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 growth

Comparable sales exclude the effects of currency movements and changes in consolidation. As indicated in the note (1) 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.

Philips Group
Sales growth composition per sector in %
2012 - 2014
 
comparable growth
currency effects
consolidation changes
nominal growth
2014 versus 2013
 
 
 
 
Healthcare
(2.0)
(1.6)
(0.5)
(4.1)
Consumer Lifestyle
5.8
(3.1)
0.0
2.7
Lighting
(2.6)
(2.3)
1.0
(3.9)
Innovation, Group & Services
(11.8)
(0.1)
2.9
(9.0)
Philips Group
(0.9)
(2.0)
0.2
(2.7)
 
 
 
 
 
2013 versus 2012
 
 
 
 
Healthcare
0.8
(4.6)
(0.3)
(4.1)
Consumer Lifestyle
10.0
(3.4)
0.0
6.6
Lighting
1.3
(3.5)
0.0
(2.2)
Innovation, Group & Services
(0.3)
(0.4)
6.4
5.7
Philips Group
2.7
(3.9)
0.1
(1.1)
 
 
 
 
 
2012 versus 2011
 
 
 
 
Healthcare
6.4
6.4
0.0
12.8
Consumer Lifestyle
8.7
4.4
1.4
14.5
Lighting
3.6
4.4
2.5
10.5
Innovation, Group & Services
(5.6)
1.7
(4.5)
(8.4)
Philips Group
5.5
5.2
0.9
11.6

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Philips Group
Sales growth composition per geographic cluster in %
2012 - 2014
 
comparable growth
currency effects
consolidation changes
nominal growth
2014 versus 2013
 
 
 
 
Western Europe
(0.9)
0.4
0.2
(0.3)
North America
(1.8)
(0.9)
(0.3)
(3.0)
Other mature geographies
(0.9)
(4.7)
0.0
(5.6)
Mature geographies
(1.3)
(0.8)
(0.1)
(2.2)
Growth geographies
0.0
(4.4)
0.7
(3.7)
Philips Group
(0.9)
(2.0)
0.2
(2.7)
 
 
 
 
 
2013 versus 2012
 
 
 
 
Western Europe
0.0
(0.6)
0.5
(0.1)
North America
(2.9)
(3.1)
(0.2)
(6.2)
Other mature geographies
10.1
(13.5)
0.0
(3.4)
Mature geographies
(0.3)
(3.3)
0.1
(3.5)
Growth geographies
8.9
(5.1)
0.0
3.8
Philips Group
2.7
(3.9)
0.1
(1.1)
 
 
 
 
 
2012 versus 2011
 
 
 
 
Western Europe
(0.8)
1.0
2.6
2.8
North America
2.4
8.6
(0.7)
10.3
Other mature geographies
9.2
9.1
(0.1)
18.2
Mature geographies
1.9
5.6
0.7
8.2
Growth geographies
13.6
4.3
1.4
19.3
Philips Group
5.5
5.2
0.9
11.6

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EBITA

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).

Philips Group
EBITA to Income from operations (or EBIT) in millions of EUR
2012 - 2014
 
Philips Group
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
2014
 
 
 
 
 
EBITA
821
616
573
293
(661)
Amortization of intangible assets1)
(332)
(159)
(53)
(106)
(14)
Impairment of goodwill
(3)
(1)
(2)
Income from operations (or EBIT)
486
456
520
185
(675)
 
 
 
 
 
 
2013
 
 
 
 
 
EBITA
2,276
1,512
483
580
(299)
Amortization of intangible assets1)
(393)
(195)
(54)
(141)
(3)
Impairment of goodwill
(28)
(2)
(26)
Income from operations (or EBIT)
1,855
1,315
429
413
(302)
 
 
 
 
 
 
2012
 
 
 
 
 
EBITA
1,003
1,226
456
69
(748)
Amortization of intangible assets1)
(411)
(200)
(56)
(147)
(8)
Income from operations (or EBIT)
592
1,026
400
(78)
(756)
1)
Excluding amortization of software and product development.
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Net Operating Capital (NOC)

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.

Philips Group
Net operating capital to total assets in millions of EUR
2012 - 2014
 
Philips Group
Healthcare
Consumer Lifestyle
Lighting
Innovation, Group & Services
2014
 
 
 
 
 
Net operating capital (NOC)
8,838
7,565
1,353
3,638
(3,718)
Exclude liabilities comprised in NOC:
 
 
 
 
 
  • payables/liabilities
9,379
2,711
1,411
1,422
3,835
  • intercompany accounts
125
65
129
(319)
  • provisions
3,445
793
220
530
1,902
Include assets not comprised in NOC:
 
 
 
 
 
  • investments in associates
157
80
20
57
  • current financial assets
125
125
  • other non-current financial assets
462
462
  • deferred tax assets
2,460
2,460
  • cash and cash equivalents
1,873
1,873
Total assets excluding assets classified as held for sale
26,739
11,274
3,049
5,739
6,677
Assets classified as held for sale
1,613
 
 
 
 
Total assets
28,352
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
 
 
Net operating capital (NOC)
10,238
7,437
1,261
4,462
(2,922)
Exclude 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
  • cash and cash equivalents
2,465
2,465
Total assets excluding assets classified as held for sale
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
  • cash and cash equivalents
3,834
3,834
Total assets excluding assets classified as held for sale
29,038
11,248
3,280
6,970
7,540
Assets classified as held for sale
43
 
 
 
 
Total assets
29,081
 
 
 
 

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Net debt

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.

Philips Group
Composition of net debt to group equity in millions of EUR unless otherwise stated
2012 - 2014
 
2012
2013
2014
Long-term debt
3,725
3,309
3,712
Short-term debt
809
592
392
Total debt
4,534
3,901
4,104
Cash and cash equivalents
3,834
2,465
1,873
Net debt1)
700
1,436
2,231
Shareholders’ equity
11,151
11,214
10,867
Non-controlling interests
34
13
101
Group equity
11,185
11,227
10,968
Net debt and group equity
11,885
12,663
13,199
Net debt divided by net debt and group equity (in %)
6%
11%
17%
Group equity divided by net debt and group equity (in %)
94%
89%
83%
1)
Total debt less cash and cash equivalents.
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Free Cash Flow

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.

Philips Group
Free cash flow in millions of EUR
2012 - 2014
 
2012
2013
2014
Cash flows from operating activities
1,886
912
1,303
Cash flows from investing activities
(712)
(862)
(984)
Cash flows before financing activities
1,174
50
319
 
 
 
 
Cash flows from operating activities
1,886
912
1,303
Net capital expenditures:
(241)
(830)
(806)
Purchase of intangible assets
(33)
(49)
(114)
Proceeds from sale of intangible assets
160
Expenditures on development assets
(311)
(326)
(295)
Capital expenditures on property, plant and equipment
(479)
(482)
(437)
Proceeds from disposals of property, plant and equipment
422
27
40
Free cash flow
1,645
82
497

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Adjustments

Prior-period financial information has been restated for the treatment of the combined businesses of Lumileds and Automotive as discontinued operations (see note (3) Discontinued operations and other assets classified as held for sale) and for two voluntary accounting policy changes (see note (1) Significant accounting policies).

(0)
(0)

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.

CO2-equivalent or carbon dioxide equivalent is a quantity that describes, for a given mixture and amount of greenhouse gas, the amount of CO2 that would have the same global warming potential (GWP), when measured over a specified timescale (generally 100 years).

SF6 (Sulfur hexafluoride) is used in the electrical industry as a gaseous dielectric medium.

Mature geographies are the highly developed markets comprising of Western Europe, North America, Japan, South Korea, Israel, Australia and New Zealand.

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.

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.

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