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Result from Operating Activities and Income Taxes

(7) Segment reporting

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Information by business sector1

Healthcare Life Science Performance Materials Corporate and Other Group
€ million 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017
Net sales2 6,246 6,190 6,185 5,882 2,406 2,446 14,836 14,517
Intersegment sales 51 57 – 51 – 57
Operating result (EBIT)3 731 1,337 1,036 834 508 689 – 548 – 437 1,727 2,423
Depreciation and amortization 747 726 696 743 240 232 60 41 1,743 1,742
Impairment losses 13 53 23 3 21 26 4 58 86
Reversals of impairment losses – 87 – 87
EBITDA3 1,492 2,028 1,755 1,580 769 947 – 488 – 391 3,528 4,164
Adjustments3 63 – 256 85 206 17 33 107 99 272 82
EBITDA pre (Segment result)3 1,556 1,773 1,840 1,786 786 980 – 381 – 292 3,800 4,246
EBITDA pre margin (in % of net sales)3 24.9% 28.6% 29.8% 30.4% 32.7% 40.1% 25.6% 29.3%
Assets by business sector 7,568 8,184 20,860 20,422 4,046 3,942 4,414 3,073 36,888 35,621
Liabilities by business sector – 2,893 – 2,985 – 1,333 – 1,254 – 489 – 484 – 14,940 – 16,832 – 19,655 – 21,554
Investments in property, plant and equipment 4 379 359 313 327 119 116 100 116 910 919
Investments in intangible assets 4 59 310 19 55 13 14 15 13 106 392
Net cash flows from operating activities 1,159 1,629 1,621 1,516 742 969 – 1,303 – 1,418 2,219 2,696
Business free cash flow3 1,025 1,314 1,393 1,402 588 906 – 497 – 429 2,508 3,193
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Excluding intersegment sales.
3
Not defined by International Financial Reporting Standard (IFRSs).
4
According to the consolidated cash flow statement.
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Information by country and region1

Europe thereof: Germany thereof: Switzerland North America thereof: United States Asia-Pacific thereof: China Latin America Middle East and Africa Group
€ million 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017
Net sales by customer location2 4,559 4,406 1,002 945 211 223 3,818 3,810 3,627 3,623 4,965 4,761 1,869 1,583 950 996 544 544 14,836 14,517
Net sales by company location2 5,012 4,828 1,407 1,416 390 360 3,871 3,835 3,704 3,672 4,718 4,532 1,659 1,416 879 959 357 364 14,836 14,517
Goodwill and other intangible assets 5,562 6,537 575 614 2,124 2,839 14,868 14,694 14,857 14,675 570 665 32 39 2 2 21,001 21,899
Property, plant and equipment 3,031 2,895 1,503 1,385 647 623 1,024 927 1,020 923 585 531 266 214 127 114 43 45 4,811 4,512
Research and development costs – 1,938 – 1,840 – 920 – 681 – 902 – 1,050 – 186 – 166 – 185 – 165 – 69 – 73 – 30 – 26 – 17 – 17 – 14 – 12 – 2,225 – 2,108
Number of employees 25,791 25,979 13,513 13,302 2,234 2,151 10,978 10,520 10,800 10,339 10,486 11,294 3,550 3,324 3,337 4,027 1,121 1,060 51,713 52,880
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Excluding intersegment sales.

Segmentation was performed in accordance with the organizational and reporting structure of the Group that applied during 2018. 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 of Merck KGaA, Darmstadt, Germany, as the main decision-maker.

The Healthcare business sector comprises the businesses with prescription pharmaceuticals, 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 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 disclosed 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 the adjustments presented in the following. Among other things, business free cash flow is also used for internal target agreements.

Neither in 2018 nor in 2017 did any single customer account for more than 10% of Group sales. Transfer prices for intragroup net sales were determined on an arm’s-length basis.

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‚ 2018 20171
EBITDA pre of the operating businesses2 4,181 4,538
Corporate and Other – 381 – 292
EBITDA pre of the Group2 3,800 4,246
Depreciation/amortization/impairment losses/reversals of impairment losses – 1,801 – 1,741
Adjustments2 – 272 – 82
Operating result (EBIT)2 1,727 2,423
Financial result – 266 – 294
Profit before income tax 1,461 2,129
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Not defined by International Financial Reporting Standard (IFRSs).

The adjustments comprised the following:

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€ million 2018 20171
Restructuring expenses – 46 – 61
Integration expenses/IT expenses – 142 – 188
Gains (+)/losses (–) on the divestment of businesses – 25 310
Acquisition-related adjustments – 2 – 63
Other adjustments – 58 – 81
Adjustments before impairment losses/reversals of impairment losses2 – 272 – 82
Impairment losses – 55 – 68
Reversals of impairment losses 87
Adjustments (total)2 – 327 – 64
1
Previous year’s figures have been adjusted, see (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Not defined by International Financial Reporting Standard (IFRSs).

The adjustments recognized under integration and IT expenses in the amount of € 142 million (2017: € 188 million) mainly result from expenses for ERP systems (2018: € 50 million/2017: € 64 million) and the integration of the Sigma-Aldrich Corporation, United States (2018: € 66 million/2017: € 95 million). These amounts were recorded under other operating expenses.

Losses on the divestment of businesses in the amount of € 25 million (2017: gains on the divestment of businesses of € 310 million) were mainly attributable to the subsequent measurement of contingent considerations received in connection with the divestment of the Biosimilars business in the previous year, and were included in other operating expenses.

The majority of other adjustments in the amount of € 58 million (2017: € 81 million) was related to the activities on the occasion of the company’s 350th anniversary (2018: € 31 million/2017: € 62 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 2018 thereof: cost of sales thereof: marketing and selling expenses thereof: administration expenses thereof: research and development costs thereof: other operating income and expenses Total
Restructuring expenses – 1 – 6 – 39 – 46
Integration expenses/IT expenses – 39 – 3 – 99 – 1 – 142
Gains (+)/losses (–) on the divestment of businesses – 25 – 25
Acquisition-related adjustments – 2 – 2
Other adjustments – 6 – 3 – 50 – 1 2 – 58
Adjustments before impairment losses/ reversals of impairment losses1 – 45 – 13 – 190 – 2 – 23 – 272
Impairment losses – 18 – 14 – 19 – 3 – 55
Reversals of impairment losses
Adjustments (total)1 – 63 – 27 – 209 – 2 – 26 – 327
1
Not defined by International Financial Reporting Standards (IFRSs).
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€ million 2017 thereof: cost of sales1 thereof: marketing and selling expenses1 thereof: administration expenses1 thereof: research and development costs1 thereof: other operating income and expenses1 Total1
Restructuring expenses – 5 – 12 – 41 – 3 – 61
Integration expenses/IT expenses – 31 – 21 – 131 – 1 – 3 – 188
Gains (+)/losses (–) on the divestment of businesses 310 310
Acquisition-related adjustments – 1 – 5 – 56 – 63
Other adjustments – 13 – 10 – 42 – 5 – 11 – 81
Adjustments before impairment losses/ reversals of impairment losses2 – 50 – 43 – 219 – 5 235 – 82
Impairment losses – 6 – 33 – 16 – 14 – 68
Reversals of impairment losses 87 87
Adjustments (total)2 31 – 76 – 219 – 21 222 – 64
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Not defined by International Financial Reporting Standards (IFRSs).

Business free cash flow was determined as follows:

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€ million 2018 20171
EBITDA pre2 3,800 4,246
Investments in property, plant and equipment, software as well as advance payments for intangible assets – 932 – 1,012
Changes in inventories – 214 – 18
Changes in trade accounts receivable as well as receivables from royalties and licenses – 145 – 22
Elimination first-time consolidation of BioControl Systems – 2
Business free cash flow2 2,508 3,193
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Not defined by International Financial Reporting Standards (IFRSs).

(8) Net sales

The following tables present a more detailed breakdown of net sales from contracts with customers by business sector.

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€ million/in % 2018
Net sales by nature of the products Healthcare Life Science Performance Materials Group
Goods 6,085 98% 5,413 87% 2,404 100% 13,902 94%
Equipment/hardware 4 343 6% 347 2%
Services 84 1 % 424 7% 2 510 4%
License income 4 4
Commission income 14 1 15
Income from co-commercialisation agreements 58 1 % 58
Total 6,246 100% 6,185 100% 2,406 100% 14,836 100%
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Net sales by region (customer location)
Europe 2,203 35% 2,136 35% 220 9% 4,559 31 %
North America 1,432 23% 2,173 35% 214 9% 3,818 26%
Asia-Pacific (APAC) 1,501 24% 1,532 25% 1,932 80% 4,965 33%
Latin America 661 11% 256 4% 32 2% 950 6%
Middle East and Africa (MEA) 448 7% 88 1 % 8 544 4%
Total 6,246 100% 6,185 100% 2,406 100% 14,836 100%

The following tables present a breakdown of net sales by key product lines/products:

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Healthcare

€ million/in % 2018
Oncology 944 15%
thereof: Erbitux® 816 13%
thereof: Bavencio® 69 1 %
 
Neurology & Immunology 1,529 24%
thereof: Rebif® 1,438 23%
thereof: Mavenclad® 90 1 %
 
Fertility 1,162 19%
thereof: Gonal-f® 708 11 %
 
General Medicine & Endocrinology 2,341 38%
thereof: Glucophage® 733 12%
thereof: Concor® 475 8%
thereof: Euthyrox® 363 6%
thereof: Saizen® 234 4%
 
Other 270 4%
Total 6,246 100%
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Life Science

€ million/in % 2018
Process Solutions 2,487 40%
Research Solutions 2,048 33%
Applied Solutions 1,650 27%
Total 6,185 100%
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Performance Materials

€ million/in % 2018
Display Solutions 1,332 55%
Surface Solutions 476 20%
Semiconductor Solutions 596 25%
Other 1
Total 2,406 100%

Further income was reported within other operating income. This relates in particular to income from upfront and milestone payments as well as royalty and license income not generated in the course of ordinary activities.

Group net sales stood at € 14,836 million in fiscal 2018, out of which an amount of € 557 million was recognized over time. Over-time revenue recognition related mainly to net sales from services and from customer-specific equipment/hardware in the Life Science business sector.

As of December 31, 2018, future income from concluded contracts with an originally expected contract term of more than one year amounted to € 294 million, of which € 191 million will be recognized in other operating income. The Group expects to generate the majority of income from these contracts in 2019 and 2020.

Significant management judgments and sources of estimation uncertainty – revenue recognition

Sales deductions

The Group granted its customers various kinds of rebates and discounts. In addition, expected customer refund claims, state compulsory charges as well as rebates from health plans and programs are also deducted from sales. The most significant portion of these deductions from sales was attributable to the Healthcare business sector. The most substantial sales deductions in this business sector were attributable to health plans and programs in the United States. The measurement of sales deductions and the corresponding refund liabilities required extensive estimates.

The measurement of sales deductions and refund liabilities resulting from expected rebates and discounts took

  • historical experience,
  • pricing information as well as
  • expected product growth rates

into consideration.

The measurement of sales deductions and refund liabilities resulting from rights of return took

  • historical return rates of individual product groups,
  • information from distributors on inventory levels as well as
  • publicly available information on product sales from sector-specific service providers (Healthcare business sector)

into consideration.

Changes in estimates of the parameters listed above have an impact on the net sales recognized in the respective adjustment period. Further information can be found in Note (30) ‟Refund liabilities”.

(9) Cost of sales

Cost of sales primarily included the cost of manufactured products sold as well as merchandise sold. Cost comprises the following items: directly attributable costs, such as cost of materials, or personnel and energy costs; depreciation and amortization; overheads attributable to the production process; inventory impairments and impairment reversals. Cost of sales included amortization of intangible assets (excluding amortization of internally generated or separately acquired software) in the amount of € 175 million (2017: € 179 million).

(10) Marketing and selling expenses

Marketing and selling expenses comprised the following items:

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€ million 2018 20171
Sales force – 913 – 918
Internal sales services – 808 – 795
Sales promotion – 509 – 504
Logistics – 702 – 649
Amortization of intangible assets2 – 975 – 1,014
Royalty and license expenses – 213 – 224
Other marketing and selling expenses – 263 – 245
Marketing and selling expenses – 4,384 – 4,349
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Excluding amortization of internally generated or separately acquired software.

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.

€ 84 million (2017: € 90 million) of royalty and license expenses related to the commercialization of Erbitux®, and € 53 million (2017: € 44 million) to the license expenses for Glucophage® in China with the distribution partner Bristol-Myers Squibb.

(11) Research and development costs

Subsidies received and reimbursements made resulted in net expenses of € 1 million in 2018 (2017: net income of € 29 million) recognized in research and development costs. These expenses comprised reimbursements from governmental institutions as well as repayments of previously recognized governmental subsidies with a total net amount of € 4 million (2017: net income of € 6 million). The reimbursements recognized in the previous year mainly referred to the strategic alliance with Pfizer Inc., United States, in the field of immuno-oncology.

(12) Other operating income

Other operating income was as follows:

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€ million 2018 20171
Income from upfront payments, milestone payments, rights and royalties 368 564
Gains on disposal of businesses and non-current assets 83 350
Gains from the release of provisions for litigation 21 10
Income from miscellaneous services 15 10
Income from the revaluation of contingent considerations 1
Reversal of impairment losses on financial assets2 91
Reversal of impairment losses on non-financial asset 87
Remaining other operating income 138 100
Other operating income 627 1,212
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Given the first-time application of IFRS 9, effective January 1, 2018, reversals of impairment losses on financial assets are offset against impairment losses on financial assets, and disclosed separately in the consolidated income statement.

Income from upfront payments, milestone payments, rights and royalties of € 368 million (2017: € 564 million) primarily resulted from the collaboration agreement entered into with Pfizer Inc., United States, in the field of immuno-oncology in 2014. This related to the pro rata recognition of deferred income in the amount of € 191 million (2017: € 191 million) (see Note (6) ‟Collaborations of material significance”). Furthermore, the Group recognized a milestone payment of € 50 million for the submission of an application; the corresponding drug candidate was sold to BioMarin Pharmaceutical Inc., United States, in 2016. License income was mainly due to the licenses granted for interferon beta products (Biogen Inc., United States), which amounted to € 79 million in the year under review (2017: € 87 million).

The gains on disposal of businesses and non-current assets of € 83 million in 2018 (2017: € 350 million) were related to the out-licensing of two DNA-dependent protein kinase (DNA-PK) inhibitors and another preclinical compound used in gene editing for six defined genetic diseases to Vertex Pharmaceuticals Incorporated, United States. Furthermore, the Group recognized gains from the transfer of exclusive rights regarding the development of T cell-based therapies using chimeric antigen receptors (CAR-T) to the Intrexon Corporation, United States, and from the termination of a license agreement in China. The gains recognized in the previous year were mainly attributable to the divestment of the Biosimilars business (€ 319 million).

Remaining other operating income in a mid double-digit million euro amount was generated from payment claims resulting from the waiver of rights to an anti PD-1 antibody previously included in the strategic alliance with Pfizer Inc., United States, (see Note (6) ‟Collaborations of material significance”) and from the reversal of a provision for insurance obligations.

(13) Other operating expenses

The breakdown of other operating expenses was as follows:

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€ million 2018 20171
Integration expenses/IT expenses – 104 – 156
Litigation – 74 – 108
Exchange rate differences from operating activities (net) – 62 – 3
Impairment losses on non-financial assets – 58 – 86
Non-income related taxes – 53 – 54
Profit share expenses – 46 – 27
Restructuring expenses – 45 – 64
Premiums, fees and contributions – 36 – 38
Expenses for the revaluation of contingent considerations – 31 – 2
Expenses for the company’s 350-year anniversary (including employee bonus) – 31 – 40
Project expenses – 25 – 7
Expenses for miscellaneous services – 23 – 13
Losses on disposal of businesses and non-current assets – 6 – 23
Acquisition expenses – 2 – 6
Impairment losses on financial assets2 – 36
Remaining other operating expenses – 185 – 218
Other operating expenses – 780 – 880
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.
2
Given the first-time application of IFRS 9, effective January 1, 2018, impairment losses on financial assets are offset against reversals of impairment losses on financial assets, and disclosed separately in the consolidated income statement.

Integration and IT expenses amounting to € 104 million (2017: € 156 million) were incurred for the global harmonization of the IT landscape and in connection with the integration of acquired and existing businesses.

Litigation expenses amounting to € 74 million (2017: € 108 million) arose primarily from additions to provisions for legal disputes (see Note (26) ‟Other provisions”).

Impairments of non-financial assets amounted to € 58 million (2017: € 86 million), € 20 million of which were attributable to a technology in the Performance Materials business sector and € 19 million of which were attributable to software modules in the Life Science business sector which are not further developed and no longer used (see Note (20) ‟Other intangible assets”).

Restructuring expenses in the amount of € 45 million (2017: € 64 million) resulted, among other things, from the adjustment of corporate structures in Darmstadt and Gernsheim. In addition, the Group incurred further expenses from the relocation of the shared service organization. In the previous year, restructuring expenses also arose in connection with the planned closure of German sites of the Life Science business sector.

The expenses for the revaluation of contingent considerations in the amount of € 31 million (2017: € 2 million) were mainly attributable to value changes (recognized through profit or loss) of the variable consideration resulting from the divestment of the Biosimilars business in the previous year.

Other operating expenses included, among others, special environmental protection costs as well as personnel expenses not allocable to the functional areas. This item also included the expense for the donation of Cesol® 600 tablets containing the active ingredient praziquantel to the World Health Organization (WHO) and expenses for insurance services.

The restructuring expenses and impairment losses contained in other operating expenses as well as the expenses for company’s 350-year anniversary anniversary were allocated to the functional costs as follows:

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Restructuring expenses Impairment losses
on non-financial assets
Expenses for company’s 350-year anniversary (including employee bonus)
€ million 2018 20171 2018 20171 2018 20171
Cost of sales – 23 – 6
Marketing and selling expenses – 6 – 17 – 15 – 33 – 1 – 12
Administration expenses – 39 – 45 – 19 – 30 – 21
Research and development costs – 33 – 5
Other operating expenses – 3 – 14 – 1
Total – 45 – 64 – 58 – 86 – 31 – 40
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

(14) Income tax

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€ million 2018 20171
Current income taxes in the period – 579 – 694
Income taxes for previous periods – 79 – 14
Deferred taxes in the period 290 1,137
Income taxes – 368 428
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

Tax reconciliation

The following table presents the tax reconciliation from theoretical income tax expense to income tax expense according to the consolidated income statement. The theoretical income tax expense is determined by applying the statutory tax rate of a corporation headquartered in Darmstadt.

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€ million 2018 20171
Profit before income tax 1,461 2,129
 
Tax rate 31.7% 31.7%
Theoretical income tax expense – 463 – 675
Tax rate differences 150 263
Tax effect of companies with a negative contribution to consolidated profit – 37 – 71
Income tax for previous periods – 79 – 14
Tax credits 52 193
Tax effect on tax loss carryforwards 34
Tax effect of non-deductible expenses/tax-free income/other tax effects – 25 732
thereof: from the US tax reform (deferred taxes on temporary differences) 619
thereof: from the US tax reform (deferred taxes on oustide basis differences) 401
thereof: from the US tax reform (one-time transition tax on foreign earnings) – 114
Income tax expense according to consolidated income statement – 368 428
 
Tax ratio according to consolidated income statement 25.2% – 20.1%
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

Income taxes consisted of corporation and trade taxes for the companies domiciled in Germany as well as comparable income taxes for foreign companies. Income taxes for previous periods recognized in fiscal 2018 resulted mainly from completed tax audits and mutual agreement procedures, and from additions to provisions for tax audits.

Impact of tax reform in the United States in 2017

The Tax Cuts and Jobs Act became effective in the US on December 22, 2017, and introduced new rules on the taxation of profits of foreign subsidiaries. This resulted in additional taxation of past profits and led to an increase in the current tax expense of the previous year by € 114 million. Please refer to the tax reconciliation of the previous year for further information on material effects from the US tax reform.

Deferred taxes (consolidated income statement)

The reconciliation between deferred taxes in the consolidated balance sheet and deferred taxes in the consolidated income statement is presented in the following table:

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€ million 2018 20171
Change in deferred tax assets (consolidated balance sheet) – 15 93
Change in deferred tax liabilities (consolidated balance sheet) 201 1,235
Changes from reclassification into assets held for sale – 30 – 41
Deferred taxes credited/debited to equity – 2 15
Changes in scope of consolidation/currency translation/other 135 – 164
Deferred taxes (consolidated income statement) 290 1,137
1
Previous year’s figures have been adjusted, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

As in the previous year, changes in scope of consolidation/currency translation/other mainly resulted from exchange rate fluctuations between the euro and the U.S. dollar.

Changes in tax loss carryforwards

Tax loss carryforwards were structured as follows:

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Dec. 31, 2018 Dec. 31, 2017
€ million Germany Abroad Total Germany Abroad Total
Tax loss carryforwards 118 1,069 1,187 117 1,054 1,171
Tax loss carry forwards for which a deferred tax asset is recognized 59 152 211 56 160 216
Tax loss carry forwards for which no deferred tax asset is recognized 59 917 976 61 894 955
Potential deferred tax assets for tax loss carry forwards 27 254 281 19 269 288
Recognized deferred tax assets on tax loss carryforwards 9 24 33 7 25 32
Not recognized deferred tax assets on tax loss carryforwards 18 230 248 12 244 256

The vast majority of the tax loss carryforwards either has no expiry date or can be utilized for up to 20 years. In 2018, the income tax expense was reduced by € 34 million (2017: € 0 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 taxes (consolidated balance sheet)

Deferred tax assets and liabilities correspond to the following balance sheet items:

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Dec. 31, 2018 Dec. 31, 2017
€ million Assets Liabilities Assets Liabilities
Intangible assets 119 1,479 111 1,555
Property, plant and equipment 34 84 23 98
Current and non-current financial assets 12 3 5 41
Inventories 564 18 554 14
Current and non-current receivables/other assets 25 5 21 2
Provisions for pensions and other post-employment benefits 454 37 485 92
Other provisions 236 66 190 35
Liabilities 67 12 69 9
Tax loss carryforwards 33 32
Tax refund claims/other 60 98 58 86
Deferred taxes (before offsetting) 1,606 1,803 1,548 1,931
Offset deferred tax assets and liabilities – 515 – 515 – 442 – 442
Deferred taxes (consolidated balance sheet) 1,091 1,288 1,106 1,489

Deferred tax liabilities from outside basis differences for planned dividend payouts were recorded in the amount of € 30 million (December 31, 2017: € 17 million). Temporary differences relating to the retained earnings of subsidiaries, for which no deferred taxes are recognized, amounted to € 9,934 million (December 31, 2017: € 2,856 million).

Income tax receivables and income tax liabilities

Income tax receivables amounted to € 460 million (December 31, 2017: € 490 million). Tax receivables resulted primarily from tax prepayments that exceeded the actual amount of tax payable for 2018 and prior fiscal years, and from refund claims for prior years.

As of December 31, 2018, income tax liabilities, including provisions for uncertain tax obligations, amounted to € 1,176 million (December 31, 2017: € 1,016 million).

The disclosure of interest and penalties related to income taxes was adjusted with retrospective effect as of January 1, 2017, see Note (49) ‟Effects from new accounting standards and other presentation and measurement changes”.

significant management judgments and sources of estimation uncertainty – income taxes

The calculation of the reported assets and liabilities from current and deferred income taxes required extensive discretionary judgments, assumptions and estimates.

The recognized income tax liabilities and provisions were partially based on estimates and interpretations of tax laws and ordinances in different jurisdictions.

With regard to deferred tax items, there were degrees of uncertainty concerning the date on which an asset is realized or a liability settled and concerning the tax rate applicable on this date. This particularly related to deferred taxes recognized in the context of the acquisitions of the Sigma-Aldrich Corporation, the Millipore Corporation, Serono SA, and AZ Electronic Materials S. A.

The recognition of deferred tax assets from loss carryforwards required an estimate of the probability of the future realizability of loss carryforwards. The following influencing factors were taken into account as part of this assessment:

  • results history,
  • results planning and
  • the existing tax planning of the respective Group company.

(15) Cost of materials

Material costs in 2018 amounted to € 2,598 million (2017: € 2,322 million) and were largely reported under cost of sales.

(16) Personnel expenses/headcount

Personnel expenses comprised the following:

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€ million 2018 2017
Wages and salaries 4,111 3,953
Compulsory social security contributions and special financial assistance 619 586
Pension expenses 295 304
Personnel expenses (including Consumer Health) 5,024 4,843
Consumer Health 204 211
Personnel expenses (as reported in the functional costs) 4,820 4,632

Personnel expenses comprised expenses of € 91 million (2017: € 86 million) for defined contribution plans which are funded exclusively using external funds and therefore do not represent any obligation for the Group other than making contribution payments. In 2017, this included an amount of € 1 million attributable to the Consumer Health business. In addition, employer contributions amounting to € 81 million (2017: € 76 million) were transferred to the German statutory pension insurance system and € 44 million (2017: € 46 million) to statutory pension insurance systems abroad. Each of these total transfer amounts included an amount of € 1 million attributable to the Consumer Health business (2017: € 2 million).

Effective December 31, 2018, the number of employees at the Group stood at 51,713 (December 31, 2017: 52,880 employees). The previous year’s figure included all employees at the Consumer Health business.

The following table provides the number of employees by function (annual average):

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2018 2017
Total thereof: Consumer Health1 Total thereof: Consumer Health
Production 16,239 623 15,570 680
Administration 9,856 160 9,272 197
Research and Development 7,243 146 6,786 143
Supply Chain 4,012 191 3,726 172
Marketing and Sales 15,445 1,973 15,073 2,253
Other 965 7 1,563 11
Average number of employees 53,760 3,100 51,990 3,456
1
The average number of employees of the Consumer-Health-business during the time of affiliation to the group from January to November 2018 was 3,358.

(17) Earnings per share

Basic earnings per share are calculated by dividing the profit after tax (net income of the Group) attributable to the shareholders of Merck KGaA, Darmstadt, Germany, by the weighted average number of theoretical shares outstanding. The calculation of the theoretical number of shares is based on 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, equity capital thus amounted to € 565 million or 434,777,878 theoretical shares outstanding. The weighted average (basic) number of shares in 2018 was likewise 434,777,878.

The calculation of diluted earnings per share had to take into account a potential dilution effect that arose from the free grant of shares of Merck KGaA, Darmstadt, Germany, to eligible employees on the occasion of the 350th anniversary of the company. The shares required for this were purchased on the market. Pursuant to IAS 33, this led to an increase of 17,924 in the weighted average (diluted) number of shares to 434,795,802 shares. However, this did not lead to an arithmetical dilution effect on the indicator so that diluted earnings per share corresponded to basic earnings per share.

(18) Net cash flows from operating activities

In 2018, tax payments totaled € 900 million (2017: € 702 million). Tax refunds totaled € 65 million (2017: € 73 million). Interest paid totaled € 286 million (2017: € 297 million). Interest received amounted to € 34 million (2017: € 28 million).

In the previous year, the changes of other assets and liabilities included the adjustment of deferred taxes as a result of the U.S. tax reform.

In the period under review, the neutralization of the profits/losses from the disposal of assets and other disposals mainly comprised the gain from the divestment of the Consumer Health business; in the previous year, this item mainly comprised the gain from the divestment of the Biosimilars business.