(8) Segment Reporting
Accounting and measurement policies
Segment Reporting
The internal organizational and reporting structure of the Group forms the basis of the segmentation of its business operations. It is founded on the business models of the business sectors, which led to homogeneous risk structures within the segments. Resource allocation and the assessment of the segments’ business development are performed by the Executive Board of Merck KGaA, Darmstadt, Germany, as the chief operating decision-maker.
Corporate and Other includes income and expenses, assets and liabilities, as well as cash flows that cannot be allocated to the reportable segments presented. They originate mainly from the central Group functions. Moreover, the column serves the reconciliation to the Group figures. As these are managed at Group level, financial expenses and financial income, which include interest expenses and interest income, as well as income tax expenses and income are 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 (IFRS). However, they represent important variables used to steer the Group. To enable operational performance to be controlled using the performance indicator EBITDA pre, this is calculated excluding depreciation and amortization, impairment losses and reversals of impairment losses, and adjustments.
€ million |
|
Healthcare |
|
Life Science |
|
Performance Materials |
|
Corporate and Other |
|
Group |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales1 |
|
6,639 |
|
7,515 |
|
3,380 |
|
– |
|
17,534 |
||||||||||
Intersegment sales |
|
– |
|
18 |
|
– |
|
-18 |
|
– |
||||||||||
Operating result (EBIT)2 |
|
1,804 |
|
1,599 |
|
240 |
|
-658 |
|
2,985 |
||||||||||
Depreciation |
|
324 |
|
786 |
|
561 |
|
84 |
|
1,756 |
||||||||||
Impairment losses |
|
56 |
|
3 |
|
123 |
|
– |
|
183 |
||||||||||
Reversals of impairment losses |
|
– |
|
– |
|
– |
|
– |
|
– |
||||||||||
EBITDA2 |
|
2,184 |
|
2,387 |
|
925 |
|
-573 |
|
4,923 |
||||||||||
Adjustments2 |
|
83 |
|
18 |
|
99 |
|
78 |
|
279 |
||||||||||
EBITDA pre (segment result)2 |
|
2,267 |
|
2,405 |
|
1,024 |
|
-495 |
|
5,201 |
||||||||||
EBITDA pre margin (in % of net sales)2 |
|
34.1% |
|
32.0% |
|
30.3% |
|
– |
|
29.7% |
||||||||||
Assets by business sector |
|
7,358 |
|
20,145 |
|
9,735 |
|
4,558 |
|
41,796 |
||||||||||
Liabilities by business sector |
|
-2,494 |
|
-1,589 |
|
-666 |
|
-20,030 |
|
-24,780 |
||||||||||
Investments in property, plant and equipment3 |
|
480 |
|
653 |
|
230 |
|
49 |
|
1,413 |
||||||||||
Investments in intangible assets3 |
|
43 |
|
51 |
|
46 |
|
10 |
|
150 |
||||||||||
Non-cash changes in provisions4 |
|
-294 |
|
-13 |
|
18 |
|
75 |
|
-213 |
||||||||||
|
||||||||||||||||||||
€ million |
|
Healthcare |
|
Life Science |
|
Performance Materials |
|
Corporate and Other |
|
Group |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales1 |
|
6,714 |
|
6,864 |
|
2,574 |
|
– |
|
16,152 |
||||||||||||
Intersegment sales |
|
– |
|
21 |
|
– |
|
-21 |
|
– |
||||||||||||
Operating result (EBIT)2 |
|
1,149 |
|
1,280 |
|
307 |
|
-617 |
|
2,120 |
||||||||||||
Depreciation |
|
713 |
|
784 |
|
328 |
|
80 |
|
1,905 |
||||||||||||
Impairment losses |
|
34 |
|
6 |
|
2 |
|
– |
|
42 |
||||||||||||
Reversals of impairment losses |
|
– |
|
– |
|
– |
|
– |
|
– |
||||||||||||
EBITDA2 |
|
1,896 |
|
2,070 |
|
637 |
|
-537 |
|
4,066 |
||||||||||||
Adjustments2 |
|
25 |
|
59 |
|
166 |
|
68 |
|
318 |
||||||||||||
EBITDA pre (segment result)2 |
|
1,922 |
|
2,129 |
|
803 |
|
-469 |
|
4,385 |
||||||||||||
EBITDA pre margin (in % of net sales)2 |
|
28.6% |
|
31.0% |
|
31.2% |
|
– |
|
27.1% |
||||||||||||
Assets by business sector3 |
|
7,560 |
|
21,596 |
|
10,785 |
|
3,867 |
|
43,808 |
||||||||||||
Liabilities by business sector3 |
|
-3,055 |
|
-1,519 |
|
-716 |
|
-20,605 |
|
-25,894 |
||||||||||||
Payments for investments in property, plant and equipment4 |
|
343 |
|
296 |
|
125 |
|
49 |
|
813 |
||||||||||||
Payments for investments in intangible assets4 |
|
91 |
|
86 |
|
12 |
|
19 |
|
208 |
||||||||||||
Non-cash changes in provisions5 |
|
44 |
|
6 |
|
25 |
|
38 |
|
112 |
||||||||||||
|
||||||||||||||||||||||
€ million |
|
Europe |
|
thereof: Germany |
|
thereof: Switzerland |
|
North America |
|
thereof: USA |
|
Asia-Pacific |
|
thereof: China |
|
Latin America |
|
Middle East and Africa |
|
Group |
||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales by customer location1 |
|
4,991 |
|
979 |
|
292 |
|
4,739 |
|
4,524 |
|
6,313 |
|
2,529 |
|
910 |
|
581 |
|
17,534 |
||||||
Net sales by company location1 |
|
5,515 |
|
1,501 |
|
462 |
|
4,830 |
|
4,639 |
|
5,962 |
|
2,224 |
|
868 |
|
361 |
|
17,534 |
||||||
Goodwill and other intangible assets2 |
|
4,930 |
|
1,585 |
|
1,628 |
|
17,876 |
|
17,866 |
|
804 |
|
63 |
|
1 |
|
– |
|
23,612 |
||||||
Property, plant and equipment |
|
3,581 |
|
1,610 |
|
877 |
|
1,664 |
|
1,657 |
|
973 |
|
343 |
|
147 |
|
56 |
|
6,421 |
||||||
Research and development costs |
|
-1,931 |
|
-884 |
|
-905 |
|
-269 |
|
-269 |
|
-63 |
|
-21 |
|
-14 |
|
-10 |
|
-2,288 |
||||||
Number of employees |
|
26,586 |
|
13,292 |
|
2,383 |
|
13,312 |
|
13,131 |
|
13,518 |
|
4,275 |
|
3,384 |
|
1,296 |
|
58,096 |
||||||
|
||||||||||||||||||||||||||
€ million |
|
Europe |
|
thereof: Germany |
|
thereof: Switzerland |
|
North America |
|
thereof: USA |
|
Asia-Pacific |
|
thereof: China |
|
Latin America |
|
Middle East and Africa |
|
Group |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales by customer location1 |
|
4,735 |
|
1,010 |
|
212 |
|
4,214 |
|
4,011 |
|
5,599 |
|
2,275 |
|
1,012 |
|
591 |
|
16,152 |
||||||||
Net sales by company location1 |
|
5,233 |
|
1,475 |
|
389 |
|
4,283 |
|
4,101 |
|
5,298 |
|
2,048 |
|
965 |
|
373 |
|
16,152 |
||||||||
Goodwill and other intangible assets2,3 |
|
5,113 |
|
1,644 |
|
1,682 |
|
20,165 |
|
20,154 |
|
1,054 |
|
77 |
|
2 |
|
– |
|
26,335 |
||||||||
Property, plant and equipment2 |
|
3,386 |
|
1,590 |
|
746 |
|
1,594 |
|
1,586 |
|
996 |
|
353 |
|
159 |
|
57 |
|
6,192 |
||||||||
Research and development costs |
|
-1,997 |
|
-923 |
|
-945 |
|
-164 |
|
-160 |
|
-79 |
|
-34 |
|
-18 |
|
-11 |
|
-2,268 |
||||||||
Number of employees |
|
26,714 |
|
13,806 |
|
2,337 |
|
12,829 |
|
12,648 |
|
12,728 |
|
4,110 |
|
3,430 |
|
1,335 |
|
57,036 |
||||||||
|
||||||||||||||||||||||||||||
The Group divides its business activities into three business sectors: The Healthcare business sector contains the business with prescription pharmaceuticals. The customers mainly comprise wholesalers, hospitals, and pharmacies. The Life Science business sector comprises products for scientific institutions and research and analytical laboratories in the pharmaceutical/biotechnology industry and applications for customers manufacturing chemical and biological pharmaceuticals. In line with the product portfolio, customers in this business sector primarily include companies of the pharmaceuticals and biotechnology 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 on the business sectors in the combined management report.
No single customer accounted for more than 10% of Group sales in fiscal 2020 or 2019. Transfer prices for intragroup net sales were determined on an arm’s-length basis. The intersegment sales reported in the above table are valued at group production cost.
The following table presents the reconciliation of Segment results of all operating businesses to the profit before income tax of the Group:
€ million |
|
2020 |
|
2019 |
||||
|---|---|---|---|---|---|---|---|---|
EBITDA pre of the operating businesses1 |
|
5,696 |
|
4,854 |
||||
Corporate and Other |
|
-495 |
|
-469 |
||||
EBITDA pre of the Group1 |
|
5,201 |
|
4,385 |
||||
Depreciation/amortization/impairment losses/reversals of impairment losses |
|
-1,938 |
|
-1,946 |
||||
Adjustments1 |
|
-279 |
|
-318 |
||||
Operating result (EBIT)1 |
|
2,985 |
|
2,120 |
||||
Financial result |
|
-354 |
|
-385 |
||||
Profit before income tax |
|
2,630 |
|
1,735 |
||||
|
||||||||
The adjustments comprised the following:
€ million |
|
2020 |
|
2019 |
||||
|---|---|---|---|---|---|---|---|---|
Restructuring costs |
|
-162 |
|
-120 |
||||
Integration costs/IT costs |
|
-108 |
|
-95 |
||||
gains (+)/losses (-) on the divestment of businesses |
|
-10 |
|
-6 |
||||
Acquisition-related adjustments |
|
10 |
|
-84 |
||||
Other adjustments |
|
-9 |
|
-13 |
||||
Adjustments before impairment losses/reversals of impairment losses1 |
|
-279 |
|
-318 |
||||
Impairment losses |
|
-128 |
|
-9 |
||||
Reversals of impairment losses |
|
– |
|
– |
||||
Adjustments (total)1 |
|
-407 |
|
-328 |
||||
|
||||||||
Restructuring expenses in the amount of € 162 million (2019: € 120 million) primarily relate to the Thrive transformation program in the Healthcare business sector that was initiated in the year under review (2020: € 88 million/2019: € 0 million). Restructuring expenses were incurred for the Bright Future program in the Performance Materials business sector in the amount of € 20 million (2019: € 50 million) and the relocation of various tasks to the shared service organization in the amount of € 9 million (2019: € 26 million). Further expenses of € 15 million related to various restructuring measures in the Life Science business sector (2019: € 9 million).
Integration and IT expenses in the amount of € 108 million (2019: € 95 million) primarily resulted from the introduction of new ERP systems (2020: € 50 million/2019: € 57 million) and the integration of Versum Materials, Inc., United States (Versum) (2020: € 37 million/2019: € 12 million). Impairment losses on intangible assets increased to € 128 million (2019: € 9 million) and are primarily related to intangible assets in the Performance Materials business sector.
Acquisition-related adjustments resulted in income of € 10 million (2019: expenses of € 84 million). This resulted in particular from the adjustment of the provision for the EU Commission’s competition law review of the Sigma-Aldrich acquisition (Note (27) “Other provisions”) in the mid double-digit million euro range. This was offset by expenses of € 22 million (previous year: € 80 million) in connection with the acquisition of Versum, mainly resulting from the consumption of inventories revalued at the time of acquisition.
The adjustments are disclosed in the consolidated income statement as part of the respective functional costs and allocated to them as follows:
€ million |
|
thereof: cost of sales |
|
thereof: marketing and selling expenses |
|
thereof: administration expenses |
|
thereof: research and development expenses |
|
thereof: other operating income and expenses |
|
Total |
||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Restructuring expenses |
|
-33 |
|
-55 |
|
-28 |
|
-25 |
|
-21 |
|
-162 |
||||
Integration expenses/IT expenses |
|
-1 |
|
-5 |
|
-71 |
|
-1 |
|
-30 |
|
-108 |
||||
gains (+)/losses (–) on the divestment of businesses |
|
– |
|
– |
|
– |
|
– |
|
-10 |
|
-10 |
||||
Acquisition-related adjustments |
|
-19 |
|
– |
|
– |
|
– |
|
29 |
|
10 |
||||
Other adjustments |
|
– |
|
– |
|
– |
|
– |
|
-9 |
|
-9 |
||||
Adjustments before impairment losses/reversals of impairment losses1 |
|
-53 |
|
-60 |
|
-98 |
|
-27 |
|
-41 |
|
-279 |
||||
Impairment losses |
|
– |
|
– |
|
– |
|
– |
|
-128 |
|
-128 |
||||
Reversals of impairment losses |
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
||||
Adjustments in the operating result (total)1 |
|
-53 |
|
-60 |
|
-98 |
|
-27 |
|
-169 |
|
-407 |
||||
|
||||||||||||||||
€ million |
|
thereof: cost of sales |
|
thereof: marketing and selling expenses |
|
thereof: administration expenses |
|
thereof: research and development expenses |
|
thereof: other operating income and expenses |
|
Total |
||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Restructuring expenses |
|
-20 |
|
-10 |
|
-40 |
|
-29 |
|
-22 |
|
-120 |
||||
Integration expenses/IT expenses |
|
– |
|
– |
|
-70 |
|
– |
|
-25 |
|
-95 |
||||
gains (+)/losses (–) on the divestment of businesses |
|
– |
|
– |
|
1 |
|
– |
|
-6 |
|
-6 |
||||
Acquisition-related adjustments |
|
-35 |
|
– |
|
– |
|
– |
|
-49 |
|
-84 |
||||
Other adjustments |
|
– |
|
– |
|
– |
|
– |
|
-13 |
|
-13 |
||||
Adjustments before impairment losses/reversals of impairment losses1 |
|
-56 |
|
-10 |
|
-109 |
|
-29 |
|
-114 |
|
-318 |
||||
Impairment losses |
|
– |
|
– |
|
– |
|
– |
|
-9 |
|
-9 |
||||
Reversals of impairment losses |
|
– |
|
– |
|
– |
|
– |
|
– |
|
– |
||||
Adjustments in the operating result (total)1 |
|
-56 |
|
-10 |
|
-109 |
|
-29 |
|
-123 |
|
-328 |
||||
|
||||||||||||||||
Business free cash flow was determined as follows:
€ million |
|
2020 |
|
2019 |
||||||
|---|---|---|---|---|---|---|---|---|---|---|
EBITDA pre1 |
|
5,201 |
|
4,385 |
||||||
Investments in property, plant and equipment, software as well as advance payments for intangible assets |
|
-1,439 |
|
-1,026 |
||||||
Changes in inventories |
|
48 |
|
-577 |
||||||
Changes in trade accounts receivable as well as receivables from royalties and licenses |
|
144 |
|
-259 |
||||||
Lease payments2 |
|
-144 |
|
-136 |
||||||
Elimination of acquisitions/divestments |
|
-45 |
|
346 |
||||||
Business Free Cash Flow1 |
|
3,765 |
|
2,732 |
||||||
|
||||||||||