Merck 2010 Annual Report Download - page 32

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Return on sales (ROS or the ratio of operating result to total revenues) and underlying free
cash flow on revenues (FCR) are our two key financial performance indicators. The divisions use
them to steer their business and we also use them for short- and long-term internally agreed
targets. Group ROS increased from 8.4% in 2009 to 12.0% in 2010. This reflects the improve-
ment in the overall business situation, which included a sharp increase in total revenues. FCR
also developed positively in line with the good business development, increasing from 11% in
2009 to 18%. We refer to the average, or the arithmetic mean, of the two indicators ROS and
FCR as the “Merck Business Target” (MBT). It is used for performance-based short- and long-
term compensation systems and amounted to 15% compared to 9.7% in 2009. Both indicators,
ROS and FCR, are presented by division in the Segment Reporting, on page 136. For EBITDA,
as per the definition, depreciation and amortization of non-current assets are added back
to earnings before interest and taxes (EBIT). For Merck, EBITDA is also an important financial
indicator. Since the acquisition of Serono, amortization of intangible assets has been lowering
the operating result. Owing to the Millipore acquisition, these amortization expenses increased
further in 2010. When high impairment losses are also incurred, EBIT or the operating result
alone does not reflect the actual earning power of the business. EBITDA increased by nearly
50% from EUR 1,625 million in 2009 to EUR 2,457 million in 2010.
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Value added is a measure of the economic strength of a company and indicates how the
corporate result is achieved and for what it is used.
Our corporate result, meaning the sum of total revenues, other income and financial income,
amounted to EUR 9,552 million in 2010. After deducting the costs of materials as well as other
purchased services and expenses, gross value added amounted to EUR 5,008 million.
Following the deduction of depreciation and amortization, net value added was EUR 3,750 million.
With a share of 69%, the majority amounting to EUR 2,597 million benefited employees in the
form of personnel expenses. Financial expenses increased over 2009 to EUR 291 million owing
to higher financing costs for the acquisition of Millipore. Taxes on income increased signifi-
cantly to EUR 220 million due to the higher level of profit before tax. At EUR 642 million, profit
after tax considerably exceeded the 2009 figure of EUR 377 million.
Strong improvement in EBITDA
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