8. Property, plant and equipment

At December 31, 2007, the composition and movements in property, plant and equipment are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

 

Gross carrying amount

Accumul. Depreciation

Net carrying amount

Gross carrying amount

Accumul. Depreciation

Net carrying amount

Land

83,511

-

83,511

83,186

-

83,186

Buildings

658,310

(301,584)

356,726

636,102

(279,163)

356,939

Plant and machinery

2,652,755

(1,624,730)

1,028,025

2,449,874

(1,498,088)

951,786

Industrial and commercial equipment

574,675

(448,876)

125,799

530,916

(405,039)

125,877

Other property, plant and equipment

236,540

(180,116)

56,424

238,643

(181,842)

56,801

4,205,791

(2,555,306)

1,650,485

3,938,721

(2,364,132)

1,574,589

Movements in gross carrying amount (in thousands of Euros)

12/31/2006

Exchange differences

Increase

Decrease

Reclass.

Other

12/31/2007

Land

83,186

1,294

412

(1,544)

177

(14)

83,511

Buildings

636,102

1,989

18,208

(2,775)

4,528

258

658,310

Plant and machinery

2,449,874

36,890

198,458

(27,182)

(6,013)

728

2,652,755

Industrial and commercial equipment

530,916

9,413

32,568

(8,231)

11,202

(1,193)

574,675

Other property, plant and equipment

238,643

(685)

37,063

(23,203)

(9,894)

(5,384)

236,540

3,938,721

48,901

286,709

(62,935)

-

(5,605)

4,205,791

Movements in accumulated depreciation (in thousands of Euros)

12/31/2006

Exchange difference

Reclass.

Decrease

Depreciation

Other

12/31/2007

Buildings

(279,163)

(2,964)

145

2,443

(21,753)

(292)

(301,584)

Plant and machinery

(1,498,088)

(24,864)

980

19,080

(122,206)

368

(1,624,730)

Industrial and commercial equipment

(405,039)

(7,706)

1,743

5,572

(43,377)

(69)

(448,876)

Other property, plant and equipment

(181,842)

574

(2,868)

15,682

(16,209)

4,547

(180,116)

(2,364,132)

(34,960)

-

42,777

(203,545)

4,554

(2,555,306)

Movements in net carrying amount (in thousands of Euros)

12/31/2006

Exchange differences

Increase

Decrease

Reclass.

Depreciation

Other

12/31/2007

Land

83,186

1,294

412

(1,544)

177

-

(14)

83,511

Buildings

356,939

(975)

18,208

(332)

4,673

(21,753)

(34)

356,726

Plant and machinery

951,786

12,026

198,458

(8,102)

(5,033)

(122,206)

1,096

1,028,025

Industrial and commercial equipment

125,877

1,707

32,568

(2,659)

12,945

(43,377)

(1,262)

125,799

Other property, plant and equipment

56,801

(111)

37,063

(7,521)

(12,762)

(16,209)

(837)

56,424

1,574,589

13,941

286,709

(20,158)

-

(203,545)

(1,051)

1,650,485

At December 31, 2006, the movements were as follows:

(in thousands of Euros)

12/31/2005

Exchange differences

Increase

Decrease

Reclass.

Other

12/31/2006

Land

67,272

7,764

3,613

(1,397)

5,748

186

83,186

Buildings

616,589

(12,567)

34,044

(15,979)

10,849

3,166

636,102

Plant and machinery

2,421,571

(79,907)

160,988

(21,846)

(28,707)

(2,225)

2,449,874

Industrial and commercial equipment

509,673

(16,549)

37,879

(16,823)

13,827

2,909

530,916

Other property, plant and equipment

249,667

(4,563)

18,932

(22,420)

(1,717)

(1,256)

238,643

3,864,772

(105,822)

255,456

(78,465)

-

2,780

3,938,721

(in thousands of Euros)

12/31/2005

Exchange differences

Increase

Decrease

Reclass.

Other

12/31/2006

Buildings

(274,890)

5,553

831

13,427

(22,406)

(1,678)

(279,163)

Plant and machinery

(1,449,690)

49,634

844

17,909

(120,361)

3,575

(1,498,089)

Industrial and commercial equipment

(387,135)

13,238

(441)

13,576

(42,234)

(2,043)

(405,039)

Other property, plant and equipment

(181,085)

3,412

(1,234)

11,646

(16,427)

1,846

(181,842)

(2,292,800)

71,837

-

56,558

(201,428)

1,700

(2,364,133)

(in thousands of Euros)

12/31/2005

Exchange differences

Increase

Decrease

Reclass.

Depreciation

Other

12/31/2006

Land

67,272

7,764

3,613

(1,397)

5,748

-

186

83,186

Buildings

341,699

(7,014)

34,044

(2,552)

11,680

(22,406)

1,488

356,939

Plant and machinery

971,881

(30,273)

160,988

(3,937)

(27,863)

(120,361)

1,350

951,785

Industrial and commercial equipment

122,538

(3,311)

37,879

(3,247)

13,386

(42,234)

866

125,877

Other property, plant and equipment

68,582

(1,151)

18,932

(10,774)

(2,951)

(16,427)

590

56,801

1,571,972

(33,985)

255,456

(21,907)

-

(201,428)

4,480

1,574,588

Increases during the year 2007 mainly refer to the Tyre sector, particularly the new operating units in Romania and China.

The ratio of additions during the year 2007 to depreciation is 1.41.

Assets under construction at December 31, 2007 amount to Euros 72,828 thousand (Euros 69,512 thousand at December 31, 2006).

Impairment losses in 2007, included in the column “decrease” in the above table, amount to Euros 811 thousand (Euros 1,145 thousand at December 31, 2006) and are recorded in the income statement under “Amortization, depreciation and impairments” (Note 32).

Restrictions on the ownership of assets are as follows:

  • machinery and plant for an equivalent amount of Euros 11,679 thousand are used as
    collateral for the loan secured from the National Bank of Egypt obtained by the subsidiary Pirelli Tyres Alexandria Co. (Euros 14,076 thousand at December 31, 2006);
  • machinery and land for Euros 78,958 thousand are used as collateral by the subsidiary Pirelli Pneus S.A. (Euros 77,645 thousand at December 31, 2006).

There are no borrowing costs capitalized to property, plant and equipment.

8.1. Finance leases

Land, buildings, plant, machinery and other assets purchased by the Group using finance leases are included in the respective categories of property, plant and equipment.

Details are as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

 

Capitalized cost

Accumulated depreciation

Net carrying amount

Capitalized cost

Accumulated depreciation

Net carrying amount

Land leased

11,187

-

11,187

11,187

-

11,187

Buildings leased

63,469

(12,559)

50,910

64,415

(10,992)

53,423

Other property, plant and equipment leased

984

(574)

410

1,036

(631)

405

Plant and machinery leased

1,791

(846)

945

1,828

(631)

1,197

77,431

(13,979)

63,452

78,466

(12,254)

66,212

Details of the most important contracts regarding land and buildings leased are as follows:

  • Pirelli & C. S.p.A. has a lease contract with a syndicate of banks (DEUTSCHE BANK LEASING S.p.A. - now SG LEASING S.p.A. - Franfinance Leasing Italia; SOGELEASE ITALIA S.p.A. – now SG LEASING S.p.A. - Franfinance Leasing Italia; LOCAT S.p.A.) on the building which houses the structures and the R&D activities of the Tyre Sector.

The contract, signed in May 2000, has a term of 13 years and a purchase option at expiration.

The net book amount of the building is Euros 41,904 thousand (Euros 43,563 thousand at December 31, 2006) and that of the land is Euros 10,184 thousand (unchanged at December 31, 2006);

  • the subsidiary Pirelli Deutschland GmbH has a lease contract with the company DAL-Florenta on the distribution warehouse located in Breuberg. The term of the contract is divided into two terms: the first is for 15 years from January 1, 1995 to December 31, 2009 and the second is for another 7.5 years. The contract has a purchase option;
  • the subsidiary Pneumobil GmbH has five lease contracts with the company DAL on the buildings of five points of sale in Germany. The terms of the contracts are between 20 and 25 years and all of the contracts expire between 2008 and 2010 and have purchase options. The contracts expiring on December 31, 2008 are being discussed with the leasing company to assess future possible scenarios.

The net carrying amounts of the buildings of the German companies total Euros 7,250 thousand (Euros 7,715 thousand at December 31, 2006) and that of the related land is Euros 1,003 thousand (unchanged compared to December 31, 2006).

The leased plant and machinery mainly include the assets relating to a lease contract that the subsidiary Pirelli & C. Real Estate Facility Management S.p.A. has with Locat Leasing S.p.A. for an automated filing system installed in one of the Company’s warehouses. The contract began in January 2005 and has a term of 7 years with a purchase option at expiration.

The net carrying amount is Euros 945 thousand.

Finance lease payables are included in financial payables (Note 24).

The minimum lease payments are detailed as follows:

(in thousands of Euros)

12/31/2007

12/31/2006

Due within 1 year

5,171

5,242

Due between 1 and 5 years

24,540

26,470

Due beyond 5 years

12,911

16,643

Total

42,622

48,355

Future financial expenses

(6,970)

(9,132)

Leases payable (Note 24)

35,652

39,223

The following table presents the finance lease liability by expiration date:

(in thousands of Euros)

12/31/2007

12/31/2006

Due within 1 year

3,381

3,275

Due between 1 and 5 years

19,711

20,371

Due beyond 5 years

12,560

15,577

Total (Note 24)

35,652

39,223

9. Intangible assets

The composition and movements in intangible assets are as follows:

(in thousands of Euros)

12/31/2006

Exchange differences.

Increase

Decrease

Amortization

Other

12/31/2007

Patents and intellectual property rights

777

-

-

-

(198)

(5)

574

Concessions, licenses and trademarks

24,188

(5)

3,612

(3,823)

(2,401)

785

22,356

Goodwill

479,734

(88)

161,399

(6,619)

-

527

634,953

Software

10,117

(2)

8,337

(899)

(6,438)

(673)

10,442

Other intangible assets

1,558

17

5,088

(42)

(1,462)

(944)

4,215

516,374

(78)

178,436

(11,383)

(10,499)

(310)

672,540

(in thousands of Euros)

12/31/2005

Exchange differences.

Increase

Decrease

Amortization

Other

12/31/2006

Patents and intellectual property rights

992

-

21

-

(263)

27

777

Concessions, licenses and trademarks

21,330

-

5,145

(65)

(2,215)

(7)

24,188

Goodwill

440,568

(111)

42,201

-

-

(2,924)

479,734

Software

12,437

(17)

4,888

(18)

(8,480)

1,307

10,117

Other intangible assets

1,474

(35)

2,629

(110)

(1,798)

(602)

1,558

476,801

(163)

54,884

(193)

(12,756)

(2,199)

516,374

The increase in “Goodwill” in 2007 mainly refers to the following transactions:

  • in the second half of 2007, shares of the subsidiary Pirelli & C. Real Estate S.p.A. were purchased on the market for Euros 54,225 thousand (equal to 3.4 percent of total share capital). This gave rise to goodwill of Euros 30,503 thousand, equal to the difference between the price paid and the accounting equity which was allocated to the group of cash-generating units corresponding to the Real Estate Sector;
  • during January 2007, Pirelli & C. Real Estate S.p.A. finalized the following acquisitions:
  • 99.27 percent of the share capital of B&L Immobilien AG (now DGAG Deutsche Grundvermogen AG), a company which held, directly and indirectly, 62 percent of the share capital of DGAG Deutsche Grundvermogen AG (now Pirelli DGAG Deutsche Grundvermogen GmbH);
  • a further 38 percent of the share capital of DGAG Deutsche Grundvermogen AG (now Pirelli DGAG Deutsche Grundvermogen GmbH).
    The purchase price was set at approximately Euros 513 million (including directly attributable transaction costs of approximately Euros 13 million).

    When the acquisition was recorded the asset and liabilities acquired were adjusted to fair value and goodwill was recognized for Euros 74,308 thousand and allocated to the Services Platform Germany and the Investment and Asset Management – Real Estate Germany cash generating units, as detailed in the following table:

(in thousands of Euros)

Fair value

Book value

Purchase price (including costs directly attributable to the business combination)

512,702

-

Property, plant and equipment

1,270

1,289

Intangible assets

215

215

Investments in associates and joint-venture

5,015

9,866

Deferred tax assets and deferred tax provisions

-

(10,305)

Inventories

1,330,312

1,344,292

Trade receivables and trade payables

8,371

12,619

Other receivables and other payables

(19,178)

(25,028)

Employee provisions and other provisions

(32,665)

(19,594)

Cash and cash equivalents

20,212

20,212

Financial payables

(839,312)

(986,402)

Assets and liabilities purchased

474,240

347,164

Minority interest in equity

(35,846)

-

Net Assets and liabilities purchased

438,394

-

Goodwill

74,308

-

  • in February 2007, Pirelli & C. Real Estate Facility Management S.p.A. purchased a 100 percent stake in Ingest Facility S.p.A. from Business Solutions (Fiat Group). The purchase price was set, following the price adjustment agreed between the parties on June 30, 2007, at Euros 54.8 million (including directly attributable transaction costs of approximately Euros 0.9 million).

The purchase price allocation entailed the following:

  • the adjustment to fair value of the assets and liabilities acquired as well as the recognition of the identifiable intangible assets at the date of acquisition separately from goodwill.
    In particular:
  • order portfolio: valuing the order backlog at the date of acquisition;
  • customer relationship with FIAT: valuing the amount invoiced resulting from the customer relationship;
  • foreign platform: same procedure described in the preceding points;
  • the recognition of goodwill of Euros 52,475 thousand equal to the excess of the cost of acquisition over the fair value of the assets and liabilities acquired/identified, allocated to the Facility cash-generating unit, as detailed in the following table:

(in thousands of Euros)

Fair value

Purchase price (including costs directly attributable to the business combination)

54,847

Property, plant and equipment

2,592

Intangible assets

4,854

Investments in associates and joint-venture

15

Other financial assets

1

Deferred tax assets and deferred tax provisions

537

Inventories

310

Trade receivables and trade payables

(20,288)

Other receivables and other payables

2,212

Employee provisions and other provisions

(12,154)

Cash and cash equivalents

3,294

Financial receivables

20,999

Assets and liabilities purchased

2,372

Goodwill

52,475

The carrying amounts of the Ingest Facility S.p.A. assets and liabilities acquired are not provided since a balance sheet prepared in accordance with IAS/IFRS was not available at the acquisition date.

At December 31, 2007, the breakdown of goodwill according to the business segment and the cash-generating unit (or groups of cash generating units) to which it was allocated for purposes of assessing impairment are shown in the following table:

(in thousands of Euros)

Business
segment

CGU/groups of CGU

Amount

Recoverable amount

Tyre

Consumer

208,349

Value in use

Tyre

Industrial

172,834

Value in use

Other businesses

Eco Technology

4,860

Value in use

Real Estate

Real Estate

30,503

Fair value

Real Estate

Agency

5,719

Value in use

Real Estate

Credit Servicing

5,066

Value in use

Real Estate

Facility

86,752

Value in use

Real Estate

Property

13,452

Value in use

Real Estate

Services platform-Germany

64,328

Value in use

Real Estate

Investment & Asset Management-Poland

3,257

Value in use

Real Estate

Investment & Asset Management-SGR Fund management

29,042

Value in use

Real Estate

Investment & Asset Management-Real Estate Germany

10,639

Value in use

Real Estate

Non-performing loans

152

Value in use

634,953

 

The impairment test consists of estimating the recoverable amount of the cash-generating units and comparing it with the net carrying amount of the relative assets including goodwill.

As regards the group of cash-generating units corresponding to the Real Estate Sector, to which the goodwill of Euros 30,503 thousand was allocated, as indicated above, the fair value corresponds to the official stock market price of the Pirelli & C. Real Estate share at December 31, 2007.

As for the other cash-generating units, the value in use corresponds to the present value of future cash flows which is estimated will be associated with the cash-generating unit.

Cash flows used to determine the value in use are based on projections covering a five-year period and are based on:

  • for the Real Estate Sector, for the first three years, on projections approved by management; the cash flows for the fourth and fifth year correspond to the cash flows for the last year of the plan while the cash flows generated by the disposal of the cash-generating units at the end of the explicit period correspond to the perpetual return again based on the last year of the plan;
  • for the Tyre Sector, for the first year, on projections approved by management; the cash flows relating to the second to the fifth year and the cash flows generated by the disposal of the cash-generating units at the end of the explicit period (assumed as being equal to the present value of the perpetual return of cash flows generated in the last year of projection) have been extrapolated using a growth factor of about 2 percent to the cash flows of the first year.

At December 31, 2007, the discount rates, net of taxes, applied to the cash flow projections are as follows:

Business
segment

Cash-generating unit

Discount rate

Tyre

Consumer

8.20%

Tyre

Industrial

8.20%

Other businesses

Eco Technology

7.80%

Real Estate

Agency

6.20%

Real Estate

Credit Servicing

6.20%

Real Estate

Facility

6.20%

Real Estate

Property

6.20%

Real Estate

Services platform-Germany

6.20%

Real Estate

Investment & Asset Management-Poland

6.20%

Real Estate

Investment & Asset Management-SGR Fund management

6.20%

Real Estate

Investment & Asset Management-Real Estate Germany

6.20%

Real Estate

Non-performing loans

6.20%

On the basis of the results of the tests performed, there is no impairment.

The impairment losses on intangible assets other than goodwill in 2007, included in the column “decreases”, amount to Euros 3,823 thousand (Euros 1,492 thousand at December 31, 2006). Impairment losses are recorded in the income statement under “Amortization, depreciation and impairments” (Note 32).