Philips Volcano used in operating room

2016 Annual Results

Message from the CEO

We have transformed Philips into a focused leader in health technology, delivering innovation to help people manage their health and to support care providers in delivering care effectively.

Frans van Houten, CEO Royal Philips

Dear Stakeholder,

I am very excited about the future of Philips as a focused leader in health technology, innovating new approaches to global health challenges. 2016 was a defining year for our company as we celebrated our 125th year as an innovation company and continued to advance our transformation. Our strategic focus is already delivering results.

We have successfully integrated our Volcano acquisition, achieving multiple quarters of double-digit growth, significant growth synergies with our image-guided therapy business, and cost synergies well beyond our original plans.

We separated the Lighting business, executing a complex project on time and below budget. In May we successfully listed Philips Lighting on the Amsterdam Euronext stock exchange, giving it the opportunity to build on its leadership position in the exciting Lighting industry. In its first year as a stand-alone company, Philips Lighting delivered strong LED sales growth and a significant increase in profitability, demonstrating the continued progress that the largest Lighting company in the industry is making. In February 2017 we further reduced our stake in Philips Lighting’s issued and outstanding share capital to approximately 55%, in line with our stated aim to fully sell down our stake in Philips Lighting over the next several years. Separately, in December we signed an agreement to sell the combined Lumileds and automotive Lighting businesses, effectively completing our portfolio transformation.

I am pleased with the momentum in the overall business performance of our HealthTech portfolio as our health technology businesses posted 5% comparable sales growth 1) and a significant increase in profitability. At the same time, we again stepped up our investments in quality, growth initiatives and innovation.

Our solutions approach – where we combine suites of systems, smart devices, software and services to help our customers improve patient outcomes and productivity – continues to gain traction, as evidenced by 11% solutions revenue growth in the year and our winning 15 new long-term strategic partnerships around the world with an aggregate value of approximately EUR 900 million.

In 2016, our products and services improved the lives of 2.1 billion people around the world. We also launched our new five-year ‘Healthy people, sustainable planet’ program, supporting the aim of improving the lives of 3 billion people per year by 2025 and becoming carbon-neutral in our operations by 2020.  And at the World Economic Forum in January 2017 the Chairman of our Supervisory Board and I signed the Compact for Responsive and Responsible Leadership, an initiative to promote and align the long-term sustainability of corporations and the long-term goals of society, with an inclusive approach for all stakeholders.

Our overall 2016 performance gives me great confidence for the future as we build upon outstanding positions in the hospital and the home, expand our solutions capability and continue to deliver on the promise of digitization and smart, connected care.

1)Non-GAAP financial measure. For the definition and reconciliation to the most directly comparable GAAP measure, refer to Reconciliation of non-GAAP information.

Transforming the delivery of care

As consumers take a more active role in managing their health, we see professional healthcare and consumer health converging. This provides a tremendous opportunity for technology to play a role in data-enabled healthcare delivery, also supporting the shift from hospital care and acute reactive care to more proactive ambulatory and home care.

Through our market-leading propositions in Personal Health, we have natural touchpoints with consumers to promote healthy lifestyles, which are critical to good health. For example, our Dream Family is a comprehensive solution comprising sleep therapy devices, a comfortable mask, therapy management software and services to provide a good night’s sleep for people with obstructive sleep apnea. And our connected Sonicare toothbrushes with smart sensor technology help to improve oral healthcare through real-time feedback and post-brush analytics.

In the hospital we are leading in integrated diagnostic solutions across various disciplines including radiology, pathology and genomics, combining advanced imaging modalities and clinical decision support aided by artificial intelligence and practice management software.

We are leading in image-guided, minimally invasive therapies which, compared with open surgery, have the benefits of reduced patient trauma, shorter recovery times and higher productivity. Our suites of interventional imaging technologies and navigation software, combined with interventional devices such as smart catheters, enable complex procedures in cardiology and oncology, for example. Our enterprise patient monitoring informatics solutions greatly reduce adverse events for patients and lighten the workload for nurses. And we are increasing our contribution to improve population health management with data analytics and targeted programs to improve health outcomes of patient cohorts with multiple co-morbidities and to reduce costs.

HealthSuite, our secure yet open healthcare Internet of Things cloud platform, connects patients and millions of devices with care providers, supported by powerful artificial intelligence. It ‘connects the dots’, enabling the flow of data needed to support first-time-right precision diagnoses and to deliver personalized treatments. At Philips, we believe this will improve outcomes, reduce costs and increase well-being.

Our initiative to build primary care capacity in developing markets through the Community Life Centers has passed its clinical and practical validation tests and will soon be ready for further roll-out, with the aim of cost-effectively improving access to care for millions of people.

Significant opportunities for value creation

Our EUR 17 billion health technology portfolio serves markets that offer attractive prospects in terms of growth and profitability.

We see a great opportunity to further improve our operational performance and to deal forthrightly with the possible impact of regulatory investigations. We believe we are making progress in improving our customer excellence programs and in strengthening margins through productivity. This is a continuation of our Accelerate! program, where there is considerable scope for ‘self-help’ by applying the Philips Business System. We will drive higher productivity by lowering the cost of goods, non-manufacturing cost and the cost of non-quality, while at the same time embedding the digital transformation in everything we do. Digitization is a great enabler of cutting-edge value propositions, as well as driving higher levels of customer service, productivity and quality.

Second, we see opportunities to boost growth in our existing core health technology businesses. We will do this by executing more effectively on customer partnerships, further transforming the business model from ‘transactional’ to one of ‘long-term partnerships’, with shared business goals and recurring revenue streams. Another proven avenue of growth is via geographical adjacencies. This approach has worked well in our Personal Health businesses, where we have taken products that have been successful in the United States or Japan, for example, and brought them into emerging economies, where there is a huge appetite for innovation and our brand. We anticipate market share gains in several of our businesses, including our Diagnostic Imaging business, which has largely overcome the incidents of the past.

Third, we are driving future growth and profit expansion with our shift to solutions. We are investing strongly in research and development for value-added, integrated solutions along the health continuum, most notably in the areas of precision diagnostics, cardiology, oncology, respiratory, and population health.

Roadmap to Win background
Roadmap to win
What
How
Resulting in
Better serve customersand improve productivity
Continue ‘self-help’ journey to improve quality, operational excellence and productivityContinue to lead the digital transformation
  • Productivity: lower costof goods and non-manufacturing costs
  • Growth enablersin place
Boost growthin core business
Capture geographic growth opportunitiesPivot to consultative customer partnerships and business models
  • Mid-single-digitrevenue growth
  • Operating leverage
  • Customer loyalty
Build winning solutions along the health continuum
Drive innovative value-added, integrated solutionsPortfolio extensions through organic investments, partnerships, and mergers & acquisitions
  • Gross margin expansion
  • Future growth

We do need to navigate carefully the many potential geo-political risks that we see today. Given that we have a balanced footprint across the world, we believe this is manageable. We are also still exposed to certain risks from legacy issues, which we aim to manage with strong focus and care.

In conclusion

I would like to thank all our customers and stakeholders for their continued support. I would also like to pay tribute to our teams around the world for their outstanding work – and the progress they achieved – in the course of the year.

With a strong commitment to continuous improvement, we will deliver the meaningful innovation and quality our customers expect – and take the next steps on our journey to reach our goal of improving the lives of 3 billion people a year by 2025!

Frans van HoutenChief Executive Officer

Our 2016 performance at a glance

Philips Group
Key datain millions of EUR unless otherwise stated
2015 - 2016

2015

2016

Sales

24,244

24,516

Comparable sales growth

2%

3%

Income from operations (EBIT)

992

1,882

as a % of sales

4.1%

7.7%

EBITA

1,372

2,235

as a % of sales

5.7%

9.1%

Net income

659

1,491

Net income attributable to shareholders per common share in EUR:

basic

0.70

1.58

diluted

0.70

1.56

Net cash provided by operating activities

1,167

1,904

Net capital expenditures

(842)

(831)

Shareholders’ equity

11,662

12,601

Employees in FTEs at year-end

112,959

114,731

continuing operations

104,204

105,223

Discontinued operations

8,755

9,508

Philips Group
Lives improvedin billions
2016
Slot 2: lives_improved_bubbles.png
Slot 4: lives_improved_bubbles_book.eps


1.2
by PhilipsHealth Productsand Solutions
1.7
by PhilipsGreen Products
1.3
by PhilipsLighting
Total: 2.1 billion (double counts eliminated)
Double counts
Conceptual drawing, areas do not reflect actual proportions
Philips Group
Comparable sales growth by geographic clusterin %
2014 - 2016
Philips Group
Income from operations (EBIT) and EBITAin millions of EUR
2012 - 2016
Philips Group
Total of net cash provided by operating activities and net capital expendituresin millions of EUR
2012 - 2016
Philips Group
Green revenues per segmentin millions of EUR
2014 - 2016
Philips Group
Brand value 1)in billions of USD
2012 - 2016
1)As measured by Interbrand
Philips Group
Research and development expensesin millions of EUR
2012 - 2016
Philips Group
Operational carbon footprintin kilotonnes CO2-equivalent
2012 - 2016
Philips Group
New patents filedin number of patents
2012 - 2016
Group
Philips Groupin millions of EUR
2015 - 2016

2015

2016

% change

Sales

24,244

24,516

1%

Green revenues

14,792

15,727

6%

Sales in mature geographies

15,836

16,148

2%

Sales in growth geographies

8,408

8,368

0%

EBITA

1,372

2,235

63%

Personal Health
Personal Healthin millions of EUR
2015 - 2016

2015

2016

% change

Sales

6,751

7,099

5%

Green revenues

3,521

3,951

12%

Sales in mature geographies

4,060

4,344

7%

Sales in growth geographies

2,691

2,755

2%

EBITA

885

1,092

23%

Diagnosis & Treatment
Diagnosis & Treatmentin millions of EUR
2015 - 2016

2015

2016

% change

Sales

6,484

6,686

3%

Green revenues

4,670

4,798

3%

Sales in mature geographies

4,395

4,471

2%

Sales in growth geographies

2,089

2,215

6%

EBITA

377

594

58%

Connected Care & Health Informatics
Connected Care & Health Informaticsin millions of EUR
2015 - 2016

2015

2016

% change

Sales

3,022

3,158

5%

Green revenues

1,258

1,442

15%

Sales in mature geographies

2,535

2,689

6%

Sales in growth geographies

487

469

4%

EBITA

227

322

42%

Management summary

  • Sales rose to EUR 17.4 billion, a nominal increase of 4%, in our HealthTech portfolio. On a comparable basis sales increased by 5% in our HealthTech portfolio, which combines our Personal Health businesses, Diagnosis & Treatment businesses, Connected Care & Health Informatics businesses, HealthTech Other and Legacy Items. Lighting posted a 5% decline on a nominal basis and a 2% decline on a comparable basis. Overall, Group sales increased by 1% on a nominal basis and 3% on a comparable basis, to EUR 24.5 billion.
  • Our Personal Health businesses’ sales increased to EUR 7,099 million, an increase of 5% on a nominal basis. The 7% growth on a comparable basis was driven by double-digit growth in Health & Wellness and mid-single-digit growth in Personal Care, Sleep & Respiratory Care and Domestic Appliances.
  • Our Diagnosis & Treatment businesses’ sales amounted to EUR 6,686 million, an increase of 3% on a nominal basis. The 4% growth on a comparable basis was driven by double-digit growth in Image-Guided Therapy and low-single-digit growth in Diagnostic Imaging, while Ultrasound was in line with 2015.
  • Our Connected Care & Health Informatics businesses’ sales rose to EUR 3,158 million, an increase of 5% on a nominal basis. The 4% growth on a comparable basis was driven by mid-single-digit growth in Patient Care & Monitoring Solutions and low-single-digit growth in Healthcare Informatics, Solutions & Services, partly offset by a low-single-digit decline in Population Health Management.
  • Lighting’s operational performance continued to improve year-on-year. Sales in 2016 were EUR 7,094 million. Comparable sales reflected double-digit growth in LED and Home, which was more than offset by a double-digit decline in Lamps and a low-single-digit decline in Professional.
  • In line with our mission to improve people’s lives, we have embedded sustainability at the heart of our business processes, and Green Revenues, including products and solutions sales, increased to 64% of total revenues in 2016. In recognition of our sustainability achievements, Philips was named industry group leader in the Capital Goods category in the 2016 Dow Jones Sustainability Index.
  • Net income amounted to EUR 1.5 billion and increased by EUR 832 million compared to 2015, driven by improved performance in the HealthTech portfolio and in Lighting as well as the Funai arbitration award, partly offset by higher financial expenses and tax charges. Net income is not allocated to segments as certain income and expense line items are monitored on a centralized basis.
  • EBITA totaled EUR 2.2 billion, compared to EUR 1.4 billion a year earlier. Our three cost savings programs all delivered ahead of plan in 2016. We achieved EUR 269 million of gross savings in overhead costs, EUR 418 million of gross savings in procurement, and our End2End process improvement program delivered productivity savings of EUR 204 million.
  • Net cash provided by operating activities increased from EUR 1.2 billion in 2015 to EUR 1.9 billion, mainly due to higher earnings and lower outflows related to pension de-risking settlements, partly offset by a EUR 280 million outflow related to the Masimo agreements and a EUR 91 million premium payment related to the October 2016 bond redemption.
  • As of October 20, 2016, Philips had completed the 3-year EUR 1.5 billion share buy-back program. During the year Philips returned EUR 868 million in dividends and shares repurchase.

Philips highlights of 2016

January

12
In line with our strategy of building multi-year strategic partnerships, Philips signed a 15-year, USD 90 million agreement with San Francisco Bay-based Marin General Hospital. It includes a managed services agreement for imaging systems, patient monitoring and clinical informatics solutions.

February

25
Philips and Allianz Worldwide Partners entered a partnership focusing on connected health solutions and services in Germany. The Personal Health programs are designed to motivate people to make healthy choices in their lifestyle. They include a combination of connected health measurement devices, app-based health programs and personal coaching.

March

3
Philips rose to first place in the European Patent Office’s 2015 ranking of patent applicants for patents filed at the EPO. In addition, the company ranked first in three of the ten leading fields of technology: Medical Technology; Electrical machinery, apparatus, energy; and Measurement.
31
Philips’ design excellence was recognized with 37 prestigious Red Dot awards, including two ‘Red Dot: Best of the Best’ awards for the IconiQ Special Edition Shaver and Lumify Ultra-Mobile Ultrasound Solution. The Red Dot Awards are one of the largest and most recognized product design competitions in the world.

May

15
Philips marked its 125th anniversary by celebrating the spirit of Frederik, Gerard and Anton Philips, the founding fathers of the Philips brand. This is characterized by an unwavering belief in the power of innovation and entrepreneurship to improve people’s lives.
27
Philips Lighting was listed and started trading on Euronext in Amsterdam under the symbol ‘LIGHT’. Following the listing of Philips Lighting, Philips retains a 71.225% stake and continues to consolidate Philips Lighting, with the aim of fully selling down over the next several years.

June

8
Philips launched the results of the first edition of its Future Health Index (FHI), an extensive international study which explores how countries around the world are positioned to meet long-term global health challenges through integration and connected care technologies
20
Building on its commitment to sustainability, Philips launched its new 5-year ‘Healthy people, sustainable planet’ program. With this program the company aims to improve the lives of 2.5 billion people per year, increase green revenues to 70% of sales, generate 15% of sales from circular revenues and become carbon-neutral in its operations – all by 2020.
21
Strengthening its Digital Pathology business, Philips acquired PathXL, a Northern Ireland-based innovator in digital pathology image analysis, workflow software and educational tools.

July

12
Philips and the Spanish hospital Campus de la Salud started the implementation of a EUR 77 million multi-year strategic partnership agreement. This deal includes Spain’s first fully digital pathology lab and Philips’ latest innovations in image-guided minimally invasive therapy and patient monitoring.
20
Philips acquired Wellcentive, a leading US-based provider of population health management software solutions. Wellcentive complements Philips’ portfolio with cloud-based IT solutions to import, aggregate and analyze clinical, claims and financial data across hospital and health systems to help care providers deliver coordinated care.

August

31
Philips and Qualcomm announced a strategic technology collaboration to advance personalized connected health across the health continuum. This collaboration will enable both companies to offer care providers enhanced, scalable, connected care solutions and services within a secure global ecosystem.

September

8
Philips became the Industry Group Leader in the Capital Goods category in the 2016 Dow Jones Sustainability Index, achieving the highest possible scores in three sections, including climate strategy and operational eco-efficiency.
21
Gavi the Vaccine Alliance and Philips plan to team up to improve immunization data quality in developing countries. Through the use of new health IT solutions, Gavi and Philips will offer interested countries their complementary expertise to help maximize immunization coverage and effectiveness by identifying children who are missing out on vaccination programs.
23
Building on its expertise in new care models based on telehealth technologies, Philips enabled Macquarie University’s MQ Health in Sydney, Australia, and Emory Healthcare in Atlanta, US, to provide continuous night-time critical care oversight to ICU patients back in Atlanta during daytime hours in Australia.

October

5
In the 2016 Interbrand annual ranking of the world’s most valuable brands, Philips’ ranking improved to #41 from #47, with a total estimated brand value of approximately USD 11.3 billion.
14
Philips, AkzoNobel, DSM and Google announced a new partnership to jointly buy renewable electricity to power part of their operations in the Netherlands. With this initiative the companies are contributing significantly toward delivering on the Dutch renewable energy target of 14% in 2020 that was agreed in the Dutch Energy Agreement for Sustainable Growth in 2013.

November

7
Philips and Masimo signed a multi-year business partnership agreement in patient monitoring and select therapy solutions. This agreement combines Masimo’s expertise in non-invasive sensor and signal processing technologies and Philips’ expertise in integrated patient monitoring and therapy solutions.
17
Philips announced the 1000th installation of its Ambient Experience solution to create a patient-friendly hospital environment. At St. Claraspital hospital in Basel, Switzerland, dynamic Lighting, video and sound create a relaxing environment during CT imaging procedures. This was also the first installation in conjunction with the IQon Spectral CT imaging system.
18
Philips received the 2016 Best in KLAS Award in Ultrasound for its full suite of advanced ultrasound solutions based on feedback from thousands of healthcare providers.

December

12
Philips signed an agreement to sell an 80.1% interest in Lumileds, a leading supplier of LED components and automotive Lighting, to funds managed by affiliates of Apollo Global Management. The transaction is expected to be completed in the first half of 2017, subject to customary closing conditions.
23
Philips signed a 10-year strategic partnership agreement with the Expert Group of Companies, one of Russia’s leading network of healthcare centers and clinics. As part of the agreement, Philips will equip the Group’s new clinics with healthcare solutions for high-quality diagnosis and treatment.

Making the world healthier and more sustainable

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Creating value for our stakeholders

We apply six different forms of capital in our processes, to deliver a range of outcomes

Capital input

The capitals (resources and relationships) that Philips draws upon for its business activities

Human

We employ diverse and talented people and give them the skills and training they need to ensure their effectiveness and their personal development and employability.

  • Employees 105,223, 36% female
  • Philips University 1,900 new courses, 1.2 million hours, 580,000 training completions
  • 49,044 employees in growth geographies

Intellectual

We apply our innovation and design expertise to create new products and solutions that meet local customer needs.

  • Invested in R&D EUR 2.0 billion(Green Innovation EUR 588 million)
  • Employees in R&D 11,380 in 54 R&D centers across the globe including growth markets

Financial

We raise the funds we need from shareholders and other capital providers. We allocate this capital to the businesses and markets we think offer the best prospects for growth and returns.

  • Debt EUR 5.6 billion
  • Equity EUR 13.5 billion
  • Market capitalization EUR 26.8 billion

Manufacturing

We apply Lean techniques to our manufacturing processes to produce high- quality products. We manage our supply chain in a responsible way.

  • Manufacturing sites 82, cost of materials used EUR 8.0 billion
  • Total assets EUR 32.3 billion
  • Capital expenditure EUR 575 million

Natural

We are a responsible company and aim to minimize the environmental impact of our supply chain, our operations, and also our products and solutions.

  • Energy used in manufacturing 8,987 terajoules
  • Water used 2.4 million m3
  • Recycled plastics inour products 1,440 tonnes

Social

We contribute to our customers and society through our products and solutions, our tax payments, the products and services we buy, and our investments in local communities.

  • Philips Foundation
  • Stakeholder engagement
  • New volunteering policy

Capabilities, Assets and Positions

Our unique strengths

We strengthen and leverage our core Capabilities, Assets and Positions – our deep customer insights, technological innovation, global footprint, our people, and the trusted Philips brand – as they create differential value.

Strategy

Where we invest

We manage our portfolio with clearly defined strategies and allocate resources to maximize value creation.

Excellence

How we operate

We are a learning organization that applies common operating principles and practices to deliver to our customers with excellence.

Path to Value

What we deliver

We define and execute business plans that deliver sustainable results along a credible Path to Value.

Value outcomes

The result of the application of the capitals to Philips’ business activities and processes as shaped by the Philips Business System

Human

We employ diverse and talented people and give them the skills and training they need to ensure their effectiveness and their personal development and employability.

  • Employee Engagement Index 74% positive
  • Sales per employee EUR 232,990
  • Employee benefit expenses EUR 7.0 billion

Intellectual

We apply our innovation and design expertise to create new products and solutions that meet local customer needs.

  • New patent filings 1,690 and IP Royalties EBITA EUR 286 million
  • 64% Green Revenues

Financial

We raise the funds we need from shareholders and other capital providers. We allocate this capital to the businesses and markets we think offer the best prospects for growth and returns.

  • Comparable sales growth 2.7%
  • EBITA as % of sales 9.1%
  • Net cash provided by operating activities EUR 1.9 billion
  • Net capital expenditures EUR 831 million
  • Dividend EUR 732 million
  • Corporate taxes paid EUR 420 million

Manufacturing

We apply Lean techniques to our manufacturing processes to produce high- quality products. We manage our supply chain in a responsible way.

  • EUR 24.5 billion products and solutions sold, with 2.1 billion Lives improved

Natural

We are a responsible company and aim to minimize the environmental impact of our supply chain, our operations, and also our products and solutions.

  • 9% revenues from circular propositions
  • CO2 emissions 1,344 kilotonnes
  • 242,000 tonnes (estimated) products put on the market
  • 64.8 kilotonnes waste, of which 83% recycled

Social

We contribute to our customers and society through our products and solutions, our tax payments, the products and services we buy, and our investments in local communities.

  • Brand value USD 11.3 billion
  • Partnerships with UNICEF, Red Cross and Ashoka