Gross profit increased by 10.8% to € 2,053 million (Q3 2011: € 1,852 million), or 75.4% as a percentage of sales (Q3 2011: 76.1%). Higher start-up costs for Merck Serono’s biopharmaceutical manufacturing site in Vevey, Switzerland, as well as idle costs in production as a result of initiatives to lower inventories in Performance Materials kept the gross margin slightly below last year’s level. In addition, the healthy growth in Emerging Markets, which typically have comparably lower prices, contributed to the slight gross margin decline.
Group marketing and selling expenses increased moderately by 2.3% to € 598 million (Q3 2011: € 585 million) but at a significantly lower growth rate than sales, indicating lower and more focused discretionary spending. Royalty, license and commission expenses increased 20.7% to € 162 million (Q3 2011: € 134 million), reflecting the strong performance of Rebif®.
Merck gave an update on the financials related to its “Fit for 2018” efficiency program on August 14, 2012, announcing that it now expects to incur one-time costs of approximately € 640 million for the Merck Serono and Consumer Health divisions between 2012 and 2014, of which approximately € 430 million will be incurred in 2012. During the third quarter of 2012, Merck reported € 104 million in total one-time costs (Q3 2011: € 6 million), including restructuring expenses (impairments and restructuring costs) of € 45 million for its “Fit for 2018” program. Thus, including a total of € 94 million for provisions for litigations and write-downs of receivables as well as hedging losses of € 21 million, other operating expenses nearly tripled to € 245 million in the third quarter of 2012 (Q3 2011: € 86 million).
Research and development (R&D) spending remained nearly unchanged compared to last year’s third quarter, up only 0.2%, to € 371 million (Q3 2011: € 370 million), but decreased significantly to 13.6% as a percentage of sales (Q3 2011: 15.2%). Fewer Phase III projects in Merck Serono’s pipeline caused R&D costs in this division to decline although these savings were partly offset by more investments in the Merck Millipore division.
Amortization of intangible assets in the third quarter of 2012 grew 2.5% to € 218 million (Q3 2011: € 213 million), representing a typical amount for this line item.
The Group reported a decline in the operating result (EBIT) of 4.1% to € 318 million in the third quarter of 2012 (Q3 2011: € 332 million) while the operating result excluding depreciation and amortization (EBITDA) was up 2.3% to € 661 million (Q3 2011: € 646 million). However, adjusted for one-time costs totaling € 93 million excluding impairments (Q3 2011: € 6 million), EBITDA pre one-time items increased 15.6% to € 754 million, or 27.7% of sales (Q3 2011: € 653 million, or 26.8% of sales). The margin improvement reflects the strong top-line growth and more efficient resource allocation throughout the Group.
In the third quarter of 2012, the Group’s financial result improved by 19.6% to € –58 million (Q3 2011: € –72 million), due to reduced interest costs on debt following the retirement of € 500 million worth of bonds in March of this year as well as lower interest costs on pension provisions. In addition, gains related to the time value of foreign exchange options benefited the financial result in the quarter under review. Merck began using foreign exchange options as hedging instruments in Q4 2011 and books fluctuations of respective time values under the financial result. As a consequence, this line may continue to be impacted by the volatility of foreign exchange rates.
Income tax amounted to € –71 million (Q3 2011: € –32 million). While one-time charges moderately impacted the reported tax rate in the quarter under review, last year’s third quarter income tax rate included a one-time deferred tax gain. However, the adjusted income tax rate of 25.5% continues to be at the midpoint of the company’s underlying tax rate of 25% to 26%.
Turning to the bottom-line, the increase in one-time costs (including impairments) of € 98 million weighed on reported net income (profit after tax attributable to Merck KGaA shareholders) of € 185 million (Q3 2011: € 224 million) or earnings per share (EPS) of € 0.85 in the third quarter of 2012 (Q3 2011: € 1.03). However, adjusted for one-time costs, EPS pre one-time items increased 22.2% to € 1.98 (Q3 2011: € 1.62).
Merck’s strong operational performance in the third quarter of 2012 as well as effective working capital management generated a record free cash flow (net cash flow from operating activities less acquisitions/divestments, purchase/disposals of intangible assets, property, plant and equipment, non-current financial assets and marketable securities) of € 815 million (Q3 2011: € 482 million), up 69.2%. A stronger focus on improving working capital has resulted in working capital declining as a percentage of sales to 23.9% as of September 30, 2012 (29.5% as of December 31, 2011).