Please note: this PDF contains only the pages highlighted in the list of contents below. The contents of this file are qualified in their entirety by reference to the printed version of the Philips Annual Report 2016. The information in this PDF has been derived from the audited financial statements 2016 of Koninklijke Philips N.V. Ernst & Young Accountants has issued unqualified auditors’ reports on these financial statements. Annual Report 2016 Analyst selection A focused leader in health technology Contents Grey text indicates parts not included in this selection from the Philips Annual Report 2016. 1 Message from the CEO 4 2 Group performance 7 2.1 Financial performance 7 2.2 Social performance - 2.3 Environmental performance - 2.4 Proposed distribution to shareholders 18 3 Segment performance 19 3.1 Personal Health businesses 21 3.2 Diagnosis & Treatment businesses 24 3.3 Connected Care & Health Informatics businesses 28 3.4 HealthTech Other 32 3.5 Lighting 36 3.6 Legacy Items 39 4 Reconciliation of non-GAAP information 40 5 Risk management 44 5.1 Our approach to risk management 44 5.2 Risk categories and factors 48 5.3 Strategic risks 48 5.4 Operational risks 50 5.5 Compliance risks 52 5.6 Financial risks 53 6 Management 55 7 Supervisory Board 56 8 Supervisory Board report - 9 Corporate governance - 2 This is the analyst selection from the Annual Report 2016 10 Group financial statements 57 11 Company financial statements 121 10.1 Management’s report on internal control - 11.1 Statements of income 122 10.2 Report of the independent auditor - 11.2 Balance sheets before appropriation of results 123 10.3 Independent auditors’ report on internal control - 11.3 Statement of changes in equity 124 over financial reporting 11.4 Notes 125 10.4 Consolidated statements of income 57 10.5 Consolidated statements of comprehensive 58 A Sales 125 income B Other business income 125 10.6 Consolidated balance sheets 59 C Sales and costs by nature 125 10.7 Consolidated statements of cash flows 61 D Financial income and expense 125 10.8 Consolidated statements of changes in equity 62 E Income tax 125 10.9 Notes 63 F Employees 125 G Intangible assets 125 General, segment and main countries H Financial fixed assets 125 information I Other financial assets 126 1 Significant accounting policies 63 J Receivables 126 2 Information by segment and main country 78 K Shareholders’ equity 126 3 Discontinued operations and other assets 80 L Debt 129 classified as held for sale M Other current liabilities 129 4 Acquisitions and divestments 81 N Contractual obligations and contingent 129 5 Interests in entities 82 liabilities not appearing in the balance sheet O Subsequent events 130 Notes related to the income statement P Appropriation of profits and profit 130 6 Income from operations 84 distributions 7 Financial income and expenses 85 8 Income taxes 85 11.5 Independent auditor’s report - 9 Earnings per share 86 12 Sustainability statements - Notes related to the balance sheet 10 Property, plant and equipment 87 13 Five-year overview 131 11 Goodwill 88 12 Intangible assets excluding goodwill 90 14 Investor Relations 134 13 Other financial assets 91 14.1 Key financials and dividend 134 14 Other assets 91 14.2 Share information 136 15 Inventories 92 14.3 Philips’ rating 138 16 Receivables 92 14.4 Performance in relation to market indices 138 17 Equity 92 14.5 Financial calendar 141 18 Debt 95 14.6 Investor contact 141 19 Provisions 97 20 Post-employment benefits 97 15 Definitions and abbreviations 143 21 Accrued liabilities 102 22 Other liabilities 102 16 Forward-looking statements and other 145 information Notes related to the cash flow statement 23 Cash flow statement supplementary 102 information 24 Contractual obligations 103 Other notes 25 Contingent assets and liabilities 104 26 Related-party transactions 106 27 Share-based compensation 107 28 Information on remuneration 110 29 Fair value of financial assets and liabilities 113 30 Details of treasury / other financial risks 116 31 Subsequent events 120 This is the analyst selection from the Annual Report 2016 3 Message from the CEO 1 1 Message from the CEO “ We have transformed Philips into a focused leader in health technology, delivering innovation to help people manage their health and to support care providers in delivering care effectively.” Frans van Houten, CEO Royal Philips Dear Stakeholder, In 2016, our products and services improved the lives of 2.1 I am very excited about the future of Philips as a billion people around the world. We also launched our new focused leader in health technology, innovating new five-year ‘Healthy people, sustainable planet’ program, approaches to global health challenges. 2016 was a supporting the aim of improving the lives of 3 billion people defining year for our company as we celebrated our per year by 2025 and becoming carbon-neutral in our 125th year as an innovation company and continued to operations by 2020. And at the World Economic Forum in advance our transformation. Our strategic focus is January 2017 the Chairman of our Supervisory Board and I already delivering results. signed the Compact for Responsive and Responsible Leadership, an initiative to promote and align the long-term We have successfully integrated our Volcano acquisition, sustainability of corporations and the long-term goals of achieving multiple quarters of double-digit growth, society, with an inclusive approach for all stakeholders. significant growth synergies with our image-guided therapy business, and cost synergies well beyond our Our overall 2016 performance gives me great confidence for original plans. the future as we build upon outstanding positions in the hospital and the home, expand our solutions capability and We separated the Lighting business, executing a complex continue to deliver on the promise of digitization and smart, project on time and below budget. In May we successfully connected care. listed Philips Lighting on the Amsterdam Euronext stock exchange, giving it the opportunity to build on its Transforming the delivery of care leadership position in the exciting Lighting industry. In its As consumers take a more active role in managing their first year as a stand-alone company, Philips Lighting health, we see professional healthcare and consumer health delivered strong LED sales growth and a significant converging. This provides a tremendous opportunity for increase in profitability, demonstrating the continued technology to play a role in data-enabled healthcare progress that the largest Lighting company in the industry delivery, also supporting the shift from hospital care and is making. In February 2017 we further reduced our stake acute reactive care to more proactive ambulatory and home in Philips Lighting’s issued and outstanding share capital care. to approximately 55%, in line with our stated aim to fully sell down our stake in Philips Lighting over the next several Through our market-leading propositions in Personal Health, years. Separately, in December we signed an agreement we have natural touchpoints with consumers to promote to sell the combined Lumileds and automotive Lighting healthy lifestyles, which are critical to good health. For businesses, effectively completing our portfolio example, our Dream Family is a comprehensive solution transformation. comprising sleep therapy devices, a comfortable mask, therapy management software and services to provide a I am pleased with the momentum in the overall business good night’s sleep for people with obstructive sleep apnea. performance of our HealthTech portfolio as our health And our connected Sonicare toothbrushes with smart sensor technology businesses posted 5% comparable sales technology help to improve oral healthcare through real- growth1) and a significant increase in profitability. At the time feedback and post-brush analytics. same time, we again stepped up our investments in quality, growth initiatives and innovation. In the hospital we are leading in integrated diagnostic solutions across various disciplines including radiology, Our solutions approach – where we combine suites of pathology and genomics, combining advanced imaging systems, smart devices, software and services to help our modalities and clinical decision support aided by artificial customers improve patient outcomes and productivity – intelligence and practice management software. continues to gain traction, as evidenced by 11% solutions revenue growth in the year and our winning 15 new long- We are leading in image-guided, minimally invasive term strategic partnerships around the world with an therapies which, compared with open surgery, have the aggregate value of approximately EUR 900 million. benefits of reduced patient trauma, shorter recovery times 4 This is the analyst selection from the Annual Report 2016 1) Non-GAAP financial measure. For the definition and reconciliation to the most directly comparable GAAP measure, refer to chapter 4, Reconciliation of non-GAAP information, of this Annual Report. Message from the CEO 1 and higher productivity. Our suites of interventional imaging are making progress in improving our customer excellence technologies and navigation software, combined with programs and in strengthening margins through productivity. interventional devices such as smart catheters, enable This is a continuation of our Accelerate! program, where there complex procedures in cardiology and oncology, for is considerable scope for ‘self-help’ by applying the Philips example. Our enterprise patient monitoring informatics Business System. We will drive higher productivity by solutions greatly reduce adverse events for patients and lowering the cost of goods, non-manufacturing cost and the lighten the workload for nurses. And we are increasing our cost of non-quality, while at the same time embedding the contribution to improve population health management with digital transformation in everything we do. Digitization is a data analytics and targeted programs to improve health great enabler of cutting-edge value propositions, as well as outcomes of patient cohorts with multiple co-morbidities driving higher levels of customer service, productivity and and to reduce costs.