2006 – 5

 

 

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): 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:

E.P. Coutinho
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 June 30, 2006 and a copy of each of following press releases entitled:

–		“Philips to acquire Intermagnetics, the world’s leading MRI components and accessories manufacturer”, dated June 15, 2006;
–		“Philips aims for minority position in Semiconductors in 2006”, dated June 21, 2006;
–		“Philips acquires Power Sentry, a leading U.S. electronics peripherals & accessories supplier”, dated July 3, 2006;
–		“Philips announces divestment of High Tech Plastics Tooling”, dated July 4, 2006;
–		“Philips acquires Bodine, a leading player in emergency lighting sector”, dated July 7, 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 17^th day of July 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
–		restated for the sale of the MDS business

Philips reports strong second quarter: sales up 10% year-on-year; net income of EUR 301 million
EBIT for the quarter increased to EUR 367 million

Sales increased strongly in the second quarter to EUR 7,601 million, 10% above Q2 2005. Adjusted for the effects of currency movements and consolidation changes, comparable sales increased by 11%, driven by strong growth in all operating divisions.

EBIT amounted to EUR 367 million, compared to EUR 158 million in the same period of last year. Medical Systems, Lighting and DAP all delivered strong increases in profitability, as did Semiconductors, benefiting from its business renewal program. In difficult market conditions, the EBIT of Consumer Electronics held up. Brand campaign costs were EUR 47 million lower than in Q2 2005 due to an amended seasonal spend pattern.

Financial income and expenses resulted in income of EUR 127 million, compared to an expense of EUR 57 million in Q2 2005. The improvement is due to the recognition of a TSMC cash dividend of EUR 223 million, net of tax.

Unconsolidated companies recorded a loss of EUR 105 million, EUR 85 million of which was attributable to LG.Philips LCD, compared to a profit of EUR 822 million in Q2 2005. Last year’s figure included a gain of EUR 753 million on the sale of NAVTEQ shares, as well as income of EUR 67 million from TSMC.

Net income of EUR 301 million (EUR 0.26 per share) compared to EUR 983 million (EUR 0.78 per share) in the corresponding period of 2005. Excluding last year’s non-taxable gain of EUR 753 million attributable to the sale of shares in NAVTEQ, net income grew over 30% in the quarter.

Cash inflow from operating activities increased to EUR 300 million, compared to EUR 52 million in Q2 2005, due to lower additional working capital requirements. Inventories as a percentage of sales amounted to 12.2%, a decrease of 1.2 percentage points compared to Q2 2005.

Gerard Kleisterlee,
Philips’ President and CEO:

“We had an excellent second quarter to round off a good first half year. Our transformation into a market-driven healthcare, lifestyle and technology company starts to show its merits, with strong profit contributions from Medical Systems, Lighting and DAP. Our CE business model is showing its robustness in difficult conditions for the industry and Semiconductors is delivering the expected benefits of its business renewal program. We continued to expand our presence in the growing healthcare market, announcing our intention to acquire Intermagnetics General Corporation and Avent Holdings, while disposing of more non-core activities during the quarter. Going forward, our increasingly focused business scope will serve as an asset.

Continuing our consistent focus on shareholder value, we are pleased to announce the launch of a further EUR 1.5 billion share repurchase program, to start in the third quarter.”

Philips Group

		Highlights in the quarter

Net income
in millions of euros unless otherwise stated

		Q2				Q2
		2005				2006
Sales			6,927				7,601
EBIT			158				367
as a % of sales			2.3				4.8
Financial income and expenses			(57	)			127
Income taxes			83				(98	)
Results unconsolidated companies			822				(105	)
Minority interests			(12	)			(19	)
Income from continuing operations			994				272
Discontinued operations			(11	)			29
Net income			983				301
Per common share — basic			0.78				0.26

     Net income

•		Net income amounted to EUR 301 million (EUR 0.26 per share), compared to EUR 983 million (EUR 0.78 per share) in the same period last year. The EUR 209 million increase in EBIT and the recognition of TSMC cash dividends of EUR 223 million only partly offset the EUR 927 million lower results from unconsolidated companies.
•		Q2 2005 included a EUR 753 million gain on the sale of shares in NAVTEQ and a EUR 109 million gain relating to a final agreement on prior-years tax settlements.
•		A gain of EUR 29 million was reported under discontinued operations on closure of the MDS transaction.

Sales by sector
in millions of euros unless otherwise stated

		Q2				Q2				% change
		2005				2006				nominal				comparable
Medical Systems			1,498				1,630				9				9
DAP			461				572				24				13
CE			2,259				2,484				10				17
Lighting			1,116				1,296				16				9
Semiconductors			1,088				1,221				12				12
Other Activities			505				398				(21	)			(10	)
Philips Group			6,927				7,601				10				11

     Sales by sector

•		Nominal sales for the Group grew by 10% compared to Q2 2005. Adjusted for the 1% downward effect of currency and consolidation changes, comparable growth was 11%. All divisions posted year-on-year growth except Other Activities.
•		Medical Systems posted 9% year-on-year comparable growth driven by the majority of its businesses. DAP grew in all businesses, reporting 13% year-on-year comparable growth. At CE, growth was driven by strong flat display sales in Connected Displays. At Lighting, comparable growth was evident across the division, notably at Automotive, Special Lighting & UHP and Lighting Electronics. Semiconductors’ 12% comparable growth was led by Automotive & Identification. Other Activities’ comparable sales decline was mainly due to Optical Storage.

Sales per region
in millions of euros unless otherwise stated

		Q2				Q2				% change
		2005				2006				nominal				comparable
Europe/Africa			2,757				3,085				12				16
North America			1,817				1,956				8				7
Latin America			461				552				20				16
Asia Pacific			1,892				2,008				6				6
Philips Group			6,927				7,601				10				11

     Sales by region

•

In Europe/Africa, comparable sales increased in all main divisions. In North America, Semiconductors, Lighting and DAP were the main drivers of the growth. Consumer Electronics led the sales increase in Latin America. In Asia Pacific, growth was most marked at Medical Systems, DAP and Lighting.

 3

EBIT

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Medical Systems			157				199
DAP			44				66
CE			62				45
Lighting			120				158
Semiconductors			27				120
Other Activities			(60	)			(57	)
Unallocated			(192	)			(164	)
Philips Group			158				367
as a % of sales			2.3				4.8

     Earnings before interest and tax (EBIT)

•		Earnings before interest and tax were EUR 367 million, compared to EUR 158 million in Q2 2005, the improvement being led by Medical Systems, Lighting and Semiconductors.
•		Medical Systems’ EBIT improved thanks to higher sales, particularly in Computed Tomography, Nuclear Medicine and X-ray, coupled with improved operational performance.
•		At DAP, EBIT improved in all main businesses, driven by sales growth and increased margins.
•		At CE, the impact of additional price pressure driven by market oversupply in flat displays was largely cushioned by the division’s business model, limiting the EBIT decline to EUR 17 million.
•		At Lighting, EBIT improved by EUR 38 million year-over-year, thanks to Lumileds and increased sales across all other businesses.
•		Semiconductors’ earnings improved strongly, on the back of higher sales in all businesses, increased capacity utilization and lower costs as a result of its business renewal program.
•		Other Activities’ EBIT was in line with Q2 2005 as improvements in Corporate Investments were offset by lower earnings in Corporate Technologies.
•		EBIT of Unallocated improved, primarily as a result of a EUR 47 million lower spend on the brand campaign. This reduction was caused by an amended seasonal spend pattern compared to 2005.

 4

Financial income and expenses

in millions of euros		Q2				Q2
		2005				2006
Interest expenses (net)			(57	)			(67	)
Other			—				194
Total			(57	)			127

     Financial income and expenses

•

Other financial income and expenses included a cash dividend from TSMC of EUR 223 million, net of tax, and a fair-value loss of EUR 32 million on the revaluation of the option on the TPV convertible bond, offsetting gains recorded in Q1 2006.

Results unconsolidated companies

in millions of euros		Q2				Q2
		2005				2006
TSMC			67				—
LG.Philips LCD			10				(85	)
NAVTEQ: gain on sale of shares			753				—
Others			(8	)			(20	)
Total			822				(105	)

     Results relating to unconsolidated companies

•

Results relating to unconsolidated companies decreased by EUR 927 million compared to Q2 2005, which was positively impacted by the EUR 753 million gain on the sale of shares in NAVTEQ. The remainder of the decrease was attributable to the change in accounting treatment of TSMC (result of EUR 67 million in Q2 2005) and the EUR 95 million lower income from LG.Philips LCD.

 5

Cash balance

in millions of euros		Q2				Q2
		2005				2006
Beginning balance			3,210				3,389
Net cash from operating activities			52				300
Gross capital expenditures			(219	)			(255	)
Acquisitions/divestments			920				(183	)
Other cash from investing activities			(11	)			(80	)
Dividend paid			(504	)			(523	)
Changes in debt/other			(426	)			(103	)
Cash provided by discontinued operations			(17	)			(7	)
Ending balance			3,005				2,538

     Cash balance

•		The cash balance decreased by EUR 851 million in Q2 2006, compared to a decrease of EUR 205 million in Q2 2005; the latter included EUR 932 million proceeds from the sale of NAVTEQ shares.
•		The main cash outflows in the quarter were EUR 523 million for dividend payments, EUR 118 million for share repurchases related to employee stock options and EUR 105 million for the purchase of Witt Biomedical Inc.

Cash flows from operating activities

     Cash flows from operating activities

•		Cash flows from operating activities improved by EUR 248 million compared to Q2 2005, driven by lower additional requirements for working capital.
•		The improvements in working capital centered on Consumer Electronics (mainly accounts receivable and inventories), DAP and Medical Systems.

Gross capital expenditures

     Gross capital expenditures

•

Gross capital expenditures were EUR 36 million higher than in Q2 2005, in line with expectations. The additional expenditure was evident in most divisions, notably further investments in Lamps and Lumileds within the Lighting division.

Inventories as a % of sales

     Inventories

•

Net inventories as a percentage of MAT sales decreased from 13.4% in Q2 2005 to 12.2%. The reduction was visible in DAP, Semiconductors, Medical Systems and CE, where the business model ensured tight inventory management despite market oversupply of flat displays.

Net debt and group equity

     Net debt and group equity

•		The net debt to group equity ratio remained in line with Q2 2005 but increased relative to Q1 2006 as a result of the cash outflow for acquisitions and dividends.
•		Group equity increased by EUR 4,302 million compared to Q2 2005, primarily due to the change in accounting treatment of TSMC. In the quarter, group equity decreased by EUR 964 million, mainly as a result of a decline in the value of Philips’ shareholding in TSMC.

Number of employees (FTEs)

     Employment

•

The number of employees at the end of Q2 2006 was 158,344 compared to 159,709 at the end of Q2 2005. The net decrease compared to Q2 2005 represents the effect of acquisitions, including Lumileds and Lifeline, offset by employee reductions related to the TPV deal as well as the ongoing divestment of businesses within Other Activities. The sequential reduction of 3,154 is mainly due to the divestment of several businesses within Corporate Investments, including MDS.

Medical Systems

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Sales			1,498				1,630
Sales growth
% nominal			5				9
% comparable			6				9
EBIT			157				199
as a % of sales			10.5				12.2
Net operating capital (NOC)			3,287				3,387
Number of employees (FTEs)			30,965				31,261

Sales

EBIT

     Business highlights

•

Philips announced plans to acquire Intermagnetics General Corporation for approximately EUR 1 billion. The company is a leading manufacturer of superconducting magnets and radio-frequency coils for magnetic resonance imaging systems.

•

In Singapore, Philips opened a EUR 12 million training facility for healthcare professionals and customers – the first of its kind in the region.

•

In the US, Philips signed 16 iSite PACS (picture archiving and communication systems) contracts, three of which were with leading healthcare organizations – Philadelphia’s Thomas Jefferson University Hospital, Seattle’s Group Health Cooperative, and New York’s Saint Vincent Catholic Medical Centers, doubling iSite’s order intake compared to Q1.

     Financial performance

•

Currency-comparable order intake for equipment grew by 2% compared to Q2 2005. Growth in Magnetic Resonance was partially offset by declines in Nuclear Medicine and Monitoring Systems. Healthcare Informatics grew strongly thanks to orders for iSite PACS.

•

Comparable sales grew 9% compared to Q2 2005, driven by almost all businesses. Double-digit growth was visible in Computed Tomography, Nuclear Medicine (higher sales in PET/CT) and X-ray (FD systems in CV X-ray). All regions contributed to the 9% growth, especially Asia Pacific (19%).

•

Witt Biomedical was fully consolidated as of April 2006, posting a loss of EUR 4 million due wholly to EUR 6 million purchase-accounting-related costs.

•

EBIT margin increased by 1.7% compared to Q2 2005 as a result of structural improvements in operating efficiencies, unusually strong sales in Computed Tomography and a release of provisions of approximately EUR 10 million.

     Looking ahead

•		High-single-digit comparable sales growth is expected in 2006.
•		Medical Systems expects that EBIT margin in the second half of the year will show an improvement compared to 2005.
•		For planning purposes, we are assuming that completion of the Intermagnetics acquisition will take place in Q4 2006. Purchase-accounting and one-time acquisition-related charges of approximately EUR 85 million are anticipated on completion.

Domestic Appliances and Personal Care

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Sales			461				572
Sales growth
% nominal			1				24
% comparable			1				13
EBIT			44				66
as a % of sales			9.5				11.5
Net operating capital (NOC)			511				1,071
Number of employees (FTEs)			8,510				9,515

Sales

EBIT

     Consumer Healthcare Solutions

•

To further develop its activities in the Consumer Health & Wellness space, Philips announced the set-up of a Consumer Healthcare Solutions business to target, through non-retail channels, the growing market for cost-effective monitoring, treatment and care outside the hospital environment. Retail channels will continue to be served by the Health & Wellness business.

     Business highlights

•

Philips announced it will buy Avent Holdings Ltd. — a baby and infant feeding products company — for GBP 460 million to further build up its health & wellness activities.

•

Leading lifestyle magazine Men’s Health named SmartTouch-XL “Best New Electric Razor” and Bodygroom “Best New Body Tool” as the first trimmer for ‘below-the-belt’ shaving.

•

In France, Philips launched the Wardrobe Care Solution, with a 3-in-1 ironing board, powerful iron, steamer and garment refresher. The product will be rolled out in Europe this fall.

•

Philips and Sara Lee launched their Senseo® coffee pod system in Shanghai, the first market introduction in China and Asia Pacific.

     Financial performance

•		Sales grew 13% on a comparable basis compared with Q2 2005, with the improvement visible across all businesses. On a regional basis, growth was strong in Central/Eastern Europe, China and Western Europe.
•		EBIT improved by EUR 22 million compared to Q2 2005; the improvement was visible in all businesses except Health & Wellness, which continued to invest in business development. EBITA improved by EUR 26 million compared to Q2 2005.
•		In Q2, the new Consumer Healthcare Solutions (CHS) business posted sales of EUR 40 million, the majority of which were attributable to Lifeline Systems. CHS posted a EUR 1 million loss, due to investments in innovation and amortization charges of EUR 6 million.
•		The increase in net operating capital and employee numbers is attributable to the acquisition of Lifeline in Q1.

     Looking ahead

•

The acquisition of Avent Holdings will be completed in Q3.

Consumer Electronics

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Sales			2,259				2,484
Sales growth
% nominal			(1	)			10
% comparable			(2	)			17
EBIT			62				45
as a % of sales			2.7				1.8
Net operating capital (NOC)			232				5
Number of employees (FTEs)			16,746				14,677

Sales

EBIT

     Business highlights

•

Marking the 10th year since Philips introduced flat TVs, its 2006 Ambilight Full Surround Cineos FlatTV launch demonstrates Philips’ ongoing leadership in TV innovation.

•

Philips acquired Power Sentry — a leading U.S. supplier to the growing and profitable peripherals & accessories market.

•

The range of Philips amBX™ PC peripherals, offering ambient light, sound and sensory effects for unrivalled gaming experiences, was named “Editors Choice” at the 2006 Electronic Entertainment Expo in Los Angeles.

•

In Europe, Philips launched its new Skype™ and Windows Live Messenger™ voice-over-internet cordless phones.

•

Philips launched its Personal Media Center, a portable entertainment device with recording and photo capabilities.

     Financial performance

•

Sales of EUR 2,484 million were up 10% on Q2 2005 in nominal terms, and 17% on a comparable basis. Growth was particularly visible in Connected Displays, driven by the accelerated transition from CRT to Flat TV. Peripherals and Accessories also posted a significant 19% comparable sales increase. Regionally, double-digit growth was evident in Europe and Latin America.

•

Against the background of oversupply and heavy price pressure in the flat displays market, the division posted EBIT of EUR 45 million, underscoring the effectiveness of its business model.

•

Net operating capital of EUR 5 million was EUR 227 million lower than Q2 2005 due to tight inventory management and further progress with the division’s outsourcing-driven asset reduction program.

     Looking ahead

•

Sales growth is expected to ease in Q3 as the speed of transition to Flat TV decelerates.

•

Margins are expected to remain under pressure as competitors and retailers clear their pipeline stock.

Lighting

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Sales			1,116				1,296
Sales growth
% nominal			3				16
% comparable			4				9
EBIT			120				158
as a % of sales			10.8				12.2
Net operating capital (NOC)			1,702				2,652
Number of employees (FTEs)			42,977				46,652

Sales

EBIT

     Business highlights

•

Philips entered the emergency lighting market by acquiring The Bodine Company — a U.S.-based lighting manufacturer.

•

For the 2006 FIFA World CupTM, Philips lit up the German government Reichstag building in Berlin and provided floodlighting at 8 of the 12 stadiums.

•

Philips and German company Novaled set a new lifetime and efficiency record for OLEDs (organic light-emitting diodes), developing a high-brightness white OLED lasting over 20,000 hours and emitting light equal to 1000 candles/m2.

•

At the Light + Building Fair in Frankfurt, Philips continued to shape the market in solid-state lighting, introducing a range of LED-based luminaires for applications ranging from city beautification and road lighting to shop and office lighting.

•

Marking Queen Elizabeth II’s 80th birthday, Philips created a permanent lighting installation for the facade of London’s Buckingham Palace, which included energy-efficient, compact LUXEON® LEDs lasting 25 years.

     Financial performance

•

Sales amounted to EUR 1,296 million, representing 9% comparable growth compared to Q2 2005. The Lumileds consolidation boosted nominal sales by a further 7%.

•

Sales were particularly buoyant in Asia Pacific, with 13% comparable growth.

•

All businesses grew above the market average, leading to market share gains. Driven by strong UHP growth, Automotive, Special Lighting & UHP posted 15% sales growth. Lumileds’ sales were 22% above the already high Q2 2005 level in USD terms, in line with the 25% comparable growth target for the full year.

•

The division recognized an ongoing amortization charge of EUR 8 million related to the acquisition of Lumileds.

•

The EBIT increase was driven by Lumileds and the higher level of sales.

     Looking ahead

•

Lumileds is well on track to meet its targets in terms of growth and profitability.

•

The division will continue to launch innovative products and to focus on emerging markets.

Semiconductors

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Sales			1,088				1,221
Sales growth
% nominal			(6	)			12
% comparable			(6	)			12
EBIT			27				120
as a % of sales			2.5				9.8
Net operating capital (NOC)			2,629				2,226
Number of employees (FTEs)			35,682				36,996

Sales

EBIT

     Business highlights

•

The French government selected Philips’ contactless SmartMX chips for its new electronic passports, bringing the total share of the world’s e-passports won by Philips to 80%.

•

Philips introduced the world’s first single-chip solution to combine immobilization and remote keyless entry functions. The chip is now being used in the new Honda Civic.

•

Philips, Nokia, RMV and Vodafone started the first commercial application of Near Field Communication for secure payment and ticketing on Hanau, Germany’s public transport system.

•

Haier, one of China’s top three handset manufacturers, selected Philips’ Ultra Low Cost Reference Phone platform based on the Nexperia cellular system solution 5128 to create a low-cost handset for mass production in China.

•

Dell selected the Nexperia TV810 semiconductor reference design for its 26-inch digital LCD HD TV. The design offers high picture quality and easy audio/video and PC hook-ups.

     Financial performance

•

Sales increased by 12% on both a nominal and a comparable basis compared to Q2 2005. Automotive & Identification, MMS and Home were the main contributors to the sales increase, while Mobile & Personal reported flat sales. Sequentially, sales increased by 5% in US dollar terms.

•

At the end of Q2, the book-to-bill ratio was 1.07, compared to 1.12 at the end of Q1. Total order book increased by 5%, mainly in Europe, compared to the end of Q1.

•

The utilization rate at the end of Q2 improved to 88%, compared to 77% in Q2 2005 and 82% in Q1 2006.

•

EBIT amounted to EUR 120 million, EUR 93 million above Q2 2005. The improvement was attributable to increased sales and cost effectiveness, the latter underpinned by the business renewal program.

•

The reduction in net operating capital was driven by ongoing progress of the division’s asset-light strategy.

•

Following the announcement in June of our intention to reduce our ownership share in Semiconductors in the second half of 2006, EUR 10 million of related project costs have been capitalized in Q2. These costs will be expensed upon completion of a transaction.

     Looking ahead

•

Mid-to-high-single-digit sequential sales growth in US dollar terms is expected in Q3 2006.

Other Activities

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Sales			505				398
Sales growth
% nominal			(17	)			(21	)
% comparable			3				(10	)
EBIT Corporate Technologies			(44	)			(50	)
EBIT Corp. Investments and others			(16	)			(7	)
Total EBIT			(60	)			(57	)
as a % of sales			(11.9	)			(14.3	)
Net operating capital (NOC)			527				290
Number of employees (FTEs)			20,051				16,772

Sales

EBITS

     Business highlights

•

Philips and the Dutch University of Groningen succeeded for the first time in fabricating electronics at the molecular level — a breakthrough published in the magazine Nature.

•

Philips Business Communications — the company’s enterprise communications activities — were transferred to the joint venture NEC Philips Unified Solutions in which Philips retains a 40% stake.

•

In the United States, the Industrial Designers Society of America (IDEA) awarded Philips a gold IDEA award for the CityWing pedestrian LED luminaire.

     Financial performance Corporate Technologies

•

Excluding the divestment of PolyLED and several incidentals in Q2 2005, EBIT of Corporate Technologies declined by EUR 3 million. Higher R&D investments in the Technology Incubators and healthcare research were partly offset by temporarily lower investment at Research and improved performance at Applied Technologies.

     Financial performance Corp. Investments/others

•

Corporate Investments recorded a loss of EUR 5 million, an improvement compared with Q2 2005 as a result of the higher EBIT in a number of its operational businesses.

•

The Service Units recorded a EUR 8 million gain.

•

The reduction in net operating capital and number of employees is attributable to the ongoing divestment of non-core business activities.

     Looking ahead

•		Continuing its innovation program focused on future growth, Corporate Technologies will step-up Incubator-related R&D investments in Q3.
•		Research costs in Q3 are expected to be approximately EUR 10 million higher than in Q2 due to the phasing of certain project expenses.
•		Corporate Investments will continue to reduce its business portfolio. Several announcements regarding divestments can be expected in the second half of 2006. Divestment-related costs of EUR 10 million are anticipated in Q3.
•		Due to tariff reductions, the gain related to the Service Units in Q2 will not be repeated in the second half of the year.

Unallocated

Key data

in millions of euros unless otherwise stated		Q2				Q2
		2005				2006
Corporate and regional overheads			(87	)			(116	)
Global brand campaign			(69	)			(22	)
Pensions/postretirement benefit costs			(36	)			(26	)
Total EBIT			(192	)			(164	)
Number of employees (FTEs)			2,500				2,471

EBIT Corporate and regional overheads

EBIT Global brand campaign

EBIT Pensions/postretirement benefit costs

		Business highlights
•		As official sponsor of the 2006 FIFA World Cup™, Philips provided Ambilight screens viewed by 18.5 million fans in 12 German cities, RFID chips in 3.2 million tickets and HeartStart defibrillators at all sports venues.
•		In India, Philips was one of five large companies to receive a Sustainability Award from the Confederation of Indian Industry (CII) for a “commitment to embedding sustainability policies and procedures in its business processes”. The CII represents over 6,100 organizations in India.
•		Philips showcased its commitment to its brand promise “sense and simplicity” at a Simplicity Event held in April in New York. The event was attended by 800 key stakeholders, including customers, suppliers, partners, top marketers, product designers, employees and the media.
•		Philips was official sponsor of TV and audio equipment to the Wimbledon 2006 tennis championships, providing over 1,400 sets as well as the Vidiwall screen at the famed No. 1 Court.
•		To identify and exploit value-adding supplier opportunities, Philips hosted the 4th ‘Partners for Growth” supplier forum in May for its top 30 suppliers. Philips channeled 22% of its 2005 spending through these suppliers, up from 17% in 2004.
		Financial performance
•		Corporate and regional overheads were higher than in Q2 2005 due to implementation costs related to compliance with section 404 of the Sarbanes-Oxley Act and expenses for several seasonal events, including the World Cup.
•		The investment in the global brand campaign was EUR 47 million lower than in Q2 2005 due to an amended seasonality pattern.
•		Pension and post-retirement benefit costs were lower than in Q2 2005. Lower pension costs in The Netherlands (abolition of post-retirement benefit plan) were partly offset by increased costs in North and Latin America.
		Looking ahead
•		Global brand campaign spend, although at a similar level to 2005 for the full year, will follow a different seasonal pattern in 2006. About 70% of the annual investment will be spent in Q4.
•		Corporate and regional overhead costs are expected to return to their normative level in Q3.

Highlights in the 1^st six months

The 1^st six months of 2006

•		Net income EUR 461 million
•		Comparable sales up 10%, driven by CE, Semiconductors and DAP
•		EBIT EUR 702 million
•		Unconsolidated companies reported a loss of EUR 141 million
•		Net debt : group equity ratio 9:91

Net income

in millions of euros unless otherwise stated		January-June
		2005				2006
Sales			13,419				14,975
EBIT			365				702
as a % of sales			2.7				4.7
Financial income and expenses			(105	)			104
Income taxes			39				(189	)
Results unconsolidated companies			844				(141	)
Minority interests			(18	)			(44	)
Income from continuing operations			1,125				432
Discontinued operations			(25	)			29
Net income			1,100				461
Per common share — basic			0.87				0.39

Management summary
•		Net income showed a profit of EUR 461 million, compared to EUR 1,100 million in the first six months of 2005; the latter included a EUR 753 million gain on the sale of shares of NAVTEQ.
•		Sales amounted to EUR 14,975 million, 12% higher than in the same period last year. The upward currency effect was more than offset by deconsolidation changes (mainly TPV and ongoing divestments in Corporate Investments), leading to comparable sales growth of 10% compared to the first half of last year.
•		Comparable sales grew at all main divisions, with double-digit growth at Consumer Electronics (16%), Semiconductors (13%) and DAP (11%). Medical Systems and Lighting both showed comparable sales growth of 8%. Sales in Corporate Investments declined by 13% as a result of the sale of various businesses (including Philips Business Communications, Anteryon, and Optical Pick-up Unit).
•		EBIT showed a profit of EUR 702 million, compared to EUR 365 million in the same period last year. EBIT increased in all divisions except Consumer Electronics. EBIT margin rose from 2.7% to 4.7%; the increase was visible in all operating divisions except Consumer Electronics.
•		Net income of EUR 461 million included a EUR 223 million cash dividend from TSMC. Last year’s net income included a EUR 753 million gain on the sale of shares in NAVTEQ and a EUR 109 million gain relating to a final agreement on prior-years tax settlements.

Other information

Other information

On June 21, Philips announced its intention to reduce its ownership share in the Semiconductors division to a minority stake in the course of the second half of 2006 through an IPO and/or sale of shares to financial investors, while continuing to evaluate industry consolidation opportunities.

Following the recent cancellation of the shares acquired in earlier share repurchase programs, the Company will continue with a next share repurchase program of up to EUR 1.5 billion, to be executed during the coming 18 months. The program will be used exclusively for capital reduction.

Outlook

Outlook

The second quarter further confirmed our solid progress in growing sales and increasing profitability. We expect this growth to continue in the second half of the year, although, given the particularly strong second half of 2005, at a slightly slower pace. Overall, we are well on track to meet our medium-term targets.

During the remainder of 2006, we will continue our business portfolio realignment through the expected acquisition of Intermagnetics and the further divestment of a number of non-core business activities. We will continue our value-creating management of capital, focusing our resources on further acquisitions, innovation, the brand, and on returning cash to shareholders.

The intention to reduce our ownership share in the Semiconductors division to a minority stake in 2006 will allow us to take a further step in implementing our strategy to build a more stable, predictable healthcare, lifestyle and technology company with a strong market focus around the brand promise of “sense and simplicity”.

Amsterdam, July 17, 2006

		Consolidated statements of income

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

		2nd quarter								January to June
		2005				2006				2005				2006
Sales			6,927				7,601				13,419				14,975
Cost of sales			(4,655	)			(5,094	)			(9,037	)			(10,114	)
Gross margin			2,272				2,507				4,382				4,861
Selling expenses			(1,176	)			(1,198	)			(2,185	)			(2,363	)
General and administrative expenses			(330	)			(351	)			(632	)			(653	)
Research and development expenses			(632	)			(623	)			(1,256	)			(1,254	)
Write off of acquired in-process R&D			—				(3	)			—				(3	)
Other business income (expense)			24				35				56				114
Income from operations			158				367				365				702
Financial income and expenses			(57	)			127				(105	)			104
Income before taxes			101				494				260				806
Income tax expense			83				(98	)			39				(189	)
Income after taxes			184				396				299				617
Results relating to unconsolidated companies			822				(105	)			844				(141	)
Minority interests			(12	)			(19	)			(18	)			(44	)
Income from continuing operations			994				272				1,125				432
Discontinued operations			(11	)			29				(25	)			29
Net income			983				301				1,100				461
Weighted average number of common shares outstanding (after deduction of treasury stock) during the period (in thousands):
•    basic											1,265,804				1,191,966
•    diluted											1,267,986				1,197,857
Net income per common share in euros:
•   basic			0.78				0.26				0.87				0.39
•   diluted			0.78				0.25				0.87				0.38
Ratios
Gross margin as a % of sales			32.8				33.0				32.7				32.5
Selling expenses as a % of sales			(17.0	)			(15.8	)			(16.3	)			(15.8	)
G&A expenses as a % of sales			(4.8	)			(4.6	)			(4.7	)			(4.4	)
R&D expenses as a % of sales			(9.1	)			(8.2	)			(9.4	)			(8.4	)
EBIT or Income from operations			158				367				365				702
as a % of sales			2.3				4.8				2.7				4.7
EBITA			189				410				426				787
as a % of sales			2.7				5.4				3.2				5.3

		Consolidated balance sheets

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

		June 30,				December 31,				June 30,
		2005				2005				2006
Current assets:
Cash and cash equivalents			3,005				5,293				2,538
Receivables			4,783				5,155				4,859
Assets of discontinued operations			338				241				—
Inventories			3,929				3,480				3,910
Other current assets			959				937				1,292
Total current assets			13,014				15,106				12,599
Non-current assets:
Investments in unconsolidated companies			6,031				5,698				3,661
Other non-current financial assets			924				673				6,654
Non-current receivables			165				213				303
Other non-current assets			3,231				3,231				3,797
Property, plant and equipment			4,901				4,893				4,753
Intangible assets excluding goodwill			1,008				1,299				1,474
Goodwill			2,044				2,748				2,999
Total assets			31,318				33,861				36,240
Current liabilities:
Accounts and notes payable			3,230				3,856				3,449
Liabilities of discontinued operations			154				143				—
Accrued liabilities			3,227				3,632				3,354
Short-term provisions			783				869				989
Other current liabilities			562				708				675
Short-term debt			815				1,167				1,360
Total current liabilities			8,771				10,375				9,827
Non-current liabilities:
Long-term debt			3,651				3,320				3,187
Long-term provisions			2,128				2,056				1,975
Other non-current liabilities			756				1,112				937
Total liabilities			15,306				16,863				15,926
Minority interests			335				332				342
Stockholders’ equity			15,677				16,666				19,972
Total liabilities and equity			31,318				33,861				36,240
Number of common shares outstanding (after deduction of treasury stock) at the end of period (in thousands)			1,247,475				1,201,358				1,188,109
Ratios
Stockholders’ equity per common share in euros			12.57				13.87				16.81
Inventories as a % of sales			13.4				11.4				12.2
Net debt : group equity			8:92				(5):105				9:91
Net operating capital			8,447				8,043				10,532
Employees at end of period of which discontinued operations 2,278 end June 2005, and 1,780 end December 2005			159,709				159,226				158,344

Consolidated statements of cash flows ^*

all amounts in millions of euros                         

restated for the sale of the MDS business         

		2nd quarter								January to June
		2005				2006				2005				2006
Cash flows from operating activities:
Net income			983				301				1,100				461
Adjustments to reconcile income to net cash provided by operating activities:
(Income) loss from discontinued operations			11				(29	)			25				(29	)
Depreciation and amortization			372				320				728				662
Impairment of equity investments			—				5				—				8
Net gain on sale of assets			(760	)			(32	)			(777	)			(103	)
Unconsolidated companies (net of dividends received)			(69	)			100				(2	)			89
Minority interests (net of dividends paid)			12				19				18				44
(Increase) decrease in working capital/other current assets			(270	)			(41	)			(1,058	)			(714	)
(Increase) decrease in non-current receivables/other assets			(134	)			(95	)			(223	)			(728	)
Increase (decrease) in provisions			(85	)			(39	)			(102	)			(40	)
Other items			(8	)			(209	)			11				(217	)
Net cash provided by (used for) operating activities			52				300				(280	)			(567	)
Cash flows from investing activities:
Purchase of intangible assets			(29	)			(31	)			(43	)			(57	)
Capital expenditures on property, plant and equipment			(219	)			(255	)			(439	)			(529	)
Proceeds from disposals of property, plant and equipment			40				22				77				49
Cash from (to) derivatives			(22	)			(71	)			(35	)			(69	)
Proceeds from sale (purchase) of other non-current financial assets			(16	)			(1	)			(112	)			(3	)
Proceeds from sale (purchase) of businesses			936				(182	)			958				(767	)
Net cash provided by (used for) investing activities			690				(518	)			406				(1,376	)
Cash flows from financing activities:
Increase (decrease) in debt			(197	)			(30	)			(326	)			225
Treasury stock transactions			(285	)			(34	)			(699	)			(407	)
Dividends paid			(504	)			(523	)			(504	)			(523	)
Net cash provided by (used for) financing activities			(986	)			(587	)			(1,529	)			(705	)
Net cash provided by (used for) continuing operations			(244	)			(805	)			(1,403	)			(2,648	)
Effect of change in consolidations and exchange rates on cash positions			56				(39	)			101				(101	)
Net cash provided by (used for ) discontinued operations 1)			(17	)			(7	)			(42	)			(6	)
Cash and cash equivalents at beginning of period			3,210				3,389				4,349				5,293
Cash and cash equivalents at end of period			3,005				2,538				3,005				2,538
* 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			(15	)			13				(33	)			15
cash provided by (used for) investing
activities			(2	)			(20	)			(9	)			(21	)
Ratio
Cash flows before financing activities			742				(218	)			126				(1,943	)

20

Consolidated statement of changes in stockholders’ equity

all amounts in millions of euros

		January to June 2006
														Accumulated other comprehensive income (loss)																				Treasury shares at cost
																		Unrealized
																		gain (loss)								Changes
						Capital												on				Additional				in fair								To hedge				To cover				Total
						in excess								Currency				available-				minimum				value of								share-based				capital				stock
		Common				of par				Retained				Translation				for-sale				Pension				cash flow								compen-				reduction				holders’
		stock				value				earnings				differences				securities				liability				hedges				Total				sation 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											461																																461
Net current period change															(117	)			3,629				210				41				3,763												3,763
Reclassifications into income															1												4				5												5
Total comprehensive income, net of tax											461				(116	)			3,629				210				45				3,768												4,229
Dividend paid											(523	)																															(523	)
Purchase of treasury stock																																			(118	)			(414	)			(532	)
Re-issuance of treasury stock							(74	)			(69	)																							283								140
Share-based compensation plans							(8	)																																			(8	)
Balance as of June 30, 2006			263				0				21,579				(2,002	)			3,619				(335	)			16				1,298				(1,168	)			(2,000	)			19,972

21

  Sectors

all amounts in millions of euros unless otherwise stated

restated for the sale of the MDS business                       

Sales and income from operations

		2nd quarter
		2005																2006
		Sales				Income from operations								Sales				Income from operations
						amount				as a % of								amount				as a % of
										sales												sales
Medical Systems			1,498				157				10.5				1,630				199				12.2
DAP			461				44				9.5				572				66				11.5
Consumer Electronics			2,259				62				2.7				2,484				45				1.8
Lighting			1,116				120				10.8				1,296				158				12.2
Semiconductors			1,088				27				2.5				1,221				120				9.8
Other Activities			505				(60	)			(11.9	)			398				(57	)			(14.3	)
Unallocated							(192	)											(164	)
Total			6,927				158				2.3				7,601				367				4.8