Results of operations

Overview of DEUTZ AG’s results of operations
  2017 2016
€ million    
Revenue 1,356.0 1,151.8
Cost of sales –1,171.5 –998.3
Research and development costs –60.3 –45.0
Selling and administrative expenses –74.5 –69.3
Other operating income 145.5 37.7
Other operating expenses –55.4 –21.4
Net investment income 15.5 4.4
Write-downs of investments –0.5
Operating profit (EBIT) 154.8 59.9
Interest expenses, net –6.8 –5.7
Income taxes –16.7 –8.6
Other taxes –2.6 –0.5
Net income 128.7 45.1
    

Revenue

In 2017, the revenue generated by DEUTZ AG came to €1,356.0 million, a sharp year-on-year rise of 17.7 per cent (2016: €1,151.8 million). This trend was primarily due to increased demand in the Construction Equipment, Material Handling and Agricultural Machinery application segments. In the Construction Equipment application segment, revenue rose by 23.3 per cent to €426.6 million (2016: €346.0 million). The increases were even higher in the Material Handling and Agricultural Machinery application segments, where revenue climbed by 44.5 per cent to €230.6 million (2016: €159.6 million) and by 30.5 per cent to €231.0 million (2016: €177.0 million) respectively.

The region with the strongest revenue growth was our largest region, EMEA (Europe, Middle East and Africa), where revenue advanced by 22.5 per cent to €1,023.3 million (2016: €835.2 million). In the Americas region, revenue rose by a substantial 10.5 per cent to €203.6 million (2016: €184.1 million). By contrast, revenue fell by 2.6 per cent to €129.1 million in the Asia-Pacific region (2016: €132.5 million).

Earnings performance

In 2017, DEUTZ AG generated an operating profit (EBIT) of €154.8 million (2016: €59.9 million). This year-on-year rise of €94.9 million was due to the far greater volume of business and, in particular, to the disposal of the land occupied by our former Cologne-Deutz site. Moreover, net investment income improved significantly. Countervailing effects to these positive factors were the higher level of research and development expenditure, negative currency effects and a temporary increase in costs caused by the rapid ramping up of capacities due to the surge in demand last year, especially in logistics.

Cost of sales

DEUTZ AG’s cost of sales came to €1,171.5 million in 2017 (2016: €998.3 million). The year-on-year increase of €173.2 million was mainly attributable to the volume-related rise in the cost of materials and a capacity-related increase in logistics costs. The gross margin 1) improved from 13.3 per cent to 13.6 per cent.

Research and development costs

In the year under review, research and development costs totalled €60.3 million (2016: €45.0 million). They largely comprised staff costs, the cost of materials and amortisation on completed development projects, after deduction of investment grants received and capitalised development costs. The rise of €15.3 million compared with 2016 was due to the increase in research and development activities and, above all, an impairment loss recognised on an uncompleted development project. The much improved market outlook for the engine series in the 4 to 6 litre capacity range, which have already achieved Stage V certification, led to a sharp drop in the expected demand for the 5.0 series. Consequently the development project was written off in full for reasons of commercial viability. It will not be pursued further for the time being.

Selling and administrative expenses

In 2017, selling and administrative expenses totalled €74.5 million (2016: €69.3 million). The year-on-year increase of €5.2 million was mainly attributable to selling expenses resulting from the intensification of sales activities. When measured as a proportion of revenue, however, selling and administrative expenses fell from 6.0 per cent in 2016 to 5.5 per cent in 2017.

Other operating income

Other operating income advanced by €107.8 million year on year to €145.5 million (2016: €37.7 million). The main reason for this increase was the income from the disposal of the land occupied by our former Cologne-Deutz site.

Other operating expenses

Other operating expenses rose by €34.0 million year on year to €55.4 million (2016: €21.4 million). This was primarily attributable to expenses in connection with reversing the sale to Deutz-Mülheim Grundstücksgesellschaft mbH in 2001/2002 of the former Company premises at the Cologne-Deutz site. The rise in other operating expenses was also caused by higher losses on the translation of foreign currency positions.

Net investment income

Net investment income was up on the previous year, rising by €11.1 million to €15.5 million (2016: €4.4 million). This was largely due to increases in the earnings of DEUTZ Asien Verwaltungs GmbH. The earnings of DEUTZ Asien Verwaltungs GmbH increased because of the equity investment in Deutz-Mülheim Grundstücksgesellschaft mbH and relates to the reversal of the sale of land to Deutz-Mülheim Grundstücksgesellschaft mbH in 2001/2002. Another reason for the increase was the distribution of a dividend by DEUTZ  Corporation, Atlanta, USA.

Net interest expense

Net interest expense in 2017 amounted to €6.8 million (2016: €5.7 million) The year-on-year deterioration of €1.1 million was mainly due to a decrease in interest income from loans to affiliated companies. Interest expense also decreased due to lower utilisation of credit lines.

Income taxes

Income taxes came to €16.7 million in 2017 (2016: €8.6 million). Current tax expenses amounted to €18.1 million (2016: €6.1 million), mainly because of the improved results of operations. The current tax expenses were partly offset by deferred tax income of €1.4 million (2016: tax expense of €2.6 million). Of the total current tax expenses, an amount of €2.2 million related to previous years and arose following tax audits for previous years.

Other taxes

Other taxes were much higher than in the previous year, advancing by €2.1 million to €2.6 million (2016: tax expense of €0.5 million). Real estate transfer tax of €2.2 million arose on the disposal of the land occupied by our former Cologne-Deutz site.

Net income

Owing, in particular, to the much better level of operating profit, the net income for the reporting year increased significantly, rising by €83.6 million year on year to €128.7 million (2016: €45.1 million). However, the level of net income was pushed up by the gain on the disposal of the land occupied by our former Cologne-Deutz site. Excluding this one-off effect, net income would still have risen year on year – and thus exceeded the forecast – because of the strong growth in the volume of business.

In view of the positive level of net income, the Board of Management and Supervisory Board propose using €18.1 million of the accumulated income to pay a dividend of €0.15 per share.

1) Gross margin: ratio of revenue less cost of sales to revenue (excluding amortisation relating to development expenditure).