Segment Reporting

(31) Information by business sector /country and region

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 assets^2,3	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.

29 KB EXCEL

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:

23 KB EXCEL

€ 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:

30.5 KB EXCEL

€ 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:

31 KB EXCEL

€ 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:

23.5 KB EXCEL

€ 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).