Annual Report 2006
GfK Group: www.gfk.com
Proposed appropriation of profits
In accordance with the German Stock Corporation Act, the dividend that may be distributed is determined by the retained profit reported in the annual financial statements of GfK AG. These are prepared under the provisions of the German Commercial Code (HGB). The retained earnings and the retained profit of GfK AG reported under the provisions of the HGB are available for distribution in their entirety to shareholders. The capital reserve may not be distributed to shareholders.
A proposal will be made to the Annual General Meeting to distribute a dividend of EUR 12,781 thousand (EUR 0.36 per no-par share) to shareholders out of the retained profit for 2006 of EUR 95,951 thousand and to transfer EUR 83,170 thousand to retained earnings.
Long-term provisions
The breakdown of long-term provisions is shown in the table below:
Pension provisions
Pension provisions within the GfK Group are based on both defined contribution plans and defined benefit plans for each company.
For defined contribution plans, which are entirely funded by external resources, there are no further obligations for GfK companies other than paying contributions. Expenses for defined contribution plans also include employer contributions to statutory pension plans.
Pension commitments are based on statutory or contractual arrangements or are on a voluntary basis. The basis of assessment for contributions to defined contribution plans is mainly the length of service with the company and the wage or salary level of the employee. However, the benefits can vary depending on the legal, fiscal and economic framework conditions of the country concerned. The pension expenses for defined contribution plans amounted to EUR 12,561 thousand (2005: EUR 12,267 thousand) in financial year 2006.
The pension obligations arising from defined benefit plans are reported according to the projected unit credit method. Actuarial reports are produced annually by independent actuariesfor defined benefit plans. The actuaries apply statistical and actuarial calculations to determine the assets and provisions to be carried on the balance sheet. Determining the fair value of defined benefit plans and pension assets is based on empirical and statistical estimated values such as, for example, future salary raises, mortality rates or expected long-term returns on the plan assets.
Discrepancies between the actual values and these estimated values are expressed as actuarial gains or losses. The GfK Group is utilizing the option under IAS 19 retrospectively from financial year 2004 whereby actuarial gains and losses are not recognized in the income statement but in income and expenses recognized directly in equity. In the year under review, actuarial losses of EUR 2,931 thousand (2005: EUR 4,839 thousand) were reported in this way. The amount of income and expenses recognized directly in equity totaled EUR 7,018 thousand (2005: EUR 4,087 thousand) as of December 31, 2006. The figures do not include deferred taxes.
The calculation of obligations and, in certain cases, associated plan assets, is based on the actuarial and statistical assumptions listed in the table below (weighted averages).
The mortality rates for the GfK companies in Germany were taken from the 2005 G guideline tables by Dr. Klaus Heubeck.
The breakdown of pension provisions reported in the balance sheet is shown in the table below.
The movement in the present value of the defined benefit obligation (DBO) during the period under review is shown in the table below.
The table below shows the movement in plan assets.
The plan assets for funded pension obligations comprise shares, fixed-rate securities and real estate. The fair value of plan assets essentially includes financial instruments amounting to EUR 40,751 thousand (2005: EUR 28,917 thousand).
General projected return on plan assets was determined based mainly on experience from the past 10 years. The projected return on plan assets reported in the financial statements for 2006 is an average of 4.43%. The actual return on plan assets in 2006 amounted to EUR 2,532 thousand. Actual income from refunds totaled EUR 13 thousand in 2006.
According to GfK estimates, contributions of around EUR 1,121 thousand will be payable into funded pension plans over the coming year. The amounts reported in the income statement break down as shown in
the table below.
The pension expenses are included mainly in cost of sales, selling and general administrative expenses and in other financial expenses.
The funding status is shown in the table below.
Other long-term provisions
The movement in other long-term provisions in the period under review is shown in the table below.
Personnel provisions comprise mainly commitments relating to employees leaving and from provisions for anniversary expenses based on contractual agreements. In addition, they comprise provisions for the Long Term Incentive Plan (EUR 2,404 thousand).
The provision for potential contractual losses relates to two long-term rental contracts at non-standard terms. The larger contract in terms of amount has been in place since 2002 at a company of NOP World. The remaining term is 10 years. The agreed rent has been compared with current and estimated future market rates and the amount in excess has been recognized in the provision. As this is an interest-free commitment, the present value has been used.
The discount was calculated at an interest rate of 7%. The nominal amount of the commitment as of the reporting date was EUR 10,020 thousand (USD 13,197 thousand). In 2006, a write-up on this discounted provision amounting to EUR 668 thousand was applied.
If the future market price for rents does not follow the trend assumed for recognition of this provision, the provision will be adjusted accordingly.
Long-term and short-term interest-bearing financial liabilities
The breakdown of financial liabilities is shown in the table below.
Other financial liabilities contained loan liabilities totaling EUR 9,869 thousand (2005: EUR 5,126 thousand) as of December 31, 2006, of which EUR 9,404 thousand (2005: EUR 4,670 thousand) concerned related parties.
As of December 31, 2006 the weighted average interest rate for amounts due to banks was 4.62% (2005: 3.93%).
The financial liabilities become due in the next five years and thereafter, as shown in the table below:
As of December 31, 2006, the GfK Group had confirmed credit lines of EUR 650,379 thousand (2005: EUR 689,992 thousand), of which EUR 183,020 thousand (2005: EUR 137,279 thousand) have not been used. The weighted average rate of interest on the credit lines is 4.54% (2005: 3.95%).
There is collateral amounting to EUR 3,439 thousand (2005: EUR 510,678 thousand) for amounts due to banks and liabilities under leases of EUR 479,460 thousand (2005: EUR 563,652 thousand). The collateral breakdown is as shown in the following table.
As part of funding the syndicated credit line, the company achieved the release of the transferred investments (2005: EUR 505,803 thousand).
In addition to the collateralization of liabilities to banks, the GfK Group has undertaken to meet certain covenants as part of a syndicated credit facility. The ratio of net indebtedness in relation to modified EBITDA, which is established on the basis of specific criteria, must be lower than 3.25. The ratio of modified EBITDA to interest expenses must be higher than 4.0.
In the event of these covenants being breached, the credit margin of the banks providing the finance increases and a new agreement on the covenants to be met in future must be concluded with the creditors. Both covenants were met by the GfK Group as of December 31, 2006.
Short-term provisions
The movement in short-term provisions during the year under review is shown in the table below.
Other short-term liabilities and deferred items
The breakdown of other short-term liabilities and deferred items is shown in the table below.
Short-term liabilities to employees mainly comprise liabilities for the payment of bonuses (EUR 23,531 thousand) and holiday and flexitime claims (EUR 14,262 thousand), liabilities arising from social security (EUR 8,365 thousand) and liabilities from wages and salaries (EUR 4,288 thousand).
Other liabilities from operating business mainly comprise amounts owed to clients (EUR 4,406 thousand), to interviewers (EUR 5,332 thousand) and to households and respondents (EUR 4,386 thousand).
Liabilities from non-operating business mainly include rent (EUR 2,913 thousand), external year-end closing costs and legal and consultancy costs (EUR 3,264 thousand).
Notes to the consolidated cash flow statement
The cash flow statement is presented at the front of these notes. It shows the changes in the GfK Group balance sheet item liquid funds in 2006. In accordance with IAS 7, a distinction is made between cash flows from operating activity and from investing and financing activity. The funding sources covered in the cash flow statement comprise liquid funds. These encompass cash in hand, checks, cash equivalents and fixed-term deposits where they are available within three months.
The cash flow from operating activity amounted to EUR 110,268 thousand (2005: EUR 128,929 thousand). It covered investments which totaled EUR 56,614 thousand (2005: EUR 681,942 thousand) in full.
Of this, EUR 12,243 thousand (2005: EUR 643,489 thousand) related to the acquisition of affiliated companies and other business units. Capital expenditure amounted to EUR 42,567 thousand (2005: EUR 35,398 thousand).
In addition, cash flow from operating activity was used for loan repayments (EUR 84,800 thousand), which contributed to a negative figure for cash flow from financing activity (EUR –90,864 thousand; 2005: cash inflow of EUR 550,254 thousand). In the year under review, interest paid amounted to EUR 26,203 thousand (2005: EUR 20,950 thousand).
Dividends totaling EUR 14,067 thousand (2005: EUR 17,150 thousand) were paid to shareholders of GfK AG and to minority shareholders in subsidiaries. The liquid funds in the balance sheet were down by EUR 31,737 thousand (2005: up by EUR 30,902 thousand).
Tax on income in financial year 2006 resulted overall in a cash outflow of EUR 32,580 thousand (2005: EUR 32,950 thousand).
Funds acquired through the purchase of subsidiaries amounted to EUR 707 thousand (2005: EUR 7,071 thousand).
Related parties
Related parties are persons or groups which could be influenced by the GfK Group or could have an influence on the GfK Group. In the year under review, the following major transactions were carried out involving related parties:
These were mainly loan obligations amounting to EUR 7,510 thousand (2005: EUR 4,130 thousand) due to GfK-NÜRNBERG, Gesellschaft für Konsum-, Markt- und Absatzforschung e.V., Berlin, the majority owner of GfK AG. The corresponding interest expenses amounted to EUR 172 thousand (2005: EUR 83 thousand).
Unless stated otherwise, amounts owed to and by related parties have mainly a remaining term of less than one year.
Material receivables, liabilities, income and expenses with non-consolidated affiliated companies, associated companies and with other participations of the GfK Group are specified in the notes under the respective items.
Contingent liabilities and other financial commitments
The contingent liabilities and other financial commitments that are not carried as liabilities in the consolidated balance sheet are reported at nominal values and break down as shown in the following table:
Of these commitments, EUR 2,024 thousand (2005: EUR 1,177 thousand) had a remaining term of less than one year.
In addition, there are the following contingent liabilities and financial commitments:
bwv Holding AG, St. Gallen, Switzerland, an affiliated, non-consolidated company in the GfK Group, sold shares in two Swiss and one Austrian joint stock company with agreement dated July 28, 2004. GfK AG has assumed a purchase price payment obligation of up to EUR 5,290 thousand (CHF 8,500 thousand) to cover acquisition claims arising from contractual infringements. From July 28, 2009, the guarantee drops to EUR 4,667 thousand (CHF 7,500 thousand) and ends by December 31, 2014 at the latest.
Following the acquisition of NOP World in 2005, the GfK Group was restructured in part and sub-groups with intermediate holding companies were set up. GfK AG has issued a declaration to the three managing directors of these sub-groups, which releases them from any future claims that may be enforced by third parties in connection with their positions as managing directors of these companies.
It is possible that subsequent tax payments may be necessary following future tax audits at GfK Group companies. The occurrence and amount of such future liabilities cannot be estimated.
The future commitments arising from lease agreements are described in the section on leases under fixed assets.
Financial instruments and derivatives
The risk of default linked to the positive fair values of the derivatives is estimated to be low, as transactions are only concluded with renowned German and foreign banks with a first rate credit-standing. Furthermore, the default risk is reduced by spreading the transactions across several banks.
The maximum default risk of the GfK Group amounts essentially to the carrying value of all financial assets. The global activities of the GfK Group and the large number of customers, which include many established major companies, reduce the concentration of the default risk.
The carrying amounts of the derivative financial instruments of the GfK Group are shown in the table below.
The carrying values of all financial instruments correspond to the fair values.
The derivative financial instruments are valued on a marking to market basis in accordance with the market conditions as of the reporting date. In addition, the Group’s own calculations are checked for plausibility by the market assessments provided by the banks.
As of December 31, 2006, the GfK Group had currency hedging contracts relating to US dollars, pound sterling and the Czech koruna. The nominal volume of the currency hedging contracts amounted to EUR 4,730 thousand (2005: EUR 7,173 thousand), whereby all contracts have a residual term of less than one year.
In addition, as of the end of the financial year, the GfK Group had a combined interest rate and currency swap with a nominal volume of EUR 4,997 thousand (2005: EUR 5,667 thousand). Of this amount, EUR 3,709 thousand (2005: EUR 4,767 thousand) have a residual term of more than one year. The fair value amounts to EUR 281 thousand (2005: EUR 4 thousand) as of the reporting date.
As of the year-end, the GfK Group also held interest rate hedging contracts in a total nominal amount of EUR 424,161 thousand (2005: EUR 441,982 thousand) and a positive fair value of EUR 11,566 thousand (2005: EUR 6,098 thousand).
As a result, an interest rate of between 2.6% and 2.7% was secured for loans in euros. The interest rate secured for loans in US dollars amounts to 4.1% (all figures before credit margin).
Of this, interest rate swaps with a nominal volume of EUR 414,396 thousand (2005: EUR 436,097 thousand) are classified as cash flow hedges.
The total interest rate swaps mature in the next five years as shown in the table below.
In the case of derivatives utilized for cash flow hedging, changes in fair value are reported as income and expense recognized directly in equity. For the year under review, the amount booked under income and expenses recognized directly in equity amounted to EUR 4,515 thousand before tax (2005: EUR 6,202 thousand) respectively EUR 2,717 thousand after tax (2005: EUR 3,732 thousand).
To hedge net investments in foreign subsidiaries, the GfK Group used the hedging instrument, net investment hedge. In the year under review, effective changes in value of a loan in US dollars, which was concluded as part of the acquisition of NOP World, as well as existing US dollar loans for the financing of GfK ARBOR, LLC, USA, and GfK V2, LLC, USA, amounting to EUR 20,859 thousand before tax (2005: EUR 6,223 thousand) respectively EUR 12,552 thousand after tax (2005: EUR –3,745 thousand) were reported in income and expense recognized directly in equity.
Gains or losses from derivative financial instruments which are not reported as part of hedge accounting are posted in financial income or expenses.
In total, the income from these financial instruments amounted to EUR 491 thousand (2005: EUR 369 thousand), while expenses amounted to EUR 25 thousand (2005: EUR 36 thousand).
GfK Annual Report 2006