Management Report
Fiscal 2010:
Bayer: operating performance on track
Progress in research and development spurs optimism
- Group targets achieved
- Strong year at MaterialScience – HealthCare and CropScience below expectations
- Over €3 billion for research and development
- Net income diminished by high special charges
- Strong operating cash flow – net financial debt below €8 billion
- Confidence for 2011: core earnings per share expected to grow by about 10%
1. Overview of Sales, Earnings and Financial Position
Full year 2010
Bayer achieved its targets for the Group in 2010. Sales rose by 12.6% – or by 8.0% on a currency- and portfolio-adjusted basis (Fx & portfolio adj.) – to a record €35.1 billion. EBITDA before special items improved by 9.7% to €7.1 billion. Core earnings per share advanced by 15.1% to €4.19. These increases were attributable to the strong recovery in the MaterialScience business and to positive currency effects. However, HealthCare did slightly less well than expected, while CropScience was well below our expectations, particularly in the first half of the year. We have adopted a package of selected measures to strengthen HealthCare and CropScience for the long term and enhance our innovative capability. At the same time we significantly raised our research and development (R&D) spending in 2010 to €3.1 billion (2009: €2.7 billion) to support our R&D pipeline, which continues to develop positively.
Net income, however, receded by 4.3% to €1,301 million (2009: €1,359 million), greatly hampered in 2010 by special charges of €1.7 billion, mainly for impairments and litigations. Earnings per share thus came in at only €1.57 (2009: €1.70).
Net financial debt declined by €1.8 billion to €7.9 billion, thanks to a further improvement in operating cash flow.
| Change in Sales | [Table 3.1] |
|---|
| | 2009 | 2010 |
| | % | % |
| Volume | -2.9 | +6.7 |
| Price | -2.8 | +1.3 |
| Currency | +0.6 | +4.9 |
| Portfolio | -0.2 | -0.3 |
| Total | –5.3 | +12.6 |
Group sales rose to €35,088 million (2009: €31,168 million). On a currency- and portfolio-adjusted basis, business at HealthCare edged forward by 1.7%. Sales of CropScience came in slightly below the prior year (Fx & portfolio adj. -1.3%) due to the weak first-half performance. By contrast, business expanded by a substantial 30.1% (Fx & portfolio adj.) at MaterialScience due to the economic recovery, with volumes already back to 2008 levels by the second quarter.
Despite the positive business development at MaterialScience, EBIT of the Bayer Group fell by 9.2% to €2,730 million (2009: €3,006 million). Earnings were diminished by special charges of €1,722 million (2009: €766 million). Of the special charges for 2010, impairments accounted for €957 million, litigations for €703 million and restructuring for €62 million. EBIT before special items amounted to €4,452 million (2009: €3,772 million). EBITDA before special items advanced by 9.7% to €7,101 million (2009: €6,472 million) buoyed by some €0.4 billion in positive currency effects. EBITDA before special items of MaterialScience tripled to €1,356 million, largely on account of significantly higher volumes and selling prices. By contrast, EBITDA before special items of CropScience fell by 14.3% to €1,293 million (2009: €1,508 million) in a weak, fiercely contested market. At HealthCare, EBITDA before special items dipped to €4,405 million (2009: €4,468 million), mainly as a result of higher selling and R&D expenses, negative effects of the health system reforms in various countries, and the effects of the early genericization of YAZ™ in the United States.
After a non-operating result of minus €1,009 million (2009: minus €1,136 million), including net interest expense of €499 million (2009: €548 million), income before income taxes amounted to €1,721 million (2009: €1,870 million). After tax expense of €411 million (2009: €511 million) and non-controlling interest, net income for 2010 was €1,301 million (2009: €1,359 million). Earnings per share came in at €1.57 (2009: €1.70). Core earnings per share increased by 15.1% to €4.19 (2009: €3.64). The calculation of core earnings per share is explained in Chapter 4.3 "Core Earnings Per Share."
Gross cash flow in 2010 improved by 2.4% to €4,771 million (2009: €4,658 million). After a significant reduction in tied-up funds thanks to a further improvement in our working capital management, net cash flow advanced by 7.4% to €5,773 million (2009: €5,375 million). Net financial debt fell by €1.8 billion compared to December 31, 2009, amounting to €7.9 billion at the end of 2010. The net pension liability – the aggregate of pension obligations and plan assets – rose by €0.8 billion compared with December 31, 2009, to €7.2 billion, mainly because of lower long-term interest rates on the capital market.
Fourth quarter of 2010
The Bayer Group achieved substantial increases in sales and underlying earnings in the fourth quarter of 2010, while EBIT was held back mainly by impairments. The improvement in our operating performance was mainly due to the continued recovery in the MaterialScience business. CropScience raised sales and EBITDA before special items. At HealthCare, sales edged ahead while EBITDA before special items posted a slight year-on-year decline.
Group sales grew by 14.5% to €9,012 million (Q4 2009: €7,872 million). Adjusted for currency and portfolio effects (Fx & portfolio adj.), business expanded by 8.1%. HealthCare sales increased by 7.3% (Fx & portfolio adj. +1.4%), with business in the Pharmaceuticals segment advancing slightly overall on a currency- and portfolio-adjusted basis despite a decrease in North America. Consumer Health sales were level with the previous year after adjusting for currency effects. The drop in sales of blood glucose monitoring systems in the United States, caused by the difficult market situation, was offset by the positive development in the other divisions. CropScience had a strong fourth quarter, with sales advancing by 18.2% (Fx & portfolio adj. +9.7%) in a positive market environment. Sales of MaterialScience climbed by 28.2% (Fx & portfolio adj. +21.6%) from the low prior-year figure, which was due to the economic crisis.
EBIT of the Bayer Group dropped by 86.1% to €51 million (Q4 2009: €366 million). Fourth-quarter earnings in 2010 were diminished by substantial special charges totaling €954 million (Q4 2009: €451 million), which in 2010 principally included impairment losses of €825 million. Of the remaining amount, €67 million was incurred for litigations in the United States, including €41 million at HealthCare relating to YAZ™/Yasmin™ and €26 million at CropScience relating mainly to an intended settlement program in connection with litigations concerning genetically modified rice (LL RICE). We also took special charges of €62 million for restructuring in HealthCare. EBIT before special items improved by 23.0% to €1,005 million (Q4 2009: €817 million).
EBITDA before special items of the Bayer Group improved by 11.6% to €1,689 million (Q4 2009: €1,513 million), driven mainly by strong earnings growth at MaterialScience and positive currency effects. HealthCare recorded EBITDA before special items of €1,138 million (Q4 2009: €1,154 million), including a €68 million gain from the settlement of a patent dispute concerning YAZ™ that partially offset the margin loss during the year. EBITDA before special items of CropScience advanced to €270 million (Q4 2009: €166 million), including one-time income of €44 million from the divestment of some older active ingredients and the execution of a license agreement. At MaterialScience, EBITDA before special items came in at €297 million (Q4 2009: €203 million).
After a non-operating result of minus €237 million (Q4 2009: minus €248 million), we recorded a pre-tax loss of €186 million for the fourth quarter of 2010 (Q4 2009: income of €118 million), leading to tax income of €45 million (Q4 2009: €38 million). After non-controlling interest, this gave a net loss of €145 million (Q4 2009: net income of €153 million). Earnings per share were minus €0.18 (Q4 2009: €0.18). Core earnings per share rose to €0.95 (Q4 2009: €0.90). The calculation of core earnings per share is explained in Chapter 4.3 "Core Earnings Per Share."
Gross cash flow of the Bayer Group advanced by 37.4% year on year to €1,414 million (Q4 2009: €1,029 million) in light of the improved operating performance. Net cash flow moved ahead by 9.9% to €1,941 million (Q4 2009: €1,766 million). We significantly reduced net financial debt in the fourth quarter of 2010 to €7.9 billion (September 30, 2010: €9.1 billion).
| Key Data by Subgroup and Segment, 4th Quarter | [Table 3.2] |
|---|
| | Sales | EBIT | EBITDA before special items* |
| | 4th Quarter
2009 | 4th Quarter
2010 | 4th Quarter
2009 | 4th Quarter
2010 | 4th Quarter
2009 | 4th Quarter
2010 |
| | € million | € million | € million | € million | € million | € million |
| HealthCare | 4,164 | 4,468 | 463 | (129) | 1,154 | 1,138 |
| Pharmaceuticals | 2,698 | 2,897 | 234 | (307) | 789 | 830 |
| Consumer Health | 1,466 | 1,571 | 229 | 178 | 365 | 308 |
| CropScience | 1,398 | 1,653 | (56) | 118 | 166 | 270 |
| Crop Protection | 1,177 | 1,367 | (42) | 160 | 149 | 266 |
| Environmental Science, BioScience |
221 |
286 |
(14) |
(42) |
17 |
4 |
| MaterialScience | 2,016 | 2,584 | 14 | 156 | 203 | 297 |
| Reconciliation | 294 | 307 | (55) | (94) | (10) | (16) |
| Group | 7,872 | 9,012 | 366 | 51 | 1,513 | 1,689 |
| * For definition see Chapter 4.2 "Calculation of EBIT(DA) Before Special Items." |