Earnings Performance of Wacker Chemie AG as per the German Commercial Code

Earnings at Wacker Chemie AG in fiscal year 2012 were marked by a lower operating result and depreciation of investments in China. Net income fell from €502.2 million in 2011 to €14.9 million.

The drop in the operating result was primarily due to lower sales revenue, in particular at WACKER POLYSILICON. In 2012, Wacker Chemie AG retained advanced payments and received damages related to terminated long-term supply contracts for polysilicon totaling €113.1 million. This had a positive effect on earnings. The financial result also includes depreciation of investments in the amount of €175.0 million. Pre-tax income came in at €98.5 million (2011: €681.2 million).

Sales fell from €3.54 billion to €3.30 billion – down by 7 percent – with performance varying among the individual divisions. WACKER SILICONES saw a slight increase in revenue year-on-year, from €1.26 billion in 2011 to €1.27 billion in 2012. WACKER POLYMERS also posted a positive sales performance, with an increase from €625.7 million to €642.0 million, almost 3 percent over a year earlier. Revenue in the WACKER POLYSILICON division dropped by some 20 percent to €1.10 billion (2011: €1.37 billion), due to the difficult photovoltaic-market environment. WACKER BIOSOLUTIONS posted an increase in sales from €103.4 million to €114.4 million, a gain of nearly 11 percent year on year. Operating performance fell by €376.1 million to €3.33 billion. In contrast to a year earlier, there was no positive effect resulting from inventory build-up (2011: €124.7 million) because inventories remained at the 2011 level.

The cost of materials was basically the same as 2011, coming in at €1.48 billion (2011: €1.47 billion). Lower raw-material costs and higher energy expenses balanced each other out over the year as a whole. Energy consumption went up, due in part to the new polysilicon production plant in Nünchritz, which was ramped up to full capacity in 2012. WACKER produced substantially more polysilicon overall in Germany in 2012 than in 2011. The average prices for strategic raw materials such as ethylene and methanol were 7 percent higher than in 2011. On the other hand, the price of silicon, a strategic base material for all silicon-based products, dropped by 6 percent compared with 2011.

Personnel expenses fell 7 percent to €726.1 million (2011: €777.2 million), primarily due to lower variable compensation payments, in part stemming from the decline in the operating result. Current personnel costs for wages and salaries remained nearly constant in comparison with 2011. Wacker Chemie AG had 9,467 employees at December 31, 2012 (December 31, 2011: 9,511). Current expense for pensions rose as a result of the increased company contribution in respect of defined-benefit pension commitments. For the first time, Wacker Chemie AG paid 350 percent of the employee contribution into the company pension fund in 2012 (2011: 250 percent).

In 2012, Wacker Chemie AG’s R&D expenses were 9 percent higher at €105.0 million (2011: €96.0 million).

Depreciation and amortization increased slightly, from €330.1 million in 2011 to €341.3 million in 2012 – up 3 percent. In 2011, however, depreciation of property, plant and equipment in the amount of some €25 million had been included in this amount. One reason for the rise in depreciation and amortization was the shortening of the useful lives of polysilicon-plant infrastructure and technical facilities. Another reason was that depreciation of the polysilicon production plant in Nünchritz was recorded for the first time in 2012.

The other operating result, consisting of other operating income less other operating expenses, improved by 12 percent (on balance), coming in at €-391.5 million (2011: €-447.2 million). This increase is largely due to advance payments retained and damages received – relating to terminated polysilicon contracts – which amounted to €113.1 million in 2012 (2011: €66.2 million). The foreign currency result from operations showed a net exchange rate loss of €10.0 million (2011: € +19.2 million). Additions to and reversals of provisions led to an increase in the other operating result, on balance, of €3.7 million (2011: €8.6 million). As for other operating expenses, major effects beside the foreign currency loss were: outgoing-freight expenses, customs duties, other selling expenses, other contractor work, and repair and maintenance.

At €389.1 million, the operating result was down by 43 percent compared with the prior year (2011: €680.8 million), lower revenue being the main cause of this drop. Owing to decreased operating performance, the material-cost ratio rose to 44.5 percent (2011: 39.7 percent). The personnel-cost ratio increased only marginally in 2012, from 21.0 percent in 2011 to 21.8.

The result from investments in joint ventures and associates was affected by depreciation of Chinese companies and expenses for losses assumed under profit-and-loss transfer agreements.

In 2012, the intercompany transfer price policy between the Chinese WACKER companies and the associated company Dow Corning (ZJG) Co. Ltd., which produces siloxane at the Zhangjiagang site in China, was adjusted to reflect altered market conditions. This led to a substantial reduction in transfer prices for siloxane and an impairment of €105.0 million in the carrying amount of the investment in Dow Corning (ZJG) Holding Co. Private Ltd., Singapore. Wacker Chemie AG holds a 25 percent share in this company.

In the process of adjusting transfer prices for siloxane, the transfer price was lowered for the HDK ^®-branded pyrogenic silica produced by Wacker Chemicals Fumed Silica (ZJG) Co. Ltd. at the Zhangjiagang site. That resulted in an impairment of €20 million in the carrying amount of the investment in Wacker Chemicals Fumed Silica (ZJG) Holding Co. Ltd., Singapore. Wacker Chemie AG holds a 51 percent share in this company.

In addition, the carrying amount of the investment in Wacker Chemicals (China) Company Ltd. (Holding), in Shanghai, China, was impaired by €50.0 million. These impairments represent WACKER’s response to the current market situation for silicone business.

The losses assumed, resulting principally from Siltronic AG and amounting to €112.0 million (2011: €20.4 million), were partially compensated by combined earnings from chemical subsidiaries in the amount of €41.3 million (2011: €39.2 million).

Net interest income amounted to €-40.0 million, €29.3 million lower than the 2011 figure of €-10.7 million. The net income figure stems mainly from lower interest income from investments in securities and fixed deposits. The increase in financial liabilities was due to higher interest expenses in 2012. The expense for interest accruing to provisions for pensions also rose.

At €83.6 million, income tax expenses fell significantly (2011: €179.0 million), reflecting the lower operating result. Adjusted for non-tax-deductible impairment of investments, the tax rate was around 30 percent.

Net income for 2012 amounted to €14.9 million (2011: €502.2 million). Retained profit for 2012 – which was calculated as the profit carried forward from 2011 less €230.0 million in allocations to retained earnings and less €109.3 million in dividends paid – amounted to €654.3 million (2011: €978.7 million).