting Firm
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Koninklijke Philips N.V. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the group financial statements). In our opinion, the group financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These group financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s group financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the US federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the group financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the group financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the group financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the group financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the group financial statements that were communicated or required to be communicated to the Audit Committee of the Supervisory Board and that: (1) relate to accounts or disclosures that are material to the group financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the group financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Revenue recognition – Sales-related accruals | |
| Description of the Matter | Primarily in the Personal Health businesses, the Company has sales promotions-related agreements with distributors and retailers whereby discounts and rebates are provided according to the quantity of goods sold and promotional and marketing activities performed by the distributors and retailers. Auditing the Company’s measurement of sales related accruals relating to rebates, promotional and marketing support is especially complex because the calculation involves subjective management assumptions around the extent to which promotional or marketing targets will be met by Philips’ customers and the related rebates will be owed. Further reference is made to note 1, Significant accounting policies, and note 7, Income from operations section Sales composition and disaggregation, to the group financial statements. |
| How We Addressed the Matter in Our Audit | As part of our audit procedures, we obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls that address the risks of material misstatement relating to measurement for sales-related accruals. This included testing controls relating to management’s verification that sales-related accruals have been reviewed and underlying assumptions were based on management’s best estimate.
|
| Valuation of Goodwill for Cash Generating Units Population Health Management and Aging and Caregiving | |
| Description of the Matter | At December 31, 2020, the total carrying value of goodwill amounted to EUR 8,014 million, representing 29% of the group’s total assets. Goodwill is allocated to Cash Generating Units (CGUs) for which management is required to test the carrying value of goodwill for impairment annually or more frequently if there is a triggering event for testing. Management recorded a total impairment charge of EUR 144 million related to the CGUs Population Health Management (PHM) and Aging and Caregiving (ACG). Further reference is made to note 1, Significant accounting policies, and note 12, Goodwill, to the group financial statements.
|
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s goodwill impairment review process related to the CGUs PHM and ACG, including controls over management’s review of the significant assumptions and controls over the mathematical accuracy of the valuation models used. For example, we tested controls over management’s determination of peer companies, evaluation of market multiples and determination of control premium.
|
| Valuation and disclosure of provisions for legal claims, litigations and contingencies | |
| Description of the Matter | The Company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings, as well as being investigated by governmental authorities for alleged non-compliance with laws and regulations. The Company records litigation provisions if it is probable that an outflow of economic benefits will be required to settle the obligation and the amount can be estimated reliably. We evaluated the accounting and disclosure for (contingent) legal liabilities, which is complex and judgmental due to the difficulty in predicting the outcome of the matters and estimating the potential impact if the outcomes are unfavorable, and the amounts involved are, or can be, material to the financial statements as a whole. Further reference is made to note 1, Significant accounting policies, note 20, Provisions, and note 25, Contingent assets and liabilities, to the group financial statements. |
| How We Addressed the Matter in Our Audit | Our audit procedures included, among others, obtaining an understanding, evaluating the design and testing the effectiveness of the Company’s internal controls around the identification and evaluation of claims, proceedings and investigations at different levels in the group, and the recording and continuous re-assessment of the related (contingent) liabilities and provisions and disclosures.
|
/s/ Ernst & Young Accountants LLP
We have served as the Company‘s auditor since 2016.
Amsterdam, the Netherlands
February 23, 2021
13.5Consolidated statements of income
Philips Group
Consolidated statements of income
in millions of EUR
For the year ended December 31
| Sales | |||
| Cost of sales | ( | ( | ( |
| Gross margin | |||
| Selling expenses | ( | ( | ( |
| General and administrative expenses | ( | ( | ( |
| Research and development expenses | ( | ( | ( |
| Other business income | |||
| Other business expenses | ( | ( | ( |
| Income from operations | |||
| Financial income | |||
| Financial expenses | ( | ( | ( |
| Investments in associates, net of income taxes | ( | ( | |
| Income before taxes | |||
| Income tax expense | ( | ( | ( |
| Income from continuing operations | |||
| Discontinued operations, net of income taxes | ( | ( | ( |
| Net income | |||
| Attribution of net income | |||
| Net income attributable to Koninklijke Philips N.V. shareholders | |||
| Net income attributable to non-controlling interests |
Philips Group
Earnings per common share attributable to Koninklijke Philips N.V. shareholders
in EUR unless otherwise stated
| Basic earnings per common share in EUR1) | |||
| Income from continuing operations attributable to shareholders | |||
| Net income attributable to shareholders | |||
| Diluted earnings per common share in EUR1) | |||
| Income from continuing operations attributable to shareholders | |||
| Net income attributable to shareholders |
Amounts may not add up due to rounding.
13.6Consolidated statements of comprehensive income
Philips Group
Consolidated statements of comprehensive income
in millions of EUR
for the year ended December 31
| Net income for the period | |||
| Pensions and other-post employment plans: | |||
| Remeasurement | ( | ||
| Income tax effect on remeasurements | ( | ( | |
| Financial assets fair value through OCI: | |||
| Net current-period change, before tax | ( | ||
| Reclassification directly into retained earnings | ( | ||
| Total of items that will not be reclassified to Income Statement | ( | ||
| Currency translation differences: | |||
| Net current period change, before tax | ( | ||
| Income tax effect on net current-period change | ( | ||
| Reclassification adjustment for (gain) loss realized | |||
| Reclassification adjustment for (gain) loss realized, in discontinued operations | ( | ||
| Cash flow hedges: | |||
| Net current-period change, before tax | ( | ( | |
| Income tax effect on net current-period change | ( | ||
| Reclassification adjustment for loss (gain) realized | ( | ( | |
| Total of items that are or may be reclassified to Income Statement | ( | ||
| Other comprehensive income for the period | ( | ||
| Total comprehensive income for the period | |||
| Total comprehensive income attributable to: | |||
| Shareholders of Koninklijke Philips N.V. | |||
| Non-controlling interests |
Amounts may not add up due to rounding.
13.7Consolidated balance sheets
Amounts may not add up due to rounding.
Philips Group
Consolidated balance sheets
in millions of EUR unless otherwise stated
As of December 31
| Non-current assets | ||
| Property, plant and equipment | ||
| Goodwill | ||
| Intangible assets excluding goodwill | ||
| Non-current receivables | ||
| Investments in associates | ||
| Other non-current financial assets | ||
| Non-current derivative financial assets | ||
| Deferred tax assets | ||
| Other non-current assets | ||
| Total non-current assets | ||
| Current assets | ||
| Inventories | ||
| Other current financial assets | ||
| Other current assets | ||
| Current derivative financial assets | ||
| Income tax receivable | ||
| Current receivables | ||
| Assets classified as held for sale | ||
| Cash and cash equivalents | ||
| Total current assets | ||
| Total assets | ||
| Equity | ||
| Equity | ||
| Common shares | ||
| Reserves | ( | |
| Other | ||
| Non-controlling interests | ||
| Group equity | ||
| Non-current liabilities | ||
| Long-term debt | ||
| Non-current derivative financial liabilities | ||
| Long-term provisions | ||
| Deferred tax liabilities | ||
| Non-current contract liabilities | ||
| Non-current tax liabilities | ||
| Other non-current liabilities | ||
| Total non-current liabilities | ||
| Current liabilities | ||
| Short-term debt | ||
| Current derivative financial liabilities | ||
| Income tax payable | ||
| Accounts payable | ||
| Accrued liabilities | ||
| Current contract liabilities | ||
| Short-term provisions | ||
| Liabilities directly associated with assets held for sale | ||
| Other current liabilities | ||
| Total current liabilities | ||
| Total liabilities and group equity |
13.8Consolidated statements of cash flows
Amounts may not add up due to rounding.
Philips Group
Consolidated statements of cash flows1)
in millions of EUR
For the year ended December 31
| Cash flows from operating activities | |||
| Net income (loss) | |||
| Results of discontinued operations, net of income tax | |||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||
| Depreciation, amortization, and impairment of fixed assets | |||
| Impairment of goodwill and other non-current financial assets | |||
| Share-based compensation | |||
| Net gain on sale of assets | ( | ( | ( |
| Interest income | ( | ( | ( |
| Interest expense on debt, borrowings, and other liabilities | |||
| Income taxes | |||
| Investments in associates, net of income taxes | |||
| Decrease (increase) in working capital | ( | ( | ( |
| Decrease (increase) in receivables and other current assets | ( | ( | |
| Decrease (Increase) in inventories | ( | ( | ( |
| Increase (decrease) in accounts payable, accrued and other current liabilities | ( | ||
| Decrease (increase) in non-current receivables, other assets and other liabilities | ( | ||
| Increase (decrease) in provisions | ( | ( | |
| Other items | ( | ( | |
| Interest paid | ( | ( | ( |
| Interest received | |||
| Dividends received from investments in associates | |||
| Income taxes paid | ( | ( | ( |
| Net cash provided by (used for) operating activities | |||
| Cash flows from investing activities | |||
| Net capital expenditures | ( | ( | ( |
| Purchase of intangible assets | ( | ( | ( |
| Expenditures on development assets | ( | ( | ( |
| Capital expenditures on property, plant and equipment | ( | ( | ( |
| Proceeds from sales of property, plant and equipment | |||
| Net proceeds from (cash used for) derivatives and current financial assets | ( | ( | |
| Purchase of other non-current financial assets | ( | ( | ( |
| Proceeds from other non-current financial assets | |||
| Purchase of businesses, net of cash acquired | ( | ( | ( |
| Net proceeds from sale of interests in businesses, net of cash disposed of | |||
| Net cash provided by (used for) for investing activities | ( | ( | ( |
| Cash flows from financing activities | |||
| Proceeds from issuance (payments on) short-term debt | |||
| Principal payments on short-term portion of long-term debt | ( | ( | ( |
| Proceeds from issuance of long-term debt | |||
| Re-issuance of treasury shares | |||
| Purchase of treasury shares | ( | ( | ( |
| Dividends paid to shareholders of Koninklijke Philips N.V. | ( | ( | ( |
| Dividends paid to shareholders of non-controlling interests | ( | ( | ( |
| Net cash provided by (used for) financing activities | ( | ( | |
| Net cash provided by (used for) continuing operations | ( | ( | |
| Net cash provided by (used for) discontinued operations | ( | ( | |
| Net cash provided by (used for) continuing and discontinued operations | ( | ( | |
| Effect of changes in exchange rates on cash and cash equivalents | ( | ( | |
| Cash and cash equivalents at the beginning of the year | |||
| Cash and cash equivalents at the end of the period |
13.9Consolidated statements of changes in equity
Philips Group
Consolidated statements of changes in equity
in millions of EUR
For the year ended December 31
| reserves | other | ||||||||||
| Balance as of Jan. 1, 2018 | ( | ( | |||||||||
| Total comprehensive income (loss) | ( | ( | |||||||||
| Dividend distributed | ( | ( | ( | ( | |||||||
| Purchase of treasury shares | ( | ( | ( | ||||||||
| Re-issuance of treasury shares | ( | ( | |||||||||
| Forward contracts | ( | ( | ( | ||||||||
| Share call options | ( | ( | ( | ||||||||
| Cancellation of treasury shares | ( | ( | |||||||||
| Share-based compensation plans | |||||||||||
| Income tax share-based compensation plans | |||||||||||
| Balance as of Dec. 31, 2018 | ( | ( | ( | ||||||||
| IFRS 16 adjustment | ( | ( | ( | ||||||||
| Balance as of Jan. 1, 2019 | ( | ( | ( | ||||||||
| Total comprehensive income (loss) | ( | ||||||||||
| Dividend distributed | ( | ( | ( | ( | |||||||
| Minority Buy-out | ( | ( | ( | ( | |||||||
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | ( | ||||||||||
| Purchase of treasury shares | ( | ( | ( | ||||||||
| Re-issuance of treasury shares | ( | ||||||||||
| Forward contracts | ( | ||||||||||
| Share call options | ( | ( | ( | ||||||||
| Cancellation of treasury shares | ( | ( | |||||||||
| Share-based compensation plans | |||||||||||
| Income tax share-based compensation plans | |||||||||||
| Balance as of Dec. 31, 2019 | ( | ( | ( | ||||||||
| Total comprehensive income (loss) | ( | ||||||||||
| Dividend distributed | ( | ( | ( | ( | |||||||
| Minority Buy-out | ( | ( | |||||||||
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | ( | ||||||||||
| Purchase of treasury shares | ( | ( | ( | ||||||||
| Re-issuance of treasury shares | ( | ||||||||||
| Forward contracts | ( | ( | ( | ( | |||||||
| Share call options | ( | ( | ( | ||||||||
| Cancellation of treasury shares | ( | ( | |||||||||
| Share-based compensation plans | |||||||||||
| Income tax share-based compensation plans | |||||||||||
| Balance as of Dec. 31, 2020 | ( | ( | ( | ||||||||
Amounts may not add up due to rounding.
13.10Notes
Notes to the Consolidated financial statements of the Philips Group
1Significant accounting policies
The Consolidated financial statements in the Group financial statements section have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the European Union (EU) and with the statutory provisions of Part 9, Book 2 of the Dutch Civil Code.
All standards and interpretations issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee effective 2020 have been endorsed by the EU; consequently, the accounting policies applied by Philips also comply with IFRS as issued by the IASB. These accounting policies have been applied by group entities.
The Consolidated financial statements have been prepared under the historical cost convention, unless otherwise indicated.
The Consolidated financial statements are presented in euros, which is the presentation currency. Due to rounding, amounts may not add up precisely to the totals provided.
Use of estimates
The preparation of the Consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates inherently contain a degree of uncertainty. Actual results may differ from these estimates under different assumptions or conditions.
In the process of applying the accounting policies, management has made estimates and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the reported amounts of assets and liabilities within the next financial year, as well as to the disclosure of contingent liabilities at the date of the Consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The company evaluates these estimates and judgments on an ongoing basis and bases the estimates on historical experience, current and expected future outcomes, third-party evaluations and various other assumptions that Philips believes are reasonable under the circumstances. Existing circumstances and assumptions about future developments may change due to circumstances beyond the company’s control and are reflected in the assumptions if and when they occur. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. The company revises material estimates if changes occur in the circumstances or if there is new information or experience on which an estimate was or can be based. Reference is made to the note on COVID-19 which includes further details on the impact of the pandemic on these significant judgments and estimates.
The areas where the most significant judgments and estimates are made are goodwill, deferred tax asset recoverability, valuation of inventories, impairments, classification and measurement of financial instruments, the accounting for an arrangement containing a lease, the assessment whether a lease option to extend or cancel a lease in which the company is a lessee is reasonably certain to be exercised or not, revenue recognition, tax risks and other contingencies, assessment of control, classification of assets and liabilities held for sale and the presentation of items of profit and loss and cash flows as continuing or discontinued, as well as when determining the fair values of acquired identifiable intangible assets, contingent considerations and investments based on an assessment of future cash flows (e.g. earn out arrangements as part of acquisitions). For further discussion of these significant judgements and estimates, reference is made to the respective accounting policies and notes within these Consolidated financial statements that relate to the above topics.
Further judgment is applied when analyzing impairments of goodwill and intangible assets not yet ready for use that are performed annually and whenever a triggering event has occurred to determine whether the carrying value exceeds the recoverable amount. These analyses are generally based on estimates of discounted future cash flows. Furthermore, the company applies judgment when actuarial assumptions are established to anticipate future events that are used in calculating post-employment benefit expenses and liabilities. These factors include assumptions with respect to interest rates, rates of increase in healthcare costs, rates of future compensation increases, turnover rates and life expectancy.
Changes in presentation from the prior year
Accounting policies have been applied consistently for all periods presented in these consolidated financial statements, except for the item mentioned below. In addition, certain prior-year amounts have been reclassified to conform to the current year presentation.
Change in per share calculations
On June 26, 2020, the Extraordinary General Meeting of Shareholders approved a dividend of EUR 0.85 per common share, in shares only. The dividend was settled in July through the issuance of 18,080,198 new common shares. In accordance with IAS 33 Earnings Per Share, per share calculations have been adjusted retrospectively for all periods presented to reflect the issuance of shares for the share dividend in respect of 2019. Further reference is made to Earnings per share.
Specific choices within IFRS
In certain instances, IFRS allows alternative accounting treatments for measurement and/or disclosure. Philips has adopted one of the treatments as appropriate to the circumstances of the company. The most important of these alternative treatments are mentioned below.
Tangible and intangible fixed assets
Under IFRS, an entity shall choose either the cost model or the revaluation model as its accounting model for tangible and intangible fixed assets. In this respect, items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. The useful lives and residual values are evaluated annually. Furthermore, the company chose to apply the cost model, meaning that costs relating to product development, the development and purchase of software for internal use and other intangible assets are capitalized and subsequently amortized over the estimated useful life. Further information on Tangible and Intangible fixed assets can be found in Property, plant and equipment and in Intangible assets excluding goodwill, respectively.
Employee benefit accounting
IFRS does not specify how an entity should present its service costs related to pensions and net interest on the net defined-benefit liability (asset) in the Consolidated statements of income. With regards to these elements, the company presents service costs in Income from operations and the net interest expenses related to defined-benefit plans in Financial expense.
Further information on employee benefit accounting can be found in Post-employment benefits.
Cash flow statements
Under IFRS, an entity shall report cash flows from operating activities using either the direct method (whereby major classes of gross cash receipts and gross cash payments are disclosed) or the indirect method (whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows). In this respect, the company chose to prepare the cash flow statements using the indirect method.
Furthermore, interest cash flows are presented in cash flows from operating activities rather than in cash flows from financing or investing activities, because they enter into the determination of profit or loss. The company chose to present dividends paid to shareholders of Koninklijke Philips N.V. as a component of cash flows from financing activities, rather than to present such dividends as cash flows from operating activities, which is an allowed alternative under IFRS.
Consolidated statements of cash flows can be found in Consolidated statements of cash flows.
Policies that are more critical in nature
Revenue recognition
Revenue from the sale of goods in the normal course of business is recognized at a point in time when the performance obligation is satisfied and it is based on the amount of the transaction price that is allocated to the performance obligation. The transaction price is the amount of the consideration to which the company expects to be entitled in exchange for transferring the promised goods to the customer. The consideration expected by the company may include fixed and/or variable amounts which can be impacted by sales returns, trade discounts and volume rebates. The company adjusts the consideration for the time value of money for the contracts where no explicit interest rate is mentioned if the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds six months. Revenue for the sale of goods is recognized when control of the asset is transferred to the buyer and only when it is highly probable that a significant reversal of revenue will not occur when uncertainties related to a variable consideration are resolved.
Transfer of control varies depending on the individual terms of the contract of sale. For consumer-type products in the segment Personal Health businesses, control is transferred when the product is shipped and delivered to the customer and title and risk have passed to the customer (depending on the delivery conditions) and acceptance of the product has been obtained. Examples of delivery conditions are ‘Free on Board point of delivery’ and ‘Costs, Insurance Paid point of delivery’, where the point of delivery may be the shipping warehouse or any other point of destination as agreed in the contract with the customer and where control is transferred to the customer.
Revenues from transactions relating to distinct goods or services are accounted for separately based on their relative stand-alone selling prices. The stand-alone selling price is defined as the price that would be charged for the goods or service in a separate transaction under similar conditions to similar customers, which within the company is mainly the Country Target Price (CTP). The transaction price determined (taking into account variable considerations) is allocated to performance obligations based on relative stand-alone selling prices. These transactions mainly occur in the segments Diagnosis & Treatment businesses and Connected Care businesses and include arrangements that require subsequent installation and training activities in order to make distinct goods operable for the customer. As such, the related installation and training activities are part of equipment sales rather than separate performance obligations. Revenue is recognized when the performance obligation is satisfied, i.e. when the installation has been completed and the equipment is ready to be used by the customer in the way contractually agreed.
Revenues are recorded net of sales taxes. A variable consideration is recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Such assessment is performed on each reporting date to check whether it is constrained. For products for which a right of return exists during a defined period, revenue recognition is determined based on the historical pattern of actual returns, or in cases where such information is not available revenue recognition is postponed until the return period has lapsed. Return policies are typically based on customary return arrangements in local markets.
A provision is recognized for assurance-type product warranty at the time of revenue recognition and reflects the estimated costs of replacement and free-of-charge services that will be incurred by the company with respect to the products sold. For certain products, the customer has the option to purchase the warranty separately, which is considered a separate performance obligation on top of the assurance-type product warranty. For such warranties which provide distinct service, revenue recognition occurs on a straight-line basis over the extended warranty contract period.
In the case of loss under a sales agreement, the loss is recognized immediately.
Expenses incurred for shipping and handling of internal movements of goods are recorded as cost of sales. Shipping and handling related to sales to third parties are recorded as selling expenses. When shipping and handling are part of a project and billed to the customer, then the related expenses are recorded as cost of sales. Shipping and handling billed to customers are distinct and separate performance obligations and recognized as revenues. Expenses incurred for sales commissions that are considered incremental to the contracts are recognized immediately in the Consolidated statements of income as selling expenses as a practical expedient under IFRS 15 Revenue from Contracts with Customers.
Revenue from services is recognized over a period of time as the company transfers control of the services to the customer which is demonstrated by the customer simultaneously receiving and consuming the benefits provided by the company. The amount of revenues is measured by reference to the progress made towards complete satisfaction of the performance obligation, which in general is evenly over time. Service revenue related to repair and maintenance activities for goods sold is recognized ratably over the service period or as services are rendered.
Royalty income from brand license arrangements is recognized based on a right to access the license, which in practice means over the contract period based on a fixed amount or reliable estimate of sales made by a licensee.
Royalty income from intellectual property rights such as technology licenses or patents is recognized based on a right-to-use the license, which in practice means at a point in time based on the contractual terms and substance of the relevant agreement with a licensee. However, revenue related to intellectual property contracts with variable consideration where a constraint in the estimation is identified, is recognized over the contract period and is based on actual or reliably estimated sales made by a licensee.
The company receives payments from customers based on a billing schedule or credit period, as established in our contracts. Credit periods are determined based on standard terms, which vary according to local market conditions. Amounts posted in deferred revenue for which the goods or services have not yet been transferred to the customer and amounts that have either been received or are due, are presented as Contract liabilities in the Consolidated balance sheets.
Income taxes
Income taxes comprise current, non-current and deferred tax. Income tax is recognized in the Consolidated statements of income except to the extent that it relates to items recognized directly within equity or in other comprehensive income. Current tax is the expected taxes payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
In cases where it is concluded it is not probable that tax authorities will accept a tax treatment, the effect of the uncertainty is reflected in the recognition and measurement of tax assets and liabilities or, alternatively, a provision is made for the amount that is expected to be settled, where this can be reasonably estimated. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the company to change its judgment regarding the adequacy of existing tax assets and liabilities. Such changes to tax assets and liabilities will impact the income tax expense in the period during which such a determination is made.
Deferred tax assets and liabilities are recognized, using the consolidated balance sheets method, for the expected tax consequences of temporary differences between the carrying amounts of assets and liabilities and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill; the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries, joint ventures and associates where the reversal of the respective temporary difference can be controlled by the company and it is probable that it will not reverse in the foreseeable future. Deferred taxes are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity or on different taxable entities, but the company intends to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences to the extent that it is probable that there will be future taxable profits against which they can be utilized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
Deferred tax liabilities for withholding taxes are recognized for subsidiaries in situations where the income is to be paid out as dividend in the foreseeable future and for undistributed earnings of unconsolidated companies to the extent that these withholding taxes are not expected to be refundable or deductible. Changes in tax rates and tax laws are reflected in the period when the change was enacted or substantively enacted by the reporting date.
Any subsequent adjustment to a tax asset or liability that originated in discontinued operations and for which no specific arrangements were made at the time of divestment, due to a change in the tax base or its measurement, is allocated to discontinued operations (i.e. backwards tracing). Examples are a tax rate change or change in retained assets or liabilities directly relating to the discontinued operation. Any subsequent change to the recognition of deferred tax assets is allocated to the component in which the taxable gain is or will be recognized. The above principles are applied to the extent the ‘discontinued operations’ are sufficiently separable from continuing operations.
Further information on income tax can be found in Income taxes.
Provisions
Provisions are recognized if, as a result of a past event, the company has a present legal or constructive obligation, the amount can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money. The increase in the provision due to passage of time is recognized as interest expense. The accounting and presentation for some of the company’s provisions is as follows:
- Product warranty – A provision for assurance-type product warranty is recognized when the underlying products or services are sold. The provision is based on historical warranty data and a weighing of possible outcomes against their associated probabilities.
- Environmental provisions – Measurement of liabilities associated with environmental obligations is based on current legal and constructive requirements. Liabilities and expected insurance recoveries, if any, are recorded separately. The carrying amount of environmental liabilities is regularly reviewed and adjusted for new facts and changes in law.
- Restructuring-related provisions – The provision for restructuring mainly relates to the estimated costs of initiated restructurings, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization. When such restructurings require discontinuance and/or closure of lines of activities, the anticipated costs of closure or discontinuance are included in restructuring provisions. A liability is recognized for those costs only when the company has a detailed formal plan for the restructuring and has raised a valid expectation with those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Before a provision is established, the company recognizes any impairment loss on the assets associated with the restructuring.
- Legal provisions – In relation to legal claim provisions and settlements, the relevant balances are transferred to Other liabilities at the point when the amount and timing of cash outflows are no longer uncertain. Settlements which are agreed for amounts in excess of existing provisions are reflected as increases in Other liabilities.
Further information on provisions can be found in Provisions.
Goodwill
The measurement of goodwill at initial recognition is described in the Basis of consolidation note. Goodwill is subsequently measured at cost less accumulated impairment losses. Further information on goodwill can also be found in Goodwill.
Intangible assets other than goodwill
Acquired finite-lived intangible assets are amortized using the straight-line method over their estimated useful life. The useful lives are evaluated annually. Intangible assets are initially capitalized at cost, with the exception of intangible assets acquired as part of a business combination, which are capitalized at their acquisition date fair value.
The company expenses all research costs as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalized as an intangible asset if the product or process is technically and commercially feasible, the company has sufficient resources and the intention to complete development and can measure the attributable expenditure reliably.
The capitalized development expenditure comprises of all directly attributable costs (including the cost of materials and direct labor). Other development expenditures and expenditures on research activities are recognized in the Consolidated statements of income. Capitalized development expenditure is stated at cost less accumulated amortization and impairment losses. Amortization of capitalized development expenditure is charged to the Consolidated statements of income on a straight-line basis over the estimated useful lives of the intangible assets.
Further information on intangible assets other than goodwill can be found in Intangible assets excluding goodwill.
Discontinued operations and non-current assets held for sale
Non-current assets and disposal groups comprising assets and liabilities that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale.
Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the Consolidated balance sheets. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the Consolidated balance sheets.
A discontinued operation is a component of an entity that has either been disposed of or is classified as held for sale, and represents a separate major line of business or geographical area of operations; or is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to sell.
If a discontinued operation is sold in stages as part of a single coordinated plan until it is completely sold, then the Investment in associate that is recognized upon sale of a portion that results in Philips having significant influence in the operation (rather than control) is continued to be treated as discontinued operation provided that the held for sale criteria are met.
Non-current assets held for sale and discontinued operations are carried at the lower of carrying amount or fair value less cost of disposal. Any gain or loss from disposal, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Consolidated financial statements and related notes for all periods presented. Comparatives in the Consolidated balance sheets are not represented when a non-current asset or disposal group is classified as held for sale. Comparatives are represented for presentation of discontinued operations in the Consolidated statements of cash flows and Consolidated statements of income.
Adjustments in the current period to amounts previously presented in discontinued operations that are directly related to the disposal of a discontinued operation in a prior period, and for which no specific arrangements were made at the time of divestment, are classified separately in discontinued operations. Circumstances to which these adjustments may relate include resolution of uncertainties that arise from the terms of the disposal transaction, such as the resolution of purchase price adjustments and indemnifications, resolution of uncertainties that arise from and are directly related to the operations of the component before its disposal, such as environmental and assurance-type product warranty obligations retained by the company, and the settlement of employee benefit plan obligations provided that the settlement is directly related to the disposal transaction.
Further information on discontinued operations and non-current assets held for sale can be found in Discontinued operations and assets classified as held for sale.
Impairment
Impairment of goodwill and intangible assets not yet ready for use
Goodwill and intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require. In case of goodwill and intangible assets not yet ready for use, either internal or external sources of information are considered indicators that an asset or a CGU may be impaired. In most cases the company identified its cash-generating units for goodwill at one level below that of an operating segment. Cash flows at this level are substantially independent from other cash flows and this is the lowest level at which goodwill is monitored by the Executive Committee. An impairment loss is recognized in the Consolidated statements of income whenever and to the extent that the carrying amount of a cash-generating unit exceeds the unit’s recoverable amount, whichever is the greater, its value in use or its fair value less cost of disposal. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from the sale of an asset in an arm’s length transaction, less costs of disposal.
Further information on impairment of goodwill and intangible assets not yet ready for use can be found in Goodwill and Intangible assets excluding goodwill respectively.
Impairment of non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets
Non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset with the greater of its value in use and fair value less cost of disposal. Value in use is measured as the present value of future cash flows expected to be generated by the asset. Fair value less cost of disposal is measured as the amount obtained from a sale of an asset in an arm’s length transaction, less costs of disposal. If the carrying amount of an asset is deemed not recoverable, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the recoverable amount. The review for impairment is carried out at the level where cash flows occur that are independent of other cash flows.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if and to the extent that there has been a change in the estimates used to determine the recoverable amount. The loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Reversals of impairment are recognized in the Consolidated statements of income.
Impairment of financial assets
The company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables, debt investments carried at fair value through Other comprehensive income (FVTOCI) and amortized cost. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the company expects to receive, discounted at an approximation of the original effective interest rate.
ECLs are recognized in two stages. For credit risk exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (12-month ECLs). The company considers a financial asset to be in default when the counterparty is unlikely to pay its credit obligations to the company in full or when the financial asset is past due. For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (lifetime ECLs). When determining whether the credit risk of a financial asset has increased significantly since initial recognition, the company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the company's historical experience and informed credit assessment and including forward-looking information, such as forecast economic conditions that affect the ability of the customers to settle the receivables.
For all trade receivables, contract assets and lease receivables, the company applies the IFRS 9 simplified approach to measuring ECLs, which uses the lifetime ECL allowance. To measure the ECLs on trade receivables, contract assets and lease receivables, the company takes into account credit-risk concentration, collective debt risk based on average historical losses, specific circumstances such as serious adverse economic conditions in a specific country or region, and other forward-looking information. Trade receivables, contract assets and lease receivables are written off when there is no reasonable expectation of recovery of the asset, for example because of bankruptcy or other forms of receivership.
Further information on financial assets can be found in Other financial assets.
Other policies
Basis of consolidation
The Consolidated financial statements comprise the financial statements of Koninklijke Philips N.V. and all subsidiaries that the company controls, i.e. when it is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights results in control. To support this presumption and in cases where Philips has less than a majority of the voting or similar rights of an investee, Philips considers all relevant facts and circumstances in assessing whether it has power over an investee, including the contractual arrangement(s) with the other vote holders of the investee, rights arising from other contractual arrangements and the company’s voting rights and potential voting rights. Subsidiaries are fully consolidated from the date that control commences until the date that control ceases. All intercompany balances and transactions have been eliminated in the Consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
Loss of control
Upon loss of control, the company derecognizes the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising from the loss of control is recognized in the Consolidated statements of income. If the company retains any interest in the previous subsidiary, such interest is measured at fair value at the date the control is lost. Subsequently it is accounted for as either an equity-accounted investee (associate) or as a financial asset, depending on the level of influence retained. Further information on loss of control can be found in Discontinued operations and assets classified as held for sale.
Business combinations
Business combinations are accounted for using the acquisition method. Under the acquisition method, the identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree are recognized at the acquisition date, which is the date on which control is transferred to the company.
The company measures goodwill at the acquisition date as:
- the fair value of the consideration transferred; plus
- the recognized amount of any non-controlling interest in the acquiree; plus
- if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
- the net recognized amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the company incurs are expensed as incurred.
Any contingent consideration payable is recognized at fair value at the acquisition date and initially is presented in Long-term provisions. When the timing and amount of the consideration become more certain, it is reclassified to Accrued liabilities. If the contingent consideration that meets the definition of a financial instrument is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in the Consolidated statements of income.
Non-controlling interests are measured on the basis of their proportionate share of the acquiree’s identifiable net assets at the date of acquisition.
Further information on business combinations can be found in Acquisitions and divestments.
Acquisitions of and adjustments to non-controlling interests
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognized. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary.
Investments in associates (equity-accounted investees)
Associates are all entities over which the company has significant influence, but no control. Significant influence is presumed with a shareholding of between
The company’s share of the net income of these companies is included in Investments in associates, net of income taxes, in the Consolidated statements of income, after adjustments to align the accounting policies with those of the company, from the date that significant influence commences until the date that significant influence ceases. Dilution gains and losses arising from investments in associates are recognized in the Consolidated statements of income as part of Investments in associates, net of income taxes. When the company’s share of losses exceeds its interest in an associate, the carrying amount of that interest (including any long-term loans) is reduced to zero and recognition of further losses is discontinued except to the extent that the company has incurred legal or constructive obligations or made payments on behalf of the associate. Unrealized gains on transactions between the company and its associates are eliminated to the extent of the company’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Remeasurement differences of an equity stake resulting from gaining control over an investee that was previously recorded as an associate are recorded under Investments in associates.
Further information on investments in associates can be found in Interests in entities.
Foreign currencies
Foreign currency transactions
The financial statements of all group entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The euro (EUR) is the functional currency of the company and the presentation currency of the Group financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or the valuation in cases where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated statements of income, except when deferred in Other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.
Foreign currency differences arising from translations are recognized in the Consolidated statements of income, except for equity investments measured at fair value through OCI which are recognized in Other comprehensive income. If there is an impairment which results in foreign currency differences being recognized, these differences are reclassified from Other comprehensive income to the Consolidated statements of income.
All foreign exchange differences are presented as part of Cost of sales, with the exception of tax items and financial income and expense, which are recognized in the same line item as they relate to in the Consolidated statements of income.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency using the exchange rate at the date the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the transaction date.
Foreign operations
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to euros at the exchange rates prevailing at the reporting date. The income and expenses of foreign operations are translated to euros at the exchange rates prevailing at the dates of the transactions.
Foreign currency differences arising upon translation of foreign operations into euros are recognized in Other comprehensive income, and presented as part of Currency translation differences in Equity. However, if the operation is a non-wholly-owned subsidiary, the relevant proportionate share of the translation difference is allocated to Non-controlling interests.
When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the Currency translation differences related to the foreign operation is reclassified to the Consolidated statements of income as part of the gain or loss on disposal. When the company disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the respective proportion of the cumulative amount is reattributed to Non-controlling interests. When the company disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to the Consolidated statements of income.
Financial instruments
Non-derivative financial assets
Recognition and initial measurement
Non-derivative financial assets are recognized when the company becomes a party to the contractual provisions of the instrument. Purchases and sales of financial assets in the normal course of business are accounted for at the trade date. Dividend and interest income are recognized when earned. Gains or losses, if any, are recorded in Financial income and expense. Non-derivative financial assets are derecognized when the rights to receive cash flows from the asset have expired or the company has transferred its rights to receive cash flows from the asset.
At initial recognition, the company measures a financial asset at its fair value plus, in the case of a financial asset not measured at fair value through profit or loss (FVTPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVTPL are expensed in the Consolidated statements of income.
Classification and subsequent measurement
The company classifies its non-derivative financial assets in the following measurement categories:
- those that are measured subsequently at fair value (either through OCI (FVTOCI) or profit or loss (FVTPL);
- those that are measured at amortized cost.
In assessing the classification, the company considers the business model for managing the financial assets and the contractual terms of the cash flows.
For assets measured at fair value, gains and losses will be recorded in either the Consolidated statements of income or in Other comprehensive income (OCI). For investments in equity instruments that are not held for trading, this will depend on whether the company has made an irrevocable election at the time of initial recognition to account for the equity investment at FVTOCI. For investments in these equity instruments, the company does not subsequently reclassify between FVTOCI and FVTPL. For debt investments, assets are reclassified between FVTOCI, FVTPL and amortized cost only when its business model for managing those assets changes.
Non-derivative financial assets comprise cash and cash equivalents, receivables and other financial assets.
Cash and cash equivalents
Cash and cash equivalents include all cash balances, certain money market funds and short-term highly liquid investments with an original maturity of three months or less that are readily convertible into known amounts of cash. Further information on cash and cash equivalents can be found in Cash flow statement supplementary information.
Receivables
Receivable balances that are held to collect are subsequently measured at amortized cost and are subject to impairment as explained in the impairment section of this note. Receivables that are held to collect and sell are subsequently measured at FVTOCI and are also subject to impairment. The company derecognizes receivables on entering into factoring transactions if the company has transferred substantially all risks and rewards or if the company does not retain control over those receivables. Further information on receivables can be found in Receivables.
Other (non-)current financial assets
Other (non-)current financial assets include both debt instruments and equity instruments.
Debt instruments include those subsequently carried at amortized cost, those carried at FVTPL and those carried at FVTOCI. Classification depends on the company’s business model for managing the asset and the cash flow characteristics of the asset.
Debt instruments that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortized cost and are subject to impairment. Interest income from these financial assets is included in Financial income using the effective interest rate method. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.
Debt instruments that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVTOCI and are subject to impairment. Movements in the carrying amounts are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses, which are recognized in the Consolidated statements of income. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to the Consolidated statements of income. Interest income from these financial assets is included in Financial income using the effective interest rate method.
Debt instruments that do not meet the criteria for amortized cost or FVTOCI are measured at FVTPL. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognized in the Consolidated statements of income in the period in which it arises.
Equity investments are subsequently measured at fair value. Equity instruments that are held for trading are measured at FVTPL. For equity instruments that are not held for trading, the company makes an irrevocable election at the time of initial recognition whether to account for the equity investment at FVTPL or FVTOCI. Where management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to the Consolidated statements of income following the derecognition of the investment. Dividends from such investments continue to be recognized in the Consolidated statements of income when the company’s right to receive payments is established.
Further information on other (non-)current financial assets can be found in Other financial assets
Debt and other financial liabilities
Debt and other financial liabilities, excluding derivative financial liabilities and provisions, are initially measured at fair value and, in the case of debt and payables, net of directly attributable transaction costs. Debt and other financial liabilities are subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate.
Debt and other financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or has expired.
Further information on debt and other financial liabilities can be found in Debt.
Equity
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity. Where the company purchases the company’s equity share capital (treasury shares), the consideration paid, including any directly attributable incremental transaction costs (net of income taxes), is deducted from equity attributable to the company’s equity holders until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the company’s equity holders.
Call options on own shares are treated as equity instruments.
Dividends are recognized as a liability in the period in which they are declared and approved by shareholders. The income tax consequences of dividends are recognized when a liability to pay the dividend is recognized.
Further information on equity can be found in Equity.
Derivative financial instruments, including hedge accounting
The company uses derivative financial instruments principally to manage its foreign currency risks and, to a more limited extent, interest rate and commodity price risks. All derivative financial instruments are accounted for at the trade date and classified as current or non-current assets or liabilities based on the maturity date or the early termination date. The company measures all derivative financial instruments at fair value that is derived from the market prices of the instruments, calculated on the basis of the present value of the estimated future cash flows based on observable interest yield curves, basis spread, credit spreads and foreign exchange rates, or derived from option pricing models, as appropriate. Gains or losses arising from changes in fair value of derivatives are recognized in the Consolidated statements of income, except for derivatives that are highly effective and qualify for cash flow or net investment hedge accounting.
Changes in the fair value of foreign exchange forward contracts attributable to forward points and changes in the time value of the option contracts are deferred in the cash flow hedges reserve within equity. The deferred amounts are recognized in the Consolidated statements of income against the related hedged transaction when it occurs.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in OCI until the Consolidated statements of income are affected by the variability in cash flows of the designated hedged item. To the extent that the hedge is ineffective, changes in the fair value are recognized in the Consolidated statements of income.
The company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is established that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the company discontinues hedge accounting prospectively. When hedge accounting is discontinued because it is expected that a forecasted transaction will not occur, the company continues to carry the derivative on the Consolidated balance sheets at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in the same line item as they relate to in the Consolidated statements of income.
Foreign currency differences arising upon retranslation of financial instruments designated as a hedge of a net investment in a foreign operation are recognized directly in the currency translation differences reserve through OCI, to the extent that the hedge is effective. To the extent that the hedge is ineffective, such differences are recognized in the Consolidated statements of income.
Offsetting and master netting agreements
The company presents financial assets and financial liabilities on a gross basis as separate line items in the Consolidated balance sheets.
Master netting agreements may be entered into when the company undertakes a number of financial instrument transactions with a single counterparty. Such an agreement provides for a net settlement of all financial instruments covered by the agreement in the event of default or certain termination events associated with any of the transactions. A master netting agreement may create a right to offset that becomes enforceable and affects the realization or settlement of individual financial assets and financial liabilities only following a specified termination event. However, if this contractual right is subject to certain limitations then it does not necessarily provide a basis for offsetting, unless both of the offsetting criteria are met, i.e. there is a legally enforceable right and an intention to settle net or simultaneously.
Property, plant and equipment
The costs of property, plant and equipment comprise all directly attributable costs (including the cost of material and direct labor).
Depreciation is generally calculated using the straight-line method over the useful life of the asset. Gains and losses on the sale of property, plant and equipment are included in Other business income. Costs related to repair and maintenance activities are expensed in the period in which they are incurred unless leading to an extension of the original lifetime or capacity.
Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.
Further information on property, plant and equipment can be found in Property, plant and equipment.
Leases
The company determines whether an arrangement constitutes or contains a lease at inception, which is based on the substance of the arrangement at the inception of the lease. The arrangement constitutes or contains a lease if fulfillment is dependent on the use of a specific asset and the arrangement conveys a right to use the asset, even if that asset is not explicitly specified in the arrangement.
Company as a lessee
Leases are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the company. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:
- fixed payments (including in-substance fixed payments) less any lease incentives receivable;
- variable lease payments that are based on an index or a rate;
- amounts expected to be payable by the lessee under residual value guarantees;
- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate at the lease commencement date is used, which is based on an assessment of interest rates the company would have to pay to borrow funds, including the consideration of factors such as the nature of the asset and location, collateral, market terms and conditions, as applicable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made.
Each lease payment is allocated between the liability and finance charges. The interest element of the finance cost is charged to the Consolidated statements of income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
Right-of-use assets are measured at cost comprising the following:
- the amount of the initial measurement of lease liability;
- any lease payments made at or before the commencement date less any lease incentives received;
- any initial direct costs;
- restoration costs.
The right-of-use assets are subsequently accounted for using principles for property, plant and equipment. Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in the Consolidated statements of income. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture considered to be of low value (i.e. less than EUR 5,000).
The company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal.
The company leases various items of real estate, vehicles and other equipment. Rental contracts are typically made for fixed periods but may have extension or termination options.
The related year end disclosures pertaining to leases as lessee have been disclosed in respective notes according to the nature of the reported item. Below are the references with respect to IFRS 16 year-end disclosures as lessee:
- For disclosure on Right-of-use assets and related movement, refer to Property, plant and equipment;
- Short-term and low-value leases, are disclosed in Income from operations;
- Disclosures regarding interest expenses on lease liabilities, are disclosed in Financial income and expenses;
- For disclosure on leasing related cash outflow and the split between interest and principal payments, refer to the Consolidated statements of cash flows and Cash flow statement supplementary information;
- For disclosure on sale and leaseback transactions, refer to Details of treasury and other financial risks;
- For disclosure on lease liabilities and maturity analysis, refer to Debt;
- Other qualitative and quantitative disclosures regarding the nature of lessee’s leasing activities and future lease obligations, refer to Details of treasury and other financial risks;
Company as a lessor
When the company acts as a lessor, it determines at lease inception whether a lease is a finance lease or an operating lease. Leases in which the company does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. The company recognizes lease payments received under operating leases as income on a straight-line basis over the lease terms in the Statement of income.
The related year end disclosures pertaining to leases as lessor have been disclosed in respective notes according to the nature of the reported item. Below are the references with respect to IFRS 16 year-end disclosures as lessor:
- For disclosures on lease income and sublease income, refer to Income from operations;
- Other qualitative disclosures regarding the nature of lessor’s leasing activities and risk management, refer to Details of treasury and other financial risks.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include direct labor and fixed and variable production overheads, taking into account the stage of completion and the normal capacity of production facilities. Costs of idle facility and abnormal waste are expensed. The cost of inventories is determined using the first-in, first-out (FIFO) method. Inventory is reduced for the estimated losses due to obsolescence. This reduction is determined for groups of products based on sales in the recent past and/or expected future demand.
Further information on inventories can be found in Inventories.
Employee benefit accounting
A defined-contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined-contribution pension plans are recognized as an employee benefit expense in the Consolidated statements of income in the periods during which services are rendered by employees.
A defined-benefit plan is a post-employment benefit plan other than a defined-contribution plan. Plans for which the company has no legal or constructive obligation to pay further amounts, but to which it does pay non-fixed contributions, are also treated as a defined-benefit plan. The net pension asset or liability recognized in the Consolidated balance sheets in respect of defined-benefit post-employment plans is the fair value of plan assets less the present value of the projected defined-benefit obligation at the Consolidated balance sheets date. The defined-benefit obligation is calculated annually by qualified actuaries using the projected unit credit method. Recognized assets are limited to the present value of any reductions in future contributions or any future refunds. The net pension liability is presented as a long-term provision; no distinction is made for the short-term portion.
For the company’s major plans, a full discount rate curve of high-quality corporate bonds is used to determine the defined-benefit obligation. The curves are based on Willis Towers Watson’s rate methodology which uses data of corporate bonds rated AA or equivalent. For the other plans a single-point discount rate is used based on corporate bonds for which there is a deep market and on the plan’s maturity. Plans in countries without a deep corporate bond market use a discount rate based on the local sovereign curve and the plan’s maturity.
Pension costs in respect of defined-benefit post-employment plans primarily represent the increase of the actuarial present value of the obligation for post-employment benefits based on employee service during the year and the interest on the net recognized asset or liability in respect of employee service in previous years.
Remeasurements of the net defined-benefit asset or liability comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (excluding interest). The company recognizes all remeasurements in Other comprehensive income.
The company recognizes gains and losses on the settlement of a defined-benefit plan when the settlement occurs. The gain or loss on settlement is the difference between the present value of the defined-benefit obligation being settled, as determined on the date of settlement, and the settlement price, including any plan assets transferred and any payments made directly by the company in connection with the settlement. Past service costs arising from the introduction of a change to the benefit payable under a plan or a significant reduction of the number of employees covered by a plan (curtailment) are recognized in full in the Consolidated statements of income.
Further information on post-employment benefit accounting can be found in Post-employment benefits.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The company recognizes a liability and an expense for bonuses and incentives based on a formula that takes into consideration the profit attributable to the company’s shareholders after certain adjustments.
The company’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods, such as jubilee entitlements. That benefit is discounted to determine its present value. Remeasurements are recognized in the Consolidated statements of income in the period in which they arise.
Further information on other employee benefits can be found in Provisions in the Other provisions section.
Share-based payment
Equity-settled transactions
The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model, further details of which are given in Share-based compensation.
The grant-date fair value of equity-settled share-based payment awards granted to employees is recognized as personnel expense, with a corresponding increase in equity, over the vesting period of the award. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the company’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of income for a period represents the movement in cumulative expense recognized at the beginning and end of that period.
Service and non-market performance conditions are not taken into account when determining the grant-date fair value of awards, but the likelihood of the conditions being met is assessed as part of the company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant-date fair value. No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met.
When an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding options and shares is reflected as additional share dilution in the computation of diluted earnings per share (further details are given in Earnings per share).
Financial income and expenses
Financial income comprises interest income on funds invested (including financial assets), dividend income, net gains on the disposal of financial assets, net fair value gains on financial assets at FVTPL, net gains on the remeasurement to fair value of any pre-existing interest in an acquiree, and net gains on foreign exchange impacts that are recognized in the Consolidated statements of income.
Interest income is recognized on an accrual basis in the Consolidated statements of income, using the effective interest method. Dividend income is recognized in the Consolidated statements of income on the date that the company’s right to receive payment is established, which in the case of quoted securities is normally the ex-dividend date.
Financial expenses comprise interest expenses on borrowings, unwinding of the discount on provisions and contingent consideration, losses on disposal of financial assets, net fair value losses on financial assets at FVTPL, impairment losses recognized on financial assets (other than trade receivables), net interest expenses related to defined-benefit plans, interest on lease liabilities and net losses on foreign exchange impacts that are recognized in the Consolidated statements of income.
Further information on financial income and expenses can be found in Financial income and expenses.
Government grants
Grants from governments are recognized at their fair value where there is a reasonable assurance that the grant will be received and the company will comply with all attached conditions. Government grants relating to costs are deferred and recognized in the Consolidated statements of income as a reduction of the related costs over the period necessary to match them with the costs that they are intended to compensate. Grants related to assets are deducted from the cost of the asset and presented net in the Consolidated balance sheets.
Financial guarantees
The company recognizes a liability at the fair value of the obligation at the inception of a financial guarantee contract. The guarantee is subsequently measured at the higher of the best estimate of the obligation or the amount initially recognized less, when appropriate, cumulative amortization.
Cash flow statements
Cash flows arising from transactions in a foreign currency are translated into the company’s functional currency using the exchange rate at the date of the cash flow. Cash flows from derivative instruments that are accounted for as cash flow hedges are classified in the same category as the cash flows from the hedged items. Cash flows from other derivative instruments are classified as investing cash flows.
Segment information
Operating segments are components of the company’s business activities about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Executive Committee of the company). The Executive Committee decides how to allocate resources and assesses performance. Reportable segments comprise the operating segments Diagnosis & Treatment businesses, Connected Care businesses and Personal Health businesses. Additionally, besides these reportable segments, segment Other exists. Segment accounting policies are the same as the accounting policies applied by the company.
Earnings per Share
The company presents basic and diluted earnings per share (EPS) data for its common shares. Basic EPS is calculated by dividing the Net income (loss) attributable to shareholders by the weighted average number of common shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the Net income (loss) attributable to shareholders and the weighted average number of common shares outstanding during the period, adjusted for own shares held, for the effects of all dilutive potential common shares, which comprises forward purchase contracts, restricted shares, performance shares and share options granted to employees.
Further information on earnings per share can be found in Earnings per share.
New standards and interpretations
IFRS accounting standards adopted as from 2020
The company applies, for the first time, certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2020.
Amendment to IFRS 3: Definition of a Business
The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. This amendment had no impact on the consolidated financial statements of the company, but may impact business combinations entered into by the company in future periods.
Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform
The amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures provide a number of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. These amendments have no impact on the consolidated financial statements of the company as it does not have interest rate hedge relationships that are impacted by this.
Amendments to IAS 1 and IAS 8 Definition of Material
The amendments provide a new definition of material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of, nor is there expected to be any future impact to the company.
Conceptual Framework for Financial Reporting issued on 29 March 2018
The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. This revision had no material impact on the consolidated financial statements of the company.
Amendment to IFRS 16 Covid-19 Related Rent Concessions
On May 28, 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases. The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. This amendment had no material impact on the consolidated financial statements of the company.
IFRS accounting standards to be adopted from 2021 onwards
A number of amendments to existing standards have been published and are mandatory for the company beginning on or after January 1, 2021, or later periods, and the company has not early-adopted them. The changes to those standards are not expected to have a material impact on the company’s financial statements.
2COVID-19
In 2020 COVID-19 affected the global economy and the company’s results, balance sheet and cash flows presented in these Consolidated financial statements. A discussion on the impact of the pandemic on the company's financial performance and risks is included in Financial performance and Risk management. The impact of the pandemic on significant accounting matters is disclosed below. Other areas have also been affected, but did not have a significant impact and are therefore not separately disclosed.
Estimates and uncertainties
As a result of the uncertainties associated with the nature of the COVID-19 pandemic, and in line with existing accounting policies, the company regularly updates its significant assumptions and estimates to support the reported amounts of assets, liabilities, income and expenses. In relation to areas of judgment and estimates as disclosed in our Significant accounting policies, those which are primarily impacted by COVID-19 include impairment testing, valuation of inventories, measurement of financial instruments and the determination of fair values (for example fair values of acquired identifiable intangible assets, contingent considerations and certain investments). These significant judgments and estimates are further discussed below.
Impairment testing
Impairment testing of goodwill and intangible assets not ready for use
Goodwill and intangible assets not yet ready for use are not amortized but are tested for impairment annually and whenever impairment indicators require such testing. For the Image-Guided Therapy cash-generating unit (CGU), the Sleep & Respiratory Care (S&RC) CGU, and a number of other smaller CGUs, such indicators were identified during the year because of deterioration in the economic environment or market in which these CGUs operate. The impairment tests performed for these CGUs did not result in any impairments.
In addition, for all goodwill and intangible assets not yet ready for use an annual impairment test was performed during Q4 2020.
In determining the recoverable amounts, consideration was given to the uncertainties embedded in the discounted cash flow projections and the appropriateness of key assumptions used in light of the pandemic, which included increased uncertainties around forecasted revenues, higher volatility in applied discount rates and other factors. Further details on these impairment procedures and the results thereof are disclosed in Goodwill and Intangible assets excluding goodwill.
Impairment testing of non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets
Similar to the above, for certain non-financial assets other than goodwill, intangible assets not yet ready for use, inventories and deferred tax assets, the changes in the economic environment provided an indicator that the carrying amount of the asset may not be recoverable. Uncertainties in the market and volatility in the financial markets resulted in increased levels of judgment in both the value-in-use calculations as well as in determining the fair value less costs of disposal of such an asset. These uncertainties were reflected in updated assessments on the future use of such assets (including useful life assessments) and in updated input parameters used in underlying calculations, which included using revised expected future cash flows due to the pandemic. Further details on the results of these impairment procedures are disclosed in Intangible assets excluding goodwill.
Impairment testing of financial assets
The company recognizes an allowance for expected credit losses (ECLs) for trade receivables, contract assets, lease receivables and debt investments carried at fair value through Other comprehensive income (FVTOCI) and amortized cost. In line with the accounting policy disclosed in the Significant accounting policies, for all financial assets to which the company applies the simplified approach, an updated assessment was made on the lifetime ECL allowance, taking into the account uncertainties resulting from the pandemic. In addition, for those assets to which the company does not apply the simplified approach to measuring ECLs, an assessment was made whether a significant increase in credit risk was observed as a result of COVID-19. In those instances, the allowance was updated to also reflect lifetime ECLs.
In making these assessments, all reasonable and supportable information was considered. Examples of indicators identified included counterparties breaching their agreed payment terms and counterparties requesting extended payment terms or (partial) waivers. In addition, forward looking elements were taken into consideration such as a deterioration of the credit rating of a counterparty or changes in risks associated with specific countries or regions due to COVID-19. Albeit the methodology applied is consistent with prior periods, certain of these factors triggered by the pandemic required an updated assessment of the ECLs. Relevant financial assets were individually assessed and additional ECL allowances were accounted for in those cases where deemed necessary. The overall impact of the increase in the level of ECLs did not have a material impact on the company’s financial assets. The company further concluded that none of the agreed changes with counterparties resulted in a substantial modification of such instruments under IFRS 9 Financial instruments.
Fair values
Certain of the company’s financial instruments and other assets and liabilities are carried at fair value. The fair values included in these Consolidated financial statements reflect market participant views and market data at the measurement date under current market conditions. This implies that due to the increased volatility and uncertainty in the financial markets due to the pandemic, these fair values are subject to significant estimates, in particular for assets and liabilities for which the fair value is based on unobservable inputs (sometimes referred to as Level 3 measurements). Expectations around future cash flows, discount rates and other significant valuation inputs related to the asset or liability as at December 31, 2020 have become subject to a greater level of uncertainty. The fair values determined taking into account these revised input parameters have been reflected in the consolidated balance sheet as of December 31, 2020. There was no significant impact as a result of the pandemic on any individual assets or liabilities carried at fair value. Further reference is made to Fair value of financial assets and liabilities.
Property, plant and equipment
In addition to what has been described above in terms of impairment testing of non-financial assets, the COVID-19 pandemic triggered a significant increase in demand for our products mainly in the Connected Care businesses. As a result, the company made investments during the financial year in order to meet this demand. These investments include, amongst others, additions to existing production lines, establishing new production lines and investing in company-specific tooling used in the supply chain. Assessing the useful life of these new investments involves a significant amount of judgment, due to the volatility in the demand forecast that affects the expected period over which these assets will be used. In certain cases, this assessment has resulted in new machinery and installations being depreciated over a useful life that is less than three years, whereas the normal useful life of these assets would be between
Employee benefit accounting
COVID-19 also had an impact on the company’s long-term employee benefits, including defined-benefit plans. Volatility in the financial markets following the COVID-19 outbreak resulted in increased judgment being required in setting key parameters used in determining these benefits, including discount rates, mortality rates, retention rates and other assumptions supporting the actuarial calculations. In those situations, we established the most appropriate parameters with the help of actuaries and taking into consideration relevant economic conditions. For our funded defined-benefit plans, increased fluctuations in the fair values of the plan assets during the financial year ended December 31, 2020 also caused further volatility in the net obligation. Neither of these impacts were significant for the balances as of December 31, 2020.
Provisions other than employee benefits
As described in the Significant accounting policies, the accounting for provisions requires significant judgment around the amount and timing of the outflow of economic benefits required to settle the obligation. As a result of the pandemic, volatility increased in our supplier commitments and customer demand for many of our businesses, requiring the company to assess its related contracts for onerous elements. In doing so, the company applied assumptions and estimates in relation to future demand forecasts, expected costs of termination and the likely outcomes of ongoing negotiations with suppliers. This has resulted in the recognition of an onerous contract provision, for which reference is made to the disclosure on Other provisions included in Provisions. No other provisions were materially impacted by COVID-19.
Inventories
The company’s inventories are stated at the lower of cost or net realizable value. In determining the appropriate level of provision for obsolescence, changes in the aging of inventory items in certain businesses and markets due to COVID-19 were considered throughout the year. In addition, current and potential excess stock levels were analyzed, incorporating the impact COVID-19 had on demand in 2020 as well as revised expectations of future demand for these items. No material change in the provision for obsolescence was identified as a result of these procedures.
Due to the changes in demand and therefore production levels within several of our businesses, the company evaluated its standard cost prices, particularly in relation to the absorption of overhead costs and additional costs. The company assessed, based on currently available information, that the change in demand and production levels is not expected to be a sustained change and therefore the standard cost prices were not updated relating to those elements.
Taxes
In response to COVID-19, many governments have changed tax regulations aimed at deferring tax filings and payments, providing tax relief and offering financial assistance. Apart from applied payment deferrals on social contribution payments, the company has no material payment deferrals. In determining the recoverability of deferred tax assets, the company took into account the uncertainties caused by the COVID-19 pandemic in its projections on the results of future operations that will generate taxable income, which did not result in a significant impact.
Treasury and other financial risks
Philips is exposed to several types of financial risks. In terms of liquidity risk, the company has taken a number of different measures to manage this risk. In addition to the successful placement of EUR
3Information by segment and main country
Philips Group
Information on income statements
in millions of EUR
| 2020 | ||||
| Diagnosis & Treatment4) | ( | |||
| Connected Care | ( | |||
| Personal Health | ( | |||
| Other | ( | ( | ||
| Inter-segment eliminations | ( | |||
| Philips Group | ( | |||
| 2019 | ||||
| Diagnosis & Treatment | ( | |||
| Connected Care | ( | |||
| Personal Health | ( | |||
| Other | ( | ( | ||
| Inter-segment eliminations | ( | |||
| Philips Group | ( | |||
| 2018 | ||||
| Diagnosis & Treatment | ( | |||
| Connected Care | ( | |||
| Personal Health | ( | |||
| Other | ( | ( | ||
| Inter-segment eliminations | ( | |||
| Philips Group | ( | |||
As required by IFRS 8 Operating Segments, Philips operating segments are Diagnosis & Treatment businesses, Connected Care businesses and Personal Health businesses, each being responsible for the management of its business worldwide.
Philips focuses on improving people’s lives through meaningful innovation across the health continuum – from healthy living and prevention to diagnosis, treatment and home care. The Diagnosis & Treatment unites the businesses related to the promise of precision diagnosis and disease pathway selection, and the businesses related to image-guided, minimally invasive treatments. The Connected Care businesses focuses on patient care solutions, advanced analytics and patient and workflow optimization inside and outside the hospital, and aims to unlock synergies from integrating and optimizing patient care pathways, and leveraging provider-payer-patient business models. The Personal Health businesses focuses on healthy living and preventative care.
The Executive Committee of Philips is deemed to be the chief operating decision maker (CODM) for IFRS 8 segment reporting purposes. The key segmental performance measure is Adjusted EBITA*), which Management believes is the most relevant measure to evaluate the results of the segments.
The term Adjusted EBITA*) is used to evaluate the performance of Philips and its segments. EBITA*) represents Income from operations excluding amortization and impairment of acquired intangible assets and impairment of goodwill. Adjusted EBITA*) represents EBITA *)excluding gains or losses from restructuring costs, acquisition-related charges and other items.
Adjusted EBITA*) is not a recognized measure of financial performance under IFRS. Below is a reconciliation of Adjusted EBITA*) to the most directly comparable IFRS measure, Net income, for the years indicated. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation from net income to Adjusted EBITA1)
In millions of EUR
| 2020 | |||||
| Net Income | |||||
| Discontinued operations, net of income taxes | |||||
| Income tax expense | |||||
| Investments in associates, net of income taxes | |||||
| Financial expenses | |||||
| Financial income | ( | ||||
| Income from operations | ( | ||||
| Amortization of intangible assets | |||||
| Impairment of goodwill | |||||
| EBITA1) | ( | ||||
| Restructuring and acquisition-related charges | |||||
| Other items | |||||
| Adjusted EBITA1) | ( | ||||
| 2019 | |||||
| Net Income | |||||
| Discontinued operations, net of income taxes | |||||
| Income tax expense | |||||
| Investments in associates, net of income taxes | ( | ||||
| Financial expenses | |||||
| Financial income | ( | ||||
| Income from operations | ( | ||||
| Amortization of intangible assets | |||||
| Impairment of goodwill | |||||
| EBITA1) | ( | ||||
| Restructuring and acquisition-related charges | |||||
| Other items | ( | ||||
| Adjusted EBITA1) | ( | ||||
| 2018 | |||||
| Net Income | |||||
| Discontinued operations, net of income taxes | |||||
| Income tax expense | |||||
| Investments in associates, net of income taxes | |||||
| Financial expenses | |||||
| Financial income | ( | ||||
| Income from operations | ( | ||||
| Amortization of intangible assets | |||||
| EBITA1) | ( | ||||
| Restructuring and acquisition-related charges | |||||
| Other items | ( | ||||
| Adjusted EBITA1) | ( |
Transactions between the segments are mainly related to components and parts included in the product portfolio of the other segments. The pricing of such transactions was at cost or determined on an arm’s length basis. Philips has no single external customer that represents
Philips Group
Main countries
in millions of EUR
| 2020 | ||
| Netherlands | ||
| United States | ||
| China | ||
| Germany | ||
| Japan | ||
| United Kingdom | ||
| France | ||
| Other countries | ||
| Total main countries | ||
| 2019 | ||
| Netherlands | ||
| United States | ||
| China | ||
| Japan | ||
| Germany | ||
| France | ||
| United Kingdom | ||
| Other countries | ||
| Total main countries | ||
| 2018 | ||
| Netherlands | ||
| United States | ||
| China | ||
| Japan | ||
| Germany | ||
| France | ||
| South Korea | ||
| Other countries | ||
| Total main countries |
4Discontinued operations and assets classified as held for sale
In 2020 and 2019 Discontinued operations consist primarily of net costs related to divestments formerly reported as discontinued operations. The below table summarizes the results of discontinued operations, net of income taxes, reported in the consolidated statements of income.
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
| Signify | ( | ||
| Combined Lumileds and Automotive businesses | ( | ||
| Other | ( | ( | ( |
| Discontinued operations, net of income taxes | ( | ( | ( |
Discontinued operations: Signify
In 2020 and 2019 there were no results from discontinued operations for Signify.
As from December 31, 2018, Philips was no longer able to exercise significant influence with respect to Signify. The results related to Philips' retained interest in Signify until the moment the company lost significant influence were recognized in discontinued operations. These results related to an overall EUR
As of December 31, 2018 the remaining shareholding in Signify was part of continuing operations. For further details, please refer to Other financial assets.
The following table summarizes the results of Signify included in the Consolidated statements of income as discontinued operations.
Results of Signify
in millions of EUR
| Costs and expenses | ( |
| Fair value adjustment retained interest | ( |
| Dividend income | |
| Income before tax | ( |
| Income tax expense | |
| Results from discontinued operations | ( |
Discontinued operations: Other
Certain costs related to other divestments, which were previously reported as discontinued operations, resulted in a net loss of EUR
Discontinued operations cash flows
The following table presents the net cash provided by (used for) discontinued operations reported in the Consolidated statements of cash flows.
Discontinued operations cash flows
in millions of EUR
| Cash flows from operating activities | ( | ( | ( |
| Cash flows from investing activities | ( | ||
| Total discontinued operations cash flows | ( | ( |
In 2020, net cash used for discontinued operations mainly related to advance income tax payments amounting to EUR
In 2019, net cash used for discontinued operations consisted primarily of a divestment formerly reported as discontinued operations.
In 2018, discontinued operations cash flows mainly include EUR
Assets classified as held for sale
As of December 31, 2020 assets held for sale consisted of property, plant and equipment for an amount of EUR
As of December 31, 2019, assets held for sale consisted of property, plant and equipment for an amount of EUR
5Acquisitions and divestments
2020
Acquisitions
Philips completed three acquisitions in 2020. The acquisitions involved an aggregated net cash outflow of EUR
Opening balance positions are provisional and subject to final purchase price adjustments, which will be finalized in 2021. The primary provisional accounts subject to change are mainly related to the valuation of the intangible assets and goodwill, as the valuation studies necessary to determine the fair market value of the intangible assets and goodwill assumed are preliminary.
Intact Vascular, Inc. (Intact Vascular) was the most notable acquisition and is discussed below. The remaining two acquisitions involved an aggregated net cash outflow of EUR
Intact Vascular
On September 4, 2020, Philips acquired all shares of Intact Vascular, headquartered in Wayne, Pennsylvania. Intact Vascular is a developer of medical devices for minimally invasive peripheral vascular surgery. Philips acquired Intact Vascular to expand its portfolio of minimally invasive therapy options for Peripheral Artery Disease with the Tack Endovascular System, an implant that restores blood flow in small limb vessels, promotes healing and preserves limbs. The Company has purchased shares for an amount of EUR
As of the acquisition date, Intact Vascular forms part of the Image-guided therapy business portfolio of the Diagnosis & Treatment segment.
In 2020, acquisition-related costs of EUR
The preliminary condensed opening balance sheet of Intact Vascular was as follows:
Intact Vascular
Opening Balance sheet
in millions of EUR
| at acquisition date | |
| Assets | |
| Intangible assets excluding goodwill | |
| Deferred tax assets | |
| Inventories | |
| Receivables and other current assets | |
| Cash | |
| Total Assets | |
| Liabilities | |
| Accounts payable and other payables | ( |
| Deferred tax liabilities | ( |
| Total Liabilities | ( |
| Total identifiable net assets at fair value | |
| Goodwill arising on acquisition | |
| Total purchase on acquisition | |
| Of which: | |
| Purchase consideration transferred | ( |
| Provision for contingent consideration | ( |
Goodwill recognized in the amount of EUR
The provision for contingent consideration represents a Long-term provision of EUR
Other intangible assets were comprised of the following:
Intact Vascular
Other intangible assets
in millions of EUR unless otherwise stated
| Technology | ||
| Other | ||
| Total other intangible assets |
The fair value of Technology is determined using the multi-period excess earnings method, which is a valuation technique that estimates the fair value of an asset based on market participants' expectations of the cash flows associated with that asset over its remaining useful life. The fair value of Technology is based on an estimate of positive future cash flows associated with incremental profits related to excess earnings, discounted at a rate of
The opening balance position represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the acquisition. The final determination of the fair market values will be completed in 2021. As of December 31, 2020, the valuation studies necessary to determine the fair market value of the intangible assets and goodwill are preliminary.
Intact Vascular is an early stage revenue acquisition. As of the acquisition date, Intact Vascular contribution to sales and net income was not material. The same applies to the combined entity for the reporting period as though the acquisition date had been as of the beginning of the reporting period.
Divestments
Philips did not complete any divestments in 2020.
Future ownership of Domestic Appliances business
On January 28, 2020, Philips announced that it will review options for future ownership of its Domestic Appliances business belonging to Personal Health. Philips started the process of creating a separate legal structure for this business within the Philips Group, which is expected to be completed in the course of 2021. Under the IFRS 5 assessment Philips has determined that Domestic Appliances business does not qualify as held for sale as of December 31, 2020. Philips concluded that the business as per December 31, 2020 is not available for immediate sale in its present condition to a third party. The Domestic Appliances business had EUR
2019
Acquisitions
Philips completed three acquisitions in 2019, with the Healthcare Information Systems business of Carestream Health being the most notable. The acquisitions involved an aggregated net cash outflow of EUR
Divestments
Philips completed two divestments in 2019 which resulted in an aggregated cash consideration of EUR
6Interests in entities
In this section we discuss the nature of the company’s interests in its consolidated entities and associates, and the effects of those interests on the company’s financial position and financial performance.
Group companies
Below is a list of material subsidiaries as per December 31, 2020 representing greater than
Philips Group
Interests in group companies
in alphabetical order by country
2020
| Legal entity name | Principal country of business |
Information related to non-controlling interests
As of December 31, 2020,
Investments in associates
Philips has investments in a number of associates. None of them are regarded as individually material. During 2020, Philips purchased 6 investments in associates, which involved an aggregate amount of EUR
Involvement with unconsolidated structured entities
Philips founded three Philips Medical Capital (PMC) entities, in the United States, France and Germany, in which Philips holds a minority interest. Philips Medical Capital, LLC in the United States is the most significant entity. PMC entities provide healthcare equipment financing and leasing services to Philips customers for diagnostic imaging equipment, patient monitoring equipment, and clinical IT systems.
The company concluded that it does not control, and therefore should not consolidate the PMC entities. In the United States, PMC operates as a subsidiary of De Lage Landen Financial Services, Inc. The same structure and treatment is applied to the PMC entities in the other countries, with other majority shareholders. Operating agreements are in place for all PMC entities, whereby acceptance of sales and financing transactions resides with the respective majority shareholder. After acceptance of a transaction by PMC, Philips transfers control and does not retain any obligations towards PMC or its customers, from the sales contracts.
At December 31, 2020, Philips’ shareholding in Philips Medical Capital, LLC had a carrying value of EUR
The company does not have any material exposures to losses from interests in unconsolidated structured entities other than the invested amounts.
7Income from operations
For information related to Sales on a segment and geographical basis, see Information by segment and main country.
Philips Group
Sales and costs by nature
in millions of EUR
| Sales | |||
| Costs of materials used | ( | ( | ( |
| Employee benefit expenses | ( | ( | ( |
| Depreciation and amortization1) | ( | ( | ( |
| Shipping and handling | ( | ( | ( |
| Advertising and promotion | ( | ( | ( |
| Lease expense2)3)3) | ( | ( | ( |
| Other operational costs4) | ( | ( | ( |
| Other business income (expenses) | ( | ( | |
| Income from operations |
Sales composition and disaggregation
Philips Group
Sales composition
in millions of EUR
| Goods | |||
| Services | |||
| Royalties | |||
| Total sales from contracts with customers | |||
| Other sources1) | |||
| Sales |
At December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations from a sale of goods and services was EUR
Philips Group
Disaggregation of Sales per segment
in millions of EUR
| Diagnosis & Treatment | |||||
| Connected Care | |||||
| Personal Health | |||||
| Other | |||||
| Philips Group |
Philips Group
Disaggregation of Sales per segment
in millions of EUR
| Diagnosis & Treatment | |||||||
| Connected Care | |||||||
| Personal Health | |||||||
| Other | |||||||
| Philips Group |
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
| Western Europe | |||||
| North America | |||||
| Other mature geographies | |||||
| Total mature geographies | |||||
| Growth geographies | |||||
| Sales |
Philips Group
Disaggregation of Sales per geographical cluster
in millions of EUR
| Western Europe | |||||||
| North America | |||||||
| Other mature geographies | |||||||
| Total mature geographies | |||||||
| Growth geographies | |||||||
| Sales |
Costs of materials used
Cost of materials used represents the inventory recognized in cost of sales.
Employee benefit expenses
Philips Group
Employee benefit expenses
in millions of EUR
| Salaries and wages1) | |||
| Post-employment benefits costs | |||
| Other social security and similar charges: | |||
| Required by law | |||
| Voluntary | |||
| Employee benefit expenses |
The employee benefit expenses relate to employees who are working on the payroll of Philips, both with permanent and temporary contracts.
For further information on post-employment benefit costs, see Post-employment benefits.
For details on the remuneration of the members of the Board of Management and the Supervisory Board, see Information on remuneration.
Employees
The average number of employees by category is summarized as follows:
Philips Group
Employees
in FTEs
| Production | |||
| Research & development | |||
| Other | |||
| Employees | |||
| 3rd party workers | |||
| Philips Group |
Employees consist of those persons working on the payroll of Philips and whose costs are reflected in the Employee benefit expenses table. 3rd party workers consist of personnel hired on a per-period basis, via external companies.
Philips Group
Employees per geographical location
in FTEs
| Netherlands | |||
| Other countries | |||
| Philips Group |
Depreciation and amortization
Depreciation of property, plant and equipment and amortization of intangible assets, including impairments, are as follows:
Philips Group
Depreciation and amortization1)
in millions of EUR
| Depreciation of property, plant and equipment | |||
| Amortization of software | |||
| Amortization of other intangible assets | |||
| Amortization of development costs | |||
| Depreciation and amortization |
Depreciation of property, plant and equipment is primarily included in cost of sales. Amortization of the categories of other intangible assets are reported in selling expenses for brand names and customer relationships and are reported in cost of sales for technology based and other intangible assets. Amortization of development cost is included in research and development expenses.
Shipping and handling
Shipping and handling costs are included in cost of sales and selling expenses in Consolidated statements of income. Further information on when costs are to be reported to cost of sales or selling expenses can be found in Significant accounting policies.
Advertising and promotion
Advertising and promotion costs are included in selling expenses in Consolidated statements of income.
Audit fees
The table below shows the fees attributable to the fiscal years 2018, 2019 and 2020 for services rendered by the respective Group auditors.
Philips Group
Agreed fees
in millions of EUR
| Audit fees | |||||||||
| consolidated financial statements | |||||||||
| statutory financial statements | |||||||||
| Audit-related fees2) | |||||||||
| divestment | |||||||||
| sustainability assurance | |||||||||
| other | |||||||||
| Fees |
Other business income (expenses)
Other business income (expenses) consists of the following:
Philips Group
Other business income (expenses)
in millions of EUR
| Result on disposal of businesses: | |||
| income | |||
| expense | ( | ||
| Result on disposal of fixed assets: | |||
| income | |||
| expense | ( | ||
| Result on other remaining businesses: | |||
| income | |||
| expense | ( | ( | ( |
| Impairment of goodwill | ( | ( | |
| Other business income (expense) | ( | ( | |
| Total other business income | |||
| Total other business expense | ( | ( | ( |
The result on disposal of businesses was mainly due to divestment of non-strategic businesses. For more information, please refer to Acquisitions and divestments.
The result on disposal of fixed assets was mainly due to the sale of real estate assets.
The result on other remaining businesses mainly relates to revaluation of contingent consideration, non-core revenue and various legal matters. In 2020 revisions to EPD's forecast due to delays in commercialization caused by the need to do more work on the maturity of the technology resulted in a EUR
Impairment of goodwill is disclosed in detail in the goodwill section, please refer to Goodwill.
8Financial income and expenses
Philips Group
Financial income and expenses
in millions of EUR
| Interest income | |||
| Interest income from loans and receivables | |||
| Interest income from cash and cash equivalents | |||
| Dividend income from financial assets | |||
| Net gains from disposal of financial assets | |||
| Net change in fair value of financial assets at fair value through profit or loss | |||
| Other financial income | |||
| Financial income | |||
| Interest expense | ( | ( | ( |
| Interest on debt and borrowings | ( | ( | ( |
| Finance charges under lease contract | ( | ( | ( |
| Interest expenses - pensions | ( | ( | ( |
| Provision-related accretion and interest | ( | ( | ( |
| Net foreign exchange losses | ( | ( | |
| Net change in fair value of financial assets at fair value through profit or loss | ( | ||
| Other financial expenses | ( | ( | ( |
| Financial expense | ( | ( | ( |
| Financial income and expenses | ( | ( | ( |
In 2020, Financial income and expenses decreased by EUR
In 2019, Financial income and expenses were EUR
9Income taxes
The income tax expense of continuing operations amounted to EUR
The components of income before taxes and income tax expense are as follows:
Philips Group
Income tax expense
in millions of EUR
| Income before taxes of continuing operations1) | |||
| Current tax (expense) benefit | ( | ( | ( |
| Deferred tax (expense) benefit | ( | ||
| Income tax expense of continuing operations | ( | ( | ( |
Income tax expense of continuing operations excludes the tax expense of the discontinued operations of EUR
The components of income tax expense of continuing operations are as follows:
Philips Group
Current income tax expense
in millions of EUR
| Current year tax (expense) benefit | ( | ( | ( |
| Prior year tax (expense) benefit | ( | ||
| Current tax (expense) | ( | ( | ( |
Philips Group
Deferred income tax expense
In millions of EUR
| Changes to recognition of tax loss and credit carry forwards | ( | ||
| Changes to recognition of temporary differences | ( | ||
| Prior year tax (expense) benefit | ( | ( | |
| Tax rate changes | ( | ||
| Origination and reversal of temporary differences, tax losses and tax credits | ( | ||
| Deferred tax (expense) benefit | ( |
Philips’ operations are subject to income taxes in various foreign jurisdictions. The statutory income tax rate varies per country, which results in a difference between the weighted average statutory income tax rate and the Netherlands’ statutory income tax rate of
A reconciliation of the weighted average statutory income tax rate to the effective income tax rate of continuing operations is as follows:
Philips Group
Effective income tax rate
in %
| Weighted average statutory income tax rate in % | |||
| Recognition of previously unrecognized tax loss and credit carryforwards | ( | ( | ( |
| Unrecognized tax loss and credit carryforwards | |||
| Changes to recognition of temporary differences | ( | ( | |
| Non-taxable income and tax incentives | ( | ( | ( |
| Non-deductible expenses | |||
| Withholding and other taxes | |||
| Tax rate changes | ( | ( | |
| Prior year tax | ( | ( | |
| Tax expense (benefit) due to change in uncertain tax treatments | ( | ( | |
| Others, net | ( | ( | |
| Effective income tax rate |
The effective income tax rate is lower than the weighted average statutory income tax rate in 2020 mainly due to recurring favorable tax incentives relating to R&D investments and export activities, and one-off benefits from a decrease in tax rate and non-taxable results from participations, presented under Withholding and other taxes and Non-taxable income and tax incentives respectively.
The decrease in effective income tax rate compared to 2019 is mainly due to these one-off benefits. This effect is partly offset by lower non-cash benefits from business integration compared to 2019.
Deferred tax assets and liabilities
Deferred tax assets are recognized for temporary differences, unused tax losses, and unused tax credits to the extent that realization of the related tax benefits is probable. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the countries where the deferred tax assets originated and during the periods when the deferred tax assets become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Net deferred tax assets relate to the following underlying assets and liabilities and tax loss carryforwards (including tax credit carryforwards) and their movements during the years 2020 and 2019 respectively are presented in the tables below.
The net deferred tax assets of EUR
At December 31, 2020 the temporary differences associated with investments, including potential income tax consequences on dividends, for which no deferred tax liabilities are recognized, aggregate to EUR
Philips Group
Deferred tax assets and liabilities
in millions of EUR
| Intangible assets | ( | ( | ||||
| Property, plant and equipment | ( | ( | ( | |||
| Inventories | ( | ( | ||||
| Other assets | ( | |||||
| Pensions and other employee benefits | ( | ( | ||||
| Other liabilities | ( | ( | ||||
| Deferred tax assets on tax loss carryforwards | ( | ( | ||||
| Set-off deferred tax positions | ( | |||||
| Net deferred tax assets | ( | ( |
Philips Group
Deferred tax assets and liabilities
in millions of EUR
| Intangible assets | ( | ( | ( | |||
| Property, plant and equipment | ( | |||||
| Inventories | ( | ( | ||||
| Other assets | ( | ( | ||||
| Pensions and other employee benefits | ( | ( | ||||
| Other liabilities | ( | ( | ||||
| Deferred tax assets on tax loss carryforwards | ( | |||||
| Set-off deferred tax positions | ( | |||||
| Net deferred tax assets | ( | ( |
The company has available tax loss and credit carryforwards, which expire as follows:
Philips Group
Expiry years of net operating loss and credit carryforwards
in millions of EUR
| Within 1 year | ||||
| 1 to 2 years | ||||
| 2 to 3 years | ||||
| 3 to 4 years | ||||
| 4 to 5 years | ||||
| Later | ||||
| Unlimited | ||||
| Total |
At December 31, 2020, the amount of deductible temporary differences for which no deferred tax asset has been recognized in the balance sheet was EUR
Tax risks
Philips is exposed to tax risks and uncertainty over tax treatments. For particular tax treatments that are not expected to be accepted by tax authorities, Philips either recognizes a liability or reflects the uncertainty in the recognition and measurement of its current and deferred tax assets and tax attributes. For the measurement of the uncertainty, Philips uses the most likely amount or the expected value of the tax treatment. The expected liabilities resulting from the uncertain tax treatments are included in non-current tax liabilities (2020: EUR
Transfer pricing risks
Philips has issued transfer pricing directives, which are in accordance with international guidelines such as those of the Organization of Economic Co-operation and Development. In order to reduce the transfer pricing uncertainties, monitoring procedures are carried out by Group Tax to safeguard the correct implementation of the transfer pricing directives. However, tax disputes can arise due to inconsistent transfer pricing regimes and different views on "at arm's length" pricing.
Tax risks on general and specific service agreements and licensing agreements
Due to the centralization of certain activities (such as research and development, IT and group functions), costs are also centralized. As a consequence, these costs and/or revenues must be allocated to the beneficiaries, i.e. the various Philips entities. For that purpose, service contracts such as intra-group service agreements and licensing agreements are signed with a large number of group entities. Tax authorities review these intra-group service and licensing agreements, and may reject the implemented intra-group charges. Furthermore, buy in/out situations in the case of (de)mergers could affect the cost allocation resulting from the intragroup service agreements between countries. The same applies to the specific service agreements.
Tax risks due to disentanglements and acquisitions
When a subsidiary of Philips is disentangled, or a new company is acquired, tax risks may arise. Philips creates merger and acquisition (M&A) teams for these disentanglements or acquisitions. In addition to representatives from the involved business, these teams consist of specialists from various group functions and are formed, among other things, to identify tax risks and to reduce potential tax claims.
Tax risks due to permanent establishments
A permanent establishment may arise when a Philips entity has activities in another country, tax claims could arise in both countries on the same income.
11Property, plant and equipment
Philips Group
Property, plant and equipment
in millions of EUR
| owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | |
| Balance as of January 1, 2020 | ||||||||||
| Cost | ||||||||||
| Accumulated depreciation | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Book value | ||||||||||
| Change in book value: | ||||||||||
| Capital expenditures/additions | ||||||||||
| Assets available for use | ( | ( | ( | |||||||
| Depreciation | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Impairments | ( | ( | ( | ( | ( | ( | ( | |||
| Reclassifications | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Translations differences and other | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Total changes | ( | ( | ( | ( | ( | |||||
| Balance as of December 31, 2020 | ||||||||||
| Cost | ||||||||||
| Accumulated depreciation | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Book value |
Philips Group
Property, plant and equipment
in millions of EUR
| owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | owned | right-of-use | |
| Balance as of January 1, 2019 | ||||||||||
| Cost | ||||||||||
| Accumulated depreciation | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Book value | ||||||||||
| Change in book value: | ||||||||||
| Capital expenditures | ||||||||||
| Assets available for use | ( | ( | ( | |||||||
| Acquisitions | ||||||||||
| Depreciation | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Impairments | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Reclassifications | ( | ( | ( | ( | ||||||
| Translations differences and other | ( | ( | ( | |||||||
| Total changes | ( | ( | ||||||||
| Balance as of December 31, 2019 | ||||||||||
| Cost | 4,278 | |||||||||
| Accumulated depreciation | ( | ( | ( | ( | ( | ( | ( | ( | ||
| Book value |
Land with a book value of EUR
The expected useful lives of property, plant and equipment are as follows:
Philips Group
Useful lives of property, plant and equipment
in years
| Buildings | from |
| Machinery and installations | from |
| Other equipment | from |
12Goodwill
The changes in 2019 and 2020 were as follows:
Philips Group
Goodwill
in millions EUR
| Balance as of January 1: | ||
| Cost | ||
| Impairments | ( | ( |
| Book value | ||
| Changes in book value: | ||
| Acquisitions | ||
| Impairments | ( | ( |
| Divestments and transfers to assets classified as held for sale | ( | |
| Translation differences and other | ( | |
| Balance as of December 31: | ||
| Cost | ||
| Impairments | ( | ( |
| Book value |
In 2020, goodwill decreased by EUR
Goodwill increased by EUR
Goodwill reallocations in 2020 and 2019
In Q4 2020, the PHM CGU was split, resulting in a separate CGU for the Aging and Caregiving (ACG) business in anticipation of its future divestment. After the PHM impairment, remaining goodwill was allocated to the ACG CGU and remaining PHM CGU based on relative fair value. The goodwill allocated to the remaining PHM CGU is immaterial. An additional CGU change in 2020 resulted in a goodwill reallocation across certain CGUs, none of which had a significant impact on headroom or led to goodwill impairments.
In 2019 there were several changes to the CGU structure following the reorganization announced in January 2019 in order to align business with customer needs. This resulted in goodwill reallocations across CGUs, none of which had a significant impact on headroom or lead to goodwill impairments.
In addition, there were also certain CGU movements and/or combinations within businesses that did not result in a reallocation of goodwill, but resulted in changes to the business structure. This did not have a significant impact on headroom or lead to goodwill impairments. In Q4 2019 CGU PIC/VH and Aging and Caregiving combined into one Population Health Management (PHM) CGU. Unrelated to this combination, prior to this in the third quarter of 2019, the then PIC/VH CGU recognized a goodwill impairment, further explained below.
Impairments
In the fourth quarter of 2020, the PHM CGU was split, resulting in a separate CGU for the ACG business in anticipation of its future divestment. The impairment test indicated that the pre-split PHM’s carrying balance of EUR
In accordance with IFRS, the fair value less cost of disposal methodology was the basis used to estimate recoverable amount for these CGUs, as at the date of the impairment tests described above, the fair value less cost of disposal was higher than the value-in-use for these CGUs. The decline in the value-in-use as compared to the fair value less cost of disposal is mainly due to revisions to the financial forecast of our Personal Emergency Response System business as a result of lower demand. The fair value, determined by Management, reflects the current operating environment and business outlook, including COVID-19 uncertainties, for the PHM and ACG CGU. Refer to the ‘Key assumptions- general’ for further detail on the fair value methodology.
Remaining ACG goodwill post-reallocation and impairment charges totaled EUR
During the third quarter of 2019, it was determined that the PIC/VH CGU within the segment Connected Care would miss its forecast mainly due to a deterioration in EBITA*) driven by a lower sales outlook in the former Wellcentive business within the CGU. The business offers services and solutions leveraging data, analytics and actionable workflow products for solutions to improve clinical and financial results. The value of the CGU, determined based on the value in use methodology, presented a recoverable amount of EUR
During December 2019, it was determined that the Neuro CGU within the segment D&T would be shut down. The Neuro business provided an integrated neurology solution comprising full head HD EEG with diagnostic imaging to map brain activity and anatomy for a wide range of neuro disorders, and uses machine learning to improve diagnosis of various neuro disorders. The value of the CGU based on the value in use test presented a recoverable amount of nil, while the carrying amount of goodwill totaled EUR
Goodwill impairment testing
For impairment testing, goodwill is allocated to cash generating units (typically one level below segment level, i.e. at the business level), which represent the lowest level at which the goodwill is monitored internally for management purposes.
Goodwill allocated to the cash generating units Image-Guided Therapy, Monitoring & Analytics and Sleep & Respiratory Care is considered to be significant in comparison to the total book value of goodwill for the Group at December 31, 2020. The amounts associated as of December 31, 2020 are presented below:
Philips Group
Goodwill allocated to the cash-generating units
in millions of EUR
| Image-Guided Therapy | ||
| Monitoring & Analytics | ||
| Sleep & Respiratory Care | ||
| Other (units carrying a non-significant goodwill balance) | ||
| Book value |
Unless otherwise noted, the basis of the recoverable amount used in the annual impairment tests for the units disclosed further in this note is the value in use.
The fair value less cost to dispose methodology was used as a basis for the recoverable amount in the annual impairment test when greater than the value-in-use test. Refer to the ‘key assumptions- general’ section for further detail on the methodology.
As a result of the uncertainty associated with the nature of the COVID-19 pandemic, the company includes various scenarios in the business forecasting process and the most reasonable and supportable assumptions that represent management’s best estimate is used as basis for the value-in-use test. While determining assumptions on COVID-19 recovery, management considered external factors including COVID-19 spread by country, specific dynamics for each CGU, other macroeconomic conditions as well as Philips specific assumptions, including expected customer capex spend and business market growth. Philips considered multiple scenarios for each market that included high, mid and low COVID recovery scenarios. The high recovery scenario suggests a more rapid recovery through the first half of the initial forecast period while the low scenario suggests a more prolonged recovery through the same period. By the end of the initial forecast period, all three scenarios converge to roughly the same market growth rates. Philips generally utilized the mid scenario forecasting short-term COVID-19 impacts with expected market recovery later in the initial forecast period. In addition, results of the goodwill impairment tests were analyzed to determine alignment with current market conditions. In the case that market data indicated that models didn’t fully consider impacts of COVID-19 within the forecasts, Philips would reexamine key inputs, such as forecast inputs or discount rates used. Upon this review, no additional changes were required. There were certain CGUs that were more negatively impacted by COVID-19 than others. Amongst those, IGT within the D&T segment as well as the CGUs within Personal Health were negatively impacted. Considering the current headroom in these CGUs, any reasonable change in these assumptions reflecting increased COVID-19 risks or prolonged impact would not cause the value in use to fall to the level of the carrying value. Refer to COVID-19 for further detail on COVID-19 considerations.
Key assumptions - general
Key assumptions used in the value-in-use impairment tests for the units were sales growth rates, EBITA%*) and the rates used for discounting the projected cash flows. These cash flow projections were determined using Royal Philips managements’ internal forecasts that cover an initial period from 2021 to 2024. Projections were extrapolated with stable or declining growth rates for a period of 3 years (2025-2027), after which a terminal value was calculated per 2028. For terminal value calculation, growth rates were capped at a historical long-term average growth rate. This represents a change in methodology from previous years as the explicit forecast increased from 3 to 4 years while the extrapolated growth period decreased from 4 to 3 years. The change in methodology from 2019 to 2020 was based on changes in the internal forecasting process.
The sales growth rates and EBITA*) used to estimate cash flows are based on past performance, external market growth assumptions and industry long-term growth averages. EBITA*) in all units mentioned in this note is expected to increase over the projection period as a result of volume growth and cost efficiencies.
The rates used for discounting the projected cash flows in goodwill impairment testing is based on a business weighted cost of capital (WACC), which in turn is based on business-specific inputs along with other inputs as mentioned below. The WACC is based on post-tax cost of equity and cost of debt, and is further calculated based on market data and inputs to accurately capture changes to the time value of money, such as the risk-free interest rate, the beta factor and country risk premium. In order to properly reflect the different risk-profiles of different businesses, a WACC is determined for each business. As such, the beta factor is determined based on a selection of peer companies, which can differ per business. Different businesses have different geographical footprints, resulting in business-specific inputs for variables like country risk.
As previously noted, the fair value less cost of disposal methodology was used as the recoverable amount when the amount was greater than the value-in-use, specifically for the PHM and ACG CGUs. The fair value is based on Level 3 inputs. Key assumptions and inputs used in the fair value less cost of disposal calculation include the trading and M&A peer groups used to determine the sales market multiples, the control premium applied to the trading sales market multiples. These inputs were applied against 2020 actual revenue for the CGUs. The trading and M&A peer groups were comprised of public companies or publicly disclosed transactions in similar industries, markets, geographies and other relevant characteristics. This trading and M&A peer group was derived from input by the business, M&A and Treasury and was evaluated and challenged for completeness and inclusion based on management’s industry experience as well as the current business and market environment. External sources were used to determine the enterprise value and revenue for the trading peer group. A control premium was added to the trading sales market multiple to simulate the premium a market participant would pay, representing the high end of the range. The control premium was sourced from global public M&A transactions from 2019 and 2020. The sales market multiple with no premium represents the low end of the range. The recoverable amount for the test was a point in between the high and low end of the range.
Key assumptions and sensitivity analysis relating to cash-generating units to which a significant amount of goodwill is allocated
Cash flow projections of Image-Guided Therapy, Monitoring & Analytics and Sleep & Respiratory Care are based on the key assumptions included in the table below, which were used in the annual impairment test performed in the fourth quarter. For certain CGUs, including M&A and S&RC, the initial forecast period projects negative growth as these businesses experienced benefits from COVID-19 in 2020.
Philips Group
Key assumptions
2020
| Image-Guided Therapy | ||||
| Monitoring & Analytics | ( | |||
| Sleep & Respiratory Care | ( |
The assumptions used for the 2019 cash flow projections were as follows:
Philips Group
Key assumptions
2019
| Image-Guided Therapy | ||||
| Monitoring & Analytics | ||||
| Sleep & Respiratory Care |
The results of the annual impairment test of Image-Guided Therapy, Monitoring & Analytics and Sleep & Respiratory Care indicate that a reasonably possible change in key assumptions would not cause the value in use to fall to the level of the carrying value.
Additional information relating to cash-generating units to which a non-significant amount relative to the total goodwill is allocated
For the other cash generating units to which a non-significant amount relative to the total goodwill is allocated, any reasonable change in assumptions would not cause the value in use to fall to the level of the carrying value.
13Intangible assets excluding goodwill
Philips Group
Intangible assets excluding goodwill
in millions of EUR
| Balance as of January 1, 2020 | ||||||||
| Cost | ||||||||
| Amortization/ impairments | ( | ( | ( | ( | ( | ( | ( | ( |
| Book value | ||||||||
| Changes in book value: | ||||||||
| Additions | ||||||||
| Assets available for use | ( | |||||||
| Acquisitions | ||||||||
| Amortization | ( | ( | ( | ( | ( | ( | ( | |
| Impairments | ( | ( | ( | ( | ( | ( | ( | |
| Transfers to assets classified as held for sale | ( | ( | ( | ( | ( | ( | ( | |
| Translation differences and other | ( | ( | ( | ( | ( | ( | ( | |
| Total changes | ( | ( | ( | ( | ( | ( | ||
| Balance as of December 31, 2020 | ||||||||
| Cost | ||||||||
| Amortization/ impairments | ( | ( | ( | ( | ( | ( | ( | ( |
| Book Value |
Philips Group
Intangible assets excluding goodwill
in millions of EUR
| Balance as of January 1, 2019 | ||||||||
| Cost | ||||||||
| Amortization/ impairments | ( | ( | ( | ( | ( | ( | ( | ( |
| Book value | ||||||||
| Changes in book value: | ||||||||
| Additions | ( | |||||||
| Assets available for use | ( | |||||||
| Acquisitions | ( | |||||||
| Amortization | ( | ( | ( | ( | ( | ( | ( | |
| Impairments | ( | ( | ( | ( | ( | |||
| Translation differences and other | ( | |||||||
| Total changes | ( | ( | ( | ( | ( | ( | ||
| Balance as of December 31, 2019 | ||||||||
| Cost | ||||||||
| Amortization/ impairments | ( | ( | ( | ( | ( | ( | ( | ( |
| Book Value |
Acquisitions in 2020 involved Intangible assets of EUR
Other notable impairments are in the Diagnosis & Treatment segment, for product development under construction in IGT-Devices of EUR
As a result of the uncertainty associated with the nature of the COVID-19 pandemic, the company includes various scenarios in the business forecasting process and the most reasonable and supportable assumptions that represent management’s best estimate is used as basis for the value-in-use test. While determining assumptions on COVID-19 recovery, management considered external factors including COVID-19 spread by country, specific dynamics for each CGU, other macroeconomic conditions as well as Philips specific assumptions, including expected customer capex spend and business market growth. Philips considered multiple scenarios for each business that included high, mid and low COVID recovery scenarios. The high recovery scenario suggests a more rapid recovery, while the low scenario suggests a more prolonged recovery over several years. The mid scenario suggests short-term COVID-19 impacts with expected market recovery earlier than the low scenario. For the impairment tests on product development in the business S&RC Philips utilized a scenario forecasting short-term COVID-19 impacts, which means a dip in demand post-COVID, with expected market recovery later in the forecast period. For the EPD impairment test, Philips used the high recovery scenario. A reasonably prolonged recovery would not materially affect the outcome of the impairment test. In addition, there were certain businesses that were more negatively impacted by COVID-19 than others. Amongst those, IGT within the D&T segment as well as the businesses within Personal Health were negatively impacted. Considering the current headroom in these CGUs, any reasonable change in these assumptions reflecting increased COVID-19 risks or prolonged impact would not cause the value in use to fall to the level of the carrying value. Refer to COVID-19 for further detail on COVID-19 considerations.
The amortization of intangible assets is specified in Income from operations.
The expected useful lives of the intangible assets excluding goodwill are as follows:
Philips Group
Expected useful lives of intangible assets excluding goodwill
in years
| Brand names | |
| Customer relationships | |
| Technology | |
| Other | |
| Software | |
| Product development |
The weighted average expected remaining life of brand names, customer relationships, technology and other intangible assets is
The most notable intangible asset as of December 31, 2020 relates to the Spectranetics customer relationships and technology with a carrying value of EUR
14Other financial assets
Other current financial assets
In 2020, Other current financial assets decreased from EUR
In 2019, Other current financial assets decreased by EUR
Other non-current financial assets
The changes during 2020 were as follows:
Philips Group
Other non-current financial assets
in millions of EUR
| Balance as of January 1, 2020 | ||||
| Changes: | ||||
| Acquisitions/additions | ||||
| Sales/redemptions/reductions | ( | ( | ( | ( |
| Value adjustment through OCI | ||||
| Value adjustment through P&L | ||||
| Translation differences and other | ( | ( | ( | ( |
| Reclassifications | ( | ( | ||
| Balance as of December 31, 2020 |
Philips Group
Other non-current financial assets
in millions of EUR
| Balance as of January 1, 2019 | ||||
| Changes: | ||||
| Acquisitions/additions | ||||
| Sales/redemptions/reductions | ( | ( | ( | ( |
| Value adjustment through OCI | ( | ( | ||
| Value adjustment through P&L | ||||
| Translation differences and other | ||||
| Reclassifications | ( | ( | ( | |
| Balance as of December 31, 2019 |
The company’s investments in Other non-current financial assets mainly consist of investments in common shares of companies in various industries and investments in limited life funds. At December 31, 2020, equity investments of EUR
In 2020, the main addition in Other non-current financial assets at FVTOCI is related to the company's investment in DC Health Digital Medical Technologies Co., Ltd in China of EUR
15Other assets
Other non-current assets
Other non-current assets in 2020 were EUR
Other current assets
Other current assets of EUR
16Inventories
Inventories are summarized as follows:
Philips Group
Inventories
in millions of EUR
| Raw materials and supplies | ||
| Work in process | ||
| Finished goods | ||
| Inventories |
The write-down of inventories to net realizable value was EUR
17Receivables
Non-current receivables
Non-current receivables are associated mainly with customer financing in the Diagnosis & Treatment businesses amounting to EUR
Current receivables
Current receivables of EUR
The accounts receivable, net, per segment are as follows:
Philips Group
Accounts receivables-net
in millions of EUR
| Diagnosis & Treatment | ||
| Connected Care | ||
| Personal Health | ||
| Other | ||
| Accounts receivable-net |
The aging analysis of accounts receivable, net, is set out below:
Philips Group
Aging analysis
in millions of EUR
| current | ||
| overdue 1-30 days | ||
| overdue 31-180 days | ||
| overdue > 180 days | ||
| Accounts receivable-net |
The above net accounts receivable represent current and overdue but not fully impaired receivables.
The changes in the allowance for doubtful accounts receivable are as follows:
Philips Group
Allowance for accounts receivable
in millions of EUR
| Balance as of January 1 | ||
| Additions charged to expense | ||
| Deductions from allowance1) | ( | ( |
| Transfer to assets held for sale | ( | |
| Other movements | ( | |
| Balance as of December 31 |
The allowance for doubtful accounts receivable has been primarily established for receivables that are past due.
Included in the above balances as per December 31, 2020 are allowances for individually impaired receivables of EUR
18Equity
Common shares
As of December 31, 2020, authorized common shares consist of
Preference shares
As a means to protect the Company against (an attempt at) an unsolicited takeover or other attempt to exert (de facto) control of the company, the ‘Stichting Preferente Aandelen Philips’ has been granted the right to acquire preference shares in the Company. As of December 31, 2020, no such right has been exercised and no preference shares have been issued. Authorized preference shares consist of 2 billion shares as of December 31, 2020 (December 31, 2019:
Options, restricted and performance shares
Under its share-based compensation plans, the Company granted stock options on its common shares and rights to receive common shares in the future (see Share-based compensation).
Treasury shares
In connection with the Company’s share repurchase programs, shares which have been repurchased and are held in Treasury for the purpose of (i) delivery upon exercise of options, restricted and performance share programs, and (ii) capital reduction, are accounted for as a reduction of shareholders’ equity. Treasury shares are recorded at cost, representing the market price on the acquisition date. When issued, shares are removed from treasury shares on a first-in, first-out (FIFO) basis.
When treasury shares are re-issued by the Company upon exercise of options (granted to employees up to 2013), the difference between the cost and the cash received is recorded in retained earnings. When treasury shares are delivered by the Company upon vesting of restricted shares or performance shares (granted under the Company’s share-based compensation plans), the difference between the market price of the shares issued and the cost is recorded in retained earnings, and the market price is recorded in capital in excess of par value.
The following table shows the movements in the outstanding number of shares over the last three years:
Philips Group
Outstanding number of shares
| Balance as of January 1 | |||
| Dividend distributed | |||
| Purchase of treasury shares | ( | ( | ( |
| Re-issuance of treasury shares | |||
| Issuance of new shares | |||
| Balance as of December 31 |
The following transactions took place resulting from former and current share-based remuneration plans:
Philips Group
Employee option and share plan transactions
| Shares acquired | |||
| Average market price | EUR | EUR | EUR |
| Amount paid | EUR | EUR | EUR |
| Shares delivered | |||
| Average price (FIFO) | EUR | EUR | EUR |
| Cost of delivered shares | EUR | EUR | EUR |
| Total shares in treasury at year-end | |||
| Total cost | EUR | EUR | EUR |
In order to reduce share capital, the following transactions took place:
Philips Group
Share capital transactions
| Shares acquired | |||
| Average market price | EUR | EUR | EUR |
| Amount paid | EUR | EUR | EUR |
| Cancellation of treasury shares (shares) | |||
| Cancellation of treasury shares (EUR) | EUR | EUR | EUR |
| Total shares in treasury at year-end | |||
| Total cost | EUR | EUR |
Share purchase transactions related to employee option and share plans, as well as transactions related to the reduction of share capital, involved a cash outflow of EUR
Share repurchase methods for share-based remuneration plans and capital reduction purposes
Philips uses different methods to repurchase shares in its own capital: (i) share buyback repurchases in the open market via an intermediary; (ii) repurchase of shares via forward contracts for future delivery of shares; and (iii) the unwinding of call options on own shares. During 2020, Philips used methods (i) and (ii) to repurchase shares for capital reduction purposes and methods (ii) and (iii) to repurchase shares for share-based compensation plans.
Forward share repurchase plans / contracts
Forward contracts to repurchase shares for share-based compensation plans
On January 29, 2020, Philips announced that it will repurchase up to
On October 22, 2018, Philips announced and started a share repurchase program for an amount of up to EUR
As of December 31, 2020, the remaining forward contracts to cover obligations under share-based remuneration plans related to
Forward contracts to repurchase shares for capital reduction purposes
On January 29, 2019, Philips announced a share buyback program for an amount of up to EUR
Share call options
In 2016 Philips purchased EUR and USD-denominated call options on its own shares to hedge options granted to employees up to 2013.
In 2020, the company unwound
On December 31, 2020, the remaining EUR-denominated options and USD-denominated options related to
Shares cancellation
In June 2020 Philips completed the cancellation of
Dividend distribution
2020
In July 2020, Philips distributed a dividend of EUR
A proposal will be submitted to the 2021 Annual General Meeting of Shareholders to pay a dividend of EUR
2019
In June 2019, Philips settled a dividend of EUR
2018
In June 2018, Philips settled a dividend of EUR
Limitations in the distribution of shareholders’ equity
As at December 31, 2020, pursuant to Dutch law, certain limitations exist relating to the distribution of shareholders’ equity of EUR
The legal reserve required by Dutch law of EUR
As at December 31, 2019, these limitations in distributable amounts were EUR
Non-controlling interests
Non-controlling interests relate to minority stakes held by third parties in consolidated group companies.
Capital management
Philips manages capital based upon the IFRS measures, net cash provided by operating activities and net cash used for investing activities as well as the non-IFRS measure net debt*). The definition of this non-IFRS measure and a reconciliation to the IFRS measure is included below.
Net debt*) is defined as the sum of long and short-term debt minus cash and cash equivalents. Group equity is defined as the sum of shareholders’ equity and non-controlling interests. This measure is used by Philips Treasury management and investment analysts to evaluate financial strength and funding requirements. The Philips net debt*) position is managed with the intention of retaining a strong investment grade credit rating. Furthermore, Philips’ aim when managing the net debt*) position is dividend stability and a pay-out ratio of
Philips Group
Composition of net debt and group equity1)
in millions of EUR unless otherwise stated
| Long-term debt | |||
| Short-term debt | |||
| Total debt | |||
| Cash and cash equivalents | |||
| Net debt1) | |||
| Shareholders' equity | |||
| Non-controlling interests | |||
| Group equity | |||
| Net debt and group equity ratio1) |
Adjusted income from continuing operations attributable to shareholders*) is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted income from continuing operations attributable to shareholders*) to the most directly comparable IFRS measure, Net income for 2020 is included in the table below.
Philips Group
| Net income | ||
| Discontinued operations, net of income taxes | ||
| Income from continuing operations | ||
| Continuing operations non-controlling interests | ( | ( |
| Income from continuing operations attributable to shareholders1)2) | ||
| Adjustments for: | ||
| Amortization of acquired intangible assets | ||
| Impairment of goodwill | ||
| Restructuring costs and acquisition-related charges | ||
| Other items | ||
| Net finance expenses3) | ( | |
| Tax impact of adjusted items | ( | ( |
| Adjusted Income from continuing operations attributable to shareholders1)2) |
19Debt
Philips has a USD
The provisions applicable to all USD-denominated corporate bonds issued by the company in March 2008 and March 2012 (due 2038 and 2042) contain a ‘Change of Control Triggering Event’. If the company would experience such an event with respect to a series of corporate bonds the company might be required to offer to purchase the bonds that are still outstanding at a purchase price equal to
In March 2020, Philips issued a EUR
As of January 1, 2019 lease liabilities of EUR
Long-term debt
The below tables present information about the long-term debt outstanding, its maturity and average interest rates in 2020 and 2019.
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
| USD bonds | |||||||
| EUR bonds | |||||||
| Forward contracts | |||||||
| Lease liability | |||||||
| Bank borrowings | |||||||
| Other long-term debt | |||||||
| Long-term debt |
Philips Group
Long-term debt
in millions of EUR unless otherwise stated
| USD bonds | |||||||
| EUR bonds | |||||||
| Forward contracts | |||||||
| Lease liability | |||||||
| Bank borrowings | |||||||
| Other long-term debt | |||||||
| Long-term debt |
Bonds
The below table discloses the amount outstanding and effective rate of bonds.
Philips Group
Unsecured Bonds
in millions of EUR unless otherwise stated
| Unsecured EUR Bonds | |||
| Due 9/06/2023; 1/2% | |||
| Due 5/02/2024; 3/4% | |||
| Due 22/05/2026; 1/2% | |||
| Due 5/02/2028; 1 3/8% | |||
| Due 30/03/2025; 1 3/8% | |||
| Due 30/03/2030; 2% | |||
| Unsecured USD Bonds | |||
| Due 5/15/2025; 7 3/4% | |||
| Due 6/01/2026; 7 1/5% | |||
| Due 5/15/2025; 7 1/8% | |||
| Due 11/03/2038; 6 7/8% | |||
| Due 3/15/2042; 5% | |||
| Adjustments1) | ( | ( | |
| Unsecured Bonds | |||
Leases
The following table presents a reconciliation between the total of future minimum lease payments and their present value.
Philips Group
Lease liabilities
in millions of EUR
| Less than one year | ||||||
| Between one and five years | ||||||
| More than five years | ||||||
| Lease liability |
Short-term debt
Philips Group
Short-term debt
in millions of EUR
| Short-term bank borrowings | ||
| Current portion of long-term debt | ||
| Short-term debt |
During 2020, the weighted average interest rate on the bank borrowings was
20Provisions
Philips Group
Provisions
in millions of EUR
| Post-employment benefit1) | ||||||
| Product warranty | ||||||
| Environmental provisions | ||||||
| Restructuring-related provisions | ||||||
| Legal provisions | ||||||
| Contingent consideration provisions | ||||||
| Other provisions | ||||||
| Provisions |
Assurance-type product warranty
The provisions for assurance-type product warranty reflect the estimated costs of replacement and free-of-charge services that will be incurred by the company with respect to products sold.
The company expects the provisions to be utilized mainly within the next year.
Philips Group
Provisions for assurance-type product warranty
in millions of EUR
| Balance as of January 1 | |||
| Changes: | |||
| Additions | |||
| Utilizations | ( | ( | ( |
| Translation differences and other | ( | ||
| Balance as of December 31 |
Environmental provisions
The environmental provisions include accrued costs recorded with respect to environmental remediation in various countries. In the United States, subsidiaries of the company have been named as potentially responsible parties in state and federal proceedings for the clean-up of certain sites.
Provisions for environmental remediation can change significantly due to the emergence of additional information regarding the extent or nature of the contamination, the need to utilize alternative technologies, actions by regulatory authorities as well as changes in judgments and discount rates.
Approximately EUR
Philips Group
Environmental provisions
in millions of EUR
| Balance as of January 1 | |||
| Changes: | |||
| Additions | |||
| Utilizations | ( | ( | ( |
| Releases | ( | ( | |
| Changes in discount rate | ( | ||
| Accretion | |||
| Translation differences and other | ( | ||
| Balance as of December 31 |
The additions and the releases of the provisions originate from additional insights in relation to factors like the estimated cost of remediation, changes in regulatory requirements and efficiencies in completion of various site work phases.
Restructuring-related provisions
Philips Group
Restructuring-related provisions
in millions of EUR
| Diagnosis & Treatment | ( | ( | ( | |||
| Connected Care | ( | ( | ( | |||
| Personal Health | ( | ( | ( | |||
| Other | ( | ( | ||||
| Philips Group | ( | ( | ( |
In 2020, the most significant restructuring projects impacted Diagnostic & Treatment and Other businesses and mainly took place in the Netherlands, US and Germany. The restructuring comprised mainly product portfolio rationalization and the reorganization of global support functions.
The company expects the provisions to be utilized mainly within the next year.
2019
In 2019, the most significant restructuring projects impacted Diagnostic & Treatment and Other businesses and mainly took place in the Netherlands, US and Germany.
The movements in the provisions for restructuring in 2019 are presented by segment as follows:
Philips Group
Restructuring-related provision
in millions of EUR
| Diagnosis & Treatment | ( | ( | ||||
| Connected Care | ( | ( | ( | |||
| Personal Health | ( | ( | ||||
| Other | ( | ( | ||||
| Philips Group | ( | ( | ( |
2018
In 2018, the most significant restructuring projects impacted Diagnosis & Treatment, Connected Care & Health Informatics and Other businesses and mainly took place in the US, Germany and Netherlands.
The movements in the provisions for restructuring in 2018 are presented by segment as follows:
Philips Group
Restructuring-related provisions
in millions of EUR
| Diagnosis & Treatment | ( | ( | |||
| Connected Care | ( | ( | |||
| Personal Health | ( | ( | |||
| Other | ( | ( | |||
| Philips Group | ( | ( |
Legal provisions
The company and certain of its group companies and former group companies are involved as a party in legal proceedings, including regulatory and other governmental proceedings.
Philips Group
Legal provisions
in millions of EUR
| Balance as of January 1 | |||
| Changes: | |||
| Additions | |||
| Utilizations | ( | ( | ( |
| Releases | ( | ( | ( |
| Accretion | |||
| Translation differences and other | ( | ( | |
| Balance as of December 31 |
The most significant proceedings
The majority of the movements in the above schedule are related to the Cathode Ray Tube (CRT) antitrust litigation and investigation with the Italian Competition Authority (ICA).
Italian Competition Authority (ICA) investigation
In 2020, the company recorded a legal provision in relation to an investigation initiated by the Italian Competition authority in February 2018. The investigation focusses on whether the company and certain other healthcare companies violated antitrust laws in the maintenance services aftermarket for medical diagnostic imaging devices.
Cathode Ray Tube (CRT) antitrust litigation
In 2020 and 2018, the majority of the movements in relation to the CRT antitrust litigation were utilizations due to the transfer to other liabilities for which the company was able to reach a settlement. These settlements were subsequently paid out during the year or in the respective following year.
For more details, refer to Contingent assets and liabilities.
The company expects the provisions to be utilized mainly within the next
Contingent consideration provisions
Philips Group
Contingent consideration provisions
in millions of EUR
| Balance as of January 1 | |||
| Acquisitions | |||
| Utilizations | ( | ( | ( |
| FV changes | ( | ( | |
| Balance as of December 31 |
The provision for contingent consideration reflects the fair value of the expected payment to former shareholders of an acquiree for the exchange of control if specified future events occur or conditions are met, such as the achievement of certain regulatory milestones or the achievement of certain commercial milestones. The provision for contingent consideration can change significantly due to changes in the estimated achievement of milestones and changes in discount rates.
In 2020, the acquisitions through business combinations consists of a provision for contingent consideration of EUR
EPD
In 2020, revisions to EPD’s forecast due to delays in commercialization caused by the need to do more work on the maturity of the technology, resulted in a EUR
In 2018, the acquisitions through business combinations mainly consisted of a provision for contingent consideration of EUR
The company expects the provisions to be utilized mainly within the next
Other provisions
Philips Group
Other provisions
in millions of EUR
| Closing balance as of December 31 | |||
| IFRS 16 adjustment | ( | ||
| Opening balance as of January 1 | |||
| Changes: | |||
| Additions | |||
| Utilizations | ( | ( | ( |
| Releases | ( | ( | ( |
| Accretion | ( | ||
| Translation differences and other | ( | ( | |
| Balance as of December 31 |
The main elements of other provisions are:
- provisions for possible taxes/social security of EUR
- provisions for onerous contracts of EUR
- provisions for employee jubilee funds EUR
- self-insurance provisions of EUR
- provisions for decommissioning costs of EUR
- provisions for rights of return of EUR
- the releases in 2018, 2019 and 2020 are due to the reassessment of the positions in other provisions throughout the year;
- the remaining provisions relate to a variety of positions, for example provision for disability of employees and provision for royalty obligations.
The company expects the provisions to be utilized mainly within the next
- provisions for employee jubilee funds of which half is expected to be utilized after
- provisions for decommissioning costs of which half is expected to be utilized after
- provisions for rights of return to be utilized mainly within the next
21Post-employment benefits
Employee post-employment benefit plans have been established in many countries in accordance with the legal requirements, customs and the local practice in the countries involved. The larger part of post-employment benefits are company pension plans, of which some are funded and some are unfunded. All funded post-employment benefit plans are considered to be related parties.
Most employees that take part in a company pension plan are covered by defined contribution (DC) pension plans. The main DC plans are in the Netherlands and the United States. The company also sponsors a number of defined benefit (DB) pension plans. The benefits provided by these plans are based on employees’ years of service and compensation levels.
The company also sponsors a limited number of DB retiree medical plans. The benefits provided by these plans typically cover a part of the healthcare costs after retirement. None of these plans are individually significant to the company and are therefore not further separately disclosed.
The larger funded DB and DC plans are governed by independent Trustees who have a legal obligation to protect the interests of all plan members and operate under the local regulatory framework.
The DB plans in the United States (US) and Germany (DE) make up most of the defined benefit obligation (DBO) and the net balance sheet position. The company also has DB plans in the rest of the world (Other); however these are individually not significant to the company and do not have a significantly different risk profile that would warrant separate disclosure.
The adjacent table provides a break-down of the present value of the funded and unfunded DBO, the fair value of plan assets and the net balance sheet position in the US, DE and Other.
Philips Group
Post-employment benefits
in millions of EUR
| Present value of funded DBO | ( | ( | ( | ( | ( | ( | ( | ( |
| Present value of unfunded DBO | ( | ( | ( | ( | ( | ( | ( | ( |
| Total present value of DBO | ( | ( | ( | ( | ( | ( | ( | ( |
| Fair value of plan assets | ||||||||
| Net balance sheet position | ( | ( | ( | ( | ( | ( | ( | ( |
The significant decrease in the present value of funded DBO in the United States in 2020 is a result of a partial settlement which is described in more detail below.
The United States
The US DB pension plans are closed plans without future pension accrual. For the funding of any deficit in the US plan the Group adheres to the minimum funding requirements of the US Pension Protection Act.
The assets of the US funded pension plans are in Trusts governed by fiduciaries. The non-qualified pension plans that cover accrual above the maximum salary of the funded qualified plan are unfunded.
The company’s qualified pension commitments in the United States are covered via the Pension Benefit Guaranty Corporation (PBGC) which charges a fee to US companies providing DB pension plans. The fee is also dependent on the amount of unfunded vested liabilities.
In continued efforts to de-risk the company’s existing and ongoing DB pension plans, the company executed a lump-sum window and annuity purchase program during 2020 regarding the US funded pension plan. Both events have been recognized as a settlement with a combined loss of EUR
Germany
The company has several DB plans in Germany which for the largest part are unfunded, meaning that after retirement the company is responsible for the benefit payments to retirees.
Due to the relatively high level of social security in Germany, the company’s pension plans mainly provide benefits for the higher earners. The plans are open for future pension accrual. Indexation is mandatory due to legal requirements. Some of the German plans have a DC design, but are accounted for as DB plans due to a legal minimum return requirement.
Company pension commitments in Germany are partly protected against employer bankruptcy via the “Pensions-Sicherungs-Verein” which charges a fee to all German companies providing pension promises.
Philips is one of the sponsors of Philips Pensionskasse VVaG in Germany, which is a multi-employer plan. The plan is classified and accounted for as a DC plan.
Risks related to DB plans
DB plans expose the company to various demographic and economic risks such as longevity risk, investment risks, currency and interest rate risk and in some cases inflation risk. The latter plays a role in the assumed wage increase but more importantly in some countries where indexation of pensions is mandatory.
The company has an active de-risking strategy in which it constantly looks for opportunities to reduce the risks associated with its DB plans. Liability-driven investment strategies, lump sum cash-out options, buy-ins, buy-outs and a change to DC are examples of the strategy. The lump-sum window and cash-out and annuity-purchase program in the US pension plan in 2020 as mentioned above are examples of that strategy.
Investment policy in our largest pension plans
Pension fund trustees are responsible for and have full discretion over the investment strategy of the plan assets. The plan assets of the Philips pension plans are invested in well diversified portfolios. The interest rate sensitivity of the fixed income portfolio is closely aligned to that of the plan’s pension liabilities for most of the plans. Any contributions from the sponsoring company are used to further increase the fixed income part of the assets. As part of the investment strategy, any improvement in the funded ratio over time is used to further decrease the interest rate mismatch between the plan assets and the pension liabilities.
Summary of pre-tax costs for post-employment benefits and reconciliations
The adjacent table contains the total of current and past service costs, administration costs and settlement results as included in Income from operations and the interest cost as included in Financial expenses.
Philips Group
Pre-tax costs for post-employment benefits
in millions of EUR
| Defined-benefit plans | |||
| - included in income from operations | |||
| - included in financial expense | |||
| - included in Discontinued operations | |||
| Defined-contribution plans | |||
| - included in income from operations | |||
| - included in Discontinued operations | |||
| Post-employment benefits costs |
Summary of the reconciliations for the DBO and plan assets
The adjacent tables contain the reconciliations for the DBO and plan assets.
Philips Group
Defined-benefit obligations
in millions of EUR
| Balance as of January 1 | ||
| Service cost | ||
| Interest cost | ||
| Employee contributions | ||
| Actuarial (gains) / losses | ||
| - demographic assumptions | ( | |
| - financial assumptions | ||
| - experience adjustment | ||
| (Negative) past service cost | ||
| Settlements | ( | ( |
| Benefits paid from plan | ( | ( |
| Benefits paid directly by employer | ( | ( |
| Translation differences and other | ( | |
| Balance as of December 31 |
Philips Group
Plan assets
in millions of EUR
| Balance as of January 1 | ||
| Interest income on plan assets | ||
| Admin expenses paid | ( | ( |
| Return on plan assets excluding interest income | ||
| Employee contributions | ||
| Employer contributions | ||
| Settlements | ( | ( |
| Benefits paid from plan | ( | ( |
| Translation differences and other | ( | |
| Balance as of December 31 |
Plan assets allocation
The asset allocation in the company’s DB plans at December 31 was as follows:
Philips Group
Plan assets allocation
in millions of EUR
| Assets quoted in active markets | ||
| - Debt securities | ||
| - Equity securities | ||
| - Other | ||
| Assets not quoted in active markets | ||
| - Debt securities | ||
| - Equity securities | ||
| - Other | ||
| Total assets |
The plan assets in 2020 contain
Assumptions
The mortality tables used for the company’s largest DB plans are:
US: PRI-2012 Generational with MP2020 improvement scale + white collar adjustment
Germany: Heubeck-Richttafeln 2018 Generational
The weighted averages of the assumptions used to calculate the DBO as of December 31 were as follows:
Philips Group
Assumptions used for defined-benefit obligations in the United States, Germany and the rest of the world
in %
| Discount rate | ||||||||
| Inflation rate | ||||||||
| Salary increase |
Sensitivity analysis
The following table illustrates the approximate impact on the DBO from movements in key assumptions. The DBO was recalculated using a change in the assumptions of
The average duration of the DBO of the DB plans is
Philips Group
Sensitivity of key assumptions
in millions of EUR
| Increase | ||
| Discount rate (1% movement) | ( | ( |
| Inflation rate (1% movement) | ||
| Salary increase (1% movement) | ||
| Longevity1) | ||
| Decrease | ||
| Discount rate (1% movement) | ||
| Inflation rate (1% movement) | ( | ( |
| Salary increase (1% movement) | ( | ( |
Cash flows and costs in 2021
The company expects considerable cash outflows in relation to post-employment benefits which are estimated to amount to EUR
- EUR
- EUR
- EUR
The service and administration cost for 2021 is expected to amount to EUR
22Accrued liabilities
Accrued liabilities are summarized as follows:
Philips Group
Accrued liabilities
in millions of EUR
| Personnel-related costs: | ||
| - Salaries and wages | ||
| - Accrued holiday entitlements | ||
| - Other personnel-related costs | ||
| Fixed-asset-related costs: | ||
| - Gas, water, electricity, rent and other | ||
| Communication and IT costs | ||
| Distribution costs | ||
| Sales-related costs: | ||
| - Commission payable | ||
| - Advertising and marketing-related costs | ||
| - Other sales-related costs | ||
| Material-related costs | ||
| Interest-related accruals | ||
| Other accrued liabilities | ||
| Accrued liabilities |
23Other liabilities
Other non-current liabilities
Non-current liabilities were EUR
Non-current liabilities are associated mainly with indemnification and non-current accruals.
Other current liabilities
Other current liabilities are summarized as follows:
Philips Group
Other current liabilities
in millions of EUR
| Accrued customer rebates that cannot be offset with accounts receivables for those customers | ||
| Other taxes including social security premiums | ||
| Other liabilities | ||
| Other current liabilities |
The other liabilities per December 31, 2019 include reclassifications from litigation provisions to liabilities due to settlements reached. As per December 31, 2020 no material reclassification of such kind occurred. For more details reference is made to Litigation provisions in Provisions and to Legal proceedings in Contingent assets and liabilities.
Contract liabilities
Non-current contract liabilities were EUR
The current contract liabilities increased with EUR
The current contract liabilities as per December 31, 2019 resulted in revenue recognized of EUR
24Cash flow statement supplementary information
Cash paid for leases
In 2020, gross lease payments of EUR
Net cash used for derivatives and current financial assets
In 2020, a total of EUR
Purchase and proceeds from non-current financial assets
In 2020, the net cash outflow of EUR
In 2019, the net cash inflow of EUR
In 2018, the net cash inflow of EUR
Philips Group
Reconciliation of liabilities arising from financing activities
in millions of EUR
| Long term debt2) | ( | ||||
| USD bonds | ( | ||||
| EUR bonds | |||||
| Bank borrowings | ( | ||||
| Other long-term debt | ( | ||||
| Leases | ( | ( | |||
| Forward contracts3) | |||||
| Short term debt2) | ( | ||||
| Short-term bank borrowings | ( | ||||
| Other short-term loans | |||||
| Forward contracts3) | |||||
| Equity | ( | ( | ( | ( | |
| Dividend payable | ( | ||||
| Forward contracts3) | ( | ( | ( | ||
| Treasury shares | ( | ( | ( | ||
| Total |
Philips Group
Reconciliation of liabilities arising from financing activities
in millions of EUR
| Long term debt2) | |||||
| USD bonds | |||||
| EUR bonds | |||||
| Bank borrowings | ( | ||||
| Other long-term debt | ( | ||||
| Leases | ( | ||||
| IFRS 16 new lease recognition2) | |||||
| Forward contracts3) | ( | ||||
| Short term debt2) | ( | ( | |||
| Short-term bank borrowings | ( | ||||
| Other short-term loans | |||||
| Forward contracts3) | ( | ||||
| Equity | ( | ( | ( | ||
| Dividend payable | ( | ||||
| Forward contracts3) | ( | ( | |||
| Treasury shares | ( | ( | ( | ||
| Total | ( |
25Contingent assets and liabilities
Contingent assets
As per December 31, 2020, the company had no material contingent assets.
Contingent liabilities
Guarantees
Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not stand by other forms of support. The total fair value of guarantees recognized on the balance sheet amounts to EUR million for both 2019 and 2020. Remaining off-balance-sheet business related guarantees on behalf of third parties and associates decreased by EUR
Environmental remediation
The company and its subsidiaries are subject to environmental laws and regulations. Under these laws, the company and/or its subsidiaries may be required to remediate the effects of certain manufacturing activities on the environment.
Legal proceedings
The company and certain of its group companies and former group companies are involved as a party in legal proceedings, regulatory and other governmental proceedings, including discussions on potential remedial actions, relating to such matters as competition issues, commercial transactions, product liability, participations and environmental pollution.
While it is not feasible to predict or determine the outcome of all pending or threatened legal proceedings, regulatory and governmental proceedings, the company is of the opinion that the cases described below may have, or have had in the recent past, a significant impact on the company’s consolidated financial position, results of operations and cash flows.
Civil Litigation
Cathode Ray Tubes (CRT)
Following the public investigations into alleged anticompetitive activities in the Cathode Ray Tubes industry that began in 2007 and which resulted in a EUR
By the end of 2020, settlements have been reached in most of these cases. Litigation is still pending or threatened in relation to: (i) the revised US indirect purchaser class settlement which received approval from the District Court for the Northern District of California in July 2020 but is still subject to appeal, (ii) potential claims that may still be filed by certain objectors to the original US indirect purchaser class settlement (iii) a claim filed by the state attorney general for Puerto Rico, (iv) a claim filed by a monitor manufacturer in the UK, (v) a claim filed by three Brazilian TV manufacturers in the Netherlands, (vi) a consumer class action in Israel and (vii) a consumer action in the Netherlands.
In all cases, the same substantive allegations about anticompetitive activities in the CRT industry are made and damages are sought. Despite prior settlements, the company has concluded that due to the specific circumstances in the cases that settled, and the particularities and considerable uncertainty associated with the remaining matters, based on current knowledge, potential losses cannot be reliably estimated with respect to some of the matters that are still pending.
In 2019, the company was served with a claim filed by LG Electronics (LGE) in the Seoul Central District Court. LGE claims restitution of approximately EUR
Public Investigations
In July 2018, the company was informed that the public prosecution service in Rio de Janeiro and the Brazilian antitrust authority CADE were conducting an investigation into tender irregularities in the medical device industry in Brazil. Philips was one of a number of companies involved in the investigation. After conducting an internal investigation into the matter focusing on certain transactions that took place before 2011, the company reached a leniency agreement with the Brazilian public prosecution service in 2020 under which the company agreed to pay EUR
In respect of the investigation in Brazil, the company also received inquiries from the US Securities and Exchange Commission (SEC) and US Department of Justice (DoJ). In addition, starting in June 2019, the company has engaged in discussions with and provided information to the SEC and DoJ regarding tender irregularities in the medical device industry in certain other jurisdictions. These interactions are ongoing and focus primarily on a number of compliance findings that the company is addressing in China and Bulgaria.
Given the uncertain nature of the relevant events and potential obligations, and based on current knowledge, the financial effect, if any, cannot be reliably estimated. The outcome of the uncertain events could have a material impact on the company’s consolidated financial position, results of operations and cash flows.
Miscellaneous
For details on other contractual obligations, please refer to liquidity risk in Details of treasury and other financial risks.
28Information on remuneration
Remuneration of the Executive Committee
In 2020, the total remuneration costs relating to the members of the Executive Committee (consisting of
Philips Group
Remuneration costs of the Executive Committee1)
in EUR
| Base salary/Base compensation | |||
| Annual incentive2) | |||
| Performance shares3)4) | |||
| Restricted share rights3) | |||
| Pension allowances5) | |||
| Pension scheme costs | |||
| Other compensation6) | |||
| Total |
At December 31, 2020, the members of the Executive Committee (including the members of the Board of Management) held
Remuneration of the Board of Management
In 2020, the total remuneration costs relating to the members of the Board of Management amounted to EUR
Philips Group
Remuneration costs of individual members of the Board of Management
in EUR
| 2020 | ||||||||
| F.A. van Houten | ||||||||
| A. Bhattacharya | ||||||||
| M.J. van Ginneken | ||||||||
| 2019 | ||||||||
| F.A. van Houten | ||||||||
| A. Bhattacharya | ||||||||
| M.J. van Ginneken | ||||||||
| 2018 | ||||||||
| F.A. van Houten | ||||||||
| A. Bhattacharya | ||||||||
| M.J. van Ginneken | ||||||||
For further information on remuneration costs, see Total remuneration costs in 2020.
The accumulated annual pension entitlements and the pension costs of individual members of the Board of Management are as follows:
Philips Group
Accumulated annual pension entitlements and pension-related costs
in EUR unless otherwise stated
| F.A. van Houten | |||
| A. Bhattacharya | |||
| M.J. van Ginneken | |||
| Pension costs |
When pension rights are granted to members of the Board of Management, necessary payments (if insured) and all necessary provisions are made in accordance with the applicable accounting principles. In 2020, no (additional) pension benefits were granted to former members of the Board of Management.
Remuneration of the Supervisory Board
The remuneration of the members of the Supervisory Board amounted to EUR
The members of the Supervisory Board do not receive any share-based remuneration. Therefore, at December 31, 2020 the members of the Supervisory Board held no stock options, performance shares or restricted shares.
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration:
Philips Group
Remuneration of the Supervisory Board
in EUR
| 20202) | ||||
| J. van der Veer | ||||
| C.A. Poon | ||||
| N. Dhawan | ||||
| O. Gadiesh | ||||
| D.E.I. Pyott | ||||
| P.A.M. Stoffels | ||||
| A.M. Harrison | ||||
| M.E. Doherty | ||||
| P. Löscher | ||||
| F. Sijbesma | ||||
| 20192) | ||||
| J. van der Veer | ||||
| C.A. Poon | ||||
| H.N.F.M. von Prondzynski | ||||
| J.P. Tai | ||||
| N. Dhawan | ||||
| O. Gadiesh | ||||
| D.E.I. Pyott | ||||
| P.A.M. Stoffels | ||||
| A.M. Harrison | ||||
| M.E. Doherty | ||||
| 20182) | ||||
| J. van der Veer | ||||
| C.A. Poon | ||||
| H.N.F.M. von Prondzynski | ||||
| J.P. Tai | ||||
| N. Dhawan | ||||
| O. Gadiesh | ||||
| D.E.I. Pyott | ||||
| P.A.M. Stoffels | ||||
| A.M. Harrison | ||||
Supervisory Board members’ and Board of Management members’ interests in Philips shares
Members of the Supervisory Board and of the Executive Committee are prohibited from writing call and put options or similar derivatives of Philips securities.
| J. van der Veer | ||
| F.A. van Houten | ||
| A. Bhattacharya | ||
| M.J. van Ginneken |
29Fair value of financial assets and liabilities
The estimated fair value of financial instruments has been determined by the company using available market information and appropriate valuation methods. The estimates presented are not necessarily indicative of the amounts that will ultimately be realized by the company upon maturity or disposal. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.
The following tables show the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. Fair value information for financial assets and financial liabilities not carried at fair value is not included if the carrying amount is a reasonable approximation of fair value. As reflected in the following table, equity instruments carried at FVTOCI were designated as such upon the adoption of IFRS 9 and upon initial measurement of new equity instruments. Remaining financial assets are mandatorily classified as FVTPL or FVTOCI.
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2020
| Financial assets | |||||
| Carried at fair value: | |||||
| Debt instruments | |||||
| Equity instruments | |||||
| Other financial assets | |||||
| Financial assets carried at FVTPL | |||||
| Debt instruments | |||||
| Equity instruments | |||||
| Current financial assets | |||||
| Receivables - current | |||||
| Financial assets carried at FVTOCI | |||||
| Derivative financial instruments | |||||
| Financial assets carried at fair value | |||||
| Carried at (amortized) cost: | |||||
| Cash and cash equivalents | |||||
| Loans and receivables: | |||||
| Current loans receivables | |||||
| Other non-current loans and receivables | |||||
| Receivables - current | |||||
| Receivables - non-current | |||||
| Financial assets carried at (amortized) cost | |||||
| Total financial assets | |||||
| Financial liabilities | |||||
| Carried at fair value: | |||||
| Contingent consideration | ( | ( | ( | ||
| Financial liabilities carried at FVTP&L | ( | ( | ( | ||
| Derivative financial instruments | ( | ( | ( | ||
| Financial liabilities carried at fair value | ( | ( | ( | ( | |
| Carried at (amortized) cost: | |||||
| Accounts payable | ( | ||||
| Interest accrual | ( | ||||
| Debt (Corporate bonds and leases) | ( | ( | ( | ( | |
| Debt (excluding corporate bonds and leases) | ( | ||||
| Financial liabilities carried at (amortized) cost | ( | ||||
| Total financial liabilities | ( |
Philips Group
Fair value of financial assets and liabilities
in millions of EUR
2019
| Financial assets | |||||
| Carried at fair value: | |||||
| Debt instruments | |||||
| Equity instruments | |||||
| Other financial assets | |||||
| Financial assets carried at FVTPL | |||||
| Debt instruments | |||||
| Equity instruments | |||||
| Current financial assets | |||||
| Receivables - current | |||||
| Financial assets carried at FVTOCI | |||||
| Derivative financial instruments | |||||
| Financial assets carried at fair value | |||||
| Carried at (amortized) cost: | |||||
| Cash and cash equivalents | |||||
| Loans and receivables: | |||||
| Current loans receivables | |||||
| Other non-current loans and receivables | |||||
| Receivables - current | |||||
| Receivables - non-current | |||||
| Financial assets carried at (amortized) cost | |||||
| Total financial assets | |||||
| Financial liabilities | |||||
| Carried at fair value: | |||||
| Contingent consideration | ( | ( | ( | ||
| Financial liabilities carried at FVTP&L | ( | ( | ( | ||
| Derivative financial instruments | ( | ( | ( | ||
| Financial liabilities carried at fair value | ( | ( | ( | ( | |
| Carried at (amortized) cost: | |||||
| Accounts payable | ( | ||||
| Interest accrual | ( | ||||
| Debt (Corporate bonds and finance leases) | ( | ( | ( | ( | |
| Debt (excluding corporate bonds and finance leases) | ( | ||||
| Financial liabilities carried at (amortized) cost | ( | ||||
| Total financial liabilities | ( |
The fair value of Philips’ debt is estimated on the basis of the quoted market prices for certain issuances, or on the basis of discounted cash flow analysis based upon market rates plus Philips’ spread for the particular tenors of the borrowing arrangement. Accrued interest is not included within the carrying amount or estimated fair value of debt.
Specific valuation techniques used to value financial instruments include:
Level 1
Instruments included in level 1 are comprised primarily of listed equity investments classified as financial assets carried at fair value through profit or loss or carried at fair value through other comprehensive income. The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
Level 2
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives or convertible bond instruments) is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are based on observable market data, the instrument is included in level 2. The fair value of derivatives is calculated as the present value of the estimated future cash flows based on observable interest yield curves, basis spread and foreign exchange rates. The valuation of convertible bond instruments uses observable market quoted data for the options and present value calculations using observable yield curves for the fair value of the bonds.
Level 3
If one or more of the significant inputs are not based on observable market data, such as third-party pricing information without adjustments, the instrument is included in level 3.
Philips recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.
As part of the EPD acquisition Philips may be required to pay additional consideration to former shareholders if specified future events occur or conditions are met, such as the achievement of certain regulatory milestones or the achievement of certain commercial milestones. The fair value of this contingent consideration provision was determined using a probability-weighted and a risk-adjusted approach to estimate the achievement of future regulatory and commercial milestones, respectively. The discount rates used in the risk-adjusted approach are ranging from
A sensitivity analysis of the EPD contingent consideration provision at December 31, 2020 shows that if the probabilities of success for regulatory milestones are increased by
As a result of the uncertainty associated with the nature of the COVID-19 pandemic, the company includes various scenarios in the business forecasting process and the most reasonable and supportable assumptions that represent management’s best estimate is used as basis for the fair values calculation of contingent considerations. While determining assumptions on COVID-19 recovery, management considered external factors including COVID-19 spread by country, specific dynamics, other macroeconomic conditions as well as Philips specific assumptions, including expected customer capex spend and business market growth. Philips considered multiple scenarios for each business that included high, mid and low COVID recovery scenarios. The high recovery scenario suggests a more rapid recovery, while the low scenario suggests a more prolonged recovery over several years. The mid scenario suggests short-term COVID-19 impacts with expected market recovery earlier than the low scenario. For the determination of the fair value of contingent considerations Philips generally utilized the high recovery scenario. A reasonably prolonged recovery would not materially affect the fair value of the contingent consideration liability. Refer to COVID-19 for further detail on COVID-19 considerations.
The table below shows the reconciliation from the beginning balance to the end balance for Level 3 fair value measurements.
Philips Group
Reconciliation of Level 3 fair value measurements
in millions of EUR
| Balance at January 1, 2020 | ||
| Acquisitions | ||
| Purchase | ||
| Sales | ( | |
| Utilizations | ( | |
| Recognized in profit and loss: | ||
| other business income | ( | |
| financial income and expenses1) | ||
| Recognized in other comprehensive income2) | ( | ( |
| Receivables held to collect and sell | ||
| Balance at December 31, 2020 |
Philips Group
Reconciliation of Level 3 fair value measurements
in millions of EUR
| Balance at January 1, 2019 | ||
| Acquisitions | ||
| Purchase | ||
| Sales | ( | |
| Utilizations | ( | |
| Recognized in profit and loss: | ||
| other business income | ( | |
| financial income and expenses | ||
| Recognized in other comprehensive income1) | ( | |
| Receivables held to collect and sell | ||
| Balance at December 31, 2019 |
The section below elaborates on transactions in derivatives. Transactions in derivatives are subject to master netting and set-off agreements. In the case of certain termination events, under the terms of the master agreement, Philips can terminate the outstanding transactions and aggregate their positive and negative values to arrive at a single net termination sum (or close-out amount). This contractual right is subject to the following:
- The right may be limited by local law if the counterparty is subject to bankruptcy proceedings;
- The right applies on a bilateral basis.
Philips Group
Financial assets subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
| Derivatives | ||
| Gross amounts of recognized financial assets | ||
| Gross amounts of recognized financial liabilities offset in the balance sheet | ||
| Net amounts of financial assets presented in the balance sheet | ||
| Related amounts not offset in the balance sheet | ||
| Financial instruments | ( | ( |
| Cash collateral received | ||
| Net amount |
Philips Group
Financial liabilities subject to offsetting, enforceable master netting arrangements or similar agreements
in millions of EUR
| Derivatives | ||
| Gross amounts of recognized financial liabilities | ( | ( |
| Gross amounts of recognized financial assets offset in the balance sheet | ||
| Net amounts of financial liabilities presented in the balance sheet | ( | ( |
| Related amounts not offset in the balance sheet | ||
| Financial instruments | ||
| Cash collateral received | ||
| Net amount | ( | ( |
30Details of treasury and other financial risks
Philips is exposed to several types of financial risks. This note further analyzes financial risks. Philips does not purchase or hold derivative financial instruments for speculative purposes. Information regarding financial instruments is included in Fair value of financial assets and liabilities.
Liquidity risk
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk for the group is monitored through the Treasury liquidity committee, which tracks the development of the actual cash flow position for the group and uses input from a number of sources in order to forecast the overall liquidity position on both a short and longer term basis. Philips invests surplus cash in short-term deposits with appropriate maturities to ensure sufficient liquidity is available to meet liabilities when due and in money market funds.
The rating of the company’s debt by major rating agencies may improve or deteriorate. As a result, Philips’ future borrowing capacity may be influenced and its financing costs may fluctuate. Philips has various sources to mitigate the liquidity risk for the group. At December 31, 2020, Philips had EUR
Philips faces cross-border foreign exchange controls and/or other legal restrictions in a few countries that could limit its ability to make these balances available on short notice for general use by the group.
Furthermore, Philips has a USD
In addition to cash and cash equivalents, at December 31, 2020, Philips also held EUR
The table below presents a summary of the Group’s fixed contractual cash obligations and commitments at December 31, 2020. These amounts are an estimate of future payments which could change as a result of various factors such as a change in interest rates, foreign exchange, contractual provisions, as well as changes in our business strategy and needs. Therefore, the actual payments made in future periods may vary from those presented in the following table:
| Long-term debt3) | |||||
| Lease obligations | |||||
| Short-term debt | |||||
| Derivative liabilities | |||||
| Purchase obligations4) | |||||
| Trade and other payables | |||||
| Contractual cash obligations |
Philips has contracts with investment funds where it committed itself to make, under certain conditions, capital contributions to these funds of an aggregated remaining amount of EUR
Philips offers voluntary supply chain finance programs with third parties which provide participating suppliers the opportunity to factor their trade receivables at the sole discretion of both the suppliers and the third parties. Philips continues to recognize these liabilities as trade payables and settles them accordingly on the invoice maturity date based on the terms and conditions these arrangements . At December 31, 2020 approximately EUR
Leasing activities
The company leases various items of real estate, vehicles and other equipment where it acts as a lessee. The company has multiple extension and termination options in a number of lease contracts. These are used to maximize operational flexibility in terms of managing the assets used in the company's operations. The options considered reasonably certain are part of lease liabilities. However, the options not considered reasonably certain are not part of lease liability, which exposes the company to potential future cash outflows amounting to EUR
The company enters into sale and lease back transactions primarily for its Sleep & Respiratory Care businesses. These transactions are accounted for at market value. The payments for these leases are considered in determining lease liabilities. Principal repayments are part of cash flows used for financing activities and interest payments are part of cash flows used for operating activities. The cash inflows arising from the sales transactions, are part of cash flows provided by financing activities. Lease payments under sale-and-leaseback arrangements for 2020 were EUR
Philips Group
Lease - minimum payments under sale-and-leaseback arrangements
in millions of EUR
| 2021 | |
| 2022 | |
| 2023 | |
| 2024 | |
| 2025 | |
| Thereafter |
Philips has leasing activities where it acts as lessor. In such arrangements, Philips provides the customer with a right to use of medical equipment in exchange for a series of payments. Residual values of assets under lease form an insignificant part of the carrying amount of those assets. Residual values are influenced by asset market prices and are therefore subject to management estimation. Residual values are at least reassessed on an annual basis, or more often when necessary. Reassessments are based on a combination of realization of assets sold, expert knowledge and judgment of local markets. For lease receivables, the value of unguaranteed residual values on December 31, 2020 was EUR
Currency risk
Currency risk is the risk that reported financial performance or the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Philips operates in many countries and currencies and therefore currency fluctuations may impact Philips’ financial results. Philips is exposed to currency risk in the following areas:
- Transaction exposures, related to anticipated sales and purchases and on-balance-sheet receivables/payables resulting from such transactions
- Translation exposure of foreign-currency intercompany and external debt and deposits
- Translation exposure of net income in foreign entities
- Translation exposure of foreign-currency-denominated equity invested in consolidated companies
- Translation exposure to equity interests in non-functional-currency investments in associates and other non-current financial assets.
It is Philips’ policy to reduce the potential year-on-year volatility caused by foreign-currency movements on its net earnings by hedging the anticipated net exposure of foreign currencies resulting from foreign-currency sales and purchases. In general, net anticipated exposures for the Group are hedged during a period of
The following table outlines the estimated nominal value in millions of EUR for committed and anticipated transaction exposure and related hedges for Philips’ most significant currency exposures consolidated as of December 31, 2020:
Philips Group
Estimated transaction exposure and related hedges
in millions of EUR
| Balance as of December 31, 2020 | ||||
| Exposure currency | ||||
| USD | ( | ( | ||
| JPY | ( | ( | ||
| GBP | ( | ( | ||
| CNY | ( | ( | ||
| CAD | ( | |||
| PLN | ( | |||
| AUD | ( | |||
| CHF | ( | ( | ||
| CZK | ( | |||
| SEK | ( | ( | ||
| RUB | ( | |||
| Others | ( | ( | ||
| Total 2020 | ( | ( | ||
| Total 2019 | ( | ( | ||
Philips uses foreign exchange spot and forward contracts, as well as zero cost collars in hedging the exposure. The derivatives related to transactions are, for hedge accounting purposes, split into hedges of on-balance-sheet accounts receivable/ payable and forecasted sales and purchases. Changes in the value of on-balance-sheet foreign-currency accounts receivable/payable, as well as the changes in the fair value of the hedges related to these exposures, are reported in the income statement under costs of sales. Hedges related to forecasted transactions, where hedge accounting is applied, are accounted for as cash flow hedges. The results from such hedges are deferred in other comprehensive income within equity to the extent that the hedge is effective. As of December 31, 2020, a gain of EUR
The total net fair value of hedges related to transaction exposure as of December 31, 2020, was an unrealized gain of EUR
Philips Group
Estimated impact of 10% increase of value of the EUR on the fair value of hedges
in millions of EUR
| USD | ||
| JPY | ||
| GBP | ||
| CHF | ||
| PLN | ||
| RUB |
The EUR
Foreign exchange exposure also arises as a result of inter-company loans and deposits. Where the company enters into such arrangements, the financing is generally provided in the functional currency of the subsidiary entity. The currency of the company’s external funding and liquid assets is matched with the required financing of subsidiaries, either directly through external foreign currency loans and deposits, or synthetically by using foreign exchange derivatives, including cross currency interest rate swaps and foreign exchange forward contracts. In certain cases where group companies may also have external foreign currency debt or liquid assets, these exposures are also hedged through the use of foreign exchange derivatives. Changes in the fair value of hedges related to this exposure are recognized within financial income and expenses in the statements of income. When such loans would be considered part of the net investment in the subsidiary, net investment hedging would be applied.
Translation exposure of foreign-currency equity invested in consolidated entities is generally not hedged. If a hedge is entered into, it is accounted for as a net investment hedge. Net current-period change, before tax, of the currency translation reserve of negative EUR
As of December 31, 2020, cross-currency interest rate swaps for a nominal value of USD
The total net fair value of financing derivatives as of December 31, 2020, was a liability of EUR
As of December 31, 2019, cross-currency interest rate swaps for a nominal value of USD
The total net fair value of financing derivatives as of December 31, 2019, was a liability of EUR
Philips does not currently hedge the foreign exchange exposure arising from equity interests in non-functional-currency investments in associates and other non-current financial assets.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Philips had, at year-end, outstanding debt of EUR
The table below provides the impact of a
Philips Group
Net debt1) and interest rate sensitivity
in millions of EUR
| Impact 1% interest increase on the fair value of the fixed-rate long-term debt2)3) | ( | ( |
| Impact 1% interest decrease on the fair value of the fixed-rate long-term debt2)3) | ||
| Impact 1% interest increase on the annualized net interest expense4) |
Global regulators and central banks have been driving international efforts to reform key benchmark interest rates (Interbank Offered Rate or IBOR rates). The market is therefore in transition to alternative risk-free reference rates (RFRs) that are transaction-based. LIBOR discontinuation after 31 December 2021 is widely expected by market participants. The company is in the process of evaluating the implications of such a phase out. The Company has no interest rate hedging relationships which get affected by the reform and do not expect any significant impact on existing contracts due to change in the interest rates. The company will continue to monitor market developments.
Equity price risk
Equity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in equity prices.
Philips is a shareholder in some publicly listed companies and as a result is exposed to potential financial loss through movements in their share prices. The aggregate equity price exposure in such financial assets amounted to approximately EUR
Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in commodity prices.
Philips is a purchaser of certain base metals, precious metals and energy. Philips may hedge certain commodity price risks using derivative instruments to minimize significant, unanticipated earnings fluctuations caused by commodity price volatility. As of December 31, 2020 and 2019, respectively, Philips did not have any significant outstanding financial commodity derivatives.
Credit risk
Credit risk represents the loss that would be recognized at the reporting date, if counterparties failed completely to perform their payment obligations as contracted. Credit risk is present within Philips trade receivables and contract assets. To have better insights into the credit exposures, Philips performs ongoing evaluations of the financial and non-financial condition of its customers and adjusts credit limits when appropriate. In instances where the creditworthiness of a customer is determined not to be sufficient to grant the credit limit required, there are a number of mitigation tools that can be utilized to close the gap, including reducing payment terms, cash on delivery, pre-payments and pledges on assets.
Philips invests available cash and cash equivalents with various financial institutions and is exposed to credit risk with these counterparties. Philips is also exposed to credit risks in the event of non-performance by financial institutions with respect to financial derivative instruments. Philips actively manages concentration risk and on a daily basis measures the potential loss under certain stress scenarios, should a financial institution default. These worst-case scenario losses are monitored and limited by the company.
The company does not enter into any financial derivative instruments to protect against default by financial institutions. However, where possible the company requires all financial institutions with which it deals in derivative transactions to complete legally enforceable netting agreements under an International Swap Dealers Association master agreement or otherwise prior to trading, and whenever possible, to have a strong credit rating. Philips also regularly monitors the development of the credit risk of its financial counterparties. Wherever possible, cash is invested and financial transactions are concluded with financial institutions with strong credit ratings or with governments or government-backed institutions.
The table below shows the number of financial institutions with credit rating A- and above with which Philips has cash at hand and short-term deposits above EUR
Philips Group
Credit risk with number of counterparties
for deposits above EUR 10 million
| AA- rated bank counterparties | |||
| A+ rated bank counterparties | |||
| A rated bank counterparties | |||
| A- rated bank counterparties | |||
For an overview of the overall maximum credit exposure related to debt instruments, derivatives and loans and receivables, please refer to Fair value of financial assets and liabilities.
Country risk
Country risk is the risk that political, legal, or economic developments in a single country could adversely impact our performance. The country risk per country is defined as the sum of the equity of all subsidiaries and associated companies in country cross-border transactions, such as intercompany loans, accounts receivable from third parties and intercompany accounts receivable. The country risk is monitored on a regular basis.
As of December 31, 2020, the company had country risk exposure of EUR
The impact of hyperinflation is also routinely assessed and was not material for the periods presented.
Other insurable risks
Philips is covered for a broad range of losses by global insurance policies in the areas of property damage/ business interruption, general and product liability, transport, directors’ and officers’ liability, employment practice liability, crime and cybersecurity. The counterparty risk related to the insurance companies participating in the above-mentioned global insurance policies is actively managed. As a rule, Philips only selects insurance companies with a financial strength of at least A-. Throughout the year the counterparty risk is monitored on a regular basis.
To lower exposures and to avoid potential losses, Philips has a global Risk Engineering program in place. The main focus of this program is on property damage and business interruption risks including company interdependencies. Regular on-site assessments take place at Philips locations and business-critical suppliers by risk engineers of the insurer in order to provide an accurate assessment of the potential loss and its impact. The results of these assessments are shared across the company’s stakeholders. On-site assessments are carried out against the predefined Risk Engineering standards, which are agreed between Philips and the insurers. Recommendations are made in a Risk Improvement report and are monitored centrally. This is the basis for decision-making by the local management of the business as to which recommendations will be implemented.
For all policies, deductibles are in place, which vary from EUR
New contracts were signed effective December 31, 2020, for the coming year, whereby the re-insurance captive retentions remained unchanged.
31Subsequent events
BioTelemetry
On December 18, 2020, Philips and BioTelemetry, Inc. (BioTelemetry) announced that they have entered into a definitive merger agreement. BioTelemetry is a leading U.S.-based provider of remote cardiac diagnostics and monitoring. The acquisition is part of the Philips strategy to be a leading provider of patient care management solutions. On February 9, 2021, Philips completed a tender offer to acquire all of the issued and outstanding shares of BioTelemetry for USD
Capsule Technologies
On January 19, 2021, Philips announced it had signed an agreement to acquire Capsule Technologies, Inc., a global leader in medical device integration and data technologies for hospitals and healthcare organizations. The acquisition will become part of Philips’ Connected Care segment and expand Philips’ patient care management solutions for all care settings. Philips will acquire Capsule Technologies for a cash consideration of USD
New credit facilities
In February 2021, Philips entered and has drawn two new bilateral loans amounting to total EUR
14Other information
14.1Reconciliation of non-IFRS information
In this Annual Report Philips presents certain financial measures when discussing Philips’ performance that are not measures of financial performance or liquidity under IFRS (‘non-IFRS’). These non-IFRS measures (also known as non-GAAP or alternative performance measures) are presented because management considers them important supplemental measures of Philips’ performance and believes that they are widely used in the industry in which Philips operates as a means of evaluating a company’s operating performance and liquidity. Philips believes that an understanding of its sales performance, profitability, financial strength and funding requirements is enhanced by reporting the following non-IFRS measures:
- Comparable sales growth;
- EBITA;
- Adjusted EBITA;
- Adjusted income from continuing operations attributable to shareholders;
- Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted (Adjusted EPS);
- Adjusted EBITDA;
- Free cash flow;
- Net debt : group equity ratio; and
- Organic Return on Invested Capital (ROIC)
Non-IFRS measures do not have standardized meanings under IFRS and not all companies calculate non-IFRS measures in the same manner or on a consistent basis. As a result, these measures may not be comparable to measures used by other companies that have the same or similar names. Accordingly, undue reliance should not be placed on the non-IFRS measures contained in this Annual Report and they should not be considered as substitutes for sales, net income, net cash provided by operating activities or other financial measures computed in accordance with IFRS.
This chapter contains the definitions of the non-IFRS measures used in this Annual Report as well as reconciliations from the most directly comparable IFRS measures. The non-IFRS measures discussed in this Annual Report are cross referenced to this chapter. These non-IFRS measures should not be viewed in isolation or as alternatives to equivalent IFRS measures and should be used in conjunction with the most directly comparable IFRS measures.
The non-IFRS financial measures presented are not measures of financial performance or liquidity under IFRS, but measures used by management to monitor the underlying performance of Philips’ business and operations and, accordingly, they have not been audited or reviewed by Philips’ external auditors.
Additionally, Philips provides forward-looking targets for comparable sales growth, adjusted EBITA margin improvement, free cash flow and organic ROIC, which are non-IFRS financial measures. Philips has not provided a quantitative reconciliation of these targets to the most directly comparable IFRS measures because certain information needed to reconcile these non-IFRS financial measures to the most comparable IFRS financial measures are dependent on specific items or impacts which are not yet determined, are subject to uncertainty and variability in timing and amount due to their nature, are outside of Philips’ control, or cannot be predicted, including items and impacts such as currency exchange rates, acquisitions and disposals, legal and tax gains and losses and pension settlements, charges and costs such as impairments, restructuring and acquisition-related charges, amortization of intangible assets and net capital expenditures. Accordingly, reconciliations of these non-IFRS forward looking financial measures to the most directly comparable IFRS financial measures are not available without unreasonable effort. Such unavailable reconciling items could significantly impact our results of operations and financial condition.
Comparable sales growth
Comparable sales growth represents the period-on-period growth in sales excluding the effects of currency movements and changes in consolidation. As indicated in Significant accounting policies, foreign currency sales and costs are translated into Philips’ presentation currency, the euro, at the exchange rates prevailing at the respective transaction dates. As a result of significant foreign currency sales and currency movements during the periods presented, the effects of translating foreign currency sales amounts into euros could have a material impact on the comparability of sales between periods. Therefore, these impacts are excluded when presenting comparable sales in euros by translating the foreign currency sales of the previous period and the current period into euros at the same average exchange rates. In addition, the years presented were affected by a number of acquisitions and divestments, as a result of which various activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales, when a previously consolidated entity is sold or control is lost, relevant sales for that entity of the corresponding prior year period are excluded. Similarly, when an entity is acquired and consolidated, relevant sales for that entity of the current year period are excluded.
Comparable sales growth is presented for the Philips Group, operating segments and geographic clusters. Philips’ believes that the presentation of comparable sales growth is meaningful for investors to evaluate the performance of Philips’ business activities over time. Comparable sales growth may be subject to limitations as an analytical tool for investors, because comparable sales growth figures are not adjusted for other effects, such as increases or decreases in prices or quantity/volume. In addition, interaction effects between currency movements and changes in consolidation are not taken into account.
Philips Group
Sales growth composition per segment
in %
| 2020 versus 2019 | ||||
| Diagnosis & Treatment | (3.7) | (1.0) | 2.3 | (2.3) |
| Connected Care | 19.1 | 0.7 | 2.3 | 22.0 |
| Personal Health | (7.6) | 0.0 | 3.5 | (4.2) |
| Philips Group | 0.3 | (0.4) | 2.6 | 2.5 |
2019 versus 2018 | ||||
| Diagnosis & Treatment | 9.8 | (1.2) | (3.2) | 5.5 |
| Connected Care | 7.7 | (0.4) | (4.2) | 3.1 |
| Personal Health | 6.0 | 0.2 | (1.2) | 5.0 |
| Philips Group | 7.5 | (0.3) | (2.8) | 4.5 |
2018 versus 2017 | ||||
| Diagnosis & Treatment | 4.9 | (2.4) | 4.1 | 6.6 |
| Connected Care | 0.2 | (1.6) | 4.1 | 2.7 |
| Personal Health | (2.8) | 0.6 | 4.6 | 2.3 |
| Philips Group | 1.9 | (1.4) | 4.2 | 4.7 |
Philips Group
Sales growth composition per geographic cluster
in %
| 2020 versus 2019 | ||||
| Western Europe | 11.6 | (0.9) | 0.1 | 10.8 |
| North America | 0.0 | (0.3) | 1.9 | 1.5 |
| Other mature geographies | (2.3) | (0.5) | 0.5 | (2.3) |
| Total mature geographies | 3.3 | (0.5) | 1.1 | 3.9 |
| Growth geographies | (5.8) | (0.1) | 5.7 | (0.3) |
| Philips Group | 0.3 | (0.3) | 2.6 | 2.5 |
2019 versus 2018 | ||||
| Western Europe | 3.6 | (1.0) | (0.2) | 2.4 |
| North America | 9.7 | (0.6) | (5.5) | 3.5 |
| Other mature geographies | 0.7 | (0.3) | (3.7) | (3.4) |
| Total mature geographies | 6.3 | (0.7) | (3.5) | 2.1 |
| Growth geographies | 10.0 | 0.6 | (1.0) | 9.6 |
| Philips Group | 7.5 | (0.3) | (2.8) | 4.5 |
2018 versus 2017 | ||||
| Western Europe | 4.9 | (2.6) | 0.4 | 2.7 |
| North America | (1.1) | (2.6) | 4.4 | 0.7 |
| Other mature geographies | 10.8 | (0.4) | 4.1 | 14.5 |
| Total mature geographies | 2.5 | (2.3) | 3.1 | 3.3 |
| Growth geographies | 0.7 | 0.4 | 6.5 | 7.6 |
| Philips Group | 1.9 | (1.4) | 4.2 | 4.7 |
Adjusted EBITA
The term Adjusted EBITA is used to evaluate the performance of Philips and its segments. EBITA represents Income from operations excluding amortization and impairment of acquired intangible assets and impairment of goodwill. Adjusted EBITA represents EBITA excluding gains or losses from restructuring costs, acquisition-related charges and other items.
Restructuring costs are defined as the estimated costs of initiated reorganizations, the most significant of which have been approved by the Executive Committee, and which generally involve the realignment of certain parts of the industrial and commercial organization.
Acquisition-related charges are defined as costs that are directly triggered by the acquisition of a company, such as transaction costs, purchase accounting related costs and integration-related expenses.
Other items are defined as any individual item with an income statement impact (loss or gain) that is deemed by management to be both significant and incidental to normal business activity. Other items may extend over several quarters and are not limited to the same financial year.
Philips considers the use of Adjusted EBITA appropriate as Philips uses it as a measure of segment performance and as one of its strategic drivers to increase profitability through re-allocation of its resources towards opportunities offering more consistent and higher returns. This is done with the aim of making the underlying performance of the businesses more transparent.
EBITA excludes amortization and impairment of acquired intangible assets (and impairment of goodwill), which primarily relates to brand names, customer relationships and technology, as Philips believes that such amounts are inconsistent in amount and frequency, are significantly impacted by the timing and/or size of acquisitions and do not factor into its decisions on allocation of its resources across segments. Although we exclude amortization and impairment of acquired intangible assets from our Adjusted EBITA measure, Philips believes that it is important for investors to understand that these acquired intangible assets contribute to revenue generation.
Philips believes Adjusted EBITA is useful to evaluate financial performance on a comparable basis over time by factoring out restructuring costs, acquisition-related charges and other incidental items which are not directly related to the operational performance of Philips Group or its segments.
Adjusted EBITA may be subject to limitations as an analytical tool for investors, as it excludes restructuring costs, acquisition-related charges and other incidental items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income.
Adjusted EBITA margin refers to Adjusted EBITA divided by sales expressed as a percentage.
Adjusted EBITA is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted EBITA to the most directly comparable IFRS measure, Net income, for the years indicated is included in the following table. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation of Net income to Adjusted EBITA
in millions of EUR
| 2020 | |||||
| Net Income | 1,195 | ||||
| Discontinued operations, net of income taxes | 10 | ||||
| Income tax expense | 284 | ||||
| Investments in associates, net of income taxes | 9 | ||||
| Financial expenses | 204 | ||||
| Financial income | (160) | ||||
| Income from operations | 1,542 | 495 | 708 | 619 | (280) |
| Amortization of acquired intangible assets | 381 | 209 | 134 | 20 | 18 |
| Impairment of goodwill | 144 | 144 | |||
| EBITA | 2,067 | 704 | 986 | 639 | (262) |
| Restructuring and acquisition-related charges | 203 | 29 | 97 | 40 | 37 |
| Other items | 301 | 83 | 112 | 25 | 81 |
| Adjusted EBITA | 2,570 | 816 | 1,195 | 704 | (145) |
| 2019 | |||||
| Net Income | 1,173 | ||||
| Discontinued operations, net of income taxes | 19 | ||||
| Income tax expense | 337 | ||||
| Investments in associates, net of income taxes | (1) | ||||
| Financial expenses | 233 | ||||
| Financial income | (117) | ||||
| Income from operations | 1,644 | 660 | 267 | 844 | (127) |
| Amortization of acquired intangible assets | 350 | 177 | 141 | 25 | 8 |
| Impairment of goodwill | 97 | 19 | 78 | ||
| EBITA | 2,091 | 856 | 486 | 869 | (119) |
| Restructuring and acquisition-related charges | 318 | 149 | 64 | 50 | 54 |
| Other items | 153 | 73 | 67 | 23 | (11) |
| Adjusted EBITA | 2,563 | 1,078 | 618 | 943 | (76) |
| 2018 | |||||
| Net Income | 1,097 | ||||
| Discontinued operations, net of income taxes | 213 | ||||
| Income tax expense | 193 | ||||
| Investments in associates, net of income taxes | 2 | ||||
| Financial expenses | 264 | ||||
| Financial income | (51) | ||||
| Income from operations | 1,719 | 629 | 399 | 796 | (105) |
| Amortization of acquired intangible assets | 347 | 98 | 140 | 31 | 79 |
| EBITA | 2,066 | 727 | 539 | 827 | (27) |
| Restructuring and acquisition-related charges | 258 | 146 | 66 | 15 | 31 |
| Other items | 41 | - | 56 | 18 | (33) |
| Adjusted EBITA | 2,366 | 872 | 662 | 860 | (28) |
Adjusted income from continuing operations attributable to shareholders
The term Adjusted income from continuing operations attributable to shareholders represents income from continuing operations less continuing operations non-controlling interests, amortization and impairment of acquired intangible assets, impairment of goodwill, excluding gains or losses from restructuring costs and acquisition-related charges, other items, adjustments to net finance expenses, adjustments to investments in associates and the tax impact of the adjusted items. Shareholders refers to shareholders of Koninklijke Philips N.V.
Restructuring costs, acquisition-related charges and other items are all defined in the Adjusted EBITA section above.
Net finance expenses are defined as either the financial income or expense component of an individual item already identified to be excluded as part of the Adjusted income from continuing operations, fair value movements of equity investments in limited life funds recognized at fair value through profit or loss or a financial income or expense component with an income statement impact (gain or loss) that is deemed by management to be both significant and incidental to normal business activity.
The Tax impact of the adjusted items is calculated using the Weighted Average Statutory Tax Rate plus any recurring tax costs or benefits.
In 2020, Philips revised the definition of net finance expenses used in the calculation of Adjusted income from continuing operations attributable to shareholders, to exclude fair value movements of limited life fund investments recognized at fair value through profit and loss. This change leads to more relevant information as the fair value movements are not indicative of Philips' performance. In addition, the fair value movements do not represent cash items. Philips believes making this change is helpful for investors to evaluate Philips' performance. Limited life fund investments are presented under Other non-current financial assets and classified as financial assets at fair value through profit or loss (refer to note Other financial assets), and related fair value movements are presented in financial income and expense (refer to note Financial income and expenses). Fair value movements of equity investments in limited life funds in 2020 were EUR 131 million. Fair value movements of equity investments in limited life funds in 2019 were EUR 1 million.
Philips considers the use of Adjusted income from continuing operations attributable to shareholders appropriate as Philips uses it as the basis for the Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted, a non-IFRS measure.
Adjusted income from continuing operations attributable to shareholders may be subject to limitations as an analytical tool for investors, as it excludes certain items and therefore does not reflect the expense associated with such items, which may be significant and have a significant effect on Philips’ net income. Net income, for the years indicated is included in the following table. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Adjusted income from continuing operations attributable to shareholders is not a recognized measure of financial performance under IFRS. The reconciliation of Adjusted income from continuing operations attributable to shareholders to the most directly comparable IFRS measure, Net income, for the years indicated is included in the following table.
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted (Adjusted EPS)
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted is calculated by dividing the Adjusted income from continuing operations attributable to shareholders by the diluted weighted average number of shares (after deduction of treasury shares) outstanding during the period, as defined in Significant accounting policies, earnings per share section.
Philips considers the use of Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted appropriate as it is a measure that is useful when comparing its performance to other companies in the HealthTech industry. However, it may be subject to limitations as an analytical tool for investors, as it uses Adjusted income from continuing operations attributable to shareholders which has certain items excluded.
Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted is not a recognized measure of financial performance under IFRS. The most directly comparable IFRS measure, income from continuing operations attributable to shareholders per common share (in EUR) - diluted for the years indicated, is included in the table below.
Philips Group
Adjusted income from continuing operations attributable to shareholders1)
in millions of EUR unless otherwise stated
| Net income | 1,097 | 1,173 | 1,195 |
| Discontinued operations, net of income taxes | 213 | 19 | 10 |
| Income from continuing operations | 1,310 | 1,192 | 1,205 |
| Continuing operations non-controlling interests | (7) | (5) | (8) |
| Income from continuing operations attributable to shareholders1) | 1,303 | 1,186 | 1,197 |
| Adjustments for: | |||
| Amortization of acquired intangible assets | 347 | 350 | 381 |
| Impairment of goodwill | 97 | 144 | |
| Restructuring costs and acquisition-related charges | 258 | 318 | 203 |
| Other items | 41 | 153 | 301 |
| Net finance expenses2) | 57 | 13 | (125) |
| Tax impact of adjusted items | (365) | (280) | (285) |
| Adjusted Income from continuing operations attributable to shareholders1) | 1,643 | 1,838 | 1,814 |
| Earnings per common share:3) | |||
| Income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | 1.37 | 1.27 | 1.31 |
| Adjusted income from continuing operations attributable to shareholders1) per common share (in EUR) - diluted | 1.72 | 1.98 | 1.98 |
Adjusted EBITDA
Adjusted EBITDA is defined as Income from operations excluding amortization and impairment of intangible assets, impairment of goodwill, depreciation and impairment of property, plant and equipment, restructuring costs, acquisition-related charges and other items.
Philips understands that Adjusted EBITDA is broadly used by analysts, rating agencies and investors in their evaluation of different companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. Philips considers Adjusted EBITDA useful when comparing its performance to other companies in the HealthTech industry. However, Adjusted EBITDA may be subject to limitations as an analytical tool because of the range of items excluded and their significance in a given reporting period. Furthermore, comparisons with other companies may be complicated due to the absence of a standardized meaning and calculation framework. Our management compensates for the limitations of using Adjusted EBITDA by using this measure to supplement IFRS results to provide a more complete understanding of the factors and trends affecting the business rather than IFRS results alone. In addition to the limitations noted above, Adjusted EBITDA excludes items that may be recurring in nature and should not be disregarded in the evaluation of performance. However, we believe it is useful to exclude such items to provide a supplemental analysis of current results and trends compared to other periods. This is because certain excluded items can vary significantly depending on specific underlying transactions or events. Also, the variability of such items may not relate specifically to ongoing operating results or trends and certain excluded items, while potentially recurring in future periods and may not be indicative of future results. A reconciliation from net income to Adjusted EBITDA is provided below. Net income, for the years indicated is included in the following table. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.
Philips Group
Reconciliation of Net income to Adjusted EBITDA
in millions of EUR
| 2020 | |||||
| Net Income | 1,195 | ||||
| Discontinued operations, net of income taxes | 10 | ||||
| Income tax expense | 284 | ||||
| Investments in associates, net of income taxes | 9 | ||||
| Financial expenses | 204 | ||||
| Financial income | (160) | ||||
| Income from operations | 1,542 | 495 | 708 | 619 | (280) |
| Depreciation, amortization and impairment of fixed assets | 1,520 | 536 | 415 | 187 | 382 |
| Impairment of goodwill | 144 | - | 144 | ||
| Restructuring and acquisition-related charges | 203 | 29 | 97 | 40 | 37 |
| Other items | 301 | 83 | 112 | 25 | 81 |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (102) | (35) | (64) | 1 | (4) |
| Adjusted EBITDA | 3,608 | 1,108 | 1,412 | 872 | 215 |
| 2019 | |||||
| Net Income | 1,173 | ||||
| Discontinued operations, net of income taxes | 19 | ||||
| Income tax expense | 337 | ||||
| Investments in associates, net of income taxes | (1) | ||||
| Financial expenses | 233 | ||||
| Financial income | (117) | ||||
| Income from operations | 1,644 | 660 | 267 | 844 | (127) |
| Depreciation, amortization and impairment of fixed assets | 1,402 | 564 | 327 | 186 | 326 |
| Impairment of goodwill | 97 | 19 | 78 | ||
| Restructuring and acquisition-related charges | 318 | 149 | 64 | 50 | 54 |
| Other items | 153 | 73 | 67 | 23 | (11) |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (111) | (109) | (2) | - | (1) |
| Adjusted EBITDA | 3,503 | 1,357 | 802 | 1,104 | 241 |
| 2018 | |||||
| Net Income | 1,097 | ||||
| Discontinued operations, net of income taxes | 213 | ||||
| Income tax expense | 193 | ||||
| Investments in associates, net of income taxes | 2 | ||||
| Financial expenses | 264 | ||||
| Financial income | (51) | ||||
| Income from operations | 1,719 | 629 | 399 | 796 | (105) |
| Depreciation, amortization and impairment of fixed assets | 1,089 | 349 | 326 | 171 | 244 |
| Restructuring and acquisition-related charges | 258 | 146 | 66 | 15 | 31 |
| Other items | 41 | - | 56 | 18 | (33) |
| Adding back impairment of fixed assets included in Restructuring and acquisition-related changes and Other items | (15) | (7) | (8) | - | 1 |
| Adjusted EBITDA | 3,093 | 1,116 | 839 | 1,000 | 139 |
Free cash flow
Free cash flow is defined as net cash flows from operating activities minus net capital expenditures. Net capital expenditures are comprised of the purchase of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from sales of property, plant and equipment.
Philips discloses free cash flow as a supplemental non-IFRS financial measure, as Philips believes it is a meaningful measure to evaluate the performance of its business activities over time. Philips understands that free cash flow is broadly used by analysts, rating agencies and investors in assessing its performance. Philips also believes that the presentation of free cash flow provides useful information to investors regarding the cash generated by the Philips operations after deducting cash outflows for purchases of intangible assets, capitalization of product development, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposal of property, plant and equipment. Therefore, the measure gives an indication of the long-term cash generating ability of the business. In addition, because free cash flow is not impacted by purchases or sales of businesses and investments, it is generally less volatile than the total of net cash provided by (used for) operating activities and net cash provided by (used for) investing activities.
Free cash flow may be subject to limitations as an analytical tool for investors, as free cash flow is not a measure of cash generated by operations available exclusively for discretionary expenditures and Philips requires funds in addition to those required for capital expenditures for a wide variety of non-discretionary expenditures, such as payments on outstanding debt, dividend payments or other investing and financing activities. In addition, free cash flow does not reflect cash payments that may be required in future for costs already incurred, such as restructuring costs.
Philips adopted IFRS 16 on January 1, 2019. As a result, Philips calculation of Free cash flow for the year ended December 31, 2020 and 2019 includes the impact of IFRS 16. Free cash flow calculations for the year ended December 31, 2018 have not been restated for this impact.
Philips Group
Composition of free cash flow
in millions of EUR
| Net cash flows provided by operating activities | 1,780 | 2,031 | 2,777 |
| Net capital expenditures: | (796) | (978) | (924) |
| Purchase of intangible assets | (123) | (156) | (127) |
| Expenditures on development assets | (298) | (339) | (302) |
| Capital expenditures on property, plant and equipment | (422) | (518) | (513) |
| Proceeds from disposals of property, plant and equipment | 46 | 35 | 18 |
| Free cash flow | 984 | 1,053 | 1,852 |
Net debt : group equity ratio
Net debt : group equity ratio is presented to express the financial strength of Philips. Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. Group equity is defined as the sum of shareholders’ equity and non-controlling interests. This measure is used by Philips Treasury management and investment analysts to evaluate financial strength and funding requirements. This measure may be subject to limitations because cash and cash equivalents are used for various purposes, not only debt repayment. The net debt calculation deducts all cash and cash equivalents whereas these items are not necessarily available exclusively for debt repayment at any given time.
Philips Group
Composition of net debt to group equity
in millions of EUR unless otherwise stated
| Long-term debt | 3,427 | 4,939 | 5,705 |
| Short-term debt | 1,394 | 508 | 1,229 |
| Total debt | 4,821 | 5,447 | 6,934 |
| Cash and cash equivalents | 1,688 | 1,425 | 3,226 |
| Net debt | 3,132 | 4,022 | 3,708 |
| Shareholders' equity | 12,088 | 12,597 | 11,870 |
| Non-controlling interests | 29 | 28 | 31 |
| Group equity | 12,117 | 12,625 | 11,901 |
| Net debt : group equity ratio | 21:79 | 24:76 | 24:76 |
Organic Return on Invested Capital
Organic Return on Invested Capital (ROIC) is defined as organic return which includes income from operations for the year excluding the impact of: Income or Loss from operations of businesses acquired in the five year period prior to the measurement date; certain tax gains and losses determined by management to be material in nature and require separate disclosure and; certain other items; and tax effects of the other adjustments (calculated at group effective tax rate) divided by average of the Net operating capital at the end of each of the five quarters ending on the relevant measurement date excluding the average net operating capital at the end of each of the five quarters ending on the relevant measurement date of the businesses acquired in the five year period prior to the measurement date, expressed as a percentage.
Net operating capital is defined as tangible fixed assets, intangible fixed assets, including goodwill, inventories and receivable balances, minus payable balances and provisions, all as further defined below. Net operating capital is also adjusted to exclude assets and liabilities of businesses acquired in the five year period prior to the relevant measurement date. Organic ROIC is calculated after taxes.
Other items are defined as material in nature and require separate disclosure and have the same nature as the items excluded from Adjusted EBITA. In the years 2019-2020 these other items included legal provisions, pension settlements and results of divestments. Refer to Net income, Income from operations (EBIT) and Adjusted EBITA within Results of operations section of Financial performance.
The term Organic Return on Invested Capital (ROIC) is used by management to evaluate Philips’ efficiency at allocating the capital under its control to profitable investments and how well the company uses capital to generate returns. Philips believes that Organic ROIC provides useful information to investors because it excludes the impact of recently acquired businesses, giving a more accurate representation of how the Philips Business System is leveraged to drive operational excellence and removes irregularity caused by various operating models of recently acquired businesses. Philips also believes that excluding certain items determined by management to be material in nature and requiring separate disclosure enhances comparability across several periods. Organic ROIC may be subject to limitations as an analytical tool for investors, as it excludes Income or Loss from operations of acquired businesses and tax gains and losses and certain other items, which may have a significant effect on ROIC. Organic ROIC is not a recognized measure of financial performance under IFRS.
The most comparable IFRS measure to Organic ROIC is Return on total assets, calculated as Income from operations for the year divided by total assets as of the end of the year. Return on total assets as of the balance sheet date for the years ended 31 December 2019 and 2020 is included in the table below.
Philips Group
Return on total assets
in millions of EUR unless otherwise stated
| Income from operations | 1,719 | 1,644 | 1,542 |
| Total assets | 26,019 | 27,016 | 27,713 |
| Return on total assets (%) | 6.6% | 6.1% | 5.6% |
The reconciliation of Average Net operating capital and the reconciliation of Net income to Organic ROIC for the years ended 31 December 2018, 2019 and 2020 are included in the following tables. Philips adopted IFRS 16 on January 1, 2019. As a result, Philips calculation of Organic ROIC for the year ended December 31, 2020 and 2019 includes the impact of IFRS 16. Organic ROIC calculations for the year ended December 31, 2018 have not been restated for this impact.
Philips Group
Reconciliation of Average Net operating capital1)
in millions of EUR unless otherwise stated
| Tangible fixed assets | 1,603 | 2,412 | 2,799 |
| Intangible fixed assets (including goodwill) | 11,473 | 12,242 | 11,789 |
| Inventories | 2,611 | 2,918 | 3,056 |
| Receivables balances2) | 4,514 | 4,955 | 5,010 |
| Payable balances3) | (6,245) | (6,461) | (6,520) |
| Provisions4) | (2,091) | (2,183) | (2,066) |
| Group Average Net operating capital | 11,865 | 13,882 | 14,068 |
| Net operating capital of businesses acquired | (3,798) | (4,176) | (3,176) |
| Average Net operating capital | 8,067 | 9,706 | 10,892 |
Philips Group
Reconciliation of Net Income to Organic ROIC
in millions of EUR unless otherwise stated
| Net Income | 1,097 | 1,173 | 1,195 |
| Discontinued operations, net of income taxes | 213 | 19 | 10 |
| Income tax expense | 193 | 337 | 284 |
| Investments in associates, net of income taxes | 2 | (1) | 9 |
| Financial expenses | 264 | 233 | 204 |
| Financial Income | (51) | (117) | (160) |
| Income from operations | 1,719 | 1,644 | 1,542 |
| (Income) Loss from operations of businesses acquired | 194 | 301 | 265 |
| Tax gains and losses | (188) | (22) | |
| Other items | (18) | 59 | |
| Income tax expense | (193) | (337) | (284) |
| Tax effects of other adjustments | (24) | (61) | 30 |
| Organic return | 1,508 | 1,529 | 1,590 |
| Average Net operating capital | 8,067 | 9,706 | 10,892 |
| Organic ROIC (%) | 18.7% | 15.8% | 14.6% |
14.2Other Key Performance Indicators
In addition to monitoring the IFRS and non-IFRS financial measures discussed under Financial performance, Philips’ management also uses the following other key performance indicators to monitor the performance of the business and to manage the business.
Lives Improved
The purpose of Philips is to improve people’s health and well-being through meaningful innovation and we aim to improve the lives of 2 billion people a year by 2025, including 300 million in underserved communities, rising to 2.5 billion and 400 million respectively by 2030. We use Lives Improved as a measurement of our societal impact. We define Lives Improved as the number of individuals who have interacted with Philips products that contribute to the social or ecological dimension over the lifetime of a product. We calculate Lives Improved as the number of individual interactions for each product sold (based on market intelligence and statistical data) and multiply by the number of those products delivered in a year (eliminating double counting for multiple different product touches per individual). See Improving people’s lives for more information on Lives Improved.
Operational Carbon Footprint
As a responsible company, we aim to minimize our environmental impact and we use the Operational Carbon Footprint as one of the measurements of our impact. We define Operational Carbon Footprint as the total greenhouse gas emissions caused by an organization, event, product or person; expressed in kilotonnes CO2-equivalent. We calculate our Operational Carbon Footprint on a half-year basis and include industrial sites (manufacturing and assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport) See Sustainable Operations for more information on our Operational Carbon Footprint.
Circular Revenues
As a company committed to the transition to a circular economy, we aim to decouple economic growth from the use of natural resources and ecosystems by using those resources more effectively. We define Circular Revenues as revenues generated through products and solutions that meet specific Circular Economy requirements (including performance and access-based business models, refurbished, reconditioned and remanufactured products and systems, refurbished, reconditioned and remanufactured components, upgrades or refurbishment on site or remote, and products with a recycled plastics content of >25% post-consumer recycled plastics or >30% post-industrial/postconsumer recycled plastics by total weight of eligible plastics). We calculate Circular Revenues as annual revenues attributable to products and solutions that meet the Circular Economy requirements.
Waste to Landfill
At Philips, as a responsible company, we strive to reduce our environmental impact. We define Waste to Landfill as total waste that is delivered for landfill and exclude one-time-only waste and waste delivered to landfill due to regulatory requirements. We calculate Waste to Landfill in kilotonnes per year. See Sustainable Operations for more information on Waste to Landfill.
Closing the Loop
At Philips, we are committed to offer a trade-in on all our professional medical equipment and to take care of responsible repurposing of such trade-in systems. We call this “Closing the Loop”. We calculate Closing the Loop as Process Adherence (%) * Reclaim (%). Process adherence (%) is defined as the % of won Replacement Philips deals which are associated with a trade in request in our CRM system. Reclaim (%) is defined as the % of won Replacement Philips deals with a customer accepted trade in request in our CRM system and a repurposing strategy that fulfills our reclaim requirements.
Philips believes that the five other key performance indicators described above (Lives Improved, Operational Carbon Footprint, Circular Revenues, Waste to Landfill and Closing the Loop) provide important information to investors and are important to understanding the long-term performance and prospects of the business. In addition, these other key performance indicators are also used for management compensation purposes. Members of the Board of Management are eligible for grants of performance shares under the Long-Term Incentive (LTI) Plan, and the vesting of the performance shares is subject to performance over a period of 3 years and based on certain criteria, including a 10% weighting for Sustainability Objectives, which Philips defines as the five other key performance indicators described above: Lives Improved, Carbon Footprint, Circular Revenues, Waste to Landfill and Closing the Loop. Philips believes that including these other key performance indicators in our remuneration policy encourages management to act responsibly and sustainably, supporting the company’s overall performance and enhancing the long-term value of the company. See Remuneration of the Board of Management in 2020 for more information on the Philips’ Long-Term Incentive (LTI) Plan.
Comparable order intake
Comparable order intake represents the period-on-period growth, expressed as a percentage, in order intake excluding the effects of currency movements and changes in consolidation. Comparable order intake is reported for equipment and software in the Diagnoses & Treatment and Connected Care businesses, and is defined as the total contractually committed value of equipment and software to be delivered within a specified timeframe, and is an approximation of expected future revenue growth in the respective businesses. Comparable order intake does not derive from the financial statements and a quantitative reconciliation is thus not provided.
Effective 2020, Philips has simplified its order intake policy by aligning horizons for all modalities to 18 months to revenue, compared to previously used delivery horizons of 6 months for Ultrasound, 12 months for Connected Care and 15 months for Diagnosis & Treatment. At the time, Philips has aligned order intake for software contracts to the same 18 months to revenue horizon, meaning that only the next 18 months conversion to revenue under the contract is recognized, compared to the full contract values recognized previously. This change eliminates major variances in order intake growth and better reflects expected revenue in the short term from order intake booked in the reporting period. Prior-year comparable order intake amounts have been restated accordingly. This realignment has not resulted in any material additional order intake recognition.
Philips uses comparable order intake as an indicator of business activity and performance. Comparable order intake is not an alternative to revenue and may be subject to limitations as an analytical tool due to differences in amount and timing between booking orders and revenue recognition. Due to divergence in practice, other companies may calculate this or a similar measure (such as order backlog) differently and therefore comparisons between companies may be complicated.
14.3Five-year overview (condensed)
Philips Group
Other Key Performance Indicators
| Lives improved, in billions | 1.36 | 1.47 | 1.54 | 1.64 | 1.75 |
| Operational carbon footprint, in kilotonnes CO2-equivalent | 812 | 881 | 786 | 706 | 535 |
| Circular revenues | 9% | 11% | 12% | 13% | 15% |
| Waste to landfill | 12% | 11% | 7% | 5% | 2% |
| Closing the Loop1)2) | 100% | ||||
| Comparable order intake1) | 6% | 10% | 6% | 9% |
Due to factors such as acquisitions and divestments, the amounts, percentages and ratios are not directly comparable.
Philips Group
Selected financial data
in millions of EUR unless otherwise stated
| Sales | 17,422 | 17,780 | 18,121 | 19,482 | 19,535 |
| Income from operations | 1,464 | 1,517 | 1,719 | 1,644 | 1,542 |
| Financial income and expenses - net | (442) | (137) | (213) | (117) | (44) |
| Income (loss) from continuing operations | 830 | 1,028 | 1,310 | 1,192 | 1,205 |
| Income (loss) from continuing operations attributable to shareholders1)2) | 826 | 1,017 | 1,303 | 1,186 | 1,197 |
| Income (loss) from discontinued operations | 660 | 843 | (213) | (19) | (10) |
| Net income (loss) | 1,490 | 1,870 | 1,097 | 1,173 | 1,195 |
| Net income (loss) attributable to shareholders1) | 1,448 | 1,657 | 1,090 | 1,167 | 1,187 |
| Total assets | 32,269 | 25,315 | 26,019 | 27,016 | 27,713 |
| Net assets | 13,435 | 12,023 | 12,117 | 12,625 | 11,901 |
| Debt | 5,606 | 4,715 | 4,821 | 5,447 | 6,934 |
| Provisions | 3,605 | 2,059 | 2,151 | 2,159 | 1,980 |
| Shareholders’ equity | 12,546 | 11,999 | 12,088 | 12,597 | 11,870 |
| Non-controlling interests | 907 | 24 | 29 | 28 | 31 |
| Weighted average shares outstanding:3) | |||||
| basic | 936,096 | 946,878 | 941,067 | 921,062 | 907,721 |
| diluted | 946,869 | 963,212 | 953,931 | 930,771 | 916,625 |
| Amount of common shares outstanding at year-end | 922,437 | 926,192 | 914,184 | 890,974 | 905,128 |
| Basic earnings per common share:3) | |||||
| Income (loss) from continuing operations attributable to shareholders1) | 0.88 | 1.07 | 1.38 | 1.29 | 1.32 |
| Net income (loss) attributable to shareholders1) | 1.55 | 1.75 | 1.16 | 1.27 | 1.31 |
| Diluted earnings per common share:3) | |||||
| Income (loss) from continuing operations attributable to shareholders1) | 0.87 | 1.06 | 1.37 | 1.27 | 1.31 |
| Net income (loss) attributable to shareholders1) | 1.53 | 1.72 | 1.14 | 1.25 | 1.29 |
| Dividend distributed per common share | 0.80 | 0.80 | 0.80 | 0.85 | 0.85 |
| Total employees at year-end (FTEs) | 114,731 | 73,951 | 77,400 | 80,495 | 81,592 |
14.4Investor information
14.4.2Financial calendar
Financial calendar
| Annual General Meeting of Shareholders | |
| Record date 2021 AGM | April 8, 2021 |
| 2021 AGM | May 6, 2021 |
| Quarterly reports1) | |
| First quarter results 2021 | April 26, 2021 |
| Second quarter results 2021 | July 26, 2021 |
| Third quarter results 2021 | October 18, 2021 |
| Fourth quarter results 2021 | January 24, 2022 |
2021 Annual General Meeting of Shareholders
The Agenda and the explanatory notes to the Agenda for the Annual General Meeting of Shareholders on May 6, 2021, will be published on the company’s website.
For the 2021 Annual General Meeting of Shareholders, a record date of April 8, 2021 will apply. Those persons who, on that date, hold shares in the Company, and are registered as such in one of the registers designated by the Board of Management for the Annual General Meeting of Shareholders, will be entitled to participate in, and vote at, the meeting.
14.4.3Investor contact
Shareholder services
Shareholders and other interested parties can make inquiries about the Annual Report 2020 to:
Royal Philips
Annual Report Office
Philips Center
P.O. Box 77900
1070 MX Amsterdam, The Netherlands
E-mail: annual.report@philips.com
The Annual Report on Form 20-F is filed electronically with the US Securities and Exchange Commission.
Holders of shares listed on Euronext Amsterdam
Communications concerning share transfers, share certificates, dividends and change of address should be directed to:
ABN AMRO Bank N.V.
Department Equity Capital Markets/Corporate Broking HQ7212
Gustav Mahlerlaan 10, 1082 PP Amsterdam
The Netherlands
Telephone: +31-20-34 42000
E-mail: corporate.broking@nl.abnamro.com
Holders of New York Registry shares
Communications concerning share transfers, share certificates, dividends and change of address should be directed to:
Deutsche Bank Trust Company Americas
C/O AST
6201 15th Avenue Brooklyn, NY 11219
Telephone (toll-free US): +1-866-706-8374
Telephone (outside of US): +1-718-921-8137
Website: www.astfinancial.com
E-mail: db@astfinancial.com
International direct investment program
Philips offers a Dividend Reinvestment and Direct Stock Purchase Plan designed for the US market. This program provides existing shareholders and interested investors with an economical and convenient way to purchase and sell Philips New York Registry shares (listed at the New York Stock Exchange) and to reinvest cash dividends. Deutsche Bank (the registrar of Philips NY Registry shares) has been authorized to implement and administer both plans for registered shareholders of and new investors in Philips NY Registry shares. Philips does not administer or sponsor the Program and assumes no obligation or liability for the operation of the plan. For further information on this program and for enrollment forms, contact:
Deutsche Bank Global Direct Investor Services
Telephone (toll-free US): +1-866-706-8374
Telephone (outside of US): +1-718-921-8137
Monday through Friday 8:00 AM EST through 8:00 PM EST
Website www.astfinancial.com
E-mail: db@astfinancial.com
or write to:
Deutsche Bank Trust Company Americas
IC/O AST
6201 15th Avenue Brooklyn, NY 11219
Analysts’ coverage
Philips is covered by approximately 25 analysts. For a list of our current analysts, please refer to: www.philips.com/a-w/about/investor/stock-info/analyst-coverage.html
How to reach us
The registered office of Royal Philips is:
High Tech Campus 5, 5656 AE Eindhoven, The Netherlands
Investor Relations contact
Royal Philips
Philips Center
P.O. Box 77900
1070 MX Amsterdam, The Netherlands
Telephone: +31-20-59 77222
Website: www.philips.com/investor
E-mail: investor.relations@philips.com
Leandro Mazzoni
Head of Investor Relations
Telephone: +31-20-59 77222
Derya Guzel
Investor Relations Director
Telephone: +31-20-59 77222
Global Sustainability contact
Royal Philips
High Tech Campus 51, 1st floor
5656 AG Eindhoven, The Netherlands
Telephone: +31-40-27 83651
Website: www.philips.com/sustainability
E-mail: philips.sustainability@philips.com
Global Press Office contact
Royal Philips
Philips Center
Amstelplein 2
1096 BC Amsterdam, The Netherlands
E-mail: group.communications@philips.com
For media contacts please refer to:
https://www.philips.com/a-w/about/news/contacts.html
14.5Definitions and abbreviations
Brominated flame retardants (BFR)
Brominated flame retardants are a group of chemicals that have an inhibitory effect on the ignition of combustible organic materials. Of the commercialized chemical flame retardants, the brominated variety are most widely used.
CO2-equivalent
Circular economy
A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using those resources more effectively. By definition it is a driver for innovation in the areas of material, component and product reuse, as well as new business models such as solutions and services. In a Circular Economy, the more effective use of materials makes it possible to create more value, both by cost savings and by developing new markets or growing existing ones.
Circular Revenues
Circular Revenues are defined by revenues generated through products and solutions that meet specific Circular Economy requirements. These include performance and access-based business models, refurbished, reconditioned and remanufactured products and systems, refurbished, reconditioned and remanufactured components, upgrades or refurbishment on site or remote, and products with a recycled plastics content of >25% post-consumer recycled plastics or >30% post-industrial/post-consumer recycled plastics by total weight of eligible plastics.
Dividend yield
The dividend yield is the annual dividend payment divided by Philips’ market capitalization. All references to dividend yield are as of December 31 of the previous year.
Employee Engagement Index (EEI)
The Employee Engagement Index (EEI) is the single measure of the overall level of employee engagement at Philips. It is a combination of perceptions and attitudes related to employee satisfaction, commitment and advocacy.
Energy-using Products (EuP)
An energy-using product is a product that uses, generates, transfers or measures energy (electricity, gas, fossil fuel). Examples include boilers, computers, televisions, transformers, industrial fans and industrial furnaces.
Full-time equivalent employee (FTE)
Full-time equivalent is a way to measure a worker’s involvement in a project. An FTE of 1.0 means that the person is equivalent to a full-time worker, while an FTE of 0.5 signals that the worker works half-time.
Global Reporting Initiative (GRI)
The Global Reporting Initiative (GRI) is a network-based organization that pioneered the world’s most widely used sustainability reporting framework. GRI is committed to the framework’s continuous improvement and application worldwide. GRI’s core goals include the mainstreaming of disclosure on environmental, social and governance performance.
Green Innovation
Green Innovation comprises all R&D activities directly contributing to the intended development of Green Products or Green Technologies. Innovation projects are characterized as Green based on the innovation brief; this designation is not revised during the project lifetime.
Green Products
Green Products offer a significant environmental improvement in one or more Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. The life cycle approach is used to determine a product’s overall environmental improvement. It calculates the environmental impact of a product over its total life cycle (raw materials, manufacturing, product use and disposal).
Green Products need to prove leadership in at least one Green Focal Area compared to industry standards, which is defined by a segment-specific peer group. This is done either by outperforming reference products (which can be a competitor or predecessor product in the particular product family) by at least 10%, by outperforming product-specific eco-requirements or by being awarded with a recognized eco-performance label. Because of different product portfolios, business segments have specified additional criteria for Green Products, including product specific minimum requirements where relevant.
Green Revenues
Green Revenues are generated through products and solutions which offer a significant environmental improvement in one or more of the Green Focal Areas: Energy efficiency, Packaging, Hazardous substances, Weight, Circularity, and Lifetime reliability. Green Revenues are determined by classifying the environmental impact of the product or solution over its total life cycle.
Philips uses Green Revenues as a measure of social and economic performance in addition to its environmental results. The use of this measure may be subject to limitations as it does not have a standardized meaning and similar measures could be determined differently by other companies.
A product or solution that has been determined to contribute to Green Revenues will continue to do so until it is decommissioned.
Growth geographies
Growth geographies are the developing geographies comprising of Asia Pacific (excluding Japan, South Korea, Australia and New Zealand), Latin America, Central & Eastern Europe, Middle East & Turkey (excluding Israel) and Africa.
Hazardous substances
Hazardous substances are generally defined as substances posing imminent and substantial danger to public health and welfare or the environment.
Income from operations (EBIT)
Income from operations as reported on the IFRS consolidated statement of income. The term EBIT (earnings before interest and tax) has the same meaning as Income from operations.
Income from continuing operations
Income from continuing operations as reported on the IFRS consolidated statement of income, which is net income from continuing operations, or net income excluding discontinued operations.
Large medical equipment
MRI systems, CT scanners, NM systems, DXR equipment, and IGT Fixed systems. This includes all Main Article Groups (MAGs) in the portfolio of these business units, except for the MAGs that represent non-life-extending upgrades: 'T82', 'Q72', 'I66', 'X19', 'Q71', 'W62', 'P10', 'S08', 'S14', 'Q74', 'S47', 'S33', 'Z44', 'S66', 'Q76', 'BI9'.
Lean
The basic insight of Lean thinking is that if every person is trained to identify wasted time and effort in their own job and to better work together to improve processes by eliminating such waste, the resulting enterprise will deliver more value at less expense.
Lives improved by Philips
To calculate how many lives we are improving, market intelligence and statistical data on the number of people touched by the products contributing to the social or ecological dimension over the lifetime of a product are multiplied by the number of those products delivered in a year. After elimination of double counts – multiple different product touches per individual are only counted once – the number of lives improved by our innovative solutions is calculated.
Long-term strategic partnership
Market/Market Group
Mature geographies
Mature geographies are the highly developed markets comprising of Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand.
Net Promoter Score
Net Promoter Score®, or NPS®, measures customer experience and predicts business growth. NPS is calculated by taking the answer to a key question on a 0-10 scale: How likely is it that you would recommend [brand] to a friend or colleague?
Respondents are grouped as follows:
• Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth.
• Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
• Detractors (score 0-6) are unhappy customers who can damage the brand and impede growth through negative word-of-mouth.
Subtracting the percentage of Detractors from the percentage of Promoters yields the Net Promoter Score, which can range from a low of -100 (if every customer is a Detractor) to a high of 100 (if every customer is a Promoter).
Operational carbon footprint
A carbon footprint is the total set of greenhouse gas emissions caused by an organization, event, product or person; usually expressed in kilotonnes CO2-equivalent. Philips' operational carbon footprint is calculated on a half-year basis and includes industrial sites (manufacturing and assembly sites), non-industrial sites (offices, warehouses, IT centers and R&D facilities), business travel (lease and rental cars and airplane travel) and logistics (air, sea and road transport).
Philips Lighting/Signify
Polyvinyl chloride (PVC)
Quadruple Aim
REACH
Responsible Business Alliance (RBA)
Restriction on Hazardous Substances (RoHS)
Solution
Sustainable Development Goals
Sustainable Innovation
VOC
Voluntary turnover
Waste Electrical and Electronic Equipment (WEEE)
Weighted Average Statutory Tax Rate (WASTR)
15Exhibits
Index of exhibits
| Exhibit 1 | English translation of the Articles of Association of the Company (incorporated by reference to Exhibit 1 to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 27, 2019 |
| Exhibit 2 | Description of securities registered under Section 12 of the Exchange Act (Incorporated by reference to Exhibit 2 to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 25, 2020) |
| Exhibit 4 | Material Contracts. |
| Exhibit 4 (a) | Services contract between the Company and F.A. van Houten (Incorporated by reference to Exhibit 4 (a) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 25, 2020) |
| Exhibit 4 (b) | Services contract between the Company and A. Bhattacharya (Incorporated by reference to Exhibit 4 (b) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 25, 2020) |
| Exhibit 4 (c) | Services contract between the Company and M.J. van Ginneken (Incorporated by reference to Exhibit 4 (c) to the Annual Report on Form 20-F (File No. 001-05146-01) filed with the Securities and Exchange Commission on February 20, 2018) |
| Exhibit 4 (d) | Global Philips Performance Share Plan applicable to the Board of Management of Koninklijke Philips N.V. |
| Exhibit 8 | List of Subsidiaries. |
| Exhibit 12 (a) | Certification of F.A. van Houten filed pursuant to 17 CFR 240. 13a-14(a). |
| Exhibit 12 (b) | Certification of A. Bhattacharya filed pursuant to 17 CFR 240. 13a-14(a). |
| Exhibit 13 (a) | Certification of F.A. van Houten furnished pursuant to 17 CFR 240. 13a-14(b). |
| Exhibit 13 (b) | Certification of A. Bhattacharya furnished pursuant to 17 CFR 240. 13a-14(b). |
| Exhibit 15 (a) | EY Consent of independent registered public accounting firm. |
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | XBRL Taxonomy Extension Schema Document. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
Signatures
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
KONINKLIJKE PHILIPS N.V. (Registrant) | |
/s/F.A. van Houten (Chief Executive Officer, Chairman of the Board of Management and the Executive Committee) | /s/A. Bhattacharya (Chief Financial Officer, Member of the Board of Management and the Executive Committee) |
| Date: February 23, 2021 | |