Alternative Performance Measures Used by the Bayer Group

The Combined Management Report and the consolidated financial statements of the Bayer Group are prepared according to the applicable financial reporting standards. In addition to the disclosures and metrics these require, Bayer publishes alternative performance measures (APMs) that are not defined or specified in these standards and for which there are no generally accepted reporting formats. Bayer calculates APMs to enable a comparison of performance indicators over time and against those of other companies in its industry sector. These APMs are calculated by making certain adjustments to items in the statement of financial position or the income statement prepared according to the applicable financial reporting standards. Such adjustments may result from differences in calculation or measurement methods, nonuniform business activities or special factors affecting the information value of these items. The APMs determined in this way apply to all periods and are used both internally for business management purposes and externally by analysts, investors and rating agencies to assess the company’s performance. Bayer determines the following APMs:

  • Change in sales (reported, currency-adjusted, currency- and portfolio-adjusted)
  • Pro-forma sales
  • EBITDA before special items
  • EBITDA margin before special items
  • EBIT
  • EBIT before special items
  • Core earnings per share
  • Net financial debt
  • Return on capital employed (ROCE)
  • Net operating profit after tax (NOPAT)
  • Capital employed
  • WACC
  • Free cash flow
  • Forecast key financial data

The (reported) change in sales is a relative indicator. It shows the percentage by which sales varied from the previous year.

The currency-adjusted or currency- and portfolio-adjusted change in sales shows the percentage change in sales excluding the impact of exchange rate effects and, in the latter case, disregarding material acquisitions and divestments as well. Exchange rate effects are generally calculated on the basis of the functional currency valid in the respective country. Exceptions existed in Brazil and Argentina, primarily at Crop Protection, where the currency effect was calculated on the basis of the U.S. dollar instead of the functional (national) currency. From 2019, these exceptions will no longer apply.

Due to the scope of the activities acquired through the Monsanto acquisition and the seasonality of the business, we are also presenting sales by strategic business entity on an unaudited, pro-forma basis to better show the operational business development for the combined business of Crop Science and Monsanto, among other reasons. The pro-forma sales are presented as if both the acquisition of Monsanto and the associated divestments had taken place as of January 1, 2017.

See table “Pro-Forma Sales by Strategic Business Unit” in Chapter “Business Development by Segment” for further details of the calculation of pro-forma sales

EBITDA stands for earnings before interest, taxes, depreciation and impairment losses / loss reversals on property, plant and equipment, impairment losses on goodwill, and amortization and impairment losses / loss reversals on other intangible assets. This performance indicator neutralizes the effects of the financial result along with distortions of operational performance that result from divergent depreciation and amortization methods and the exercise of measurement discretion. EBITDA is EBIT plus the amortization of intangible assets and the depreciation of property, plant and equipment, plus impairment losses and minus impairment loss reversals, recognized in profit or loss during the reporting period.

EBIT (earnings before interest and taxes) serves to present a company’s performance while eliminating the effects of differences among local taxation systems and different financing activities.

See Note “General information” for the reconciliation to EBIT

EBITDA before special items and EBIT before special items show the development of the operational business irrespective of the effects of special items, i.e. special effects for the Bayer Group with regard to their nature and magnitude. These may include acquisition costs, divestments, litigations, restructuring, integration costs, impairment losses and impairment loss reversals. In the calculation of EBIT before special items and EBITDA before special items, special charges are added and special gains subtracted.

The EBITDA margin before special items is a relative indicator used by Bayer for internal and external comparisons of operational earnings performance. It is the ratio of EBITDA before special items to net sales.

Core earnings per share (core EPS) from continuing operations is an APM based on the concept of earnings per share (EPS) as defined in IAS 33. Core earnings per share form the basis of the Bayer Group’s dividend policy.

See table “Core Earnings per Share” in Chapter “Earnings Performance of the Bayer Group” for the calculation of core EPS, and Chapter “Earnings Performance of the Bayer Group” for further details

Core EPS are calculated using the following method: Based on EBIT (as per the income statements), the special items, impairment losses on goodwill, amortization /impairment losses /loss reversals on other intangible assets, impairment losses /loss reversals on property, plant and equipment and the accelerated depreciation included in special items are neutralized to determine core EBIT. This enables a comparison of performance over time. Core EBIT is reconciled to core net income from continuing operations, and core EPS are then calculated by dividing core net income by the weighted average number of shares.

As core earnings per share are calculated for each interim reporting period, core earnings per share for the fiscal year or for each interim reporting period up to the respective closing date may deviate from the cumulated core earnings per share for the individual interim reporting periods.

Net financial debt is an important financial management indicator for the Bayer Group and is used both internally and externally in assessing its liquidity, capital structure and financial flexibility.

See table “Net Financial Debt” in Chapter “Asset and Financial Position of the Bayer Group” for the calculation of net financial debt, and Chapter “Asset and Financial Position of the Bayer Group” for further details

The return on capital employed (ROCE) indicates the capital return over a specified period and is a value-based indicator used in long-term business and portfolio analyses. It is the ratio of net operating profit after taxes (NOPAT) to the average capital employed. NOPAT represents the operating result after taxes and is calculated by subtracting income taxes from EBIT. Income taxes are calculated by multiplying EBIT by a uniform tax rate that is based on a historical average of tax rates.

See Chapter “Value-Based Performance” for the calculation of ROCE

The capital employed by Bayer is the total carrying amount of operational noncurrent and current assets, minus liabilities that are largely non-interest-bearing in character and / or would distort the capital base. An average value, calculated from the values at the end of the prior year and of the reporting year, is used to depict the change in capital employed during the reporting year. The definition of capital employed was updated in 2018 to reflect the changes resulting from IFRS 15 (Revenue from Contracts with Customers) and relevant line items in the statement of financial position were expanded.

See Chapter “Value-Based Performance” for the calculation of capital employed

The ROCE is compared to the weighted average cost of capital (WACC), which is the return expected by the providers of equity and debt. If the ROCE exceeds the WACC, return expectations have been exceeded, indicating that enterprise value has been created.

The WACC is based on an after-tax approach and calculated at the start of the year as the weighted average of the equity and debt cost factors. The cost of equity is determined using the Capital Asset Pricing Model (CAPM), while the debt-capital cost factor is calculated based on the average returns of ten-year Eurobonds issued by industrial companies. Further information on the segment-specific capital cost factors used as part of impairment testing is provided in Note “Segment reporting”.

Free cash flow (FCF) is an alternative performance measure that is based on the cash flow from operating activities under IAS 7. FCF illustrates the cash flows available for paying dividends and reducing debt as well as for investing in innovation and acquisitions. It is calculated by subtracting cash outflows for additions to property, plant and equipment and intangible assets from cash flows from operating activities, adding interest and dividends received along with interest received from interest-rate swaps, and deducting interest paid including interest-rate swaps.

The forward-looking key performance indicators published in the forecast for key financial data are based on data that are determined in the course of our planning process. The key financial data in the forecast are determined in accordance with the applied accounting policies and with the calculation models for alternative performance measures described in this chapter.

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