Financial position of the Group

Total assets amounted to EUR 170.7 billion as of December 31, 2019, up by EUR 25.3 billion against December 31, 2018. The recognition of right-of-use assets and current and non-current lease liabilities resulting from the first-time application of the IFRS 16 “Leases” accounting standard had a significant impact.

Cash and cash equivalents increased by EUR 1.7 billion year-on-year.

For further information, please refer to the section “Consolidated statement of cash flows” and Note 35 “Notes to the consolidated statement of cash flows” in the notes to the consolidated financial statements.

Trade receivables increased by EUR 0.9 billion to EUR 10.8 billion, mainly due to higher receivables in the Systems Solutions, United States, Group Development, and Germany operating segments. In the Systems Solutions operating segment, receivables increased mainly as a result of the expiration of a factoring transaction. Higher receivables in the United States operating segment were driven by a larger customer base, while in the Group Development operating segment, receivables increased as a result of the acquisition of Tele2 Netherlands and the resulting increase in the customer base. Exchange rate effects, especially from the translation of U.S. dollars into euros, also increased receivables.

Other current and non-current assets increased by EUR 2.3 billion to EUR 14.1 billion as follows: Other current and non-current financial assets increased by EUR 2.8 billion to EUR 7.3 billion, due in part to positive effects from the measurement of embedded derivatives at T‑Mobile US (EUR 0.5 billion) and to the deposit of cash collateral in connection with forward-payer swaps concluded for future borrowings at T‑Mobile US (EUR 0.6 billion). In addition, other financial assets increased by EUR 1.3 billion in connection with the change in approach as of the start of the third quarter of 2019 of capitalizing grants receivable from funding projects for the broadband build-out in Germany upon conclusion of the contract. By contrast, inventories decreased by EUR 0.2 billion to EUR 1.6 billion, primarily as a result of a reduction in mobile terminal equipment inventory levels in the Germany and United States operating segments.

Intangible assets increased by EUR 3.3 billion to EUR 68.2 billion. Additions totaling EUR 6.6 billion increased the carrying amount and mainly relate to capital expenditures in the Germany, United States, Europe, and Group Development operating segments. In the Germany operating segment, additions of EUR 2.2 billion relate to the 5G licenses acquired in Germany. In the United States operating segment, capital expenditures included a total of EUR 1.0 billion for the acquisition of FCC mobile licenses. In the Europe operating segment, 5G licenses acquired in Austria increased the carrying amount by EUR 0.1 billion. Changes in the composition of the Group increased the carrying amount by a further EUR 0.6 billion. The acquisition of Tele2 Netherlands in the Group Development operating segment resulted in identifiable intangible assets totaling EUR 0.5 billion at the acquisition date (including customer base and spectrum licenses) in addition to goodwill of EUR 0.1 billion. Positive exchange rate effects, primarily from the translation of U.S. dollars into euros, increased the carrying amount by EUR 0.8 billion. Amortizations reduced the net carrying amount by EUR 4.8 billion. This includes impairment losses of EUR 0.1 billion.

Property, plant and equipment decreased by EUR 1.1 billion compared with December 31, 2018 to EUR 49.5 billion. The first-time application of IFRS 16 as of January 1, 2019 accounted for a reduction of EUR 2.5 billion. Assets arising from finance leases that were reported under property, plant and equipment until December 31, 2018, for which Deutsche Telekom as the lessee bore substantially all the risks and rewards associated with the lease, are now recognized as rights to use the underlying leased assets. Depreciation and impairment losses of EUR 9.2 billion reduced the carrying amount. This included impairment losses of EUR 0.3 billion primarily relating to technical equipment and machinery in the Romania cash-generating unit in the Europe operating segment. Disposals of EUR 0.6 billion also reduced the carrying amount. Additions of EUR 10.6 billion – especially to upgrade and build out the network in our United States operating segment and in connection with the broadband/fiber-optic build-out, the IP transformation, and mobile infrastructure in the Germany and Europe operating segments – increased the carrying amount. Effects of changes in the composition of the Group resulting from the acquisition of Tele2 Netherlands increased the carrying amount by EUR 0.3 billion. Positive exchange rate effects, primarily from the translation of U.S. dollars into euros, increased the carrying amount by EUR 0.2 billion.

Rights to use lease assets were recognized in the amount of EUR 18.0 billion as of December 31, 2019. The remeasurement and reclassification effect reported amounted to EUR 16.2 billion as of January 1, 2019. This includes both rights to use lease assets recognized in the statement of financial position for the first time and rights to use assets arising from finance leases in the amount of EUR 2.5 billion that were previously disclosed under property, plant and equipment. The increase is a result of additions of EUR 5.5 billion relating mainly to leases concluded in the United States operating segment, and of EUR 0.2 billion from the effects of changes in the composition of the Group from the acquisition of Tele2 Netherlands. Positive exchange rate effects, primarily from the translation of U.S. dollars into euros, increased the carrying amount by EUR 0.2 billion. Depreciation and amortization totaling EUR 3.6 billion and disposals of EUR 0.4 billion had an offsetting effect.

Investments accounted for using the equity method decreased by EUR 0.1 billion to EUR 0.5 billion in the reporting year. This was primarily due to the transfer of the around 11 percent stake in Ströer SE & Co. KGaA to the plan assets of Deutsche Telekom Trust e.V. as of August 14, 2019 to cover existing pension obligations.

Current and non-current financial liabilities increased by EUR 4.1 billion to EUR 66.3 billion compared with the end of 2018. This was largely attributable to the euro bonds issued by Deutsche Telekom in 2019 with a total volume of EUR 4.5 billion and pound sterling bonds with a total volume of GBP 0.4 billion (EUR 0.5 billion). In addition, OTE issued a euro bond with a volume of EUR 0.4 billion. Scheduled repayments of U.S. dollar bonds totaling USD 1.8 billion (EUR 1.6 billion) and of euro bonds totaling EUR 0.8 billion among other things had an offsetting effect. Liabilities to banks increased by EUR 0.8 billion in connection with short-term borrowing. Financial liabilities increased in connection with the spectrum licenses acquired in Germany. In place of a lump-sum payment, government representatives agreed to let us pay the purchase price in annual installments through 2030. After deducting collateral and the first, already paid installment, financial liabilities increased by EUR 2.0 billion. The transition to IFRS 16 resulted in finance lease liabilities being reclassified from financial liabilities to lease liabilities. Based on the carrying amounts as of December 31, 2018, this reclassification reduced financial liabilities by EUR 2.5 billion. The measurement of forward-payer swaps concluded for future borrowings at T‑Mobile US gave rise to a remeasurement loss recognized directly in equity of EUR 0.6 billion.

For further information on the development of financial liabilities, please refer to Note 13 “Financial liabilities and lease liabilities” in the notes to the consolidated financial statements.

The first-time application of IFRS 16 led to the recognition of current and non-current lease liabilities totaling EUR 18.1 billion. These also included the finance lease liabilities that used to be reported under financial liabilities. The carrying amount of the recognized lease liabilities increased to EUR 19.8 billion as of December 31, 2019. Lease liabilities primarily relate to the United States operating segment.

Trade and other payables decreased year-on-year by EUR 1.3 billion to EUR 9.4 billion. The reduction in the level of liabilities in the United States, Europe, and Germany operating segments contributed to this decrease. Exchange rate effects from the translation from U.S. dollars into euros had an increasing effect.

Current and non-current provisions increased against the prior-year level by EUR 0.6 billion to EUR 12.5 billion, of which EUR 5.8 billion (December 31, 2018: EUR 5.5 billion) related to provisions for pensions and other employee benefits. This increase is primarily due to interest rate adjustments and the decline in the share price of the stake in BT, which had been transferred to plan assets. The transfer of the stake of around 11 percent in Ströer SE & Co. KGaA to plan assets as of August 14, 2019 had an offsetting effect. At EUR 6.7 billion, other provisions were slightly higher than in the prior year.

Other current and non-current liabilities decreased by EUR 0.4 billion to EUR 14.2 billion as of December 31, 2019. These were reduced by liabilities of EUR 2.2 billion from straight-line leases, mainly for cell sites in the United States operating segment that were no longer required to be reported under IFRS 16. In connection with the change in approach for the accounting treatment of contractual grants receivable from funding projects for the broadband build-out in Germany, non-financial other liabilities of EUR 1.2 billion were recognized for existing build-out obligations.

Shareholders’ equity increased by EUR 2.8 billion as of December 31, 2018 to EUR 46.2 billion, due in particular to profit of EUR 5.3 billion. Non-cash effects from currency translation of EUR 0.5 billion, capital increases from share-based payments of EUR 0.5 billion, and income taxes relating to components of other comprehensive income of EUR 0.3 billion increased shareholders’ equity. The transition to IFRS 16 as of January 1, 2019 also increased the carrying amount by EUR 0.3 billion. The cumulative effect of this was an increase of EUR 0.3 billion in retained earnings (including shares attributable to non-controlling interests) recognized directly in equity as of January 1, 2019. The acquisition of Tele2 Netherlands in the Group Development operating segment resulted in transactions with owners which increased shareholders’ equity by EUR 0.5 billion, and effects of EUR 0.2 billion from changes in the composition of the Group. The OTE share buy-back program reduced transactions with owners by EUR 0.1 billion. The carrying amount was reduced by dividend payments for the 2018 financial year to Deutsche Telekom AG shareholders in the amount of EUR 3.3 billion and to other shareholders of subsidiaries in the amount of EUR 0.2 billion. Shareholders’ equity was also reduced by EUR 0.6 billion due to the remeasurement of defined benefit plans and by a total of EUR 0.6 billion due to losses from hedging instruments, mainly in connection with forward-payer swaps concluded for future borrowings at T‑Mobile US.

For further information, please refer to Note 19 “Shareholders’ equity” in the notes to the consolidated financial statements.

For further information on the acquisition of Tele2 Netherlands, please refer to the section “Changes in the composition of the Group and other transactions” in the notes to the consolidated financial statements.

Net debt

Changes in net debt

millions of €

Our net debt increased from EUR 55.4 billion year-on-year to EUR 76.0 billion, largely due to the first-time application of IFRS 16. Other effects of EUR 1.1 billion include, among other factors, financing options under which the payments for trade payables become due at a later point in time by involving banks in the process, increased liabilities for the acquisition of broadcasting rights, and offsetting effects from the measurement of embedded derivatives at T‑Mobile US.

Other financing options

Off-balance-sheet financial instruments mainly relate to the sale of receivables by means of factoring. Total receivables sold as of December 31, 2019 amounted to EUR 4.2 billion (December 31, 2018: EUR 4.7 billion). This mainly relates to factoring agreements in the United States and Germany operating segments. The agreements are used in particular for active receivables management.

Furthermore, in the reporting year, we chose financing options totaling EUR 0.7 billion (2018: EUR 0.2 billion) which extended the period of payment for trade payables from operating and investing activities by involving banks in the process and which upon payment are shown under cash flows used in/from financing activities. As a result, we show these payables under financial liabilities in the statement of financial position.

Finance management

Our finance management ensures our Group’s ongoing solvency and hence its financial equilibrium. The fundamentals of Deutsche Telekom’s finance policy are established each year by the Board of Management and overseen by the Supervisory Board. Group Treasury is responsible for implementing the finance policy and for ongoing risk management.

To ensure financial flexibility, we primarily use the KPI “relative debt.” This is a core component of our finance strategy and an important performance indicator for investors, analysts, and rating agencies.

Free cash flow of the Group before dividend payments and spectrum investment grew from EUR 6.2 billion in the prior year to EUR 10.1 billion, with net cash from operating activities increasing by EUR 5.1 billion to EUR 23.1 billion. Due to the first-time application of the IFRS 16 accounting standard, the principal repayment portion of lease payments is presented in net cash used in/from financing activities. These payments totaling EUR 3.1 billion were taken into account in the calculation of free cash flow AL. The strong performance of our operating segments, in particular the United States, significantly increased net cash from operating activities. Compared with the prior year, factoring agreements – especially in the Germany and Systems Solutions operating segments – resulted in negative effects of EUR 0.3 billion on net cash from operating activities. In addition, in the previous year, dividends received in the amount of EUR 0.2 billion had had an increasing effect. Net cash from operating activities was also reduced by a EUR 0.5 billion increase in net interest payments and a EUR 0.1 billion increase in tax payments in the reporting year.

Cash capex (before spectrum investment) increased by EUR 0.9 billion compared with 2018. This increase relates almost entirely to the United States operating segment and was primarily attributable to the infrastructure build-out for the 600 MHz spectrum, which also lays the groundwork for 5G. Other capital expenditures were focused primarily on the Germany and Europe operating segments and went toward the build-out and upgrade of our networks. Exchange rate effects increased free cash flow AL and cash capex.

For further information on the statement of cash flows, please refer to Note 35 “Notes to the consolidated statement of cash flows” in the notes to the consolidated financial statements.

Profitability

ROCE improved in the reporting year by 0.4 percentage points to 5.1 percent. This positive trend was due to a substantial increase in net operating profit after taxes (NOPAT), which posted stronger percentage growth than the average amount of net operating assets (NOA). The positive development in NOPAT was driven primarily by the increase in EBIT. The higher share of profit of associates and joint ventures accounted for using the equity method also had a positive effect; this item had been negatively impacted by an effect of EUR 0.6 billion in 2018 due to the settlement in connection with ending the Toll Collect arbitration proceedings. Overall, NOPAT amounted to EUR 6.9 billion in 2019, up from EUR 5.9 billion in 2018. The average amount of net operating assets (NOA) increased to EUR 135.6 billion in 2019 from EUR 124.0 billion in the prior year. This increase was due mainly to higher intangible assets (including spectrum acquisitions in Germany and the United States) and higher operating working capital. Other non-current assets remained virtually on a par with the prior-year level. The overall development of NOA reflects our consistently high investment volume.

For further information on the definition of ROCE and the methods used to calculate this key performance indicator, please refer to the section “Management of the Group.”