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Earnings Position
Sales up 29.6% - Sales up 25.0% before changes in the scope of consolidation and exchange rate effects - Adjusted EBIT up 113.2%
| Continental Corporation in € millions | |||
|---|---|---|---|
| 2010 | 2009 | Δ in % | |
| Sales | 26,046.9 | 20,095.7 | 29.6 |
| EBITDA | 3,587.6 | 1,591.2 | 125.5 |
| in % of sales | 13.8 | 7.9 | |
| EBIT | 1,935.2 | −1,040.4 | 286.0 |
| in % of sales | 7.4 | −5.2 | |
| Net income attributable to the shareholders of the parent | 576.0 | −1,649.2 | 134.9 |
| Earnings per share (in €) | 2.88 | −9.76 | 129.5 |
| Research and development expenses | 1,450.4 | 1,356.3 | 6.9 |
| in % of sales | 5.6 | 6.7 | |
| Depreciation and amortization1 | 1,652.4 | 2,631.6 | −37.2 |
| thereof impairment2 | 57.7 | 993.0 | −94.2 |
| Operating assets (at December 31) | 15,282.8 | 14,582.7 | 4.8 |
| EBIT in % of operating assets (at December 31) | 12.7 | −7.1 | |
| Operating assets (average) | 15,580.0 | 16,024.1 | −2.8 |
| EBIT in % of operating assets (average) | 12.4 | −6.5 | |
| Capital expenditure3 | 1,296.4 | 860.1 | 50.7 |
| in % of sales | 5.0 | 4.3 | |
| Number of employees at the end of the year4 | 148,228 | 134,434 | 10.3 |
| Adjusted sales5 | 25,945.3 | 19,941.0 | 30.1 |
| Adjusted operating result (adjusted EBIT)6 | 2,516.8 | 1,180.5 | 113.2 |
| in % of adjusted sales | 9.7 | 5.9 | |
1) Excluding impairments on financial investments. |
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Sales up 29.6%
The corporation's sales increased in 2010 as compared with the previous year by €5,951.2 million or 29.6% to €26,046.9 million (PY: €20,095.7 million), primarily thanks to the recovery of the markets relevant to us. The increase in the output of light vehicles, i.e. passenger cars, station wagons and light commercial vehicles, in 2010 had a major impact on business performance. We also recorded significant increases in our non-automotive business. Based on 2009 sales that were heavily influenced by the global economic crisis, each month of 2010 saw sales significantly exceeding those for the same month of the previous year. Changes in the scope of consolidation had a slight negative impact, whilst exchange rate changes had the effect of increasing sales.
In 2010, sales by region changed as follows compared with the previous year:
| Sales by region in % | |||
|---|---|---|---|
| 2010 | 2009 | ||
| Germany | 27 | 29 | |
| Europe excluding Germany | 33 | 34 | |
| NAFTA | 19 | 18 | |
| Asia | 16 | 14 | |
| Other countries | 5 | 5 | |
Adjusted EBIT up 113.2%
The corporation's adjusted EBIT was up in 2010 compared with the same period of 2009 by €1,336.3 million, or 113.2%, to €2,516.8 million (PY: €1,180.5 million), equivalent to 9.7% (PY: 5.9%) of adjusted sales.
Adjusted EBIT rose in the fourth quarter of 2010 compared with the same period of the previous year by €213.1 million, or 41.5%, to €726.0 million (PY: €512.9 million), equivalent to 10.5% (PY: 9.0%) of adjusted sales. On a comparable basis, there was adjusted EBIT of €484.7 million in the third quarter of 2010.
EBIT up 286.0%
EBIT was up by €2,975.6 million year-on-year to €1,935.2 million in 2010, an increase of 286.0% (PY: -€1,040.4 million). The return on sales climbed to 7.4% (PY: -5.2%).
The amortization of intangible assets from the purchase price allocation (PPA) reduced EBIT in the year under review by €454.3 million (PY: €455.2 million). This amount includes impairments on intangible assets from the purchase price allocation (PPA) in the amount of €0.8 million in 2010 (PY: €7.5 million).
The return on capital employed (EBIT as a percentage of average operating assets) amounted to 12.4% (PY: -6.5%).
Special effects in 2010
In total, there were impairments on property, plant and equipment, and intangible assets of €29.3 million (Chassis & Safety €3.4 million, Powertrain €16.3 million, Interior €0.0 million, Passenger and Light Truck Tires €7.5 million, Commercial Vehicle Tires –, ContiTech €2.1 million) in 2010 that did not relate to restructuring measures. This includes an impairment loss of €0.3 million on capitalized intangible assets from the purchase price allocation.
The Interior division incurred expenses of €5.6 million for additional final activities relating to the disposal of certain business operations.
Due to the winding-up activities for the disposal of an associated company, a gain of €2.1 million was generated in the Interior division while a tax expense for the corporation was incurred in the same amount.
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 additional restructuring expenses of €11.9 million in the Powertrain division in 2010. This primarily relates to impairments on production plants that were partially offset by provisions for supplier claims that were no longer needed.
Additional restructuring-related expenses of €14.7 million were incurred in the Passenger and Light Truck Tires division in connection with the end of tire production in Clairoix, France.
Additional restructuring expenses of €6.0 million were incurred at the Traiskirchen, Austria, location in the Passenger and Light Truck Tires division.
Due to massive collapses in demand on the European commercial vehicle market as a result of the economic crisis, Continental had to reduce production capacity at all European commercial vehicle tire locations in 2009. A still available production cell in Hanover-Stöcken, Germany, was finally closed down. This led to further restructuring expenses totaling €34.6 million in the Commercial Vehicle Tires division in 2010.
Expenses of €34.8 million (Chassis & Safety €4.0 million, Powertrain €18.9 million, Interior income of €3.2 million, Passenger and Light Truck Tires €9.4 million, Commercial Vehicle Tires €2.3 million, ContiTech €3.0 million, Holding €0.4 million) were also incurred, primarily due to restructuring activities and severance payments. For the Passenger and Light Truck Tires division, this includes an impairment loss of €0.5 million on intangible assets from the purchase price allocation (PPA).
The sale of our North American OTR activities to the Titan Tire Corporation in 2006 led to a gain in 2010 of €3.3 million in the Commercial Vehicle Tires division.
The antitrust proceedings initiated in 2007 against Dunlop Oil & Marine Ltd., U.K., a subsidiary of ContiTech AG, in the area of offshore hoses resulted in further expenses of €20.8 million in the ContiTech division.
Owing to the higher expected cash outflows for the VDO loan as a result of rising margins, the carrying amount was adjusted as expense for this loan in 2009 and in June of 2010. The adjustment in 2010 resulted in expenses of €27.4 million. These deferrals will be amortized over the term of the loan and reduce expenses accordingly. This amortization resulted in a positive effect of €37.6 million in 2010. Due to the partial repayments of the VDO loan, the adjustments attributable to the amounts repaid were reversed on a pro-rated basis. In addition to largely using the net income of the bonds placed at the end of September 2010 for a total nominal amount of €1,250.0 million, another partial repayment of €100.0 million in nominal terms was made in December 2010. A pro-rated amount of €9.6 million was incurred from the adjustment on the above-mentioned amounts that were paid early, which then also led to a gain in the same amount. Income of €19.8 million resulted from all the previously mentioned effects in 2010 as a whole.
The total consolidated expense from special effects amounted to €132.5 million in 2010. Adjusted for impairment on capitalized intangible assets from the purchase price allocation in an amount of €0.8 million, special effects had an adverse impact totaling €131.7 million.
Special effects in 2009
In the third quarter of 2009, the impairment test on goodwill led to an impairment requirement of €875.8 million. €367.0 million of this related to the Chassis & Safety division, €447.4 million to the Powertrain division and €61.4 million to the Interior division.
Production was discontinued in Huntsville, U.S.A., at the end of 2010. By closing the Huntsville site and consolidating production capacities as well as concentrating research and development activities, we expect to optimize regional production and reduce costs significantly. In 2009, the Powertrain and Interior divisions incurred restructuring expenses of €82.6 million.
In this same context, a decision was made to move the activities of several business units of the Powertrain and Interior divisions from the Deer Park, U.S.A., location to other locations. This led to restructuring expenses of €5.4 million.
Due to declining volumes and expiring customer orders, production capacity at the plant in Karben, Germany, had to be adjusted. This led to restructuring expenses of €31.9 million in the Chassis & Safety, Powertrain and Interior divisions.
As a result of the expiration of further customer orders and cost savings in the areas of research & development (R&D) and administration, there were restructuring expenses of €31.4 million for the Interior division at the plant in Babenhausen, Germany, in 2009.
The Interior division incurred restructuring expenses of €12.2 million at its Wetzlar, Germany, location due to expiring R&D projects for which there are no follow-up orders.
The research and development location in Neubiberg, Germany, was closed. This led to restructuring expenses of €8.8 million in the Powertrain and Interior divisions.
The associate Hyundai Autonet Co. Ltd., Kyoungki-do, South Korea, of the Interior division was sold at a price of €126.6 million. The transaction resulted in recognition of impairment losses in the amount of €73.6 million.
In view of the disposal of two associated companies, impairment losses in the amounts of €43.6 million and €2.0 million were recognized in the Interior division.
As of October 31, 2009, the Public Transport Solutions business from the non-OE area was sold to the Trapeze ITS Group – predominantly as part of an asset deal – for a provisional negative purchase price of €11.7 million, stemming primarily from a decrease in working capital from the signing date to the closing date. The final purchase price determination was concluded in the fourth quarter of 2010. This sale resulted in expenses totaling €4.5 million for the Interior division in 2009.
In the Chassis & Safety and Powertrain divisions in particular, unutilized provisions for severance payments of €5.3 million were reversed as part of the finishing up of restructuring activities at the plant in Dortmund, Germany, since parts of the production capacity could be transferred to the Interior division.
Production at the plant in Hiroshima, Japan, will be relocated to Changshu, China. This resulted in restructuring expenses of €2.9 million in the Chassis & Safety division.
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 restructuring expenses of €44.7 million in the Powertrain division which relate primarily to impairments on production lines and the settlement of supplier claims.
The plant in Blythewood, U.S.A., results from a joint venture with a U.S. engine manufacturer, which is also the plant's main customer. Due to declining capacity utilization, a decision was made at the end of 2008 to close the plant and to relocate production to Newport News, U.S.A. Continental had filed for damages for underutilization against the joint venture partner. As part of an agreement, the entire plant including the associated production was transferred to the joint venture partner instead of a relocation. This sale generated a gain of €10.5 million for the Powertrain division, taking into account all reciprocal claims and interests.
Relocation of the production remaining with Continental and the research and development activities to Newport News, U.S.A., resulted in further restructuring expenses in the amount of €4.2 million for the Powertrain division.
The necessary adjustment of production overcapacity in Europe to the current market conditions led to the discontinuation of passenger and light truck tire production in Clairoix, France. This led to restructuring expenses of €207.3 million in 2009. These are countered by a positive effect on earnings of €11.4 million from lower pension obligations due to the resulting shortened employment periods for the employees.
The closure of the compounding and rubberization activities in Traiskirchen, Austria, at the end of 2009 led to expenses of €12.9 million for restructuring in the Passenger and Light Truck Tires division.
Measures introduced for the location in Hanover-Stöcken, Germany, led to restructuring expenses of €46.4 million in the Commercial Vehicle Tires division.
The closure of the Conti Machinery plant in Puchov, Slovakia, led to restructuring expenses of €8.0 million in the Commercial Vehicle Tires division, including €1.1 million of impairment on intangible assets from the Matador purchase price allocation. In connection with this, there was also an impairment on an at-equity investment in the amount of €0.8 million.
The sales declines resulting from the global economic crisis meant that it was no longer possible to efficiently utilize the externally operated warehouse in Straubing, Germany. The warehouse was therefore closed. The corresponding rental agreement exists until 2016. At the end of 2009, it was assumed that the properties could not be sub-leased accordingly. A provision of €9.7 million was therefore recognized in the Commercial Vehicle Tires division.
The partial impairment of the Matador brand name, and an impairment on property, plant and equipment in Puchov, Slovakia, driven by significant sales declines, led to an impairment loss of €10.7 million for the Passenger and Light Truck Tires and Commercial Vehicle Tires divisions, of which €4.0 million related to capitalized intangible assets from the Matador purchase price allocation.
The impairment test on customer relationships recorded under other intangible assets led to an impairment requirement of €2.4 million with various customer groups for the Passenger and Light Truck Tires division.
The closure and transfer of Western European locations of the Fluid Technology business unit in the ContiTech division led to restructuring expenses of €33.4 million in 2009.
The antitrust proceedings initiated in 2007 against Dunlop Oil & Marine Ltd., U.K., a subsidiary of ContiTech AG, in the area of offshore hoses, resulted in further expenses of €6.2 million.
For the ContiTech division, the initial consolidation of the conveyor belt company Kolubara Univerzal D.O.O., Serbia, led to a gain of €0.7 million from the negative balance.
In the corporation there were also smaller impairments on property, plant and equipment, and intangible assets totaling €13.1 million, of which €9.7 million related to the Automotive Group and €3.4 million to the Rubber Group.
In addition, the Automotive Group incurred expenses, chiefly from restructuring measures, totaling €25.4 million in the year under review. The Rubber Group incurred further expenses totaling €2.2 million, also primarily resulting from restructuring measures.
In 2009, the cost-cutting program initiated worldwide in response to the economic crisis led to expenses for severance payments totaling €116.7 million (Chassis & Safety €21.4 million, Powertrain €14.1 million, Interior €26.4 million, Passenger and Light Truck Tires €11.1 million, Commercial Vehicle Tires €5.3 million, ContiTech €30.1 million, Holding €8.3 million).
Owing to the higher expected cash outflows for the VDO loan as a result of rising margins, the carrying amount was adjusted as expense in September and December 2009. At the end of 2009, the value of these adjustments totaled €64.5 million. This deferral will be amortized over the term of the loan and reduces expenses accordingly.
For the corporation, the total expense from special effects amounted to €1,755.4 million in 2009. Adjusted for goodwill impairment of €875.8 million and for impairments on intangible assets from the purchase price allocation in the amount of €7.5 million, there was a negative impact of €872.1 million from special effects.
Procurement
In 2010, the Continental Corporation spent €17.5 billion on raw materials, capital goods, and other materials and services, which is equivalent to 67% of sales.
On the one hand, the rapid recovery of the economy and the demand in the growth markets led to a high price level on the markets for basic materials and raw materials. On the other hand, this economic recovery is exactly what drove the increase in the entire corporation's production volume. The production volume significantly influenced not only the direct material, but also the indirect material and therefore especially investments.
Research and development
Research and development expenses rose by €94.1 million or 6.9% year-on-year to €1,450.4 million (PY: €1,356.3 million), or 5.6% (PY: 6.7%) of sales.
In the Chassis & Safety, Powertrain and Interior divisions, costs stemming from initial product development projects in the original equipment business are being capitalized. Costs are capitalized as of the point in time at which we have been named as a supplier by the original equipment manufacturer and have successfully fulfilled a specific pre-release stage. Capitalization ends with the approval for unlimited series production. The costs of customer-specific applications, pre-production prototypes and testing for products already being sold continue to be expensed as incurred. Capitalized development expenses are amortized over a useful life of three years, using the straight-line method. The assumed useful life reflects the time in which an economic benefit is likely to be achievable from these development projects. Of the development costs incurred in the three divisions in 2010, €74.5 million (PY: €49.0 million) met the criteria for recognition as an asset.
The requirements for capitalizing intangible assets from development activities (IAS 38) were not met in the Passenger and Light Truck Tires, Commercial Vehicle Tires and ContiTech divisions in 2010 or in 2009.
Depreciation and amortization
Depreciation and amortization fell year-on-year by €979.2 million to €1,652.4 million (PY: €2,631.6 million) and amount to 6.3% of sales (PY: 13.1%). In the year under review, impairment losses of €57.7 million (PY: €993.0 million) were recognized. The previous year's figure includes goodwill impairment of €875.8 million.
Net interest expense
The net interest amount also decreased by €23.6 million to -€697.2 million (PY: -€720.8 million). This decrease is primarily due to mostly non-cash currency effects and effects from changes in the fair value of derivative instruments. At a total of €40.6 million, the two effects were €23.1 million above the previous year's figure of €17.5 million. Interest income from 2010 amounted to €22.6 million (PY: €30.3 million). Interest expense, excluding the already described effects of foreign currency translation, changes in the fair value of derivative instruments, and earnings from available-for-sale financial assets, fell by €8.2 million compared with the previous year to €760.4 million (PY: €768.6 million).
As in previous years, the amount of interest expense, and thus the net interest amount, is chiefly attributable to the utilization of the VDO loan agreement with a committed amount totaling €6,484.9 million (PY: €11.0 billion) as of December 31, 2010. The significant reduction of the utilization of the VDO loan is the result of several effects. A key effect was the capital increase that was successfully carried out in January of 2010 and the resulting decrease in net indebtedness. Continental generated net proceeds of €1,056.0 million from the capital increase. Due to the positive market environment and the high demand for its bonds, Continental also implemented in mid-2010 another key component of the refinancing package initiated at the end of 2009 to improve its financial and capital structure by placing four bonds with a total volume of €3.0 billion in the third quarter of 2010 via Conti-Gummi Finance B.V., Amsterdam, Netherlands. The net proceeds from these bonds were used to repay part of the utilization of the VDO loan and to repay the loan borrowed to refinance tranche B (due in August of 2010) of the VDO loan (forward start facility). More of the VDO loan was repaid in December 2010 as well due to good business performance. The deferred financing expenses attributable to the repaid amounts had to be closed out and expensed and led to a special effect totaling -€36.8 million. Another negative effect in interest expenses from the VDO loan and forward start facility was due to the (compared with the previous year) higher margin of these loans resulting from the ratings decreases over the course of 2009 and the renegotiation of the covenants of the VDO loan concluded in May 2010 and December 2009. The fact that the market interest rate was lower as compared with the previous year had a positive effect. Taking into account all previously mentioned effects, interest expenses for the VDO loan and the forward start facility amounted to €595.9 million, down by €49.1 million on the previous year's figure of €645.0 million.
The bonds placed in the third quarter of 2010 resulted in interest expenses totaling €73.6 million in 2010.
Tax expense
Income tax expense for fiscal year 2010 amounted to €592.1 million (PY: income item of €154.3 million). The tax rate amounts to 47.8%. In the previous year, the tax relief rate before the goodwill impairment (which had no tax effect) was 17.4%.
Tax expense for the year under review is primarily affected by non-cash valuation allowances totaling €354.4 million on deferred tax assets. €120.1 million of these valuation allowances were attributable to deferred tax assets for tax carryforwards in Germany measured at the relevant tax rate. The corresponding deferred tax assets from 2009 of €68.9 million and the increases within the year under review of €51.2 million were written down in full. Continental AG's rating decrease in May 2010, accompanied by the higher interest margin on existing loans and the future increasing interest burden from issuing euro bonds with a volume totaling €3.0 billion in the third quarter of 2010, make the use of the carryforward in Germany particularly unlikely from the current point of view. Since 2008, a limit on the deductible interest that can be carried forward has applied in Germany; the amount deductible under the tax law is limited to 30% of the taxable income before depreciation and amortization and before interest.
The valuation allowances on deferred tax assets in non-German units have increased by €163.9 million year-on-year to €234.3 million, €11.8 million of which relates to previous years, and have a corresponding negative effect on the tax rate.
The tax rate was also negatively impacted by non-deductible operating expenses, and in Germany by non-imputable foreign withholding tax due to the lack of applicable volume. There was a positive influence from foreign tax rate differences, as well as incentives and tax holidays.
Tax expense for the previous year was primarily affected by impairments of €108.5 million on deferred tax assets on loss and interest carryforwards in Germany. This was necessary since the German fiscal authorities are of the opinion that a harmful change of shareholder has occurred pursuant to Section 8c of the German Corporate Income Tax Act (Körperschaftssteuergesetz – KStG) due to Schaeffler KG's acquisitions of shares in 2008 and 2009. Continental does not share this legal opinion on the time and scope of harmful share purchases, and is already taking legal action to redress this in test proceedings.
Net income attributable to the shareholders of the parent
Net income attributable to the shareholders of the parent increased in 2010 by €2,225.2 million to €576.0 million (PY: -€1,649.2 million). This corresponds to earnings per share of €2.88 (PY: -€9.76).
| Reconciliation of EBIT to net income in € millions | |||
|---|---|---|---|
| 2010 | 2009 | Δ in % | |
| Chassis & Safety | 569.0 | −102.5 | 655.1 |
| Powertrain | −198.1 | −943.2 | 79.0 |
| Interior | 197.0 | −516.0 | 138.2 |
| Passenger and Light Truck Tires | 993.3 | 536.4 | 85.2 |
| Commercial Vehicle Tires | 50.1 | −50.1 | 200.0 |
| ContiTech | 369.6 | 169.4 | 118.2 |
| Other/consolidation | −45.7 | −134.4 | |
| EBIT | 1,935.2 | −1,040.4 | 286.0 |
| Net interest expense | −697.2 | −720.8 | 3.3 |
| Earnings before income taxes | 1,238.0 | −1,761.2 | 170.3 |
| Income taxes | −592.1 | 154.3 | −483.7 |
| Net income | 645.9 | −1,606.9 | 140.2 |
| Non-controlling interests | −69.9 | −42.3 | −65.2 |
| Net income attributable to the shareholders of the parent | 576.0 | −1,649.2 | 134.9 |
| Earnings per share (in €), undiluted | 2.88 | −9.76 | 129.5 |