The primary objective of Bertelsmann’s financial policy is to achieve a balance between financial security, return on equity and growth. For this, Bertelsmann bases its financing policy on the requirements of a “Baa1/BBB+” credit ratingExpression of creditworthiness of a creditor or financial instrument by an agency specialized in evaluating credit risk. and the associated qualitative and quantitative criteria. Credit ratings and capital market transparency make a considerable contribution to the Group’s financial security and independence.

In accordance with the Group structure, the capital allocation is made centrally by Bertelsmann SE & Co. KGaAA partnership limited by shares (KGaA) with a European stock corporation (Societas Europaea, or SE) as the personally liable partner. The personally liable partner is responsible for the management and representation of the KGaA., which provides the Group companies with liquidity and manages the issuance of guarantees and letters of comfort for them. The Group consists largely of a single financial unit, thereby optimizing capital procurement and investment opportunities.

Bertelsmann utilizes a financial control system employing quantitative financial targets concerning the Group’s economic debt and, to a lesser extent, its capital structure. One of the financial targets is a dynamic leverage factorThe leverage factor is the ratio of economic debt to operating EBITDA. In calculating the leverage factor, modifications are made to the balance sheet figures to better reflect the Group’s actual financial strength from an economic viewpoint. calculated as the ratio of economic debt to operating EBITDAEarnings before interest, taxes, depreciation, amortization and special items. and limited to the defined maximum of 2.5. Economic debt is defined as net financial debt plus provisions for pensions, profit participation capital and the net present value of operating leases. Like operating EBITDA, economic debt is modified for calculation purposes.

As of December 31, 2013, the Group had a leverage factor of 2.0 (December 31, 2012: 2.3). Despite a high level of investment activity during the reporting period, the net financial debt at year-end fell by half to €636 million (previous year: €1,218 million) thanks to proceeds from the placement of RTL Group shares and a high level of operating cash flowA company’s cash inflows and outflows during a specific period.. As of December 31, 2013, pension provisions of €1,944 million were also below the previous year’s level (December 31, 2012: €2,146 million). This means that as of December 31, 2013, economic debt was reduced to €4,178 million from €4,773 million in the previous year.

Another financial target is the coverage ratioThe (interest) coverage ratio is a financing target. It represents the ratio of operating EBITDA to financial result. Amounts reported in the annual financial statements are modified in calculating the coverage ratio.. This is calculated as the ratio of operating EBITDA (after modifications) to financial result and is supposed to be above 4. In the reporting period the coverage ratio was 6.0 (previous year: 6.4). The Group’s equity ratio was significantly above the self-imposed minimum of 25 percent and increased to 40.7 percent (December 31, 2012: 32.2 percent).

In April 2013, Bertelsmann repaid a tranche of a US private placement from 2003 of US$200 million on time. In addition, the tranche of the US private placement falling due in 2015 for the sum of US$200 million was repaid early in August 2013. Both US private placements were issued by the US financing company Bertelsmann U.S. Finance LLC, which in the reporting period was merged with Bertelsmann Inc., a US subsidiary of Bertelsmann. Furthermore, in December 2013 Bertelsmann repurchased parts of a bond falling due in October 2015 and another bond falling due in September 2016 for the total nominal amount of €284 million as part of a public buyback offer in December 2013. All repayments were made from existing liquidity.

Bertelsmann has been rated by the ratingExpression of creditworthiness of a creditor or financial instrument by an agency specialized in evaluating credit risk. agencies Moody’s and Standard & Poor’s (S&P) since 2002. The agency ratings facilitate access to the international capital markets and are therefore a key element of Bertelsmann’s financial security. Bertelsmann is rated by Moody’s as “Baa1” (outlook: stable) and by S&P as “BBB+” (outlook: stable). Both credit ratings are in the investment grade category and meet Bertelsmann’s target rating. Bertelsmann’s short-term credit quality rating is “P-2” from Moody’s and “A-2” from S&P.

The Bertelsmann Group also has access to liquidity via a syndicated loanLoan facility involving a consortium of banks.. This forms the backbone of the strategic credit reserve, and Bertelsmann can utilize this to draw down up to €1.2 billion of revolving funds in euros, US dollars and pounds sterling. In June 2013, the syndicated loan previously with a term through to 2017 was extended for a further year, namely until 2018. As in the previous year, Bertelsmann did not make use of this credit facility in financial year 2013.

The total earnings before interest and taxes is the starting parameter for preparing the Bertelsmann cash flowA company’s cash inflows and outflows during a specific period. statement. In the reporting period, Bertelsmann generated net cash from operating activities of €1,785 million (previous year: €1,876 million). The Group’s long-term operating free cash flow adjusted for non-recurring items was €1,760 million (previous year: €1,861 million), and the cash conversion rate was 100 percent (previous year: 107 percent), within the target corridor (see the section entitled “Value-Oriented Management System”). At €-1,010 million, cash flow from investing activities was significantly above the level for the previous year (previous year: €-617 million). This included investments in intangible assets and fixed and financial assets of €-808 million (previous year: €-567 million). The purchase prices for consolidated investments (net of acquired cash and cash equivalents) increased to €-504 million (previous year: €-88 million), particularly as a result of the strategic portfolio expansions made in the reporting period. Proceeds from the sale of subsidiaries and other business units and disposal of other fixed assets were €373 million (previous year: €93 million). Cash flow from investing activities was €-657 million (previous year: €-382 million). The outflow of €-1,188 million was attributable to the financial debt of €676 million acquired as part of the acquisition activity as well as early and scheduled repayments of financial debt. This was offset by inflows from the placement of RTL Group shares, which are included in the reported €1,410 million of the item “Change in equity.” Dividends paid to the shareholders of Bertelsmann SE & Co. KGaAA partnership limited by shares (KGaA) with a European stock corporation (Societas Europaea, or SE) as the personally liable partner. The personally liable partner is responsible for the management and representation of the KGaA. came to €-180 million (previous year: €-180 million). Dividends to non-controlling interests and payments to partners in partnerships came to €-445 million (previous year: €-213 million). The increase results from the payment of special dividends by RTL Group in spring and summer 2013. As of December 31, 2013, Bertelsmann had cash and cash equivalents of €2.7 billion (previous year: €2.7 billion).

The off-balance-sheet liabilities include contingent liabilities and other financial commitments, almost all of which result from operating activities conducted by the divisions. Off-balancesheet liabilities increased year on year, primarily due to the strategic portfolio expansions. The off-balance-sheet liabilities in place as of December 31, 2013 had no significant negative effects on the Group’s net assets, financial position and results of operation for the past or the future financial year.

Total investments including financial debt acquired of €676 million amounted to €1,988 million in financial year 2013, significantly above the previous year’s figure of €655 million. Investments according to the cash flowA company’s cash inflows and outflows during a specific period. statement amounted to €1,312 million (previous year: €655 million). As in previous years, the majority of the €289 million investment in property, plant and equipment (previous year: €270 million) stemmed from Arvato. Investments in intangible assets came to €411 million (previous year: €177 million) and were primarily attributable to BMG for the acquisition of music catalogs and to RTL Group for investments in film rights. The sum of €108 million was invested in financial assets (previous year: €120 million). Purchase prices for consolidated investments (less acquired cash and cash equivalents) totaled €504 million in the reporting period (previous year: €88 million) and were primarily attributable to the takeovers of BMG and Gothia. The negative investments of Penguin Random House in the amount of €-36 million (previous year: €53 million) can be attributed to cash and cash equivalents acquired as a result of the merger of Penguin and Random House.

Total assets increased significantly to €21.4 billion as of December 31, 2013 (previous year: €18.9 billion). The increase is mainly attributable to the reduction in shares in RTL Group, the merger of Penguin and Random House as well as the takeovers of BMG and Gothia. These portfolio changes led to an increase in intangible assets and equity. Cash and cash equivalents of €2.7 billion remained at the previous year’s high level (previous year: €2.7 billion). The income from the reduction in shares in RTL Group increased equity to €8.7 billion (previous year: €6.1 billion). As a result of this increase, the equity ratio increased from 32.2 percent in the previous year to 40.7 percent.

Equity attributable to Bertelsmann SE & Co. KGaAA partnership limited by shares (KGaA) with a European stock corporation (Societas Europaea, or SE) as the personally liable partner. The personally liable partner is responsible for the management and representation of the KGaA. shareholders increased to €6.9 billion (previous year: €5.3 billion). Provisions for pensions and similar obligations decreased from €2,146 million in the previous year to €1,944 million. Gross financial debt decreased from €3,876 million to €3,381 million as of December 31, 2013 due to the partial early repayments of long-term debt reported in the section “Financing Activities.” Apart from that, the balance sheet structure remained largely unchanged from the previous year.

Profit participation capital had a nominal value of €301 million as of December 31, 2013, which is unchanged from the previous year. If the effective interest method is applied, the carrying amount of profit participation capital was €413 million as of December 31, 2013 (previous year: €413 million). The 2001 profit participation certificates (ISIN DE0005229942) account for 94 percent of notional profit participation capital, while the 1992 profit participation certificates (ISIN DE0005229900) account for the remaining 6 percent.

The 2001 profit participation certificates are officially listed for trading on the Regulated Market of the Frankfurt Stock Exchange. Their price is listed as a percentage of nominal value. The lowest closing rate of the 2001 profit participation certificates in financial year 2013 was 244.00 percent in January; their highest was 284.00 percent in November.

Under the terms and conditions of the 2001 profit participation certificates, the payout for each full financial year is 15 percent of notional value, subject to the availability of sufficient Group profit as well as profit at the level of Bertelsmann SE & Co. KGaAA partnership limited by shares (KGaA) with a European stock corporation (Societas Europaea, or SE) as the personally liable partner. The personally liable partner is responsible for the management and representation of the KGaA.. These conditions were met in the past financial year. Accordingly, a payout of 15 percent of the notional value of the 2001 profit participation certificates will be made for financial year 2013.

The 1992 profit participation certificates, approved for trading on the Regulated Market in Frankfurt, only have a limited cash trade due to their low volume. Payouts on the 1992 profit participation certificates are based on the Group’s return on total assets. As the return on total assets for financial year 2013 was 6.49 percent (previous year: 6.39 percent), the payout on the 1992 profit participation certificates for financial year 2013 will be 7.49 percent of their notional value (previous year: 7.39 percent).

The payout distribution date for both profit participation certificates is expected to be on May 12, 2014. Under the terms and conditions of the profit participation certificates, the auditors appointed by Bertelsmann SE & Co. KGaA are responsible for verifying whether amounts to be distributed have been calculated correctly. The auditors of both profit participation certificates provide confirmation of this.