Mercedes 2006 Annual Report Download - page 67

Management Report | Profitability | 51
Research and development expenses amounted to €5.3 billion
in 2006 compared to €5.6 billion in 2005. Research and develop-
ment expenses as a proportion of revenues were 3.5% (2005:
3.8%). The decrease is partially due to the fact that the prior-year
figure includes research and development expenses for the
smart forfour and higher expenses for the smart fortwo succes-
sor model. The deconsolidation of the off-highway business and
currency effects also contributed to the reduction.
Other income of €1.3 billion exceeded the prior-year figure of
€1.0 billion. The disposal of the off-highway business, the sale of
real-estate investments not required for operating purposes as
well as higher insurance compensation resulted in other income
of €0.5 billion in 2006. In 2005, the Group recorded a gain of
€0.2 billion on the sale of a vehicle testing facility of the Chrysler
Group.
Financial income, which consists of income from investments
as well as interest income and other financial income, improved
to €0.6 billion in 2006 (2005: €0.2 billion).
Income from investments of €0.4 billion in 2006 was lower than
the €0.9 billion reported in the prior year, which included a gain
of €0.7 billion realized on the sale of DaimlerChrysler’s remaining
shares in Mitsubishi Motors Corporation (MMC).
There were positive effects in 2006 in particular from the im-
proved profit contribution from our at-equity investment in
Toll Collect and from investment income following the sale of
real-estate investments not required for operating purposes.
The profit contribution from EADS was slightly lower than in the
prior year.
The improvement in the net interest expense from €0.6 billion
to €0.3 billion in 2006 is primarily due to reduced unrealized
losses from the mark-to-market valuation of derivative financial
instruments that did not qualify for hedge accounting treatment.
The other financial income of €0.5 billion was significantly
higher than the prior-year loss of €0.1 billion. This was mainly a
result of two financial transactions entered into to hedge the
price risks of EADS shares. They were concluded in July 2004 for
an interest of approximately 3% in EADS and in April 2006 for
a 7.5% interest in EADS. The contractual agreements to dispose
of EADS shares for certain prices starting in the year 2007
combined with the decrease in the stock market price of EADS
shares in 2006 led to a valuation gain totaling €0.5 billion.
In the year 2005 there had been a valuation loss of €0.2 billion,
but also increased income from the sale of other securities.
The income tax expense amounted to €0.7 billion in 2006
(2005: €0.5 billion). Related to income before income taxes of
€4.0 billion (2005: €3.4 billion), the effective tax rate was 17.7%
compared with 14.9% in the prior year. The effective tax rate was
reduced in both years by profit contributions from the Group’s
at-equity investment in EADS, which are mainly exempt from
income tax, and by tax-free gains included in net periodic pension
costs and net postretirement benefit costs.