Forecasted Income Statement

This section describes and discusses the techniques and assumptions made in forecasting the income statement of the BMW Group. The forecasted analytical income statement is illustrated in appendix A.28 whereas the forecasted inputs and assumptions are presented in table 1.17 and discussed more in detail below.

Table 1.17 – Forecasted assumption and inputs for the analytical income statement

Analytical Income statement - Assumptions Forecasted Ratios

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Revenue Growth 7.9% 7.1% 5.5% 5.1% 5.0% 5.7% 5.7% 5.7% 5.8% 5.8% 2.0%

R&D % of revenue -7.00% -7.50% -8.00% -8.50% -8.50% -8.50% -8.50% -8.50% -8.50% -8.50% -8.50%

COGS % revenue -65.00% -65.00% -65.00% -65.00% -65.00% -65.00% -65.00% -65.00% -65.00% -65.00% -65.00%

Total COGS % of revenue -72.00% -72.50% -73.00% -73.50% -73.50% -73.50% -73.50% -73.50% -73.50% -73.50% -73.50%

Gross Profit - - - - - - - - - - -

Sales and adm. costs % of revenue -9.50% -9.50% -9.50% -9.50% -9.50% -9.50% -9.50% -9.50% -9.50% -9.50% -9.50%

Other operating income % of revenue 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%

Other operating expenses % of revenue -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50% -1.50%

Result from equity accounted investments %

of revenue 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30% 0.30%

EBITDA - - - - - - - - - - -

Depreciation & Amortization % of PP&E and

intangible assets -24.20% -24.20% -24.20% -24.20% -24.20% -24.20% -24.20% -24.20% -24.20% -24.20% -24.20%

EBIT - - - - - - - - - - -

Taxes on EBIT (Statutory tax rate 30.5%) -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50%

NOPAT - - - - - - - - - - -

Net borrowing costs % of NIBD -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00% -4.00%

Other financial results -185 -185 -185 -185 -185 -185 -185 -185 -185 -185 -185

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Net financial expenses - - - - - - - - - - -

Tax savings from debt financing (Statutory

tax rate 30.5%) -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50% -30.50%

Net financial expenses after tax - - - - - - - - - - -

Net earnings (profit after tax) - - - - - - - - - - -

Attributable to minority interest - - - - - - - - - - -

Attributable to shareholders of BMW AG - - - - - - - - - - -

(Source: Own creation) Cost of Gods Sold

Operating expenses such as “Cost of goods sold”, “Sales and administration costs” and “other operating expenses” are by Koller et al (2010) recommended to be forecasted as a percentage of revenue.

Additionally, all of these items were considered to be operating activities in the financial analysis and are as such believed to be strongly related to the revenue of the group.

It was clear from the profitability analysis that BMW had by far the lowest COGS margin in comparison to its peers, one likely reason being the common platform used for producing vehicles. However, it is believed that the COGS margin will to some extent increase in the future, as it is believed that the BMW Group will have to increase their investments in research and development in the future, in order to be able to comply with the strict CO2 emission limits set in place by the European Union, and which may be further adopted by other countries as well.

R&D expenses as a margin of revenue have therefore been separated from the COGS margin to illustrate this clearer. The R&D cost as a percent of revenue has fluctuated between -6.3 to 7 percent over the period analyzed and was 6.7 percent of revenue in 2011. It is forecasted that it will increase to 7 percent in 2012 and increase by another 0.5 percent of revenue each year until 2015 and stay constant at a margin of 8.5 for the remaining forecasted years. The total COGS margin will as such be 73.5 percent in year 2015 and onwards, which is still well below the COGS margin of the group’s peers in 2011 but also likely to affect the profit margin negatively in comparison to the 2011 t margin.

Other Operating Expenses

As suggested above it is believed that “sales and administration costs” are strongly related to the firm’s revenue. However, as suggested in the profitability analysis, “other operating expenses” may be harder to predict, as it includes exchange losses, impairment losses and write downs amongst other

82 items and may as such vary from year to year depending upon both the external and internal environment. But it is also believed that these costs are more likely to increase as the group expands their sales and operations (assuming that revenue increases as a result).

Excluding the years affected by the financial crisis (2008 and 2009), the average margin of “Sales and administration costs” as a percentage of revenue is -9.43%. It is believed that it will stay at a similar level in the future and the margin is as such forecasted at -9.5%. The average margin of “other operating expenses” as a percentage of revenue has over the last two years been 1.54 percent and it is believed that it will remain at a similar margin and it is therefore forecasted at 1.5 percent of revenue.

Other Operating Income

As with operating expenses, “other operating income” is also forecasted as a percentage of revenue for the same reasons discussed above. The average margin of “other operating income” as a percentage of revenue has over the last two years been 0.97 percent and it is believed that it will remain at a similar margin in the future and is therefore forecasted at 1 percent of revenue.

Results From Equity Accounted Investments

According to Koller et al (2010) income from equity investments could be estimated using historical growth or by examining the revenue and the profit forecasts of publicly traded comparables that are similar to the equity investments. However, such detailed information on the investments is not provided by the BMW Group. “Result from equity accounted investments” is therefore forecasted as percentage of revenue as suggested by Petersen and Plenborg (2011). “Result from equity accounted investments” as a percentage of revenue increased over the period analyzed from 0.02 to 0.3 percent.

The margin as a percent of revenue is given the limited information forecasted as no change and therefore set at 0.3 percent.

Depreciation & Amortization

Depreciation & Amortization can according to Koller et al (2010) either be forecasted as a percentage of revenue or as a percentage of property, plant and equipment (PP&E). Either method could be used if capital expenditure is smooth rather than lumpy (Koller et al 2010).

83 The BMW Group has a capital expenditure target of 7 percent of total Group revenue (BMW Group 2012). An analysis of the CAPEX margin in comparison to the group’s total revenue (Industrial Business and Financial Services) suggests that CAPEX margin has been smooth rather than lumpy, although the trend has been decreasing over the period analyzed (see appendix A.29). Moreover, “Depreciation &

Amortization” is according to BMW Group (2012) derived from “PP&E” and “intangible assets” and the forecast is as such based on these two balance sheet items. “Depreciation & Amortization” as a percentage of “PP&E” and “intangible assets” have fluctuated between 23.06% and 25.95% with an average of 24.19% over the period analyzed. Depreciation & Amortization is therefore forecasted to be 24.2% of “PP&E” and “intangible assets”.

Tax Rate

The tax rate is set at the German Statutory tax rate of 30.5 percent and the same tax rate is also applied to calculate the forecasted tax savings from debt financing.

Net Financial Expenses

Net financial expenses consist of “interest expenses”, “Interest income” and “other financial results”.

Net-interest borrowing rate is in this case defined as the difference between “interest expenses” and

“interest income” divided by previous year’s net-interest bearing debt. Previous year’s net-interest bearing debt is used as suggested by Koller et al (2010), in order to avoid any circularity that leads to implementation problems.

The net-interest borrowing rate has fluctuated between -2.45 to -6.89 percent, with an average of -3.95 percent over the period analyzed. The net-interest borrowing rate is therefore forecasted to be -4 percentage of previous year’s net-interest bearing debt.

“Other financial results” is mainly affected by losses and gains related to financial instruments, which would be very difficult to predict. Additionally, no further information is provided on these losses and gains. The average absolute value over the period analyzed is therefore used as the forecasted value, which is equal to - 185.

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