16. Earnings; Asset and Financial Position of the Bayer Group

Transcription

1 Bayer Annual Report Earnings; Asset and Financial Position of the Bayer Group 16.1 Earnings Performance of the Bayer Group Bayer Group Summary Income Statements [Table ] Change million million % Net sales 40,157 42, Cost of goods sold 19,516 20, Selling expenses 10,312 11, Research and development expenses 3,406 3, General administration expenses 1,712 1, Other operating income (+) and expenses ( ) (277) (134) EBIT 1 4,934 5, Financial result (727) (981) 34.9 Income before income taxes 4,207 4, Income taxes (1,021) (1,082) 6.0 Income after income taxes 3,186 3, of which attributable to non-controlling interest (3) 17 of which attributable to Bayer AG stockholders (net income) 3,189 3, figures restated 1 EBIT = earnings before financial result and taxes of the Bayer Group rose to 42,239 million (+ 5.2%). The increase after adjusting for currency and portfolio effects was 7.2%. The cost of goods sold increased by 3.8% to 20,266 million, mainly due to higher volumes at HealthCare and MaterialScience. The ratio of the cost of goods sold to total sales was 48.0% (: 48.6%). The selling expenses of 11,018 million (+ 6.8%) amounted to 26.1% of sales (: 25.7%). Research and development (r&d) expenses rose in by 4.9% to 3,574 million, the increase being attributable to HealthCare and CropScience. The ratio of r&d expenses to sales remained level at 8.5% (: 8.5%). General administration expenses, at 1,741 million, were slightly above the prior year (+ 1.7%). The ratio of general administration expenses to total sales was somewhat lower at 4.1% (: 4.3%). The negative balance of other operating income and expenses was reduced considerably to minus 134 million (: minus 277 million), mainly because special charges for accounting measures related to legal claims were lower in (see also Chapter 16.2 Calculation of E Before Special Items ). ebit climbed by 11.6% in to 5,506 million.

2 170 Bayer Annual Report The financial result fell by 34.9% to minus 981 million. It comprised 356 million (: 355 million) in net interest expense, 322 million (: 297 million) in interest cost for pension and other provisions, and a 248 million (: 120 million) net exchange loss. The year-on-year increase in the net exchange loss was mainly due to exchange rate effects in Venezuela, Ukraine and Argentina, higher exchange hedging costs and the fact that the prior year s financial result included a one-time gain of 77 million from the sale of Bayer s interest in Onyx Pharmaceuticals Inc., United States. Tax expense in increased to 1,082 million as a result of earnings growth (: 1,021 million). Income after income taxes came in at 3,443 million. Income attributable to non-controlling interest rose by 20 million to 17 million. Bayer Group net income for was 3,426 million (: 3,189 million) Calculation of EBIT(DA) Before Special Items Key performance indicators for the Bayer Group are ebit before special items and ebitda before special items. These indicators are reported in order to allow a more accurate assessment of business operations. The special items comprising effects that are non-recurring or do not regularly recur or attain similar magnitudes are detailed in the following table. ebitda, ebitda before special items and ebit before special items are not defined in the International Financial Reporting Standards (ifrs) and should therefore be regarded only as supplementary information. ebitda before special items is a meaningful indicator of operating performance since it is not affected by depreciation, amortization, impairment losses, impairment loss reversals or special items. By reporting this indicator, the company aims to give readers a clear picture of the results of operations and ensure comparability of data over time. The ebitda margin before special items, which is the ratio of ebitda before special items to sales, serves as a relative indicator for the internal and external comparison of operational earning power. Depreciation, amortization and impairment losses increased by 1.4% in to 2,936 million (: 2,896 million), comprising 1,592 million (: 1,572 million) in amortization and impairments of intangible assets, 2 million (: 13 million) in impairment loss reversals and 1,346 million (: 1,337 million) in depreciation and impairments of property, plant and equipment. A total of 68 million (: 268 million) in depreciation, amortization and impairments constituted special items. This amount comprised 70 million (: 259 million) in impairment losses and 0 million (: 22 million) in depreciation and amortization, less 2 million (: 13 million) in impairment loss reversals.

3 Bayer Annual Report 171 Special Items Reconciliation [Table ] EBIT 1 EBIT 1 EBIT 1 EBIT 1 EBITDA² EBITDA² EBITDA² EBITDA² million million million million million million million million Before special items 1,094 1,003 5,773 5,944 1,769 1,846 8,401 8,812 HealthCare (354) (376) (713) (331) (268) (347) (476) (298) Impairment losses / impairment loss reversals (55) (29) (171) (29) 14 Restructuring (109) (197) (78) (145) Litigations (180) (88) (269) (88) (180) (88) (269) (88) Integration costs (10) (86) (76) (153) (10) (86) (76) (149) Settlement of pre-existing relationship Divestitures (173) (96) (173) (96) CropScience (40) (32) (72) (32) (37) (2) (64) (2) Restructuring (40) (67) (37) (59) Litigations (1) (5) (1) (1) (5) (1) Divestitures (31) (31) (1) (1) MaterialScience (18) (22) 6 (43) (4) (21) 29 (38) Restructuring (18) (22) (36) (43) (4) (21) (13) (38) Divestitures Reconciliation (27) (12) (60) (32) (27) (12) (60) (32) Restructuring (25) (12) (58) (32) (25) (12) (58) (32) Litigations (2) (2) (2) (2) Total special items (439) (442) (839) (438) (336) (382) (571) (370) of which cost of goods sold (79) (68) (116) (80) (42) (37) (83) (49) of which selling expenses (37) (50) (73) (63) (37) (21) (73) (34) of which research and development expenses (77) 1 (212) (2) (12) 1 1 (2) of which general administration expenses (38) (23) (56) (55) (35) (23) (53) (51) of which other operating income / expenses (208) (302) (382) (238) (210) (302) (363) (234) After special items ,934 5,506 1,433 1,464 7,830 8,442 1 EBIT = earnings before financial result and taxes 2 EBITDA = EBIT plus amortization and impairment losses on intangible assets, plus depreciation and impairment losses on property, plant and equipment, minus impairment loss reversals 3 For details see Note [6.2] to the consolidated financial statements 16.3 Core Earnings Per Share Earnings per share according to ifrs are affected by the purchase price allocation for acquisitions and other special factors. To enhance comparability, we also determine core net income after eliminating amortization and impairment losses / impairment loss reversals of intangible assets, impairment losses / impairment loss reversals of property, plant and equipment and special items, and the related tax effects. From this core net income we calculate core earnings per share in the same way as earnings per share. Core earnings per share form the basis for our dividend policy. Core earnings per share in rose by 7.3% to 6.02 (: 5.61).

4 172 Bayer Annual Report Core Earnings per Share [Table ] million million million million EBIT (as per income statements) ,934 5,506 Amortization and impairment losses / loss reversals on intangible assets ,559 1,590 Impairment losses / loss reversals on property, plant and equipment Special items (other than amortization and impairment losses / loss reversals) Core EBIT 1,449 1,507 7,112 7,562 Financial result (as per income statements) (84) (347) (727) (981) Special items in the financial result (72) Income taxes (as per income statements) (129) 16 (1,021) (1,082) Special items in income taxes Tax effects related to amortization, impairment losses / loss reversals and special items (266) (246) (734) (576) Income after income taxes attributable to non-controlling interest (as per income statements) 13 (6) 3 (17) Core net income ,643 4,977 Shares Shares Shares Shares Number of issued ordinary shares 826,947, ,947, ,947, ,947,808 Core earnings per share ( ) Consolidatd Financial Statements Note 16 The calculation of earnings per share in accordance with ifrs is explained in Note [16] to the consolidated financial statements. Core net income, core earnings per share and core ebit are not defined in ifrs Value Management SYSTEM BASED ON CASH VALUE ADDED The principal value-based steering parameters in the Bayer Group are the cash value added (cva) and the cash flow return on investment (cfroi). If the cva is positive, the respective company or business entity has exceeded the minimum requirements of the equity and debt capital providers and has created value. The cfroi is a ratio indicating the profitability of the Group or of individual business entities and must be compared to the cost of capital. CALCULATING THE COST OF CAPITAL Bayer calculates the cost of capital according to the debt / equity ratio at the beginning of the year using the weighted average cost of capital (wacc) formula. The cost of equity capital is the return expected by stockholders, computed from capital market information. The cost of debt capital used in calculating wacc is based on the terms for ten-year Eurobonds issued by industrial companies with an a rating. Cost of capital for the Bayer Group 7.6% To take into account the different risk and return profiles of our principal businesses, we calculate individual capital cost factors after income taxes for each of our subgroups. These were 7.9% for HealthCare, 7.3% for CropScience and 6.9% for MaterialScience. The capital cost factor for the Group as a whole in was 7.6%.

5 Bayer Annual Report 173 GROSS CASH FLOW, CASH VALUE ADDED AND CASH FLOW RETURN ON INVESTMENT AS PERFORMANCE YARDSTICKS The gross cash flow is the measure of our internal financing capability. Bayer has chosen this parameter because it is relatively free of accounting influences and is therefore a more meaningful performance indicator. Taking into account the costs of capital and of reproducing depletable assets, we determine the gross cash flow hurdle. If the gross cash flow hurdle is exceeded, the cva is positive and thus the required return on equity and debt plus the cost of asset reproduction has been earned. Positive CVA = value created The cfroi is the difference between the gross cash flow and the cost of reproducing depletable assets, divided by the capital invested. The capital invested is calculated from the statement of financial position and basically comprises the property, plant and equipment and intangible assets required for operations stated at the historical cost of acquisition or construction plus working capital, less interestfree liabilities (such as current provisions). To mitigate the effect of fluctuations in the capital invested during the year, the cfroi is computed on the basis of the average capital invested for the respective year. The gross cash flow hurdle for was 4,447 million. Actual gross cash flow came in at 6,820 million, exceeding the hurdle by 53.4%. Thus the entire cost of capital and asset reproduction costs were earned in. The positive cva of 2,373 million shows that Bayer exceeded the minimum return and reproduction requirements and created value. A cfroi of 11.9% was achieved in. HealthCare and CropScience exceeded their required returns (including asset reproduction), raised their cva and helped to increase the value of the Group. In MaterialScience reduced the gap to the gross cash flow hurdle, which continues to be impacted by growth investments. Value Management Indicators by Subgroup [Table ] HealthCare CropScience MaterialScience Bayer Group million million million million million million million million Gross cash flow 1 (GCF) 3,573 4,011 1,590 1, ,832 6,820 Gross cash flow hurdle 2,109 2, ,060 1,025 4,260 4,447 Cash value added (CVA) 1,464 1, (173) (64) 1,572 2,373 Cash flow return on investment (CFROI) 14.1% 13.4% 14.2% 15.3% 5.5% 6.0% 11.1% 11.9% WACC 7.9% 7.9% 7.3% 7.3% 6.9% 6.9% 7.6% 7.6% Average capital invested 22,480 26,784 9,881 10,841 10,371 10,524 43,548 48,934 Delta cash value added is not listed due to its limited importance. 1 For definition see Chapter 16.5 Liquidity and Capital Expenditures of the Bayer Group.

6 174 Bayer Annual Report 16.5 Liquidity and Capital Expenditures of the Bayer Group Bayer Group Summary Statements of Cash Flows [Table ] million million Gross cash flow 1 5,832 6,820 Changes in working capital / other non-cash items (661) (1,010) Net cash provided by (used in) operating activities (net cash flow) 5,171 5,810 Net cash provided by (used in) investing activities (2,581) (15,539) Net cash provided by (used in) financing activities (2,535) 9,736 Change in cash and cash equivalents due to business activities 55 7 Cash and cash equivalents at beginning of period 1,698 1,662 Change due to exchange rate movements and to changes in scope of consolidation (91) 184 Cash and cash equivalents at end of period 1,662 1,853 1 Gross cash flow = income after income taxes, plus income taxes, plus financial result, minus income taxes paid or accrued, plus depreciation, amortization and impairment losses, minus impairment loss reversals, plus / minus changes in pension provisions, minus gains / plus losses on retirements of noncurrent assets, minus gains from the remeasurement of already held assets in step acquisitions. The change in pension provisions includes the elimination of non-cash components of EBIT. It also contains benefit payments during the year. OPERATING CASH FLOW Gross cash flow climbed by 16.9% in to 6,820 million (: 5,832 million), mainly because of the improvement in ebit. Net cash flow moved ahead by 12.4% to 5,810 million (: 5,171 million), after a business-related increase in cash tied up in working capital and 778 million in deferred income from the one-time payment received in connection with the sgc collaboration with Merck & Co., Inc., United States. Income taxes paid in amounted to 1,835 million (: 1,281 million). INVESTING CASH FLOW Net cash outflow for investing activities in amounted to 15,539 million. Cash outflows for property, plant and equipment and intangible assets were 10% higher at 2,371 million (: 2,157 million) and included 832 million (: 809 million) at HealthCare, 686 million (: 538 million) at CropScience and 605 million (: 559 million) at MaterialScience. The 13,545 million (: 1,082 million) in outflows for acquisitions mainly related to the purchases of the consumer care businesses of Merck & Co., Inc., United States, and Algeta asa, Norway. Cash outflows from noncurrent and current financial assets amounted to 177 million (: inflow of 301 million). Inflows from interest and dividends totaled 107 million (: 125 million).

7 Bayer Annual Report 175 The principal strategic capital expenditures for property, plant and equipment in the operating segments within the past two years are listed in the following table: Capital Expenditures for Property, Plant and Equipment [Table ] Segment CAPITAL EXPENDITURES Pharmaceuticals Description Expansion of Xarelto TM production capacities in Wuppertal and Leverkusen, Germany Expansion of production capacities for new rfactor VIII therapies in Wuppertal, Germany Expansion of R&D laboratory capacities in Wuppertal, Germany Modernization of research facilities in Berlin, Germany Expansion of production capacities in Beijing, China Expansion of Quality Control Biologics in Berkeley, California, United States Consumer Health CropScience Completion of capacity expansion for fungicides in Germany and Switzerland Completion of capacity expansion for herbicides in Germany Establishment of breeding stations for various plant species worldwide MaterialScience Doubling of production capacities for polycarbonates in Shanghai, China Doubling of production capacities for hexamethylene diisocyanate (HDI) in Shanghai, China Completion of capacity expansion for diphenylmethane diisocyanate (MDI) in Shanghai, China Construction of a world-scale production complex for toluene diisocyanate (TDI) based on gas-phase phosgenation technology in Dormagen, Germany CAPITAL EXPENDITURES Pharmaceuticals Consolidation of multiple administrative and business operations in Whippany, New Jersey, United States Expansion of Xarelto TM production capacities in Wuppertal and Leverkusen, Germany Expansion of production capacities for biologics in Wuppertal, Germany Consumer Health CropScience Capacity expansion and process modifications for the production of fungicides in Germany, Switzerland, and the United States and for related formulating units in France Expansion of manufacturing capacities for herbicidal active ingredients in Germany and the United States Establishment of breeding stations for wheat in Europe, North America, and Asia / Pacific; for soybeans in North America and Latin America; and for other crops and trait development MaterialScience Doubling of production capacities for polycarbonates in Shanghai, China Expansion of production capacities for diphenylmethane diisocyanate (MDI) in Shanghai, China Construction of a world-scale production complex for toluene diisocyanate (TDI) based on gas-phase phosgenation technology in Dormagen, Germany Completion of a multi-purpose facility for aliphatic isocyanates - hexamethylene diisocyanate (HDI) and isophorone diisocyanate (IPDI) - in Leverkusen, Germany

8 176 Bayer Annual Report FINANCING CASH FLOW Net cash inflow for financing activities in amounted to 9,736 million, including net borrowings of 11,838 million (: net loan repayments of 619 million). Net interest payments were 7% higher at 362 million (: 338 million). The cash outflow for dividends amounted to 1,739 million (: 1,574 million). LIQUID ASSETS AND NET FINANCIAL DEBT Net Financial Debt [Table ] Dec. 31, Dec. 31, million million Bonds and notes / promissory notes 4,520 14,964 of which hybrid bonds 1 1,344 4,552 Liabilities to banks 2,302 3,835 Liabilities under finance leases Liabilities from derivatives Other financial liabilities 1,516 1,976 Positive fair values of hedges of recorded transactions (504) (258) Financial liabilities 8,526 21,600 Cash and cash equivalents (1,662) (1,853) Current financial assets (133) (135) Net financial debt 6,731 19,612 1 classified as debt according to IFRS Net financial debt of the Bayer Group increased in to 19.6 billion, mainly as a result of cash outflows for acquisitions. As of December 31,, the Group had cash and cash equivalents of 1.9 billion (: 1.7 billion). Financial liabilities at the end of the reporting period amounted to 21.6 billion (: 8.5 billion), with three subordinated hybrid bonds reflected at 4.6 billion overall. Net financial debt should be viewed against the fact that Moody s and Standard & Poor s treat 75% and 50%, respectively, of the hybrid bond issued in July 2005 with a nominal volume of 1.3 billion as equity. Moody s and Standard & Poor s treat 50% of the hybrid bonds issued in July with nominal volumes of 1.75 billion and 1.5 billion, respectively, as equity. The hybrid bonds thus have a more limited effect on the Group s rating-specific debt indicators than conventional borrowings. Our noncurrent financial liabilities increased in from 5.6 billion to 18.5 billion, while current financial liabilities remained unchanged at 3.4 billion.

9 Bayer Annual Report Asset and Capital Structure of the Bayer Group Bayer Group Summary Statements of Financial Position [Table ] Dec. 31, Dec. 31, Change million million % Noncurrent assets 32,289 48, Current assets 19,028 22, Total assets 51,317 70, Equity 20,804 20, Noncurrent liabilities 16,490 34,513. Current liabilities 14,023 15, Liabilities 30,513 50, Total equity and liabilities 51,317 70, Total assets as of December 31,, increased by 36.9% to 70.2 billion. Noncurrent assets rose by 48.7% to 48.0 billion due mainly to acquisitions. This was due to the 6.3 billion increase in goodwill and the 6.7 billion rise in other intangible assets. The carrying amount of current assets climbed to 22.2 billion. Equity was lower by 0.6 billion at 20.2 billion. The positive effects from the net income of 3.4 billion and the exchange differences of 1.4 billion (: negative effect of 0.7 billion) were offset by the negative effect from the increase of 3.5 billion (: positive effect from the decline of 1.3 billion) recognized outside profit or loss in post-employment benefit obligations and the dividend payment of 1.7 billion (: 1.6 billion). The equity ratio (equity coverage of total assets) as of December 31, was 28.8% (: 40.5%). Liabilities increased by 19.5 billion compared with December 31,, to 50.0 billion, due to the acquisition-related 12.8 billion increase in financial liabilities and the 4.9 billion increase in provisions for pensions and other post-employment benefits. Net Defined Benefit Liability for Post-Employment Benefits [Table ] Dec. 31, Dec. 31, million million Provisions for pensions and other post-employment benefits 7,368 12,236 Net defined benefit asset (117) (41) Net defined benefit liability for post-employment benefits 7,251 12,195 The net defined benefit liability for pensions and other post-employment benefits increased from 7.3 billion to 12.2 billion in, mainly due to a decline in long-term capital market interest rates for high-quality corporate bonds.

10 178 Bayer Annual Report Ratios [Table ] Cost of sales ratio (%) R & D expense ratio (%) Return on sales in (%) EBIT margin (%) EBITDA margin before special items (%) Asset intensity (%) Reinvestment ratio (%) Liability structure (%) Gearing Free operating cash flow ( million) Inventory turnover Receivables turnover Payables turnover Equity ratio (%) Return on equity (%) Return on assets (%) figures restated 1 property, plant and equipment Cost of goods sold Research and development expenses Income after income taxes EBIT EBITDA before special items Property, plant and equipment + intangible assets Total assets Capital expenditures Depreciation 1 Current liabilities Liabilities Net debt + pension provisions Equity Net operating cash flow less cash outflows for property, plant and equipment 3,014 3,439 and intangible assets Cost of goods sold Inventories Trade accounts receivable Cost of goods sold Trade accounts payable Equity Total assets Income after income taxes Average equity Income before income taxes and interest expense Average total assets

11 Bayer Annual Report Financial Management of the Group The financial management of the Bayer Group is conducted by the strategic management holding company Bayer AG. Capital is a global resource, generally procured centrally and distributed within the Group. The foremost objectives of our financial management are to help bring about a sustained increase in corporate value and to ensure the Group s liquidity and creditworthiness. This involves optimizing the capital structure and effectively managing risks. The management of currency, interest rate, raw material price and default risks helps to reduce the volatility of our earnings. The contracted rating agencies assess Bayer as follows: Rating [Table ] Long-term rating Outlook Short-term rating Standard & Poor s A stable A 2 Moody s A3 stable P 2 These credit ratings reflect the company s high solvency and ensure access to a broad investor base for financing purposes. It remains our goal to achieve and maintain financial ratios that support an a category rating in order to maintain our financial flexibility. We pursue a prudent debt management strategy to ensure flexibility, drawing on a balanced financing portfolio. This is based on bonds predominantly a multi-currency European Medium Term Notes program, syndicated credit facilities, bilateral loan agreements and a global commercial paper program. We use financial derivatives to hedge against risks arising from business operations or financial transactions, but do not employ contracts in the absence of an underlying transaction. It is our policy to diminish default risks by selecting trading partners with a high credit standing. We closely monitor the execution of all transactions, which are conducted in accordance with Group directives. Further details of our risk management objectives and the ways in which we account for all the major types of hedged transactions along with price, credit and liquidity risks as they relate to the use of financial instruments are given in Chapter 20.3 Opportunities and Risks Report.