5. Financial position
5.1 Capital expenditure
Capital expenditure for property, plant and equipment normally plays a minor role at Software AG. These investments totaled €11.3 million in fiscal year 2008, compared with €11.0 million in 2007, and primarily comprised operating and office equipment in the sales branches and the administrative headquarters in Darmstadt.
Capital expenditure for financial assets fell from €4.9 million to €1.0 million. Investments relating to acquisitions were significantly reduced, from €362.3 million to €38.9 million. In 2007, the acquisition of webMethods, Inc., at €321.4 million including ancillary acquisition costs, made up most of this total.
5.2 Consolidated statement of cash flows
Cash flow developed particularly well in 2008. In the past fiscal year Software AG generated free cash flow of €133.4 million (2007: €82.2 million). This is equivalent to an increase of 62 percent. Free cash flow therefore even exceeded net income of € 115.9 million. Free cash flow was 18.5 percent of total revenue, compared with 13.2 in the previous year. Free cash flow per share rose by 61 percent from €2.89 to €4.66. This strong cash flow trend supports us in the form of liquidity for our strategic business development. It also enables a rapid reduction of net liabilities, caused by acquisitions, of €70.3 million at the end of 2008.
Good operating cash flow
In fiscal 2008, our operating cash flow rose by 49 percent to €140.1 million, compared to €94.0 million in 2007. This growth is primarily based on the higher income for the year and a ratio of working capital to revenue that fell from 4.2 percent in the previous year to 3.4 percent.
Cash outflow from investing activities fell from €374.1 million to €45.5 million. In the previous year, this value was exceptionally high, in particular because of the acquisition of webMethods, Inc. Cash outflows from financing activities amounted to €76.3 million, compared with cash inflows of €179.8 million in 2007. In the fiscal year €46.2 million of the bank loans of €328.4 million in 2007 were repaid, and at the end of the year under review these valued only €165.6 million.
In total, cash and cash equivalents decreased by €15.6 million, compared with a decrease of €103.5 million in the previous year, when cash transactions for acquisitions caused this high value.
Consolidated statement of cash flows
In € million | Q4 2008 | Q4 2007 | 2008 as a whole | 2007 as a whole | % |
Operating cash flow | 43.8 | 47.4 | 140.1 | 94.0 | + 49 |
CapEx* | - 1.6 | - 9.6 | - 6.6 | - 11.8 | - 44 |
Free cash flow | 42.2 | 37.8 | 133.4 | 82.2 | + 62 |
% of revenue | 19.9 | 20.3 | 18.5 | 13.2 | |
Free cash flow per share
| 1.48 | 1.33 | 4.66 | 2.89 | + 61 |
Average number of shares (in million) | 28.6 | 28.5 | 28.6 | 28.4 | + 1 |
*Net cash used in investing activities adjusted to take account of acquisitions
5.3 Financing
The financial management of Software AG ensures that all Group companies are continuously solvent. Based on the guidelines adopted by the Executive Board, the financial policy and risk management are implemented by the central Treasury department. Active working capital management controls the Group's liquidity position centrally. Financial investments are basically short term. We minimize default risk by careful selection of transaction partners based on stringent criteria and broadly diversified investment. The focus on short-term investment means that Group funds are invested at near money-market rates. Our central Treasury department monitors the current risks for all Group companies and hedges them using derivative financial instruments. In doing so, we only hedge existing balance sheet items or expected cash flows. The high equity ratio and a robust free cash flow create the basis for the Company’s internal and external growth.
Liquidity and financing
Following a large reduction in 2007 caused by acquisitions, cash and cash equivalents rose again in 2008. At the end of the year, they totaled €96.9 million, compared to €81.3 million in 2007. Equity rose to €549.1 million (2007: €462.5 million). As a result, the equity-to-assets ratio returned to a value of 49 percent (2007: 45 percent). Acquisition-related borrowing totaling €328.4 million was significantly reduced once again in 2008. At the end of the year, non-current liabilities were €138.5 million, compared to €197.6 million at the end of 2007.
Financing instruments
The company uses bank loans, finance leasing and the free cash flow as financing instruments. The financing risk arises from the possibility that the Company may not be able to satisfy existing financial liabilities for example arising from loan agreements, lease agreements or trade accounts payable. The risk is limited by active working capital management and Group-wide liquidity control and is, if necessary, balanced by available cash and bilateral lines of credit. The bank loans used are predominantly at variable interest rates and have terms to maturity of no later than 2013. Partial amounts are converted into synthetic fixed-interest rate loans using interest rate swaps. The table below shows the contractually fixed payments arising from recognized financial liabilities. The values show the undiscounted liabilities. Variable interest payments are based on the level of interest at the reporting date. Liabilities in foreign currency are measured at the exchange rate as of December 31, 2008.
Non-derivative financial liabilities
in € thousands | Up to 1 year | 1 to 5 years | >5 years | Total |
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Liabilities to financial institutions | ||||
Repayment | 59,782 | 105,771 | 0 | 165,553 |
Interest | 5,006 | 4,877 | 0 | 9,883 |
Trade payables | 35,824 | 68 | 0 | 35,892 |
Other financial liabilities | 1,569 | 70 | 0 | 1,639 |
Liabilities from finance leasing | 9 | 0 | 0 | 9 |
Other non-derivative liabilities | 42,698 | 378 | 0 | 43,076 |
Derivative financial liabilities | 1,929 | 870 | 0 | 2,799 |
5.4 Assets
Software AG's assets increased by 9 percent to €1,111.0 million in fiscal 2008 (2007: €1,023.3 million). Both current and non-current assets rose.
At year end, current assets amounted to €371.4 million (2007: €306.6 million). This reflects an increase of 21 percent. Bank deposits, trade receivables, other receivables and other assets rose.
At year end, our non-current assets amounted to €739.6 million (2007: €716.7 million). This a slight increase of 3 percent on the previous year’s value. There were no significant changes within the items.
Off-balance sheet assets and financial instruments
In addition to the assets reported in the consolidated balance sheet, Software AG has off-balance sheet assets. These relate primarily to rented office space, rented company cars and hardware. Off-balance sheet assets also include the Software AG brand name, which is an important intangible asset. The brand image was continuously enhanced in the year under review.
5.5 Balance sheet structure and key financial indicators
In the period under review, the Group’s total assets rose 9 percent to €1,111.0 million, compared to €1,023.3 million in the previous year.
The following changes occurred on the assets side: Cash and cash equivalents rose from €81.3 million to €96.9 million (+ 19 percent). Trade receivables increased from €225.0 million to €264.5 million as a result of business expansion. Other receivables and other assets also increased from €26.7 million to €29.8 million. Deferred tax assets rose from €55.5 million to €66.7 million. The financial market crisis made it necessary to increase various provisions and allowances for bad debt, which are not tax deductible in certain countries, and as a result, an increase in the deferred tax assets was posted. The prepaid expenses remained practically unchanged at €6.0 million, compared with €5.8 million in the previous year. Fixed assets rose more sharply, from €628.9 million to €647.1 million. Goodwill makes up €442.7 million of this, a currency-related increase on €431.6 million in 2007. The value of goodwill is regularly tested in an impairment test and is ensured over the long term by the cash flows of the acquired business units.
On the liabilities side, current liabilities rose from €196.4 million to €248.1 million. Of this, financial liabilities amounted to €61.4 million (2007: €46.7 million). This results from a transfer of previously non-current financial liabilities to current liabilities following the expiry of periods. Non-current liabilities, which include the debt financing of the webMethods acquisition, amounted to €136.9 million. We were able to significantly reduce this, compared to the previous year’s value of €197.6 million because of the strong cash flow. Deferred tax liabilities fell from €79.6 million to €73.8 million. Deferred income rose considerably from €87.2 million to €103.2 million. This relates to future maintenance revenues, of which the proportion paid in advance by customers was deferred in the balance sheet. The growth results from the clear increase in business volume. Our equity increased from €462.5 million to €549.1 million. As a result, our equity-to-assets ratio is 49.4 percent (2007: 45.2 percent).
