The financial information included in this document is based on IFRS, as explained in Significant accounting policies, unless otherwise indicated.
This document contains certain forward-looking statements. By their nature, these statements involve risk and uncertainty. For more information, please refer to Forward-looking statements and other information.
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.
This document comprises regulated information within the meaning of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht).
The chapters Group financial statements and Company financial statements contain the statutory financial statements of the Company. The introduction to the chapter Group financial statements sets out which parts of this Annual Report form the Management report within the meaning of Section 2:391 of the Dutch Civil Code.
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.
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.
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.
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.
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.
As we continue our transformation into a customer-first solutions company, we are guided by our strategic roadmap, with its three key imperatives:
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.
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
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.
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.
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.
For a current overview of the Executive Committee members, see also https://www.philips.com/a-w/about/executive-committee.html
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).
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.
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:
Delivering solutions that enable healthier lifestyles, personal hygiene and living with chronic disease.
Driving better care management by seamlessly connecting patients and caregivers from the hospital to the home.
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:
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.
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:
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.
The resources and relationships that Philips draws upon for its business activities
The result of the application of the various resources to Philips’ business activities and processes as shaped by the Philips Business System
The societal impact of Philips through its supply chain, its operations, and its products and solutions
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
| 2020 | |
|---|---|
| Diagnosis & Treatment | 42% |
| Connected Care | 28% |
| Personal Health | 28% |
| Other | 2% |
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:
In 2020, the Diagnosis & Treatment segment consisted of the following areas of business:
Diagnosis & Treatment
Total sales by business
| 2020 | |
|---|---|
| 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.
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.
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:
Connected Care
Total sales by business
| 2020 | |
|---|---|
| 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.
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.
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:
In 2020, the Personal Health segment consisted of the following areas of business:
Personal Health
Total sales by business
| 2020 | |
|---|---|
| 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.
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.
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.
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.
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:
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 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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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 %
| 2020 | |
|---|---|
| Western Europe | 28% |
| North America | 36% |
| Other mature geographies | 6% |
| Total mature geographies | 70% |
| Growth geographies | 30% |
| Philips Group | 100% |
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.
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.
Detailed information on our supplier sustainability programs is available in section Supplier indicators of this Annual Report.
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.
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.
Philips Group
Key data
in millions of EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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 |
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
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 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 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 2020, sales amounted to EUR 389 million, compared to EUR 469 million in 2019. The decrease was mainly due to lower royalty income.
Philips Group
Sales by geographic area
in millions of EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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 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.
Philips Group
Diagnosis & Treatment businesses sales
in millions of EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
Philips Group
Connected care businesses sales
in millions of EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
Philips Group
Personal Health businesses sales
in millions of EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
Philips Group
Cost of sales components
in millions of EUR unless otherwise stated
| 2018 | as a % of sales | 2019 | as a % of sales | 2020 | as a % of sales | |
|---|---|---|---|---|---|---|
| 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.
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.
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.
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.
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.
Philips Group
Research and development expenses
in millions of EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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 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
| Income from operations | as a % of sales | Adjusted EBITA1) | as a % of sales | |
|---|---|---|---|---|
| 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.
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 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 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.
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.
A breakdown of Financial income and expenses is presented in the following table.
Philips Group
Financial income and expenses
in millions of EUR
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
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.
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.
Philips Group
Discontinued operations, net of income taxes
in millions of EUR
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
Net income attributable to non-controlling interests increased from EUR 5 million in 2019 to EUR 8 million in 2020.
Philips Group
Restructuring and related charges
in millions of EUR
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| Restructuring and related charges per segment: | |||
| Diagnosis & Treatment | 74 | 107 | 57 |
| Connected Care | 40 | 38 | 76 |
| Personal Health | 14 | 50 | 40 |
| Other | 31 | 54 | 37 |
| Philips Group | 159 | 249 | 209 |
| Cost breakdown of restructuring and related charges: | |||
| Provision for Personnel lay-off costs | 99 | 140 | 86 |
| Restructuring-related asset impairment | 21 | 44 | 58 |
| Other restructuring-related costs | 39 | 65 | 65 |
| Philips Group | 159 | 249 | 209 |
In 2020, the most significant restructuring projects impacted the Connected Care and Diagnosis & Treatment segments and mainly took place in the Netherlands, US and Germany. The restructuring mainly comprised product portfolio rationalization and the reorganization of global support functions.
In 2019, the most significant restructuring projects impacted Other and Diagnosis & Treatment and mainly took place in the Netherlands, US and Germany. The restructuring mainly comprised product portfolio rationalization and the reorganization of global support functions.
For further information on restructuring, refer to Provisions.
Philips Group
Acquisition-related charges
in millions of EUR
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| Diagnosis & Treatment | 72 | 42 | (28) |
| Connected Care | 26 | 26 | 22 |
| Personal Health | 1 | 1 | - |
| Other | - | - | |
| Philips Group | 99 | 69 | (6) |
In 2020, acquisition-related charges amounted to a gain of EUR 6 million. The Diagnosis & Treatment businesses recorded a gain of EUR 28 million, mainly related to a gain of EUR 101 million on the release of a contingent consideration liability, partly offset by charges related to the acquisitions of the Healthcare Information Systems business of Carestream Health and Spectranetics.
In 2019, acquisition-related charges amounted to EUR 69 million. The Diagnosis & Treatment businesses recorded EUR 42 million of acquisition-related charges, mainly related to the acquisition of Spectranetics, a US-based global leader in vascular intervention and lead management solutions
Annual goodwill-impairment tests were performed, which resulted in a EUR 144 million goodwill impairment charge, mainly due to revisions to the financial forecast of our Personal Emergency Response System business as a result of lower demand.
For further information on the goodwill sensitivity analysis, please refer to Goodwill.
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.
Philips did not complete any divestments in 2020.
For details, please refer to Acquisitions and divestments.
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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 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.
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 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.
Philips Group
Net cash provided by (used for) discontinued operations
in millions of EUR
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
Condensed consolidated balance sheets for the years 2018, 2019 and 2020 are presented below:
Philips Group
Condensed consolidated balance sheets
in millions of EUR
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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) |
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
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.
For further information, please refer to Debt.
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
In 2020, shareholders’ equity decreased by EUR 727 million to EUR 11,870 million at year-end. The increase in the net income of EUR 1,195 million, as well as the impact of the accounting for share-based compensation plans, including the effect of related hedging transactions through share call options (in aggregate EUR 112 million) increased shareholders’ equity. This was largely offset by currency translation losses of EUR 1,037 million, primarily, due to the depreciation of the US dollar against the Euro in 2020, the purchase of forward contracts for the completion of the share buyback program (EUR 793 million), settlements of earlier concluded forward contracts (EUR 126 million) and the share repurchases made in the open market (EUR 130 million).
Shareholders’ equity increased by EUR 509 million in 2019 to EUR 12,597 million at December 31, 2019. The increase was mainly due to net results of EUR 1,173 million, the positive impact of currency translation differences of EUR 239 million, net fair value increases of financial assets of EUR 82 million, and the impact of the accounting for share-based compensation plans, including the effect of related hedging transactions through forward contracts and share call options (in aggregate EUR 112 million). This was mainly offset by acquired shares because of settlements of earlier concluded forward transactions of EUR 706 million, share repurchases made in the open market of EUR 621 million, and dividend payments to shareholders of Royal Philips of EUR 453 million (including tax and service charges).
The number of issued common shares of Royal Philips at December 31, 2020 was 911,053,001. At year-end 2020, the company held 5.9 million shares in treasury. All of these shares were held in treasury to cover obligations under long-term incentive plans. In 2016, Philips purchased call options on its own shares to hedge options granted to employees up to 2013, and on December 31, 2020, Philips' outstanding options related to 0.9 million shares. In 2020 (and earlier years), the company entered into several forward contracts to acquire its own shares, and on December 31, 2020, the outstanding forward contracts related to 27 million shares. See below for more information on the shares that were acquired in the course of 2020. Philips issued 48,757 shares in May 2020 (in order to pay out the gross Annual Incentive over 2019 to the members of the Board of Management) and issued 18 million shares in July 2020 (in order to distribute the 2019 dividend). The company cancelled 3.8 million shares in June 2020.
The number of issued common shares of Royal Philips at December 31, 2019 was 896,733,721. At year-end 2019, the company held 5.8 million shares in treasury. Of these shares, 5.3 million shares were held in treasury to cover obligations under long-term incentive plans, and 0.5 million shares were held for share capital reduction purposes. Philips repurchased and acquired shares in the course of the year, and cancelled 30 million shares in June 2019 and 8.5 million shares in December 2019. In 2016, Philips purchased call options on its own shares to hedge options granted to employees up to 2013. As of December 31, 2019, the company held 2.3 million of such options. In 2017 and 2018, Philips entered into several forward contracts in order to cover obligations under its long-term incentive plans, as well as to reduce its share capital. As of December 31, 2019, the outstanding forward contracts related to 6 million shares.
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.
The open market transactions via an intermediary allow for buybacks during both open and closed periods.
Philips Group
Impact of share repurchase on share count
in thousands of shares as of December 31
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| Shares issued | 929,645 | 940,909 | 926,196 | 896,734 | 911,053 |
| Shares in treasury | 7,208 | 14,717 | 12,011 | 5,760 | 5,925 |
| Shares outstanding | 922,437 | 926,192 | 914,184 | 890,974 | 905,128 |
| Shares repurchased | 25,193 | 19,842 | 31,994 | 40,390 | 8,670 |
| Shares cancelled | 18,830 | 24,247 | 38,541 | 3,810 |
Philips Group
Total number of shares repurchased
in thousands of shares unless otherwise stated
| share repurchases related to shares acquired for capital reduction | average price paid per share in EUR | shares acquired for LTI's | average price paid per share in EUR | total number of shares purchased as part of publicly announced plans or programs1)2)3) | approximate value of shares that may yet be purchased under the plans or programs in thousands of EUR | |
|---|---|---|---|---|---|---|
| January 2020 | 1,499 | 43.24 | 135 | 43.29 | 1,499 | 1,173,332 |
| February 2020 | 585 | 39.90 | 585 | 1,149,992 | ||
| March 2020 | 1,235 | 33.98 | 502 | 37.39 | 1,235 | 1,108,039 |
| April 2020 | 77 | 36.20 | 1,108,039 | |||
| May 2020 | 1,108,039 | |||||
| June 2020 | 1,108,039 | |||||
| July 2020 | 179 | 42.79 | 1,108,039 | |||
| August 2020 | 1,108,039 | |||||
| September 2020 | 1,108,039 | |||||
| October 2020 | 1,504 | 32.14 | 1,400 | 1,063,869 | ||
| November 2020 | 1,457 | 32.99 | 1,300 | 1,022,841 | ||
| December 2020 | 1,497 | 33.05 | 1,300 | 981,793 | ||
| Total | 3,318 | 5,351 | 7,318 | |||
| of which4) | ||||||
| purchased in the open market | 3,318 | 3,318 | ||||
| acquired through exercise of call options/settlement of forward contracts | 5,351 | 4,000 | ||||
| To be acquired through settlement of forward contracts | 981,793 |
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:
| Payments due by period | |||||
|---|---|---|---|---|---|
| total | less than 1 year | 1-3 years | 3-5 years | after 5 years | |
| 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.
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.
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).
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.
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.
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
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| in EUR | 0.80 | 0.80 | 0.80 | 0.85 | 0.85 |
| in USD | 0.90 | 0.90 | 0.94 | 0.96 | 0.95 |
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.
The analysis of the 2019 financial results compared to 2018, and the discussion of the critical accounting policies, have not been included in this Annual Report. These sections are included in Philips’ Form 20-F for the financial year 2020, which will be filed electronically with the US Securities and Exchange Commission.
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.
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.
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.”
We act responsibly towards our planet in line with UN SDGs 12 and 13.
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 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
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).
In this Environmental performance section, an overview is given of the most important environmental parameters of the Healthy people, Sustainable planet program. Details can be found in the Sustainability statements.
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.
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,
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.
Philips Group
Green Innovation per segment
in millions of EUR
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.
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.
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.
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.
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.
For more information on our Circular Economy activities and the progress towards targets in 2020, please refer to Circular Economy.
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%.
Philips Group
Green Revenues per segment
in millions of EUR unless otherwise stated
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.
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.
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.
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.
Philips’ Sustainable Operations programs focus on the main contributors to climate change, recycling of waste, reduction of water consumption, and reduction of emissions.
Full details can be found in Sustainability statements.
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) as further described in Scope.
Philips Group
Net operational carbon footprint
in kilotonnes CO2 -equivalent
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:
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.
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.
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
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| 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) as further described in Scope. Due to new insights and improved calculation methodologies, the emission results from air freight and air travel have been restated historically.
Philips Group
Energy consumption1)
in terajoules (TJ) unless otherwise stated
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| 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 |
| Operational energy efficiency in TJ/mln EUR sales | 0.15 | 0.12 | 0.12 | 0.11 | 0.10 |
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
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| 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.
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
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| 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 %
| 2020 | |
|---|---|
| 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
| 2016 | 2017 | 2018 | 2019 | 2020 | |
|---|---|---|---|---|---|
| Restricted substances | 1 | 0 | 0 | 0 | 0 |
| Hazardous substances | 10,496 | 5,243 | 3,363 | 2,521 | 616 |
For more details on emissions from substances, please refer to Sustainable Operations.
Our people strategy supports a constantly evolving workforce, capable of delivering strong business performance and executing our strategy. As such, we focus on our Workforce of the Future and our deep commitment to Inclusion & Diversity, supported by our culture.
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.
The following table shows the number of Lives Improved per market.
Philips Group
Lives improved per market
| Market | Lives Improved (million)1) | Population (million)2) | Saturation rate (as % of population) | GDP (USD million)3) |
|---|---|---|---|---|
| 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 |
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.
More information on training and learning programs can be found in People development.
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.
Philips Group
Gender diversity
in %
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.
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.
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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.
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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 |
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| 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 |
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
| Staff | Professionals | Management | Executives | Total | |
|---|---|---|---|---|---|
| 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
| Staff | Professionals | Management | Executives | Total | |
|---|---|---|---|---|---|
| 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% |
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.
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.
We believe that businesses have the responsibility to respect human rights and the ability to contribute to positive human rights impacts. The Philips’ Sustainability Board leads our efforts to respect human rights. This is the highest governing sustainability body, which meets quarterly. It defines Philips’ ESG strategy, programs and policies, including human rights. It also monitors progress and takes corrective action where needed.
In 2020, we advanced our human rights due diligence globally as a result of the outcomes of our 2018 Human Rights Impact Assessment (HRIA), and deployed a new assessment, covering five manufacturing sites and over 4,000 employees. With these assessments, 60% of our at-risk sites received a dedicated HRIA in the past 3 years (target 2023: 100%). The methodology was enhanced to enable assessments at a greater scale, focusing on human rights of our direct and indirect workers. We also discussed our human rights strategy and its implications during our yearly training program for our General Business Principles (GBP) Compliance Officer network. Given their prominent role in our grievance mechanism, the discussion focused on human rights awareness and its connection with relevant internal policies and investigation procedures.
Finally, we sharpened our commitment to human rights by revising and updating our Human Rights Policy, alongside our updated Fair Employment and Inclusion & Diversity policies. These policies, together with the long-established General Business Principles (GBP), offer details on how we respect human rights as set out in the International Bill of Human Rights and the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work. In this, we follow the guidance given in the United Nations Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises. Philips has also been a signatory to the UN Global Compact since 2007. Our Human Rights Report contains detailed information regarding our progress, targets and plans for continuous improvement.
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.
For more information on Health and Safety, please refer to Health and Safety performance
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.
For more information on the Philips Foundation, please refer to Philips Foundation.
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.
An overview of stakeholders and topics discussed is provided in Sustainability statements.
For more information on our stakeholder engagement activities in 2020, please refer to Stakeholder engagement.
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.
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.
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.
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.
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.
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.
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. A description of the composition of the remuneration of the individual members of the Board of Management and the Supervisory Board is included in Report of the Remuneration Committee.
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.
The results of the monitoring measures in place are given in General Business Principles
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.
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
| Corporate Income Tax | VAT1) | Payroll Tax | Customs duties | Other Tax | Total | |
|---|---|---|---|---|---|---|
| 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 |
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.
On the following pages we show how Philips performed in a number of key countries in 2020 on a subset of the WEF Core metrics, as well as a number of additional Philips-specific metrics that we consider fundamental to the strategy and operation of our business.
Volunteer I&D Committees address several focus areas: Women, Race, Disabilities, LGBTQIA+, Mental Health, Culture and Internal Communication. In Blumenau we marked Cultural Diversity Day and National Day of People with Disabilities, and launched initiatives to help people stay well and healthy during COVID.
Partnering with the Faculty of Medicine Foundation, Philips Foundation donated medical equipment to Hospital das Clinicas for diagnosis and treatment of COVID-19, capacity building and training. It is collaborating with Saúde Alegria e Sustentabilidade Brasil to build four units for telehealth consultations with remote communities.
260.5 million EUR revenues
193.5 million EUR cost of sales
19.6 million EUR tangible assets
4.4 million EUR capital expenditure
Philips worked closely with the health authorities to address the COVID-19 at federal level and in many states. Philips also attended stakeholder meetings as a board member of local medical technology trade associations.
During the pandemic we extended our health and well-being program to include psychological well-being, and launched our Employee Assistance Program. Virtual learning summits attracted over 4,000 employees, and a female leadership forum supported the growth of our female talent.
With Philips’ support, Philips Foundation donated medical equipment to Thunder God Mountain Hospital, Wuhan, to support treatment of pneumonia resulting from coronavirus. Philips Foundation also joined the national Heart by Heart project, offered breast and cervical cancer screening for rural women, and provided telehealth training to rural doctors.
2,313.8 million EUR revenues
1,553.4 million EUR cost of sales
144.8 million EUR tangible assets
35.7 million EUR capital expenditure
In 2020, Philips cooperated with government and associations to discuss industry standards, policy design, research and innovation. Philips also conducted research on sustainability with China Center for International Economic Exchange, and cooperated with China Association of Disaster and Emergency Rescue Medicine.
The home office agreement with the Workers Council was extended to all Philips France employees, with a third home office day per week and a furniture allowance for better and healthier working conditions. An 89/100 rating on the 2020 index for gender equality reflects the strong effort to reduce the salary gap and improve gender equality in senior positions.
Philips France and Philips Foundation joined forces to support the French Red Cross in helping people affected by the unprecedented healthcare crisis caused by the pandemic. Philips Foundation also donated health and hygiene products to support shelters for children.
539.9 million EUR revenues
405.8 million EUR cost of sales
21.9 million EUR tangible assets
4.2 million EUR capital expenditure
In 2020, Philips engaged with the Ministry of Health to support the digital transformation of the healthcare system. Philips is also working closely with the Direction Générale de l’Offre de Soins on new initiatives related to value-based procurement.
Faced with the pandemic, Philips launched additional well-being offerings, including ergonomics support and a psychological helpline. A local parents network helped employees manage work and childcare responsibilities. Learning offerings included training on leading women, unconscious bias, healthy leadership and the ‘new normal’.
Women with a migrant background often lack information on the importance of early detection of breast cancer and on how to self-examine. Philips Foundation joined with Pink Ribbon Germany to develop a multilingual app providing extensive health information.
3,194.0 million EUR revenues
1,924.1 million EUR cost of sales
172.7 million EUR tangible assets
43.9 million EUR capital expenditure
In 2020, Philips supported the Ministry of Health and COVID-19 task forces in the federal states with equipment. It also supported the launch of the National Future Hospital Act to assist hospitals with digital health solutions. Philips teamed up with the Federal Ministry of Economic Affairs in launching the EU-wide Gaia-X program.
In 2020, our Employee Resource Group focused on women’s personal and professional development. Programs on unconscious bias and gender equality strengthened our commitment to an inclusive workplace. Our Pride March in Bangalore showcased our commitment to inclusion of the LGBT+ community in the workplace.
Philips Foundation and Philips India supported the government’s emergency relief measures to manage coronavirus treatment and health workers’ safety. Basic day-to-day necessities were also given to migrant workers impacted by the lockdown.
646.4 million EUR revenues
308.0 million EUR cost of sales
76.0 million EUR tangible assets
33.1 million EUR capital expenditure
Through the industry association, Philips provided ventilator management training to healthcare providers, as well as donating Lumify portable ultrasound devices to several hospitals. Philips took part in discussions on AI standardization with the Department of Telecommunications, and contributed to the document AI for all by the National Institution for Transforming India.
A local survey showed that many employees understood ‘diversity’ but were unsure what ‘inclusion’ meant. Increasing understanding of inclusion has been a focal point during and after COVID-19. We hosted a learning summit at which female managers shared insights about their careers.
To improve cancer outcomes and survival rates, measures for early detection through education and self-examination were implemented at our facilities during Pink Ribbon month and Movember.
1,149.5 million EUR revenues
869.7 million EUR cost of sales
129.2 million EUR tangible assets
95.4 million EUR capital expenditure
During COVID-19, Philips worked with various Ministries to ensure timely availability of medical devices. We also engaged with stakeholders on digital healthcare, cybersecurity and AI policies for medical devices, mainly through the Federation of Medical Devices Associations. Via the European Business Council in Japan we engaged with the Ministry of Health on the reimbursement and approval systems.
During COVID-19 we supported employee health and well-being through health offerings, HR policies and energy management programs. The Employment Scheme for longer-term unemployed continued, including support for refugees. We were a top scorer in the 2020 LGBTI Global Benchmark survey of Workplace Pride.
In the pandemic, Philips Foundation and Philips volunteers reached out to vulnerable groups. Some 100 tablets and five care robots were donated to combat loneliness among the elderly and mental health patients. Further donations included supporting caregivers and their next of kin.
8,047.7 million EUR revenues
4,955.7 million EUR cost of sales
657.6 million EUR tangible assets
95.7 million EUR capital expenditure
In the pandemic, Philips supplied critical equipment to hospitals and set up a digital patient portal with the government. Together with Philips Foundation, Philips provided financial and volunteering support to Dutch care organizations.
Philips is on the board of, among others, employers’ organization VNO-NCW and trade association FME, as well as public-private committees on innovation, talent, AI, cybersecurity, and health. Philips chaired the VNO-NCW board which advised on the societal responsibility of businesses.
During COVID-19, we prioritized employee health and well-being programs, including mental health. Support for those working from home included 2 days paid emergency leave, physiotherapy, and virtual yoga classes. Philips signed the Time to Change Mental Health employer pledge.
Together with Global Action Plan, Philips Foundation launched the Clean Air for Schools Framework, a free online tool that shows teachers, parents and local authorities how to tackle air pollution in and around school grounds.
669.2 million EUR revenues
523.3 million EUR cost of sales
40.8 million EUR tangible assets
0.0 million EUR capital expenditure
Philips engaged with government and the National Health Service to support the COVID-19 response. This includes provisioning equipment for Nightingale hospitals, and remote monitoring and real-time data sharing during patient transfers. Philips engaged with industry through the Association of British Health Technology Industries and the Office of Life Science’s European Union Relationship Group and remains a founding member of the Business for Clean Air Task Force.
Our Black Employees Resource Group (BERG) has helped raise awareness on topics like privilege and allyship. We also have an active Veterans’ and LatinX network. In 2020, we made it onto Forbes’ America’s Best Employers for Women and America’s Best Employers for Diversity lists, among others. The number of women in senior leadership positions rose to 33%.
Faced with COVID-19, Philips Foundation worked with MedShare to equip local primary care clinics, day-care centers and hospitals, especially in underserved communities, with protective facilities.
10,374.2 million EUR revenues
6,132.4 million EUR cost of sales
886.8 million EUR tangible assets
303.9 million EUR capital expenditure
Philips liaised with state and local governments to ensure that our manufacturing locations and key suppliers remained open during the pandemic. Philips also helped launch and lead an initiative with partners in the medical imaging industry to identify government policies promoting the adoption of artificial intelligence.
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 other information and in the overview of risk factors described in Risk factors.
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.
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.
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:
Examples of measures taken during 2020 to further strengthen risk management:
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
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.
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.
For each risk factor, we set out below responses that we believe help us to manage these risks. However, we may not be successful in deploying some or all of these mitigating actions effectively. If circumstances occur or are not sufficiently mitigated, our cash flow, operating results, financial position, business and reputation could be material adversely affected. In addition, risks and uncertainties could cause actual results to vary from those described, which may include forward-looking statements, or could impact our ability to meet our targets or be detrimental to our profitability or reputation. The risk responses described below are designed to manage risks towards, and should be read in conjunction with, the Risk Appetite as described above.
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.
Risk response: Philips performs ongoing analyses of markets and competitive developments including financials, market shares, M&A, investments and partnerships, product introductions and innovations, patents and hiring trends. Philips monitors and maintains relationships with policy makers and regulatory and standard setting bodies to stay on top of changes in policies, legislation, regulation and other external standards. Our consultative customer partnerships and services business models, through which we establish long-term strategic partnerships with customers; including leading practitioners in healthcare, provide us with a deep understanding of their (future) needs. Philips continuously invests significantly in R&D in innovation and new products and services; our Innovation 2025 transformation program is accelerating the innovation ambitions across all elements of the Philips Business System. We have raised our ESG commitments towards 2025, examples of enablers are our practices defined by the Philips Business System and 100% of product offerings in line with EcoDesign requirements.
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.
Risk response: Philips monitors economic, political and general societal changes and, where deemed necessary, develops response strategies to such events, including pandemics (e.g. COVID-19) and Brexit.
Philips is active in more than 100 countries and this global footprint allows us to absorb adverse local market developments. High-risk markets (i.e. exposed to high volatility) are regularly assessed for emerging risks, and capital structure planning is performed.
Philips optimizes its integrated supply chain organization, its supplier base and manufacturing footprint to enable agile responses to large and rapid shifts in demand and supply.
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.
Risk response: Philips operates in a growing, evolving healthcare market. Our portfolio covers various products and services across the entire health continuum without significant dependence on a single product, service or market. Where we engage in long-term service-based business models we run a disciplined deal process with strict acceptance criteria.
Scenarios for execution of divestments are reviewed with input from various internal and external professional parties. Philips has a proven process for the preparation and execution of divestments.
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.
Risk response: Philips leverages its in-depth knowledge of healthcare, R&D, Quality Management Systems and sustainable global business model and invests in maintaining a strong brand and footprint in growth geographies, which represent over 30% of sales and over 35,000 employees. This local presence enables Philips to tailor its propositions to local market needs and activate locally.
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.
Risk response: Philips has an active acquisition allocation strategy and M&A roadmap per growth area to ensure organizational fit.
Philips uses a structured and disciplined acquisition process with strict acceptance criteria, budgets and tollgates and time allocated for critical review of due diligence, including integration risks and expected integration benefits. A broad range of internal and external functional experts is involved in this process.
Philips develops and deploys a high-quality post-acquisition integration playbook with set milestones and conducts value creation progress reviews with the responsible business leader throughout the integration of each acquisition.
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.
Risk response: Philips has an Intellectual Property & Standards organization (IP&S) that 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.
In addition, 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.
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.
Risk response: The Philips Group Crisis Operations team has activated a comprehensive COVID-19 response program, which is continuously being matured and helps Philips to be better prepared to respond to potential future events.
Philips focuses on delivering on its triple duty of care:
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.
Risk response: Philips has established a Group Security function and implemented security management processes and controls, as well as monitoring risk trends on material security topics, such as the risk of security breaches in our information systems and our products and services. The Security Steering Committee continuously monitors the risks, required investments and progress made on the program to reduce security risk. Risk workshops are held across the business to calibrate cybersecurity risks and the appropriate risk appetite.
Philips assesses and continuously improves key security controls for business applications and conducts vulnerability scans. We have strengthened the IT function to assure IT systems are kept up to date and applications are designed and developed with security in mind. In addition, Philips evaluates its supply chain and continuously monitors the security maturity of critical suppliers and their performance against contractually agreed security standards.
Philips maintains relationships and cooperates with several government intelligence and law enforcement agencies in order to remain abreast of new threats.
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.
Risk response: Philips uses a risk assessment method and runs risk workshops to identify and address risks to our critical business applications. The IT Business Continuity Management plan includes, for example, real-time monitoring availability, redundancies, testing, and upgrading of applications.
We validate IT systems and strengthen our IT Change Management to make sure that every change of an IT system is executed in a controlled way and sufficiently tested to minimize the impact in terms of business disruption due to failure of the system.
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.
Risk response: Philips is expanding its ‘Design for Excellence’ approach to the full value chain, which includes designing products in such a way that supply dependencies are minimal.
Philips is optimizing its integrated supply chain organization, forecasting analytics, supplier base and manufacturing footprint to enable agile responses to large and rapid shifts in demand and supply and a changing geopolitical risk landscape.
Philips has deployed an integrated supplier risk management framework to assess and manage suppliers from various perspectives such as strategic fit, financial stability, operational performance and quality, sustainability, compliance and location.
Philips conducts various assessments and develops response strategies to events potentially impacting its supply chain, such as changes in trade agreements (e.g. Brexit), natural disasters, emerging markets volatility, and pandemics (e.g. COVID-19). Philips has deployed a global Business Continuity Management System, which is aligned to, and certified against, the ISO standard for Business Continuity.
Philips manages the risk of rising commodity prices by several means, including long-term contracting and keeping physical inventories. Philips closely monitors price developments and takes pricing action where appropriate.
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.
Risk response: Philips is in continuous dialogue with customers to understand their needs and to reaffirm that its strategy and products and solutions portfolio are addressing these. Philips is driving a marketing transformation to accelerate the understanding of customer needs and to translate that understanding into integrated value propositions.
Philips is driving the Innovation 2025 transformation to accelerate its innovation ambitions across all elements of the Philips Business System, improving processes and tools in all aspects of innovation (from exploration to launch in the market). This is part of a broader transformation program, based on Lean Management and enabled by a dedicated Business Transformation organization, to enable Philips’ overall strategic imperatives.
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.
Risk response: Philips continuously assesses capability gaps for its key positions and has initiatives in place to close any employee capability gaps and maintains a remuneration structure aimed at attracting and retaining talent.
Philips measures employee engagement through regular surveys and benchmarks the results against high-performing external norms and across the organization. Philips performs deep-dives where necessary (for instance relating to the COVID-19 pandemic) and drives improvement actions to address any gaps.
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.
Risk response: Philips has set up a Brexit taskforce including a governance structure and several workstreams which assess various scenarios and define contingency plans for these. Several measures related to duties, customs, regulatory, and data are being implemented to minimize the residual risks.
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.
Risk response: Philips is committed to delivering the highest-quality products, services and solutions compliant with all applicable laws and standards. We continuously invest substantially in embedding quality in our organizational culture as well as consolidating and standardizing our Quality Management Systems. Quality is an integral part of the evaluation of all levels of management. With consistency of purpose, top-down accountability, consolidation, standardization and continuous improvement, we aim to drive greater speed in the adoption of a quality mindset as well as improved quality outcomes throughout the enterprise. 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.
Our Quality & Regulatory Function closely monitors the developments in the regulatory landscape. Through specialist teams at global, regional or local level, detailed standards and requirements are defined as an integrated part of our process standards, and this ensures that our employees are aware of and able to comply with these requirements.
Furthermore, Philips has established a Privacy framework, which includes policies, standards and procedures (such as Binding Corporate Rules), with the aim of ensuring compliance with applicable data protection laws and regulations and ensuring ‘privacy by design’ in all our services and solutions.
For more information, refer to the section Quality & Regulatory in this report.
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.
Risk response: Over the years, we have extensively transformed the company and strengthened our business processes. As part of that, we have invested substantially in adherence to our General Business Principles through the deployment of various compliance and awareness programs, as well as the establishment of policies and processes that reinforce adherence. For more details, please refer to the sub-section Philips General Business Principles in the section Our approach to risk management.
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.
Risk response: At Philips, liquidity is monitored by the Group Treasury department, which tracks the actual cash flow for the Group against forecasts of the liquidity requirements on both a short- and longer-term basis. This includes regular reviews of liquidity versus credit rating constraints to manage the risk of potential negative outlooks or downgrades in credit ratings. Philips manages the available liquidity for the Group in several ways, e.g. by spreading maturities of external debt over time and by having appropriate standby credit facilities available. As an example, to anticipate potential liquidity constraints in the market caused by COVID-19, Philips took the decision to settle the dividend in respect of 2019 in shares only, to complete the remainder of the share buyback program through forward contracts, and to raise EUR 1 billion in bonds in March 2020.
Philips hedges the anticipated net exposure of developed-market foreign currencies resulting from sales and purchases in those currencies. For emerging markets, Philips mainly relies on pricing adjustments for its products and services to counteract any expected depreciation of emerging-market currencies.
Philips performs ongoing evaluations of the financial and non-financial condition of its customers and other counterparties and uses various tools manage the credit risks.
Please also refer to Details of treasury and other financial risks.
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.
Risk response: Philips’ tax policy, strategy and planning provides overarching governance. The global Philips tax organization designs and implements this and provides tax advice, ensures tax compliance, including accounting and reporting, and deploys our tax risk management and control framework to ensure adherence to up-to-date tax policies. The Group Tax department is in charge of establishing, maintaining and overseeing the tax policies. Potential risks are carefully monitored and dealt with by tax specialists from relevant areas (e.g. corporate income tax, transfer pricing, VAT, wage tax and tax accounting). A group of Market Tax Managers supports managing the risks and overall tax governance by applying their knowledge of local markets (e.g. introduction of new tax law), among others in monthly reviews.
Please also refer to the disclosure Income taxes and the Country Activity and Tax Report.
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.
Risk response: Philips has defined a Long-Term Employee Benefits (LTEB) Policy to ensure careful management and monitoring of long-term employee benefits. Philips has an active de-risking strategy, in which it constantly looks for opportunities to reduce the risks associated with its defined benefit plans.
The policy and strategy are managed and monitored by the LTEB Committee, chaired by the Group CFO. Regular reviews include the funded status of LTEB plans, execution of approved funding proposals, new plans and plan changes, compliance with the LTEB Policy, the implementation of an adequate and appropriate LTEB governance structure and risk/control matrix, potential SOX compliance issues for LTEB plans, key Risk Indicators and risk mitigating actions.
Please also refer to Post-employment benefits.
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.
Risk response: Philips has adopted a Financial Code of Ethics to deter wrongdoings and to promote honest and ethical conduct, full, fair, accurate, timely, and understandable disclosures, and internal reporting of (suspected) violations. Philips’ Business Control Framework (PBCF) sets the standard for risk management and internal control over financial reporting, including management self-assessments against our Internal Control Standard (ICS).
Please also refer to the Our approach to risk management section for more information on our PBCF.
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.
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.
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.
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.
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.
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
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.
The overview below indicates key matters that we reviewed and/or discussed during meetings throughout 2020:
The Supervisory Board also conducted 'deep dives' into a range of topics including:
The Supervisory Board also reviewed Philips’ annual and interim financial statements, including non- financial information, prior to publication.
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.
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 |
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.
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.
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
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:
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.
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:
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.
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):
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.
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 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:
| July to September: | October to December: | January to March: | April to June: |
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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
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.
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:
| Compensation element | Purpose and link to strategy | Operation | Policy Level |
|---|---|---|---|
| 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. | |
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
| European companies | Dutch companies | US companies | |
|---|---|---|---|
| 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
| US companies | European companies | Japanese companies |
|---|---|---|
| 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.
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
| end of term | |
|---|---|
| Frans van Houten | AGM 2023 |
| Abhijit Bhattacharya | AGM 2023 |
| Marnix van Ginneken | AGM 2021 |
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.
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.
The Annual Incentive performance has been assessed based on:
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.
| Financial performance criteria | Weighting as % of target Annual Incentive | Assessment of performance | Weighted pay-out as % of target Annual Incentive | ||||
|---|---|---|---|---|---|---|---|
| threshold performance | target performance | maximum performance | realized performance | resulting payout as % of 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% | |||||
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.
| Board of Management Member | Individual Performance criteria | Assessment of performance | Weighted pay-out as% of target Annual Incentive |
|---|---|---|---|
| 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
| Annual incentive opportunity | Realized annual incentive | |||||
|---|---|---|---|---|---|---|
| Target as a % of base compensation | Target Annual Incentive | Financial performance (weighted pay-out %) | Individual performance (weighted pay-out %) | Payout as % of target Annual Incentive | Realized annual incentive | |
| 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 |
The Annual Incentive criteria consist of:
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:
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:
For the year 2021, the following performance categories are selected to ensure alignment with the key (strategic) priorities in the year:
| Board of Management Member | Selected performance categories |
|---|---|
| Frans van Houten |
|
| Abhijit Bhattacharya |
|
| Marnix van Ginneken |
|
The 3-year performance period of the 2018 performance share grant ended on December 31, 2020. The payout results are explained below.
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 %
| Position | 20-14 | 13 | 12 | 11 | 10 | 9 | 8 | 7 | 6 | 5-1 |
|---|---|---|---|---|---|---|---|---|---|---|
| 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%
| Company | total return | rank number |
|---|---|---|
| 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 |
The LTI Plan EPS payouts and targets set at the beginning of the performance period were as follows:
Philips Group
LTI Plan EPS payouts
| Below threshold | Threshold | Target | Maximum | Actual | |
|---|---|---|---|---|---|
| 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
| achievement | weighting | vesting level | |
|---|---|---|---|
| TSR | 140% | 50% | 70% |
| EPS | 110% | 50% | 55% |
| Total | 125% |
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:
Please refer to the Long-Term Incentive Plan published on the company’s website for more information.
The following pension arrangement is in place for the members of the Board of Management working under a Dutch contract:
For further details on the pension allowances and pension scheme costs, please refer to Pensions / section 4.1.2 of the Annual Report.
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
| Costs in the year | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| reported year | annual base compensation2) | base compensation | realized annual incentive | performance shares3) | pension allowances4) | pension scheme costs | other compensation5) | total cost | Fixed-variable remuneration6) | |
| 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% | ||
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 |
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
| grant date | number of shares originally granted | value at grant date | vesting date | end of holding period | unvested opening balance at Jan. 1, 2020 | number of shares awarded in 2020 | (dividend) shares awarded | number of shares vested in 20201) | value at vesting date in 2020 | unvested closing balance at Dec. 31, 2020 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 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 |
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
| grant date | vesting date | exercise price (in EUR) | expiry date | opening balance at January 1, 2020 | number of stock options awarded in 2020 | number of stock options exercised in 2020 | share price on exercise date | number of stock options expired in 2020 | closing balance at December 31, 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 |
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
| Chair | Vice Chair | Member | |
|---|---|---|---|
| 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.
The individual members of the Supervisory Board received, by virtue of the positions they held, the following remuneration in 2020:
| membership | committees | other compensation2) | total | |
|---|---|---|---|---|
| 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 |
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 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.
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:
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.
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.
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.
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.
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.
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.
The remuneration of the individual members of the Board of Management is determined by the Supervisory Board, taking into account the remuneration policy adopted by the General Meeting of Shareholders. The remuneration of the individual members of the Supervisory Board is determined by the General Meeting of Shareholders, also on the basis of a remuneration policy.
The current remuneration policies for the Board of Management and the Supervisory Board, respectively, were adopted in 2020 and are published on the company’s website. A description of the composition of the remuneration of the individual members of the Board of Management and the Supervisory Board is included in Report of the Remuneration Committee.
Pursuant to Dutch law, the shareholders are entitled to vote on the adoption of the remuneration policies for each of the Board of Management and the Supervisory Board at the Annual General Meeting (at least) every four years. The adoption of a remuneration policy will require a special majority of three-quarters of the votes cast (as the Articles of Association do not allow a lower majority). In addition, shareholders have an advisory vote at the Annual General Meeting of Shareholders on the remuneration report relating to the preceding financial year (as prepared by the Remuneration Committee and included in the Annual Report). The relevant item will be included in the agenda for the Annual General Meeting of Shareholders 2021.
Pursuant to Dutch law, the Supervisory Board is authorized to reduce or eliminate unpaid bonuses awarded to members of the Board of Management if payment or delivery of the bonus would be unacceptable according to the principles of reasonableness and fairness. The company, which in this respect may also be represented by the Supervisory Board or a special representative appointed for this purpose by the General Meeting of Shareholders, may also request return of bonuses already paid or delivered insofar as these have been granted on the basis of incorrect information on the fulfillment of the relevant performance criteria or other conditions. Bonuses are broadly defined as ‘non-fixed’ (variable) remuneration – either in cash or in the form of share-based compensation – that is conditional in whole or in part on the achievement of certain targets or the occurrence of certain circumstances. The explanatory notes to the balance sheet shall report on any moderation and/or claim for repayment of Board of Management remuneration. No such reduction of unpaid bonuses or requests for repayment occurred during the financial year 2020.
In compliance with the Dutch Corporate Governance Code, the company does not grant personal loans to and guarantees on behalf of members of the Board of Management or the Supervisory Board. No such loans were granted and no such guarantees were issued in 2020, nor were any loans or guarantees outstanding as of December 31, 2020.
Also in compliance with the Dutch Corporate Governance Code, the Articles of Association provide that shares or rights to shares shall not be granted to members of the Supervisory Board.
Members of the Board of Management and 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. According to Philips’ internal rules of conduct with respect to inside information, members of the Board of Management and the Supervisory Board are only allowed to trade in Philips securities (including the exercise of stock options) during ‘windows’ of 20 business days following the publication of annual and quarterly results (provided further the person involved has no inside information regarding Philips at that time, unless an exemption is available). Furthermore, members of the Board of Management and the Supervisory Board are prohibited from trading, directly or indirectly, in securities of any of the companies belonging to Philips’ peer group (as determined by the Supervisory Board), during one week preceding the disclosure of Philips’ annual or quarterly results.
Transactions in Philips shares carried out by members of the Board of Management and the Supervisory Board are reported to the Netherlands Authority for the Financial Markets (AFM) in accordance with the EU Market Abuse Regulation and, if necessary, to other relevant authorities.
Unless Dutch law provides otherwise, the members of the Board of Management and of the Supervisory Board shall be reimbursed by the company for various costs and expenses, such as the reasonable costs of defending claims, as formalized in the Articles of Association. Under certain circumstances, described in the Articles of Association, such as an act or failure to act by a member of the Board of Management or a member of the Supervisory Board that can be characterized as intentional (opzettelijk), intentionally reckless (bewust roekeloos) or seriously culpable (ernstig verwijtbaar), there will be no entitlement to this reimbursement unless the law or the principles of reasonableness and fairness require otherwise. The company has also taken out liability insurance (D&O – Directors & Officers) for the persons concerned.
Candidates for appointment to the Supervisory Board, the Board of Management and the Executive Committee are selected taking into account the company’s Diversity Policy, which is published on the company’s website.
For more details on the Diversity Policy and board diversity, please refer to Report of the Corporate Governance and Nomination & Selection Committee. For more details on the Diversity Policy, the profile of the Supervisory Board and board diversity please refer to Supervisory Board report and to Report of the Corporate Governance and Nomination & Selection Committee
Dutch law on conflicts of interest provides that a member of the Board of Management or Supervisory Board may not participate in the adoption of resolutions if he or she has a direct or indirect personal conflict of interest with the company or related enterprise. If all members of the Board of Management have a conflict of interest, the resolution concerned will be considered by the Supervisory Board. If all members of the Supervisory Board have a conflict of interest, the resolution concerned must be considered by the General Meeting of Shareholders.
In compliance with the Dutch Corporate Governance Code, the company’s corporate governance includes rules to specify situations in which a potential or actual conflict may exist, procedures to avoid such conflicts of interest as much as possible, and to deal with such conflicts should they arise. Relevant matters relating to conflicts of interest, if any, must be mentioned in the Annual Report for the financial year in question. No decisions to enter into material transactions in which there are conflicts of interest with members of the Board of Management or the Supervisory Board were taken during the financial year 2020.
In compliance with the Dutch Corporate Governance Code, members of the Board of Management require the approval of the Supervisory Board before they can accept a position as a member of a supervisory board or a position as a non-executive director on a one-tier board (Non-Executive Directorship) at another company. The Supervisory Board must be notified of other important positions (to be) held by a member of the Board of Management.
Dutch law provides for certain limitations on the number of Non-Executive Directorships a member of the Board of Management or Supervisory Board may hold. No member of the Board of Management shall hold more than two Non-Executive Directorships at ‘large’ companies (naamloze vennootschappen or besloten vennootschappen) or ‘large’ foundations (stichtingen), as defined under Dutch law, and no member of the Board of Management shall hold the position of chairman of another one-tier board or the position of chairman of another supervisory board. No member of the Supervisory Board shall hold more than five Non-Executive Directorships at such companies or foundations, with a position as chairman counting for two. During the financial year 2020 all members of the Board of Management and the Supervisory Board complied with the limitations described above in this paragraph.
The Annual General Meeting of Shareholders shall be held no later than six months after the end of the financial year. The agenda for the meeting typically includes: an advisory vote on the remuneration report; discussion of the Annual Report, the adoption of the financial statements; policy on additions to reserves and dividends; any proposed dividends or other distributions; discharge of the members of the Board of Management and the Supervisory Board; any other matters proposed by the Supervisory Board, the Board of Management or shareholders in accordance with Dutch law and the Articles of Association.
Shareholders’ meetings are convened by public notice via the company’s website, and registered shareholders are notified by letter or by electronic means of communication at least 42 days prior to the day of the relevant meeting. Shareholders who wish to exercise the rights attached to their shares in respect of a shareholders’ meeting are required to register for such meeting. Shareholders may attend a meeting in person, vote by proxy (via an independent third party) or grant a power of attorney to a third party to attend the meeting and vote on their behalf. Details on registration for meetings, attendance and proxy voting will be included in the notice convening the relevant meeting.
Pursuant to Dutch law, the record date for the exercise of voting rights and rights relating to shareholders’ meetings is set at the 28th day prior to the day of the relevant meeting. Shareholders registered on such date are entitled to attend the meeting and to exercise the other shareholder rights (at the relevant meeting) notwithstanding any subsequent sale of their shares after the record date.
In accordance with the Articles of Association and Dutch law, requests from shareholders for items to be included on the agenda will generally be honored, subject to the company’s rights to refuse to include the requested agenda item under Dutch law, provided that such requests are made in writing at least 60 days before a General Meeting of Shareholders to the Board of Management and the Supervisory Board by shareholders representing at least 1% of the company’s outstanding capital or, according to the official price list of Euronext Amsterdam, representing a value of at least EUR 50 million. Written requests may be submitted electronically and shall comply with the procedure stipulated by the Board of Management, which procedure is posted on the company’s website.
Pursuant to Dutch law, shareholders requesting an item to be included on the agenda of a meeting have an obligation to disclose their full economic interest (i.e. long position and short position) to the company. The company has the obligation to publish such disclosures on its website.
The main powers of the General Meeting of Shareholders are:
The company applies principle 4.1 of the Dutch Corporate Governance Code within the framework of the Articles of Association and Dutch law and in the manner described in this corporate governance report. 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. 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.
The authorized share capital of the company amounts to EUR 800 million, divided into 2 billion common shares with a nominal value of 20 eurocents each and 2 billion preference shares also with a nominal value of 20 eurocents each. 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. All shares are fully paid-up. There are currently no limitations, either under Dutch law or the Articles of Association, to the transfer of the common shares.
Only Euroclear shares are traded on Euronext Amsterdam. Only New York Registry Shares are traded on the New York Stock Exchange. Pursuant to Section 10:138(2) of the Dutch Civil Code, the laws of the State of New York are applicable to the proprietary regime with respect to the New York Registry Shares, which proprietary regime includes the requirements for a transfer of, or the creation of an in rem right in, such New York Registry Shares. Euroclear shares and New York Registry Shares may be exchanged for each other.
As per December 31, 2020, approximately 93% of the common shares were held through the system of Euroclear Nederland (Euroclear shares) and approximately 7% of the common shares were represented by New York Registry Shares issued in the name of approximately 911 holders of record, including Cede & Co. Cede & Co which acts as nominee for The Depository Trust Company holding the shares (indirectly) for individual investors as beneficiaries. Deutsche Bank Trust Company Americas is Philips’ New York transfer agent, registrar and dividend disbursing agent. Since certain shares are held by brokers and other nominees, these numbers may not be representative of the actual number of United States beneficial holders or the number of New York Registry Shares beneficially held by US residents.
At the 2020 Annual General Meeting of Shareholders, it was resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to issue shares or to grant rights to acquire shares in the company as well as to restrict or exclude the pre-emption right accruing to shareholders up to and including October 29, 2021. This authorization is limited to a maximum of 10% of the number of shares issued as of April 30, 2020.
In addition, at the 2020 Annual General Meeting of Shareholders, it was resolved to authorize the Board of Management, subject to the approval of the Supervisory Board, to acquire shares in the company within the limits of the Articles of Association and within a certain price range up to and including October 29, 2021. The maximum number of shares the company may hold will not exceed 10% of the issued share capital as of April 30, 2020. The number of shares may be increased by 10% of the issued capital as of that same date in connection with the execution of share repurchase programs for capital reduction programs.
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
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.
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.
Philips is continuously focused on maintaining strong and open relations with its shareholders. In addition to communication with its shareholders at shareholders’ meetings, the company may discuss its financial results during conference calls, which are broadly accessible. The company also publishes annual, semi-annual and quarterly reports and press releases, and informs investors via its website.
From time to time the company communicates with investors and analysts via roadshows, broker conferences and a Capital Markets Day, which are announced in advance on the company’s website. The purpose of these engagements is to further inform the market of the results, strategy and decisions made, as well as to receive feedback from shareholders. It is the company’s policy to post presentations to investors and analysts on its website. Philips applies recommendation 4.2.3 of the Dutch Corporate Governance Code, which it does not view (in line with market practice) as extending to less important analyst meetings and presentations.
Furthermore, Philips engages in bilateral communications with investors and analysts. These communications take place either at the initiative of the company or at the initiative of investors/analysts. The company is generally represented by its Investor Relations department during these interactions, however, on a limited number of occasions the Investor Relations department is accompanied by one or more members of the senior management. The subject matter of the bilateral communications ranges from individual queries from investors/analysts to more elaborate discussions following disclosures that the company has made, such as its annual and quarterly reports. Philips complies with applicable rules and regulations on fair and non-selective disclosure and equal treatment of shareholders.
The Dutch Act on Financial Supervision imposes an obligation on persons holding certain interests to disclose (inter alia) percentage holdings in the capital and/or voting rights in the company when such holdings reach, exceed or fall below 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95 percent (as a result of an acquisition or disposal by a person, or as a result of a change in the company’s total number of voting rights or capital issued). Certain derivatives (settled in kind or in cash) are also taken into account when calculating the capital interest. The statutory obligation to disclose capital interest relates not only to gross long positions, but also to gross short positions. Required disclosures must be made to the Netherlands Authority for the Financial Markets (AFM) without delay. The AFM then notifies the company of such disclosures and includes them in a register, which is published on the AFM’s website. Furthermore, an obligation to disclose (net) short positions is set out in the EU Regulation on Short Selling.
The AFM register shows the following notifications of substantial holdings and/or voting rights at or above the 3% threshold: BlackRock, Inc.: substantial holding of 5.03% and 6.19% of the voting rights (January 5, 2017); UBS Group AG: substantial holding of 3.78% and 3.78% of the voting rights (February 1, 2021). The AFM register also shows a notification by Philips of a substantial holding of 3.27% in its own share capital (no voting rights).
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.
The Board of Management and the Supervisory Board are of the opinion that the principles and best practice provisions of the Dutch Corporate Governance Code that are addressed to the boards, are being applied. The full text of the Dutch Corporate Governance Code can be found on the website of the Monitoring Commission Corporate Governance Code (www.commissiecorporategovernance.nl).
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.
This section ‘Group financial statements’ and the section 'Company financial statements' together contain the statutory financial statements of the company. These statements are subject to adoption by the company’s shareholders at the upcoming 2021 Annual General Meeting of Shareholders.
The following sections and chapters:
form the management report within the meaning of section 2:391 of the Dutch Civil Code.
The sections Strategy and Businesses, Financial performance and Environment, Social and Governance provide an extensive analysis of the developments during the financial year 2020 and the results. These sections also provide information on the business outlook, investments, financing, personnel and research and development.
For ‘Additional information’ within the meaning of section 2:392 of the Dutch Civil Code, please refer to Independent auditor's report and the Appropriation of profits.
Please refer to Forward-looking statements and other information for more information about forward-looking statements, third-party market share data, fair value information, and revisions and reclassifications.
The Board of Management of Royal Philips hereby declares that, to the best of our knowledge, the Group financial statements and Company financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole and that the management report referred to above gives a true and fair view concerning the position as per the balance sheet date, the development and performance of the business during the financial year of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks that they face.
Board of Management
Frans van Houten
Abhijit Bhattacharya
Marnix van Ginneken
February 23, 2021
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
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.
Management’s report on internal control over financial reporting is set out in Management’s report on internal control. The report set out in section 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 2020 consolidated financial statements and the company financial statements, in accordance with Dutch law, including the Dutch standards on Auditing, of Koninklijke Philips N.V., which is set out in Independent auditor's report.
Ernst & Young Accountants LLP has also issued a report on the consolidated financial statements 2019 and 2020 in accordance with the standards of the Public Company Accounting Oversight Board in the US, which will be included in the Annual Report on Form 20-F expected to be filed with the US Securities and Exchange Commission on February 23, 2021.
To: The Supervisory Board and Shareholders of Koninklijke Philips N.V.
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.
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.
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.
Ernst & Young Accountants LLP
Amsterdam, the Netherlands
February 23, 2021
Philips Group
Consolidated statements of income
in millions of EUR
For the year ended December 31
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| Sales7 | 18,121 | 19,482 | 19,535 |
| Cost of sales | (9,568) | (10,607) | (10,754) |
| Gross margin | 8,554 | 8,875 | 8,781 |
| Selling expenses | (4,500) | (4,682) | (4,606) |
| General and administrative expenses | (631) | (631) | (668) |
| Research and development expenses | (1,759) | (1,884) | (1,915) |
| Other business income7 | 88 | 155 | 123 |
| Other business expenses7 | (33) | (188) | (173) |
| Income from operations7 | 1,719 | 1,644 | 1,542 |
| Financial income8 | 51 | 117 | 160 |
| Financial expenses8 | (264) | (233) | (204) |
| Investments in associates, net of income taxes | (2) | 1 | (9) |
| Income before taxes | 1,503 | 1,529 | 1,490 |
| Income tax expense9 | (193) | (337) | (284) |
| Income from continuing operations | 1,310 | 1,192 | 1,205 |
| Discontinued operations, net of income taxes4 | (213) | (19) | (10) |
| Net income | 1,097 | 1,173 | 1,195 |
| Attribution of net income | |||
| Net income attributable to Koninklijke Philips N.V. shareholders | 1,090 | 1,167 | 1,187 |
| Net income attributable to non-controlling interests | 7 | 5 | 8 |
Philips Group
Earnings per common share attributable to Koninklijke Philips N.V. shareholders
in EUR unless otherwise stated
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| Basic earnings per common share in EUR1) | |||
| Income from continuing operations attributable to shareholders | 1.38 | 1.29 | 1.32 |
| Net income attributable to shareholders | 1.16 | 1.27 | 1.31 |
| Diluted earnings per common share in EUR1) | |||
| Income from continuing operations attributable to shareholders | 1.37 | 1.27 | 1.31 |
| Net income attributable to shareholders | 1.14 | 1.25 | 1.29 |
Amounts may not add up due to rounding.
Philips Group
Consolidated statements of comprehensive income
in millions of EUR
for the year ended December 31
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| Net income for the period | 1,097 | 1,173 | 1,195 |
| Pensions and other-post employment plans:21 | |||
| Remeasurement | (8) | 30 | 51 |
| Income tax effect on remeasurements9 | (19) | 3 | (12) |
| Financial assets fair value through OCI: | |||
| Net current-period change, before tax | (147) | 82 | - |
| Reclassification directly into retained earnings | (5) | ||
| Total of items that will not be reclassified to Income Statement | (179) | 114 | 39 |
| Currency translation differences: | |||
| Net current period change, before tax | 383 | 218 | (1,040) |
| Income tax effect on net current-period change9 | (29) | - | 1 |
| Reclassification adjustment for (gain) loss realized | 4 | ||
| Reclassification adjustment for (gain) loss realized, in discontinued operations | (6) | 16 | |
| Cash flow hedges: | |||
| Net current-period change, before tax | (13) | (53) | 69 |
| Income tax effect on net current-period change9 | 11 | 6 | (17) |
| Reclassification adjustment for loss (gain) realized | (31) | 33 | (6) |
| Total of items that are or may be reclassified to Income Statement | 315 | 225 | (992) |
| Other comprehensive income for the period | 136 | 340 | (953) |
| Total comprehensive income for the period | 1,233 | 1,512 | 242 |
| Total comprehensive income attributable to: | |||
| Shareholders of Koninklijke Philips N.V. | 1,225 | 1,507 | 235 |
| Non-controlling interests | 8 | 5 | 6 |
Amounts may not add up due to rounding.
Amounts may not add up due to rounding.
Philips Group
Consolidated balance sheets
in millions of EUR unless otherwise stated
As of December 31
| 2019 | 2020 | |
|---|---|---|
| Non-current assets | ||
| Property, plant and equipment 113 | 2,866 | 2,682 |
| Goodwill123 | 8,654 | 8,014 |
| Intangible assets excluding goodwill133 | 3,466 | 2,997 |
| Non-current receivables17 | 178 | 230 |
| Investments in associates6 | 233 | 240 |
| Other non-current financial assets14 | 248 | 430 |
| Non-current derivative financial assets29 | 1 | 6 |
| Deferred tax assets9 | 1,865 | 1,820 |
| Other non-current assets15 | 47 | 66 |
| Total non-current assets | 17,557 | 16,486 |
| Current assets | ||
| Inventories16 | 2,773 | 2,993 |
| Other current financial assets14 | 1 | - |
| Other current assets15 | 476 | 424 |
| Current derivative financial assets29 | 38 | 105 |
| Income tax receivable9 | 177 | 150 |
| Current receivables2617 | 4,554 | 4,156 |
| Assets classified as held for sale4 | 13 | 173 |
| Cash and cash equivalents30 | 1,425 | 3,226 |
| Total current assets | 9,459 | 11,227 |
| Total assets | 27,016 | 27,713 |
| Equity18 | ||
| Equity | 12,597 | 11,870 |
| Common shares | 179 | 182 |
| Reserves | 652 | (340) |
| Other | 11,766 | 12,028 |
| Non-controlling interests18 | 28 | 31 |
| Group equity | 12,625 | 11,901 |
| Non-current liabilities | ||
| Long-term debt 19 | 4,939 | 5,705 |
| Non-current derivative financial liabilities29 | 124 | 86 |
| Long-term provisions2120 | 1,603 | 1,458 |
| Deferred tax liabilities9 | 143 | 59 |
| Non-current contract liabilities23 | 348 | 403 |
| Non-current tax liabilities 9 | 186 | 291 |
| Other non-current liabilities23 | 71 | 74 |
| Total non-current liabilities | 7,413 | 8,077 |
| Current liabilities | ||
| Short-term debt 19 | 508 | 1,229 |
| Current derivative financial liabilities29 | 67 | 77 |
| Income tax payable9 | 100 | 57 |
| Accounts payable26 | 2,089 | 2,119 |
| Accrued liabilities22 | 1,632 | 1,678 |
| Current contract liabilities23 | 1,170 | 1,239 |
| Short-term provisions2120 | 556 | 522 |
| Liabilities directly associated with assets held for sale4 | - | 30 |
| Other current liabilities23 | 856 | 785 |
| Total current liabilities | 6,978 | 7,735 |
| Total liabilities and group equity | 27,016 | 27,713 |
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
| 2018 | 2019 | 2020 | |
|---|---|---|---|
| Cash flows from operating activities | |||
| Net income (loss) | 1,097 | 1,173 | 1,195 |
| Results of discontinued operations, net of income tax | 213 | 19 | 10 |
| Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||
| Depreciation, amortization, and impairment of fixed assets | 1,089 | 1,402 | 1,520 |
| Impairment of goodwill and other non-current financial assets | 1 | 97 | 144 |
| Share-based compensation | 97 | 98 | 115 |
| Net gain on sale of assets | (71) | (77) | (2) |
| Interest income | (31) | (27) | (14) |
| Interest expense on debt, borrowings, and other liabilities | 165 | 174 | 160 |
| Income taxes | 193 | 337 | 284 |
| Investments in associates, net of income taxes | 2 | 6 | 8 |
| Decrease (increase) in working capital | (179) | (819) | (87) |
| Decrease (increase) in receivables and other current assets | (97) | (274) | 87 |
| Decrease (Increase) in inventories | (394) | (175) | (584) |
| Increase (decrease) in accounts payable, accrued and other current liabilities | 311 | (369) | 411 |
| Decrease (increase) in non-current receivables, other assets and other liabilities | (49) | 122 | 40 |
| Increase (decrease) in provisions20 | (271) | 27 | (87) |
| Other items | (59) | (5) | 13 |
| Interest paid | (170) | (172) | (148) |
| Interest received | 35 | 27 | 15 |
| Dividends received from investments in associates | 20 | 12 | 4 |
| Income taxes paid | (301) | (363) | (394) |
| Net cash provided by (used for) operating activities | 1,780 | 2,031 | 2,777 |
| Cash flows from investing activities | |||
| 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 sales of property, plant and equipment4 | 46 | 35 | 18 |
| Net proceeds from (cash used for) derivatives and current financial assets24 | (175) | 385 | (13) |
| Purchase of other non-current financial assets24 | (34) | (63) | (131) |
| Proceeds from other non-current financial assets24 | 77 | 162 | 65 |
| Purchase of businesses, net of cash acquired5 | (628) | (255) | (317) |
| Net proceeds from sale of interests in businesses, net of cash disposed of4 | 70 | 146 | 4 |
| Net cash provided by (used for) for investing activities | (1,486) | (603) | (1,316) |
| Cash flows from financing activities | |||
| Proceeds from issuance (payments on) short-term debt19 | 34 | 23 | 16 |
| Principal payments on short-term portion of long-term debt19 | (1,161) | (761) | (298) |
| Proceeds from issuance of long-term debt19 | 1,287 | 847 | 1,065 |
| Re-issuance of treasury shares | 94 | 58 | 46 |
| Purchase of treasury shares | (1,042) | (1,376) | (343) |
| Dividends paid to shareholders of Koninklijke Philips N.V. | (401) | (453) | (1) |
| Dividends paid to shareholders of non-controlling interests | (3) | (2) | (2) |
| Net cash provided by (used for) financing activities | (1,192) | (1,665) | 483 |
| Net cash provided by (used for) continuing operations | (898) | (237) | 1,944 |
| Net cash provided by (used for) discontinued operations4 | 647 | (25) | (88) |
| Net cash provided by (used for) continuing and discontinued operations | (251) | (262) | 1,856 |
| Effect of changes in exchange rates on cash and cash equivalents | - | (2) | (55) |
| Cash and cash equivalents at the beginning of the year | 1,939 | 1,688 | 1,425 |
| Cash and cash equivalents at the end of the period | 1,688 | 1,425 | 3,226 |
Philips Group
Consolidated statements of changes in equity
in millions of EUR
For the year ended December 31
Common share | Currency translation differences1) | Fair value through OCI | Cash flow hedges | Capital in excess of par value | Retained earnings | Treasury shares at cost | Total shareholders' equity | Non-controlling interests | Group equity | ||
|---|---|---|---|---|---|---|---|---|---|---|---|
| reserves | other | ||||||||||
| Balance as of Jan. 1, 2018 | 188 | 392 | (34) | 23 | 3,311 | 8,571 | (481) | 11,970 | 24 | 11,993 | |
| Total comprehensive income (loss) | 347 | (147) | (33) | 1,058 | 1,225 | 8 | 1,233 | ||||
| Dividend distributed | 2 | 336 | (738) | (400) | (3) | (403) | |||||
| Purchase of treasury shares | (514) | (514) | (514) | ||||||||
| Re-issuance of treasury shares | (276) | (4) | 341 | 61 | 61 | ||||||
| Forward contracts | 124 | (443) | (319) | (319) | |||||||
| Share call options | 34 | (85) | (51) | (51) | |||||||
| Cancellation of treasury shares | (5) | (779) | 783 | ||||||||
| Share-based compensation plans | 107 | 107 | 107 | ||||||||
| Income tax share-based compensation plans | 11 | 11 | 11 | ||||||||
| Balance as of Dec. 31, 2018 | 185 | 739 | (181) | (10) | 3,487 | 8,266 | (399) | 12,088 | 29 | 12,117 | |
| IFRS 16 adjustment | (33) | (33) | (33) | ||||||||
| Balance as of Jan. 1, 2019 | 185 | 739 | (181) | (10) | 3,487 | 8,232 | (399) | 12,055 | 29 | 12,084 | |
| Total comprehensive income (loss) | 239 | 82 | (13) | 1,200 | 1,507 | 5 | 1,512 | ||||
| Dividend distributed | 2 | 319 | (775) | (453) | (2) | (456) | |||||
| Minority Buy-out | (3) | (3) | (3) | (6) | |||||||
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | (204) | 204 | |||||||||
| Purchase of treasury shares | (621) | (621) | (621) | ||||||||
| Re-issuance of treasury shares | (246) | 11 | 266 | 31 | 31 | ||||||
| Forward contracts | 706 | (706) | |||||||||
| Share call options | 28 | (58) | (30) | (30) | |||||||
| Cancellation of treasury shares | (8) | (1,308) | 1,316 | ||||||||
| Share-based compensation plans | 101 | 101 | 101 | ||||||||
| Income tax share-based compensation plans | 10 | 10 | 10 | ||||||||
| Balance as of Dec. 31, 2019 | 179 | 978 | (303) | (24) | 3,671 | 8,296 | (201) | 12,597 | 28 | 12,625 | |
| Total comprehensive income (loss) | (1,036) | - | 46 | 1,225 | 235 | 6 | 242 | ||||
| Dividend distributed | 4 | 754 | (782) | (25) | (2) | (26) | |||||
| Minority Buy-out | (1) | (1) | |||||||||
| Transfer of gain on disposal of equity investments at FVTOCI to retained earnings | (2) | 2 | - | - | |||||||
| Purchase of treasury shares | - | (130) | (130) | (130) | |||||||
| Re-issuance of treasury shares | - | (146) | 7 | 161 | 23 | 23 | |||||
| Forward contracts | (793) | (126) | (920) | (920) | |||||||
| Share call options | 24 | (55) | (31) | (31) | |||||||
| Cancellation of treasury shares | (1) | (151) | 152 | ||||||||
| Share-based compensation plans | 116 | 116 | 116 | ||||||||
| Income tax share-based compensation plans | 4 | 4 | 4 | ||||||||
| Balance as of Dec. 31, 2020 | 182 | (58) | (305) | 23 | 4,400 | 7,828 | (199) | 11,870 | 31 | 11,901 | |
Amounts may not add up due to rounding.
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.
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.
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.
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.
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.
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.
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.
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.
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 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 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:
Further information on provisions can be found in Provisions.
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.
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.
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.
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.
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.
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.
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.
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 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:
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 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.
Associates are all entities over which the company has significant influence, but no control. Significant influence is presumed with a shareholding of between 20% and 50% of the voting rights or when the company has board representation through which it is able to exercise significant influence. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The carrying amount of an investment includes the carrying amount of goodwill identified on acquisition. An impairment loss on such investment is allocated to the investment as a whole.
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.
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.
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.
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.
The company classifies its non-derivative financial assets in the following measurement categories:
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 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.
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 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, 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.
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.
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.
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.
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.
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.
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:
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 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:
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:
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.
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.
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 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.
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.
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 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.
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.
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.
The company applies, for the first time, certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2020.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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 5 and 10 years. In addition, the general market volatility increased the level of judgment involved in determining the residual values of certain of these assets. Neither of these developments did result in significant changes to our Property, plant and equipment.
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.
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.
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.
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.
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 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. Apart from the above measures, COVID-19 did not have a significant impact on other financial risks, including how we manage those.
Philips Group
Information on income statements
in millions of EUR
| sales | sales including intercompany | depreciation and amortization1) | Adjusted EBITA2)3) | |
|---|---|---|---|---|
| 2020 | ||||
| Diagnosis & Treatment4) | 8,175 | 8,289 | (536) | 816 |
| Connected Care | 5,564 | 5,640 | (415) | 1,195 |
| Personal Health | 5,407 | 5,424 | (187) | 704 |
| Other | 389 | 463 | (382) | (145) |
| Inter-segment eliminations | (281) | |||
| Philips Group | 19,535 | 19,535 | (1,520) | 2,570 |
| 2019 | ||||
| Diagnosis & Treatment | 8,485 | 8,576 | (564) | 1,078 |
| Connected Care | 4,674 | 4,705 | (327) | 618 |
| Personal Health | 5,854 | 5,864 | (186) | 943 |
| Other | 469 | 542 | (326) | (76) |
| Inter-segment eliminations | (204) | |||
| Philips Group | 19,482 | 19,482 | (1,402) | 2,563 |
| 2018 | ||||
| Diagnosis & Treatment | 7,726 | 7,806 | (349) | 872 |
| Connected Care | 4,341 | 4,358 | (326) | 662 |
| Personal Health | 5,524 | 5,538 | (171) | 860 |
| Other | 530 | 612 | (244) | (28) |
| Inter-segment eliminations | (193) | |||
| Philips Group | 18,121 | 18,121 | (1,089) | 2,366 |
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
| Philips Group | Diagnosis & Treatment | Connected Care | Personal Health | Other | |
|---|---|---|---|---|---|
| 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 intangible assets | 381 | 209 | 134 | 20 | 18 |
| Impairment of goodwill | 144 | - | 144 | ||
| EBITA1) | 2,067 | 704 | 986 | 639 | (262) |
| Restructuring and acquisition-related charges | 203 | 29 | 97 | 40 | 37 |
| Other items | 301 | 83 | 112 | 25 | 81 |
| Adjusted EBITA1) | 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 intangible assets | 350 | 177 | 141 | 25 | 8 |
| Impairment of goodwill | 97 | 19 | 78 | ||
| EBITA1) | 2,091 | 856 | 486 | 869 | (119) |
| Restructuring and acquisition-related charges | 318 | 149 | 64 | 50 | 54 |
| Other items | 153 | 73 | 67 | 23 | (11) |
| Adjusted EBITA1) | 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 intangible assets | 347 | 98 | 140 | 31 | 79 |
| EBITA1) | 2,066 | 727 | 539 | 827 | (27) |
| Restructuring and acquisition-related charges | 258 | 146 | 66 | 15 | 31 |
| Other items | 41 | - | 56 | 18 | (33) |
| Adjusted EBITA1) | 2,366 | 872 | 662 | 860 | (28) |
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 10% or more of sales.
Philips Group
Main countries
in millions of EUR
| sales1) | tangible and intangible assets2) | |
|---|---|---|
| 2020 | ||
| Netherlands | 555 | 1,926 |
| United States | 6,636 | 9,080 |
| China | 2,432 | 313 |
| Germany | 1,314 | 302 |
| Japan | 1,113 | 511 |
| United Kingdom | 545 | 545 |
| France | 509 | 49 |
| Other countries | 6,432 | 968 |
| Total main countries | 19,535 | 13,694 |
| 2019 | ||
| Netherlands | 522 | 2,148 |
| United States | 6,667 | 9,864 |
| China | 2,707 | 340 |
| Japan | 1,186 | 550 |
| Germany | 1,087 | 308 |
| France | 505 | 46 |
| United Kingdom | 470 | 611 |
| Other countries | 6,338 | 1,119 |
| Total main countries | 19,482 | 14,986 |
| 2018 |