Reconciliation of non-GAAP information

Explanation of Non-GAAP measures

Koninklijke Philips N.V. (the ‘Company’) believes that an understanding of sales performance is enhanced when the effects of currency movements and acquisitions and divestments (changes in consolidation) are excluded. Accordingly, in addition to presenting ‘nominal growth’, ‘comparable growth’ is provided.

Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the Significant accounting policies, sales and income are translated from foreign currencies into the Company’s reporting currency, the euro, at the exchange rate on transaction dates during the respective years. As a result of significant currency movements during the years presented, the effects of translating foreign currency sales amounts into euros could have a material impact. Therefore, these impacts have been excluded in arriving at the comparable sales in euros. Currency effects have been calculated by translating previous years’ foreign currency sales amounts into euros at the following year’s exchange rates in comparison with the sales in euros as historically reported. Years under review were characterized by a number of acquisitions and divestments, as a result of which activities were consolidated or deconsolidated. The effect of consolidation changes has also been excluded in arriving at the comparable sales. For the purpose of calculating comparable sales growth, when a previously consolidated entity is sold or contributed to a venture that is not consolidated by the Company, relevant sales are excluded from impacted prior-year periods. Similarly, when an entity is acquired, relevant sales are excluded from impacted periods.

The Company uses the term EBIT and EBITA to evaluate the performance of the Philips Group and its operating sectors. The term EBIT has the same meaning as Income from operations (IFO). Referencing EBITA will make the underlying performance of our businesses more transparent by factoring out the amortization of acquired intangible assets. EBITA represents income from operations before amortization and impairment of intangible assets generated in acquisitions (excluding software and capitalized development expenses).

The Company believes that an understanding of the Philips Group’s financial condition is enhanced by the disclosure of net operating capital (NOC), as this figure is used by Philips’ management to evaluate the capital efficiency of the Philips Group and its operating sectors. NOC is defined as: total assets excluding assets classified as held for sale less: (a) cash and cash equivalents, (b) deferred tax assets, (c) other non-current financial assets and current financial assets, (d) investments in associates, and after deduction of: (e) provisions, (f) accounts and notes payable, (g) accrued liabilities, (h) other non-current liabilities and other current liabilities.

Net debt is defined as the sum of long- and short-term debt minus cash and cash equivalents. The net debt position as a percentage of the sum of group equity (shareholders’ equity and non-controlling interests) and net debt is presented to express the financial strength of the Company. This measure is widely used by management and investment analysts and is therefore included in the disclosure. Our net debt position is managed in such a way that we expect to continiously meet our objective to retain our target at A3 rating (Moody’s) and A- rating (Standard and Poor’s). Furthermore, the Group’s objective when managing the net debt position is to fulfill our commitment to a stable dividend policy with a 40% to 50% pay-out of continuing net income.

Cash flows before financing activities, being the sum total of net cash from operating activities and net cash from investing activities, and free cash flow, being net cash from operating activities minus net capital expenditures, are presented separately to facilitate the reader’s understanding of the Company’s funding requirements.

Net capital expenditures comprise of purchase of intangible assets, proceeds from sale of intangible assets, expenditures on development assets, capital expenditures on property, plant and equipment and proceeds from disposals of property, plant and equipment. This measure is widely used by management to calculate free cash flow.

Adjustments

Prior-period financial statements have been restated for the treatment of Audio, Video, Multimedia and Accessories as discontinued operations (see note (7) Discontinued operations and other assets classified as held for sale) and the adoption of IAS 19R, which mainly relates to pension reporting (see note (30) Post-employment benefits).

Sales growth composition per sector
in %
 
comparable growth
currency effects
consolidation changes
nominal growth
 
 
 
 
 
2013 versus 2012
 
 
 
 
Healthcare
0.8
(4.6)
(0.3)
(4.1)
Consumer Lifestyle
10.0
(3.4)
0.0
6.6
Lighting
3.2
(3.5)
0.0
(0.3)
Innovation, Group & Services
(2.0)
(0.5)
5.7
3.2
Philips Group
3.3
(3.9)
0.1
(0.5)
 
 
 
 
 
2012 versus 2011
 
 
 
 
Healthcare
6.4
6.4
0.0
12.8
Consumer Lifestyle
8.7
4.4
1.4
14.5
Lighting
3.8
4.6
2.1
10.5
Innovation, Group & Services
0.3
1.7
(4.4)
(2.5)
Philips Group
5.7
5.2
0.8
11.7
 
 
 
 
 
2011 versus 2010
 
 
 
 
Healthcare
5.3
(2.5)
0.1
2.9
Consumer Lifestyle
11.0
(1.8)
4.5
13.7
Lighting
6.2
(2.4)
(2.7)
1.1
Innovation, Group & Services
(12.9)
(0.9)
(9.0)
(22.8)
Philips Group
5.8
(2.3)
(0.7)
2.8

Sales growth composition per geographic cluster
in %
 
comparable growth
currency effects
consolidation changes
nominal growth
 
 
 
 
 
2013 versus 2012
 
 
 
 
Western Europe
0.1
(0.6)
0.5
0.0
North America
(2.4)
(3.1)
(0.2)
(5.7)
Other mature geographies
5.0
(12.3)
0.0
(7.3)
Total mature geographies
(0.5)
(3.4)
0.1
(3.8)
Growth geographies
10.7
(5.1)
0.0
5.6
Philips Group
3.3
(3.9)
0.1
(0.5)
 
 
 
 
 
2012 versus 2011
 
 
 
 
Western Europe
(0.9)
1.1
2.5
2.7
North America
2.7
8.7
(0.7)
10.7
Other mature geographies
11.8
9.2
(0.1)
20.9
Total mature geographies
2.4
5.6
0.7
8.7
Growth geographies
12.5
4.3
1.2
18.0
Philips Group
5.7
5.2
0.8
11.7
 
 
 
 
 
2011 versus 2010
 
 
 
 
Western Europe
(0.7)
0.3
(1.9)
(2.3)
North America
5.2
(4.9)
0.3
0.6
Other mature geographies
6.9
2.7
(2.0)
7.6
Total mature geographies
2.9
(1.8)
(0.9)
0.2
Growth geographies
12.4
(3.3)
(0.3)
8.8
Philips Group
5.8
(2.3)
(0.7)
2.8

Composition of net debt to group equity
 
2011
2012
2013
 
 
 
 
Long-term debt
3,278
3,725
3,309
Short-term debt
582
809
592
Total debt
3,860
4,534
3,901
Cash and cash equivalents
3,147
3,834
2,465
Net debt (cash)1)
713
700
1,436
 
 
 
 
Shareholders’ equity
12,328
11,151
11,214
Non-controlling interests
34
34
13
Group equity
12,362
11,185
11,227
 
 
 
 
Net debt and group equity
13,075
11,885
12,663
Net debt divided by net debt and group equity (in %)
5
6
11
Group equity divided by net debt and group equity (in %)
95
94
89
1)
Total debt less cash and cash equivalents.
Composition of cash flows
 
2011
2012
2013
 
 
 
 
Cash flows from operating activities
760
2,082
1,138
Cash flows from investing activities
(1,275)
(925)
(997)
Cash flows before financing activities
(515)
1,157
141
 
 
 
 
Cash flows from operating activities
760
2,082
1,138
Net capital expenditures:
(857)
(455)
(966)
Purchase of intangible assets
(69)
(34)
(49)
Proceeds from sale of intangible assets
160
Expenditures on development assets
(276)
(345)
(357)
Capital expenditures on property, plant and equipment
(640)
(661)
(587)
Proceeds from disposals of property, plant and equipment
128
425
27
Free cash flows
(97)
1,627
172

EBITA to Income from operations (or EBIT)
 
Philips Group
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
 
 
 
 
 
 
2013
 
 
 
 
 
EBITA
2,451
1,512
483
695
(239)
Amortization of intangible assets1)
(432)
(195)
(54)
(180)
(3)
Impairment of goodwill
(28)
(2)
(26)
Income from operations (or EBIT)
1,991
1,315
429
489
(242)
 
 
 
 
 
 
2012
 
 
 
 
 
EBITA
1,106
1,226
456
128
(704)
Amortization of intangible assets1)
(458)
(200)
(56)
(194)
(8)
Income from operations (or EBIT)
648
1,026
400
(66)
(712)
 
 
 
 
 
 
2011
 
 
 
 
 
EBITA
1,435
1,080
153
399
(197)
Amortization of intangible assets1)
(559)
(229)
(44)
(276)
(10)
Impairment of goodwill
(1,355)
(824)
(531)
Income from operations (or EBIT)
(479)
27
109
(408)
(207)
1)
Excluding amortization of software and product development.
Net operating capital to total assets
 
Philips Group
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
 
 
 
 
 
 
2013
 
 
 
 
 
Net operating capital (NOC)
10,238
7,437
1,261
4,462
(2,922)
Exlcude liabilities comprised in NOC:
 
 
 
 
 
- payables/liabilities
8,453
2,541
1,275
1,672
2,965
- intercompany accounts
124
75
105
(304)
- provisions
2,554
278
221
452
1,603
Include assets not comprised in NOC:
 
 
 
 
 
- investments in associates
161
85
20
56
- current financial assets
10
10
- other non-current financial assets
496
496
- deferred tax assets
1,675
1,675
- liquid assets
2,465
2,465
 
26,052
10,465
2,832
6,711
6,044
Assets classified as held for sale
507
 
 
 
 
Total assets
26,559
 
 
 
 
 
 
 
 
 
 
2012
 
 
 
 
 
Net operating capital (NOC)
9,316
7,976
1,205
4,635
(4,500)
Exclude liabilities comprised in NOC:
 
 
 
 
 
- payables/liabilities
10,287
2,760
1,718
1,695
4,114
- intercompany accounts
71
42
37
(150)
- provisions
2,956
355
315
581
1,705
Include assets not comprised in NOC:
 
 
 
 
 
- investments in associates
177
86
22
69
- other non-current financial assets
549
549
- deferred tax assets
1,919
1,919
- liquid assets
3,834
3,834
 
29,038
11,248
3,280
6,970
7,540
Assets classified as held for sale
43
 
 
 
 
Total assets
29,081
 
 
 
 
 
 
 
 
 
 
2011
 
 
 
 
 
Net operating capital (NOC)
10,382
8,418
874
4,965
(3,875)
Exclude liabilities comprised in NOC:
 
 
 
 
 
- payables/ liabilities
10,357
2,697
2,292
1,593
3,775
- intercompany accounts
103
74
51
(228)
- provisions
2,680
287
551
283
1,559
Include assets not comprised in NOC:
 
 
 
 
 
- investments in associates
203
86
3
23
91
- other non-current financial assets
346
346
- deferred tax assets
1,731
1,731
- liquid assets
3,147
3,147
 
28,846
11,591
3,794
6,915
6,546
Assets classified as held for sale
551
 
 
 
 
Total assets
29,397
 
 
 
 

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This is an interactive electronic version of the Philips Annual Report 2013 and also contains certain information in summarized form. The contents of this version are qualified in their entirety by reference to the printed version of the full Philips Annual Report 2013. This printed version is available as a PDF file on this website. Information about: forward-looking statements, third-party market share data, fair value information, IFRS basis of presentation, use of non-GAAP information, statutory financial statements and management report, reclassifications and analysis of 2013 compared to 2012.

Comparable sales exclude the effect of currency movements and acquisitions and divestments (changes in consolidation). Philips believes that comparable sales information enhances understanding of sales performance.

Earnings before interest, tax and amortization (EBITA) represents income from continuing operations excluding results attributable to non-controlling interest holders, results relating to investments in associates, income taxes, financial income and expenses, amortization and impairment on intangible assets (excluding software and capitalized development expenses). Philips believes that EBITA information makes the underlying performance of its businesses more transparent by factoring out the amortization of these intangible assets, which arises when acquisitions are consolidated. In our Annual Report on form 20-F this definition is referred to as Adjusted IFO.

This equals recurring net income from continuing operations, or net income excluding discontinued operations and excluding material non-recurring items.

Free cash flow is the net cash flow from operating activities minus net capital expenditures.

Growth geographies are the developing geographies comprising of Asia Pacific (excluding Japan, South Korea, Australia and New Zealand), Latin America, Central & Eastern Europe, the Middle East (excluding Israel) and Africa.