Trade payables / Other payables / Derivative financial instruments / Commitments and contingencies / Revenues from sales and services

25. Trade payables

Trade payables are analyzed as follows:

(in thousands of euros)

 

12/31/2007

12/31/2006

 

Total

Non-current

Current

Total

Non-current

Current

Associates and joint ventures

21,704

-

21,704

24,458

-

24,458

Third parties

1,079,800

-

1,079,800

1,198,417

-

1,198,417

Notes payable

3,043

-

3,043

97,073

-

97,073

Payables on construction contracts

4,026

-

4,026

3,640

-

3,640

 

1,108,573

-

1,108,573

1,323,588

-

1,323,588

The carrying amount of trade payables is regarded as approximating fair value.

The reduction in notes payables at December 31, 2008 is mainly due to the change in the terms for the purchase of natural rubber on the part of the Tyre sector. The reduction is basically compensated by the increase in trade receivables from third parties.

Payables on construction contracts relating to the Real Estate sector represent the advances received on progress billings for contracts, equal to Euros 30,266 thousand at December 31, 2008 (Euros 26,818 thousand at December 31, 2007), in excess of costs incurred and margins recognized on the basis of the percentage of completion method, equal to Euros 26,240 thousand at December 31, 2008 (Euros 23,178 thousand at December 31, 2007).

26. Other payables

Other payables can be analyzed as follows:

(in thousands of euros)

 

12/31/2007

12/31/2006

 

Total

Non-current

Current

Total

Non-current

Current

Associates and joint ventures

7,344

-

7,344

21,466

-

21,466

Trade and other accrued liabilities
and deferred income

72,253

3,712

68,541

130,776

4,869

125,907

Tax payables

53,986

8,167

45,819

98,433

10,288

88,145

Payables to employees

168,244

277

167,967

131,031

77

130,954

Payables to social security agencies

38,256

3,052

35,204

48,308

2,934

45,374

Payables for stock options

10

-

10

494

-

494

Dividends payable

920

-

920

827,252

-

827,252

Advances from customers

2,284

10

2,274

4,979

-

4,979

Other payables

187,576

33,254

154,322

155,234

5,132

150,102

 

530,873

48,472

482,401

1,417,973

23,300

1,394,673

Dividends payable declared last year referred to the reimbursement of share capital to the shareholders of Pirelli & C. S.p.A. for Euros 826,254 thousand, approved by the shareholders’ meeting held on December 12, 2007.

Other non-current payables mainly include the payables for the acquisition of stakes in Polish companies (Euros 11,210 thousand) and payables for the non-performing loan portfolio (Euros 17,661 thousand), both relating to the Real Estate sector.

Other current payables comprise:

  • Payables for claims under warranty arising from defects on the products marketed for Euros 26,597 thousand:
  • payables for the purchase of property, plant and equipment for Euros 27,649 thousand, relating to the Tyre sector;
  • payables for down-payments and advances relating to the Real Estate sector for Euros 1,763 thousand;
  • payables to sales representatives, agents, professionals and consultants for Euros 9,429 thousand;
  • payables of the Parent, Pirelli & C. S.p.A., to Alitalia S.p.A. for the capital subscribed by not yet paid for Euros 8,871 thousand;
  • advances disbursed by the European Union to the Tyre sector for research projects for Euros 1,678 thousand;
  • payables for withholding taxes at source on income of the Tyre sector for Euros 3,405 thousand.

The carrying amount of other current and non-current payables is regarded as approximating fair value.

27. Derivative financial instruments

This item includes the measurement at fair value of derivatives outstanding at December 31, 2008.

In particular, the portion of the fair value measurement included in current assets comprises:

  • Euros 90,535 thousand (Euros 56,116 thousand at December 31, 2007) relating to the fair value measurement of forward currency purchases and sales in place at December 31, 2008. These are derivative transactions hedging commercial and financial transactions of the Group; the hedge accounting option was not adopted. The fair value is determined by using the forward exchange rate at the balance sheet date;
  • Euros 3,507 thousand (Euros 2,210 thousand at December 31, 2007) relating principally to the measurement of other derivatives at fair value. In particular, Euros 1,934 thousand refers to the fair value measurement of futures contracts purchased on natural rubber on which the Tyre sector uses hedge accounting in accordance with IAS 39.

The above hedge put into place in the last quarter of 2008 by the Tyre sector aims to limit exposure to the economic effects of an increase in natural rubber prices and contain the cost of the future provisioning of natural rubber for a limited part of the total requirements for the first half of 2009.

In order to avoid fluctuations in economic results due to the volatility of the relative fair value, hedge accounting was adopted under IAS 39.

The amount recognized in equity at December 31, 2008 is a positive Euros 1,934 thousand.

The portion of the fair value measurement included in current liabilities comprises:

  • Euros 104,106 thousand (Euros 72,513 thousand at December 31, 2007) relating to the fair value measurement of forward currency purchases and sales in place at the closing date. These are derivative transactions hedging commercial and financial transactions of the Group; the hedge accounting option was not adopted. The fair value is determined by using the forward exchange rate at the balance sheet date;
  • Euros 6,367 thousand (Euros 2,210 thousand in financial instruments recorded in assets at December 31, 2007) relating to the fair value measurement of interest rate derivatives, referring mainly to the Real Estate sector for Euros 264 thousand (a positive Euros 2,210 thousand at December 31, 2007) and the Tyre sector for Euros 4,992 thousand.

As far as the Real Estate sector is concerned, the line item includes the measurement of the plain vanilla interest rate collar purchased in 2006 with a notional amount of Euros 120 million to hedge an increase in interest rates. The derivative qualified for hedge accounting under IAS 39. Hedge accounting is only applied to the intrinsic value while the change in the time value is recognized in the income statement.

In 2008, the amount recognized in equity is a negative Euros 2,038 thousand (a positive Euros 875 thousand at December 31, 2007), whereas that recognized in the income statement is a negative Euros 432 thousand.

Details relating to the derivative financial instruments in place at December 31, 2008 are as follows:

Type of financial instrument

Interest rate collar

Interest rate collar

Interest rate collar

Counterpart

SoGen

Barclays

Morgan Stanley

Notional amount for the period December 31, 2008
to March 31, 2009

40,000,000

40,000,000

40,000,000

Premium paid

360,000

333,000

360,000

Date of contracts

1/27/2006

1/30/2006

1/31/2006

Date of expiration

8/3/2010

8/3/2010

8/3/2010

Interest rate cap

3.75%

3.75%

3.75%

Interest rate floor

2.20%

2.20%

2.20%

Fair value at December 31, 2008

(88,150)

(88,150)

(88,150)

As far as the Tyre sector is concerned, the line item includes the measurement of plain vanilla interest rate swaps purchased during the year to hedge an increase in the interest rates on a notional amount of Euros 100 million. The derivative qualifies for hedge accounting under IAS 39.

In 2008, the amount recognized in equity is a negative Euros 4,992 thousand.

The amounts included in non-current assets (equal to Euros 3,161 thousand, Euros 3,849 thousand at December 31, 2007) and in non-current liabilities (equal to Euros 2,139 thousand, Euros 6,782 thousand at December 31, 2007) refer to the fair value measurement of forward currency purchases and sales in place at December 31, 2008. These are derivative transactions hedging commercial and financial transactions of the Group; the hedge accounting option was not adopted. The fair value is determined by using the forward exchange rate at the balance sheet date.

28. Commitments and contingencies

SURETIES

Sureties were provided by banking institutions and insurance companies to third parties and in the interests of companies of the Pirelli & C. Real Estate S.p.A. group mainly to fulfill contractual obligations for a total of Euros 156,966 thousand.

Moreover, guarantees and comfort letters were provided by Pirelli & C. Real Estate in the interests of investments holdings for a total of Euros 161,896 thousand, principally among which are the following:

  • joint insurance obligations to third parties for various reasons for a total of Euros 9,644 thousand;
  • guarantees for loans made by credit institutions to associates and joint ventures for a total of Euros 23,957 thousand;
  • guarantees provided in favor of Hypo Real Estate, the financing bank in the acquisition of the DGAG, to cover any tax liabilities associated with the period of the duration of the loan. These guarantees involve an exposure for the Group quantified in Euros 29,616 thousand;
  • guarantees provided, as part of securitization transactions conducted by vehicle companies for the correct and precise fulfillment of payment obligations for a total of Euros 52,896 thousand;
  • guarantees provided, as part of the transaction for the sale of junior notes relating to a non-performing loan portfolio of ex-Banco di Sicilia, to third parties on behalf of joint ventures. These guarantees, counter-guaranteed by the partner in the venture, involve a net exposure for the group of Euros 26,009 thousand;
  • guarantees provided, mainly for the fulfillment of payment obligations by International Credit Recovery 8 S.r.l. for the purchase price of a non-performing loan portfolio for an amount of Euros 13,773 thousand.

Finally, Pirelli & C. Real Estate S.p.A. has a commitment to proportionally cover any negative difference between the flows from rental income and interest expenses payable by the joint venture Tiglio I S.r.l. to the lending banking institutions on credit lines expiring in 2009; at this time, based on available information, revenue flows are higher than estimated interest expenses.

SECURITIES PLEDGED

Securities of associates and joint ventures of the Real Estate sector are pledged for an amount of Euros 96,879 thousand.

COMMITMENTS FOR PURCHASES OF PROPERTIES

Commitments for the purchase of properties refer to the Pirelli & C. Real Estate S.p.A. obligation to purchase certain buildings if they remain unsold, owned by Imser 60 S.r.l., for a maximum amount of Euros 288,600 thousand. The purchase prices of these buildings are established by contract at a fraction of their market value. This option may be exercised by the counterpart between November 12, 2021 and May 31, 2022.

COMMITMENTS FOR PURCHASES OF PROPERTY, PLANT AND EQUIPMENT

Commitments for the purchase of property, plant and equipment mainly refer to the Tyre sector and total Euros 84.4 million (Euros 85.8 million at December 31, 2007), principally in reference to the companies in Brazil, China, Egypt, Italy and Germany.

COMMITMENTS FOR PURCHASES OF INVESTMENTS / FUND SHARES

These refer to purchase options and commitments undertaken:

  • by Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. to subscribe to shares of Fondo Abitare Sociale 1 - Closed-end Ethical Real Estate Investment Fund for Qualified Investors for a total amount of Euros 1,913 thousand;
  • by Pirelli & C. Real Estate S.p.A. to subscribe to, through its investment holding, Alimede Luxembourg S.a.r.l., shares of Fondo Social & Public Initiatives – Closed-end Speculative Real Estate Investment Fund for a total maximum amount of Euros 7,000 thousand;
  • by Pirelli RE Netherlands B.V. to subscribe to shares of Fondo Vivaldi – Closed-end Speculative Real Estate Investment Fund for a total maximum amount of Euros 3,000 thousand;
  • by Pirelli Finance (Luxembourg) S.A. to subscribe to shares of the company Equinox Two S.c.a., a private equity company specialized in investments in listed and unlisted companies with a high potential for growth, for an equivalent maximum amount of Euros 7,550 thousand.

GUARANTEES PROVIDED AT THE TIME OF THE SALE OF OLIMPIA

At the time of the sale of the investment in Olimpia S.p.A., the sellers (Pirelli and Sintonia) remained responsible for all tax risks for the periods up to the date of sale.

The litigation currently pending can be summarized in the following terms.

On December 27, 2006, the Tax Revenues Agency had notified Olimpia S.p.A. of an assessment for IRAP taxes regarding 2001.

Briefly, with regard to the year 2001, an assessment was received for the alleged financial income on the Bell bonds repayable in Olivetti shares, with a consequent IRAP tax of Euros 26.5 million, in addition to penalties of the same amount.

The company opposed the assessment and filed suit on administrative grounds and against the evident unfounded grounds of the tax assessment.

In September 2007, the Tax Commission of the First Instance, by motivated decision 654/01/07 of November 25, 2007, ruled in favor of the appeal filed by the company and completely canceled the above-mentioned assessment.

The Tax Revenues Agency appealed this decision. Counter-arguments were filed with the Regional Tax Commission. The hearing for discussion is fixed for this May 29.

With regard to the assessment for the year 2002, with which Olimpia was attributed the status of a “shell company”, the appeal was discussed on November 18, 2008. The relative IRPEG tax amounts to Euros 29.3 million, besides penalties for the same amount.

Even though the ruling has not yet been filed, the company is confident of the outcome, considering the unfounded grounds, the solid foundation of the argumentation and the positive direction of the discussion.

On December 9, 2008, another assessment was notified relating to 2003, with which Olimpia was again identified as a “shell company”. The relative IRPEG tax amounts to Euros 28.5 million, besides penalties for same amount.

This assessment, like the preceding one, is considered completely groundless and the company has lodged an appeal with the Tax Commission of the First Instance. The first instance ruling can reasonably be expected to be handed down by the end of 2009.

For this second dispute, as well, since the nature is the same as the previous one, there is reason to trust that the company’s arguments, supported by qualified experts, will be upheld in court, without resulting in any increase in tax.

PROCEEDINGS FOR UNLAWFUL ADMINISTRATIVE RESPONSIBILITY PURSUANT
TO LAW 231/2001

As to the investigation conducted by the Milan district attorney’s office regarding matters which involved two former employees of the company’s Security Function, reference should be made to the Report on Corporate Governance, included with the financial statements, in which this issue is discussed at length.

With regard to the valuation of the possible effects of this matter, even though the company has recourse to special procedure for the application of sanctions by request, it is noted that the risk associated with the competent Judicial Authority’s confirmation of the existence of responsibility pursuant to Legislative Decree 231/2001 is constituted by the payment of a pecuniary penalty of limited amount. It is believed that in this case the risk of the application of interdicting sanctions is low.

The company, with the assistance of highly-qualified experts in this area, has also examined the possibility of third-party liability resulting from the activities conducted by the above-mentioned parties.

The company – although considering and reiterating its non-involvement with the acts committed, moreover also to the company’s detriment – consistent with the values of loyalty and correctness that are the basis of its action and the importance that Pirelli has always recognized in the wealth of its human resources, it deemed it proper to offer immediately an economic contribution as an act of solidarity. The extent of the contribution was determined on the basis of an equitable evaluation supported also by the above-noted experts, and is offered to all employees or former employees of the Pirelli Group who were the target of “intrusive activities” according to what has emerged from the acts of the proceedings.

With regard to contingent liabilities, should the parties indicated in the lists contained in the notice of conclusion of the investigation bring action against the former employees of the company, who are the authors of the acts for which the company is responsible under ex article 2049 of the Italian Civil Code, the company is of the opinion that this risk is possible but not quantifiable at this time.

Lastly, it should be noted that the company is continuing with the civil suits against the suppliers of the security service involved in the investigations, with the aim of being reimbursed for the payment of services rendered since they are considered as not having been carried out or illegal.

29. Revenues from sales and services

Revenues from sales and services can be analyzed as follows:

(in thousands of euros)

 

2008

2007

Revenues from sales of products

4,342,434

5,672,612

Revenues from services

304,711

402,390

Revenues on construction contracts

13,030

595

 

4,660,175

6,075,597