1Message from the CEO

Dear Stakeholder,

Amidst the ongoing impact of COVID-19 on society, 2021 was an eventful and challenging year. Our continued strategic progress and strong growth in the first half of the year were overshadowed by the unprecedented scale of the global supply chain disruptions in the second half of the year, as well as the Philips Respironics voluntary field action to remediate the component quality issue in certain of its products.

The intensified global supply chain headwinds and postponement of customer equipment installations due to COVID-19 presented challenges to fully convert our opportunities to revenue in the second half of the year. These factors, combined with the sales consequences of the recall, resulted in full-year sales of EUR 17.2 billion, down 1% year-on-year.

As we work to overcome these headwinds and look to the future, I am very encouraged by the underlying performance of our businesses. Our Diagnosis & Treatment businesses and Personal Health businesses performed well in 2021, recording 8% and 9% comparable sales growth^*) respectively. Following in the wake of 2020’s high COVID-19-related demand for hospital ventilation and monitoring & analytics solutions, our Connected Care businesses posted a 23% decline in comparable sales in 2021, which also reflects the effect of the Philips Respironics recall.

We have strengthened our portfolio through our R&D programs, partnerships, and acquisitions. The relevance of our innovative products and solutions and customer interest in partnering with Philips is underscored by the 4% growth in comparable order intake, resulting in an order book that is 18% higher year-on-year.

Nevertheless, I would like to emphasize that I very much regret the impact of the Philips Respironics recall on patients, care providers and shareholders. We identified – through our post-market surveillance processes – that the sound abatement foam used since 2008 in certain of our sleep and respiratory care products may degrade under certain circumstances. Subsequently, we issued a voluntary recall notification for affected devices to address potential health risks. We have ramped up production, service and repair capacity to ensure patients receive a repaired or replacement device as fast as possible.

As of January 2022, Philips Respironics has shipped a total of approximately 750,000 repair kits and replacement devices to customers and aims to complete the repair and replacement program in the fourth quarter of 2022. In close dialogue with regulators across the world, we are conducting a comprehensive test and research program to better characterize health risks. In parallel, we have captured and applied learnings from this recall across the entire company, as patient safety, quality and integrity are of the utmost importance to us.

Continued progress on strategic roadmap

In 2021, we saw sustained traction for our strategy to help transform the delivery of care across the health continuum, and our innovative portfolio resonates very strongly with customers.

Inspired by our purpose to improve people’s health and well-being, we innovate solutions that deliver meaningful impact. In the consumer domain, for instance, our new Sonicare 9900 Prestige electric toothbrush leverages AI to optimize the user’s brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.

For healthcare providers, our innovative solutions – smart combinations of systems, devices, software and services – help them deliver on the Quadruple Aim of better health outcomes, improved patient and staff experience, and lower cost of care:

• Giving clinicians smart connected imaging tools like our new Spectral CT 7500 system, which deliver high-quality spectral images for every patient on every scan, helping them make precision diagnoses without the need for multiple re-scans. Or our new MR 5300 1.5T ‘helium-free for life’ system, which combines operational and clinical excellence with reduced environmental impact.

• Enabling real-time, remote collaboration between technologists, radiologists and imaging operations teams across multiple sites with our vendor-neutral, multimodality Radiology Operations Command Center.

• Helping surgeons in the interventional lab perform personalized, minimally invasive procedures with solutions like our Azurion next-generation image-guided therapy platform, which was further expanded with breakthrough applications in 2021.

• Enabling healthcare professionals to orchestrate care delivery, also for patients recovering at home, with connected care solutions like our Patient Flow Capacity Suite, which helps hospitals manage the complete patient journey, and Acute Care Telehealth, which builds on our successful Tele-ICU solutions.

We signed 80 long-term strategic partnerships with hospitals and health systems around the world in 2021, underlining customers’ appreciation of our holistic approach to healthcare. Solutions-based sales and recurring revenues continue to generate a growing proportion of total sales, with the figure now standing at around 45%. In order to maintain the strong flow of health technology innovations going forward, we invested EUR 1.8 billion in R&D in 2021.

Major divestment completed, acquisitions to drive future growth

In September, we completed the sale of the Domestic Appliances business to Hillhouse Investment, concluding our line of major divestments. We believe this will allow us to focus on extending our leadership in health technology solutions.

To support future growth and the delivery of data-enabled care across care settings, we again invested significantly in our data science, informatics and cloud technology capabilities in 2021. The acquisitions of BioTelemetry, Capsule Technologies and Cardiologs (the latter completed in January 2022) strengthen our position in patient care management in the hospital and the home. In January 2022, we also closed the acquisition of Vesper Medical, further expanding our image-guided therapy devices portfolio with venous stents.

Delivering on our ESG commitments

We reached 1.67 billion people with our products and services in 2021, including 167 million in underserved communities – taking us a step closer to our goal of improving 2 billion lives per year by 2025, including 300 million in underserved communities.

We continued to deliver on the other key commitments set out in our Environmental, Social & Governance (ESG) framework. We are already carbon-neutral in our operations and are now engaging with suppliers and customers to reduce emissions across our entire value chain, as well as driving the transition to a circular economy.

We again received recognition for our sustainability efforts in 2021 – achieving a CDP ‘A List’ rating for the ninth consecutive year for our climate action, and securing second-highest place in the global Dow Jones Sustainability Indices (DJSI) list.

Looking ahead

We continue to invest in the future, further improving operational excellence and growing our core business, while driving our transformation into a digital, customer-first solutions company. I am very confident in our ability to overcome our current challenges. Against this background, and reflecting the importance we attach to dividend stability, we propose to maintain the dividend at EUR 0.85 per share.

Based on good customer demand and our growing order book, we expect to resume our growth and margin expansion trajectory in the course of 2022. In the short term, however, we continue to see significant volatility and headwinds related to COVID-19 and supply chain challenges, despite our ongoing mitigation efforts. Due to this, the Respironics field action and the strong growth in Q1 2021, we expect to start the year with a comparable sales decline, followed by a recovery and strong second half of the year. For the full year, we target 3-5% comparable sales growth^*) and a 40-90 basis-points improvement in Adjusted EBITA^*) margin.

In closing

I would like to thank our customers, suppliers and partners for their continued support over the past 12 months. And a special word of thanks to our employees for their fantastic contribution through another year of often difficult working circumstances due to the pandemic.

I would also like to express my appreciation to our shareholders for the confidence they continue to show in Philips’ long-term future. This is a future founded on purpose and the robust, growing demand for health technology, which Philips will serve with a relentless focus on customer needs, its strong portfolio of innovations, and an unwavering commitment to continuous improvement.

Frans van Houten
Chief Executive Officer

2Board of Management and Executive Committee

Royal Philips has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is accountable to the General Meeting of Shareholders for the fulfillment of its respective duties. The Board of Management is entrusted with the management of the company. The other members of the Executive Committee have been appointed to support the Board of Management in the fulfilment of its managerial duties. Please also refer to Board of Management and Executive Committee within the chapter Corporate governance.

Members of the Board of Management

Other members of the Executive Committee

For a current overview of the Executive Committee members, see also https://www.philips.com/a-w/about/executive-committee.html

3Strategy and Businesses

3.1Driven by purpose

At Philips, our purpose to improve people’s health and well-being through meaningful innovation is at the center of everything we do. This core principle has never been more important than it is in these challenging times. 

As a leading health technology company, we believe that – viewed through the lens of customer needs – innovation can improve people's health and healthcare outcomes, as well as making care more accessible, personal, connected and sustainable. 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.

Our view on healthcare

Besides the healthcare sector's 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 – this puts people’s health journeys front and center and enables integrated care pathways. Believing that healthcare should be safe, seamless, efficient and effective, we strive to ‘connect the dots’ for our customers and consumers, supporting the flow of real-time data needed to provide precision diagnoses, treatment and chronic care for patients. 

Going forward, we believe the digital transformation of healthcare and – accelerated by COVID-19 – the increasing adoption of virtual care or ‘telehealth’ will play a major 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.

With our global reach, market leadership positions, deep clinical and technological insights, and customer-centric innovation capability, we are strongly placed to create further value in a changing healthcare world through our propositions in:

Diagnosis & Treatment

• Precision Diagnosis – providing smart, connected systems, optimized workflows, and integrated diagnostic insights, leading to clear care pathways and predictable outcomes
• Image Guided Therapy – innovating minimally invasive procedures in a growing number of therapeutic areas, with significantly better outcomes and productivity, while patients have a much better experience and can return home faster

Connected Care

Driving better care management by providing a wealth of actionable data about patients' condition and hospital operations, and seamlessly connecting patients and caregivers in any care setting from the hospital to the home

Personal Health

Delivering propositions that help people enjoy healthier lifestyles and enhance personal hygiene

Our key strategic imperatives and value creation objectives

Underpinned by these strategic imperatives, Philips’ targets for accelerated growth, higher profitability and improved cash flow for the 2021–2025 period are: 

• An acceleration of the average annual Group comparable sales growth^*) to 5 to 6%. In 2022, Philips targets to deliver 3 to 5% comparable sales growth^*) for the Group.
• An average Adjusted EBITA^*) margin improvement of 60 to 80 basis points annually over the 2021-2025 period, reaching high-teens for the Group. In 2022, Philips targets to deliver a 40 to 90 basis-points improvement in Adjusted EBITA^*) margin for the Group. 
• Free cash flow^*) above EUR 2 billion by 2025. 
• Organic Return on Invested Capital (ROIC)^*) of mid-to-high teens by 2025.

3.2How we create value

Based on the International Integrated Reporting Council framework, and with the Philips Business System at the heart of our endeavors, we use various resources to create value for our stakeholders in the short, medium and long term.

As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines how we work together effectively to achieve our company objectives – the Philips Business System (PBS). The PBS integrates key aspects of how we operate:

Strategy

Our strategy defines our path to sustainable value creation for customers and shareholders.

Governance

Clear governance, roles and responsibilities empower people to collaborate and act fast.

Processes

Simplified standard processes, systems and practices enable lean and agile ways of working.

People

We value and develop people and teams, rewarding them for sustainable results.

Culture

We live the Philips culture, which sets standards on behaviors, such as ensuring patient safety, quality and integrity, and putting the customer first.

Performance

Through disciplined performance management and continuous improvement we achieve our goals.

Having a single business system increases speed and agility, and enhances standardization, quality and productivity, while driving a better, more consistent experience for our customers.

Resource inputs

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

Human

• Employees 78,189, 120-plus nationalities, 40% female
• Philips University 863,000 courses, 830,000 hours, 835,000 training completions
• 31,923 employees in growth geographies
• Focus on Inclusion & Diversity

Intellectual

• Invested in R&D EUR 1.8 billion (Green Innovation EUR 197 million)
• Employees in R&D 10,751 across the globe including growth geographies

Financial

• Equity EUR 14.5 billion
• Net debt^*) EUR 4.7 billion

Manufacturing

• Employees in production 38,618
• Industrial sites 25, cost of materials used EUR 4.1 billion
• Total assets EUR 31 billion
• Capital expenditure EUR 397 million

Natural

• Energy used in manufacturing 1,263 terajoules
• Water used 703,104 m³
• 'Closing the loop' on all our professional medical equipment by 2025

Social

• Philips Foundation
• Stakeholder engagement
• Volunteering policy

Value outcomes

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

Human

• Employee Engagement Index 79% favorable
• Sales per employee EUR 219,419
• Safety 213 Total Recordable Cases

Intellectual

• New patent filings 860
• Royalties EUR 382.5 million
• 182 design awards

Financial

• Comparable sales growth^*) (1.2)%
• Adjusted EBITA^*) as a % of sales 12.0%
• Free cash flow^*) EUR 900 million

Manufacturing

• EUR 12.0 billion revenues from goods sold

Natural

• 70.5% Green/EcoDesigned Revenues
• 16% revenues from circular propositions
• Net CO₂ emissions from own operations down to zero kilotonnes
• 73.5 tonnes (estimated) materials used to put products on the market
• Waste 22,204 tonnes, of which 87% repurposed

Social

• Brand value USD 12.1 billion (Interbrand)
• Partnerships with UNICEF, Red Cross, Amref and Ashoka

Societal impact

The societal impact of Philips through its supply chain, its operations, and its products and solutions

Human

• Employee benefit expenses EUR 6,246 million, all staff paid at least a Living Wage
• Appointed 72% of our senior positions from internal sources
• 28% of Leadership positions held by women

Intellectual

• Around 60% of revenues from new products and solutions introduced in the last three years
• Over 65% of sales from leadership positions

Financial

• Market capitalization EUR 29 billion at year-end
• Long-term credit rating A- (Fitch), Baa1 (Moody's), BBB+ (Standard & Poor's)
• Dividend EUR 773 million

Manufacturing

• 100% electricity from renewable sources

Natural

• Environmental impact of Philips operations down to EUR 106 million
  
• All 25/25 industrial sites 'Zero Waste to Landfill' at year-end 2021
• First health technology company to have its CO₂ reductions assessed and approved by the Science Based Targets initiative

Social

• 1.67 billion Lives Improved, of which 167 million in underserved communities (including 2.2 million via Philips Foundation)
• 430,000 employees impacted at suppliers participating in the 'Beyond Auditing' program
• Total tax contribution EUR 4,090 million (taxes paid/withheld)
• Income tax benefit EUR 103 million; the effective income tax rate is (20.0)%

3.3Materiality analysis

We identify the environ­mental, social, and governance topics which we believe have the greatest impact on our business and the greatest level of concern to stakeholders along our value chain. Assessing these topics enables us to prioritize and focus upon the most material topics and effectively address these in our policies and programs. Philips’ impact on society at large is covered through our Lives Improved metric and the Environmental Profit & Loss account.

Our materiality assessment is based on an ongoing trend analysis, media search, and stakeholder input. In 2021, we solicited input from a diverse group of external and internal stakeholders, including investors, NGOs, customers, suppliers, peer companies, academia, and senior management in Philips. Similar to 2020, we used an evidence-based approach to materiality analysis powered by Datamaran. By applying Datamaran’s automated sifting and analysis of millions of data points from publicly available sources, including corporate reports, mandatory regulations and voluntary initiatives, as well as news and social media, we identified a list of topics that are material to our business. With this data-driven approach to materiality analysis we have incorporated a wider range of data and stakeholders than was ever possible before and managed to get an evidence-based perspective on regulatory, strategic and reputational risks and opportunities. Public health risks emerged as a new material topic in 2020, as a result of the COVID-19 pandemic, and was again included in 2021.

Changes in 2021

In 2021, the topic of Human rights & responsible supply chains was split into two separate topics, considering the growing importance of both. Next, Responsible tax practices was carved out from the Business ethics & General Business Principles topic due to the growing importance of the topic in society. On the external view, the most significant increase compared to 2020 is climate change. The internal view saw a significant increase in importance on climate change, circular economy and employee rights.

Our materiality assessment has been conducted in the context of the GRI Sustainable Reporting Standards and the results have been reviewed and approved by the Philips ESG Committee.

For more information on materiality, refer to Material topics and our focus.

3.4Our businesses

Our reporting structure in 2021

Koninklijke Philips N.V. (Royal Philips) is the parent company of the Philips Group. In 2021, 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.

Since the completion of the sale of the Domestic Appliances business (formerly part of the Personal Health businesses), it is no longer consolidated by Philips as from September 1, 2021 and therefore is not included in the following discussion.

 

3.4.1Diagnosis & Treatment businesses

Our Diagnosis & Treatment businesses create value through their unique portfolio of innovative solutions – consisting of systems, smart devices, software and services, powered by AI-enabled informatics – that support precision diagnoses and minimally invasive procedures in therapeutic areas such as cardiology, peripheral vascular, neurology, surgery, and oncology. With these 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.

Serving diagnostic enterprise imaging markets globally, we see significant opportunity to enable precise diagnoses while at the same time supporting adjacent needs for guidance across care pathways and increasing departmental productivity. We do this through smart diagnostic systems, connected workflow solutions, integrated diagnostics and clear care pathways, driving enterprise-wide operational efficiency and supporting clinicians to provide an early and definitive diagnosis, enabling them to select tailored care pathways and predictable outcomes for every patient.

We also provide integrated solutions combining imaging systems and diagnostic and therapeutic devices, which optimize interventional procedures and so deliver more effective treatment, better outcomes and higher productivity. Building upon our leading-edge Image Guided Therapy System – Azurion, we continue to innovate, optimizing clinical and operational lab performance through advances in workflow and integration for routine procedures, and expanding the role of image-guided interventions to treat new groups of patients such as those with complex diseases including stroke, lung cancer and spine disorders. We are also 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 2021, the Diagnosis & Treatment businesses benefited from a partial resumption of elective procedures and exams as the COVID-19 restrictions eased, and strong order growth for capital equipment, which bodes well for 2022. We continued to make advances in innovation, strengthening our portfolio and providing clinical and economic evidence to support the adoption of our solutions. In oncology care, we deepened our collaboration with leading precision radiation therapy company Elekta, with the aim of advancing comprehensive and personalized cancer care through precision oncology solutions. The launch of the Spectral Computed Tomography 7500 system is a significant step forward in integrating the additional diagnostic benefits of spectral CT into standard workflows, and in combination with Image Guided Therapy System – Azurion – represents the world’s first always-on spectral detector angio-CT solution. Significant new clinical data demonstrated the value of intravascular ultrasound, in which Philips is a global leader, in the treatment of a broad range of peripheral vascular patient populations.

In 2021, the Diagnosis & Treatment segment consisted of the following areas of business:

• Diagnostic Imaging: Magnetic Resonance Imaging (MRI), with helium-free for life operations, bundled with associated software to streamline workflows, optimize diagnostic quality, and improve patient experience; X-ray systems, together with associated software to streamline workflows and optimize diagnostic quality; advanced and efficient Computed Tomography (CT) systems and software, including detector-based Spectral CT; molecular and hybrid imaging solutions for nuclear medicine
• Ultrasound: echography solutions focused on diagnosis, treatment planning and guidance for cardiology, general imaging, obstetrics/gynecology, and point-of-care applications, as well as proprietary software capabilities to enable advanced diagnostics and interventions
• Enterprise Diagnostic Informatics: a suite of integrated products and services that deliver a comprehensive platform designed to connect clinical data and optimize workflows around every step in the patient’s journey across a range of diagnostic (radiology, point-of-care, laboratory) and clinical (oncology, cardiology, neurology) service lines
• Image Guided Therapy: Systems – integrated interventional systems that combine information from imaging systems, interventional devices, navigation tools and patient health records to provide interventional staff with the control and information they need to perform procedures efficiently; Devices – interventional diagnostic and therapeutic devices to treat coronary artery and peripheral vascular disease, including Intravascular Ultrasound (IVUS), Intracardiac Echo (ICE), fractional flow reserve (FFR) and instantaneous wave-free ratio (iFR) physiology measurement, atherectomy catheters, a dissection repair implant, as well as drug-coated balloons and lead extraction devices 

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 2021 Diagnosis & Treatment had around 32,000 employees worldwide.

2021 business highlights

Philips received US FDA clearance for its SmartCT (Cone Beam CT) application for the Azurion image-guided therapy system, which provides interventionalists with CT-like 3D images to enhance procedural outcomes and fits seamlessly into existing workflows. An industry-first, Philips also introduced ClarifEye Augmented Reality Surgical Navigation, advancing minimally invasive spine procedures in the hybrid operating room.

Philips has pioneered spectral CT diagnostics. The company’s new Spectral CT 7500, which enables customers to benefit from a reduction in follow-up scans, increased certainty in lesion characterization, and reduced time to diagnosis, is attracting strong customer demand. For example, the University Medical Center Utrecht in the Netherlands installed two Spectral CT systems, with the aim of providing greater confidence in mainstream clinical diagnosis – for all patients and in all exams.

Building on the success of the IntraSight interventional applications platform, we further reinforced Philips’ leading position in image- guided therapy with the introduction of IntraSight Mobile, which offers users in hospitals and office-based labs the integration, flexibility and affordability of a single mobile system for intravascular imaging, physiology measurements and co-registration for seamless workflows and enhanced patient care.

Philips announced progress on several clinical studies including the positive two-year clinical study results for the Tack Endovascular System for dissection repair, the first patient enrollment in the DEFINE GPS multicenter study to further drive the adoption of iFR for percutaneous coronary interventions based on clinical evidence, and the start of the WE-TRUST multicenter stroke study to shorten treatment times by identifying, planning and treating ischemic stroke patients in the interventional suite. Moreover, Philips announced the first structural heart repair procedure at Mayo Clinic using its new 3D intracardiac echocardiography catheter VeriSight Pro.

Building on Philips’ leadership in image-guided therapy solutions in cardiology, the company is further strengthening its position in fast- growing adjacencies such as neurology and oncology. For example, USA-based Piedmont Health equipped its neurosurgical operating rooms with a specialized version of Philips Azurion for the treatment of stroke. Philips also announced positive results of a clinical study aimed at setting a new standard of safety and accuracy in the diagnosis of small peripheral lung lesions using Philips Lung suite.

Philips launched next-generation digital pathology solution, Philips Digital Pathology Suite – IntelliSite – which features a comprehensive, scalable suite of software tools and capabilities designed to help streamline workflows, enhance diagnostic confidence, facilitate team collaboration, integrate artificial intelligence (AI) and increase the efficiency of pathology labs. Underlining its leading role in digital pathology, the company partnered with Healius Pathology, one of Australia's leading providers of private medical laboratory and pathology services, to deploy a multi-site digital pathology solution across Healius’ National Pathology Network.

Philips introduced new AI-enabled software and systems in MR, including the MR 5300, its second helium-free for life MR operations 1.5T system, the MR 7700 3.0T system for neuro applications, and MR Workspace, which simplifies the path from image acquisition to diagnosis.

The company enhanced its EPIQ and Affiniti ultrasound systems with tele-ultrasound capabilities, as well as adding liver fat quantification tools that allow allows non-invasive diagnosis of early-stage fatty liver disease.

A new addition to its Ambient Experience portfolio, Philips launched Pediatric Coaching, a holistic solution designed to be a less stressful experience for parents and their children undergoing MRI scans. The company also announced an initiative with the Walt Disney Company EMEA to test the effects of custom-made animations, including specially-made Disney stories, within Philips’ Ambient Experience hospital environments.

Philips further expanded its leading image-guided therapy portfolio through the acquisition of Vesper Medical, adding a venous stenting solution to address the root cause of chronic deep venous disease and enhance patient care. This will complement Philips’ strong IVUS offering in venous imaging and expand the company's growth in the vascular therapy market.

Philips received FDA clearance for its new MR 5300 system, continuing the advancement of the company’s helium-free for life operating portfolio. Powered by AI, the MR 5300 simplifies and automates complex clinical and operational tasks for outpatient clinical use and MR departments to help accelerate workflows and improve access to affordable, quality care.

Further expanding the company’s comprehensive CT portfolio, Philips introduced the new CT 5100 Incisive with CT Smart Workflow, comprising AI-enabled capabilities designed to accelerate workflows, enhance diagnostic confidence, and maximize system up-time.

3.4.2Connected Care businesses

Spanning the entire health continuum, the Connected Care businesses help broaden the reach and deepen the impact of healthcare – with solutions that unite devices, informatics, data and people across care networks. In this way, Philips connects patients and caregivers across care settings, delivering clinical, operational and therapeutic solutions that help our customers address the Quadruple Aim of better health outcomes, improved patient and staff experience, and lower cost of care.

In 2021, Connected Care continued to play a crucial role in fulfilling patient and customer needs created by the COVID-19 global pandemic – delivering core systems such as patient monitors, supporting the expansion of telehealth for the ICU, providing ventilators and oxygen, and delivering remote patient care safely.

COVID-19 continues to accelerate the digital transformation of healthcare, enabled by, for example, cloud and SaaS offerings. Increasingly, our customers need to support the transition of care, in the hospital and from the hospital to the home, making virtual care services an essential part of healthcare delivery. At the same time, they want to be able to unlock data siloes and translate data into clinical and operational insights to support better outcomes. And they want to leverage automation and remote support in order to improve workflows and alleviate staffing constraints.

In 2021, Connected Care rose to these challenges in large, growing and diverse markets, supported by the recent acquisitions in clinical data services and the increased focus on informatics.

Philips has a deep understanding of clinical care and the patient experience inside and outside the hospital. The combination of our advanced technological solutions and consultative approach allows us to be an effective partner to our customers in their transformation, both across the enterprise and at the level of the individual clinician, nurse and patient. Our consultation services are set up to help redesign and optimize patient and work flows, as well as to provide predictive analytics, customized training and improved accessibility across our application landscape, thus reducing the burden on hospital staff and improving patient safety.

This requires secure common digital data platforms that connect and align consumers, patients, payers and healthcare providers in an interoperable manner. Philips’ platforms aggregate and leverage information from clinical devices, patient and historical data to support care providers in patient engagement, diagnostics, (ambulatory) patient monitoring and (clinical) therapy solutions.

In June 2021, our subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices. Following the substantial ramp-up of its production, service and repair capacity in 2021, the repair and replacement program in the United States and several other markets is under way. As of January 2022, Philips Respironics has shipped a total of approximately 750,000 repair kits and replacement devices to customers and aims to complete the repair and replacement program in the fourth quarter of 2022. 

In 2021, the Connected Care segment consisted of the following areas of business:

• Hospital Patient Monitoring: This business delivers acute patient management solutions to improve clinical and patient outcomes and achieve operational and economic efficiencies. Leveraging a strong presence in the ICU, Hospital Patient Monitoring solutions enhance customers’ experience and improve patient outcomes with seamless patient data monitoring from admission to discharge, and by turning patient data into clinical insights that are actionable at the right time and specific to targeted care settings. 
• Emergency Care: Our business propositions play a critical role in connected acute care management, both inside and outside the hospital, including cardiac resuscitation (e.g. AEDs) and emergency care solutions (devices, services, and digital/data solutions).
• Sleep & Respiratory Care: Philips’ cloud-based sleep and respiratory patient management solutions enable the care of more than 10.5 million connected patients, driving adherence, reimbursement and remote patient management. This extends from ambulatory patient care solutions for obstructive sleep apnea, to end-to-end solutions that encompass consumer engagement, diagnostics, people-centric therapy, cloud-based connected propositions and care management services for patients with COPD (Chronic Obstructive Pulmonary Disease) and respiratory conditions. Hospital Respiratory Care provides invasive and non-invasive ventilators for acute and sub-acute hospital environments; Home Respiratory Care supports chronic care management in the home.
• Connected Care Informatics^*): This business includes a fully integrated Electronic Medical Record & Care Management business, which enables centralized management of clinical, organizational and operational processes, virtual care delivery propositions, including remote patient management, and real-time monitoring in acute care, including telehealth in the ICU. Philips’ Tele-ICU program continues to play a pivotal role, enabling clinicians and nursing staff to remotely monitor a scalable number of ICU beds from a central monitoring facility with predictive analytics, enabled by Philips’ HealthSuite Platform. In 2021, Philips acquired Capsule Technologies, Inc., which now forms part of Clinical Data Services. Capsule is a leading player in medical device and data integration across the enterprise, integrating with more than 1,000 vendor-agnostic device models. Building on its core integration and interoperability capabilities, along with the Philips HealthSuite Platform, we will fuel our data and healthcare Internet of Things (IoT) capabilities in support of integrated workflow solutions for the hospital. In 2021, Philips also acquired BioTelemetry, Inc. and it now forms part of the Ambulatory Monitoring & Diagnostics business. BioTelemetry holds a leading position in patient care management in ambulatory and home care settings in North America through a suite of cardiac diagnostic and monitoring solutions to identify heart rhythm disorders supported by Artificial Intelligence algorithms.

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 the patient care management businesses (Ambulatory Monitoring & Diagnostics and Sleep & Respiratory Care), revenue is generated through clinical services, 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. However, in 2021, the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business in June had a negative impact on sales in the second half of the year.

At year-end 2021, the Connected Care businesses had around 18,000 employees worldwide.

2021 business highlights 

Philips launched two new HealthSuite informatics solutions which are scalable across the enterprise, to support its customers in achieving the Quadruple Aim of healthcare: Patient Flow Capacity Suite, a solution that helps hospitals manage the complete patient journey, and Acute Care Telehealth, which builds on Philips’ successful Tele-ICU solutions.

Philips’ recently acquired Capsule business continued to add new device drivers to its Medical Device Information Platform, which will be integrated with HealthSuite. With more than 1,000 unique types of medical devices capable of integrating with the platform, customers can connect more devices to advance health systems’ digital transformation with intelligent, vendor-agnostic tools that turn complex data streams into actionable insights.

Philips introduced its integrated Interventional Hemodynamic System with the portable Patient Monitor IntelliVue X3, providing advanced vital signs measurements at the tableside in the interventional suite and continuous monitoring across care settings. Uninterrupted patient monitoring can help to improve clinical decision making and timely detection of potential adverse events at every stage.

Expanding its portable patient management offering, Philips introduced the Medical Tablet, a portable monitoring kit designed to help clinicians remotely monitor larger patient populations during emergency situations. This new offering, which is available in North America, Europe and Japan, provides remote access to patient data to improve workflows and better manage increased patient volumes.

Philips entered into a partnership agreement with Orbita Inc., a provider of conversational artificial intelligence (AI) solutions for healthcare, to co-create next-generation conversational virtual assistants for Philips’ consumer health and patient support applications.

Philips announced a collaboration with USA-based MedChat to integrate MedChat’s live chat and AI-driven chatbot services into Philips Patient Navigation Manager. With the combined offering, Philips enables its customers in North America to create automated communication workflows that function seamlessly alongside patient access and call center operations.

Highlighting the company’s leading position in high-acuity care settings, Philips received FDA clearance for the IntelliVue MX750 and MX850 patient monitors, which are uniquely designed to support scalability, alarm management, cybersecurity, and enhanced infection prevention within the hospital.

Building on the ambulatory cardiac diagnostics and monitoring solutions resulting from the BioTelemetry acquisition, Philips announced the acquisition of Cardiologs (closed on January 7, 2022), adding a vendor-neutral heart disorder screener and ECG analysis applications based on machine learning algorithms. This technology will accelerate diagnostic reporting and streamline clinician workflow and patient care.

3.4.3Personal Health businesses

Our Personal Health businesses play an important role on the health continuum – in the healthy living, prevention and home care stages – delivering compelling value propositions to enable people to live a healthy life and proactively manage their own health.

We aim to drive profitable growth through a relentless focus on innovation across three key areas:

• Reaching more people through consumer-driven product and solutions innovation 
• Accelerating online growth and engaging more people through an end-to-end digital approach
• Expanding our ecosystem through partnerships with leading retailers and scaling new business models

In September 2021, Philips completed the sale of its Domestic Appliances business to Hillhouse Investment, a global investment firm. The results of this transaction, which Philips announced in March 2021, are reported under Discontinued operations for 2021. As a result, in 2021, the Personal Health segment consisted of the following remaining areas of business:

• Oral Healthcare: power toothbrushes for a range of price segments, from entry-level battery-operated toothbrushes for a young audience, to premium intuitive power toothbrushes connected to the Sonicare app with in-app coaching and teledentistry service; brush heads, which are also available as a subscription service; products for interdental cleaning and for teeth whitening
• Mother & Child Care: products to support parents and babies in the first 1,000 days, including infant feeding (breast pumps, baby bottles, sterilizers), digital parental solutions (Pregnancy+ and Baby+ apps)
• Personal Care: products from entry-level to premium for male grooming (shavers, OneBlade, groomers, trimmers, hair clippers), including premium solutions with SkinIQ technology and in-app coaching for a personalized shave, blade subscriptions; beauty solutions (skin care, hair care, hair removal), including solutions with the latest SenseIQ technology that sense and adapt for personalized care, also available through subscription models.

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. Worldwide about half of our Personal Health sales now take place online.

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, we strongly believe in the connection between good oral care and good overall health - a belief underpinned by the World Health Organization (WHO), which adopted a resolution on oral healthcare in May 2021. Good oral care is important for everyone. And since everyone is different, oral healthcare should also be personalized to each user, so they can get the best health outcome. Philips Sonicare offers a wide range of solutions for complete oral care: from intelligent and intuitive power toothbrushes to interdental cleaning solutions and apps that help users to manage their complete oral care on a daily basis and give the option to share brushing data with their dental practitioners, putting personalized guidance at their fingertips. 

We also offer mobile solutions to support parents and parents-to-be for a more informed, more connected and healthier journey to parenthood. 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, with new, personalized content for each day of the pregnancy. As of year-end 2021, the Pregnancy+ app and Baby+ app combined have more than 56 million downloads, almost 2 million daily active users, and are available in 22 languages.

The company’s wide portfolio of connected consumer health platforms leverages Philips HealthSuite Platform, a cloud-enabled connected health ecosystem of devices, apps and digital tools that support 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 2021, Personal Health employed around 10,000 people worldwide.

2021 business highlights

The global launch of Philips’ most advanced electric toothbrush, the Sonicare 9900 Prestige, was positively received by consumers. The premium electric toothbrush leverages AI to optimize the user’s brushing technique, ensuring full coverage of their teeth, and instills brushing habits that improve oral health.

Toward the end of the year, Philips completed the successful roll-out of the Sonicare 9900 Prestige in North America, China, Europe, Middle East and Asia Pacific. It finished #1 in the Stiftung Warentest, Europe’s leading consumer organization. Philips further expanded its oral healthcare portfolio with the launch of innovative interdental cleaning devices in North America, China and Asia Pacific.

Underlining Philips’ strategy to deliver locally relevant solutions, the company launched several oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips launched its professional teeth whitening offering Zoom in China through a local partnership with LinkedCare, one of the largest dental solution providers in the Chinese dental market.

Expanding the company’s leading male grooming portfolio, Philips introduced the Shaver Series 9000 with SkinIQ technology in markets around the world, including China, North America and Europe. The premium shaver leverages AI and sensors to offer a personalized shave tailored to each unique skin and hair type.

Philips produced its 100 millionth OneBlade, just 5 years after its launch in 2016. The Philips OneBlade has disrupted shaving markets worldwide, creating a new category for shaving, trimming, and edging.

Philips introduced the Lumea IPL 9000 series with SenseIQ technology for personalized hair removal, which is now also available through a Try&Buy subscription model in various European countries.

The No. 1 worldwide pregnancy app that’s the most recommended app by midwives and pediatricians, the Philips Pregnancy+ app, debuted in India. The Philips Pregnancy+ app is currently available in 175+ countries worldwide, and offers a fully immersive experience for expecting parents, enabling them to track their baby’s growth, all with personalized content supported by clinical expertise.

Philips’ newest baby tech launched in North America (with subsequent markets launching throughout 2022): the Philips Avent Natural Baby Bottle with Natural Response nipple, which releases milk only when baby actively drinks, just like breastfeeding, easing the switch between breast and bottle.

3.4.4Other

In our external reporting on Other we report on the items Innovation & Strategy, IP Royalties, Central costs, and other small items. At year-end 2021, around 18,000 people worldwide were working in these areas.

About Other

Innovation & Strategy

The role of Innovation & Strategy is to listen to the voice of the customer and, in collaboration with the operating businesses and the markets, direct the company strategy and innovation roadmap to achieve our growth and profitability ambitions. The various components of Innovation & Strategy include: the Chief Technology Office (CTO), Research, HealthSuite Platform, the Chief Medical Office, Engineering Solutions, Experience Design, Healthcare Transformation Services, Strategy, and Partnerships. Our four largest Innovation Hubs are in Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China).

The Innovation & Strategy function tunes into industry trends and customer signals to develop innovations that solve real-world problems for healthcare customers and consumers. Innovation & Strategy advances innovation together with Philips' businesses, markets and partners. This entails cooperation between research, design, medical affairs, professional services, marketing, strategy and businesses in a multi-disciplinary fashion, from early exploration to first-of-a-kind offerings.

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 and agility, to capture and generate new ideas, and in some cases to leverage third-party capabilities. This may include sharing the related financial exposure and benefits.

Finally, Innovation & Strategy sets the agenda to drive continuous improvement in the Philips product and solution portfolios. Innovation & Strategy improves the efficiency and effectiveness of innovation through Centers of Excellence, such as Platform Modularity & Re-use, Data Science, Artificial Intelligence and Internet of Things.

Chief Technology Office (CTO) and Philips Research

The Chief Technology Office orchestrates customer-centric innovation strategy and portfolio management, and drives adoption of digital architecture and platforms, Data Science and AI, as well as excellence in software, across Philips’ businesses and markets. Philips Research initiates game-changing innovations – based on deep customer insights and technology advancements – that disrupt and cross boundaries in health technology and care delivery. It does so to increase the availability and accuracy of healthcare and improve clinical and economic outcomes, as well as supporting the associated transformation of Philips into a digital solutions company. CTO and Research encompass the following organizations:

• Innovation Management, responsible for end-to-end innovation strategy and portfolio management, integrated roadmaps linking products, systems and software to solutions, New Business Creation Excellence, R&D competency management, Clinical Research Board, Innovation Transformation and Performance Management and public funding programs.
• The Chief Architect Office defines the reference architecture for the HealthSuite Platform, domain-specific digital application platforms, and Modular Systems, covering all systems, products, services, solutions and digital IT in Philips.
• The Software Center of Excellence drives adoption of industry best practices in creating and maintaining application-level software, modular and configurable system design and model-based system engineering.
• The Data Science and AI Center of Excellence defines and deploys strategies and best practices for dealing with Data Science and AI in a responsible and compliant way, and develops common tools to facilitate the development process and co-creation of innovative propositions with clinical and business partners.
• Philips Research, as co-creator and strategic partner of the Philips businesses, markets and complementary Open Innovation ecosystem partners, drives customer needs-focused front-end innovation and clinical research at sites across the globe. The role of Research increasingly goes beyond early-stage proof-of-concept, including advanced development of smart connected devices and systems, and integrated solutions and services, fitting regionally relevant digital ecosystems.

Philips HealthSuite Platform

Philips HealthSuite Platform helps unlock the power of data to enable healthcare professionals, patients and consumers to engage in connected care. Its modular set of re-usable digital capabilities liberate, integrate and enable actionable insights on data from disparate systems within a secure environment. HealthSuite Platform helps accelerate the development and deployment of digital propositions across the health continuum, supporting better health outcomes, improved patient/consumer and staff experience, and lower cost of care.

Chief Medical Office

The Chief Medical Office is responsible for clinical innovation and strategy, healthcare economics, clinical evidence generation, medical affairs 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, care provider and payer.

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 and nurturing customer partnerships and growth opportunities, fostering peer-to-peer relationships in relevant medical communities, driving co-innovation with customers, liaising with medical regulatory bodies, and supporting clinical and economic evidence development.

Engineering Solutions

Engineering Solutions is accountable for bringing engineering capabilities in Philips to world-class level to realize innovations that deliver on our customers’ needs, advancing the Quadruple Aim. Taking a customer-first approach, Engineering Solutions turns ideas into working innovations by providing deep engineering expertise, cross-business product platforms, and innovation processes and tools. Engineering Solutions also works for selected external companies in the healthcare, high-tech and semiconductor industries. 

Innovation Hubs

To drive innovation effectiveness and efficiency, and to enable locally relevant solution creation, we have established four Innovation Hubs for the Philips Group: Eindhoven (Netherlands), Cambridge (USA), Bangalore (India) and Shanghai (China). The four hubs form a global network, together with the other smaller innovation and research sites in their respective regions, to provide access to each other’s capabilities to serve businesses, markets and customers globally.

• Philips Innovation Center Eindhoven, with satellites in Hamburg, Paris and Moscow, is Philips’ largest cross-functional Innovation Hub, hosting the global headquarters of most of our central innovation organizations. Many of the company’s core research programs are also run from here, as well as innovation for digital platforms and solution & services delivery.
• Philips Innovation Center Cambridge, MA is located at the heart of medical innovation within the North America market. It has innovation partnerships with top engineering institutions like MIT, with top clinical sites, and with government funding agencies like NIH (National Institutes of Health) and BARDA (Biomedical Advanced Research and Development Authority). The Research lab in Cambridge focuses on the application of Data Science and AI in radiology, ultrasound, and acute care.
• Philips Innovation Center Bangalore is our largest software-focused site, with over 3,400 engineers. In addition, it hosts, among others, R&D teams from most of our operating businesses and IT. The Center also functions as the hub for market-driven innovation in surrounding geographies in Asia Pacific, Africa, and Middle East & Turkey.
• Philips Innovation Center Shanghai is a key contributor to the healthcare and healthy living transformation of China. It combines digital innovation, research and solutions development for the China market, participating in local digital ecosystems, while several of its locally relevant innovations are also finding their way globally. Programs focus on personal health, clinical informatics for precision diagnosis, and connected care solutions.

Alongside the hubs, where most of the central Innovation & Strategy organization is concentrated together with selected business R&D and market innovation teams, we continue to have significant, but more focused innovation capabilities integrated into key technology centers at our other global business sites.

Philips Experience Design and Healthcare Transformation Services

Philips Experience Design is the global design function for the company, ensuring the user experiences of our innovations are inspiring, meaningful, people-focused, and locally relevant. Philips Experience Design also ensures the Philips brand experience is distinctive, consistently expressed across all customer touchpoints, and drives customer preference. A key enabler for this is an engaging and differentiating design language system (DLS) that is embedded in software, hardware, and services across our businesses. Philips Experience Design partners with stakeholders across the enterprise in applying creativity and design thinking, from defining value propositions to co-creating solutions with customers, as well as developing new approaches in areas such as data-enabled design tools and processes that help create meaning and capture value from data. Philips Experience Design received a record 182 awards for design excellence in 2021.

Philips Healthcare Transformation Services (HTS) is a consulting practice within Philips that helps our customers improve process efficiency and enhance the care experience. Our consultants leverage 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 clinical and consulting expertise delivering a portfolio of methods and tools in operational and clinical transformation, environment and experience design, and digital transformation and performance analytics.

IP Royalties

Philips Intellectual Property & Standards (IP&S) proactively pursues the creation of new Intellectual Property (IP) in close co-operation with Philips’ operating businesses and Innovation & Strategy. IP&S is a leading industrial IP organization providing world-class IP solutions to Philips’ businesses to support their growth, competitiveness and profitability.

Royal Philips’ IP portfolio currently consists of 57,000 patent rights, 33,000 trademarks, 114,000 design rights and 2,900 domain names. Philips filed 860 new patents in 2021, with a strong focus on the growth areas in health technology services and solutions.

Philips earns substantial annual income from license fees and royalties.

Philips believes its business as a whole is not materially dependent on any particular third-party patent or license, or any particular group of third-party patents and licenses.

Central costs

We recharge the directly attributable part of the functional costs to the business segments. The remaining part is accounted for as 'central costs', and includes costs related to the Executive Committee and Group functions such as Strategy, Legal and Audit fees.

Real estate

Philips is present in more than 75 countries globally and has its corporate 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 2021, we relocated key offices in Farnborough (UK), Stockholm (Sweden), Toronto (Canada), Gurgaon (India) and Istanbul (Turkey). We invested in, amongst others, our sites in Plymouth (USA), Eindhoven (Netherlands), Alajuela (Costa Rica), Pune (India) and Böblingen (Germany) to create an engaging workplace that can help attract and retain the best talent. We have continued to drive productivity by optimizing our footprint globally and reducing the number of sites through post-acquisition integration programs, as well as by implementing our Future of Work concept to support hybrid working in 2022.

We have fully transferred 33 properties and partially transferred 48 properties as part of the sale of our Domestic Appliances business.

In line with our Environmental ESG commitment towards 2025, we continue to actively optimize our real estate portfolio. Having met our goal of bringing our site-related CO₂ emissions under 35 kilotons per year in 2020, we further reduced our CO₂ emissions by 15% in 2021. In addition, we reached 73.9% renewable energy in 2021, meeting our 2021 target of 72% and on track to achieve our target of 75% by 2025.

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 continued to decrease in 2021 as a result of COVID-19, and this trend is expected to continue in 2022. The net book value of our land and buildings at December 31, 2021, represented EUR 1,388 million; construction in progress represented EUR 24 million. Our current facilities are adequate to meet the requirements of our present and foreseeable future operations.

3.5Our geographies

3.5.1Our Markets

We address North America, Western Europe and other mature geographies, as well as Greater China and other growth geographies, via three market groups – North America, Greater China and International Markets – which are active in more than 100 countries worldwide.

The Markets’ core objective is to understand local market/customer needs, to create and activate the local marketing plans, to develop and manage the relationship with existing and new customers, to deliver orders, and to manage and service the installed base of equipment and informatics at our customer sites. The Markets manage the market-oriented profit-and-loss account (P&L). They act as the voice of the customer in the creation of the suite of solutions strategy, 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) – Ultrasound-Japan, for example. Through the BMC process it is agreed 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 and the collaborative P&L, while leveraging the functional excellence and shared infrastructure of the company.

3.5.2Macro-economic landscape in 2021

In 2021, the world economy experienced strong growth, largely due to the base effect from the recession suffered in 2020 as a result of the COVID-19 pandemic. The economic re-opening seen in 2021 has led to significant economic recoveries, although the COVID-19 pandemic and global supply bottlenecks persist. According to Oxford Economics, global real GDP is estimated to have grown by 5.8% in 2021, compared with the -3.5% estimated for 2021 in 2020. Across Philips’ markets, Latin America, Europe and Japan are estimated to have not yet reached their 2019 real GDP levels. Oxford Economics expects global real GDP growth to moderate to 4.2% in 2022.

3.5.32021 highlights from our Market Groups 

North America

Philips continued to focus on helping customers drive innovation in areas such as cancer care, cardiovascular care and provider digital transformation, while forging strategic partnerships to advance artificial intelligence (AI) and data analytics. 2021 saw our long-term strategic partnerships continue to expand into these areas, as health systems looked to advance care for their communities. 

New York University Langone Health’s Department of Pathology worked with us to integrate Philips Genomics Workspace into their EMR (electronic medical record) and enable the largest cancer sequencing test in the industry. We signed a long-term strategic partnership specifically focused on integrated cardiovascular solutions with Lankenau Heart Institute, part of Main Line Health, and formed a unique partnership with the University of California, San Francisco (UCSF), to develop AI technologies that will enable personalization and make it easier for patients to select providers, access their health information and receive virtual care at home. Further, Baptist Health signed a 10-year strategic partnership to help standardize patient monitoring solutions, supporting their digital transformation goals. 

Our partnerships in 2021 also highlighted our commitment to health equity and sustainability. The US Chamber of Commerce Foundation, in partnership with Philips and the Platform for Accelerating the Circular Economy (PACE), expanded the Capital Equipment Coalition (CEC) to North America to accelerate transformation to a circular economy model. We are also working with the National Minority Quality Forum (NMQF), as part of a joint mission to raise awareness of and support on key issues such as maternal mortality among Black women, leveraging Philips resources and technology, e.g. the Pregnancy+ app, to help close the healthcare disparities gaps. 

In keeping with our belief in the added value of AI, we announced the Philips Sonicare 9900 Prestige, an AI-enabled toothbrush with SenseIQ technology. Philips Sonicare continues to be the sonic toothbrush brand most recommended by US dental professionals, and we maintain a No. 1 market share in electric male grooming. 

Greater China

In 2021 we continued our efforts to provide innovative health technology solutions in support of China’s national health strategy, Healthy China.

Philips provided the Yili Chuanxin Oncology hospital in Xinjiang, a newly established top-tier private hospital, with an Oncology solution to address the hospital’s clinical needs in screening, precision diagnosis, targeted treatment and rehabilitation of cancer patients. The solution includes IntelliSpace Digital Pathology and the Ingenia 3.0T MR, IQon Spectral CT, Incisive CT and CT Big Bore imaging systems, combined with IntelliSpace Portal for advanced visualization and analysis.

Driven by the China Healthcare Reform, PCI (Percutaneous Coronary Intervention) procedures are gradually being transferred from top-tier hospitals to low-tier hospitals, which urgently need medical technology to help doctors provide quality diagnosis and treatment to cardiovascular patients. We provided an integrated solution, including Azurion and IVUS (intravascular ultrasound), to a county-level hospital in Kaifeng, Henan Province, to address the hospital’s needs in the diagnosis and treatment of PCI patients.

Philips provided The First Affiliated Hospital of Zhengzhou University – one of the biggest hospitals in the world, with more than 10,000 beds – with a range of advanced diagnostic imaging and image-guided therapy systems, including IQon Spectral CT and the Azurion image-guided therapy platform.

We signed a solutions contract with Gansu Provincial Maternity and Child Care Hospital to streamline and advance the delivery of critical care across multiple departments. The contract includes patient monitors, an ECG management system, and ICCA (IntelliSpace Critical Care and Anesthesia) informatics systems.

For consumers, we launched an integrated platform, Philips Healthy Living Lab, in which Philips is partnering with other brands, such as Unilever, IHG and Alibaba, to engage consumers with healthy living experiences.

Underlining our strategy to deliver locally relevant solutions, the company launched several oral healthcare innovations targeting multiple price points in China, including two new electric toothbrushes. In addition, Philips launched its professional teeth whitening offering Zoom in China through a local partnership with LinkedCare, one of the largest dental solution providers in the Chinese dental market.

Recognizing the need for local-for-local development and manufacturing in China, we continue to strengthen our innovation centers in China and aim to achieve 90% localization by the end of 2023.

International Markets

In our International Markets we strive to execute on a shared global vision whilst meeting the unique local needs and circumstances of our customers. Our goal is to elevate customer relationships and move from being a trusted supplier of equipment, services and software to a transformational partner directly contributing to our customers’ long-term success. To support this vision we have made great progress on leveling up our go-to-market model, developing scalable solutions and software, expanding fit-for-future capabilities, reinvesting revenue to enable new business models, and establishing new partnerships. 

In 2021, Philips entered into many new customer partnerships, including the following:

Philips and Spanish healthcare group Vithas signed a 5-year strategic agreement, which will allow Vithas Group hospitals and medical centers to benefit from Philips’ latest innovations in diagnostic imaging technology, health informatics and equipment for minimally invasive interventional procedures.

In Germany, Philips signed a 10-year partnership agreement with the Brandenburg University Clinic. The agreement includes a wide range of integrated solutions along the health continuum. Furthermore, Philips will act as the general contractor for an extension to the central operating rooms and cardiology department.

As part of Philips’ 10-year partnership with Rutherford Health to open multiple Community Diagnostic Centers in England, the first center was opened in Taunton, for which Philips provided innovative diagnostic imaging systems, including Ingenia Ambition MR combined with Ambient Experience, which allows patients to control and personalize the imaging environment.

In France, Philips and Rennes University Hospital signed a 5-year technology, research and innovation partnership to advance patient care. The hospital will have access to Philips’ latest technologies and informatics solutions to enhance the diagnosis, treatment, monitoring and management of patients. The multi-year strategic partnership will accelerate clinical research focused on image-guided minimally invasive therapy, neurology, intensive care units and digital pathology.

In the Netherlands, Philips signed a 12-year strategic partnership with IJsselland Hospital, focusing on innovation, digitalization and optimization of care delivery, which also includes the delivery of patient monitoring and imaging solutions, including CT and MRI systems.

In Russia, Philips won several key projects, including one at Moscow City Healthcare Department for ultrasound systems, including lifetime service support for local clinics. The company also concluded a turnkey project for Sakha Republic (Yakutia), equipping the regional hospitals’ cardiology and oncology departments with, among others, our Azurion 7 image-guided therapy solution, MR Ingenia Ambition imaging system, and IntelliSpace Critical Care and Anesthesia informatics system.

In Poland, Philips delivered 15 systems from across the total Azurion portfolio to empower doctors serving patients’ needs in the area of interventional cardiology, electrophysiology (EP), neuroradiology and hybrid solutions.

In Latin America, Philips signed a strategic agreement with UnitedHealth Group, comprising a comprehensive portfolio of Diagnostic Imaging, Image Guided Therapy and Customer Services solutions and a turnkey solution for the renovation of 12 sites in Brazil. Under this agreement, the customer will have access to leading-edge technology, enabling them to dedicate more time to their patients. In Mexico, Philips worked with Digipath to establish the first digital pathology laboratory in the country, with Philips IntelliSite Pathology Solution enhancing productivity and supporting precision medicine and diagnostics.

Philips, together with the Saudi Data and Artificial Intelligence Authority (SDAIA), opened the first AI lab in the Kingdom of Saudi Arabia in October 2021. The Riyadh-based center will spearhead research and development of AI programs and standards to boost the use of AI in the healthcare technology sector, and build an ecosystem of highly skilled AI experts in Saudi Arabia.

3.6Supply chain and procurement

3.6.1Supply chain

Philips runs an Integrated Supply Chain, which encompasses supplier selection and management through procurement, manufacturing across all the industrial sites, logistics and warehousing operations, as well as demand/supply orchestration. 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. 

The COVID-19 pandemic has continued to test the resilience of supply chains globally. Philips has not been immune to the increasing impact of issues, such as the shortage of electronic components and logistical constraints. On the logistics front, we have established long-term contracts with suppliers, ensuring increased reliability – still not at pre-COVID-19 levels due to ports congestion – as well as secured costs and availability on contracted lanes. We have also expanded our rail and road transportation options to diversify our routes. For semiconductors, we have placed non-cancellable orders for an 18-month horizon to ensure our place in the queues. At the same time, we have intensified spot buys and  alternate parts qualifications in partnership with Research & Development. In parallel, we continue our advocacy towards the industry and governments on prioritizing supplies for life-saving equipment. Much like the rest of the industry, however, we remain exposed to sudden breakouts of COVID-19 in various countries and among suppliers, which will continue to make it difficult to predict developments through at least the first half of 2022. All of these challenges have reinforced our strategy for a more ‘regional vs global’ approach to our end-to-end network design.

Philips has continued to progress the consolidation of its manufacturing footprint into versatile ‘multi-modality’ manufacturing sites that produce multiple product categories and are located within or near the regions they serve. We do this for enhanced scale, efficiency, and customer proximity. While our site count has continued to decrease, the number of locations equipped to make the same product is increasing. Philips is using its multi-modality sites, in combination with contract manufacturing partners, to regionally ‘multi-source’ many of its products. This will increase the resilience of our supply chain to manage future, unplanned disruptions and ensure access to public healthcare investment where ‘local’ requirements exist in our largest markets.

We have also made good progress on transforming our warehousing and distribution operations into a more customer-centric and agile network that is more responsive to market volatility. In the last three years, we have reduced our warehousing footprint by 35%, essentially through consolidation and servicing of multiple businesses from a single location.

In 2021 we finalized the implementation of artificial intelligence and machine learning in our baseline demand forecasting operations for all our businesses in order to improve demand forecasting accuracy and manage inventories more efficiently. We achieved an improved forecast accuracy for our Personal Health products of more than 20% in the markets Europe, North America and Greater China. The other markets are in the early operating phase. We have insourced the AI forecasting activities for our health systems and medical devices portfolio from a third-party supplier and increased the baseline demand forecasting accuracy by 8%.

In June 2021, our subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices. Following the substantial ramp-up of its production, service and repair capacity in 2021, the repair and replacement program in the United States and several other markets is under way. Production was trebled during the second half of 2021. Philips Respironics plans to further increase production volumes during the first half of 2022, subject to availability of inputs and taking into account global semiconductor shortages.

3.6.2Procurement

In 2021, strong economic recovery led to sustained high demand. Combined with low levels of inventories and long lead times, this resulted in tightness and scarcity in many markets, as well as volatile spot-market price environments. Under these circumstances, the Procurement function’s priority was to endeavor to safeguard continuity of supply, with dedicated teams by modalities and types of commodities, so that Philips could continue to provide critical healthcare equipment and solutions to our customers all over the world. 

Global manufacturing remained in catch-up mode throughout the year. In addition, supply chain bottlenecks and other incidents had direct significant impacts on the already tight markets. Many market risks were in play at the same time – COVID-related delays in supply ramp-ups, the US chemical industry hit by weather storms, the blockage of the Suez Canal, the global shipping container shortage, the energy crisis in China, as well as problems on the gas market in Europe. Especially in the components area, capacity remained a major issue, causing shortages across all end-markets.  

3.6.3Supplier sustainability

Philips’ purpose to improve people’s lives applies throughout our value chain. An important area of focus for the Integrated Supply Chain is sustainability, and we are actively working on this together with our partners, whether these be component 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, our sustainability strategy has included dedicated supplier sustainability programs. We have a direct (tier 1) business relationship with approximately 5,800 product and component suppliers and 18,000 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 2021, we focused on further maximizing our positive impact on the supply chain, strengthening our maturity-based approach to drive continuous improvement. Through the Supplier Sustainability Performance program, we improved the lives of 430,000 workers in our supply chain (2020: 302,000). We also launched new ways to engage our suppliers, performing deep-dives on human rights impacts and dedicated energy scans to identify cost-effective ways to decarbonize suppliers’ manufacturing environments. 

Managing our large and diverse 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 2021, our programs focused specifically on improving suppliers’ sustainability performance, responsible sourcing of minerals, and reducing the environmental footprint of our supply base by driving the adoption of science-based targets.

Detailed information on our supplier sustainability programs is available in section Supplier indicators of this Annual Report. 

4Financial performance

4.1Performance review

The year 2021

• 2021 saw strong growth in orders and sales in the Diagnosis & Treatment and Personal Health segments, with a decline in Connected Care following the extraordinary growth in 2020 and the impact of the Philips Respironics voluntary recall notification. Increases in component and transportation costs, along with shortages of key components due to capacity constraints and delays in transport routes, impacted Philips' sales and profitability.
• Sales amounted to EUR 17.2 billion, a decline of 1% on a nominal and comparable basis. Comparable sales growth^*) in the Diagnosis & Treatment businesses was 8% and in the Personal Health businesses 9% on a comparable basis. However, this was more than offset by a 23% decline in the Connected Care businesses. This was largely due to the Respironics recall but also the high comparable base in 2020. Nevertheless, we ended the year with our highest-ever order book, 18% above 2020.
• In Q3 2021, Philips completed the divestment of Domestic Appliances as planned, resulting in a EUR 2.5 billion gain after tax and transaction-related costs; reported in Discontinued Operations.
• Net income amounted to EUR 3.3 billion, an increase of EUR 2.1 billion compared to 2020, mainly driven by the gain on the sale of the Domestic Appliances business. Net income is not allocated to segments, as certain income and expense line items are recorded on a centralized basis.
• Adjusted EBITA^*) amounted to EUR 2.1 billion, or 12.0% of sales. Productivity programs delivered annual savings of approximately EUR 279 million. This included approximately EUR 140 million procurement savings, led by the Design for Excellence (DfX) program, and approximately EUR 139 million savings from other productivity programs. While the Diagnosis & Treatment and Personal Health businesses delivered improved profit expansion, the Connected Care businesses showed a decline in Adjusted EBITA^*) margin, primarily due to the decline in sales and the impact of the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business. 
• Operating cash flow amounted to EUR 1.6 billion, and Free cash flow^*) amounted to EUR 0.9 billion.
• In 2021, Philips completed the acquisitions of BioTelemetry and Capsule Technologies, which we believe will further drive our transformation into a solutions company and, in particular, further strengthen our position to improve patient care across care settings for multiple diseases and medical conditions.
• In June 2021, our subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices. Following the substantial ramp-up of its production, service and repair capacity in 2021, the repair and replacement program in the United States and several other markets is under way. We recognized a field action provision of EUR 0.7 billion to cover the costs of the recall.
• We expect to resume our growth and margin expansion trajectory in the course of 2022, however, we continue to see volatility and headwinds related to COVID and the supply chain shortages, especially in the first half of the year, despite our ongoing mitigation actions.
• On January 29, 2019, Philips announced a EUR 1.5 billion share buyback program for capital reduction purposes. Approximately half of the program was executed through open market purchases during 2019 and the first quarter of 2020. The other half was executed through individual forward contracts. The last settlement under such contracts took place in December 2021 and the program was completed. 
• On July 26, 2021, Philips announced a new EUR 1.5 billion share buyback program for capital reduction purposes. Philips entered into a number of forward transactions in the third quarter, covering approximately half of the program, with settlement dates in 2022, 2023 and 2024. The remainder of the program was executed through open market purchases taking place in Q4 2021 and Q1 2022.

4.2Results of operations

Sales

The composition of sales growth in percentage terms in 2021, compared to 2020 and 2019, is presented in the following table.

Group sales amounted to EUR 17,156 million in 2021, 0.9% lower than in 2020 on a nominal basis. Considering a 0.3% positive effect from currency and consolidation, comparable sales^*) decreased by 1.2%. While the currency effect was negative, mainly due to depreciation of currencies against the euro, and affected all business segments, this was more than offset by a positive consolidation impact from new acquisitions.

Diagnosis & Treatment businesses

In 2021, sales amounted to EUR 8,635 million, 5.6% higher than in 2020 on a nominal basis. Considering a 2.5% negative currency effect and consolidation impact, comparable sales^*) increased by 8.1%. This was driven by double-digit growth in Image-Guided Therapy and mid-single-digit growth in Diagnostic Imaging and Ultrasound, reflecting demand for Philips' portfolio and positive market conditions.

Connected Care businesses

In 2021, sales amounted to EUR 4,593 million, 17.5% lower than in 2020 on a nominal basis. Considering a 5.1% positive currency effect and consolidation impact, comparable sales^*) decreased by 22.6%, following the high COVID-19-generated demand in 2020 and the impact of the Respironics recall in 2021. 

Personal Health businesses

In 2021, sales amounted to EUR 3,410 million, 7.4% higher than in 2020 on a nominal basis. Considering a 1.6% negative currency effect and consolidation impact, comparable sales^*) increased by 9.0%. This was driven by robust customer demand for new product introductions across the world.

Other

In 2021, sales amounted to EUR 519 million, compared to EUR 396 million in 2020. The increase was mainly driven by supplies to a divested business and higher royalty income. 

Performance per geographic cluster

Sales in mature geographies in 2021 were 2% lower than in 2020 on a nominal basis and 3% lower on a comparable basis^*). Sales in Western Europe were 2% lower year-on-year on a nominal basis and 3% lower on a comparable basis^*), with a double-digit decline in the Connected Care businesses, partly offset by high-single-digit growth in the Diagnosis & Treatment businesses and mid-single-digit growth in the Personal Health businesses. Sales in North America were 1% lower year-on-year on a nominal basis and decreased 3% on a comparable basis^*), as double-digit growth in the Diagnosis & Treatment businesses and mid-single-digit growth in the Personal Health businesses were largely offset by a double-digit decline in the Connected Care businesses. Sales in other mature geographies decreased by 3% on a nominal basis and were in line with 2020 on a comparable basis^*). Mid-single-digit comparable sales growth^*) in the Personal Health businesses and Diagnosis & Treatment businesses was partly offset by a double-digit decline in the Connected Care businesses.

Sales in growth geographies in 2021 increased by 1% on a nominal basis and 3% on a comparable basis^*), with double-digit growth in the Personal Health businesses and high-single-digit growth in the Diagnosis & Treatment businesses, partly offset by a double-digit decline in the Connected Care businesses. The mid-single-digit comparable sales growth^*) was driven by double-digit growth in India, high-single-digit growth in Russia & Central Asia, and mid-single-digit growth in Central & Eastern Europe and Latin America.

Diagnosis & Treatment businesses

Sales in growth geographies increased by 5% on a nominal basis in 2021, and on a comparable basis^*) showed high-single-digit growth, driven by double-digit growth in Latin America, India and Central & Eastern Europe and mid-single-digit growth in China. Sales in mature geographies increased by 6% on a nominal basis and showed high-single-digit growth on a comparable basis^*). Comparable sales^*) increased, with double-digit growth in North America and high-single-digit growth in Western Europe.

Connected Care businesses

Sales in growth geographies decreased by 28% on a nominal basis in 2021, and on a comparable basis^*) showed a double-digit decline, with a double-digit decline across most regions. Sales in mature geographies decreased by 16% on a nominal basis and showed a double-digit decline on a comparable basis^*), with a double-digit decline in Western Europe and North America and a mid-single-digit decline in Japan.

Personal Health businesses

Sales in growth geographies increased by 15% on a nominal basis in 2021, and on a comparable basis^*) showed double-digit growth, which was attributable to double-digit growth in Central & Eastern Europe, Russia & Central Asia and Latin America and mid-single-digit growth in China. Sales in mature geographies increased by 3% on a nominal basis, and on a comparable basis^*) showed mid-single-digit growth, driven by mid-single-digit growth in Western Europe and North America.

Cost of sales

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 495 million to EUR 9,988 million in 2021, compared to EUR 9,493 million in 2020, mainly due to the field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business reflected in other manufacturing costs. Other key factors influencing cost of sales were as follows:

• Costs of materials used decreased by EUR 79 million in 2021, mainly driven by productivity savings and a positive foreign currency impact, partly offset by the impact of increases in procurement and supply chain costs.
• Salaries and wages decreased by EUR 71 million in 2021, driven by productivity and restructuring savings, partly offset by acquisitions. 
• Depreciation and amortization decreased by EUR 112 million in 2021, mainly due to lower impairments of technology assets of EUR 55 million compared to EUR 92 million in 2020.

Gross margin

In 2021, Philips’ gross margin was EUR 7,168 million, or 41.8% of sales, compared to EUR 7,820 million, or 45.2% of sales, in 2020. The year-on-year decrease in gross margin was mainly driven by the field action provision of EUR 719 million (representing 4.2% of sales) in connection with the Philips Respironics voluntary recall notification in the Sleep & Respiratory Care business.

Selling expenses

Selling expenses amounted to EUR 4,258 million, or 24.8% of sales, in 2021, compared to EUR 4,054 million, or 23.4% of sales, in 2020. The year-on-year increase in selling expenses of EUR 204 million was driven by the acquisitions of BioTelemetry and Capsule Technologies and higher investments in advertising and promotion, partly offset by a positive foreign currency impact and lower restructuring costs. Selling expenses include restructuring, acquisition-related and other charges of EUR 140 million in 2021, compared to EUR 133 million in 2020.

General and administrative expenses

General and administrative expenses amounted to EUR 599 million, or 3.5% of sales, in 2021, compared to EUR 630 million, or 3.6% of sales, in 2020. The year-on-year decrease of EUR 31 million in general and administrative expenses was mainly driven by lower restructuring, acquisition-related and other charges. 

Research and development expenses

Research and development costs were EUR 1,806 million, or 10.5% of sales, in 2021, compared to EUR 1,822 million, or 10.5% of sales, in 2020. The year-on-year decrease of EUR 16 million was mainly driven by lower restructuring, acquisition-related and other charges. 2021 includes EUR 101 million of restructuring, acquisition-related and other charges, compared to EUR 131 million in 2020.

Net income, Income from operations (EBIT) and Adjusted EBITA^*)

Net income is not allocated to segments, as certain income and expense line items are monitored on a centralized basis, resulting in them being shown on a Philips Group level only.

The following overview shows Income from operations and Adjusted EBITA^*) by segment.

Net income in 2021 increased by EUR 2.1 billion compared to 2020, mainly driven by the gain on the sale of the Domestic Appliances business, partly offset by the EUR 719 million field action provision.

Income from operations in 2021 amounted to EUR 553 million, or 3.2% of sales, compared to EUR 1,264 million, or 7.3% of sales, in 2020, mainly impacted by the EUR 719 million field action provision. Adjusted EBITA^*) in 2021 was EUR 2,054 million and the margin amounted to 12.0%, compared to EUR 2,277 million and a margin of 13.1%, due to a decline in sales and the impact of supply chain headwinds, partly offset by productivity measures.

Amortization and goodwill impairment charges in 2021 were EUR 337 million. This includes a charge of EUR 13 million related to an impairment of goodwill and amortization charges of EUR 55 million related to an impairment of a technology asset. In 2020, amortization and goodwill impairment charges were EUR 521 million and included a charge of EUR 144 million related to an impairment of goodwill in the Connected Care segment, as well as amortization charges of EUR 92 million related to an impairment of a technology asset.

Restructuring, acquisition-related and other charges in 2021 were EUR 1,164 million. This includes a field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification, provisions for quality actions of EUR 94 million and other matters of EUR 53 million in the Connected Care businesses, restructuring charges of EUR 80 million, acquisition-related charges of EUR 102 million partly offset by a EUR 87 million gain related to the re-measurement of contingent consideration liabilities, a loss of EUR 76 million related to a divestment, and separation costs of EUR 64 million related to the Domestic Appliances business. 2021 also includes a release of a legal provision of EUR 38 million, a gain of EUR 33 million related to a minority participation, and a benefit from the re-measurement of environmental liabilities of EUR 22 million. 2020 charges were EUR 494 million and included EUR 200 million of restructuring charges, EUR 95 million of acquisition-related charges offset by a EUR 101 million gain related to the re-measurement of a contingent consideration liability, EUR 31 million related to impairments of capitalized development costs, EUR 43 million of 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.

Income from continuing operations attributable to shareholders per common share (in EUR) - diluted, was EUR 0.67 in 2021, compared to EUR 1.08 in 2020. Adjusted income from continuing operations attributable to shareholders per common share (in EUR) - diluted^*) was EUR 1.65 in 2021, compared to EUR 1.74 in 2020.

Diagnosis & Treatment businesses

Income from operations in 2021 increased to EUR 941 million, compared to EUR 497 million in 2020. This was primarily due to sales growth and productivity measures. These factors also resulted in an increased Adjusted EBITA^*), which was 12.4% of sales in 2021.

Amortization and goodwill impairment charges in 2021 were EUR 155 million and include EUR 55 million of charges related to an impairment of a technology asset in Image-Guided Therapy. 2020 charges were EUR 209 million and included EUR 92 million of charges related to an impairment of a technology asset in Image-Guided Therapy.

Restructuring, acquisition-related and other charges in 2021 amounted to a gain of EUR 25 million and include restructuring charges of EUR 44 million, acquisition-related charges of EUR 48 million offset by a EUR 85 million gain related to the re-measurement of contingent consideration liabilities, and a release of a legal provision of EUR 38 million. 2020 charges were EUR 112 million and included EUR 57 million of restructuring charges, EUR 73 million of acquisition-related charges offset by a EUR 101 million gain related to the re-measurement of a contingent consideration liability, EUR 38 million related to legal matters, and a EUR 31 million impairment of capitalized development costs.

Connected Care businesses

Income from operations in 2021 decreased to EUR (732) million, compared to EUR 711 million in 2020. This was mainly due to the decline in sales and the impact of the Respironics recall on the Sleep & Respiratory Care business. These factors also impacted Adjusted EBITA^*), which was 10.6% of sales in 2021.

Amortization and goodwill impairment charges in 2021 were EUR 161 million and include EUR 13 million impairment of goodwill related to the divested Personal Emergency Response Services (PERS) and Senior Living business. 2020 charges were EUR 278 million and included a EUR 144 million impairment of goodwill related to the Population Health Management business.

Restructuring, acquisition-related and other charges in 2021 were EUR 1,058 million and include a field action provision of EUR 719 million in connection with the Philips Respironics voluntary recall notification, EUR 93 million of restructuring and acquisition-related charges, provisions for quality actions of EUR 94 million and other matters of EUR 53 million, and a gain of EUR 33 million related to a minority participation. 2020 charges were EUR 209 million and included 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.

Personal Health businesses

Income from operations in 2021 increased to EUR 585 million, compared to EUR 356 million in 2020. This was mainly driven by sales growth and productivity measures, partly offset by higher investments in advertising & promotion. These factors also resulted in an increased Adjusted EBITA^*), which was 17.6% of sales.

Amortization charges in 2021 were EUR 15 million and include amortization charges related to intangible assets in Mother & Child Care. 2020 charges were EUR 16 million and included amortization charges related to intangible assets in Mother & Child Care.

Restructuring, acquisition-related and other charges in 2021 were not material. 2020 charges were EUR 55 million and included restructuring charges of EUR 31 million.

Other

In Other we report on the items Innovation, IP Royalties, Central costs and Other.

Income from operations in 2021 was EUR (242) million, compared to EUR (300) million in 2020. Adjusted EBITA^*) in 2021 was EUR (105) million, compared to EUR (165) million in 2020. Income from operations and Adjusted EBITA^*) increased, mainly due to higher royalty income and lower charges related to environmental provisions, partly offset by investments, mainly in IT and Quality & Regulatory affairs.

Restructuring, acquisition-related and other charges in 2021 were EUR 131 million and include a loss of EUR 76 million related to a divestment and EUR 64 million of separation costs related to the Domestic Appliances business, partly offset by a benefit from the re-measurement of environmental liabilities of EUR 22 million. 2020 charges were EUR 118 million and included 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.

Financial income and expenses

A breakdown of Financial income and expenses is presented in the following table.

Financial income and expenses resulted in an expense of EUR 39 million in 2021, compared to an expense of EUR 44 million in 2020. 2021 includes gains on the value of Philips' minority participations and higher net interest income. For further information, refer to Financial income and expenses.

Income taxes

Income taxes amounted to a benefit of EUR 103 million. The effective income tax rate in 2021 was (20.0)%, compared to 17.6% in 2020, mainly due to the impact from the recognition of tax assets and other tax benefits as a result of a business transfer during the year. 

Investment in associates

Results related to investments in associates improved from a loss of EUR 9 million in 2020 to a loss of EUR 4 million in 2021. The number of associates increased compared to 2020. Although gains were recorded in a number of investments in associates, these were more than offset by losses in the remainder.

Discontinued operations

Discontinued operations consist primarily of the Domestic Appliances business and certain other divestments that were reported as discontinued operations. In 2021 the sale of the Domestic Appliance business resulted in an after-tax gain of EUR 2.5 billion.

For further information, refer to Discontinued operations and assets classified as held for sale.

Non-controlling interests

Net income attributable to non-controlling interests decreased from EUR 8 million in 2020 to EUR 4 million in 2021.

4.3Restructuring and acquisition-related charges and goodwill impairment charges

In 2021, the most significant restructuring projects impacted the Diagnosis & Treatment and Connected Care segments and mainly took place in the US and Netherlands. The restructuring mainly comprised product portfolio rationalization and the reorganization of global support functions.

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.

For further information on restructuring, refer to Provisions.

In 2021, acquisition-related charges amounted to EUR 14 million. The Connected Care segment recorded charges of EUR 51 million related to the acquisitions of BioTelemetry and Capsule Technologies. The Diagnosis & Treatment businesses recorded a gain of EUR 37 million, mainly related to a gain of EUR 85 million from the re-measurement of contingent consideration liabilities, partly offset by charges related to the acquisitions of Spectranetics and the Healthcare Information Systems business of Carestream Health.

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 from the re-measurement of a contingent consideration liability, partly offset by charges related to the acquisitions of Spectranetics and the Healthcare Information Systems business of Carestream Health.

During 2021, EUR 15 million of goodwill impairment charges were recorded, mainly due to EUR 13 million of impairment losses related to the divested Personal Emergency Response Services (PERS) and Senior Living business. 

For further information on the goodwill sensitivity analysis, please refer to Goodwill.

4.4Acquisitions and divestments

Acquisitions

In 2021, Philips completed two acquisitions: BioTelemetry, which was completed on February 9, 2021, and Capsule Technologies, which was completed on March 4, 2021. The acquisitions of Vesper Medical and Cardiologs were closed at the beginning of 2022. Acquisitions in 2021 and prior years led to acquisition and post-merger integration charges of EUR 51 million in the Connected Care businesses.

In 2020, Philips completed three acquisitions, with Intact Vascular being the most notable. Acquisitions in 2020 and prior years led to acquisition and post-merger integration charges resulting in a gain of EUR 28 million in the Diagnosis & Treatment businesses and charges of EUR 22 million in the Connected Care businesses.

Divestments

In 2021, Philips completed three divestments. On September 1, 2021, Philips sold its Domestic Appliances business to a global investment firm Hillhouse Investment, resulting in a EUR 2.5 billion gain after tax and transaction-related costs; reported in Discontinued Operations.

In addition, Philips completed the divestment of the Personal Emergency Response Services (PERS) and Senior Living business on June 30, 2021, and on September 17, 2021, completed the divestment of a small business in segment Other. As part of the PERS divestment, Philips acquired shares in the buyer, Connect America Investment Holdings, LLC, with a value of EUR 40 million. The investment is classified as a financial asset measured at Fair Value through Other Comprehensive Income (FVTOCI) and is reported as part of Other non-current financial assets. The divestment resulted in a loss of EUR 76 million, which is included in Other business expenses in our Statement of Income.

For details, please refer to Acquisitions and divestments.

4.5Changes in cash and cash equivalents, including cash flows

The movements in cash and cash equivalents for the years ended December 31, 2019, 2020 and 2021 are presented and explained in the following table and text.

Net cash flows from operating activities

Net cash flows from operating activities amounted to EUR 1,629 million in 2021, compared to EUR 2,511 million in 2020. This decrease is mainly due to increased working capital and consumption of provisions, partly offset by lower income tax paid. Free cash flow^*) amounted to EUR 900 million in 2021, compared to EUR 1,635 million in 2020.

In 2020, net cash flows from operating activities amounted to EUR 2,511 million, compared to EUR 1,813 million in 2019. Free cash flow^*) amounted to EUR 1,635 million in 2020, compared to EUR 923 million in 2019.

Net cash flows from investing activities

Net cash flows from investing activities consist of net capital expenditures and other cash flows from investing activities.

In 2021, other cash flows from investing activities amounted to a cash outflow of EUR 2,943 million, mainly due to the acquisitions of BioTelemetry and Capsule Technologies amounting to EUR 2.8 billion. 

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. 

Net cash flows from financing activities

Net cash flows from financing activities consist of treasury shares transactions, changes in debt, dividend paid and other cash flow items. 

In 2021, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 1,613 million net cash outflow. Changes in debt mainly relates to short-term debt and lease repayments. Philips’ shareholders received a total dividend of EUR 773 million, including costs, of which the cash portion amounted to EUR 482 million.

In 2020, treasury shares transactions mainly included the share buyback activities, which resulted in EUR 297 million net cash outflow. 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. The 2019 dividend was distributed fully in shares in July 2020.

Net cash provided by (used for) discontinued operations

In 2021, net cash provided by discontinued operations was EUR 3,403 million and consisted primarily of the net cash inflow of EUR 3,319 million from the sale of the Domestic Appliances business on September 1, 2021.

In 2020, net cash provided by discontinued operations mainly related to the Domestic Appliances business, partly offset by advance income tax payments amounting to EUR 78 million. 

4.6Financing

Condensed consolidated balance sheets for the years 2019, 2020 and 2021 are presented in the following table:

4.7Debt position

Total debt outstanding at the end of 2021 was EUR 6,980 million, compared with EUR 6,934 million at the end of 2020.

In 2021, total debt increased by EUR 46 million compared to 2020. The increase mainly comes from currency effects and consolidation changes, partly offset by net lease repayments and forward settlements. Repayments of long-term debt amounted to EUR 302 million. In February 2021, Philips entered into two bilateral loans amounting to a total of EUR 500 million that were repaid in September 2021. In addition, Philips issued commercial paper of EUR 300 million in May 2021 and EUR 150 million in July 2021 that was repaid in September 2021. Changes in payment obligations from forward contracts are mainly related to the forward contracts entered into of EUR 731 million relating to the EUR 1.5 billion share buyback program announced on July 26, 2021, and EUR 90 million relating to the long-term incentive and employee stock purchase plans announced on May 19,2021. In addition, a total amount of EUR 745 million of forward contracts matured in 2021, which completed the settlement of the EUR 1.5 billion share buyback program announced on January 29, 2019, and a total amount of EUR 123 million of forward contracts matured in 2021 relating to the long-term incentive and employee stock purchase plans announced on October 22, 2018 and January 29, 2020. These payment obligations are recorded as financial liabilities under long-term debt. Other changes, mainly resulting from currency effects, led to an increase of EUR 175 million.

In 2020, total debt increased by EUR 1,487 million compared to 2019. New borrowings of long-term debt included 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 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 for 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.

At the end of 2021, long-term debt as a proportion of the total debt stood at 92.7% with an average remaining term (including current portion) of 6.0 years, compared to 82.3% and 6.3 years respectively at the end of 2020.

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.

For further information, please refer to Debt.

4.8Liquidity position

As of December 31, 2021, 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 3,303 million, versus gross debt (including short and long-term) of EUR 6,980 million.

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.

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, 2021, 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. In 2021, Philips did not issue any new notes under the program. 

Additionally, as of December 31, 2021 Philips held EUR 67 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.

In terms of liquidity the company has a solid liquidity position and the company's liquidity risk management procedures have not changed significantly during 2021 because of COVID-19. No significant concentration risks have been identified as a result of COVID-19 and the access to existing lines of credit remains intact. These lines of credit, along with other financial risks to which Philips is exposed, are disclosed in Details of treasury and other financial risks. Further, with respect to Respironics field action, please refer Contingent assets and liabilities. The management continues to monitor the risks associated with such potential claims and its impact on liquidity position, if any.

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 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.

4.9Shareholders’ equity

In 2021, shareholders’ equity increased by EUR 2,568 million to EUR 14,438 million at year-end. The increase was mainly due to net income of EUR 3,323 million and currency translation gains of EUR 1,117 million, primarily due to the appreciation of the US dollar against the euro in 2021. This was partly offset by the dividend distributed (EUR 482 million), settlements of earlier concluded forward contracts (EUR 869 million) and the share repurchases made in the open market (EUR 758 million).

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).

Share capital structure

The number of issued common shares of Royal Philips at December 31, 2021 was 883,898,696. At year-end 2021, the company held 13.7 million shares in treasury.  Of these shares, 5.7 million shares were held to cover obligations under long-term incentive plans, and 8.0 million shares were held for share capital reduction purposes. In 2016, Philips purchased call options on its own shares to hedge options granted to employees up to 2013, and on December 31, 2021, Philips’ outstanding options related to 0.4 million shares. In 2021 (and earlier years), the company entered into several forward contracts to acquire its own shares, and on December 31, 2021, the outstanding forward contracts related to 25,071,218 shares. See below for more information on the shares that were acquired in the course of 2021. Philips issued 6,345,968 shares in June 2021 (in order to distribute the 2020 dividend). The company cancelled 33.5 million shares in December 2021.

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.

Share repurchase methods for long-term incentive plans and capital reduction purposes

Historically, 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 2021, 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. 

4.10Cash obligations 

Contractual cash obligations

The following table presents a summary of the Group’s fixed contractual cash obligations and commitments as of December 31, 2021. 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:

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 104 million (2020: EUR 132 million). As of December 31, 2021, 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. As of December 31, 2021, approximately EUR 139 million (2020: EUR 227 million) of the Philips accounts payable were transferred under these arrangements.

Other cash commitments

The company and its subsidiaries sponsor post-employment benefit plans in many countries in accordance with legal requirements, customs and the local situation in the countries involved. For a discussion of the plans and expected cash outflows, please refer to Post-employment benefits.

The company had EUR 66 million restructuring-related provisions by the end of 2021, of which EUR 58 million is expected to result in cash outflows in 2022. Refer to Provisions for details of restructuring provisions.

Please refer to Dividend for information on the proposed dividend distribution.

In 2021, Philips entered into a total amount of EUR 731 million of forward contracts relating to the EUR 1.5 billion share buyback program announced on July 26, 2021, with maturity dates in 2022, 2023 and 2024. A total amount of EUR 745 million of forward contracts matured in 2021, which completed the settlement of the EUR 1.5 billion share buyback program announced on January 29, 2019. As the program was initiated for capital reduction purposes, Philips intends to cancel all of the shares acquired under the program.

Please refer to Equity for information on other Long-term incentive and employee stock purchase plans.

Guarantees

Philips’ policy is to provide guarantees and other letters of support only in writing. Philips does not provide other forms of support. The total fair value of guarantees recognized on the balance sheet amounts to EUR nil million for both 2020 and 2021. Remaining off-balance-sheet business-related guarantees on behalf of third parties and associates decreased by EUR 14 million during 2021 to EUR 2 million (December 31, 2020: EUR 16 million).

4.11Dividend

Dividend policy

Philips’ dividend policy is aimed at dividend stability and a pay-out ratio of 40% to 50% of adjusted income from continuing operations attributable to shareholders^*). 

Proposed distribution

A proposal will be submitted to the Annual General Meeting of Shareholders, to be held on May 10, 2022, 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 2021.

If the above dividend proposal is adopted, the shares will be traded ex-dividend as of May 12, 2022 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 13, 2022.

Shareholders will be given the opportunity to make their choice between cash and shares between May 16 and June 3, 2022. 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 1, 2 and 3, 2022. 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 7, 2022. Payment of the dividend (up to EUR 744 million) and delivery of new common shares, with settlement of fractions in cash, if required, will take place from June 8, 2022. 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 6, 2022.

Further details will be given in the agenda for the 2022 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 June 2021, Philips settled a dividend of EUR 0.85 per common share, representing a total value of EUR 773 million including costs. Shareholders could elect for a cash dividend or a share dividend. Approximately 38% of the shareholders elected for a share dividend, resulting in the issuance of 6,345,968 new common shares, leading to a 0.7% dilution. The dilution caused by the newly issued dividend shares was more than offset by the cancellation of 33.5 million shares in December 2021. For more information refer to Shareholders’ equity. The settlement of the cash dividend involved an amount of EUR 482 million (including costs).

Dividends and distributions per common share

The following table sets forth in euros the gross dividends on the common shares in the fiscal years indicated (from prior-year profit distribution) and such amounts as converted into US dollars and paid to holders of shares of the New York Registry:

4.12Analysis of 2020 compared to 2019

The analysis of the 2020 financial results compared to 2019, 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 2021, which will be filed electronically with the US Securities and Exchange Commission.

5Environmental, Social and Governance

Environmental, Social & Governance (ESG) are the three key dimensions within which a company’s approach to doing business responsibly and sustainably, and its overall societal impact, are defined. They give expression to an increasingly widely held view – that companies that hold themselves accountable to their stakeholders and increase transparency will be more viable, and valuable, in the long term. 

Philips is a purpose-driven company aiming to improve the health and well-being of 2.5 billion people annually by 2030. We believe that private-sector companies like ours have a vital role to play in collaborating with other partners across our supply chain, and with private and public organizations in society, to address the major challenges the world is facing. 

Taking a multi-stakeholder approach, we draw inspiration from the societal impact we can have through our products and solutions, and through how we operate in the world. Our company is very conscious of our responsibility and our contribution to society and the environment. 

We aim to be a front-runner in the area of ESG and have been recognized as leading the way in, for example, sustainability, corporate governance practices and tax transparency. 

Our reporting is aligned with the comprehensive and integrated Environmental, Social & Governance (ESG) commitments we have adopted for the period 2020-2025.

We have excluded the data from Domestic Appliances from the ESG information wherever possible. In a limited number of cases, for example for road logistics emissions, we have used proxies. If Domestic Appliances information was not available for past years, and could therefore not be excluded, we have indicated this in the respective section. The EEI and GBP results have not been restated.

5.1ESG reporting framework

Building on our extensive experience of environmental and social impact measurement and of providing transparency on governance, Philips has taken an active role – in collaboration with, in particular, the International Financial Reporting Standards (IFRS) Foundation, the World Economic Forum (WEF) and the European Union – 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 anti-corruption. In 2017, at the WEF 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).

In 2020, the WEF’s International Business Council (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. Thus far, 54 companies reported in line with this framework. 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’. 

In section 5.6 of this Annual Report, we show how Philips performed in 2021 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.

Philips is also contributing to the IFRS Foundation’s endeavors to drive standardization of non-financial reporting as well as the development of sustainability standards by the European Union.

EU taxonomy framework

The aim of the European Taxonomy Regulation (EU 2020/852), including the delegated acts adopted thereunder, is to provide companies, investors and policymakers with appropriate criteria for determining which economic activities can be considered environmentally sustainable, and it requires companies to report on how and to what extent their activities are associated with such ‘taxonomy-eligible activities’. The Taxonomy Regulation is relatively new and there are still significant uncertainties around its phased implementation. It is expected, however, that it will be developed into a comprehensive and detailed framework over the coming years.

The Taxonomy Regulation provides certain conditions for taxonomy alignment. Among others, the relevant activity must substantially contribute to one or more of the following six environmental objectives (while not significantly harming any of the others):

1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems

The delegated acts adopted under the Taxonomy Regulation will provide technical screening criteria which must also be met to constitute taxonomy alignment. On the date of this Annual Report 2021, only one relevant delegated act has been adopted, concerning activities significantly contributing to climate change mitigation and adaptation.

The taxonomy framework provisions effective on the date of this Annual Report 2021 require Philips to disclose the proportion of its taxonomy-eligible activities (described in any delegated act adopted to date) and non-eligible economic activities in its total turnover, capital and operational expenditure, as well as certain qualitative information. We used the delegated act ((EU) 2021/2139) to identify activities that are eligible. However, none of our revenue-generating activities were included as this delegated act only applies to sectors with very high CO₂ emissions. As a result, Philips’ core activities are not within the scope of this delegated act and consequently none of Philips' revenues were eligible under this delegated act during 2021 (0%). All revenues were non-eligible (100%). We used delegated act (EU) 2021/2178 for the definition and calculation of the taxonomy-eligible percentages. Revenue is calculated based on ’Sales’ as per Consolidated statements of income. Philips expects to be eligible and report its taxonomy-eligible revenues under additional environmental objectives as further delegated acts with applicable technical screening criteria are adopted.

Some other (enabling) Philips activities are included in the delegated act ((EU) 2021/2139) and are eligible for capital expenditures for the objective of climate change mitigation. We therefore screened (EU) 2021/2139, assessed our capital expenditure and identified relevant activities mainly related to our real estate portfolio. For these activities, capital expenditures are determined based on the 2021 additions to property, plant and equipment, intangible assets, and additions to right-of-use assets, excluding any re-assessments (refer to Property, plant and equipment and Intangible assets excluding goodwill).

Reportable taxonomy-eligible capital expenditures in 2021 amounted to EUR 10 million, or 1% of total capital expenditure (non-eligible capital expenditures 99%), and mainly related to energy efficiency improvement measures in our buildings (installation, maintenance and repair of energy efficiency equipment), as well as onsite renewable electricity generation (installation, maintenance and repair of renewable energy technologies).

Similar to capital expenditures, we screened (EU) 2021/2139, assessed for relevant operational expenditures activities and have not identified any eligible operational expenditure. Total operational expenditures are determined based on the 2021 non-capitalized costs that relate to research and development, building renovation, short-term lease, maintenance and repair, and any other direct expenditures relating to day-to day servicing of property, plant and equipment.

In 2021, we did not record reportable taxonomy-eligible operational expenditures (0%), as, for example, the sourcing of renewable energy was not included in the Taxonomy. Non-eligible operational expenditures were 100%.

We followed the same accounting principles as in our financial statements.

Since the EU taxonomy is new, we will continue to monitor legislative developments and adapt our disclosures where needed.

5.2Philips' ESG commitments

In September 2020, Philips 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’ 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, social targets, and 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.” 

Philips’ ESG commitments are set out below. Further details relating to these commitments can be found throughout the rest of this chapter, in Supplier sustainability,  and in Sustainability statements.

5.3Environmental performance

We launched our ESG commitments, with ambitious targets to be achieved by the end of 2025, in September 2020. Besides our social impact, focusing on SDG 3, described in the next section, we have an environmental impact through our global operations (including our supply chain), 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 our ESG commitments. Details can be found in the Sustainability statements.

Environmental impact

Philips has been performing Life-Cycle Assessments (LCAs) since 1990. LCAs provide insight into the lifetime environmental impact of our products. They are used to steer our EcoDesign efforts by reducing the environmental impact during the lifetime of our products and to grow our Green/EcoDesigned and Circular Solutions portfolio. As a next step, for the fifth year, 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.

The definition of the use-case scenarios has a significant impact on the result, especially for consumer products, which have large sales volumes, long lifetimes and frequently high energy consumption (e.g. haircare products). With the disentanglement of Domestic Appliances business, which manufactures energy consuming products like steam irons and AirFryers, the environmental impact of Philips reduced significantly.

The following table shows the impact of the Domestic Appliances business disentanglement on the 2020 EP&L.

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 in the future.

Results 2021

In 2021, Philips' environmental impact amounted to EUR 2.16 billion, compared to EUR 2.32 billion in 2020 (excluding Domestic Appliances business). This reduction was mainly driven by a change in product mix. The most significant environmental impact, 81% 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% of the total impact respectively. The environmental costs include the environmental impact of the full lifetime of the products that we put on the market in 2021, e.g. 10 years in the case of a medical system or 4 years of usage in the case of a Sonicare toothbrush. As we expand our EcoDesign activities, with a target to have all our products EcoDesigned by 2025, we expect the environmental impact to decrease.

Of the total 2021 impact, just EUR 106 million (5%) is directly caused by Philips’ own operations, mainly driven by outbound logistics, followed by business travel. Compared to EUR 115 million in 2020, this is an 8% reduction, mainly due to lower emissions from logistics and the phasing-out of fossil fuels.

Our supply chain currently has an environmental impact of some EUR 289 million, which is 13% 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 have committed to reduce our full value chain emissions in line with a 1.5 °C global warming scenario.

For more information on our efforts to reduce emissions in the supply chain, please refer to Supplier indicators.

For more information on our efforts to reduce emissions in the customer use-phase, please refer to Green/EcoDesigned Innovation and Green/EcoDesigned Revenues.

5.3.1Green/EcoDesigned Innovation

Research from the Potsdam Institute for Climate Impact research shows that over 4% of global CO₂ emissions are caused by the Healthcare sector. We see a growing demand from our customers to reduce their environmental impact. Our Green/EcoDesigned Innovation – the Research & Development spend related to the development of new generations of Green/EcoDesigned 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.

In 2021, Philips invested EUR 197 million in Green/EcoDesigned Innovation, a significant reduction compared to 2020 due to the completion of a  number of sizeable innovation projects in the course of 2021. We expect this spend to increase again in the years to come. In 2021, over EUR 1.5 billion was invested in Sustainable Innovation.

As the current EU Taxonomy delegated act only applies to sectors with highest CO₂ emissions, Philips’ activities are not within the scope of this delegated act and consequently none of Philips' R&D investments were eligible under this taxonomy during 2021.

Philips Group

Green Innovation per segment

in millions of EUR

Diagnosis & Treatment businesses

Philips develops innovative diagnosis and treatment solutions that support precision diagnosis and effective, minimally invasive interventions and therapy, while respecting the limits of natural resources. Investments in Green Innovation in 2021 amounted to EUR 96 million, compared to EUR 122 million in 2020.

All Philips EcoDesign/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. Through circular-ready design, Philips also pays particular attention to enabling the upgrading and reuse pathways, so our customers can benefit from enhancements in workflow, dose management and imaging quality and availability of re-used service parts 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 continued to actively partner 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. Philips aims to close the loop on all medical equipment that becomes available to us by the end of 2025. To achieve this target, we actively drive trade-ins in markets where de-install, trade-in and reverse logistics capabilities are in place, and build these capabilities in countries that do not yet have them.

Connected Care businesses

Philips’ connected health IT solutions integrate, collect, combine and deliver quality data for actionable insights to help improve access to quality care, while respecting the limits of natural resources. It is our belief that well-designed e-health solutions can reduce the travel-related carbon footprint of healthcare, increase efficiency in hospitals, and improve access to care and outcomes. This has also become apparent during the COVID-19 crisis. Green/EcoDesigned Innovation investments in 2021 amounted to EUR 32 million, compared to EUR 51 million in 2020. Green Innovation projects in 2021 will deliver the coming years, among other things, new EcoDesigned patient monitors with lower environmental footprints, reflecting all the Philips EcoDesign/Green Focal Areas. Energy efficiency, material reduction and closing the loop activities are the main areas of focus.

Personal Health businesses

The continued high level of R&D investments at our Personal Health businesses is also reflected in the Green/EcoDesigned Innovation spend, which amounted to EUR 65 million in 2021, compared with EUR 80 million in 2020. 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. More specifically, as part of our Fit for Future Packaging program, we launched the first plastic free packaging solution in our Personal Care portfolio for an online One Blade shaver.

Other

The segment Other invested EUR 4 million in Green/EcoDesigned Innovation, spread over projects focused on global challenges relating to water, air, energy, food, circular economy, and access to affordable healthcare.

Circular economy

For a sustainable world, the transition from a linear to a circular economy is essential. A circular economy aims to decouple economic growth from the use of natural resources and ecosystems by using these resources more effectively. It is a driver of innovation in the areas of material, component and product re-use, as well as new business models such as system solutions and services. At Philips, we have set ambitious targets to guide this journey. In 2020, as we announced our ESG commitments, we aimed, among other things, to generate 25% of our revenues from circular products and services, to extend our ‘closing the loop’ practices across all our medical products, and to further embed circular practices at our sites and send zero waste to landfill in our own operations. 

For more information on our Circular Economy activities and the progress towards targets in 2021, please refer to Circular Economy.

5.3.2Green/EcoDesigned Revenues

Green/EcoDesigned 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/EcoDesigned Revenues amounted to EUR 12.1 billion in 2021, or 70.5% of sales (73.2% in 2020). This decrease is mainly attributable to lower Green/EcoDesigned revenues in the Connected Care businesses, in particular in Sleep & Respiratory Care.

As the current EU Taxonomy delegated act only applies to sectors with highest CO₂ emissions, Philips’ activities are not within the scope of this delegated act and consequently none of Philips' revenues were eligible under this taxonomy during 2021.

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 and lower weight (thus less resources), although increased attention was also given to hazardous substances, packaging and recyclability in all segments in 2021, the latter driven by our Circular Economy initiatives.

Diagnosis & Treatment businesses

In 2021, no new main platforms were launched in our Diagnosis & Treatment businesses, after a significant expansion in 2020 with new Green/EcoDesigned Products – CT Incisive, Mobile X-Ray system Zenition 50 and 70 – and with redesigns of various Green/EcoDesigned Products offering further environmental improvements, such as the MR Ambition and Elition systems. Specific attention was paid to maintaining the Green/EcoDesigned status of the systems and on preparing for future EcoDesigned product launches.

Connected Care businesses

After several launches of new Green/EcoDesigned products in 2020, no new launches took place in 2021. Last year, our Connected Care businesses launched the following Green/EcoDesigned Products – VS30 and MX850 patient monitors, EV300 and EVO ventilators and the Intrepid HeartStart monitor & defibrillator. New EcoDesigned Products are expected in 2022 with improvements on all EcoDesign focal areas.

Personal Health businesses

In our Personal Health businesses, the focus is on Green/EcoDesigned 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/EcoDesigned Revenues in 2021 amounted to 84% of total sales, comparable to 2020. We continue to make progress in developing PVC/BFR-free products. More than 90% 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 haircare portfolio we launched a new energy-efficient hairdryer saving 15% of energy consumption compared to its predecessor. 

5.4Social performance

Our people strategy and culture support a constantly evolving workforce capable of delivering strong business performance and executing our strategy. As such, we focus on developing our Workforce of the Future and delivering on our deep commitment to Inclusion & Diversity.

5.4.1Improving people’s lives

The lack of access to affordable, quality care is one of the most pressing issues of our time. Climate change is intensifying this situation and putting the lives of millions of people at risk. At Philips, we are conscious of our responsibilities towards society and the planet. It is our purpose to improve people’s health and well-being through meaningful innovation. As such, we aim to improve the lives of 2.5 billion people a year by 2030. To ensure we remain on track to achieve this goal, we have developed an integrated approach, that tells us how many lives have been improved by our products and solutions in a given year. We call this our Lives Improved model.

The Lives Improved model helps us to track our performance on a country-to-country basis in line with UN Sustainable Development Goal 3,  allowing us to shape strategies to ensure healthy lives and promote well-being for all at all ages.

In 2021, Philips improved 1.67 billion lives, an increase of around 140 million compared to 2020. This increase was driven by steady growth of all segments and the inclusion of new businesses such as IGT-Devices, EMR & Care Management and Enterprise Diagnostic Informatics, as well as the added contributions of our Philips Foundation and CSR projects.

From a market perspective, we saw significant growth mainly in Latin America (resulting from the inclusion of the EMR & Care Management business), Greater China, the Indian Subcontinent and Africa (mainly driven by the inclusion of Philips Foundation).

We have additional commitments to improve the lives of 300 million people in underserved communities with our health-related products by 2025, rising to 400 million by 2030. This commitment allows us to increase our focus on those populations where we can make a positive impact by providing access to effective and affordable healthcare for those in greatest need. By combining the strengths of Philips, Philips Foundation and its partners, we can provide better healthcare and improve health outcomes for all. In 2021, our health-related solutions improved the lives of 167 million people in underserved markets (an increase of 40 million compared to 2020).

In the course of 2021 we changed the definition of ‘lives improved’ (effective January 2021) to align more closely with our purpose. The new definition includes only products or solutions that contribute to people’s health and well-being, and no longer includes the contribution from our Green Products and Solutions that support a healthy ecosystem. Additionally, as we discontinued our Domestic Appliances business, we have removed the impact of this business from the 2021 Lives Improved results. The combined impact of these changes resulted in an overall drop of 223 million lives improved.

For more information, please refer to our Lives Improved methodology document.

Lives Improved per market

The following table shows the number of Lives Improved per market.

5.4.2Our culture

Culture is foundational to achieving our strategic ambitions. Our behaviors create a shared understanding of how we all need to act in order to live up to our purpose of improving the lives of people around the world. All Philips employees are expected to commit to living our behaviors – Customers first, Patient safety, quality and integrity always, Team up to win, Take ownership to deliver fast, and Eager to improve and inspire – every step of the way.

As we continue our transformation into a focused leader in health technology, we foster a culture within Philips that will help us achieve operational excellence and extend our solutions capability to address our customers’ unmet needs. Patient safety and quality are at the heart of our purpose. By fostering an inclusive and psychologically safe environment our people feel valued for who they are and for their contributions. As a health technology leader, the health and well-being of our people is imperative for success.

As work evolves during the COVID-19 pandemic, we are embracing a hybrid working model that offers greater flexibility and improved collaboration for better patient, customer and consumer outcomes, as well as enhanced employee well-being. From feedback shared by more than 10,000 employees in our ’office of the future’ survey, we learned that 68% of people want to work from home at least two days a week, while 72% emphasizes the need to meet physically in offices for effective connections. Our new ways of working are defined by three goals:

• Embracing flexibility. Making innovative choices for how and where to work, allowing more autonomy for our employees.
• Being at our best: Caring for ourselves, each other and our customers, patients and consumers. This means prioritizing our own well-being, as well as making time for personal growth and development.
• Impactful collaboration: Creating moments to come together, supporting employees’ sense of connection and belonging, so we can build strong teams, generate ideas and solve problems.

All of the above underpins how we lead, engage, hire and develop our employees. We have been focusing on well-being, deepening our leadership asks into the organization and supporting our culture shift as a leading innovative, customer-focused health technology company.

We are building an organization that is fit for today and the future with the skills and capabilities needed to successfully deliver on our strategic imperatives. We attract, onboard and retain the best talent to accelerate our business transformation.

5.4.3Workforce of the Future

In 2021, the Workforce of the Future remained a key pillar of our People strategy. In a fast-changing landscape – with a need for evolving capabilities in support of our business transformation, as well as a need to adapt to the changes in the nature of work accelerated by the pandemic – our focus on the Workforce of the Future helps us to attract, develop and retain a workforce that will deliver the strategic capabilities needed to win.

We staff our positions based on assessed behavior, potential and capabilities. In 2021, we filled 72% 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 2021, 68% 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.

Strategic Capability Building

We apply an enterprise-wide Strategic Workforce Planning approach, which all businesses and markets adopt as part of the strategic planning cycle, to identify and develop the capabilities needed to realize our ambitions as a health technology company. This approach recognizes that capabilities are complex, with people, processes and systems being developed holistically. In 2021 we continued our focus on strategic positions and top talent and used the lens of strategic enterprise capabilities to focus our talent attraction, onboarding and development initiatives.

Total Workforce Strategy

We continue our Total Workforce Strategy, which considers all sources of skill, capabilities, locations and changes in the labor market in order to deliver the Workforce of the Future.

Our Right Shoring & Sourcing methodology is used to implement this strategy. This methodology steers improvements in workforce composition towards the ‘right shore’ (onshore, nearshore and offshore) and the ‘right source’ (employees, contingent workers and outsourced). The cost savings delivered by the program increased by 55% year-on-year

We extended our Freelance Management System in 2021 to cover India, on top of the Netherlands, Germany and the USA. By advertising opportunities for freelancers on our own Careers site alongside employee jobs, we now source 48% of all our freelancer hires ourselves, without having to go through staffing agencies.

Our Philips-wide Graduate Development Program (GDP) continues to perform well attracting 40 participants in 2021 - and expected to grow to over 300 in 2022. The GDP lasts two years and includes three job rotations, as well as offering the graduates a comprehensive learning and development track and career centers to help guide future steps.

We continue to drive campus hiring, with a 23% year-on-year increase in campus hires compared to 2020 amounting to 1,173 campus hires in 2021 (952 in 2020). Philips also offered meaningful work experience to 17% more interns than in 2020, and they formed a critical source of our graduate hires - with 53% of all graduate hires having been an intern with us.

More information on training and learning programs can be found in People development.

5.4.4Inclusion & Diversity

Philips’ commitment towards Inclusion & Diversity is reflected in our General Business Principles and the company-wide Inclusion & Diversity Policy and Fair Employment Policy that were updated and published in 2021.

The company continues to put in place measures to enhance diversity and inclusion at all levels within the organization, and to ensure that the diversity at senior management levels reflects the diversity of our stakeholders, including consumers, our customers and their patients.

To this end, Philips made a new commitment of 35% gender diversity in senior leadership positions by the end of 2025, raising the ambition from the original target of 30%. As of year-end 2021, the figure stands at 28%.

Philips Group

Gender diversity

in %¹⁾

¹⁾Includes Domestic Appliances

With diversity being part of Philips’ purpose and one of the three strategic pillars of our global People strategy, long-term Inclusion & Diversity ambitions are embedded in our training, our approach to new ways of working including hybrid working, and our focus on health and well-being. Additionally, our leadership development programs, how we listen and respond to employee feedback, and the transparency required to hire and promote talent of underrepresented groups are also in focus.

Execution is monitored through a diversity dashboard based on a global scorecard with specific goals. This drives accountability and focus, and empowers leaders to customize goals, hear the stories behind the numbers, and intervene where appropriate.

During 2021, further work was done to bring together and grow global initiatives and amplify inclusion around unconscious bias, health, well-being and energy management, to grow awareness, stimulate learning and increase the resilience of our employees in the face of the pandemic. These initiatives are building on the holistic, long-term approach that sustainable success stems from an inclusive environment in which everyone can be and bring their best self to work (#youareyou). They include, but are not limited to:

Gender parity

• Building senior women mentoring programs to develop and retain senior female leaders across different levels, functions and markets
• Our Diversity Council continues to accelerate change and increase leadership involvement.

Broadening diversity

• Commitment to empower and increase the number of talents with a different race/ethnicity in leadership, starting in North America

Health & Well-being

• Employee safety incidents (Total Recordable Cases) stood at 213, an increase versus 2020 but well below industry averages. COVID-19 continued to impact our associates, but no work-related deaths were recorded.
• Addressing mental health and well-being with the continued roll-out of the global Employee Assistance program for employees and close dependents
• Embedding and extending the Energy Management Program, helping employees to build resilience and address work/life rhythm
• Offering further company-wide Mindfulness sessions and, across four key markets, an employee Mental Health Champion program, upskilling employees to offer confidential peer-to-peer guidance to support mental well-being.

Learning & Development

• Continuing the deployment across the organization of tailor-made training to address unconscious bias
• Providing globally available masterclasses, led by our leaders and international speakers on topics like Allyship, Privilege, Resilience and Psychological Safety

Creating belonging – #youareyou

• The (virtual) global and local celebrations of International Women’s Day across 80 locations worldwide; World Health Day, Pride, and World Mental Health Day
• A new global governance for our valued Employee Resource Groups (ERG) was launched, including an ERG Resource Center: offering active support to employees in setting up their own diverse and inclusive bottom-up networks. These include women’s networks, the Black Employees Resource Group in North America, an Asian employees’ network, and revival of the LGBTQ+ community. In 2021 we added the Middle Eastern Employee Resource Group, Future Leaders in Philips and Parents Club in the United States, a Benelux chapter of our Black Employee Resource Group, and a Global Care-givers Network, the latter as a direct response to the challenges experienced during the pandemic.

Recognition

• Achieving Best Place to Work for LGBTQ+ Equality status, receiving a score of 100% on the Human Rights Campaign 2021 Corporate Equality Index. Listed on Forbes Best Diversity Initiatives and Equal Opportunity Magazine’s Top 50 employers.

5.4.5Employee engagement

In an environment of constant, rapid change, it is vital to stay connected and engaged with our people by continually checking in with and listening to them. Employee engagement and improving the experience of our people are pivotal to the success of our strategy. In 2021, employee engagement remained high at 79%, exceeding the Fortune 500 benchmark, despite the pandemic. This was driven by our people feeling proud to work for Philips, inspired to do their best work, and believing that Philips is a great place to work. It was further fostered by a focus on health & well-being, and employees feeling that they can be themselves and have the flexibility needed to enable a healthy work-life rhythm while meeting their career goals.

Our quarterly employee surveys help to keep our finger on the pulse of employee sentiment toward the company. We act upon our employees’ ideas for improvement and show them that their feedback is valued.

At Philips, we believe we perform at our best when we feel connected, supported and psychologically safe. Amidst the ongoing pandemic in 2021, we listened actively to our employees to provide them with greater clarity of direction and increased autonomy and flexibility to deal with challenging personal and work situations. Moreover, we strengthened our Health & Well-being programs with a focus on mental well-being, which is designed to help our employees to build resilience through conscious energy management, adopt a healthier lifestyle, and achieve a better work/life balance.

5.4.6Employment

The total number of Philips Group employees was 78,189 at the end of 2021, compared to 75,001 at the end of 2020, an increase of 3,188 FTE.

Geographic footprint

Approximately 59% (2020: 61%) of the Philips workforce is located in mature geographies and 41% (2020: 39%) in growth geographies. In 2021, the number of employees in mature geographies decreased by 558. The number of employees in growth geographies increased by 2,629.

Employee turnover

In 2021, employee turnover amounted to 17.6%, of which 10.0% was voluntary, compared to 14.0% (7.3% voluntary) in 2020. External benchmarks show that our voluntary employee turnover remains in line with similar-sized companies, and that we are reasonably successful in retaining our employees.

5.4.7Equal opportunities and equal pay

Philips is committed to equal pay and will continue to investigate whether any deviations from this principle exist.

Many countries with a Philips presence – for example, Australia, the United Kingdom, Sweden, certain US states and India – have already undertaken pay equity reviews. In the US, Philips will be executing a Nationwide Pay Equity Project during 2022, building on work already completed at US state level.

In 2021, a study by EDGE (Economic Dividends for Gender Equality) of Philips in the Netherlands was completed, with Philips being certified for Gender Equality. The study found no statistical evidence of unequal pay. We continue to study gender pay parity using the EDGE methodology and plan to scale this application to cover 80% of Philips’ global country presence by the end of 2022.

5.4.8Living wage

Philips can only achieve its aim to improve the lives of 2.5 billion people per year by 2030 if we support and empower our people, so they can be their best and perform effectively. To this end, we conducted a living wage analysis for the third year in a row 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, healthcare, 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.

The living wage analysis conducted in 2021 showed again that all wages and benefits at Philips were above the defined living wage levels in all 76 countries surveyed.

5.4.9Health and Safety

In 2021, the COVID-19 global pandemic continued to significantly affect Philips’ global operations in many ways, including government-mandated lockdowns, travel restrictions, and most importantly ensuring employee health and safety whilst maintaining critical operational commitments. Philips continued to deliver on its triple duty of care: meeting critical customer needs, ensuring the health and safety of employees, and ensuring business continuity. A Group Crisis Operations Team and local Crisis Management Teams continued 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 maintained and received over 44,000 hits in 2021.

Working as a team across all functions, Philips was able to maintain manufacturing operations and ensure support for our customers, including front-line hospitals, to minimize interruption to key service and support activities. During 2021, approximately 5,168 Philips employees voluntarily reported a COVID-19 infection. 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. Cumulatively in 2020 and 2021, Philips recorded 7,374 COVID-19 cases (5,168 in 2021), 19 fatalities (13 in 2021).

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 213 TRCs in 2021, a 20% increase compared to 178 in 2020. While our workforce continued to expand in 2021, the TRC rate decreased from 0.24 per hundred FTEs in 2020 to 0.29 in 2021.

In 2021 we recorded 114 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 25% increase compared with 91 in 2020. The LWIC rate increased to 0.16 per 100 FTEs in 2021, compared with 0.12 in 2020. The number of Lost Workdays caused by injuries increased by 1,672 days (65%) to 4,236 days in 2021.

For more information on Health and Safety, please refer to Health and Safety performance

5.4.10Human rights

Philips strongly believes that companies have both the responsibility to respect human rights and the ability to protect them. Philips’ Human Rights Policy, General Business Principles, and other relevant policies detail how Philips respects human rights, in line with the International Bill of Human Rights and the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work. In this regard, Philips also follows the guidance given in the UN Guiding Principles on Business and Human Rights and the Organization for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises. Philips has also been a signatory to the UN Global Compact since 2007. Philips’ ESG Committee, composed of Executive Committee members and senior executives from businesses and functions across Philips, leads our efforts and actions. The Committee is responsible for strategy and oversight of all company activities across the three ESG dimensions. The Committee also monitors progress and takes corrective action where needed.

In 2021, we continued to develop our due diligence strategy by conducting Human Rights Impact Assessments (HRIA). In the last quarter of 2020, we deployed a new methodology, covering five manufacturing sites in China and over 4,000 employees. With these assessments, 60% of our at-risk sites have received a dedicated human rights impact assessment in the past three years (target 2023: 100%). In the first quarter of 2021, additional validation activities took place, followed by the creation of an action plan by local management. Results were shared in our Human Rights Report. Continuous support during the implementation of the action plan has been put in place.

Although the Human Rights Impact Assessment of selected sites did not cover the supply chain, learnings from these site assessments were used to develop and launch a new deep-dive approach for certain suppliers. This has been piloted in Q4 2021, with a focused assessment on human rights, compared with the broader Supplier sustainability assessment approach which covers sustainability more holistically.

In 2021, the human rights program was presented to our Health & Safety officers at a dedicated employee event. We also deployed new training materials on our GBP, targeting employees without regular access to a computer, or otherwise unable to complete the online training module. For the approximately 12,000 employees who are not able to take the online General Business Principles course, an offline General Business Principles training has been created. For the upcoming year, we will strengthen our human rights due diligence, continue to engage in dialogues with those already trained, and expand tailored human rights communication and training to key audiences within Philips. Our Human Rights Report contains detailed information regarding our progress, targets, and plans for continuous improvement.

5.4.11Philips Foundation

Stichting Philips Foundation, an independent foundation organized under Dutch law, is a registered charity established in 2014. In 2021, 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 underserved communities through meaningful innovation. 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. 

5.4.12Working with stakeholders

In organizing ourselves around customers and markets, we conduct dialogues with our stakeholders in order to explore common ground for addressing societal challenges, building partnerships and jointly developing supporting ecosystems for our innovations around the world.

An overview of stakeholders and topics discussed is provided in Sustainability statements.

For more information on our stakeholder engagement activities in 2021, please refer to Stakeholder engagement.

5.5Governance

5.5.1Corporate governance structure

Koninklijke Philips N.V. (Royal Philips), a company organized under Dutch law, is the parent company of the Philips group. Its shares have been listed on the Amsterdam stock exchange (Euronext Amsterdam) since 1912. Furthermore, its shares have been traded in the United States since 1962 and have been listed on the New York Stock Exchange since 1987.

Royal Philips has a two-tier board structure consisting of a Board of Management and a Supervisory Board, each of which is accountable to the General Meeting of Shareholders for the fulfillment of its respective duties.

The company is governed by Dutch corporate and securities laws, its Articles of Association, and the Rules of Procedure of the Board of Management and the Executive Committee and of the Supervisory Board respectively. Its corporate governance framework is also based on the Dutch Corporate Governance Code (dated December 8, 2016) and US laws and regulations applicable to Foreign Private Issuers. Additionally, the Board of Management has implemented the Philips General Business Principles (GBP) and underlying policies, as well as separate codes of ethics that apply to employees working in specific areas of our business, i.e. the Financial Code of Ethics and the Procurement Code of Ethics. Many of the documents referred to are published on the company’s website and more information can be found in Our approach to risk management.

Please also refer to Corporate governance where the main elements of the company’s corporate governance structure have been addressed.

5.5.2Philips Business System

As we drive our transformation to become a solutions provider to our customers and consumers, we have adopted a single standard operating model that defines exactly how we want to work – the Philips Business System (PBS). 

The PBS integrates key aspects of how we operate – from our strategy, governance, organizational design, processes and systems, to our people and team practices, and our culture and performance management. 

It is designed to make Philips a simpler, faster, customer-focused, learning organization, in order to fulfill our purpose of improving the health and well-being of billions of people. One that aspires to the highest standards of quality and integrity in everything we do. Building on standard work and best practices, with clear accountabilities and a culture of continuous improvement and compliance. Applying our creativity to make a competitive difference in serving our customers. Making Philips the best place to work.

For more information on the PBS, please refer to How we create value.

5.5.3Quality & Regulatory 

Our business success depends on the quality of our products, services and solutions, and our compliance with many global regulations and standards. In 2021, we continued our transformation journey to accelerate our customer-focused global processes, procedures, standards, and patient safety & quality mindset, all with the goal of maintaining the highest possible level of quality for our customers and their patients. 

As a business with a significant global footprint, ensuring compliance with evolving regulations and standards, including data privacy and cybersecurity, involves increased levels of investment to meet the demands of increased regulatory enforcement activity. Our business deals in the secure electronic transmission, storage and hosting of sensitive information, including personal information, protected health information, financial information, intellectual property, and other sensitive information related to our customers and workforce. For information on how Philips manages cybersecurity risk, please refer to Operational risks.

Quality

Philips is committed to delivering the highest quality products, services and solutions compliant with all applicable laws and standards. We continuously strive to raise our performance in ensuring quality, which is reflected in our continued substantial investment to embed quality through the standardization and adoption of industry best practices throughout our Quality Management System. Quality is an integral part of the leadership and culture of what we do at Philips. Through this quality system improvement program, our aim is to elevate and ensure consistency in how we work, collaborate and make decisions together as 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.

Regulatory Compliance

Philips actively maintains Quality Management Systems 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 must comply 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. 

Often, new products that we introduce are subject to pre-market regulatory processes (e.g. pre-market approval (PMA) and pre-market notification (510(k)) 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), the Medical Device Regulation (EU-MDR) passed its date of application (May 26, 2021). Through the comprehensive EU-MDR program which has been running since 2018 and with a joint effort across all of Philips, we have passed this major milestone successfully. For a part of our product portfolio we make use of the Grace Period^*) for various reasons including stock depletion, notified body capacity limitations and resource balancing. To achieve this major milestone we made an annual EU MDR investment of around EUR 30 million in 2021 and expect to have additional compliance costs for the new regulations of around EUR 13 million in 2022 to conclude the transition. We believe the global regulatory environment will continue to evolve, which could impact the cost, the time needed to approve, and ultimately, our ability to maintain existing approvals or obtain future approvals for our products.

Consent Decree

In October 2017, Philips North America LLC reached agreement on a consent decree with the US Department of Justice, representing the Food and Drug Administration (FDA), related to compliance with current good manufacturing practice requirements arising from inspections conducted in 2015 and prior, focusing primarily on Philips’ Emergency Care & Resuscitation (ECR) business operations in Andover, Massachusetts, and Bothell, Washington. 

Following a successful inspection in Bothell, Washington, in April 2020, the FDA determined that Philips had met the conditions for resuming manufacturing and distribution of defibrillators in the US. The consent decree remains in effect for several years, during which the Emergency Care (formerly ECR) business will be subject to a series of annual assessments by an independent expert. Hospital Patient Monitoring (formerly Monitoring & Analytics), also named in the Consent Decree, is also under a heightened level of scrutiny over the same period. 

Substantial progress continues to be made in our compliance efforts. In August 2021, the FDA inspected Emergency Care in Bothell again as a Consent Decree follow-up. Two observations (Form 483) were issued and subsequently remediated and reported to the FDA. The FDA later presented Emergency Care with four Establishment Inspection Reports dating back to 2015, signaling the closure of the four open inspections.

Even with these successes, 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 Emergency Care or Hospital Patient Monitoring 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. 

Philips Respironics voluntary recall notification 

On June 14, 2021, Philips’ subsidiary, Philips Respironics, initiated a voluntary recall notification in the United States and field safety notice outside the United States for certain sleep and respiratory care products to address identified potential health risks related to the polyester-based polyurethane (PE-PUR) sound abatement foam in these devices.

At the time of the June 2021 recall/field safety notice, Philips had received a limited number of reports of possible patient impact due to foam degradation, and no reports regarding patient impact related to chemical emissions. Philips continues to monitor complaints received following the recall/field safety notice via our Quality Management System, in accordance with the medical devices regulations and laws in the markets that we serve.

We are treating this matter with the highest possible seriousness, and are working to address this issue as efficiently and thoroughly as possible. 

We are conducting a comprehensive test and research program and provided an update in December 2021 on the positive VOC test results related to the first-generation DreamStation devices.

The company has developed a comprehensive plan to replace the PE-PUR sound abatement foam used in earlier-generation devices with the new material used in the second-generation products such as DreamStation 2, which has been approved by the US FDA and regulatory authorities around the world, and has already begun this process. Philips Respironics has been working in close partnership with the US FDA, competent authorities, and other regulators around the world, as well as our customers, clinicians, and patients, to complete the needed repairs and replacements associated with this recall. In certain circumstances, the products in question may be replaced rather than repaired.

5.5.4Remuneration policy

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.

5.5.5General Business Principles

While pursuing our business objectives, we aim to be a responsible partner in society, acting with integrity towards our employees, customers, business partners and shareholders, as well as the wider community in which we operate. Everyone at Philips is expected to always act with integrity, and Philips rigorously enforces compliance of its General Business Principles (GBP) throughout the company.

In the highly regulated world of healthcare, integrity requires in-depth knowledge of the applicable rules and regulations and a sensitivity to healthcare-specific issues. The GBP – part of the Philips Business System – incorporate and represent the fundamental principles by which all Philips businesses and employees around the globe must abide. They set the minimum standard for business conduct, both for individual employees and for the company and our subsidiaries. Our GBP also serve as a reference for the business conduct we expect from all our business partners.

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 2021, a total of 610 concerns were reported via Philips Speak Up (Ethics Line) and through our network of GBP Compliance Officers. This represents an increase of 7% from the total of 571 concerns in the previous reporting period (2020).

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 2021, 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, whilst realizing that the extraordinary business conditions in both 2020 and 2021 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

5.5.6Risk management approach 

Risk management and control forms an integral part of the Philips business planning and performance review cycle. The company’s risk management policy and framework are designed to provide reasonable assurance that its strategic and operational objectives are met, that legal requirements are complied with, and that the integrity of the company’s financial reporting and its related disclosures is safeguarded. Please refer to Risk management for a more detailed description of Philips’ approach to risk management (including Internal Control over Financial Reporting), risk categories and factors, and certain specific risks that have been identified.

With respect to financial reporting, a structured self-assessment and monitoring process is used company-wide to assess, document, review and monitor compliance with Internal Control over Financial Reporting. On the basis of the outcome of this process, the Board of Management confirms that: (i) the management report (within the meaning of section 2:391 of the Dutch Civil Code) provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems; (ii) such systems provide a reasonable level of assurance that the financial reporting does not contain any material inaccuracies; (iii) based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis; and (iv) the management report states those material risks and uncertainties that are relevant to the expected continuity of the company for a period of 12 months after the preparation of the report. The financial statements fairly represent the financial condition and result of operations of the company and provide the required disclosures.

In view of the above, the Board of Management believes that it is in compliance with best practice 1.4.2 of the Dutch Corporate Governance Code. It should be noted that the above does not imply that the internal risk management and control systems provide certainty as to the realization of operational and financial business objectives, nor can they prevent all misstatements, inaccuracies, errors, fraud or non-compliances with rules and regulations. The above statement on internal control should not be construed as a statement in response to the requirements of section 404 of the US Sarbanes-Oxley Act. The statement as to compliance with section 404 is set forth in Management’s report on internal control.

5.5.7Total tax contribution

To fulfil 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 2021, 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, Philips committed to provide transparency on its taxes paid and collected in the countries it operates in. Our Country Activity and Tax Report can be found on our website. Philips' total tax contribution in 2021, amounting to EUR 4,090 million, is presented by tax type in the following table.

5.6Philips' ESG performance at a glance

Below we show how Philips performed in 2021 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.

5.7ESG by key country

On the following pages we show how Philips performed in a number of key countries in 2021 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.

6Risk management

6.1Our approach to risk management

Vision and objectives

Philips approaches risk management as a value-creating activity that is integral to innovation and entrepreneurship. As such, it is part of the Philips Business System (PBS). 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), which are further described in this chapter. 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.

Risk management governance

The Executive Committee identifies and manages the risks Philips face 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 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 areas of responsibility. Various functions (such as Internal Control, Quality & Regulatory, and Group Security) support the 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 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 Disclosure Committee’s purpose is to ensure that the company implements and maintains internal procedures for the timely collection, evaluation and disclosure, 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 Environmental, Social and Governance (ESG) Committee initiates, drives and coordinates ESG strategy development, policy setting, disclosures and planning of programs and activities in relation to our ESG commitments. It administers ESG reporting, monitors progress, assesses risks in relation to Philips’ ESG strategy and makes recommendations to the Executive Committee on our ESG endeavors.

The Supervisory Board oversees Philips’ risk management. The Audit Committee and the Quality & Regulatory Committee of the Supervisory Board assist the full Supervisory Board in fulfilling its risk management oversight responsibilities. The Audit Committee reviews the quality of risk management and controls, and the reported findings of internal and external audits. The Quality & Regulatory Committee’s role particularly relates to the quality and regulatory compliance of the Company’s products (including software), services and systems throughout their lifecycle of development, testing, manufacturing, marketing and servicing.

The Corporate governance chapter of this report addresses the main elements of the Company’s corporate governance structure, reports on how it applies the principles and best practices of the Dutch Corporate Governance Code and provides certain other information relevant to risk management governance.

Risk appetite

The Executive Committee and management seek to manage risks consistently within the risk appetite. Risk appetite is set by the Executive Committee and captured in the Risk Management Policy. It is effectuated through our PBS, of which various elements – such as our strategy, Philips business principles and behaviors, 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 patient safety, including compliance with regulations and quality standards. Risk appetite for the four main risk categories is visualized below. Philips does not classify these risk categories in order of importance.

Risk management process

In order to provide a comprehensive view of Philips’ risks, structured risk assessments take place according to the Philips risk management process standard, applying a top-down and bottom-up approach. Our process standard is designed based on the Enterprise Risk Management Framework: Integrating with Strategy and Performance (2017) from the committee of sponsoring organizations of the Treadway Commission (COSO) and on ISO 31000 - Risk Management. The process is supported by regular risk workshops with management at Group, Business, Market and Function levels. During 2021, several risk management workshops were held to assess and respond to enterprise risks.

Key elements of the Philips risk management process are:

• Management of Businesses, Markets and key Functions perform a risk assessment at least once a year, with updates of the strategic plan, to identify and prioritize risks, assign ownership, and implement appropriate risk responses. Risk workshops are conducted across the company to facilitate these risk assessments.
• Management discusses and monitors the risk profile and risk response effectiveness at least quarterly in its performance reviews and during Audit & Risk Committees, which are held for all Businesses, Markets and selected Functions and at Group level. 
• Developments in the enterprise risk profile and management’s initiatives to improve risk responses are discussed and monitored during the quarterly meeting of the Audit Committee of the Supervisory Board. 
• As an integral part of the strategy review, each year the Executive Committee assesses the enterprise risk profile and the potential risk impact versus Group risk appetite. This assessment considers various inputs such as risk assessments from Businesses, Markets and Functions, Philips Internal Audit findings, Legal and Insurance matters, the materiality analysis, and external research. The assessment also covers the effectiveness of the risk management framework and potential improvements thereto.
• The Philips risk profile and the risk management framework are discussed at least once a year with the Supervisory Board.

Examples of measures taken during 2021 to further strengthen risk management:

• Continued development of our COVID-19 response program with the aim of being better prepared to respond to potential future events;
• Continued improvement and consolidation of our Quality Management Systems;
• Operating a Risk & Compliance (R&C) Center of Excellence to drive continuous improvement, knowledge sharing, capability building and risk transparency across various R&C areas;
• Further integration of standard risk management practices in regular performance and strategy execution dialogues;
• Continued improvement of our security (including cyber, product and supply chain) risk management capabilities;
• Various improvements to supply chain related risk, including supplier risk management and business continuity management;
• Further deployment of the recommendations from the Taskforce on Climate-related Financial Disclosures, particularly related to climate adaptation and transition risks; and
• Increased use of data analytics and automation in controls monitoring, and ongoing development of our enterprise governance, risk and compliance IT platform.

Philips Business Control Framework

The Philips Business Control Framework (PBCF) sets the standard for Internal Control over Financial Reporting at Philips. The objective of the PBCF is to maintain integrated management control of the company’s operations to ensure the integrity of the financial reporting, as well as compliance with laws and regulations. Philips has designed its PBCF based on the COSO Internal Control-Integrated Framework (2013).

As part of the PBCF, Philips has implemented a standard set of internal controls over financial reporting. Together with Philips’ established accounting procedures, this standard set of internal controls is designed to provide reasonable assurance that assets are safeguarded, that the books and records properly reflect transactions necessary to permit preparation of financial statements, that policies and procedures are carried out by qualified personnel, and that published financial statements are properly prepared and do not contain any material misstatements. In each unit, management is responsible for customizing the controls set for their business, risk profile and operations.

Each year, management’s accountability for internal controls for financial reporting is evidenced through the formal certification statement sign-off. Any deficiencies noted in the design and operating effectiveness of Internal Controls over Financial Reporting which were not completely remediated, are evaluated at year-end by the Board of Management. The Board of Management’s report, including its conclusions regarding the effectiveness of Internal Controls over Financial Reporting, can be found in Management’s report on internal control

Philips General Business Principles (GBP)

As part of the Philips Business System, our GBP set the standard for our business conduct as a health technology company. The GBP form an integral part of labor contracts in virtually every country in which Philips operates, and translations are available in 30 languages. Each year, employees reconfirm their commitment to the code of conduct after completing their GBP e-learning, while there is an additional annual sign-off for Executives. A similar sign-off is in place for Finance and Procurement staff for their respective codes of conduct. Detailed underlying policies, manuals, training, and tools are in place to give employees practical guidance on how to apply and uphold the GBP in their daily work. 

The GBP Review Committee is responsible for the effective deployment of the GBP and for generally promoting a culture of compliance and ethics within the company. The Committee is chaired by the Chief Legal Officer, and its members include the Chief Financial Officer, Chief Human Resources Officer and the Chief of International Markets. Furthermore, all our key 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 using 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. At least twice a year, the GBP Review Committee, as well as the Executive Committee and Audit Committee of the Supervisory Board, 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, which enable 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.

6.2Risk factors

Philips believes the risks set out below are the material risks that could impact our ability to achieve our 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, reputation and/or ability to achieve its business and ESG objectives. Philips defines risks in four main categories: Strategic, Operational, Compliance and Financial. Philips presents the risk factors within each risk category in order of its 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, reputation, and/or ability to achieve its business and ESG objectives. Furthermore, other risk factors not listed below may ultimately prove to have more significant adverse consequences than those listed risk factors.

The visual below lists our material risks and how these relate to our strategic roadmap through their main connection points with our strategic imperatives. The improvement initiatives related to our strategic imperatives are also designed to address these risks. Compared to the previous year we have prioritized risk factors relating to Geopolitics, Patient safety and ESG and have de-emphasized risk factors related to Brexit and Pensions.

In the following sections we provide a description of each material risk factor, as well as our main responses, which 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 value creation objectives could be materially adversely affected. In addition, risks and uncertainties could cause actual results to vary from those described, including those described in forward-looking statements, could impact our ability to meet our targets or could be detrimental to our 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.

6.3Strategic risks

Philips may be unable to gain leadership in health informatics.

Fundamental developments in the health technology industry, such as use of Artificial Intelligence (AI) and Machine Learning (ML), digital platforms delivering insights at scale, and the shift towards cloud-based Software as a Service (SaaS) business models, are dramatically changing our business environment. Our informatics businesses may fall behind ‘born digital’ competitors if Philips fails to timely develop and globally commercialize capabilities, adjust business models, introduce new products and services in response to these changes. This could result in an inability to satisfy patient and customer needs, thereby missing out on revenue and margin growth opportunities, which may have a material adverse impact on Philips’ business, financial condition and operating results.

Risk response: Philips has put in place a framework of various initiatives intended to accelerate the transformation of informatics propositions. Initiatives include moving our propositions to the cloud, with a SaaS business model, extending our HealthSuite Platform (HSP) with the necessary data lake elements and associated AI/ML toolsets, so that both Philips businesses and customers can easily generate insights-at-scale, the accelerated creation of new Informatics propositions based upon HSP with explicit data and AI strategies, and the upgrade of our Informatics and Data Science talent and capabilities. In addition, to be able to participate in the China digital ecosystem, a software Innovation Center is being set up in China, and various local partnerships have been forged.

Philips may be unable to transform its business model to health technology solutions and services.

As Philips’ business profile has shifted focus towards health technology, we believe we need to shift from transactional product-focused business models towards outcome-oriented, multi-year customer partnership business models enabled by solutions and value-added services. If this shift is made too slowly or is not successful, we may face a loss of customer relevance, inability to capture growth, and loss of market share. Given its health technology focus, Philips may have a reduced ability to offset such potential negative impacts on its health technology business by other businesses through a more diversified portfolio. The transition to solutions and services business models also raises a longer-term risk of (among other things) stronger customer dependency and default. Any of these factors may have a material adverse impact on Philips’ business, financial condition and operating results.

Risk response: Philips is running multiple interconnected initiatives intended to enable and accelerate the transformation of its business model. Initiatives relate to the end-to-end support of our solutions offerings by our governance, processes and IT systems, making our solutions available through SaaS and PaaS, digital customer engagement and e-commerce channels, and through activation of our solutions in markets. Despite our health technology focused portfolio, it covers various products, solutions and services across the entire health continuum without significant dependence on a single product, solution, service or market. Where we engage in long-term service-based business models, we aim to run a disciplined deal process with strict acceptance criteria. 

Philips’ global operations are exposed to macroeconomic and geopolitical changes.

Philips’ business environment can be adversely impacted by macroeconomic and geopolitical conditions in individual and global markets. There is general uncertainty with regard to macroeconomic factors, such as monetary and healthcare policies, regulatory change, public capital investments in healthcare ecosystems, consumer confidence and spending, pandemics, civil unrest and war amongst others. In particular, geopolitical tensions and protectionism have intensified and increasingly affect policies on trade, production, duties and taxation.

Mature economies are currently the main source of Philips’ revenues, while growth economies are an increasing source of revenues. Philips produces, sources and designs 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, trade and tax policies in the US, China and EU may trigger reactions and countermeasures by and may have an adverse impact on other economies and international markets. Such measures may include tariffs, sanctions, local sourcing requirements, market access limitations, technology restrictions, data localization requirements and data transfer restrictions, import or export controls, mobility of talent, nationalization of assets, or restrictions on the repatriation of returns from foreign investments. These may lead to adverse impacts on global trade levels and flows, economic growth, financial market and political stability, all of which could adversely affect the demand for, and supply of, Philips' products and services. The factors described above, or other factors which may impact conditions relevant to Philips' business environment, 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 necessary, develops response strategies to such events, including pandemics (e.g. COVID-19). High-risk markets (i.e. exposed to high volatility) are regularly assessed for emerging risks, and if necessary, capital structure planning is performed.

Philips is active in more than 100 countries, and we believe that this global footprint allows us to better deal with adverse local market developments. Philips establishes a strong local presence in both mature and growth geographies through market-specific strategies (e.g. for China, the US, the EU). These market strategies cover various aspects such as manufacturing and assembly, innovation, hosting of health data, capability development and the leveraging of our in-depth knowledge of healthcare, Research & Development, our Quality Management Systems and sustainable global business models, and our brand. This local presence enables Philips to tailor its propositions to local market needs and activate them locally. In addition to local measures, Philips also optimizes its integrated supply chain organization, supplier base and manufacturing footprint from a global perspective, to enable agile responses to large and rapid shifts in demand and supply globally.

Acquisitions could fail to deliver on Philips’ business plans and value creation expectations, and we may not be able to successfully integrate acquired operations.

Selected acquisitions have been and are expected to remain part of Philips’ growth strategy. Acquisitions may expose Philips to integration and other risks in areas such as sales and service, logistics, regulatory compliance, legal claims, information technology and finance, and we may not be able to successfully or efficiently integrate new acquisitions with our existing operations, culture and systems. Integration challenges may adversely impact the realization of expected contributions from acquisitions. These transactions may incur significant costs, result in unforeseen operating difficulties, may also divert management attention from other business priorities, and may ultimately be unsuccessful. Cost savings expected to be implemented or other assumptions underlying the business plan relating to a particular acquisition may not be realized. If we are unable to accomplish any of our objectives at the independent operating subsidiaries we acquire, we may not realize the anticipated benefits of acquisitions and we may experience lower than anticipated profits, or even losses. 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 roadmap per growth area to ensure organizational fit. Philips aims to use 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 are 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 may be unable to secure and maintain intellectual property rights for its products and services or may infringe others’ intellectual property rights.

Philips is dependent on its ability to obtain and maintain licenses and other intellectual property (IP) rights covering its products and services and its design and manufacturing processes. The IP portfolio is the result of an extensive IP generation process that could be influenced by a number of factors, including innovation and acquisitions. 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 IP rights to technology applied in Philips’ products and services. If any such claims of infringement of these IP 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) and the protection of existing IP in close co-operation with Philips’ operating businesses and Innovation & Strategy. IP&S is a leading industrial IP organization providing 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.

Philips may be unable to meet internal or external aims or expectations with respect to ESG-related matters.

Environmental, Social and Governance (ESG) factors may directly and indirectly impact the business environment in which Philips operates. Philips may from time to time disclose ESG-related initiatives or aims in connection with the conduct of its business and operations (for example with respect to reducing greenhouse gas emissions in its supply chain). However, there is no guarantee that Philips will be able to implement such initiatives or meet such aims within anticipated timeframes, or at all. In addition, there is an increasing focus from Philips’ stakeholders – including customers, employees, regulators, and investors – on ESG matters, and those stakeholders may also have ESG-related expectations with respect to Philips’ business and operations. For example, customers may focus on ESG-related criteria in buying our products and any inability by Philips to address concerns about ESG-related matters could negatively impact sentiment towards Philips and our products and brands. There are an increasing number of regulatory and legislative initiatives to address ESG issues, such as the EU Taxonomy Regulation which aims to define common rules for determining whether economic activities contribute to sustainability objectives. These regulatory and legislative initiatives in turn could also affect how our products or business operations are perceived by customers or other stakeholders. If our products or business operations do not meet the criteria for sustainability according to the EU Taxonomy Regulation (including the related delegated regulations) or any other similar regulations, this may negatively affect the views of our customers or other stakeholders. Philips may fail to fulfil internal or external ESG-related initiatives, aims or expectations, or may be perceived to do so, or we may fail adequately or accurately to report performance or developments with respect to such initiatives, aims or expectations. In addition, Philips could be criticized or held responsible for the scope of its initiatives or goals regarding ESG matters. Any of these factors may have an adverse impact on Philips’ reputation and brand value or on Philips’ business, financial condition and operating results.

Risk response: We have raised our ESG commitments towards 2025 and have adopted a comprehensive ESG framework. Environmental: We are working to minimize our impact on the planet by taking climate action, driving the transition to a circular economy, implementing EcoDesign in our products, and partnering with our suppliers to reduce their environmental footprint. Social: We aim to deliver social impact by improving people’s health and well-being, offering the best place to work, and engaging with our suppliers and the communities where we operate. Governance: At Philips, everything we do is anchored by ethical and responsible practices. Our management structure, operating model, ethics framework and robust risk management help us maintain the highest standards. We have established a ESG Committee which monitors progress and assesses risks in relation to our ESG strategy and makes recommendations to the Executive Committee on the continuous improvement of our ESG endeavors. For more information, please refer to the Environmental, Social and Governance chapter in this report.

6.4Operational risks

Products and services may fail quality or security standards, which may adversely affect patient safety and customer operations.

Our products and services, either new and/or in field use by our customers, may fail to meet product quality or product security standards, cause (patient) harm, negatively impact customer operations and their ability to provide healthcare, provide unauthorized access to patient records and medical devices through cyber security incidents, or generally cause customer dissatisfaction. Given Philips’ focus on health technology, products and services often require regulatory approvals, including approval of quality and benefit/risk prior to market introduction. Philips may experience issues with the quality of our products and services as a result of various factors, including product design, production, suppliers, materials used, installation, or newly emerging and rapidly evolving cybersecurity threats. These (and other) issues could cause events that need to be actively addressed, which may lead to (amongst others) higher costs of design, market activation, stop use, field recalls and repairs, as well as financial claims and liabilities, damage to our brand reputation, competitive disadvantage, regulatory non-compliance (refer to the Compliance risk section), and loss of market access and market share, any of which may have a material adverse impact on Philips’ market valuation, revenue growth and operating results. Many of our products also have multiple software components, which may be exposed to security threats, including in the event of obsolescence or insufficient maintenance.

Notwithstanding the proliferation of technology and technology-based control systems to detect defects or other errors in our products before they are released, our business ultimately relies on people as our greatest resource, and, from time-to-time, they make mistakes or engage in violations of applicable policies, laws, rules or procedures that are not always caught immediately by our technological processes or by our controls and other procedures, which are intended to prevent and detect such errors or violations. In addition to human error, our quality controls are also subject to overriding, and resource or technical constraints. As such, these quality controls and preventative measures may not be effective in detecting all defects or errors in our products before they have been released into the marketplace. In such an event, the technological reliability and safety of our products could be below our standards and our reputation, brand and sales could be adversely affected. In addition, we could be required to, or may find it necessary to, offer a refund for the product or service, suspend the availability or sale of the product or service or expend significant resources to cure the defect or error. Any of these factors may have in a material adverse impact on Philips’ business, financial condition and operating results.

Risk response: Philips is committed to delivering the highest-quality products, services and solutions compliant with all applicable laws and standards, and patient safety is paramount to everything we do. We design, produce, and supply our products and services with a focus on safety, security and effectiveness. Post-market surveillance processes monitor our devices after release to market to attempt to uncover emerging issues as early as possible. The quality of production and performance of our critical suppliers is also monitored closely. A cybersafe program is running to address obsolescence issues.

We continuously invest substantially in embedding quality in our organizational culture as well as consolidating and standardizing our Quality Management Systems (QMS). A formal quality audit program assesses our organization’s compliance with our QMS. With consistency of purpose, top-down accountability, consolidation, standardization and continuous improvement, we aim to drive the adoption of a quality mindset as well as improved quality and safety outcomes throughout the enterprise. Next to continuous improvement we run a program with the aim to accelerate patient safety & quality. Quality is an integral part of the evaluation of all levels of management. We perform extensive programs to monitor and evaluate product performance and correct or remove any product from service that presents harm to patients or users. In the event of issues we run extensive programs with the goal of recalling, repairing or replacing affected products and attempting to prevent such issues from reoccurring. For example, in June 2021 our subsidiary, Philips Respironics, initiated a voluntary recall notification for certain sleep and respiratory care products to address identified potential health risks, and the repair and replacement program in the US and several other markets is under way. While we believe our processes have become more robust, continuing to enhance our quality culture remains a top priority. 

For further details refer to Provisions and Contingent assets and liabilities.

Philips may be unable to ensure an effective supply chain.

Most of Philips’ operations are conducted internationally, which exposes Philips to supply chain challenges. Philips produces and procures products and parts in various countries globally and in addition is partly dependent on the production and procurement of products and parts from Asian countries, and disruption to production in and shipping from Asian countries could have a disproportionate impact on our business compared to disruptions in other markets. The production and shipping of products and parts, whether from Philips or from third-parties, could be interrupted by various factors such as geopolitics (e.g. US-China relations and protectionist measures taken in various markets), regional conflicts, natural disasters or extreme weather events, (the effects of which may be exacerbated by climate change), container imbalances or port congestions. As a recent example, our sales were impacted unfavorably by the intensified global supply chain issues, primarily related to the shortage of electronic components, poor ocean freight schedule reliability, and COVID-19 affecting suppliers. Although difficult to predict, supply chain headwinds are expected to continue throughout 2022, with a significant impact in the first quarter. There is currently scarcity in the availability of semi-conductors due to increased global demand, which is expected to continue in 2022: as a health technology company, Philips is dependent on the availability of semiconductors and continued scarcity may cause increased lead times and adversely impact our production capacity. Pandemics (e.g. resurgences of COVID-19 or mutations thereof) may disrupt supply chains due to rapid shifts in demand, need for production capacity adjustments and safety improvements in the environments for production, field service, installation and Research & Development in which our employees operate. Philips is also exposed to risks associated with delivery of products and services to customers (for example due to construction material or labor shortages), such as the issues with customer site readiness that Philips encountered in the fourth quarter of 2021, which resulted in (among other things) postponement of equipment installations in hospitals. Such delivery risks may be exacerbated by insufficient staffing levels or staffing disruptions at Philips, its customers or other third-party service providers, including as a result of COVID-19. If Philips is not able to respond swiftly to those various factors, this may result in an inability to deliver on customer needs, ultimately resulting in loss of revenue and margin.

A general shortage of materials (sub-) components or means of transportation drives the risk of fluctuations in price. Philips purchases raw materials, including rare-earth metals, copper, steel, aluminum, noble gases and oil-related products. Commodities have been subject to volatile markets, and such volatility is expected to continue and costs to increase, including as a result of stricter climate change related laws and regulations. Such legislation could require investments in technology to reduce energy use, and greenhouse gas emissions, beyond what we expect in our existing plans or could result in additional and increased carbon pricing. If Philips is not able to compensate for increased costs of (sub-) components, (raw) materials and transportation, reduce reliance thereon, or pass on increased costs to customers, then price increases could have a material adverse impact on Philips’ business, financial condition and operating results.

Philips is also 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, which may result in increased dependency on a concentration of external suppliers. These processes also need to be balanced with local market requirements, including those relating to local manufacturing and data storage. 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.

Risk response: Philips is extending the simplification of its portfolio and its ‘Design for Excellence’ approach to the full value chain, which includes designing products in such a way that supply dependencies are minimized. Furthermore, we are optimizing our integrated supply chain organization, forecasting analytics, supplier base and manufacturing footprint, stock management to enable agile responses to large and rapid shifts in demand and supply and a changing geopolitical risk landscape. Philips is making balanced investments in both global and local supply chains to reduce dependencies and lead times and to meet local market requirements.

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. We also maintain close relationships with our suppliers and maintain an ongoing dialogue to align our demand to their supply allocation.

Philips conducts various scenario assessments and develops response strategies to events potentially impacting its supply chain, such as geopolitical changes, natural disasters emerging markets volatility, and pandemics. We run various global warming and weather scenarios on the geographical footprint of our facilities as well as our suppliers in line with the recommendations of the Taskforce on Climate related Financial Disclosures. Philips has deployed a global Business Continuity Management System, which is aligned to, and certified against, the ISO standard for Business Continuity.

Philips manages carbon pricing risk by reducing its full value chain carbon footprint and partnering with suppliers to reduce their environmental footprint and closely monitor carbon regulations including carbon taxes. 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.

Philips could be exposed to a significant enterprise cybersecurity breach.

Philips relies on information technology to operate and manage its businesses and store confidential data (relating to employees, customers, intellectual property, suppliers and other partners). Philips’ products, solutions and services increasingly contain sophisticated and complex information technology. We control and process confidential data related to patients and customers. The healthcare industry is subject to strict privacy, security and safety regulations with regard to a wide range of health information. At the same time geopolitical conflicts and criminal activity continue to drive increases in the number, severity and sophistication of cyber-attacks globally. Considering the general increase in cyber-crime, our customers and other stakeholders are becoming more demanding regarding the cybersecurity of our products and services. As a multinational health technology company, Philips is 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 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 Philips deals with the operational threat of cybercrime on a continuous basis and has so far been able to prevent significant damage or 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 as described above, which may result in a material adverse impact on Philips’ business, financial condition and operating results.

Risk response: Philips has established a Group Security function and implemented security management processes and controls, and monitors 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 company 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. We run mandatory Security trainings across the company. Philips evaluates its supply chain and continuously monitors the security maturity of critical suppliers and their performance against contractually agreed security standards. Philips also continuously improves the Philips Business System to ensure adequate security management of products and services via the Quality Management Systems. 

Philips maintains relationships and cooperates with several government intelligence and law enforcement agencies, as well as with healthcare sector-specific Information Sharing and Analysis Centers (ISACs) and Cyber Emergency Response Teams (CERTs), to remain abreast of new threats.

Philips is exposed to risks in connection with business transformation and IT system changes and continuity.

Philips expects to engage in multiple transformation programs to support the shift of our business and enable our IT landscape for our health technology strategy. If we do not effectively execute and deliver on those transformation programs, including any upgrades to the Philips IT architecture, this may result in us not realizing our business growth, operational excellence and solutions ambitions, which may have a material adverse impact on our business, financial condition and operating results.

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, which may lead to a material adverse impact on Philips’ business, financial condition and operating results.

Risk response: Philips has a dedicated business transformation and implementation organization which drives end-to-end orchestration of transformations across the organization. To support the transformation programs, Philips has created several practices to drive a culture of performance and to ensure programs are effective. These practices include Lean and Agile, Change Management, Project Management, Knowledge Management, and Performance Management. Philips is rolling out an Enterprise Process Framework to simplify and standardize our business processes and supporting enterprise (IT) architecture. 

Philips uses a structured IT risk management method to identify and address risks to our critical business applications. Our ongoing IT Business Continuity Management activities include real-time monitoring of availability, redundancies, testing, and upgrading of applications. We regularly validate IT systems and continuously improve our IT Change Management capabilities 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 dependent on its people for leadership and specialized skills and may be unable to attract and retain such personnel. 

The attraction and retention of talented employees is critical to Philips’ success and the loss of employees with specialized skills could result in business interruptions. There is fierce competition to attract talent in key capability segments and the heightened expectation of attrition post-pandemic increases the risk of loss of talent and critical skills. COVID-19 may continue to present challenges to team interactions and the onboarding of new people. Philips is competing for the best talent and most sought-after skills, and there is no assurance of succeeding compared to other companies in attracting and retaining the highly qualified employees needed in the future. Wage inflation is increasing the competition for talent and the cost of labor. This may negatively impact our ability to deliver on our strategic imperatives and if we are unable to offset the increased costs of labor through higher selling prices, then rising costs could also have a material adverse impact on Philips’ business, financial condition and operating results.

Risk response: Philips continuously assesses capability gaps for its key positions and has initiatives in place to close any employee capability gaps. This includes monitoring and understanding the drivers behind attrition, maintaining appropriate remuneration structures aimed at attracting and retaining talent, and leveraging its purpose and contribution to societal and environmental challenges as a differentiating proposition for employees.

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. For example, the company is running a ‘Future of Work’ program to drive a hybrid-model approach, with continued emphasis on embracing flexibility, being at our best, and impactful collaboration.

COVID-19 and other pandemics could have an adverse effect on Philips’ operations and employees.

COVID-19 continued to affect Philips’ operations and results in 2021 and Philips continues to see uncertainty and volatility related to the impact of COVID-19 across the world and in underserved communities in particular. This is driven by, among other things, the effectiveness of vaccination programs, mutations of COVID-19, and potentially new viruses which may cause new pandemics. COVID-19 may continue to impact delivery on our triple duty of care in various ways: the health and safety of our employees (in various working environments, such as production, supply, field service, Research & Development, and working from home); meeting critical customer needs (for example, our production capacity and our ability to deliver, install and provide service); and business continuity (for example, our functional operations, supply chain, and commercial processes). Responses to the risks of COVID-19 are expected to require effort and expense and may negatively affect Philips’ business, financial conditions and results of operations. In addition, Philips’ customers may not yet be fully focused on making new investments in medical equipment or may be facing liquidity issues caused by COVID-19, which may adversely impact Philips’ revenue and cash flow generation.

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 is focused on delivering on its triple duty of care:

• Safeguarding the health and safety of employees (including personal hygiene measures and safety protocols, working from home protocol, safe working environments, personal protective equipment);
• Meeting critical customer needs (including production volume ramp-up, delivery and installation of critical equipment, fair and ethical allocation of scarce equipment and supplies, customer services, updated clinical guidance, increased cloud-enabled telehealth, remote patient engagement and hub-and-spoke models); and
• Ensuring business continuity (including liquidity measures and our Business Continuity Management System covering functional operations, the integrated supply chain and commercial processes).

Philips may face challenges to drive operational excellence and speed in bringing innovations to market.

To gain sustainable competitive advantage and to deliver on our purpose and the Quadruple Aim (better health outcomes, improved patient experience, improved staff experience and lower cost of care), it is important that Philips continues to innovate and delivers these innovations to the market on a timely basis. The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the innovation process. Success in launching innovations depends on a number of factors, including defining the right value propositions, the right architecture and platform creation, development, market acceptance, production and delivery ramp-up, potential quality issues or other defects in the early stages of introduction. This also depends on the ability to attract and retain skilled employees. Costs of developing new products and solutions may be reflected on Philips’ balance sheet and may be subject to write-down or impairment depending on the performance of such products or services and the significance and timing of such write-downs or impairments are uncertain. Accordingly, Philips cannot determine in advance the ultimate effect that innovations will have on its financial condition and operating results. If Philips fails to create and commercialize its innovations, 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 better understand their needs and to reaffirm that its strategy is translated into a balanced portfolio of products, software, services and integrated solutions and a corresponding innovation pipeline. Philips is driving a marketing transformation to accelerate the understanding of rapidly evolving customer needs and to translate that understanding into integrated value propositions. Philips is also driving the Customer First Innovation transformation to accelerate its innovation ambitions and effectiveness across all elements of the Philips Business System, with a focus on digital platform-based solutions and software-defined systems, leveraging data and AI at scale. New ways of working will be anchored in improved processes and tools in all aspects of customer needs-focused innovation (from exploration to launch in the market and eventually customer success management). 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.

6.5Compliance risks

Philips is exposed to non-compliance of its products and services with various regulations and standards, including quality, product safety and security.

Philips operates in a highly regulated health-technology 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), and IGZ (the Netherlands)). In the European Union (EU), the Medical Device Regulation (EU MDR) became effective in May 2021 and imposes 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), Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) and Energy-using Products (EuP) regulations. We are subject to various domestic, EU, US and foreign environmental laws and regulations, which are continuing to develop. Any failure to comply with such environmental laws and regulations could expose us to lawsuits, administrative penalties and civil remedies, which may have a material adverse impact on Philips’ business, financial condition and operating results.

Philips has observed an increase in security requirements in a variety of new and upcoming legislation dealing with market access of consumer goods, medical devices, information and communication technology (ICT) products, (cloud) services, and specific areas such as data protection, Artificial Intelligence and supply chain. Both regulators and customers require us to demonstrate legal compliance and adequate security management using national and international standards and associated certifications. 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, disgorgements of profits or claims for damages. Product safety incidents or user concerns could trigger inspections by the FDA or other regulatory agencies, which, if failed, could trigger the impacts described above as well as other consequences. These issues could adversely impact Philips’ financial condition or operating result through lost revenue and cost of any required remedial actions, penalties or claims for damages and could also 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. Our Quality & Regulatory function closely monitors developments in the regulatory landscape. Through specialist teams at global, regional or local level, detailed standards and requirements are defined and continuously improved as an integral part of our process standards and through dedicated programs when needed, with the aim of ensuring that our employees are aware of and able to comply with these requirements. In the event of potential compliance issues, we actively engage with the regulatory authorities with respect to compliance and remediation where relevant. For example, in June 2021 our subsidiary, Philips Respironics, initiated a voluntary recall notification for certain sleep and respiratory care products to address identified potential health risks, and the US Food and Drug Administration (FDA) conducted an inspection of a Philips Respironics manufacturing facility in connection with the recall. We are working closely with the FDA to clarify and follow up on the inspectional findings and its recent requests related to comprehensive testing.

For more information, refer to the sub-section Quality & Regulatory in the Governance section of the ESG chapter in this report and Provisions and Contingent assets and liabilities.

Philips is exposed to the risks of non-compliance with business conduct rules and regulations, including anti-bribery, healthcare compliance and data privacy.

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 of compliance risk areas include commission payments to third parties, remuneration payments to agents, distributors, consultants and the like, as well as the acceptance of gifts, which may be considered in some markets to be normal local business practice. 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. 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 and fines. For further details, please refer to the sub-section Legal proceedings within the Contingent assets and liabilities note to the Group Financial Statements.

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. With respect to privacy, 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 details, please refer to the sub-section Philips General Business Principles in the section headed “Our approach to risk management”.

6.6Financial risks

Philips is exposed to a variety of treasury and financing risks, including liquidity, currency, credit and country risk.

Negative developments impacting the liquidity of global capital markets could affect Philips’ ability to raise or re-finance debt in the capital markets or could lead to significant increases in the cost of such borrowing in the future. If the markets expect a downgrade by the rating agencies, or if such a downgrade has actually taken place, this could increase the cost of borrowing, reduce our potential investor base and adversely affect our business.

Philips’ financing and liquidity position may also impact its ability to implement or complete any share buyback program or distribute any dividends in accordance with its dividend policy or at all. Any announced share buyback program or dividend policy may also be amended, suspended or terminated at any time, including at Philips’ discretion or as a result of applicable law, regulation or regulatory guidance, and any such amendment, suspension or termination could negatively affect the trading price of, increase trading price volatility of or reduce the market liquidity of Philips’ shares or other securities. Additionally, any share buyback program or distribution of dividend could diminish Philips’ cash or other reserves, which may impact its ability to finance future growth and to pursue possible future strategic opportunities. Any share buyback program or dividend payment will depend on factors such as availability of financing, liquidity position, business outlook, cash flow requirements and financial performance, the state of the market and the general economic climate (including the impact of the COVID-19 pandemic) and other factors, including tax and other regulatory considerations. Philips and its subsidiaries may also be subject to limitations on the distribution of shareholders’ equity under applicable law.

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 and net investments in its foreign subsidiaries 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, Philips committed approximately half of the EUR 1.5 billion share buyback program for capital reduction purposes by entering into a number of forward transactions, with settlement dates in 2022, 2023 and 2024. The remainder of the program was executed through open market purchases.

Philips hedges the anticipated net exposure of developed-market foreign currencies resulting from sales, purchases and net investments in its foreign subsidiaries 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 to manage the credit risks.

Please also refer to Details of treasury and other financial risks.

Philips is exposed to tax risks which could have a significant adverse financial impact.

Philips is exposed to tax risks which could result in double taxation, penalties and interest payments. The source of the risks could originate from local tax rules and regulations as well as international and EU regulatory frameworks. These include transfer pricing risks on internal cross-border deliveries of goods and services, as well as tax risks relating to changes in the transfer pricing model. Furthermore Philips is exposed to 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, indirect taxes, wage tax and tax accounting). A group of Market Tax Managers helps to manage 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. 

Flaws in internal controls could adversely affect our financial reporting and management process.

Accurate disclosures provide investors and other market professionals with significant information for a better understanding of Philips’ businesses. Failures in internal controls or other issues with respect to Philips’ public disclosures, including disclosures with respect to cybersecurity risks and incidents, could create market uncertainty regarding the reliability of the information (including financial data) presented and could have a negative impact on the price of Philips securities. In addition, the reliability of revenue and expenditure data is key for steering the businesses and for managing top-line and bottom-line growth. The long lifecycle of health technology solution sales, from order acceptance to accepted installation and servicing, together with the complexity of the accounting rules for when revenue can be recognized in the accounts, presents a challenge in terms of ensuring consistent and correct application of the accounting rules throughout Philips’ global business. Significant changes in the way of working, such as working from home during a pandemic, may have an adverse impact on the control environment under which controls are executed, monitored, reviewed and tested. Any flaws in internal controls, or regulatory or investor actions in connection with flaws in internal controls, could adversely affect Philips’ financial condition, results of operation, reputation and brand.

Risk response: Philips’ Business Control Framework (PBCF) sets the standard for risk management and internal control over financial reporting. Key components of our PCBF are our 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) and standards on management testing of controls. Please also refer to the section for more information on our PBCF.

7Supervisory Board

In the two-tier corporate structure under Dutch law, the Supervisory Board is a separate body that is independent of the Board of Management and the company. The Supervisory Board supervises the policies, management and 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.

8Supervisory Board report

Letter from the Chairman of the Supervisory Board 

Dear Stakeholder,

2021 was a challenging, mixed year for Philips, as the company saw strong performance across most of its core businesses offset by a number of significant headwinds – increasing supply chain pressures, the COVID-19-related postponement of equipment installations, and the consequences of the voluntary recall by Philips Respironics. However, in view of the strong customer demand and record-high order book, the company expects to resume its growth and margin expansion trajectory in the course of 2022, with a comparable sales decline at the start of the year followed by a recovery and strong second half of the year.

In June, Philips' subsidiary Respironics initiated a voluntary recall notification for certain sleep and respiratory care products, to address potential health risks related to the sound abatement foam in these devices. Following the substantial ramp-up of production, service and repair capacity in close dialogue with regulators across the world, the repair and replacement program is well under way in the United States and several other markets. As a company wholly committed to patient safety, Philips fully understands the impact this issue has had on patients and care givers.

In September, Philips successfully completed the sale of the Domestic Appliances business, concluding its major divestments. We believe this will allow Philips to focus fully on continuing its transformation into a solutions company and extending its leadership in health technology. 

Strategy and portfolio continue to resonate with customers

Health systems around the world are striving to transform the delivery of care, with the aim of improving health outcomes, patient and staff experience, and productivity. Philips’ strategy and portfolio of innovations across the health continuum – supporting personal health, precision diagnosis, image-guided therapies and connected care, and leveraging the power of data and informatics – continues to resonate very well with customers.

In recent years, Philips has invested significantly in informatics and data science, as well as cloud technology, to enable the delivery of solutions across care settings. This drive continued in 2021 with the acquisitions of BioTelemetry and Capsule Technologies in particular, strengthening Philips’ leadership in patient care management solutions for the hospital and the home.

Customers’ appreciation for Philips’ strategy was underlined by the 80 long-term strategic partnerships the company signed with hospitals and health systems around the world in the course of the year.

ESG commitments

As a purpose-driven company, Philips has adopted a fully integrated approach to doing business responsibly and sustainably. In 2021, Philips continued to deliver on the key commitments set out in its Environmental, Social & Governance (ESG) framework – e.g. by remaining carbon-neutral in its own operations, by engaging with suppliers and customers to help minimize environmental impact across the value chain, as well as by leading the transition to a circular economy and extending access to care for underserved communities. In 2021, Philips also published its first Country Activity and Tax Report, providing transparency on taxes paid and collected in the countries where it operates.

Supervisory Board 

The Supervisory Board spent several sessions in 2021 reviewing, among other things, the Philips Respironics recall, quality, strategy, risk, business controls, financial and business performance, as well as its talent pipeline and succession planning, and Environmental, Social & Governance (ESG) programs.

At the AGM in May, the Supervisory Board was strengthened by the addition of Indra Nooyi and Chua Sock Koong. Indra Nooyi is a proven business leader in the consumer sectors, with a strong track record of delivering sustained profitable growth, while doing business sustainably and responsibly. Chua Sock Koong brings in-depth knowledge of information technology and the growth of digital services businesses, as well as extensive experience of business in Asia. Their strategic insights will be of great value to our Board and to Philips, as the company strives to expand its leadership in health technology solutions.

We are also very pleased to propose Herna Verhagen and Sanjay Poonen as new members of the Supervisory Board to the Annual General Meeting of Shareholders, which will be held on May 10, 2022. With her proven track record in driving a customer-first company culture and a background in e-commerce logistics, Herna Verhagen will bring valued and new perspectives to the Supervisory Board, while Sanjay Poonen’s extensive experience in enterprise IT and cloud-enabled business models will further strengthen the Supervisory Board’s digital competencies.

I am honored to have taken over the role as Chairman of the Supervisory Board in May 2021. I would like to record the Supervisory Board’s gratitude to my predecessor, Jeroen van der Veer, for his many years of leadership. I also wish to thank Christine Poon and Orit Gadiesh, who stepped down from the Supervisory Board in 2021, and Neelam Dhawan, who will step down at the end of the Annual General Meeting of Shareholders in 2022, for their long-term counsel and support. Together with my fellow Supervisory Board members, I look forward to providing continued oversight of Philips as it acts on its purpose of improving people’s health and well-being through meaningful innovation, and advising the Board of Management where applicable.

Feike Sijbesma
Chairman of the Supervisory Board

Introduction Supervisory Board Report

The Supervisory Board supervises and advises the Board of Management and Executive Committee in performing their management tasks and setting the direction of the business of the Philips Group. As members of the Supervisory Board, we 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 2021 and other relevant information on its functioning.

Activities of the Supervisory Board

The overview below indicates key matters that we reviewed and/or discussed during meetings in the course of 2021:

• Regular assessments of the company’s overall strategy to extend its leadership as a health technology company. These included reviews of the strategic priorities for each of the business clusters, the company’s informatics strategy and its strategy in key markets and the Philips Business System (the company’s standard operating model). An external expert provided the Supervisory Board with an external perspective on digital health in the coming five years and the challenges and opportunities this brings to the company;
• Regular reviews of the company’s acquisitions, divestments and partnerships funnel;
• Selected acquisitions and divestments, including the acquisitions of BioTelemetry, Inc., Capsule Technologies, Inc., Cardiologs (closed on January 7, 2022), and Vesper Medical Inc. (closed on January 11, 2022) and the divestment of the Domestic Appliances business;
• The (business) performance of the Philips Group and its underlying businesses, as well as the company’s flexibility under its capital structure and credit ratings to pay dividends and to fund capital investments, including share repurchases and other financial initiatives and the EUR 1.5 billion share buyback program the company announced on July 26, 2021;
• The (business) performance of companies previously acquired by the company;
• Oversight of the adequacy of financial and internal controls;
• Capital allocation, including the dividend policy and pay-out and the M&A framework;
• The performance of the Integrated Supply Chain and an update on the key transformation programs and the progress made;
• Geopolitical developments and their impact on Philips’ business;
• Philips’ annual management commitments, including the 2022 key performance indicators for the Executive Committee, the 2022 targets for such key performance indicators, and the annual operating plan for 2022;
• Quality & Regulatory compliance, systems and processes. In view of the Philips Respironics voluntary recall notification related to the sound abatement foam in certain sleep and respiratory care products (announced on June 14, 2021), the Supervisory Board regularly discussed this issue and the progress made with respect to the repair and replacement program with Management. Furthermore, the Supervisory Board was regularly updated on the internal Accelerating Patient Safety and Quality program that was launched by the company in the course of 2021. Also refer to the description of the activities of the Quality & Regulatory Committee in the section Report of the Quality & Regulatory Committee of this Supervisory Board report;
• The company’s quality transformation journey, as embedded in the Philips Business System;
• Enterprise risk management, including updates on and improvements of the relevant processes, the outcome of the annual risk assessment dialogue with the Executive Committee, an update of the top risks faced by the Philips Group, the possible impact of such risks, and control and mitigation measures. Reference is made to the section Our approach to risk management;
• The succession of Jeroen van der Veer as Chairman of the Supervisory Board by Feike Sijbesma and the changes in the composition of the committees of the Supervisory Board;
• The company’s People strategy, review of talent management, leadership and talent development, leadership culture, inclusion and diversity, and succession planning for executive management;
• Evaluation of the Board of Management and the Executive Committee based on the achievement of specific group and individual targets approved by the Supervisory Board at the beginning of the year;
• Significant civil litigation claims against, and public investigations into, Philips;
• Philips’ Environmental, Social and Governance (ESG) approach, comprising an update on the launch of, and progress made with respect to the 2025 ESG key programs and sustainability commitments and aims ( including circular revenues) and Philips’ aim to improve the health and well-being of 2.5 billion people per year by 2030 through meaningful innovation, as well as how ESG is embedded in the Philips Business System. 

The Supervisory Board also conducted 'deep dives' into a range of topics including:

• Strategy and performance trajectory, and major innovations (including demonstrations of latest innovations) in the Personal Health, Diagnosis & Treatment and Connected Care segments;
• The strategy and performance of Philips North America and Philips International Markets, including market trends, business performance and key strategic and transformation initiatives and priorities.

The Supervisory Board also reviewed Philips’ annual and interim financial statements, including non-financial information, prior to publication.

Supervisory Board meetings and attendance

In 2021, the members of the Supervisory Board convened for seven regular meetings and two extraordinary meetings. Moreover, we collectively and individually interacted with members of the Board of Management, 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. Indra Nooyi and Chua Sock Koong, appointed to the Supervisory Board with effect from May 6, 2021, followed an induction program and interacted with the members of the Board of Management and 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 2021. All Supervisory Board members were present during the Supervisory Board meetings in 2021, with the exception of one member unable to attend the January 2021 meeting, one member unable to attend the February 2021 meeting, and one member unable to attend the October 2021 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 there have been limited local site visits by Supervisory Board members.

Composition, diversity and self-evaluation by the Supervisory Board

The Supervisory Board is a separate corporate body that is independent of the Board of Management and the company. Its independent character is also reflected in the requirement that members of the Supervisory Board can be neither a member of the Board of Management nor an employee of the company. The Supervisory Board considers all its members to be independent under the Dutch Corporate Governance Code. Furthermore, the members of its Audit Committee are independent under the rules of the US Securities and Exchange Commission, applicable to the Audit Committee.

The Supervisory Board currently consists of nine members. In 2021, there were a number of changes to the composition of the Board, all effective as per (the end of) the Annual General Meeting of Shareholders held in 2021. Indra Nooyi and Chua Sock Koong were each appointed as a member of the Supervisory Board for a term of four years. The term of appointment of Jeroen van der Veer and Christine Poon expired and Orit Gadiesh stepped down from the Supervisory Board. The Supervisory Board appointed Feike Sijbesma as Chair of the Supervisory Board, and Paul Stoffels as Vice-Chair and Secretary of the Supervisory Board.

The agenda for the upcoming 2022 Annual General Meeting of Shareholders will include proposals to re-appoint Paul Stoffels and Marc Harrison as members of the Supervisory Board and to appoint Herna Verhagen and Sanjay Poonen as new members of the Supervisory Board. At the end of the 2022 Annual General Meeting of Shareholders, the term of appointment of Neelam Dhawan will expire. She will step down from the Supervisory Board after having served a decade on the Supervisory Board. We, as members of the Supervisory Board, would like to take this opportunity to thank Neelam Dhawan for her contributions to our work and are very pleased with the availability of the proposed new members (subject to their appointment at the 2022 AGM).

The Supervisory Board attaches great value to diversity in its composition and has 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 2021 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 44% of the Supervisory Board members (4 out of 9) are female. Overall, 32% (7 out of 22) of the positions to which the Diversity Policy applies (Supervisory Board and Executive Committee/Board of Management) are held by women. Upon the proposed (re-)appointments at the upcoming 2022 Annual General Meeting of Shareholders, 40% of the Supervisory Board members (4 out of 10) will be female and 30% of the positions to which the Diversity Policy applies will be held by women. The proposed (re)appointments are in accordance with the mandatory gender quota imposed by Dutch law, effective 2022, requiring that at least one-third of the supervisory board members are women (and at least one-third are men). 

As explained in the report of the Corporate Governance and Nomination and Selection Committee and the section Inclusion & Diversity of this Annual Report, the company continues its efforts to enhance inclusion and diversity in the entire organization. Philips’ company-wide commitment towards Inclusion & Diversity is reflected in the Inclusion & Diversity Policy, the General Business Principles and the Fair Employment Policy, which were all updated in 2021. The company continues to put in place measures to enhance diversity and inclusion at all levels within the organization. Philips has set a goal of 35% gender diversity in senior leadership positions (a subset of Management and Executive positions) by the end of 2025. The Supervisory Board expects these efforts to contribute to the achievement of the company’s gender (and other) 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 our goals. The Supervisory Board will continue to devote attention to this topic in 2022.

In 2021, 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 2021 self-evaluation process for the Supervisory Board and its committees. This included drafting and submitting relevant questionnaires, interviewing members of the Supervisory Board as well as aggregating and reporting on the results. The questionnaires covered topics such as the composition of the Supervisory Board and the required profile (in terms of skills and experience, geographical coverage and diversity) of future Supervisory Board members, stakeholder oversight, strategic oversight, the management and focus of the meetings of the Supervisory Board, the effectiveness of the Supervisory Board’s oversight of various aspects of the company’s business (such as product and service quality), risk management, succession planning and human resources oversight, the engagement with Management and recommendations to improve the Supervisory Board’s functioning and ways of working going forward. Furthermore, the performance of the Chairman and of the Supervisory Board’s committees was evaluated separately.

The report on the results of the self-evaluation was shared and discussed in a private meeting of the Supervisory Board. The responses provided by the Supervisory Board members indicated that the Supervisory Board continues to be a well-functioning team, is of an appropriate size and benefits from expertise, diversity and international representation. A number of suggestions were made to further strengthen the Supervisory Board going forward, focusing among others on the following topics: knowledge of medical technology, the key regulatory regimes applicable to the company, the company’s approach to research and development, product design, manufacturing and suppliers (including in the context of quality and patient safety), the overall control structure and reporting lines in the company and succession planning. Early 2022, the Chairman of the Supervisory Board discussed the results of the self-evaluation with each of the individual members of the Supervisory Board, and the evaluation of his own functioning with the Vice-Chairman. Finally, the Supervisory Board noted the smooth transition of the role of the Chairman in 2021.

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 committees

While retaining overall responsibility, 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. In 2015, 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 Supervisory 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 Supervisory Board retains overall responsibility for the activities of its committees.

Financial Statements 2021

The financial statements of the company for 2021, 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 2021 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 2021.

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 2021.

February 22, 2022

The Supervisory Board

Feike Sijbesma
Paul Stoffels
Chua Sock Koong
Neelam Dhawan
Liz Doherty
Marc Harrison
Peter Löscher
Indra Nooyi
David Pyott

Further information

To gain a better understanding of the responsibilities of the Supervisory Board and the internal regulations and procedures governing its functioning and that of its committees, please refer to Corporate governance and to the following documents published on the company’s website:

• Articles of Association
• Rules of Procedure Supervisory Board, including the Charters of the Supervisory Board committees
• Diversity Policy for the Supervisory Board, Board of Management and Executive Committee

8.1Report of the Corporate Governance and Nomination & Selection Committee

The Corporate Governance and Nomination & Selection Committee is chaired by Feike Sijbesma. Its other members are Paul Stoffels (who joined in the course of 2021) and Indra Nooyi (who joined after her appointment as member of the Supervisory Board at the 2021 Annual General Meeting of Shareholders). 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 2021, Corporate Governance and Nomination & Selection Committee members held five 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 appointment of Indra Nooyi and Chua Sock Koong as members of the Supervisory Board at the 2021 Annual General Meeting of Shareholders. This also resulted in the proposals to re-appoint Paul Stoffels and Marc Harrison as members of the Supervisory Board and to appoint Herna Verhagen and Sanjay Poonen as new members of the Supervisory Board at the upcoming 2022 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. Reference is made to 2022 Annual Incentive,  setting out the performance review of the Board of Management and the Executive Committee members by the Remuneration Committee.

In 2021, 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. This resulted in the re-appointment of Marnix van Ginneken as a member of the Board of Management at the 2021 Annual General Meeting of Shareholders. Furthermore, Shez Partovi was appointed as a member of the Executive Committee in his role as Chief Innovation and Strategy Officer, effective July 2021, succeeding Jeroen Tas who stepped down from the Executive Committee at the same time. Rob Cascella and Henk de Jong stepped down from the Executive Committee effective April 2021 and September 2021 respectively.

With respect to corporate governance matters, the Committee discussed relevant developments and legislative changes, including the introduction in Dutch law of a gender quota for supervisory boards, expected Dutch legislation on virtual-only general meetings of shareholders, and European developments in the area of ESG reporting.

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 Committee periodically assesses the Diversity Policy and the size and composition of the Supervisory Board and makes recommendations, if relevant, relating to the profile for the Supervisory Board.

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. As explained in its report, the full Supervisory Board spent time in 2021 considering its composition, as well as the composition of the Executive Committee (including the Board of Management). 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.

8.2Report of the Remuneration Committee

8.2.1Letter from the Remuneration Committee Chair

Dear Stakeholder,

On behalf of the Remuneration Committee, I am pleased to report on the Committee’s activities in 2021 and to present the 2021 Remuneration Report on behalf of the Board of Management and the Supervisory Board.

Looking back at the decisions made during the year

The Remuneration Committee has taken a number of decisions and approaches in this past year.

We were pleased that Mr Marnix van Ginneken remained available to be a member of the Board of Management, and our shareholders re-appointed him at the 2021 Annual General Meeting of Shareholders. The Remuneration Committee prepared a new service agreement for him which was shared with our shareholders ahead of the shareholders meeting.

We have noted that a certain number of advisory votes were cast against our Remuneration Report 2020 at the 2021 Annual General Meeting of Shareholders. During our regular engagements with shareholders and institutional advisory organizations some of them raised concerns around our explanation of adjustments made to the adjusted Earnings Per Share (EPS) metric in the Long-Term Incentive Plan for the Board of Management. Whilst we consider our approach in line with our current Remuneration Policy (as adopted in 2020), we have enhanced the disclosure on adjusted EPS performance in this year’s Remuneration Report.

In line with our company-wide delay of salary increases, necessary for cost containment as per the company operating plans, the Supervisory Board followed the proposal of the Remuneration Committee to defer the base salary increases for Messrs Abhijit Bhattacharya and Marnix van Ginneken from April 1 to July 1, 2021. The base salary of Mr Frans van Houten remained unchanged.

Company performance despite headwinds

Philips’ remuneration policy is designed to encourage its employees to deliver on the company’s purpose and strategy, create stakeholder value, and to provide motivation and retention. When assessing the Annual Incentive and Long-Term Incentive performance, the Remuneration Committee acknowledged Philips’ strong growth in its Diagnosis & Treatment and Personal Health business segments, contributing to the improvement of the health and well-being of 1.67 billion people globally. Moreover, the organic and inorganic portfolio extensions have made Philips’ products, services, and solutions portfolio more competitive than ever, resulting in 80 new long-term strategic partnerships, as well as an all-time-high order book. The company also delivered on focusing its portfolio by successfully divesting the Domestic Appliances business to Hillhouse Investment, realizing a significant financial gain.

At the same time, the Remuneration Committee considered the significant headwinds that Philips experienced in 2021, due to the unprecedented external supply chain constraints and the consequences of the voluntary Philips Respironics field action. The Annual Incentive and Long-Term Incentive pay-out was impacted significantly by these factors, reducing the realized Total Direct Compensation of the Chief Executive Officer for 2021 to less than half of such compensation for 2020 (taking into account the closing share price at the end of the relevant performance period).

No adjustments were made for the Philips Respironics field action, and the negative impact thereof is fully included in the Annual Incentive realization and the LTI Plan EPS achievement. However, the Remuneration Committee took into account that certain external supply chain constraints affected the Company’s results beyond its control, considering that Philips’ business portfolio is heavily exposed to the availability of specific electronic components. Consequently, we recommended to the Supervisory Board to partially adjust this impact for Annual Incentive and Long-Term Incentive calculation purposes, balancing financial performance over the year against the continued progress made on the company’s strategic roadmap, amidst the ongoing impact of COVID-19 on society and our employees. Furthermore, the Remuneration Committee excluded the financial gain derived from the sale of the Domestic Appliances business, while adding back the operational result of this business for the Long-Term Incentive to attain comparability versus target (which was set in 2019 and includes this business). The Remuneration Committee values to uphold the principle that the Annual Incentive and Long-Term Incentive adjustment methodology is applied uniformly and equitably across the Company at large including the members of the Board of Management.

Overall, this resulted in a realized below target Annual Incentive payout of 64% of target for Frans van Houten, 57% of target for Abhijit Bhattacharya, and 64% of target for Marnix van Ginneken. The 2019 Long-Term Incentive plan vested significantly below target, paying out at 38% of target, based on Company performance against the original targets set in 2019. The Remuneration Committee concluded that the reduced payout of the Annual Incentive and the significantly reduced vesting of the Long-Term Incentive appropriately reflected Company performance. At the same time, the Remuneration Committee considered that pay for performance was reflected by proportionally recognizing the significant progress on strategic and operational goals during 2021, while also being mindful of the engagement, motivation and retention of the wider talent group across the Company.

The composition of the Remuneration Committee and its activities

The Remuneration Committee is chaired by Paul Stoffels. Its other members are David Pyott and Feike Sijbesma. 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 in the following table:

The Committee met five times in 2021. 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 2021.

Paul Stoffels
Chairman of the Remuneration Committee

8.2.2Remuneration report 2021

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 2021. The report will also be published as a stand-alone document on the company’s website after the 2022 Annual General Meeting of Shareholders, the agenda of which will include an advisory vote on this Remuneration Report.

Board of Management

Summary of Remuneration Policy

The Remuneration Policy and Long-Term Incentive Plan for the Board of Management have been adopted and approved respectively by the Annual General Meeting of Shareholders 2020, which took place on April 30, 2020.

The objectives of the Remuneration Policy for the Board of Management are: to focus them on delivering on our purpose and strategy, to motivate and retain them, and to create stakeholder value.

Thus, the Remuneration Policy:

• Supports improving the company’s overall performance and enhancing the long-term value of the company;
• Directly supports our purpose by: 
  a) linking a part of remuneration to achieving our strategic imperatives through the criteria and targets included in the Annual and Long-Term Incentives;
  b) offering market competitive compensation compared to a peer group of business competitors and companies we compete with for executive talent;
  c) enabling us to motivate, retain and attract world-class talent in order to support our purpose of improving people’s health and well-being through meaningful innovation and our goal of addressing our customers’ healthcare challenges (delivering on the Quadruple Aim);
  d) stimulating share ownership to create alignment with shareholders and encourage employees to act as stewards and ambassadors of the company;
• Encourages the company and its employees to act responsibly and sustainably;
• Delivers value for our stakeholders, such as shareholders, customers, consumers and employees, by continuously engaging with them and make a positive contribution to society at large;
• Leads to fair and internally consistent pay levels by taking into account internal pay ratios.

Main elements of the Remuneration Policy

Peer Groups

We use a Quantum Peer Group for remuneration benchmarking purposes, and therefore we aim to ensure that it includes business competitors, with an emphasis on companies in the healthcare, technology-related or consumer products area, and other companies we compete with for executive talent. The Quantum Peer Group consists of predominantly Dutch and other European companies, plus a minority (up to 25%) of US-based global companies, of comparable size, complexity and international scope.

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.

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). Following the divestment of the Domestic Appliances business, the Supervisory Board has decided to remove Groupe SEB and De Longhi from the TSR Performance Peer Group and replace them with Alcon and Reckitt Benckiser. Furthermore, due to Hitachi's change in business portfolio, the Supervisory Board has decided to replace this TSR peer company with Canon. No changes were made to the Quantum Peer Group during 2021.

Services agreements

The members of the Board of Management are engaged by means of a services agreement (overeenkomst van opdracht). Termination of the contract by either party is subject to six months’ notice period. The severance payment is set at a maximum of one year’s annual base compensation. No severance payment is due if the agreement is terminated early on behalf of the Board of Management member or in the case of urgent cause (dringende reden) as defined in article 7:678 and further in the Dutch Civil Code. The term of the services agreement is aligned with the term for which the relevant member has been appointed by the General Meeting of Shareholders (which is a maximum period of four years, it being understood that this period expires no later than at the end of the AGM held in the fourth year after the year of appointment).

8.2.3Remuneration of the Board of Management in 2021

The Supervisory Board has determined the 2021 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 2021 Annual General Meeting of Shareholders. In addition, the Supervisory Board has determined the 2021 pay-out of the 2019 Long-Term Incentive Plan, of which the performance period ended on December 31, 2021. 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 2021 Annual Incentive, as well as 2019 Long-Term Incentive performance criteria, were adequate.

Annual Base Compensation

The annual compensation of the members of the Board of Management has been reviewed as part of the regular remuneration review. In the case of Frans van Houten, the annual compensation remained unchanged in 2021 compared to 2020 at EUR 1,325,000. As a result of the review, the annual compensation of Abhijit Bhattacharya and Marnix van Ginneken has been increased per July 1, 2021, from EUR 785,000 to EUR 795,000 and EUR 595,000 to EUR 615,000 respectively. This increase was made to move the total compensation level closer to the market median level, as well as to reflect internal relativities. Typically, any salary increase is implemented on April 1, however all merit and promotional salary increases for senior management globally were delayed from April 1, 2021 to July 1, 2021.

2021 Annual Incentive

The Annual Incentive performance has been assessed based on Company financial results as well as individual results. For Frans van Houten, Abhijit Bhattacharya and Marnix van Ginneken, payout of the Annual Incentive is significantly below target level at 64%, 57% and 64% (of target) respectively. Details are as follows:

Company financial results (80% weighting)

In line with the Remuneration Policy, the Company sets financial targets in advance of the year for all members of the Board of Management. For the year 2021, the financial targets set at Group level cover Comparable Sales Growth^*), EBITA^*) and free cash flow^*). As the Company did only partially reach its strategic and operational objectives, this resulted in a partial payout on comparable sales growth^*), no payout on EBITA^*) and a partial payout on free cash flow^*).

To recognize the underlying progress, certain adjustments were included for restructuring and acquisition related costs as well as specific unexpected events that were outside of management’s control, to the extent they have not been reflected in the original targets. Due to the external supply chain constraints and component shortages, the Company experienced a significant delay in sales recognition, even though its order book stands at an all-time high. This was considered partially – i.e. 50% of the sales impact of EUR 498 million which corresponds to 1.5% of comparable sales growth^*) – in the calculation of the comparable sales growth^*) and corresponding impacts on EBITA^*) and free cash flow^*) realization, based on a detailed analysis of the value of confirmed orders that could not be translated to revenue in 2021 as expected by customers and planned by the company. No adjustments were made for the sales loss and any costs associated with the Philips Respironics field action, and hence the negative impact of the field action is fully included in the Annual Incentive realization.