Koninklijke Philips N.V. — FY 2017 Form 20-F
Reporting period: Year ended December 31, 2017; filed February 20, 2018. This is an annual report, not a standalone Q4 filing. Financial statements are prepared under IFRS. Amounts below are in euros unless noted.
Business context and performance
Philips continued its shift to a focused health-technology company, reporting Personal Health, Diagnosis & Treatment, and Connected Care & Health Informatics as its principal businesses. Philips Lighting was deconsolidated in November after Philips reduced its stake to 29.01%; the remaining stake was classified as held for sale.
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Sales | €17.780bn | €17.422bn |
| Comparable sales growth | 4% | 5% |
| Income from operations | €1.517bn; 8.5% of sales | €1.464bn; 8.4% |
| Adjusted EBITA (non-IFRS) | €2.153bn; 12.1% of sales | €1.921bn; 11.0% |
| Income from continuing operations | €1.028bn | €831m |
| Net income | €1.870bn | €1.491bn |
| Net cash from operating activities | €1.870bn | €1.170bn |
| Free cash flow (non-IFRS) | €1.185bn | €429m |
| Gross margin | 46.0% | 45.6% |
Sales rose 2% nominally; comparable growth was 4% after currency and consolidation effects. Growth geographies recorded 8% comparable growth versus 2% in mature geographies. Operating cash flow and free cash flow increased year over year. Adjusted EBITA improvement reflected higher volumes, procurement savings and other productivity gains; management reported approximately €483m of 2017 productivity savings.
Segments and material changes
- Personal Health: Sales €7.310bn, up 6% comparably; Adjusted EBITA margin 16.7%, up from 15.6%.
- Diagnosis & Treatment: Sales €6.891bn, up 3% comparably; Adjusted EBITA margin rose to 10.4% from 9.4%. Reported operating income fell to €488m from €546m, amid higher acquisition and restructuring charges.
- Connected Care & Health Informatics: Sales €3.163bn, up 3% comparably; Adjusted EBITA margin increased to 11.8% from 10.3%. Reported operating income declined to €206m from €275m, including higher quality, regulatory, acquisition and restructuring costs.
- Philips Lighting: Philips recognized a €599m gain on deconsolidation in discontinued operations. The retained interest was valued at €1.264bn at year-end; a €104m subsequent valuation loss was recorded. Total discontinued-operations income was €843m, contributing materially to net income.
Debt, liquidity and shareholder matters
Year-end gross debt was €4.715bn, cash and cash equivalents €1.939bn, and net debt €2.776bn, down from €3.272bn in 2016. Philips reported €2.939bn of available liquidity, including cash and a €1bn committed revolving credit facility, against gross debt of €4.715bn. The revolving facility had no outstanding borrowings. Philips said it believed liquidity and capital-market access were sufficient for current financing needs; it targets a strong investment-grade rating and reports no financial covenants in its outstanding long-term debt and credit facilities.
Philips announced a €1.5bn share repurchase program for capital reduction and reported it was 77% complete by year-end. A dividend of €0.80 per common share for 2017 was proposed, subject to shareholder approval.
Outlook, commentary and key risks
- Management said it expected to deliver its medium-term targets in 2018: 4%–6% comparable sales growth and an average annual improvement of 100 basis points in Adjusted EBITA margin. These are management targets, not a guarantee.
- Management highlighted continued operational-excellence needs, with product performance and quality improvement its stated highest priority for 2018. It also cited challenging economic conditions, uncertainty around US healthcare policy, currency movements, and rising commodity costs.
- Regulatory matters are significant. An October 2017 consent decree with the US Department of Justice, representing the FDA, restricts manufacturing and distribution of certain external defibrillators at two facilities until FDA certification of compliance, subject to specified exceptions. Philips also reported an FDA inspection of its Cleveland CT/AMI facility and said it would provide monthly progress reports; follow-up inspections were anticipated in 2018.
- Other risks include product quality and liability, cybersecurity and privacy, regulatory approvals, supply-chain and commodity exposure, tax uncertainty, pension funding, litigation and the timing and proceeds of the remaining Philips Lighting sell-down. The report includes CRT antitrust proceedings and other legal matters; outcomes may be uncertain.
- FY 2017 included €316m of restructuring and acquisition-related charges, including costs associated with the Spectranetics acquisition. The US Tax Cuts and Jobs Act contributed a total €171m tax charge across continuing and discontinued operations.
The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2017.
Most important facts for investors to verify
- Review the quality and sustainability of earnings: net income includes substantial discontinued-operations income, including the Philips Lighting deconsolidation gain; compare it with continuing-operations profit and cash generation.
- Check the assumptions behind Adjusted EBITA and free cash flow, both non-IFRS measures, against their IFRS reconciliations and the reported restructuring, acquisition and quality-related costs.
- Track FDA compliance progress, the consent-decree restrictions and any effects on product availability, revenue, remediation costs or customer relationships.
- Monitor Philips Lighting’s remaining stake, its valuation, and the timing and proceeds of the planned divestment.
- Assess delivery against the 2018 growth and margin targets, alongside debt, available liquidity, pension cash requirements and the capital-return program.