Mercedes 1998 Annual Report Download - page 63

ANALYSIS OF THE FINANCIAL SITUATION
59
COMMON PERFORMANCE MEASURES ESTABLISHED THROUGH-
OUT GROUP. For guidance and control of the DaimlerChrysler
Group and its business units, we have placed the controlling
measures of the two companies on a uniform basis. This adjust-
ment was made easier by the fact that the controlling factors of
the two partners were already based on the principles of value-
oriented company management and were similar in their fea-
tures. The new control system permits and promotes decentral-
ized responsibility, transparency across the business units, and
investment allocation oriented toward capital markets’ princi-
pals in all units of the DaimlerChrysler Group.
For control purposes, we distinguish between the Group level
and the operative business level. At the Group level, we use
Net Operating Income, an after-tax measure of results, which is
set in relation to the capital invested in the Group, to determine
the Group profit statistic Return on Net Assets (RONA). This
shows the extent to which the DaimlerChrysler Group as a
whole is achieving or exceeding the return expectations of its
investors. The expected return, or weighted average cost of
capital for the Group, is defined as the minimum return which
the investors expect for the investment of equity and borrow-
ings. These capital costs are determined primarily by the inter-
est rate for long-term bonds plus a risk premium for invest-
ments in stocks. At the present time, we calculate the Group’s
weighted average cost of capital to be 9.2% after taxes.
For the industrial business units, we continue to use operating
profit, a measure of results before interest and taxes, since this
figure accurately depicts the scope of responsibility of opera-
tive management. As a capital basis in this respect we also use
net assets, that is, assets less those liabilities which are not
subject to interest payments. The minimum expected return on
net assets is 15.5%. The costs of capital in the new measure-
ment system are largely consistent in their levels of expecta-
tion to the 12% on capital employed which was formerly pre-
scribed for the business units of the Daimler-Benz Group as the
minimum required rate of return. For the financial services
business units, it is customary to use return on equity as the
controlling standard.
According to the new system, interest on advance payments
for long-term contracts is excluded from operating profit.
Henceforth, DaimlerChrysler AG corporate research costs are
considered Group expenses and are no longer excluded from
the calculation of operating profit. In 1998, merger costs were
removed from the calculation of segment operating profit.
On the whole, the new calculation method results in a slightly
higher operating profit. The following table compares the old
and new calculation methods.
Operating profit according
to SFAS 14 (old)
Interest costs of pensions,
net
Operating income from
affiliated, associated and
related companies*)
Gains on unallocated
financial instruments
Interest on advance
payments on long term
contracts
Corporate research of
DaimlerChrysler AG
Merger costs
Operating profit according
to SFAS 131 (new)
5.547
721
74
(112)
–
6.230
Reconciliation of
Operating Profit 1998
in Millions of €
7,613
688
80
(156)
(154)
(163)
685
8,593
Daimler-
Chrysler
Group
Passenger
Cars
Mercedes-
Benz, smart
Passenger
Cars and
Trucks
Chrysler,
Plymouth,
Jeep, Dodge
Commercial
Vehicles
Mercedes-
Benz,
Freightliner,
Sterling, Setra
Chrysler
Financial
Services
Services Aerospace
1,913
179
27
(126)
–
–
–
1,993
4,007
165
40
–
–
–
4,212
865
106
5
(30)
–
–
–
946
652
–
–
–
–
–
–
652
374
12
6
–
–
–
392
537
143
33
–
(90)
–
623
*) The income from Airbus Industrie was included in the previous definition of operating profit.