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Notes to the Consolidated Income Statements

6. Other Expenses and Income

 

in € millions 2011 2010
Other expenses -415.8 -645.2
Other income 219.0 127.5
Other income and expenses -196.8 -517.7
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Expenses
The other expenses relate primarily to:

in € millions 2011 2010
Special bonuses 103.0 79.1
Expenses for specified warranty risks 98.9 186.4
Restructuring measures without impairment 62.6 55.7
Litigation and environmental risks 52.5 70.7
Expenses for termination benefits 30.8 39.4
Impairments on property, plant and equipment, and intangible assets 25.4 65.6
Valuation allowances for doubtful accounts 15.4 5.3
Losses on the sale of property, plant and equipment, and from scrapping 13.3 18.9
Realized and unrealized foreign currency exchange losses 6.9 6.9
Adjustments of the syndicated loan — 27.4
Losses on the sale of subsidiaries and business units — 5.7
Other 7.0 84.1
Other expenses 415.8 645.2
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In particular, the €229.4 million reduction in other operating expenses to €415.8 million (PY: €645.2 million) resulted from the declining additions to specific warranty provisions and lower impairment losses for intangible assets and property, plant and equipment totaling €124.3 million (PY: €252.0 million).

The economic situation of the Fuel Supply business unit in the Powertrain division in Europe is characterized by insufficient and constantly decreasing profitability. For this reason, the location in Dortmund, Germany, is being restructured. Parts of production and assembly are being relocated and the site is being expanded into a competence center for fuel feed units of the Fuel Supply business unit. Restructuring expenses of €35.8 million have been incurred in this connection.

Continental Industrias del Caucho S.A., Madrid, Spain, reached an agreement with the employee representatives to close the site in Coslada, Spain, by the end of 2011. The plant, which assembled air conditioning lines, started reporting losses after a major contract was lost at the end of 2009. The site was closed as of December 31, 2011, resulting in restructuring expenses of €14.1 million.

Further restructuring in the European and North American regions resulted in expenses of €12.7 million in the period under review.

A still available production cell in Hanover-Stöcken, Germany, was finally closed down. This resulted in further restructuring expenses and impairment losses totaling €34.6 million in 2010.

In the previous year, the closure of the compounding and rubberization activities in Traiskirchen, Austria, led to additional restructuring expenses and impairment losses of €6.0 million.

Owing to the withdrawal of a customer order for the development and production of diesel injection systems at the plant in Blythewood, U.S.A., restructuring measures had to be introduced in 2009. This resulted in further restructuring expenses of €11.9 million in 2010. These primarily relate to impairment losses on production lines, which were partially offset by the provisions for supplier claims no longer required.

Restructuring measures were resolved for the location in Clairoix, France, in 2009 owing to the need to adjust production capacity for passenger and light truck tires in the European region. Further expenses of €16.9 million were incurred in this context in 2010.

Expenses totaling €5.6 million were incurred in 2010 for additional final activities relating to the disposal of certain business operations.

In total, there were impairment losses on property, plant and equipment and intangible assets amounting to €25.4 million in 2011, largely in connection with the Deer Park, U.S.A. property.

The expenses for specific warranty risks amounted to €98.9 million in the reporting period (PY: €186.4 million). Please also see Notes 26 and 34.

The expenses for litigation and environmental risks fell to €52.5 million (PY: €70.7 million). The antitrust proceedings initiated in 2007 against Dunlop Oil & Marine Ltd., Grimsby, U.K., a subsidiary of ContiTech AG in the area of offshore hoses, resulted in further expenses of €10.7 million (PY: €20.8 million) in the year under review. Please also see Notes 26 and 34.

The special bonuses relate primarily to expenses for the virtual shares in the amount of €4.4 million (PY: €1.2 million), expenses from stock option plans in the amount of €7.2 million (PY: €17.3 million), the long-term incentive plan in the amount of €21.9 million (PY: €22.6 million) and a provision for the Conti Value Sharing Bonus in the amount of €69.5 million (PY: €39.2 million from the Conti Special Bonus).

Personnel adjustments not related to restructuring led to expenses for severance payments of €30.8 million. Expenses for severance payments of €39.4 million had been incurred in the previous year for the cost-cutting program initiated in 2008.

In the year under review, expenses of €6.9 million (PY: €6.9 million) were incurred as a result of foreign currency translations from operating receivables and liabilities in foreign currencies not classified as indebtedness.

Losses of €13.3 million (PY: €18.9 million) arose on the sale of property, plant and equipment and scrapping activities in the period under review.

The cost resulting from allowances on receivables was €15.4 million (PY: €5.3 million).

The "Other" item also includes expenses for other taxes and other compensation from customer and supplier claims.

Income
Other income relates primarily to:

in € millions 2011 2010
Reversals of restructuring provisions 39.9 19.8
Adjustments of the syndicated loan 29.1 47.2
Gain from the reimbursement of customer tooling expenses 23.8 20.2
Gain on the sale of property, plant and equipment 15.2 11.1
Gain on the reversal of post-employment benefit obligations 14.5 —
Gain on the sale of subsidiaries and business units 6.5 3.8
Impairment reversals 5.0 7.9
Other 85.0 17.5
Other income 219.0 127.5
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The €91.5 million rise in other operating income to €219.0 million (PY: €127.5 million) resulted in particular from lower health care obligations in connection with restructuring and the reversal of restructuring provisions no longer required, in particular for the locations in Huntsville, U.S.A., and Babenhausen and Karben, both in Germany, amounting of €59.4 million in total.

Owing to the anticipated higher cash outflow for the syndicated loan resulting from rising interest margins, the carrying amount was adjusted in profit or loss in 2009 and 2010. However, a drop in the margins for the syndicated loan was observed as of June 30, 2011. The associated expectation of lower cash outflows for this loan then led to an adjustment of the carrying amount in profit or loss in the amount of €9.1 million. These deferrals will be amortized over the term of the loan, reducing or increasing expenses accordingly. The amortization of the carrying amount adjustments resulted in a positive effect of €15.0 million in 2011. As a result of partial repayments of the syndicated loan, the adjustments attributable to the repayment amount pro rata were reversed in early April and December 2011. These reversals resulted in a gain of €5.0 million. The above effects resulted in a net gain of €29.1 million as of December 31, 2011. Please also see the results of the renegotiation of the syndicated loan under Note 28.

In 2011, reimbursements of €23.8 million (PY: €20.2 million) were received for customer tooling.

Income of €15.2 million (PY: €11.1 million) was generated from the sale of property, plant and equipment in the period under review.

Other income included proceeds from license agreements and provisions for customer and supplier claims no longer required. In addition, government grants amounting to €29.4 million (PY: €23.0 million) that were not intended for investments in non-current assets were recognized in profit or loss in the "Other" item and in function cost items.

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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.