Analysis of the income statement and statement of financial position of the Salini Impregilo Group and the Parent Company.

This chapter presents the reclassified income statement, statement of financial position and structure of the Group and the Parent Company’s financial position at December 31, 2014. It also includes a summary of the main changes in the consolidated income statement, compared with those for the previous year, and in the statement of financial position, in comparison with the related figures for the previous year.

Unless otherwise stated, amounts are in millions of euros and those shown in parentheses refer to the previous year.

The "Alternative performance indicators" paragraph in the "Other information" section provides a definition of the indicators in the statement of financial position and income statement used to analyze the operating performance and financial position of the Group and the Parent Company.

Introductory Remarks

On June 20, 2014, as part of a transaction aimed at Italian and international institutional investors, the Board of Directors of the Parent Company Salini Impregilo S.p.A. exercised the powers granted to it by the Extraordinary Shareholders’ Meeting held on September 12, 2013, and approved the share capital increase limited to 10% of the existing capital, with the waiver of option rights. The transaction was successfully completed with the issuance of 44,740,000 new ordinary shares without par value and the increase in share capital by an amount of €44,740,000. The subscription price of the shares was set at €3.70 per share, while the consideration received, net of directly related additional expenses, was €161.6 million. Under this offer, which was restricted to Italian and institutional investors only, the controlling company Salini Costruttori S.p.A. sold 94,000,000 Salini Impregilo S.p.A. ordinary shares. Finally, taking into account that the greenshoe option was also exercised on July 18, 2014 by the Joint Global Coordinator for the transaction, for an additional number of 4,050,000 ordinary shares, to date the free float of Salini Impregilo S.p.A. is around 38.11% of the ordinary share capital.

Lastly, you are reminded that, from the end of the first half of 2014, the estimates referring to the set of industrial activities that the Group has in the Bolivarian Republic of Venezuela have needed to be updated. In line with the previous financial reports, made available to the public as required by the current legal provisions, the deterioration of the economic conditions of the country, which have been going downhill since the early months of the year, were such that it became necessary to make a detailed assessment of the time and financial parameters according to which the Group’s net assets can be generated in reference to this area. The Group’s relations with the local economic system as well as with

the client local administrations are still excellent and geared toward maximum cooperation in pursuit of the respective goals, as demonstrated by the additional work awarded at the end of June 2014 in relation to existing railway contracts. However, in light of the current general framework of the local currency/financial market situation in the area, stemming from the conditions of the above-mentioned local economic system, and consistent with recent changes to the currency regulations of the country, it was considered reasonable, among other things, to adopt, with effect from June 30, 2014, a new reference exchange rate for the translation of both the current values of working capital denominated in Venezuelan currency and the perspective values both to be paid/realized in the entire life estimates of the ongoing railway projects under direct management.

The official exchange rate used, called SICAD 2, whose first fixing took place during the last few days of the first quarter of 2014, is believed to be the most representative of the relationship under which future cash flows, expressed in local currency, may be adjusted in the event that they were verified at the valuation date also considering the possibility to access the Venezuelan currency market and the Group’s specific needs to obtain currency other than the functional currency.

This exchange rate expresses a substantial depreciation (by about 9 times) of the local currency against the US Dollar, compared with the official exchange rate previously used, i.e. CENCOEX (formerly CADIVI), for the purposes of preparing the consolidated financial statements of the Salini Group as at December 31, 2013.

The updated estimates had a number of effects on the accounts as at December 31, 2014, the most significant of which is the overall reduction in the value of net assets in local currency, for a total of approximately €97 million, of which €55 million calculated upon adoption of the new currency and the remaining €42 million deriving from fluctuations in the amounts and the exchange rate during the second half of 2014.

In the Extraordinary Official Gazette No. 6,171 of February 10, 2015, the Ministry of Popular Power for the Economy, Finance and Public Banking (MPPEFBP) and the Central Bank of Venezuela (BCV) published the “Convenio Cambiario No. 33”, replacing the SICAD II exchange rate system with a newly-introduced floating official exchange rate called SIMADI.

In summary, with the entry into force of this latest exchange convenio, three levels of exchange rate are set:

  1. CENCOEX 6.30 BSF per 1 US$, for essential foodstuffs;
  2. SICAD 12 BSF per 1 US$, for specific economic sectors and public sector enterprises;
  3. SIMADI, whereby exchange rate transactions will be executed based on offer and demand, generating a floating exchange rate that will be published on a daily basis.

To date, there are no large exchange volumes to establish whether the aforementioned free exchange rate will effectively be supplied by operators with hard currency needed for transactions. At the moment, the SIMADI exchange rate is set at 187.78 BSF per US$.

In compliance with the provisions of international financial reporting standards, the effects of this further change in Venezuela’s currency system will be reflected in the 2015 financial year. For further details about accounting considerations for this event, see the notes to the consolidated financial statements of the Salini Group and the separate financial statements of Salini Impregilo S.p.A.

Remarks concerning the comparability of the income statement and statement of financial position data for 2014 with those for the previous year – new accounting standards in effect as of January 1, 2014

As a general remark, it is worth mentioning that, starting with the current year, some new international financial reporting standards went into effect, among which the following are specifically relevant for the purposes of the Annual Report of the Salini Impregilo Group:

  • IFRS 10 - Consolidated financial statements
    This standard replaces SIC 12 Consolidation - Special purpose entities and certain parts of IAS 27 - Consolidated and separate financial statements. The new standard identifies a single control model and defines, on a more structured basis, the requirements for determining whether or not control exists. This provision is particularly relevant with regard to situations that qualify as entailing "de facto control", even if the essential conditions for determining the existence of control are basically the same as those contained in the standards previously in effect.
  • IFRS 11 – Joint Arrangements
    This standard replaces IAS 31 - Interests in joint ventures and SIC 13 - Jointly controlled entities - Non-monetary contributions by venturers. It defines the criteria for the identification of joint arrangements and how they should be accounted for based on the rights and obligations arising from the contract, regardless of its legal form. The new standard provides for different recognition methods, depending on whether the transaction is a joint operation or a joint venture, and eliminates the possibility to apply different accounting treatments to the same types of arrangements and, conversely, defines a single model based on the contractual rights and obligations.
  • IAS 28 – Investments in Associates and Joint Ventures
    This standard defines the accounting treatment of investments in associates and joint venture and is a rewording of the old IAS 28 in light of the new provisions introduced with IFRS 10 and IFRS 11.

These standards were adopted retrospectively to allow a presentation of results on a like-for-like basis with the information for previous periods.

The greatest difficulties in interpreting and applying the new standards were encountered above all in relation to Special Purpose Vehicles ("SPVs") in which the Group participates jointly with other partner companies and which are established for the sole purpose of carrying out specific construction projects. These entities, which in 2013 belonged exclusively to the former Impregilo Group, were mainly identified as Joint Ventures and recognized using the proportional consolidation option provided in the previously applicable IAS 31.

The restatement of the 2013 comparison data following adoption of the new standards has resulted, in the consolidated income statement, in a €164 million reduction in revenues and non-material effects on EBIT and net profit. The drop in revenue was mainly due to the different consolidation method for some entities. The most significant of them is Grupo Unidos por el Canal SA (Panama), which was consolidated on a proportional basis in the 2013 financial statements, whereas now it is valued using the equity method. For a detailed review of the effects deriving from the adoption of the new standards, refer to the notes. 

Introductory remarks concerning the comparability of the income statement and statement of financial position data for 2014 with those for the previous year – continuity with the consolidated financial statements of the Salini Group for 2013

The merger by incorporation of Salini S.p.A. (formerly the controlling company at December 31, 2013) into Impregilo S.p.A. (formerly the controlled company at December 31, 2013) became fully effective as of January 1, 2014. The company changed its name to Salini Impregilo S.p.A. as a result of this merger.

In accordance with the requirements of the international financial reporting standards adopted by the Group in continuity with previous years, the above-mentioned merger does not constitute a transaction likely to modify the amounts recognized in the Group’s financial statements, due to the fact that it qualifies as a "business combination of entities under common control", control of which Salini S.p.A. acquired over Impregilo S.p.A. with effect from April 1, 2013. With the exception of the information provided above regarding new international financial reporting standards, the mandatory adoption of which is statutorily required as of January 1, 2014, the statement of financial position, income statements and statement of cash flows of the Salini Impregilo Group at December 31, 2014 reflect continuity of values with respect to the consolidated financial statements of the Salini Group for the year ended December 31, 2013. These financial statements also reflected the restatement of the assets and liabilities of the Impregilo Group based on their respective fair value on the date control was acquired and the subsequent allocation of the difference between the above-mentioned fair value and the total consideration paid in 2013 by the then controlling company Salini S.p.A. to acquire said control, as part of a process commonly referred to as purchase price allocation (PPA). Please note that the differential was positive and, consequently, was recognized in the 2013 consolidated income statement as badwill. For more information about these issues, please see the detailed disclosure provided in the notes to the consolidated financial statements of the Salini Group for the year ended December 31, 2013.

Taking into account the developments described above, the data of the consolidated income statement and consolidated statement of comprehensive income for 2013 - provided below for comparative purposes - are those of the Salini Group and presented in the Annual Report of the Salini Group at December 31, 2013 to reflect:

  • the classification of the Todini Costruzioni Generali Group and the company Fisia Babcock Environment GmbH in accordance with IFRS 5;
  • the retrospective recognition of the effects of the adoption of the new international financial reporting standards referred to in the previous paragraph of this section.

These figures, however, are not fully comparable with those presented by the Group resulting from the merger for the period reviewed in this Annual Report due to the fact that the contribution made by the Impregilo Group in the previous financial year was recognized, according to the line-by-line consolidation method, only as from April 1, 2013, the date of control acquisition by Salini S.p.A..

Please note that, in the first quarter of 2014, consistent with the process of monetizing the Group’s non-core assets, launched in October 2012 and continued last year, the Salini Impregilo Group executed preliminary agreements for the sale to external parties of the entire interest held by Impregilo International Infrastructures N.V. in the German company Fisia Babcock Environment GmbH. These agreements were finalized in May 2014; therefore, in the period reviewed in this Annual Report, the financial position attributable to this company (at the time of sale) and the net profit resulting from the sale, equal to €89.2 million, were reclassified in accordance with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations".

Lastly, with reference to the classification of the Todini Costruzioni Generali Group under IFRS 5, it is noted that following expression of interest in relation to its operations in Italy and abroad and given the company’s desire to rationalize the management of non-operational activities, the Todini Group was divided into business units. This restructuring operation, not foreseeable in December 2013, required an extension of the maximum deadlines set by IFRS 5 to satisfy the requests of potential buyers and resulted in the business units subject to expressions of interest being classified as non-current assets held for sale and profit (loss) from discontinued operations, in accordance with the provisions of IFRS 5. The business units not subject to an expression of interest by potential buyers and residual assets were classified in continuing operations. In accordance with IFRS 5, these classifications were also applied for the comparative period solely to income statement data.

With reference to the separate financial statements presented below in this report, it is noted that the comparative data relating to the year ended December 31, 2013 refer to Impregilo S.p.A. before the merger, which took effect in legal and accounting terms as of January 1, 2014. The Impregilo data at December 31, 2013 were restated to take account of the new accounting standards applicable as from January 1, 2014.