Notes to the consolidated income statement
Sales were generated primarily from the sale of goods and to a limited degree also included revenues from services rendered. Merck Group sales totaled € 11,291.5 million in 2014 (2013: € 10,700.1 million), which represented an increase of 5.5 % compared to 2013 (decrease of – 0.4 % in 2013). Sales are presented by division and region in the Segment Reporting (see Note ).
(24) Royalty, license and commission income
In 2014, royalty and license income totaled € 138.0 million (2013: € 359.8 million) and mainly included royalty and license income from the products Humira® (AbbVie Inc.), Viibryd® (Actavis, formerly Forest Laboratories Inc.) and Puregon® (Merck & Co. Inc.) as well as income from the active pharmaceutical ingredients bisoprolol and metformin. The change compared to 2013 resulted primarily from the expiration of the patents for Avonex® (Biogen Idec Inc.) and Enbrel® (Amgen Inc.). An out-of-court settlement was reached with AbbVie Inc. for patent disputes regarding Humira®. Based on this settlement, Merck recorded no further license income for this product as of the second half of 2014.
Revenue from the strategic alliance with Pfizer Inc., USA, in immuno-oncology was recognized for the first time in 2014. More details on the agreement can be found in Note .
In 2014, commission income totaled € 71.3 million (2013: € 35.2 million). This primarily consisted of proceeds from cooperation and distribution agreements.
The breakdown of royalty, license and commission income by division is presented in the Segment Reporting (see Note ).
(25) 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.
The breakdown of cost of sales by division is presented in the Segment Reporting (Note ).
(26) Marketing and selling expenses
Marketing and selling expenses comprised the following:
|Sales force||– 809.3||– 789.8|
|Internal sales services||– 613.6||– 598.7|
|Sales promotion||– 469.4||– 458.4|
|Logistics||– 412.6||– 390.7|
|Amortization of intangible assets1||– 719.0||– 762.0|
|Other marketing and selling expenses||– 81.0||– 88.9|
|Marketing and selling expenses1||– 3,104.9||– 3,088.5|
Amortization of intangible assets was attributable to marketing approvals, patents, licenses and similar rights, brands, trademarks and other, which could be functionally allocated to Marketing and Selling.
The breakdown of marketing and selling expenses by division is presented in the Segment Reporting (see Note ).
(27) Royalty, license and commission expenses
In 2014, royalty and license expenses amounted to € 160.5 million (2013: € 212.8 million) and commission expenses totaled € 377.0 million (2013: € 354.2 million).
The sales-dependent royalty payments represented selling expenses and were expensed in the period in which they were incurred. Of significance here are the marketing rights to Erbitux® outside the United States and Canada, for which expenses totaling € 84.7 million (2013: € 80.9 million) were incurred in 2014.
Co-marketing agreements lead to sales-dependent commission payments that are expensed in the period in which they are incurred. The commission expenses incurred related mainly to the marketing of Rebif® in the United States, for which expenses of € 314.6 million were incurred in 2014 (2013: € 302.4 million). These also represented exclusively selling expenses.
The breakdown of royalty, license and commission expenses by division is presented in the Segment Reporting (see Note ).
(28) Administration expenses
Personnel costs and material expenses of management and administrative functions were recorded under this item unless charged to other functional costs as internal services.
The breakdown of administration expenses by division is presented in the Segment Reporting (see Note ).
(29) Research and development costs
Research and development costs increased in 2014 to € 1,703.7 million (2013: € 1,506.6 million). Amortization of intangible assets (excluding software) that had been attributable to research and development costs was allocated to this functional area for the first time in 2014.
Reimbursements for research and development amounting to € 18.4 million (2013: € 15.0 million) were offset against research and development costs. This figure also included government subsidies of € 5.9 million (2013: € 8.9 million).
The breakdown of research and development costs by division and region is presented in the Segment Reporting (see Note ).
(30) Other operating expenses and income
Other operating expenses and income were as follows:
|Impairment losses1||– 100.2||– 225.6|
|Litigation1||– 95.5||– 205.2|
|Integration costs / IT costs||– 87.2||– 49.0|
|Restructuring costs||– 83.9||– 130.5|
|Premiums, fees and contributions||– 55.2||– 54.3|
|Allowances for receivables||– 41.9||– 47.1|
|Non-income related taxes||– 35.5||– 37.4|
|Acquisition costs||– 24.5||–|
|Expenses for miscellaneous services||– 21.8||– 23.9|
|Losses on the divestment of businesses||– 8.8||– 2.3|
|Project costs||– 4.4||– 6.5|
|Other operating expenses1||– 125.2||– 131.0|
|Total other operating expenses1||– 684.1||– 912.8|
|Gains from the release of provisions for litigation||260.3||50.4|
|Exchange rate differences from operating activities||53.3||26.0|
|Release of allowances for receivables||41.8||42.1|
|Income from miscellaneous services||26.4||25.1|
|Gains on disposal of assets||3.7||7.5|
|Income from investments||1.5||1.5|
|Other operating income1||39.4||42.1|
|Total other operating income1||426.4||194.7|
|Total other operating expenses and income||– 257.7||– 718.1|
In fiscal 2014, income from the release of provisions for litigation was disclosed separately and not offset against litigation expenses. The previous year’s figure has been correspondingly adjusted.
The net expenses previously disclosed under one-time items were reclassified to other operating income and expenses based on their nature.
The impairments totaled € 100.2 million (2013: € 225.6 million) and related in the amount of € 84.9 million (2013: € 10.5 million) to assets which were assigned to research and development, in the amount of € 5.1 million (2013: € 12.6 million) to production plants, in the amount of € 0.1 million (2013: € 156.2 million) to sales-related assets, and in the amount of € 5.7 million (2013: € 23.5 million) to administration. In addition, impairments were recognized in the amount of € 4.4 million (2013: € 5.5 million) for non-consolidated investments and other financial instruments which were classified to the category “available-for-sale”. In 2013, impairments were recorded in the amount of € 17.3 million for capitalized goodwill in connection with the sale of the Discovery and Development Solutions business field of the Merck Millipore division. Further information on impairments can be found under Intangible Assets (see Note ).
Integration and IT costs of € 87.2 million (2013: € 49.0 million) were incurred primarily for the global harmonization of the IT landscape and in connection with the integration of acquired and existing businesses.
The restructuring charges incurred in fiscal 2014 amounting to € 83.9 million (2013: € 130.5 million) arose in connection with the “Fit for 2018” transformation and growth program in the amount of € 79.5 million (2013: € 130.5 million). As in the previous year, these charges largely related to personnel measures, for instance the elimination of positions in order to create a leaner and more efficient organization. Of the recognized asset impairments, an amount of € 4.5 million (2013: € 35.7 million) was attributable to the program, which resulted in total expenses of € 84.0 million (2013: € 166.2 million) for the “Fit for 2018” program.
Acquisition costs amounting to € 24.5 million (2013: € 0.0 million) were incurred for the acquisition of AZ Electronic Materials S.A., Luxembourg, as well as for the proposed acquisition of the Sigma-Aldrich Corporation, USA.
Other operating expenses also include special environmental protection costs as well as personnel expenses not allocable to the functional areas, for example costs of the works council.
Income from the release of provisions for litigation in fiscal 2014 amounted to € 260.3 million (2013: € 50.4 million) and was mainly attributable to the settlement of the legal dispute with Israel Bio-Engineering Project Limited Partnership (IBEP).
The breakdown of other operating expenses and income by division is presented in the Segment Reporting (see Note ).
(31) Financial result
|Interest income and similar income||30.6||30.1|
|Interest expenses and similar expenses||– 162.4||– 176.6|
|Interest component from currency hedging transactions||– 5.1||– 17.2|
|Interest result||– 136.9||– 163.7|
|Interest component of the additions to pension provisions and other non-current provisions||– 55.2||– 54.2|
|Currency differences from financing activities||– 13.0||– 4.3|
|Result from financial investments||0.1||–|
|– 205.0||– 222.2|
The financial result improved year-on-year mainly as a result of lower interest expenses and a reduced interest component from currency hedging transactions. The higher interest expenses in 2013 included expenses for a bond that was repaid in September 2013.
These lower interest expenses were partially offset by financing costs in connection with the proposed acquisition of the Sigma-Aldrich Corporation, USA. The interest component from currency hedging transactions compared to the previous year was mainly due to savings resulting from the establishment of a U.S. dollar in-house bank as this led to a significant decline in the nominal value of existing currency hedging transactions.
Currency differences from financial investments were mainly the result of expenses for premiums on options entered into to hedge intragroup transactions in foreign currency.
(32) Income tax
|Current taxes in the period||– 592.4||– 496.9|
|Taxes for previous periods||– 21.9||– 41.6|
|Deferred taxes in the period||222.1||359.0|
|– 392.2||– 179.5|
The following table presents the tax reconciliation from theoretical tax expense to tax expense according to the income statement. The theoretical tax expense is determined by applying the statutory tax rate of 30.7 % of a corporation headquartered in Darmstadt.
|Profit before income tax||1,557.0||1,388.6|
|Tax rate||30.7 %||30.7 %|
|Theoretical tax expense||– 478.0||– 426.3|
|Tax rate differences||100.8||109.7|
|Tax effect of companies with a negative contribution to consolidated profit||– 15.8||– 14.6|
|Tax for other periods||– 21.9||– 41.6|
|Tax effect on tax loss carryforwards||18.5||0.4|
|Tax effect of non-deductible expenses / tax-free income / Other tax effects||– 19.0||– 32.9|
|Tax expense according to income statement||– 392.2||– 179.5|
|Tax ratio according to income statement||25.2 %||12.9 %|
The tax expense consisted of corporation and trade taxes for the companies domiciled in Germany as well as comparable income taxes for foreign companies.
In 2013 the higher tax credits in 2013 arose primarily in the United States due to the consideration of dividend income from high-tax countries.
The reconciliation between deferred taxes in the balance sheet and deferred taxes in the income statement is presented in the following table:
|Change in deferred tax assets (balance sheet)||256.5||– 210.2|
|Change in deferred tax liabilities (balance sheet)||– 152.9||526.5|
|Deferred taxes credited / debited to equity||– 177.4||42.0|
|Changes in scope of consolidation / currency translation / other changes||295.9||0.7|
|Deferred taxes (income statement)||222.1||359.0|
Tax loss carryforwards were structured as follows:
|Dec. 31, 2014||Dec. 31, 2013|
|Tax loss carryforwards||8.0||948.4||956.4||3.4||437.4||440.8|
Including deferred tax asset
|Deferred tax asset||0.5||71.5||72.0||0.2||20.6||20.8|
Excluding deferred tax asset
|Theoretical deferred tax asset||0.8||106.5||107.3||0.4||77.5||77.9|
The increase in non-German tax loss carryforwards and the higher deferred tax assets compared to 2013 was mainly the result of the acquisition of AZ Electronic Materials S.A., Luxembourg.
Deferred tax assets are recognized for tax loss and interest carryforwards only if for tax loss carryforwards of less than € 5.0 million realization of the related tax benefits is probable within one year, and for tax loss carryforwards of more than € 5.0 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 carried forward for up to 20 years.
The tax loss carryforwards accumulated in Germany for corporation and trade tax amounted to € 8.0 million (2013: € 3.4 million).
The additional theoretically possible deferred tax assets amounted to € 107.3 million (2013: € 77.9 million).
In 2014, the income tax expense was reduced by € 18.5 million (2013: € 0.4 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:
|Dec. 31, 2014||Dec. 31, 2013|
|Property, plant and equipment||16.1||69.8||14.8||58.3|
|Current and non-current financial assets||0.1||3.6||0.1||3.9|
|Current and non-current receivables / Other assets||57.5||7.4||39.1||23.4|
|Provisions for pensions and other post-employment benefits||338.0||47.2||149.6||47.2|
|Current and non-current other provisions||308.1||72.5||311.8||69.0|
|Current and non-current liabilities||120.0||36.0||41.6||4.9|
|Tax loss carryforwards||72.0||–||20.8||–|
|Tax refund claims / Other||18.7||41.6||42.2||18.2|
|Offset deferred tax assets and liabilities||– 517.4||– 517.4||– 365.2||– 365.2|
|Deferred taxes (balance sheet)||992.9||818.4||736.4||665.5|
In addition to deferred tax assets on tax loss carryforwards amounting to € 72.0 million (2013: € 20.8 million), deferred tax assets of € 920.9 million were recognized for temporary differences (2013: € 715.6 million).
As of the balance sheet date, deferred tax liabilities for temporary differences for interests in subsidiaries as regards planned dividend payments amounted to € 31.0 million (2013: € 12.9 million). No deferred tax liabilities were recognized for other temporary differences relating to interests in subsidiaries since the reversal of these differences was not foreseeable. Temporary differences relating to the retained earnings of subsidiaries amounted to € 5,194.3 million (2013: € 4,894.6 million).
(33) Non-controlling interests
Non-controlling interests in net profit were primarily composed of the minority interests in the listed companies Merck Ltd., India, and P.T. Merck Tbk., Indonesia, as well as in the companies Merck (Pvt.) Ltd., Pakistan, and Merck Ltd., Thailand.
(34) 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.
Following the resolution by the Annual General Meeting of Merck KGaA on May 9, 2014 to conduct a 1:2 share split, the no-par value shares with a pro rata amount of the share capital of € 2.60 a piece were each divided into two shares with a pro rata amount of the share capital of € 1.30 a piece. The share capital of € 168.0 million was newly divided into 129,242,252 shares. Accordingly, the general partner’s capital of € 397.2 million was divided into 305,535,626 theoretical shares. Overall, the total capital thus amounted to € 565.2 million or 434,777,878 theoretical shares outstanding. Taking into account the share split, the weighted average number of shares in 2014 was likewise 434,777,878 in 2014.
As of December 31, 2014 there were no potentially dilutive shares. Diluted earnings per share were equivalent to basic earnings per share.
The calculation of basic and diluted earnings per share was adjusted for all the reporting periods presented owing to the share split that took effect on June 30, 2014.