Notes to the Consolidated Income Statement
(7) Net sales
Net sales were generated primarily from the sale of goods and to a limited degree also included revenues from services rendered, commission income as well as profit-sharing from collaborations. Merck Group net sales totaled € 15,024 million in 2016 (2015: € 12,845 million), which represented an increase of 17.0% compared with 2015. The breakdown of net sales is presented in the Segment Reporting in Note  “Information by business sector / countries and regions”.
(8) Cost of sales
Cost of sales primarily included the cost of manufactured products sold as well as merchandise sold. Cost comprises overheads and, if necessary, inventory write-downs, in addition to directly attributable costs, such as the cost of materials, personnel and energy, as well as depreciation / amortization.
(9) Marketing and selling expenses
Marketing and selling expenses comprised the following:30 KB EXCEL
|Sales force||– 1,063||– 913|
|Internal sales services||– 903||– 740|
|Sales promotion||– 598||– 522|
|Logistics||– 614||– 471|
|Amortization of intangible assets 1||– 1,032||– 779|
|Royalty, license and commission expenses||– 177||– 513|
|Other marketing and selling expenses||– 140||– 112|
|Marketing and selling expenses||– 4,526||– 4,050|
Amortization of intangible assets was mainly attributable to customer relationships, marketing authorizations, licenses and similar rights, brands and trademarks, which could be functionally allocated to Marketing and Selling.
Royalty, license and commission expenses arose mainly in connection with the commercialization of Erbitux® outside the United States and Canada amounting to € 97 million (2015: € 93 million). In 2016, no further commission expenses were incurred for the commercialization of Rebif®in the United States following the expiration of a marketing agreement with Pfizer, Inc., USA (2015: € 334 million).
(10) Research and development costs
Research and development costs totaled € 1,976 million in 2016 (2015: € 1,709 million).
Reimbursements for research and development amounting to € 84 million (2015: € 88 million) were offset against research and development costs. This figure also included government subsidies of € 3 million (2015: € 3 million). As in 2015, the reimbursements were mainly from the strategic alliance with Pfizer Inc., USA.
The breakdown of research and development costs by region is presented in the Segment Reporting (see Note  “Information by business sector / country and region”).
(11) Other operating income
Other operating income was as follows:30 KB EXCEL
|Gains on disposal of businesses and non-current assets||483||52|
|Income from milestone payments, rights and royalties||317||262|
|Reversal of allowances for receivables||59||40|
|Gains from the release of provisions for litigation||23||35|
|Income from miscellaneous services||18||22|
|Remaining other operating income||96||59|
|Other operating income||996||471|
In fiscal 2016, the gains on the disposal of businesses and non-current assets in the amount of € 483 million (2015: € 52 million) were attributable to sale of the rights to Kuvan® (€ 330 million), the deconsolidation of the Venezuelan entities (€ 50 million) as well as the disposal of equity investments.
An amount of € 191 million (2015: € 191 million) of the income from milestone payments, rights and royalties totaling € 317 million (2015: € 262 million) resulted from the collaboration agreement entered into with Pfizer Inc., USA, in 2014 in the field of immuno-oncology. This related to the pro rata recognition of deferred income from the upfront payment as well as the value of the right to co-promote Xalkori® (see Note  “Collaborations of material significance”). Royalty and license income was mainly due to a license granted in 2016 for interferon beta products (Biogen Inc., USA) as well as for the product Viibryd® (Allergan plc, Ireland).
(12) Other operating expenses
The breakdown of other operating expenses was as follows:30.5 KB EXCEL
|Integration costs / IT costs||– 193||– 78|
|Impairment losses||– 134||– 128|
|Litigation||– 104||– 85|
|Non-income-related taxes||– 68||– 44|
|Premiums, fees and contributions||– 65||– 57|
|Exchange rate differences from operating activities (net)||– 57||– 49|
|Allowances for receivables||– 52||– 84|
|Profit-sharing expenses||– 39||– 26|
|Restructuring costs||– 22||– 48|
|Expenses for miscellaneous services||– 15||– 20|
|Project costs||– 11||– 16|
|Acquisition costs||– 7||– 102|
|Remaining other operating expenses||– 215||– 180|
|Other operating expenses||– 981||– 917|
Integration and IT costs amounting to € 193 million (2015: € 78 million) were incurred for the global harmonization of the IT landscape and in connection with the integration of acquired and existing businesses. In 2016, this related mainly to the Sigma-Aldrich integration.
Impairment losses totaled € 134 million (2015: € 128 million) and related in the amount of € 93 million to sales-related assets (2015: € 0 million), in the amount of € 19 million to production plants and technologies (2015: € 0 million), in the amount of € 14 million to assets which were assigned to research and development (2015: € 121 million), and in the amount of € 2 million to administration (2015: € 7 million). Moreover, impairment losses in the amount of € 5 million (2015: € 0 million) were recognized on other financial instruments which were classified to the category “available for sale”. Further information on impairments of intangible assets can be found in Note  “Intangible assets”.
The restructuring costs incurred in fiscal 2016 amounting to € 22 million (2015: € 48 million) arose mainly in connection with the “Fit for 2018” transformation and growth program. As in the previous year, these costs largely related to personnel measures, for instance the elimination of positions in order to create a leaner and more efficient organization.
Remaining other operating expenses also included environmental protection costs as well as personnel expenses not allocable to the functional areas.
(13) Financial result30 KB EXCEL
|Interest income and similar income||20||32|
|Interest expenses and similar expenses||– 277||– 292|
|Interest expenses from interest rate derivatives||– 13||– 11|
|Interest result||– 270||– 271|
|Interest component of the additions to pension provisions and other non-current provisions||– 52||– 46|
|Currency differences from financing activities||– 4||– 40|
|Financial result||– 326||– 357|
Currency differences from financing activities in 2015 were mainly the result of expenses for hedging intragroup transactions in foreign currency. These expenses result from hedging at forward rates while intragroup transactions are measured at spot rates. The decline in 2016 was primarily due to a lower hedging volume and changes in forward rate markups.
(14) Income tax29.5 KB EXCEL
|Current income taxes in the period||– 671||– 705|
|Income taxes for previous periods||– 19||– 95|
|Deferred taxes in the period||168||432|
|Income tax||– 521||– 368|
The following table presents the tax reconciliation from theoretical income tax expense to income tax expense according to the income statement. The theoretical income tax expense is determined by applying the statutory tax rate of 30.7% of a corporation headquartered in Darmstadt.31 KB EXCEL
|Profit before income tax||2,154||1,487|
|Theoretical income tax expense||– 661||– 456|
|Tax rate differences||235||151|
|Tax effect of companies with a negative contribution to consolidated profit||– 38||– 22|
|Income tax for previous periods||– 19||– 95|
|Tax effect on tax loss carryforwards||1||16|
|Tax effect of non-deductible expenses / Tax-free income / Other tax effects||– 43||– 482|
|Income tax expense according to consolidated income statement||– 521||– 368|
|Tax ratio according to consolidated income statement||24.2%||24.8%|
Income taxes consisted of corporation and trade taxes for the companies domiciled in Germany as well as comparable income taxes for foreign companies.
The higher tax credits in 2015 arose primarily in the United States due to the consideration of dividend income. However, this dividend income was also taxable in the United States; the related tax expense was included in 2015 under “Tax effect of non-deductible expenses / Tax-free income / Other tax effects.” The change in the item “Income tax for previous periods” resulted, among other things, from the addition to provisions for tax audits in 2015.
The reconciliation between deferred taxes in the consolidated balance sheet and deferred taxes in the consolidated income statement is presented in the following table:22.5 KB EXCEL
|€ million||2016||2015 1|
|Change in deferred tax assets (consolidated balance sheet)||– 37||57|
|Change in deferred tax liabilities (consolidated balance sheet)||206||– 2,107|
|Deferred taxes credited / debited to equity||– 85||41|
|Changes in scope of consolidation / currency translation / other changes||84||2,441|
|Deferred taxes (consolidated income statement)||168||432|
Tax loss carryforwards were structured as follows:32.5 KB EXCEL
|Dec. 31, 2016||Dec. 31, 2015 1|
|Tax loss carryforwards||88||959||1,047||22||1,184||1,206|
|thereof: including deferred tax asset||13||322||335||5||469||474|
|Deferred tax asset||2||74||76||–||119||119|
|thereof: excluding deferred tax asset||75||637||712||17||715||732|
|Theoretical deferred tax asset||11||156||167||3||181||184|
The decrease in non-German tax loss carryforwards was mainly due to the utilization of loss carryforwards in the United States.
Deferred tax assets are recognized for tax loss and interest carryforwards only if for tax loss carryforwards of less than € 5 million realization of the related tax benefits is probable within one year, and for tax loss carryforwards of more than € 5 million realization of the related tax benefits is probable within the next three years.
The vast majority of the tax loss carryforwards either has no expiry date or can be utilized for up to 20 years.
In 2016, the income tax expense was reduced by € 1 million (2015: € 16 million) due to the utilization of tax loss carryforwards from prior years for which no deferred tax asset had been recognized in prior periods.
Deferred tax assets and liabilities correspond to the following balance sheet items:33 KB EXCEL
|Dec. 31, 2016||Dec. 31, 2015 1|
|Property, plant and equipment||25||114||23||169|
|Current and non-current financial assets||4||11||10||12|
|Current and non-current receivables / Other assets||27||2||26||11|
|Provisions for pensions and other post-employment benefits||460||85||351||70|
|Current and non-current other provisions||355||41||308||36|
|Current and non-current liabilities||106||13||125||20|
|Tax loss carryforwards||76||–||119||–|
|Tax refund claims / Other||50||467||164||427|
|Offset deferred tax assets and liabilities||– 751||– 751||– 784||– 784|
|Deferred taxes (consolidated balance sheet)||1,013||2,720||1,050||2,926|
In addition to deferred tax assets on tax loss carryforwards amounting to € 76 million (2015: € 119 million), deferred tax assets of € 937 million were recognized for temporary differences (2015: € 930 million).
As of the balance sheet date, deferred taxes for temporary differences for interests in subsidiaries were recognized to the extent that these related to planned dividend payments and, in this context, the reversal of these differences was foreseeable. Deferred tax liabilities in a total amount of € 466 million (2015: € 391 million) were recognized for the higher or lower tax expense attributable to dividend payments. Temporary differences relating to the retained earnings of subsidiaries amounted to € 5,669 million (2015: € 5,248 million).
(15) Earnings per share
Basic earnings per share are calculated by dividing the profit after tax attributable to the shareholders of Merck KGaA by the weighted average number of theoretical shares outstanding. The use of a theoretical number of shares takes into account the fact that the general partner’s capital is not represented by shares. The share capital of € 168 million was divided into 129,242,252 shares. Accordingly, the general partner’s capital of € 397 million was divided into 305,535,626 theoretical shares. Overall, the total capital thus amounted to € 565 million or 434,777,878 theoretical shares outstanding. The weighted average number of shares in 2016 was likewise 434,777,878.
As of December 31, 2016, there were no potentially dilutive shares. Diluted earnings per share were equivalent to basic earnings per share.