2006 – 3

 

 

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

For the period commencing February 14 through April 18, 2006

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): o

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

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:

A. Westerlaken
Koninklijke Philips Electronics N.V.
Amstelplein 2
1096 BC Amsterdam – The Netherlands

 

 

This report comprises a copy of the Quarterly Report of the Philips Group for the three months ended March 31, 2006 and a copy of each of following press releases entitled:

—		“Philips opens unique facility showcasing solid-state lighting for City Beautification”, dated February 14, 2006;
—		“World’s First ‘Ambient Experience’ Cardiology Suite Opens at Catharina Hospital in Eindhoven, the Netherlands”, dated February 22, 2006;
—		“Philips to sell Contract Manufacturing Services France SAS (CMS) to Groupe Attel”, dated February 24, 2006;
—		“Philips completes EUR 1.5 billion share buyback program”, daed February 28, 2006;
—		“Turnover of Philips’ Green Flagship products doubles to 2 billion Euros”, dated March 6, 2006;
—		“Philips to acquire cardiology healthcare company Witt Biomedical corporation”, dated March 8, 2006;
—		“Philips announces divestment of Anteryon B.V.”, dated March 9, 2006;
—		“Philips and De Lage Landen Announce Medical Financing in Asia Pacific”, dated March 10, 2006;
—		“Philips invests EUR 30 million in its lighting plant in Aachen”, dated March 23, 2006;
—		“Philips closes acquisition of Lifeline Systems, Inc.”, dated March 23, 2006;

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 18^th day of April 2006.

KONINKLIJKE PHILIPS ELECTRONICS N.V.

/s/ G.J. Kleisterlee
(President,
Chairman of the Board of Management)

/s/ P.J. Sivignon
(Chief Financial Officer,
Member of the Board of Management)

Forward-looking statements

This document contains 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 (including, but not limited to, restructuring cost and cost savings), in particular the outlook paragraph in this report.

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. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, levels of consumer and business spending in major economies, changes in consumer tastes and preferences, changes in law, the performance of the financial markets, pension costs, the levels of marketing and promotional expenditures by Philips and its competitors, raw materials and employee costs, changes in exchange and interest rates (in particular changes in the euro and the US dollar can materially affect results), changes in tax rates and future business combinations, acquisitions or dispositions and the rate of technological changes, political and military developments in countries where Philips operates, the risk of a downturn in the semiconductor market, Philips’ ability to secure short-term profitability and invest in long-term growth, and industry consolidation.

Statements regarding market share, including as to Philips’ competitive position, contained in this document are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated.

Use of non-US GAAP information

In presenting and discussing the Philips Group’s financial position, operating results and cash flows, management uses certain non-US GAAP financial measures. These non-US GAAP financial measures should not be viewed in isolation as alternatives to the equivalent US GAAP measure(s) and should be used in conjunction with the most directly comparable US GAAP measure(s). A discussion of the non-US GAAP measures included in this document and a reconciliation of such measures to the most directly comparable US GAAP measure(s) are contained in this document.

Use of fair value measurements

In presenting the Philips Group’s financial position, fair values are used for the measurement of various items in accordance with the applicable accounting standards. These fair values are based on market prices, where available, and are obtained from sources that are deemed to be reliable. Users are cautioned that these values are subject to changes over time and are only valid at the balance sheet date. When a readily determinable market value does not exist, fair values are estimated using valuation models. The models that are used are appropriate for their purpose. They require management to make significant assumptions with respect to future developments which are inherently uncertain and may therefore deviate from actual developments. In certain cases, independent valuations are obtained to support management’s determination of fair values.

Report on the performance of the Philips Group

—		all amounts in millions of euros unless otherwise stated; data included are unaudited
—		financial reporting according to US GAAP unless otherwise stated
—		includes reclassification of MDS to discontinued operations
		Philips reports improved net income of EUR 160 million Sales increased 14% to EUR 7,374 million
		In the first quarter, Philips recorded net income of EUR 160 million (EUR 0.13 per share), compared with net income of EUR 117 million (EUR 0.09 per share) in the corresponding period of 2005. The increase was primarily attributable to improved performance of the main divisions, particularly Semiconductors and Lighting.
		Sales increased strongly to EUR 7,374 million, 14% above Q1 2005. Adjusted for the effects of currency movements and consolidation changes, comparable sales increased by 10%, driven by strong growth in all main divisions.
		EBIT amounted to EUR 335 million, compared to EUR 207 million in the same period of last year. The increase was largely driven by higher sales and improved business performance, particularly in the Semiconductors and Lighting divisions, and a EUR 30 million gain on the sale of the CryptoTec encryption business reported under Other Activities.
		Financial income and expenses resulted in an expense of EUR 23 million, an improvement of EUR 25 million compared to Q1 2005. This improvement mainly resulted from a EUR 20 million revaluation of the option on the convertible bond issued by TPV.
		Unconsolidated companies recorded a loss of EUR 36 million, compared to a profit of EUR 22 million in Q1 2005. In Q1 2005, income from TSMC of EUR 71 million was reported under results relating to unconsolidated companies. From 2006, a change in accounting treatment means that Philips no longer recognizes income from TSMC but rather will recognize a dividend, which will be reported in Q2 2006 under financial income and expense.
		Cash outflow from operating activities increased to EUR 867 million, compared to EUR 332 million in Q1 2005. The increase was entirely due to EUR 582 million additional funding for the UK pension fund. Inventories as a percentage of sales amounted to 12.3%, marginally higher than in Q1 2005.

Gerard Kleisterlee,
Philips’ President and CEO:

“We’re pleased that we are keeping our momentum, with strong growth and solid performance across all our main divisions. A strong customer focus, together with innovative products, helped expand our already strong position within healthcare, lifestyle and technology.

We also see that our recent acquisitions are starting to make a contribution to our top and bottom line. Demand for our medical IT solutions was strong in the first quarter, and Lumileds contributed to a continued good performance in Lighting. With the first acquisition in our Consumer Health & Wellness business announced in the first quarter, followed by an additional acquisition in our Medical Systems business, we are consistently building our portfolio to become increasingly geared to profitable growth.”

Philips Group

Highlights in the quarter

Net income
in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Sales			6,492				7,374
EBIT			207				335
as a % of sales			3.2				4.5
Financial income and expenses			(48	)			(23	)
Income taxes			(44	)			(91	)
Results unconsolidated companies			22				(36	)
Minority interests			(6	)			(25	)
Income from continuing operations			131				160
Discontinued operations			(14	)			—
Net income			117				160
Per common share — basic			0.09				0.13

		Net income
•		Net income amounted to EUR 160 million (EUR 0.13 per share), compared to EUR 117 million (EUR 0.09 per share) in Q1 2005. EBIT increased by EUR 128 million, driven by the Lighting and Semiconductors divisions and a EUR 30 million gain on the sale of the CryptoTec business. A fair-value gain of EUR 20 million was recognized for the revaluation of the option on the TPV convertible bond. The improvement in income before taxes was partly offset by the EUR 58 million decrease in results relating to unconsolidated companies. This decrease included charges of EUR 45 million mainly for the voluntary support of social plans for employees impacted by the bankruptcy of some LG.Philips Displays activities and a delay of income recognition to Q2 2006 following a change in the accounting treatment of TSMC.

Sales by sector

in millions of euros unless otherwise stated

										% change
		Q1				Q1								compa-
		2005				2006				nominal				rable
Medical Systems			1,285				1,469				14				8
DAP			427				496				16				10
CE			2,153				2,423				13				16
Lighting			1,128				1,345				19				8
Semiconductors			1,012				1,219				20				13
Other Activities			487				422				(13	)			(16	)
Philips Group			6,492				7,374				14				10

		Sales by sector
•		Nominal sales for the Group increased 14% compared to Q1 2005. Adjusted for a 6% upward effect of currency movements and a 2% downward effect of consolidation changes, comparable sales increased 10%.
•		Medical Systems’ growth was driven by Computed Tomography, Ultrasound, X-ray and Healthcare IT. At DAP, growth was mainly driven by Shaving & Beauty. At Consumer Electronics, Connected Displays and Peripherals & Accessories drove the sales growth. Lighting’s comparable growth was attributable to all businesses, most notably Lamps and Luminaires. Lumileds’ sales grew by 25% in the quarter in US dollar terms. Within Semiconductors, all businesses contributed to the sales growth, led by Automotive & Identification and MMS.

Sales per region

in millions of euros unless otherwise stated

										% change
		Q1				Q1								compa-
		2005				2006				nominal				rable
Europe/Africa			2,849				3,086				8				10
North America			1,645				1,845				12				6
Latin America			316				485				53				29
Asia Pacific			1,682				1,958				16				8
Philips Group			6,492				7,374				14				10

		Sales by region
•		In Europe/Africa, comparable sales increased in all main operating divisions. In North America, Semiconductors and Consumer Electronics were the main drivers of the growth. In Latin America, all main divisions saw double-digit increases in sales. In Asia Pacific, all divisions reported growth, led by Medical Systems and DAP.

EBIT

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Medical Systems			100				99
DAP			56				62
CE			46				58
Lighting			149				195
Semiconductors			14				89
Other Activities			(59	)			(67	)
Unallocated			(99	)			(101	)
Philips Group			207				335
as a % of sales			3.2				4.5

		Earnings before interest and tax (EBIT)
•		EBIT improved by EUR 128 million, or 1.3% of sales, compared to Q1 2005, mainly driven by the Semiconductors and Lighting divisions.
•		Medical Systems’ EBIT, excluding MedQuist, increased slightly despite a less favorable geographical sales mix, additional investments in R&D and ongoing charges relating to the acquisition of Stentor.
•		DAP’s EBIT improved thanks to higher sales, particularly in Shaving & Beauty. Excluding restructuring charges, EBIT improved by EUR 18 million compared to Q1 2005.
•		CE’s EBIT improved by 0.3% of sales to EUR 58 million. Licenses’ EBIT improved, driven by higher revenues from DVD patents.
•		The improvement in Lighting’s EBIT was due to higher sales and lower restructuring charges.
•		Semiconductors’ EBIT improved by EUR 75 million, which was attributable to higher sales, mainly in the MMS and Automotive & Identification businesses.
•		Other Activities’ EBIT declined due to Corporate Investments, which reported lower sales in a number of businesses. Corporate Technologies’ EBIT improved, thanks to the gain on the sale of the CryptoTec business.

Financial income and expenses

		Q1				Q1
in millions of euros		2005				2006
Interest expenses (net)			(48	)			(42	)
Other			—				19
Total			(48	)			(23	)

		Financial income and expenses
•		Net interest expenses amounted to EUR 42 million, compared to EUR 48 million in Q1 2005.
•		A fair-value gain of EUR 20 million was recognized for the revaluation of the option on the TPV convertible bond.

Results unconsolidated companies

		Q1				Q1
in millions of euros		2005				2006
LG.Philips LCD:       Operational			(34	)			15
LG.Philips Displays: Operational			2				—
Restructuring			(18	)			—
Others			72				(51	)
Total			22				(36	)

		Results relating to unconsolidated companies
•		Results relating to unconsolidated companies were EUR 58 million lower than in Q1 2005 due to the change in accounting treatment of TSMC and charges of EUR 45 million mainly relating to the voluntary support of social plans for employees impacted by the bankruptcy of some LG.Philips Displays activities.
•		LG.Philips LCD’s results were EUR 49 million better than in Q1 2005; sales improved by 20% year-over-year.
•		Q1 2005 results included EUR 71 million income from TSMC.

Cash balance

		Q1				Q1
in millions of euros		2005				2006
Beginning balance			4,349				5,293
Net cash from operating activities			(332	)			(867	)
Gross capital expenditures			(220	)			(274	)
Acquisitions/divestments			(74	)			(585	)
Other cash from investing activities			10				1
Changes in debt/other			(498	)			(180	)
Cash provided by discontinued operations			(25	)			1
Ending balance			3,210				3,389

		Cash balance
•		The cash position decreased by EUR 1,904 million in the quarter, compared to a decrease of EUR 1,139 million in Q1 2005.
•		Cash was primarily used for additional funding for the UK pension fund (EUR 582 million), the acquisition of Lifeline Systems (EUR 579 million) and the completion of the EUR 1.5 billion share repurchase program (EUR 414 million).

		Cash flows from operating activities
•		The higher cash outflow (EUR 535 million) compared to Q1 2005 was entirely due to the additional funding for the UK pension fund, which has been recognized as a prepayment in the balance sheet.
•		Excluding the additional pension funding, cash required for working capital declined compared to Q1 2005. Higher working capital requirements in Consumer Electronics and Lighting were more than compensated by improvements in the other divisions.

		Gross capital expenditures
•		Gross capital expenditures amounted to EUR 274 million, an increase of EUR 54 million compared to Q1 2005. Lighting, through investments in Lumileds, was the main driver behind the increase. Semiconductors’ expenditure was stable while Other Activities’ spend decreased.

		Inventories
•		Net inventories as a percentage of sales amounted to 12.3%, an increase of 0.3 percentage points compared to Q1 2005. The sequential increase in inventories was largely in line with the seasonal trend.

		Net debt and group equity
•		Net debt increased by EUR 2.1 billion during the quarter, primarily as a result of the EUR 1.6 billion cash required to fund the Lifeline acquisition, to provide additional funding for the UK pension fund and to complete the share repurchase program.
•		Group equity increased EUR 4.3 billion, mainly due to the change in accounting treatment of TSMC (from equity to fair- value accounting) and the net income of EUR 160 million. This was partly offset by a dividend charge of EUR 523 million and the repurchase of shares for an amount of EUR 414 million.

		Employment
•		The number of employees at the end of Q1 2006 was 161,498, of which 1,684 related to discontinued operations. Excluding the effects of consolidation and deconsolidation, the increase during the quarter was 2,055. This increase was mainly driven by higher levels of business activity at the Lighting division.

Medical Systems

Key data

		Q1				Q1
		2005				2006
Sales			1,285				1,469
Sales growth
% nominal			2				14
% comparable			5				8
EBIT			100				99
as a % of sales			7.8				6.7
Net operating capital (NOC)			3,058				3,362
Number of employees (FTEs)			30,756				30,696

		Business highlights
•		Subject to receipt of regulatory approval, Philips will acquire Witt Biomedical Corporation – the largest global independent supplier of hemodynamic monitoring and clinical reporting systems and ranked #1 in 2005 by vendor reviewer KLAS – for approximately USD 165 million.
•		Philips introduced the GEMINI PET/CT scanner, which is more than two times more sensitive and conducts exams 50% faster than conventional PET scanners.
•		Together with De Lage Landen International (a Rabobank subsidiary), Philips announced the set-up in Asia Pacific of Philips Medical Capital, offering financing to customers in the region.
•		The world’s first Ambient Experience Catheterization Lab opened at Catharina Hospital in Eindhoven, the Netherlands. The CathLab integrates lighting and consumer electronics to enhance workflow and reduce anxiety among heart patients.

		Financial performance
•		Order intake for equipment grew by 18% compared to Q1 2005 on a currency comparable basis, evident across almost all businesses and all major regions. Demand for iSite PACS continued to exceed expectations.
•		Sales showed year-on-year comparable growth of 8%, led by Computed Tomography, Ultrasound, X-ray and Healthcare Informatics.
•		All regions contributed to the 8% sales growth, especially Latin America (48%) and Asia Pacific (16%).
•		Excluding MedQuist, EBIT increased slightly compared to Q1 2005. Incremental sales-driven margin was largely offset by additional investments in R&D, increased selling expenses (partly driven by the establishment of a sales and service infrastructure in emerging markets) and additional charges relating to the acquisition of Stentor.

		Looking ahead
•		Following the anticipated completion in Q2 of the acquisition of Witt Biomedical Corporation in the core area of Cardiovascular Imaging, integration costs and the application of purchase accounting will result in a charge of approximately EUR 15 million in Q2.

•		As a first step towards optimizing the industrial blueprint and accelerating operational efficiencies, Medical Systems announced in March 2006 the transfer of Nuclear Medicine manufacturing activities from Milpitas, CA to Cleveland, OH, the diagnostic imaging manufacturing center.
•		To continue the strong growth of the past two years, Medical Systems has reorganized its global sales and service structure, enabling the division to operate more efficiently through shared back-offices and processes.

Domestic Appliances and Personal Care

Key data

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Sales			427				496
Sales growth
% nominal			9				16
% comparable			9				10
EBIT			56				62
as a % of sales			13.1				12.5
Net operating capital (NOC)			460				1,126
Number of employees (FTEs)			8,542				9,384

		Business highlights
•		Philips acquired North America’s leading personal emergency response company, Lifeline Systems, Inc., building up the Consumer Health & Wellness business.
•		Philips launched a branded rice cooker range in six Asian countries, including China, tapping into a category making up 60% of Asia’s food and beverage market.
•		In Western Europe, Philips launched a new model of the Satinelle Ice epilator – the first on the market to combine a built-in soothing ice pack and massage function.
•		Targeting the younger male shaving market, Philips kicked off its Male Shaving sponsorship of the Williams Formula 1 team in Bahrain with the first online game, letting spectators race against team drivers Mark Webber and Nico Rosberg.

		Financial performance
•		Comparable sales grew 10% compared to Q1 2005, driven by Shaving & Beauty and Domestic Appliances.
•		Adjusted for restructuring charges of EUR 12 million, EBIT increased EUR 18 million compared with Q1 2005; the improvement was visible across all businesses except Consumer Health & Wellness, which continued to invest in business development.
•		Net operating capital increased, mainly due to the consolidation of Lifeline Systems (EUR 662 million).

		Looking ahead
•		The focus will remain on maintaining the 15-16% EBIT margin and achieving the 7% comparable sales growth target for 2006, based on innovation, new product launches and emerging markets.
•		The acquisition of Lifeline Systems, completed in March 2006, will result in purchase accounting charges of approximately EUR 12 million in 2006.

Consumer Electronics

Key data

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Sales			2,153				2,423
Sales growth
% nominal			7				13
% comparable			7				16
EBIT			46				58
as a % of sales			2.1				2.4
Net operating capital (NOC)			108				78
Number of employees (FTEs)			16,725				14,932

		Business highlights
•		In North America, Wal-Mart and Sam’s Club named Philips “2005 Supplier of the Year” of home electronics.
•		With significant demand expected this year for high-definition home entertainment systems, Philips announced it is introducing Blu-ray consumer products in the 2nd half of 2006.
•		Philips was named “Official Big Screen Supplier” for the 2006 FIFA World CupTM. Matches from 11 host cities will be broadcast on Vidiwall screens at iconic sites like Berlin’s Brandenburg Gate and São Paulo’s Jockey Club.
•		Supporting the drive for “sense and simplicity”, Philips launched the 8-in-1 universal remote control. It makes using up to 8 devices easy, by only lighting up those buttons on the remote control that are needed to operate each specific device.

		Financial performance
•		Sales of EUR 2,423 million in Consumer Electronics represent 13% nominal and 16% comparable growth compared to Q1 2005. Strong sales growth in Connected Displays (driven by the accelerating transition from CRT to flat displays) and Peripherals & Accessories fueled most of the increase. From a geographical perspective, double-digit growth, both nominal and comparable, was visible in Europe, North and Latin America.
•		EBIT increased EUR 12 million, or 0.3% of sales, due to higher optical license income. Excluding the additional license income, EBIT was in line with Q1 2005.
•		Net operating capital was lower than in Q1 2005, underscoring the continued effectiveness of the division’s asset-light business model.

		Looking ahead
•		Q2 will see the introduction of an extensive new range of Monitors and FlatTVs, including models with the innovative 4-side Ambilight feature.
•		CE is expected to sustain its full-year profitability bandwidth of 4 – 4.5%.

Lighting

Key data

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Sales			1,128				1,345
Sales growth
% nominal			5				19
% comparable			6				8
EBIT			149				195
as a % of sales			13.2				14.5
Net operating capital (NOC)			1,617				2,665
Number of employees (FTEs)			44,429				46,701

		Business highlights
•		Philips announced a EUR 30 million investment to expand Xenon car lighting production capacity in Aachen, Germany. Xenon headlights are three times brighter and more energy-efficient than traditional halogen headlights.
•		Philips’ Lumileds lighting business introduced the LUXEON ® K2 range, which was warmly received by the market. The range is 15 to 30% brighter than leading white-light high-power LEDs.
•		At its Outdoor Lighting Application Center in Miribel, France, Philips unveiled the first city beautification lighting demonstration to include a range of solid-state lighting, showing customers how lighting can improve urban life.
•		The State of California chose Philips’ ALTO low-mercury T8 office lamps as the preferred lamp in its state purchasing contract, based on the product’s lower mercury content.

		Financial performance
•		Sales amounted to EUR 1,345 million, corresponding to 8% comparable growth compared to Q1 2005.
•		The comparable growth was seen across all businesses and, geographically, was strong in Europe, Asia Pacific and Latin America. Lumileds’ sales increased 25% in US dollar terms compared with Q1 2005. This business remains on track to deliver EBITA of 25% on a full-year basis.
•		EBIT was impacted by restructuring charges of EUR 16 million, a Lumileds purchase-accounting-related charge of EUR 14 million and a one-time real estate gain of EUR 11 million. In Q1 2005, restructuring charges amounted to EUR 27 million.
•		The increase in net operating capital and employees was mainly attributable to the consolidation of Lumileds in Q4 2005.

		Looking ahead
•		In Q2, a charge of EUR 8 million is expected for purchase-accounting-related amortization.
•		Strict cost control and optimization of the supply chain remain a priority.
•		Full-year 2006 sales are expected to show comparable growth of 6%.

Semiconductors

Key data

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Sales			1,012				1,219
Sales growth
% nominal			(3	)			20
% comparable			(2	)			13
EBIT			14				89
as a % of sales			1.4				7.3
Net operating capital (NOC)			2,649				2,326
Number of employees (FTEs)			34,856				35,472

		Business highlights
•		Philips’ venture T3G launched a 3G-videophone reference design for Samsung for the world’s first cell phone adapted to China’s newly developed TD-SCDMA network.
•		Philips won an order to provide identification chipsets for passive keyless entry in Renault’s Mégane line of cars. With passive keyless entry, drivers carrying security cards can touch the car to unlock it and start the motor by pushing a button.
•		Dell will start shipments of digital LCD TVs based on our integrated HD-ATSC System on Chip for the US market.
•		Since launching the NexperiaTM TV505 reference, Philips has shipped over one million LCD TV single-chips for this reference design.
•		Philips, IBM, Intel, SAP and Deutsche Post World Net launched RFID pilot projects to boost the efficiency of logistic solutions and global supply chains.

		Financial performance
•		Sales increased by 20% on a nominal basis and 13% on a comparable basis. All segments posted sales growth, led by the MMS and Automotive & Identification businesses. Sequentially, sales in US dollar terms declined by 7%, reflecting seasonality.
•		At the end of Q1 2006, the book-to-bill ratio improved to 1.12, compared to 0.96 at the end of Q4 2005. The total order book increased by 16%, mainly for delivery beyond the short term.
•		The utilization rate improved to 82%, compared to 75% in Q1 2005, but was down sequentially from 83% in Q4 2005.
•		EBIT amounted to EUR 89 million, compared to EUR 14 million in Q1 2005. The improvement was attributable to higher sales and better utilization, partially offset by costs of EUR 10 million related to the legal disentanglement of the division.
•		EBIT included charges of EUR 11 million related to restructuring in the Sales & Marketing organization.

		Looking ahead
•		Low-to-mid-single-digit sequential sales growth in US dollar terms is expected in Q2 2006.
•		In Q2, costs related to the set-up of a separate legal structure are expected to be slightly higher than in Q1.

Other Activities

Key data

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Sales			487				422
Sales growth
% nominal			(17	)			(13	)
% comparable			2				(16	)
EBIT Corporate Technologies			(70	)			(27	)
EBIT Corp. Investments and others			11				(40	)
Total EBIT			(59	)			(67	)
as a % of sales			(12.1	)			(15.9	)
Net operating capital (NOC)			282				361
Number of employees (FTEs)			20,584				20,158

		Business highlights
•		Philips Research developed the world’s first fully functional Radio Frequency Identification (RFID) tag based entirely on plastic electronics, offering the potential for lower-cost RFID tags to replace bar coding in packaging.
•		In India, Philips Research completed successful trials of a low-emissions woodstove. The stove uses heat from burning wood to power a fan that can reduce fuel consumption by 80%, smoke pollution by 90% and organic volatile emissions by 99%.
•		The Industrie Forum Design Hannover, one of Europe’s most renowned design centers, selected Philips’ Pedestrian LED Luminaire – designed by Philips Design – for the 2006 Gold iF product design award.

		Financial performance Corporate Technologies
•		The improvement in EBIT compared to Q1 2005 was primarily attributable to a EUR 30 million gain on the sale of CryptoTec and to increased license income.
		Financial performance Corp. Investments/others
•		Corporate Investments’ nominal sales declined by 16%. Due to the lower sales level, the ongoing businesses in Corporate Investments posted a loss of EUR 16 million, compared to a profit of EUR 5 million in Q1 2005.
•		Real Estate was negatively impacted by a valuation adjustment of EUR 9 million.

		Looking ahead
•		The divestment of Philips Business Communications was closed on April 3.
•		Philips intends to transfer its Optical Storage Data Drive business to Philips BenQ Digital Storage (PBDS). As a result of the transaction, the conditions for Philips to consolidate PBDS are no longer fulfilled. Philips will therefore de-consolidate PBDS upon completion, expected in Q2, which will reduce sales by approximately EUR 650 million annually.
•		The average quarterly EBIT of Other Activities in 2006 is expected to be similar to that reported for Q1.

Unallocated

Key data

in millions of euros unless otherwise stated

		Q1				Q1
		2005				2006
Corporate and regional overheads			(67	)			(76	)
Global brand campaign			(2	)			(3	)
Pensions/postretirement benefit costs			(30	)			(22	)
Total EBIT			(99	)			(101	)
Number of employees (FTEs)			2,505				2,471

		Business highlights
•		In its Sustainability Report 2005, Philips announced it introduced 50 new Green Flagship products in 2005, bringing the total number of Green Flagships to over 160 by the end of the year. Revenue from Green Flagship products also jumped 100%, to EUR 2 billion in 2005 from EUR 1 billion in 2004.
•		Philips presented its first Global Supplier Awards. Amtek Group – a metal, plastic and rubber supplier – won the “Best Overall” category; Sanmina-SCI Corporation – an electronics manufacturer – won the “Breakthrough” award for successful support in transferring manufacturing activities; and LG.Philips LCD won the “Growth Contribution” award for significantly increasing 2005 output to meet rising demand for flat-panel televisions.
•		In line with Philips’ goal to be more market-driven, Philips and Brussels-based Management Centre Europe will offer the Kotler Certified Marketing Manager program to Philips’ non-marketing employees. The course is exam-certified by the Kotler Marketing Group – a global marketing training firm.

		Financial performance
•		Corporate and regional overheads were higher than in Q1 2005, due in part to implementation costs related to compliance with section 404 of the Sarbanes-Oxley Act.
•		Pension costs/post-retirement benefit costs were lower than in Q1 2005, largely as a consequence of the abolition in 2006 of the post-retirement benefit plan in the Netherlands and lower pension costs, also in the Netherlands.

		Looking ahead
•		Brand campaign spend is expected to be at similar levels, and to follow a similar seasonal pattern, as in 2005.
•		The implementation costs related to Sarbanes Oxley compliance for full-year 2006 are expected to be approximately EUR 20 million.

Other information

		Other information
		From 2006 onwards, Philips’ interest in TSMC has been categorized as a financial asset rather than an equity investment. Consequently, Philips no longer accounts for its share in TSMC’s income under results relating to unconsolidated companies. Instead, Philips will recognize its annual dividend in the income statement. On February 14, 2006, the TSMC Board recommended the distribution of a TWD 2.5 cash dividend per common share and a 3% stock dividend (30 shares for every 1,000 owned), subject to the approval of the shareholders meeting on May 16, 2006. At the current exchange rate, this would amount to approximately EUR 430 million, net of tax, and will be recognized under financial income and expense in Q2 2006.

		Outlook
		The first quarter of 2006 reaffirmed that we are on track to achieve our medium-term sales growth and EBIT margin targets.
		We are pleased with the performance of Semiconductors. We are on schedule with the creation of a separate legal structure for the division, which we expect will be completed by the end of the third quarter. We remain confident that, in this way, we will create options to further strengthen the activity and maximize shareholder value.
		During the remainder of the year, we will continue to explore opportunities to add to organic growth through targeted acquisitions consistent with our portfolio realignment.
		We will continue to manage our balance sheet in line with our policy to maximize value creation and will further improve our cost structure by simplifying our organization and our way of working.
		Amsterdam, April 18, 2006
		Board of Management

Consolidated statements of income

all amounts in millions of euros unless otherwise stated
restated for the intended sale of the MDS business

		January to March
		2005				2006
Sales			6,492				7,374
Cost of sales			(4,381	)			(5,020	)
Gross margin			2,111				2,354
Selling expenses			(1,009	)			(1,165	)
General and administrative expenses			(302	)			(302	)
Research and development expenses			(624	)			(631	)
Other business income (expense)			31				79
Income from operations			207				335
Financial income and expenses			(48	)			(23	)
Income before taxes			159				312
Income tax expense			(44	)			(91	)
Income after taxes			115				221
Results relating to unconsolidated companies, including a year-to-date net dilution gain of EUR 7 million (2005: nil)			22				(36	)
Minority interests			(6	)			(25	)
Income from continuing operations			131				160
Discontinued operations			(14	)			—
Net income			117				160
Weighted average number of common shares outstanding (after deduction of treasury stock) during the period (in thousands):
•  basic			1,276,078				1,195,716
•  diluted			1,279,471				1,203,980
Net income per common share in euros:
•  basic			0.09				0.13
•  diluted			0.09				0.13
Ratios
Gross margin as a % of sales			32.5				31.9
Selling expenses as a % of sales			(15.5	)			(15.8	)
G&A expenses as a % of sales			(4.7	)			(4.1	)
R&D expenses as a % of sales			(9.6	)			(8.6	)
EBIT or Income from operations			207				335
as a % of sales			3.2				4.5
EBITA			237				377
as a % of sales			3.7				5.1

Consolidated balance sheets

all amounts in millions of euros unless otherwise stated
restated for the intended sale of the MDS business

		March 31,				December 31,				March 31,
		2005				2005				2006
Current assets:
Cash and cash equivalents			3,210				5,293				3,389
Receivables			4,445				5,155				4,948
Assets of discontinued operations			326				241				210
Inventories			3,523				3,480				3,858
Other current assets			1,013				937				1,246
Total current assets			12,517				15,106				13,651
Non-current assets:
Investments in unconsolidated companies			6,011				5,698				3,738
Other non-current financial assets			867				673				7,436
Non-current receivables			159				213				268
Other non-current assets			3,036				3,231				3,798
Property, plant and equipment			4,861				4,893				4,879
Intangible assets excluding goodwill			980				1,299				1,463
Goodwill			1,911				2,748				3,061
Total assets			30,342				33,861				38,294
Current liabilities:
Accounts and notes payable			2,970				3,856				3,418
Liabilities of discontinued operations			160				143				115
Accrued liabilities			3,160				3,632				3,565
Short-term provisions			830				869				1,005
Other current liabilities			609				708				766
Dividend payable			504				—				523
Short-term debt			889				1,167				1,453
Total current liabilities			9,122				10,375				10,845
Non-current liabilities:
Long-term debt			3,608				3,320				3,240
Long-term provisions			2,095				2,056				2,014
Other non-current liabilities			706				1,112				917
Total liabilities			15,531				16,863				17,016
Minority interests			305				332				347
Stockholders’ equity			14,506				16,666				20,931
Total liabilities and equity			30,342				33,861				38,294
Number of common shares outstanding (after deduction of treasury stock) at the end of period (in thousands)			1,261,725				1,201,358				1,188,852
Ratios
Stockholders’ equity per common share in euros			11.50				13.87				17.61
Inventories as a % of sales			12.0				11.4				12.3
Net debt : group equity			8:92				(5):105				6:94
Net operating capital			7,908				8,043				10,301
Employees at end of period of which discontinued operations 2,460 end March 2005, 1,780 end December 2005 and 1,684 end March 2006			160,857				159,226				161,498

Consolidated statements of cash flows ^*

all amounts in millions of euros
restated for the intended sale of the MDS business

						January to March
		2005				2006
Cash flows from operating activities:
Net income			117				160
Adjustments to reconcile income to net cash provided by operating activities:
(Income) loss from discontinued operations			14				—
Depreciation and amortization			356				342
Impairment of equity investments			—				3
Net gain on sale of assets			(17	)			(71	)
Unconsolidated companies (net of dividends received)			67				(11	)
Minority interests (net of dividends paid)			6				25
(Increase) decrease in working capital/other current assets			(788	)			(673	)
(Increase) decrease in non-current receivables/other assets			(89	)			(633	)
Increase (decrease) in provisions			(17	)			(1	)
Other items			19				(8	)
Net cash provided by (used for) operating activities			(332	)			(867	)
Cash flows from investing activities:
Purchase of intangible assets			(14	)			(26	)
Capital expenditures on property, plant and equipment			(220	)			(274	)
Proceeds from disposals of property, plant and equipment			37				27
Cash from (to) derivatives			(9	)			2
Proceeds from sale (purchase) of other non-current financial assets			(4	)			(2	)
Proceeds from sale (purchase) of businesses			(74	)			(585	)
Net cash provided by (used for) investing activities			(284	)			(858	)
Cash flows from financing activities:
Increase (decrease) in debt			(129	)			255
Treasury stock transactions			(414	)			(373	)
Dividends paid			—				—
Net cash provided by (used for) financing activities			(543	)			(118	)
Net cash provided by (used for) continuing operations			(1,159	)			(1,843	)
Effect of change in consolidations and exchange rates on cash positions			45				(62	)
Net cash provided by (used for ) discontinued operations 1)			(25	)			1
Cash and cash equivalents at beginning of period			4,349				5,293
Cash and cash equivalents at end of period			3,210				3,389

 

*		For a number of reasons, principally the effects of translation differences and consolidation changes, certain items in the statements of cash flows do not correspond to the differences between the balance sheet amounts for the respective items.
1)		cash provided by (used for) operating activities			(18	)			2
		cash provided by (used for) investing activities			(7	)			(1	)
		Ratio
		Cash flows before financing activities			(616	)			(1,725	)

Consolidated statement of changes in stockholders’ equity

all amounts in millions of euros

		January to March 2006
																		Accumulated other comprehensive income (loss)																Treasury shares at cost
																		Unrealized								Changes								To hedge
						Capital												gain (loss)								in fair								share-
						in												on				Additional				value of								based				To cover				Total
						excess								Currency				available-				minimum				cash								compen-				capital				stock
		Common				of par				Retained				translation				for-sale				pension				flow								sation				reduction				holders’
		stock				value				earnings				differences				securities				liability				hedges				Total				plans				program				equity
Balance as of December 31, 2005			263				82				21,710				(1,886	)			(10	)			(545	)			(29	)			(2,470	)			(1,333	)			(1,586	)			16,666
Net income											160																																160
Net current period change															172				4,566				202				19				4,959												4,959
Reclassifications into income															2												8				10												10
Total comprehensive income, net of tax											160				174				4,566				202				27				4,969												5,129
Dividend payable											(523	)																															(523	)
Purchase of treasury stock																																							(414	)			(414	)
Re-issuance of treasury stock							(63	)																											116								53
Share-based compensation plans							20																																				20
Balance as of March 31, 2006			263				39				21,347				(1,712	)			4,556				(343	)			(2	)			2,499				(1,217	)			(2,000	)			20,931

Sectors

all amounts in millions of euros unless otherwise stated
restated for the intended sale of the MDS business

Sales and income from operations

		January to March
		2005												2006
						Income from operations												Income from operations
		Sales				amount				as a % of				Sales				amount				as a % of
										sales												sales
Medical Systems			1,285				100				7.8				1,469				99				6.7
DAP			427				56				13.1				496				62				12.5
Consumer Electronics			2,153				46				2.1				2,423				58				2.4
Lighting			1,128				149				13.2				1,345				195				14.5
Semiconductors			1,012				14				1.4				1,219				89				7.3
Other Activities			487				(59	)			(12.1	)			422				(67	)			(15.9	)
Unallocated							(99	)											(101	)
Total			6,492				207				3.2				7,374				335				4.5

Sectors and main countries

all amounts in millions of euros
restated for the intended sale of the MDS business

Sales and total assets

		Sales								Total assets
		January to March								March 31,
		2005				2006				2005				2006
Medical Systems			1,285				1,469				4,932				5,461
DAP			427				496				835				1,616
Consumer Electronics			2,153				2,423				2,393				2,660
Lighting			1,128				1,345				2,576				3,783
Semiconductors			1,012				1,219				3,922				3,646
Other Activities			487				422				7,270				5,040
Unallocated											8,088				15,878
Total			6,492				7,374				30,016				38,084
Discontinued operations											326				210
Total											30,342				38,294

Sales and long-lived assets

		Sales								Long-lived assets *
		January to March								March 31,
		2005				2006				2005				2006
Netherlands			270				258				1,493				1,479
United States			1,558				1,725				3,002				4,873
Germany			519				592				556				535
France			398				395				190				165
United Kingdom			265				282				194				88
China			610				746				349				330
Other countries			2,872				3,376				1,968				1,933
Total			6,492				7,374				7,752				9,403

Pension costs

all amounts in millions of euros unless otherwise stated
restated for the intended sale of the MDS business

Net periodic pension costs of defined-benefit plans

		January-March
		Netherlands				Other
Service cost			53				37
Interest cost on the projected benefit obligation			134				102
Expected return on plan assets			(203	)			(98	)
Amortization of unrecognized transition obligation			—				—
Net actuarial (gain) loss recognized			(10	)			21
Amortization of prior service cost			(15	)			7
Settlement loss			—				—
Other			—				—
Net periodic cost (income)			(41	)			69

The net periodic pension costs in the first quarter of 2006 amounted to EUR 52 million, of which EUR 28 million related to defined-benefit plans (the Netherlands income of EUR 41 million, other countries cost of EUR 69 million) and EUR 24 million related to defined-contribution plans outside the Netherlands (the Netherlands cost of EUR 2 million, other countries cost of EUR 22 million).

Net periodic costs of postretirement benefits other than pensions

		January-March
		Netherlands				Other
Service cost			—				1
Interest cost on the accumulated postretirement benefit obligation			—				7
Amortization of unrecognized transition obligation			—				2
Net actuarial loss recognized			—				1
Curtailment gain			—				—
Net periodic cost (income)			—				11