Koninklijke Philips N.V. — 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are audited and prepared under IFRS as issued by the IASB and endorsed by the EU. Ernst & Young issued an unqualified opinion on the financial statements and internal controls.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Sales | EUR 19.482 billion | EUR 18.121 billion |
| Comparable sales growth | 4.5% | 4.7% |
| Gross margin | EUR 8.875 billion; 45.6% of sales | EUR 8.554 billion; 47.2% of sales |
| Income from operations | EUR 1.644 billion; 8.4% of sales | EUR 1.719 billion; 9.5% of sales |
| Income from continuing operations | EUR 1.192 billion | EUR 1.310 billion |
| Net income | EUR 1.173 billion | EUR 1.097 billion |
| Adjusted EBITA | EUR 2.563 billion; 13.2% of sales | EUR 2.366 billion; 13.1% of sales |
| Operating cash flow | EUR 2.031 billion | EUR 1.780 billion |
| Free cash flow | EUR 1.053 billion | EUR 984 million |
| Diluted EPS from continuing operations | EUR 1.30 | EUR 1.39 |
| Adjusted diluted EPS | EUR 2.02 | EUR 1.76 |
Sales rose 7.5% nominally, supported partly by currency and consolidation effects; comparable growth was 4.5%. By segment, comparable sales growth was 5.5% in Diagnosis & Treatment, 3.1% in Connected Care and 5.0% in Personal Health. Adjusted EBITA margins were 12.7%, 13.2% and 16.1%, respectively; Connected Care’s margin fell from 15.2% in 2018, while the other two segment margins improved.
Debt, liquidity and capital allocation
At year-end, cash and cash equivalents were EUR 1.425 billion, total debt EUR 5.447 billion and net debt EUR 4.022 billion, compared with EUR 1.688 billion, EUR 4.821 billion and EUR 3.132 billion, respectively, in 2018. The increase in debt includes EUR 1.059 billion of lease liabilities recognized following adoption of IFRS 16; this recognition had no cash impact. Philips reported EUR 2.425 billion of available liquidity, including cash and a EUR 1 billion committed revolving credit facility. The facility had no amount drawn at year-end. Long-term debt was 91% of total debt, with an average remaining term of 8.0 years.
Philips completed the sale of its remaining Signify shares in 2019 and continued a EUR 1.5 billion share buyback program, completing 41.5% by year-end. Management proposed a dividend of EUR 0.85 per share, subject to shareholder approval; the 2018 dividend was EUR 0.80.
Material changes and management commentary
- Adjusted EBITA increased EUR 197 million, but margin improvement was only 10 basis points and fell short of management’s plan. Sales growth and productivity savings were partly offset by tariffs, lower IP royalty income and growth investments.
- Connected Care had lower adjusted EBITA, with management citing tariffs, adverse currency effects, mix and higher material costs. Management said corrective actions were underway and expected improvement during 2020.
- Gross margin percentage declined to 45.6%, primarily due to lower IP royalty income and tariffs. Net income increased, helped by operating improvements, lower net financial expenses and lower discontinued-operation charges, but partly offset by higher taxes and EUR 97 million of goodwill impairment.
- Productivity programs generated approximately EUR 480 million of annual savings. The company reported comparable order intake growth of 3%, following 10% growth in 2018.
- Philips announced a review of future ownership options for its Domestic Appliances business, which recorded EUR 2.3 billion in 2019 sales; a separate legal structure was expected to be created in the course of 2021.
Outlook, risks and contingencies
For 2020, management targeted 4–6% comparable sales growth and approximately 100 basis points of adjusted EBITA margin improvement, with momentum expected to strengthen through the year. Philips said it would provide guidance for the next medium-term period during 2020. These are non-IFRS targets; the filing does not provide a quantitative reconciliation to IFRS measures.
- COVID-19: The outbreak was affecting Chinese consumer demand and Philips’ global supply chain. Management expected a negative first-quarter 2020 impact but said its magnitude and duration could not then be quantified.
- Quality and regulatory: A US consent decree continues to impose requirements on defibrillator manufacturing and distribution at specified facilities. Certain US sales remain suspended, subject to exceptions; future violations could lead to further restrictions, recalls or other actions. The filing says the matter’s ultimate impact and any additional investment are uncertain.
- Legal and regulatory matters: The company disclosed pending CRT-related litigation and investigations involving, among other matters, medical-device competition and alleged tender irregularities in Brazil and China. For some pending matters, potential losses could not be reliably estimated; adverse outcomes could materially affect financial position, results or cash flows.
- Other risks: The filing highlights tariffs and trade restrictions, foreign exchange, supply-chain disruption, cybersecurity and data privacy, product quality, regulatory approvals, acquisitions and integration, taxes, pensions, and economic and political uncertainty.
- Other items: Philips recorded EUR 97 million of goodwill impairment, including EUR 78 million related to Population Insights & Care/VitalHealth and EUR 19 million associated with closure of the Neuro business. Total restructuring, acquisition-related and other items affecting operating income were EUR 471 million.
Important facts for investors to verify
- Whether 2020 sales and margin targets were achieved, especially the planned Connected Care recovery and the effects of tariffs and COVID-19.
- Whether adjusted metrics, including comparable sales, adjusted EBITA and free cash flow, reconcile as expected to IFRS results; these non-IFRS measures are not standardized.
- Developments in the US consent decree and pending legal or governmental matters, including any change in potential costs or business restrictions.
- Execution, timing and proceeds of any Domestic Appliances ownership transaction, and implications for the continuing portfolio.
- Debt and cash generation after IFRS 16 lease accounting, buybacks and dividends, alongside pension funding needs and the proposed EUR 0.85 dividend’s shareholder approval.