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A new approach to annual reporting
Philips is striving to combine timely reporting of its annual financial results with full
disclosure and transparency.
This year, Philips has again accelerated the reporting of its annual financial results. The
performance in 2004 has been summarized in a separate booklet entitled Annual Review 2004 of
Koninklijke Philips Electronics N.V. ( Royal Philips Electronics , or the Company ), which was
published on January 27, 2005.
Full financial information and further statutory and other information, including the Operating and
financial review and prospects, is contained in this Annual Report.
Forward-looking statements
This document contains certain forward-looking statements with respect to the financial condition,
results of operations and business of Philips and certain of the plans and objectives of Philips
with respect to these items (including, but not limited to, cost savings), in particular the
outlook paragraph of the Operating and financial review and prospects in this Annual Report
By their nature, forward-looking statements involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future. There are a number of factors
that could cause actual results and developments to differ materially from those expressed or
implied by these forward-looking statements. These factors include, but are not limited to, levels
of consumer and business spending in major economies, changes in consumer tastes and preferences,
changes in law, the performance of the financial markets, pension costs, the levels of marketing
and promotional expenditures by Philips and its competitors, raw materials and employee costs,
changes in exchange and interest rates (in particular changes in the euro and the US dollar can
materially affect results), changes in tax rates and future business combinations, acquisitions or
dispositions and the rate of technological changes, political and military developments in
countries where Philips operates, the risk of a downturn in the semiconductor market, Philips
ability to secure short-term profitability and invest in long-term growth in Lighting and product
R D in Medical Systems, and industry consolidation.
Statements regarding market share, including as to Philips competitive position, contained in this
document are based on outside sources such as specialized research institutes, industry and dealer
panels in combination with management estimates. Where full-year information regarding 2004 is not
yet available to Philips, those statements may also be based on estimates and projections prepared
by outside sources or management. Rankings are based on sales unless otherwise stated.
Use of non-GAAP information
In presenting and discussing the Philips Group s financial position, operating results and cash
flows, management uses certain non-GAAP financial measures. These non-GAAP financial measures
should not be viewed in isolation as alternatives to the equivalent GAAP measure(s) and should be
used in conjunction with the most directly comparable US GAAP measure(s). A discussion of the
non-GAAP measures included in this document and a reconciliation of such measures to the most
directly comparable US GAAP measure(s) are contained on pages 210 and 211 in this document.
Philips Annual Report 2004 1
| 4 | Financial highlights | |||
| 7 | Message from the President | |||
| 12 | Governance | |||
| 14 | Reporting and Control | |||
| 17 | Board of Management | |||
| 18 | Group Management Committee | |||
| 20 | Supervisory Board | |||
| 21 | Supervisory Board Report | |||
| Information on the Philips Group | ||||
| 28 | The structure of the Philips Group | |||
| 28 | Business overview | |||
| 29 | Product sectors and principal products | |||
| 39 | Property, plant and equipment | |||
| 40 | Cooperative business activities and unconsolidated companies | |||
| Operating and financial review and prospects | ||||
| 43 | Introduction | |||
| 44 | Group performance 2004 compared to 2003 | |||
| 44 | Management summary | |||
| 45 | Performance of the Group | |||
| 50 | Performance by sector | |||
| 58 | Performance by region | |||
| 59 | Employment | |||
| 60 | Group performance 2003 compared to 2002 | |||
| 67 | Restructuring and impairment charges | |||
| 70 | Liquidity and capital resources | |||
| 76 | Risk management | |||
| 82 | Critical accounting policies | |||
| 85 | IFRS information | |||
| 86 | Other information | |||
| 86 | Proposed dividend to shareholders | |||
| 86 | Share repurchase program | |||
| 86 | MedQuist | |||
| 87 | Outlook | |||
| 89 | Report of independent registered public accounting firm | |||
| Financial statements of the Philips Group | ||||
| 90 | Consolidated statements of income | |||
| 92 | Consolidated balance sheets | |||
| 94 | Consolidated statements of cash flows | |||
| 96 | Consolidated statements of stockholders equity | |||
| 97 | Accounting policies | |||
| 105 | New accounting standards | |||
| 106 | Notes to the consolidated financial statements | |||
| Dutch GAAP information | ||||
| 176 | Accounting principles | |||
| 176 | Reconciliation US to Dutch GAAP | |||
| 178 | Philips Group | |||
| 178 | Consolidated statements of income | |||
| 180 | Consolidated balance sheets | |||
| 182 | Consolidated statements of stockholders equity | |||
| 183 | Notes to the consolidated financial statements | |||
| 187 | Royal Philips Electronics | |||
| 187 | Balance sheets and statements of income | |||
| 188 | Notes to the financial statements | |||
| Other information | ||||
| 193 | Auditors report | |||
| 194 | Proposed dividend to shareholders | |||
| 195 | Corporate governance | |||
| 210 | Reconciliation of non-GAAP information | |||
| 212 | The Philips Group in the last eleven years | |||
| 214 | Shareholder information |
2 Philips Annual Report 2004
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Financial statements of the Philips Group
Notes to the consolidated financial statements of the Philips Group
| 106 | (1 | ) | Acquisitions and divestments | |||||
| 112 | (2 | ) | Income from operations | |||||
| 120 | (3 | ) | Financial income and expenses | |||||
| 120 | (4 | ) | Income taxes | |||||
| 124 | (5 | ) | Investments in unconsolidated companies | |||||
| 129 | (6 | ) | Minority interests | |||||
| 129 | (7 | ) | Cumulative effect of a change in accounting principles | |||||
| 130 | (8 | ) | Earnings per share | |||||
| 130 | (9 | ) | Receivables | |||||
| 131 | (10 | ) | Inventories | |||||
| 131 | (11 | ) | Other current assets | |||||
| 132 | (12 | ) | Other non-current financial assets | |||||
| 133 | (13 | ) | Non-current receivables | |||||
| 133 | (14 | ) | Other non-current assets | |||||
| 134 | (15 | ) | Property, plant and equipment | |||||
| 135 | (16 | ) | Intangible assets excluding goodwill | |||||
| 136 | (17 | ) | Goodwill | |||||
| 137 | (18 | ) | Accrued liabilities | |||||
| 137 | (19 | ) | Provisions | |||||
| 139 | (20 | ) | Pensions | |||||
| 144 | (21 | ) | Postretirement benefits other than pensions | |||||
| 146 | (22 | ) | Other current liabilities | |||||
| 146 | (23 | ) | Short-term debt | |||||
| 147 | (24 | ) | Long-term debt | |||||
| 149 | (25 | ) | Other non-current liabilities | |||||
| 149 | (26 | ) | Commitments and contingent liabilities | |||||
| 153 | (27 | ) | Stockholders equity | |||||
| 154 | (28 | ) | Cash from derivatives | |||||
| 154 | (29 | ) | Proceeds from other non-current financial assets | |||||
| 154 | (30 | ) | Assets received in lieu of cash from the sale of businesses | |||||
| 155 | (31 | ) | Related-party transactions | |||||
| 155 | (32 | ) | Share-based compensation | |||||
| 160 | (33 | ) | Information on remuneration of the individual members of the Board of Management and the Supervisory Board | |||||
| 165 | (34 | ) | Financial instruments, derivatives and risks | |||||
| 171 | (35 | ) | Information relating to product sectors and main countries |
Dutch GAAP information
Notes to the consolidated financial statements of the Philips Group
| 183 | (36 | ) | Income from operations | |||||
| 183 | (37 | ) | Financial income and expenses | |||||
| 183 | (38 | ) | Income taxes | |||||
| 184 | (39 | ) | Unconsolidated companies | |||||
| 185 | (40 | ) | Other non-current assets | |||||
| 186 | (41 | ) | Goodwill consolidated companies | |||||
| 186 | (42 | ) | Stockholders equity |
Notes to the financial statements of Royal Philips Electronics
| 188 | (A | ) | Receivables | |||||
| 188 | (B | ) | Investments in affiliated companies | |||||
| 189 | (C | ) | Other non-current financial assets | |||||
| 189 | (D | ) | Tangible fixed assets | |||||
| 189 | (E | ) | Intangible fixed assets | |||||
| 190 | (F | ) | Other liabilities | |||||
| 190 | (G | ) | Short-term debt | |||||
| 190 | (H | ) | Provisions | |||||
| 190 | (I | ) | Long-term debt | |||||
| 191 | (J | ) | Stockholders equity | |||||
| 192 | (K | ) | Net income | |||||
| 192 | (L | ) | Employees | |||||
| 192 | (M | ) | Obligations not appearing in the balance sheet |
Philips Annual Report 2004 3
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Financial highlights
4 Philips Annual Report 2004
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all amounts in millions of euros unless otherwise stated
| 2002 | 2003 | 2004 | ||||||||||
| Sales | 31,820 | 29,037 | 30,319 | |||||||||
| Income from operations | 420 | 488 | 1,607 | |||||||||
| As a % of sales | 1.3 | 1.7 | 5.3 | |||||||||
| Results relating to unconsolidated companies | (1,346 | ) | 506 | 1,422 | ||||||||
| Net income (loss) | (3,206 | ) | 695 | 2,836 | ||||||||
| Per common share in euros - basic | (2.51 | ) | 0.54 | 2.22 | ||||||||
| - diluted | (2.51 | ) | 0.54 | 2.21 | ||||||||
| Dividend paid per common share in euros | 0.36 | 0.36 | 0.36 | |||||||||
| Net operating capital | 10,539 | 8,071 | 7,192 | |||||||||
| Cash flows before financing activities | 1,980 | 2,734 | 3,350 | |||||||||
| Stockholders equity | 13,919 | 12,763 | 14,860 | |||||||||
| Per common share in euros | 10.91 | 9.97 | 11.60 | |||||||||
| Net debt : group equity ratio | 27:73 | 18:82 | 1:99 | |||||||||
| Employees at December 31 | 170,087 | 164,438 | 161,586 |
Philips Annual Report 2004 5
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6 Philips Annual Report 2004
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Message from the President
With the introduction of our new brand promise Sense and simplicity we are creating a unique,
differentiated positioning that will further enhance our value proposition to our customers.
2004 was a year of major progress for Philips. Driven by our focus on operational performance and
cost management, our financial results showed considerable improvement, delivering a return well in
excess of our cost of capital. With the consistent execution of our management agenda for 2004 we
also took an important step forward in implementing our strategy to transform Philips into a truly
market-driven healthcare, lifestyle and technology company. And with the introduction of our new
brand promise Sense and simplicity we are creating a unique, differentiated positioning that will
further enhance our value proposition to our customers.
Strong financial performance
Adjusted for the weakening US dollar, sales were up almost 9% compared to 2003, mainly in
Semiconductors, driven by a rebound in the industry, and in Consumer Electronics. Going forward,
however, our focus on innovation is providing Philips with a basis for stronger growth across all
our divisions. Capitalizing on the significant cost savings and the process improvements we have
made over the past few years, income from operations increased to EUR 1,607 million, or 5.3% of
sales, moving us closer to our goal of a 7-10 % operating margin, to be realized within one to two
years from now. Income from operations includes a gain from the initial public offering of NAVTEQ
(EUR 635 million) as well as an impairment charge for MedQuist (EUR 590 million) and the net cost
of settlement of litigation with Volumetrics (EUR 133 million).
Philips Annual Report 2004 7
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Message from the President
Results from unconsolidated companies rose to EUR 1,422 million, driven by improved performance by
TSMC and our LCD venture LG.Philips LCD. Thanks to its successful IPO, the latter company now has
direct access to the capital markets. We also took steps to dispose of some more of our financial
holdings. Altogether, this resulted in Group net income of EUR 2,836 million, or EUR 2.22 per
share. Cash flow from operating activities was strong at EUR 2,697 million. On a net basis, the
Company is now virtually debt-free, which will allow us to pursue our growth plans while also
returning cash to you in the form of a higher dividend.
Fulfilling our commitments
In my message to you last year, we committed to the following management agenda for 2004:
| To achieve 14% EBITA at Medical Systems in 2004 | |
| To implement CE s renewal program to achieve 4 4.5% operating margin by the end of 2005 | |
| To accelerate profitable growth through the sustained transformation of Philips into a market-driven organization | |
| To increase the number of product leadership positions and the rate of innovation across the Group | |
| To continue to focus on reducing indirect costs to achieve additional savings of EUR 250 million. |
I would now like to review these commitments and discuss how we performed.
14% EBITA at Medical Systems
I am very proud to report that we met our target of 14% EBITA. Actually we surpassed it, achieving
14.4% excluding the Volumetrics settlement. The management team at Medical Systems has successfully