Mercedes 1999 Annual Report Download - page 67

ANALYSIS OF THE FINANCIAL SITUATION
61
The Services division, in which the services activities of
debis and Chrysler Financial Services were integrated in
1999, recorded an operating profit of €2,039 million (1998:
€985 million). This increase was mainly due to gains of
€1,140 million from the sale of most of our shares in debitel
AG. As this transaction took place less than two years after
the merger, we reported the figure, in accordance with US
GAAP, in the statement of income as extraordinary income.
However, within the framework of segment reporting it is
allocated to the operating profit of the Services division.
Negative effects on earnings arose from a charge in the
amount of €127 million relating to prior period
securitization transactions. After adjusting for these effects
and for one-time income from the share-swap (debitel for
Freecom) carried out with Metro in 1998, the comparable
figure for operating profit is still well above last year’s
result.
The Aerospace division profited again in 1999 from the
strong demand for civil aircraft and from the extraordinary
market success of the Airbus program, especially the A320-
family. Growth in revenues caused by increased aircraft de-
liveries and a favorable US dollar exchange rate led to a rise
in operating profit by 17% to €730 million. Due to existing
currency-hedging, however, we were not able to take full ad-
vantage of exchange-rate developments. Restructuring bur-
dens caused by capacity adjustments in the area of defense
systems, made necessary by a further decline in the Ger-
man defense budget, prevented an even higher rise in earn-
ings.
The decline in operating profit for the segment Other is
mainly due to the fact that the previous year’s results in-
cluded income from the disposal of the Group’s semiconduc-
tor activities and from the sale of two buildings at
Potsdamer Platz. The Automotive Electronics business con-
tinued to increase revenues and earnings while the MTU/
Diesel Engines unit was also able to improve slightly on the
high level of earnings achieved in the preceding year. At
Adtranz we acquired the remaining 50% stake from ABB in
the spring. The reorganization measures introduced in the
plants in Germany in 1998 contributed to a reduction in the
operating losses of the Rail Systems business. Because
there is still a situation of overcapacity, additional measures
were necessary, mainly in Europe outside Germany, which
in 1999 again had a negative effect on operating profit.
However, with a comprehensive reorganization of produc-
tion, concentration on core competencies and the adjust-
ment of capacities to market demand, we are confident that
Adtranz will be able to achieve and sustain profitability.
FINANCIAL INCOME MARKED BY EXCHANGE-RATE INFLU-
ENCES.
In the year under review, financial income declined
by €0.4 billion to €0.3 billion. Higher income from affiliated,
associated and related companies and from stock-market
gains, which we achieved due to the positive development of
stock markets in 1999, were offset by significant charges re-
lated to exchange-rate movements. The substantial deprecia-
tion of the euro against other currencies that are important
to us led to sizable burdens from the settlement and valua-
tion of derivative financial instruments, which did not
qualify for hedge accounting. However, the losses incurred
of €1.1 billion are only temporary mark-to-market adjust-
ments, as the corresponding underlying transactions will be
recorded for purposes of operating profit with the prevailing
exchange rates on the day of settlement. In the event that
the current exchange rates also prevail at the time of settle-
ment of the underlying transaction and the derivative finan-
cial instrument, a shift occurs between financial income and
operating profit. Therefore the contracted hedge rates apply
in determining net income. The planned adoption of the
new accounting standard SFAS 133, which permits hedge
accounting for anticipated foreign currency cash flows, may
result in lower earnings volatility in periods of significant
exchange rate fluctuations.
99 99
€US $ €
98
Operating Profit by
Segments
in millions
Mercedes-Benz Passenger Cars
& smart
Chrysler Group
(Chrysler, Jeep®, Dodge, Plymouth)
Commercial Vehicles
(Mercedes-Benz, Freightliner,
Sterling, Setra, Thomas Built Buses)
Services
Aerospace
Other
Eliminations
DaimlerChrysler Group
2,722 2,703 1,993
5,086 5,051 4,255
1,075 1,067 946
2,053 2,039 985
735 730 623
(402) (399) (130)
(180) (179) (79)
11,089 11,012 8,593