Annual Financial Statements as of December 31, 2014 and Management Report

Transcription

1 TRANSLATION - AUDITOR'S REPORT Annual Financial Statements as of December 31, 2014 and Management Report Merck Financial Services GmbH Darmstadt The English language text below is a translation provided for information purposes only. The original German text shall prevail in the event of any discrepancies between the English translation and the German original. We do not accept any liability for the use of, or reliance on, the English translation or for any errors or misunderstandings that may derive from the translation. KPMG AG Wirtschaftsprüfungsgesellschaft

2 BALANCE SHEET AS OF DECEMBER 31, 2014 in thousands of euro Notes 31/12/ /12/2013 ASSETS A. Non-current assets Financial assets (1) 1. Loans to affiliates (2) 413,323 1,529, Other loans (3) ,323 1,529,884 B. Current assets I. Receivables and other assets 1. Receivables from affiliates (4) 6,376,117 4,769, Other assets (5) 462,369 74,611 II. Other securities (6) 959,916 2,042,212 III. Cash and cash equivalents (7) 1,539, ,205 9,337,993 7,245,421 C. Prepaid and deferred expenses (8) 37,985 70,801 9,789,301 8,846,106 Key to symbols and figures: Figures are in thousands of euro Page 1

3 BALANCE SHEET AS OF DECEMBER 31, 2014 in thousands of euro Notes 31/12/ /12/2013 EQUITY AND LIABILITIES A. Equity (9) I. Subscribed capital II. Capital reserve 104, ,975 III. Accumulated loss -1-1 IV. Net loss for the financial year , ,999 B. Provisions (10) Other provisions 207,429 57, ,429 57,614 C. Liabilities (11) 1. Bonds (12) 2,930,000 2,930, Liabilities to banks (13) 235,397 6, Trade payables Liabilities to affiliates (14) 6,227,174 5,662, Other liabilities (15) 84,302 84,878 9,476,873 8,683,493 D. Deferred income 0 0 9,789,301 8,846,106 Key to symbols and figures: Figures are in thousands of euro Page 2

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5 INCOME STATEMENT FOR THE PERIOD FROM JANUARY 1 TO DECEMBER 31, 2014 in thousands of euro Notes Other operating income (16) 647 1, Other operating expenses (17) -5,187-5, Write-downs of non-current financial assets and current asset securities Financial result (18) -75,264-36, Result from ordinary operations -80,454-41, Income from loss transfer (19) 80,454 41, Net result for the year 0 - Key to symbols and figures: Figures are in thousands of euro Page 3

6 CASH FLOW STATEMENT FOR THE FINANCIAL YEAR 2014 The following cash flow statement prepared in accordance with GAS (German Accounting Standard) 2 provides information on the liquidity situation and the financial development of the Company: 01-12/ /2013 In thousands of In thousands of euro euro Net loss for year (before profit/loss transfer) -80,454-41,258 Change in provisions 2-2,623 Result of fixed assets disposal -3,856 3,470 Write-ups/write-downs on current assets 6, Change in interest accrual 2,549-11,392 Change in compensation fee 29,949-7,850 Other non-cash income and expenses -280,642 0 Cash flow from operating activities -325,968-60,558 Change in financial receivables from third-party entities 0 202,294 Financial investments in affiliates -14, ,438 Income from disposals of investments in affiliates 1,210,177 2,256,450 Income from disposals of investment in third-parties Purchase/sale of current securities 1,075, ,293 Cash flow from investing activities 2,272,443 1,532,309 Loss adoption by the shareholder Merck KGaA 41,258 40,244 Payments from redemption of bonds 0-750,000 Change in current and non-current financial debt to third parties 236,061-14,644 Change in financial receivables from affiliates -1,607,066-1,217,114 Change in financial liabilities due to affiliates 564, ,869 Other changes from financing activities ,173 Cash flow from financing activities -766,089-1,458,818 Net change in cash and cash equivalents 1,180,386 12,933 Cash and cash equivalents at 31/12/2013 (p.y. 31/12/2012) 359, ,272 Cash and cash equivalents at 31/12/2014 (p.y. 31/12/2013) 1,539, ,205 Key to symbols and figures: Figures are in thousands of euro Page 4

7 STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR 2014 Changes in equity 31/12/2014 in thousands of euro 01/01/2014 Nominal capital Capital reserve 104, ,975 Accumulated loss Total 104, ,999 Changes in equity 31/12/2013 in thousands of euro 01/01/2013 Nominal capital Capital reserve 104, ,975 Accumulated loss Total 104, ,999 Key to symbols and figures: Figures are in thousands of euro Page 5

8 NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR 2014 GENERAL COMMENTS The annual financial statements of Merck Financial Services GmbH (MFS) as of December 31, 2014 have been prepared, pursuant to article 267 (3) sentence 2 HGB (German Commercial Code), according to the provisions for large limited companies as defined by the German Commercial Code and the GmbH- Gesetz (German Limited Companies Act). The income statement is presented using the total cost method. Some headings in the balance sheet and the income statement have been combined in order to improve the clarity of disclosure; the items affected are shown separately in the notes. Page 6

9 NOTES TO THE BALANCE SHEET (1) FINANCIAL ASSETS Loans to affiliates Long-term securities Total in thousands of euro Cumulative acquisition costs as of 01/01/2014 1,529, ,529,884 Additions 14,000-14,000 Disposals -1,208, ,208,852 Changes in currency rates 78, ,291 Cumulative acquisition costs as of 31/12/ , ,323 Cumulative write-downs as of 01/01/ Write-downs Disposals Cumulative write-downs as of 31/12/2014 Carrying amount as of 31/12/ , ,323 Financial assets are generally stated at their acquisition costs, reduced, where necessary, by writedowns to their fair values. In the case of hedging transactions, the underlying transactions are combined with the hedging transactions to form a hedging unit pursuant to article 254 HGB (German Commercial Code) and unrealized profits, which are matched by unrealized losses in the derivatives, are also disclosed in this item. In 2014 a significant decrease of the financial assets can be noted due to expired loans. (2) LOANS TO AFFILIATES This balance sheet item presents non-current loans which are valued at acquisition costs. The loan amounts are subdivided into individual loans with different valuta for each company. All currency risks are hedged by forward currency transactions (FCT), congruent in terms of maturity and currency, and corresponding hedging units have been formed. The changes in value of the derivatives in the opposite direction are disclosed under the balance sheet item Other Assets (Note 5) or Provisions for Hedging Units (Note 10). Further explanations can be found under the balance sheet item Financial Instruments (Note 22). (3) OTHER LOANS In 2011, Merck Financial Services GmbH, Darmstadt, granted a customer of Merck Group a long-term loan of 1,000 thousand GBP with a term of four years and an effective interest rate of 8.326%; the loan Page 7

10 is being redeemed in quarterly installments and valued at acquisition costs. The loan has been settled according to plan. (4) RECEIVABLES FROM AFFILIATES in thousands of euro 31/12/2014 of which due in more than one year 31/12/2013 of which due in more than one year Receivables from affiliates 6,376,117-4,769,393 - V. of which due from the shareholder 578,365-1,406,790-6,376,117-4,769,393 - Receivables from affiliates are stated at their nominal value. Where default or other risks exist, they are accounted for by appropriate allowances. All receivables from affiliates have a remaining term of less than one year. Receivables in foreign currency have been translated at the mid currency spot rates at the balance sheet date. The receivables from affiliates mainly include current account receivables of 2,734,686 thousand euro and receivables from loans granted of 3,560,000 thousand euro. The following foreign currency loans are essentially combined with forward currency transactions to form hedging units: JPY USD CAD 39,204 thousand euro 215,978 thousand euro 7,087 thousand euro As a consequence of forming hedging units this balance sheet includes 2,443 thousand euro for impairment losses as the result of negative fluctuations in currency, against which positive market values exist from forward currency transactions for the same amounts from the creation of hedging units. The positive market values are disclosed in the item Other Assets (Note 5) in the sub-item Other receivables from third parties. (5) OTHER RECEIVABLES 31/12/2014 of which due in 31/12/2013 of which due more than one in more than in thousands of euro year one year Other receivables from third parties 462, ,611 - Other assets are stated at nominal value. Where default or other risks exist, these are accounted for by appropriate allowances. Other assets mainly have a remaining term of less than one year. Currently only operative hedging instruments for TWD are due in more than one year. Receivables in foreign currency have been translated at the mid currency spot rates at the balance sheet date. Other receivables due from third parties include interest receivables amounting to 5,377 thousand euro. Page 8

11 Furthermore, the item contains, pursuant to IDW RS HFA 35, positive changes in market values based on currency rates from external forward currency transactions which are matched by losses of the same amount from underlying transactions included in a hedging unit. (6) OTHER SECURITIES Composition 31/12/2014 in thousands of EUR 31/12/2013 in thousands of EUR Commercial papers 603, ,736 Bonds 212,264 1,057,853 Options 14,460 0 Others 129, ,623 Other securities 959,916 2,042,212 In order to manage its liquidity efficiently, the Company holds short-term securities on the capital markets. These serve the purpose, together with the available cash and cash equivalents, of ensuring adequate liquidity in the Group. Securities are measured at acquisition costs or the lower closing rate. The potions result from the hedging of a loan by AZ Electronic Materials (Japan) KK amounting to 70 bn JPY (7) CASH AND CASH EQUIVALENTS Cash and cash equivalents amounting to 1,539 thousand euro mainly comprise current and deposit accounts with banks. The liquidity is held principally in euro in order to minimize risks. Foreign currency assets are stated at the mid currency spot rates pertaining on the balance sheet date. Changes in cash and cash equivalents are presented in the cash flow statement for (8) PREPAID AND DEFERRED EXPENSES The presented prepaid and deferred expenses amounting to 37,985 thousand euro (p.y. 70,801 thousand euro) relate mainly to loan discounts amounting to 4,260 thousand euro (p.y. 5,614 thousand euro) in connection with the taking up of loans. The loan discounts are released in installments over the relevant terms. The accounting is based on the initial costs adjusted by the installments for the loans. Furthermore, this item includes the compensation fee to Merck Financial Trading GmbH, Gernsheim, and Merck Capital Ltd., Malta, amounting to 29,823 thousand euro (p.y. 59,772 thousand euro) not yet released over the terms of the derivatives of 2 to 36 months. It is being paid to the two in-house banks for the adoption of the market value risks from derivatives which are employed to hedge the planned transactions of the Merck Group and covers the cost of the risk capital that the companies have to provide for covering these market value risks. The companies may not close out the derivatives without the instruction of MFS until their final maturity. Payment is made on concluding a derivative with the above-mentioned companies for the whole period of the derivative. (9) EQUITY With regard to the description of the equity we refer to the statement of changes in equity for the financial year The subscribed capital as recorded in the commercial register amounts to 25 thousand euro. Page 9

12 The accumulated loss of 1 thousand euro arises from the time prior to the formation of a group for tax purposes. (10) PROVISIONS in thousands of euro 31/12/ /12/2013 remark Provisions for pending losses 19,599 51,875 a. Provisions for hedging units 187,774 5,685 b. Sundry provisions third parties c. Other provisions 207,429 57,614 a. Provisions for pending losses For derivatives that are not included in a hedging unit, negative market values are shown as provision for pending losses. Any unrealized gains are not accounted for. Likewise if changes in market values due to currency rate fluctuations of the underlying and hedging transactions included in a hedging unit do not net each other out, the negative valuation overhang of the hedging transaction is shown a provision for pending losses. Positive valuation overhangs of the hedging transaction are not accounted for. Hedging units are accounted for by using the gross hedge presentation for loans that are hedged against currency rate fluctuations, all other hedging transactions are accounted for by using the net hedge presentation method. b. Provisions for hedging units Negative market values of hedging units that are accounted for by using the gross hedge presentation method are shown in this position, which are matched by gains in the underlying transactions. c. Sundry provisions third parties These provisions account for all recognizable risks and uncertain obligations and are recognized at the settlement amount considered necessary after applying reasonable commercial judgment. (11) LIABILITIES Liabilities are stated at their settlement amounts. Current payables in foreign currency are translated at the mid currency spot rates at balance sheet date. Page 10

13 (12) BONDS Liabilities from issued bonds amounting to 2,930,00 thousand euro consist of the following issued bonds as per December 31, 2014: Remaining Remaining Remaining 31/12/2014 term of less term of 1 to 5 term of more Total in thousands of euro than 1 year years than 5 years Bonds 1,450, ,000 1,350,000 2,930,000 1,450, ,000 1,350,000 2,930,000 Remaining term of less than 1 year Remaining term of 1 to 5 years Remaining term of more than 5 years 31/12/2013 Total in thousands of euro Bonds - 1,510,000 1,420,000 2,930,000-1,510,000 1,420,000 2,930,000 In the financial year 2009 Merck launched a Debit Issuance Program which constructs a contractual framework for the issue of bonds at nominal value. In the financial year 2013 the contractual limit was increased to 15 billion euro. Under this program bonds amounting to a nominal value of 2.7 billion euro are currently outstanding. The total amount is subdivided as follows: Bond in euro with a nominal value of 1,350,000 thousand euro, term until March 2015 and an interest coupon of 3.375%. Bond in euro with a nominal value of 1,350,000, term until March 2020 and an interest coupon of 4.5%. Furthermore the following bonds were issued: Bond in euro with a nominal value of 100,000 thousand euro, term until December 2015 and a floating interest rate (an interest rate of 3.615% was fixed by means of an interest rate swap). Bond in euro with a nominal value of 60,000 thousand euro, term until November 2016 and an interest coupon of 4%. Bond in euro with a nominal value of 70,000 thousand euro, term until November 2019 and an interest coupon of 4.25%. (13) LIABILITIES TO BANKS Liabilities to banks are measured at their settlement amounts. The liabilities to banks of 235,397 thousand euro contain a loan of 200,000 thousand euro from Europäische Investitionsbank received in 2014 for Pharma R&D. Liabilities of 35,397 thousand euro (p.y. 6,079 thousand euro) are owed to the companies principal banks. The liabilities of 35,397 thousand euro have a remaining term of less than one year. Page 11

14 (14) LIABILITIES TO AFFILIATES in thousands of euro Remaining term of less than 1 year Remaining term of 1 to 5 years Remaining term of more than 5 years 31/12/2014 Total Other liabilities to affiliates 6,227, ,227,174 - of which to the shareholder 53, ,700 6,227, ,227,174 in thousands of euro Remaining term of less than 1 year Remaining term of 1 to 5 years Remaining term of more than 5 years 31/12/2013 Total Other liabilities to affiliates 5,662, ,662,536 - of which to the shareholder ,662, ,662,536 In its function as finance company for the subsidiaries of Merck Group, Merck Financial Services GmbH discloses almost all current loans and clearing accounts payable to affiliates. From these loans currency risks are hedged by forward currency transactions (FCT) with the same terms and hedging units are appropriately formed. As a consequence of the fact that all foreign currency loans are included in hedging units, the historic cost principle only applies to any positive measurement surpluses from the hedging units which relate to the underlying transactions. Negative fluctuations in value of 2,289 thousand euro caused by currency rates included in this item are matched by positive market values from derivatives which are disclosed under Other receivables from third parties in accordance with IDW RS HFA 35. Negative market values corresponding to positive fluctuations caused by currency rates amount to 5,712 thousand euro and are shown in item Provisions for hedging units. (15) OTHER LIABILITIES Other liabilities are measured at the settlement amount and, in case of foreign currencies, were translated at the mid currency spot rates at closing date. They amount to 84,302 thousand euro (p.y. 84,878 thousand euro), have a remaining term of less than one year and consist of interest payables to third parties due to issued bonds with an amount of 83,621 thousand euro (p.y. 83,060 thousand euro). Page 12

15 NOTES TO THE INCOME STATEMENT (16) OTHER OPERATING INCOME in thousands of euro Sundry income 647 1,326 Other operating income 647 1,326 Sundry income includes income unrelated to accounting period amounting to 22 thousand euro (p.y. 50 thousand euro). (17) OTHER OPERATING EXPENSES in thousands of euro Third-party services and charges 4,781 5,032 Bank charges, fees, insurance and consultancy costs Sundry operating expenses 0 2 Other operating expenses 5,187 5,536 Third-party services and charges relate primarily to services performed by Merck KGaA, Darmstadt. Bank charges, fees, insurance and consultancy costs mainly contain consultancy fees and bank charges. Page 13

16 (18) FINANCIAL RESULT Composition 2014 of which affiliates 2013 of which affiliates In thousands of euro In thousands of euro Income from investments and financial asset loans 35,895 35, , ,895 Other interest and similar income 96,902 84,244 73,165 48,623 Interest and similar expenses -193,128-63, ,069-54,690 Net interest -60,331 56,910-32, ,828 Income from currency exchange differences 1,528,361 1,639,392 Expenses from currency exchange differences -1,543,294-1,642,935 Currency exchange differences -14,933-3,543 Financial result -75,264 56,910-36, ,828 There is no subdivision in this item. Interest and similar expenses include a compensatory payment related to Merck Financial Trading GmbH, Gernsheim, and Merck Capital Ltd., Malta, amounting to 52,090 thousand euro (p.y. 46,800 thousand euro), which is released over a particular specific period. This is being paid to the two in-house banks for the adoption of the market value risks from derivatives which are employed to hedge the planned transactions of Merck Group and covers the cost of the risk capital that the companies have to provide for covering these market value risks. The companies may not close out the derivatives without the instruction of MFS until their final maturity. Payment is made on concluding a derivative with the above-mentioned companies for the whole period of the derivative. (19) APPROPRIATEN OF RESULT The loss amounting to 80,454 thousand euro is taken over by the shareholder Merck KGaA, Darmstadt, under the profit and loss transfer agreement dated January 22, Page 14

17 OTHER DISCLOSURES (20) CONTINGENT LIABILITIES The following contingent liabilities existed at December 31, 2014: 31/12/2014 of which to affiliates 31/12/2012 of which to affiliates in thousands of euro Surety endorsements 2,531 2,531 2,232 2,232 Guarantees 137, ,716 99,132 99, , , , ,364 The surety endorsements and guarantees arise mainly from contractual fulfillment and warranty guarantees to customers to affiliates. The likelihood of claims being made on the contingent liabilities is considered to be very low since all affiliates have access to adequate liquid funds and can finance themselves at all times via the Group s inhouse bank. (21) OTHER FINANCIAL COMMITMENTS Other financial commitments include 320 thousand euro from service contracts due to affiliates. The amounts are due within one year. (22) FINANCIAL INSTRUMENTS Derivative financial instruments are employed solely to hedge group currency and interest positions in order to minimize foreign-currency risks and financing costs of the Group caused by exchange rate and interest rate movements. Forward exchange contracts, exchange options and interest-rate swaps, customary in the market, are employed for this purpose. The use of such derivative contracts is set out in guidelines. The conclusion of derivative transactions is subject to constant risk control. A strict separation of functions between trading, execution and control is assured. Derivative financial contracts are only concluded with banks of good credit standing and are limited to the hedging of financing transactions. On account of the function of Merck Financial Services GmbH, Darmstadt, as the central financing unit, currency risks of affiliates are hedged by issuing intergroup derivative financial instruments to these entities. In order to avoid an open position at Merck Financial Services GmbH, Darmstadt, these intergroup derivative financial instruments are hedged with similar derivative financial instruments issued by banks, the intergroup derivative financial instrument representing, from the perspective of Merck Financial Services GmbH, Darmstadt, underlying transactions. Moreover, derivative financial instruments are negotiated with banks to hedge own interest and currency risks of Merck Financial Services GmbH, Darmstadt. Page 15

18 As at the balance sheet date, the following derivative financial items existed with banks and affiliates (derivative financial instruments can be both underlying and hedging transactions): Market values & nominal volumes Nominal volumes Market values in thousands of euro Forward currency transactions 22,071,389 6,616, ,254-3,568 of which operating transactions of which financial transactions 22,071,389 6,616, ,254-3,568 Currency options 910, ,888 17,896 - of which operating transactions of which financial transactions 910, ,888 17,896 - Interest rate swaps 650, , ,096-42,644 23,632,375 8,182, ,054-46,212 The following remaining terms exist for the derivative financial instruments (nominal volumes) as of the balance sheet date: Nominal values by remaining term Remaining Remaining term Remaining Remaining term Total term up to more than term up to more than Total in thousands of euro 1 year 1 year 31/12/ year 1 year 31/12/2013 Forward currency transactions 21,419, ,882 22,071,389 4,969,747 1,646,443 6,616,190 Currency options 821,573 89, , , , ,888 Interest rate swaps 100, , , , ,000 23,632,375 8,182,079 Forward currency transactions and options serve, on the one hand, to hedge loans that have been granted to or received from companies of the Merck Group and, on the other hand, to hedge specific future operating transactions between affiliates. Interest rate swaps serve to hedge the interest rate in connection with existing and future variable interest financing. Future transactions are only hedged if it may be assumed with a very high level of probability that they will indeed occur. The nominal volume is the total of all purchase and sales amounts of derivative financial transactions. The market values arise from the measurement of the outstanding positions at market prices without accounting for developments in value in the other direction from underlying transactions recognized. These are equivalent to the expenses and income if the derivative contracts are closed out at the balance sheet date. The determination of market values is based on quoted prices or on current market data provided by a recognized information service. For anticipated hedging units, forward currency transactions passed on, contained in hedging units, and for interest swaps, balance sheet accounting is in accordance with the net hedge presentation method. In all other cases accounting is in accordance with the gross hedge presentation method. Under the gross hedge presentation method income and expenditure from the underlying and hedging transactions are accounted for in the balance sheet and the income statement. Under the net hedge presentation method the changes in value of the underlying and hedging transactions are not accounted Page 16

19 for in the income statement until the end of the hedging unit. Until this point in time there is no recognition in the balance sheet or in the income statement. Positive market values of the derivatives are, to the extent that the derivatives are in a hedging unit, disclosed under Other assets in accordance with IDW RS HFA 35. Negative market values, to the extent that the derivatives are in a hedging unit, are disclosed in Provisions for hedging units. Sole derivatives and measurement surpluses from derivatives included, in principle, in one hedging unit, are treated in accordance with general measurement principles on an imparity basis, i.e. unrealized gains are not disclosed and unrealized losses are included in the Provision for pending losses. Measurement is performed at the mid currency spot rate, interest premiums and discounts specific to the terms in relation to the traded market price. The interest rate swaps held to secure interest are valued with the help of generally accepted measurement models for the market, based on interest curves available on the market. With the formation of measurement units, pursuant to article 254 HGB (German Commercial Code), the regulations contained in articles 249 (1), 252 (1) No. 3 and 4, 253 (1) sentence 1 and 256a are not applicable to the extent that and in the period in which contrary value changes or payment flows cancel each other out. The nominal volume of the underlying transactions (including underlying transactions in the form of intergroup forward currency transactions) corresponds to the nominal value of the hedges. A theoretical risk of default exists in respect of existing financial derivatives but only to a maximum of their positive market values. As the underlying contracts were concluded solely with banks of good credit standing, we do not anticipate any real credit risk for these financial instruments. (23) MANAGEMENT The managing directors Mr. Rando Bruns and Mr. Jörg Bermüller do not have an employment relationship with the Company. (24) AUDIT COMMITTEE Four audit committee sessions took place in 2014 pursuant to the statutory regulations of article 107 (3) AktG (German Stock Corporation Law). The audit committee consisted of the managing directors Mr. Rando Bruns and Mr. Jörg Bermüller and the chairman of the audit committee Mr. Rüdiger Demuth, Director Closing Service of Merck Accounting Solutions & Services Europe GmbH. (25) GROUP RELATIONSHIPS Merck Financial Services GmbH, Darmstadt, is a Group company of E. Merck KG, Darmstadt, and is included in the consolidated financial statements of that company. In addition, the Company is included in the sub-group consolidated financial statements of Merck KGaA, Darmstadt. The Group and the sub-group consolidated financial statements are filed with the electronic Federal Gazette and can be viewed under (26) AUDIT FEES Fees to our auditor amounted to 61 thousand euro, of which 54 thousand euro related to the year-end audit and 7 thousand euro to other certification services. Page 17

20 (27) OTHER The Company does not employ any staff of its own. Darmstadt, March 31, 2015 The Management Rando Bruns Jörg Bermüller Page 18

21 MANAGEMENT REPORT AS OF DECEMBER 31, 2014 Merck Financial Services GmbH The object of the Company is to execute all activities which are necessary for performing its function as an in-house bank of Merck Group, particularly the centralization of the finance activities, the control and management of cash flows, the taking-up of loans as well as issuing the bonds, fixed-interest certificates and debentures, every type of financial support for the Merck Group companies (affiliates), and the management of currency, interest and market price risks. As a 100% subsidiary, the Company is subject to a profit and loss transfer agreement with Merck KGaA, as the controlling enterprise. Control ratios The Company is integrated in the control system of Merck Group. Furthermore, the Company commands providing liquidity within Merck Group and the financial result as a major key performance indicators. Economic report Overall economic situation In connection with the European debt crisis the general interest level continued to remain at a historically low level during The value of the USD increased from USD 1.38/EUR to USD 1.21/EUR during 2014, whereas the value of the Japanese yen was continuously devaluated from JPY 140/EUR to JPY 145/EUR. Business development Merck Financial Services GmbH ( the Company ) was founded on August 27, 2007 as a GmbH [Gesellschaft mit beschränkter Haftung: German private limited company] under the name Merck Oktober Allgemeine Beteiligungs GmbH. The Company changed its name on October 26, 2007 to Merck 9. Allgemeine Beteiligungs GmbH and again on February 5, 2009 to Merck Financial Services GmbH. The registered office of the Company is in Darmstadt. As a result of its activities as central financing unit, the Company recorded a loss in the amount of 80.5 million euro in the financial year The loss was taken over in accordance with the profit and loss transfer agreement by Merck KGaA. Thus the loss is at a significant higher level as the prior-year value (41.3 million euro). The increase results from a weaker financial result with less income from financial assets. Merck Financial Services GmbH acts as financing unit and in-house bank for Merck KGaA, and hence for the entire Merck Group, and is therefore considerably influenced by the development of Merck KGaA. At the same time, Merck KGaA is guarantor for outstanding financial debt of the Company in the amount of 3,165.4 million euro (p.y. 2,936.1 million euro). The Management is content with the economic situation although the financial result as key performance indicator has developed below last year s forecast. This is mainly due to the fact that the income from financial assets has decreased. Result of operations The result of ordinary business activities of million euro (p.y million euro) is mainly influenced by the financial result, which amounts to million euro (p.y million euro). Net interest included in the financial result amounts to million euro (p.y million euro). It results from the sum of interest income from affiliates amounting to million euro (p.y Page 19

22 million euro) and of interest income from current assets amounting to 12.7 million euro (p.y million euro) as well as interest expenses of million euro (p.y million euro), of which million euro (p.y million euro) mainly result from interest expenses from financial transactions of the Company and 11.1 million euro (p.y. 7.9 million euro) from interest expenses for loans from companies within the Merck Group. The decrease of the interest income results from lower loans. Other operating income contributes 0.6 million euro (p.y. 1.3 million euro) to the annual result. Other operating expenses amount to 5.2 million euro (p.y. 5.5 million euro), which primarily comprise expenses for third-party services (4.8 million euro; p.y. 5.0 million euro) as well as bank charges and consultancy fees (0.4 million euro; p.y. 0.5 million euro). Net assets The total assets of the Company amount to 9,789.3 million euro (p.y. 8,846.1 million euro). The increase in total assets is mainly the result of increased positive market values of hedges for foreign exchange risks as well as increased receivables from affiliates. The subscribed capital of the Company is fully paid up and amounts to 25 thousand euro. The capital reserve amounts to million euro as in the prior year. The ratio of equity to the balance sheet total amounts to 1.1% and is thus at a similar level as in the prior year (p.y. 1.2%). Non-current capital, i.e. equity and long-term debt in relation to total assets, makes up 16.2% (p.y. 34.3%). The reason for the 18.1%-points decrease is the reclassification of bonds amounting to 1,450 million euro from non-current to current. Receivables and loans to affiliates amount to 6,789.4 million euro (p.y. 6,298.8 million euro). Loans to third parties, on the other hand, amount to 0.0 million euro (p.y. 0.4 million euro). These are matched on the equity and liabilities side by 6,227.2 million euro (p.y. 5,662.5 million euro) intergroup payables. Intergroup items consist of current clearing accounts as well as fixed term loans and investments with companies of Merck Group. Receivables to third parties as well as other short-term assets amounting to 2,961.9 million euro (p.y. 2,476.0 million euro) predominantly consist of cash and cash equivalents with a volume of 1,539.6 million euro (p.y million euro) and current asset securities of million euro (p.y. 2,042.2 million euro). These consist primarily of investments in commercial paper and corporate bonds. Liabilities to third parties and provisions amounting to 3,457.1 million euro (p.y. 3,078.6 million euro) are mainly based on bonds and private placements issued amounting in total to 2,930.0 million euro (p.y. 2,930.0 million euro). In addition, there are 84.3 million euro (p.y million euro) of liabilities to third parties as well as financial liabilities to banks of million euro (p.y. 6.1 million euro). Provisions amount to million euro (p.y million euro) and mainly comprise of provisions for pending losses amounting to 19.6 million euro (p.y million euro) and provisions for hedging units amounting to million euro (p.y. 5.7 million euro). They result from hedges for acquisitions. Financial position In the financial year 2014 the cash and cash equivalents of the Company have increased significantly and amount to 1,539.6 million euro (p.y million euro). Cash and cash equivalents are available for purchase price payments regarding a future acquisition of Merck Group. Personnel Merck Financial Services GmbH does not employ any personnel of its own. The operating activities are undertaken by employees of Merck KGaA. Thus, controlling of the total business activities of the Company is also carried out through Merck KGaA and is aligned with the financing needs of the parent company and group companies. Page 20

23 Risk report......risk and opportunity management Merck Financial Services GmbH, as the central group-wide financing unit, first and foremost provides support to the operating business activities of Merck Group. The currency risks arising from transactions have to be reduced and, ideally, eliminated. The Company is exposed to interest-rate risks and also to associated opportunities, as the bonds issued in the capital market carry fixed interest rates, whereas the funds are reinvested internally or in the capital market with shorter terms. Since the major part of the external finance debt of the Company is tied long-term to fixed interest rates and the liquidity reserves of the Company are deposited solely on a short-term basis at, currently, considerably lower interest rates, a rise in interest rates would lead to an improvement in the interest result of the company....business-related risks The business activities of Merck Financial Services GmbH are confined exclusively to financial transactions. As a result, the associated risks are outlined under finance risks below....finance risks Due to its function as central financing unit within Merck Group and through its activities in the external capital market, the Company is subject to market price risks, loan-default as well as liquidity risks. Market price risks, particularly from fluctuations of exchange and interest rates, can have significant consequences for profit and cash flow. In order to secure existing risk positions, the Company uses derivatives to minimize finance risks and financing costs caused by fluctuations of exchange or interest rate. To this end, the Company continuously monitors the existing risk positions, in the process of which finance transactions recorded in foreign currency are hedged. Financial transactions with credit risks are mainly concluded with banks and companies of good credit standing. The credit rating of the counterparts is constantly monitored so as to be able to react to deteriorations at short notice and to minimize possible risk of default for the Company. Risks of default of receivables from affiliates are currently not evident. The liquidity risk, i.e. the risk that the Company is unable to meet its financial obligations, is limited by an effective cash management system and by a multi-currency working-capital credit line of 2 billion euro, with seventeen banks of good credit standing and a credit line with a remaining term of two years. Merck KGaA has issued a guarantee for the external liabilities of the Company. There is nothing to indicate that the credit line granted is restricted in its availability. Furthermore, the Company has a Debt Issuance Program which facilitates the issuance of debentures up to a volume of 15.0 billion euro. As at December 31, 2014 an amount of 2.7 billion euro (p.y. 2.7 billion euro) has been utilized. Furthermore, the amounts stated for individual balance sheet items are subject to risks of changing market conditions and, as a consequence, to changes of their fair values. This could affect the results adversely as well as the relationship within the balance sheet....legal risks In the course of its activities in the capital market and through its function as a group-wide financing unit, Merck Financial Services GmbH is exposed to legal risks. Necessary precautionary measures have been taken to recognize potential dangers and safeguard the rights of the Company....Information technology risks Through a substantial back-up system of technical components, networks and sites, the Company ensures also in case of failure of individual components the required availability of its critical business application systems and access to business-relevant data. The Company has security guidelines Page 21

24 containing organizational, technical and software-related measures on access control, access rights, virus protection and data privacy. Compliance with and the effectiveness of these measures are continuously monitored. A strict IT risk-management process ensures that IT risks are evaluated and adequate measures put into force....management s assessment of the overall risk situation At present, no risks are recognizable that could endanger the continuation of the Company as going concern....the internal control system with regard to the accounting and reporting procedures It is the aim of the internal control system (ICS) for the accounting and reporting procedures to provide adequate certainty that the financial statements are prepared in accordance with generally accepted accounting and reporting standards by implementing controls. Merck Financial Services GmbH is integrated in the risk management system of Merck KGaA Group. Significant instruments and regulations are: - Accounting guidelines - A clearly defined separation of tasks and assignment of responsibilities - The inclusion of external experts where required for example, for the appraisal of financial instruments - The use of suitable, largely uniform IT financial systems and application of detailed authorization concepts for ensuring task-related empowerment, taking into account the principles of functional separation - Implemented system controls and additional procedural controls relating to accounting at corporate level - Taking into account the recorded and evaluated risks in the risk management system in the annual financial statements, insofar as is required pursuant to existing accounting principles Management is responsible, within the Company, for implementing these regulations and the application of instruments. All structures and procedures described are subject to regular reviews by the internal audit function. The management of Merck KGaA lays down in an annual audit plan which structures and procedures are to be subjected to an audit. Other disclosures required by article 289 (2) sentence 1 German Commercial Code...Post balance sheet events On March 24, 2015 an issued bond amounting to 1.35 billion euro has been repaid in due time. Page 22

25 Forecast... Because of its function as external and internal trading partner for financial transactions, the results of Merck Financial Services GmbH are mainly dependent on the interest income and interest expenses. For 2015 we expect a significant increase in operating profit as the financial result will improve significantly. The latter is basically due to the fact that of the repayment of the high-yield bond of 1.35 billion euro. This forecast assumes that no foreign exchange differences appear. These effects are not likely to be forecasted and can have positive or negative effects. Due to the fact that profits made and losses incurred will be taken over by Merck KGaA under the existing profit and loss takeover agreement, the annual net profit or loss of the Company will be in any case equalized to zero. Through the high liquidity of the Company no liquidity bottlenecks are expected at present. Furthermore, the Company has sufficient credit lines at its disposal to guarantee provision of liquidity during the ensuing two years. Actual development can deviate from the expectations presented here. Darmstadt, March 31, 2015 Page 23

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27 Auditor s report We have audited the annual financial statements, comprising the balance sheet, the income statement, the cash flow statement, the statement of changes to equity and the notes to the financial statements, together with the bookkeeping system, and the management report of the Merck Financial Services GmbH, Darmstadt, for the business year from January 1, to December 31, The maintenance of the books and records and the preparation of the annual financial statements and management report in accordance with German commercial law are the responsibility of the Company s management. Our responsibility is to express an opinion on the annual financial statements, together with the bookkeeping system, and the management report based on our audit. We conducted our audit of the annual financial statements in accordance with Art. 317 HGB [ Handelsgesetzbuch : German Commercial Code ] and the German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the annual financial statements in accordance with German principles of proper accounting and in the management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Company and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the books and records, the annual financial statements and the management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the annual financial statements and management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations

28 In our opinion, based on the findings of our audit, the annual financial statements comply with the legal requirements and give a true and fair view of the net assets, financial position and results of operations of Merck Financial Services GmbH in accordance with German principles of proper accounting. The management report is consistent with the annual financial statements and as a whole provides a suitable view of the Company's position and suitably presents the opportunities and risks of future development. Frankfurt am Main, 10. April 2015 KPMG AG Wirtschaftsprüfungsgesellschaft [Original German version signed by:] Jenal Wirtschaftsprüfer [German Public Auditor] Bernau Wirtschaftsprüferin [German Public Auditor]