financial reporting related matters - philips · pdf filein presenting and discussing the...

November 01, 2013 _Sector Confidential 1

December 6th, 2013

Royal Philips Financial Reporting Related Matters

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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, developments within the euro zone, 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 2012 and the “Risk and uncertainties” section in our semi-annual financial report for the six months ended July 1, 2013.

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 specialized 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 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 our Annual Report 2012. Further information on non-GAAP measures can be found in our Annual Report 2012.

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 2012 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 the accounting policies as stated in the Annual Report 2012, unless otherwise stated.

Important information

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• Q4 2013 Review of Intangible Assets

• Reporting changes 2014

─ Reclassification of cost by function

• Pensions

─ 2013 Funded status

─ 2013 & 2014 Pension cost and cash flow

• Innovation, Group & Services EBITA outlook 2014

• Financial calendar 2014

Agenda

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• Pensions





Agenda

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• Goodwill review: During our quarterly procedures, we review for impairment indicators. Specific cash-generating units with limited headroom i.e. Consumer Luminaires and Lumileds are monitored more closely as already mentioned in our semi-annual report. • Other intangible assets review: Quarter to date, an impairment of EUR 23 million has been identified in Healthcare related to the Mammography business in Imaging Systems. This impairment is due to a change in the business outlook coming from a slower than expected sales ramp up.

Q4 2013 Review of Intangible Assets

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• Pensions





Agenda

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• There are no new accounting changes effective January 1, 2014 that will have a material impact on our financial reporting in 2014

• A voluntary accounting policy change on January 1, 2014 with retrospective application, will result in the reclassification of cost by function in the income statement as of 2014:

– Company-wide overhead and indirect Business function costs will be brought more in line with the actual activities performed in our markets. This change has no net effect on Income from operations (EBIT)

Estimated impact EUR million

2013 YTD Q3

Cost of sales 58

Selling expenses (154)

General and administrative expenses 101

Research and development expenses (5)

Income from operations 0

Note: Amounts are estimates, final 2013 figures will be disclosed in a press release in Q1 2014

Reporting changes 2014

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• Pensions





Agenda

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Pensions 2013

• Pension financials in line with earlier expectations for FY 2013:

– Pension cost estimated at EUR 416 million (excl. a EUR 48 million net one-time gain)

– Net interest cost estimated at EUR 72 million

– Cash outflow estimated at EUR 688 million

• Significant progress in 2013 in de-risking of the Defined Benefit (DB) plans:

– US DB plan freeze and lump-sum offering to terminated vested employees

– Partial Buy-In for UK DB plan

– New funding agreement for DB plan in the Netherlands under which Philips is no longer liable for future deficits. One-time contribution of EUR 600 million in 2014, which is expected to consist partly of non-cash assets. We will continue to apply DB accounting under IFRS

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• Year to date, the total funded status improved due to favorable discount rates for the main DB plans. The Balance sheet position improved as higher interest rates lowered the net present value of the liabilities and, to a lesser extent, negatively affected the market value of the plan assets

• Funded status 2012 has been restated to reflect the exclusion of accrued pension administration costs from the DBO1 as required by IAS19R (positive impact of EUR 224 million)

• Balance sheet position: Surpluses in the Netherlands, UK and Brazil are not recognized (asset-ceiling test)

1 DBO = Defined Benefit Obligation

Update on pension plans’ funded status (IFRS basis)

EUR million December 31, 2012

(restated for IAS19R) October 31, 2013

(not reported)

Funded Status

Balance Sheet position

Funded Status Balance Sheet position

Netherlands Pre-paid pension asset 777 0 740 0

Other major plans (1,237) (1,823) (848) (1,390)

Major plans (460) (1,823) (108) (1,390)

Minor plans (202) (199) (223) (223)

Total (662) (2,022) (331) (1,613)

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• Calculations will be finalized early January 2014 based on actual market data and assumptions as per December 31, 2013

• Dutch pension plan’s 2014 expected regular cash contribution is EUR 216 million • Service cost expected to be EUR 15 million lower than in 2013 due to changes in the plan

1 Excluding EUR 48 million net one-time gain 2 Including EUR 155 million US plan deficit funding 3 Including EUR 144 million US plan deficit funding 4 Including EUR 154 million US plan deficit funding, excluding any cash part of the EUR 600 million one-time contribution to the Dutch pension plan 5 FI&E = Financial Income & Expenses

EUR million

Estimate 2013 (Annual Report 2012)

Estimate 2013 (based on October data)

Estimate 2014

(based on October data)

Pension cost (in EBITA)

421 4161 389

Net interest cost (in FI&E5)

75 72 63

Cash outflow 6482 6883 6154

Estimated pension cost & cash flow for 2013/2014

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─ Reclassification of costs by function

• Pensions





Agenda

13 1 Mainly due to additional License income, release of environmental provisions, partly offset by net pension settlement loss

Innovation, Group & Services EBITA outlook

(380)

40 (330)

IG&S Reported EBITA development 2013 – 2014 (in EUR million)

(15)

(290)

(10) (40)

(25)

Outlook 2014

Accelerate! investments

Original guidance 2013

Latest view 2013

Reversal one-offs1

Restructuring costs

License income

One-offs1

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Financial calendar 20141

January 28 Fourth quarter and annual results 2013

February 25 Annual Report 2013

April 22 First quarter results 2014

May 1 Annual General Meeting of Shareholders 2014

July 21 Second quarter and semi-annual results 2014

September 23-24 Capital Markets Days on all 3 business sectors

October 20 Third quarter results 2014

1 Subject to final confirmation

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Q & A

November 01, 2013 _Sector Confidential 16

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