Royal Philips Electronics Financial reporting related matters. December 8 th, PDF Free Download

Royal Philips Electronics Financial reporting related matters December 8 th, 2011 1

Important information Forward-looking statements This document and the related oral presentation, including responses to questions following the presentation contain 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. Examples of forward-looking statements include statements made about our strategy, estimates of sales growth, future EBITA and future developments in our organic business. By their nature, these statements involve risk and uncertainty because they relate to future events and circumstances and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these statements. These factors include but are not limited to domestic and global economic and business conditions, the successful implementation of our strategy and our ability to realize the benefits of this strategy, our ability to develop and market new products, changes in legislation, legal claims, changes in exchange and interest rates, changes in tax rates, pension costs and actuarial assumptions, raw materials and employee costs, our ability to identify and complete successful acquisitions and to integrate those acquisitions into our business, our ability to successfully exit certain businesses or restructure our operations, the rate of technological changes, political, economic and other developments in countries where Philips operates, industry consolidation and competition. As a result, Philips actual future results may differ materially from the plans, goals and expectations set forth in such forward-looking statements. For a discussion of factors that could cause future results to differ from such forward-looking statements, see the Risk management chapter included in our Annual Report 2010 and the "Risk and uncertainties section in our semi-annual financial report for the six months ended July 3, 2011. Third-party market share data Statements regarding market share, including those regarding Philips competitive position, contained in this document are based on outside sources such as research institutes, industry and dealer panels in combination with management estimates. Where information 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 IFRS measures and should be used in conjunction with the most directly comparable IFRS measures. A reconciliation of such measures to the most directly comparable IFRS measures is contained in this document. Further information on non-gaap measures can be found in our Annual Report 2010. Use of fair-value measurements In presenting the Philips Group s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Readers are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When quoted prices do not exist, we estimated the fair values using appropriate valuation models, and when observable market data are not available, we used unobservable inputs. They require management to make significant assumptions with respect to future developments, which are inherently uncertain and may therefore deviate from actual developments. Critical assumptions used are disclosed in our 2010 financial statements. Independent valuations may have been obtained to support management s determination of fair values. All amounts in millions of euro s unless otherwise stated; data included are unaudited. Financial reporting is in accordance with IFRS, unless otherwise stated. This document comprises regulated information within the meaning of the Dutch Financial Markets Supervision Act Wet op het Financieel Toezicht. 2

Agenda Reclassifications License income Warranty cost Amortization of intangibles Goodwill review Equity stakes Pensions 2011 Funded status 2012 pension costs and cash flow IAS 19 impact Group Management & Services Composition Cost estimate Publication and AGM dates 2012 3

Change of IP royalty allocation policy Current allocation policy IP royalty received for products sold by a Sector are allocated to that Sector If a sector no longer sells such products, then IP royalties are allocated to GM&S - Exception: For Consumer Lifestyle, IP royalties for products no longer sold by the sector are currently allocated to it New allocation policy IP royalty received for products sold by a Sector are allocated to that Sector The exception related to royalty for Consumer Lifestyle is abolished Impact for 2011: approximately EUR 220 million of revenue, EUR 180 million EBITA, formerly reported under Consumer Lifestyle, would be reclassified under GM&S 4

Reclassification of warranty cost in the income statement as of 2012 Warranty costs Philips currently records costs of standard warranty in Selling expenses; and will change the accounting treatment to Cost of Sales per 2012 The change follows the rationale that the costs of warranty are an integral part of the sale of goods and services and are therefore better reflected in Cost of Sales Warranty costs 2009 2010 2011 YtD Q3 Cost of Sales -500-415 -290 Selling Expenses -500-415 -290 Note: Amounts are estimates, final figures will be disclosed in a 2012 press release 5

Reclassification of amortization of intangibles in the income statement as of 2012 Amortization of Intangibles: brand names and customer lists Philips currently records amortization of all intangibles in Cost of Sales; and will change the accounting treatment to Selling Expenses per 2012 This change follows the rationale that use of customer lists and brand names are supporting the sales process Amortization of brand names and customer lists 2009 2010 2011 YtD Q3 Cost of Sales -225-275 -220 Selling Expenses -225-275 -220 Note: Amounts are estimates, final figures will be disclosed in a 2012 press release 6

Goodwill review Q4 2011 No impairments are expected for acquisitions in Healthcare, Consumer Lifestyle and Lighting as no impairment triggers have been identified 8

Agenda Reclassifications License income Warranty cost Amortization of intangibles Goodwill review Equity stakes Pensions 2011 Funded status 2012 pension costs and cash flow IAS 19 impact as of 2013 Group Management & Services Composition Cost estimate Publication and AGM dates 2012 9

Philips equity interests have a book value of EUR 326 million 1/2 as per Q3 2011. Significant interests are: Equity interest Intertrust Technologies Corporation Innolux Display Corp. Prime Ventures Philips Medical Capital Shenyang Neusoft Corp. Ltd. Ownership (% of total) Book value (in EUR million) Total 163 Valuation Accounting basis 49.5% 51 Not listed Equity accounted 1.3% 26 Listed, Taiwanese Stock Exchange Source of equity stakes Acquired in 2002 together with Sony Fair value Acquired in 2010 after TPO Displays Corp. merged with Innolux Display Corp. Share in TPO Displays Corp. following merger of Philips Mobile Display Systems with Toppoly Optoelectronics Corporation of Taiwan in 2006 26% 29 Not listed Fair value Acquired in 2008 in exchange of the transfer of certain incubator activities 40% 32 Not listed Equity accounted 2.0% 25 Listed, Shanghai Stock Exchange Finance company for medical equipment, established in 2005 Fair value Acquired in 2008 following the swap of shares in Neusoft Group Ltd. held by Philips 1 The equity interests are included in the balance sheet captions Investments in Associates and Other non-current financial assets, which represent an aggregated book value of EUR 532 million as per October 2, 2011 (EUR 660 million as per December 31, 2010). 2 The value of Philips equity interests as per December 31, 2010 was EUR 473 million. The EUR 147 million decline compared to October 2, 2011 is mainly due to the sale of TCL shares (EUR 63 million) and the decline in stock prices of Innolux Display Corp. (EUR 63 million) and Shenyang Neusoft Corp. Ltd. (EUR 20 million). 10

Update funded status pension plans (IFRS basis) As of November 2011 December 31, 2010 June 30, 2011 (not reported) November 30, 2011 (not reported) Funded Status Balance sheet position Funded Status Balance sheet position Funded Status Balance sheet position Netherlands Pre-paid pension asset 1,380 0 1,333 0 745 0 Other major plans (1,268) (1,611) (738) (1,382) (1,190) (1,619) Net balance sheet position major plans (1,611) (1,382) (1,619) Funded status minor plans (203) (193) (204) Net balance sheet position (1,814) (1,575) (1,823) Compared to year end 2011, the market volatility thus far has had limited impact on the IFRS funded position 12

Pension cost and cash flow 2011 and 2012 In millions of EUR 2011 as expected in Annual Report 2010 2011 Forecast (based on November) Pension cost 206 202 (excl. EUR 15m one-off gains) Cash flow 627 (incl. EUR 200m US plan deficit funding) 634 (incl. EUR 155m US plan deficit funding) 2012 Expected (based on November) 210 622 (incl. EUR 121m US plan deficit funding) The market volatility so far has had limited impact on the IFRS pension cost and on cash flows Calculations will be finalized early January 2012 based on actual market data and assumptions as per December 31, 2011 13

Impact of new IAS19 Relevance of changes in IAS19R Change in IAS19R Corridor method discontinued (deferred recognition of actuarial gains/losses) Elimination of EROA, introduction of net interest method (discount rate applied on recognized net funded position) More extensive disclosure requirements Relevance for Philips Not relevant as Philips already applies direct recognition of actuarial gains/losses through Other Comprehensive Income (OCI) Relevant: - elimination of EROA credit has negative impact on EBITA - Lower volatility in Equity (actuarial gains/losses) Partially relevant: - Sensitivity analysis is already provided in the AR - New disclosures required (risks, funding details, maturity profile of plans) Philips will adopt IAS19R as from January 1, 2013 14

Impact of IAS19R on EBITA Illustrative example In millions EURO Current IAS19 Service cost DB/DC/Retiree Medical Interest cost Expected Return on Assets Total pension cost (in EBITA) 2011 excl. one-off gains Forecast 322 982 (1,102) 202 IAS19R Service cost DB/DC/Retiree Medical in EBITA Net Interest cost in Financial Income & Expense Total pension cost 322 97 419 Impact of change EBITA impact Financial Income & Expense impact Total profit impact (120) (97) (217) 15

Group Management & Services Description of main activities Corporate Technologies Philips Corporate Technologies encompasses Corporate Research and Intellectual Property & Standards (IP&S) Corporate & Regional Costs Corporate center and country & regional overheads Pensions Pension and other postretirement benefit costs mostly related to former Philips employees Service Units and Other Global service units; Shared service centers; Corporate Investments; New venture integration and Philips Design. Service unit cost are charged out based on a zero budget basis 17

Group Management & Services Cost level outlook GM&S Adjusted EBITA development 2011 (280) (380) (75) (25) Underlying Costs 2011 Stranded costs Accelerate! costs LV 2011 Latest View 2011 Adjusted EBITA development in line with guidance provided during the CMD September 13 th and disclosure on the Accelerate! program (October 17 th ) 18

Agenda Reclassifications License income Warranty cost Amortization of intangibles Goodwill review Equity stakes Pensions 2011 Funded status 2012 pension costs and cash flow IAS 19 impact as of 2013 Group Management & Services Composition Cost estimate Publication and AGM dates 2012 19

Publication and AGM dates 2012 January 30 Fourth quarterly and annual results 2011 February 23 Annual Report 2011 April 23 First quarterly results 2012 April 26 Annual General Meeting of Shareholders July 23 Second quarterly and semi-annual results 2012 October 22 Third quarterly results 2012 20

Summary Change of IP royalty allocation policy; royalty income for products not sold through a sector will be reported under GM&S per 2012 Reclassification of warranty costs and amortization of intangibles in the income statement as of 2012 No goodwill impairment triggers have been identified, hence we do not expect any impairment this year Latest view 2011 adjusted EBITA for GM&S of EUR (380) Philips pension balance sheet position is expected to be in line with last year. 2012 pension cost are expected to be in line compared to 2011. Pension cash cost are expected to reduce by EUR 10 million Philips to adopt IAS19R from 2013. The negative impact to EBITA has been considered in the strategic plan, and hence the 2013 mid-term targets will not be revised 21

Q&A 22

Royal Philips Electronics Financial reporting related matters. December 8 th, 2011