Segment Reporting

(32) Information by business sector/country and region

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Information by business sector

Healthcare Life Science Performance Materials Corporate and Other Group
€ million 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
Net sales1 6,999 6,855 5,882 5,658 2,446 2,511 15,327 15,024
Operating result (EBIT)2 1,447 1,593 834 556 689 823 – 445 – 492 2,525 2,481
Depreciation and amortization 742 746 743 797 232 237 41 25 1,758 1,805
Impairment losses 53 88 3 26 26 17 4 2 86 134
Reversals of impairment losses – 87 – 3 – 1 – 87 – 5
EBITDA2 2,155 2,425 1,580 1,378 947 1,077 – 400 – 465 4,282 4,415
Adjustments2 – 206 – 297 206 274 33 29 99 69 132 75
EBITDA pre (Segment result)2 1,949 2,128 1,786 1,652 980 1,106 – 301 – 396 4,414 4,490
EBITDA pre margin (in % of net sales)2 27.9% 31.0% 30.4% 29.2% 40.1% 44.1% 28.8% 29.9%
Net operating assets2, 3 5,728 5,600 19,449 21,860 3,629 4,146 326 200 29,131 31,805
Segment liabilities –2,456 – 2,427 – 973 – 953 – 314 – 290 – 259 – 106 – 4,002 – 3,777
Investments in property, plant and equipment4 359 315 327 254 116 96 116 51 919 716
Investments in intangible assets4 310 47 55 47 14 13 13 25 392 132
Net cash flows from operating activities 1,629 1,723 1,516 1,417 969 1,054 – 1,418 – 1,677 2,696 2,518
Business free cash flow2 1,448 1,648 1,402 1,144 906 1,011 – 437 – 485 3,318 3,318
1
Excluding intersegment sales.
2
Not defined by International Financial Reporting Standards (IFRS), see Note (33) ‟Information on Segment Reporting”.
3
Previous year’s figures have been adjusted, see Note (4) ‟Acquisitions and divestments”.
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 Group
€ million 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
Net sales by customer location1 4,756 4,735 979 983 226 238 3,810 3,858 3,623 3,668 4,921 4,736 1,583 1,356 1,232 1,136 608 559 15,327 15,024
Net sales by company location1 5,229 5,466 1,521 1,712 362 327 3,835 3,854 3,672 3,691 4,685 4,450 1,416 1,041 1,196 1,099 382 154 15,327 15,024
Goodwill and other intangible assets2 6,537 7,047 614 372 2,839 3,345 14,694 17,137 14,675 17,137 665 803 39 46 2 2 6 21,899 24,995
Property, plant and equipment2 2,895 2,554 1,385 1,187 623 548 927 1,016 923 1,014 531 504 214 172 114 110 45 49 4,512 4,231
Research and development costs – 1,864 – 1,697 – 701 – 763 – 1,050 – 840 – 167 – 184 – 166 – 184 – 75 – 61 – 26 – 25 – 21 – 21 – 13 – 12 – 2,140 – 1,976
Number of employees 25,979 24,437 13,302 12,449 2,151 2,078 10,520 10,037 10,339 9,874 11,294 10,754 3,324 3,080 4,027 4,112 1,060 1,008 52,880 50,348
1
Excluding intersegment sales.
2
Previous year’s figures have been adjusted, see Note (4) ‟Acquisitions and divestments”.

(33) Information on Segment Reporting

Segmentation was performed in accordance with the organizational and reporting structure of the Group that applied during 2017. The combination into segments is based on the business models of the business sectors and led to homogeneous risk structures within the segments. Resource allocation and the assessment of the earning power of the business sectors was performed by the Executive Board as the main decision-maker.

The Healthcare business sector comprises the businesses with prescription and over-the-counter pharmaceuticals and biopharmaceuticals as well as allergy products and medical devices. The customers of this business sector mainly comprise wholesalers, hospitals and pharmacies. 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. In accordance with the field of activity, the customers of this business sector largely include companies of the pharmaceuticals and biotech sector as well as retailers, corporate customers and universities. The Performance Materials business sector consists of the entire specialty chemicals business and primarily services industrial companies. 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. As these are steered at Group level, 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 (segment result) and business free cash flow. EBITDA pre and business free cash flow are performance indicators not defined by International Financial Reporting Standards. However, they repre­sent important variables used to steer the Group. To permit a better understanding of operational performance, EBITDA pre excludes depreciation and amortization, impairment losses, and reversals of impairment losses as well as adjustments presented in the following. Among other things, business free cash flow is also used for internal target agreements.

In 2017, 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 € 55 million (2016: € 46 million) and with the Performance Materials business sector in an amount of € 2 million (2016: € 2 million). Transfer prices for intragroup sales are determined on an arm’s length basis.

Neither in 2017 nor in 2016 did any single customer account for more than 10% of Group sales.

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

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€ million 2017 2016
EBITDA pre of the operating businesses1 4,715 4,887
Corporate and Other – 301 – 396
EBITDA pre of the Group1 4,414 4,490
Depreciation/amortization/impairment losses/reversals of impairment losses – 1,758 – 1,934
Adjustments1 – 132 – 75
Operating result (EBIT)1 2,525 2,481
Financial result – 300 – 326
Profit before income tax 2,224 2,154
1
Not defined by International Financial Reporting Standards (IFRS).

The adjustments made comprised the following:

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€ million 2017 2016
Restructuring costs – 84 – 22
Integration costs/IT costs – 189 – 193
Gains (+)/losses (–) on the divestment of businesses 310 304
Acquisition-related adjustments – 63 – 153
Other adjustments – 106 – 11
Adjustments before impairment losses/reversals of impairment losses1 – 132 – 75
Impairment losses – 68 – 115
Reversals of impairment losses 87
Adjustments (total)1 – 114 – 191
1
Not defined by International Financial Reporting Standards (IFRS).

The adjustments of € 189 million recorded under integration costs/IT costs (2016: € 193 million) were largely incurred in connection with the integration of the Sigma-Aldrich Corporation, USA, (€ 95 million) as well as expenses for ERP systems (€ 64 million). These amounts were recorded under other operating expenses.

The gains from the divestment of businesses amounting to € 310 million (2016: € 304 million) resulted mainly from the divestment of the Biosimilars business and were included in other operating income.

Other adjustments amounting to € 106 million (2016: € 11 million) were largely attributable to the promise of a one-time bonus for employees on the occasion of the company’s 350th anniversary (€ 53 million) as well as to expenses in connection with the analysis of strategic options for the Consumer Health business (€ 24 million).

The adjustments were included in the consolidated income statement under cost of sales as well as under other operating expenses and income and were allocable to functional costs as follows:

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€ million
2017
thereof: cost of sales thereof: marketing and selling thereof: administration costs thereof: research and development thereof: other operating income and expense Total
Restructuring costs – 13 – 25 – 43 – 3 – 84
Integration costs/IT costs – 31 – 21 – 132 – 1 – 3 – 189
Gains (+)/losses (–) on the divestment of businesses 310 310
Acquisition-related adjustments – 1 – 5 – 56 – 63
Other adjustments – 13 – 11 – 66 – 5 – 11 – 106
Adjustments before impairment losses/reversals of impairment losses1 – 59 – 57 – 246 – 5 235 – 132
Impairment losses – 6 – 33 – 16 – 14 – 68
Reversals of impairment losses 87 87
Adjustments (total)1 23 – 90 – 246 – 21 222 – 114
1
Not defined by International Financial Reporting Standards (IFRS).
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€ million
2016
thereof:cost of sales thereof: marketing and selling thereof: administration costs thereof: research and development thereof: other operating income and expense Total
Restructuring costs – 3 – 19 – 22
Integration costs/IT costs – 12 – 45 – 133 – 2 – 193
Gains (+)/losses (–) on the divestment of businesses 304 304
Acquisition-related adjustments – 153 – 153
Other adjustments – 9 – 2 – 11
Adjustments before impairment losses/reversals of impairment losses1 – 12 – 48 – 162 – 2 149 – 75
Impairment losses – 19 – 88 – 2 – 3 – 4 – 115
Reversals of impairment losses
Adjustments (total)1 – 31 – 136 – 163 – 5 145 – 191
1
Not defined by International Financial Reporting Standards (IFRS).

Business free cash flow was determined as follows:

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€ million 2017 2016
EBITDA pre1 4,414 4,490
Investments in property, plant and equipment, software as well as advance payments for intangible assets – 1,047 – 859
Changes in inventories according to the consolidated balance sheet2 – 23 1
Changes in trade accounts receivable as well as receivables from royalties and licenses according to the consolidated balance sheet – 24 – 177
Elimination first-time consolidation of Sigma-Aldrich – 149
Elimination first-time consolidation of BioControl Systems2 – 2 12
Business free cash flow1 3,318 3,318
1
Not defined by International Financial Reporting Standards (IFRS).
1
Previous year’s figures have been adjusted, see Note (4) ‟Acquisitions and divestments”.

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

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€ million Dec. 31, 2017 Dec. 31, 20161
Assets 35,621 38,258
Monetary assets (cash and cash equivalents, current financial assets, loans, securities) – 749 – 1,123
Non-operating receivables, income tax receivables, deferred taxes and net defined benefit assets – 1,739 – 1,542
Assets held for sale – 12
Operating assets (gross)2 33,133 35,582
Trade accounts payable – 2,195 – 2,048
Other operating liabilities – 1,806 – 1,729
Segment liabilities – 4,002 – 3,777
Operating assets (net)2 29,131 31,805
1
Not defined by International Financial Reporting Standards (IFRS).
1
Previous year’s figures have been adjusted, see Note (4) ‟Acquisitions and divestments”.