Income (loss) from discontinued operations / Earnings per share / Dividends per share / Related party disclosures / Significant subsequent events / Other information

41. Income (loss) from discontinued operations

The income (loss) from discontinued operations and the cash flows provided by and used for such operations are detailed as follows:

(in thousands of euros)

 

2008

2007

  

of which related parties

 

of which related parties

Revenues from sales and services

233,482

41,986

428,940

91,973

Other income

7,656

11,422

Raw materials and consumables used (net of change in inventories)

(12,623)

(28,216)

Personnel costs

(35,589)

(60,225)

Amortization, depreciation and impairments

(2,980)

(5,132)

Other expenses

(192,663)

(11,217)

(362,936)

(26,471)

Increase in property, plant and equipment from internal work

73

901

Operating loss

(2,644)

 

(15,246)

 

Financial income

325

75

91,452

101

Financial expenses

(4,585)

(44,644)

(2)

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

117

(82)

Share of earnings (losses) of associates and joint ventures

1,802

1,802

2,065

2,065

Income (loss) before income taxes

(4,985)

 

33,545

 

Income taxes

(4,137)

(7,225)

Income (loss) for the year

(9,122)

 

26,320

 

Net gain realized

72,543

41,417

Total income from discontinued operations

63,421

 

67,737

 

A

Net cash flows provided by (used for) operating activities

57,672

58,794

B

Net cash flows provided by (used for) investing activities

103,082

70,783

C

Net cash flows provided by (used for) financing activities

(119,022)

(63,568)

D

Total cash flows provided (used) during year (A+B+C)

41,732

 

66,009

 

E

Cash and cash equivalents + bank overdrafts
at beginning of year

39,461

 

382

 

F

Cash and cash equivalents + bank overdrafts
at end of year (D+E)

81,193

 

66,391

 

Discontinued operations in 2008 are described as follows:

  • on July 24, 2008, an agreement was signed between Pirelli and CyOptics Inc. to integrate PGT Photonics S.p.A., a photonics company in the Pirelli Group, resulting from the spin-off of Pirelli Broadband Solutions and Pirelli Labs activities, in CyOptics, a privately-owned American company which is a leader in the field of optical components based on indium phosphide technology. At the same time, Pirelli subscribed to a CyOptics capital increase with a cash contribution of U.S. dollars 20 million.

Following the operation, Pirelli holds about a 30 percent stake in the new CyOptics. The loss from the discontinued operation is Euros 11,207 thousand (a loss of Euros 14,788 thousand in 2007);

  • on November 5, 2008, the Pirelli RE board of directors approved the terms and conditions of the contract for the sale, to Manutencoop Facility Management, of its 50 percent stake in Pirelli Re Integrated Facility Management, a 50-50 joint venture with Intesa Sanpaolo which, through its investment holdings, supplies project management and facility management services. The closing of the transaction and the announcement to the market, once all the conditions precedent had been satisfied and the necessary authorization were obtained from the Antitrust Authority, took place on December 23, 2008. The sales price of 100 percent of Pirelli RE Integrated Facility Management, including the 50 percent interest held by Intesa Sanpaolo, was equal to Euros 137.5 million and equally divided between the two seller companies Pirelli RE and Intesa Sanpaolo, against an Enterprise Value of Euros 270 million. For the Pirelli RE Group, the impact on the net financial position, excluding Pirelli RE shareholder loans, was an approximate positive Euros 90 million.

The total income from the discontinued operation is Euros 74,628 thousand (Euros 49,455 thousand in 2007), including a gain realized for Euros 71,371 thousand (Euros 41,417 thousand in 2007).

As for the year 2007, the income (loss) from discontinued operations, in addition to what was described above, included:

  • the gain of Euros 91,000 thousand on the sale of the warrants obtained under the agreement for the sale of the Energy and Telecom Cables and Systems activities in July 2005 to Goldman Sachs and linked to the economic benefits on Prysmian (Lux) S.a.r.l. (included in “financial income” in the table above);
  • the accrual relating to the adjustment of the value of the guarantees provided to Goldman Sachs (costs of Euros 4,125 thousand, included in “other expenses” in the table above);
  • the effect of the sale of Olimpia S.p.A. (a loss of Euros 53,805 thousand, of which Euros 39,794 thousand is included in “financial expenses” and Euros 14,011 thousand included in “other expenses” in the table above).

42. Earnings per share

Basic earnings per share is calculated by dividing the income attributable to the equity holders of the company (adjusted to take into account the minimum dividends due to savings shares) by the weighted average number of outstanding ordinary shares during the year, excluding ordinary treasury shares.

 

2008

2007

Income (loss) from continuing operations for the year attributable
to the equity holders of the company (in millions of Euro)

(379)

119

Income (loss) attributable to savings shares considering the extra 2% (in millions of euros)

9

(3)

Income (loss) from adjusted continuing operations for the year attributable
to the equity holders of the company (in millions of Euro)

(370)

116

Weighted average number of outstanding ordinary shares (in thousands)

5,230,244

5,230,525

Basic earnings per ordinary share from continuing operations (in Euros per thousand of shares)

(70.65)

22.09

Income (loss) from discontinued operations for the year attributable
to the equity holders of the company (in millions of Euro)

31

46

Income (loss) attributable to savings shares considering the extra 2% (in millions of euros)

(1)

(1)

Income (loss) from discontinued operations for the year attributable
to the equity holders of the company (in millions of Euro)

30

45

Weighted average number of outstanding ordinary shares (in thousands)

5,230,244

5,230,525

Basic earnings per ordinary share from discontinued operations (in Euros per thousand of shares)

5.74

8.60

Diluted earnings per share has not been calculated since the company, at both December 31, 2008 and December 31, 2007, has only one category of potentially dilutive ordinary shares: shares from exercising stock options. However, since the price to exercise the stock options is higher than market value, the stock options have not been considered as exercised.

43. Dividends per share

Pirelli & C. S.p.A., paid dividends based on 2007 earnings to its shareholders equal to Euros 0.0160 per each 5,230,524,503 ordinary share (excluding treasury shares) and Euros 0.0728 per each 130,272,660 savings shares (excluding treasury shares).

Total dividends paid out amounted to Euros 93.2 million.

44. Related party disclosures

Related party transactions, including intragroup transactions, are neither unusual nor exceptional but fall under the ordinary course of business of the companies of the Group. Such transactions, when not concluded at standard conditions or dictated by specific laws, are in any case conducted at arm’s length.

The following table summarizes the balance sheet and income statement line items which include related party transactions and the relative incidence of the total:

(in millions of Euro)

 

Total in financial statements at 12/31/2008

Of which
related parties

% of total

Total in financial statements at 12/31/2007

Of which
related parties

% of total

BALANCE SHEET

      

Non-current assets

      

Other receivables

723.0

565.2

78.2%

672.9

520.8

77.4%

Current assets

      

Trade receivables

788.0

77.1

9.8%

1,098.9

123.7

11.3%

Other receivables

240.0

23.9

10.0%

241.5

22.1

9.1%

Current liabilities

      

Borrowings from banks and other
financial institutions

693.6

5.2

0.8%

754.7

2.9

0.4%

Trade payables

1,108.6

23.8

2.2%

1,323.6

29.1

2.2%

Other payables

482.4

7.7

1.6%

1,394.7

21.5

1.5%

Tax payables

44.0

1.1

2.4%

45.7

-

-

INCOME STATEMENT

      

Revenues from sales and services

4,660.2

138.1

3.0%

6,075.6

195.9

3.2%

Other income

175.9

-

-

274.9

72.7

26.4%

Personnel costs

(1,174.9)

(3.1)

0.3%

(1,095.9)

(14.5)

1.3%

Other expenses

(1,687.6)

(42.9)

2.5%

(1,703.9)

(88.9)

5.2%

Financial income

577.3

34.1

5.9%

295.3

31.2

10.6%

Financial expenses

(603.5)

(0.2)

-

(377.2)

(4.5)

1.2%

Dividends

31.3

-

-

34.5

6.6

19.2%

Related party transactions relating to discontinued operations are detailed in Note 41.

The income statement, balance sheet and cash flow effects of transactions with related parties on the consolidated financial statements of the Pirelli & C. Group for the year ended December 31, 2008 are as follows.

TRANSACTIONS WITH ASSOCIATES AND JOINT VENTURES:

(in millions of Euro)

Revenues for goods and services

136.5

These mainly refer to mandates with the associates and JV of the Real Estate relating
to fund and asset management and technical and commercial services.

Other expenses

25.3

These mainly refer to Pirelli & C. Real Estate sundry types of amounts recharged,
connected, among other things, also to consortium expenses, and to the purchase
of an area located in Pioltello by a Pirelli Real Estate company.

Financial income

34.1

This mainly includes interest income relating to financial receivables

from associates and joint ventures of Pirelli & C. Real Estate.

Financial expenses

0.2

Current trade receivables

76.4

These mainly refer to receivables for services rendered to associates and joint

ventures of Pirelli & C. Real Estate

Non-current other receivables

0.9

Non-current financial receivables

564.3

These mainly refer to loans made for real estate initiatives managed by the individual companies of the Pirelli & C. Real Estate Group.

Current other receivables

7.0

These refer to Pirelli & C. Real Estate and mainly include a receivable to be collected for dividends declared.

Current financial receivables

16.9

These mainly refer to current account balances with the new companies that hold real estate assets in Germany.

Current trade payables

21.7

These mainly refer to Pirelli & C. Real Estate sundry types of amounts recharged.

Current other payables

7.7

These mainly include Pirelli & C. Real Estate companies’ sundry types
of amounts recharged.

Current borrowings from banks and other financial institutions

5.2

These mainly include the liability balances on the intercompany current accounts
of the companies of Pirelli & C. Real Estate.

Current tax payables

1.1

These refer to the payable of Pirelli & C. Real Estate S.p.A. to Trixia S.r.l. for expenses arising from this company’s participation in the regime for fiscal transparency under
art. 115 of TUIR, by virtue of which taxable income and loss of the company are allocated to the shareholders.

TRANSACTIONS WITH PARTIES RELATED TO PIRELLI THROUGH DIRECTORS

(in millions of Euro)

Revenues for goods and services

1.6

These refer to services rendered by Pirelli & C. Real Estate S.p.A. and Pirelli & C. S.p.A. to the Camfin group

Other expenses

9.0

These refer to costs for the sponsorship of F.C. Internazionale Milano S.p.A.

Current trade receivables

0.7

These refer to receivables for the supply of the above services to the Camfin.

Current trade payables

2.2

These refer to payables for the supply of the above services
to F.C. Internazionale Milano S.p.A.

Dividends paid (cash flows)

22.7

These are dividends to Camfin S.p.A. (Euros 21.9 million) and C.M.C. S.p.A. (Euros 0.8 million) from Pirelli & C. S.p.A..

Change in financial payables (cash flows)

218.9

Capital reimbursed to Camfin S.p.A (Euros 211.1 million ) and C.M.C. S.p.A. (Euros 7.8 million) by Pirelli & C. S.p.A..

BENEFITS TO KEY EXECUTIVES

In 2008, the compensation due to key executives, being those who have the power and responsibility, directly or indirectly, for the planning, direction and control of the activities of Pirelli & C. S.p.A., including executive and non-executive directors, amounts to Euros 11,707 thousand (Euros 26,505 thousand in 2007). Of that amount, “Personnel costs” were charged for Euros 3,097 thousand in 2008 (long-term part is equal to Euros 608 thousand) and Euros 14,504 thousand in 2007 (long-term part is equal to Euros 490 thousand) and “Other expenses” for Euros 8,610 thousand (Euros 12,001 thousand in 2007).

To the chairman of Pirelli & C. S.p.A. and the executive deputy chairman of Pirelli & C. Real Estate, for the offices held in those companies, besides severance indemnity (similar to employees’ leaving indemnity and included in the amount in the previous paragraph) a further annual component of severance indemnity is paid pursuant to ex art. 17, paragraph 1, letter c), of D.P.R. 917/1986 (TUIR), starting from age 62, or eventually predeceasing that age, as a result of insurance policies taken out with leading insurance companies. The annual premium is borne by the companies and corresponds to the amounts that would be due by the companies to the social security agencies or benefit funds had those persons been classified in the “manager” employment category of those companies.

45. Significant subsequent events

On January 27, 2009, Brembo, Magneti Marelli and Pirelli announced that they had launched a technological cooperation initiative with the aim of developing hi-tech solutions for the Italian and international automotive industry.

The Cyber Tyre, the intelligent tyre developed by Pirelli, will be integrated with Magneti Marelli’s electronic control systems and Brembo’s hi-tech braking systems to create special technological solutions which will meet the performance and safety requirements of every kind of user.

The competence and expertise of the three Italian groups is recognized at an international level. By combining their experience, they aim to create important synergies and to develop applications, especially in the field of car safety systems. Another aim of the project is to reduce environmental impact, and develop applications that are in line with international regulations and which reflect the new CO2 limits established by the EU, scheduled to come into force in 2012.

On February 11, 2009, the Pirelli Group presented the guidelines of its 2009-2011 Industrial Plan.

On March 5, 2009, the Pirelli & C. Real Estate S.p.A. board of directors confirmed the resolutions passed in February authorizing a share capital increase against payment, divisible, to be offered as option rights to the shareholders for a maximum amount of Euros 400 million. The transaction is aimed at strengthening the company’s equity structure and supporting its new business model.

The share capital increase is expected to be completed by the end of the first half of the current year, assuming that it will be approved by the special session of the shareholders’ meeting called at the same time as the ordinary session of the shareholders’ meeting that, among other things, will resolve on the approval of the financial statements for the year ended December 31, 2008, and that the necessary authorizations will also be obtained from the relevant authorities.

Pirelli & C. S.p.A. has given its full support to the capital increase and has made a commitment to subscribe to its share equal to Euros 226 million. The company has also stated that it will subscribe to any unsubscribed shares that remain at the end of the offer period for a total amount of Euros 174 million. Pirelli & C. S.p.A. will fulfill its obligation by converting into equity a part of the financial receivable due from Pirelli & C. Real Estate S.p.A., amounting to Euros 491 million at December 31, 2008.

On March 24, 2009, Pirelli and Alcatel-Lucent reached an agreement for the sale to Alcatel-Lucent by Pirelli of its investment in Alcatel-Lucent Submarine Networks, a telecommunications submarine systems company. The deal took place after Pirelli exercised the put option contracted between the two companies in 2004 when the agreement had been sealed with Alcatel for the acquisition of some of Pirelli’s activities in submarine systems. The sale, for a total amount of Euros 56 million, will be paid in three tranches by the end of 2009. Pirelli’s divestiture is consistent with its strategy of focusing on the core business as announced by the Group upon presentation of the Industrial Plan 2009-2011.

46. Other information

COMPENSATION TO DIRECTORS AND STATUTORY AUDITORS

Compensation to directors and statutory auditors of Pirelli & C. S.p.A. to carry out these functions also in other companies included in the scope of consolidation is as follows:

(in thousands of euros)

 

2008

2007

Directors

8,840

13,620

Statutory auditors

157

266

 

8,997

13,886

HEADCOUNT

The average number of employees of the companies included in consolidation, by category, is the following:

 

2008

2007

Executives and white collars

7,808

8,396

Blue collars

20,254

18,426

Temporary workers

3,438

3,958

 

31,500

30,780

COMPENSATION TO AUDIT FIRMS

The following schedule, prepared in accordance with art. 149 – duodecies of the Consob Regulation for Issuers, presents the fees paid for the year 2008 for the audit services and services other than audit rendered by the audit firm of Reconta Ernst & Young S.p.A. and by the entities belonging to its network:

(in thousands of euros)

Audit services

Pirelli & C S.p.A.

235 *

Subsidiaries

3,325 *

3,560 *

87,8%*

Certification services

Pirelli & C S.p.A.

23 *

Subsidiaries

226 *

249 *

6,1%*

Tax consulting services

Pirelli & C S.p.A.

- *

Subsidiaries

240 *

240 *

5,9%*

Services other than audit

Pirelli & C S.p.A.

- *

Subsidiaries

7 *

7 *

0,2%*

   

4,056 *

100%*

* Of which Euros 173 thousand refers to professional services rendered in respect of the engagement for the audit of the consolidated financial statements at October 31, 2008 as part of the sale of the investment in Pirelli & C. Real Estate Facility Management B.V., in addition to the professional services relating to the examination of the pro-forma data of Pirelli & C. Real Estate S.p.A. for the half year ended June 30, 2008 to be included in the Information Document, prepared in accordance with art. 71 of the Regulation for Issuers adopted by Consob resolution 11971/1999 and subsequent amendments and additions.

TRANSACTIONS GENERATED BY UNUSUAL AND/OR EXCEPTIONAL TRANSACTIONSi

In accordance with Consob Communication of July 28, 2006, a statement is made to the effect that during 2008 the Group did not carry out any unusual and/or exceptional transactions as defined by that same Communication.

EXCHANGE RATES

The main exchange rates used for consolidation purposes are as follows:

(local currency against Euros)

 

Year-end

Change in %

Average

Change in %

 

12/31/2008

12/31/2007

2008

2007

British pound

0.9525

0.7334

29.87%

0.7961

0.6765

17.68%

Swiss franc

1.4850

1.6547

(10.26%)

1.5873

1.6370

(3.04%)

Slovakian koruna

30.1260

33.5830

(10.29%)

31.2771

33.8864

(7.70%)

American dollar

1.3917

1.4721

(5.46%)

1.4716

1.3443

9.47%

Canadian dollar

1.6998

1.4449

17.64%

1.5596

1.4846

5.05%

Brazilian real

3.2524

2.6075

24.73%

2.7041

2.6910

0.49%

Venezuela bolivar

2.9922

3.1650

(5.46%)

3.1640

2.8900

9.48%

Argentine peso

4.8055

4.6356

3.67%

4.6535

4.1757

11.44%

Australian dollar

2.0274

1.6757

20.99%

1.7411

1.6372

6.35%

Chinese renminbi

9.4991

10.7516

(11.65%)

10.2270

10.3024

(0.73%)

Singapore dollar

2.0040

2.1163

(5.31%)

2.0769

2.0492

1.35%

Egyptian pound

7.6544

8.1039

(5.55%)

7.9888

7.6286

4.72%

Turkish lira

2.1511

1.7102

25.78%

1.9062

1.7989

5.96%

NET FINANCIAL POSITION

(Non-GAAP Alternative Performance Measure)

(in millions of Euro)

 

12/31/2008

12/31/2007

  

of which related parties

 

of which related parties

Borrowings from banks and other financial institutions - current

677

5

737

3

Financial accrued liabilities and deferred income - current

59

46

Borrowings from banks and other financial institutions - non-current

1,378

912

Payables to shareholders for capital reduction

-

826

Total gross debt

2,114

 

2,521

 

Cash and cash equivalents

(254)

(2,058)

Securities held for trading

(116)

(114)

Financial receivables - current

(29)

(17)

(19)

(16)

Financial accrued income and prepaid expenses - current

(31)

(18)

Net financial debt (*)

1,684

 

312

 

Financial receivables - non-current

(652)

(565)

(609)

(520)

Financial accrued income and prepaid expenses - non-current

(4)

(5)

Total net financial (liquidity)/debt position

1,028

 

(302)

 

* In accordance with Consob Communication of July 28, 2006 and in conformity with the CESR recommendation of February 10, 2005 “Recommendation on Alternative Performance Measures”.

The main events which had an impact on the net financial position are the following:

  • Acquisition of Speed S.p.A. (Euros 835.5 million)
  • Investment in Highstreet – Pirelli Real Estate (Euros 59.8 million)
  • Investment in CyOptics (Euros 12.7 million)
  • Purchase of Pirelli & C. Real Estate S.p.A. treasury shares (Euros 22.1 million)
  • Purchase of net assets of minority interests relating to the Turkish companies of Pirelli Tyre (Euros 43.3 million)
  • Dividends paid (Euros 168 million).

At December 31, 2008, the Group has, besides cash and securities held for trading totaling Euros 369,705 thousand, unused committed credit lines of Euros 785,000 thousand (Euros 2,672,000 thousand at December 31, 2007).