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Segment Reporting

(31) Information by business sector /country and region

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Information by business sector

Healthcare Life Science Performance Materials Corporate and Other Merck Group
€ million 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Net sales1 6,855 6,934 5,658 3,355 2,511 2,556 15,024 12,845
Operating result (EBIT)2 1,593 1,097 556 301 823 878 – 492 – 432 2,481 1,843
Depreciation and amortization 746 752 797 372 237 242 25 18 1,805 1,383
Impairment losses 88 122 26 2 17 2 2 3 134 128
Reversals of impairment losses – 3 – 1 – 1 – 5 – 1
EBITDA2 2,425 1,970 1,378 674 1,077 1,120 – 465 – 411 4,415 3,354
Exceptionals2 – 297 31 274 182 29 12 69 51 75 276
EBITDA pre exceptionals (Segment result)2 2,128 2,002 1,652 856 1,106 1,132 – 396 – 360 4,490 3,630
EBITDA margin pre exceptionals (in % of net sales)2 31.0% 28.9% 29.2% 25.5% 44.1% 44.3% 29.9% 28.3%
Net operating assets2,3 5,600 5,813 21,853 21,624 4,146 4,170 200 113 31,798 31,720
Segment liabilities – 2,427 – 2,479 – 953 – 910 – 290 – 290 – 106 – 61 – 3,777 – 3,739
Investments in property, plant and equipment 4 315 232 254 133 96 103 51 45 716 514
Investments in intangible assets4 47 146 47 8 13 10 25 15 132 179
Net cash flows from operating activities 1,723 1,683 1,417 706 1,054 1,139 – 1,677 – 1,333 2,518 2,195
Business free cash flow2 1,648 1,581 1,144 676 1,011 931 – 485 – 421 3,318 2,766
1
Without intersegment sales.
2
Not defined by International Financial Reporting Standards (IFRS).
3
Previous year’s figures have been adjusted, see “Acquisitions, assets held for sale and disposal groups”.
4
According to the consolidated cash flow statement.
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Information by country and region

Europe thereof: Germany thereof: Switzerland North America thereof: USA Asia-Pacific thereof: China Latin America Middle East and Africa Merck Group
€ million 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Net sales by customer location1 4,735 4,103 983 851 238 160 3,858 2,723 3,668 2,567 4,736 4,241 1,356 1,105 1,136 1,265 559 513 15,024 12,845
Net sales by company location1 5,466 4,735 1,712 1,563 327 177 3,854 2,719 3,691 2,587 4,450 4,014 1,041 669 1,099 1,238 154 138 15,024 12,845
Intangible assets2 7,047 7,753 372 352 3,345 3,979 17,131 16,787 17,131 16,787 803 871 46 52 2 5 6 6 24,989 25,422
Property, plant and equipment2 2,554 2,401 1,187 1,104 548 527 1,015 1,026 1,013 1,024 504 443 172 124 110 93 49 44 4,230 4,008
Research and development costs – 1,697 – 1,510 – 763 – 835 – 840 – 530 – 184 – 124 – 184 – 121 – 61 – 45 – 25 – 12 – 21 – 24 – 12 – 7 – 1,976 – 1,709
Number of employees 24,438 23,429 12,450 11,938 2,078 1,946 10,037 9,794 9,874 9,629 10,754 11,096 2,999 2,619 4,140 4,352 1,045 942 50,414 49,613
1
Without intersegment sales.
2
Previous year’s figures have been adjusted, see “Acquisitions, assets held for sale and disposal groups”.

(32) Information on Segment Reporting

Segmentation was performed in accordance with the organizational and reporting structure of the Merck Group that applied during 2016.

The Healthcare business sector comprises the businesses with prescription and over-the-counter pharmaceuticals and biopharmaceuticals as well as allergy products. The Life Science business sector offers solutions to research and analytical laboratories in the pharmaceutical / biotechnology industry or in academic institutions, and customers manufacturing large- and small-molecule drugs. The Performance Materials business sector consists of the entire specialty chemicals business. The fields of activity of the individual segments are described in detail in the sections about the business sectors in the combined management report.

Corporate and Other included income and expenses, assets and liabilities as well as cash flows that could not be directly allocated to the reportable segments presented. This related mainly to central Group functions. Moreover, the column served the reconciliation to the Group numbers. The expenses and income as well as cash flows attributable to the financial result and income taxes were also presented under Corporate and Other.

Apart from sales, the success of a segment is mainly determined by EBITDA pre exceptionals (segment result) and business free cash flow. EBITDA pre exceptionals and business free cash flow are performance indicators not defined by International Financial Reporting Standards. However, they represent important variables used to steer the Merck Group. To permit a better understanding of operational performance, EBITDA pre exceptionals excludes depreciation and amortization, impairment losses, and reversals of impairment losses as well as exceptional income and expenses presented in the following. Among other things, business free cash flow is also used for internal target agreements.

In 2016, only the Life Science business sector generated intragroup sales between business sectors. These resulted mainly from transactions with the Healthcare business sector in an amount of € 46 million and with the Performance Materials business sector (€ 2 million). Transfer prices for intragroup sales are determined on an arm’s length basis.

Neither in 2016 nor in 2015 did any single customer account for more than 10% of Group sales.

The following table presents the reconciliation of EBITDA pre exceptionals of all operating businesses to the profit before income tax of the Merck Group:

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€ million 2016 2015
EBITDA pre exceptionals of the operating businesses1 4,887 3,990
Corporate and Other – 396 – 360
EBITDA pre exceptionals of the Merck Group1 4,490 3,630
Depreciation / amortization / impairment losses / reversals of impairment losses – 1,934 – 1,511
Exceptionals1 – 75 – 276
Operating result (EBIT)1 2,481 1,843
Financial result – 326 – 357
Profit before income tax 2,154 1,487
1
Not defined by International Financial Reporting Standards (IFRS).

Exceptionals comprised the following:

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€ million 2016 2015
Restructuring costs – 22 – 48
Integration costs / IT costs – 193 – 78
Gains (+) / losses (–) on the divestment of businesses 304 – 2
Acquisition-related exceptionals – 153 – 133
Other exceptionals – 11 – 16
Exceptionals before impairment losses / reversals of impairment losses1 – 75 – 276
Impairment losses – 115 – 92
Reversals of impairment losses
Exceptionals (total)1 – 191 – 367
1
Not defined by International Financial Reporting Standards (IFRS).

Exceptionals were included in the consolidated income statement under cost of sales as well as under other operating expenses and income. The exceptionals of € 193 million recorded under integration costs / IT costs (2015: € 78 million) were largely incurred in connection with the integration of the Sigma-­Aldrich Corporation, USA (€ 125 million), as well as expenses for ERP systems (€ 40 million). These amounts were recorded under other operating expenses.

The gains from the divestment of businesses amounting to € 304 million (2015: losses from the divestment of businesses amounting to € 2 million) resulted mainly from the sales of the rights to Kuvan® and the associated business transactions. These gains were included in other operating income.

The acquisition-related exceptionals amounting to € 153 million (2015: € 133 million) were due to the acquisition of the Sigma-­Aldrich Corporation, USA, and primarily consisted of the step-up of the inventories from the purchase price allocation for the Sigma-­Aldrich Corporation, USA, which was recognized six months after the acquisition in the income statement as part of cost of sales.

Business free cash flow was determined as follows:

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€ million 2016 2015
EBITDA pre exceptionals1 4,490 3,630
Investments in property, plant and equipment, software as well as
advance payments for intangible assets
– 859 – 609
Changes in inventories according to the consolidated balance sheet2 3 – 950
Changes in trade accounts receivable and receivables from royalties and licenses
according to the consolidated balance sheet
– 177 – 514
Adjustment first-time consolidation of Sigma-­Aldrich2 – 149 1,210
Adjustment first-time consolidation of BioControl Systems 10
Business free cash flow1 3,318 2,766
1
Not defined by International Financial Reporting Standards (IFRS).
2
Previous year’s figures have been adjusted, see “Acquisitions, assets held for sale and disposal groups”.

The reconciliation of operating assets presented in the Segment Reporting to the total assets of the Merck Group was as follows:

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€ million Dec. 31, 2016 Dec. 31, 20151
Assets 38,251 38,081
Monetary assets (cash and cash equivalents,
current financial assets, loans and securities)
– 1,123 – 1,093
Non-operating receivables, income tax receivables, deferred taxes
and net defined benefit assets
– 1,542 – 1,484
Assets held for sale – 12 – 46
Operating assets (gross)2 35,575 35,458
Trade accounts payable – 2,048 – 1,921
Other operating liabilities – 1,729 – 1,818
Segment liabilities – 3,777 – 3,739
Operating assets (net)2 31,798 31,720
1
Previous year’s figures have been adjusted, see “Acquisitions, assets held for sale and disposal groups”.
2
Not defined by International Financial Reporting Standards (IFRS).