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finanCial statements
Statutory auditors report on the consolidated financial statements 03 Consolidated financial statements 05 Notes to the consolidated financial statements 10
This is a free translation into English of the statutory auditors report on the consolidated financial statements issued in French and it is provided solely for the convenience of English-speaking users. The statutory auditors report includes information specifically required by French law in such reports, whether modified or not. This information is presented below the audit opinion on the consolidated financial statements and includes an explanatory paragraph discussing the auditors assessments of certain significant accounting and auditing matters. These assessments were considered for the purpose of issuing an audit opinion on the consolidated financial statements taken as a whole and not to provide separate assurance on individual account balances, transactions or disclosures. This report also includes information relating to the specific verification of information given in the groups management report. This report should be read in conjunction with and construed in accordance with French law and professional auditing standards applicable in France
BDO France Lger et associs 113, rue de lUniversit 75007 Paris S.A.R.L au capital de 50.000 Commissaire aux comptes Membre de la compagnie rgionale de Paris
ERNST & Young et Autres 41, rue Ybry 92576 Neuilly-sur-Seine Cedex S.A.A capital variable Commissaire aux Comptes Membre de la compagnie rgionale de Versailles
Financire cVT
Year ended December 31, 2010 Statutory auditors report on the consolidated financial statements To the Shareholders, In compliance with the assignment entrusted to us by a collective decision of the shareholders, we hereby report to you, for the year ended December 31, 2010, on: the audit of the accompanying consolidated financial statements of Financire CVT; the justification of our assessments; the specific verification required by law. These consolidated financial statements have been approved by the chairman. Our role is to express an opinion on these consolidated financial statements based on our audit. I. pinion on the consolidated financial statements O We conducted our audit in accordance with professional standards applicable in France; those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures, using sampling techniques or other methods of selection, to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made, as well as the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the Group as at December 31, 2010 and of the results of its operations for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
II. Justification of our assessments In accordance with the requirements of article L. 823-9 of the French commercial code (Code de commerce) relating to the justification of our assessments, we bring to your attention the following matters: As indicated in notes 3 (b), 3 (c) and 17 to the consolidated financial statements, your group performs estimates that could have a significant impact, notably in the determination of the margin on completion of each contract, assessed on the basis of the last known elements concerning its performance. These estimates are reflected in the balance sheet in Construction contracts in progress, assets, Construction contracts in progress, liabilities and, in the case of completed contracts, in Current provisions. We have reviewed the processes set up by your group in this field and assessed the data and assumptions provided, and we ascertained that these estimates were reasonable. As mentioned in note 3 (b) to the consolidated financial statements, we remind you that all information mentioned in the preceding paragraphs is based on forecasts that are uncertain by their nature, and that consequently actual figures can sometimes differ significantly. Notes 3 (i.2) and 10 to the consolidated financial statements set out the methods implemented by your group to test acquisition goodwill at the closing period. Our work consisted in examining the methods and assumptions used by your group during the implementation of these tests and verifying that the notes to the consolidated financial statements provide appropriate information. Your group forms provisions that cover its retirement and related commitments according to the method described in note 3 (r) to the consolidated financial statements. The commitments were essentially valued by external actuaries. Our work consisted in examining the data used, assessing the assumptions selected and making sure that they are reasonable, as well as verifying that note 18 to the consolidated financial statements provides appropriate information. These assessments were made as part of our audit of the consolidated financial statements taken as a whole, and therefore contributed to the opinion we formed which is expressed in the first part of this report. III. Specific verification As required by law we have also verified, in accordance with professional standards applicable in France, the information presented in the Groups management report. We have no matters to report as to its fair presentation and its consistency with the consolidated financial statements. Paris and Neuilly-sur-Seine, March 10, 2011
The statutory auditors French original signed by BDO France Lger et associs Michel Lger ERNST & Young et Autres Gilles Puissochet
Note to the consolidated financial statements: The Statutory Auditors issued an audit report on the first 18-month financial year from July 1, 2008 to December 31, 2009. The Statutory Auditors performed an audit on the pro forma financial statements for the 12-month period from January 1, 2009 to December 31, 2009. The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
(In thousands, except for number of shares) At beginning of year Capital increase Reduction in capital Change in scope Other(1) Dividends paid Net profit Other comprehensive income Total comprehensive income At December 31, 2009 Dividends paid Net profit Other comprehensive income Total comprehensive income At December 31, 2010
40 1,046,486 (468,153)
40 1,046,486 (468,153) 4,171 (21,848) (1,393) 2,490 (15,760) (13,270) 546,033 (2,144) (16,948) 14,201 (2,747) 541,142
Equity at December 31, 2009 Financire CVT was formed in July 2008 with an initial share capital of 40,000 comprising 40,000 ordinary shares, each with a par value of 1. During the financial year, Financire CVTs shareholders carried out the following capital transactions with a view to acquiring all the shares in Converteam Group: a) an increase in capital through an asset contribution in a nominal amount of 1,046,486 thousand through the issuance of 1,046,486,292 fully paid-up shares each with a par value of 1, b) a reduction in capital, which was not motivated by losses, through the cancellation of 468,152,866 shares each with a par value of 1. Upon completion of these successive share issues, the capital stood at 578,373,426 fully paid-up shares, each with a par value of 1. (1) The Extraordinary General Meeting of November 25, 2009 decided to reduce the share capital through the cancellation of 468,152,866 shares each with a par value of 1. In return for the cancellation of these shares, a decision was made to allot an amount in cash representing the portion of the Companys net assets accounted for by these shares. The difference between the
par value of the cancelled shares and their redemption value (difference of 21,848 thousand) is recognized in retained earnings. N.B. Financire CVT did not hold any treasury shares during 2009. Equity at December 31, 2010 No dividend was paid in respect of 2009 year by Financire CVT. Note that Financire CVT did not hold any treasury shares at December 31, 2010. All income will be appropriated to retained earnings, with no dividend payments planned. Minority interests See note 30.
(1) The net effect of exchange rate fluctuations reflects the translation of the financial statements of our activities outside France. It derived mainly from our subsidiaries in the United Kingdom. (2) Net debt of 975.7 million at December 31, 2010 comprises
1,228.3 million in borrowings (see note 19) less 252.6 million in cash (See note 16). At December 31, 2010, income tax paid stood at 2.5 million and the net amount of interest paid and received came to (25.5) million.
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Note 4.1 Significant events of the financial year Note 4.2 Changes in scope of consolidation Note 5 Note 6 Research & development expenses Other income and expenses
Note 6.1 Other operating income and expenses Note 6.2 Other income and expenses Note 7 Note 8 Note 9 Financial income/(expense) Income tax Share-based payments (cash-settled)
Note 10 Goodwill Note 11 Intangible assets, net Note 12 Property, plant and equipment, net Note 13 Other non-current assets, net Note 14 Inventories and construction contracts in progress, net Note 15 Other current assets, net Note 16 Cash and cash equivalents Note 17 Provisions Note 18 Employee benefits Note 19 Borrowings Note 20 Other current liabilities Note 21 Lease obligations Note 22 Financial assets and liabilities Note 23 Financial instruments Note 24 Financial risk management objectives and policies Note 25 Employees and payroll costs Note 26 Off-balance sheet commitments Note 27 Contingencies Note 28 Related parties Note 29 Subsequent events Note 30 Companies included in the scope of consolidation
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amendments to IAS 27 Consolidated and Separate Financial Statements, Amendment to IFRS 5 Non-current assets held for sale and discontinued operations providing guidance on implementing the standard in the event of the partial disposal of interests in a subsidiary resulting in loss of control, Amendment to IAS 39 Eligible Hedged Items, Amendment to IFRS 2 Group cash-settled share-based payment transactions, Improvement in 2009 Amendments to IFRS 2, IAS 38 and IFRIC 9, IFRIC 12 Service Concession Arrangements, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 16 Hedges of a Net Investment, IFRIC 17 Distributions of Non-cash Assets to Owners, IFRIC 18 Transfers of Assets from Customers. Accounting standards and interpretations not in force The Group did not elect for early adoption of standards and interpretations, application of which was not mandatory in 2010. The Group is currently assessing the possible effects of these new standards and interpretations that have not yet entered into force on the consolidated financial statements. The consolidated financial statements were approved by a decision made by CVT Holding, the sole shareholder, on March 10, 2011.
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(b) Use of estimates The preparation of the consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the balance sheet date, and (3) income and expenses. Management reviews estimates on an ongoing basis using currently available information. Total estimated revenue and costs on a contract reflect managements current best estimate of the probable future benefits and obligations associated with the contract. The assumptions used to calculate present and future obligations take into account current technology as well as the commercial and contractual positions, assessed on a contractby-contract basis. Significant items subject to such estimates and assumptions include sales and margin recognized on construction contracts, provisions for warranties and litigation, pension plan liabilities and share-based payments, impairment of non-current assets and deferred taxes. Actual results may differ from those estimates, due to events and changing circumstances. (c) Sales and operating expenses Measurement of sales and expenses The amount of revenue arising from a transaction is usually determined by the contractual agreement with the customer. Production costs include direct (such as material and labor) and indirect costs, including warranty costs. Warranty costs are estimated on the basis of contractual agreements using available statistical data and weighting of all possible outcomes against their associated probabilities. Warranty periods may extend for up to five years. Selling and administrative expenses are excluded from production costs. Recognition of sales and costs Irrespective of the type of contracts, sales are recognized only when the outcome of the transaction can be estimated reliably. Revenue from the sale of manufactured products and service contracts with a term of less than one year is recognized when the significant risks and rewards of ownership are transferred to the customer, which generally occurs on delivery and on performance of service activities. All production costs incurred or to be incurred in respect of the sale are charged to the cost of sales at the date of recognition of sales. Revenue from construction contracts is recognized using the percentage of completion method. The stage of completion is assessed using milestones reflecting the physical completion of a proportion of the contract work or the performance of services
laid down in the agreement. The excess of revenue measured on a percentage of completion basis over the revenue recognized in prior periods represents sales for the period. The cost of sales on construction contracts is computed on the same basis. The excess of costs to be recognized over the cost of sales recognized in prior periods represents the cost of sales for the period. As a consequence, adjustments to contract estimates resulting from job conditions and performance are recognized under the cost of sales as soon as they occur in proportion to the stage of completion. Selling and administrative expenses are expensed as incurred. Research costs are expensed as incurred. Development costs are expensed as incurred unless the project they relate to meets the criteria for capitalization (see note 3 (j)). When it is probable that contract costs to completion will exceed total estimated contract revenue, the expected loss is immediately recognized as an expense. With respect to construction contracts, the total amount of costs incurred to date plus the margin recognized less progress billings is determined on a contract-by-contract basis. If the amount is positive, it is included as an asset recognized under construction contracts in progress. If negative, it is included as a liability under construction contracts in progress. The construction contracts in progress item under liabilities also includes advances received from customers. (d) Current income/(loss) from operations Current income/(loss) from operations includes gross margin, administrative and selling expenses and research & development expenses. It notably includes the service cost of pensions, employee profit sharing, foreign exchange gains or losses associated with operating activities, and other operating income and expenses. Other operating income and expenses notably include a portion of pension costs (amortization of actuarial gains and losses, deferral of unrecognized past service cost and impact of plan curtailments and settlements), and capital gains/(losses) on the disposal of intangible assets and property, plant and equipment in connection with ordinary activities. (e) Income/(loss) from operations To provide greater clarity concerning the Groups current performance, the income/(loss) from operations consists of current income/(loss) from operations, as described above, and nonrecurring items, presented under other income and expenses. Other income and expenses principally include share-based payments, restructuring costs, capital gains and losses on disposal of investments or activities and significant asset impairments.
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(f) Financial income and expense Financial income and expense include: Interest charges and income relating to net consolidated debt which consists of bonds, other borrowings including finance lease liabilities and cash and cash equivalents; Other expenses paid to financial institutions for financing operations; The financial component of pension costs (interest cost and expected return on assets); Dividends received from non-consolidated investments; Foreign exchange gains and losses resulting from financing and hedging activities. Changes in the fair value of interestrate hedges are recognized directly under other financial income or expense when they do not meet hedging criteria defined by IAS 39. (g) Translation of financial statements denominated in foreign currencies The individual financial statements of each Group foreign subsidiary are presented according to the primary economic environment in which the entity operates. Accordingly, the functional currency of the Groups foreign subsidiaries is the applicable local currency. For the purpose of the consolidated financial statements, the results of operations and financial position of each entity are stated in euros, which is the functional currency of the Group and the presentation currency for the consolidated financial statements. The assets and liabilities of foreign subsidiaries located outside the euro zone are translated into euros at the closing exchange rate, while their income and cash flow statements are translated at the average exchange rate for the financial year. The resulting translation adjustment is included in other comprehensive income. Goodwill and fair value adjustments arising from the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. (h) Hedging instruments (h.1) Currency hedges Derivatives are initially recognized at fair value at the date contracts come into force and are re-measured at fair value at each balance sheet date. This fair value is recognized as an asset when it is positive and as a liability when it is negative. Fair value is based on valuations confirmed by banks. The fair value of forward currency agreements is based on forward exchange rates for contracts with a similar maturity. Since these instruments are not eligible as hedging instruments, foreign exchange gains and losses arising from changes in the
fair value of the derivatives are recognized directly in the income statement under other financial income or expenses. Monetary items held as assets and liabilities to be received or paid resulting from the foreign currency transactions are re-measured at closing exchange rates at each balance sheet date. Foreign exchange gains or losses at the date of payment, as well as unrealized gains or losses deriving from re-measurements, are recognized in the income statement under income from operations when they relate to operating activities or under financial income or expense when they relate to financing activities. (h.2) Interest-rate hedges The Group may enter into hedging transactions to protect itself against the risk of fluctuations in interest-rate risks. Derivatives are initially recognized at fair value at the date contracts come into force and are re-measured at the fair value at the end of each closing period. This fair value is recognized as an asset when it is positive and as a liability when it is negative. Fair value is based on valuations confirmed by banks. Where the hedging relationships between derivatives and the risks hedged satisfy the conditions required for use of hedge accounting, the Group applies hedge accounting. A hedging relationship satisfies the conditions required for use of hedge accounting where, upon initiation of the hedge, it is designated as such and formally documented and where it can be demonstrated that the hedge remains effective throughout the period for which it was initially put in place. Fair value hedge accounting is applied to fixed-income borrowings, and cash flow hedge accounting to floating-rate borrowings. With regard to fair value hedging relationships, the re-measurement of fixed-income borrowings is offset in the income statement through changes in the fair value of the derivative. When fair value hedge accounting is applied, changes in the fair value of derivatives and hedged items are recognized in the income statement and offset the portion of the gain or loss recognized on the effective portion of the hedging instrument. With regard to cash flow hedging relationships, changes in the fair value of the derivative are recognized directly in other comprehensive income. The portion of the gain or loss recognized on the effective portion of the hedging instrument is recognized directly in other comprehensive income. When the expected transaction subsequently gives rise to the recognition of a monetary item, the amounts previously recognized directly in other comprehensive income are reclassified in the income statement.
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(i) Business combinations and goodwill (i.1) Business combinations The Group did not elect for early adoption of the revised IFRS 3 for business combinations prior to December 31, 2009. This new standard is applied by the Group for business combinations that occurred after January 1, 2010. It was not used during the financial year. In accordance with IFRS 3, the accounting treatment adopted by the Group for business combinations that occurred prior to December 31, 2009 is presented below. This accounting method was used in connection with the acquisition of the Converteam Group in September 2008. Business combinations are accounted for using the purchase method. Accordingly, identifiable assets, contingent assets and liabilities of the company acquired satisfying the IFRS recognition criteria are recognized at fair value at the acquisition date, with the exception of non-current assets currently in the process of being sold, which are recognized at fair value less costs to sell in accordance with IFRS 5. The cost of a business combination reflects: at fair value at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the acquirer, in exchange for control of the acquiree; plus any costs directly attributable to the business combination. The difference between the cost of the business combination and the interest of the acquirer in the net fair value of the assets and liabilities identified at the date of acquisition is recognized in goodwill. Where this difference is negative, it is recognized immediately in the income statement. The initial measurement of fair values is finalized over the 12 months following the date of acquisition and any adjustment to these fair values is recognized in the form of a retroactive adjustment to goodwill. After this 12-month period, any adjustment is recognized directly in the income statement. (i.2) Goodwill Goodwill represents the excess of the cost of acquisition over the acquirers interest in the fair value of assets, liabilities and contingent liabilities acquired in a business combination. Goodwill is not amortized but tested for impairment at least annually. For the purpose of impairment testing, goodwill is tested at the cash generating unit level. The Group believes that it comprises a single cash generating unit. The reasons for this decision are as follows: None of the Groups subsidiaries are independent, The business and commercial strategy is global and is defined at Group level,
Products and systems, as well as sales, are coordinated at Group level and all the subsidiaries operate in the same markets, The Rotating Machines division is fully integrated with the products and systems provided by the other divisions of the Group, since it primarily develops its products for the Groups systems. Even though the Rotating Machines division may have its own market, this market is restricted by the Groups strategy and management. Accordingly, this division is therefore fully integrated with the rest of the Group, R&D strategy is decided and managed at Group level, and all the subsidiaries benefit from the results of this strategy. In conclusion, the Group believes that it comprises a single cash generating unit. The impairment test methodology is based on a comparison between the CGUs recoverable amount and its carrying amount. The recoverable amount is the higher of fair value less costs to sell and value in use. Converteam uses value in use to calculate the recoverable amount for the Group, in line with section 20 of IAS 36. Value in use is the present value of future cash flows anticipated from the CGU. Tests are carried out using the following method: The CGUs value in use is determined using projected cash flow after tax over a five-year period, calculated using the medium-term budget prepared by the Group. The projections are based on past experience, macroeconomic data for the power conversion market, the order backlog and products under development. The cash flows are extrapolated beyond this five-year period using a perpetual growth rate; The cash flows are discounted at a rate reflecting the markets current assessment of the time value of money and the risks specific to the relevant asset. This rate represents a weighted average cost of capital (WACC) after tax. The use of an after tax rate leads to the calculation of recoverable amounts similar to those obtained using pre-tax rates based on cash flows not subject to tax. The discount rate used for impairment testing during the period is stated in Note 10. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is recognized first as a reduction in the carrying amount of any goodwill allocated and then in other assets on a pro rata basis based on the carrying amount of each asset. A goodwill impairment loss may not be reversed in a subsequent period. (j) Intangible assets Intangible assets include both acquired intangible assets (such as technology, licensing agreements, intellectual property rights,
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contractual relationships, margin in backlog) and internally generated intangible assets. Acquisitions of intangible assets Acquired intangible assets are initially stated at cost and are amortized on a straight-line basis over their estimated useful lives. Margin in backlog is amortized on a straight line basis over a period of between one to three years owing to the average life of projects within the Group. The other intangible assets acquired are amortized on a straight-line basis over a period of ten years owing to the long-term nature of the contracts or the remaining life of these intangible assets if it is less than ten years. Internally generated intangible assets Research costs are expensed as incurred. Development costs are expensed as incurred unless the project they relate to meets the following criteria for capitalization: The project is clearly defined and its related costs are separately identified and reliably measured, The technical feasibility of the project is demonstrated, The intention exists to complete the project and to use or sell it, Adequate financial resources are available to complete the project, It is probable that the future economic benefits attributable to the project will flow to the Group. Capitalized development expenses are amortized on a straightline basis over the estimated useful life of the asset under development. The amortization charge is reported under research & development expenses. (k) Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and any accumulated impairment losses. The amount initially recognized in respect of an item of property, plant and equipment is allocated to its significant parts. Each part represents a component with a specific useful life. Depreciation is computed using the straight-line method over the estimated useful lives of each component. The most commonly used useful lives are as follows:
Estimated useful life (years) Buildings Machinery and equipment Tools, furniture, fixtures and other 15 7-12 3-7
Depreciation expense is recorded in the cost of sales, selling expenses or administrative expenses, based on the function of the underlying asset. Leases Property, plant and equipment acquired under finance leases or long-term rental arrangements that transfer substantially all the risks and rewards incidental to ownership is capitalized. It is recognized at fair value at the inception of the lease, or at the present value of the minimum lease payments, if lower. The corresponding liability to the lessor is included in the balance sheet as a financial liability. Lease payments are apportioned between finance charges and a reduction in the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Assets held under finance leases are depreciated over the expected useful lives on the same basis as owned assets or, wherever shorter, the term of the relevant lease. Leases that do not transfer substantially all the risks and rewards incidental to ownership are classified as operating leases. Rentals payable are expensed on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also deferred on a straight-line basis over the lease term. (l) Impairment of property, plant and equipment and intangible assets At each balance sheet date, the Group reviews the carrying amount of its property, plant and equipment and intangible assets to determine whether there is any evidence that the carrying amount of such assets may exceed their estimated recoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. If the recoverable amount is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. The impairment loss is recognized immediately in the income statement. When an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount. The increased carrying amount must not exceed the carrying amount that would have been determined, had no impairment loss been recognized in previous years. A reversal of an impairment loss is recognized immediately in the income statement.
Useful lives are reviewed on a regular basis and changes in estimates, when relevant, are accounted for on a prospective basis.
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(m) Financial assets Under IAS 39, financial assets include loans and deposits, investments, borrowings, pension plan assets, derivatives with positive fair value and trade receivables. On the balance sheet, financial assets include the following items: Loans and deposits Loans and deposits are initially recognized at fair value, plus directly attributable transaction costs and are subsequently measured at amortized cost using the effective interest rate method. If there is any evidence that these assets may be impaired, they are reviewed for impairment. Any difference between the carrying amount and impaired value (net realizable value) is recorded as a financial expense. The impairment loss may be reversed subsequently if the value is recovered in the future. In this case, the reversal of the impairment loss is recognized in financial income. Trade receivables Receivables are initially recognized at fair value, which in most cases is represented by their nominal value. Their recoverable amount is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. The impairment is recognized through an allowance for the expected credit risk. The impairment loss may be reversed if the value is recovered in the future. In this case, the reversal of the impairment loss is recognized in income from operations. Other current assets, net Other current assets include advances paid to suppliers, receivables from tax authorities (excluding income tax credits), prepaid expenses and other receivables. They are initially stated at fair value, less any impairment losses. Other current assets also include derivatives with a positive fair value (see note 3h). Cash and cash equivalents Cash and cash equivalents include bank accounts and short-term investments, which have maturities of up to three months at their inception. Bank overdrafts payable on first demand form an integral part of cash management and are therefore included as a component of cash and cash equivalents. Cash and cash equivalents consist of cash and highly liquid investments that are readily convertible to determinable amount of cash carrying an insignificant risk of changes in value and with an initial maturity of less than three months. (n) Inventories Raw materials and supplies, work in progress and finished products are stated at the lower of cost, using the weighted average
cost method, and net realizable value. Net realizable value is the estimated selling price in the normal course of business, less estimated costs to completion and selling expenses. Inventory cost comprises direct material and, where applicable, direct labor costs and those overheads that have been incurred in bringing the inventories to their existing location and condition. (o) Taxation Deferred taxes are calculated for each taxable entity in respect of temporary differences arising between the tax base and carrying amount of assets and liabilities and are accounted for using the liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized where it is probable that taxable profits will be available against which deductible temporary differences can be set off. The carrying amount of deferred tax assets is reviewed at each balance sheet date. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same tax authority and the Group intends to settle its current tax assets and liabilities on a net basis. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax is recognized in the income statement, except when it relates to items set off against or added directly to other comprehensive income, in which case the deferred tax is also recognized in other comprehensive income. (p) Provisions While a construction contract is in progress, obligations attributable to such a contract are taken into account in the assessment of the margin to be recognized and are therefore recognized in Construction contracts in progress under either assets or liabilities, as appropriate. At the completion date, such obligations are recognized as separate liabilities where they satisfy the following criteria: - the Group has a present legal or constructive obligation as a result of a past event; - it is probable that an outflow of economic resources will be required to settle the obligation; and such outflow can be reliably estimated.
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These liabilities are presented as provisions when they are of uncertain timing or amount. When this uncertainty is removed, they are presented as trade payables or other current liabilities. Obligations resulting from transactions other than construction contracts are directly recognized as provisions as soon as the criteria above described are met. Where the effect of the time value of money is material, provisions are measured at their present value. Restructuring costs are accrued when the reorganization or closure of facilities, or a program to reduce the workforce is announced and when management has given an undertaking to the affected employees and the related costs can be determined reliably. Such costs include employees severance and termination benefits and estimated facility closing costs. (q) Financial liabilities Financial liabilities include loans, convertible bonds, other borrowings, finance lease obligations, derivatives with negative fair value and trade payables. All financial liabilities are initially recognized at fair value and the fair value of loans and bonds is calculated less transaction costs directly attributable to debt issuance. Loans Bank loans and debt instruments are initially stated at the fair value of the proceeds received less costs directly attributable to the transaction. Subsequently, they are stated at amortized cost using the effective interest rate method. Amortized cost is calculated using the effective interest rate method less any impairment, any principal repayments and any value adjustments. This calculation includes all fees, commission and transaction costs included in the calculation of the effective interest rate. Gains and losses are recognized in the income statement when debt is derecognized, as well as through the amortized cost mechanism. Convertible bonds Bonds convertible into shares are split into separate debt and option components at inception. The value of the debt component is determined by discounting all future cash flows arising from the convertible bond. The value of the option component corresponds to the difference between the value of the debt portion and the proceeds of the issue. This value is recognized in equity. The deferred tax liability resulting from the difference between the carrying amount of debt component and its corresponding tax base is deducted from equity. The financial expense relating to the convertible bonds is then calculated by applying the effective interest rate to the debt at the end of each period.
The excess of financial expense over the interest actually paid out is added to the value of the debt in the balance sheet bringing the liability to its redemption value at the maturity date. Finance lease obligations: see note 3 (k) Derivatives Derivatives are recognized and re-measured at fair value under other current liabilities. Trade payables Trade payables are initially recognized at fair value, which in most cases is represented by nominal value. (r) Employee benefits The Group provides retirement and termination benefits to its employees. The type of benefits offered to an individual employee depends on the local legal requirements as well as operating practices of the specific subsidiaries. Termination benefits are generally lump-sum payments based upon an individuals years of credited service and annualized salary at retirement or termination of employment. Defined benefit plans For single employer defined benefit plans, the fair value of plan assets is assessed annually. The Group uses the projected unit credit method to determine the present value of its defined benefit obligations and the related current and past service costs. This method uses a best estimate of actuarial assumptions including the probable future length of the employees service, the employees final pay, average life expectancy and probable turnover of beneficiaries. The Group re-measures its pension obligations at each balance sheet date. Differences between actual and expected returns on plan assets together with the effects of any changes in actuarial assumptions are assessed. If this cumulative difference exceeds 10% of the greater of the projected benefit obligations or the market value of plan assets, the resulting unrecognized gains/ losses are amortized over the average remaining service life of active employees (corridor approach). The estimated cost of providing benefits to employees is accrued over the years in which the employees are active. In the income statement, the service cost component of pension benefit costs is included in current income from operations. The amortization of the actuarial net loss/(gain) as well as unrecognized past service cost and the impact of plan curtailments and settlements are recognized in other operating expenses. The financial components of the pension benefit cost such as interest cost and asset returns are included in financial income/(expense).
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The Group also provides employee benefits that are considered as other long-term employee benefits such as jubilee awards. The accounting method adopted is similar to the method used for defined benefits, except that past service costs and actuarial gains/losses are recognized immediately and the corridor approach is not applied. Defined contribution plans For defined contribution plans, the Group pays contributions to independently administered funds at a fixed percentage of employees pay. The relevant costs are expensed as incurred under income from operations.
(s) Share-based payments (cash-settled) Cash-settled share-based payments are measured at fair value at the grant date and recognized at the current fair value determined at each balance sheet date based on a number of conditions. This cash-settled share-based payments plan is predicated on the value of the shares of the Groups ultimate parent company, namely CVT Holding, and payment is made by the Group and its subsidiaries. In accordance with IFRS 2, the expense is recognized in income from operations over the vesting period under other expenses. The corresponding adjustment is a liability to employees recognized in other current liabilities.
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At December 31, 2009 (12 months) 2,120 2,234 4,354 (466) 0 (2,912) (3,378)
At December 31, 2009 (18 months) 1,814 1,814 3,628 (477) 0 (4,099) (4,576)
(1) This item reflects amortization of actuarial gains and losses and unrecognized past service costs, plus workforce reductions (see note 18).
(1) 2009 saw a decrease in the order backlog (22%), due in particular to global economic conditions. As a result, the Group launched a program to adjust its cost structure and initiated several cost-cutting drives. This program was continued during 2010. Restructuring costs amounted to 7,498 thousand in the financial year to December 31, 2010.
(2) The charge related to the cash-settled share-based payment came to 8,112 thousand in the financial year to December 31, 2010 and 3,725 thousand in the financial year to December 31, 2009 (see note 9). (3) Other expenses principally relate to provisions for various risks.
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(1) Other financial income and other financial expense chiefly included the 5,536 thousand net gain in the fair value of interest rate and currency hedges in the year ended December 31, 2009 and a net charge of 33,252 thousand in the year ended December 31, 2010. During the previous period, this item notably included 33,930 thousand in financial expense related to the redemption of the interest-rate swaps unwound when the debt was renegotiated (see note 19).
(2) Amortization of debt issuance costs stood at 34,958 thousand in the year ended December 31, 2010. This amount includes the remaining 34,321 thousand in amortization of issuance costs related to the original debt (see note 19). (3) Other bank charges include 1,794 thousand related to the early repayment of the debt.
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(1) The Group does not recognize any deferred tax assets at subsidiaries or in countries where it is unlikely that future profits will be available allowing these deferred tax assets to be used. The 2010 tax credit, which represents an effective tax rate of 41.90%, reflects the write-off of the deferred tax assets by Chinese company Converteam Rotating Machines (Yantai) Co. (b) Deferred tax assets and liabilities
At December 31, 2009 3,379 38,465 41,844 (32,822) 9,022 9,022 (52,584) 32,823 (19,761) (10,739)
In 2009, permanent differences relate mainly to 18,569 thousand in taxes on capital gains resulting from the sale of investments. These gains stem from the sale of Converteam Technology Ltd and Converteam UK Ltd shares to Converteam Holdings Northern Europe Ltd and of Converteam GmbH shares to Converteam Holdings CEER GmbH.
(In thousands) Tax loss carryforwards Other items Gross deferred tax assets before netting Netting by tax group or by legal entity - Liabilities Gross deferred tax assets after netting Deferred tax assets Gross deferred tax liabilities before netting Netting by tax group or by legal entity - Liabilities Deferred tax liabilities after netting Net deferred tax
Change over the period 4,382 (8,090) (3,708) 11,527 7,819 7,819 30,912 (11,527) 19,385 27,204
Other income
Translation adjustments and changes 243 645 888 (888) 0 0 (824) 888 64 64
At December 31, 2010 8,004 31,020 39,024 (22,183) 16,841 16,841 (37,263) 22,184 (15,079) 1,762
Deferred tax assets and liabilities break down as follows: The Group was satisfied as to the recoverability of the deferred tax assets, net at December 31, 2010 of 16.8 million based on its three-year business plan.
The analysis conducted by the Group showed a capacity to generate a sufficient level of taxable profits to use its net tax loss carryforwards and other net deferred tax assets arising from timing differences over a period of five years, reflecting the longterm nature of the Groups operations.
22
In accordance with IFRS 2, the expense of 3,725 thousand in the year ended December 31, 2009 and 8,112 thousand in the year ended December 31, 2010 was recognized in other expenses throughout the vesting period of the rights. The corresponding adjustment is a liability to employees recognized in other current liabilities. The debt stood at 11,842 thousand at December 31, 2010.
noTe 10 gooDwill
At the balance sheet date, the goodwill impairment test showed that no impairment was required for the period ended December 31, 2010. The goodwill impairment test was based on a weighted average cost of capital of 7.7% after tax. This rate was defined by an independent expert. The Group also conducted sensitivity tests, and their results do not contradict the findings of the goodwill impairment tests at December 31, 2010.
(In thousands) Margin in backlog Licenses/patents Software Other intangible assets Gross value Margin in backlog Licenses/patents Software Other intangible assets Accumulated amortization Margin in backlog Licenses/patents Software Other intangible assets Net value
0 0 (19) 0 (19) 0 0 19 0 19 0 0 0 0 0
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(In thousands) Land Buildings Machinery and equipment Tools, furniture, fixtures and other Constructions in progress Gross value Land Buildings Machinery and equipment Tools, furniture, fixtures and other Accumulated depreciation Land Buildings Machinery and equipment Tools, furniture, fixtures and other Constructions in progress Net value
0 (9) (548) (187) 0 (744) 0 8 345 169 522 0 (1) (203) (18) 0 (222)
Acquisitions of property, plant and equipment reflect the cost of renewing and modernizing equipment mainly for industrial sites in order to keep pace with Converteams current expansion.
noTe 12.2 - properTy, planT anD equipmenT helD unDer Finance leases, neT
At December 31, 2009 1,252 11,952 3,971 17,175 0 (4,743) (3,105) (7,848) 1,252 7,209 866 9,327 Acquisitions/ Depreciation/ Impairment 0 0 168 168 0 (889) (662) (1,551) 0 (889) (494) (1,383) Disposals Translation adjustments and other changes (640) 802 (233) (71) 0 (14) 110 96 (640) 788 (123) 25 At December 31, 2010 612 12,754 1,319 14,685 0 (5,646) (1,070) (6,716) 612 7,108 249 7,969
(In thousands) Land Buildings Machinery and equipment Gross value Land Buildings Machinery and equipment Accumulated depreciation Land Buildings Machinery and equipment Net value
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(b) Construction contracts in progress, net Construction contracts in progress break down as follows:
(In thousands) Construction contracts in progress, assets Construction contracts in progress, liabilities Construction contracts in progress, net Contract cost incurred plus profits recognized less losses recognized to date Less progress billings Construction contracts in progress before down-payments received from customers Downpayments received from customers Construction contracts in progress, net At December 31, 2010 310,760 (450,871) (140,111) 2,343,170 (2,375,341) (32,171) (107,940) (140,111) At December 31, 2009 470,476 (625,556) (155,080) 1,987,291 (1,997,449) (10,158) (144,922) (155,080)
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noTe 17 proVisions
At December 31, 2009 (In thousands) Warranties Litigation and claims Losses to completion on products and services Other risks on contracts Current provisions Tax risks and litigation Restructuring Other non-current provisions Non-current provisions Total provisions 51,829 15,231 415 19,420 86,895 1,557 9,284 3,592 14,433 101,328 49,055 6,218 971 20,629 76,873 302 8,466 190 8,958 85,831 (17,620) (11,071) (91) (12,993) (41,775) 0 (690) (1,578) (2,268) (44,043) (22,037) (2,447) (673) (2,254) (27,411) (127) (6,903) (87) (7,117) (34,528) Additions Reversals not used Uses Translation At December 31, adjustments 2010 and other changes 1,238 22 21 1,829 3,110 139 76 1 216 3,326 62,465 7,953 643 26,631 97,692 1,871 10,233 2,118 14,222 111,914
Provisions for warranties are accounted for as agreed in contracts. Provisions for warranty costs are generally accrued on the basis of a percentage of the sale price (0.75% and 1.2% respectively for systems and rotating machine activities) and are periodically reviewed on a contract-by-contract basis. The Group is engaged in several legal proceedings, mostly contract related disputes that have arisen in the normal course of
its business. Contract related disputes, often involving claims for contract delays or additional work, are common in the areas in which the Group operates. Certain proceedings against the Group do not involve a specific amount. Amounts set aside in respect of litigation, considered as reliable estimates of probable liabilities, are included in litigation and claims provisions and other current liabilities.
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accordance with IAS 19. Jubilee plans are offered in France and in Germany, with a lump sum to be paid depending on the number of years spent in the Group. In France, jubilee awards are paid after 15, 20, 30, 35 and 40 years of service while in Germany, they are paid after 25 and 40 years of service. The Group has no plan assets funding the defined benefit pension liabilities.
(b) Healthcare plan (specific to the USA) The rate of growth projected in the Groups healthcare plan costs is 9.65% in the year ended December 31, 2010, reducing thereafter to a rate of 5.76% from 2018 onwards. The table below shows the impact of an increase and a decrease of 100 basis point in projected healthcare cost trend rates on the defined benefit obligation and service cost:
(In thousands) At December 31, 2009 Defined benefit obligation Service cost At December 31, 2010 Defined benefit obligation Service cost 244 14 (235) (13) 227 12 (217) (11) +1% -1%
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Cumulative unrecognized actuarial gains and losses to be amortized at December 31, 2009 and at December 31, 2010 amounted to (2,891) thousand and (6,520) thousand respectively. hange in net amount recognized and components of pension costs C
(In thousands) Accrued pension and retirement benefits at the acquisition date Service cost Interest cost Expected return on plan assets Recognized actuarial net (loss)/gain Amortization of past service costs Plan curtailment/settlement/adjustments Sub-total pension cost Benefits paid Others (reclassification as restructuring provision) Translation adjustment Defined benefit obligation at the end of the year
Cumulative unrecognized past service costs to be amortized came to 4,616 thousand at December 31, 2009 and to 2,191 thousand at December 31, 2010.
At December 31, 2010 (43,811) (957) (2,112) 0 (79) 426 702 (2,020) 1,035 0 (267) (45,063)
At December 31, 2009 (12 months) (45,692) (1,097) (2,135) 0 (174) 314 1,980 (1,112) 1,067 1,806 120 (43,811)
At December 31, 2009 (18 months) (45,030) (1,395) (2,759) 0 (480) 314 1,980 (2,340) 1,727 1,806 26 (43,811)
The balance-sheet position of the predominantly long-term relevant assets and liabilities breaks down as follows.
(In thousands) Accrued pension and retirement benefits Excess pension plan assets Net (accrued) prepaid benefit cost At December 31, 2010 (45,063) 0 (45,063) At December 31, 2009 (12 months) (43,811) 0 (43,811) At December 31, 2009 (18 months) (43,811) 0 (43,811)
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Pension cost in the income statement The pension cost shown in the 2009 and 2010 income statement breaks down as follows:
(In thousands) Defined benefit obligation Operating expenses Other income and expenses(1) Interest expense Pension cost Defined contribution obligation Operating expenses Pension cost (total) (5,135) (7,155) (12,162) (15,613) (6,773) (9,113) (957) 1,049 (2,112) (2,020) (2,493) 3,934 (4,892) (3,451) (1,395) 1,814 (2,759) (2,340) At December 31, 2010 At December 31, 2009 (12 months) At December 31, 2009 (18 months)
(1) This item reflects amortization of actuarial gains and losses and unrecognized past service costs, plus workforce reductions.
noTe 19 borrowings
(a) Analysis by nature
(In thousands) Loans Loans - capitalized interest Loans - accrued interest Debt issuance costs(1) Other borrowings Other borrowings - capitalized interest Other borrowings - accrued interest Obligations under finance leases(2) Other borrowings Borrowings by nature Non-current Current 1,228,302 1,169,579 58,723 At December 31, 2010 494,404 0 107 (8,176) 690,996 39,893 3,232 7,846 At December 31, 2009 531,968 1,972 221 (34,321) 690,995 11,256 4,091 9,535 97 1,215,814 1,200,775 15,039
As stated in note 3 q), loans and other borrowings carrying interest are initially recognized at their fair value less transaction costs directly attributable to the issuance of debt. These financial liabilities are then stated at amortized cost using the effective interest rate method. (1) The total amount of transaction costs directly attributable to the bank debt issued in late September 2008 came to 43.3 million. A total of 9 million of these costs was amortized during the
financial year to December 31, 2009. The remainder of 34.3 million to be amortized stood at December 31, 2009. Following the renegotiation of the debt, this amount of 34.3 million was amortized in full at December 31, 2010. The total amount of transaction costs directly attributable to the new bank debt issued on June 10, 2010 came to 8.8 million, of which 636 thousand had been amortized by December 31, 2010. (2) See note 21.
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1) Loans As part of the various restructuring transactions carried out by the Group on September 29, 2008, it arranged several borrowings that were repaid on June 10, 2010. The characteristics of these loans were as follows:
Currency of the borrowing (In thousands) A1 loan A2 loan B1 loan B2 loan C1 loan C2 loan Cash bridge Permanent credit line Mezzanine facility Total o/w capital o/w capitalized and accrued interest EUR GBP EUR GBP EUR GBP EUR EUR EUR 176 000 114,000 115,000 30,000 115,000 30,000 100,000 2,478 34,992 717,470 Amount at issuance Amount at December 31, 2010 0 0 0 0 0 0 0 0 0 0 0 0 Amount at December 31, 2009 150,797 87,635 104,824 24,532 104,830 24,532 0 0 37,008 534,161 531,968 2,193 Nominal interest rate(1) 3m Euribor + 2.75% 3m Libor + 2.75% 3m Euribor + 3.25% 3m Libor + 3.25% 3m Euribor + 3.75% 3m Libor + 3.75% 3m Euribor + 2.75% 3m Euribor + 2.75% 3m Euribor + 10.5% Maturity date
(1) excluding the related effects of the interest rate swap The Group renegotiated its debt and arranged new borrowings on June 10, 2010. The characteristics of these borrowings are as follows:
Currency of the borrowing (In thousands) Permanent credit line Loan Loan Total o/w capital o/w capitalized and accrued interest EUR EUR GBP 0 357,264 142,736 500,000 Amount at issuance Amount at December 31, 2010 0 357,349 137,162 494,511 494,404 107 Amount at December 31, 2009 0 0 0 0 0 0 Nominal interest rate(1) 3m Euribor + 1.5% 3m Euribor + 2.0% 3m Libor + 2.0% Maturity date
(1) excluding the related effects of the interest rate swap The borrowings stated in the above table are subject to covenants (note 26.2). To curb the risk arising from fluctuations in interest rates, the Group hedges its positions using interest-rate swaps. With regard to the swaps covering the original debt, the Group recorded 31,212 thousand in other current liabilities reflecting the fair value of these derivatives at December 31, 2009. A corresponding financial expense of 668 thousand and a 30,544 thousand loss recorded directly under other compre-
hensive income were also recognized. As part of the June 2010 debt renegotiations, these swaps were unwound and the Group thus made an equalizing payment of 34,598 thousand. This repayment gave rise to 33,930 thousand in financial expense and a change of 30,544 thousand in other comprehensive income by comparison with December 31, 2009. With regard to the swaps covering the new debt, the Group recorded 145 thousand in other current liabilities reflecting the fair value of these derivatives at December 31, 2010. Accordingly, a loss of 145 thousand was recognized directly in other comprehensive income.
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The change over the financial year in other comprehensive income attributable to interest-rate hedging instruments thus came to 30,399 thousand. 2) Other borrowings (shareholder loans) At September 29, 2008, CVT Holding granted Financire CVT two shareholder loans of 200 million and 10.7 million respectively. The outstanding amount of this loan, which was partially repaid during the 2009 financial year, came to 1.1 million (including interest) at December 31, 2010.
Currency of the borrowing (In thousands) Other borrowings Other borrowings Other borrowings Total o/w capital o/w capitalized and accrued interest EUR EUR EUR
Furthermore, in connection with the reductions in capital carried out in December 2009, CVT Holding also granted Financire CVT a 490 million shareholder loan. An early interest payment of 3 million was made during the 2010 financial year. At December 31, 2010, the outstanding amount of the loan stood at 506.7 million, comprising a principal amount of 490 million and 16.7 million in capitalized interest. The characteristics of these shareholder loans are as follows:
Amount at December 31, 2010 226,176 1,195 506,751 734,122 690,996 43,126
Amount at December 31, 2009 214,242 1,067 491,033 706,342 690,995 15,347
Maturity date
The interest on these shareholder loans is capitalized. The interest and debt will be redeemed in the event of a major change in the Groups ownership structure. (b) Analysis by maturity
Short term At December 31, 2010 494,404 107 (8,176) 690,996 39,893 3,232 7,846 1,228,302 Within 1 year 60,000 107 (2,325) 0 0 0 941 58,723 1-2 years 2-3 years Long term 3-4 years 4-5 years Over 5 years
(In thousands) Loans Loans - accrued interest Debt issuance costs Other borrowings Other borrowings - capitalized interest Other borrowings - accrued interest Obligations under finance lease Other borrowings Borrowings by maturity
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(1)Personnel and related costs include the cash-settled sharebased payments liability (see note 9) (2)Accrued expenses include mainly accrued expenses on contracts in progress.
(3)At December 31, 2010, derivatives included 145 thousand linked to interest-rate hedges and 7,627 thousand linked to currency hedges. At December 31, 2009, the corresponding amounts were 31,212 thousand and 8,021 thousand respectively.
(In thousands) Debt: future payments Interest: future payments Finance lease Operating lease
32
(1) In 2010, the market value of 678 thousand comprises: 8,305 thousand in current assets (see note 15) (7,627) thousand in current liabilities (see note 20)
33
At December 31, 2009 (In thousands) Within 1 year Nominal value Bank forward currency agreements Purchases CAD/EUR GBP/EUR KRW/EUR NOK/EUR SGD/EUR USD/EUR Bank forward currency agreements Sales CAD/EUR GBP/EUR USD/EUR USD/GBP Export insurance contracts Total Forward commodity hedging agreements Total(2) Copper 174 14 174 Sales USD/EUR 8,499 9 3,983 (238) 3,308 175,826 887 106 241 84,740 3,206 57,991 189,923 Market value 82 442 14 (0) (2) 313 (192) (485) 2,046 3,548 1,685 462 30,746 (47) (65) 1 (308) 2,367 4,511 401 745 29 (66) (96) (48) 1-2 years Nominal value 532 48,625 Market value (3) (1,167) 2-3 years Nominal value Market value Total Nominal value 3,840 224,450 887 106 241 88,289 4,891 60,820 225,180 401 13,227 Market value 79 (725) 14 (0) (2) 266 (257) (455) 1,672 (96) (277) 219 14 233
(2) In 2009, the market value of 233 thousand comprises: 8,240 thousand in current assets (see note 15) (8,021) thousand in current liabilities (see note 20) 14 thousand relating to forward agreements put in place to cover risks on the Groups metals purchases.
b) Interest rate risk b.1) Treasury Management of the Groups treasury is handled centrally by Converteam Trsorerie SNC. The Groups policy is to minimize its interest rate risk. Cash and cash equivalents are invested in secure investments indexed to fixed interest rates or to floating rates with an initial maturity of less than three months.
Assuming all other parameters remain unchanged, the Groups sensitivity to a 50 bp increase in interest rates stood at 1,242 thousand in terms of its 2010 pre-tax income.
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b.2) Loans The sensitivity of the interest-rate hedging instruments is broken down in the following table:
Currency USD (In thousands) Impact on other comprehensive income Impact on pre-tax income Impact on other comprehensive income Impact on pre-tax income GBP Impact on other comprehensive income Impact on pre-tax income Impact on other comprehensive income Impact on pre-tax income Change +50 bps -50 bps +50 bps -50 bps Sensitivity 2010 469 0 (475) 0 437 0 (443) 0 Sensitivity 2009 1,097 73 (1,118) (73) 4,665 443 (4,754) (379)
c) Credit risk Risks related to receivables: The Group considers that the risk of counterparty insolvency leading to a significant impact on its financial situation or income is limited. The Group ensures that these counterparties
(In thousands) Trade receivables, net at December 31, 2009 Trade receivables, net at December 31, 2010
generally have strong credit profiles or adequate financial strength to satisfy their contractual obligations. The credit risk corresponds to receivables classified as overdue without any valuation allowances. The analysis by maturity of net receivables breaks down as follows:
TOTAL 168,682 183,515 Not past due 134,379 135,333 Past due < 1 year 28,181 38,295 Past due > 1 year 6,122 9,887
The Group did not experience during 2010 and has not experienced since any major payment default by its customers. d) Liquidity risk An analysis by maturity and interest rate of the Group debt is shown in note 19 Borrowings. The components of cash and cash equivalents are shown in note 16. Cash and cash equivalents consist of cash and highly
(In thousands) Cash and cash equivalents Borrowings due within 1 year Cash available within 1 year
liquid investments that are readily convertible to a determinable amount of cash carrying an insignificant risk of changes in value and with an initial maturity of less than three months. The financial crisis did not have any effects on the Groups cash investments. The net cash available to the Group at December 31, 2009 and 2010 broke down as follows:
At December 31, 2010 252,605 (58,723) 193,882 At December 31, 2009 229,149 (15,039) 214,110
e) Capital management The Groups capital management objectives are: - to support the entitys ability to pay dividends to shareholders, and - to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk. No changes were made in 2010 in the objectives, policies or processes in these areas. f) Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments measured at fair value:
- Level 1: quoted prices in active markets for identical assets or liabilities, - Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, - Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data. The Group considers that its currency and interest rate hedging instruments can be assigned to Level 1 as they are measured based solely on quoted prices in active markets.
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Guarantees are provided principally by banks in the form of performance bonds and letters of credit and are normally for defined amounts and periods. They are issued to customers with whom commercial contracts have been signed. The projects, for which the guarantees are given, are regularly reviewed by management and should payments become probable pursuant to guarantees, the necessary accruals will be set aside and recorded in the consolidated financial statements at that time. Converteam Group has negotiated performance bonds and guarantee facilities, uses of which are shown in the following table:
At December 31, 2010 230,341 0 230,341 At December 31, 2009 218,737 61 218,798
In addition, 344 million in parent company guarantees were also issued at December 31, 2010. The guarantee facilities negotiated with banks at December 31, 2010 amounted to 459 million, which included 320 million in confirmed lines and 139 million in non-confirmed lines.
Following the debt refinancing, bank loans are subject to financial covenants based on net debt/EBITDA and EBITDA/interest ratios measured at the level of Financire CVT: The net debt/EBITDA ratio over a 12-month period must be below 2.5x The EBITDA/net interest ratio over a 12-month period must be above 4x At December 31, 2010, the Group met these criteria.
noTe 27 - conTingencies
Although Converteam does not believe at the balance sheet preparation date that these claims will have a material adverse impact on its financial position, the Group cannot guarantee that these claims will not have a material adverse impact on its future results.
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Litigation (1) See note 17 Provisions (2) Procedures in progress: In the normal course of its business, the Group is exposed to risks of litigation on technical and commercial grounds. Provisions are set aside where appropriate and the Group pursues an active policy of arranging insurance cover for this type of risk. - In 2007, Marnavi Splendor GmbH & Co., KG filed a claim in the United States against Converteam. The amount claimed stood at around $1.3 million. On February 26, 2010, the US judge ruled that the court did not have jurisdiction and invited the plaintiff to bring the case before the French courts, which this latter finally gave up. This litigation is therefore closed now. - In 2008, the Group was served with a writ of summons in the United States from Carnival Corporation and Cunard Line, Ltd claiming a sum in excess of $130 million jointly from Converteam and another group. This litigation was closed between Converteam and Carnival by a settlement agreement signed out of court on August 5, 2010 which had a non significant financial impact on Converteam. - During 2008 and 2009, Converteam received contractual claims from one of its customers following incidents which had been occurring since 2007 in respect of products which the Group had supplied. Investigations revealed that these incidents were notably attributable to a component manufactured by a Converteam supplier and built into the equipment sold. The Group has set aside provisions in an amount that it considers will cover related costs. - In 2009, the Group was issued with third-party notice in the United States from Rolls-Royce AB in its capacity as guarantor. The plaintiff is claiming a sum in excess of $300 million from Converteam and from another group. This claim is linked to the litigation that Royal Caribbean Cruises Ltd (RCCL) initiated in 2003 against Rolls-Royce AB and other companies. Pursuant to the agreements signed in 2005 that gave rise to Converteam, no liability in respect of this litigation was transferred to the Group. Accordingly, Converteam considers that it is not concerned by this lawsuit. - In December 2010, a Converteam customer initiated ICC arbitration in Stockholm concerning equipment that Converteam supplied. The amount claimed by the customer stands at 47,9 million. Converteam fully rejects this claim and has counterclaimed for some 8,7 million of additional costs incurred. The Group has set aside provisions in an amount that it considers will cover related costs.
- At the end of 2010, Converteam was served with a complaint initiated in the United States by the Japanese group Crystal Cruises which claims damages jointly from Converteam and another group. Today, the amount of the claim is not known. Product liability: The Group designs, manufactures and sells several products, which may be of a significant unit value and are used in major industrial projects. Accordingly, product-related defects may have the potential to create liabilities that could be material. If potential product defects become known, a technical assessment occurs whereby products of the affected type are quantified and studied. If the results of the study indicate that a product liability exists, provisions are recorded. The Group believes that it has set aside adequate provisions to cover currently known product-related liabilities, and regularly revises its estimates using currently available information. Neither the Group nor any of its subsidiaries are aware of product-related liabilities that are expected to exceed the amount already recognized. The Group believes it has set aside sufficient amounts to satisfy its litigation, environmental and product liability obligations to the extent they can be estimated. Other legal risks: The Groups subsidiaries operate in sectors where a relatively small number of participants can materially affect the market dynamics. To date, the Group has not experienced any material adverse effects on its reputation, operations, or financial condition or results relating to competition and antitrust laws. However, there can be no assurance that the application of such laws will not in future have such a material adverse effect. Given the nature of the products that Converteam sells, the Group conducts a proportion of its business with governmental agencies and public sector entities, including those in countries known to experience corruption. The Group actively strives to ensure compliance with the laws and regulations relating to illegal or other prohibited payments and has established internal compliance programs to control the risk of such illegal activities and address appropriately any problem that may arise. A number of the Groups units are bound by confidentiality agreements entered into in the normal course of their activities that are normally associated with major contracts. Any breaches of such confidentiality obligations could lead to the payment of indemnities or other recourse that could adversely affect the Groups operations or financial condition or results. Environment, Health & Safety: The Group operates in various countries around the world which have differing laws and regulations on environmental protection, and health and safety. The Group has set an overall policy covering the risk management of these aspects and is confident that it is compliant in all its operations.
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Converteam Group SAS 30, avenue Carnot 91345 Massy Cedex (France) www.converteam.com