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Acquisition and Sale of Companies and Business Units

In order to strengthen its tire activities on the Indian market, Continental acquired all shares in Modi Tyres Company Limited, Modipuram, India. The main share in the company is held by Continental Global Holding Netherlands B.V., Maastricht, Netherlands. The purchase agreement was concluded on April 17, 2011, and the transaction completed on July 15, 2011. The total purchase price was €31.1 million, including €3.0 million for a non-competition agreement with the seller. This amount was capitalized as an intangible asset. The purchase price also includes €7.2 million for contingent purchase price payments based on the quantity of tires produced and the company's EBITDA in years two to four after the deal. This amount was discounted to present value as of the acquisition date.

The incidental acquisition costs of €0.6 million were recognized as other operating expenses. The company was included in Continental's consolidated financial statements for the first time as of July 31, 2011. The company was renamed Continental India Limited on September 23, 2011.

The assets and liabilities included for the first time in the consolidated balance sheets were recognized in the following amounts (in € millions):

Continental India Limited (formerly known as Modi Tyres Company Limited)
  Carrying amount immediately before acquisition Fair value at date of initial consolidation
Intangible assets 0.6 3.6
Property, plant and equipment 7.6 65.5
Other long-term assets 0.1 0.1
Inventories 8.9 8.9
Accounts receivable 3.6 3.6
Other current assets 3.4 3.4
Cash and cash equivalents 0.1 0.1
Pension provisions -1.4 -1.4
Net deferred taxes -0.6 -20.2
Trade accounts payable -2.5 -2.5
Other current liabilities -47.9 -47.9
Purchased net assets -28.1 13.2
Purchase price   31.1
Goodwill   17.9
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In the context of preliminary purchase price allocation, there were significant upward revaluations of property, plant and equipment relating to land and buildings (€33.4 million) and technical equipment and machinery (€24.5 million). Intangible assets were recognized in the amount of €3.0 million for the non-competition agreement described above. No further adjustments were made. The goodwill of €17.9 million includes synergies reflecting the entry on the expanding Indian market. This acquisition marks the Tire division's first location on the Asian subcontinent.

Since August 1, 2011, Continental India Limited has contributed €33.4 million to sales and -€5.1 million to net income attributable to the shareholders of the parent. If the transaction had been completed as of January 1, 2011, the net income attributable to the shareholders of the parent would have been an additional €16.8 million less. Accordingly, sales would have been a further €40.2 million higher. The effects of the first-time inclusion of the acquired business in the consolidated financial statements of Continental including the preliminary purchase price allocation are not significant for the net assets, financial and earnings position as of December 31, 2011.

On February 19, 2011, Continental Holding France SAS, Sarreguemines, France, concluded the purchase agreement for 49.9% of shares in the tire and service sales group Alençon Pneus SAS, Alençon, France, in order to boost its sales position on the French market. The acquisition was completed on June 8, 2011. In addition, put and call rights were agreed between the parties for the remaining shares. The group was included in Continental's consolidated financial statements for the first time as of June 1, 2011. The company employs around 450 people and is assigned to the Tire division. The current, preliminary purchase price allocation resulted in acquired intangible assets of €11.0 million and goodwill of €27.8 million. Since June 2011, the business of Alençon Pneus SAS has contributed €54.5 million to sales and €1.2 million to net income attributable to the shareholders of the parent. The effects of the first-time inclusion of the acquired business in the consolidated financial statements of Continental including the preliminary purchase price allocation are not significant for the net assets, financial and earnings position as of December 31, 2011.

To expand the business area of special-purpose conveyor belts, particularly to broaden the customer base and improve export conditions, acquisitions for €6.9 million were made in the ContiTech division. Intangible assets were capitalized in the amount of €2.4 million. In the context of preliminary purchase price allocation, the individual transactions resulted in positive differences of €0.9 million capitalized as goodwill and other negative differences of €0.2 million recognized as other operating income. Since joining the Continental Corporation, the business acquired by the ContiTech division has contributed €8.6 million to sales and -€1.7 million to net income attributable to the shareholders of the parent. The effects of the first-time inclusion of the acquired business in the consolidated financial statements of Continental including the preliminary purchase price allocation are not significant for the net assets, financial and earnings position as of December 31, 2011.

Other asset deals with a total value of €3.0 million resulted in the capitalization of €1.8 million as intangible assets and the recognition of negative differences of €0.6 million as other operating income. The effects of these transactions, including the corresponding preliminary purchase price allocation, have no significant effect on the net assets, financial and earnings position of Continental as of December 31, 2011.

Acquisitions of non-controlling interests and business units
 In the period under review, 9.4% of shares were acquired in GTY Tire Company, Fort Mill, South Carolina, U.S.A., for a purchase price of €3.3 million that, as per the conditions of the agreement, had not been paid in full as of the end of the reporting period. Remaining shares were also acquired in two smaller companies in the Tire division. The effects of these transactions have no significant effect on the net assets, financial and earnings position of Continental as of December 31, 2011. The minimal differences between purchase price and non-controlling interests were recognized in the other comprehensive income.

Disposals of companies and business units
 The sale of three smaller operations of the Tire and ContiTech divisions also had no significant effect on the net assets, financial and earnings position of Continental as of December 31, 2011.

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Continental Value Contribution (CVC). The CVC represents the absolute amount of additional value created, and the Delta CVC represents the change in absolute value creation over the prior year. This change in the absolute contribution measured by Delta CVC allows us to monitor the extent to which management units generate value-creating growth or resources must be employed more efficiently. The CVC is measured by subtracting the weighted average cost of capital (WACC) from the ROCE and multiplying this by the average operating assets for the fiscal year. The weighted average cost of capital calculated for the Continental Corporation corresponds to the required minimum return. The cost of capital is calculated as the weighted average ratio of the cost of equity and borrowing costs.

Currency swap. Swap of principal payable or receivable in one currency into similar terms in another currency. Often used when issuing loans denominated in a currency other than that of the lender.

Defined Benefit Obligation (DBO). DBO is defined as the present value of all vested and non-vested benefits calculated on the basis of estimated salary levels at retirement. The only actuarial method that may be used to calculate the DBO is the projected unit credit method. DBO corresponds to PBO (projected benefit obligation).

Derivative financial instruments. Transactions used to manage interest rate and/or currency risks.

Dividend payout ratio. The dividend payout ratio is the ratio between the dividend for the fiscal year and the earnings per share.

EBIT. Earnings Before Interest and Taxes. EBIT represents the results of operations. Since 2002, when the amortization of goodwill was discontinued, EBITDA has been equal to EBIT.

EBITA. EBIT before scheduled goodwill amortization.

EBITDA. Earnings before interest, taxes, depreciation and amortization.

Finance lease. Under a finance lease, the lessor transfers the investment risk to the lessee. This means that the lessor bears only the credit risk and any agreed services. The lessee is the beneficial owner of the leased asset. Finance leases are characterized by a fixed basic term during which the lease may not be terminated by the lessee.

Gearing ratio. The gearing ratio represents the net indebtedness divided by total equity, expressed as a percentage.

Hedging. Securing a transaction against risks, such as fluctuations in exchange rates, by entering into an offsetting hedge transaction, typically in the form of a forward contract.

IAS. International Accounting Standards.

IASB. International Accounting Standards Board. The authority that defines the International Financial Reporting Standards.

IFRIC. International Financial Reporting Interpretations Committee. Committee that reviews and determines appropriate treatment of accounting issues within the context of IFRS and IAS.

IFRS. International Financial Reporting Standards. The accounting standards issued by the IASB.

Interest rate cap. An interest rate cap sets an upper limit for a variable interest rate in relation to a notional debt amount. To the extent that the variable interest due on the underlying debt exceeds the cap amount, the holder of the cap receives income as compensation in the amount of the difference to the cap. An up-front premium is paid as consideration for the cap.

Interest rate swap. An interest rate swap is the exchange of interest payments between two parties. For example, this allows variable interest to be exchanged for fixed interest, or vice versa.

Net indebtedness. The net amount of interest-bearing liabilities as recognized in the balance sheet, cash and cash equivalents, the positive fair values of the derivative financial instruments as well as other interest-bearing investments.

Operating assets. Operating assets are the assets less liabilities as reported in the balance sheet, without recognizing the net indebtedness, discounted trade bills, deferred tax assets, income tax receivable and payable, as well as other financial assets and debts.

Operating lease. A form of lease that is largely similar to rental. Leased assets are recognized in the lessor's balance sheet and capitalized.

PPA. Purchase Price Allocation. PPA is the process of breaking down the purchase price and assigning the values to the identified assets, liabilities, and contingent liabilities following a business combination. Subsequent adjustments to the opening balance sheet – resulting from differences between the preliminary and final fair values at the date of initial consolidation – are recognized as "PPA adjustments".

Rating. Standardized indicator for the international finance markets that assesses and classifies the creditworthiness of a debtor. The classification is the result of an economic analysis of the debtor by specialist rating companies.

ROCE. Return On Capital Employed. We define ROCE as the ratio of EBIT to average operating assets for the fiscal year.

SIC. Standing Interpretations Committee (predecessor to the IFRIC).

US GAAP. United States Generally Accepted Accounting Principles. These principles are subdivided into binding and guiding principles.

Weighted Average Cost of Capital (WACC). The WACC represents the weighted average cost of the required return on equity and net interest-bearing liabilities.