Financial risk management policies / Capital management policies / Estimates and assumptions / Segment information / Property, plant and equipment

4. Financial risk management policies

Financial risk management is an integral part of the management of the Group’s operations. Risk management is carried out centrally using policies defined by the General Management. Such policies define the categories of risk and specify the procedures and operating limits for each type of transaction and/or instrument. In accordance with these policies, the Group uses derivative contracts in relation to underlying financial assets or liabilities or future transactions. Financial risk management is centralized at the Sector Treasuries which have the task of evaluating the risks and putting into place the relative hedges under the coordination of Group Treasury. The Sector Treasuries operate directly in the market on behalf of the Operating Units and, where they cannot operate directly because of external restrictions, they coordinate the activities of Local Treasury Units.

TYPES OF FINANCIAL RISKS

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk. This risk is managed by the Sector Treasuries and coordinated by Group Treasury.

The Operating Units are responsible for gathering all the information inherent to the positions subject to foreign exchange risk which are managed by forward contracts negotiated with the Sector Treasuries. The positions subject to exchange risk are mainly represented by sales and purchases invoices.

The Sector Treasuries are responsible for assessing and managing the net position for every currency, in accordance with policies and pre-set limits, by negotiating derivative contracts on the market, generally forward contracts.

As a result, a change in exchange rates will not generate any significant effect on the income statement.

Forward contracts between the Operating Units and the Sector Treasuries as well as those among the Sector Treasuries and the market are not designated as hedging instruments as defined by IAS 39 although they are in place for the purpose of managing risks.

Currency translation risk

The Group holds controlling investments in companies which prepare their financial statements in currencies other than the euro, which is the presentation currency of the Group. This exposes the Group to risk from currency translations since fluctuations in the exchange rates of certain foreign currencies against the presentation currency (euro) can cause changes in the amount of consolidated equity.

The principal exposures to currency translation risk are monitored but it is not the Group’s policy to hedge this exposure.

About 61 percent (about 73 percent at December 31, 2007) of total consolidated equity at December 31, 2008 is expressed in Euro. The most important currencies for the Group other than the Euro are the Brazilian real (14 percent; 11 percent at December 31, 2007) and the Turkish lira (8 percent; 6 percent at December 31, 2007).

The effect on total consolidated equity resulting from a hypothetical increase or decrease in the value of the above currencies against the Euro – all other conditions being equal, is as follows:

(in thousands of euros)

 

10% increase in value

10% decrease in value

 

12/31/2008

12/31/2007

12/31/2008

12/31/2007

Brazilian real

36,633

45,744

(29,973)

(37,427)

Turkish lira

20,578

27,333

(16,836)

(22,364)

Total effect on consolidated equity

57,211

73,077

(46,809)

(59,791)

Interest rate risk

The Group’s policy is to tend to maintain a correct balance between fixed-rate debt and floating-rate debt with the aim being fixed-rate debt at about 60 percent of total financial debt.

The Group manages the risk of an increase in floating-rate debt interest rates by compensation with floating-rate receivables and by the use of derivative contracts. The designation of such derivatives as hedging instruments under IAS 39 is decided case by case and authorized by the General Management.

The effects on the results for the year and directly on total equity resulting from an increase or decrease of 0.50 percent in the level of interest rates of all the currencies to which the Group is exposed – all other conditions being equal, are the following:

(in thousands of euros)

 

+0.50% increase

-0.50% decrease

 

12/31/2008

12/31/2007

12/31/2008

12/31/2007

Effect on the result for the year:

- companies consolidated line-by-line

(3,850)

39

2,634

1,276

- companies accounted for using the equity method

(1,484)

7,052

3,045

670

Total effect on the result for the year

(5,334)

7,091

5,679

1,946

Direct effect on equity:

- companies consolidated line-by-line

1,195

836

(1,970)

(838)

- companies accounted for using the equity method

8,472

8,924

(8,749)

(9,169)

Total direct effect on equity

9,667

9,760

(10,719)

(10,007)

The impact on the result for the year includes the effect on:

  • financial income and expenses of floating-rate receivables and payables;
  • liquidated income and expenses of interest rate derivatives;
  • change in fair value of interest rate derivatives.

The direct impact on equity is connected with the change in fair value of cash flow hedge derivatives.

Price risk associated with financial assets

The Group is exposed to price risk to the extent of the volatility of financial assets such as listed and unlisted equity shares and bonds, listed real estate investment funds and unlisted closed-end real estate investment funds for an amount equal to about 9 percent of total consolidated assets at December 31, 2008 (12 percent at December 31, 2007); the change in fair value of these financial assets is recognized in equity or in the income statement in accordance with IAS 39.

Listed equity shares and listed real estate investment funds, whose change in fair value is recognized in equity, represent 59 percent of total financial assets subject to price risk (77 percent at December 31, 2007). A change of 1 percent in these listed securities, all other conditions being equal, would cause a change of Euros 3,641 thousand (Euros 8,233 thousand at December 31, 2007) in the equity of the Group.

Financial assets, whose change in fair value is recognized through profit or loss, refer to unlisted closed-end real estate investment funds, whose fair value is arrived by reference to a basket of similarly listed securities. A change in the reference index relating to listed closed-end real estate funds of 1 percent, all other conditions being equal, would cause an impact on the result for the year of Euros 296 thousand (Euros 319 thousand at December 31, 2007).

Credit risk

Credit risk represents the Group’s exposure to potential losses due to the non-fulfillment of obligations undertaken by commercial and financial counterparts.

The Group does have significant concentrations of credit risk.

In order to limit this risk with commercial counterparts, the Group has put into place procedures to assess the potential and financial creditworthiness of the customers in order to monitor flows of estimated collections and for recovery actions, if any.

The aim of these procedures is to define the customer credit limits which, if exceeded, will activate the rule causing supplies to be blocked.

In some cases the client is asked to furnish guarantees; these will mainly be bank guarantees provided by high-credit standing banks or personal guarantees. Mortgages are requested less frequently.

Another tool used to manage commercial credit risk are insurance policies taken out to forestall the risk of non-payment through a meticulous selection of the customer portfolio made together with the insurance company, which undertakes to guarantee compensation in the case of insolvency.

As for financial counterparts, for the management of temporary excess resources or for the negotiation of derivatives, the Group only uses high-credit worthy counterparts.

Receivables for shareholders’ loans are evaluated together with the interest invested in the capital of the investment holding, using an analysis of cash flows generated by the relative underlying real estate projects.

The carrying amount of junior notes and non-performing loans is adjusted each time there is a change in the estimate of discounted cash flows expected and, in the case of impairment, is indirectly reduced through recognition of a specific provision account. In some cases, the customers are asked to furnish guarantees; these are mainly bank guarantees provided by high-credit standing banks, personal guarantees or mortgages.

Impairment losses on receivables are calculated on the basis of the risk of non-fulfillment by the counterpart determined by considering the information available on the solvency of the counterpart and historical experience. The carrying amount of receivables is indirectly reduced through recognition of a provision account.

Single significant positions, for which there is an objective condition of partial or total uncollectibility are written down individually. The amount of the impairment loss takes into account the estimate of future recoverable flows and the relative date of collection, recovery costs and expenses and the fair value of the guarantees, if any.

The positions which are not written down individually are included in groups with similar characteristics from the standpoint of credit risk and written down on a collective basis according to a percentage that increases as the overdue period increases. The collective impairment procedure also applies to receivables not yet due.

The writedown percentages are determined on the basis of historical experience and statistical data.

Liquidity risk

Liquidity risk represents the risk that available financial resources will not be sufficient to meet financial and commercial obligations within the prescribed time and due dates. The main instruments used by the Group to manage liquidity risk are three-year and annual financial plans and treasury plans that enable the Group to fully and correctly recognize and measure incoming and outgoing monetary flows. Variances between the plans and the actual figures are constantly analyzed.

Prudent liquidity risk management implies maintaining sufficient cash and/or short-term securities that can be readily converted into cash, the availability of funding through an adequate amount of committed credit facilities and/or the ability to close out market positions. Due to the dynamic nature of the businesses in which it operates, the Group aims to maintain flexibility in funding by using committed credit lines.

In order to optimize the management of financial resources and thus the liquidity risk, the Group has implemented a centralized system for managing collection and payment flows while respecting the different local currency and tax laws. The negotiation and management of banking relations is conducted centrally so that short-term and medium-term financial requirements are assured of coverage at the lowest cost possible. Even the funding of medium/long-term resources on the capital market is optimized by using centralized management.

At December 31, 2008, in addition to liquidity and securities held for trading, equal to Euros 369,705 thousand, the Group has unused committed credit facilities of Euros 785,000 thousand (Euros 2,672,000 thousand at December 31, 2007), with the following expiration dates:

(in thousands of euros)

2010

10.000

2011

136.000

2012

639.000

 

785.000

The maturities of financial liabilities at December 31, 2008 can be summarized as follows:

(in thousands of euros)

 

within 1 year

between
1 and 2 years

between
2 and 5 years

beyond 5 years

Total

Trade payables

1,108,573

-

-

-

1,108,573

Other payables

482,401

29,706

15,006

3,760

530,873

Derivative financial instruments

110,473

2,139

-

-

112,612

Borrowings from banks
and other financial institutions

695,561

312,427

1,057,320

6,000

2,071,308

 

2,397,008

344,272

1,072,326

9,760

3,823,366

The maturities of financial liabilities at December 31, 2007 can be summarized as follows:

(in thousands of euros)

 

within 1 year

between
1 and 2 years

between
2 and 5 years

beyond 5 years

Total

Trade payables

1,323,588

-

-

-

1,323,588

Other payables

1,394,673

2,058

17,504

3,738

1,417,973

Derivative financial instruments

72,513

262

6,520

-

79,295

Borrowings from banks
and other financial institutions

754,661

289,526

465,488

150,282

1,659,957

 

3,545,435

291,846

489,512

154,020

4,480,813

Additional information: categories of financial assets and liabilities

The carrying amounts for every category of financial assets and liabilities identified in IAS 39 are reported as follows:

(in thousands of euros)

 

Note

Carrying amount
at December 31, 2008

Carrying amount
at December 31, 2007

FINANCIAL ASSETS

   

Financial assets at fair value through profit or loss

   

- designated at the time of initial recognition

Other financial assets - non-current

11

29,599

31,910

- held for trading

Securities held for trading

17

115,800

114,039

Derivative financial instruments - non-current

27

3,161

3,849

Derivative financial instruments - current

27

92,108

56,116

Loans and receivables

   

Other receivables - non-current

14

723,004

672,894

Trade receivables - current

13

787,951

1,098,927

Other receivables - current

14

239,956

241,475

Cash and cash equivalents

18

253,905

2,057,682

Available-for-sale financial assets

   

Other financial assets - non-current

11

476,300

926,362

Hedging financial instruments

   

Derivative financial instruments - current

27

1,934

2,210

Total financial assets

 

2,723,718

5,205,464

FINANCIAL LIABILITIES

   

Financial liabilities at fair value through profit or loss

   

- held for trading

Derivative financial instruments - non-current

27

2,139

6,782

Derivative financial instruments - current

27

105,217

72,513

Financial liabilities measured at amortized cost

   

Borrowings from bank and other financial institutions - non-current

24

1,375,747

905,296

Other payables - non-current

26

48,472

23,300

Borrowings from bank and other financial institutions - current

24

695,561

754,661

Trade payables - current

25

1,108,573

1,323,588

Other payables - current

26

482,401

1,394,673

Hedging financial instruments

   

Derivative financial instruments -current

27

5,256

-

Total financial liabilities

 

3,823,366

4,480,813

5. Capital management policies

The objective of the Group is to maximize the return on net invested capital, maintaining the ability to operate over time and guaranteeing adequate returns for the shareholders and benefits for the other stakeholders, with a sustainable financial structure.

In order to achieve these objectives, in addition to pursuing satisfactory economic results and generating cash flows, the Group can take action on the dividend policy and the configuration of the Company’s capital.

The main indicators used by the Group to manage capital are the following:

  1. Ratio between operating profit, including earnings (losses) from investments and average net invested capital: the indicator represents the capacity of the company’s results to remunerate net invested capital, this being understood as the sum of fixed assets and net working capital. The earnings (losses) of investments is included in the calculation as it is the most important measure representing the performance of the Real Estate sector. The objective of the Group is that this ratio should be higher than the average cost of capital (WACC);
  2. Gearing: this is calculated as the ratio of net financial position and equity. It is an indicator of the sustainability of the debt to equity ratio, which takes into account the market situation and the trend of the cost of capital and debt at different times;
  3. R.O.E (Return on equity): this is calculated as the ratio between the result for the year and average equity. It is an indicator representing the capacity of the Group to remunerate its shareholders. The objective is that the indicator should assume a value that is significantly higher than the rate of return on a risk-free investment, correlated to the nature of the businesses managed.

The amounts for the years 2008, 2007 and 2006 are as follows:

  

2008

2007

2006

1

Ratio between operating profit, including earnings (losses) from investments and average net invested capital

(7.89%)

8.92%

15.93%

2

Gearing ratio

0.43

n/a *

0.42

3

R.O.E. (Return on Equity)

(13.35%)

7.61%

(20.37%)

* Not applicable as there is a positive net finacial position

6. Estimates and assumptions

The preparation of the consolidated financial statements requires management to make estimates and assumptions which, in some circumstances, are based on difficult and subjective judgments and estimates derived from historical experience and assumptions which, each time, are believed to be reasonable and realistic under the circumstances. Actual results could therefore differ from those estimates. Estimates and assumptions are periodically reviewed and the effect of each change made to them is reflected in the income statement in the period in which the estimate review is carried out if the review only has an effect on that period, or also in successive periods if the review has an effect on both the current and future periods.

With this in mind, it should be noted that the situation triggered by the current economic and financial crisis has prompted assumptions to be made about a future featuring a high degree of uncertainty. Therefore, it is not to be excluded that, next year, results could be different from estimates. As a result, even material adjustments to the carrying amounts of assets and liabilities might be required which today clearly cannot be either estimated or foreseen. Such estimates affect the reported amounts of some assets and liabilities, costs and revenues, as well as the disclosure of contingent assets and liabilities at the balance sheet date.

The estimates and assumptions will generally refer to the measurement of the recoverable amounts of intangible assets, the definition of the useful lives of property, plant and equipment, the recoverability of receivables and the recognition and measurement of provisions. The estimates and assumptions are based upon data which reflects the current state of available knowledge.

ACCOUNTING POLICIES OF PARTICULAR IMPORTANCE REQUIRING A HIGHER DEGREE
OF JUDGMENT

A brief description is provided below of the accounting policies which require a higher degree of subjective assumptions and judgments by management in making estimates and for which a change in the conditions underlying the assumptions could have a significant impact on the consolidated financial statements or for which there is the risk of material adjustment to the carrying amount of assets and liabilities in the year subsequent to the balance sheet date.

Goodwill

In accordance with the accounting policies applied in the preparation of the financial statements, goodwill is tested annually in order to assess whether there is an impairment that should be recorded in the income statement. In particular, the test involves the allocation of goodwill to cash-generating units and the determination of the relative recoverable amount, understood as being the higher of fair value and the value in use.

If the value in use is lower than the carrying amount of the cash-generating units, an impairment on the goodwill allocated to them should be recognized. The allocation of goodwill to cash-generating units and the determination of their value in use involves estimates which depend on subjective valuations as well as on factors which could change over time with consequent and possibly material effects compared to the assessments made by management.

Impairment of property, plant and equipment and intangible assets

In accordance with the accounting policies applied, property, plant and equipment and intangible assets are tested to ascertain if there is an impairment, which should be recognized, when there are indications that would imply difficulties in recovering the net carrying amount through the use of the asset. The verification of the existence of these indications requires management to make subjective judgments based on available internal or external information and historical experience. Moreover, when it has been determined that there could be a potential impairment, that impairment must be determined by reference to suitable valuation techniques. The proper identification of elements indicating the existence of a potential impairment and the estimates used to determine it depend on subjective judgments and factors which can vary over time and influence the assessments and estimates made by management.

In that context, for purposes of preparing the consolidated financial statements at December 31, 2008, and most particularly in conducting the impairment test, the various sectors of the Group took into account the estimated trends for 2009. The assumptions and results are consistent with those announced to the financial community upon presenation of the three-year 2009-2011 Industrial Plan. Based on the plan data as modified, there was no need to recognize an impairment loss.

Pension plans and other post-employment benefits

The companies of the Group have pension plans and medicare plans for its employees in various countries.

The main defined benefits plans of the Group are in the United States, the United Kingdom and Italy.

Management uses different actuarial assumptions to calculate the liability and the expected return on plan assets. The actuarial assumptions of financial nature refer to the discount rate, the expected return on plan assets, the rate of future compensation increases and the trend of medicare costs.

The actuarial assumptions of demographic nature mainly refer to mortality, disability and resignation rates.

With particular regard to the discount rates, in 2008, the rate curves showed high volatility as a consequence of the financial crisis and the relative effects on the return of high-quality corporate securities.

The Group identified discount rates which it deemed balanced, in view of the market context.

Deferred income taxes

The recognition of deferred tax assets is made on the basis of expectations of future income. The measurement of future income for purposes of recognizing deferred income taxes depends on factors which can vary over time and determine significant effects on the measurement of deferred tax assets.

In the determination of deferred taxes, budget results and plans consistent with those used for impairment testing and described in the previous paragraph in relation to the recoverable amount of non-current assets have been taken into account. It is also believed that the deferred taxes are congruous and cover the risk of a further worsening of the plan assumptions, considering that the net deferred tax assets recognized refer to temporary differences and tax losses which, to a significant degree, may be recovered over a very long period of time, therefore compatible with a scenario that shows that the crisis and economic recovery would extend beyond the time frame implicit in the above plans.

Provisions for other liabilities and charges

Accruals are made for legal and fiscal liabilities and charges that will probably require an outflow of resources. The amount of the provisions recorded in the financial statements relating to such liabilities and charges represents the best estimate at that time made by management for legal and tax actions covering various types of cases which are under the jurisdiction of different countries. This estimate involves assumptions which depend on factors which can change over time and which could therefore have material effects on the current estimates made by management in the preparation of the consolidated financial statements.

7. Segment information

For the Pirelli & C. Group, the business segment constitutes the primary segment whereas the geographical segment represents the secondary segment.

PRIMARY REPORTING FORMAT – BUSINESS SEGMENT

At December 31, 2008, continuing operations of the group are divided into the following segments:

  • Tyre
  • Real Estate
  • Broadband Access
  • Other Business

The remaining part comprises financial companies (including the Parent) and other service companies. None of these constitutes a reportable segment.

Segment results for the year ending December 31, 2008 are as follows:

(in thousands of euros)

 

Tyre

Real Estate

Broadband Access

Other
Businesses

Other

Total 2008

Sales to third parties

4,099,717

364,358

124,555

70,930

615

4,660,175

Sales to the Group

481

740

-

632

(1,853)

-

Total sales

4,100,198

365,098

124,555

71,562

(1,238)

4,660,175

Depreciation of property, plant and equipment/amortization of intangible assets

(190,452)

(9,415)

(896)

(1,063)

(6,854)

(208,680)

Impairment losses of property, plant and equipment/intangible assets

(9,815)

(60)

-

-

-

(9,875)

Operating profit (loss)

150,736

(71,237)

3,871

(18,372)

(21,743)

43,255

Share of earnings (losses) of companies accounted for by the equity method

481

(177,019)

-

(909)

1,770

(175,677)

Financial income (expenses)

(26,115)

Impairment losses on investments

(275,262)

Dividends

31,268

Gains (losses) from changes in fair value of financial assets

(796)

Loss before income taxes

     

(403,327)

Income taxes

(72,620)

Loss from continuing operations

     

(475,947)

Income (loss) from discontinued operations

-

74,628

(10,935)

-

(272)

63,421

Loss for the year

     

(412,526)

Segment results for the year ending December 31, 2007 were as follows:

(in thousands of euros)

 

Tyre

Real Estate

Broadband Access

Other
Businesses

Other

Total 2007

Sales to third parties

4,160,899

1,724,024

112,410

68,410

9,854

6,075,597

Sales to the Group

819

351

-

3,028

(4,198)

-

Total sales

4,161,718

1,724,375

112,410

71,438

5,656

6,075,597

Depreciation of property, plant and equipment/amortization of intangible assets

(190,465)

(7,646)

(1,048)

(883)

(8,870)

(208,912)

Impairment losses of property, plant and equipment/intangible assets

(811)

(3,823)

-

-

-

(4,634)

Operating profit (loss)

358,090

33,120

852

(8,497)

(19,565)

364,000

Share of earnings (losses) of companies accounted for by the equity method

159

114,977

-

-

1,407

116,543

Financial income (expenses)

(81,887)

Impairment losses on investments

(34,137)

Dividends

34,459

Gains (losses) from changes in fair value of financial assets

(20,097)

Income before income taxes

     

378,881

Income taxes

(123,028)

Income from continuing operations

     

255,853

Income (loss) from
discontinued operations

 

49,455

(14,788)

 

33,070

67,737

Income for the year

     

323,590

Sales between business segments are carried out at market value.

Segment assets, liabilities and capital expenditures at December 31, 2008 are as follows:

(in thousands of euros)

 

Tyre

Real Estate

Broadband Access

Other
Businesses

Other

Total 12/31/2008

Segment assets

3,727,998

568,827

57,895

64,199

124,909

4,543,828

Investments in associates and joint ventures

911

357,868

-

6,493

150,028

515,300

Total allocated assets

3,728,909

926,695

57,895

70,692

274,937

5,059,128

Unallocated assets

1,874,090

Total assets

     

6,933,218

Segment liabilities

1,628,707

355,252

58,864

26,640

158,450

2,227,913

Unallocated liabilities

2,330,943

Total liabilities

     

4,558,856

Capital expenditures - property, plant and equipment

285,415

6,101

1,892

15,837

1,479

310,724

Capital expenditures - intangible assets

459,777

13,702

164

75

2,986

476,704

Segment assets, liabilities and capital expenditures at December 31, 2007 were as follows:

(in thousands of euros)

 

Tyre

Real Estate

Broadband Access

Other Businesses

Other

Total 12/31/2007

Segment assets

3,256,011

905,832

55,803

43,520

107,839

4,369,005

Investments in associates and joint ventures

718

480,341

-

2,410

50,725

534,194

Total allocated assets

3,256,729

1,386,173

55,803

45,930

158,564

4,903,199

Unallocated assets

4,050,041

Total assets

     

8,953,240

Segment liabilities

1,564,238

518,999

61,686

24,152

213,613

2,382,688

Unallocated liabilities

2,766,481

Total liabilities

     

5,149,169

Capital expenditures - property, plant and equipment

262,378

6,469

4,093

9,709

4,060

286,709

Capital expenditures - intangible assets

7,089

168,093

308

980

1,966

178,436

Segment assets mainly consist of property, plant and equipment, intangible assets, assets under finance leases, inventories, trade receivables and other receivables. They exclude financial receivables, cash and cash equivalents, other financial assets, securities held for trading and current and deferred tax assets.

Segment liabilities mainly include trade payables and other payables, advances from customers, provisions for other liabilities and charges and employee benefit obligations. They exclude financial payables and current and deferred tax liabilities.

Capital expenditures mainly refer to the purchase of plant and machinery.

SECONDARY REPORTING FORMAT – GEOGRAPHICAL SEGMENT

Sales by geographical area, allocated on the basis of the country in which the customer resides, are as follows:

(in millions of Euro)

 

2008

2007 (*)

Europe:

- Italy

810.4

17.39%

829.4

13.65%

- Other European countries (*)

1,586.1

34.03%

3,077.9

50.66%

North America

287.5

6.17%

329.5

5.42%

Central and South America

1,323.8

28.41%

1,187.7

19.55%

Oceania, Africa and Asia

652.4

14.00%

651.1

10.72%

 

4,660.2

100.00%

6,075.6

100.00%

* In 2007, this line included the effect of the deconsolidation of DGAG activities for an amount of Euros 1,295.6 million.

Assets by geographical area, allocated on the basis of the country in which the assets are located, are as follows:

(in thousands of euros)

 

12/31/2008

12/31/2007

Europe

- Italy

2,438,070

35.16%

2,253,776

25.17%

- Other European countries

1,170,704

16.89%

1,216,412

13.59%

North America

142,676

2.06%

124,665

1.39%

Central and South America

788,841

11.38%

816,790

9.12%

Oceania, Africa and Asia

518,837

7.48%

491,556

5.49%

Total allocated assets

5,059,128

72.97%

4,903,199

54.76%

Unallocated assets

1,874,090

27.03%

4,050,041

45.24%

 

6,933,218

100.00%

8,953,240

100.00%

Capital expenditures by geographical area, allocated on the basis of the country in which the factories are located, are as follows.

(in thousands of euros)

 

12/31/2008

12/31/2007

Europe

- Italy

45,960

14.79%

43,530

15.18%

- Other European countries

121,585

39.13%

134,910

47.05%

North America

4,205

1.35%

2,746

0.97%

Central and South America

68,163

21.94%

40,607

14.16%

Oceania, Africa and Asia

70,811

22.79%

64,916

22.64%

 

310,724

100.00%

286,709

100.00%

8. Property, plant and equipment

At December 31, 2008, the composition and movements in property, plant and equipment are as follows:

(in thousands of euros)

 

12/31/2008

12/31/2007

 

Gross carrying amount

Accumulated depreciation

Net carrying amount

Gross carrying amount

Accumulated depreciation

Net carrying amount

Land

83,456

-

83,456

83,511

-

83,511

Buildings

625,712

(296,474)

329,238

658,310

(301,584)

356,726

Plant and machinery

2,549,392

(1,537,876)

1,011,516

2,652,755

(1,624,730)

1,028,025

Industrial and commercial equipment

525,374

(410,590)

114,784

574,675

(448,876)

125,799

Other property, plant
and equipment

226,136

(167,084)

59,052

236,540

(180,116)

56,424

 

4,010,070

(2,412,024)

1,598,046

4,205,791

(2,555,306)

1,650,485

MOVEMENTS IN GROSS CARRYING AMOUNT (in thousands of euros)

 

12/31/2007

Discontinued operations

Exchange differences

Increase

Decrease

Reclass.

Other

12/31/2008

Land

83,511

-

(7,077)

8,910

(4,496)

2,608

-

83,456

Buildings

658,310

(7,679)

(42,084)

26,014

(11,975)

3,119

7

625,712

Plant and machinery

2,652,755

(28,166)

(237,116)

205,862

(29,232)

(12,706)

(2,005)

2,549,392

Industrial and commercial equipment

574,675

(25,151)

(54,071)

37,938

(17,501)

9,180

304

525,374

Other property, plant and equipment

236,540

(12,031)

(16,265)

32,000

(13,135)

(2,201)

1,228

226,136

 

4.205.791

(73.027)

(356.613)

310.724

(76.339)

-

(466)

4.010.070

MOVEMENTS IN ACCUMULATED DEPRECIATION (in thousands of euros)

 

12/31/2007

Discontinued operations

Exchange difference

Reclass.

Decrease

Depreciation

Other

12/31/2008

Land

(301,584)

4,324

20,123

-

2,497

(21,041)

(793)

(296,474)

Plant and machinery

(1,624,730)

10,952

170,495

7,430

19,798

(122,152)

332

(1,537,876)

Industrial and commercial equipment

(448,876)

18,233

46,490

37

16,236

(41,187)

(1,523)

(410,590)

Other property, plant and equipment

(180,116)

9,235

13,925

(7,467)

11,345

(14,362)

356

(167,084)

 

(2,555,306)

42,744

251,033

-

49,875

(198,742)

(1,628)

(2,412,024)

MOVEMENTS IN NET CARRYING AMOUNT (in thousands of euros)

 

31/12/2007

Attività
cedute

Diff.
da conv.

Incr.

Decr.

Riclass.

Amm.ti

Altro

31/12/2008

Land

83,511

-

(7,077)

8,910

(4,496)

2,608

-

-

83,456

Buildings

356,726

(3,355)

(21,961)

26,014

(9,478)

3,119

(21,041)

(786)

329,238

Plant and machinery

1,028,025

(17,214)

(66,621)

205,862

(9,434)

(5,276)

(122,152)

(1,673)

1,011,517

Industrial and commercial equipment

125,799

(6,918)

(7,581)

37,938

(1,265)

9,217

(41,187)

(1,219)

114,784

Other property, plant and equipment

56,424

(2,796)

(2,340)

32,000

(1,791)

(9,668)

(14,362)

1,584

59,051

 

1,650,485

(30,283)

(105,580)

310,724

(26,464)

-

(198,742)

(2,095)

1,598,046

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

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)

 

12/31/2007

Exchange differences

Increase

Decrease

Reclass.

Depreciation

Other

12/31/2008

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

286,708

(20,158)

-

(203,545)

(1,051)

1,650,485

Increases during the year 2008 mainly refer to additions in the Tyre sector, particularly the new operating units in Romania, China and Brazil.

The ratio of additions in 2008 to depreciation is 1.56.

Assets under construction at December 31, 2008 amount to Euros 115,454 thousand (Euros 72,828 thousand at December 31, 2007).

Impairment losses in 2008, included in the column “decrease” in the above table, amount to Euros 9,815 thousand (Euros 811 thousand in 2007) and are recognized in the income statement under “Amortization, depreciation and impairments” (Note 32).

Discontinued operations refer to the deconsolidation of the companies Integra FM B.V. group (formerly Pirelli RE Integrated Facility Management B.V.) and PGT Photonics S.p.A., following the sale of the stakes held to third parties.

Restrictions on the ownership of assets are as follow:

  • the subsidiary Pirelli Tyres Alexandria Co. is using plant and machinery as collateral for an equivalent amount of Euros 10,844 thousand (Euros 11,679 thousand at December 31, 2007);
  • the subsidiary Pirelli Pneus S.A. is using machinery and land as collateral for a total of Euros 50,248 thousand (Euros 78,958 thousand at December 31, 2007).

There were 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)

 

12/31/2008

12/31/2007

 

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

61,842

(13,832)

48,010

63,469

(12,559)

50,910

Other property, plant
and equipment leased

17,389

(7,623)

9,766

984

(574)

410

Plant and machinery leased

86

(86)

-

1,791

(846)

945

 

90,504

(21,541)

68,963

77,431

(13,979)

63,452

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 40,244 thousand (Euros 41,904 thousand at December 31, 2007) and that of the land is Euros 10,184 thousand (unchanged at December 31, 2007);

  • the subsidiary Pirelli Deutschland GmbH has a lease contract with the company DAL-Florenta on the distribution warehouse located in Breuberg. 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-Florenta 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 by 2010.

The net carrying amounts of the buildings of the German companies total Euros 6,785 thousand (Euros 7,250 thousand at December 31, 2007) and that of the related land is Euros 1,003 thousand (unchanged compared to December 31, 2007).

Other assets leased mainly include an airplane under a leaseback arrangement between the subsidiary Perseo S.r.l. and Intesa Leasing S.p.A.. The contract began in April 2005 and has a term of 7 years with a purchase option at expiration. The net carrying amount is Euros 9,520 thousand.

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

The minimum lease payments (that is, the payments made by the lessee over the residual term of the lease) are detailed as follows:

(in thousands of euros)

 

12/31/2008

12/31/2007

Due within 1 year

12,447

5,171

Due between 1 and 5 years

34,117

24,540

Due beyond 5 years

-

12,911

 

46,564

42,622

Future financial expenses

(5,465)

(6,970)

Leases payable (note 24)

41,099

35,652

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

(in thousands of euros)

 

12/31/2008

12/31/2007

Due within 1 year

10,759

3,381

Due between 1 and 5 years

30,340

19,711

Due beyond 5 years

-

12,560

Leases payable (note 24)

41,099

35,652