Alternative Performance Measures

In this Combined Management Report the following Alternative Performance Measures, which are not defined in accordance with IFRS, are used to explain the results of operations and/or net assets and financial position. These should not be considered in isolation but as complementary information for evaluating Bertelsmann’s business situation and are differentiated in terms of strictly defined and broadly defined key performance indicators, in the same way as the valueoriented management system.

Organic Revenue Growth

The organic growth is calculated by adjusting the reported revenue growth for the impact of exchange rate effects and corporate acqusition and disposals. When determining the exchange rate effects, the functional currency that is valid in the respective country is used.

Organic Revenue Growth  

in percent20162015
Organic revenue growth0.90.4
Exchange rate effects(1.3)4.2
Portfolio and other effects(0.7)(1.8)
Reported revenue growth(1.1)2.8

Operating EBITDA

Operating EBITDA is determined as earnings before interest, tax, depreciation, amortization and impairment losses and is adjusted for special items. The adjustments for special items serve to determine a sustainable operating result that could be repeated under normal economic circumstances, which is not affected by special factors or structural distortions. These special items primarily include impairment losses and reversals of impairment losses, remeasurements, restructuring expenses and/or results from disposals of investments. This means that operating EBITDA is a meaningful performance indicator.

Operating EBITDA  

in € millions20162015
EBIT (earnings before interest and taxes)1,7991,681
Amortization/depreciation, impairment losses and reversals of intangible assets and property, plant and equipment632616
Adjustments on amortization/depreciation, impairment losses and reversals of intangible assets and property, plant and equipment included in special items(2)(3)
Special items139191
attributable to: RTL Group(7)(13)
attributable to: Penguin Random House3866
attributable to: Gruner + Jahr3054
attributable to: BMG818
attributable to: Arvato5156
attributable to: Bertelsmann Printing Group713
attributable to: Bertelsmann Education Group17(44)
attributable to: Bertelsmann Investments(35)15
attributable to: Corporate3026
Operating EBITDA2,5682,485

BVA

BVA measures the profit realized above and beyond the appropriate return on invested capital. This form of value orientation is reflected in strategic investment, portfolio planning and the management of Group operations and, together with qualitative criteria, provides the basis for measuring the variable portion at the Group level. BVA is calculated as the difference between net operating profit after tax (NOPAT) and the cost of capital. NOPAT is calculated on the basis of operating EBITDA. NOPAT, which is used to calculate BVA, is determined by deducting depreciation and amortization, provided that they are not included in special items, and a flat 33 percent tax. Cost of capital is the product of the weighted average cost of capital (WACC) and the average level of capital invested. The uniform WACC after taxes is 8 percent. The average invested capital is calculated quarterly on the basis of the Group’s operating assets less non-interest-bearing operating liabilities. In addition, 66 percent of the net present value of operating leases is taken into account when calculating the invested capital.

BVA  

in € millions20162015
Operating EBITDA2,5682,485
Amortization, depreciation, impairment and reversals of intangible assets and property, plant and equipment not included in special items(630)(613)
Operating EBIT1,9381,872
Flat taxes (33 percent)(640)(618)
NOPAT (net operating profit after tax)1,2981,254
Average invested capital14,38313,746
Cost of capital (8 percent)1,1511,099
BVA147155

Cash Conversion Rate

The cash conversion rate serves as a measure of cash generated from business activities and is calculated as the ratio of operating free cash flow to operating EBIT. The operating free cash flow is determined on the basis of the cash flow from operating activities as reported in the consolidated cash flow statement, whereby the impact of paid income taxes and the change in provisions for pensions and similar obligations on cash flow from operating activities is offset. Operating free cash flow is also reduced by investments in intangible assets and property, plant and equipment or, if applicable, increased by proceeds from the sale of non-current assets. Further adjustments are made in order to ensure an allocation of capital flows to the relevant periods and to offset the impact of payment flows resulting from special items on the operating free cash flow in a way that is methodically consistent with the operating EBITDA. Further adjustments in the financial year 2016 mainly reflected the impact of restructuring measures on payments.

The operating EBITDA is used to calculate the operating EBIT by deducting amortization and depreciation, provided that these are not included in special items. The Group aims to maintain a cash conversion rate of 90 to 100 percent as a long-term average.

Cash Conversion Rate  

in € millions20162015
Cash flow from operating activities1,9541,600
Income taxes paid234286
Change in provisions for pensions and similar obligations5545
Investments in intangible assets and property, plant and equipment (less proceeds from the sale of non-current assets)(610)(588)
Further adjustments166216
Operating free cash flow1,7991,559
Operating EBTIDA2,5682,485
Amortization, depreciation, impairment and reversals of intangible assets and property, plant and equipment not included in special items630613
Operating EBIT1,9381,872
Cash conversion rate (in percent)
Operating free cash flow / operating EBIT
9383

Economic Debt

Net financial debt is calculated on the basis of gross financial debt, which is derived from the balance sheet items current and non-current financial debt minus cash and cash equivalents. Economic debt is defined as net financial debt less the 50 percent par value component of the hybrid bonds plus provisions for pensions, profit participation capital and the net present value of operating leases. In calculating economic debt, the hybrid bonds are accounted for at 50 percent as both bonds are classified by the rating agencies as 50 percent equity. Economic debt is modified for the purposes of calculating the leverage factor.

Economic Debt  

in € millions20162015
Gross financial debt3,9984,075
Less cash and cash equivalents(1,373)(1,310)
Net financial debt2,6252,765
Less 50 percent nominal capital hybrid bonds(625)(625)
Provisions for pensions1,9991,709
Profit participation capital413413
Net present value of operating leases1,5011,347
Economic debt5,9135,609

Leverage Factor

One of the financial targets is a dynamic leverage factor calculated as the ratio of economic debt to operating EBITDA and limited to the defined maximum of 2.5. In determining the leverage factor, the economic debt and the operating EBITDA are modified in order to enable financial management that corresponds to the Group’s structure and its tolerable indebtedness. The modifications in respect of the economic debt largely relate to cash and cash equivalents, which are tied up in the Group while the modifications in respect of the operating EBTIDA address the Group’s structure and its co-shareholder shares. The leverage factor determined in this way is thus always more conservative than the figure that would be obtained using only the items recognized in the balance sheet.

Leverage Factor  

in € millions20162015
Economic debt5,9135,609
Modifications199195
Economic debtLF6,1125,804
Operating EBITDA2,5682,485
Modifications(101)(75)
Operating EBITDALF2,4672,410
Leverage factor: Economic debtLF/
operating EBITDALF
2.52.4