Search

 

Financial Position

 

Reconciliation of cash flow
Continental's cash from operating activities fell in 2010 by €577.9 million to €1,849.2 million (PY: €2,427.1 million) and amounted to 7.1% of sales (PY: 12.1%).

Free cash flow for fiscal year 2010 amounted to €566.9 million (PY: €1,640.3 million), corresponding to a year-on-year decline of €1,073.4 million.

Interest payments resulting in particular from the purchase price financing for the acquisition of Siemens VDO fell by €31.6 million to €725.6 million (PY: €757.2 million).

Income tax payments increased by €288.2 million to €493.0 million (PY: €204.8 million).

The expansion of working capital had a negative impact, leading to an outflow of funds of €1,078.4 million as compared with fiscal year 2009. This increase in operating working capital is a result of the increase in inventories by €993.0 million and an increase in operating receivables of €330.7 million. In contrast, there was also a €245.3 million increase in operating liabilities.

Inflows from pension provisions fell year-on-year by €676.6 million to €38.2 million. This was mainly due to the reimbursement from Contractual Trust Arrangements (CTAs) at several corporation companies for pension payments made by the companies since mid 2006, Continental Pension Trust e.V. acquiring 24.9% of the shares in ContiTech AG, as well as the discontinuation of the status of the assets as qualifying plan assets of the respective CTAs which led to a total of €682.8 million in cash inflows in fiscal year 2009 and which were not offset by comparable positive effects in fiscal year 2010.

Total cash outflows amounting to €1,282.3 million (PY: €786.8 million) resulted from investment activities, primarily influenced by the €383.2 million increase in investments in property, plant and equipment, and software to €1,242.6 million (PY: €859.4 million).

The cash inflow from the sale of subsidiaries and business units was €123.2 million lower than in the previous year, mainly due to the sale of the associated company Hyundai Autonet Co., Ltd. to Hyundai Mobis Co., Ltd. in June 2009, which led to a cash inflow of €126.6 million, for which there was no comparable single effect in 2010.

Capital expenditure (additions)
 Capital expenditure for property, plant and equipment, and software amounted to €1,296.4 million in 2010. This includes €52.3 million (PY: €0.0 million) for finance leasing and €1.5 million (PY: €0.7 million) for capitalizing borrowing costs. Overall, there was a significant increase of €436.3 million as against the previous year's level of €860.1 million, with all divisions contributing to this increase. Capital expenditure amounted to 5.0% (PY: 4.3%) of sales.

Indebtedness
 Gross indebtedness was €8,990.5 million as at the end of 2010 (PY: €10,712.5 million) or down by €1,722.0 million on the previous year's level.

The change in the value of the bonds from €5.2 million at the end of 2009 to €2,988.5 million at the end of fiscal year 2010 is due to the four bonds with a total volume of €3.0 billion placed by Conti-Gummi Finance B.V., Amsterdam, Netherlands, in the third quarter of 2010. All bonds are denominated in euros and backed with guarantees by Continental AG and select subsidiaries. A five-year bond of €750.0 million with an interest rate of 8.5% p.a. was placed in July 2010, a seven- year bond of €1,000.0 million and an interest rate of 7.5% p.a. was placed at the beginning of September 2010, and two bonds were placed at the end of September 2010, each in the amount of €625.0 million but with different maturities. The first bond matures in January 2016 and has an interest rate of 6.5% p.a., while the second matures in October 2018 and has an interest rate of 7.125% p.a. Interest payments are made semi-annually in arrears.

in € millions Dec. 31, 2010 Dec. 31, 2009
Cash provided by operating activities 1,849.2 2,427.1
Cash used for investing activities −1,282.3 −786.8
Cash flow before financing activities (free cash flow) 566.9 1,640.3
Dividends paid and repayment of capital to non-controlling interests −35.2 −33.0
Proceeds from the issuance of shares 1,056.0 –
Non-cash changes 6.8 −42.4
Other −28.1 14.1
Foreign exchange effects 12.1 9.0
Change in net indebtedness 1,578.5 1,588.0
Download Table (.xls)

Liabilities to banks amounted to €5,144.9 million as of December 31, 2010 (PY: €10,096.3 million) and were therefore €4,951.4 million below the previous year's level. The VDO loan was drawn down as at December 31, 2010, by Continental AG and Continental Rubber of America, Corp. (CRoA), Willmington, U.S.A., and is valued at a total of €4,297.0 million as at the reporting date (PY: €9,180.1 million). The amount committed under this loan was €6,484.9 million as of the end of 2010 (PY: €11.0 billion). The significant reduction in the VDO loan is due to 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 (before tax effects) of €1,056.0 million from the capital increase, which were used in accordance with the terms of the contract to repay part of tranche B of the VDO loan due in August of 2010. With the capital increase, Continental also fulfilled the prerequisite for receiving a forward start facility (FSF) with a volume of a maximum of €2,500.0 million to refinance tranche B in August of 2010. This connection was part of the refinancing package successfully concluded in December 2009 for the purpose of improving the financial and capital structure. Due to the positive market environment and the high demand for its bonds, Continental implemented another key component of the refinancing package to improve its financial and capital structure in summer 2010 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). Due to good business performance, a further repayment of tranche C of the VDO loan was made in December 2010 in a nominal amount of €100.0 million. For tranche C, due in August 2012, there are still interest hedges at the end of 2010 amounting to €3,125.0 million. The resulting average fixed interest rate to be paid is 4.19% plus margin. Owing in particular to the higher expected cash flows for the VDO loan as a result of rising margins, the carrying amount was adjusted as expense in 2009 and in June of 2010. At the end of 2010, the value of these adjustments totaled €44.7 million (PY: €64.5 million). This deferral will be amortized over the term of the loan and reduces expenses accordingly.

Of the loan granted by the European Investment Bank (EIB) in an original amount of €600.0 million, early repayments totaling €300.0 million were made (€200.0 million in 2009 and €100.0 million in January 2010). The EIB loan was therefore drawn down in an amount of €300.0 million in nominal terms as at the end of 2010.

The various financial liabilities increased by €246.1 million to €857.1 million (PY: €611.0 million). This is mainly due to the increased use of factoring programs as compared with the previous year, an increase in liabilities from financing leasing and higher negative fair values of derivatives. The use of factoring programs was increased by €162.5 million to €381.5 million (PY: €219.0 million). The factoring program concluded in November 2010 with Norddeutsche Landesbank Luxembourg S.A. and Coface Finanz GmbH replaces the program with Skandifinanz Bank AG and provides for €80.0 million more financing volume (€230.0 million in total) compared with the Skandifinanz Bank AG program. At €224.0 million, almost all of the program was utilized as of the end of 2010 (PY: Skandifinanz Bank AG: €149.5 million). In addition, a factoring program with a financing volume of €150.0 million was agreed with Landesbank Hessen-Thüringen Girozentrale in December 2010, of which €82.7 million was used as of the end of 2010 (PY: €– million). The factoring program agreed in October 2009 with Wells Fargo Bank N.A. (formerly Wachovia Bank National Association) was expanded to include the Bank of Nova Scotia as partner, and in this connection the financing volume was increased to $150.0 million. €74.7 million was used as of the end of 2010 (PY: €69.4 million). The €41.6 million increase in the leasing liabilities, from €107.4 million in 2009 to €149.0 million in 2010, is due mainly to building and equipment leasing in connection with the construction of a passenger and light truck tire factory in Hefei, China. The fair value of the derivatives was €234.0 million, up €28.9 million from €205.1 million as of December 31, 2009. At €86.5 million, the volume of issued commercial paper was €13.1 million higher than the figure at the end of the previous year (€73.4 million).

At €1,673.5 million (PY: €1,817.0 million), cash and cash equivalents, derivative instruments and interest-bearing investments were down by €143.5 million.

Net indebtedness decreased by €1,578.5 million to €7,317.0 million as compared with €8,895.5 million at year-end 2009.

Effective indebtedness, i.e. including contingent liabilities on notes, was down by €1,585.5 million to €7,323.7 million (PY: €8,909.2 million).

Financing
Against the backdrop of the global economic crisis, the need emerged for the first time at the end of 2008 to adjust selected conditions of the agreement for the VDO loan in line with the changing economic environment. A concept prepared by Continental AG was submitted to the banking syndicate in December 2008 and was approved by almost all lending banks in January 2009. Although Continental AG reacted well to the effects of the global crisis and, in particular, succeeded in creating and maintaining sufficient liquidity, a further need for adjustment of selected financial covenants associated with the VDO loan emerged at the end of 2009. The result of the renegotiations for the VDO loan, which were concluded successfully at the end of December 2009, is an agreement on increased flexibility with regard to the ratio of net indebtedness to EBITDA and the ratio of EBITDA to net interest income. In addition, a further margin increase in comparison to the previous conditions and restrictions of the scope for dividend payments were agreed. The adjusted financial covenants also stipulate for the first time a limitation of the annual investment volume and the provision of an extensive collateral package by various companies in the Continental Corporation. In addition, the December 2009 renegotiations included a refinancing package that is expected to create an improved financial and capital structure. The banks gave a binding commitment for a forward start facility (FSF) of €2.5 billion for the VDO loan's tranche B of €3.5 billion due in August 2010. However the facility could be used only under the proviso that a capital increase with gross proceeds of at least €1.0 billion be carried out by August 2010.

The focus in 2010 was the implementation of the measures agreed in the above-mentioned refinancing package to improve the financial and capital structure. The first milestone of the refinancing package was reached back in January of 2010 with the implementation of a capital increase that was met with great interest by the market. The net proceeds (before tax effects) of €1,056.0 million were used to pay back tranche B of the VDO loan in accordance with the agreement. Continental thus fulfilled the requirement for receiving the forward start facility to pay back tranche B due in August 2010. In the summer of 2010, Continental exploited the positive market environment and the high demand for bonds, successfully placingfour euro-denominated bonds totaling €3.0 billion with German and foreign investors in the third quarter of 2010. All bonds were heavily oversubscribed, so the emission volume of the second bond placed at the beginning of September 2010 was raised from the original planned amount of €750.0 million to €1.0 billion. All bonds participated in the comprehensive collateral package granted to the lending banks in accordance with the renegotiations of the VDO loan described above. In line with the agreement, the net proceeds from all of these bonds were used to repay part 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).

In 2010, the agreed financial covenants were complied with as of the respective quarterly balance sheet dates.

Over the course of 2010, Continental made significant changes to the composition of its financial indebtedness. For example, the bond issues and the expansion of the factoring programs resulted in a stronger diversification of the financing sources and also a significant improvement of the maturity structure.

As of December 31, 2010, Continental is in a very good liquidity position of approximately €4.2 billion (PY: €3.9 billion) made up of cash and unused committed lines of credit.

On average, based on quarter-end values, 56.6% (PY: 36.4%) of gross indebtedness after hedging measures had fixed interest rates over the year.

top

 

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.