SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN ISSUER

Pursuant to Rule 13a-16 or 15d-16 of the
Securities Exchange Act of 1934

KONINKLIJKE PHILIPS ELECTRONICS N.V.

(Exact name of registrant as specified in its charter)

Royal Philips Electronics
(Translation of registrant’s name into English)

The Netherlands
(Jurisdiction of incorporation or organization)

Breitner Center, Amstelplein 2, 1096 BC Amsterdam, The Netherlands
(Address of principal executive offices).

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F þ          Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule101(b)(1): ___

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule101(b)(7): ___

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o           No þ

Name and address of person authorized to receive notices
and communications from the Securities and Exchange Commission:

E.P. Coutinho
Koninklijke Philips Electronics N.V.
Amstelplein 2
1096 BC Amsterdam — The Netherlands

 

 

This report comprises a copy of the Annual Report of the Philips Group for the year ended December 31, 2009, dated February 22, 2010, as well as copy of the press release entitled:

“Philips publishes combined 2009 annual financial and sustainability report”, dated February 22, 2010.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized at Amsterdam, on the 22nd day of February 2010.

KONINKLIJKE PHILIPS ELECTRONICS N.V.

/s/ E.P. Coutinho
(General Secretary)

Philips publishes combined 2009 Annual Financial and Sustainability Report

February 22, 2010

Amsterdam, The Netherlands — Royal Philips Electronics (AEX: PHI, NYSE: PHG) today published its combined Annual Financial and Sustainability Report 2009, and expects to file its 2009 Form 20-F with the US Securities and Exchange Commission later today (www.sec.gov).

Philips also published the Agenda for the Annual General Meeting of Shareholders which will take place on March 25, 2010. The agenda includes the proposal for (early) reappointment of the Board of Management members Gottfried Dutine, Rudy Provoost, Andrea Ragnetti and Steve Rusckowski, to underline continuity in a well-functioning management team against the background of the succession of the President/CEO of the company in 2011.

The 2009 Annual Report and Sustainability report is available to shareholders and other interested parties via this internet link. For the first time, the publication of Philips’ Annual Financial and Sustainability Report will be online only, a decision made for environmental reasons.

The Agenda for the Annual General Meeting of Shareholders is available via this internet link.

For more information, please contact:
Joon Knapen
Philips Corporate Communications:
Tel: +31 20 59 77477
Email: joon.knapen@philips.com

About Royal Philips Electronics
Royal Philips Electronics of the Netherlands (NYSE: PHG, AEX: PHI) is a diversified Health and Well-being company, focused on improving people’s lives through timely innovations. As a world leader in healthcare, lifestyle and lighting, Philips integrates technologies and design into people-centric solutions, based on fundamental customer insights and the brand promise of “sense and simplicity”. Headquartered in the Netherlands, Philips employs more than 116,000 employees in more than 60 countries worldwide. With sales of EUR 23 billion in 2009, the company is a market leader in cardiac care, acute care and home healthcare, energy efficient lighting solutions and new lighting applications, as well as lifestyle products for personal well-being and pleasure with strong leadership positions in flat TV, male shaving and grooming, portable entertainment and oral healthcare. News from Philips is located at www.philips.com/newscenter.

Forward-looking statements
This release may 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. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future and there are many factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements.

Annual Report 2009

Financial, social and environmental performance

staying focused
acting decisively

Contents

		Performance highlights			4
		President’s message			6
1		Who we are			11
1.1		Our company			11
1.2		Our strategic focus			12
1.3		Our ambitions			14
2		Our strategy in action			15
2.1		Professional Healthcare			15
2.2		Home Healthcare			19
2.3		Healthy Life & Personal Care			23
2.4		Home Living & Interactive Living			27
2.5		Home Lighting			31
2.6		Professional Lighting			35
3		Our planet, our partners, our people			39
3.1		Climate change			39
3.2		Our environmental footprint			42
3.3		Partnerships for progress			45
3.4		Supplier sustainability			48
3.5		Working at Philips			51
3.6		Working in our communities			54
4		Our group performance			57
4.1		Management discussion and analysis			58
4.2		Liquidity and capital resources			68
4.3		Sustainability			74
4.4		Proposed distribution to shareholders			80
4.5		Outlook			81
5		Our sector performance			82
5.1		Our structure			82
5.2		Healthcare			84
5.3		Consumer Lifestyle			89
5.4		Lighting			95
5.5		Group Management & Services			100
6		Risk management			103
6.1		Introduction			103
6.2		Our approach to risk management and business control			103
6.3		Risk categories and factors			106
6.4		Strategic risks			107
6.5		Operational risks			108
6.6		Compliance risks			110
6.7		Financial risks			111
7		Investor information			120
7.1		The Philips investment proposition			120
7.2		The year 2009			121
7.3		Share information			123
7.4		Risk management			124
7.5		Performance in relation to market indices			125
7.6		Philips’ acquisitions			126
7.7		Financial calendar			126
7.8		Five-year overview			127
8		Our leadership			130
8.1		Board of Management			130
8.2		Group Management Committee			132
8.3		Supervisory Board			133
9		Supervisory Board report			134
9.1		Introduction			134
9.2		Corporate Governance and Nomination and Selection Committee report			136
9.3		Report of the Remuneration Committee			137
9.4		Report of the Audit Committee			141
10		Corporate governance			143
10.1		Corporate governance of the Philips Group			143
10.2		Board of Management			143
10.3		Supervisory Board			145
10.4		General Meeting of Shareholders			147
10.5		Logistics of the General Meeting of Shareholders			148
10.6		Investor Relations			149

2     Philips Annual Report 2009

11		Group financial statements					153
11.1		Introduction					153
11.2		Management’s report on internal control					153
11.3		Reports of the independent auditor					154
11.4		Auditors’ report on internal control					154
11.5		Consolidated statements of income					155
11.6		Consolidated statements of comprehensive income					157
11.7		Consolidated balance sheets					158
11.8		Consolidated statements of cash flows					160
11.9		Consolidated statements of changes in equity					162
11.10		Information by sector and main country					163
11.11		Significant accounting policies					166
11.12		Notes					172
		1		Discontinued operations			172
		2		Acquisitions and divestments			172
		3		Income from operations			177
		4		Financial income and expenses			178
		5		Income taxes			179
		6		Investments in equity-accounted investees			181
		7		Receivables			183
		8		Inventories			183
		9		Other current assets			183
		10		Other non-current financial assets			183
		11		Non-current receivables			184
		12		Other non-current assets			184
		13		Property, plant and equipment			185
		14		Intangible assets excluding goodwill			186
		15		Goodwill			187
		16		Accrued liabilities			188
		17		Provisions			188
		18		Pensions and other postretirement benefits			189
		19		Other current liabilities			193
		20		Short-term debt			193
		21		Long-term debt			194
		22		Other non-current liabilities			194
		23		Contractual obligations			194
		24		Contingent liabilities			195
		25		Stockholders' equity			197
		26		Cash from (used for) derivatives and securities			197
		27		Proceeds from other non-current financial assets			198
		28		Assets in lieu of cash from sale of businesses			198
		29		Related-party transactions			198
		30		Share-based compensation			198
		31		Information on remuneration			200
		32		Fair value of financial assets and liabilities			206
		33		Other financial instruments			207
		34		Subsequent events			207
11.13		Auditor’s report — Group					208
12		Company financial statements					209
12.1		Balance sheets					209
12.2		Statements of income					210
12.3		Statements of equity					210
12.4		Introduction					211
12.5		Notes					212
		A		Receivables			212
		B		Investments in affiliated companies			212
		C		Other non-current financial assets			212
		D		Other current liabilities			212
		E		Short-term debt			212
		F		Long-term debt			213
		G		Stockholders' equity			213
		H		Net income			214
		I		Employees			214
		J		Obligations not appearing in the balance sheet			214
		K		Audit fees			214
		L		Subsequent events			214
12.6		Auditor’s report — Company					214
13		Sustainability performance					215
13.1		Approach to sustainability reporting					215
13.2		Economic indicators					218
13.3		Environmental indicators					218
13.4		Social indicators					222
13.5		Supplier indicators					224
13.6		Independent assurance report					226
13.7		Global Reporting Initiative (GRI) table					227
14		Reconciliation of non-GAAP information					234
15		Investor contact					239
16		Definitions and abbreviations					241
17		Forward-looking statements and other information					242

Philips Annual Report 2009     3

Performance highlights

Performance highlights

Financial table

all amounts in millions of euros unless otherwise stated

		2007				2008				2009
Sales			26,793				26,385				23,189
EBITA1)			2,094				744				1,050
as a % of sales			7.8				2.8				4.5
EBIT			1,867				54				614
as a % of sales			7.0				0.2				2.6
Net income (loss)			4,880				(92	)			424
per common share in euros
- basic			4.49				(0.09	)			0.46
- diluted			4.43				(0.09	)			0.46
Net operating capital1)			10,802				14,069				12,649
Free cash flows1)			824				773				863
Stockholders’ equity			21,741				15,544				14,595
Employees at December 312)			123,801				121,398				115,924

4     Philips Annual Report 2009

Performance highlights

Philips Annual Report 2009     5

President’s message

President’s message

“2009 was all about staying focused and acting decisively. As a result of the swift action we took, the Philips of 2010 is clearly a more agile, better company than the one that went into 2009.”

Gerard Kleisterlee, President

6     Philips Annual Report 2009

President’s message

Dear stakeholder

Looking back at what was a testing year for Philips, I am very pleased with the progress we made in 2009. In the most challenging economic environment in decades, we acted swiftly and decisively to adjust our cost structure and working capital to market conditions — while continuing to invest in our future. We did this to make sure we emerge from the recession as a stronger company, well positioned to capitalize on future economic growth. The effects of our actions became increasingly visible in our earnings, our cash flow performance and our stronger position with customers, especially in the second half of the year.

Philips today is a simpler, more agile company. Compared to previous downturns, our new Health and Well-being portfolio proved its intrinsic quality and increased resilience through sustained profitability.

For the full year, comparable sales were down 11% on 2008. While Healthcare revenues were almost on par with 2008, Consumer Lifestyle saw the biggest drop in sales, due to a very weak consumer market and active portfolio pruning. Lighting rebounded strongly in the course of the year, though it continued to feel the impact of the ongoing decline in commercial construction. Emerging markets accounted for a steady 30% of revenues, with strong growth at Healthcare offsetting declines at Consumer Lifestyle.

EBITA as a percentage of sales rose from 2.8% to 4.5%. Our performance in the second half of the year reflected our proactive cost management and strong fundamentals, delivering an adjusted profitability of 9.9% for that period and a record 12.3% for a fourth quarter.

We tackled the recession without sacrificing our longer-term strategic ambitions. We continued to invest in marketing and innovation and to reallocate resources to emerging markets and high-margin, sustainable growth initiatives, while maintaining a strong balance sheet supported by robust operating cash flows. Examples include our acquisition of coffee-machine maker Saeco and the expansion of our Philips-branded stores for Consumer Lighting in China and India.

As a responsible corporate citizen committed to helping build a sustainable society, we continued to drive the implementation of our EcoVision programs. Green Products generated 31% of total sales, up from 23% in 2008, and our investment in Green Innovations is ahead of target to reach a cumulative EUR 1 billion by 2012.

As a sign of confidence in our future, we are proposing to the upcoming General Meeting of Shareholders to maintain this year’s dividend at EUR 0.70 per common share, in cash or stock — resulting in a yield (as of December 31, 2009) of 3.4% for shareholders.

How did we do against our Management Agenda 2009

Drive performance

Relentlessly manage cash

On the back of improved operating performance and strongly reduced working capital, we improved free cash flow to 3.7% of sales, more than offsetting the EUR 485 million cash-out for the final settlement of asbestos claims.

Proactively align cost structure with market conditions and increase productivity

We took swift action to adjust our cost structure to lower revenues. We substantially reduced our fixed costs through decisive but responsible actions to optimize our industrial footprint and organizational structure, and we tightly managed our discretionary expenses.

In 2009, in spite of 11% lower revenues, overall productivity improved by 5.6%, driven by the positive effect of our ongoing efficiency programs in all sectors. The restructuring and change programs across our sectors have put us in a stronger position, and we will continue to drive productivity improvement going forward.

Manage risks and opportunities in a balanced way to strengthen our market positions

In the face of the ongoing uncertainty, we focused on cash flow and profitability when making decisions regarding mix and pricing. Nevertheless we broadly managed to maintain our shares in the market, with gains for Healthcare and Lighting in emerging markets.

Philips Annual Report 2009     7

President’s message

At Healthcare, we strengthened our position in image-guided intervention with the acquisition of Traxtal. At Consumer Lifestyle, we extended our leadership in the market for coffee appliances into the high-growth high-margin espresso machine segment with the acquisition of Italian manufacturer Saeco. And at Lighting, we further reinforced our position across the solid-state lighting value chain, for instance through the acquisition of lighting controls companies Dynalite and Teletrol.

Accelerate change

Organize around customers and markets, thereby improving Net Promoter Score

In today’s highly competitive business environment, customer intimacy and flexibility are essential, and we are continually adapting our organization to the changing needs of the marketplace — in both mature and emerging economies. In 2009 this translated to a 9% improvement in our Net Promoter Score to 60% (co-)leadership, up from 51% last year.

Increase Employee Engagement to high-performance level and implement ‘Leading to Win’

Compared to 2008, our Employee Engagement Index fell one point to 68, two points short of our high-performance target of 70. Though disappointed by this slight decline, it is encouraging to see that our engagement levels remain high despite such difficult times, and have indeed improved in several of our businesses. In fact, the participation rate increased to 91%.

The Employee Engagement survey is a key element of ‘Leading to Win’, the new way our people are evaluated and rewarded at year-end, which we drove deeper into the organization in 2009. Employees are no longer assessed solely on what they achieve (results), but also on how they achieve it (behavior). ‘Leading to Win’ is designed to develop a strong customer and performance- oriented culture that encourages employees to strive for results, not just in their own area, but for Philips as a whole.

Accelerate sector transformation programs

In view of macro-economic developments, we accelerated planned initiatives to increase organizational effectiveness, lower our fixed and discretionary cost base and simplify our structure. Within Healthcare we focused on de-layering our management structure to increase our speed of execution and lower operating costs. We effected further changes in Consumer Lifestyle in our drive for strong market-focused execution. And within Lighting we organized our sales force along channels and applications while continuing to reduce our fixed cost base through various restructuring projects.

Implement strategy

Further build the brand in the Health and Well-being space

We continue to invest heavily in our key differentiators — our brand and our end-user-driven innovation and design. In 2009 we again improved our position in the annual Interbrand ranking of the top-100 global brands, rising to 42^nd place. This clearly demonstrates we are translating our brand promise of “sense and simplicity” into a positive customer experience designed around their needs.

Continue to re-allocate resources to growth opportunities and emerging markets, including selective mergers and acquisitions

Despite the recession, we sustained our investment in growth in 2009. One of our key endeavors was to step up our resource investment in emerging markets so that we are even better placed to meet the needs of local people — and to develop solutions for these countries that can also transfer to more mature markets throughout the rest of the world.

8     Philips Annual Report 2009

President’s message

We acquired a number of strategically aligned high-growth businesses in 2009. As outlined above, these included coffee machine maker Saeco, healthcare company Traxtal in the growth area of image-guided intervention and therapy, and Dynalite and Teletron, two specialists in lighting controls — technology that is key to the unfolding LED lighting revolution.

Increase revenue derived from leadership positions

In spite of worldwide market downturns, some 60% of our revenue was generated by businesses with global leadership positions in 2009.

Building the leading company in Health and Well-being

Based on fundamental customer and end-user insights, we integrate technology and design into people-centric solutions that deliver on our promise of “sense and simplicity”. We believe the current economic crisis is likely to have the effect of accelerating the fundamental trends underpinning our strategy, thereby intensifying demand for healthcare (especially outside the hospital), a healthy lifestyle and solutions with a better ecological footprint, such as energy-efficient high-quality lighting.

With strong leadership positions in both clinical and home healthcare, as well as a growing presence in emerging markets, we will continue to simplify healthcare by focusing on the people in the care cycle — patients and care providers — in order to improve patient outcomes while easing the financial pressure on the healthcare system.

Building upon market-leading positions based on differentiation and profitability rather than scale, we will also continue to focus on innovative lifestyle solutions that enhance consumers’ sense of personal well-being. Where appropriate, we will enter new value spaces.

And, supported by the growing demand for energy-saving solutions and the trend toward solid-state lighting, we will continue to drive the transition from lighting products to application-based solutions.

We have responded to the economic downturn by stepping up our efforts to become a more customer-focused, agile and simpler company. I remain confident we will come out of this difficult economic period as a leader in the field of health and well-being. We have the strategy, financial resources and human capital that are required for success. Clearly, aspiring to improve people’s health and well-being automatically implies that sustainability will remain integral to everything we do.

Management Agenda 2010

Our Management Agenda 2010 is our compass for the next year of our journey to bring “sense and simplicity” to health and well-being markets.

In the column Drive performance we stress the importance of returning to growth and increasing market share. At the same time, we must continue to manage cost and cash aggressively, as that is essential to enable healthy growth.

Under Accelerate change we have made the empowerment of our people in local markets and customer-facing staff a key priority, so that we can help our customers more quickly and effectively and thus gain a competitive edge. Increasing the number of Philips promoters and driving engagement levels remain crucial objectives.

As well as referring to key strategic initiatives in our sectors, the final column, Implement strategy, reaffirms our vital ambition to strengthen our position in emerging markets and the importance of leveraging sustainability as an integral part of our strategy and an additional driver of growth.

Final thoughts

In the current climate we cannot reliably predict future developments. Visibility beyond the short term remains low. However, we are very confident about our prospects when the economy does recover.

We have a portfolio of strong businesses that provide innovative, simplicity-led solutions to many of the issues associated with important global trends — the demand for affordable healthcare, the desire for personal well-being and the need for greater energy efficiency.

We have a solid balance sheet and a good cash position, an increasingly strong brand and leading market positions, especially in emerging markets, as well as a committed, highly motivated workforce.

We will continue to stay focused on cost and cash flow and to act decisively to capture growth opportunities. I believe 2010 will be a year of solid progress towards our EBITA profitability target of 10% or better. During the past 12 months we have rigorously managed cash and cost while retaining the capability to ramp up production to meet demand when sales do rebound. Across our sectors we have substantially lowered our fixed costs and our break-even point. At the same time, we continue to invest in emerging markets and acquisitions while maintaining our spending on innovation and marketing.

Philips Annual Report 2009     9

President’s message

We have weathered the storm and prepared the ground for a future of profitable growth. Going forward, I am convinced that relentless focus on our customers’ needs, along with rigorous execution of our strategy, will enable us to realize our ambition of becoming the leading company in Health and Well-being.

In conclusion, I would like to thank our customers and suppliers for their loyalty and support in these tough economic times. Once again, our employees — including those from our 2009 acquisitions — have responded to adversity with resilience and creative endeavor. Their efforts are greatly appreciated.

Finally, on behalf of the entire Board of Management, I would like to thank our shareholders for their continuing support. They can rest assured that we remain fully committed to increasing the value of their investment.

Gerard Kleisterlee, President

Management Agenda 2010

The leading company in Health and Well-being

Drive performance

•		Drive top-line growth and market share
•		Continue to reduce costs and improve cost agility
•		Further increase cash flow by managing cash aggressively

Accelerate change

•		Increase customer centricity by empowering local markets and customer facing staff
•		Increase number of businesses with NPS (co-) leadership positions
•		Increase employee engagement to high performance level

Implement strategy

•		Increase our market position in emerging markets
•		Drive key strategy initiatives for each sector
•		Leverage Sustainability as an integral part of our strategy

10     Philips Annual Report 2009

1 Who we are 1 - 1.1

¹ Who we are

^1.1 Our company

Our company was founded in Eindhoven, The Netherlands, in 1891 by Anton and Gerard Philips to manufacture incandescent lamps and other electrical products. Ever since then, our innovations have been making people’s lives simpler, more enjoyable and more productive.

We are committed to enhancing economic prosperity, environmental quality and social equity wherever we operate.

Our values

Our values, the four Ds, are like a compass — guiding us in how we behave every day, and reminding us of the attitude we should have towards our work, our customers and our colleagues.

Delight customers

We anticipate and exceed customer expectation

Deliver great results

We continually raise the bar

Develop people

We get the best from ourselves and each other

Depend on each other

We deliver more value by working as One Philips

Philips Annual Report 2009     11

1 Who we are 1.2 - 1.2

^1.2 Our strategic focus

Philips is a global company which delivers meaningful innovations that improve people’s health and well-being.

Our health and well-being focus extends beyond our products and services to include the way we work: engaging our employees; focusing our social investment in communities on education in energy efficiency and healthy lifestyles; reducing the environmental impact of our products and processes; and driving sustainability throughout our supply chain.

Our health and well-being offering is powered by our three sectors: Healthcare, Consumer Lifestyle and Lighting.

Meeting people’s needs with “sense and simplicity”

People’s needs form the starting point for everything we do. By tracking trends in society and obtaining fundamental insights into the issues people face in their daily lives, we are able to identify opportunities for innovative solutions that meet their needs and aspirations.

Our “sense and simplicity” brand promise expresses a commitment to put people at the center of our thinking, to eliminate unnecessary complexity and to deliver the meaningful benefits of technology. Our adoption of Net Promoter Score (NPS), which measures people’s willingness to recommend a company/product to a friend or colleague, shows how we are doing in this respect.

Capturing value in mature and emerging markets

Despite the global financial and economic crisis, we still see enormous potential in both mature and emerging markets, and we apply our competence in marketing, design and innovation to capture value from major economic, social and demographic trends.

These include the need of a growing and longer-living population for more and affordable healthcare, the demand for energy-efficient solutions to help combat climate change and promote sustainable development, the emergence of empowered consumers with high health and well-being aspirations, and, last but not least, the growing importance of emerging markets in the world economy.

We have a long-established presence, strong brand equity and large workforce in the emerging economies. This gives us the home-grown insights needed to produce sustainable solutions that meet the needs of local people. We already realize one-third of our sales in the emerging markets, and this figure could conceivably rise to around 50% by the middle of this decade. In order to capture the growth opportunities that are available, we continue to invest in building our local organizations, competencies and resources in these markets.

The current economic crisis is likely to have the effect of accelerating the fundamental trends outlined above, increasing demand for healthcare (especially outside the hospital), a healthy lifestyle and energy-efficient high-quality lighting.

Building the leading company in Health and Well-being

Delivering on our promise of “sense and simplicity”, our sectors deliver solutions that create value for our customers — healthcare and lighting professionals and end-consumers.

People-focused, healthcare simplified

In Healthcare, we are building businesses with strong leadership positions in both professional and home healthcare, as well as a growing presence in emerging markets. We simplify healthcare by focusing on the people in the care cycle — patients and care providers — rather than technologies or products. By combining human insights and clinical expertise, we deliver innovative solutions that help improve patient outcomes while lowering the financial burden on the healthcare system.

Enabling people to enjoy a healthy lifestyle

The pursuit of personal well-being is a universal trend, equally relevant in mature and emerging markets. With a strong market-driven, insight-led culture, coupled with technological expertise and excellent design, Consumer Lifestyle focuses on innovative lifestyle solutions that enhance consumers’ sense of personal well-being. With simplicity providing our competitive edge, we continue to build upon existing market-leading positions based on differentiation and profitability rather than scale, as well as entering new value spaces.

Simply enhancing life with light

Supported by the growing demand for energy-saving solutions and the structural shift toward solid-state lighting, our Lighting sector is strengthening its global leadership in fast-growing areas, such as LEDs and energy-efficient lighting, by driving the transition from products

12     Philips Annual Report 2009

1 Who we are 1.2 - 1.2

and components to life-enhancing applications and solutions. Our strong IP position across the LED value chain will further reinforce this leadership.

One Philips focus on Health and Well-being

Synergies across the portfolio

One mission

Improving people’s lives

One promise

“sense and simplicity”

One company

-		Common, end-user-driven innovation process
-		Strong global brand
-		Channel access and global presence
-		Engaged workforce
-		Technology, know-how and strong IP positions
-		Economies of scale, e.g. shared service centers

Strategic priorities

We have simplified our organization, tightened our focus and defined six platforms — Professional Healthcare, Home Healthcare, Healthy Life / Personal Care, Home Living / Interactive Living, Home Lighting and Professional Lighting — all with drivers for growth.

Together, these six platforms create a coherent portfolio. We see many opportunities to leverage capabilities and synergies across the platforms, as they are united in different combinations by customer segments, channels, key processes and capabilities, and technology platforms.

For the coming period we have set the following strategic priorities:

•		Increase our market position in emerging markets
•		Drive key strategy initiatives for each sector:

	-		Move towards leadership position in imaging
	-		Grow Home Healthcare
	-		Grow Health & Wellness
	-		Manage TV to profitability
	-		Become the lighting solutions leader in Outdoor
	-		Grow Consumer Luminaires
	-		Optimize the lamps lifecycle

•

Leverage Sustainability as an integral part of our strategy

Achieving our objectives

Our goals have become even more challenging with the economic downturn. We intend to realize our ambitions by continuing to focus relentlessly on people’s needs and aspirations. This means:

•		creating meaningful innovations based on validated user insights
•		developing and maintaining strong relationships with our customers
•		nurturing talent and unlocking the full potential of our own highly engaged Philips people, as measured by our Employee Engagement Index.

Any strategy is only as good as its execution. We believe that if we maintain our focus and continue to execute swiftly and decisively, we will succeed in making Philips the leading company in Health and Well-being.

Philips Annual Report 2009     13

1 Who we are 1.3 - 1.3

^1.3 Our ambitions

Our financial targets

•

Comparable sales growth:

-

well in excess of global GDP

•		Group EBITA margin: 10% or more
•		Sector EBITA targets:

	-		Healthcare 15-17%
	-		Consumer Lifestyle 8-10%
	-		Lighting 12-14%

•

Return on invested capital: 12-13%

Our EcoVision4 targets

over the period 2007 - 2012

•		Double revenues from Green Products to 30% of total sales
•		Double investment in Green Innovations to a cumulative EUR 1 billion
•		Improve our operational energy efficiency by 25% and reduce CO2 emissions by 25%

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2 Our strategy in action 2 - 2.1

2 Our strategy in action

2.1 Professional Healthcare

Global demographic and environmental trends, such as aging populations and the spread of chronic diseases like obesity and diabetes to the developing world, will require a fundamental shift in the way healthcare is provided.

In the professional domain, we are driven to improve the way both patients and professionals experience healthcare, to improve clinical outcomes, and to enable the delivery of quality healthcare at lower cost.

By focusing on the range of medical issues associated with oncology, cardiology and women’s health, we can deliver better, more differentiated solutions that are more clinically relevant.

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In Healthcare we continue to pursue small, tuck-in acquisitions to support our focused growth initiatives.

Image-guided intervention and therapy is a natural extension of our imaging business and bridges our care cycle strengths in diagnosis and management. In 2009 we announced the acquisition of Canada-based Traxtal, an innovator in the field of minimally invasive instruments and software for image-guided intervention and therapy. Traxtal’s soft-tissue navigation solution functions as a GPS for medical instruments, making interventional radiology procedures more accurate while aiming to reduce contrast, radiation dose and intervention time. Coupled with our strong position in medical imaging, this acquisition has made Philips one of the leading solution providers for image-guided procedures.

“The acquisition of Traxtal opens up great opportunities for further cutting-edge, minimally invasive intervention and therapy solutions in combination with our other leading diagnostic and imaging products in Ultrasound, CT and MR,” said Steve Rusckowski, CEO of Philips Healthcare.

Expanding emergency healthcare offering

In 2009 we also acquired US-based InnerCool Therapies, a leader in body temperature management. “This transaction will allow us to broaden our offering in emergency care, and also enable us to provide leadership in promising future applications which could further preserve heart and brain tissue in the event of Sudden Cardiac Arrest,” said Steve Rusckowski.

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Rising wealth and population growth will dramatically increase demand for quality healthcare in emerging markets. We have reinforced our healthcare presence and growth ambitions in these markets.

Over the last five years we have extended our industrial and commercial footprint in the emerging markets by acquiring several companies and establishing a manufacturing joint venture. We see a clear need for both state-of-the-art equipment and value products. For example, in 2009 we sold more of our cutting-edge iCT scanners in China than in any other country. At the same time we are leveraging our supply chain capabilities in China, India and Brazil to enrich our portfolio of value-priced products and services adapted to local needs. We have now introduced more than 10 new healthcare systems — across several modalities — that we built locally and sell globally.

Localize care cycles and care settings

Emerging markets are set to become the chronic disease centers of the world. By 2015, China and India will be the largest cardiac markets, and by 2020 three-quarters of all cancer deaths will occur in emerging markets. Our focus is on cardiology, oncology and women’s health.

New business models

We are also developing new services and business models — including unique financial, clinical and turnkey solutions — to help local care providers address the specific and often complex healthcare challenges in their markets.

Investing in the future

Our new imaging systems campus in Suzhou, which will manufacture our value range CT and MR systems, reflects Philips’ commitment to gain leadership in the imaging market, particularly in China. In India, we plan to set up a plant for the manufacture of cardiovascular and general X-Ray systems to cater to healthcare infrastructure needs of smaller hospitals and care providers in that country. And we will continue to leverage small local-for-local and local-for-global acquisition opportunities for supply chain, product portfolio and channel improvements.

Philips Annual Report 2009     17

Our Healthcare Solutions group helps care providers to meet the challenges of modern healthcare, thereby enabling better care at lower cost.

Today’s hospitals face multiple challenges. How to provide enhanced services without increasing the burden on a system that is already pushed to its limits? How to make care cost-effective at a time when the cost of healthcare is rising? How best to use resources and support front-line staff to reduce errors and improve quality of care?

Enabling quality healthcare

Philips Healthcare Solutions helps care providers manage the uncertainty surrounding the investments, resources and technology that are so vital to quality healthcare provision. Extending far beyond the supply of equipment, our portfolio of healthcare services includes finance solutions (MediGo), turnkey project solutions (MediQuip) and managed services (MediServ). These allow hospitals to plan, implement and manage their long-term technology provision with solutions tailored to their specific needs, thereby meeting clinical expectations and business and operational imperatives. This leaves them free to concentrate on what matters most — their patients.

Benefits all round

We help our clients increase their return on investment through cost reductions and improved process efficiencies. And by keeping them up to date with the most modern and innovative medical technologies, we help them achieve faster patient throughput, cutting cost per patient and reducing the number of units and staff required to service patients. For patients, this translates to shorter waiting times, fewer rescheduled appointments, faster examinations and less anxiety associated with the care process.

2009 highlights for Philips Healthcare Solutions included projects in Mexico, Spain, India, China, Japan and the Philippines.

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2 Our strategy in action 2.2 - 2.2

2.2 Home Healthcare

Overburdened hospitals with limited resources and challenging financial circumstances will be hard pressed to care effectively for the growing numbers of long-term patients with chronic ailments such as sleep disorders and heart disease. New solutions must be found.

Addressing the growing demographic need for care in the home, we provide both equipment — for sleep-disordered breathing, home respiratory care and respiratory drug delivery — and home monitoring services to support cardiac and elderly care.

We work together with our clinical provider customers to improve the quality of life for at-risk individuals in the home through better awareness, diagnosis, treatment, monitoring and management of their conditions.

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Lack of sleep has a significant impact on health and well-being and has been associated with diminished cognitive performance and vigilance, weight gain, insulin resistance (diabetes), increased incidence of heart attacks, decreased immune function and shorter life expectancy.

Drawing upon our home healthcare strengths and scientific knowledge in the field of sleep, as well as our access to professional channels, we are uniquely positioned to address this near-epidemic problem with scientifically based sleep management solutions.

New sleep therapy platform

Our Philips Respironics Sleep Therapy System uses advanced intelligence to deliver optimum care while making patient management easier for our provider customers. Customer input was a key element in the development of this new platform, delivering an even higher level of sophistication in sleep therapy for Obstructive Sleep Apnea. Through advances in software algorithms, humidification management and the marriage of proven technologies, the Sleep Therapy System thinks for itself, carefully monitoring patients and recognizing when therapy needs are changing.

20     Philips Annual Report 2009

More and more patients require oxygen, ventilation or nebulization therapy at home. What better example of our health and well-being focus than simply helping them to breathe?

Chronic diseases account for 70% of all deaths in the US and consume 75% of US healthcare expenditure. Worldwide, they represent 60% of all deaths, and the percentage is growing as developing nations begin to develop greater incidences of ‘western’ diseases. In the home respiratory market there is an increased incidence of chronic diseases like COPD, asthma, etc., resulting in more patients requiring dedicated respiratory treatments at home.

Making life more livable

We enjoy market leadership in home respiratory care, including oxygen-generation products for the ambulatory patient, home ventilation and airway clearance devices. Solutions like our new Trilogy100 portable at-home life-support ventilator are designed to be simple to use and live with, as well as providing clinically effective therapy. Patients who use them often experience greater freedom, mobility and independence in their daily lives.

When developing the Trilogy100 ventilator, we focused on areas for clinicians and caregivers that are most important in delivering home respiratory care — ease of use, versatility and portability. The integration of the three makes Trilogy100 a significant advancement in home respiratory care.

Philips Annual Report 2009     21

With demand for care outgrowing the number of healthcare practitioners, we are partnering in innovation to help patients better manage their health at home.

Globally, fewer care professionals are having to handle more patients, in less time and at a lower cost. In 2009, Philips and Achmea Health, the Netherlands’ largest healthcare insurer, signed a five-year agreement to cooperate on the development of innovative care solutions that will enable chronic disease sufferers to manage their health at home, reducing the need for hospital stays.

Insight-based solutions

“The insights of patients and healthcare professionals captured by Achmea Health are an important tool for us in our efforts to develop solutions that genuinely meet people’s needs,” commented Walter van Kuijen, General Manager Home Monitoring, Philips Healthcare.

“This will not only benefit patients: by reducing the number of hospital stays and shortening those that do take place, the burden on the healthcare system can also be reduced. In the long term we believe that this approach will enable us to reduce the costs of health insurance for our customers,” added Roelof Konterman, Chairman of the Board of Management of Achmea Health.

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2 Our strategy in action 2.3 - 2.3

2.3 Healthy Life & Personal Care

Philips Annual Report 2009     23

With Sonicare For Kids, we are driving growth in our Oral Healthcare business while helping youngsters toward a lifetime of good oral health.

It’s a daily challenge for parents everywhere — how do you make sure your children clean their teeth properly? We all know it’s essential that children develop effective brushing habits early. So, to help meet this goal, we have launched Sonicare For Kids.

A true case of “sense and simplicity"

“In developing Philips Sonicare For Kids, we combined our patented sonic technology with kid-friendly features to create a toothbrush that delivers maximum effectiveness for children at every age, whether they can brush by themselves or need parental help,” explains Vivienne Palmer, Marketing Manager, Philips Sonicare.

Sonicare For Kids is designed for children aged four to ten. It has an innovative ‘KidTimer’ that helps children reach the recommended two-minute brushing time by progressively increasing brushing time over 90 days. Plus, there are fun musical tones to indicate when it’s time to move to another section of the mouth. The ergonomic handle fits easily in a small hand and has two gripping locations so that the parent can hold the brush with the child to start with and then the child can hold it on its own for independent brushing.

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To make a difference in emerging markets we have to focus even more on understanding local needs and adapting our portfolio to address these needs.

Consumer needs, spending power and many other important factors are often different in the emerging markets than in the mature markets. And the emerging markets themselves differ from each other. Key to success is the ability to attract, develop and retain talent in our emerging markets, improving the transfer of know-how and increasing our speed in adapting to fast-moving market conditions.

Making cooking a joy — every day

Our Healthy Variety rice cooker demonstrates our commitment to addressing emerging market needs in a manner true to “sense and simplicity”. Fully run by local talent with a deep understanding of consumer needs, the proposition addresses the dilemma experienced by many consumers who are looking for inspiration and guidance when cooking.

The Healthy Variety rice cooker offers Chinese consumers not only cooking inspiration, but also a new user experience in navigation. It is the world’s first rice cooker to provide visual and audio step-by-step guidance, and bundles a nest of dedicated accessories for consumers to enjoy 30 different cooking experiences.

Philips Annual Report 2009     25

We are building a platform for technology-enabled personal health management — making it easier for people to get active, fit and healthy.

Modern life, with all its conveniences, also has its challenges. The technology that helps us fit more into a day also renders us less physically active. Collectively, as our activity level goes down and our weight up, there are dangerous consequences: cancer and heart disease, already the two most common and deadly diseases, are on the rise.

Most of us know we need to be more active, but how do we find the time, energy and motivation? Our DirectLife program could be the answer.

Innovative new approach to fitness

DirectLife is “sense and simplicity”, quite literally, “in action”. It combines smart technology with proven coaching methods to make our busy lifestyles more active. And it creates awareness on how active you are and helps you set balanced and achievable goals to increase your daily activity levels.

The discreet, wearable Activity Monitor records your daily movements and transfers the information to a webpage that keeps track of your progress against your longer-term goals. It motivates, gives feedback and provides support to help people make sustainable changes in their lifestyles. It focuses on making everyday life more active, rather than expecting people to have dedicated times at which they work out, play sports or exercise.

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2 Our strategy in action 2.4 - 2.4

2.4 Home Living & Interactive Living

Our ambition for the Home Living platform is to make Philips the true home brand for comfort, cooking and cleaning. It is all about making the home cozy and inviting, reflecting people’s identity and their preferred way of living.

Interactive Living is about sharing rich, pleasurable life experiences, free of any boundaries. In a complex world, this simplicity-led platform builds upon the implications and possibilities of the internet (r)evolution, with products and services blending to fulfill consumer needs.

Philips Annual Report 2009     27

The ground-breaking Cinema 21:9 television reflects our ambition to enable consumers to share pleasurable life experiences — free of any restrictions.

We don’t just watch films at the cinema, we experience them. The 21:9 aspect ratio of a cinema screen was developed to mimic our own peripheral vision, providing a totally immersive viewing experience. Such is its power that we frequently ‘lose ourselves’ when watching a film in a cinema.

Films fill a cinema screen. The images reach right out to the very limits of the screen and of our peripheral vision, enveloping us so completely in the action that we actively ‘feel’ along with the characters in front of us. This cannot be achieved on a conventional 16:9 widescreen TV at home without moving to a ‘letterbox’ view or losing the full scope of the original shot.

World premiere

With a 21:9 aspect ratio, our Cinema 21:9 — introduced at the 2009 IFA in Berlin — is the world’s first cinema-proportioned LCD TV. In combination with Ambilight technology, which accurately matches on-screen content to extend the picture beyond the confines of the screen, Cinema 21:9 is the first TV to deliver a genuine cinematic viewing experience to movie lovers in their own home.

Cinema 21:9 was named European Home Theater Innovation 2009-2010 (along with our BD9100 Blu-ray player) by the European Imaging and Sound Association.

28     Philips Annual Report 2009

Saeco acquisition allows Philips to expand in the high-growth, high-margin espresso machine market with a strong range of products.

In July 2009 we closed the acquisition of Saeco International Group S.p.A. of Italy, one of the world’s leading espresso machine makers. The espresso machine segment is generally regarded as the most valuable market space within the global coffee appliances market, as it typically achieves double-digit sales growth and profit margins.

The acquisition of Saeco has significantly boosted Philips’ coffee machines business, which already held a leading position in drip-filter and single-serve (Senseo) products, by adding an exciting and technologically advanced range of espresso-making solutions.

“Through this acquisition, we are creating a new, dynamic market leader in coffee machines with excellent growth prospects for the future,” commented Andrea Ragnetti, CEO of Philips Consumer Lifestyle. “The enjoyment of quality coffee, along with the pleasant and positive experience this can create for consumers, ties this acquisition to the very heart of Philips’ strategy to become the leading company in Health and Well-being. At the same time, the acquisition of Saeco is a real step forward in further positioning the Consumer Lifestyle sector for the future.”

Philips Annual Report 2009     29

Air treatment is a fast-growing market, especially in China. We aim to become the trusted brand for air purification.

A simple breath keeps us alive. Yet in this single breath, we take in more than just life-giving oxygen. In the course of a day, we may inhale up to two tablespoons of airborne particles, including allergens such as pollen and mold spores, pet dander and dust mite by-products. Figures released by the World Health Organization in 2007 claimed that in a number of countries — including several emerging economies — indoor air pollution is responsible for a total of 1.2 million deaths a year. As children breathe up to twice as much air as adults, they will inhale even higher levels of airborne contaminants and are even more exposed to acute respiratory conditions.

In emerging markets like China, people living in cities face the same indoor air pollution issues as anywhere else, but the expanding economy has created additional environmental challenges as a result of, for example, things like construction projects and increased car ownership.

Taking control of air quality

To combat this problem, we have developed the Philips Clean Air System, which removes all allergens, odors and gases, reducing exposure to particles that may cause allergic reactions. A simple solution families can rely on — filling the room with fresh, healthy air.

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2 Our strategy in action 2.5 - 2.5

2.5 Home Lighting

Home lighting is not only about ‘functional’ lighting — increasingly it is about the power of lighting to offer more ‘emotional’ scene-setting and ambience creation.

The growing importance of design is clearly noticeable in the interior of people’s homes. Customers increasingly want to be able to personalize their interiors in line with their needs. For example, bright white light for the home office and working spaces, more yellowish light for living rooms or bedrooms. For us, this means an increased focus on solutions that allow our customers to play with light, adapting it to their moods and wishes.

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In 2009 we introduced a complete range of energy-efficient LED light bulbs for the home — another milestone in establishing leadership in solid-state lighting.

September 2009 saw the start of the phase-out of incandescent lamps within the European Union, a move that will significantly reduce energy consumption and carbon emissions.

We have developed a host of alternative solutions that help consumers achieve the desired ambience in their home while still cutting their electricity usage. These include — for the first time — an extensive selection of attractive LED light bulbs. Consumers no longer have to compromise on style, quality and contemporary home ambience in order to save energy.

Elegance and efficiency

The uniqueness of our LED lamp range lies in the combination of beautifully designed lamps for standard-type fittings and the quality of lighting that people want in their homes, whether for functional or ambient lighting. And the lamps last up to 25 times longer than incandescent bulbs while consuming only a fraction of the energy! They pay for themselves in as little as 18 months — meanwhile, the contribution to the environment starts right away.

32     Philips Annual Report 2009

In China and India we are using new, customer-centric approaches to make sure we fully meet consumers’ lighting needs.

In China we have opened 80 Philips-branded lighting stores that uniquely address customer demand for energy-efficient, value-added lighting solutions for the home. The interior layout is based on rooms in the home rather than product categories. We also have 800 Home Lighting Centers within multi-branded lighting shops, extending distribution even further. Both formats will be further rolled out in 2010.

In order to reach the Indian consumer, we have developed the customer-centric concept of Light Lounges — experience centers that show Philips solutions in home decorative lighting and offer consumers a unique ‘see, touch and feel’ experience. In addition to these special Light Lounges in shopping malls, on high streets and at stand-alone locations, we are also partnering with retailers to create shop-in-shop sales outlets. By year-end 2009 we had 28 Light Lounges and 125 shop-in-shop outlets in 28 cities across India, with many more planned for 2010.

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In 2009 we unveiled the first-ever OLED-based interactive lighting concepts for both consumer and professional applications — the next phase in the solid-state lighting revolution.

An OLED (organic LED) is an extremely flat, lightweight panel. When switched off, it resembles a mirror. But as soon as current is applied, the whole panel lights up, dispersing a gentle glow of light. OLED technology is complementary to, not a replacement for, point-source LED technology and is now entering the stage that it can be turned into meaningful applications.

Beyond illumination

“Our OH...LED! concepts demonstrate a new light ambience, novel design possibilities and unique interactivity of light and human gesture,” says Rudy Provoost, CEO of Philips Lighting. “Economic and environmental concerns are driving all of us to make the move to cleaner, more energy-efficient solutions as quickly as we can. What’s particularly exciting is that LEDs and OLEDs offer the possibility to create new lighting designs and experiences that weren’t achievable in the past. With these new concepts Philips is adding a whole new dimension to lighting and the way it can enhance people’s lives.”

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2 Our strategy in action 2.6 - 2.6

2.6 Professional Lighting

The professional lighting market is currently undergoing a radical transformation, driven by the energy efficiency imperative, the solid-state lighting revolution and the increasing focus on application-based lighting solutions.

In our endeavor to meet the needs of our customers in the office, outdoor, industry, retail, hospitality, entertainment, healtcare and automotive segments, we are delivering new, responsible forms of lighting — customer-centric, simplicity-led innovations that enhance people’s experience of light.

Philips Annual Report 2009      35

In 2009, a number of acquisitions reinforced our transformation from a product champion to a provider of application-based solutions.

Over the past few years we have been taking careful and deliberate steps to position ourselves to deliver across the lighting value chain, especially in solid-state. We have not acquired these businesses simply to expand. We have set out to capture value in specific market segments by offering total solutions.

In 2009 we acquired lighting controls businesses Dynalite (Australia) and Teletrol Systems (US), allowing us to capitalize on the trend toward solid-state lighting and the demand for greater energy efficiency. One of the primary benefits of lighting controls is their ability to monitor and manage lighting (and connected) resources — enabling energy savings of around 50%. At the same time, they can enhance the ambience and comfort of an indoor or outdoor environment.

Architectural lighting

We also acquired Italy-based llti Luce, one of Europe’s leading LED design companies for architectural indoor lighting, and luminaire manufacturer Selecon of New Zealand, which makes specialist luminaires for the entertainment and high-performance architectural lighting market.

36     Philips Annual Report 2009

The growing demand for energy-efficient lighting presents an opportunity to expand our business with value-added services.

With growing awareness of the savings they can make by switching to energy-efficient lighting solutions — not to mention the increasing legislative pressure to do so — many customers want to replace their installed base. And with new construction and infrastructure limited by financing constraints, the renovation opportunity is tremendous. Philips can leverage this trend through new ways of going to market, such as energy services — ranging from energy audits to full-fledged consultancy and systems integration.

Philips Lightolier Energy Services Group’s comprehensive toolbox encompasses energy audits, upgrades and full turnkey solutions. Recent projects include the Weyerhaeuser King County Aquatic Center, Washington. The problems of high energy and maintenance costs, antiquated system appearance and inadequate light levels were resolved by changing to new Wide-Lite arena fixtures and a Lightolier controls package to utilize programmability and daylight harvesting. The result? Annual energy savings of over USD 60,000.

First-of-its-kind audit and upgrade program

As of 2009, the Energy Services Group is leading an unprecedented commercial energy audit and lighting upgrade program aimed at replacing inefficient lighting systems currently found in 85% of existing buildings. A key element of the program is a contractual guarantee that the energy audit will deliver measurable energy cost reduction, defined projected return on investment, and itemized economic payback, among other benefits.

“It’s important to note that we are improving the quality of light at the same time as helping a building become more energy-efficient,” said Zia Eftekhar, CEO, Philips Lightolier. “We know that reducing energy use and operational costs cannot come at the expense of properly illuminating the facility, and we believe we are in the unique position to deliver both efficiencies and quality of light.”

Philips Annual Report 2009     37

Outdoor lighting can play a vital role in enhancing the quality of urban life, making cities safer and more enjoyable to live in and visit.

Municipal authorities the world over are embracing the benefits that energy-efficient outdoor lighting has to offer in making their towns and cities more attractive and sustainable.

Of course, safety, security and orientation remain essential requirements. But now, with its flexibility and scope for dynamics, outdoor lighting can also be used to enliven, entertain and captivate — making it an extremely effective image builder for any city.

Grand Canal, Hangzhou

Running from Hangzhou in the south of China to Beijing in the north, the Grand Canal — 1,764 km in length — is the world’s longest man-made waterway. In combination with the natural hydrosphere, our floodlighting solutions create a beautiful, soft lighting ambience — icy blue in winter and blue-green in summer — impressing city residents and visitors alike. The Grand Canal lighting project has created an impactful landmark for Hangzhou, reinforcing the city’s identity as a whole.

The project came second at the 2009 city.people.light awards, an annual competition organized by the Lighting Urban Community International Association (LUCI) and Philips to reward projects which demonstrate the contribution lighting can make to the well-being of those visiting or living in a city or town.

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3 Our planet, our partners, our people 3 - 3.1

3 Our planet, our partners, our people

3.1 Climate change

Recognizing that energy efficiency is one essential answer to climate change, we have made a serious commitment to develop, promote and market more energy-efficient solutions for people in all markets.

We meet this challenge with our Green Products and Green Innovations and by inspiring individuals to make simple changes that can have profound results. We seek to facilitate new solutions to drive responsible energy practices and have long focused on the energy efficiency of our products and production processes.

Philips Annual Report 2009     39

To combat climate change, Philips calls upon mayors and municipal leaders to accelerate sustainability in infrastructure projects and building renovation.

We believe there is opportunity for a robust and comprehensive follow-up agreement to the Kyoto Treaty, with existing technology solutions offering an achievable path to reducing harmful emissions.

At the UN climate conference in New York, Philips CEO Gerard Kleisterlee said: “If an ambitious and effective global climate change program can be agreed, it will create the conditions for transformational change of our world economy and deliver the signals that companies need to speed up investment of billions of dollars in energy-efficient products, services, technologies and infrastructure such as LED lighting technology.”

We put weight behind this appeal by partnering with the World Green Building Council, committing to improving the energy efficiency of cities by 40% in the next 10 years.

Transforming the global market

Along with OSRAM we are participating in a global initiative to accelerate the uptake of low-energy light bulbs and efficient lighting systems by the Global Environment Facility and the United Nations Environment Programme.

The aim is to reduce the bills of electricity consumers in developing economies while delivering cuts in emissions of greenhouse gases. The goal is also to replace fuel-based lighting systems, such as kerosene, which are linked with health-hazardous indoor air pollution.

Breakthrough idea

We submitted the first entry in the US Department of Energy’s L Prize competition, which seeks high-quality, high-efficiency solid-state lighting products to replace the 60W incandescent light bulb. Named one of the “best inventions of 2009” by TIME Magazine, our LED bulb emits the same amount of light as its incandescent equivalent but uses less than 10W and lasts for 25,000 hours — or 25 times as long.

40     Philips Annual Report 2009

Philips is working to help the Indonesian government meet its goal to reduce global warming caused by excessive energy consumption.

With economic growth of 5-6% annually, Indonesia faces the challenge of fast-rising domestic energy demand with declining oil and gas production. Encouraging the simple switch to energy-efficient lighting can help ease that pressure, particularly in the country’s kampongs, villages with native houses.

Knowing that 60% of the people in the world’s fourth most populous nation live in kampongs where inefficient costly-to-operate traditional lighting is still used, we launched the Philips Bright Energy Saving Kampong program.

A helping hand

Our employees volunteer to explain the advantages of energy-efficient lighting: brighter light, enhanced safety, and reduced electricity bills and CO₂ emissions. During 2009 we educated villagers in 50 kampongs across Java, Sumatra, Kalimantan and Sulawesi to become Bright Energy Saving Kampongs. We also provided 1,000 energy-saving lamps for each village and 100 fluorescent lamps for public facilities like roads, schools and town halls, and offered support during the switchover.

Simply a success

Sukamaju village is just one kampong enjoying the benefits of this program. One of those benefits is that the new brighter lighting is safer for midwives who no longer have to travel in the dark. Plus, electricity bills dropped a hefty 33%.

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3 Our planet, our partners, our people 3.2 - 3.2

3.2 Our environmental footprint

The significant issues for our company — and our industry — in the environmental area continue to be energy efficiency, chemical content of products, and collection and recycling. We remain committed to giving our full attention to these challenges despite the economic downturn.

To reduce our ecological footprint we are maintaining our focus on overall environmental performance improvement, driven by our EcoVision III and EcoVision4 action programs.

Working with stakeholders we aim to share expertise and co-create innovative solutions that will make a difference to future generations.

42     Philips Annual Report 2009

Philips is dedicated to improving the ecological performance of its products and processes, setting stretch targets to meet these challenges.

With our EcoVision4 program we focus on energy and material efficiency over the entire product lifecycle, as well as in our daily operations. By 2012, Philips will generate 30% of total revenues from Green Products, have doubled investment in Green Innovations to a cumulative EUR 1 billion, and improved our operational energy efficiency by 25% and reduced CO₂ emissions by 25%, all compared with the base year 2007.

Green Products

In the third year of EcoVision4, Green Products already represent a significant share of our revenues in all the markets we serve. In fact Green Products grew 19% in 2009, during a time of declining overall sales. To raise the bar we are going beyond our original target, aiming for 50% in 2015.

We use the Philips Green logo to identify an increasing number of our Green Products. To further increase awareness and encourage individuals to make smart daily choices, we relaunched our asimpleswitch.com website.

Green Innovations

Because sustainability is a strategic innovation driver for Philips, we regularly review our research portfolio from a sustainability angle. A few examples: the world’s first OLED (Organic Light-Emitting Diode)-based, interactive lighting concepts for consumer and professional use; TVs that carry the EU Ecolabel; and our DoseWise radiation management that ensures optimal image quality while protecting people in X-ray environments.

Operational energy efficiency

2009 saw a step change in our efforts to reduce operational CO₂ emissions. In addition to continuing our systematic Energy Potential Scans, green lease car policy and global green IT program, new initiatives include a green purchasing policy and investigating options to buy and generate renewable energy.

Philips Annual Report 2009      43

We are committed to continuously improve the ecological performance of our products throughout their lifespan.

Knowing that our influence on the environmental performance of our products does not end at the time of sale, we are focused on effectively managing collection and recycling initiatives; exploring the concept of Cradle to Cradle, searching for innovative products, processes and services that (re)use materials effectively; and protecting human health and the environment through earlier identification and targeted phase-out of certain chemical substances.

Collection and recycling

We consider end-of-life during our EcoDesign process and are active in improving the environmental performance of collection and recycling compliance schemes, particularly in the EU. We expanded the voluntary collection and recycling services started in 2008 in India and Brazil, and also launched them in Argentina during 2009.

Philips supports the development of Waste Electrical and Electronic Equipment (WEEE) legislation that creates a level playing field based on fair and transparent financing mechanisms, and stimulates maximum collection and responsible recycling. We support the general concept of Individual Producer Responsibility and collaborate with stakeholders to find practical and fair solutions for its implementation. We also support legislative processes in countries like India and China, and we signed a Memorandum of Understanding in Thailand supporting WEEE legislation.

Cradle to Cradle

We launched our first Cradle to Cradle-inspired product, the Performer Energy Care vacuum cleaner, made partly from recycled and bio-based plastics.

Chemical content of products

To support EU REACH (Registration, Evaluation, Authorization and Restriction of Chemical) compliance, Philips participated in developing ‘Bill of Material (BOM) check’, an industry platform for suppliers to provide chemical information on the items they sell. BOMcheck also facilitates RoHS (Restriction of the use of certain Hazardous Substances in electrical and electronic equipment) compliance. By providing full material declaration, BOMcheck also supports EcoDesign and our phase-out of BFRs and PVC in consumer products. Following a pilot in 2009 we plan a full roll-out to suppliers in 2010.

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3 Our planet, our partners, our people 3.3 - 3.3

3.3 Partnerships for progress

World leaders from rich and poor countries alike, representing all United Nations member states, have pledged to achieve the eight Millennium Development Goals (MDGs) by the year 2015 — to significantly reduce poverty, illiteracy, inequity and disease in poor countries.

Our experience has shown that reaching these markets requires tailor-made solutions, a different approach to marketing and distribution, and multi-sector partnerships.

Taking into account the MDGs that relate to our expertise, we are focusing on projects that simply enhance life with light and simplify healthcare with a resolute focus on people’s needs.

Philips Annual Report 2009      45

Philips and Project HOPE are partnering to improve chronic disease management and patient outcomes in China, and reduce the burden on the country’s healthcare system.

Launched in Shanghai, Beijing, Guangzhou and Wuhan, this program is the first of its kind to target three chronic disease areas in China: heart disease, stroke and respiratory disease. It will link leading hospitals, community healthcare centers and home-based rehabilitative services in those four cities to enhance the care patients receive locally.

Chronic diseases are major causes of death and disability in China, and their related healthcare services account for a significant portion of total healthcare expenditures. On average, chronic disease patients visit doctors three times a year. About 55% of them choose municipal hospitals, which are relatively crowded, inconvenient and expensive, while only 25% choose community healthcare centers.

Sharing expertise, providing affordable care

“By participating in the program, we hope to transfer our clinical expertise to community healthcare centers and enhance communication between big hospitals, secondary hospitals and community healthcare centers,” says Professor Deng Weiwu, Chief Physician, Honorable Director, Institute of Ruijin Infectious and Respiratory Diseases, Shanghai Jiao Tong University School of Medicine.

“Under the new integrated model, patients will receive better education for self-care and risk factor reduction, in addition to easy access to more efficient and affordable care at community healthcare centers,” he explains.

Philips will provide funding and technical support to this three-year program, announced in June 2009. Project HOPE (Health Opportunities for People Everywhere) will bring to the team more than 50 years of experience in international public health and developing healthcare training programs.

46      Philips Annual Report 2009

We are making affordable, high-quality energy-efficient lighting available to people living without electricity.

To meet the basic need for lighting it is essential that governments and international institutions, NGOs and companies like Philips work together. That’s why we have a public-private partnership with the Dutch government. Known as SESA (Sustainable Energy Solutions for Africa), this initiative is designed to provide affordable, appropriate and sustainable energy-saving solutions to off-grid consumers in sub-Saharan Africa. We also support projects with NGOs like World Vision and Light Up The World (LUTW).

We presented our Uday Mini Solar lantern in September to the Dutch government as part of our SESA program. Developed in India, this robust product features enhanced battery and lamp life, fast battery charging and portability — all based on insights from rural consumers. The first SESA pilot was launched in Ghana and is slated for completion in early 2010, with roll-out to other sub-Saharan countries including Kenya, Uganda, Tanzania and Mali.

Lighting for literacy

World Vision distributed the Uday Mini as part of its initiative to provide girls in deprived outskirts of Bangalore, India, with access to education and literacy training — cornerstones of women’s development. And as the largest supporter of LUTW to date, we are helping provide solar lighting for learning and literacy programs in developing countries. LUTW helped us test solar reading solutions in Sierra Leone and Honduras, providing valuable input to develop an optimal lighting solution for education in off-grid areas. More than 10,000 people in total now have access to solar lighting thanks to the LUTW-Philips collaboration.

Philips Annual Report 2009      47

3 Our planet, our partners, our people 3.4 - 3.4

3.4 Supplier sustainability

We believe in asking our suppliers to share our commitment to sustainability. This includes sound environmental and ethical standards as well as providing working conditions for their employees that reflect both the Philips General Business Principles and the Electronic Industry Citizenship Coalition (EICC) Code of Conduct.

We continue to focus on the Philips Supplier Sustainability Involvement Program, closely collaborating with our supplier partners and relevant stakeholders to drive progress. It’s about improving conditions in the chain.

48      Philips Annual Report 2009

We believe achieving a sustainable supply base is about taking care of workers’ lives and the environment.

As a member company of the Electronic Industry Citizenship Coalition (EICC) our goal is to improve conditions in the electronics supply chain. To do just that, we conducted a record total of 858 supplier audits to identify and resolve issues in 2009.

Our approach

The Philips Supplier Sustainability Involvement Program is built on five pillars: setting out our requirements; building understanding and agreement; monitoring identified risk suppliers through audits using the EICC checklist (90% of initial audits are now conducted by specialized external auditing bodies); working with suppliers to resolve issues quickly; and engaging stakeholders.

To focus our efforts, we developed an approach based on a risk profile related to spend, country of production, business risk and type of supplier relationship. Where risk is identified we conduct awareness training with suppliers to prepare for third-party audits.

Corrective action plans are agreed upon within 30 days of an audit. Sustainability officers follow up monthly and can escalate the issue to the responsible purchasing manager as necessary to ensure zero-tolerance issues are resolved within three months. In this way the vast majority of zero-tolerances from 2009 have been resolved.

Continual conformance audits show that a multi-year approach to training and auditing is essential to ingrain sustainability in the supply chain.

New initiatives

Mirroring our supplier approach, we audited 12 internal sites in risk countries using the EICC checklist.

We selected 10 pilot products whose components are being analyzed to assess CO₂ emissions throughout the supply chain. Our goal is to identify large sources of emissions and implement abatement measures with our suppliers.

Philips Annual Report 2009      49

We seek constructive dialogue and the opportunity to engage with stakeholders in the supply chain and beyond.

This work is done in close cooperation with our suppliers, in bilateral meetings with investors and NGOs, and via projects with the Electronic Industry Citizenship Coalition (EICC). We also believe that cooperation with local governments is the way to truly achieve sustainable change.

Integrating new suppliers

With the acquisition of Partners in Lighting, 140 new suppliers were added to the Philips Supplier Sustainability Involvement Program. “To determine our audit schedule we built a plan around two priority axes — supplier size and commodity profile because some industries have more difficult working conditions than others,” explained Geert Tuytens, Chief Operations Officer, Philips Consumer Luminaires.

Frameway Glass in Guangdong China is a large Philips supplier and, as a glass factory, it faces safety challenges. “It was the first time we experienced an EICC audit” said Ryan Law, Project Engineer, Frameway Industries Limited. “We learned a lot about how we can improve our internal systems on labor, environment and safety. Our factory is now a safer, cleaner, more comfortable place to work for our 350 employees.”

Listening to investors

The Dutch Association of Investors for Sustainable Development (VBDO) awarded Philips with top sustainability scores in its 2009 Responsible Supply Chain Management Benchmark, ranking the company highest among the 40 large publicly listed Dutch companies benchmarked. Our scores have improved over the benchmark’s four years, reaching 90% in 2009, up substantially from 62% in 2006, 77% in 2007 and 85% in 2008.

“This is quite a performance, as Philips managed to even further improve their already high score,” said Giuseppe van der Helm, Executive Director VBDO.

Asked how the company could build on this momentum, the VBDO’s recommendations include rolling out similar auditing processes for second-tier suppliers, enhancing recycling possibilities in cooperation with suppliers, and improving energy efficiency in the supply chain.

50      Philips Annual Report 2009

3 Our planet, our partners, our people 3.5 - 3.5

3.5 Working at Philips

To become an even more market-driven and people-centric company we have been working to increase organizational effectiveness and simplify our structure.

We believe it is important that employees are engaged — that they feel part of a team, know their ideas and suggestions count, trust their manager, and value diverse perspectives.

It is crucial that we communicate properly among ourselves and that everyone is given full opportunity to use their individual talents. Leaders who do well in connecting our people with the long-term Philips ambitions are highly recognized.

Philips Annual Report 2009      51

Philips employees are engaged and have proven resilient during a year of restructuring and economic uncertainty.

We accelerated planned initiatives to increase organizational effectiveness and simplify our structure. Within Healthcare, for example, we focused on de-layering our management structure to increase speed of execution and lower operating costs.

In addition to less layers and costs, simplifying Philips means culture change. Reducing management layers brings people ‘on the shop floor’ closer to the Board of Management and gives managers a broader span of control. As a result they delegate more and focus more on getting the right people on their teams.

Unfortunately transformation necessitates job cuts. As a people-centric organization, we support those affected responsibly and with respect.

While engagement remains high, we aim higher

We seek honest feedback from our employees and are pleased that 91% of them participated in the 2009 Employee Engagement Survey. At 68 the overall engagement index is two points short of our high-performance target of 70. Although we aim higher, it is encouraging to see that our engagement levels remain high and have improved in several of our businesses.

The survey offers valuable insights into how we can improve. Teams talk about results in open, honest ‘Deep Dive’ sessions. In this way root causes of any issues arising from the survey are addressed and corrective actions put in place.

Diversity and inclusion continues to evolve

Diversity allows us to better understand our customers and meet their needs. While the percentage of female executives across our company has remained stable at 10%, we continue to focus on achieving our goal of increasing that number to 15% by 2012.

Because we recognize it is vital to have local staff to organize around customers and markets, we will grow the number of executives with BRIC (Brazil, Russia, India, China) nationality.

Philips Pride, our network for gays, lesbians and gay-friendly colleagues, has grown to over 150 members, mainly based in the Netherlands and US.

52      Philips Annual Report 2009

We are strengthening the alignment between individual objectives and overall company goals, and emphasizing the importance of how we work.

Given today’s challenging economic climate, it’s more important than ever that we keep working to achieve our aim of becoming a people-focused, market-driven company with a strong, performance-oriented culture.

To make this a reality, we are unleashing a One Philips mentality, inspiring leaders to strive for results not just in their own business or function, but for Philips as a whole.

We also are encouraging a way of working that’s much more in line with the four Philips Values — Delight customers, Deliver great results, Depend on each other, Develop people — which summarize the behavior we think is vital to our success as a company.

Changing how we manage performance

We are changing the way we evaluate and reward our people. To emphasize how important it is to live the values in everything we do, with ‘Leading to Win’, our employees are assessed not just on what they achieve (results) — but also on how they achieve it (behavior).

‘Leading to Win’ is about aligning the way we set targets, manage and reward performance with our ambition to become a high-performance growth company.

Philips Annual Report 2009      53

3 Our planet, our partners, our people 3.6 - 3.6

3.6 Working in our communities

We at Philips have long been active in the communities where we live and work. Now we are taking this dedication to the next level with our first global social investment program, called SimplyHealthy@Schools.

Initiatives around the world bring “sense and simplicity” to people’s health and well-being, and simply enhance life with light. We enhance learning by upgrading school lighting, teach youngsters about nature and HIV/AIDS, support programs to fight global killers like cardiovascular diseases and cancer, and more.

By linking social investment initiatives with the scope of our business, we can make the most of our core competencies to make a difference in people’s lives.

54      Philips Annual Report 2009

Encouraging healthy, active lifestyles, we are proud to be a signature sponsor of the American Heart Association’s Start! Heart Walk.

There’s no question actions speak louder than words. That’s why we have taken an important step to reinforce our desire to be the leading company in Health and Well-being by sponsoring the American Heart Association’s largest multi-city event and fundraiser called the Start! Heart Walk.

Through a special website, employees created walking teams with colleagues to participate in a local Heart Walk in cities across the United States or virtually through our Philips Virtual Team. By taking part, over 1,900 employees found a great way to exercise and have fun with colleagues, while raising more than EUR 223,000 to support research, find answers and save lives.

Fighting a global killer

Cardiovascular diseases, which include heart disease and stroke, are the world’s leading cause of death, claiming more than 17 million lives annually, with over 864,000 of those in the US alone.

“Philips is helping our mission of fighting heart disease and stroke by providing support to this important cause so that more resources can be made available to those looking for tips on how to get more physical activity into their day,” said Neil Meltzer, American Heart Association Board Chairman and President and Chief Operating Officer, Sinai Hospital of Baltimore.

Philips Annual Report 2009      55

Building on our heritage of working with the communities where we operate, we have launched our first global social investment program. It’s called SimplyHealthy@Schools.

With SimplyHealthy@Schools, Philips employees are going to classrooms around the world to upgrade lighting to enhance learning and energy saving. And they’re working with teachers to show children simple ways to improve their health and well-being with light, water, air, sleep, oral hygiene and exercise. All employees can volunteer to improve school lighting or help 9 to 12 year-olds become ‘Health Warriors’.

The program got off to a flying start in eight countries — India, Indonesia, Japan, Malaysia, Philippines, Russia, Singapore and Thailand — reaching about 5,000 students in 37 schools. It’s slated to expand globally in 2010.

Building on our work with students worldwide

Community involvement is not new to Philips. We have been running programs in all regions for many years.

In Brazil, for example, hundreds of employees have reached out to tens of thousands of students since 2001 when they began raising awareness about HIV/AIDS and teen pregnancy through the ‘Donate Life’ project. Our volunteers have taught young people about the environment since they started ‘Learning with Nature’ in 2002. Then, with the support of the São Paulo Municipal Secretariat of Education, we began ‘Speaking from the heart’ in 2006 to educate students about cardiovascular health. These are just a few of the many projects in Brazil where Philips is well-known for its social investments focusing on global issues.

Students who attended our Eco-Camps in Malaysia in 2009 learned about energy efficiency and how they can reduce their ‘Footprint in Nature’ by making simple changes in their everyday lives. The goal always is to plant the seed for a mindset that will preserve the environment for future generations.

56      Philips Annual Report 2009

4 Our group performance 4 - 4

4 Our group performance

“With little visibility on revenue in 2009, we focused on the things we could control. We took decisive action to generate cash and manage our costs in line with revenues. The effects of this became increasingly visible in our earnings and cash flow performance, especially in the second half of the year”

Pierre-Jean Sivignon, Chief Financial Officer

Philips Annual Report 2009      57

4 Our group performance 4.1 - 4.1.1

4.1 Management discussion and analysis

4.1.1		Management summary
		The year 2009
		In 2009, we saw continued deterioration of our markets. Despite these challenging economic conditions, we acted quickly and decisively to further accelerate restructuring programs and implement cost-saving measures, while still investing in acquisitions, marketing, and research and development, and continuing to focus on cash flow. Compared to 2008, EBIT, EBITA, Net income and Cash flow before financing activities improved.
		Full-year comparable sales were 11% below last year, which reflected sales declines in both mature and emerging markets. However, sales improved in the second half of the year with fourth-quarter comparable sales on par with the same quarter in 2008.
		Group sales were impacted by 17% lower comparable sales at Consumer Lifestyle due to the severe downturn in consumer markets and proactive portfolio pruning; Lighting sales declined 13%, with ongoing weakness in end-markets, particularly in the construction sector; Healthcare proved more resilient, with a sales decline limited to 3%, as strong growth in the emerging markets was more than offset by declines in the US.
		Despite difficult economic conditions, we continued to make selective acquisitions of high-margin, high-growth businesses in 2009, adding eight companies to our portfolio, benefiting all three operating sectors and resulting in a cash outflow of EUR 294 million. Additionally, we divested the non-core businesses of Monitors and FIMI (medical display units).
		We sold our remaining stake in LG Display and Pace Micro Technology, generating EUR 704 million cash proceeds and a gain of EUR 117 million. The economic downturn resulted in a EUR 48 million non-cash impairment charge for NXP. However, following the recovery of the TPV Technology share price in 2009, the accumulated non-cash impairment charge recognized in 2008 was reversed by an amount of EUR 55 million.
		EBIT included EUR 450 million of restructuring charges and related asset impairments, EUR 101 million of acquisition-related charges, and EUR 48 million of product recall charges at Consumer Lifestyle, partly offset by a EUR 131 million curtailment gain for retiree medical benefit plans, a EUR 103 million tax benefit mainly related to a deferred tax asset in Lumileds, previously not recognized, and EUR 57 million net insurance recoveries.
		Despite lower sales, EBITA improved from EUR 744 million in 2008 to EUR 1,050 million, despite the severe decline in sales. The increase was driven by fixed cost reductions, lower restructuring and acquisition-related charges, portfolio changes and strict cost control.
		We generated cash flows from operating activities of EUR 1,545 million, or 6.7% of sales, as we continued our focus on stringent working capital management.

Key data
in millions of euros unless otherwise stated

		2007				2008				2009
Sales			26,793				26,385				23,189
EBITA1)			2,094				744				1,050
as a % of sales			7.8				2.8				4.5
EBIT			1,867				54				614
as a % of sales			7.0				0.2				2.6
Financial income and expenses			2,849				88				(166	)
Income tax expense			(582	)			(256	)			(100	)
Results of equity-accounted investees			884				19				76
Income (loss) from continuing operations			5,018				(95	)			424
Income (loss) from discontinued operations			(138	)			3				—
Net income (loss)			4,880				(92	)			424
Net income (loss):
Per common share — basic			4.49				(0.09	)			0.46
Per common share — diluted			4.43				(0.09	)			0.46
Net operating capital (NOC)1)			10,802				14,069				12,649
Cash flows before financing activities1)			5,452				(1,606	)			1,326
Employees (FTEs)			123,801				121,398				115,924
of which discontinued operations			5,703				—				—

58      Philips Annual Report 2009

4 Our group performance 4.1.2 - 4.1.3

4.1.2		Sales
		In percentage terms, the composition of sales growth in 2009, compared to 2008, is presented in the table below.
		Sales growth composition 2009 versus 2008 in %

		comparable				currency				consolidation				nominal
		growth				effects				changes				growth
Healthcare			(2.7	)			2.6				2.6				2.5
Consumer Lifestyle			(16.5	)			(0.7	)			(5.0	)			(22.2	)
Lighting			(12.6	)			1.0				0.5				(11.1	)
GM&S			(30.2	)			(0.1	)			(0.2	)			(30.5	)
Philips Group			(11.4	)			0.7				(1.4	)			(12.1	)

		Group sales amounted to EUR 23,189 million in 2009, a 12% decline compared to 2008. Adjusted for a favorable 1% currency effect and an unfavorable impact of portfolio changes, comparable sales were 11% below 2008. The decline in comparable sales was largely attributable to the challenging economic environment, particularly in the consumer markets and in North America.
		Consumer Lifestyle reported a 17% comparable sales decline largely due to weakened consumer markets, visible in both mature and emerging markets, and selective portfolio pruning, mainly the exit of certain markets and products, such as DVD recorders. Comparable sales declines were seen in all businesses except Health & Wellness.
		Sales at Lighting were 13% lower than in 2008, impacted by weakness in the commercial construction environment and automotive market. This resulted in year-on-year declines in all businesses.
		Healthcare sales declined 3% on a comparable basis, largely impacted by the economic recession and the uncertainty around healthcare reform in the US. Lower sales were visible at Healthcare Informatics, Clinical Care Systems, and Imaging Systems, partly tempered by moderate growth at Customer Services and Home Healthcare Solutions.
4.1.3		Earnings
		In 2009, Philips’ gross margin was EUR 8,079 million, or 34.8% of sales, compared to EUR 8,447 million, or 32.0% of sales, in 2008. Gross margin in 2009 included restructuring and acquisition-related charges of EUR 268 million and net asbestos-related recoveries of EUR 57 million. 2008 included EUR 360 million restructuring and acquisition-related charges and EUR 264 million of asbestos-related settlement charges. The improvement in 2009 was mainly driven by higher margins at Consumer Lifestyle, partly offset by declines at Lighting and Healthcare.
		Selling expenses decreased from EUR 5,518 million in 2008 to EUR 5,159 million in 2009. 2008 included EUR 215 million of restructuring and acquisition-related charges, compared to EUR 185 million in 2009. In relation to sales, selling expenses increased from 20.9% to 22.2%, largely due to lower sales levels. This percentage increase was mainly due to higher costs relative to sales at Consumer Lifestyle and Lighting, partly offset by Healthcare.
		General and administrative expenses (G&A expenses) amounted to EUR 734 million, a decrease of EUR 238 million compared to 2008, mainly due to a EUR 131 million curtailment gain for retiree medical benefit plans and lower restructuring charges in 2009. As a percentage of sales, G&A expenses decreased from 3.7% in 2008 to 3.2%, driven by the aforementioned items and lower costs in relation to sales at Consumer Lifestyle and Healthcare, partly offset by Lighting.
		Research and development costs declined from EUR 1,777 million in 2008 to EUR 1,631 million in 2009. 2008 included EUR 40 million of restructuring charges, compared to EUR 73 million in 2009. The decline in research and development spend was largely driven by the lower costs at Consumer Lifestyle, partly offset by higher costs at Healthcare and Lighting. As a percentage of sales, research and development costs increased from 6.7% to 7.0%, largely due to Lighting.
		The overview below shows sales, EBIT and EBITA according to the 2009 sector classifications.
		Sales, EBIT and EBITA 2009 in millions of euros unless otherwise stated

		sales				EBIT				%				EBITA1)				%
Healthcare			7,839				591				7.5				848				10.8
Consumer Lifestyle			8,467				321				3.8				339				4.0
Lighting			6,546				(16	)			(0.2	)			145				2.2
Group Management & Services			337				(282	)			—				(282	)			—
Philips Group			23,189				614				2.6				1,050				4.5

Philips Annual Report 2009      59

4      Our group performance     4.1.3 - 4.1.5

Sales, EBIT and EBITA 2008 in millions of euros unless otherwise stated

		sales				EBIT				%				EBITA1)				%
Healthcare			7,649				621				8.1				839				11.0
Consumer Lifestyle			10,889				110				1.0				126				1.2
Lighting			7,362				24				0.3				480				6.5
Group Management & Services			485				(701	)			—				(701	)			—
Philips Group			26,385				54				0.2				744				2.8

		In 2009, EBIT increased by EUR 560 million compared to 2008, to EUR 614 million, or 2.6% of sales. 2009 included EUR 450 million of restructuring charges, EUR 101 million of acquisition-related charges, and a EUR 131 million gain related to curtailment for retiree medical benefit plans. EBIT in 2008 included a EUR 301 million non-cash goodwill impairment charge mainly related to Lumileds. EBIT and EBITA in 2008 were both impacted by a EUR 264 million asbestos-related settlement charge, EUR 541 million of restructuring charges and EUR 131 million of acquisition-related charges.
		Amortization of intangibles, excluding software and capitalized product development, amounted to EUR 436 million, an increase of EUR 47 million compared with EUR 389 million in 2008.
		EBITA increased from EUR 744 million in 2008 to EUR 1,050 million in 2009. Lower EBITA at Lighting was offset by improved earnings at Consumer Lifestyle, GM&S and Healthcare. As a percentage of sales, EBITA increased from 2.8% in 2008 to 4.5% in 2009.
		Healthcare
		Healthcare’s EBITA of EUR 848 million was EUR 9 million higher than in 2008 and included EUR 42 million of restructuring charges and EUR 64 million of acquisition-related charges. EBITA in 2008 included EUR 63 million of restructuring charges, EUR 90 million of acquisition-related charges and a EUR 45 million gain on the sale of Philips Speech Recognition Services. As a percentage of sales, EBITA declined from 11.0% in 2008 to 10.8% in 2009.
		Consumer Lifestyle
		Consumer Lifestyle’s EBITA increased from EUR 126 million in 2008 to EUR 339 million in 2009, mainly as result of lower non-manufacturing cost. The impact of lower sales on profitability was largely offset by an improved gross margin percentage in most businesses, notably Television, mainly driven by the divestment of Television in North America and a higher Ambilight share of sales. EBITA in 2008 included EUR 198 million of restructuring charges and a EUR 42 million gain on the sale of the Set-Top Boxes activity. 2009 was impacted by EUR 120 million of restructuring charges, EUR 48 million of product recall-related charges and EUR 16 million of acquisition-related charges. EBITA as a percentage of sales improved from 1.2% in 2008 to 4.0%, driven primarily by portfolio management and cost control.
		Lighting
		Lighting’s EBITA declined from EUR 480 million in 2008 to EUR 145 million. EBITA in 2008 included EUR 245 million of restructuring charges and EUR 41 million of acquisition-related and other charges. EBITA in 2009 was impacted by EUR 225 million of restructuring charges and EUR 22 million of acquisition-related charges. As a percentage of sales, EBITA declined from 6.5% in 2008 to 2.2% due to lower sales and margin pressures in most businesses.
		Group Management & Services
		The EBITA loss at Group Management & Services was EUR 282 million in 2009, compared to a loss of EUR 701 million in 2008. EBITA in 2008 included a EUR 264 million asbestos-related settlement charge, whereas 2009 was mainly impacted by a EUR 131 million gain related to curtailment for retiree medical benefit plans and EUR 57 million of net asbestos-related recoveries. Restructuring charges at Group Management & Services in 2009 amounted to EUR 63 million.
		For further information regarding the performance of the sectors, see chapter 5, Our sector performance, of this Annual Report.
4.1.4		Pensions
		The net periodic pension costs of defined-benefit pension plans amounted to a cost of EUR 3 million in 2009 compared to EUR 21 million credit in 2008, due to lower expected returns on lower assets in 2009. The defined-contribution pension cost amounted to EUR 107 million, EUR 11 million higher than in 2008, mainly due to a gradual shift from defined-benefit to defined-contribution pension plans. 2009 included a curtailment gain for retiree medical benefit plans totaling EUR 131 million. For further information, refer to note 18 in the Group financial statements.
4.1.5		Restructuring and impairment charges
		In 2009, EBIT included net charges totaling EUR 450 million for restructuring and related asset impairments. 2008 included EUR 541 million of restructuring and related asset impairment charges.

60     Philips Annual Report 2009

4     Our group performance     4.1.5 - 4.1.6

		In addition to the annual goodwill impairment tests for Philips, due to the economic circumstances trigger-based impairment tests were performed during the year, resulting in no goodwill impairments. For further information on sensitivity analysis, please refer to note 15 in the Group financial statements. In 2008 there were EUR 301 million of non-cash goodwill impairment charges, mainly related to Lumileds.
		Restructuring and related charges in millions of euros

		2007				2008				2009
Restructuring charges per sector:
Healthcare			1				63				42
Consumer Lifestyle			7				198				120
Lighting			24				245				225
GM&S			5				35				63
			37				541				450
Cost breakdown of restructuring charges:
Personnel lay-off costs			35				374				399
Release of provision			(5	)			(2	)			(81	)
Restructuring-related asset impairment			4				116				84
Other restructuring-related costs			3				53				48	1)
			37				541				450

		The most significant restructuring projects in 2009 related to Lighting and Consumer Lifestyle. Restructuring projects at Lighting aimed at further increasing organizational effectiveness, and centered on Lamps. The largest restructuring projects were in the Netherlands, Belgium, Poland and various locations in the US. Consumer Lifestyle restructuring projects focused on Television (primarily in Belgium and France), Peripherals & Accessories (mainly Technology & Development in the Netherlands) and Domestic Appliances (mainly Singapore and China). Healthcare initiated various restructuring projects aimed at reduction of the fixed cost structure, mainly impacting Imaging Systems (the Netherlands), Home Healthcare Solutions and Clinical Care Systems (various locations in the US).
		Other restructuring projects focused on reducing the fixed cost structure of Corporate Research Technologies, Philips Information Technology, Philips Design, and Corporate Overheads within Group Management & Services.
		In 2009, restructuring provisions of EUR 81 million were released, mainly as a result of placing employees in different positions within the company and the release of a restructuring provision in conjunction with the sale of Hoffmeister (Lighting).
		In 2008, the most significant restructuring projects related to Lighting, Consumer Lifestyle and Healthcare. Restructuring projects at Lighting mainly centered on Lamps (principally North America and Poland), Professional Luminaires (notably Germany), Special Lighting Applications (primarily the Netherlands and Belgium), Automotive (mainly Korea and Germany) and Lighting Electronics (primarily the Netherlands).
		Consumer Lifestyle restructuring projects in 2008 concentrated on the integration of the former Domestic Appliances and Consumer Electronics businesses, the exit of Television from North America, restructuring of the Television operation in Juarez (Mexico) and restructuring charges taken to re-align the European industrial footprint. Healthcare restructuring costs spanned many locations, including sites in Hamburg (Germany), Helsinki (Finland) and Andover (US). For further information on restructuring, please refer to note 17 in the Group financial statements.
4.1.6  Financial income and expenses
		A breakdown of the Financial income and expenses is shown in the table below.
		Financial income and expenses in millions of euros

		2007				2008				2009
Interest expense (net)			(43	)			(105	)			(252	)
Sale of securities			2,804				1,406				126
Value adjustments on securities			(36	)			(1,148	)			(58	)
Other			124				(65	)			18
			2,849				88				(166	)

The net interest expense in 2009 was EUR 147 million higher than in 2008, as a result of lower interest income due to lower interest rates applied to an average lower liquid asset position of the Group and higher interest costs associated with hedging.

Philips Annual Report 2009     61

4     Our group performance     4.1.6 - 4.1.8

Sale of securities in millions of euros

		2007				2008				2009
Gain on sale of TSMC shares			2,783				1,205				—
Gain on sale of LG Display shares			—				158				69
Gain on sale of D&M shares			—				20				—
Gain on sale of Nuance shares			31				—				—
Loss on sale of JDS Uniphase shares			(10	)			—				—
Gain on sale of Pace shares			—				—				48
Others			—				23				9
			2,804				1,406				126

		In 2009, income from the sale of securities totaled EUR 126 million. This included a EUR 69 million gain from the sale of remaining shares in LG Display, and a EUR 48 million gain from the sale of remaining shares in Pace Micro Technology. These gains were partially offset by impairment charges amounting to EUR 58 million, mainly from shareholdings in NXP. Other financial income in 2009 primarily consisted of a EUR 19 million gain related to the revaluation of the convertible bonds received from TPV Technology and CBAY, and dividend income totaling EUR 16 million, EUR 12 million of which related to holdings in LG Display. Other financial expenses included EUR 15 million accretion expenses mainly associated with discounted asbestos provisions.
		Value adjustments on securities in millions of euros

		2007				2008				2009
NXP			—				(599	)			(48	)
LG Display			—				(448	)			—
TPO Display			—				(71	)			—
Pace Micro Technology			—				(30	)			—
Prime Technology			—				—				(6	)
JDS Uniphase			(36	)			—				—
Other			—				—				(4	)
			(36	)			(1,148	)			(58	)

		2008 included a gain of EUR 1,406 million, mainly on the sale of shares in TSMC, LG Display and D&M. 2008 also included EUR 23 million dividend from TSMC. These were partly offset by EUR 1,148 million non-cash impairment losses at NXP, LG Display, and Pace Micro Technology. Additionally, 2008 included a EUR 37 million loss related to the revaluation of the TPV Technology convertible bond.
		For further information, refer to note 4 in the Group financial statements.
4.1.7		Income taxes
		Income taxes amounted to EUR 100 million, compared to EUR 256 million in 2008.
		The tax burden in 2009 corresponded to an effective tax rate of 22.3% on pre-tax income, compared to 180% in 2008. The 2009 effective tax rate was impacted by EUR 103 million of net tax benefits, mainly the recognition of a deferred tax asset for Lumileds previously not recognized, various non-deductible value adjustments, and a number of tax settlements. The 2008 effective tax rate was affected by non-deductible impairment and value adjustments, increased valuation allowances, higher provisions for uncertain tax positions and foreign withholding taxes for which a credit could not be realized. These were partially offset by non-taxable gains resulting from the sale of securities.
		For 2010, the effective tax rate excluding non-taxable items is expected to be between 27% and 29%. For further information, please refer to note 5in the Group financial statements.
4.1.8		Results of equity-accounted investees
		The results related to equity-accounted investees increased from EUR 19 million in 2008 to EUR 76 million in 2009.
		Results of equity-accounted investees in millions of euros

		2007				2008				2009
Company’s participation in income (loss)			246				81				23
Results on sale of shares			660				(2	)			—
Gains arising from dilution effects			—				12				—
(Reversal of) investment impairment and guarantee charges			(22	)			(72	)			53
			884				19				76

		Following recovery of the TPV share price in 2009, the accumulated value adjustment of the shareholding in TPV recognized in 2008 was reversed by EUR 55 million. The company’s participation in income of EUR 23 million was mainly attributable to results on Intertrust.
		During 2008, as a result of the reduction in both the Philips shareholding and the number of Philips board members, LG Display was accounted for as an available-for-sale financial asset and no longer as an equity-accounted investee.
		For further information, refer to note 6 in the Group financial statements.

62     Philips Annual Report 2009

4     Our group performance     4.1.9 - 4.1.13

4.1.9		Minority interests
		The share of minority interests in the net income of the Group amounted to EUR 14 million in 2009. In 2008, a EUR 1 million net loss was attributable to minority interests.
4.1.10		Discontinued operations
		The results from discontinued operations in 2008 included a EUR 10 million net gain on the results of MedQuist and a net loss of EUR 7 million on the sales of Semiconductors.
		For further information, refer to note 1 in the Group financial statements.
4.1.11		Net income
		Income from continuing operations increased from a loss of EUR 95 million in 2008 to a profit of EUR 424 million. The improvement was largely driven by EUR 560 million higher EBIT, EUR 57 million higher earnings from equity-accounted investees and lower income tax expense, partly offset by higher costs in Financial income and expenses.
		Net income for the Group including discontinued operations amounted to a profit of EUR 424 million, or EUR 0.46 per common share, in 2009, compared to a loss of EUR 92 million, or 0.09 per common share, in 2008.
4.1.12		Acquisitions and divestments
		Despite the global recession, in 2009 Philips continued to invest in innovative, high-growth companies that are in line with our strategy to become the leading company in Health and Well-being. During the year, Philips acquired eight strategically-aligned companies, benefiting all three operating sectors, while divesting the unprofitable IT Displays business within Consumer Lifestyle and FIMI medical displays.
		In 2009, acquisitions resulted in integration and purchase-accounting charges totaling EUR 101 million: Healthcare EUR 63 million, Consumer Lifestyle EUR 16 million, and Lighting EUR 22 million.
		In 2008, acquisitions led to integration and purchase-accounting charges totaling EUR 130 million, mainly in Healthcare and Lighting.
		For further information, refer to note 2 in the Group financial statements.
		Acquisitions
		Within Healthcare, we acquired three key companies. In March, we acquired Meditronics, a manufacturer of general X-ray systems targeting the economy segment in India. In April, we added Traxtal to our portfolio, enabling Philips to become one of the leading healthcare solutions providers for image-guided procedures. InnerCool, a pioneer in the field of therapeautic hypothermia, was acquired in July, reinforcing our leadership position in the emergency care market by adding body temperature management solutions to our existing product offering in this field.
		Within Consumer Lifestyle, Philips acquired Saeco International Group S.p.A. of Italy, one of the world’s leading espresso machine makers, positioning us to achieve our goal of becoming a global leader in coffee machines.
		Within Lighting, Philips added four companies to its portfolio. Further strengthening our position to lead the global switch to energy-efficient lighting solutions, we acquired Dynalite in Australia and Teletrol Systems in the US. Additionally, we acquired llti Luce, one of Europe’s leading LED design companies for innovative architectural indoor lighting, and Selecon, a prominent global designer, manufacturer and distributor of professional theatrical and architectural lighting fixtures.
		Acquisitions in 2008 In 2008 we acquired a number of notable companies. Healthcare acquisitions included VISICU, Respironics, TOMCAT, Medel SpA, Dixtal Biomédica e Tecnologia, Shenzhen Goldway and Alpha X-Ray Technologies. Within Lighting, Philips completed the acquisition of luminaires company Genlyte, a leader in North American construction luminaires market.
		Divestments
		In 2009, Philips continued to transform the Television business from one based on scale to one based on innovation and differentiation by transferring the IT Displays business to TPV Technology Limited in a brand licensing agreement. Within Healthcare, Philips sold its shares in FIMI to Barco NV, in line with Philips’ strategy to divest non-core activities and focus on expanding its growth platforms.
		Divestments in 2008
		In 2008, Philips also sold several non-core business interests. These divestments included the sale of the Set-Top Boxes activities; the brand license agreement with respect to the North America television, audio and video businesses; the sale of Philips Speech Recognition Services (PSRS); and the divestment of High Tech Plastic-Optics; the sale of Philips’ approximate 70% ownership stake in MedQuist.

Philips Annual Report 2009     63

4.1.13		Performance by market cluster
		In 2009, sales declined 11% on a comparable basis, impacted by the global recession, with double-digit sales declines visible in both mature and emerging markets.
		The comparatively lower sales in mature markets were the result of lower sales in all three sectors. In Western Europe, the sharp sales decline was largely attributable to lower sales at Consumer Lifestyle, partly due to managed portfolio pruning, and in Lighting. A double-digit decline was visible in North America, with lower sales in all sectors, due to the recession and uncertainty surrounding the pending US Healthcare Reform Act.
		Sales in emerging markets declined 11%, largely impacted by a double-digit decline in Latin America (Consumer Lifestyle and Lighting) and a low single-digit decline in China as growth at Lighting and Healthcare was more than offset by lower sales at Consumer Lifestyle. Sharp declines were also visible in Russia, which were partly offset by slight growth in India and the Middle East.
		EBITA in mature markets improved by EUR 115 million compared to 2008 as lower EBITA in Western Europe was more than offset by higher EBITA in North America, mainly reflecting the effect of a EUR 264 million asbestos-related settlement charge in 2008. The EBITA decline in Western Europe was mainly attributable to lower sales at Consumer and Lifestyle. EBITA improved compared with 2008 in the emerging markets, mainly due to growth at Healthcare in Latin America and China, lower restructuring charges and a EUR 131 million curtailment gain for retiree medical benefit plans.
		EBITA per market cluster1,2) in millions of euros

		2007				2008				2009
Western Europe			1,169				283				94
North America			433				219				466
Other mature markets			63				14				71
Total mature markets			1,665				516				631
Emerging markets			429				228				419
			2,094				744				1,050

EBIT per market cluster1) in millions of euros

		2007				2008				2009
Western Europe			1,146				258				73
North America			233				(402	)			105
Other mature markets			63				14				63
Total mature markets			1,442				(130	)			241
Emerging markets			425				184				373
			1,867				54				614

4.1.14		Performance by key function
		Marketing
		Throughout 2009, Philips continued to deliver on its brand promise of “sense and simplicity”. Driving thought leadership in Health and Well-being, combined with a continued focus on Net Promoter Score (NPS) to improve customer experiences across all touchpoints, was central to Philips’ marketing strategy in 2009. As a result, the company moved up to 42nd place on the Interbrand ranking of the 100 best global brands. This progression is continued evidence that the promise of

64     Philips Annual Report 2009

4     Our group performance     4.1.14 - 4.1.14

		“sense and simplicity” resonates with stakeholders and customers. Since the launch of “sense and simplicity” five years ago, Philips’ brand value has increased 85%.
		Philips’ total 2009 marketing expenses declined nominally to EUR 804 million, but as percentage of sales remained broadly in line with 2008 levels. In 2009, Philips’ marketing strategy showed an increased focus on organizing around customers and markets. To that end, global investment was tailored more substantially to strategic markets.
		The corporate focus on thought leadership in Health and Well-being also extended to Philips’ online marketing strategies in 2009, where several new initiatives were launched. Within the Healthcare sector, Philips expanded its online presence via the launch of GetlnsideHealth.com, an e-service that delivers the latest news, views and updates on technology innovation in health and well-being.
		In support of its sustainability campaign, the company launched ASimpleSwitch.com to business stakeholders. This online platform promotes smart energy efficiency and consumption in the business and consumer space. The company also leveraged social media capabilities to drive marketing messaging and brand awareness via the launch of Philips.Live.com, an internal and external video platform that enables consumers, customers and employees to share short video clips on their experiences with Philips products and services.
		In 2010, Philips will continue to leverage online and social media to drive thought leadership in Health and Well-being. Greater emphasis will be placed on increasing our online presence in emerging and growth markets.
		Driving sustainable customer engagement in concert with our brand promise is essential to our company goals and aspirations. We have used the Net Promoter Score (NPS) since 2006 to drive our company’s efforts to improve customer experiences at all touchpoints. The implementation of this measure has confirmed that outstanding customer and consumer loyalty are critical to achieving growth. We continue to leverage NPS insights to drive customer centricity and direct our market strategy.
		Our NPS has continued to grow each year. In 2009, we achieved increased NPS leadership across our businesses and as a result 60% of our businesses currently have industry leadership positions. We noted strong performance in the emerging markets China and India. In more established markets such as the US and Germany improvements were also achieved. In 2010, we will continue to expand our coverage of NPS to include additional strategic markets and cross-sector business domains.
		Research & development
		Our Research & Development teams create innovative, meaningful products and solutions for customers — a critical driver of Philips’ competitiveness in its markets. By maintaining our substantial R&D investments in 2009, Philips has continued to expand its vast knowledge and intellectual property base. Early involvement of customers in new technologies, application and business concepts ensures deep insight into their needs — the foundation for our innovations. To better capitalize on opportunities in fast-growing emerging markets, Philips is in the process of reallocating EUR 250 million to innovation projects in high-growth market segments. In 2009, approximately one third of this reallocation was completed. Underlining our focus on market-driven innovation, we have created a Board function managing Markets and Innovation, incorporating the role of Chief Technology Officer and the responsibility for managing Corporate Technologies.

Philips Annual Report 2009     65

4     Our group performance     4.1.14 - 4.1.15

Research and development expenses per sector in millions of euros

		2007				2008				2009
Healthcare			594				672				679
Consumer Lifestyle			504				513				395
Lighting			282				345				351
GM&S			221				247				206
Philips Group			1,601				1,777				1,631

		In 2009, Philips’ investment in R&D activities amounted to EUR 1,631 million (7.0% of sales), compared with EUR 1,777 million (6.7% of sales) in 2008.
		Since the Incubator activities are now maturing and increasingly aligned with the growth plans of our individual sectors, the early-stage incubation costs, which were originally covered at Group Management & Services, are now allocated to the Research and Development costs of the respective sectors. R&D expenses for prior years have been reclassified to reflect the allocation of the Incubator costs to the business sectors. Healthcare R&D expenses increased slightly in 2009, reflecting our continued investments in emerging markets and home healthcare. Lighting’s expenses were broadly in line with 2008, although with a reduction in traditional lighting and an increase in solid-state lighting applications. At Consumer Lifestyle, we maintained R&D investment as a percentage of sales at the level of 2008, while reducing spend in mature areas like TV.
		The global recession affected demand for new product, and our new product sales — products introduced within the last year (for B2C products) or three years (for B2B products) — dropped from 58% of total sales in 2008 to 48% in 2009. Philips aims to maintain this ratio at around 50%, while at the same time focusing on the profitability of new products and reallocating innovation spend more towards new business creation.
		Supply management
		The Supply Management function has been designed to create value for Philips by leveraging the scale of the company, thereby creating a single point of management and accountability for our supply base and supply chain activities. It covers non-product-related purchasing through the dedicated shared service Philips General Purchasing, and bill-of-material purchasing leveraged for Philips via commodity teams working across the sectors.
		Our approach in turbulent markets
		The turbulent global economic climate made it essential to have in place proactive risk management and mitigation strategies aimed at ensuring continuity of supply and competitiveness of sourcing. Our initiatives included enhanced monitoring of the financial stability of the key supplier base and, where necessary, early intervention to reduce Philips’ exposure.
		Supply Management also assisted in managing the sourcing risk through a pro-active approach towards key and sole source suppliers.
		We have emphasized improving competitiveness through negotiation events, such as the “sooner & more” program, as well as improving cash flow through extended payment terms. Various value engineering activities were started in all sectors to help secure longer-term competitiveness.
		A number of projects were started in 2009 to re-define the Philips warehousing and distribution footprint as One Philips so as to provide better customer service at lower cost. The Supply Management organization in emerging countries has been strengthened further to support Philips’ ambition in these countries. In 2009, 47% of spend originated from low-cost countries.
		Our supplier network
		The Global Supplier Rating System (GSRS) was further deployed in 2009, providing structured measurement of supplier performance and rigorous tracking of improvement actions. GSRS covered over 85% of Philips’ total spend in 2009.
		In 2009, Philips continued to develop the Partners for Growth strategic supplier network, bringing together its top 36 suppliers to identify and exploit joint business opportunities with a focus on together coming out of the crisis stronger. This initiative accompanies our supplier sustainability initiative, which ensures mandatory auditing of all suppliers with spend above EUR 100,000 in risk areas. This involves tracking all supplier sustainability issues in risk areas and, where necessary, a highly accelerated resolution of identified issues.
4.1.15		Employment
		The total number of employees of the Philips Group was 115,924 at the end of 2009, compared to 121,398 at the end of 2008. Approximately 45% were employed in the Lighting sector, due to the still relatively strong vertical integration in this business. Some 30% were employed in the Healthcare sector and approximately 16% of the workforce was employed in the Consumer Lifestyle sector.

66     Philips Annual Report 2009

4     Our group performance     4.1.15 - 4.1.15

		The decrease in headcount in 2009 was mainly due to organizational right-sizing to align with the challenging economic conditions. The declines were partly offset by acquisitions, mainly at Consumer Lifestyle. Group Management & Services headcount was slightly higher than in 2008 due to a gradual shift of support functions such as IT from the operating sectors.
		Approximately 57% of Philips’ workforce is located in mature markets, and about 43% in emerging markets. In 2009, the number of employees in mature markets decreased, largely as a result of organizational right-sizing. Emerging markets also saw a reduction in employee numbers as the additional headcount from Healthcare acquisitions in China, India and Brazil was offset largely by the sale of the Television factory in Juarez (Mexico) and a headcount reduction due to lower factory production within Lighting.
		Despite the lower sales, employee productivity for the Group improved compared to 2008, driven by the positive effect of ongoing efficiency and transformation programs in all sectors.
		Employees per sector in FTEs at year-end

		2007				2008				2009
Healthcare			29,191				35,551				34,296
Consumer Lifestyle			23,280				17,145				18,389
Lighting			54,440				57,367				51,653
GM&S			11,187				11,335				11,586
			118,098				121,398				115,924
Discontinued operations			5,703				—				—
			123,801				121,398				115,924

Employees per market cluster in FTEs at year-end

		2007				2008				2009
Western Europe			39,747				36,966				35,496
North America			21,682				31,336				27,069
Other mature markets			2,347				2,119				3,095
Total mature markets			63,776				70,421				65,660
Emerging markets			54,322				50,977				50,264
			118,098				121,398				115,924
Discontinued operations			5,703				—				—
			123,801				121,398				115,924

Employment in FTEs

		2007				2008				2009
Position at beginning of year			121,732				123,801				121,398
Consolidation changes:
- new consolidations			6,654				12,673				2,432
- deconsolidations			(3,535	)			(1,571	)			(276	)
Comparable change			(1,050	)			(13,505	)			(7,630	)
Position at year-end			123,801				121,398				115,924
of which:
continuing operations			118,098				121,398				115,924
discontinued operations			5,703				—				—

Philips Annual Report 2009     67

4     Our group performance     4.2 - 4.2.1

4.2

Liquidity and capital resources

4.2.1		Cash flows provided by continuing operations
		Cash flows from operating activities
		Net cash from operating activities amounted to EUR 1,545 million in 2009, which was EUR 103 million lower than the operating cash flows generated in 2008. Higher earnings and lower working capital requirements in most sectors were more than offset by the final asbestos settlement payment.
		Condensed consolidated statements of cash flows for the years ended December 31, 2007, 2008 and 2009 are presented below:
		Condensed consolidated cash flow statements in millions of euros

		2007				2008				2009
Cash flows from operating activities:
Net income (loss) attributable to stockholders			4,873				(91	)			410
(Income) loss from discontinued operations			138				(3	)			—
Adjustments to reconcile net income to net cash provided by operating activities			(3,259	)			1,742				1,135
Net cash provided by operating activities			1,752				1,648				1,545
Net cash (used for) provided by investing activities			3,700				(3,254	)			(219	)
Cash flows before financing activities			5,452				(1,606	)			1,326
Net cash used for financing activities			(2,371	)			(3,575	)			(545	)
Cash (used for) provided by continuing operations			3,081				(5,181	)			781
Net cash (used for) discontinued operations			(115	)			(37	)			—
Effect of changes in exchange rates on cash and cash equivalents			(112	)			(39	)			(15	)
Total change in cash and cash equivalents			2,854				(5,257	)			766
Cash and cash equivalents at the beginning of year			6,023				8,877				3,620
Less cash and cash equivalents at the end of year — discontinued operations			108				—				—
Cash and cash equivalents at the end of year — continuing operations			8,769				3,620				4,386

Please refer to the consolidated statements of cash flows.

		Cash flows from investing activities
		Cash flows from investing activities resulted in a net outflow of EUR 219 million in 2009, due to EUR 682 million cash used for net capital expenditures, EUR 300 million used for acquisitions, and EUR 39 million outflow related to derivatives and securities, partly offset by EUR 802 million inflows received mostly from the sale of other non-current financial assets (mainly LG Display and Pace Micro Technology).
		2008 cash flows from investing activities resulted in a net outflow of EUR 3,254 million, due to EUR 5,316 million cash used for acquisitions and EUR 875 million used for net capital expenditures, partly offset by EUR 2,600 million of inflows received mainly from the sale of other non-current financial assets (mainly TSMC and LG Display) and EUR 337 million inflow related to derivatives.
		Net capital expenditures
		Net capital expenditures totaled EUR 682 million in 2009, EUR 193 million lower than in 2008, mainly due to lower investments across all sectors, notably Lighting.

68     Philips Annual Report 2009

4     Our group performance     4.2.1 - 4.2.4

		Acquisitions
		In 2009, a total of EUR 300 million cash was used for acquisitions, mainly for Saeco (EUR 171 million), Dynalite (EUR 31 million) and Traxtal (EUR 18 million).
		In 2008, a total of EUR 5,316 million cash was used for acquisitions, mainly for Respironics (EUR 3,196 million), Genlyte (EUR 1,894 million) and VISICU (EUR 198 million).
		Divestments and derivatives
		Cash proceeds of EUR 628 million and EUR 76 million were received from the final sale of stakes in LG Display and Pace Micro Technology respectively. Cash flows from derivatives and securities led to a net cash outflow of EUR 39 million.
		In 2008, cash proceeds of EUR 1,831 million and EUR 37 million were received from the final sale of stakes in TSMC and D&M Holdings respectively. Additionally, the sale of shares in LG Display generated EUR 670 million cash. Cash flows from derivatives led to a net cash inflow of EUR 337 million.
		Cash flows from financing activities
		Net cash used for financing activities in 2009 was EUR 545 million. Philips’ shareholders were paid EUR 647 million in the form of a dividend payment. The net impact of changes in debt was an increase of EUR 60 million, including the drawdown of a EUR 250 million loan, EUR 62 million increase from finance lease and bank loans, offset by repayments on short-term debts and other long-term debt amounting to EUR 252 million. Additionally, net cash inflows for share delivery totaled EUR 29 million.
		Net cash used for financing activities in 2008 was EUR 3,575 million. The impact of changes in debt was an increase of EUR 380 million, including the issuance of EUR 2,053 million of bonds, offset by bond repayments amounting to EUR 1,691 million. Also, Philips’ shareholders were paid EUR 720 million in the form of a dividend payment. Additionally, net cash outflows for share repurchases totaled EUR 3,257 million. This included a total of EUR 3,298 million related to the repurchases of shares for cancellation. The cash outflows were partially offset by a net cash inflow of EUR 41 million due to the exercise of stock options.
4.2.2		Cash flows from discontinued operations
		In 2008, EUR 37 million cash was used by discontinued operations, the majority of which related to tax payments in connection with the 2006 sale of Philips’ majority stake in the Semiconductors business.
4.2.3		Financing
		Consolidated balance sheet for the years 2009, 2008 and 2007 is presented below:
		Condensed consolidated balance sheet information in millions of euros

		2007				2008				2009
Intangible assets			6,635				11,757				11,523
Property, plant and equipment			3,194				3,496				3,252
Inventories			3,213				3,491				2,913
Receivables			9,251				7,922				7,481
Accounts payable and other liabilities			(7,817	)			(8,708	)			(8,636	)
Provisions			(3,055	)			(3,421	)			(2,980	)
Other non-current financial assets			3,183				1,331				691
Equity-accounted investees			1,817				293				281
Assets of discontinued operations			319				—				—
Liabilities of discontinued operations			(78	)			—				—
			16,662				16,161				14,525
Cash and cash equivalents			8,769				3,620				4,386
Debt			(3,563	)			(4,188	)			(4,267	)
Net cash (debt)			5,206				(568	)			119
Minority interests			(127	)			(49	)			(49	)
Stockholders’ equity			(21,741	)			(15,544	)			(14,595	)
			(16,662	)			(16,161	)			(14,525	)