Pirelli & C.

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The Group

In this report on operations, in addition to the financial performance measures established by the IFRSs, certain non-IFRS measures originated from the latter are presented although they are not required by the IFRSs (Non-GAAP Measures).

These performance measures are presented to enable a clearer understanding of the trend of the Group’s operations and should not be construed as a substitute for the information required by the IFRSs.

Specifically, the Non-GAAP Measures used are the following:

  • Gross Operating Margin (EBITDA): this economic measure is used by the Group as a financial target for internal presentations (business plans) and external presentations (to analysts and investors), and is a useful unit of measurement to assess the overall operating performance of the Group and of the individual business segments in addition to Operating Income. The Gross Operating Margin is an intermediate economic measure deriving from Operating Income, but excluding depreciation and amortization of tangible and intangible assets;
  • Fixed assets: this measure consists of the sum of “Property, plant and equipment”, “Intangible assets”, “Investments in associates and joint venture” and “Other financial assets”;
  • Provisions: this measure is the sum of “Provisions for other liabilities and charges (current and non-current)”, “Provisions for employee benefits” and “Deferred tax liabilities”;
  • Net working capital: this measure consists of all the items not included in the two measures above, in “Equity” and in “Net financial position”;
  • Net financial position: this performance measure is represented by the gross financial debt and other financial receivables less cash and cash equivalents. The section “Explanatory notes on the consolidated financial statements” presents a table showing the balance sheet amounts used to calculate the measure.

It is important to remember that the Integrated Facility Management business of Pirelli Real Estate and the Photonics business, which were both sold during 2008, were considered “Discontinued operation”.

The Group’s consolidated accounts can be summarized as follows:

(in millions of euro)

12/31/2009 12/31/2008
Net sales 4,462.2 4,660.2
Gross operating margin before restructuring expenses 508.1 396.1
of which property value adjustments (7.9) (9.3)
% of net sales 11.4% 8.5%
Net operating income before restructuring expenses 297.0 187.4
of which property value adjustments (7.9) (9.3)
% of net sales 6.7% 4.0%
Restructuring expenses (79.6) (144.2)
Net operating income 217.4 43.2
of which property value adjustments (7.9) (9.3)
% of net sales 4.9% 0.9%
Net income from equity investments (56.7) (366.5)
of which property value adjustments (23.5) (126.5)
Financial income/(expenses) (85.4) (80.0)
Income tax (97.9) (72.6)
Net income from continuing operations (22.6) (475.9)
Net income from discontinued operations - 63.4
Total net income (22.6) (412.5)
     
Net income attributable to the equity holders of Pirelli & C. S.p.A. 22.7 (347.5)
Total net earnings per share attributable to the equity holders of Pirelli & C. S.p.A. (in euro) 0.004 (0.065)
     
Fixed assets 3,596.2 3,686.7
Net working capital 221.8 397.1
Net invested capital 3,818.0 4,083.8
Total net equity 2,494.7 2,374.4
Provisions 794.5 681.7
Net financial (liquidity)/debt position 528.8 1,027.7
     
Equity attributable to the equity holders of Pirelli & C. S.p.A. 2,175.0 2,171.8
Equity per share attributable to the equity holders of Pirelli & C. S.p.A. (in euro) 0.405 0.405
Investments in property, plant and equipment 225 311
R&D expenses 137 156
% of net sales 3,1% 3,3%
Employees (number at end of period) 29,570 31,056
Industrial sites no. 21 21
Pirelli & C. S.p.A. shares
Ordinary shares (no. millions) 5,233.1 5,233.1
of which treasury shares 3.9 3.9
Savings shares (no. millions) 134.8 134.8
of which treasury shares 4.5 4.5
Total shares (no. millions) 5,367.9 5,367.9

For a better understanding of the Group’s performance, the income data and the net financial position are presented below divided by business segments.

Situation at 12/31/2009 (in millions of euro)

Tyre Eco Technology Real Estate Broadband Access Other * Total
Net sales 3,992.9 56.6 271.7 132.1 8.9 4,462.2
Gross operating margin before restructuring expenses 538.0 (9.1) (5.0) 5.3 (21.1) 508.1
of which property value adjustments - - (7.9) - - (7.9)
Operating income before restructuring expenses 345.5 (10.8) (12.4) 4.5 (29.8) 297.0
of which property value adjustments - - (7.9) - - (7.9)
Restructuring expenses (37.0) - (23.9) (0.5) (18.2) (79.6)
Operating income 308.5 (10.8) (36.3) 4.0 (48.0) 217.4
of which property value adjustments - - (7.9) - - (7.9)
Net income from equity investments 4.2 - (45.1) - (15.8) (56.7)
of which property value adjustments - - (23.5) - - (23.5)
Operating income including net income from equity investments excluding property value adjustments and before restructuring expenses (26.1)
Financial income/(expenses) (76.1) (2.5) (15.6) 0.3 8.5 (85.4)
Income tax (90.0) (0.4) (7.8) 0.3 - (97.9)
Net income from continuing operations 146.6 (13.7) (104.8) 4.6 (55.3) (22.6)
Net income from discontinued operations - - - - - -
Net income 146.6 (13.7) (104.8) 4.6 (55.3) (22.6)
Net financial (liquidity)/debt position 1,027.3 47.2 41.3 (35.7) (551.3) 528.8

Situation at 12/31/2008 (in millions of euro)

Tyre Eco Technology Real Estate Broadband Access Other * Total
Net sales 4,100.2 62.9 365.1 124.6 7.4 4,660.2
Gross operating margin before restructuring expenses 441.2 (11.0) (17.6) 4.8 (21.3) 396.1
of which property value adjustments - - (9.3) - - (9.3)
Operating income before restructuring expenses 250.7 (11.8) (27.0) 3.9 (28.4) 187.4
of which property value adjustments - - (9.3) - - (9.3)
Restructuring expenses (100.0) - (44.2) - - (144.2)
Operating income 150.7 (11.8) (71.2) 3.9 (28.4) 43.2
of which property value adjustments (9.3) - - (9.3)
Net income from equity investments 27.8 - (168.5) - (225.8) (366.5)
of which property value adjustments - - (126.5) - - (126.5)
Operating income including net income from equity investments excluding property value adjustments and before restructuring expenses (59.7)
Financial income/(expenses) (82.8) (1.6) (26.0) (2.6) 33.0 (80.0)
Income tax (70.1) 0.2 (1.9) 0.7 (1.5) (72.6)
Net income from continuing operations 25.6 (13.2) (267.6) 2.0 (222.7) (475.9)
Net income from discontinued operations - - 74.6 - (11.2) 63.4
Net income 25.6 (13.2) (193.0) 2.0 (233.9) (412.5)
Net financial (liquidity)/debt position 1,266.8 19.0 289.5 (15.0) (532.6) 1,027.7
* The item includes the environmental company, Ambiente (operating loss in 2009 of Euro 3.7 million compared with a loss of Euro 2.6 million in 2008), PZero S.r.l. (operativo loss in 2009 of Euro 3.8 million compared with a loss of Euro 3.9 million in 2008), all the financial companies (including the Parent Company), the other service companies and, as regards the item net sales , the eliminations on consolidation

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Net sales

Net sales in financial year 2009 amounted to Euro 4,462.2 million compared with Euro 4,660.2 million in the year 2008.

The percentage breakdown of net sales into business segment is as follows:

2009 2008
Tyre 89.4% 88.0%
Eco Technology 1.3% 1.3%
Real Estate 6.1% 7.8%
Broadband Access 3.0% 2.7%
Other 0.2% 0.2%
100% 100%

The consolidated change on a like-for-like basis broken down by business segment is as follows:

Tyre - 1.6%
Eco Technology - 10.0%
Real Estate - 25.6%
Broadband Access + 6.0%
Group Total - 3.3%
Foreign exchange effect - 1.4%
High inflation effect + 0.5%
Total change - 4.2%

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Operating income

The operating income before restructuring expenses amounted to Euro 297 million (of which Euro 7.9 million relating to property devaluations in Pirelli Real Estate) compared with Euro 187.4 million in the year 2008 (of which Euro 9.3 million relating to property devaluations in Pirelli Real Estate).

Restructuring expenses, of Euro 79.6 million, are associated primarily with the rationalization of Pirelli Tyre’s staff structures and manufacturing base in Europe (Euro 37 million), the rationalization of Pirelli Real Estate’s structures (Euro 23.9 million) and the reorganization of the corporate structures (Euro 18.2 million).

The operating income amounted to Euro 217.4 million compared with Euro 43.2 million in the previous year.

The change in relation to the single business segments is as follows:

(in millions of euro)
Operating income 2008 43.2
Tyre 94.8
Eco Technology 1.0
Real Estate 14.6
Broadband Access 0.6
Restructuring expenses 64.6
Other (1.4)
Total 174.2
Operating income 2009 217.4

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Net income from equity investments

Net income from equity investments, which includes the share of the net income of companies carried at equity, the effects of sales or impairment losses and dividends from unconsolidated equity investments, is negative by Euro 56.7 million, compared with a negative figure of Euro 366.5 million in the previous year.

Among the most significant events we can note the improvement in the proportions of net income of associates and joint ventures in relation to the Pirelli Real Estate Group, which went from a negative effect of Euro 168.5 million (of which Euro 126.5 million relating to property devaluations) to a negative amount of Euro 45.1 million (of which Euro 23.5 million relating to property devaluations).

In 2009 the amount also included the negative effect deriving from the sale of the remaining equity investment in Telecom Italia S.p.a. for Euro 17.5 million, while the net income for the previous year included also the negative value adjustment of the equity investment in listed companies (Telecom Italia S.p.A. of Euro 173 million, RCS MediaGroup S.p.A. of Euro 66 million and Avanex Corporation of Euro 24 million).

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Net income

Net income from continuing operations is negative by Euro 22.6 million compared with a loss of Euro 475.9 million in the previous year.

The figure for the previous year included discontinued operations, the net income of which (a positive Euro 63.4 million) related to the sale of the Photonics business (negative Euro 11.2 million) offsetting the positive effect of the sale of the Facility Management business of Pirelli Real Estate (Euro 74.6 million).

Total net income is negative by Euro 22.6 million compared with a loss of Euro 412.5 million in the previous year.

The total net income attributable to Pirelli & C. S.p.A. is a positive Euro 22.7 million (Euro 0.004 per share), compared with a negative Euro 347.5 million in the year 2008 (negative Euro 0.065 per share).

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Equity

Consolidated equity increased from Euro 2,374.4 million at December 31, 2008 to Euro 2,494.7 million at December 31, 2009.

Equity attributable to equity holders of Pirelli & C. S.p.A. as of December 31, 2009 is Euro 2,175 million (Euro 0.405 per share) compared to Euro 2,171.8 million (Euro 0.405 per share) at December 31st, 2008.

The change can be summarised as follows:

(in millions of euro)

Group Minorities Total
Equity at 12/31/2008 2,171.8 202.6 2,374.4
Translation differences 40.7 (3.1) 37.6
Net income 22.7 (45.3) (22.6)
Pirelli & C. Real Estate S.p.A. capital increase (2.6) 165.5 162.9
Dividends paid - (2.3) (2.3)
Tyre minorities acquisition - (4.3) (4.3)
Adjustment to fair value of available-for-sale financial assets/derivatives 25.4 4.8 30.2
Share of other components recognised in equity related to associates and joint ventures (1.3) (0.4) (1.7)
Net actuarial gains/(losses) on employee benefits (77.2) (0.3) (77.5)
Other changes (4.5) 2.5 (2.0)
Total changes 3.2 117.1 120.3
Equity at 12/31/2009 2,175.0 319.7 2,494.7

The statement of reconciliation between the Equity of the Parent Company Pirelli & C. S.p.A. and the Consolidated Equity attributable to the equity holders of the Parent Company is presented below, under the terms of the Consob Communication of the 28th of July 2006.

Reconciliation between equity Pirelli & C. S.p.A. and consolidated equity attributable to the equity holders (in millions of euro)

Share Capital Reserves Income (loss) Total
Equity - Pirelli & C. S.p.A. at December 31, 2009 1,554 156 113 1,823
Results for the year of consolidated companies (pre-consolidation adjustments) 62 62
Capital and reserves of consolidated companies (pre-consolidation adjustments) 1,504 1,504
Consolidation adjustments:
- carrying amount of investments in consolidated companies (1,232) (1,232)
- intragroup dividends 201 (201) -
- other (31) 49 18
Consolidated equity - Group at December 31, 2009 1,554 598 23 2,175

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Net financial position

The Group’s net financial position went from a negative Euro 1,027.7 million at December 31, 2008 to Euro 528.8 million at December 31, 2009.

The change in the year can be summarised in the following cash flow:

(in millions of euro)

Q1 2009 Q2 2009 Q3 2009 Q4 2009 2009 2008
Operating income (EBIT) before restructuring expenses 50.3 72.0 82.8 91.9 297.0 187.4
Amortization & Depreciation 51.4 52.4 52.3 55.0 211.1 208.7
Property, plant and equipment and intangible assets (42.9) (37.4) (32.0) (115.5) (227.8) (378.2)
Change in working capital/other (262.8) 96.7 84.4 357.5 275.8 (147.5)
Operating cash flow (204.0) 183.7 187.5 388.9 556.1 (129.6)
Financial income/(expenses) (20.2) (19.2) (13.6) (32.4) (85.4) (80.0)
Income tax (26.3) (19.2) (36.1) (16.3) (97.9) (72.6)
Net operating cash flow (250.5) 145.3 137.8 340.2 372.8 (282.2)
Impact of Speed S.p.A. acquisition - - - - - (835.5)
Financial investments/divestments 37.9 78.1 129.4 (26.3) 219.1 (11.7)
Dividends paid - (2.4) - - (2.4) (168.0)
Cash Out for restructuring expenses (45.8) (25.1) (15.7) (19.6) (106.2) (28.1)
Pirelli & C. Real Estate S.p.A. capital increase subscribed by minorities - 167.4 - 167.4 -
Exchange differences/other 7.2 (24.6) (2.7) (131.7) (151.8) (4.3)
Net cash flow (251.2) 171.3 416.2 162.6 498.9 (1,329.8)

The table below shows a breakdown of the net financial position by business segment:

(in millions of euro)

Tyre Real Estate Other businesses Corporate Consolidated
Gross debt * 1,553 489 101 276 1,824
Financial receivables (84) (415) (37) (561) (502)
Cash equivalents and securities held for trading (442) (33) (4) (314) (793)
Net financial position 1,027 41 60 (599) 529
* of which due to Corporate 411 72 73

The item “Other business” includes Pirelli Eco Technology, Pirelli Broadband, Pirelli Ambiente and PZero.

A breakdown of the structure of gross debt, divided by type and maturity, is shown below:

(in millions of Euro)

Financial Statements 12/31/2009 Maturity date
2010 2011 2012 2013
Utilization of committed lines 1,061 35 50 976 -
Other financing 763 283 100 143 237
Total gross debt 1,824 318 150 1,119 237
17.4% 8.2% 61.3% 13.0%

At December 31, 2009 unused Committed credit facilities amounted to Euro 819 million.

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Investments in property, plant and equipment

Investments in property, plant and equipment amounted to a total of Euro 225 million, of which Euro 217 million in relation to the Tyre segment, with a ratio of 1.1 with respect to the amount of depreciation.

Employees

At December 31, 2009 the Group had 29,570 employees (of which 2,245 temporary) compared with 31,056 on December 31, 2008 (of which 2,913 temporary).

12/31/2009 12/31/2008
Geographical areas
Europe:
- Italy 4,454 15.06% 5,170 16.65%
- Rest of Europe 8,131 27.50% 9,079 29.23%
North America 230 0.78% 245 0.79%
Central and South America 11,754 39.75% 11,819 38.06%
Oceania, Africa and Asia 5,001 16.91% 4,743 15.27%
29,570 100.00% 31,056 100.00%
Business segment
Tyre 27,480 92.94% 28,601 92.10%
Eco Technology 284 0.96% 218 0.70%
Real Estate 1,139 3.85% 1,558 5.02%
Broadband Access 128 0.43% 113 0.36%
Other businesses 539 1.82% 566 1.82%
29,570 100.00% 31,056 100.00%