3. Notes to the consolidated income statement

3.1 Revenue

No. 029
in € millions 2011 2010
Revenue from the sale of goods 10,499 9,223
Other revenue 195 272
Total 10,694 9,495

Revenue from the sale of goods consists of invoiced sales of goods to customers, net of early payment discounts. Other revenue includes EUR 103 m (prior year: EUR 94 m) in revenue from other services consisting mainly of research and development services as well as revenue from the sale of tools and special machines.

3.2 Other income

No. 030
in € millions 2011 2010
Exchange gains 292 308
Reversal of provisions 6 4
Reduction of allowances 3 8
Gains on disposal of assets 3 5
Miscellaneous income 26 50
Total 330 375

Exchange gains consist primarily of gains arising from changes in exchange rates between initial recognition and settlement as well as exchange gains resulting from remeasuring monetary items in the statement of financial position at the closing rate.

3.3 Other expenses

No. 031
in € millions 2011 2010
Exchange losses 219 319
Increase in allowances 3 4
Losses on disposal of assets 3 3
Miscellaneous expenses 19 51
Total 244 377

Exchange losses of EUR 219 m (prior year: EUR 319 m) include both realized and unrealized exchange losses. The development of exchange rates, particularly against the U.S. Dollar, led [--break--]  to a decline in exchange losses realized on derivative currency hedging instruments compared to the prior year.

3.4 Personnel expense and headcount

The number of employees at December 31, 2011 was 74,031, 9.7 % above the prior year level [--break--]  of 67,509. In 2011, the Schaeffler Group had an average of 71,896 employees (prior year: 65,041) and 748 temporary staff (prior year: 488).

Number of employees by region – average

No. 032
Number of employees by region 2011 2010
Germany 29,001 27,457
Europe excluding Germany 21,425 19,016
North America 6,474 5,505
South America 4,636 4,368
Asia/Pacific 10,360 8,695
Total 71,896 65,041

Number of employees by functional area – average

No. 033
Number of employees by functional area 2011 2010
Production 56,457 50,886
Research and development 5,465 4,902
Selling 5,793 5,366
General administration 4,181 3,887
Total 71,896 65,041

The Schaeffler Group’s personnel expense can be analyzed as follows:

Personnel expense

No. 034
in € millions 2011 2010
Wages and salaries 2,484 2,264
Social security contributions 495 437
Pensions and similar benefit expenses 49 57
Total 3,028 2,758

The increase in personnel expense in 2011 is mainly due to the encouraging volume of business and the related increase in staffing levels in all regions.

Pensions and similar benefit expenses consist mainly of expenses related to defined benefit [--break--]  pension plans, contributions to defined contribution pension plans, expenses in connection [--break--] with the “Pensionssicherungsverein” (German pension assurance association), and other employee benefits.

3.5 Financial result

No. 035
in € millions 2011 2010
Expected return on pension plan assets 26 25
Interest income on financial assets 13 12
Miscellaneous financial income 1 14
Interest income 40 51
Interest expense on financial debt -494 -386
Interest expense from compounding of pensions
and other provisions
-86 -84
Net interest expense on interest rate derivatives -176 -373
Miscellaneous financial expense -17 -18
Interest expense -773 -861
Share of net income (loss) of equity-accounted investees 324 -349
Financial result -409 -1,159

The Schaeffler Group’s financial result comprises interest income of EUR 40 m (prior year: EUR 51 m) and interest expense of EUR 773 m (prior year: EUR 861 m) as well as the share of net income (loss) of equity-accounted investees of EUR 324 m (prior year: EUR -349 m).

The income (loss) from equity-accounted investees consists almost entirely of income from Schaeffler’s 36.14 % interest in Continental AG up to September 30, 2011 and since that date from [--break--]  Schaeffler’s 100 % limited partner share in Schaeffler Beteiligungsholding GmbH & Co. KG, which [--break--] now holds the 36.14 % interest in Continental AG and is also accounted for under the equity method in these consolidated financial statements.

Interest income relates primarily to expected returns on plan assets of funded pension plans and income from discounting various line items in the statement of financial position.

Interest expense of EUR 494 m (prior year: EUR 386 m) was primarily incurred on financial [--break--]  debt, EUR 176 m (prior year: EUR 373 m) on interest rate derivatives, and EUR 86 m (prior year: EUR 84 m) relate to compounding of pensions and other provisions.

Interest expense on financial debt of EUR 494 m (prior year: EUR 386 m) includes primarily interest payments of EUR 395 m (prior year: EUR 282 m) for the Senior Facility Agreement and expenses of EUR 78 m (prior year: EUR 30 m) relating to transaction costs amortized over the term of the financial debt, as well as interest expense of EUR 20 m (prior year: EUR 25 m) on the annuity loan. The amortization of transaction costs includes EUR 47 m resulting from the adjustment of the term of the loan, which was shortened in connection with the refinancing agreement reached with the banks on January 27, 2012.

Net interest expense on interest rate derivatives of EUR 176 m (prior year: EUR 373 m) includes [--break--]  EUR 170 m (prior year: EUR 252 m) in compensation payments on interest rate derivatives and EUR 75 m (prior year: EUR 91 m) in expenses arising from the amortization of the cash flow hedge accounting reserve accumulated up to November 20, 2009. These interest expenses [--break--] are partially offset by EUR 69 m in gains (prior year: losses of EUR 30 m) arising from unrealized non-cash fair value changes of interest rate derivatives. These gains are presented in [--break--] interest expense as well since they economically relate to interest expense on the company’s financial debt.

3.6 Income taxes

Income taxes consist of the following:

No. 036
in € millions 2011 2010
Current income taxes 386 314
Deferred income taxes -8 -37
Income taxes 378 277

As a corporation, Schaeffler AG was subject to German corporation tax and trade tax during the reporting period. Trade tax is levied by municipalities.

The average domestic tax rate for corporations was 27.9 % in 2011 (prior year: 27.9 %). This tax rate consists of corporation tax, including the solidarity surcharge, of 15.9 % (prior year: 15.9 %) as well as the average trade tax rate of 12.0 % (prior year: 12.0 %). Partnerships located in Germany are only subject to trade tax.

In 2011, current income tax expense related to prior years amounts to EUR 16 m (prior year: [--break--]  EUR 19 m). In addition, Schaeffler had deferred tax income of EUR 14 m (prior year: EUR 20 m) related to prior years.

Deviations from the expected tax rate result from differing country-specific tax rates applicable to German and foreign entities.

The following tax rate reconciliation shows the tax effects required to reconcile expected income tax expense to income tax expense as reported in the consolidated income statement. The calculation for 2011 is based on a 28.0 % (prior year: 28.0 %) effective combined trade and corporation tax rate including solidarity surcharge for Schaeffler AG.

Tax rate reconciliation

No. 037
in € millions 2011 2010
Net income before tax 1,280 350
Expected tax expense 358 98
Addition/reduction due to deviating local tax bases -1 4
Foreign/domestic tax rate differences -4 -1
Non-recognition of deferred tax assets 4 7
Change in tax rate and law 0 -5
Non-deductible expenses 122 146
Share of net income (loss) of equity-accounted investees -90 54
Taxes for previous years 2 -1
Other -13 -25
Reported tax expense 378 277

The additional income tax on non-deductible expenses is almost entirely caused by interest expense that is non-deductible because of the interest deduction cap (German Zinsschranke). As it is not probable that the interest carryforwards will be utilized in the foreseeable future, [--break--]  no deferred tax assets were recognized on interest carryforwards.

Share of net income (loss) of equity-accounted investees relates primarily to the investment in Continental AG, Hanover.