Operating Activities

Accounting and measurement policies

Segment reporting

The Group’s business activities are broken down into the three operational business sectors of Life Science, Healthcare and Electronics, as well as the central Group functions. This segment structure reflects the internal organizational and reporting structure. The Life Science business sector encompasses business with tools, chemicals and equipment for academic labs, biotech and pharmaceutical manufacturers, as well as the industrial sector. The Healthcare business sector discovers, develops, manufactures and markets prescription drugs and biopharmaceuticals. The Electronics business sector supplies materials for the semiconductor and display industries and surface design. The three business sectors differ in terms of their products and services, their customers, their sales structures and processes, and the regulatory environment in which they operate. However, the activities that are bundled in each individual business sector are extremely similar in terms of these criteria. The central Group functions also encompass service activities that are the same for all business sectors, such as procurement and human resources, as well as other central Group functions that are not allocated to any of the business sectors. Resource allocation and the assessment of business development are performed at the level of the business sectors by the Executive Board of Merck KGaA, Darmstadt, Germany, as the chief operating decision-maker.

In addition to the direct activities of the central Group functions, “Corporate and Other” includes income and expenses, assets and liabilities, as well as cash flows that cannot be allocated to the reportable segments as they are managed at Group level in central Group functions. This relates in particular to expenses and income for the foreign currency hedging of transactions in operating business, financial expenses and financial income, which include interest expenses and interest income as well as income tax expenses and income. Financial liabilities, pension provisions as well as income tax assets and liabilities are also allocated to “Corporate and Other”. Moreover, the column serves as the reconciliation to the Group figures.

Apart from net sales, the success of a segment is mainly determined by EBITDA pre (segment result). EBITDA pre is a key figure that is not defined by International Financial Reporting Standards (IFRS). However, it represents the most important variable 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 in addition to specific adjustments presented below.

The segment data is derived from the financial information, which is based on the IFRSs applied in the consolidated financial statements. Transfer prices for intragroup net sales were determined on an arm’s-length basis for all of the business sectors. Fixed assets are allocated to the segments based on the degree of utilization. Depreciation expenses are allocated on the same basis. Fixed assets are always recognized by the buyer at the amortized Group cost following intragroup transactions. Services performed by the Group functions are allocated on the basis of planning data. Any deviations in the actual costs incurred are not allocated to the reportable operating segments but continue to be recognized in the “Corporate and Other” column.