EX-99.7 8 d519850dex997.htm FI ANNUAL REPORT AT DECEMBER 31, 2012, REPORTS OF THE AUDITORS FI annual report at December 31, 2012, reports of the Auditors

LOGO

 

ANNUAL REPORT

AT DECEMBER 31, 2012

FIAT

INDUSTRIAL


LOGO

 

FIAT INDUSTRIAL

THE GLOBAL SCALE OF OUR

INDUSTRIAL AND COMMERCIAL

ACTIVITIES, TOGETHER WITH THE

FLEXIBILITY OF THE ORGANIZATION

AND OUR PROVEN EXPERIENCE

IN MANAGING THE UNEXPECTED,

WILL ENABLE US TO COMPENSATE

FOR DIFFICULTIES THAT WE

MAY ENCOUNTER IN CERTAIN

BUSINESS SEGMENTS OR

GEOGRAPHIC MARKETS WITH

STRONG RESULTS IN OTHERS.

Sergio Marchionne

Chairman


LOGO

 

GENERAL MEETING

Fiat Industrial’s shareholders are notified that an Ordinary General Meeting will be held at Centro Congressi Lingotto, Via Nizza 280, Turin at 11 a.m. on April 8, 2013 (single call) to vote on the following:

Agenda

1. Annual Report:

a) Motion for Approval of the Statutory Financial Statements at December 31, 2012, Allocation of Profit and Dividend Distribution

b) Compensation Policy pursuant to Article 123-ter of Legislative Decree 58/98

2. Election of Board of Statutory Auditors:

a) Election of Regular Auditors, Alternate Auditors and Chairman

b) Compensation for Statutory Auditors

NOTICE

Attendance and Representation

Shareholders are entitled to attend the Meeting if they hold the right to vote at the close of business on the record date of March 26, 2013 and the Company has received the relevant confirmation of entitlement from an authorized intermediary.

As provided by law, Shareholders entitled to attend the Meeting may appoint a representative by written proxy.

The Company has designated Servizio Titoli S.p.A. as the representative, pursuant to Article 135-undecies of Legislative Decree 58/98, upon whom shareholders may confer proxy and instruct to vote on all or some of the motions on the agenda. The deadline for conferral of proxy is April 4, 2013, using the form provided on the corporate website (www.fiatindustrial.com/Investor Relations/Shareholder Info/Shareholder Meetings). The form can also be requested by calling +39 011 0923200.

Documentation and Information

The Notice of General Meeting available on the corporate website (www.fiatindustrial.com /Investor Relations/Shareholder Info/Shareholder Meetings) contains complete information and instructions relating to the rights exercisable by Shareholders, including the procedure and deadlines for presenting lists of candidates for election of the Statutory Auditors.

The Annual Report and Annual Report on Corporate Governance are available at the Company’s registered office and on the corporate website. Reports and motions relating to the other items on the agenda will be available at the Company’s registered office and on the corporate website on or before the legal deadline.

2


LOGO

 

FIAT INDUSTRIAL VILL

19-9-2011

3


LOGO

 

CONTENTS

CONTENTS

BOARD OF DIRECTORS AND AUDITORS 6

LETTER FROM THE CHAIRMAN 8

THE GROUP AT A GLANCE 11

2012 in Summary 12

Introduction 14

Group Structure 15

Brands 16

Fiat Industrial around the World 22

Our Commitment to Sustainable Development 24

REPORT ON OPERATIONS 35

Highlights 36

Shareholders 37

Key Events in 2012 40

Highlights by Sector 50

Main Risks and Uncertainties to which

Fiat Industrial S.p.A. and the Group are Exposed 52

Research and Innovation 66

Human Resources 74

Financial Review - Fiat Industrial Group 80

Corporate Governance 96

Transactions between Group Companies and with Related Parties 104

Subsequent Events and Outlook 105

Operating Performance by Sector 106

Agricultural and Construction Equipment 107

Trucks and Commercial Vehicles 115

FPT Industrial 125

Financial Review - Fiat Industrial S.p.A. 128

Motion for Approval of the Statutory Financial Statements at December 31, 2012, Allocation of Profit and Dividend Distribution 131

4


LOGO

 

FIAT INDUSTRIAL GROUP - CONSOLIDATED

FINANCIAL STATEMENTS AT DECEMBER 31, 2012 133

Consolidated Income Statement 134

Consolidated Statement of Comprehensive Income 135

Consolidated Statement of Financial Position 136

Consolidated Statement of Cash Flows 138

Statement of Changes in Consolidated Equity 139

Consolidated Income Statement pursuant to Consob Resolution 15519 of July 27, 2006 140

Consolidated Statement of Financial Position pursuant to Consob Resolution 15519 of July 27, 2006 141

Consolidated Statement of Cash Flows

Pursuant to Consob Resolution 15519 of July 27, 2006 142

Notes to the Consolidated Financial Statements 143

Appendix I - Fiat Industrial Group Companies at December 31, 2012 237

Appendix II - Information required under

Article 149-duodecies of the Consob Issuer Regulations 250

ATTESTATION OF THE CONSOLIDATED

FINANCIAL STATEMENTS UNDER ARTICLE 154-BIS

OF LEGISLATIVE DECREE 58/98 251

FIAT INDUSTRIAL S.P.A. - STATUTORY

FINANCIAL STATEMENTS AT DECEMBER 31, 2012 253

Income Statement 254

Statement of Comprehensive Income 254

Statement of Financial Position 255

Statement of Cash Flows 256

Statement of Changes in Equity 257

Income Statement pursuant to Consob Resolution 15519 of July 27, 2006 258

Statement of Financial Position pursuant to Consob Resolution 15519 of July 27, 2006 259

Statement of Cash Flows pursuant to Consob Resolution 15519 Of July 27, 2006 260

Notes to the Statutory Financial Statements 261

Appendix - Information required under

Article 149-duodecies of the Consob Issuer Regulations 302

ATTESTATION OF THE STATUTORY

FINANCIAL STATEMENTS UNDER

ARTICLE 154-BIS OF LEGISLATIVE DECREE 58/98 303

REPORTS OF THE INDEPENDENT AUDITORS 305

REPORTS OF THE BOARD OF STATUTORY AUDITORS 311

MOTIONS FOR AGM 319

This document has been translated into English for the convenience of international readers. The original Italian should be considered the authoritative version.

5

 


LOGO

 

BOARD OF DIRECTORS AND AUDITORS

BOARD OF DIRECTORS AND AUDITORS

BOARD OF DIRECTORS

Chairman

Sergio Marchionne

Directors

Alberto Bombassei (2) Gianni Coda John Elkann (1) (3) Maria Patrizia Grieco (1) Robert Liberatore (1) Libero Milone (2) Giovanni Perissinotto (3) Guido Tabellini (2)

Jacqueline Tammenoms Bakker (3)

John Zhao

BOARD OF STATUTORY AUDITORS

Regular Auditors

Paolo Piccatti-Chairman

Valter Cantino

Lucio Pasquini

Alternate Auditors

Riccardo Rota Vittorio Sansonetti Giorgio Cavalitto

INDEPENDENT AUDITORS

Reconta Ernst & Young S.p.A.

(1) Member of the Nominating, Corporate Governance and Sustainability Committee

(2) Member of the Internal Control and Risk Committee

(3) Member of the Compensation Committee

6


LOGO

 

FIAT

7


LOGO

 

LETTER FROM THE CHAIRMAN

LETTER FROM THE CHAIRMAN

Dear Shareholders,

2012 was a particularly significant year for Fiat Industrial, both for the results achieved, despite deteriorating economic conditions in several major European markets, and for the fact that it represented the beginning of another important chapter.

The decision to ensure full independence and freedom of movement for the capital goods businesses, through the demerger from Fiat Group, has unlocked their growth potential and brought clear financial benefits.

In 2012, its second year as an independent group, Fiat Industrial posted another year of gains and met all financial targets. Revenues were up 6.2% to €25.8 billion.

Trading profit was also significantly higher at more than €2 billion, with trading margin improving 1.2 percentage points over the prior year to 8.1%.

Net profit was up 31% to €921 million.

Those results demonstrate the solidity of the Group and its businesses and were primarily driven by continued robust performance for CNH, particularly in the Agricultural Equipment segment.

On that basis, the Board of Directors is recommending a total dividend of approximately €275 million, corresponding to €0.225 per ordinary share.

Despite being a relative newcomer to the financial markets, the profound sense of responsibility with which the Group manages its activities reflects the values and experience integral to each of the Group’s businesses.

During the year, Fiat Industrial’s leadership in sustainability was again recognized by leading rating agencies and other international organizations.

The Group was reconfirmed Industry Leader in the Industrial Engineering sector of the prestigious Dow Jones Sustainability Indexes (DJSI) World and Europe, which only admit companies that are best-in-class in terms of the sustainable management of their businesses. Fiat Industrial scored 85/100 compared with an average of 51/100 for the sector. For the second consecutive year, Fiat Industrial was also admitted to the Italy 100 Carbon Disclosure Leadership Index (CDLI) with a score of 91/100 for the level of disclosure on issues related to climate change.

We consider these important recognitions of what we have already achieved, as well as an incentive to continue in our commitment and set even more ambitious targets for the future.

None of these results would have been possible without the determination and dedication of the men and women at Fiat Industrial and we thank them for embracing these principles and translating them into concrete action.

Fiat Industrial has reached another crucial moment in its history.

In November, CNH Global N.V. (CNH) and Fiat Industrial S.p.A. signed a merger agreement that paves the way for a new corporate structure and full integration of their activities.

The transaction - which will be submitted to the respective companies’ shareholders at the extraordinary general meetings to be called for approval of the transaction, with completion expected during the third quarter of 2013 - represents the culmination of a lengthy simplification process initiated more than two years ago.

8


LOGO

 

From a technical perspective, the agreement provides for the establishment of a new company (NewCo) into which both Fiat Industrial and CNH will be merged, with Fiat Industrial shareholders receiving one NewCo share for each Fiat Industrial share held and CNH minority shareholders receiving 3.828 NewCo shares for each CNH share held.

NewCo will adopt a loyalty voting structure to promote a stable shareholder base by rewarding long-term share ownership.

From a strategic viewpoint, we consider this step vital to the future growth, simplification, rationalization, autonomy and efficiency of the Group.

It will lead to the creation of a fully-integrated, multinational capital goods group capable of competing at the very top of its sector.

It will be one of the largest, most solid players in its peer group with an established global presence and, finally, the freedom to craft its own destiny.

It will have the necessary flexibility to pursue the most advantageous strategic options and capitalize on opportunities for growth and consolidation consistent with its ambitions as a leader in the sector.

The new organizational structure, announced at the end of 2012, reflects the international profile of the Group’s businesses and will play a key role in facilitating the integration process.

For 2013, we expect continued solid trading conditions for all sectors, especially CNH.

The global scale of our industrial and commercial activities, together with the flexibility of the organization and our proven experience in managing the unexpected, will enable us to compensate for difficulties that we may encounter in certain business segments or geographic markets with strong results in others.

On the back of the Group’s performance to date, Fiat Industrial’s objectives for 2013 are: revenues up 5%; trading margin between 8.3% and 8.5%; and net industrial debt down to between €1.1 billion and €1.4 billion.

For the past two years, the new Group has met and exceeded all expectations. It has established a new course with decisiveness, efficiency and responsibility.

As a truly global organization, it understands that continuous improvement and change are essential to compete. Our move forward to the full integration of Fiat Industrial and CNH is based on that approach.

As we forge this new industrial group, with all of the opportunities and challenges that it will bring, we know that the further integration of our activities will unleash renewed vitality and opportunity for the development of our businesses and contribute significantly to the creation of value.

We want to thank you for your support during 2012 and for remaining with us as we enter this next historic phase.

February 21, 2013

/s/ Sergio Marchionne Sergio Marchionne CHAIRMAN

9


LOGO

 

4


LOGO

 

THE GROUP AT A GLANCE

0

12 2012 in Summary

14 Introduction

15 Group Structure

16 Brands

22 Fiat Industrial around the World

24 Our Commitment to Sustainable Development


LOGO

 

THE GROUP AT A GLANCE

2012 IN SUMMARY

2012 IN SUMMARY

Financial Results

REVENUES TRADING PROFIT PROFIT

€25.8 BILLION €2.1 BILLION €0.9 BILLION

NET INDUSTRIAL DEBT TOTAL AVAILABLE LIQUIDITY

€1.6 BILLION €6.2 BILLION

The Group

3 11 190

SECTORS BRANDS NATIONAL MARKETS

49 64 68,257

R&D CENTERS PLANTS EMPLOYEES

5,800 €895 MILLION €15.2 MILLION

INDIVIDUALS DEDICATED INVESTED IN R&D INVESTED IN TRAINING

TO INNOVATION

12


LOGO

 

The Group at a Glance

REVENUES

(€ million)

2012 25,785

2011 24,289

2010 21,342

0 10,000 20,000 30,000

TRADING PROFIT

(€ million)

2012 2,079

2011 1,686

2010 1,092

0 1,000 2,000

PROFIT/(LOSS)

(€ million)

2012 921

2011 701

2010 378

-1,000 0 1,000

NET DEBT

(€ million)

15,994

2012

1,642

14,549

2011

1,239

12,179

2010

1,900

0 5,000 10,000 15,000

Fiat Industrial Group Industrial Activities

13


LOGO

 

THE GROUP AT A GLANCE

INTRODUCTION

INTRODUCTION

Fiat Industrial Group was created on January 1, 2011 through the demerger of the capital goods activities of Fiat S.p.A. The Group produces and sells agricultural and construction equipment (CNH), trucks and commercial vehicles (Iveco), and engines and transmissions for industrial and marine applications (FPT Industrial).

Since January 3, 2011, Fiat S.p.A. and Fiat Industrial S.p.A. have been listed separately on Borsa Italiana’s electronic exchange (MTA) in Milan and operate as independent companies, each with its own management and board of directors.

For the purpose of simplifying the Company’s capital structure and governance, during the year Fiat Industrial S.p.A. undertook a mandatory conversion of all 103,292,310 preference shares and 79,912,800 savings shares into 130,241,397 ordinary shares. The transaction was completed on May 21, 2012 at a conversion ratio of 0.700 ordinary shares per preference share and 0.725 ordinary shares per savings share. From that date, Fiat Industrial ordinary shares only were traded on the MTA, and the Company’s share capital totaled €1,919,433,144.74, consisting of 1,222,568,882 shares with a par value of €1.57 each.

*****

On May 30, 2012, Fiat Industrial S.p.A. (“FI”) invited the Board of Directors of CNH Global N.V. (“CNH”), in which FI holds an 87% stake, to explore the benefits of a merger of the two companies into a newly-incorporated Dutch company, or similar structure, at exchange ratios determined with reference to the undisturbed market prices of FI and CNH shares prior to the transaction being announced (i.e., March/April 2012). The objective of the transaction is to simplify the Group’s capital structure by creating a single class of liquid stock, with a primary listing in New York and a secondary listing in Europe (subsequently identified as Borsa Italiana in Milan), thereby establishing a true peer to the major North American-based capital goods players in both scale and capital market appeal. On November 26, 2012 - following completion of negotiations between Fiat Industrial and the Special Committee formed by CNH Global N.V.’s Board of Directors - FI and CNH announced that they had entered into a definitive merger agreement. On the basis of the agreement, FI and CNH will be merged into a newly-incorporated Dutch company (NewCo), with FI shareholders receiving one NewCo share for each FI share held and CNH shareholders receiving 3.828 NewCo shares for each CNH share held. In addition, on December 28, 2012, CNH paid minority shareholders a cash dividend of USD 10 per CNH share, as also established in the agreement. Based on market values on November 16, 2012, the trading day prior to the announcement of Fl’s final offer, the cash dividend together with the 3.828 NewCo common shares offered for each CNH share represents a 25.6% premium over the implied value of Fl’s initial offer. In addition, CNH minority shareholders benefited from the dividend being paid prior to completion of the merger. The transaction is subject to the customary closing conditions, including a cap on the exercise of withdrawal rights by FI shareholders and opposition rights by FI creditors of €325 million in aggregate. It is also subject to the approval of shareholders of both FI and CNH. FI, which holds 87% of CNH, has stipulated that it will vote its CNH shares in favor of the transaction. Additionally, NewCo will adopt a loyalty voting structure, whereby the shareholders of FI and CNH that are present or represented by proxy at the respective shareholder meetings at which the merger transaction is approved, and continue to hold their shares until the effective date of the merger, may elect to receive common shares in NewCo registered in a special section of the company’s share register that entitles them to two votes. Following completion of the merger, new shareholders will also be able to earn a double vote by holding their shares continuously for a period of at least three years. The structure is intended to facilitate a stable shareholder base and reward long-term share ownership, while allowing the Group enhanced flexibility to pursue strategic opportunities in the future.

14


LOGO

 

GROUP

STRUCTURE

THE GROUP AT A GLANCE

The Group at a Glance

GROUP STRUCTURE

FIAT INDUSTRIAL

CNH FPT IVECO

INDUSTRIAL

87.4% 100% 100%

AGRICULTURAL POWERTRAIN TRUCKS

& CONSTRUCTION & COMMERCIAL

EQUIPMENT VEHICLES

15


LOGO

 

THE GROUP AT A GLANCE

BRANDS

BRANDS

Fiat Industrial is a global leader in the capital goods sector with a significant industrial base, technological excellence in customer solutions, an extensive product range and a worldwide presence. Created through the demerger of Fiat S.p.A.’s capital goods activities, the Group operates through CNH, Iveco and FPT Industrial, each of which is a major international player in its sector. The three businesses design, produce and sell tractors, agricultural equipment, construction equipment (CNH), trucks and commercial vehicles, buses, coaches and special vehicles (Iveco), as well as engines and transmissions for those products and for marine applications (FPT Industrial).

The Group’s industrial and financial services companies are located in 44 countries around the world with a commercial presence in approximately 190 countries.

16


LOGO

 

The Group at a Glance

AGRICULTURAL AND CONSTRUCTION EQUIPMENT (CNH)

CNH was built on the experience of brands that over the years have played a key role in the development of the agricultural and construction equipment industries in both Europe and the United States and that today offer customers the best technological solutions available. Agricultural equipment is sold under the New Holland Agriculture and Case IH Agriculture brands, as well as the Steyr brand in Europe. Construction equipment is sold under the New Holland Construction and Case Construction brands.

CNH offers customers adaptable, quality, high productivity products, backed by full service support (CNH Parts & Service) and personalized financing solutions (CNH Capital).

Case IH Agriculture

The Case IH Agriculture brand has a long tradition of leadership in the agricultural sector and is synonymous with incomparable performance, reliability and operating efficiency.

The brand’s range of tractors, balers and combines continues in the tradition of notable predecessors such as Case International Harvester and David Brown, to name but a few.

Case IH’s powerful, reliable and highly-productive machines are backed by a global organization that supports agriculture producers in the optimized, 360 degree management of their activities.

New Holland Agriculture

New Holland Agriculture provides customers affordable solutions to improve farming efficiency and productivity. In 2006, it broke new ground with the launch of its Clean Energy Leader strategy that actively promotes sustainable agriculture. New Holland offers cash crop producers, livestock farmers, contractors, vineyards and ground-care professionals the largest choice of easy-to-operate tractors, harvesters, material handling equipment, seeders and planters. In total, it has more than 80 product lines and over 300 models.

That agricultural equipment offering is complemented by efficient parts & service support, an extensive range of tailored financial services, and a global network of professional dealers.

CASE i

AGRICULTURE

NEW HOLLAND

AGRICULTURE

17


LOGO

 

THE GROUP AT A GLANCE

BRANDS

Steyr

For more than 60 years, Steyr has been known for the quality, reliability and excellence of its agricultural tractors. Steyr’s distinctive tractors, with the trademark red-white-red design first used in 1967, are produced in St. Valentin, Austria. The brand is leader in the “premium” segment in Austria and exports 60% of production, principally to Germany, Switzerland, France, Italy, Belgium, the Netherlands, Luxembourg, Scandinavia and Eastern Europe.

Nineteen tractor models are produced at the St. Valentin plant, including the Kompakt, 9000 MT, Profi and CVT series, as well as products for municipal and forestry applications. The brand’s range of products demonstrates its ability to respond rapidly to a constantly evolving market.

Case Construction

Since it was established in Racine, Wisconsin (USA) more than 170 years ago, Case Construction has built a reputation as a premium manufacturer of technologically-advanced products for the construction equipment industry.

With more than 90 models carrying the Case name and colors, the brand has a solution for every application. The product lineup includes skid steer loaders and wheel loaders, mini excavators, backhoe loaders, crawler and wheel excavators - all designed to operate in extreme climatic conditions or high-risk situations.

In addition, Case has more than a century of experience working with defense forces, and government and non-government organizations around the world in areas such as dismantling land mines and re-building communities that have been devastated by natural disasters.

New Holland Construction

New Holland Construction is a leader in the global construction equipment market. Behind the trademark black and yellow livery is the wealth of know-how and experience inherited from Fiat Kobelco, O&K, New Holland and Fiat Allis, merged into a single brand that offers advanced solutions to the construction sector and strives constantly for total customer satisfaction.

Complementing the comprehensive product offering is the brand’s extensive network of dealers that operate on a simple but effective philosophy: listen to customers, take a personal approach to their problems and offer them rapid, effective solutions.

STEYR

CASE

CONSTRUCTION

NEW HOLLAND

CONSTRUCTION

18


LOGO

 

The Group at a Glance

TRUCKS AND COMMERCIAL VEHICLES (IVECO)

The sector’s product portfolio includes: light, medium and heavy commercial and industrial vehicles for the transportation and distribution of goods, which are cost efficient and low environmental impact (Iveco); commuter buses and touring coaches offering the maximum in comfort and environmental performance (Iveco Irisbus); quarry and mining equipment purpose-built to move heavy materials in all conditions with absolute reliability (Iveco Astra); special vehicles that can be deployed rapidly and effectively for firefighting (Iveco Magirus), as well as civil defense and peace-keeping missions (Iveco Defence Vehicles). Iveco guarantees customers the highest level of after-sales support worldwide and, through Iveco Capital, offers advanced financial services solutions for the purchase, lease or rental of its products. The sector operates through the following brands:

Iveco

Iveco is an international leader in goods transport solutions. It designs, manufactures and sells a wide range of light, medium and heavy commercial vehicles for both on-road and off-road use. The portfolio of cost-effective products is complemented by a range of after-sales, financing and used vehicle services.

From the beginning, the brand has been committed to safe, efficient and ecological mobility. In fact, it is the only producer to offer eco-friendly engines across its entire range. From light segment vehicles (Daily), to medium (Eurocargo) and heavy (Stralis and Trakker), all products are available with EEV (Enhanced Environmentally-friendly Vehicle) and natural gas engines. In addition, with the incorporation of FPT Industrial’s revolutionary patented High Efficiency SCR (Selective Catalytic Reduction) system, the engine on the new Stralis Hi-Way conforms to Euro VI emissions standards without resorting to exhaust gas recirculation.

Iveco Astra

Established in 1946, the company has been part of the Iveco family since 1986 and is known around the world for the endurance, reliability and versatility of its vehicles. Astra has more than 60 years experience in designing and producing vehicles for the most challenging tasks and extreme climatic conditions. Its vehicles have a proven track record of operating in the most inaccessible quarries and mines and moving huge quantities of rock, mud and other materials. The product range includes mining and construction vehicles, rigid and articulated dumptrucks, and special vehicles.

IVECO

IVECO

ASTRA

19


LOGO

 

THE GROUP AT A GLANCE

BRANDS

Iveco Irisbus

Iveco Irisbus is a major European manufacturer of passenger transport solutions that distributes its products in more than 40 countries around the world. The brand’s complete range of solutions includes city and intercity commuter buses, economy and luxury coaches, minibuses and school buses. For years, Iveco Irisbus has worked in close collaboration with European public transport operators to develop and test new fuels and propulsion systems, with a particular focus on environmental footprint, passenger comfort and operating efficiency.

Iveco Magirus

For 148 years, Magirus has been producing equipment that is purpose-built to respond to serious emergencies, such as fires, floods, earthquakes and explosions. The business was established in 1864 by Conrad Magirus, chief of the local fire brigade in Ulm (Germany) and inventor of the first ever firefighting ladder. Today, Iveco Magirus is one of the major global suppliers of firefighting and emergency response equipment and actively collaborates with firefighters from Siberia to Africa to Europe, and from China to Japan to Brazil.

Iveco Defence Vehicles

Iveco Defence Vehicles produces and sells vehicles for defense and civil protection applications. The company is headquartered in Bolzano, Italy, where it produces the Lince, Iveco’s flagship armored vehicle that is sold to defense forces around the world, and the Freccia, a medium armored vehicle.

Widely-recognized for its technological excellence, in recent years Iveco Defence Vehicles has developed significantly in international markets, leveraging, in particular, on its expertise in combining excellence in mobility with the most advanced protection solutions.

IVECO

IRISBUS

IVECO

MAGIRUS

IVECO

DEFENCE VEHICLES

20


LOGO

 

The Group at a Glance

ENGINES AND TRANSMISSIONS FPT Industrial

FPT Industrial specializes in the design, production and sale of propulsion and transmission systems for on- and off-road trucks and commercial vehicles, as well as engines for marine and power generation applications. The sector employs around 8,000 people at 10 plants and 6 R&D centers and is present in approximately 100 countries through a network of around 100 dealers and 1,300 service centers. FPT Industrial is one of the world’s leading producers of powertrains for industrial application with an extensive product portfolio (consisting of 5 engine families ranging in output from 31-740 kW, axles for trucks and commercial vehicles, and transmissions with maximum torque from 300-470 Nm), and strong emphasis on research and development.

FPT

21


LOGO

 

THE GROUP AT A GLANCE

FIAT INDUSTRIAL AROUND THE WORLD

FIAT INDUSTRIAL AROUND THE WORLD

Fiat Industrial: a global group with a major industrial and commercial presence. Employing a global vision but interacting at the local level, the Group is prepared to face new challenges, fully leverage the opportunities in each market and respond rapidly to the needs of customers.

€25,785 million

Revenues

68,257

Employees

64

Plants

49

R&D Centers

NORTH AMERICA

28.5%

REVENUES

16.9%

EMPLOYEES

10

PLANTS

13

R&D CENTERS

MERCOSUR

14.9%

REVENUES

14.2%

EMPLOYEES

9

PLANTS

5

R&D CENTERS

22


LOGO

 

The Group at a Glance

EUROPE

(EXCLUDING ITALY)

31.8%

REVENUES

34.5%

EMPLOYEES

23

PLANTS

18

R&D CENTERS

ITALY

7.9%

REVENUES

27.2%

EMPLOYEES

14

PLANTS

10

R&D CENTERS

REST OF WORLD

16.9%

REVENUES

7.2%

EMPLOYEES

8

PLANTS

3

R&D CENTERS

23


LOGO

 

THE GROUP AT A GLANCE

OUR

COMMITMENT TO SUSTAINABLE DEVELOPMENT

OUR COMMITMENT

TO SUSTAINABLE DEVELOPMENT

From the moment it became an independent group, Fiat Industrial Group has been committed to operating in an environmentally and socially-responsible manner, building on the solid values that were already a well-established part of its business model prior to the demerger from Fiat Group.

To ensure effective application of those values, the Group has adopted a governance model - that is continually evolving in line with development of the Group and international best practice - in which top management has a direct and active role in issues relating to sustainability. At Board level, the Nominating, Corporate Governance and Sustainability Committee evaluates proposals relating to strategic guidelines for sustainability-related issues and reviews the annual Sustainability Report. The Group Executive Council - the highest decision-making body after the Board of Directors - defines the strategic approach, evaluates the congruity of the Sustainability Plan with business objectives and is regularly updated on the Group’s sustainability performance. The Sustainability Unit, which is part of the Group Finance organization, plays a key role in promoting a culture of sustainability throughout the Group, facilitates the process of continuous improvement, and contributes to managing risks and strengthening the relationship with and perceptions of stakeholders, in addition to managing sustainability reporting and communications.

The governance system includes the Code of Conduct, which serves as the basis for a series of operating guidelines aimed at ensuring the Group’s activities are conducted in a consistent and responsible manner.

Another important component of the sustainability governance system is the Sustainability Plan, which reports on the progress of existing projects and new targets to drive continuous improvement in the Group’s sustainability performance. The Plan is incorporated in the Sustainability Report, which reports each year on Fiat Industrial’s environmental and social performance. This year in its second edition, the Sustainability Report, which supplements the financial information contained in this document, is prepared on a voluntary basis applying the Global Reporting Initiative’s G3.1 guidelines (GRI-G3.1). The Report is available in the Sustainability section of the corporate website.

For Fiat Industrial, acting sustainably means managing the social and environmental impacts of its activities in a manner that takes the expectations of all stakeholders into account. That approach contributes to the Group’s ability to identify and effectively manage potential risks and leverage opportunities to increase the long-term value of the enterprise.

In order to demonstrate how the three dimensions of sustainability interrelate, this section provides a description of several key aspects of Fiat Industrial’s business model, highlighting how effective management of the environmental and social dimensions translates into stronger revenues and more cost-efficient operations. Where possible, a quantification of the economic benefits generated is also provided. The areas discussed in this section, which focus on key phases in the product life cycle, were selected on the basis of a materiality analysis conducted during the year. A more detailed analysis of these areas and other environmental and social aspects of the Group’s activities is provided in the 2012 Sustainability Report.

24


LOGO

 

The Group at a Glance

The environmental and social aspects looked at are linked to the supply of raw materials, production processes and use of the Group’s product. The analysis also looks at innovation, which is essential in achieving processes and products that are cost effective, safe and environmentally responsible.

INNOVATION

For Fiat Industrial Group, innovation means managing a structured process, open to the contribution of stakeholders, whose objective is a product offering that achieves the highest standards in terms of environmental performance, safety and efficiency, while delivering low operating and maintenance costs. The Group’s R&D activities focus on the design of environmentally-responsible production processes and products that meet or exceed future regulatory standards. In 2012, the Group spent a total of €895 million on Research and Development, equivalent to 3.6% of net revenues for Industrial Activities. R&D activities directly involved a total of around 5,800 people at 49 centers worldwide, five of which are located in Latin America and employ 690 people. The Group’s research and development activities principally relate to: products (reduction of polluting emissions, alternative fuels, ergonomics, safety), production processes (ergonomics in the workplace, logistics, quality, energy efficiency) and working methods (virtual analysis, quality optimization, reduction of product development times).

The Group’s commitment to excellence in research and development has led to the registration of around 6,500 patents, which enabled Fiat Industrial Group to secure €2 million in grants and €376 million in subsidized funding in 2012.

That amount included €350 million in funding from the European Investment Bank based on a comprehensive evaluation of the Group’s R&D process and, specifically, the emphasis on mitigating climate change.

25


LOGO

 

THE GROUP AT A GLANCE

OUR

COMMITMENT TO SUSTAINABLE DEVELOPMENT

SUPPLIERS

Fiat Industrial Group has adopted a responsible approach to managing the supply chain at every level, from small local suppliers to large multinationals. The Group seeks to go beyond the purely commercial considerations to forge long-lasting and mutually beneficial relationships with highly-qualified partners that share its principles. Achieving sustainability throughout the supply chain means having a strategic vision that goes beyond the factory walls and fostering a sense of shared responsibility.

The Group’s standards of environmental and social sustainability have been fully integrated into its supply chain management. The supplier selection process looks not only at the quality and competitiveness of a supplier’s products and services, but also adherence to the Group’s social, ethical and environmental principles.

Group companies use the International Material Data System (IMDS) - an online database of source and content of products from suppliers - to monitor and optimize the recyclability and recoverability of the vehicles and components produced. Through the IMDS, Group companies are able to guarantee customers that products are environmentally-compatible and conform to EC Regulation 1907/2006 (REACH) on management of hazardous chemicals and associated risks, as well as EC Directive 2000/53/EC on waste from end-of-life vehicles and EC Directive 2005/64/EC on vehicle reuse, recycling and recovery.

Fiat Industrial Group believes that suppliers are key partners for growth and, as such, is committed to maintaining a constant dialogue with them. In 2012, the Group continued to strengthen relationships with suppliers, as demonstrated by the numerous long-standing and mutually beneficial commercial relationships, and the minimal number of disputes. The Group has various initiatives in place to incentivize supplier innovation. Through the Supplier Performance (Su.Per) program, in particular, it encourages suppliers to be proactive by sharing the economic benefits generated by innovative methods and technologies that they have proposed. In 2012, more than 50 suppliers benefited from this program (in line with 2011) and more than 200 supplier proposals were implemented, generating economic benefits valued at more than €10 million. One of those projects, developed in partnership between Iveco and its suppliers, was the introduction of a new plastic component to improve the aerodynamics of the Iveco Stralis. That aerodynamic kit - which costs €244 per unit less than the component it replaced - led to a further reduction in fuel consumption, and consequently, also CO 2 emissions.

PRODUCTION PROCESSES

Fiat Industrial Group is committed to continuous improvement in the environmental performance of its production processes, adopting the best technologies available and operating responsibly to mitigate climate change and conserve natural resources.

The Group’s objective is to achieve and maintain the highest possible standards of excellence in production processes, through implementation of the principles of World Class Manufacturing (WCM), the innovative Japanese methodology based on a philosophy of continuous improvement. At year-end 2012, 53 Group plants had implemented WCM, representing 83% of total Group plants.

The primary objective of the WCM program is to eliminate all waste and loss through the rigorous application of a range of methods and standards. Targets include: zero defects, zero breakdowns, zero waste, zero accidents, inventory

26


LOGO

 

The Group at a Glance

reduction, as well as on-time delivery from suppliers, to the dealer network and the customer. Actions for continuous improvement are based on cost deployment analysis, which identifies waste and loss at the plant, identifies actions for other functions within the organization responsible for eliminating sources of waste, evaluates the viability of projects, and uses specific performance indicators to assess and validate the results of those projects. This approach leads to a more effective evaluation process, as all factors upon which each action could potentially impact are measured and correlated. Application of this system at all plants facilitates a group-wide culture, based on efficient processes and a language that is universally recognized at all plants and in all countries where the Group operates. Another strong point is that it encourages employees to get involved and take responsibility by contributing to the improvement of processes through a system of suggestions and direct feedback. The best ideas generated through this process are also shared with other plants. WCM involves the entire organization and, by eliminating barriers, opens the way for sharing of ideas, know-how and skills within each plant and even between plants. In 2012, a total of around 375,000 suggestions were submitted by employees at plants participating in the WCM program, with an average of 10 suggestions per employee.

One of the pillars of the WCM system is the environmental pillar, which utilizes the principles of environmental management to create a series of coordinated measures aimed at reducing the environmental impact of a plant. Beyond compliance with legal and regulatory requirements, the process begins with a rigorous analysis of accidents, risks and waste (energy consumption, water usage, VOC emissions and waste generation) to identify corrective actions that will enable cost reductions.

Achievement of these targets requires a significant commitment in terms of both improvements in technical and operational performance, as well as financial investment.

27


LOGO

 

THE GROUP AT A GLANCE

OUR

COMMITMENT TO SUSTAINABLE DEVELOPMENT

All targets set out in the Group’s 2010-2014 Environmental Plan for 2012 were achieved and the principal environmental KPIs showed a continuation of the positive trend recorded in recent years, reconfirming Fiat Industrial Group’s significant emphasis on the environment. With regard to the principal indicators, per unit produced(1) VOC emissions were down 8% over 2011, water withdrawal 5%, waste generation 2%, energy consumption 4% and CO2 emissions 9%.

The year-over-year reduction in energy consumption, despite similar production levels, was largely due to efficiencies achieved from energy saving initiatives. One example was the campaign to save energy on lighting in which approximately 40% of Group plants took part. The initiative led to a total reduction of more than 21,000 GJ, representing a saving of some 2,500 tons in CO2 emissions. The financial benefit after just one year was equivalent to 55% of the initial investment.

Total Group expenditure on environmental protection measures totaled approximately €36 million in 2012 (+6% over 2011, at a comparable scope of reporting) and included: €24 million on waste disposal and emissions treatment and €12 million for prevention and environmental management.

Investment to improve energy performance represented 6% of the total energy expenditure and led to a reduction of more than 117,000 GJ in energy consumed for the year.

The Group’s Environmental Management System for production processes has received ISO 14001 certification. In 2012, Group companies continued their commitment to achieving and maintaining certification for plants and, at year-end 2012, 56 plants were ISO 14001 certified.

The Group conformed its Energy Management System to the new ISO 50001:2011 standard and, at year-end 2012, 23 sites, accounting for 70% of total Group energy consumption, had been certified. The main advantage of this certification is that it provides a systematic approach to continuous improvement in environmental and energy performance.

(1) The indicators used relate to production hours, except for those for Volatile Organic Compounds, which refer to emissions for painted square meter. For FPT Industrial, the production hours for 2011 and 2010 are based on estimates.

28


LOGO

 

The Group at a Glance

This results in a more efficient and rational use of resources, leading to both financial benefits and a reduction in waste, pollutants and greenhouse gas emissions.

In terms of waste management, one of the Group’s principal initiatives in 2012 was the establishment of the Iveco taskforce, a working group consisting of representatives from the main European plants whose role is to formulate measures for savings and improvement based on a comprehensive analysis of waste disposal costs. That process provided the opportunity to share know-how and compare experiences between plants, through a benchmarking of disposal costs, costs of internal waste management and disposal methods used for each waste type. Using standard data collection tools, the working group formulated measures for improvement, identified best practices and assessed applicability for each individual plant. Potential savings in waste disposal costs from measures identified by the working group are estimated at around 10%. This improvement in Iveco’s environmental performance has also led to an increase in the waste recovery indicator of 2.2%.

OCCUPATIONAL HEALTH AND SAFETY

Ensuring adequate health and safety in the workplace is essential to the sustainable management of Fiat Industrial Group’s business activities. In the Code of Conduct, the Group affirms the principle of a safe and healthy work environment being a fundamental right of every employee in every plant.

One of the initiatives developed by Fiat Industrial Group to meet that objective is an effective health and safety management system which conforms to OHSAS 18001 standards. As demonstration of its commitment in this area, 56 Group plants around the world are OHSAS 18001 certified.

29


LOGO

 

THE GROUP AT A GLANCE

OUR

COMMITMENT TO SUSTAINABLE DEVELOPMENT

Employee training, commensurate with their individual activities and responsibilities, is designed to increase awareness and promote proactive behavior in order to prevent potential risks occurring. During 2012, the Group provided a total of approximately 265,000 thousand hours of training on health and safety, a 13% increase over 2011. More than 38,800 employees received training during the year, including 28,274 hourly employees.

Clear and effective communication is also a crucial factor in the success of Group policies to prevent accident and occupational illness. Safe behavior derives from a deep-rooted culture of safety, which can only be strengthened by engaging employees and ensuring they are fully aware of potential risks and their role in terms of health and safety. Despite the difficult global economic environment, numerous initiatives have been implemented by Group companies in recent years to improve safety in the workplace and, in 2012, the Group spent a total of approximately €96 million on improvement initiatives, representing a 16% increase over 2011.

In 2012, spending on improvements in safety and working conditions (worker protection, improvements to facilities, inspections of plants and the working environment) totaled €80 million, while €16 million was spent on employee health (healthcare costs).

Investment in health and safety has also led to a reduction in insurance premiums paid to INAIL (the Italian state accident and disability insurance agency), totaling more than €5 million in 2011 and over €4 million in 2012.

As a result of Group initiatives, some of which are mentioned above, for 2012 the overall frequency rate was 0.37 accidents per 100,000 work hours, representing a 33% drop over the prior year, with a severity rate of 0.12 days of absence due to accidents per 1,000 hours worked. Those figures relate to 92.1% of Group employees.

During 2012, there were no fatal accidents involving employees, contractors or other personnel operating at Fiat Industrial Group premises worldwide.

PRODUCTS

Fiat Industrial Group is fully aware of the role it can play in reducing greenhouse gas emissions and it has made a major commitment to researching and developing products and defining production processes that are safe, environmentally-friendly and cost-effective. The Fiat Industrial Group Environmental Guidelines, approved in September 2010, transform this responsibility into well-defined commitments and set out the principal areas of action to be taken through the product life cycle, from conception, to production, use and end-of-life management.

In the design phase, Group companies seek to combine innovation with economic viability. At the same time, priority is given to the use of recycled materials, which contribute to a reduction in raw material usage and can also be reused or recycled at the end of the product’s life. Design also focuses on reducing components to simplify maintenance and separation of materials at end-of-life. The innovation process places the maximum emphasis on the environmental impact of products during the utilization phase, which, in some cases, accounts for more than 80% of CO2 emissions generated over the product life cycle. As a result of the Group’s achievements in this area, it is able to offer a portfolio of products with polluting emissions levels that meet the most stringent European and U.S. standards. Through the application of HI-eSCR technology, for example, the Cursor family of engines already conforms to future Euro VI emissions regulations.

30


LOGO

 

The Group at a Glance

The Group invests in research to improve the efficiency of its existing engine models, as well as developing alternative solutions that range from use of fuels derived from renewable sources to alternative propulsion systems. Research is also focused on applications that help drivers optimize their driving style, which can make a significant contribution to reducing emissions, as well as intelligent driver assistance systems (ADAS) that improve safety for all road users.

In recent years, the Group has adopted an integrated approach to achieve a more precise calculation of the environmental impact individual products have over their life cycle. This enables further improvements in environmental performance and offers customers the opportunity to make environmentally responsible and cost-effective choices. Improvements in consumption, longevity and maintenance intervals, in addition to achieving lower access tolls in urban centers for certain types of vehicles can reduce both the environmental impact and the total cost of ownership of the product. One example is the Iveco Stralis Hi-Way, which in September 2012 was named Truck of the Year 2013 by a panel of journalists from 25 specialist commercial vehicle magazines across Europe. The award recognized the Stralis’ environmental performance and the reduction of up to 4% in total cost of ownership.

Fiat Industrial Group brands offer customers an extensive range of products that are designed to meet specific requirements. During 2012, Iveco sold over 1,400 vehicles from its natural gas range and FPT Industrial reconfirmed its position as leader in the design and manufacture of natural gas engines, with over 20,000 engines produced. CNH expanded its range of Tier 4A/Stage IlIB compliant products to 140 agricultural equipment models (up 75% over 2011) and 116 construction equipment models (up 55% over 2011).

31


LOGO

 

THE GROUP AT A GLANCE

OUR

COMMITMENT TO SUSTAINABLE DEVELOPMENT

AWARDS AND RECOGNITION

Fiat Industrial’s achievements in improving sustainability performance were recognized by leading sustainability rating agencies and other international organizations.

For the second consecutive year, Fiat Industrial S.p.A. was named Industry Leader in the prestigious Dow Jones Sustainability Indexes World and Europe, which only admit companies that are best-in-class in terms of economic, environmental and social performance. The Company scored 85/100 compared to an average of 51/100 for all Industrial Engineering sector companies evaluated by RobecoSAM, the specialists in sustainability investing.

Vigeo also evaluated Fiat Industrial’s environmental, social and governance performance, assigning a rating of 57/100. The Group ranked among the top 15 companies in the “Industrial Goods & Services” universe at the European level and, in November 2012, it was also included in the Vigeo World 120 and Vigeo Europe 120 indexes recently launched by Vigeo in collaboration with NYSE Euronext. The index is based on a performance evaluation of companies in North America, Asia Pacific and Europe included in the Stoxx 1800 index. The Vigeo indexes do not exclude companies based on product or activity, except where the product or activity is prohibited by law or international convention. Companies included in the index are those rated highest in ESG performance based on nearly 330 different indicators.

Dow Jones

Sustainability Indexes

Member 2012/13

MSCI Indices

Member of the MSCI ESG Indices

2012-2013

Member 2012/2013

STOXX

ESG LEADERS INDICES

FTSE

ECPI ITALIA SRI

INDEX SERIES

ECPI

Sense in sustainability

CDP

DRIVING SUSTAINABILITY ECONOMIES

The Group is also a member of other major sustainability indexes such as: the MSCI WORLD ESG, MSCI WORLD ex USA ESG, MSCI EAFE ESG, MSCI EUROPE ESG, STOXX® Global ESG Leaders, STOXX® Global ESG Environmental Leaders, STOXX® Global ESG Social Leaders, EURO STOXX® ESG Leaders 50, FTSE ECPI Italia SRI Benchmark and FTSE ECPI Italia SRI Leaders, ECPI Ethical EMU Equity.

32


LOGO

 

The Group at a Glance

In November 2012, Oekom Research reconfirmed Fiat Industrial’s Prime status, which is awarded to companies that are sustainability leaders in their sectors.

In the Carbon Disclosure Project’s Italy 100 Report, Fiat Industrial was confirmed in the Carbon Disclosure Leadership Index (CDLI) at the top of the “Industrials” sector, with a score of 91/100 for the level of transparency in disclosures on issues linked to climate change and a “B” grade (on a scale from A-best to E-worst) for climate change mitigation initiatives.

2012

SUSTAINABILITY REPORT

Web> bit.ly/Zmn5Nd

QR Code>

33


LOGO

 


LOGO

 

REPORT ON OPERATIONS

36 Highlights

37 Shareholders

40 Key Events in 2012

50 Highlights by Sector

52 Main Risks and Uncertainties to which

Fiat Industrial S.p.A. and the Group are Exposed

66 Research and Innovation

74 Human Resources

80 Financial Review - Fiat Industrial Group

96 Corporate Governance

104 Transactions between Group Companies

and with Related Parties

105 Subsequent Events and Outlook

106 Operating Performance by Sector

107 Agricultural and Construction Equipment

115 Trucks and Commercial Vehicles

125 FPT Industrial

128 Financial Review - Fiat Industrial S.p.A.

131 Motion for Approval of the Statutory Financial

Statements at December 31, 2012, Allocation

of Profit and Dividend Distribution


LOGO

 

REPORT ON OPERATIONS

HIGHLIGHTS

HIGHLIGHTS

(€ million) 2012 2011 2010 2009

Net revenues 25,785 24,289 21,342 17,968

Trading profit/(loss) 2,079 1,686 1,092 322

Operating profit/(loss) 1,862 1,629 1,017 (19)

Profit/(loss) before taxes 1,485 1,169 576 (470)

Profit/(loss) for the year 921 701 378 (503)

Attributable to:

Owners of the parent 810 624 341 (464)

Non-controlling interests 111 77 37 (39)

Basic earnings/(loss) per ordinary share (€) (1) 0.663 0.511 0.279 (0.379)

Diluted earnings/(loss) per ordinary share (€) (1) 0.663 0.511 0.279 (0.379)

Investments in tangible and intangible assets 1,349 993 872 708

of which: capitalized R&D costs 533 400 396 298

R&D expenditure (2) 895 742 652 538

Total Assets 38,937 38,643 34,921 30,919

Net (debt)/cash (15,994) (14,549) (12,179) (11,283)

of which: net industrial (debt)/cash (1,642) (1,239) (1,900) (1,315)

Total equity 5,722 5,411 4,744 5,791

Equity attributable to owners of the parent 4,935 4,555 3,987 5,073

Employees at year end 68,257 66,998 62,123 61,243

(1) For all years shown, earnings per share calculation is based on the average number of ordinary shares outstanding after taking into account the effect of the conversion on May 21, 2012. See Note 13 to the Consolidated Financial Statements for additional information on the calculation of basic and diluted earnings per share

(2) Includes capitalized R&D and R&D charged directly to the income statement

SELECTED DATA BY REGION

Revenues

Companies Employees Plants R&D Centers (€ million)

2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

Italy 26 28 18,574 18,645 14 14 10 11 2,045 2,465

Europe (excluding Italy) 133 138 23,578 22,875 23 24 18 19 8,204 7,971

North America 45 49 11,500 10,976 10 10 13 13 7,339 6,049

Mercosur 10 9 9,663 9,655 9 8 5 4 3,850 4,106

Other regions 43 42 4,942 4,847 8 8 3 4 4,347 3,698

Total 257 266 68,257 66,998 64 64 49 51 25,785 24,289

36


LOGO

 

Report on Operations

SHAREHOLDERS

REPORT ON OPERATIONS

SHAREHOLDERS

FINANCIAL COMMUNICATION

During 2012, Fiat Industrial continued the intense program of activities initiated in 2011 to present the new Group and give the market greater insight on the various businesses, the interaction and synergies between those businesses.

The Group’s objective is to continue building on the relationship of trust with customers and investors through transparent and responsible management aimed at increasing the value of the enterprise on a sustainable basis. The Investor Relations team interacts with the financial community throughout the year, maintaining an active dialogue and communication flow to shareholders, investors and analysts to keep them up-to-date and enhance their understanding of the Group and its activities.

Those communication activities also include conference calls and public presentations held to present periodic financial results or other events that require direct communication to the market. Information presented or discussed on those occasions is immediately made publicly available on the corporate website (www.fiatindustrial.com). Other activities include participation in seminars and industry conferences, as well as non-deal roadshows in major financial centers that provide the opportunity for direct contact with management.

Following approval by shareholders (ordinary, preference and savings share) in early April of the proposal to simplify the Company’s capital structure, the Investor Relations team held several one-to-one meetings and conferences with institutional investors and analysts to explain the transaction and its advantages for shareholders.

Between the end of May and the end of November - the period between the date of Fiat Industrial’s first communication to CNH Global N.V. proposing consideration of the benefits of a potential strategic transaction between the two companies and the date of the joint announcement of the definitive merger agreement to combine the respective businesses - the Investor Relations team also maintained a constant dialogue with the financial community through conference calls and meetings to present and explain the proposed transaction and its benefits.

Several non-deal roadshows, one-to-one meetings and conferences on the capital goods sector were organized by equity and fixed income analysts in London, Paris, Geneva, Zurich, Amsterdam, Rotterdam, The Hague, Brussels, Milan and at the Company’s head office in Turin, at which management and the IR team also had the opportunity to give additional briefings to investors on the operating performance of Fiat Industrial’s various businesses and their strategic plans going forward.

Financial information, institutional presentations, periodic publications, official press releases and real-time share price updates are available in the Investor Relations section of the corporate website (www.fiatindustrial.com).

Shareholders can also contact the Company at the following: Toll-free number in Italy: 800/804027 E-mail: serviziotitoli@fiatindustrial.com investor.relations@fiatindustrial.com

37


LOGO

 

REPORT ON OPERATIONS

SHAREHOLDERS

FIAT INDUSTRIAL ORDINARY SHARES: PERFORMANCE RELATIVE TO FTSE MIB AND DOW JONES INDUSTRIAL AVERAGE (REBASED TO 100 AT 1/2/2012) AND DAILY TRADING VOLUME

150 100 50

10 20 30 40 50 60 Millions of ord. shares

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

FIAT INDUSTRIAL DJIA FTSE MIB

The global economy remained weak throughout 2012. There was a contraction in economic activity in the eurozone and the UK, while the US and Japan recorded moderate growth and the emerging markets, China and Brazil in particular, registered signs of a slowdown. In the U.S., the risk of a failure to reach a political agreement on the budget that would bring the economy to the edge of a “fiscal cliff” created significant uncertainty for consumers and businesses. In China, the weakness of the global economy led to a drop in export activity which was only partially compensated by domestic demand and infrastructure investment. In the eurozone, 2012 saw more restrictive fiscal policies and clampdowns on public spending even in the more robust economies. Economic conditions were also affected by the protracted uncertainty in financial markets, which eased significantly during the second half of the year due to actions taken by the ECB to stabilize the euro, particularly the launch of the Outright Monetary Transactions program.

The FTSE MIB index registered a 5% increase, compared with a 26% decrease for the prior year. Fiat Industrial shares registered double-digit growth (+21%), reversing the prior year’s performance when the price closed down for the year, in line with the negative trend for the Italian market overall.

38


LOGO

 

Report on Operations

MAJOR SHAREHOLDERS

At the date of this Report, Fiat Industrial had a total of 1,222,568,882 ordinary shares outstanding and the following institutions held more than 2% of ordinary shares:

ORDINARY SHARES: 1,222,568,882

EXOR S.p.A. 30.01%

Fiat S.p.A. 2.80%

Harris Associates LP 5.03%

Government of Singapore Investment Corporation Pte Ltd 2.55%

Other institutional investors in the EU 21.35%

Other institutional investors outside the EU 17.13%

Other shareholders 21.13%

EARNINGS PER SHARE (*)

(figures in €) 2012 2011 2010 2009

Basic earnings/(loss) per ordinary share 0.663 0.511 0.279 (0.379)

Diluted earnings/(loss) per ordinary share 0.663 0.511 0.279 (0.379)

(*) For all years shown, earnings per share calculation is based on the average number of ordinary shares outstanding after taking into account the effect of the conversion on May 21, 2012

REFERENCE PRICE PER SHARE (*)

(figures in €) 12.28.12 12.30.11 01.03.11

Ordinary shares 8.255 6.625 9.000

Preference shares - 4.570 6.250

Savings shares - 4.732 6.180

(Source: Reuters)

(*) Equivalent to the closing auction price

MONTHLY MINIMUM AND MAXIMUM PRICE IN 2012 (figures in €)

12 10 8 6 4 2

01 02 03 04 05 06 07 08 09 10 11 12

Other institutional investors - outside EU

17.13%

Other institutional investors - EU

21.35%

Harris Associates LP

5.03%

Other shareholders

21.13%

EXOR S.p.A.

30.01%

Fiat S.p.A.

2.80%

Government of Singapore

Investment Corporation

Pte Ltd

2.55%

FIAT INDUSTRIAL

FIAT INDUSTRIAL

FIAT INDUSTRIAL

39


LOGO

 

REPORT ON OPERATIONS

KEY EVENTS IN 2012

KEY EVENTS IN 2012

JANUARY

CASE i

NEW HOLLAND

AGRICULTURE

CNH’s agricultural brands win nine 2012 AE50 innovation awards from ASABE (American Society of Agricultural and Biological Engineers).

AE50

CASE i

Release in Europe and North America of Maxxum and Steyr Profi ecotech tractors, Titan 30 and 40 Series Floaters, 920 and 930 Nutri-Placer applicators, 950 Nutri-Tiller strip-till system and six new Axial-Flow combine models, all Tier 4A/Stage IIIB emissions compliant.

CASE i

New Axial-Flow 30 Series EfficientPower combines launched in Australia, China, Russia and Ukraine and 635 Module Express cotton pickers in Brazil.

CASE

621F wheel loader introduced in North America.

NEW HOLLAND

CONSTRUCTION

North American debut of new Tier 4A/Stage IIIB compliant B95C and B110C loader backhoe tractors at World of Concrete show.

IVECO FPT

Iveco participates in Dakar rally in South America with an Iveco Powerstar and two Iveco Trakker Evolution 2 trucks equipped with 900 hp Cursor 13 engines from FPT Industrial. The vehicles take 1st, 2nd and 6th place in the overall truck ranking.

IVECO

Launch of two versions of the new Daily, one with 146 hp 2.3-liter F1A engine (Euro 5) with exclusive MultiJet II technology, and the other with 146 hp 3.0-liter F1C engine (EEV). Both engines are produced by FPT Industrial.

FPT

Launch of additional versions of NEF and Cursor Tier 4A engines for the retail market, and Tier 4A F5C for application on CNH agricultural and construction equipment.

40


LOGO

 

Report on Operations

FEBRUARY

CNH

CNH hosts a Russian government delegation at JV in Naberezhnye Chelny, Tatarstan to celebrate completion of first stage of production activities at the plant.

Novedad Tecnica Sooresaliente

Fima 2012 (Espana)

NEW HOLLAND

AGRICULTURE

At FIMA in Spain, New Holland Agriculture wins an outstanding innovation award for the SynchroKnife central header drive and four technical innovation awards.

NEW HOLLAND AGRICULTURE

In North America, at the National Farm Show, brand introduces T6 tractors featuring Tier 4A/Stage IIIB compliant engines, and new MegaCutter tractor with disc mower-conditioners and ProRotor rotary rakes.

CASE

Launch of 885B motor grader in North America and new CX210C and CX235C crawler excavators in Europe.

FPT

In Brazil, Euro V versions of the NEF 6, Cursor 9 and Cursor 13 engines are launched for application on Iveco trucks and buses.

FPT

Launch at Miami Boat Show of FPT Industrial’s NEF67 500 PD unit engine for the US market.

MARCH

FIAT INDUSTRIAL

Standard & Poor’s raises outlook for Fiat Industrial S.p.A. from negative to stable and affirms the long-term rating of “BB+” and short-term rating of “B”.

CNH

CNH announces long-term strategic partnership with Orkel AS, the Norwegian market leader in high-performance fixed-chamber round balers, compactors and tractor trailers.

NEW HOLLAND AGRICULTURE

Launch of T9 tractor in Brazil.

41


LOGO

 

REPORT ON OPERATIONS

KEY EVENTS IN 2012

CASE

North American launch of new Tier 4A/Stage IIIB-compliant loader backhoe tractor models and the new CX210C and CX470C crawler excavators.

NEW HOLLAND

CONSTRUCTION

In Europe, launch of Tier 4A/Stage IIIB LM625 telescopic handler.

FPT

Production ramp up in Brazil of the new Euro V F1 engines for LCVs.

APRIL

CASE i

Axial-Flow 9230 combine harvester awarded PUCHAR (“highest honor”) by Polish Ministry of Agriculture and Rural Development at Agrotech 2012.

CASE i

At Agrishow 2012 in Brazil, Case IH presents extensive offering of no-till planters produced in alliance with Semeato.

NEW HOLLAND

AGRICULTURE

At Agrishow, presentation of new CR5080, CR6080SL and CR9080 Twin Rotor models and, through alliance with Semeato, new SOLTT planting equipment.

CASE

Launch of new Tier 3 wheel loaders in key markets in Africa, Middle East, CIS and Central Asia. In Europe, the brand launches new Tier 4A/Stage IIIB 1121F and 1021F wheel loader models.

NEW HOLLAND

CONSTRUCTION

Introduction of new C series crawler excavator and wheel loader with Tier 3 engines to key markets in Africa, Middle East, CIS and Central Asia. In Europe, the brand launches Tier 4A/Stage IIIB W270 and W300 wheel loaders.

IVECO

At Intermat Paris, debut of new Dakar limited edition version of Trakker (only 502 will be made available).

IVECO

At Bedrijfsauto 2012 in Amsterdam, presentation of new Stralis LNG Natural Power with 330 hp Cursor 8 engine.

IVECO

At Auto Beijing, through JV with Naveco, Iveco unveils new K version of Yuejin Ouka developed for medium-upper end of light vehicle market and, through JV with SIH, presents new 6x4 Genlyon M100 heavy truck.

42


LOGO

 

Report on Operations

IVECO

IRISBUS

Iveco secures order from the City of Dijon for 102 diesel-electric hybrid buses.

FPT

New plant in Cordoba (Argentina) begins operations with production launch of Euro V Cursor 13 engine for Iveco Stralis and Trakker.

FPT

SAIC Fiat Powertrain Hongyan Co. Ltd. (an FPT Industrial JV in China) presents new Euro IV 480 hp Cursor 13 engine at Auto Beijing. Engine also named “Environmental Protection Engine 2012” by China Auto News.

FPT

At Intermat 2012 in Paris, presentation of Tier 4B/Stage IV off-road engine range, equipped with “Hi-Efficiency SCR” technology.

FPT

At Buenos Aires boat show, South American launch of NEF 67 500 PD unit.

FPT

Production begins on N45, NEF4, NEF6 and Cursor 13 Tier 4A engines for CNH, Tier 4A F5C engine for Perkins and Stage IIIA N45 engine for Power Generation sector.

MAY

FIAT INDUSTRIAL

Completion on May 21st of mandatory conversion of all preference and savings shares into ordinary shares. From that date, Fiat Industrial ordinary shares only are traded on Borsa Italiana (MTA).

FIAT INDUSTRIAL

On May 30, 2012, Fiat Industrial S.p.A. invites Board of CNH Global N.V. to explore benefits of a potential merger of both companies into a newly-incorporated Dutch company. The objective is to simplify the Group’s capital structure creating a single class of stock - with primary listing in New York and secondary listing in Europe – and establishing a true peer to major North American capital goods players.

NEW HOLLAND

AGRICULTURE

Release of new fuel-efficient TD5 series tractors in South Africa and TT Compact series in key African markets.

CASE

CONSTRUCTION

At CTT trade show in Moscow, brand presents latest range of Tier 3 SR and SV skid steer and TR compact track loaders.

43


LOGO

 

REPORT ON OPERATIONS

KEY EVENTS IN 2012

FPT IVECO

Joint presentation of exclusive new High-Efficiency SCR (HI-eSCR) technology, designed to meet Euro VI standards in Europe (effective in January 2014). This patented FPT Industrial technology reduces emissions, offers top level performance and lowers operating costs.

JUNE

Topofmind

CASE i

Release in Brazil of Axial-Flow 7120 and 8120 combine models. The brand’s sugar cane harvester receives “Top of Mind” award from

Revista Rural magazine.

CASE i

Puma 145 with Efficient Power is awarded “HIT of the Fair” at XIII Mazovian Agricultural Days exhibition in Poland.

NEW HOLLAND

AGRICULTURE

Launch of BigBaler series in Europe, Australia and North America.

IVECO

DEFENSE VEHICLE

At Eurosatory in Paris, a prototype of the 6x6 Guarani armored amphibious personnel carrier is delivered to the Brazilian Army.

JULY

European Investment Bank

FIAT INDUSTRIAL

Fiat Industrial and European Investment Bank sign agreement for €350 million in funding to support Group R&D projects to improve energy efficiency and reduce CO2 emissions.

44


LOGO

 

Report on Operations

CASE

CONSTRUCTION

Launch in India of SR130 and SR150 skid steer loaders.

IVECO

Preview presentation of new Stralis Hi-Way to dealers and international press. Iveco’s latest generation on-road heavy truck range is available with new Euro V and VI Cursor diesel engines from FPT Industrial. Euro VI versions use patented HI-eSCR technology.

AUGUST

CASE i

At Farm Progress show in U.S., Case IH unveils 4WD Steiger Rowtrac tractor with narrow tracks.

NEW HOLLAND

AGRICULTURE

At Farm Progress show, brand introduces new 840CD rigid draper head designed for CR series Twin Rotor and CX8000 super-conventional combines.

NEW HOLLAND

AGRICULTURE

ISOBUS communication system between tractor and SOLTT planter receives top prize in Innovation Category at Expointer in Brazil.

CASE

CONSTRUCTION

Introduction of new Tier 4A/Stage IIIB H series rough-terrain forklifts and 570N XT tractor loaders in North America.

IVECO

In Brazil, Iveco launches new generation of Stralis Ecoline range.

FPT

Production launch of Stage IIIA Cursor 10 engines for power generation.

SEPTEMBER

Dow Jones

Sustainability Indexes

Member 2012/13

FIAT INDUSTRIAL

For 2nd consecutive year, Fiat Industrial is included in DJSI World and Europe indexes as Sector Leader, with a score of 85/100 compared to an average of 51/100 for all Industrial Engineering companies evaluated by RobecoSAM.

45


LOGO

 

REPORT ON OPERATIONS

KEY EVENTS IN 2012

NEW HOLLAND

AGRICULTURE

Launch of new FR forage harvester models in Europe, including 2 Tier 4A/Stage IIIB models. Leveraging on long-term strategic partnership with Orkel, New Holland Agriculture introduces new series of professional fixed chamber Roll Balers.

NEW HOLLAND AGRICULTURE

At CIAME in China, New Holland launches Braud 9080L, the first grape harvester to be offered in the local market.

NEW HOLLAND

CONSTRUCTION

In Latin America, introduction of new LM1445 and LM1745 telehandlers and new E55B compact excavator.

STRALIS

2013

TRUCK OF THE YEAR

IVECO

At IAA in Hanover, Stralis Hi-Way is named “International Truck of the Year 2013” for making “greatest contribution to road transport efficiency from several different perspectives including: fuel economy, safety, drivability, comfort and a low-environmental footprint”.

IVECO

Hanover is also the venue for presentation of the heavy on-road Stralis “Emotional” and “Iveco Dual Energy” concept. The new Trakker, part of Iveco’s quarry and construction range, with an all-new cabin and available with Euro V Cursor 8 and 13 engines from FPT Industrial also makes its world debut at IAA.

IVECO

ASTRA

At IAA in Hanover, launch of new version of the HD9 with all-new cabin and enhanced performance characteristics.

IVECO

IRISBUS

Brand wins major contract to supply more than 150 Crossway Low Entry buses to Deutsche Bahn Fuhrpark Service GmbH, a leading bus operator in Germany.

FPT

Presentation of new Euro VI Cursor 8 CNG engine for buses and other on-road vehicles at IAA in Hanover.

FPT

Production begins on Euro V versions of NEF4 engines and F1C for light and medium commercial vehicles in Brazil, and Euro V Cursor 9 for Iveco heavy trucks in Argentina.

FPT

New York to Bermuda record set by FB Design boat with twin 650 hp C90 engine from FPT Industrial.

46


LOGO

 

Report on Operations

FPT

Agreement signed with VDL Bus & Coach to supply Euro VI Cursor 9 engine with HI-eSCR technology and with Ford to supply Cursor 10 engines for new range of heavy trucks.

OCTOBER

CNH

CNH Capital LLC completes private offering of USD 750 million in

3.875% notes due 2015. Notes are issued at par with interest payable semi-annually.

IVECO

Iveco and Larimar Group sign agreement for JV to manufacture trucks and buses in South Africa. The agreement forms part of Iveco’s strategy of manufacturing globally, while tailoring products to local needs.

CASE

CONSTRUCTION

NEW HOLLAND

CONSTRUCTION

New generation of Tier 4A/Stage IIIB wheeled excavators (NHC B PRO series and Case WX8 series) launched in Europe.

CASE

CONSTRUCTION

In North America, the B series grader voted one of “Top 100” products in 2012 by Construction Equipment magazine.

FPT

Production begins on Euro V NEF6 CNG engines for Peruvian bus manufacturer Modasa.

FPT

At Genoa Boat Show, debut of 570 hp NEF67, the brand’s first Tier 3 compliant marine engine.

NOVEMBER

FIAT INDUSTRIAL

On November 26th, following negotiations between Fiat Industrial and Special Committee formed by Board of CNH Global, the companies announce a definitive merger agreement. Fiat Industrial and CNH are to merge into a newly-incorporated Dutch company.

47


LOGO

 

REPORT ON OPERATIONS

KEY EVENTS IN 2012

CDP

DRIVING SUSTAINABLE ECONOMIES

FIAT

INDUSTRIAL

Confirmed top of Industrials sector in Carbon Disclosure Leadership Index (CDLI) by Italy 100 Report with score of 91/100.

ASABE

AE50

Outstanding innovations AWARD

2013

CASE i

NEW HOLLAND

AGRICULTURE

ASABE announces winners of the 2013 AE50 innovation awards. CNH brands win 10 prizes in total.

NEW HOLLAND

AGRICULTURE

New BigBaler series awarded SIMA Silver Innovation Medal in France.

TRACTOR OF THE YEAR 2013

BEST OF SPECIALIZED

WINNER

NEW HOLLAND

AGRICULTURE

At EIMA in Italy, T4060F tractor wins the 2013 “Best of Specialized” tractor award.

NEW HOLLAND

AGRICULTURE

At Eima, brand launches several new tractor models: compact T3F for small and mid-sized orchard and viticulture operators; TI3 and TI4 for hay-making and landscaping; and T5 range, with T5 Electro Command models.

NEW HOLLAND

AGRICULTURE

In the Far East, the brand also launches new TS6 tractor series.

NEW HOLLAND

AGRICULTURE

Locally manufactured T7 tractors introduced in Brazil.

CASE CONSTRUCTION

Better Roads magazine names 621F wheel loader among “Top 25” products in 2012 for fuel efficiency and productivity.

NEW HOLLAND

CONSTRUCTION

Introduction of new C Series crawler excavator with Tier 4A/Stage IIIB engines.

TRUCK

IVECO

In China, Naveco’s Chaoyue is named “Truck of the Year China 2013”.

IVECO

In Brazil Tector Attack receives “AutoData Award” in the Truck category.

48


LOGO

 

Report on Operations

DECEMBER

CNH

As a result of an ongoing strategic review of its construction equipment business, CNH announces next phase of its business relationship with Kobelco Construction Machinery Co., Ltd. Non-exclusive licensing and supply agreements take effect January 1, 2013 and all joint ventures between the parties unwound.

FPT

Brand receives two major awards in China: one for the HI-eSCR system as best technological innovation and the other for achievements in raising the standard of technology in the construction equipment sector in China.

49


REPORT ON OPERATIONS

HIGHLIGHTS BY SECTOR

HIGHLIGHTS BY SECTOR

Net revenues

Trading profit/(loss)

Operating profit/(loss)

Total operating assets

(€ million) 2012 2011 2012 2011 2012 2011 2012 2011

Agricultural and Construction Equipment (CNH) 16,056 13,896 1,566 1,154 1,529 1,181 22,666 21,267

Trucks and Commercial Vehicles (Iveco) 8,9 LOGO 9,562 469 490 288 408 10,273 9,718

FPT Industrial 2,933 3,220 142 107 142 106 1,911 1,954

Other Activities and Eliminations (2,128) (2,389) (98) (65) (97) (66) (528) (604)

TOTAL 25,785 24,289 2,079 1,686 1,862 1,629 34,322 32,335

Total operating liabilities Capital expenditure(1) R&D expense(2) Number of employees

(€ million) 2012 2011 2012 2011 2012 2011 2012 2011

Agricultural and Construction Equipment (CNH) 18,047 17,013 758 494 520 384 33,826 32,693

Trucks and Commercial Vehicles (Iveco) 9,186 8,853 439 343 289 254 26,307 26,202

FPT Industrial 1,187 1,389 151 155 86 104 8,029 8,008

Other Activities and Eliminations (428) (488) 1 1 - - 95 95

TOTAL 27,992 26,767 1,349 993 895 742 68,257 66,998

(1) Investments in tangible and intangible assets (net of vehicles sold under buy-back commitments and leased out)

(2) Includes capitalized R&D and R&D charged directly to the income statement

50


LOGO

 

Report on Operations

51


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS

The Group’s earnings and financial position are and will continue to be influenced by various macroeconomic factors - including increases or decreases in gross domestic product, the level of consumer and business confidence, changes in interest rates on consumer and business credit, energy prices and the cost of commodities or other raw materials - which exist in the various countries in which it operates.

Financial conditions in several regions continue to place significant economic pressures on existing and potential customers, including the Group’s dealer networks. As a result, some customers may delay or cancel plans to purchase the Group’s products and services and may not be able to fulfill their obligations to the Group in a timely fashion. Additionally, the Group’s suppliers may be impacted by economic pressures, which may adversely affect their ability to fulfill their obligations to the Group, which could result in product delays, increased accounts receivable, defaults and inventory challenges. There is particular concern about economic conditions in Europe (and potentially the long-term viability of the Euro currency), which is at risk of being impacted by sovereign debt defaults and other severe pressures on the banking system in European Union countries. It is uncertain whether central bank or governmental measures will reduce or eliminate this risk. In addition, other governments may continue to implement measures designed to slow the economic growth rate in those countries (e.g., higher interest rates, reduced bank lending and other anti-inflation measures). If there is significant deterioration in the global economy or the economies of key regions, the demand for the Group’s products and services would likely decrease and the Group’s results of operations, financial position and cash flows could be materially and adversely affected.

In addition, a decline in equity market values could cause many companies, including the Group, to carefully evaluate whether certain intangible assets, such as goodwill, have become impaired. The factors that the Group evaluates to determine whether an impairment charge is necessary require management judgment and estimates. The estimates are impacted by a number of factors, including, but not limited to, worldwide economic factors and technological changes. Any of these factors, or other unexpected factors, may require the Group to consider whether it needs to record an impairment charge. In the event the Group is required to record an impairment charge with respect to certain intangible assets, it would have an adverse impact on the Group’s financial position and results of operations.

52


LOGO

 

RISKS ASSOCIATED WITH FINANCING REQUIREMENTS

The Group’s future performance will depend on, among other things, its ability to finance debt repayment obligations and planned investments from operating cash flow, available liquidity, the renewal or refinancing of existing bank loans and/or facilities and possible recourse to capital markets or other sources of financing. Although the Group has measures in place to ensure that adequate levels of working capital and liquidity are maintained, further declines in sales volumes could have a negative impact on the cash-generating capacity of its operating activities. The Group could, therefore, find itself having to seek additional financing and/or refinance existing debt, including in unfavorable market conditions, with limited availability of funding and a general increase in funding costs. Any difficulty in obtaining financing could have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

RISKS ASSOCIATED WITH THE CREDIT RATING OF FIAT INDUSTRIAL S.P.A.

On January 5, 2011, Moody’s Investors Service assigned Fiat Industrial a Ba1 Corporate Family Rating and a short-term “Not Prime” rating, with stable outlook. On February 24, 2011 Standard & Poor’s Rating Services confirmed a long-term rating of BB+ with negative outlook, in line with the preliminary rating issued on November 4, 2010, and a short-term rating of B. On March 22, 2012, Standard & Poor’s upgraded its outlook from negative to stable and confirmed Fiat Industrial’s long-term rating of BB+ and short-term rating of B.

In addition to other factors, the ability to access capital markets and the related costs are highly dependent on the Group’s credit rating. Any downgrade by rating agencies could increase the Group’s cost of capital and potentially limit its access to sources of financing with a consequent material adverse effect on its business prospects, earnings and/or financial position.

RISKS ASSOCIATED WITH FLUCTUATIONS IN CURRENCY, INTEREST AND CREDIT RISK

The Group, which operates in numerous markets worldwide, is naturally exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the difference in geographic distribution between the Group’s manufacturing activities and its commercial activities, resulting in cash flows from exports denominated in currencies that differ from those associated with production activities.

The Group uses various forms of financing to cover funding requirements for its industrial activities and for financing customers and dealers. The Group’s financial services companies operate a matching policy to offset the impact of differences in rates of interest on the financed portfolio and related liabilities. Nevertheless, changes in interest rates can result in increases or decreases in revenues, finance costs and margins.

Consistent with its risk management policies, the Group seeks to manage currency and interest rate risk through the use of financial hedging instruments. Despite such hedges being in place, however, sudden fluctuations in currency or interest rates could have an adverse effect on the Group’s business prospects, earnings and/or financial position.

Report on Operations

53


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

The Group’s Financial Services activities are also subject to the risk of insolvency of dealers and end customers, as well as unfavorable economic conditions in markets where these activities are carried out, which the Group seeks to mitigate through credit policies applied to dealers and end customers.

RISKS ASSOCIATED WITH THE AGRICULTURAL AND CONSTRUCTION EQUIPMENT, AND TRUCK AND COMMERCIAL VEHICLES MARKETS

Performance of the agricultural equipment market is influenced, in particular, by factors such as:

the price of agricultural commodities and the relative level of inventories

the profitability of agricultural enterprises

the demand for food products

agricultural policies, including aid and subsidies to agricultural enterprises, provided by major governments and/or supranational organizations

In addition, unfavorable climactic conditions, especially during the spring, a particularly important period for generating sales orders, could have a negative impact on the decision to buy agricultural equipment and, consequently, on the Group’s revenues.

Performance of the construction equipment market is influenced, in particular, by factors such as:

public infrastructure spending

new residential and non-residential construction

Performance of the trucks and commercial vehicle market is influenced, in particular, by factors such as:

changes in global market conditions including changes in levels of business investments and sales of commodities

public infrastructure spending

The above factors could significantly influence the demand for agricultural and construction equipment, as well as for trucks and commercial vehicles, and, consequently, the Group’s financial results.

RISKS ASSOCIATED WITH RELATIONSHIPS WITH EMPLOYEES AND SUPPLIERS

In many countries where the Group operates, Group employees are protected by various laws and/or collective labor agreements that guarantee them, through local and national representatives, the right of consultation on specific matters, including downsizing or closure of production activities and reductions in personnel. Laws and/or collective labor agreements applicable to the Group could impair its flexibility in reshaping and/or strategically repositioning its business activities. The Group’s ability to reduce personnel or implement other permanent or temporary redundancy measures is subject to government approvals and the agreement of the labor unions where such laws and agreements are applicable. Industrial action by employees could have an adverse impact on the Group’s business activities.

Furthermore, the Group purchases raw materials and components from a large number of suppliers and relies on services and products provided by companies external to the Group. Some of those companies are highly unionized.

54


LOGO

 

Close collaboration between a manufacturer and its suppliers is common in the industries in which the Group operates and although this offers economic benefits in terms of cost reduction, it also means that the Group is more reliant on its suppliers and is exposed to the possibility that difficulties, including of a financial or industrial relations nature, experienced by those suppliers (whether caused by internal or external factors) could have a material adverse effect on the Group’s business prospects, earnings and/or financial position.

RISKS ASSOCIATED WITH INCREASES IN COSTS, DISRUPTION OF SUPPLY OR SHORTAGE OF RAW MATERIALS

The Group relies upon key suppliers for certain raw materials, parts and components. The Group cannot guarantee that it will be able to maintain appropriate supply arrangements with these suppliers or otherwise assure access to raw materials, parts and components. In some cases this access may be affected by factors outside of the Group’s control and the control of its suppliers. Adverse financial conditions and natural disasters, such as the March 2011 earthquake and tsunami in Japan, could cause some of the Group’s suppliers to face severe financial hardship and disrupt the Group’s access to critical raw materials, parts and components. Any disruption to or shortage of supply of raw materials, parts and components could negatively impact the Group’s costs of production, the Group’s ability to fulfill orders, the Group’s ability to achieve growth in product sales and the profitability of the Group’s business.

Certain companies in the Group use a variety of raw materials in their businesses including steel, aluminum, lead, resin and copper, and precious metals such as platinum, palladium and rhodium. The prices for these raw materials fluctuate and at times in recent periods prices have increased significantly in response to changing market conditions. The Group will seek to manage this exposure, but it may not be successful in hedging these risks. Substantial increases in the prices for raw materials would increase the Group’s operating costs and could reduce profitability if the increased costs were not offset by changes in product prices.

RISKS ASSOCIATED WITH THE CNH’S STRATEGIC ALLIANCE WITH KOBELCO CONSTRUCTION MACHINERY CO., LTD.

Effective December 31, 2012, the first phase of CNH’s global alliance with Kobelco Construction Machinery Co., Ltd. expired and CNH entered a new phase of the relationship. CNH will continue to be able to purchase whole goods from Kobelco as well as component parts to continue to manufacture excavators, based upon Kobelco technology, in CNH’s plants until at least December 31, 2017. With the end of the first phase of the global alliance, CNH and Kobelco will terminate their co-ownership of certain companies formed in connection with the global alliance. In addition, the territorial sales and marketing restrictions under the global alliance will expire. While the Group expects a smooth transition with respect to implemented changes, a failure to realize such a transition and anticipated benefits could have a material adverse effect upon the Group’s construction product lines, construction equipment distribution network, financial position and results of operations.

Report on Operations

55


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

RISKS ASSOCIATED WITH MANAGEMENT

The Group’s success is largely dependent on the ability of its senior executives and other members of management to effectively manage the Group and individual areas of business. The loss of any senior executive, manager or other key employee without an adequate replacement or the inability to attract and retain new, qualified personnel, including any loss of members of senior management or employees that could occur in connection with the proposed Transaction, could therefore have an adverse effect on the Group’s business prospects, earnings and/or financial position.

RISKS ASSOCIATED WITH THE HIGH LEVEL OF COMPETITION IN THE INDUSTRIES IN WHICH THE GROUP OPERATES

Substantially all of the Group’s revenues are generated in highly competitive sectors that include the production and distribution of agricultural and construction equipment, trucks and commercial vehicles, and related powertrain systems. The Group faces competition from other international manufacturers of trucks and commercial vehicles in Europe and Latin America and from global, regional and local agricultural and construction equipment manufacturers, distributors and component suppliers in Europe, North America and Latin America. These markets are highly competitive in terms of product quality, innovation, pricing, fuel economy, reliability, safety, customer service and financial services offered. Competition, particularly in pricing, has increased significantly in the Group’s areas of activity in recent years. Should the Group be unable to adapt effectively to external market conditions, this could have an adverse effect on its business prospects, earnings and/or financial position.

RISKS ASSOCIATED WITH ENVIRONMENTAL AND OTHER GOVERNMENT REGULATION

The Group’s products and activities are subject to numerous environmental laws and regulations (local, national and international) which are becoming increasingly stringent in many countries in which it operates. Such regulations govern, among other things, products - with requirements for reduced emissions of polluting gases, reduced fuel consumption and safety becoming increasingly stricter - and industrial plants - with requirements for reduced emissions, treatment of waste and water and prohibitions on soil contamination becoming increasingly stricter. To comply with such regulations, the Group employs considerable resources and expects it will continue to incur substantial costs in the future.

In addition, government initiatives to stimulate consumer demand for products sold by the Group, such as changes in tax treatment or purchase incentives for new vehicles, can substantially influence the timing and level of revenue generation. The terms, size and duration of such government measures is unpredictable and outside of the Group’s control. Any adverse change in government policy relating to those measures could have a material adverse effect on the Group’s business prospects, operating results and/or financial position.

56


LOGO

 

RISKS ASSOCIATED WITH THE ABILITY TO OFFER INNOVATIVE PRODUCTS

The success of the Group’s businesses depends on their ability to maintain or increase share in existing markets and/or to expand into new markets through the development of innovative, high-quality products that provide adequate profitability. In particular, the failure to develop and offer innovative products that compare favorably to those of the Group’s principal competitors in terms of price, quality, functionality and features, or delays in bringing strategic new products to market, could result in reduced market share, having a material adverse effect on the Group’s business prospects, earnings and/or financial position.

RISKS ASSOCIATED WITH OPERATING IN EMERGING MARKETS

The Group’s ability to grow its businesses depends to an increasing degree on its ability to increase market share, and operate profitably, in emerging market countries, such as Brazil, Russia, India, China, Argentina and Turkey. In addition, the Group could increase its use of component suppliers in these markets. The Group’s implementation of these strategies will involve a significant investment of capital and other resources and entail various risks. For example, the Group may encounter difficulties in obtaining necessary government approvals in a timely manner. In addition, the Group may experience delays and incur significant costs in constructing facilities, establishing supply channels, and commencing manufacturing operations. Further, customers in these markets may not readily accept the Group’s products. The Group may face challenges as a result of the pervasiveness of corruption and other irregularities in business practices in certain regions. Some of these emerging market countries also may be subject to a greater degree of economic and political volatility that could adversely affect the Group’s financial position, results of operations and cash flow.

RISKS ASSOCIATED WITH THE CAPITAL GOODS MARKET

More than other sectors, producers in the capital goods sector, such as CNH and Iveco, are subject to:

the condition of financial markets, in particular, the ability to access the securitization market and prevailing interest rates in that market. In North America, in particular, CNH makes considerable use of asset-backed securitization to fund financing offered to dealers and end customers. Negative conditions in the financial markets, and the asset-backed securitization market in particular, could have a significant impact on the Group’s business prospects, earnings and/or financial position

cyclicality, which can cause sudden declines in demand, with negative effects on inventory levels and product pricing, both new and used. In general, demand in the capital goods sector is highly correlated to the economic cycle and can be subject to even greater levels of volatility

Report on Operations

57


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

RISKS ASSOCIATED WITH THE GROUP’S DEFINED BENEFIT PENSION PLANS AND OTHER POST-EMPLOYMENT OBLIGATIONS

At December 31, 2012, Fiat Industrial’s defined benefit pension plans and other post-employment benefits had an underfunded status of approximately €1,857 million. This amount included defined benefit pension plans and other post-employment benefits obligations of €801 million for plans that the Group is not currently required to fund. Changes in applicable law could affect the funding requirements in the future.

The funded status of Fiat Industrial’s defined benefit pension and post-employment benefit plans is subject to many factors as discussed in the section “Significant Accounting Policies - Use of Estimates” of the Notes to Fiat Industrial’s Annual Consolidated Financial Statements. To the extent that the Group’s obligations under a plan are unfunded or underfunded, the Group will have to use cash flow from operations and other sources to pay its obligations as they become due. In addition, since the assets that currently fund these obligations are primarily invested in debt instruments and equity securities, the value of these assets will vary due to market factors. In recent years, these fluctuations have been significant and adverse and there is no assurance that they will not be significant and adverse in the future.

RISKS ASSOCIATED WITH THE GLOBAL NATURE OF THE GROUP’S ACTIVITIES

Some of those risks include:

changes in laws, regulations and policies that affect:

import and export duties and quotas

currency restrictions

the design, manufacture and sale of the Group’s products, including, for example, engine emissions regulations

interest rates and the availability of credit to the Group’s dealers and customers

property and contract rights

where and to whom products may be sold

taxes

regulations from changing world organization initiatives and agreements

changes in the dynamics of the industries and markets in which the Group operates

varying and unpredictable customer needs and desires

varying and unexpected actions of the Group’s competitors

labor disruptions

changes in governmental debt relief and subsidy program policies in certain significant markets such as Brazil

war, civil unrest, and terrorism

58


LOGO

 

RISKS ASSOCIATED WITH THE DEMERGER OF ACTIVITIES FROM FIAT S.P.A. AND TRANSFER TO FIAT INDUSTRIAL S.P.A.

Under Italian law, following the Demerger, Fiat Industrial continues to be liable jointly with Fiat for liabilities of Fiat that arose prior to effectiveness of the Demerger and were still outstanding at that date. This statutory liability is limited to the value of the net assets attributed to Fiat Industrial in the Demerger and will survive until the liabilities of Fiat existing as of the Demerger will be satisfied in full. Furthermore, Fiat Industrial may be responsible jointly with Fiat in relation to tax liabilities, even if such liabilities exceed the value of the net assets transferred to Fiat Industrial in the Demerger. Such potential liabilities, like all other liabilities of Fiat Industrial, will be assumed by the company that becomes successor to Fiat Industrial following the Merger.

RISKS ASSOCIATED WITH PENDING LEGAL PROCEEDINGS

The Group is involved in various product liability, warranty, product performance, asbestos, personal injury, environmental claims and lawsuits, governmental investigations and other legal proceedings that arise in the ordinary course of its business. The Group estimates such potential claims and contingent liabilities and, where appropriate, records provisions to address these contingent liabilities. The ultimate outcome of the legal matters pending against the Group is uncertain and although such lawsuits are not expected individually to have a material adverse effect on the Group’s financial position or its profitability, such lawsuits could have, in the aggregate, a material adverse effect on the Group’s consolidated financial position, cash flows, results of operations or profitability.

Furthermore, the Group could in the future be subject to judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on its results of operations in any particular period. In addition, while the Group maintains insurance coverage with respect to certain claims, it may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against any such claims.

RISKS ASSOCIATED WITH FINANCIAL SERVICES

Credit risk

Fundamental to any organization that extends credit is the credit risk associated with customers. The creditworthiness of each customer, rates of delinquency, repossessions and net losses on customer loans are impacted by many factors, including:

relevant industry and general economic conditions

the availability of capital

changes in interest rates

the experience and skills of the customer’s management team

commodity prices

political events

Report on Operations

59


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

weather

the value of the collateral securing the extension of credit

A deterioration in the quality of the Group’s financial assets, an increase in delinquencies or a reduction in collateral recovery rates could have an adverse impact on the performance of the Group’s financial services businesses. These risks become more acute in any economic slowdown or recession due to decreased demand for (or the availability of) credit, declining asset values, changes in government subsidies, reductions in collateral to loan balance ratios, and an increase in delinquencies, foreclosures and losses. In such circumstances, the Group’s loan servicing and litigation costs may also increase. In addition, governments may pass laws, or implement regulations, that modify rights and obligations under existing agreements, or which prohibit or limit the exercise of contractual rights.

When loans default and the Group’s financial services businesses repossess collateral securing the repayment of a loan, its ability to recover or mitigate losses by selling the collateral is subject to the market value of such collateral. Those values are affected by levels of new and used inventory of agricultural and construction equipment, as well as trucks and commercial vehicles, on the market. They are also dependent upon the strength or weakness of market demand for new and used agricultural and construction equipment, as well as trucks and commercial vehicles, which is affected by the strength of the general economy. In addition, repossessed collateral may be in poor condition, which would reduce its value. Finally, relative pricing of used equipment, compared with new equipment, can affect levels of market demand and the resale of repossessed equipment. An industry-wide decrease in demand for agricultural or construction equipment, as well as trucks and commercial vehicles, could result in lower resale values for repossessed equipment, which could increase losses on loans and leases, adversely affecting the Group’s financial position and results of operations.

Funding risk

The Group’s financial services business has traditionally relied upon the asset-backed securitization (“ABS”) market and committed asset-backed facilities as a primary source of funding and liquidity. Access to funding at competitive rates is essential to the Group’s financial services business. From mid-2007 through 2009, events occurred in the global financial market, including the weakened financial condition of several major financial institutions, problems related to subprime mortgages and other financial assets, the devaluation of various assets in secondary markets, the forced sale of asset-backed and other securities by certain investors, and the lowering of ratings on certain ABS transactions, which caused a significant reduction in liquidity in the secondary market for ABS transactions outstanding at such time and a significant increase in funding costs. During these periods, conditions in the ABS market adversely affected the Group’s ability to sell receivables on a favorable or timely basis. Similar conditions in the future would have an adverse impact on the Group’s financial position and results of operations. As the Group’s financial services businesses finance a significant portion of the Group’s sales of equipment, to the extent such financial services businesses are unable to access funding on acceptable terms, the Group’s sales of equipment would be negatively impacted.

To maintain competitiveness in the capital markets and to promote the efficient use of various funding sources, additional reserve support has been added to certain previously-issued ABS transactions. Such optional support may be required

60


LOGO

 

to maintain credit ratings assigned to transactions if loss experiences are higher than anticipated. The need to provide additional reserve support could have an adverse effect on the Group’s financial position, results of operations and cash flow.

Repurchase risk

In connection with the Group’s ABS transactions, the Group makes customary representations and warranties regarding the assets being securitized, as disclosed in the related offering documents. While no recourse provisions exist that allow holders of asset-backed securities issued by the Group’s trusts to require the Group to repurchase those securities, a breach of these representations and warranties could give rise to an obligation to repurchase non-conforming receivables from the trusts. Any future repurchases could have an adverse effect on the Group’s financial position, results of operations and cash flow.

Regulatory risk

The operations of the Group’s financial services businesses are subject, in certain instances, to supervision and regulation by various governmental authorities. These operations are also subject to various laws and judicial and administrative decisions and interpretations imposing requirements and restrictions, which among other things:

regulate credit granting activities, including establishing licensing requirements

establish maximum interest rates, finance and other charges

regulate customers’ insurance coverage

require disclosure to customers

govern secured and unsecured transactions

set collection, foreclosure, repossession and claims handling procedures and other trade practices

prohibit discrimination in the extension of credit and administration of loans

regulate the use and reporting of information related to a borrower

To the extent that applicable laws are amended or construed differently, new laws are adopted to expand the scope of regulation imposed upon such financial services businesses, or applicable laws prohibit interest rates the Group charges from rising to a level commensurate with risk and market conditions, such events could adversely affect the Group’s financial services businesses and the Group’s financial position and results of operations.

RISKS ASSOCIATED WITH THE SIGNIFICANT OUTSTANDING INDEBTEDNESS OF THE GROUP

As of December 31, 2012, the Group had an aggregate of €20.6 billion (including €16 billion relating to financial services companies) of consolidated gross indebtedness, and its equity was €5.7 billion, including non-controlling interests.

Report on Operations

61


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

The extent of the Group’s indebtedness could have important consequences to its operations and financial results, including:

the Group may not be able to secure additional funds for working capital, capital expenditures, debt service requirements or general corporate purposes

the Group may need to use a portion of its projected future cash flow from operations to pay principal and interest on its indebtedness, which may reduce the amount of funds available to the Group for other purposes

the Group may be more financially leveraged than some of its competitors, which could put it at a competitive disadvantage

the Group may not be able to adjust rapidly to changing market conditions, which may make it more vulnerable to a downturn in general economic conditions or its business

the Group may not be able to access the capital markets on favorable terms, which may adversely affect its ability to provide competitive retail and wholesale financing programs

These risks are exacerbated by current volatility in the financial markets resulting from perceived strains on the finances and creditworthiness of several governments and financial institutions, particularly in the Eurozone.

Among the anticipated benefits of the Merger is the expected reduction in funding costs over time due to improved debt capital markets positioning of the combined entity. However, certain of the circumstances and risks described may delay or reduce the expected cost savings from the future funding structures and the expected cost savings may not be achieved in full or at all.

RISKS ASSOCIATED WITH COVENANTS IN THE GROUP’S DEBTS AGREEMENTS

The indentures governing certain of the Group’s outstanding public indebtedness, and other credit agreements to which companies in the Group are a party, contain covenants that restrict the ability of companies in the Group to, among other things:

incur additional debt

make certain investments

enter into certain types of transactions with affiliates

sell certain assets or merge with or into other companies

use assets as security in other transactions

enter into sale and leaseback transactions

For more information regarding the Group’s credit facilities and debt, refer to Note 27 to the Fiat Industrial Consolidated Financial Statements.

62


LOGO

 

MAIN RISKS AND UNCERTAINTIES ASSOCIATED WITH THE FIAT INDUSTRIAL-CNH MERGER (THE “TRANSACTION”)

RISKS ASSOCIATED WITH THE EXCHANGE RATIOS

The Exchange Ratios set out in the Merger Agreement will not be adjusted for changes in the value of CNH common shares or the value of Fiat Industrial ordinary shares, or for changes in the relative value of the businesses of CNH or Fiat Industrial. If the value of CNH common shares relative to the value of Fiat Industrial ordinary shares increases or decreases (or the value of CNH business increases or decreases relative to the value of the Fiat Industrial business) prior to the effectiveness of the Merger, the market value of the NewCo’s common shares that shareholders receive in the Merger may be higher or lower than the then-current relative values of their shares.

RISKS ASSOCIATED WITH THE POTENTIAL OPPOSITION OF CREDITORS

Pursuant to Article 2503 of the Italian Civil Code, the Fiat Industrial Merger cannot take effect until sixty days after the last registration required under Article 2502-bis, without prejudice to all other forms of protection guaranteed to creditors under the Italian Civil Code.

RISKS ASSOCIATED WITH DIRECTORS AND EXECUTIVE OFFICERS OF FIAT INDUSTRIAL AND CNH HAVING INTERESTS IN RELATION TO THE TRANSACTION THAT MAY DIFFER FROM THOSE OF OTHER FIAT INDUSTRIAL OR CNH SHAREHOLDERS

Some of Fiat Industrial’s directors who recommend that Fiat Industrial shareholders vote in favor of the Fiat Industrial Merger Plan and the transactions contemplated thereby, could express interests that may be different from those of other shareholders of Fiat Industrial and CNH. The receipt of compensation or other benefits in connection with the Merger may influence these persons in making their recommendation that Fiat Industrial shareholders vote in favor of approval of the Merger Plan and the transactions contemplated thereby. Some of Fiat Industrial’s executive officers also have benefit arrangements that could result in them having an interest in the Mergers.

RISK ASSOCIATED WITH COSTS RELATED TO THE TRANSACTION

NewCo, Fiat Industrial and CNH have incurred, and expect to continue to incur, significant costs in connection with the Merger, including the fees of their respective professional advisors. In addition, Fiat Industrial may be obligated to pay in the aggregate up to €325,000,000 to shareholders that exercise statutory cash exit rights and to Fiat Industrial’s creditors following their possible opposition to the Merger. NewCo, Fiat Industrial and CNH may incur unanticipated costs associated with the transaction and the listing of NewCo’s common shares. Unanticipated costs may have an adverse impact on the results of operations of NewCo following the effectiveness of the Merger.

Report on Operations

63


LOGO

 

REPORT ON OPERATIONS

MAIN RISKS AND UNCERTAINTIES TO WHICH FIAT INDUSTRIAL S.P.A. AND THE GROUP ARE EXPOSED

RISKS ASSOCIATED WITH THE HIGH-LOW VOTING STRUCTURE TO BE ADOPTED BY NEWCO

Fiat Industrial shareholders and CNH shareholders that are present or represented by proxy at the applicable extraordinary general meeting approving the Merger (regardless of how they vote) and continue to hold their Fiat Industrial ordinary shares and/or CNH common shares from the record date of the applicable extraordinary general meeting until the effectiveness of the Fiat Industrial Merger or the CNH Merger may elect to receive one special voting share in addition to each NewCo common share received in the Merger. In addition, following the Merger, persons who hold NewCo common shares for an uninterrupted period of at least three years may also elect to receive one special voting share in addition to each NewCo share held, provided that such shares have been registered in the Loyalty Register upon application by the relevant holder.

If Fiat Industrial and CNH shareholders holding a significant number of Fiat Industrial ordinary shares and/or CNH common shares elect to receive special voting shares in connection with the Merger or come to hold special voting shares after the Merger, or if NewCo shareholders holding a significant number of NewCo common shares for an uninterrupted period of at least three years elect to receive special voting shares, a relatively large proportion of the voting power in NewCo could be concentrated in some shareholders. Exor, which holds 30.01% of Fiat Industrial’s share capital, confirmed its current intention to maintain voting rights in NewCo above the legal threshold for a mandatory tender offer (i.e., 30%).

RISKS ASSOCIATED WITH THE CONDITIONS PRECEDENT TO THE TRANSACTION

Pursuant to the merger agreement, following shareholder approval, the effectiveness of the Merger will be subject to satisfaction or (to the extent permissible by law) waiver of the merger conditions. Execution of each merger will also be conditional on completion of the other. As such, there can be no guarantee at this stage that the Transaction will actually take place. Following the approval of the Merger by the Fiat Industrial shareholders, in the event that Fiat Industrial or CNH considers waiving certain of the Merger conditions, shareholder approval of any such waiver may not be required or sought.

RISKS ASSOCIATED WITH AGREEMENTS THAT CONTAIN CHANGE OF CONTROL CLAUSES

Fiat Industrial and CNH are a party to joint ventures, supply agreements, license agreements, financing and other agreements and instruments, some of which contain provisions that may be triggered by the Merger, such as default provisions, termination provisions, acceleration provisions and/or mandatory repurchase provisions.

In addition, other agreements of Fiat Industrial and CNH may require the payment of fees in connection with the envisaged transaction. If Fiat Industrial or CNH is unable to obtain any necessary waiver or consent, the operation of the above provisions may cause the loss of significant contractual rights and benefits, the termination of joint venture agreements, supply agreements, licensing agreements or may require the renegotiation of financing agreements and/or the payment of significant fees. Investors cannot be assured that NewCo will be able to negotiate new agreements on terms as favorable as those that Fiat Industrial and CNH had, or at all.

64


LOGO

 

RISKS ASSOCIATED WITH THE TAX IMPLICATIONS OF THE TRANSACTION

The tax implications of the transaction are under evaluation. The main tax risks arising from the Transaction are related to an exit tax issue and continuation of the tax consolidation in Italy.

The Merger is tax-neutral with respect to the Fiat Industrial S.p.A. assets that will remain connected with the Italian permanent establishment, but will result in the realization of capital gains or losses on those Fiat Industrial S.p.A. assets that are not connected with the Italian permanent establishment, giving rise to an exit tax. Under the proposed structure, only the Italian investments of Fiat Industrial S.p.A. will remain connected to an Italian permanent establishment. As a consequence of the Transaction, a mandatory ruling request should be submitted to the Italian tax authorities in order to ensure continuity of the Fiscal Unit currently in place between Fiat Industrial and Fiat Industrial’s Italian subsidiaries. It is possible that the carried-forward tax losses generated by the Fiscal Unit could not be used to offset any exit gain or the future taxable income of the Fiscal Unit. No deferred tax assets have been accrued in relation to the above carried-forward tax losses.

Report on Operations

65


LOGO

 

REPORT ON OPERATIONS

RESEARCH AND INNOVATION

RESEARCH AND INNOVATION

In its research activities, Fiat Industrial Group maintains a constant focus on environmental, social and economic sustainability. For each business, that translates into developing production processes and products that are both eco-compatible and socially responsible - and a step ahead of constantly evolving regulatory standards. For products, in particular, the main areas of focus in research and innovation are reducing polluting emissions, assessing the potential of alternative propulsion systems and fuels, and improving ergonomics and safety.

In July 2012, Fiat Industrial and the European Investment Bank (EIB) signed an agreement for €350 million in funding for projects at five of the Group’s R&D centers located in Italy (where 83% will be invested), Germany (8%) and Switzerland (9%). The primary goal of those projects is to develop solutions that improve the energy efficiency of vehicles and reduce CO2 emissions, principally through:

engine technologies and components that meet new emissions standards and application of those technologies on trucks, commercial vehicles, and agricultural equipment

alternative fuel, transmission and engine technologies for commercial vehicles

innovative vehicle architectures that optimize aerodynamic performance and reduce vehicle weight, with a particular emphasis on safety

During the year, the Group spent a total of €895 million on Research & Development(1) (equivalent to 3.6% of net revenues for Industrial Activities), with approximately 5,800 people at 49 R&D centers worldwide. At year-end, the Group had 6,488 active patents, including 887 new patents registered during the year.

Collaboration between the three sectors in the area of innovation was further strengthened in 2012 with the central objective being to increase the competitiveness of products and leverage synergies across the organization.

The Group also continued to benefit from the support of Centro Ricerche Fiat (CRF) - which remained part of Fiat Group following the demerger - with service agreements in place that ensure continuity of support for the Group’s R&D activities. Development activities are primarily carried out at sector level.

COLLABORATION WITH CRF

Research activities are focused in three main areas: environmental sustainability, social sustainability and economically-sustainable competition.

(1) Includes capitalized R&D and R&D charged directly to the income statement

66


LOGO

 

Environmental Sustainability

This area focuses on solutions to increase energy efficiency and reduce the environmental impact of vehicles over their entire life cycle (production to dismantling). Major developments in 2012 included:

Euro 6 diesel technologies for Light Commercial Vehicles (LCVs). Between September 2014 and September 2016, new Euro 6 emissions standards will be phased in for LCVs in Europe, requiring further reductions in polluting emissions, particularly nitrogen oxides (NOx). During 2012, CRF conducted preliminary tests to evaluate the efficiency of various emissions conversion technologies. Those tests looked at methods for controlling the formation of pollutants inside the combustion chamber, as well as conversion of pollutants via a post-treatment system. The AdBlue-based Selective Catalytic Reduction (SCR) post-treatment system, already available on heavy duty vehicles for some time, is a technically viable solution for achieving Euro 6 emissions levels. However, the cost and complexity of integration with existing engine technologies still needs to be carefully evaluated. As a result, efforts have focused on evaluating other technologies such as Low Pressure EGR (exhaust gas recirculation) and NOx Storage Catalysts (NSC). It has been demonstrated that for LCVs also - in combination with an upgraded turbo-compressor - application of these two technologies on the F1A engines used in the Ducato and Daily is a viable solution for achieving Euro 6 emissions standards based on the New European Driving Cycle (NEDC). Further research and testing are necessary to determine which solution provides the best compromise between cost, efficiency and fuel economy.

Natural gas engines. Alongside development of conventional engine technologies for commercial applications, during 2012 CRF also conducted an extensive evaluation of natural gas technologies (including existing technologies and others still under development) to assess their strengths and - for those technologies already used by FPT Industrial on Heavy Duty CNG engines - areas of improvement or sustainable alternative solutions. In its evaluation, CRF looked at all possible alternatives in terms of: combustion, fuel injection systems, exhaust gas post-treatment systems, and CNG/LNG storage systems. In parallel with that technical evaluation, it also conducted a technical and cost benchmark analysis of solutions

Report on Operations

67


LOGO

 

REPORT ON OPERATIONS

RESEARCH AND INNOVATION

selected by competitors. The conclusions of the evaluation, also supported by several industry experts, confirmed FPT Industrial’s selection as the winning solution: stoichiometric otto cycle combustion with multipoint indirect injection and exhaust gas post-treatment system with three-way catalyzer. In addition to the system’s simplicity, it also provides the best compromise between cost and performance and benefits from the proven reliability of the sub-systems used and flexibility in potential application (from CNG minibuses, vans and tractors to CNG/LNG trucks and buses). The evaluation also highlighted areas for improvement correlated to heat management, as well as priorities for future innovation and pre-development of new CNG heavy duty engines.

100% bioethanol propulsion. In collaboration with CNH, CRF developed two prototype bioethanol engines for major sugar and ethanol producers in Brazil. Bioethanol has been widely used in Brazil for some time without negative impacts on the food chain and, as such, qualifies as a renewable energy source. From well to wheel, bioethanol produces 50% less greenhouse gases than traditional fuels. In addition, when used at source, it is mileage neutral and can generate estimated savings of at least 50% compared with diesel. The two prototype bioethanol engines are: a 243 kW Cursor 8, based on the CNG version, for application on sugar cane harvesters, and a 243 kW Cursor 9, based on the diesel version, for application on the CCH tractor used for cut crop harvesting. Testing of the bioethanol Cursor 8 on a sugar cane harvester began in mid-2012. The first phase of more than 400 hours of tests demonstrated the prototype’s viability in terms of environmental performance and utilization of local sources of renewable energy. Development will continue during 2013 and will be extended to include field testing of the prototype engine for the CCH tractor.

Biomethane/bioethanol engine for tractors. During 2012, the CNG-powered “S” Series F1C engine (136 hp, 350 Nm) continued to prove its flexibility in use with alternative fuels. Alongside the natural gas only, natural gas/gasoline and prototype natural gas/hydrogen versions for automotive applications, a natural gas/ethanol version was also developed for application on CNH tractors. Due to a redesigned combustion chamber, the prototype version is capable of delivering

68


LOGO

 

optimum performance whether running on natural gas or ethanol. The compression ratio was also reduced with minimal impact on fuel efficiency when operating on natural gas only. The other area of development was a biomethane (gas)/bioethanol (liquid) system, which introduces an innovative solution for heating the fuel rail that resolves issues with cold starts typical with ethanol. Operating on biomethane or bioethanol, the engine meets the most stringent emissions limits - such as the EEV (Enhanced Environmentally-friendly Vehicle) standards - using a simple three-way catalyzer. At the same time, well-to-wheel CO2 emissions are between 50% and 100% lower than versions using conventional fossil fuels, giving this engine the potential to be the cleanest and most versatile in the product range. The final stage of development will be a pilot program that includes field testing of the biomethane/bioethanol F1C engine on a series of prototype tractors and construction of a biofuel production plant to achieve a complete virtuous circle, with negligible environmental impact and an attractive cost/return ratio.

CNG Steyr tractor. CRF and CNH continued development and began field testing of the prototype CNG Steyr tractor presented at Agritechnica 2011 in Hanover. The prototype is equipped with the 136 hp, 3000 cc 4-cylinder CNG F1C originally developed by FPT Industrial for light commercial vehicles such as the Iveco Daily Natural Power and Fiat Ducato Natural Power. CRF carried out major software upgrades on the engine control unit to enable higher torque at lower speeds. This improves performance in agricultural applications, where conditions often require sudden changes in direction, such as when shoveling/unloading with the front scoop.

Field testing began at the CNR facility in Italy during the summer and then continued at the CNH facility in St. Valentin, Austria. The prototype was also tested on-site by a local agricultural producer - with facilities to produce biomethane via anaerobic digestion and purification of organic waste - providing the opportunity to verify reliability of the engine in real conditions when operating on biomethane. In addition, data capture of the prototype’s principal operating characteristics

Report on Operations

69


LOGO

 

REPORT ON OPERATIONS

RESEARCH AND INNOVATION

during testing enabled a comprehensive evaluation of efficiency and fuel consumption levels. The data showed that, operating on 100% biomethane, the tractor can achieve average savings in fuel costs of between 25% and 40% compared with a conventional diesel engine.

Daily hybrid Dual Energy concept. Iveco and CRF worked on the development and construction of a concept vehicle - presented at the IAA Commercial Vehicle Trade Show in Hanover - featuring a number of innovative technologies that enhance fuel economy, comfort and functionality. The vehicle is based on a Daily van with a hybrid Iveco Dual Energy system incorporating an electric motor and a Euro 5 F1C diesel engine. CRF was involved in development of the dual-circuit cooling system: a high-temperature circuit for the diesel engine and a low-temperature circuit for the electric motor, inverter and battery pack. The vehicle also incorporates an innovative aerodynamic underbody panel that functions as a heat exchanger, contributing to dissipation of thermal energy from the low-temperature circuit. This concept vehicle will be developed into a working prototype during 2013.

Advanced Temperature Management Systems. During 2012, CRF worked with CNH on development of a prototype T7000 series agricultural tractor with a dual-circuit cooling system. A high-temperature circuit is used to cool the engine and a low-temperature circuit cools the condenser, intercooler and hydraulic oil radiator. This system improves overall performance of the tractor (including fuel economy) and provides easier maintenance as both radiators use the same technology, versus the current system of three heat exchangers based on different technologies. The prototype was designed using components that are already available.

A similar dual-circuit cooling system was developed for Iveco, as part of its “Next Generation Thermal Systems” innovation project. This system simplifies the forward thermal module consisting of two radiators (high-temperature and low-temperature) and enables more compact and efficient design of on-board systems, such as air intake and climate control.

The new low-temperature radiator has a large heat exchange surface area, shared with multiple auxiliary systems, which

70


LOGO

 

provides more efficient heat dissipation, requiring less frequent activation of the cooling fan and, as a result, improved fuel economy. In relation to the EU-funded COmplete Vehicle Energy-saving Technologies for Heavy-Trucks (CONVENIENT) project, development activities will focus on integration of the dual-circuit cooling system with a new full-hybrid diesel/electric propulsion system.

Iveco’s Next Generation Auxiliaries Project. During the year, CRF continued work on another project for Iveco that uses electric auxiliary systems to improve fuel efficiency for heavy trucks. A 500 hp Iveco Eco-Stralis EEV was used as the test platform. One of the vehicle’s key features is a system that recovers kinetic energy generated during braking for use in powering auxiliary systems. The vehicle has also been fitted with a high-capacity lithium battery pack that can power the vehicle’s climate control system independently for up to around 8 hours (during a driver’s rest break, for example). An innovative electro-hydraulic servo is also in development. Activities in 2013 include testing with dynamometer and on-road to evaluate fuel consumption under actual operating conditions.

Driving Style Evaluation. At an equivalent average commercial speed, adopting a more efficient and eco-friendly driving style can achieve fuel savings of 5% to 12%. During 2012, CRF completed development and testing of the Driving Style Evaluation system, which was designed to help drivers of trucks and other commercial vehicles optimize fuel consumption by giving them real-time feedback on their driving style.

Algorithms were developed to analyze data available from the propulsion system, vehicle and GPS and, using the dashboard display, present the driver with i) an overall evaluation of driving style and its impact on fuel consumption, and ii) tips on how to reduce consumption.

Used in conjunction with Iveconnet Fleet, the Driving Style Evaluation system also enables remote evaluation of individual drivers in a fleet. This system was introduced on the new Stralis Hi-Way launched in 2012.

Social Sustainability

This area focuses on solutions to enhance accident prevention capabilities through systems that recognize potentially dangerous situations and assist the driver in taking evasive action, as well as ensuring maximum protection for the vehicle occupants and other road users in the event of an accident.

Driver Attention Support for trucks. Fatigue, drowsiness and, in general, an inadequate level of attention to the road are among the principal causes of road accidents and represent one of the greatest risks for truck drivers. During 2012, CRF, in collaboration with Iveco, completed development and production ramp up of the Driver Attention Support system for trucks, contributing to the validation and final approval process for the software that is integrated with the Iveconnet Drive system on-board the new Iveco Stralis Hi-Way. Based principally on an analysis of steering wheel movement, the system alerts the driver when behavior indicates a decrease in level of attention and, if appropriate, even prompts the driver to take a rest break. The Driver Attention Support system helps improve safety for the driver, other road users, the vehicle and the freight being transported.

Report on Operations

71


LOGO

 

REPORT ON OPERATIONS

RESEARCH AND INNOVATION

Economically-sustainable competition

This area focuses on solutions to increase the competitiveness of new products through enhancements in performance and functionality and a reduction in the time required to bring new technologies to market.

New front suspension for APL tractor. One of the main drivers in the development of agricultural tractors over the next few years will be solutions to increase productivity. For the next generation of models, increasing road speeds to 60 km/h and reducing operator fatigue will be essential features. This will require a front suspension that offers stability, drivability and comfort on the road, under all conditions, without compromising productivity and handling in the field. During 2012, CRF fitted a tractor from CNH’s All Purpose Light range with a heavy duty front axle and independent wishbone suspension that was conceived, designed and patented by CRF. The hydro-pneumatic system that controls the suspension allows a high level maneuverability when the tractor is operating in the field and active damping of the front suspension when operating on-road, combined with an advanced auto-leveling system that adjusts the position and rigidity of the suspension based on the load on the front axle. Development activities were carried out in direct collaboration with the team responsible for the APL platform to ensure viable solutions that are compatible with mass production, from both a technical and cost perspective.

Simulation of a cataphoresis process. To help reduce time and costs associated with testing and improve the corrosion resistance of Iveco products, CRF has developed an innovative methodology for simulating the cataphoresis coating process for vehicle cabins and chassis. Computer-aided engineering tools are used to simulate the entire electrodeposition process. By using the Finite Element Method to model the vehicle body immersed in an electro-cataphoric bath, taking into account the specific characteristics of the coating material, it is possible to map the effective distribution of the coating. This analysis reveals areas susceptible to uneven distribution, necessitating the introduction of slots in the design that will improve distribution of the protective coating, without compromising the integrity of the structure. This methodology contributes to optimization of the production process and results in cost savings. Iveco will utilize this process for development of the 2014 model year Daily.

72


LOGO

 

Report on Operations

73


LOGO

 

REPORT ON OPERATIONS

HUMAN RESOURCES

HUMAN RESOURCES

At December 31, 2012, Fiat Industrial Group had 68,257 employees, an increase of 1,259 over the 66,998 figure at year-end 2011. The change was partially attributable to the difference between new hires (approximately 8,100) and departures (approximately 7,150) during the year. The change in scope of operations accounted for an increase of around 300 employees, of which about 170 was attributable to the consolidation - from January 1, 2012 - of Iveco dealers acquired in France during 2011. The remaining increase over year-end 2011 was mainly due to net new hiring of white-collar employees, primarily in R&D (approx. 600 people), as well as in India and China, and in the brand/commercial activities. At CNH, manufacturing also registered an increase, particularly for the Agricultural Equipment business, both in Europe and in North America. Those increases were partially offset by a decrease in manufacturing employees at Iveco both in Latin America, mainly associated with weaker market conditions and affecting temporary workers, and in Europe, following the restructuring announced in May.

ORGANIZATIONAL AND MANAGERIAL DEVELOPMENT

With the objective of enhancing the operational integration of Fiat Industrial S.p.A. and CNH Global N.V., in November 2012 Fiat Industrial S.p.A. announced the formation of the Group Executive Council (“GEC”) and the creation of four Regional Chief Operating Officers who, together with the Chief Financial Officer, all report to a Group Chief Operating Officer.

The Group Executive Council is the Group’s highest executive decision making body outside of its Board of Directors. It is responsible for reviewing the operating performance of the businesses, setting performance targets, making key strategic decisions and investments for the Group and sharing best practices, including the development and deployment of key human resources.

The GEC has four main groupings:

The first is composed of four Regional Operating Groups (NAFTA, Europe, Middle East and Africa, Latin America, and APAC) integrating Agricultural Equipment, Construction Equipment, and Truck and Commercial Vehicles businesses, plus Powertrain (FPT Industrial). Each is the responsibility of a Chief Operating Officer (COO), who will drive the organization via a regional management team.

The second grouping is reflective of the Group’s focus and emphasis on its brands (Case IH, New Holland Agriculture, Case Construction Equipment, New Holland Construction, Iveco, Parts & Service). Each of the global brands is represented in the GEC, and their responsibility will be to improve and develop an appropriate brand portfolio and to assist in the development of adequate commercial and marketing strategies in each of the Group’s operating regions.

74


LOGO

 

The third group is composed of industrial leaders, who drive consistency and rigor across the operating regions, and optimize the capital allocation choices the Group will face in the years to come.

The final group is composed of support and corporate functions.

During 2012, Fiat Industrial Group strengthened the HR Global System through SAP HR, an integrated tool that supports the main global HR processes of PLM, Variable Pay and Salary Alignment as a single global reporting system with full personnel data.

Specific features have been developed to enhance:

Quality of personnel administration data and significant update activities conducted by HR Shared Services

Functionality of the SAP HR portal for use by managers

Functionality of the SAP HR portal for use by employees, particularly introduction of a new module for CVs

Significant improvements were also made to other systems, such as the Talent Management tool with the addition of new online features that minimize the need to print documents for use in Management Review and Talent Review sessions.

In terms of coordination of the principal corporate processes, in 2012 Fiat Industrial continued the approach adopted after the demerger from Fiat S.p.A. With the support of a lean team of cross-company specialists, this approach takes into account the needs and priorities of each Group company, leveraging best practice and expertise group-wide. Management of most processes is decentralized, while some administrative services are still provided by Fiat S.p.A. on the basis of service agreements.

The Performance and Leadership Management process, which has been in place for managers and professionals for a number of years, continues to serve as the basis for personnel management decisions, together with the Talent Review process, which enables early identification of high-potential individuals, as well as charting of their professional development.

Report on Operations

75


LOGO

 

REPORT ON OPERATIONS

HUMAN RESOURCES

Training

Investment in training to support Fiat Industrial’s business activities and the professional development of employees totaled around €15.2 million for the year. About 1.4 million hours of training were provided, including 66,165 hours of web-based distance learning.

Grants and Scholarships

In 2012, Fiat Industrial Group took part in the Fiat Grant and Scholarship Program for children of employees in Italy and abroad.

A total of 174 grants and scholarships were awarded (31 in Italy), totaling approximately €308,000. Recipients were located in Italy, as well as other countries where the Group has a significant presence including the UK, Poland, France, Belgium, Spain, Portugal, U.S., Mexico, Brazil, Argentina, China, Australia and India.

INDUSTRIAL RELATIONS

During 2012, Fiat Industrial continued to work with trade unions and employee representatives to reach consensus-based solutions for managing conditions in various markets. Continued economic difficulties in Europe affected Iveco and the CNH Construction Equipment businesses in several countries and weaker demand also had negative repercussions for Iveco’s business in Latin America. By contrast, conditions were favorable for the Agricultural Equipment business overall and for the Construction Equipment business in North America due to a modest recovery in demand.

FPT Industrial was also affected by changing market conditions, with Group and external customers experiencing fluctuations in production levels that varied by geographic market and business line.

Intensive collective bargaining at various levels resulted in, among other things, agreements with trade unions on pay and employment conditions in various countries where Fiat Industrial Group operates.

76


LOGO

 

Social dialogue

In November 2012, the members of the Special Negotiating Body (SNB) of Fiat Industrial (despite the validity of its composition not yet being formalized) participated in a training course provided by the European Trade Union Institute (ETUI), as agreed at the meeting held with the Company on December 16, 2011. The purpose of the course was to provide in-depth information on the role and tasks of European Works Councils (EWCs), as established by EC Directive 2009/38/EC. Just prior to year-end, the Company was forced to postpone the first negotiating meeting between management and the SNB, planned for January 23, 2013, as two members of the SNB had declined the invitation and IndustriAll (the European Union of Metal, Chemical and Textiles workers) withdrew availability of the expert nominated by the SNB in light of FIOM being excluded from designating representatives to the Special Negotiating Body.

In Italy, dialogue continued on the basis of the new rules defined by the signatories to the Collective Labor Agreement (CLA) of December 13, 2011, which took effect January 1, 2012. Those rules relate to both the relational system and mechanisms to address production needs. With reference to the latter, varied solutions have been implemented from plant to plant by applying the more flexible system of shifts and working hours established by the CLA, thereby improving the Company’s ability to respond to changes in production requirements.

Management of production levels

Production stoppages continued to be necessary in 2012 due to the instability of production volumes in several countries. In Italy, the use of temporary layoff benefits (CIGO) increased for FPT Industrial, but was down over 2011 levels for both CNH and Iveco. At the Iveco plant in Brescia, the agreement allowing for a reduction in hours worked per week for all plant workers in accordance with the Solidarity Contract legislation was extended for a further year until August 21, 2013, through an agreement with the unions that are signatories to the CLA.

Production stoppages through temporary layoff benefit schemes increased in France, mainly for FPT Industrial, and in Germany for the Iveco plant in Ulm. In Spain, the utilization of temporary layoff benefits was also quite extensive in 2012. However, following the transfer of production from Ulm, stoppages were discontinued at the Madrid plant in the latter part of the year. In Latin America, the number of temporary workers was reduced at Iveco, while extensive use of overtime was employed by FPT Industrial in Brazil, mainly associated with the transfer of production of the Cursor and NEF engines to Cordoba. Higher market demand for the Agricultural Equipment business and increased volumes for Construction Equipment products in the U.S. were met through the use of overtime and increased employment levels. Meanwhile, flexible work-time agreements were applied to meet fluctuations in production requirements at several Iveco plants (in Australia, Argentina, China, the Czech Republic and Venezuela), as well as the FPT Industrial plant in China and the CNH plant in Poland.

In May 2012, Iveco announced a restructuring of its manufacturing activities in Europe aimed at improving efficiency and competitiveness. Creation of a fire-fighting center of excellence in Ulm was designed to overcome the structural underutilization and fragmentation of Iveco’s activities in this business area. Production located at Iveco’s other firefighting plants in Graz (Austria), Chambéry (France) and Görlitz and Weisweil (Germany) was scheduled to progressively converge in Ulm. The difficult trading conditions that persist in the European truck market made the underutilization of the Ulm Heavy Commercial Vehicles (HCV) plant no longer sustainable. As a result, Iveco reorganized HCV production in Europe and, as of September, moved production from Ulm to its plant in Madrid. The R&D center and testing facilities located in Ulm were not impacted by the reorganization and existing know-how will be applied to product development

Report on Operations

77


LOGO

 

REPORT ON OPERATIONS

HUMAN RESOURCES

for both trucks and fire-fighting equipment. In order to minimize the social impact, social plans and plans to manage the restructuring were agreed upon with local unions and employee representatives, in compliance with the laws, regulations and procedures applicable in each country. The agreements were signed in the third quarter at Iveco Magirus AG (Ulm) and at Iveco Magirus Brandschutztechnik GmbH (Graz). At Iveco Magirus Brandschutztechnik GmbH (Weisweil) and at Iveco Magirus Camiva (Chambéry), agreements were reached during the fourth quarter, while for Iveco Magirus Brandschutztechnik GmbH (Görlitz), a buy-out solution was pursued and the related agreement was signed in late November for a change in ownership effective January 1, 2013. No significant restructuring or reorganization initiatives were implemented in other countries during the year.

Collective bargaining

In Italy, on October 11, 2012, negotiations were initiated to renew the December 13, 2011 CLA, which had a duration of one year commencing January 1, 2012. During this first meeting, an agreement was signed to introduce a basic health care plan for all Fiat Group and Fiat Industrial Group employees in Italy at the sole expense of the employer. The plan includes provision of long-term care in the event of loss of self-sufficiency, as well as screening and testing for cardiovascular diseases and metabolic syndrome. As of February 20, 2013, negotiations for renewal of the CLA were still ongoing.

The principal negotiations in 2012 relating to company-level agreements included: the annual negotiation in France, which resulted in average salary increases of around 2.5% and, for Iveco and CNH, deals on the criteria for the 2012 profit sharing agreement; a collective agreement covering wage and employment conditions stipulated at Company level with the union representative of employees from Iveco Czech Republic; agreements in Brazil for pay increases based on domestic economic growth and in line with increases for the rest of industrial sector in Brazil, as well as one-off bonuses. In Germany, the agreement for renewal of the metalworkers’ contract, applied by most Group companies, provided for salary increases of 4.3% from May 2012 for a period of 13 months.

Labor unrest

In terms of hours of work lost, the level of labor unrest in Italy was only about 15% of the level registered in 2011. Outside Italy, the overall level of labor unrest during the year was negligible. There was labor action in Germany and France at sites affected by the Iveco restructuring before agreements on management of the restructuring had been reached.

78


LOGO

 

Report on Operations

79


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

INTRODUCTION

Fiat Industrial Group was created on January 1, 2011 through the demerger of the capital goods activities of Fiat S.p.A. The Group produces and sells agricultural and construction equipment, trucks and commercial vehicles, as well as engines and transmissions for industrial and marine applications.

Principal changes in the scope of consolidation in 2012

Since January 1, 2012, the Group has consolidated the profit and loss of Iveco Finance Holdings Limited (renamed Iveco Capital Limited in 2012) on a line-by-line basis. The balance sheet was fully consolidated on December 31, 2011, following the agreement for orderly termination of the joint venture. Iveco Capital Limited became a wholly-owned subsidiary in May 2012 following acquisition of the remaining 51% from Barclays.

Since January 1, 2012, the Group has fully consolidated Iveco Provence, an Iveco dealer in which a 100% interest was acquired during the second quarter of 2011. In the 2011 consolidated financial statements, the holding was accounted for using the equity method.

For completeness of information, in December 2012, CNH sold its 20% stake in Kobelco Construction Machinery Co., Ltd., an associate company previously accounted for using the equity method.

80


LOGO

 

FINANCIAL REVIEW

Operating Performance

(€ million)

2012 2011

Net revenues 25,785 24,289

Cost of sales 20,925 20,038

Selling, general and administrative costs 2,183 2,002

Research and development costs 560 505

Other income/(expenses) (38) (58)

TRADING PROFIT/(LOSS) 2,079 1,686

Gains/(losses) on disposal of investments (38) 26

Restructuring costs 166 95

Other unusual income/(expenses) (13) 12

OPERATING PROFIT/(LOSS) 1,862 1,629

Financial income/(expenses) (458) (546)

Result from investments 81 86

Share of profit/(loss) of investees accounted for using the equity method 86 97

Other income/(expense) from investments (5) (11)

PROFIT/(LOSS) BEFORE TAXES 1,485 1,169

Income taxes 564 468

PROFIT/(LOSS) FROM CONTINUING OPERATIONS 921 701

Profit/(loss) from discontinued operations - -

PROFIT/(LOSS) 921 701

PROFIT/(LOSS) ATTRIBUTABLE TO:

Owners of the parent 810 624

Non-controlling interests 111 77

The following review provides an analysis of net revenues and trading profit by individual sector. Comments on other line items relate to the Group as a whole.

Net revenues

The Group reported 2012 revenues up 6.2% to €25,785 million, as continued robust performance for CNH more than compensated for weaker trading conditions in other businesses. CNH reported substantial growth in the Agricultural Equipment business driven by increased volumes, positive net pricing, and favorable product mix. Iveco posted a decline in deliveries, reflecting a further deterioration in economic conditions in several major European markets and weaker demand in Latin America. For FPT Industrial, sales volumes were down as a result of the contraction in demand for diesel engines for on-road applications.

Revenues by sector

(€ million) 2012 2011 % change

Agricultural and Construction Equipment (CNH) 16,056 13,896 15.5

Trucks and Commercial Vehicles (Iveco) 8,924 9,562 -6.7

FPT Industrial 2,933 3,220 -8.9

Eliminations and Other (2,128) (2,389) -

Total for the Group 25,785 24,289 6.2

Report on Operations

81


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

In detail, revenue performance by sector was as follows:

Agricultural and Construction Equipment

CNH reported revenues of €16,056 million for the year, up 15.5% over 2011 (+6.7% in US dollar terms), as solid global demand for Agricultural Equipment more than offset the negative effects of more difficult trading conditions in the Construction Equipment segment. By geographic area, revenues for both Agricultural and Construction Equipment were as follows: 44% North America, 31% Europe, Africa, Middle East and the Commonwealth of Independent States (EAME & CIS), 15% Latin America, and 10% Asia Pacific (APAC) markets.

Net sales for the Agricultural Equipment business were up 20% over 2011 (+10% in US dollar terms), driven by increased volumes, positive net pricing, and favorable product mix. All geographic regions reported revenue increases on a constant currency basis. For the Construction Equipment business, net sales increased 6%; in US dollar terms sales decreased 3%, as modest industry recovery in North America and Eastern Europe did not offset the continued slowdown in demand in other regions.

Worldwide agricultural equipment market share performance was in line with the market for both tractors and combines. CNH’s worldwide construction equipment market share was stable, with gains in Latin America.

Trucks and Commercial Vehicles

Iveco posted full-year revenues of €8,924 million, a 6.7% decrease over the prior year. Volume declines, attributable to further deterioration in economic conditions in several major European markets and weaker demand in Latin America, were partially offset by a more favorable product mix.

A total of 137,028 vehicles (including buses and special vehicles) were delivered during the year, representing a 10.7% decrease versus 2011. Volumes were lower in all segments, with deliveries of light vehicles down 11.8%, medium down 21.6% and heavy down 6.0% . In Western Europe, Iveco delivered a total of 69,414 vehicles (-21.1%), with declines registered in all major markets: Germany -16.1%, France -17.7%, Spain -24.3%, Italy -37.1% and the UK -15.3% . In Latin America, deliveries were down 21.8% . In Eastern Europe, performance ran counter to the trend in Western Europe with deliveries up 21.9% over the prior year. In Rest of World markets, Iveco posted a 36.4% year-over-year increase.

The Western European truck market (GVW ³3.5 tons) contracted 7.4% in 2012, with trading conditions deteriorating throughout the year. Southern Europe experienced the largest decrease with the gap between Northern and Southern European markets continuing to widen. Iveco’s estimated market share in Western Europe (GVW ³3.5 tons) was 11.3%, representing a 0.8 percentage point decrease versus 2011. Although overall share in Italy was up 2.1 percentage points to 33.1%, the gain was not sufficient to offset share losses in other major markets. In the light segment, share was down 1.3 percentage points to 11.7% (-0.7 p.p. assuming comparable market mix), primarily due to the crisis in the construction sector and the continuing shift in demand toward car-based models. In the medium segment, Iveco’s overall share was down 0.8 percentage points to 22.8% (-0.1 p.p. assuming comparable market mix), despite gains being achieved in several markets. Share of the European heavy segment was up 0.2 percentage points to 7.5% (+0.8 p.p. assuming comparable market mix) on the back of positive performance across markets.

In Latin America, demand for trucks (GVW ³3.5 tons) was down 14.3% . Iveco registered an 11.6% share (+0.1 p.p. versus 2011) and strengthened its leadership in the light segment in Brazil, with share up 5.3 percentage points to 25.6% .

FPT Industrial

FPT Industrial reported 2012 revenues of €2,933 million, down 8.9% over the prior year due to lower volumes to both Group companies and external customers. For 2012, sales to external customers accounted for 34% of total revenues, up from 33% in 2011.

82


LOGO

 

A total of 476,786 engines were sold during the year, down 15% over 2011. By major customer, 31% of engines were supplied to Iveco, 27% to CNH and the remaining 42% to external customers (including Sevel, the Fiat JV for light commercial vehicles, which accounted for 24%). In addition, FPT Industrial delivered 64,154 transmissions (-14% year-over-year) and 154,958 axles (-9%).

Trading profit/(loss)

Trading profit came in at €2,079 million for full-year 2012, an increase of €393 million (+23.3%) over €1,686 million in 2011. Group trading margin was higher at 8.1% (6.9% for 2011), with both CNH and FPT Industrial posting strong gains and Iveco maintaining a comparable trading margin despite the decrease in delivery volumes.

Trading profit/(loss) by sector

(€ million) 2012 2011 Change

Agricultural and Construction Equipment (CNH) 1,566 1,154 412

Trucks and Commercial Vehicles (Iveco) 469 490 -21

FPT Industrial 142 107 35

Eliminations and Other (98) (65) -33

Total for the Group 2,079 1,686 393

Trading margin (%) 8.1 6.9

In detail, trading profit by sector was as follows:

Agricultural and Construction Equipment

CNH recorded a strong performance, with trading profit increasing 36% to €1,566 million for the year (€1,154 million for 2011) and trading margin at 9.8% (8.3% for 2011). Increased volumes and positive net pricing in both businesses compensated for increases in SG&A expenditures and R&D expense, primarily related to significant investments in new products and Tier 4 engine emissions compliance programs.

Trucks and Commercial Vehicles

Iveco closed the year with a trading profit of €469 million (€490 million for 2011). The decrease over the prior year, which was primarily attributable to lower volumes, was largely offset by benefits deriving from cost reduction measures. Trading margin was slightly up over the prior year at 5.3% (5.1% for 2011).

FPT Industrial

FPT Industrial reported trading profit of €142 million, compared with €107 million for 2011. Despite the contraction in volumes, there was a significant improvement in trading margin (+1.5 p.p. to 4.8%) resulting from efficiencies achieved during the year and the absence of the one-off costs recognized in 2011 in relation to production start-ups.

Report on Operations

83


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

Operating profit/(loss)

Operating profit was €1,862 million for the year, an increase of €233 million over 2011 (€1,629 million). The €393 million increase in trading profit was partially offset by higher net unusual expenses (€217 million versus €57 million for 2011).

Net losses on disposals totaled €38 million for 2012 and relates to the sale of the 20% stake in Kobelco Construction Machinery Co., Ltd. For 2011, there was a net gain of €26 million, of which €25 million related to the accounting effects of the acquisition of the remaining 50% in the joint venture L&T - Case Equipment Private Limited.

Restructuring costs totaled €166 million, compared with €95 million in 2011. For both years, those costs mainly related to the Trucks and Commercial Vehicles sector. In 2011, restructuring costs recognized by Iveco were principally related to the closure of two bus assembly plants (one in Spain and the other in Italy). In 2012, those costs were essentially attributable to the reorganization of Iveco’s manufacturing activities in Europe specifically, concentration of heavy truck production at the plant in Madrid (which already produced heavy trucks) and termination of those activities in Ulm. At the same time, production of fire-fighting equipment at four other European plants, where it was the sole activity, was transferred to Ulm.

Other unusual expenses (net) of €13 million, mainly reflecting costs for the rationalization of strategic suppliers. In 2011, there was other unusual income of €12 million, mainly arising from the release to income of a provision for risks no longer existing in connection with a minor investee.

Following is a summary of the principal components of operating profit, by sector:

Trading profit/(loss) Gains/(losses) on disposal of investments Restructuring costs Other unusual income/(expenses) Operating profit/(loss)

(€ million) 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011

Agricultural and Construction Equipment (CNH) 1,566 1,154 (38) 25 (1) (2) - - 1,529 1,181

Trucks and Commercial Vehicles (Iveco) 469 490 - 2 167 95 (14) 11 288 408

FPT Industrial 142 107 - - - 2 - 1 142 106

Eliminations and Other (98) (65) - (1) - - 1 - (97) (66)

Total for the Group 2,079 1,686 (38) 26 166 95 (13) 12 1,862 1,629

Profit/(loss) for the year

Net financial expenses totaled €458 million, compared with €546 million for 2011. The improvement was primarily attributable to a reduction in funding costs and lower foreign exchange losses.

Result from investments totaled €81 million, slightly down from €86 million for 2011 mainly due to lower earnings for joint venture companies.

Profit before taxes was €1,485 million, compared with €1,169 million for 2011. The increase primarily reflects the €233 million improvement in operating profit and the €88 million decrease in net financial expenses.

Income taxes totaled €564 million (€468 million for 2011) and mainly related to taxable income of companies operating outside Italy. The effective tax rate of 38% (36% excluding current and deferred IRAP) was in line with expectations.

84


LOGO

 

Net profit was €921 million, up 31% over the €701 million profit for 2011.

Profit attributable to owners of the parent was €810 million (€624 million for 2011).

Statement of Cash Flows

Following is a summary statement of cash flows and related comments. A complete statement of cash flows is provided in the Consolidated Financial Statements.

(€ million) 2012 2011

A) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 5,639 3,686

B) CASH FROM/(USED IN) OPERATING ACTIVITIES 1,698 2,326

C) CASH FROM/(USED IN) INVESTING ACTIVITIES (2,974) (2,266)

D) CASH FROM/(USED IN) FINANCING ACTIVITIES 327 1,862

Currency translation differences (79) 31

E) NET CHANGE IN CASH AND CASH EQUIVALENTS (1,028) 1,953

F) CASH AND CASH EQUIVALENTS AT END OF THE YEAR 4,611 5,639

In 2012, operating activities generated €1,698 million in cash. Income-related cash inflows of €1,912 million (calculated as net profit plus amortization and depreciation, dividends, changes in provisions and items related to sales with buy-back commitments and operating leases, net of gains/losses on disposals and other non-cash items) were partially offset by a €214 million increase in working capital (based on a comparable scope of operations and constant exchange rates).

Cash used in investing activities totaled €2,974 million.

Expenditure on tangible and intangible assets (including €533 million in capitalized development costs) totaled €1,349 million.

The increase in receivables from financing activities (accounting for cash absorption of €1,749 million) primarily related to higher levels of financing provided by CNH to both dealers and customers.

Financing activities generated €327 million in cash in 2012. The €584 million in cash proceeds from new bond issues and increased utilization of available credit lines were partially absorbed by €480 million in dividend payments and the repayment by Iveco Capital to Barclays Group of debt outstanding at December 31, 2011.

Statement of Financial Position for Fiat Industrial Group at December 31, 2012

At December 31, 2012, total assets amounted to €38,937 million, increasing €294 million from the €38,643 million figure at year-end 2011.

Non-current assets totaled €11,241 million, an increase of €549 million over year-end 2011, primarily attributable to investments for the period (net of amortization/depreciation).

Current assets decreased €265 million to €27,671 million at year-end 2012. The decrease was primarily attributable to a €1,092 million reduction in liquidity and lower current tax receivables, which were partially offset by an increase in receivables from financing activities.

Receivables from financing activities totaled €15,237 million at December 31, 2012, representing an increase of €1,291 million over year-end 2011. Net of currency translation differences and write-downs, there was a €1,584 million increase principally relating to the increase in financing provided to CNH customers in the U.S., Iveco dealers in Europe and CNH dealers in the U.S. and Brazil.

Report on Operations

85


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

Working capital (net of items relating to vehicles sold under buy-back commitments and vehicles no longer subject to lease agreements that are held in inventory) was a positive €875 million, representing a €76 million increase for the year.

(€ million) At December 31, 2012 At December 31, 2011 Change

Inventory (a) 4,673 4,723 (50)

Trade receivables 1,436 1,562 (126)

Trade payables (4,843) (5,052) 209

Net Current Taxes Receivable/(Payable) & Other Current Receivables/(Payables) (b) (391) (434) 43

Working capital 875 799 76

(a) Inventory is reported net of vehicles held for sale by Iveco that have been bought back (under buy-back commitments) or returned following expiry of a lease agreement

(b) Other current payables, included under current taxes receivable/(payable) & other current receivables/(payables), are stated net of amounts due to customers in relation to vehicles sold under buy-back commitments, which consist of the repurchase amount payable at the end of the lease period, together with the value of any lease installments received in advance. The value at the beginning of the contract period, equivalent to the difference between the sale price and the repurchase amount, is recognized on a straight-line basis over the contract period

At December 31, 2012, trade receivables, other receivables and receivables from financing activities falling due after that date and sold without recourse and, therefore, eliminated from the statement of financial position pursuant to the derecognition requirements of IAS 39 totaled €763 million (€980 million at December 31, 2011).

Working capital increased €214 million over the year (on a comparable scope of operations and at constant exchange rates), principally due to the slowdown in business activity for Iveco in Latin America and Europe.

At December 31, 2012, consolidated net debt totaled €15,994 million, up €1,445 million over the €14,549 million figure at December 31, 2011. Excluding positive currency translation differences of approximately €258 million, cash from operating activities was more than offset by increases in the loan portfolios of the financial services companies, as well as capital expenditure and dividend distributions during the year.

(€ million) At December 31, 2012 At December 31, 2011

Debt:

Asset-backed financing (9,708) (9,479)

Other debt (10,925) (10,738)

Total debt (20,633) (20,217)

Other financial assets (a) 121 118

Other financial liabilities (a) (97) (157)

Liquidity:

Current securities 4 68

Cash and cash equivalents 4,611 5,639

Net (Debt)/Cash (15,994) (14,549)

Industrial Activities (1,642) (1,239)

Financial Services (14,352) (13,310)

Cash, cash equivalents and current securities 4,615 5,707

Available credit lines 1,591 1,588

Total available liquidity 6,206 7,295

(a) Includes fair value of derivative financial instruments

86


LOGO

 

Debt for the Group increased €416 million during 2012 (increase of €798 million at constant exchange rates), mainly reflecting an increase of €229 million in asset-backed financing and USD 750 million in new bond issues, increased utilization of available credit lines and new medium/long-term bank financing. Those increases were partially offset by the repayment by Iveco Capital to Barclays Group of debt outstanding at year-end 2011.

At December 31, 2012, liquidity totaled approximately €4.6 billion (down €1.1 billion over the €5.7 billion at year-end 2011). Total available liquidity (including €1.6 billion in undrawn committed facilities at year-end 2012 and 2011) decreased €1.1 billion to €6.2 billion, mainly as a result of cash utilization related to refinancing needs and portfolio growth for financial services, as well as capital expenditure and dividend payments. Cash flow from operations was partially offset by the increase in working capital.

Cash and cash equivalents included cash with a pre-determined use of €670 million (€728 million at December 31, 2011), primarily associated with servicing of securitization vehicles (included under asset-backed financing).

Industrial Activities and Financial Services 2012 Results

The following tables provide a breakdown of the consolidated statements of income, financial position and cash flows between “Industrial Activities” and “Financial Services”. Financial Services includes subsidiaries of CNH and Iveco engaged in retail and dealer finance, leasing and rental activities.

Prior to the end of 2011, Iveco Finance Holdings Limited (renamed Iveco Capital Limited during 2012), a joint venture between Iveco and Barclays, was accounted for under the equity method. As a result of the agreement for orderly termination of the joint venture signed in December 2011, the assets and liabilities of Iveco Finance Holdings Limited were consolidated on a line-by-line basis at December 31, 2011. As of January 1, 2012, the Group has also consolidated the company’s profit and loss on a line-by-line basis.

Basis of analysis

The segmentation between Industrial Activities and Financial Services represents a sub-consolidation prepared on the basis of the core business activities carried out by each Group company.

Investments held by companies belonging to one segment in companies included in the other segment are accounted for under the equity method. To provide a more meaningful presentation of net profit, the results of investments accounted for in this manner are classified in the income statement under result from intersegment investments.

Report on Operations

87


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

The holding companies (Fiat Industrial S.p.A. and Fiat Netherlands Holding N.V.) are included under Industrial Activities.

The sub-consolidation of Industrial Activities also includes companies that perform centralized treasury activities (i.e., raising funding in the market and financing Group companies). These activities do not, however, include the offer of financing to third parties.

Operating Performance by Activity

2012 2011

(€ million) Consolidated Industrial Activities Financial Services Consolidated Industrial Activities Financial Services

Net revenues 25,785 24,682 1,508 24,289 23,291 1,307

Cost of sales 20,925 20,281 1,049 20,038 19,239 1,108

Selling, general and administrative costs 2,183 2,016 167 2,002 1,860 142

Research and development costs 560 560 - 505 505 -

Other income/(expenses) (38) (39) 1 (58) (78) 20

TRADING PROFIT/(LOSS) 2,079 1,786 293 1,686 1,609 77

Gains/(losses) on disposal of investments (38) (38) - 26 26 -

Restructuring costs 166 166 - 95 95 -

Other unusual income/(expenses) (13) (13) - 12 12 -

OPERATING PROFIT/(LOSS) 1,862 1,569 293 1,629 1,552 77

Financial income/(expenses) (458) (458) - (546) (546) -

Result from investments (*) 81 71 10 86 85 1

PROFIT/(LOSS) BEFORE TAXES 1,485 1,182 303 1,169 1,091 78

Income taxes 564 438 126 468 389 79

PROFIT/(LOSS) 921 744 177 701 702 (1)

Result from intersegment investments - 177 - - (1) 2

PROFIT/(LOSS) 921 921 177 701 701 1

(*) Includes income from investments as well as impairment (losses)/reversals on non-intersegment investments accounted for under the equity method

Industrial Activities

For 2012, net revenues for Industrial Activities were up 6.0% to €24,682 million, with the increase for CNH more than offsetting declines for Iveco and FPT Industrial. For CNH, revenues were up 16.6% (+7.6% in US dollar terms), primarily reflecting higher volumes, better pricing and a more favorable product mix for the Agricultural Equipment business. Construction Equipment sales grew at a slower pace (declining in US dollar terms), as a result of the difficult trading conditions. Iveco reported a 7.5% decrease in revenues, with deliveries down as a result of further deterioration in economic conditions in several major European markets and weaker demand in Latin America. For FPT Industrial, revenues were down 8.9% on the back of lower demand for diesel engines for on-road applications.

Trading profit for Industrial Activities totaled €1,786 million, increasing €177 million over the €1,609 million figure for 2011. The improvement in trading performance reflects higher revenues for CNH and the improved result for FPT Industrial driven by industrial efficiencies. By contrast, Iveco reported a drop in trading profit, with the impact of lower volumes only partially offset by efficiency gains.

Operating Profit came in at €1,569 million for the year, compared with €1,552 million for 2011. The €177 million increase in trading profit was partially offset by a €160 million increase in net unusual expenses, relating primarily to restructuring costs for Iveco and net losses on disposal of investments (compared with a net gain for 2011) resulting from termination of CNH’s strategic alliance with Kobelco.

88


LOGO

 

Financial Services

Net revenues for Financial Services totaled €1,508 million for 2012, a 15.4% increase over 2011 attributable to the change in scope of consolidation for Iveco’s Financial Services.

(€ million) 2012 2011 % change

Agricultural and Construction Equipment (CNH) 1,197 1,170 2.3

Trucks and Commercial Vehicles (Iveco) 311 137 127.0

Total 1,508 1,307 15.4

CNH Financial Services reported revenues of €1,197 million, up 2.3% over 2011 (-5.6% in US dollar terms). The increase in the average value of the managed portfolio, driven by higher volumes for Industrial Activities, was offset by a reduction in interest income reflecting a general reduction in market rates of interest.

Iveco’s Financial Services activities posted revenues of €311 million, with the year-over-year increase also reflecting the line-by-line consolidation of Iveco Capital Limited, as described at the beginning of the section. On a like-for-like basis, revenues were down 13% over 2011, primarily due to the lower average value of the managed portfolio in Eastern Europe.

Trading profit for Financial Services totaled €293 million, compared to €77 million in 2011.

(€ million) 2012 2011 Change

Agricultural and Construction Equipment (CNH) 330 227 103

Trucks and Commercial Vehicles (Iveco) (37) (151) 114

Eliminations and Other - 1 -1

Total 293 77 216

For CNH’s Financial Services, trading profit was €330 million, up €103 million over the prior year due to the increase in the average portfolio, lower SG&A expenses and lower bad debt provisions. Those improvements were partially offset by lower margins.

Iveco’s Financial Services business reported a trading loss of €37 million improving significantly over the €151 million loss in 2011 due to lower credit loss provisions, as well as a reduction in losses for Central and Eastern Europe and for the rental business in Spain. Consolidation of Iveco Capital Limited contributed a loss of €2 million.

Report on Operations

89


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

Statement of Financial Position by Activity

At December 31, 2012 At December 31, 2011

(€ million) Consolidated Industrial Activities Financial Services Consolidated Industrial Activities Financial Services

Intangible assets 4,174 4,056 118 3,909 3,794 115

Property, plant and equipment 4,572 4,569 3 4,177 4,174 3

Investments and other financial assets 531 2,371 88 666 2,247 70

Leased assets 622 27 595 558 33 525

Defined benefit plan assets 256 249 7 215 209 6

Deferred tax assets 1,086 950 136 1,167 1,022 145

Total non-current assets 11,241 12,222 947 10,692 11,479 864

Inventory 4,843 4,755 88 4,865 4,774 91

Trade receivables 1,436 1,381 119 1,562 1,467 222

Receivables from financing activities 15,237 4,702 16,331 13,946 3,235 15,220

Current taxes receivable 302 293 9 685 627 58

Other current assets 1,117 837 596 1,053 860 409

Current financial assets: 125 121 6 186 117 71

Current securities 4 - 4 68 - 68

Other financial assets 121 121 2 118 117 3

Cash and cash equivalents 4,611 2,948 1,663 5,639 4,236 1,403

Total current assets 27,671 15,037 18,812 27,936 15,316 17,474

Assets held for sale 25 8 17 15 8 7

TOTAL ASSETS 38,937 27,267 19,776 38,643 26,803 18,345

Equity 5,722 5,722 1,929 5,411 5,411 1,651

Provisions: 4,589 4,542 47 4,540 4,497 43

Employee benefits 1,941 1,919 22 2,070 2,047 23

Other provisions 2,648 2,623 25 2,470 2,450 20

Debt: 20,633 9,238 17,191 20,217 8,637 16,089

Asset-backed financing 9,708 149 9,597 9,479 215 9,424

Other debt 10,925 9,089 7,594 10,738 8,422 6,665

Other financial liabilities 97 78 21 157 140 19

Trade payables 4,843 4,730 179 5,052 5,004 177

Current taxes payable 217 167 50 660 599 61

Deferred tax liabilities 170 110 60 111 58 53

Other current liabilities 2,666 2,680 299 2,495 2,457 252

Liabilities held for sale - - - - - -

Total liabilities 33,251 21,545 17,847 33,232 21,392 16,694

TOTAL EQUITY AND LIABILITIES 38,937 27,267 19,776 38,643 26,803 18,345

90


LOGO

 

Net Debt by Activity at December 31, 2012

At December 31, 2012 At December 31, 2011

(€ million)

Consolidated Industrial Activities Financial Services Consolidated Industrial Activities Financial Services

Debt: (20,633) (9,238) (17,191) (20,217) (8,637) (16,089)

Asset-backed financing (9,708) (149) (9,597) (9,479) (215) (9,424)

Other debt (10,925) (9,089) (7,594) (10,738) (8,422) (6,665)

Intersegment financial receivables - 4,605 1,191 - 3,185 1,324

Debt, net of intersegment balances (20,633) (4,633) (16,000) (20,217) (5,452) (14,765)

Other financial assets (a) 121 121 2 118 117 3

Other financial liabilities (a) (97) (78) (21) (157) (140) (19)

Liquidity:

Current securities 4 - 4 68 - 68

Cash and cash equivalents 4,611 2,948 1,663 5,639 4,236 1,403

Net (Debt)/Cash (15,994) (1,642) (14,352) (14,549) (1,239) (13,310)

(a) Includes fair value of derivative financial instruments

As a result of the role played by the central treasury, debt for Industrial Activities also includes funding raised by the central treasury on behalf of consolidated Financial Services companies (included under intersegment financial receivables).

Intersegment financial receivables for Financial Services companies, on the other hand, represent loans or advances to industrial companies for receivables sold to Financial Services companies that do not meet the derecognition requirements of IAS 39 as well as cash deposited temporarily with the central treasury.

Net debt for the Financial Services companies at December 31, 2012 was €1,042 million higher than year-end 2011. That increase mainly reflects the increase in the lending portfolio (€1,706 million), partially compensated by cash from operating activities (€282 million) and positive currency translation differences (€230 million).

Report on Operations

91


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

Change in Net Industrial Debt

(€ million) 2012 2011

Net Industrial (Debt)/Cash at the beginning of the year (1,239) (1,900)

Profit/(loss) for the year 921 701

Amortization and depreciation (net of vehicles sold under buy-back commitments or leased out) 716 664

Change in provisions for risks and charges and similar 123 350

Cash from/(used in) operating activities during the year before change in working capital 1,760 1,715

Change in working capital (291) 346

Cash from/(used in) operating activities 1,469 2,061

Investments in property, plant and equipment and intangible assets (net of vehicles sold under buy-back commitments and leased out) (1,344) (991)

Cash from/(used in) operating activities, net of capital expenditures 125 1,070

Change in consolidation scope and other changes (86) (400)

Net industrial cash flow 39 670

Capital increases, dividends, purchase of ownership interests in subsidiaries (470) (9)

Currency translation differences 28 -

Change in net industrial debt (403) 661

Net Industrial (Debt)/Cash at the end of the year (1,642) (1,239)

During 2012, net industrial debt increased €403 million to €1,642 million.

The €1,760 million in cash generated by operating activities (before changes in working capital) was more than offset by investments in fixed assets (€1,344 million), working capital absorption (€291 million), and dividend payment.

92


LOGO

 

Statement of Cash Flows by Activity

2012 2011

(€ million) Consolidated Industrial Activities Financial Services Consolidated Industrial Activities Financial Services

A) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,639 4,236 1,403 3,686 2,500 1,186

B) CASH FROM/(USED IN) OPERATING ACTIVITIES:

Profit/(loss) for the year 921 921 177 701 701 1

Amortization and depreciation (net of vehicles sold under buy-back commitments or leased out) 719 716 3 666 664 2

(Gains)/losses on disposal of non-current assets (net of vehicles sold under buy-back commitments) and other non-cash items 222 (114) 159 262 (38) 299

Dividends received 80 127 6 57 116 5

Change in provisions 73 68 5 178 178 -

Change in deferred taxes 103 95 8 101 82 19

Changes relating to buy-back commitments (a) (117) (51) (66) 40 20 18

Changes relating to operating leases (b) (89) (2) (87) (12) (8) (4)

Change in working capital (214) (291) 77 333 346 (11)

TOTAL 1,698 1,469 282 2,326 2,061 329

C) CASH FROM/(USED IN) INVESTING ACTIVITIES:

Investments in:

Property, plant and equipment and intangible assets (net of vehicles sold under buy-back commitments or leased out) (1,349) (1,344) (5) (993) (991) (2)

Subsidiaries and other equity investments (4) (210) - (104) (289) 30

Proceeds from the sale of non-current assets (net of vehicles sold under buy-back commitments) 76 77 30 11 11 -

Net change in receivables from financing activities (1,749) (43) (1,706) (1,152) (58) (1,094)

Change in other current securities 61 - 61 (47) - (47)

Other changes (9) (1,603) 1,594 19 162 (143)

TOTAL (2,974) (3,123) (26) (2,266) (1,165) (1,256)

D) CASH FROM/(USED IN) FINANCING ACTIVITIES:

Net change in debt and other financial assets/liabilities 797 880 (83) 1,871 853 1,018

Increase in share capital 10 10 175 - - 155

Dividends paid (480) (480) (53) (8) (8) (64)

(Purchase)/sale of ownership interests in subsidiaries - - - (1) (1) -

TOTAL 327 410 39 1,862 844 1,109

Currency translation differences (79) (44) (35) 31 (4) 35

E) NET CHANGE IN CASH AND CASH EQUIVALENTS (1,028) (1,288) 260 1,953 1,736 217

F) CASH AND CASH EQUIVALENTS AT END OF YEAR 4,611 2,948 1,663 5,639 4,236 1,403

(a) Cash generated from the sale of vehicles under buy-back commitments, net of amounts included in Profit/(loss) for the period, are recognized under operating activities in a single line item, which includes changes in working capital, capital expenditure, depreciation and impairment losses. The item also includes gains and losses arising from the sale of vehicles subject to buy-back commitments before the end of the agreement and without repossession of the vehicle

(b) Cash from operating leases is stated in a separate line item, which also includes investments, depreciation, write-downs and changes in inventory

Report on Operations

93


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL GROUP

Industrial Activities

For 2012, Industrial Activities absorbed cash and cash equivalents totaling €1,288 million. Specifically:

Operating activities generated €1,469 million in cash. Net profit adjusted for amortization and depreciation, gains/losses on disposals and other non-cash items, changes in provisions, deferred taxes, items related to vehicles sold under buy-back commitments or leased out and dividends received totaling €1,760 million was partially offset by an increase in working capital of €291 million (on a comparable scope of operations and at constant exchange rates).

Investing activities absorbed a total of €3,123 million in cash, primarily related to investments in fixed assets and equity interests (€1,344 million), as well as changes in financial receivables from/debt payable to the Group’s financial services companies (included under other changes).

Financing activities generated cash of €410 million, essentially through increased utilization of available credit lines and new medium/long-term bank financing, partially offset by the distribution of €480 million in dividends.

Financial Services

At December 31, 2012, cash and cash equivalents for Financial Services totaled €1,663 million, up €260 million over December 31, 2011.

Changes in cash were attributable to:

Operating activities, which generated €282 million in cash, principally from income-related cash inflows.

Investing activities (including changes in financial receivables from/debt payable to the Group’s industrial companies), which absorbed €26 million in cash, with a €1,706 million increase in the loan portfolio being substantially offset by the net change in amounts due from industrial companies in the Group.

Financing activities, which generated a total of €39 million, with proceeds from new bond issues (totaling €584 million) partially compensated by the repayment by Iveco Capital to Barclays Group of debt outstanding at year-end 2011.

94


LOGO

 

Report on Operations

95


LOGO

 

REPORT ON OPERATIONS

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

INTRODUCTION

Fiat Industrial Group adheres to the Corporate Governance Code for Italian Listed Companies issued in March 2006 (and amended in 2010 and 2011) and adopted by Borsa Italiana (the “Corporate Governance Code” or “Code”), with additions and amendments that take account of the specific characteristics of the Group, as indicated below.

In accordance with regulatory requirements, the Annual Report on Corporate Governance provides a general description of the Group’s corporate governance system together with information on ownership structure and adherence to the Corporate Governance Code, including key governance practices and the principal characteristics of the system of internal control and risk management including with reference to financial reporting. The Report, available in the Corporate Governance section of the Group website (www.fiatindustrial.com), is divided into four sections: the first contains a description of the governance structure; the second gives information on the capital structure and shareholders; the third provides an analysis of implementation of specific recommendations of the Corporate Governance Code and describes the principal characteristics of the system of internal control and risk management including with reference to financial reporting, in addition to the main governance practices adopted; and the fourth includes tables summarizing Fiat Industrial’s ownership and board structure, a side-by-side comparison illustrating how Fiat Industrial has applied the principles and criteria of the Code, as well as the principal corporate governance related documents.

The Corporate Governance Code for Italian Listed Companies is available on the website of Borsa Italiana S.p.A.

DIRECTION AND COORDINATION

Fiat Industrial S.p.A. is not subject to the direction and coordination of any other company or entity and has full independence in setting strategic and operating guidelines. Fiat Industrial’s direct and indirect subsidiaries in Italy have, with a few specific exceptions, named Fiat Industrial as the entity which, pursuant to Article 2497-bis of the Civil Code, exercises direction and coordination over them. That activity consists in: setting general strategic and operating guidelines for the Group through definition and updating of the internal control and risk management system, corporate governance model and corporate structure; establishment of a group-wide Code of Conduct; and definition of policies for the management of personnel, financial resources and external communications. Group coordination also encompasses group finance, internal audit and legal services, as well as centralized cash management through specialized treasury companies.

Direction and coordination at group level enables subsidiaries, which retain full management and operating autonomy, to realize economies of scale by availing themselves of professional and specialized services with improving levels of quality and to concentrate their resources on management of their core business.

96


LOGO

 

BOARD OF DIRECTORS

The By-laws establish that the Board of Directors may be composed of between nine and fifteen members. At the General Meeting held on April 5, 2012, Shareholders elected eleven Board members whose term of office expires on the date of the General Meeting called for approval of the 2014 financial statements. The Board of Directors was elected using the voting list system, which gave minority shareholders the opportunity to elect a member.

The minimum equity interest required for submission of a list of candidates is established by Consob and is based on a company’s average market capitalization for the fourth quarter of the previous year (below €15 billion, the minimum is 1%).

Article 11 of the By-laws stipulates that no individual 75 years of age or more may be appointed as a director. In addition, directors are also subject to the provisions of law relating to ineligibility and termination and they may be re-elected.

Each list must indicate at least one candidate that satisfies the legal requirements of independence, in addition to the requirements of the Corporate Governance Code adhered to by the Company.

Law 120 of July 12, 2011 introduced the principle of adequate gender diversity on the boards of directors and statutory auditors of listed companies. In particular, Law 120, including through the provisions of Articles 147-ter 1-ter and 148 1-bis introduced to Legislative Decree 58/1998, imposes the requirement that for the first election of the boards of directors and statutory auditors after August 12, 2012, there be at least one-fifth representation of each gender and that, for the two subsequent terms of office, there be at least one-third representation of each.

In implementation of the regulatory authority conferred by the above articles, on February 8, 2012 Consob issued Resolution 18098 amending the Issuer Regulations to include Article 144-undecies that introduces, inter alia, the requirement for listed companies to include provisions in their by-laws establishing procedures for the formation of lists of candidates for elections and for the substitution of directors and statutory auditors leaving office during a term that ensure adequate gender diversity as defined above.

As stated, the new regulations apply to elections of directors and statutory auditors occurring subsequent to August 12, 2012.

Given that the amendments were necessary to comply with new legal requirements concerning gender diversity for the Boards of Directors and Statutory Auditors, on the basis of the powers attributed to it under Article 15 of the By-laws, the Board of Directors voted to approve those amendments on January 31, 2013.

Under Article 16 of the By-laws, all directors with executive responsibilities are vested, separately and individually, with the power to represent the Company and, under Article 12, the Vice Chairman (where appointed) serves as acting Chairman if the latter is absent or unable to carry out his duties. For the first one-year mandate and following the subsequent election of the new Board, the Board of Directors adopted a model for delegation under which the Chairman is vested with all appropriate powers and authority to act on behalf of the Company, except where reserved by law or the Company’s internal procedures for the Board of Directors itself. The Board has retained sole authority for approval of significant transactions.

The Board of Directors is composed of a majority of independent directors (8 out of 11), whose presence ensures that (i) strategic decisions and financial decisions of major significance are taken with a broad consensus and that (ii) an effective governance model is in place.

The contribution of independent directors is also fundamental to the composition and performance of committees whose role is to undertake a preliminary examination of many issues addressed by the Board, as well as performing an essential advisory role with respect to the roles and responsibilities established in their respective charters.

From an operational perspective, the Chairman is supported by the Group Executive Council (GEC), a decision-making body led by the Chairman and composed, until mid-November 2012, of the heads of the operating sectors and of certain central functions who are invited to attend all meetings of the Board of Directors. Consistent with the objective of enhancing the operational integration of Fiat Industrial and CNH, a new Group Executive Council was formed in November 2012 which is composed of 4 main groupings: regional operations, brands, industrial processes, and support/corporate functions. Finally, the Group’s corporate governance model is predicated on the broad delegation of powers to the head of the individual operating regions (EMEA, NAFTA, LATAM and APAC).

Report on Operations

97


LOGO

 

REPORT ON OPERATIONS

CORPORATE GOVERNANCE

In relation to the adoption of procedures for transactions with related parties pursuant to Article 2391-bis of the Civil Code and Consob Regulation 17221/2010, given the importance the Regulation places on the opinion expressed by independent directors, in 2010 the Company elected to defer adoption until the independent directors had taken office following the demerger. The objective was to ensure active participation of the independent directors in approval of the procedures.

On April 21, 2011, and with effect from the following date, the Board of Directors adopted the “Procedures for Transactions with Related Parties” (the “Procedures”) to ensure full transparency and substantial and procedural fairness in transactions with related parties, as defined under IAS 24.

The Procedures define “significant transactions”, which require the prior approval of the Board and must be publicly disclosed in the form of an information document. Before giving its approval, the Board must seek the binding opinion of the Internal Control and Risk Committee, which has responsibility for related-party transactions with the exception of matters relating to compensation (for which the Compensation Committee is responsible).

Other transactions, except those falling within the residual category of minor transactions i.e., transactions less than €200,000 in value or, for transactions with legal entities having consolidated annual revenues in excess of €200 million only, transactions less than €10 million in value are defined as “non-significant” and may be entered into with the prior non-binding opinion of the above committee.

The Procedures also establish exemptions, including: transactions taking place in the ordinary course of business and entered into at standard or market terms; transactions with or between subsidiaries and transactions with associates, provided that no other parties related to the Company have a significant interest; and transactions of minor value.

The task of implementing the Procedures and disseminating them to Group companies is assigned to the manager responsible for the Company’s financial reporting, who must also ensure coordination with the administrative and accounting procedures required under Article 154-bis of Legislative Decree 58/98. On April 21, 2011, the Board also approved the “Guidelines for Significant Transactions”, under which transactions having a significant impact on the Company’s earnings and financial position are subject to prior examination and approval by the Board.

As such, the powers conferred on the executive director specifically exclude decisions relating to significant transactions that, in and of themselves, require that the Company publish prospectuses or information documents in accordance with specific requirements established by regulatory authorities.

Prior to the Company undertaking a significant transaction, the executive directors are to provide the Board a summary report on their analysis of the strategic compatibility, economic feasibility and expected return.

Pursuant to Article 12 of the By-laws, the Board of Directors, in consultation with the Statutory Auditors, is to appoint one or more managers responsible for the Company’s financial reporting. If more than one individual is appointed, they shall have joint responsibility. It is a requirement that the individual(s) appointed have several years of accounting and financial experience within a large company. In implementation of that provision, on January 31, 2013 the Board of Directors appointed the Chief Financial Officer as the manager responsible for the Company’s financial reporting.

At December 31, 2012, the Board of Directors was composed of one executive director and ten non-executive directors (i.e., without specific authorities or executive responsibilities within the Company or Group). Eight of the directors qualified as independent on the basis of the requirements of the Corporate Governance Code and also met the independence requirements established in Legislative Decree 58/98, as well as the independence requirements set out by the Board of Directors (at the proposal of the Nominating, Corporate Governance and Sustainability Committee) in its report to Shareholders on the election, on April 5, 2012, of the Board of Directors for the period 2012-2014.

The Chairman is an executive director. He also serves as Chairman of the principal subsidiaries (CNH Global N.V., Iveco S.p.A. and FPT Industrial S.p.A.), but has no operational powers with regard to those companies.

98


LOGO

 

An adequate number of independent directors is an essential element in the Group’s corporate governance which ensures that the interests of shareholders and third parties are protected. The contribution of independent directors is also fundamental to the composition and performance of committees whose role is to undertake a preliminary examination of many issues addressed by the Board, as well as performing an essential advisory role with respect to the roles and responsibilities established in their respective charters.

The independence of directors is assessed annually. Additionally, any time a circumstance arises that could potentially compromise a director’s independence, the director concerned is required to report the situation in writing. The results of the annual assessment are duly communicated to the market. On February 1, 2012, the Board of Directors determined that the existing six independent directors continued to satisfy the independence requirements established in the Corporate Governance Code.

At the meeting convened on April 5, 2012, following the Annual General Meeting at which the new Board of Directors was elected for the 2012-2014 period, the Board confirmed that eight of the directors (A. Bombassei, M.P. Grieco, R. Liberatore, L. Milone, G. Perissinotto, G. Tabellini, J. Tammenoms Bakker and J. Zhao) met the criteria for independence established in the Corporate Governance Code and Legislative Decree 58/98. The Statutory Auditors determined that the criteria and procedures for verifying the independence of Directors were correctly applied.

On February 21, 2013, the Board of Directors, on the basis of proposals formulated by the Compensation Committee, approved the general compensation policy for executive directors, directors with specific responsibilities and executives with strategic responsibilities for 2013.

Some directors also hold positions at other listed companies or companies of significant interest. Excluding the positions held by the executive director within Fiat Industrial Group, the most significant are as follows:

Alberto Bombassei: Chairman of Brembo S.p.A., Director of Atlantia S.p.A., Italcementi S.p.A., Nuovo Trasporto Viaggiatori S.p.A. and Pirelli & C. S.p.A.

Gianni Coda: Member of the Advisory Board of Fiat Automoveis S.A. (FIASA), Director of Tofas Türk Otomobil Fabrikasi A.S .

John Elkann: Chairman and General Partner of Giovanni Agnelli & C. S.a.p.Az., Chairman and CEO of EXOR S.p.A., Chairman of Fiat S.p.A. and Editrice La Stampa S.p.A., Director of Gruppo Banca Leonardo S.p.A., The Economist Group and SGS S.A.

Maria Patrizia Grieco: Chairman and Chief Executive Officer of Olivetti S.p.A.

Robert Liberatore: Senior Transatlantic Fellow of The German Marshall Fund, Chairman of the Faith and Politics Institute, Director of the Atlantic Council, National Democratic Institute and Federal City Council, Senior Adviser at Boston Consulting Group

Sergio Marchionne: Chairman and CEO of Chrysler Group LLC, CEO of Fiat S.p.A., Chairman of SGS S.A., Chairman and CEO of Fiat Group Automobiles S.p.A., Director of EXOR S.p.A. and Philip Morris International Inc.

Libero Milone: Director of Poltrona Frau S.p.A., Falck Renewables S.p.A. and Tofas Türk Otomobil Fabrikasi A.S .

Giovanni Perissinotto: Director of Hera S.p.A.

Guido Tabellini: Director of CIR S.p.A.

Jacqueline Tammenoms Bakker: Director of Tesco PLC, Vivendi S.A. and the Van Leer Group Foundation

John Zhao: CEO and General Manager of Hony Capital Limited, Director and Senior Vice President of Legend Holdings Limited, Chairman of Beijing Hony Future Investment Advisor Ltd., Executive Director of China Pharmaceutical Group Limited

Report on Operations

99


LOGO

 

REPORT ON OPERATIONS

CORPORATE GOVERNANCE

BOARD COMMITTEES

On September 27, 2010, the Board of Directors instituted the Internal Control Committee and the Nominating and Compensation Committee.

On March 10, 2011, the Board of Directors changed the name of the Nominating and Compensation Committee to the Nominating, Compensation and Sustainability Committee.

In consideration of the significant role of the Committees, on April 5, 2012, the Board of Directors decided to separate the functions of the Nominating, Compensation and Sustainability Committee (renamed Nominating, Corporate Governance and Sustainability Committee) and establish a new and distinct Compensation Committee. On October 31, 2012, in implementation of the most recent recommendations of the Corporate Governance Code, the Board of Directors redefined the role of the Internal Control Committee and also renamed it Internal Control and Risk Committee.

INTERNAL CONTROL SYSTEM

In 2010, Fiat Industrial adopted a corporate governance model (including mechanisms for implementation and a system of internal controls), which, in addition to ensuring compliance with legal and regulatory requirements in Italy, is also substantially in line with international best practice for groups of a similar scale and leverages on the systems and practices in place for Fiat Group - particularly those already adopted by companies that subsequently became part of Fiat Industrial Group.

In 2012, the Board revised the “Guidelines for the System of Internal Control and Risk Management”, including adoption of changes introduced by the Corporate Governance Code in 2011.

The System of Internal Control and Risk Management, based on the model provided by the COSO Report and the principles of the Corporate Governance Code, consists of a set of policies, procedures and organizational structures aimed at identifying, measuring, managing and monitoring the principal risks to which the Company is exposed. The system is integrated within the organizational and corporate governance framework adopted by the Company, and contributes to the protection of corporate assets, as well as ensuring the efficiency and effectiveness of business processes, reliability of financial information and compliance with laws and regulations, as well as the By-laws and internal procedures.

The system, which has been developed on the basis of national and international best practice, consists of the following 3 levels of control:

Level 1: operating areas, which identify and assess risk and establish specific actions for management of that risk Level 2: central functions with responsibility for risk control, which define methodologies and instruments for managing risk and monitor that risk

Level 3: internal audit, which conducts independent evaluations of the System in its entirety. The head of Internal Audit is also assigned the role of Compliance Officer pursuant to Article 150 of Legislative Decree 58/98

The Guidelines for the System of Internal Control and Risk Management provide a detailed description of the duties and responsibilities of the principal individuals and entities involved and set out the procedures for their coordination in order to ensure the effectiveness and efficiency of the system and reduce potential duplication of activities.

Fiat Industrial has put in place a system of risk management and internal control over financial reporting based on the model provided in the COSO Report, according to which the internal control system is defined as a set of rules, procedures and tools designed to provide reasonable assurance of the achievement of corporate objectives. In relation to financial reporting, the reliability, accuracy, completeness and timeliness of the information itself contributes to ensuring those corporate objectives are achieved. Risk management constitutes an integral part of the internal control system. The periodic evaluation of the system of internal control over financial reporting is designed to ensure the overall effectiveness of the components of the COSO Framework model (control environment, risk assessment, control activities, information and communication, monitoring) in achieving those objectives. The principal characteristics of the system of risk management and internal control over financial reporting are provided in the Annual Report on Corporate Governance.

100


LOGO

 

Public disclosure of periodic financial results, including via the internet, is done strictly in accordance with applicable legal and regulatory requirements, as well as the Company’s own policies and procedures.

The Code of Conduct, adopted in 2010, and the Compliance Program (ex Legislative Decree 231/2001) are an integral part of the Internal Control System. The Code of Conduct contains the business ethics principles to which the Company adheres and which directors, statutory auditors, employees, consultants and partners are required to observe. The Code of Conduct has been adopted by all Group companies worldwide and incorporates specific guidelines related to the Environment, Health and Safety, Business Ethics and Anti-Corruption, Suppliers, Management of Human Resources and the Respect of Human Rights. Furthermore, the Code of Conduct is distributed to all employees in accordance with local legal and regulatory requirements. Consultants and partners are also informed of the Group’s adherence to the Code either through direct notification or, when entering into contract agreements, through inclusion of specific clauses making reference to the principles contained in the Code.

On February 1, 2012, the Board of Directors, at the proposal of the Internal Control and Risk Committee, ratified amendments to the Guidelines for Adoption and Revision of the Compliance Program by Group companies in Italy (the “Guidelines”) and approved the revised Compliance Program (pursuant to Legislative Decree 231/2001). Both documents were updated to better reflect changes in the Company’s operating activities, as well as the new environmental offenses introduced by Legislative Decree 121/2011.

In February 2013, the Compliance Program Supervisory Body - having consulted with the Internal Control and Risk Committee - revised the Guidelines to incorporate new categories of offenses introduced to Legislative Decree 231/2001. In particular, Legislative Decree 109/2012 introduced the offense of employing foreign nationals residing illegally in Italy to Article 25-duodecies and Law 190/2012 introduced the offense of being induced to give a bribe to Article 25 and the offense of bribery between private individuals to Article 25-ter.

For 2012, the Compliance Program Supervisory Body was a single individual operating on the basis of a specific supervisory program, who reported to the Boards of Directors and Statutory Auditors (including through the Internal Control and Risk Committee).

In application of the Compliance Program and the Code of Conduct, the Whistleblowing Procedures were adopted for the management of reports and claims filed by persons inside and outside the Company in relation to suspected or presumed violations of the code of conduct, fraud involving company assets or financial reporting, oppressive behavior towards employees or third parties, reports or claims regarding accounting, internal accounting controls and independent audits.

The purpose of the Procedures for the Engagement of Audit Firms is to regulate the engagement, by Fiat Industrial and its subsidiaries, of audit firms and other related parties in order to ensure the independence of firms engaged to audit the financial statements. In this context, “related parties” are considered companies or professional firms that maintain an ongoing relationship with the independent auditors (i.e., the network). The procedures make a distinction between audit services, audit-related services, and non-audit services and, for each category, they establish the scope of engagements, procedures for approval, and obligations relating to internal reporting of costs.

In application of the requirements of Articles 36 and 39 of Consob’s Market Rules, having established the scope of application of that regulation within the Group, Fiat Industrial has determined that the accounting and reporting systems are adequate for public disclosure of certain accounting information upon which the consolidated financial statements are based (as required by the above regulation), as well as providing management and the independent auditors of the Parent Company with the information used for preparation of the consolidated financial statements. Similarly, information flows to the independent auditor of the Parent Company - in place at various levels in the chain of corporate control, continuous throughout the entire financial year and instrumental for the auditing of the Parent Company’s interim and annual accounts - was found to be effective. Finally, Fiat Industrial receives regular information on the composition of corporate bodies within subsidiaries along with information on the positions held by each member and is responsible for maintaining centralized records of

Report on Operations

101


LOGO

 

REPORT ON CORPORATE

OPERATIONS GOVERNANCE

formal documentation relating to the by-laws and delegation of powers to the members of the corporate bodies, in addition to keeping them properly updated. During the year, no companies incorporated under the laws of a non-EU member State were acquired which, on an individual basis, are significant for the purposes of the aforementioned Regulation.

BOARD OF STATUTORY AUDITORS

In accordance with Article 17 of the By-laws, the Board of Statutory Auditors is composed of three regular auditors and three alternates, all of whom must be entered in the Register of Auditors and have at least three years of experience as a statutory account auditor. They may, within the legal limit, also hold other positions as director or statutory auditor.

In accordance with Legislative Decree 58/98, Article 17 of the By-laws establishes the right for appropriately constituted minority groups to appoint one regular auditor, who serves as Chairman, and one alternate. The By-laws also establish that the minimum equity interest required for submission of a list of candidates for elections of the Statutory Auditors may not be lower than the percentage required by law for elections of the Board of Directors.

For lists containing three or more candidates in total, the first two candidates for regular auditor must be of different genders to ensure that the composition of the Board of Statutory Auditors meets the legal requirements for gender diversity. Similarly, if the list contains two or more candidates for alternate auditor, the first two candidates appearing in the relevant section of the list must be of different genders.

Where two or more lists receive the same number of votes, candidates from the list representing the greatest number of shares or, if equal, the list representing the greatest number of shareholders, is elected. The lists, together with documentation required by law and the Company By-laws, must be placed on record at the Company’s registered office at least 25 days prior to the date of the meeting, in accordance with the applicable regulations.

If, at the deadline, only one list has been submitted or the lists have been submitted by shareholders that are related, as defined by law, the deadline for presentation of lists is extended by an additional 3 days and the minimum shareholding required for submission is reduced to half the initial percentage. The notice calling the meeting must also provide for at least one method of submitting lists remotely, which enables identification of the shareholders making the submission.

If no minority list is presented by the original deadline, notice to that effect must be published together with details of the extended deadline and the reduced minimum percentage shareholding required for submission, in accordance with the legal requirement.

The statutory auditors are elected as follows:

1. two regular auditors and two alternate auditors are elected from the list that has obtained the highest number of votes from Shareholders, on the basis of the numerical order in which they appear in each section of the list

2. in compliance with the provisions of law, the remaining regular auditor and the other alternate auditor are elected from the list obtaining the second highest number of votes, on the basis of the numerical order in which they appear in each section of the list. Where two or more lists receive the same number of votes, candidates from the list representing the greatest number of shares or, if equal, the list representing the greatest number of shareholders, is elected The chairmanship of the Board of Statutory Auditors will go to the first candidate from the list obtaining the second highest number of votes as determined under point 2 above.

The above voting procedure will be utilized for the first time at the General Meeting of Shareholders called for approval of the 2012 financial statements.

102


LOGO

 

The Statutory Auditors are: Chairman - Paolo Piccatti; regular auditors - Valter Cantino and Lucio Pasquini; alternate auditors - Riccardo Rota, Vittorio Sansonetti and Giorgio Cavalitto. The three regular auditors, together with the alternates Riccardo Rota and Vittorio Sansonetti were appointed at the time of the Company’s incorporation. Giorgio Cavalitto, an alternate auditor, was elected by Shareholders on December 6, 2010 and took office on the effective date of the Demerger. The current term of the Board of Statutory Auditors and the three alternate auditors expires on the date of the General Meeting called for approval of the 2012 financial statements.

Following is a list of the most significant positions held by the members of the Board of Statutory Auditors. Paolo Piccatti: Chairman of the Board of Statutory Auditors at Fiat Group Automobiles S.p.A., Fiat Partecipazioni S.p.A., FPT Industrial S.p.A., Juventus F.C. S.p.A., Banca Sella S.p.A., Società Petrolifera Italiana S.p.A., and regular auditor of EXOR S.p.A., Giovanni Agnelli & C. S.a.p.az., Iveco S.p.A. and Banca Sella Holding S.p.A. Valter Cantino: Independent Director at Società Italiana di Revisione e Fiduciaria - S.I.RE.F. S.p.A., Chairman of the Board of Auditors at Fondazione Torino Wireless and regular auditor of FGA Capital S.p.A. Lucio Pasquini: Chairman of the Board of Statutory Auditors at Burgo Energia S.p.A., 2 A S.p.A., Cofincaf S.p.A., Elettrogruppo Zerouno S.p.A., Ercom S.p.A., Gever S.p.A., PKP Gruppo Finanziario S.p.A. and regular auditor of Burgo Distribuzione S.r.l., Finlav S.p.A., Gruppo Banca Leonardo S.p.A., Lavazza Coffee Shops S.r.l., Schneider Electric S.p.A. and Comecart S.p.A.

ANNUAL REPORT ON CORPORATE GOVERNANCE

FIAT

Web > http://bit.ly/12LcvDH

QR Code >

Report on Operations

103


LOGO

 

REPORT ON TRANSACTIONS

OPERATIONS BETWEEN

GROUP COMPANIES

AND WITH

RELATED PARTIES

TRANSACTIONS BETWEEN GROUP COMPANIES AND WITH RELATED PARTIES

During the period, there were no transactions, including intragroup, with related parties which qualified as unusual or atypical. Any related-party transactions formed part of the normal business activities of companies in the Group. Such transactions are concluded at standard market terms for the nature of goods and/or services offered.

Information on transactions with related parties, including specific disclosures required by the Consob Communication of July 28, 2006, is provided in Note 35 to the Consolidated Financial Statements and Note 24 to the Statutory Financial Statements.

**********

As part of the requirements of Legislative Decree 196/03 (the Italian data protection act), several activities, including specific audits, were performed to evaluate the system of data protection for information held by Group companies subject to this law. These activities confirmed that legislative requirements relating to the protection of personal data processed by Group companies had been substantially complied with, including preparation of the Security Planning Document.

104


LOGO

 

SUBSEQUENT REPORT ON EVENTS OPERATIONS AND OUTLOOK

SUBSEQUENT EVENTS AND OUTLOOK

SUBSEQUENT EVENTS

On February 7, 2013, Fiat Industrial S.p.A. completed renewal of a 3-year 2 billion committed revolving credit facility with a group of 21 banks. The facility is available for general corporate purposes and working capital requirements. It replaces the 3-year 2 billion facility originally signed in December 2010.

OUTLOOK

On the back of the Group’s performance to date and expectations of continuing strong trading conditions across all sectors, especially CNH, Fiat Industrial is setting 2013 guidance as follows:

Revenues up 5%

Trading margin between 8.3% and 8.5%

Net industrial debt between 1.1 billion and €1.4 billion

Report on Operations

105


LOGO

 

OPERATING PERFORMANCE BY SECTOR

106


LOGO

 

CASE

STEYR

CASE

CONSTRUCTION

NEW HOLLAND

AGRICULTURE

NEW HOLLAND

CONSTRUCTION

AGRICULTURAL

AND CONSTRUCTION EQUIPMENT

CNH

HIGHLIGHTS

(€ million) 2012 2011

Net revenues 16,056 13,896

Trading profit/(loss) 1,566 1,154

Operating profit/(loss) (*) 1,529 1,181

Investments in tangible and intangible assets (**) 758 494

of which capitalized R&D costs 286 173

Total R&D expenditure (***) 520 384

Employees at year end 33,826 32,693

(*) Includes restructuring costs and other unusual income/(expenses)

(**) Net of vehicles leased out

(***) Includes capitalized R&D and R&D charged directly to the income statement

COMMERCIAL PERFORMANCE

Worldwide agricultural equipment industry unit sales were stable compared to 2011, with global demand flat for tractors and up 3% for combines. North American tractor sales were up 9%, with the under 40 hp segment up 8% and the over 40 hp segment up 10%, and combine sales were down 1%. Latin American tractor sales increased 4% and combine sales increased 3%. EAME & CIS (Europe, Africa Middle East and CIS) markets were down 3%, despite combine sales being up 9%. APAC (Asia Pacific) markets decreased 2% for tractors and 19% for combines.

Worldwide agricultural equipment market share performance was in line with the market for both tractors and combines. CNH gained share in the combine segment in the APAC region while losing some in the under 40 hp tractors market in North America, a segment that CNH does not participate actively.

CNH worldwide production of agricultural equipment trailed retail sales in the fourth quarter as the Group implemented the scheduled production slowdown to reduce company and dealer inventory to year-end desired levels.

Global construction equipment industry unit sales declined 6% over the prior year, with light equipment up 8% and heavy equipment down 18%. North American demand was up 27% and EAME & CIS markets 3%. In Latin America, the market was down 2%, driven by a 6% decline in the heavy line. In APAC markets, industry sales were down 22% for the year, with light equipment demand almost flat year-over-year.

Report on Operations

107


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

Worldwide construction equipment market share for 2012 was in line with the industry in both the light and heavy segments. CNH gained market share in Latin America both in the light and heavy segment despite the industry demand decline. Production activity was slowed in line with demand expectations for individual markets and to ensure company and dealer inventories matched demand on a worldwide basis.

As part of its global growth strategy, the sector conducted several operations.

On February 15th, CNH hosted a Russian government delegation at its JV operations in Naberezhnye Chelny (Tatarstan, Russia) to celebrate completion of the first stage of production activities at the plant and the signing of a Memorandum of Understanding with the Republic of Tatarstan for the supply of 80 units of New Holland agricultural equipment manufactured locally.

On March 8th, CNH announced a long-term strategic partnership with Orkel AS, the Norwegian market leader in high-performance fixed-chamber round balers, compactors and tractor trailers. Under the agreement, CNH will acquire intellectual property rights and tooling for Orkel’s fixed-chamber round balers (FCRB) and Orkel will become CNH’s preferred engineering partner for development of a new generation of high performance/heavy duty fixed-chamber round balers. Orkel-CNH products will be sold under the Orkel, New Holland Agriculture and Case IH brands through their respective dealer networks.

On December 26th, as a result of an ongoing strategic review of its construction equipment business, CNH announced that it is moving into the next phase of its business relationship with Kobelco Construction Machinery Co., Ltd. The non-exclusive licensing and supply agreements that took effect January 1, 2013 will allow CNH to pursue a global strategy leveraging the industry-leading technologies and resources available to it as part of the Fiat Industrial Group. The new business relationship includes the unwinding of all joint ventures between the parties.

108


LOGO

 

INNOVATION AND PRODUCTS

During 2012, Case IH Agriculture continued its introduction of Efficient Power Tier 4A/Stage IIIB emission compliant equipment in Europe and North America with the launch of Maxxum and Steyr Profi ecotech tractors, 30 and 40 Series Titan floaters, 920 and 930 Nutri-Placer applicators, the 950 Nutri-Tiller strip-till system, 6 new models of Axial-Flow combines and the new narrow track 4WD Steiger Rowtrac. The new 30 Series Efficient Power Axial Flow combines were introduced in Australia, China, Russia and Ukraine. The Module Express 635 cotton pickers, the Axial-Flow 7120 and 8120 combine models and, through a strategic alliance with Semeato, an expanded no-till planter offering were introduced on the Brazilian market.

Case IH’s Axial-Flow 9230 combine harvester was awarded the “PUCHAR”, or “highest honor” by the Polish Ministry of Agriculture and Rural Development at Agrotech 2012 for offering the newest rotor threshing solution for multiple operating conditions in the industry and the Puma 145 tractor with Efficient Power was awarded “HIT of the Fair” at the XIII Mazowieckie Dni Rolnictwa (Mazovian Agricultural Days) exhibition in Poland. In Brazil, Revista Rural magazine honored the brand sugar cane harvester with the “Top of Mind” award. As announced in November 2012, the American Society of Agricultural and Biological Engineers (ASABE) recognized Case IH for innovation with the 2013 AE50 awards, specifically for the new 2013 Axial-Flow combine cab, the pivoting grain spout on the Axial-Flow combine, the Nutri-Placer 920 and the Precision Disk 500 air disk drill.

During 2012, New Holland Agriculture introduced the new BigBaler range with up to 20% increased capacity and up to 5% denser bales in Europe, Australia and North America. The brand leveraged the newly signed agreements with Semeato and Orkel launching the new SOLTT planting equipment in Brazil and the Roll Baler, the new series of professional fixed chamber roll balers, in Europe. In Brazil, the brand completed the introduction of the CR5080, CR6080SL and CR9080 Twin Rotor combines with models from class 5 to class 9 and launched the T9 4WD and T7 tractors. In Europe, New

Report on Operations

109


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

Holland Agriculture introduced new FR forage harvesters, including two Tier 4A/Stage IIIB models from 450 to 824 hp and several new tractors including the ground care Boomer Compact 3000 range, upgraded with the EasyDrive continuously variable transmission, the compact T3F dedicated to small and mid-sized orchard and viticulture operators, the TI3 and TI4 equal sized wheel tractors designed for hay-making operations and field maintenance, new additions to the Tier 4A/Stage IIIB T5 range, now also available with the 4 step powershift Electro Command transmission. In North America, the brand launched the Tier 4A/Stage IIIB compliant T6 tractors, the new MegaCutter tractor mounted disc mower-conditioners, the new ProRotor rotary rakes and the new 840CD rigid draper head specifically designed to match the CR series Twin Rotor and the CX8000 super-conventional combines, which provide uniform crop flow up to 45-foot cutting widths. New Holland Agriculture also launched the new fuel efficient TD5 tractor series in South Africa and Far East markets. In addition, it introduced the TT Compact tractor series, with fuel-efficient engines from 35 to 47 hp, in key African markets including South Africa, Morocco and Tunisia. In the Far East, the brand also launched the new TS6 tractor series, featuring four models ranging from 110 to 139 hp. In China, New Holland Agriculture displayed its Braud 9080L, the first grape harvester ever to be presented in the country.

In Europe, New Holland Agriculture won at FIMA (the international fair for agricultural equipment in Spain), an outstanding innovation award for the SynchroKnife central header drive and 4 technical innovation awards for the Intelligent Trailer Braking system, the Smart Key technology, the Braud 9090X olive harvester and the Steering-O-Matic Plus system for the TK4000 range of crawler tractors. In Brazil, the ISOBUS communication system between tractor and the SOLTT planter received the top prize in the Innovation Category at Expointer, the largest fair in Southern Brazil. In North America, New Holland Agriculture won six 2013 AE50 awards for Engineering Innovation for the 840CD rigid draper head, the Advanced Operator Control System for H8000 Series Speedrower self-propelled windrowers, the BigBaler Series, the IntelliFill System for FR Series forage harvesters, the ABS SuperSteer anti-lock braking system for T7 Series tractors and the homologation option for T9 Series tractors granting free road circulation in the EU. In Europe, the new BigBaler series

110


LOGO

 

received the Silver Innovation Medal at SIMA in France and at EIMA (International Agricultural Machinery Exhibition) in Italy the T4060F tractor won the 2013 “Best of Specialized” tractor award.

In January 2012 the CNH agricultural brands won nine 2012 AE50 innovation awards from the American Society of Agricultural and Biological Engineers (ASABE). The awards recognized the New Holland T8 and T9 tractors, the SynchroKnife drive, the MowMax II independent modular disc cutterbar and the add-on Cornrower attachment, the Case IH Steiger 600 tractor, the Independent Grain Tank Cross-Auger Control on the Case IH Series 30 combine, the MagnaCut Fine Cut Chopper and the Robo-Sharpener.

During 2012, Case Construction continued its product rejuvenation plan introducing, in North America, new Tier 4A/Stage IIIB compliant tractor loader backhoe models, the new CX210C and CX470C crawler excavator, the 621F wheel loader, the H Series rough-terrain forklift and 570N XT tractor loader, and the 885B motor grader. In Europe, the brand launched the new wheel loader models 1121F and 1021F, new crawler excavator models CX210C and CX235C and the new WX 8 wheeled excavators series equipped with three-pump hydraulic system. The new 521F and 621F wheel loaders with Tier 3 engines were introduced in Africa, the Middle East, the CIS and Central Asia. In Russia, Case Construction presented its range of Tier 3 compliant SR and SV skid steer and TR compact track loaders, while in India the brand launched the SR 130 and SR 150 models. In North America, Construction Equipment magazine recognized the Case motor grader B Series among the “Top 100” products for 2012, while Better Roads magazine elected Case wheel loader 621F as one of the “Top 25” products in 2012, due to its fuel efficiency and increased productivity.

During 2012, New Holland Construction launched, in Europe, the LM625 telescopic handler, the W270 and W300 wheel loaders, new C Series crawler excavator including short-radius model and the new wheeled excavator B Series PRO, all Tier 4A/Stage IIIB emission compliant. The new Tier 4A/Stage IIIB compliant B95C and B110C loader backhoe tractors were introduced in North America at the World of Concrete show in Las Vegas. The brand continued to focus on

Report on Operations

111


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

emerging markets, introducing the new C Series crawler excavator and wheel loader with Tier 3 engines to key markets in Africa, the Middle East, the CIS and Central Asia. In Latin America, New Holland Construction launched the new LM1445 and LM1745 telehandlers, extending the lift-height range to 17 meters, and the new E55B compact excavator. New Holland Construction now offers one of the most complete compact product lines in Latin America.

SERVICES

CNH’s Customer Care department actively collaborates with brands, dealers, technical services and many other CNH departments to develop, manage and support customer service solutions that contribute to building solid, long-term relationships with customers by meeting their needs and expectations.

In 2012 new contact channels were opened in collaboration with the Brands such as IPhone Apps and Tablet applications available for public download. Questions or inquiries originating from these new channel sources are then directed into the standard customer relationship channels for monitoring and resolution.

A new Interactive Voice Response (IVR) selection dedicated to Precision Farming was implemented globally for the NH AG Brand to facilitate customers to reach related technical support services through the one toll free number per region. The Brands are on a large scale active within the Social Media communication with Customers present in all major regions through Facebook, Twitter, and YouTube etc. This activity is a vital and important communication tool with current and future Customers.

In 2012, CNH continued support activities for the sales and service network with initiatives targeted at strengthening relationships with customers and ensuring rapid service response to minimize downtime and maximize productivity. In Latin America, Customer Care is launching the BDA service in Argentina for Case IH, which will be followed up with extended implementation in 2013. Updates for NA BDA included adding the New Holland Construction brand.

112


LOGO

 

Globally, the Customer Care service processes have been mapped and evaluated with the objective to enhance, simplify and improve current process management, monitoring and reporting activities to be able to implement a new CRM system to improve on and enhance the experience of end customers.

CNH offers financial services in North America, Europe, Brazil and Australia providing a comprehensive range of financial products such as dealer and end-customer financing, finance leases, operating leases, credit cards, equipment rental programs and insurance products. Financial services are offered for both the Agricultural Equipment and Construction Equipment businesses.

In North America, the activity is carried out through wholly-owned financial services companies that support sales through dealer and end-customer financing, as well medium/long-term operating leases.

In Europe, end-customer financing is primarily managed through CNH Capital Europe S.a.S., a joint venture with BNP Paribas Group (49.9% owned by CNH and accounted for under the equity method) that operates in Italy, France, Germany, Belgium, the Netherlands, Luxembourg, the UK, Spain and Austria. Vendor programs with banking partners are also in place in France, Portugal, Denmark and Poland.

Dealer financing and end-customer financing activities not managed by the joint venture with BNP Paribas are managed through captive financial services subsidiaries.

In Brazil, the captive financial services company Banco CNH Capital S.A. offers both dealer and end-customer financing. For end-customer financing, the company mainly serves as intermediary for funding provided by the Banco Nacional de Desenvolvimento Economico e Social (BNDES), a federally-owned company connected to the Brazilian Ministry of Development, Industry and Foreign Trade. Vendor programs offered jointly with banking partners are also in place. In Australia, CNH offers dealer and end-customer financing through a captive financial services company.

Report on Operations

113


LOGO

 

114


LOGO

 

IVECO

IVECO ASTRA

IVECO IRISBUS

IVECO MAGIRUS

IVECO DEFENCE VEHICLES

TRUCKS AND COMMERCIALVEHICLES

IVECO

HIGHLIGHTS

(€ million) 2012 2011

Net revenues 8,924 9,562

Trading profit/(loss) 469 490

Operating profit/(loss) (*) 288 408

Investments in tangible and intangible assets (**) 439 343

of which capitalized R&D costs 208 171

Total R&D expenditure (***) 289 254

Employees at year end 26,307 26,202

(*) Includes restructuring costs and other unusual income/(expenses)

(**) Net of vehicles sold under buy-back commitments or leased out

(***) Includes capitalized R&D and R&D charged directly to the income statement

COMMERCIAL PERFORMANCE

The Western European truck market (GVW 3.5 tons) contracted 7.4% in 2012 to 574,700 units, with trading conditions deteriorating throughout the year. Most markets experienced a fall in demand, albeit to significantly varying degrees. The only countries to register growth were the UK (+2.1%), Denmark (+10.5%), Norway (+16.1%) and Switzerland (+4.5%). Southern European markets experienced the largest decreases resulting in the gap between Northern and Southern Europe continuing to widen. Registrations were down 29.0% in Italy, 21.2% in Spain, 37.6% in Portugal and 60.2% in Greece. France and Germany posted more modest decreases of 6.3% and 6.0%, respectively.

The light segment (GVW 3.5-6 tons) was down 6.3% overall, reflecting a 29.2% decrease for Southern Europe compared with a more modest 1.5% decrease for the rest of Western Europe, where performance was varied.

In the medium segment (GVW 6.1-15.9 tons), registrations were down 7.3% over the prior year, with the UK being the only market to post a year-over-year increase (+16.2%).

The heavy segment (GVW >16 tons) was down 9.5%, with declines in all markets except Norway, Denmark, Finland and Ireland. Southern Europe experienced the most significant contraction also in the heavy segment, with registrations down 23.8% over the prior year.

Demand for buses in Western Europe was down 2.1% over 2011 to 29,700 units. All segments registered declines with the exception of the Minibus & Truck Derived segment (+17.5%) which accounts for 30% of the total market. Performance was uneven across the major markets, with the UK and Germany increasing 32.7% and 2.1%, respectively, while Italy, France and Spain registered significant contractions (-30.4%, -10.7% and -38.9%, respectively).

In Latin America, the truck market (GVW 3.5 tons) was down 14.3% to 207,200 units. The Venezuelan market recorded growth of 10.2%, while Argentina was down 4.4% over the prior year and Brazil contracted 18.3%. The year-over-year

Report on Operations

115


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

comparison for Brazil reflects higher purchase activity in the latter part of 2011 associated with the introduction of new emissions regulations. Demand was lower in all segments, with light vehicles (GVW 3.5-7.9 tons) down 15.2%, medium (GVW 8-31 tons) down 13.8% and heavy (GVW >31 tons) down 14.2%.

Commercial Vehicle Market (GVW 3.5 tons) by country

(units in thousands) 2012 2011 % change

France 118.9 126.9 -6.3

Germany 164.4 174.9 -6.0

UK 109.1 106.9 2.1

Italy 42.6 60,0 -29.0

Spain 25.0 31.7 -21.2

Rest of Western Europe 114.7 120,2 -4.6

Western Europe 574.7 620.6 -7.4

Commercial Vehicle Market (GVW 3.5 tons) by product

(units in thousands) 2012 2011 % change

Heavy 182.8 202.0 -9.5

Medium 50.4 54.4 -7.3

Light 341.5 364.2 -6.3

Western Europe 574.7 620.6 -7.4

Iveco’s estimated market share in Western Europe (GVW 3.5 tons) was 11.3%, representing a 0.8 percentage point decrease versus 2011. Although Iveco increased share in Italy by 2.1 percentage points to 33.1%, the gain was not sufficient to offset share losses in other major markets, including France (-0.6 p.p. to 13.2%), Germany (-0.5 p.p. to 8.0%), Spain (-0.4 p.p. to 19.9%) and the UK (-0.2 p.p. to 6.4%).

In the light segment, share was down 1.3 percentage points to 11.7% (-0.7 p.p. assuming comparable market mix). That result primarily reflected the crisis in the construction sector, which is an important market for Iveco, as well as the continuing shift in demand toward car-based models. Despite a gain in Italy (+0.5 p.p. to 28.6%), share in the European light segment was negatively affected by performance in France (-1.0 p.p. to 15.0%), Germany (-1.2 p.p. to 7.4%), Spain (-1.9 p.p. to 18.0%) and the UK (-0.4 p.p. to 5.7%).

In the medium segment, Iveco’s overall share was down 0.8 percentage points to 22.8% (-0.1 p.p. assuming comparable market mix). Gains were achieved in several markets, the most significant of which was in Italy (+6.3 p.p. to 67.3%). However, share was down in Spain (-3.6 p.p. to 44.0%) and the UK (-4.8 p.p. to 18.3%), where the year-over-year comparison reflected several large deliveries to major customers in 2011. Iveco retained its solid second place position in Western Europe.

Share of the European heavy segment was up 0.2 percentage points to 7.5% (+0.8 p.p. assuming comparable market mix) on the back of positive performance across markets, particularly Italy (+4.2 p.p. to 35.5%), Spain (+2.7 p.p. to 17.9%), the UK (+0.9 p.p. to 4.0%) and Germany (+0.2 p.p. to 5.1%).

Iveco Irisbus’s share of the Western European passenger transport market was down 1.5 percentage points over the previous year to 16.0%. Share decreased in all segments with the exception of the Intercity & Coach segment, where it closed the year up 0.7 percentage points to 7.4%. Results were positive in Italy (+10.3 p.p. to 43.6%), France (+1.2 p.p. to 42.9%) and Germany (+1.4 p.p. to 5.7%).

116


LOGO

 

In Latin America, Iveco registered an 11.6% share (+0.1 p.p. versus 2011), with gains in Argentina (+1.6 p.p. to 22.3%) and Venezuela (+0.1 p.p. to 11.5%) being largely offset by the decline in Brazil (-0.5 p.p. to 9.5%). Iveco strengthened its leadership position in the light segment in Brazil, with share up 5.3 percentage points to 25.6%, and in the heavy segment in Argentina, with share up 4.7 percentage points to 26.9%.

Commercial Vehicle Sales - by country

(units in thousands) 2012 2011 % change

France 17.8 21.6 -17.7

Germany 14.1 16.8 -16.1

UK 7.0 8.3 -15.3

Italy 13.9 22.1 -37.1

Spain 5.4 7.1 -24.3

Rest of Western Europe 11.2 12.1 -6.9

Western Europe 69.4 88.0 -21.1

Eastern Europe 18.1 14.8 21.9

Rest of World 49.5 50.6 -2.1

Total Sales 137.0 153.4 -10.7

Naveco 114.8 101.5 13.1

SAIC Iveco Hongyan 17.0 31.5 -46.0

Grand Total 268.8 286.4 -6.1

Commercial Vehicle Sales - by product

(units in thousands) 2012 2011(**) % change

Heavy 33.3 35.4 -6.0

Medium 17.5 22.3 -21.6

Light 73.7 83.5 -11.8

Buses 8.8 9.5 -6.8

Special vehicles (*) 3.7 2.7 40.1

Total Sales 137.0 153.4 -10.7

(*) Defense and firefighting vehicles

(**)For the purpose of comparability with 2012, data for 2011 has been reclassified. Changes include recognition of Astra brand special vehicles under “heavy” and truck-derived buses - which were still recognized under “light” in 2011 - under “buses”

A total of 137,028 vehicles (including buses and special vehicles) were delivered during the year, representing a 10.7% decrease versus 2011. Volumes were lower in all segments, with light vehicles down 11.8%, medium down 21.6% and heavy down 6.0%. In Western Europe, Iveco delivered a total of 69,414 vehicles (-21.1%), with declines registered in all major markets: Germany -16.1%, France -17.7%, Spain -24.3%, Italy -37.1% and the UK -15.3%. In Latin America, deliveries were down 21.8%. In Eastern Europe, performance ran counter to the trend in Western Europe with deliveries up 21.9% over the prior year. In Rest of World markets, Iveco posted a 36.4% year-over-year increase.

In China, Naveco - the 50/50 joint venture with Nanjing Automotive Corporation (controlled by the SAIC Group) - sold 40,006 light vehicles in the Power Daily range (up 2.6% over 2011) and 74,772 medium vehicles in the Yuejin range (up 19.7% over 2011).

Report on Operations

117


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

SAIC Iveco Hongyan Commercial Vehicles Co. Ltd. (33.5% owned by Iveco), sold 17,008 heavy commercial vehicles, representing a 46.0% decrease over the previous year.

Including LSVs (low-speed vehicles for agricultural use), the two joint ventures increased sales 3.3% over the prior year to 147,747 units (143,015 in 2011).

Despite the general economic uncertainty caused by the financial crisis, Iveco demonstrated the resilience of its business which benefits from a global manufacturing presence and strong product portfolio.

After activities to consolidate its presence in Latin America and China, during 2012 Iveco focused on development of its activities in Africa and the Middle East where the commercial, distribution and service networks underwent significant expansion.

Iveco’s product offering in those regions covers the entire portfolio from light all the way to heavy vehicles. The majority of vehicles distributed in those markets will be produced by the joint ventures in China with local assembly for some products, where circumstances require. The product offering will be further supplemented by models designed and produced in Europe.

During the year, Iveco and Larimar Group, a leading South African public transport operator and bus bodybuilder, signed an agreement for establishment of a joint venture that will manufacture trucks and buses in South Africa. Iveco will hold a 60% interest in the JV that will assemble 7,000 trucks and 1,000 buses a year, with a workforce of around 1,000

118


LOGO

 

employees, at a plant located in the suburbs of Pretoria. Production will include light, medium and heavy duty trucks, as well as front-engine and low-floor city buses. Activity is expected to commence in the second half of 2013 with the Eurocargo range.

Latin America has become one of Iveco’s most important markets. In Brazil, Iveco launched the new generation of the Ecoline range, which is now fully compliant with Euro V emissions standards. In Argentina, the brand launched the medium segment Vertis (introduced in Brazil in 2010), which is expected to become a major competitor in its segment.

In China, Iveco continued to develop new product platforms for the domestic and export markets. The company continues to invest in development of new models to compete in market segments where it is currently not present, particularly the high-end segment. In November, Iveco presented some of its most recent European models at the Guangzhou Motor Show - one of the most important commercial vehicle trade shows in China - marking the official entry of the Iveco brand in the Chinese market.

As part of the World Class Manufacturing program, one of the world’s leading methodologies for production, maintenance, logistics and control processes, Iveco received Silver Awards for the Madrid and Suzzara plants. Including Valladolid, Iveco now has three Silver level plants.

Report on Operations

119


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

INNOVATION AND PRODUCTS

A commitment to product development, sustainable mobility and innovation are all key pillars in Iveco’s strategy. During the year, Iveco continued development of new technologies and products that can make a significant contribution to the achievement of sustainable mobility.

In 2012, Iveco continued research into innovative technological solutions that will expand its range of eco-friendly, energy-efficient vehicles.

During the year, Iveco and FPT Industrial presented the exclusive new “High Efficiency Selective Catalytic Reduction” technology (HI-eSCR), designed to meet Euro VI standards in Europe (effective from January 1, 2014) and customer requirements in terms of reduced fuel consumption and operating costs. This patented technology developed by FPT Industrial enables vehicles to achieve strict Euro VI standards for nitrogen oxide emissions without resorting to exhaust gas recirculation.

At the IAA Commercial Vehicle Trade Show in Hanover, Iveco showcased the Iveco Dual Energy, a hybrid diesel/electric LCV chassis prototype capable of switching energy source to adapt to the requirements of each individual mission. This vehicle is a further demonstration of Iveco’s commitment to the development of innovative solutions for sustainable mobility. This extremely flexible technology offers a choice between electric only propulsion - with almost zero local emissions and low noise levels - or hybrid (thermoelectric) propulsion which is suitable for long-distance and intercity travel and enables reductions in fuel consumption and CO2 emissions of up to 25%.

New additions to the product range during the year included two additional versions of the new Daily: one with a 146 hp 2.3-liter F1A engine (Euro 5) produced by FPT Industrial and incorporating the exclusive MultiJet II technology, and the other with a 146 hp 3.0-liter F1C engine (EEV), also produced by FPT Industrial, which further expands the range of light commercial vehicles adapted to more demanding missions. Combined with the new 6-speed transmission and Start&Stop system, the 146 hp 2.3-liter engine enables the new Daily to achieve reductions in fuel consumption and CO2 emissions of up to 10% (combined cycle).

Iveco gave a preview presentation of the new Stralis Hi-Way to dealers and the international press at the beginning of July, followed by the official presentation at the IAA in September. The latest generation of Iveco’s on-road heavy truck range, the vehicle provides customers a number of major advantages including reduced fuel consumption, lower maintenance costs and enhancements in quality and reliability. The Stralis Hi-Way also features an all-new cab which offers enhanced driving comfort, the latest integrated telematic systems, improved customer service tools and innovative electronic safety systems. The vehicle is available with Euro V and VI Cursor diesel engines from FPT Industrial. The Euro VI engines incorporate FPT Industrial’s patented High Efficiency SCR technology, which conforms them to Euro VI emissions standards without sacrificing fuel efficiency. At the IAA in Hanover, the Stralis Hi-Way was named “International Truck of the Year 2013”, awarded on the basis of the evaluation of a group of journalists from 25 specialist commercial vehicle magazines across Europe. The Hi-Way was recognized for having “made the greatest contribution to road transport efficiency from several different perspectives including: fuel economy, safety, driveability, comfort and a low-environmental footprint”. Another addition to the heavy on-road range during the year was the Stralis “Emotional”. With its extensive range of features, this vehicle offers customers a state-of-the-art driving environment and unsurpassed comfort in the on-board living area.

Hanover was also the venue for the world premiere of the new Trakker, part of the quarry and construction range. The

120


LOGO

 

Trakker is equipped with an all-new cabin, derived from the Stralis, that enhances both driveability and on-board comfort and it is available with Euro V Cursor 8 and 13 engines from FPT Industrial. In addition, the Astra brand presented a new version of the HD9 with all-new cabin and enhanced performance characteristics.

At Intermat 2012 in Paris, Iveco presented the Dakar limited edition version of the Trakker (only 502 vehicles produced). This heavy goods transporter - which incorporates some of the key features of the actual Trakker that won the Dakar rally in Latin America at the beginning of 2012 - is available with 8 and 13-liter Cursor engines ranging from 310 to 500 hp.

At the Bedrijfsauto 2012 in Amsterdam, Iveco presented the new Stralis LNG Natural Power with a 330 hp Cursor 8 engine designed for medium-range missions and which, because of its reduced noise levels, can operate night time deliveries. The LNG technology also offers reduced emissions, an extended operating range of up to 750 km, together with other advantages such as a lower tare weight, which translates into a higher useful load and lower fuel consumption than a diesel-powered vehicle.

In the mass transit segment, Iveco won an order for 102 diesel/electric hybrid buses from the City of Dijon in April. In September, it also won a contract to supply more than 150 Crossway Low Entry regional buses to Deutsche Bahn Fuhrpark Service GmbH, a leading bus operator in Germany, beginning in 2013. The buses will be used on both metropolitan and regional routes.

In Brazil, Iveco launched the new generation of its Stralis Ecoline range. The vehicle is available with a range of engines from FPT Industrial, including 330 hp and 360 hp versions of the Cursor 9 and 400 hp, 440 hp and 480 hp versions of the Cursor 13. At the Eurosatory trade show in Paris, one of the largest in the European defense vehicle sector, Iveco delivered a prototype of the Guarani, a 6x6 armored amphibious personnel carrier, to the Brazilian Army. Iveco has been contracted to supply 2,044 units of this vehicle which was designed in collaboration with the Science and Technology department of the Brazilian Army.

Report on Operations

121


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE

BY SECTOR

Iveco participated at Auto China 2012 in Beijing through its various joint ventures. Naveco presented the 2012 model of the Yuejin Ouka, the K version, which is targeted at the medium-upper range of the light commercial vehicle market. SIH (SAIC Iveco Hongyan Commercial Vehicles Co. Ltd.) presented the new 6x4 Genlyon M100, a heavy truck for long-distance goods transport.

In November, Iveco received two prestigious international awards. In China, the new Naveco Chaoyue was named “Truck of the Year China 2013” and, in Brazil, the Iveco Tector Attack received the “AutoData Award” in the Truck category. Iveco took part in the Dakar rally in South America in January 2012 with an Iveco Powerstar and two Iveco Trakker Evolution 2 vehicles (all fitted with FPT Industrial 900 hp Cursor 13 engines) taking first, second and sixth place in the overall truck ranking.

Finally, in the world of sport, Iveco continued its activities as Truck and Commercial Vehicle Supplier for MotoGP, as well as Official Sponsor of Team Yamaha Factory Racing and Official Supplier to Team Ferrari.

SERVICES

As projected, during 2012 there was a drop in the number of vehicles in operation, primarily in Western Europe, particularly for vehicles registered in the last 5 years. In addition, general economic conditions resulted in a reduction in average annual mileage meaning that there was also a decline in potential demand for spare parts. This trend was most evident in Southern Europe (Italy and Spain in particular). By contrast, in several European countries there was an increase in demand for spare parts in the bus segment, consisting largely of public sector operators.

In Central and Eastern Europe, the after-sales business was generally stable. In Africa, Asia and the Middle East, the parts business continued to develop throughout the year following several months of strong growth in new vehicle sales. In other countries, significant increases in activity were registered in Russia and Turkey.

122


LOGO

 

On a global basis, the majority of parts categories registered a slowdown in growth and there was a continued decline in demand for incidental items and accessories.

During the year, there was further divergence in the level of pricing pressure between product segments. In the product categories where there is the greatest level of competition, in particular repairs, pricing policies were put into effect to enable recovery of market share while at the same time actions were taken to improve margins.

The offering of reconditioned parts was also expanded during the year to meet the increased focus of customers on cost containment.

The Operations division focused on improving customer service execution by enhancing logistics between supply centers to achieve a single virtual supply center. The resulting improvement in delivery performance led to an average reduction of 20% for customer complaints and 25% for vehicle downtime compared to the previous year, and achievement of 97% availability of materials. A large percentage of urgent orders are now delivered overnight thereby ensuring customers availability of the product by the open of business the following day.

Iveco offers direct financial services in Europe, as well as in Latin America, Poland and China through the financial services companies of Fiat Group Automobiles (Fiat Group).

During the fourth quarter of 2011, the Group formalized procedures for orderly termination of Iveco Finance Holdings Limited (renamed Iveco Capital Limited in 2012), the joint venture with Barclays which managed the financial services activities (retail and dealer) for Iveco in Italy, Germany, France, the UK and Switzerland. As agreed by the parties, from January 1, 2012 Iveco took over responsibility for funding Iveco Capital Limited and, in May 2012, it acquired the remaining 51% from Barclays for a purchase consideration of €119 million, making it a wholly-owned subsidiary.

Report on Operations

123


LOGO

 

REPORT ON OPERATING

OPERATIONS PERFORMANCE BY SECTOR

For retail financing activities, the funding arrangements are as follows: secured funding from Barclays for the portfolio existing at December 31, 2011; vendor programs with BNP Paribas in Germany and France for new financing generated from January 1, 2012; agreement with Intesa Sanpaolo to fund new financing generated in Italy; and, direct funding of the portfolio in Switzerland and the UK. For dealer financing activities, funding is provided through a pan-European securitization program arranged with Barclays.

In Spain, financial services are managed by Transolver Finance Establecimiento Financiero de Credito S.A. (a 50/50 joint venture with the Santander Group) which is accounted for under the equity method. The company offers both retail and dealer financing. Iveco also provides rental services in Spain through Transolver Service S.A., fully consolidated by Fiat Industrial Group.

In Eastern Europe, the activity is managed by fully-consolidated captive financial services companies.

The contraction in business volumes experienced in 2012 had a negative impact on the number of new vehicles financed and market penetration. Improved profitability for the year reflected improved management of credit risk and a resulting reduction in bad debt charges.

For fully-consolidated financial services companies and the Spanish joint venture, 13,161 new vehicles were financed in 2012, compared to 17,601 vehicles in 2011, and the penetration rate dropped to 21.0% (24.3% in 2011). Total vehicles financed decreased to 18,638 (26,172 in 2011).

124


LOGO

 

FPT

FPT INDUSTRIAL

HIGHLIGHTS

(€ million)

2012

2011

Net revenues

2,933

3,220

Trading profit/(loss)

142

107

Operating profit/(loss) (*)

142

106

Investments in tangible and intangible assets

151

155

of which capitalized R&D costs

39

56

Total R&D expenditure (**)

86

104

Employees at year end

8,029

8,008

(*) Includes restructuring costs and net unusual income/(expenses)

(**) Includes capitalized R&D and R&D charged directly to the income statement

OPERATING PERFORMANCE

FPT Industrial produces powertrains for trucks and commercial vehicles, agricultural and construction equipment, and marine applications.

During 2012, the sector’s performance was affected by a decline in volumes associated with the contraction in market demand for engines for on-road vehicle applications.

Revenues for the year totaled €2,933 million, a decrease of 8.9% over the prior year attributable to lower volumes to both Group companies and external customers. Sales to external customers accounted for 34% of total revenues, up from 33% in 2011.

A total of 476,786 engines were sold during the year, down 15% over 2011. By major customer, 31% of engines were supplied to Iveco, 27% to CNH, and the remaining 42% to external customers (including Sevel, the Fiat JV for light commercial vehicles, which accounted for 24%). In addition, FPT Industrial delivered 64,154 transmissions (-14% year-over-year) and 154,958 axles (-9%).

As part of its international development activities, in 2012 the sector began working through FPTI Representação Comercial de Motores Automotivos Ltda. in Brazil, whose principal activity is distribution of heavy-duty diesel engines designed and produced by FPT Industrial. In November, FPT Industrial also opened a new distribution center in Shanghai that will service the entire Asia Pacific region.

INNOVATION AND PRODUCTS

FPT Industrial designs and manufactures engines for both on-road and off-road (industrial and agricultural) applications. During the year, FPT Industrial launched a number of new technologies and products that demonstrated its commitment to research and innovation in support of environmentally sustainable mobility.

Report on Operations

125


LOGO

 

REPORT ON OPERATIONS OPERATING PERFORMANCE BY SECTOR

At a joint press event at Fiat Industrial Village in May, FPT Industrial and Iveco presented the exclusive new High Efficiency SCR (Selective Catalytic Reduction) technology, designed to achieve compliance with Euro VI emissions standards that come into effect in Europe from January 1, 2014. Based on the proprietary “SCR Only” technology completed in 2011, which has NOx conversion efficiency levels above 95%, the patented High Efficiency SCR system delivers an unprecedented level of performance. This after-treatment system, which uses SCR technology only to achieve Euro VI emissions levels, is unparalleled as it meets the very strict nitrogen oxide limits without the use of exhaust gas recirculation, thereby maintaining top level performance and enabling a reduction in operating costs.

This technology will also be utilized to achieve Tier 4B/Stage IV standards for agricultural and construction equipment, eliminating the need to use diesel particulate filter (DPF) systems, which will give CNH a significant competitive advantage when the new regulations come into effect in 2014. At Intermat 2012 in Paris, FPT Industrial presented its entire range of Tier 4B/Stage IV off-road engines, equipped with the HI-eSCR system, for the North American and European markets.

In 2012, FPT Industrial’s production activities in Latin America were expanded with the opening of the new factory in Cordoba in Argentina. The NEF, Cursor and S8000 diesel engines will be produced at the plant in support of Iveco and CNH’s activities in the region.

The plant began production of the Cursor 13 Euro V engines for Iveco’s Stralis and Trakker vehicles. This was followed later in the year with the launch of the Cursor 9 Euro V engines for Iveco heavy-duty vehicles.

In Brazil, production began on Euro V versions of the NEF4, NEF6, Cursor 9 and Cursor 13 engines for application on Iveco trucks and buses, as well as the Euro V F1 engine family for light commercial vehicles, including the 126 hp F1A for the Fiat Professional Ducato, the 176 hp F1C twin turbo for the Iveco Daily and the F1C for light and medium commercial vehicles.

In addition, 2012 also saw the production launch of the Euro V NEF6 CNG engine for the Peruvian bus manufacturer Modasa.

Production ramp-up continued on the Tier 4A NEF4, NEF6, N45 and Cursor 13 engines, as well as additional versions of the F5C, for application on CNH agricultural and construction equipment. New Tier 4A versions of the NEF and Cursor engines were also launched for the retail market. Production and supply to Perkins of Tier 4A F5C engines with power output above 56 kW also began.

In the power generation segment, FPT Industrial expanded its range of Stage IIIA engines with the launch of the N45 and also began production of the Stage IIIA Cursor 10.

FPT Industrial was present at the IAA Commercial Vehicle Trade Show in Hanover, where it presented the new Euro VI Cursor 8 CNG engine for buses and other on-road vehicles. In awarding the “International Truck of the Year 2013” to the Iveco Stralis Hi-Way, the jury also gave special mention to the contribution of FPT Industrial’s Cursor range of engines to the vehicle’s fuel efficiency and enhanced environmental profile, and praised the innovative HI-eSCR technology for opening a new avenue in the reduction of noxious emissions on diesel engines.

At EIMA (International Agricultural Machinery Exhibition), New Holland Agriculture won the “2013 Best of Specialized” award for the T4060 F tractor equipped with NEF45 engine from FPT Industrial.

126


LOGO

 

FPT Industrial participated at Auto China 2012 in Beijing, where the SFH joint venture (SAIC Fiat Powertrain Hongyan Co. Ltd.) launched the 480 hp Euro IV Cursor 13 for the Chinese market. The engine was named “Environmental Protection Engine 2012” by China Auto News magazine. At the “Parts Industry Summit and Forum” and “Company of the Year Award 2012” organized by HC360.com, FPT Industrial was recognized as the leading brand of engines for its achievements in raising the standard of technology in the construction equipment sector in China. The brand was also recognized for the HI-eSCR system, which was named the most significant technological innovation, and for its efforts toward protecting the environment.

In the marine segment, FPT Industrial presented and launched the NEF67 500 PD unit (500 hp engine with POD Drive) for the U.S. market at the Miami Boat Show. Other activities in the segment included participation at the Buenos Aires Boat Show, which was also the venue for the South American launch of the unit. In October, at the Genoa Boat Show, FPT Industrial presented the 570 hp NEF67, its first marine engine compliant with Tier 3 emissions limits that come into effect in 2013. The Boat Show was also the occasion to celebrate the New York to Bermuda record set at the end of September by an FB Design boat which was equipped with two 650 hp FPT C90 engines and beat the previous record by more than 4 hours.

FPT Industrial signed several major agreements during the year, further strengthening its overall market position. In September, a letter of intent was signed with VDL Bus & Coach, one of the leading bus producers in Europe, to supply the innovative Euro VI Cursor 9 engine with HI-eSCR technology manufactured to the customer’s specifications. An agreement was also signed with Ford to supply Cursor 10 engines for its new range of heavy trucks for the EMEA and Latin American markets. In China, an agreement was signed for the supply of 180 Cursor 8 engines that are compliant with National V emissions standards (equivalent to Euro V in Europe). The engines will be used on buses operated by the metropolitan transport authority in Beijing.

Report on Operations

127


LOGO

 

REPORT ON OPERATIONS

FINANCIAL REVIEW - FIAT INDUSTRIAL S.P.A.

FINANCIAL REVIEW - FIAT INDUSTRIAL S.P.A.

The following information is based on the 2012 financial statements prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”), as adopted by the European Union, and regulations implementing Article 9 of Legislative Decree 38/2005.

OPERATING PERFORMANCE

For 2012, the Company reported net profit of €129 million, representing a €198 million decrease over 2011. The principal components of the income statement were as follows:

(€ million) 2012 2011

Income from investments

Dividends 230 450

Personnel and operating costs, net of other income (29) (19)

Financial income/(expense) (87) (139)

PROFIT/(LOSS) BEFORE TAXES 114 292

Income taxes 15 35

PROFIT/(LOSS) FOR THE YEAR 129 327

Income from investments totaled €230 million (€450 million in 2011) and consisted of dividends from the subsidiary Fiat Netherlands Holding N.V.

Personnel and operating costs, net of other income totaled €29 million, compared with €19 million in 2011.

Specifically:

Personnel and other operating costs of €46 million, a €17 million increase over the prior year principally due to non-recurring items related to the merger with CNH and the notional cost of stock grants. The Company had an average of 71 employees in 2012, compared to an average of 32 in 2011, following acquisition of the “Fiat Industrial Group Internal Audit” business unit on December 1, 2011.

Other income of €17 million (€10 million in 2011) principally related to services rendered, including by management personnel, to Group companies - and in certain limited cases also to companies in Fiat Group. The €7 million increase over 2011 was attributable to Audit services provided to other Group companies.

128


LOGO

 

Net financial expense totaled €87 million and essentially consisted of interest on debt. In 2011, net financial expense totaled €139 million and also included expense incurred for early repayment of a loan from Fiat S.p.A. resulting from the demerger.

Income taxes consisted of €15 million in income (€35 million in 2011), relating to tax losses contributed by Fiat Industrial S.p.A. to the tax consolidation for Group companies in Italy.

STATEMENT OF FINANCIAL POSITION

The principal components of the statement of financial position were as follows:

(€ million) At 12.31.2012 At 12.31.2011

Non-current assets 6,500 5,784

of which: Investments 6,488 5,778

Working capital 19 19

NET CAPITAL INVESTED 6,519 5,803

EQUITY 3,973 4,077

NET DEBT 2,546 1,726

Non-current assets consisted almost entirely of controlling interests in the principal Group companies.

The €710 million increase in equity investments over December 31, 2011 was due to the recapitalizations of Fiat Netherlands Holdings N.V. (€635 million) and Iveco S.p.A. (€75 million) in February and December 2012, respectively.

Working capital totaled €19 million and consisted of trade receivables/payables, other receivables/payables (from/to tax authorities, employees, etc.) and receivable/payable positions with Group companies participating in the domestic tax consolidation.

Equity totaled €3,973 million at December 31, 2012, a net decrease of €104 thousand over year-end 2011, essentially attributable to the distribution of €240 million in dividends partially offset by €129 million in profit for the year. A more detailed analysis of changes in equity is provided in Fiat Industrial S.p.A.’s financial statements.

Net debt at December 31, 2012 totaled €2,546 million, increasing €820 million over year-end 2011 due primarily to the recapitalization of certain subsidiaries. Net debt consisted of the following:

(€ million) At 12.31.2012 At 12.31.2011

Current financial assets, cash and cash equivalents - -

Current financial liabilities 2,535 1,720

Non-current financial liabilities 11 6

NET DEBT/(CASH) 2,546 1,726

Current financial liabilities shown at December 31, 2012 included an overdraft on the current account held with Fiat Industrial Finance S.p.A. A more detailed analysis of cash flows is provided in Fiat Industrial S.p.A.’s financial statements.

Report on Operations

129


LOGO

 

REPORT ON OPERATIONS FINANCIAL REVIEW - FIAT INDUSTRIAL S.P.A.

RECONCILIATION BETWEEN EQUITY AND PROFIT OF THE PARENT COMPANY AND THE GROUP

Pursuant to the Consob Communication of July 28, 2006, the following table provides a reconciliation between the net profit and equity of Fiat Industrial S.p.A. for the year ended December 31, 2012 and the comparable items on a consolidated basis (portion attributable to owners of Fiat Industrial S.p.A.):

Equity at 2012 Equity at 2011

(€ million) 12.31.2012 Net Profit 12.31.2011 Net Profit

FINANCIAL STATEMENTS OF FIAT INDUSTRIAL S.P.A. 3,973 129 4,077 327

Elimination of carrying amounts of consolidated investments and related dividends (6,487) (230) (5,777) (450)

Equity and profit/(loss) of consolidated entities 7,488 916 6,291 742

Consolidation adjustments:

- Elimination of intercompany profit/loss on inventories and fixed assets, dividends paid between subsidiaries and other adjustments (39) (5) (36) 5

CONSOLIDATED FINANCIAL STATEMENTS (PORTION ATTRIBUTABLE TO

OWNERS OF FIAT INDUSTRIAL S.P.A.) 4,935 810 4,555 624

130


LOGO

 

MOTION FOR APPROVAL OF THE STATUTORY FINANCIAL STATEMENTS AT DECEMBER 31, 2012, ALLOCATION OF PROFIT AND DIVIDEND DISTRIBUTION REPORT ON OPERATIONS

MOTION FOR APPROVAL OF THE STATUTORY FINANCIAL STATEMENTS AT DECEMBER 31, 2012, ALLOCATION OF PROFIT

AND DIVIDEND DISTRIBUTION

Report on Operations

Shareholders,

We submit for your approval the Statutory Financial Statements at December 31, 2012, which report profit of €128,609,403 and a retained profit reserve of €730,913,008.

We propose a dividend of €0.225 per ordinary share, equivalent to a maximum total distribution of approximately €275.1 million, consisting of the remaining profit for 2012 of €122,178,933 - following allocation of €6,430,470 to the legal reserve – and a maximum of €152,899,065.45 from the retained profit reserve.

This proposal is in line with the policy adopted by the Board of Directors to distribute between 25% and 35% of the Group’s consolidated profit.

The dividend will be payable on April 25, 2013 (ex-dividend date of April 22) on shares on record at April 24, 2013.

February 21, 2013

On behalf of the Board of Directors

/s/ Sergio Marchionne

Sergio Marchionne

CHAIRMAN

131


LOGO

 


LOGO

 

FIAT INDUSTRIAL GROUP CONSOLIDATED FINANCIAL STATEMENTS

at December 31, 2012

134 Consolidated Income Statement 142 Consolidated Statement of Cash Flows

135 Consolidated Statement of Comprehensive Income pursuant to Consob Resolution 15519

of July 27, 2006

136 Consolidated Statement of Financial Position 143 Notes to the Consolidated Financial Statements

138 Consolidated Statement of Cash Flows 237 Appendix I - Fiat Industrial Group Companies

139 Statement of Changes in Consolidated Equity 250 Appendix II - Information Required

140 Consolidated Income Statement under Article 149-duodecies of the Consob

pursuant to Consob Resolution 15519 Issuer Regulations

of July 27, 2006 251 Attestation of the Consolidated Financial

141 Consolidated Statement of Financial Position Statements under Article 154-bis

pursuant to Consob Resolution 15519 of Legislative Decree 58/98

of July 27, 2006


LOGO

 

CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012

INCOME STATEMENT

CONSOLIDATED INCOME STATEMENT(*)

(€ million) Note 2012 2011

Net revenues (1) 25,785 24,289

Cost of sales (2) 20,925 20,038

Selling, general and administrative costs (3) 2,183 2,002

Research and development costs (4) 560 505

Other income/(expenses) (5) (38) (58)

TRADING PROFIT/(LOSS) 2,079 1,686

Gains/(losses) on the disposal of investments (6) (38) 26

Restructuring costs (7) 166 95

Other unusual income/(expenses) (8) (13) 12

OPERATING PROFIT/(LOSS) 1,862 1,629

Financial income/(expenses) (9) (458) (546)

Result from investments: (10) 81 86

Share of the profit/(loss) of investees accounted for using the equity method 86 97

Other income/(expenses) from investments (5) (11)

PROFIT/(LOSS) BEFORE TAXES 1,485 1,169

Income taxes (11) 564 468

PROFIT/(LOSS) FROM CONTINUING OPERATIONS 921 701

Profit/(loss) from discontinued operations - -

PROFIT/(LOSS) 921 701

PROFIT/(LOSS) ATTRIBUTABLE TO:

Owners of the parent 810 624

Non-controlling interests 111 77

(in €)

BASIC AND DILUTED EARNINGS/(LOSS) PER ORDINARY SHARE (13) 0.663 0.487

BASIC AND DILUTED EARNINGS/(LOSS) PER PREFERENCE SHARE (13) 0.487

BASIC AND DILUTED EARNINGS/(LOSS) PER SAVINGS SHARE (13) 0.533

(*) Pursuant to Consob Resolution No. 15519 of July 27, 2006, the effects of related party transactions on the Consolidated income statement are presented in the specific Income statement schedule provided in the following pages and are further described in Note 35.

134


LOGO

 

STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(€ million) Note 2012 2011

PROFIT/(LOSS) (A) 921 701

Gains/(losses) on cash flow hedges (24) 45 (43)

Gains/(losses) on fair value of available-for-sale financial assets (24) - -

Gains/(losses) on exchange differences on translating foreign operations (24) (225) (66)

Share of other comprehensive income of entities consolidated by using the equity method (24) (47) 21

Income tax relating to components of Other comprehensive income (24) (10) 6

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX (B) (237) (82)

TOTAL COMPREHENSIVE INCOME (A)+(B) 684 619

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO:

Owners of the parent 591 549

Non-controlling interests 93 70

Fiat Industrial Consolidated Financial Statements

135


LOGO

 

CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012 STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION(*)

(€ million) Note At December 31, 2012 At December 31, 2011

ASSETS

Intangible assets (14) 4,174 3,909

Property, plant and equipment (15) 4,572 4,177

Investments and other financial assets: (16) 531 666

Investments accounted for using the equity method 464 614

Other investments and financial assets 67 52

Leased assets (17) 622 558

Defined benefit plan assets 256 215

Deferred tax assets (11) 1,086 1,167

Total Non-current assets 11,241 10,692

Inventories (18) 4,843 4,865

Trade receivables (19) 1,436 1,562

Receivables from financing activities (19) 15,237 13,946

Current tax receivables (19) 302 685

Other current assets (19) 1,117 1,053

Current financial assets: 125 186

Current securities (20) 4 68

Other financial assets (21) 121 118

Cash and cash equivalents (22) 4,611 5,639

Total Current assets 27,671 27,936

Assets held for sale (23) 25 15

TOTAL ASSETS 38,937 38,643

(*) Pursuant to Consob Resolution No. 15519 of July 27, 2006, the effects of related party transactions on the Statement of financial position are presented in the specific Statement of financial position schedule provided in the following pages and are further described in Note 35.

136


LOGO

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(CONTINUED)

(€ million) Note At December 31, 2012 At December 31, 2011

EQUITY AND LIABILITIES

Issued capital and reserves attributable to owners of the parent (24) 4,935 4,555

Non-controlling interests (24) 787 856

Total Equity 5,722 5,411

Provisions: 4,589 4,540

Employee benefits (25) 1,941 2,070

Other provisions (26) 2,648 2,470

Debt: (27) 20,633 20,217

Asset-backed financing (27) 9,708 9,479

Other debt (27) 10,925 10,738

Other financial liabilities (21) 97 157

Trade payables (28) 4,843 5,052

Current tax payables 217 660

Deferred tax liabilities (11) 170 111

Other current liabilities (29) 2,666 2,495

Liabilities held for sale - -

Total Liabilities 33,215 33,232

TOTAL EQUITY AND LIABILITIES 38,937 38,643

Fiat Industrial Consolidated Financial Statements

137


LOGO

 

CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012 STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENT OF CASH FLOWS(*)

(€ million) Note 2012 2011

A) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR (22) 5,639 3,686

B) CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES DURING THE YEAR

Profit/(loss) 921 701

Amortization and depreciation (net of vehicles sold under buy-back commitments and operating leases) 719 666

(Gains)/losses on disposal of:

Property plant and equipment and intangible assets (net of vehicles sold under buy-back commitments) (8) (1)

Investments 38 (26)

Other non-cash items (37) 192 289

Dividends received 80 57

Change in provisions 73 178

Change in deferred income taxes 103 101

Change in items due to buy-back commitments (37) (117) 40

Change in operating lease items (37) (89) (12)

Change in working capital (37) (214) 333

TOTAL 1,698 2,326

C) CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES:

Investments in:

Property, plant and equipment and intangible assets (net of vehicles sold under buy-back commitments and operating leases) (1,349) (993)

Consolidated subsidiaries, net of cash acquired - (99)

Other equity investments (4) (5)

Proceeds from the sale of:

Property, plant and equipment and intangible assets (net of vehicles sold under buy-back commitments) 32 10

Other investments 44 1

Net change in receivables from financing activities (37) (1,749) (1,152)

Change in other current securities 61 (47)

Other changes (9) 19

TOTAL (2,974) (2,266)

D) CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES:

Bonds issued 584 2,557

Issuance of other medium-term borrowings 2,113 1,974

Repayment of other medium-term borrowings (1,791) (1,231)

Net change in other financial payables and other financial assets/liabilities (37) (109) (1,429)

Capital increase 10 -

Dividends paid (480) (8)

(Purchase)/sale of ownership interests in subsidiaries - (1)

TOTAL 327 1,862

Translation exchange differences (79) 31

E) TOTAL CHANGE IN CASH AND CASH EQUIVALENTS (1,028) 1,953

F) CASH AND CASH EQUIVALENTS AT END OF THE YEAR (22) 4,611 5,639

(*) Pursuant to Consob Resolution No. 15519 of July 27, 2006, the effects of related party transactions on the Consolidated statement of cash flows are presented in the specific Statement of cash flows schedule

provided in the following pages.

138


LOGO

 

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012

STATEMENT OF CHANGES IN CONSOLIDATED EQUITY

Cumulative

share of OCI

Cumulative of entities

Cash flow translation Available-for- consolidated Non-

Capital Earnings hedge adjustment sale financial under the controlling

(€ million) Share capital reserves reserves reserve reserve assets reserve equity method interests Total

AT JANUARY 1, 2011 1,913 457 1,276 (25) 335 - 31 757 4,744

Changes in equity for 2011

Capital increase - - - - - - - - -

Dividends distributed - - - - - - - (8) (8)

Purchase and sale of ownership interests in subsidiaries from/to non-controlling interests - (5) - - - - - 22 17

Total comprehensive income for the year - - 624 (33) (63) - 21 70 619

Other changes - - 24 - - - - 15 39

AT DECEMBER 31, 2011 1,913 452 1,924 (58) 272 - 52 856 5,411

Changes in equity for 2012

Capital increase 6 (6) - - - - - 10 10

Dividends distributed - - (240) - - - - (240) (480)

Purchase and sale of ownership interests in subsidiaries from/to non-controlling interests - (11) - - - - - 57 46

Increase/(decrease) in the Reserve for share-based payments - - 6 - - - - - 6

Total comprehensive income for the year - - 810 32 (210) - (41) 93 684

Other changes - - 34 - - - - 11 45

AT DECEMBER 31, 2012 1,919 435 2,534 (26) 62 - 11 787 5,722

Fiat Industrial Consolidated Financial Statements

139


LOGO

 

CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012 INCOME STATEMENT PURSUANT TO CONSOB RESOLUTION 15519 OF JULY 27, 2006

CONSOLIDATED INCOME STATEMENT

PURSUANT TO CONSOB RESOLUTION NO. 15519 OF JULY 27, 2006

2012 2011

(€ million) Note Total of which Related parties (Note 35) Total of which Related parties (Note 35)

Net revenues (1) 25,785 1,219 24,289 1,559

Cost of sales (2) 20,925 987 20,038 846

Selling, general and administrative costs (3) 2,183 238 2,002 234

Research and development costs (4) 560 22 505 28

Other income/(expenses) (5) (38) 1 (58) 2

TRADING PROFIT/(LOSS) 2,079 1,686

Gains/(losses) on the disposal of investments (6) (38) - 26 1

Restructuring costs (7) 166 - 95 -

Other unusual income/(expenses) (8) (13) - 12 -

OPERATING PROFIT/(LOSS) 1,862 1,629

Financial income/(expenses) (9) (458) 2 (546) (87)

Result from investments: (10) 81 81 86 86

Share of the profit/(loss) of investees accounted for using the equity method 86 86 97 97

Other income/(expenses) from investments (5) (5) (11) (11)

PROFIT/(LOSS) BEFORE TAXES 1,485 1,169

Income taxes (11) 564 468

PROFIT/(LOSS) FROM CONTINUING OPERATIONS 921 701

Profit/(loss) from discontinued operations - -

PROFIT/(LOSS) 921 701

PROFIT/(LOSS) ATTRIBUTABLE TO:

Owners of the parent 810 624

Non-controlling interests 111 77

140


LOGO

 

STATEMENT OF FINANCIAL POSITION PURSUANT TO CONSOB RESOLUTION 15519 OF JULY 27, 2006 CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

PURSUANT TO CONSOB RESOLUTION NO. 15519 OF JULY 27, 2006

At December 31, 2012 At December 31, 2011

(€ million) Note Total of which Related parties (Note 35) Total of which Related parties (Note 35)

ASSETS

Intangible assets (14) 4,174 - 3,909 -

Property, plant and equipment (15) 4,572 - 4,177 -

Investments and other financial assets: (16) 531 520 666 664

Investments accounted for using the equity method 464 464 614 614

Other investments and financial assets 67 56 52 50

Leased assets (17) 622 - 558 -

Defined benefit plan assets 256 - 215 -

Deferred tax assets (11) 1,086 - 1,167 -

Total Non-current assets 11,241 10,692

Inventories (18) 4,843 1 4,865 -

Trade receivables (19) 1,436 146 1,562 149

Receivables from financing activities (19) 15,237 18 13,946 12

Current tax receivables (19) 302 - 685 -

Other current assets (19) 1,117 23 1,053 9

Current financial assets: 125 - 186 -

Current securities (20) 4 - 68 -

Other financial assets (21) 121 - 118 -

Cash and cash equivalents (22) 4,611 35 5,639 18

Total Current assets 27,671 27,936

Assets held for sale (23) 25 - 15 -

TOTAL ASSETS 38,937 38,643

EQUITY AND LIABILITIES

Issued capital and reserves attributable to owners of the parent (24) 4,935 10 4,555 3

Non-controlling interests (24) 787 - 856 -

Total Equity 5,722 5,411

Provisions: 4,589 6 4,540 1

Employee benefits (25) 1,941 1 2,070 1

Other provisions (26) 2,648 5 2,470 -

Debt: (27) 20,633 10 20,217 8

Asset-backed financing (27) 9,708 3 9,479 2

Other debt (27) 10,925 7 10,738 6

Other financial liabilities (21) 97 - 157 -

Trade payables (28) 4,843 262 5,052 292

Current tax payables 217 - 660 -

Deferred tax liabilities (11) 170 - 111 -

Other current liabilities (29) 2,666 28 2,495 28

Liabilities held for sale - - - -

Total Liabilities 33,215 33,232

TOTAL EQUITY AND LIABILITIES 38,937 38,643

Fiat Industrial Consolidated Financial Statements

141


LOGO

 

CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2012 STATEMENT OF CASH FLOWS PURSUANT TO CONSOB RESOLUTION 15519 OF JULY 27, 2006

CONSOLIDATED STATEMENT OF CASH FLOWS

PURSUANT TO CONSOB RESOLUTION NO. 15519 OF JULY 27, 2006

2012 2011

(€ million) Note Total of which Related Parties (Note 35) Total of which Related Parties (Note 35)

A) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR (22) 5,639 3,686

B) CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES DURING THE YEAR:

Profit/(loss) 921 - 701 -

Amortization and depreciation (net of vehicles sold under buy-back commitments and operating leases) 719 - 666 -

(Gains)/losses on disposal of:

Property plant and equipment and intangible assets (net of vehicles sold under buy-back commitments) (8) - (1) -

Investments 38 - (26) -

Other non-cash items (37) 192 - 289 -

Dividends received 80 80 57 57

Change in provisions 73 - 178 1

Change in deferred income taxes 103 - 101 -

Change in items due to buy-back commitments (37) (117) - 40 -

Change in operating lease items (37) (89) - (12) -

Change in working capital (37) (214) (9) 333 37

TOTAL 1,698 2,326

C) CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES:

Investments in:

Property, plant and equipment and intangible assets

(net of vehicles sold under buy-back commitments and operating leases) (1,349) - (993) -

Consolidated subsidiaries, net of cash acquired - - (99) (95)

Other equity investments (4) (4) (5) -

Proceeds from the sale of:

Property, plant and equipment and intangible assets (net of vehicles sold under buy-back commitments) 32 - 10 -

Other investments 44 - 1 1

Net change in receivables from financing activities (37) (1,749) (14) (1,152) (61)

Change in other current securities 61 - (47) -

Other changes (9) - 19 -

TOTAL (2,974) (2,266)

D) CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES:

Bonds issued 584 - 2,557 -

Issuance of other medium-term borrowings 2,113 - 1,974 -

Repayment of other medium-term borrowings (1,791) - (1,231) -

Net change in other financial payables and other financial assets/liabilities (37) (109) (1) (1,429) (2,761)

Capital increase 10 - - -

Dividends paid (480) (77) (8) -

(Purchase)/sale of ownership interests in subsidiaries - - (1) -

TOTAL 327 1,862

Translation exchange differences (79) 31

E) TOTAL CHANGE IN CASH AND CASH EQUIVALENTS (1,028) 1,953

F) CASH AND CASH EQUIVALENTS AT END OF THE YEAR (22) 4,611 5,639

142


LOGO

 

NOTES CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

PRINCIPAL ACTIVITIES

Fiat Industrial S.p.A. is a corporation organized under the laws of the Republic of Italy. Fiat Industrial S.p.A. and its subsidiaries (the “Group”) operate in approximately 40 countries. The Group is involved in the manufacture and sale of agricultural and construction equipment, trucks and commercial vehicles and Industrial&Marine engines and transmission systems. The Group was formed on January 1st, 2011 through the demerger of activities from Fiat S.p.A. and their transfer to Fiat Industrial S.p.A. The assets and liabilities were transferred at their existing carrying amounts. For additional information, refer to the 2011 Consolidated Financial Statements.

The Group has its head office in Turin, Italy.

The consolidated financial statements are presented in Euros, the currency of the primary economic environment in which the Group operates.

Fiat Industrial - CNH merger

On May 30, 2012, Fiat Industrial S.p.A. invited the Board of Directors of CNH Global N.V. (“CNH”), in which Fiat Industrial holds an 87% stake, to explore the benefits of a combination in which the two companies would merge into a newly-incorporated Dutch company, or adopt a similar structure, at exchange ratios determined with reference to the undisturbed market prices of Fiat Industrial and CNH shares prior to the transaction being announced (i.e., March/April 2012). The objective of the transaction is to simplify the Group’s capital structure by creating a single class of liquid stock, with a primary listing in New York and a secondary listing in Europe (with Milan subsequently being selected), thereby establishing a true peer to the major North American-based capital goods players in both scale and capital market appeal.

Following completion of negotiations between Fiat Industrial and the Special Committee formed by CNH Global N.V.’s Board of Directors, on November 26, 2012, Fiat Industrial and CNH announced that they had entered into a definitive merger agreement. Under the terms of that agreement, Fiat Industrial and CNH will merge into a newly-incorporated Dutch company (“NewCo”) with Fiat Industrial shareholders receiving one NewCo share for each Fiat Industrial share held and CNH shareholders receiving 3.828 NewCo shares for each CNH share held. As also established in the agreement, on December 28, 2012, CNH paid minority shareholders a cash dividend of $10 per CNH share. The transaction will be subject to the customary closing conditions, including a cap on the exercise of withdrawal rights by Fiat Industrial shareholders and opposition rights by Fiat Industrial creditors of €325 million in aggregate. The merger is also subject to the approval of shareholders of both Fiat Industrial and CNH.

Fiat Industrial Consolidated Financial Statements

143


LOGO

 

CONSOLIDATED NOTES

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

As the merger represents a “business combination involving entities or businesses under common control”, it is outside the scope of application of IFRS 3. Accordingly, no adjustments will be made to the carrying amounts of the assets and liabilities of Fiat Industrial or CNH. This will result in the amounts recognized in the consolidated statement of financial position post-merger being equal to those reported in the statement of financial position for Fiat Industrial Group pre-merger. The only significant accounting effect of the transaction will be the attribution to owners of the parent company post-merger of the non-controlling interests in CNH Global N.V.

SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The 2012 consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (the “IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements are also prepared in accordance with the IFRSs adopted by the European Union, and with the provisions implementing article 9 of Legislative Decree no. 38/2005. The designation “IFRS” also includes all valid International Accounting Standards (“IAS”), as well as all interpretations of the IFRS Interpretations Committee, formerly the Standing Interpretations Committee (“SIC”) and then the International Financial Reporting Interpretations Committee (“IFRIC”).

The financial statements are prepared under the historical cost convention, modified as required for the measurement of certain financial instruments, as well as on a going concern basis. In this respect, despite operating in a continuingly difficult economic and financial environment, the Group’s assessment is that no material uncertainties (as defined in paragraph 25 of IAS 1) exist about its ability to continue as a going concern, in view also of the measures already undertaken by the Group to adapt to the changed levels of demand and its industrial and financial flexibility.

Format of the financial statements

The Group presents an income statement using a classification based on the function of expenses (otherwise known as the “cost of sales” method), rather than one based on their nature, as this is believed to provide information that is more relevant. The format selected is that used for managing the business and for management reporting purposes and is consistent with international practice in the capital goods sector. In this income statement, the Group also presents subtotals for both Trading Profit and Operating Profit. Trading Profit is the measure used by management to assess the trading performance of the Group’s businesses and is therefore, together with Operating Profit, one of the measures of segment profit that the Group presents under IFRS. Trading Profit is also presented on a consolidated basis because management believes it is important to consider the Group’s profitability on a basis consistent with that of its operating segments. Trading Profit represents Operating Profit before specific items that are considered to hinder comparison of the trading performance of the Group’s businesses either on a year-on-year basis or with other businesses. Management believes that Trading Profit should, therefore, be made available to investors to assist them in their assessment of the trading performance of Group’s businesses. Specifically Trading Profit is a measure that excludes Gains/(losses) on the disposal of investments, Restructuring costs and Other “unusual” income/(expenses) which impact, and are indicative of, operational performance, but whose effects occur on a less frequent basis; each of these items is described as follows:

Gains/(losses) on the disposal of investments are defined as gains or losses incurred on the disposal of investments (both consolidated subsidiaries and unconsolidated associates or other investments), inclusive of transaction costs. The caption also includes gains/losses recognized in business combinations achieved in stages, when the Group’s previously held equity interest in the acquiree is re-measured at its acquisition-date fair value.

144


LOGO

 

Restructuring costs are defined as costs associated with involuntary employee termination benefits pursuant to a one-time benefit arrangement, costs to consolidate or close facilities and relocate employees, and any other cost incurred for the implementation of restructuring plans; those plans reflect specific actions taken by management to improve the Group’s future profitability.

Other unusual income/(expenses) are defined as asset write-downs (of plant, equipment or inventory) and provisions (or their subsequent reversal) arising from infrequent external events or market conditions.

Management excludes the above items from Trading Profit because they are individually or collectively material items that are not considered to be representative of the routine trading performance of the Group’s businesses. Operating Profit captures all items which are operational in nature regardless of the rate of occurrence. By distinguishing operational items between Trading Profit and Operating Profit, the Group’s performance may be evaluated in a more effective manner, while still disclosing a higher level of detail.

For the Statement of financial position, a mixed format has been selected to present current and non-current assets and liabilities, as permitted by IAS 1. Companies carrying out industrial activities and those carrying out financial activities are both consolidated in the Group’s financial statements. The investment portfolios of financial services companies are included in current assets, as the investments will be realized in their normal operating cycle. Financial services companies, though, obtain funds only partially from the market: the remainder are obtained from Fiat Industrial S.p.A. through the Group’s treasury companies (included in industrial companies), which lend funds both to industrial Group companies and to financial services companies as the need arises. This financial service structure within the Group means that any attempt to separate current and non-current liabilities in the Consolidated statement of financial position is not meaningful. Disclosure of the due dates of liabilities is however provided in the notes.

The Statement of cash flows is presented using the indirect method.

In connection with the requirements of the Consob Resolution No. 15519 of July 27, 2006 as to the format of the financial statements, specific supplementary Income Statement, Statement of Financial Position and Statement of Cash Flows formats have been added for related party transactions so as not to compromise an overall reading of the statements.

Basis of consolidation

Subsidiaries

Subsidiaries are enterprises controlled by the Group, as defined in IAS 27 - Consolidated and Separate Financial Statements. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Non-controlling interests in the net assets of consolidated subsidiaries and non-controlling interests in the profit or loss of consolidated subsidiaries are presented separately from the interests of the owners of the parent in the consolidated statement of financial position and income statement respectively. Losses applicable to non-controlling interests which exceed the non-controlling interests in the subsidiary’s equity are debited to non-controlling interests.

Changes in the Group’s ownership interests in subsidiaries that do not result in the loss of control are accounted for as equity transactions. The carrying amounts of the equity attributable to owners of the parent and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the book value of the non-controlling interests and the fair value of the relevant consideration is recognized directly in the equity attributable to the owners of the parent.

Fiat Industrial Consolidated Financial Statements

145


LOGO

 

CONSOLIDATED NOTES

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

If the Group loses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the relevant consideration and the fair value of any retained interest and (ii) the carrying amount of the assets (including goodwill) and liabilities of the subsidiary and any non-controlling interests. Any profits or losses recognized in other comprehensive income in respect of the subsidiary are accounted for as if the subsidiary had been sold (i.e. are reclassified to profit or loss or transferred directly to retained earnings depending on the applicable IFRS). The fair value of any investment retained in the former subsidiary is measured in accordance with IAS 39, IAS 28 or IAS 31, depending on the type of investment.

Subsidiaries that are either dormant or generate a negligible volume of business, are not consolidated. Their impact on the Group’s assets, liabilities, financial position and profit/(loss) attributable to the owners of the parent is immaterial.

Jointly controlled entities

Jointly controlled entities are enterprises in which the Group has contractually agreed sharing of control or for which a contractual arrangement exists whereby two or more parties undertake an economic activity that is subject to joint control. Investments in jointly controlled entities are accounted for using the equity method from the date that joint control commences until the date that joint control ceases.

Associates

Associates are enterprises over which the Group has significant influence, but not control or joint control, over the financial and operating policies, as defined in IAS 28 - Investments in Associates. The consolidated financial statements include the Group’s share of the earnings of associates using the equity method, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses of an associate, if any, exceeds the carrying amount of the associate in the Group’s balance sheet, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate.

Investments in other companies

Investments in other companies that are available-for-sale financial assets are measured at fair value, when this can be reliably determined. Gains or losses arising from changes in fair value are recognized directly in other comprehensive income until the assets are sold or are impaired, when the cumulative gains and losses previously recognized in equity are recognized in the profit or loss of the period. Investments in other companies for which fair value is not available or is not reliable are stated at cost less any impairment losses. Dividends received from these investments are included in Other income/(expenses) from investments.

146


LOGO

 

Transactions eliminated on consolidation

All significant intragroup balances and transactions and any unrealized gains and losses arising from intragroup transactions are eliminated in preparing the consolidated financial statements. Unrealized gains and losses arising from transactions with associates and jointly controlled entities are eliminated to the extent of the Group’s interest in those entities.

Foreign currency transactions

Transactions in foreign currencies are recorded at the foreign exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate prevailing at that date. Exchange differences arising on the settlement of monetary items or on reporting monetary items at rates different from those at which they were initially recorded during the period or in previous financial statements, are recognized in profit or loss.

Consolidation of foreign entities

All assets and liabilities of foreign consolidated companies with a functional currency other than the Euro are translated using the exchange rates in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Translation differences resulting from the application of this method are classified as equity until the disposal of the investment. Average rates of exchange are used to translate the cash flows of foreign subsidiaries in preparing the consolidated statement of cash flows.

The goodwill, assets acquired and liabilities assumed arising from the acquisition of entities with a functional currency other than the Euro are recognized in the functional currency and translated at the exchange rate at the acquisition date. These balances are subsequently retranslated at the exchange rate at the balance sheet date.

The principal exchange rates used in 2012 and 2011 to translate into Euros the financial statements prepared in currencies other than the Euro were as follows:

Average 2012 At December 31, 2012 Average 2011 At December 31, 2011

U.S. dollar 1.285 1.319 1.392 1.294

Pound sterling 0.811 0.816 0.868 0.835

Swiss franc 1.205 1.207 1.233 1.216

Polish zloty 4.185 4.074 4.121 4.458

Brazilian real 2.508 2.704 2.327 2.416

Argentine peso 5.836 6.478 5.742 5.561

In the context of IFRS First-time Adoption, the cumulative translation difference arising from the consolidation of foreign operations outside the Euro zone was set at nil, as permitted by IFRS 1; gains or losses on subsequent disposal of any foreign operation only include accumulated translation differences arising after January 1, 2004.

Fiat Industrial Consolidated Financial Statements

147


LOGO

 

CONSOLIDATED NOTES

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

Business Combinations

Business combinations are accounted for by applying the acquisition method. Under this method, the consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred and liabilities assumed by the Group and the equity interests issued in exchange for control of the acquiree. Acquisition-related costs are generally recognized in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value at that date, except for the following which are measured in accordance with the relevant standard:

deferred tax assets and liabilities;

assets and liabilities relating to employee benefit arrangements;

liabilities or equity instruments relating to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree;

assets (or disposal groups) that are classified as held for sale.

Goodwill is measured as the excess of the aggregate of the consideration transferred in the business combination, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a gain from a bargain purchase.

Non-controlling interest is initially measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The selection of the measurement method is made on a transaction-by-transaction basis.

Any contingent consideration arrangement in the business combination is measured at its acquisition-date fair value and included as part of the consideration transferred in the business combination in order to determine goodwill. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are recognized retrospectively, with corresponding adjustments to goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which may not exceed one year from the acquisition date) about facts and circumstances that existed as of the acquisition date. Any changes in fair value after the measurement period are recognized in profit or loss.

When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured at its acquisition-date fair value and the resulting gain or loss, if any, is recognized in profit or loss. Changes in the equity interest in the acquiree that have been recognized in Other comprehensive income in prior reporting periods are reclassified to profit or loss as if the interest had been disposed of.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete in the consolidated financial statements. Those provisional amounts are adjusted during the above-mentioned measurement period to reflect new information obtained about facts and circumstances that existed at the acquisition date which, if known, would have affected the amounts recognized at that date.

Business combinations that took place prior to January 1, 2010 were accounted for in accordance with the previous version of IFRS 3.

148


LOGO

 

Intangible assets

Goodwill

Goodwill arising on business combinations is initially measured at cost as established at the acquisition date, as defined in the above paragraph. Goodwill is not amortized, but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

On disposal of part or whole of a business which was previously acquired and which gave rise to the recognition of goodwill, the remaining amount of the related goodwill is included in the determination of the gain or loss on disposal.

In the context of IFRS First-time Adoption, the Fiat Group elected not to apply IFRS 3 - Business Combinations retrospectively to the business combinations that occurred before January 1, 2004; as a consequence, goodwill arising on acquisitions before the date of transition to IFRS has been retained at the previous Italian GAAP amounts, subject to impairment testing at that date.

Development costs

Development costs for vehicle project production (trucks, buses, agricultural and construction equipment and engines) are recognized as an asset if and only if both of the following conditions are met: that development costs can be measured reliably and that the technical feasibility of the product, volumes and pricing support the view that the development expenditure will generate future economic benefits. Capitalized development costs include all direct and indirect costs that may be directly attributed to the development process. Capitalized development costs are amortized on a systematic basis from the start of production of the related product over the product’s estimated average life, as follows:

N° of years

Trucks and Buses 4-8

Agricultural and Construction Equipment 5

Engines 8-10

All other development costs are expensed as incurred.

Intangible assets with indefinite useful lives

Intangible assets with indefinite useful lives consist principally of acquired trademarks which have no legal, contractual, competitive, economic, or other factors that limit their useful lives. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or more frequently whenever there is an indication that the asset may be impaired.

Fiat Industrial Consolidated Financial Statements

149


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Other intangible assets

Other purchased and internally-generated intangible assets are recognized as assets in accordance with IAS 38 - Intangible Assets, where it is probable that the use of the asset will generate future economic benefits and where the costs of the asset can be determined reliably.

Such assets are measured at purchase or manufacturing cost and amortized on a straight-line basis over their estimated useful lives, if these assets have finite useful lives.

Other intangible assets acquired as part of the acquisition of a business are capitalized separately from goodwill if their fair value can be measured reliably.

Property, plant and equipment

Cost

Property, plant and equipment are stated at acquisition or production cost.

Subsequent expenditures and the cost of replacing parts of an asset are capitalized only if they increase the future economic benefits embodied in that asset. All other expenditures are expensed as incurred. When such replacement costs are capitalized, the carrying amount of the parts that are replaced is recognized in profit or loss.

Property, plant and equipment also include vehicles sold with a buy-back commitment, which are recognized under the method described in the paragraph Revenue recognition if the buy-back commitment originates from Iveco.

Assets held under finance leases, which provide the Group with substantially all the risks and rewards of ownership, are recognized as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the financial statement as a debt. The assets are depreciated by the method and at the rates indicated below.

Leases where the lessor retains substantially all the risks and rewards of ownership of the assets are classified as operating leases. Operating lease expenditures are expensed on a straight-line basis over the lease terms.

Depreciation

Depreciation is calculated on a straight line basis over the estimated useful lives of the assets as follows:

Depreciation rates

Buildings

2.5% - 10%

Plant, machinery and equipment

6.25% - 20%

Other assets

10% - 25%

Land is not depreciated.

150


LOGO

 

Finance leases

Future minimum lease payments from lessees are classified as Receivables from financing activities. Lease payments are recognized as the repayment of the principal and financial income remunerating the initial investment and the services provided.

Leased assets

Leased assets include vehicles leased to retail customers by the Group’s leasing companies under operating lease arrangements. They are stated at cost and depreciated at annual rates of between 20% and 33%.

When such assets are no longer leased and become held for sale, the Group reclassifies their carrying amount to Inventories.

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets (as defined under IAS

23 - Borrowing Costs), which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalized and amortized over the useful life of the class of assets to which they refer.

All other borrowing costs are expensed when incurred.

Impairment of assets

The Group reviews, at least annually, the recoverability of the carrying amount of intangible assets (including capitalized development costs) and property, plant and equipment, in order to determine whether there is any indication that those assets have suffered an impairment loss. If indicators of impairment are present, the carrying amount of the asset is reduced to its recoverable amount. Intangible assets with indefinite useful life are tested for impairment annually, or more frequently, if there is an indication that an asset may be impaired.

Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

The recoverable amount of an asset is the higher of its fair value less disposal costs and its value in use. In assessing its value in use, the pre-tax 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 risks specific to the asset. An impairment loss is recognized when the recoverable amount is lower than the carrying amount. Where an impairment loss for assets other than goodwill subsequently no longer exists or has decreased, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but not in excess of the carrying amount that would have been recorded had no impairment loss been recognized. A reversal of an impairment loss is recognized in profit or loss immediately.

Fiat Industrial Consolidated Financial Statements

151


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Financial instruments

Presentation

Financial instruments held by the Group are presented in the financial statements as described in the following paragraphs.

Investments and other non-current financial assets comprise investments in unconsolidated companies and other non-current financial assets (held-to-maturity securities, non-current loans and receivables and other non-current available-for-sale financial assets).

Current financial assets, as defined in IAS 39, include trade receivables, receivables from financing activities (retail financing, dealer financing, lease financing and other current loans to third parties), current securities and other current financial assets (which include derivative financial instruments stated at fair value as assets), as well as cash and cash equivalents.

In particular, Cash and cash equivalents include cash at banks, units in liquidity funds and other money market securities that are readily convertible into cash and are subject to an insignificant risk of changes in value.

Current securities include short-term or marketable securities which represent temporary investments of available funds and do not satisfy the requirements for being classified as cash equivalents; current securities include both available-for-sale and held-for-trading securities.

Financial liabilities refer to debt, which includes asset-backed financing, and other financial liabilities (which include derivative financial instruments stated at fair value as liabilities), trade payables and other payables.

Measurement

Investments in unconsolidated companies classified as non-current financial assets are accounted for as described in the section Basis of consolidation.

Non-current financial assets other than investments, as well as current financial assets and financial liabilities, are accounted for in accordance with IAS 39 - Financial Instruments: Recognition and Measurement.

Current financial assets and held-to-maturity securities are recognized on the basis of the settlement date and, on initial recognition, are measured at fair value (corresponding to acquisition cost), including transaction costs.

Subsequent to initial recognition, available-for-sale and held-for-trading financial assets are measured at fair value. When market prices are not available, the fair value of available-for-sale financial assets is measured using appropriate valuation techniques e.g. discounted cash flow analysis based on market information available at the balance sheet date.

Gains and losses on available-for-sale financial assets are recognized directly in other comprehensive income until the financial asset is disposed of or is determined to be impaired; when the asset is disposed of, the cumulative gains or losses, including those previously recognized in other comprehensive income, are reclassified to profit or loss for the period; when the asset is impaired, accumulated losses are recognized to profit or loss. Gains and losses arising from changes in the fair value of held-for-trading financial instruments are included in profit or loss for the period.

Loans and receivables which are not held by the Group for trading (loans and receivables originating in the course of business), held-to-maturity securities and all financial assets for which published price quotations in an active market are not available and whose fair value cannot be determined reliably, are measured, to the extent that they have a fixed term, at amortized cost, using the effective interest method. When the financial assets do not have a fixed term, they are measured at acquisition cost. Receivables with maturities of over one year which bear no interest or an interest rate significantly lower than market rates are discounted using market rates.

152


LOGO

 

Assessments are made regularly as to whether there is any objective evidence that a financial asset or group of assets may be impaired. If any such evidence exists, an impairment loss is included in profit or loss for the period.

Except for derivative instruments, financial liabilities are measured at amortized cost using the effective interest method.

Financial assets and liabilities hedged by derivative instruments are measured in accordance with hedge accounting principles applicable to fair value hedges: gains and losses arising from remeasurement at fair value, due to changes in the respective hedged risk, are recognized in profit or loss and are offset by the effective portion of the loss or gain arising from remeasurement at fair value of the hedging instrument.

Derivative financial instruments

Derivative financial instruments are used for hedging purposes, in order to reduce currency, interest rate and market price risks. In accordance with IAS 39, derivative financial instruments qualify for hedge accounting only when at the inception of the hedge there is formal designation and documentation of the hedging relationship, the hedge is expected to be highly effective, its effectiveness can be reliably measured and it is highly effective throughout the financial reporting periods for which it is designated.

All derivative financial instruments are measured in accordance with IAS 39 at fair value.

When derivative financial instruments qualify for hedge accounting, the following accounting treatment applies:

Fair value hedges - Where a derivative financial instrument is designated as a hedge of the exposure to changes in fair value of a recognized asset or liability that is attributable to a particular risk and could affect the income statement, the gain or loss from remeasuring the hedging instrument at fair value is recognized in profit or loss. The gain or loss on the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognized in profit or loss.

Cash flow hedges - Where a derivative financial instrument is designated as a hedge of the exposure to variability in future cash flows of a recognized asset or liability or a highly probable forecasted transaction and could affect the income statement, the effective portion of any gain or loss on the derivative financial instrument is recognized directly in other comprehensive income. The cumulative gain or loss is removed from other comprehensive income and recognized in profit or loss at the same time as the economic effect arising from the hedged item affects income. The gain or loss associated with a hedge or part of a hedge that has become ineffective is recognized in profit or loss immediately. When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss realized to the point of termination remains in other comprehensive income and is recognized in profit or loss at the same time as the underlying transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealized gain or loss held in other comprehensive income is recognized in profit or loss immediately.

If hedge accounting cannot be applied, the gains or losses from the fair value measurement of derivative financial instruments are recognized immediately in profit or loss.

Fiat Industrial Consolidated Financial Statements

153


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Transfers of financial assets

The Group derecognizes financial assets when, and only when, the contractual rights to the cash flows arising from the assets no longer hold or if the Group transfers the financial activities. When the Group transfers a financial asset: if the Group transfers substantially all the risks and rewards of ownership of the financial asset, it derecognizes the financial asset and recognizes separately as assets or liabilities any possible rights and obligations created or retained in the transfer; if the Group retains substantially all the risks and rewards of ownership of the financial asset, it continues to recognize the financial asset; if the Group neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, it determines whether it has retained control of the financial asset. In this case: if the Group has not maintained control, it derecognizes the financial asset and recognizes separately as assets and liabilities any possible rights and obligations created or retained in the transfer; if the Group has retained control, it continues to recognize the financial asset to the extent of its continuing involvement in the financial asset.

On derecognition of a financial asset, the difference between the carrying amount of the asset and the consideration received or receivable for the transfer of the asset is recognized in profit or loss.

Inventories

Inventories of raw materials, semi-finished products and finished goods, (including assets leased out under operating leases) are stated at the lower of cost and net realizable value, cost being determined on a first in-first-out (FIFO) basis. Cost includes the direct costs of materials, labor and indirect costs (variable and fixed). Provision is made for obsolete and slow-moving raw materials, finished goods, spare parts and other supplies based on their expected future use and realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs for sale and distribution.

The measurement of construction contracts is based on the stage of completion determined as the proportion that cost incurred to the balance sheet date bears to the estimated total contract cost. These items are presented net of progress billings received from customers. Any losses on such contracts are fully recorded in profit or loss when they become known.

Assets and liabilities held for sale

Non-current assets are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset is available for immediate sale in its present condition. When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amounts and fair value less costs to sell.

154


LOGO

 

Employee benefits

Pension plans

Employees of the Group participate in several defined benefit and/or defined contribution pension plans in accordance with local conditions and practices in the countries in which the Group operates.

The Group’s obligation to fund defined benefit pension plans and the annual cost recognized in profit or loss are determined on an actuarial basis using the projected unit credit method. The portion of net cumulative actuarial gains and losses which exceeds the greater of 10% of the present value of the defined benefit obligation and 10% of the fair value of plan assets at the end of the previous year is amortized over the average remaining service lives of the employees (the “corridor approach”). It should be noted that in the context of IFRS First-time Adoption the Fiat Group elected to recognize all cumulative actuarial gains and losses existing at January 1, 2004 even though it decided to use the corridor approach for subsequent actuarial gains and losses.

The post-employment benefit obligation recognized in the statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses, arising from the application of the corridor method and unrecognized past service cost, reduced by the fair value of plan assets. Any net asset resulting from this calculation is recognized at the lower of its amount and the total of any cumulative unrecognized net actuarial losses and past service cost, and the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

If changes are made to a plan that alter the benefits due for past service or if a new plan is introduced regarding past service then past service costs are recognized in profit or loss on a straight-line basis over the average period remaining until the benefits become vested. If a change is made to a plan that significantly reduces the number of employees who are members of the plan or that alters the conditions of the plan such that employees will no longer be entitled to the same benefits for a significant part of their future service, or if such benefits will be reduced, the profit or loss arising from such changes is immediately recognized in profit or loss.

All other costs and income arising from the measurement of pension plan provisions are allocated to costs by function in profit or loss, except for interest cost on unfunded defined benefit plans which is reported as part of Financial expenses.

Costs arising from defined contribution plans are recognized as an expense in profit or loss as incurred.

Post-employment plans other than pensions

The Group provides certain post-employment defined benefits, mainly health care plans. The method of accounting and the frequency of valuations are similar to those used for defined benefit pension plans.

The scheme underlying the Employee leaving entitlements in Italy of the Italian Group companies (the TFR) was classified as a defined benefit plan until December 31, 2006. The legislation regarding this scheme and leading to this classification was amended by Law no. 296 of December 27, 2006 (the “2007 Finance Law”) and subsequent decrees and regulations issued in the first part of 2007. In view of these changes, and with specific reference to those regarding companies with at least 50 employees, this scheme only continues to be classified as a defined benefit plan in the consolidated financial statements for those benefits accruing up to December 31, 2006 (and not yet settled by the balance sheet date), while after that date the scheme is classified as a defined contribution plan.

Fiat Industrial Consolidated Financial Statements

155


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Equity compensation plans

The Group provides additional benefits to certain members of senior management and employees through equity compensation plans (stock option plans and stock grants). In accordance with IFRS 2 - Share-based Payment, these plans represent a component of recipient remuneration. The compensation expense, corresponding to the fair value of the instruments at the grant date, is recognized in profit or loss on a straight-line basis over the period from the grant date to the vesting date, with the offsetting credit recognized directly in equity. Any subsequent changes to fair value do not have any effect on the initial measurement.

Provisions

The Group records provisions when it has an obligation, legal or constructive, to a third party, when it is probable that an outflow of Group resources will be required to satisfy the obligation and when a reliable estimate of the amount can be made.

Changes in estimates are reflected in profit or loss in the period in which the change occurs.

Treasury shares

Treasury shares are presented as a deduction from equity. The original cost of treasury shares and the proceeds of any subsequent sale are presented as movements in equity.

Revenue recognition

Revenue is recognized if it is probable that the economic benefits associated with a transaction will flow to the Group and the revenue can be measured reliably. Revenues are stated net of discounts, allowances and returns, as well as costs for sales incentive programs, determined on the basis of historical costs, country by country, and charged against profit for the period in which the corresponding sales are recognized. The Group’s sales incentive programs include the granting of retail financing at significant discount to market interest rates. The corresponding cost is recognized at the time of the initial sale.

Revenues from the sale of products are recognized when the risks and rewards of ownership of the goods are transferred to the customer, the sales price is agreed or determinable and receipt of payment can be assumed: this corresponds generally to the date when the vehicles are made available to non-group dealers, or the delivery date in the case of direct sales. New vehicle sales with a buy-back commitment are not recognized at the time of delivery but are accounted for as operating leases when it is probable that the vehicle will be bought back. More specifically, vehicles sold with a buy-back commitment from Iveco are accounted for as Property, plant and equipment because agreements usually have a long-term buy-back commitment. The difference between the carrying value (corresponding to the manufacturing cost) and the estimated resale value (net of refurbishing costs) at the end of the buy-back period is depreciated on a straight-line basis over the same period. The initial sale price received is recognized as an advance payment (liability). The difference between the initial sale price and the buy-back price is recognized as rental revenue on a straight-line basis over the term of the operating lease. Assets sold under a buy-back commitment that are initially recognized in Property, plant and equipment are reclassified to Inventories at the end of the agreement term if they are held for sale. The proceeds from the sale of such assets are recognized as Revenues.

156


LOGO

 

Revenues from construction contracts are recognized by reference to the stage of completion.

Revenues from the sale of extended warranties and maintenance contracts are recognized over the period during which the service is provided.

Revenues also include lease rentals and interest income from financial services companies.

Cost of sales

Cost of sales comprises the cost of manufacturing products and the acquisition cost of purchased merchandise which has been sold. It includes all directly attributable material and production costs and all production overheads. These include the depreciation of property, plant and equipment and the amortization of intangible assets relating to production and write-downs of inventories. Cost of sales also includes freight and insurance costs relating to deliveries to dealers and agency fees in the case of direct sales.

Cost of sales also includes provisions made to cover the estimated cost of product warranties at the time of sale to dealer networks or to the end customer.

Expenses which are directly attributable to the financial services businesses, including the interest expense related to the financing of financial services businesses as a whole and charges for risk provisions and write-downs, are reported in cost of sales.

Research and development costs

This item includes research costs, development costs not eligible for capitalization and the amortization of development costs recognized as assets in accordance with IAS 38 (see Notes 4 and 14).

Government grants

Government grants are recognized in the financial statements when there is reasonable assurance that the company concerned will comply with the conditions for receiving such grants and that the grants themselves will be received. Government grants are recognized as income over the periods necessary to match them with the related costs which they are intended to offset.

The benefit of a government loan at a below-market rate of interest is treated as a government grant. The benefit of the below-market rate of interest is measured as the difference between the initial carrying amount of the loan (fair value plus transaction costs) and the proceeds received, and is accounted for in accordance with the policies already used for the recognition of government grants.

Taxes

Income taxes include all taxes based upon the taxable profits of the Group. Taxes on income are recognized in profit or loss except to the extent that they relate to items directly charged or credited to other comprehensive income, in which case the related income tax effect is recognized in other comprehensive income. Provisions for income taxes that could arise on the distribution of a subsidiary’s undistributed profits are only made where there is a current intention to distribute such profits. Other taxes not based on income, such as property taxes and capital taxes, are included in operating expenses. Deferred taxes are provided using the full liability method. They are calculated on all temporary differences between the tax base of an asset or liability and the carrying amounts in the consolidated financial statements, except for those arising from non-tax-deductible goodwill and those related to investments in subsidiaries where it is possible to control the reversal of the differences and reversal will not take place in the foreseeable future. Deferred tax assets

Fiat Industrial Consolidated Financial Statements

157


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

relating to the carry-forward of unused tax losses and tax credits, as well as those arising from temporary differences, are recognized to the extent that it is probable that future profits will be available against which they can be utilized. Current and deferred income tax assets and liabilities are offset when the income taxes are levied by the same taxation authority and where there is a legally enforceable right of offset. Deferred tax assets and liabilities are measured at the substantively enacted tax rates in the respective jurisdictions in which the Group operates that are expected to apply to taxable income in the periods in which temporary differences reverse or expire.

Dividends

Dividends payable by the Group are reported as a movement in equity in the period in which they are approved by shareholders in their Annual General Meeting.

Earnings per share

Basic earnings per share are calculated by dividing the profit/(loss) attributable to owners of the parent entity by the weighted average number of shares outstanding during the year.

For diluted earnings per share the weighted average number of shares outstanding has not been modified because no dilutive instruments have been issued by Fiat Industrial S.p.A.

Use of estimates

The preparation of financial statements and related disclosures that conform to IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and associated assumptions are based on elements known at the date of preparation of the financial statements, on historical experience and on other factors that are considered to be relevant. Actual results could differ from those estimates.

In this respect the situation caused by the profound economic and financial crisis which began in 2008 has led to the need to make assumptions regarding future performance which are characterized by significant uncertainty; as a consequence, therefore, it cannot be excluded that results may arise during the next year which differ from estimates, and which therefore might require adjustments, even significant, to be made to the carrying amount of the items in question, which at the present moment can clearly neither be estimated nor predicted. The main items affected by these situations of uncertainty are the allowances for doubtful accounts receivable and inventories, non-current assets (tangible and intangible assets), the residual values of vehicles leased out under operating lease arrangements or sold with buy-back clauses, sales allowances, product warranties, pension and other post-retirement benefits, deferred tax assets and contingent liabilities.

Estimates and assumptions are reviewed periodically and the effects of any changes are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the critical judgments and the key assumptions concerning the future, that management has made in the process of applying the Group accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements or that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

158


LOGO

 

Allowance for doubtful accounts

The allowance for doubtful accounts reflects management’s estimate of losses inherent in the wholesale and retail credit portfolio. This allowance is based on the Group’s estimate of the losses to be incurred, which derives from past experience with similar receivables, current and historical past due amounts, dealer termination rates, write-offs and collections, the careful monitoring of portfolio credit quality and current and projected economic and market conditions. Should the present economic and financial situation persist or even worsen, this could lead to a further deterioration in the financial situation of the Group’s debtors compared to that already taken into consideration in calculating the allowances recognized in the financial statements.

Allowance for obsolete and slow-moving inventory

The allowance for obsolete and slow-moving inventory reflects management’s estimate of the loss in value expected by the Group, and has been determined on the basis of past experience and historical and expected future trends in the used vehicle market. A worsening of the economic and financial situation could cause a further deterioration in conditions in the used vehicle market compared to that already taken into consideration in calculating the allowances recognized in the financial statements.

Recoverability of non-current assets (including goodwill)

Non-current assets include property, plant and equipment, intangible assets (including goodwill), investments and other financial assets. Management reviews the carrying value of non-current assets held and used and that of assets to be disposed of when events and circumstances warrant such a review. Management performs this review using estimates of future cash flows from the use or disposal of the asset and a suitable discount rate in order to calculate present value. If the carrying amount of a non-current asset is considered impaired, the Group recognizes an impairment loss for the amount by which the carrying amount of the asset exceeds its estimated recoverable amount from use or disposal determined by reference to its most recent business forecasts.

In view of the present economic and financial situation, the Group has the following considerations in respect of its future prospects: In this context, when preparing figures for the consolidated financial statements for the year ended December 31, 2012 and more specifically when carrying out impairment testing of tangible and intangible assets, the various segments of the Group have taken into account their performance for 2013 as forecast in the budgets of the Fiat Industrial Group, with assumptions and results consistent with the statements made in the section Significant events subsequent to the year end and outlook. In addition, for subsequent years they have taken into account the internal forecasts and targets for the years 2014 - 2016. These forecasts did not indicate the need to recognize any significant impairment losses.

In addition, should the assumptions underlying the forecast deteriorate further the following is noted:

The Group’s tangible assets and intangible assets with a finite useful life (which essentially regard development costs) relate to models or products having a high technological content in line with the latest environmental laws and regulations, which consequently renders them competitive in the present economic situation, especially in the more mature economies in which particular attention is placed on the eco-sustainability of those types of products. As a result, therefore, despite the fact that the capital goods sector (in particular, commercial vehicles and construction equipment in certain specific geographical areas) is one of the markets most affected by the crisis in the immediate term, it is considered highly probable that the life cycle of these products can be lengthened to extend over the period of time involved in a slower economic recovery, in this way allowing the Group to achieve sufficient earnings flows to cover the investments, albeit over a longer timescale.

Fiat Industrial Consolidated Financial Statements

159


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Around 96% of capitalized goodwill relates to the CNH business amounting to €1,840 million at December 31, 2012. Detailed analyses using various methodologies were carried out to test its recoverability; the underlying considerations are described in Note 14.

Residual values of assets leased out under operating lease arrangements or sold with a buy-back commitment

The Group reports assets rented to customers or leased to them under operating leases as tangible assets. Furthermore, new vehicle sales with a buy-back commitment are not recognized as sales at the time of delivery but are accounted for as operating leases if it is probable that the vehicle will be bought back. The Group recognizes income from such operating leases on a straight-line basis over the term of the lease. Depreciation expense for assets subject to operating leases is recognized on a straight-line basis over the lease term in amounts necessary to reduce the cost of an asset to its estimated residual value at the end of the lease term. The estimated residual value of leased assets is calculated at the lease inception date on the basis of published industry information and historical experience. Realization of the residual values is dependent on the Group’s future ability to market the assets under the then-prevailing market conditions. The Group continually evaluates whether events and circumstances have occurred which impact the estimated residual values of the assets on operating leases. The used vehicle market was carefully monitored throughout 2012 to ensure that write-downs were properly determined. It cannot however be excluded that additional write-downs may be needed if market conditions should deteriorate even further.

Sales allowances

At the later time of sale or the time an incentive is announced to dealers, the Group recognizes the estimated impact of sales allowances in the form of dealer and customer incentives as a reduction of revenue. There may be numerous types of incentives available at any particular time. The determination of sales allowances requires management estimates based on different factors.

Product warranties

The Group makes provisions for estimated expenses related to product warranties at the time products are sold. Management establishes these estimates based on historical information on the nature, frequency and average cost of warranty claims. The Group seeks to improve vehicle quality and minimize warranty expenses arising from claims.

Pension and other post-retirement benefits

Group companies sponsor defined benefits plans in various countries, mainly in the United States, in the United Kingdom and in Germany.

Employee benefit liabilities and the related assets and the costs and net interest expense connected with them are measured on an actuarial basis which requires the use of estimates and assumptions to determine the net liability or net asset for the Group. The actuarial method takes into consideration parameters of a financial nature such as the discount rate, the expected rate of return on plan assets, the growth rate of salaries and the growth rate of health care costs and takes into consideration the likelihood of potential

160


LOGO

 

future events by using parameters of a demographic nature such as mortality rates and dismissal or retirement rates. In particular, the discount rates selected are based on yields or yield curves of high quality corporate bonds in the relevant market. The expected returns on plan assets are determined on the basis of expectations for long-term capital market returns, inflation, current bond yields and other variables, adjusted for any specific aspects of the asset investment strategy. Trends in health care costs are developed on the basis of historical experience, the near-term outlook for costs and likely long-term trends. Salary growth rates reflect the Group’s long-term actual expectation in the reference market and inflation trends. Changes in any of these assumptions may have an effect on future contributions to the plans.

The effects resulting from revising the estimates for the above parameters are not recognized in the statement of financial position and in profit or loss when they arise but are recognized using the “corridor method” adopted by the Group: a detailed explanation of the way in which the method for recognizing the actuarial gains and losses arising from the measurement of the liabilities and assets relating to employee benefits works may be found in the Employee benefits section above.

Significant future changes in the yields of corporate bonds, other actuarial assumptions referred to above and return on plan assets may significantly impact on the liability and the unrecognized actuarial gains and losses.

Realization of deferred tax assets

At December 31, 2012, the Group had deferred tax assets and theoretical tax benefits arising from tax loss carry forwards of €1,414 million, of which €498 million is not recognized in the financial statements. The corresponding totals at December 31, 2011 were €1,558 million and €502 million, respectively. Management has recorded these valuation allowances to reduce deferred tax assets to the amount that it believes it is probable will be recovered. In making these adjustments, management has taken into consideration figures from budgets and forecasts consistent with those used for impairment testing and discussed in the preceding paragraph relating to the recoverable amount of non-current assets. Moreover, the adjustments that have been recognized are considered to be sufficient to protect against the risk of a further deterioration of the assumptions in these forecasts, taking account of the fact that the net deferred assets accordingly recognized relate to temporary differences and tax losses which, to a significant extent, may be recovered over a very long period, and are therefore consistent with a situation in which the time needed to exit from the crisis and for an economic recovery to occur extends beyond the term implicit in the above-mentioned estimates.

Contingent liabilities

The Group is the subject of legal proceedings and tax issues covering a range of matters, which are pending in various jurisdictions. Due to the uncertainty inherent in such matters, it is difficult to predict the final outcome of such matters. The cases and claims against the Group often raise difficult and complex factual and legal issues, which are subject to many uncertainties, including but not limited to the facts and circumstances of each particular case and claim, the jurisdiction and the differences in applicable law. In the normal course of business management consults with legal counsel and certain other experts on matters related to litigation and taxes. The Group accrues a liability when it is determined that an adverse outcome is probable and the amount of the loss can be reasonably estimated. In the event an adverse outcome is possible or an estimate is not determinable, the matter is disclosed.

Fiat Industrial Consolidated Financial Statements

161


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Accounting standards, amendments and interpretations adopted from January 1, 2012

On October 7, 2010, the IASB issued amendments to IFRS 7 - Financial Instruments: Disclosures. The amendments allow users of financial statements to improve their understanding of transfers (“derecognition”) of financial assets, including an understanding of the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of a transfer transaction is undertaken at the end of a reporting period, and is applicable on a prospective basis. The Group adopted the amendments from January 1, 2012. The application of these amendments did not have any significant effect on the measurement of the related items in the financial statements and had limited effects on the disclosures presented in this Annual Report; in this regard, reference should be made to the above paragraph Transfers of financial assets and to Note 19 with reference to the transfer of receivables.

Accounting standards, amendments and interpretations effective from January 1, 2012 but not applicable to the Group

On December 20, 2010, the IASB issued amendments to IAS 12 - Income Taxes which clarify the accounting for deferred tax relating to investment properties measured at fair value. The amendments introduce the presumption that the carrying amount of deferred taxes relating to investment properties measured at fair value under IAS 40 will be recovered through sale. As a result of the amendments, SIC - 21 Income Taxes - Recovery of Revalued Non-Depreciable Assets no longer applies. The amendments should be applied retrospectively from January 1, 2012. The matters addressed by the amendments do not apply to the Group.

Accounting standards, amendments and interpretations not yet applicable and not early adopted by the Group

The accounting standards, amendments and interpretations described in the following have already been endorsed by the European Union at the date of this Annual Report.

On May 12, 2011, the IASB issued IFRS 10 - Consolidated Financial Statements replacing SIC - 12 - Consolidation-Special Purpose Entities and parts of IAS 27 - Consolidated and Separate Financial Statements (which has been renamed Separate Financial Statements and addresses the accounting treatment of investments in separate financial statements). The new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The standard is effective retrospectively from January 1, 2013. The European Union has completed its endorsement process, postponing the effective date to January 1, 2014 and permitting early application; the Group has elected to early adopt the standard from January 1, 2013. Application of this standard is not expected to have significant effects on the Group’s financial statements.

On May 12, 2011, the IASB issued IFRS 11 - Joint Arrangements superseding IAS 31 - Interests in Joint Ventures and SIC - 13 - Jointly Controlled Entities - Non-monetary Contributions by Venturers. The new standard provides the criteria for identifying joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form, and requires the use of a single method to account for interests in jointly controlled entities, the equity method. The standard is effective retrospectively from January 1, 2013. Following the issue of the new standard, IAS 28 - Investments in Associates has been amended to include accounting for investments in jointly controlled entities in its scope of application (from the effective date of the standard). The European Union has completed its endorsement process, postponing the effective date to January 1, 2014 and permitting early application; the Group has elected to early adopt the standard from January 1, 2013. Application of this standard is not expected to have significant effects on the Group’s financial statements.

162


LOGO

 

On May 12, 2011, the IASB issued IFRS 12 - Disclosure of Interests in Other Entities, a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates, special purpose vehicles and other unconsolidated vehicles. The standard is effective for annual periods beginning after January 1, 2013. The European Union has completed its endorsement process, postponing the effective date to January 1, 2014 and permitting early application; the Group has elected to early adopt the standard from January 1, 2013. Application of this standard is not expected to have significant effects on the Group’s financial statements.

On May 12, 2011, the IASB issued IFRS 13 - Fair Value Measurement, which clarifies the determination of fair value for the purpose of the financial statements and is applicable to all IFRSs permitting or requiring a fair value measurement or the presentation of disclosures based on fair value. The standard is effective prospectively from January 1, 2013. Application of this standard is not expected to have significant effects on the Group’s financial statements.

On June 16, 2011, the IASB issued an amendment to IAS 19 - Employee Benefits, applicable retrospectively from the year beginning January 1, 2013. The amendment modifies the requirements for recognizing defined benefit plans and termination benefits. The main changes concerning defined benefit plans regard the recognition of the entire plan deficit or surplus in the balance sheet, the introduction of net interest expense and the classification of net interest expense arising from defined benefit plans. In detail: Recognition of the plan deficit or surplus: the amendment removes the previous option of being able to defer actuarial gains and losses under the “corridor method”, requiring these to be recognized directly in other comprehensive income. In addition, the amendment requires the immediate recognition of past service costs in profit or loss.

Net interest expense: the concepts of interest expense and expected return on plan assets are replaced by the concept of net interest expense on the net plan deficit or surplus, which consists of: the interest expense calculated on the present value of the liability for defined benefit plans, the interest income arising from the valuation of the plan assets, and the interest expense or income arising from any limits to the recognition of the plan surplus.

Net interest expense is calculated for all components by using the discount rate applied for measuring the obligation for defined benefit plans at the beginning of the period. In accordance with the current version of IAS 19, the expected return on plan assets is calculated by using a long-term expected rate of return.

Classification of net interest expense: in accordance with the new definition of net interest expense set out in the standard, net interest expense on defined benefit plans will be recognized as Financial income/(expenses) in the income statement. Under the current version of IAS 19, the Group is recognizing all the income and expense arising from the measurement of defined benefit plans by functional area, except for the financial cost relating to unfunded defined benefit plans which is included in Financial income/(expenses).

In accordance with the transitional rules included in paragraph 173 of IAS 19, the Group will apply this amendment retrospectively from January 1, 2013, adjusting the balances of the balance sheet at December 31, 2011 and the income statement balances for 2012 as if the amendments to IAS 19 had always been applied. At the date of this report, the Group has calculated that the adoption of the standard will lead to a decrease in equity of €168 million and €324 million at December 31, 2011 and 2012, respectively, and a decrease of €18 million in net income for 2012.

Fiat Industrial Consolidated Financial Statements

163


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

On June 16, 2011, the IASB issued an amendment to IAS 1 - Presentation of Financial Statements requiring companies to group items presented in comprehensive income on the basis of whether they are potentially reclassifiable to profit or loss subsequently. The amendment is applicable for periods beginning on or after July 1, 2012; the Group will apply this amendment from January 1, 2013. Applying this amendment will have no effect on the measurement of items in the financial statements.

On December 16, 2011, the IASB issued certain amendments to IAS 32 - Financial Instruments: Presentation to clarify the application of certain offsetting criteria for financial assets and financial liabilities in IAS 32. The amendments are effective for annual periods beginning on or after January 1, 2014 and are required to be applied retrospectively.

On December 16, 2011, the IASB issued certain amendments to IFRS 7 - Financial Instruments: Disclosures. The amendments require information about the effect or potential effect of netting arrangements for financial assets and liabilities on an entity’s financial position. Entities are required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The required disclosures should be provided retrospectively. Applying these amendments will have no effect on the measurement of items in the Group’s financial statements.

The European Union had not yet completed its endorsement process for the following standards and amendments at the date of this Annual Report: On November 12, 2009, the IASB issued a new standard IFRS 9 - Financial Instruments that was subsequently amended. The standard, having an effective date for mandatory adoption of January 1, 2015 retrospectively, represents the completion of the first part of a project to replace IAS 39 and introduces new requirements for the classification and measurement of financial assets and financial liabilities. The new standard uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial assets. The most significant effect of the standard regarding the classification and measurement of financial liabilities relates to the accounting for changes in fair value attributable to changes in the credit risk of financial liabilities designated as at fair value through profit or loss. Under the new standard these changes are recognized in other comprehensive income and are not subsequently reclassified to profit or loss.

On May 17, 2012, the IASB issued a set of amendments to IFRSs (“Annual Improvements to IFRSs 2009-2011 Cycle”) that are applicable retrospectively from January 1, 2013; set out below are those that will lead to changes in the presentation, recognition or measurement of financial statement items, excluding those that only regard changes in terminology or editorial changes having a limited accounting effect and those that affect standards or interpretations that are not applicable to the Group:

164


LOGO

 

IAS 1 - Presentation of Financial Statements: the amendment clarifies the way in which comparative information should be presented when an entity changes accounting policies and when an entity provides comparative information in addition to the minimum comparative financial statements; IAS 16 - Property, Plant and Equipment: the amendment clarifies that items such as spare parts, stand-by equipment and servicing equipment shall be recognized in accordance with IAS 16 when they meet the definition of property, plant and equipment, otherwise such items shall be classified as inventory; IAS 32 - Financial instruments: Presentation: the amendment eliminates an inconsistency between IAS 12 - Income Taxes and IAS 32 concerning the recognition of taxation arising from distributions to shareholders, establishing that this shall be recognized in profit or loss to the extent the distribution refers to income generated by transactions originally recognized in profit or loss; IAS 34 - Interim Financial Reporting: the amendment clarifies that the disclosures for total assets and total liabilities for a particular reportable segment shall be provided if and only if: a) a measure of total assets and liabilities, or both, is regularly provided to the chief operating decision maker, and b) there has been a material change from the amount disclosed in the last annual financial statements for that reportable segment.

Fiat Industrial Consolidated Financial Statements

165


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

RISK MANAGEMENT

Credit risk

The Group’s credit concentration risk differs in relation to the activities carried out by the individual segments and various sales markets in which the Group operates; in all cases, however, the risk is mitigated by the large number of counterparties and customers. Considered from a global point of view, however, there is a concentration of credit risk in trade receivables and receivables from financing activities, in particular dealer financing and finance leases in the European Union market for Iveco, and in North America for CNH, as well as in Latin America for the main segments.

Financial assets are recognized in the statement of financial position net of write-downs for the risk that counterparties may be unable to fulfill their contractual obligations, determined on the basis of the available information as to the creditworthiness of the customer and historical data.

Liquidity risk

The Group is exposed to funding risk if there is difficulty in obtaining finance for operations at any given point in time.

The cash flows, funding requirements and liquidity of Group companies are monitored on a centralized basis, under the control of the Group Treasury. The aim of this centralized system is to optimize the efficiency and effectiveness of the management of the Group’s capital resources.

Additionally, as part of its activities the Group regularly carries out funding operations on the various financial markets which may take on different technical forms and which are aimed at ensuring that it has an adequate level of current and future liquidity.

The continuation of a difficult economic situation in the markets in which the Group operates and the uncertainties that characterize the financial markets necessitate giving special attention to the management of liquidity risk. In that sense measures taken to generate financial resources through operations and to maintain an adequate level of available liquidity are an important factor in ensuring normal operating conditions and addressing strategic challenges over the next few years. The Group therefore plans to meet its requirements to settle liabilities as they fall due and to cover expected capital expenditures by using cash flows from operations and available liquidity, renewing or refinancing bank loans and making recourse to the bond market and other forms of funding.

Interest rate risk and currency risk

As a multinational group that has operations throughout the world, the Group is exposed to market risks from fluctuations in foreign currency exchange and interest rates.

The exposure to foreign currency risk arises both in connection with the geographical distribution of the Group’s industrial activities compared to the markets in which it sells its products, and in relation to the use of external borrowing denominated in foreign currencies.

The exposure to interest rate risk arises from the need to fund industrial and financial operating activities and the necessity to deploy surplus funds. Changes in market interest rates may have the effect of either increasing or decreasing the Group’s net profit/(loss), thereby indirectly affecting the costs and returns of financing and investing transactions.

The Group regularly assesses its exposure to interest rate and foreign currency risk and manages those risks through the use of derivative financial instruments in accordance with its established risk management policies.

166


LOGO

 

The Group’s policy permits derivatives to be used only for managing the exposure to fluctuations in exchange and interest rates connected with future cash flows and assets and liabilities, and not for speculative purposes.

The Group utilizes derivative financial instruments designated as fair value hedges, mainly to hedge: the currency risk on financial instruments denominated in foreign currency; the interest rate risk on fixed rate loans and borrowings.

The instruments used for these hedges are mainly currency swaps, forward contracts, interest rate swaps and combined interest rate and currency financial instruments.

The Group uses derivative financial instruments as cash flow hedges for the purpose of pre-determining: the exchange rate at which forecasted transactions denominated in foreign currencies will be accounted for; the interest paid on borrowings, both to match the fixed interest received on loans (customer financing activity), and to achieve a pre-defined mix of floating versus fixed rate funding structured loans.

The exchange rate exposure on forecasted commercial flows is hedged by currency swaps, forward contracts and currency options. Interest rate exposures are usually hedged by interest rate swaps and, in limited cases, by forward rate agreements.

Counterparties to these agreements are major and diverse financial institutions.

Information on the fair value of derivative financial instruments held at the balance sheet date is provided in Note 21. Additional qualitative information on the financial risks to which the Group is exposed is provided in Note 33.

SCOPE OF CONSOLIDATION

The consolidated financial statements of the Group as of December 31, 2012 include Fiat Industrial S.p.A. and 204 consolidated subsidiaries in which Fiat Industrial S.p.A., directly or indirectly, has a majority of the voting rights, over which it exercises control, or from which it is able to derive benefit by virtue of its power to govern corporate financial and operating policies. A total of 193 subsidiaries were consolidated at December 31, 2011.

Excluded from consolidation are 23 subsidiaries that are either dormant or generate a negligible volume of business: their proportion of the Group’s assets, liabilities, financial position and earnings is immaterial. In particular, 18 of such subsidiaries are accounted for using the cost method, and represent in aggregate less than 0.01 percent of Group revenues, equity and total assets.

There have been no significant changes in the scope of consolidation during 2012. The following changes occurred:

The Group has consolidated the income statement of its investment in Iveco Finance Holdings Limited (“IFHL”), renamed Iveco Capital Limited during 2012, on a line-by-line basis since January 1, 2012, while the balance sheet was first consolidated on a line-by-line-basis at December 31, 2011. Additional information on the accounting treatment of this transaction is included in the paragraph Business combinations below.

The Group has consolidated its interest in Iveco Provence group (formerly known as the Patascia group) on a line-by-line basis since January 1, 2012; Iveco acquired a 100% interest in this dealer in the second quarter of 2011, but it was not consolidated on a line-byline basis in the Fiat Industrial Group financial statements at December 31, 2011 due to a lack of certain of the information required to prepare the notes in a consistent manner. The total assets and net revenues of Iveco Provence group were considered not significant compared to those of the Group and the interest in this group was accounted for using the equity method at that date.

Fiat Industrial Consolidated Financial Statements

167


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

For completeness of information, it is recalled that in December 2012 CNH sold its 20% interest in Kobelco Construction Machinery Co., Ltd., an associate previously accounted for using the equity method.

Interests in jointly controlled entities (16 companies at December 31, 2012 and 2011) are accounted for using the equity method. Condensed financial information relating to the Group’s pro-rata interest in these entities is as follows:

(€ million) At December 31, 2012 At December 31, 2011

Non-current assets 282 262

Current assets 913 931

Total Assets 1,195 1,193

Debt 232 194

Other liabilities 548 573

The combined amounts of the Group’s share in the principal income statement items of jointly controlled entities accounted for using the equity method are as follows:

(€ million) 2012 2011

Net revenues 1,517 1,421

Trading profit/(loss) 80 77

Operating profit/(loss) 81 78

Profit/(loss) before taxes 75 90

Profit/(loss) 61 71

At December 31, 2012, 6 associates are accounted for using the equity method (8 associates at December 31, 2011), while 3 associates, that in aggregate are of minor importance, are accounted for using the cost method (3 associates at December 31, 2011). The main aggregate amounts related to the Group interests in associates are as follows:

(€ million) At December 31, 2012 At December 31, 2011

Total assets 804 1,239

Total liabilities 714 1,049

(€ million) 2012 2011

Net revenues 589 586

Profit/(loss) 11 18

168


LOGO

 

The main aggregate amounts related to the Group’s interests in associates accounted for using the cost method are as follows:

(€ million) At December 31, 2012 At December 31, 2011

Total assets 91 101

Liabilities 88 87

(€ million) 2012 2011

Net revenues 20 49

Profit/(loss) (6) (6)

BUSINESS COMBINATIONS

No business combinations took place in 2012.

Acquisition of Iveco Capital Limited

During the fourth quarter of 2011, the Group established the means for carrying out a mutual dissolution of the joint venture with Barclays, IFHL, renamed Iveco Capital Limited during 2012, which managed the financial services activities (end customers and dealers) of Iveco in Italy, Germany, France, the UK and Switzerland. In accordance with that agreement, Iveco has had to arrange for financing the new portfolio of Iveco Capital Limited since January 1, 2012, and in May 2012 purchased the remaining 51% of Iveco Capital Limited from Barclays at a price of €119 million, thereby acquiring 100% ownership.

Financial services provided to end customers are now managed in the following manner: secured funding with Barclays of the outstanding portfolio at December 31, 2011; vendor program agreements with BNP-Paribas in Germany and in France for the new portfolio originating on or after January 1, 2012; an agreement in Italy with Intesa Sanpaolo for financing the new portfolio; direct financing of the portfolio in Switzerland and in the UK. The funding of dealer financing activities is ensured through a three-years pan-European securitization program with Barclays.

In terms of the accounting treatment of this operation, it is recalled that, in consideration of the agreements entered into with Barclays at the end of December 2011, the Group accounted for its investment in Iveco Capital Limited at December 31, 2011 by consolidating the company’s balance sheet on a line-by-line basis at that date. The operation was treated as a business combination achieved in stages in accordance with IFRS 3 - Business Combinations.

As permitted by this standard, the identifiable assets acquired and the identifiable liabilities assumed were provisionally recognized at their carrying amounts in the consolidated financial statements of Iveco Capital Limited at December 31, 2011 while waiting for the calculation of the fair value of certain items at the Acquisition date (identified as December 31, 2011) to be completed. This measurement process was completed during the third quarter of 2012 and led to the conclusion that the provisional values represent their fair value at the Acquisition date, except for an insignificant change in debt (€1 million) with a corresponding change in goodwill. The identifiable assets acquired and liabilities assumed were therefore recognized at their Acquisition date fair value, except for deferred taxes and certain obligations associated with employee benefits which were recognized in accordance with the applicable standard, as required by IFRS 3:

Fiat Industrial Consolidated Financial Statements

169


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

(€ million) At the Acquisition date

Intangible assets 3

Property, plant and equipment -

Investments and other financial assets -

Leased assets 5

Defined benefit plan assets -

Deferred tax assets 48

Total non-current assets 56

Inventories 17

Trade receivables 76

Receivables from financing activities 2,613

Current tax receivables 1

Other current assets 22

Current financial assets -

Cash and cash equivalents 30

Total current assets 2,759

Assets held for sale -

Total assets acquired (a) 2,815

Provisions 8

Debt 2,433

Other financial liabilities -

Trade payables 106

Current tax payables -

Deferred tax liabilities 23

Other current liabilities 21

Liabilities held for sale -

Total liabilities assumed (b) 2,591

Net assets acquired/(net liabilities assumed) (a) - (b) 224

Goodwill arising from the acquisition, amounting to €10 million, was determined at the end of the measurement period as follows:

(€ million) At the Acquisition date

Consideration due for the purchase of the remaining interest of 51% 119

Fair value of the previously-held interest (49%) 115

Amount assigned to non-controlling interests -

Less: Net assets acquired (224)

Goodwill 10

The recognition of goodwill is based on the favorable earnings prospects of the business forming part of the transaction, also given the fact that in this way Iveco will now be able to fully benefit from the financial services activity in Western Europe, of which it previously enjoyed only 49% since the joint venture held the exclusive management rights to this activity.

The 49% interest previously held in Iveco Capital Limited as an associate was recognized at the Acquisition date fair value and the income of €1 million resulting from measuring it in this way was included in Gains/(losses) on the disposal of investments in 2011. Costs connected with the acquisition, amounting to approximately €1 million, were excluded from the consideration and recognized as a 2011 expense in Gains/(losses) on the disposal of investments.

170


LOGO

 

Consideration for this business combination is set out below, together with the resulting cash flows:

(€ million) At the Acquisition date

Consideration paid 119

Deferred consideration -

Total Consideration 119

Cash and cash equivalents paid 119

Cash and cash equivalents received (30)

Total cash flows paid/(received) 89

At the Acquisition date Iveco Capital Limited’s identifiable assets acquired and liabilities assumed included trade receivables of €76 million and receivables from financing activities of €2,613 million. The gross amount due in respect of receivables from financing activities was €2,703 million, of which €90 million considered of doubtful recovery.

Only the balance sheet of the acquired business was consolidated on a line-by-line basis at December 31, 2011; if the acquisition had taken place with effect from January 1, 2011, the Group’s net revenues for that year would have increased by €154 million, while the net profit for that year would have decreased by €6 million.

Fiat Industrial Consolidated Financial Statements

171


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

COMPOSITION AND PRINCIPAL CHANGES

1. Net revenues

Net revenues may be analyzed as follows:

(€ million) 2012 2011

Sales of goods 24,053 22,732

Interest income from customers and other financial income of financial services companies 789 680

Rendering of services 604 530

Rents on assets sold with a buy-back commitment 165 188

Rents on operating leases 154 146

Other 20 13

Total Net revenues 25,785 24,289

2. Cost of sales

Cost of sales comprises the following:

(€ million) 2012 2011

Interest cost and other financial expenses from financial services companies 672 729

Other costs of sales 20,253 19,309

Total Cost of sales 20,925 20,038

3. Selling, general and administrative costs

Selling costs amount to €1,002 million in 2012 (€947 million in 2011) and mainly comprise marketing, advertising and sales personnel costs.

General and administrative costs amount to €1,181 million in 2012 (€1,055 million in 2011) and mainly comprise expenses which are not attributable to sales, production and research and development functions.

4. Research and development costs

In 2012, Research and development costs of €560 million (€505 million in 2011) comprise all the research and development costs not recognized as assets in the year, amounting to €362 million (€342 million in 2011), and the amortization of capitalized development costs of €198 million (€163 million in 2011). During 2012, the Group incurred new expenditure for capitalized development costs of €533 million (€400 million in 2011).

5. Other income/(expenses)

This item consists of miscellaneous operating costs which cannot be allocated to specific functional areas, such as indirect taxes and duties, and accruals for various provisions not attributable to other items of Cost of sales or Selling, general and administrative costs, net of income arising from trading operations which is not attributable to the sale of goods and services.

172


LOGO

 

6. Gains/(losses) on the disposal of investments

Net losses on the disposal of investments amount to €38 million in 2012, mainly due to the sale of the 20% interest in Kobelco Construction Machinery Co., Ltd. The gain of €26 million in 2011 included, for an amount of €25 million, the accounting effects arising from the increase to 100% of the Group’s interest in the joint venture L&T - Case Equipment Private Limited.

7. Restructuring costs

This item amounts to €166 million in 2012, mainly relating to Iveco. Restructuring costs in 2011 amounted to €95 million, again mainly relating to Iveco.

8. Other unusual income/(expenses)

In 2012 Other unusual expenses amounts to €13 million, mainly related to costs for the rationalization of strategic suppliers. In 2011 this item amounted to an income of €12 million, mainly arising from the release to income of a provision for risks that was no longer required, in connection with a minor investee.

9. Financial income/(expenses)

In addition to the items included in the specific lines of the income statement, Net financial income/(expenses) in 2012 also includes the Interest income from customers and other financial income of financial services companies included in Net revenues for €789 million (€680 million in 2011) and Interest expense and other financial charges from financial services companies included in Cost of sales for €672 million (€729 million in 2011).

A reconciliation to the income statement is provided under the following table.

(€ million) 2012 2011

Financial income:

Interest earned and other financial income 45 76

Interest income from customers and other financial income of financial services companies 789 680

Total financial income 834 756

of which:

Financial income, excluding financial services companies (a) 45 76

Interest and other financial expenses:

Interest expense and other financial expenses 927 992

Write-downs of financial assets 169 302

Interest costs on employee benefits 67 68

Total interest and other financial expenses 1,163 1,362

Net (income)/expenses from derivative financial instruments and exchange losses 12 (11)

Total interest and other financial expenses, net (income)/expenses from derivative financial instruments and exchange losses 1,175 1,351

of which:

Interest and other financial expenses, effects resulting from derivative financial instruments and exchange differences, excluding financial services companies (b) 503 622

Net financial income/(expenses) excluding financial services companies (a) - (b) (458) (546)

Fiat Industrial Consolidated Financial Statements

173


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Interest earned and other financial income may be analyzed as follows:

(€ million) 2012 2011

Interest income from banks 12 19

Other interest income and financial income 33 57

Total Interest income and other financial income 45 76

Interest cost and other financial expenses may be analyzed as follows:

(€ million) 2012 2011

Interest expenses on bonds 322 309

Bank interest expenses 200 171

Interest expenses on trade payables 2 5

Commission expenses 9 6

Other interest cost and financial expenses 394 501

Total Interest cost and other financial expenses 927 992

Other interest cost and other financial expenses include, amongst other things, interest cost on asset-backed financing. In 2011 this item also included a non-recurring charge of €72 million determined after the Demerger on the basis of market values and relating to the early repayment of the outstanding medium-term financial payables due to the Fiat Group at December 31, 2010.

10. Result from investments

In 2012 the net gain of €81 million (a net gain of €86 million in 2011) includes the Group’s share of €86 million (€97 million in 2011) in the net profit or loss of investees accounted for using the equity method, and a net loss of €5 million (a net loss of €11 million in 2011) consisting of impairment losses and reversals of impairment losses, accruals to the investment provision and dividend income. In detail the item mainly includes (amounts in € million): entities of CNH 82 (85 in 2011) and entities of Iveco -2 (2 in 2011).

11. Income taxes

Income taxes consist of the following:

(€ million) 2012 2011

Current taxes:

IRAP 25 34

Other taxes 425 322

Total Current taxes 450 356

Deferred taxes for the period:

IRAP 3 (5)

Other taxes 110 118

Total Deferred taxes 113 113

Taxes relating to prior periods 1 (1)

Total Income taxes 564 468

174


LOGO

 

Overall, the increase in the charge for current taxes in 2012 with respect to 2011 is mainly due to an increase in the taxable profits of non-Italian companies. Taxes relating to prior periods include the costs arising from certain disputes with tax authorities net of adjustments to tax contingency reserves.

The effective tax rate for 2012 (excluding current and deferred IRAP) was 36% (effective tax rate of 37.5% in 2011).

A reconciliation between the tax charges recorded in the consolidated financial statements and the statutory tax charge, calculated on the basis of the statutory tax rate in effect in Italy, is as follows:

(€ million)

2012 2011

Statutory income taxes 408 321

Tax effect of permanent differences (74) (46)

Taxes relating to prior years 1 (1)

Difference between foreign tax rates and the statutory Italian tax rate 66 84

Deferred taxes relating to prior years (14) (32)

Deferred tax assets not recognized 156 84

Use of tax losses for which no deferred tax assets were previously recognized - (1)

Other differences (7) 30

Current and deferred income tax recognized in the financial statements, excluding IRAP 536 439

IRAP (current and deferred) 28 29

Current and deferred income tax recognized in the financial statements 564 468

Since the IRAP tax has a taxable basis that is different from income before taxes, it generates distortions between one year and another. Accordingly, in order to render the reconciliation between recognized income taxes and statutory income taxes more meaningful, IRAP tax is not taken into consideration; statutory income taxes are determined by applying only the tax rate in effect in Italy (IRES equal to 27.5% in 2012 and in 2011) to Profit/(loss) before taxes.

Permanent differences in the above reconciliations include the tax effect of non-taxable income of €152 million in 2012 (€83 million in 2011) and of non-deductible costs of €78 million in 2012 (€37 million in 2011).

Deferred tax assets had an overall negative effect of €142 million on the reconciliation in 2012 as the result of the non-recognition of deferred tax assets on temporary differences and tax losses arising during the year of €156 million, partially offset by the recognition of previously unrecognized deferred tax assets of €14 million.

Other differences included unrecoverable withholding tax for €26 million in 2012 (€27 million in 2011).

Net deferred tax assets at December 31, 2012 consist of deferred tax assets, net of deferred tax liabilities, which have been offset where possible by the individual consolidated companies. The net balance of Deferred tax assets and Deferred tax liabilities may be analyzed as follows:

(€ million)

At December 31, 2012 At December 31, 2011

Deferred tax assets 1,086 1,167

Deferred tax liabilities (170) (111)

Total 916 1,056

The decrease in net deferred tax assets, as analyzed in the following table, is mainly due to the following:

for €113 million to the effect recognized in profit or loss of the utilization, net of valuation allowances, of deferred tax assets/liabilities recognized on temporary differences and tax losses arising during the year;

for €4 million relating to the negative tax effect of items recognized directly in equity; and

for €31 million to the effect of foreign exchange differences (exchange losses of €28 million) and other changes (decreases €3 million).

Fiat Industrial Consolidated Financial Statements

175


LOGO

 

CONSOLIDATED

FINANCIAL STATEMENTS

AT DECEMBER 31, 2012

NOTES

Deferred tax assets, net of Deferred tax liabilities may be analyzed by source as follows:

(€ million)

At

December 31,

2011

Recognized

in profit or loss

Recognized

in equity

Translation

differences

and other

changes

At

December 31,

2012

Deferred tax assets arising from:

Taxed provisions 658 65 - (17) 706

Inventories 111 28 - (2) 137

Taxed allowances for doubtful accounts 145 22 - (7) 160

Provision for employee benefits 346 (36) - (3) 307

Intangible assets 223 (23) - - 200

Write-downs of financial assets 13 (1) - - 12

Measurement of derivative financial instruments 36 (15) (5) 1 17

Other 248 (8) - (45) 195

Total Deferred tax assets 1,780 32 (5) (73) 1,734

Deferred tax liabilities arising from:

Accelerated depreciation (308) (21) - 8 (321)

Deferred tax on gains on disposal - - - - -

Inventory (79) (2) - 2 (79)

Provision for employee benefits (21) 1 - - (20)

Capitalization of development costs (238) (72) - 5 (305)

Other (212) (29) 9 10 (222)

Total Deferred tax liabilities (858) (123) 9 25 (947)

Theoretical tax benefit arising from tax loss carryforwards 636 (15) - 6 627

Adjustments for assets whose recoverability is not probable (502) (7) - 11 (498)

Total Deferred tax assets, net of Deferred tax liabilities 1,056 (113) 4 (31) 916

The decision to recognize Deferred tax assets is taken for each company in the Group by assessing critically whether the conditions exist for the future recoverability of such assets on the basis of updated strategic plans, accompanied by the related tax plans. For this reason, the total theoretical future tax benefits arising from deductible temporary differences (€1,734 million at December 31, 2012 and €1,780 million at December 31, 2011) and tax loss carryforwards (€627 million at December 31, 2012 and €636 million at December 31, 2011) have been reduced by €498 million at December 31, 2012 and by €502 million at December 31, 2011.

In particular, Deferred tax assets, net of Deferred tax liabilities, include €215 million at December 31, 2012 (€268 million at December 31, 2011) of tax benefits arising from tax loss carryforwards. at December 31, 2012, a further tax benefit of €411 million (€368 million at December 31, 2011) arising from tax loss carryforwards has not been recognized.

176


LOGO

 

Deferred taxes have not been provided on the undistributed earnings of subsidiaries since the Group is able to control the timing of the distribution of these reserves and it is probable that they will not be distributed in the foreseeable future.

The totals of deductible and taxable temporary differences and accumulated tax losses at December 31, 2012, together with the amounts for which deferred tax assets have not been recognized, analyzed by year of expiry, are as follows:

Year of expiry

(€ million)

Total

at December 31,

2012 2013 2014 2015 2016

Beyond

2016

Unlimited/indeterminable

Temporary differences and tax losses relating to State taxation (IRES in the case of Italy):

Deductible temporary differences 5,303 2,582 507 483 487 1,209 35

Taxable temporary differences (2,759) 214 (680) (684) (662) (881) (66)

Tax losses 2,124 71 43 17 48 573 1,372

Temporary differences and tax losses for which deferred tax assets have not been recognized (2,199) (290) (76) (57) (74) (272) (1,430)

Temporary differences and tax losses relating to State taxation 2,469 2,577 (206) (241) (201) 629 (89)

Temporary differences and tax losses relating to local taxation (IRAP in the case of Italy):

Deductible temporary differences 1,270 394 198 173 141 350 14

Taxable temporary differences (254) (30) (25) (25) (25) (149) -

Tax losses 351 - - 1 1 90 259

Temporary differences and tax losses for which deferred tax assets have not been recognized (48) (20) (9) (9) (5) 50 (55)

Temporary differences and tax losses relating to local taxation 1,319 344 164 140 112 341 218

12. Other information by nature

The income statement includes personnel costs for €3,464 million in 2012 (€3,296 million in 2011). An analysis of the average number of employees by category is as follows:

2012 2011

Managers 899 844

White-collar 23,083 21,177

Blue-collar 43,475 42,411

Average number of employees 67,457 64,432

13. Earnings/(loss) per share

On May 21, 2012, following the resolution adopted by shareholders in an extraordinary general meeting held on April 5, 2012, the procedure commenced for the mandatory conversion of all the 103,292,310 preference shares and 79,912,800 savings shares of Fiat Industrial S.p.A. into 130,241,397 of the Company’s ordinary shares having the same features as the outstanding ordinary shares, with enjoyment rights from January 1, 2012, using a ratio of 0.700 for the preference shares and 0.725 for the savings shares. Since that date, therefore, only the ordinary shares of Fiat Industrial S.p.A. are traded on the Borsa Italiana Electronic Stock Exchange and the Company’s fully-paid share capital of €1,919,433,144.74 consists of 1,222,568,882 shares each of par value €1.57. For further information about conversion, reference should be made to the paragraph Share capital in Note 24.

Fiat Industrial Consolidated Financial Statements

177


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31, 2012

NOTES

To calculate basic earnings per share for 2012, the profit/(loss) attributable to the owners of the parent was divided by the weighted average number of shares outstanding during the year taking into account the number of ordinary shares existing after the conversion.

Basic earnings per share has been calculated for 2011 by considering the number of ordinary, preferred and savings shares of Fiat Industrial S.p.A. outstanding at December 31, 2011; the portion of the result attributable to each class of share has been calculated on the basis of the respective rights to receive dividend. For the purpose of the calculation of earnings per share, however, the amount of the dividends contractually due to each class of share on the theoretical total distribution of profit has been subtracted from the Profit/(loss) attributable to the owners of the parent. The amount obtained in this way has then been divided by the number of outstanding shares.

The following table sets out the profit/(loss) attributable to the owners of the parent, the profit/(loss) attributable to each class of shares and the weighted average number of outstanding shares used to calculate basic earnings per share for 2012 and 2011:

Profit/(loss) for the period attributable to owners of the parent

Preferred dividends declared for the period

Profit/(loss) equally attributable to all classes of shares

Profit/(loss) attributable to each class of shares

Weighted average number of shares outstanding

Basic Earnings/(loss) per share

€ million

€ million

€ million

€ million

thousand

2012

Ordinary shares

810

810

810

1,222,560

0.663

Ordinary shares

-

531

531

1,092,327

0.487

Preference shares

10

41

51

103,292

0.487

Savings shares

7

35

42

79,913

0.533

2011 Total

624

17

607

624

1,275,532

Since the Group has no equity instruments having dilutive effects, the figures used to calculate diluted earnings per share are the same as those used to calculate basic earnings per share.

For completeness of information, basic and diluted earnings per share 2011 was also redetermined assuming the conversion of all preference and savings shares into Fiat Industrial S.p.A. ordinary shares as if it had occurred at the beginning of the same year. The post-conversion basic and diluted earnings per share for the year would have been €0.511.

14. Intangible assets

In 2012 and in 2011 changes in the gross carrying amount of Intangible assets were as follows:

(€ million)

Goodwill

Trademarks and other intangible assets with indefinite useful lives

Development costs externally acquired

Development costs internally generated

Total Development costs

Patents, concessions and licenses externally acquired

Other intangible assets externally acquired

Advances and intangible assets in progress externally acquired

Total gross carrying amount of Intangible assets

At December 31, 2011

2,464

226

650

2,367

3,017

689

476

8

6,880

Additions

-

-

99

434

533

33

36

9

611

Divestitures

-

-

-

(15)

(15)

-

(6)

-

(21)

Translation differences and other changes

(40)

(5)

(5)

(56)

(61)

(10)

(9)

(5)

(130)

At December 31, 2012

2,424

221

744

2,730

3,474

712

497

12

7,340

178


LOGO

 

(€ million)

At December 31,

2010

Additions

Divestitures

Translation differences and

other changes

At December 31, 2011

Goodwill 2,359 - - 105 2,464

Trademarks and other intangible assets with indefinite useful lives 219 - - 7 226

Development costs externally acquired 582 68 - - 650

Development costs internally generated 2,026 332(4) 13 2,367

Total Development costs 2,608 400 (4) 13 3,017

Patents, concessions and licenses externally acquired 638 20 - 31 689

Other intangible assets externally acquired 423 30 (1) 24 476

Advances and intangible assets in progress externally acquired 7 7 - (6) 8

Total gross carrying amount of Intangible assets 6,254 457 (5) 174 6,880

In 2012 and in 2011 changes in accumulated amortization and impairment losses were as follows:

(€ million)

At December 31,

2011

Amortization

Impairment losses

Divestitures

Translation

differences and other changes

At December 31,

2012

Goodwill 527 - - - (10) 517

Trademarks and other intangible assets with indefinite useful lives 46 - - - (1) 45

Development costs externally acquired 332 66 - - (5) 393

Development costs internally generated 1,207 132 - (7) (40) 1,292

Total Development costs 1,539 198 - (7) (45) 1,685

Patents, concessions and licenses externally acquired 519 45 - - (12) 552

Other intangible assets externally acquired 340 36 - (2) (7) 367

Advances and intangible assets in progress externally acquired - - - - - -

Total accumulated amortization and impairment of Intangible assets 2,971 279 - (9) (75) 3,166

(€ million)

At December 31,

2010 Amortization

Impairment losses

Divestitures

Translation

differences and

other changes

At December 31,

2011

Goodwill 511 - - - 16 527

Trademarks and other intangible assets with indefinite useful lives 45 - - - 1 46

Development costs externally acquired 309 23 - - - 332

Development costs internally generated 1,064 140 - (2) 5 1,207

Total Development costs 1,373 163 - (2) 5 1,539

Patents, concessions and licenses externally acquired 459 46 - - 14 519

Other intangible assets externally acquired 299 37 - - 4 340

Advances and intangible assets in progress externally acquired - - - - - -

Total accumulated amortization and impairment of Intangible assets 2,687 246 - (2) 40 2,971

Fiat Industrial Consolidated Financial Statements

179


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

In 2012 and in 2011 changes in the net carrying amount of Intangible assets were as follows:

(€ million)

At

December 31,

2011

Additions

Amortization

Impairment losses

Divestitures

Translation differences and

other changes

At

December 31,

2012

Goodwill 1,937 - - - - (30) 1,907

Trademarks and other intangible assets with indefinite useful lives 180 - - - - (4) 176

Development costs externally acquired 318 99 (66) - - - 351

Development costs internally generated 1,160 434 (132) - (8) (16) 1,438

Total Development costs 1,478 533 (198) - (8) (16) 1,789

Patents, concessions and licenses externally acquired 170 33 (45) - - 2 160

Other intangible assets externally acquired 136 36 (36) - (4) (2) 130

Advances and intangible assets in progress externally acquired 8 9 - - - (5) 12

Total net carrying amount of Intangible assets 3,909 611 (279) - (12) (55) 4,174

(€ million)

At

December 31,

2010 Additions

Amortization

Impairment losses

Divestitures

Translation differences and

other changes

At

December 31,

2011

Goodwill 1,848 - - - - 89 1,937

Trademarks and other intangible assets with indefinite useful lives 174 - - - - 6 180

Development costs externally acquired 273 68 (23) - - - 318

Development costs internally generated 962 332 (140) - (2) 8 1,160

Total Development costs 1,235 400 (163) - (2) 8 1,478

Patents, concessions and licenses externally acquired 179 20 (46) - - 17 170

Other intangible assets externally acquired 124 30 (37) - (1) 20 136

Advances and intangible assets in progress externally acquired 7 7 - - - (6) 8

Total net carrying amount of Intangible assets 3,567 457 (246) - (3) 134 3,909

Foreign exchange losses of €60 million in 2012 (gains of €70 million in 2011) principally reflect the depreciation of the US dollar and of the Brazilian real against the Euro.

Goodwill, trademarks and intangible assets with indefinite useful lives

Goodwill is allocated to the Group’s cash-generating units (“CGUs”) identified as the Group’s operating segments. The following table presents the allocation of goodwill across the segments:

(€ million)

At December 31, 2012

At December 31, 2011

CNH 1,840 1,872

Iveco 63 61

FPT Industrial 4 4

Goodwill net carrying amount 1,907 1,937

180


LOGO

 

Trademarks and Other intangible assets with indefinite useful lives are mainly attributable to CNH and consist of acquired trademarks and similar rights which have no legal, contractual, competitive or economic factors that limit their useful lives. For the purposes of impairment testing, these assets were attributed to the respective cash-generating units without the need for any recognition of impairment.

The vast majority of goodwill, representing approximately 96% of the total, relates to CNH, where the cash-generating units considered for the testing of the recoverability of the goodwill are generally the product lines.

The cash generating units to which goodwill has been allocated consist of the following business units:

Amount allocated to goodwill

(€ million) At December 31, 2012 At December 31, 2011

Agricultural Equipment 1,296 1,315

Construction Equipment 446 458

Financial Services 98 99

Total 1,840 1,872

To determine the recoverable amount of these cash-generating units CNH uses multiple valuation methodologies, relying largely on an income approach but also incorporating value indicators from a market approach.

Under the income approach, CNH calculates the recoverable amount of a cash-generating unit based on the present value of estimated future cash flows. The income approach is dependent on several critical management assumptions, including estimates of future sales, gross margins, operating costs, income tax rates, terminal value growth rates, capital expenditures, changes in working capital requirements, and the weighted average cost of capital (discount rate). Discount rate assumptions include an assessment of the risk inherent in the future cash flows of the respective cash-generating units. The following discount rates before taxes as of December 31, 2012 were selected by CNH:

2012 2011

Agricultural Equipment 18.0% 18.8%

Construction Equipment 13.7% 17.0%

Financial Services 19.7% n/a

Expected cash flows used under the income approach are developed in conjunction with CNH budgeting and forecasting process. CNH uses eight years of expected cash flows as management believes that this period generally reflects the underlying market cycles for its businesses. Under the market approach, CNH estimates the recoverable amount of the Agricultural and Construction Equipment cash-generating units using revenue and EBITDA multiples and estimates the recoverable amount of the Financial Services cash-generating unit using book value and interest margin multiples. The multiples are derived from comparable publicly-traded companies with similar operating and investment characteristics as the respective cash-generating units. The guideline company method makes use of market price data of corporations whose stock is actively traded in a public, free and open market, either on an exchange or over-the counter basis. Although it is clear no two companies are entirely alike, the corporations selected as guideline companies must be engaged in the same, or a similar, line of business or be subject to similar financial and business risks, including the opportunity for growth.

A terminal value is included at the end of the projection period used in the discounted cash flow analyses in order to reflect the remaining value that each cash-generating unit is expected to generate. The terminal value represents the present value in the last year of the projection period of all subsequent cash flows into perpetuity. The terminal value growth rate is a key assumption used in determining the terminal value as it represents the annual growth of all

Fiat Industrial Consolidated Financial Statements

181


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

subsequent cash flows into perpetuity. The terminal value growth rate for Agricultural Equipment cash-generating unit was 1% in 2012 and 2011, respectively, for Construction Equipment was 3% and 2% in 2012 and 2011, respectively. The terminal value growth rate for Financial Services was 1.5% in 2012, while income approach was only used as a secondary approach to further support the market approach in 2011.

As of December 31, 2012, the estimated recoverable amount, calculated using the above method, of the Agricultural Equipment and Financial Services cash-generating units, substantially exceeded the respective carrying values. The Construction Equipment cash-generating unit’s excess of recoverable amount over carrying value was approximately 7%. A 1.2% increase in the discount rate, holding all other assumptions constant, or a further decline in market demand for construction equipment, particularly in emerging markets and Europe, could result in an impairment loss in future reporting periods.

The results obtained for Iveco and related sensitivity analyses also confirmed the absence of impairment losses to be recognized.

Finally, the estimates and budget data to which the above mentioned parameters have been applied are those determined by management based on past performance and expectations of developments in the markets in which the Group operates. Estimating the recoverable amount of cash generating units requires discretion and the use of estimates by management. The Group cannot guarantee that there will be no goodwill impairment in future periods. Circumstances and events, which could potentially cause further impairment losses, are constantly monitored by the Group.

Development costs

The amortization of development costs and impairment losses are reported in the income statement as Research and development costs.

Development costs recognized as assets are attributed to cash generating units and are tested for impairment together with the related tangible fixed assets, using the discounted cash flow method for determining their recoverable amount.

15. Property, plant and equipment

In 2012 and in 2011, changes in the gross carrying amount of Property, plant and equipment were as follows:

(€ million) At December 31, 2011 Additions Divestitures Translation differences Other changes At December 31, 2012

Land 213 18 (2) (2) 3 230

Owned industrial buildings 2,091 70 (48) (25) 19 2,107

Industrial buildings leased under finance leases 16 2 - - 21 39

Total Industrial buildings 2,107 72 (48) (25) 40 2,146

Owned plant, machinery and equipment 6,021 267 (289) (67) 143 6,075

Plant, machinery and equipment leased under finance leases 53 8 - - - 61

Total Plant, machinery and equipment 6,074 275 (289) (67) 143 6,136

Assets sold with a buy-back commitment 1,321 542 (56) - (246) 1,561

Owned other tangible assets 688 56 (38) (7) 16 715

Other tangible assets leased under finance leases 6 - (4) - - 2

Total Other tangible assets 694 56 (42) (7) 16 717

Advances and tangible assets in progress 180 317 - (8) (243) 246

Total gross carrying amount of Property, plant and equipment 10,589 1,280 (437) (109) (287) 11,036

182


LOGO

 

(€ million) At December 31, 2010 Additions Divestitures Translation differences Other changes At December 31, 2011

Land 210 1 (2) 1 3 213

Owned industrial buildings 1,952 64 (21) (8) 104 2,091

Industrial buildings leased under finance leases 16 1 - - (1) 16

Total Industrial buildings 1,968 65 (21) (8) 103 2,107

Owned plant, machinery and equipment 5,720 242 (86) (16) 161 6,021

Plant, machinery and equipment leased under finance leases 49 8 - - (4) 53

Total Plant, machinery and equipment 5,769 250 (86) (16) 157 6,074

Assets sold with a buy-back commitment 1,167 533 (132) 1 (248) 1,321

Owned other tangible assets 683 25 (57) 3 34 688

Other tangible assets leased under finance leases 6 - - - - 6

Total Other tangible assets 689 25 (57) 3 34 694

Advances and tangible assets in progress 194 195 - 1 (210) 180

Total gross carrying amount of Property, plant and equipment 9,997 1,069 (298) (18) (161) 10,589

In 2012 and in 2011, changes in accumulated depreciation and impairment losses were as follows:

(€ million) At December 31, 2011 Depreciation Impairment losses Divestitures Translation differences Other changes At December 31, 2012

Land 3 - - - - - 3

Owned industrial buildings 1,104 74 - (33) (7) - 1,138

Industrial buildings leased under finance leases 4 2 - - - (1) 5

Total Industrial buildings 1,108 76 - (33) (7) (1) 1,143

Owned plant, machinery and equipment 4,467 325 3 (280) (32) (65) 4,418

Plant, machinery and equipment leased under finance leases 16 3 - - - - 19

Total Plant, machinery and equipment 4,483 328 3 (280) (32) (65) 4,437

Assets sold with a buy-back commitment 290 169 15 (39) (4) (96) 335

Owned other tangible assets 524 36 - (36) (2) 22 544

Other tangible assets leased under finance leases 4 - - (2) - - 2

Total Other tangible assets 528 36 - (38) (2) 22 546

Advances and tangible assets in progress - - - - - - -

Total accumulated depreciation and impairment of Property, plant and equipment 6,412 609 18 (390) (45) (140) 6,464

Fiat Industrial Consolidated Financial Statements

183


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31, 2012

NOTES

(€ million) At December 31, 2010 Depreciation Impairment losses Divestitures Translation differences Other changes At December 31, 2011

Land 2 - 1 - - - 3

Owned industrial buildings 1,053 68 - (18) 1 - 1,104

Industrial buildings leased under finance leases 7 - - - - (3) 4

Total Industrial buildings 1,060 68 - (18) 1 (3) 1,108

Owned plant, machinery and equipment 4,226 310 14 (78) (7) 2 4,467

Plant, machinery and equipment leased under finance leases 13 4 - - - (1) 16

Total Plant, machinery and equipment 4,239 314 14 (78) (7) 1 4,483

Assets sold with a buy-back commitment 296 135 11 (64) - (88) 290

Owned other tangible assets 541 37 - (56) 1 1 524

Other tangible assets leased under finance leases 3 1 - - - - 4

Total Other tangible assets 544 38 - (56) 1 1 528

Advances and tangible assets in progress - - - - - - -

Total accumulated depreciation and impairment of Property, plant and equipment 6,141 555 26 (216) (5) (89) 6,412

In 2012 and in 2011, changes in the net carrying amount of Property, plant and equipment were as follows:

(€ million) At December 31, 2011 Additions Depreciation Impairment losses Divestitures Translation differences Other changes At December 31, 2012

Land 210 18 - - (2) (2) 3 227

Owned industrial buildings 987 70 (74) - (15) (18) 19 969

Industrial buildings leased under finance leases 12 2 (2) - - - 22 34

Total Industrial buildings 999 72 (76) - (15) (18) 41 1,003

Owned plant, machinery and equipment 1,554 267 (325) (3) (9) (35) 208 1,657

Plant, machinery and equipment leased under finance leases 37 8 (3) - - - - 42

Total Plant, machinery and equipment 1,591 275 (328) (3) (9) (35) 208 1,699

Assets sold with a buy-back commitment 1,031 542 (169) (15) (17) 4 (150) 1,226

Owned other tangible assets 164 56 (36) - (2) (5) (6) 171

Other tangible assets leased under finance leases 2 - - - (2) - - -

Total Other tangible assets 166 56 (36) - (4) (5) (6) 171

Advances and tangible assets in progress 180 317 - - - (8) (243) 246

Total net carrying amount of Property, plant and equipment 4,177 1,280 (609) (18) (47) (64) (147) 4,572

184


LOGO

 

(€ million) At December 31, 2010 Additions Depreciation Impairment losses Divestitures Translation differences Other changes At December 31, 2011

Land 208 1 - (1) (2) 1 3 210

Owned industrial buildings 899 64 (68) - (3) (9) 104 987

Industrial buildings leased under finance leases 9 1 - - - - 2 12

Total Industrial buildings 908 65 (68) - (3) (9) 106 999

Owned plant, machinery and equipment 1,494 242 (310) (14) (8) (9) 159 1,554

Plant, machinery and equipment leased under finance leases 36 8 (4) - - - (3) 37

Total Plant, machinery and equipment 1,530 250 (314) (14) (8) (9) 156 1,591

Assets sold with a buy-back commitment 871 533 (135) (11) (68) 1 (160) 1,031

Owned other tangible assets 142 25 (37) - (1) 2 33 164

Other tangible assets leased under finance leases 3 - (1) - - - - 2

Total Other tangible assets 145 25 (38) - (1) 2 33 166

Advances and tangible assets in progress 194 195 - - - 1 (210) 180

Total net carrying amount of Property, plant and equipment 3,856 1,069 (555) (26) (82) (13) (72) 4,177

Additions of €1,280 million in 2012 mainly relate to CNH and Iveco.

During 2012 Iveco recognized impairment losses on Assets sold with a buy-back commitment for an amount of €15 million (€11 million in 2011) in order to align their carrying amount to market value. These losses are fully recognized in Cost of sales.

The column Other changes includes the reclassification of the prior year balances for Advances and tangible assets in progress to the appropriate categories when the assets were effectively acquired and put into operation, as well as the reclassification to Inventory of Assets sold with a buy-back commitment that are held for sale at the agreement expiry date of €150 million.

At December 31, 2012, land and industrial buildings of the Group pledged as security for debt amounted to €67 million (€45 million at December 31, 2011); plant and machinery pledged as security for debt and other commitments amounted to €72 million (€68 million at December 31, 2011) and other assets pledged as security for debt and other commitments totaled €1 million (€2 million at December 31, 2011); these relate to suppliers’ assets recognized in the consolidated financial statements in accordance with IFRIC 4, with the simultaneous recognition of a financial lease payable.

At December 31, 2012, the Group had contractual commitments for the acquisition of property, plant and equipment amounting to €239 million (€104 million at December 31, 2011).

16. Investments and other financial assets

(€ million) At December 31, 2012 At December 31, 2011

Investments accounted for using the equity method 464 614

Investments at cost 5 1

Total Investments 469 615

Other securities 1 1

Non-current financial receivables 61 50

Total Investments and other financial assets 531 666

Fiat Industrial Consolidated Financial Statements

185


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31, 2012

NOTES

Investments

Changes in Investments in 2012 and in 2011 are set out below:

(€ million) At December 31, 2011 Revaluations/(Write-downs) Acquisitions and capitalizations Translation differences Disposals and other changes At December 31, 2012

Investments in unconsolidated subsidiaries 11 - - - (4) 7

Investments in jointly controlled entities 360 67 3 (2) (69) 359

Investments in associates 244 19 - (16) (144) 103

Total Investments 615 86 3 (18) (217) 469

(€ million) At December 31, 2010 Revaluations/(Write-downs) Acquisitions and capitalizations Translation differences Disposals and other changes At December 31, 2011

Investments in unconsolidated subsidiaries 11 (4) - - 4 11

Investments in jointly controlled entities 338 80 - 7 (65) 360

Investments in associates 342 10 - 14 (122) 244

Total Investments 691 86 - 21 (183) 615

Revaluations and Write-downs include the Group’s share of the profit or loss for the year of investments accounted for using the equity method for an amount of €86 million in 2012 (€97 million in 2011). In 2012 and in 2011 this item also includes impairment losses recognized during the period for investments accounted for using the cost method.

Disposals and other changes, a decrease of €217 million in 2012, mainly consist of €128 million arising from the sale of the 20% interest in Kobelco Construction Machinery Co., Ltd. and a decrease of €80 million as the result of the distribution of dividends by companies accounted for using the equity method. The item Investments in jointly controlled entities comprises the following:

At December 31, 2012 At December 31, 2011

% of interest (€ million) % of interest (€ million)

Naveco (Nanjing Iveco Motor Co.) Ltd. 50.0 169 50.0 169

TurkTraktorVe Ziraat Makineleri A.S. 37.5 104 37.5 87

New Holland HFT Japan Inc. 50.0 35 50.0 42

CNH de Mexico SA de CV 50.0 22 50.0 19

SAIC Iveco Commercial Vehicle Investment Company Limited 50.0 19 50.0 37

Transolver Finance Establecimiento Financiero de Credito S.A. 50.0 7 50.0 4

Other 3 2

Total Investments in jointly controlled entities 359 360

186


LOGO

 

The item Investments in associates comprises the following:

At December 31, 2012 At December 31, 2011

% of interest (€ million) % of interest (€ million)

CNH Capital Europe S.a.S. 49.9 73 49.9 69

Al-GhaziTractors Ltd. 43.2 24 43.2 24

Kobelco Construction Machinery Co., Ltd. - - 20.0 145

Other 6 6

Total Investments in associates 103 244

At December 31, 2012, the stock market value of Investments in listed jointly controlled entities and listed associates, based on prices quoted on regulated markets, is as follows:

(€ million) Carrying value Stock market

TurkTraktorVe Ziraat Makineleri A.S. 104 495

Al-GhaziTractors Ltd. 24 34

Total Investments in listed jointly controlled entities and associates 128 529

At December 31, 2012 and 2011, no non-current financial receivables had been pledged as security for loans.

17.

 

Leased assets

The Group, and in particular Iveco and CNH, lease out assets, mainly their own products, as part of their financial services businesses. This item changed as follows in 2012 and 2011:

(€ million)

At December 31, 2011

Additions

Depreciation

Translation differences

Disposals and other changes

At December 31, 2012

Gross carrying amount 743 381 - (10) (304) 810

Less: Depreciation and impairment (185) - (112) 2 107 (188)

Net carrying amount of Leased assets 558 381 (112) (8) (197) 622

(€ million)

At December 31, 2010

Additions

Depreciation

Translation differences

Disposals and other changes

At December 31, 2011

Gross carrying amount 674 296 - 18 (245) 743

Less: Depreciation and impairment (182) - (90) (4) 91 (185)

Net carrying amount of Leased assets 492 296 (90) 14 (154) 558

Fiat Industrial Consolidated Financial Statements

187


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

At December 31, 2012 minimum lease payments from non-cancellable operating leases amount to €199 million (€186 million at December 31, 2011) and fall

due as follows:

(€ million) At December 31, 2012 At December 31, 2011

Within one year 96 86

Between one and five years 102 99

Beyond five years 1 1

Total Minimum lease payments 199 186

At December 31, 2012, assets amounting to €3 million (€4 million at December 31, 2011) were leased out under operating leases and act as security for loans received.

18. Inventories

(€ million) At December 31, 2012 At December 31, 2011

Raw materials, supplies and finished goods 4,821 4,849

Gross amount due from customers for contract works 22 16

Total Inventories 4,843 4,865

At December 31, 2012, Inventories include assets which are no longer subject to operating lease arrangements or buy-back commitments and are held for sale for €170 million (€142 million at December 31, 2011). Excluding this item, Inventories decreased by €50 million in 2012.

At December 31, 2012, Inventories include those measured at net realizable value (estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale) amounting to €1,104 million (€961 million at December 31, 2011).

The amount of inventory write-downs recognized as an expense during 2012 is €61 million (€84 million in 2011). Amounts recognized as income from the reversal of write-downs on items sold during the year were not significant.

There were no inventories pledged as security at December 31, 2012 and 2011.

The majority of amounts due from customers for contract work relates to Iveco and can be analyzed as follows:

(€ million) At December 31, 2012 At December 31, 2011

Aggregate amount of costs incurred and recognized profits (less recognized losses) to date 23 26

Less: Progress billings (1) (11)

Construction contracts, net of advances on contract work 22 15

Gross amount due from customers for contract work as an asset 22 16

Less: Gross amount due to customers for contract work as a liability included in Other current liabilities - (1)

Construction contracts, net of advances on contract work 22 15

188


LOGO

 

19. Current receivables and Other current assets

This item may be analyzed as follows:

(€ million) At December 31, 2012 At December 31, 2011

Trade receivables 1,436 1,562

Receivables from financing activities 15,237 13,946

Current tax receivables 302 685

Other current assets:

Other current receivables 970 902

Accrued income and prepaid expenses 147 151

Total Other current assets 1,117 1,053

Total Current receivables and Other current assets 18,092 17,246

An analysis by due date is as follows:

At December 31, 2012 At December 31, 2011

(€ million) due within one year due between one and five years due beyond five years Total due within one year due between one and five years due beyond five years Total

Trade receivables 1,423 13 - 1,436 1,553 9 - 1,562

Receivables from financing activities 9,451 5,706 80 15,237 8,634 5,241 71 13,946

Current tax receivables 279 22 1 302 679 6 - 685

Other current receivables 861 83 26 970 738 139 25 902

Total Current receivables 12,014 5,824 107 17,945 11,604 5,395 96 17,095

Trade receivables

Trade receivables are shown net of allowances for doubtful accounts of €169 million at December 31, 2012 (€189 million at December 31, 2011), determined on the basis of historical losses on receivables. Changes in the allowance accounts during 2012 are as follows:

(€ million)

At December 31, 2011 Provision Use and other changes At December 31, 2012

Allowances for doubtful accounts 189 27 (47) 169

The carrying amount of Trade receivables is considered in line with their fair value.

Receivables from financing activities

Receivables from financing activities include the following:

(€ million) At December 31, 2012 At December 31, 2011

Retail financing 7,628 6,985

Dealer financing 6,099 5,243

Finance leases 1,314 1,619

Other 196 99

Total Receivables from financing activities 15,237 13,946

Fiat Industrial Consolidated Financial Statements

189


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Total Receivables from financing activities increased by €1,291 million over the period, mainly due to an increase in receivables from retail financing in CNH in the United States and in receivables from dealer financing in Iveco in Europe and in CNH in the United States and Brazil. Changes in exchange rates, mainly between the Euro and the US dollar and the Brazilian real, led to a decrease of €293 million, partially offset by the depreciation in the Euro/Real exchange rate. Receivables from financing activities are shown net of an allowance for doubtful accounts determined on the basis of specific insolvency risks. At December 31, 2012 the allowance amounts to €592 million (€564 million at December 31, 2011). Changes in the allowance accounts during the year considered are as follows:

(€ million)

At December 31, 2011

Provision

Use and other changes

At December 31, 2012

Allowance for receivables regarding:

Finance leases 263 2 (9) 256

Retail financing 208 65 (52) 221

Dealer financing 93 29 (7) 115

Other - - - -

Total Allowance on Receivables from financing activities 564 96(68) 592

Finance lease receivables mainly relate to vehicles of Iveco and CNH leased out under finance lease arrangements. The interest rate implicit in the lease is determined at the commencement of the lease for the whole lease term. The average interest rate implicit in total finance lease receivables varies depending on prevailing market interest rates.

The item may be analyzed as follows stated gross of an allowance of €256 million at December 31, 2012 (€263 million at December 31, 2011):

(€ million)

At December 31, 2012 At December 31, 2011

due within one year

due between one and five years

due beyond five years

Total

due within one year

due between one and five years

due beyond five years

Total

Receivables for future minimum lease payments 821 1,141 47 2,009 1,100 1,189 29 2,318

Less: unrealized interest income (153) (274) (12) (439) (168) (265) (3) (436)

Present value of future minimum lease payments 668 867 35 1,570 932 924 26 1,882

No contingent rents were recognized as finance leases during 2012 or 2011 and unguaranteed residual values at December 31, 2012 and 2011 are not significant. Receivables for dealer financing are typically generated by sales of vehicles and are generally managed under dealer network financing programs as a component of the portfolio of the financial services companies. These receivables are interest bearing, with the exception of an initial limited, non-interest bearing period. The contractual terms governing the relationships with the dealer networks vary from sector to sector and from country to country, although payment terms range from two to six months.

The fair value of receivables from financing activities at December 31, 2012 was €15,551 million (€14,324 million at December 31, 2011) which has been calculated using a discounted cash flow method based on the following discount rates, adjusted, where necessary, to take account of the specific risk of insolvency of the underlying financial instrument.

(in %) EUR USD GBP CAD AUD BRL PLN

Interest rate for six months 0.32% 0.30% 0.67% 1.30% 2.90% 7.08% 3.79%

Interest rate for one year 0.33% 0.32% 0.67% 1.33% 2.79% 7.12% 3.41%

Interest rate for five years 0.77% 0.85% 1.02% 1.71% 3.31% 8.15% 3.33%

190


LOGO

 

Other current assets

At December 31, 2012, Other current assets mainly consist of Other tax receivables for VAT and other indirect taxes of €680 million (€614 million at December 31, 2011), Receivables from employees of €38 million (€26 million at December 31, 2011) and Accrued income and prepaid expenses of €147 million (€151 million at December 31, 2011).

The carrying amount of Other current assets at the balance sheet date is in line with fair value.

Transfers of financial assets

The Group transfers a number of its financial, trade and tax receivables under securitization programs or factoring transactions.

A securitization transaction entails the sale of a portfolio of receivables to a securitization vehicle. This special purpose entity finances the purchase of the receivables by issuing asset-backed securities (i.e. securities whose repayment and interest flow depend upon the cash flow generated by the portfolio). Asset-backed securities are divided into classes according to their degree of seniority and rating: the most senior classes are placed with investors on the market; the junior class, whose repayment is subordinated to the senior classes, is normally subscribed for by the seller. The residual interest in the receivables retained by the seller is therefore limited to the junior securities it has subscribed for. In accordance with SIC 12 - Consolidation - Special Purpose Entities (SPEs), all securitization vehicles are included in the scope of consolidation, because the subscription of the junior asset-backed securities by the seller implies its control in substance over the SPE.

Furthermore, factoring transactions may be either with recourse or without recourse; certain without recourse transfers include deferred payment clauses (for example, when the payment by the factor of a minor part of the purchase price is dependent on the total amount collected from the receivables), requiring first loss cover, meaning that the transferor takes priority participation in the losses, or require a significant exposure to the cash flows arising from the transferred receivables to be retained. These types of transactions do not comply with the requirements of IAS 39 for the derecognition of the assets since the risks and rewards connected with collection are not substantially transferred, and accordingly the Group continues to recognize the receivables transferred by this means in its balance sheet and recognizes a financial liability of the same amount under Asset-backed financing (Note 27). The gains and losses arising from the transfer of these assets are only recognized when the assets are derecognized. At December 31, 2012, the carrying amount of such transferred assets and the related liability and the respective fair values are as follows:

At December 31, 2012

(€ million) Trade receivables

Receivables from

financing activities

Other financial assets

Total

Carrying amount of assets 543 8,998 745 10,286

Carrying amount of the related liabilities (543) (8,420) (745) (9,708)

Liabilities for which the counterparty has the right to obtain relief on the transferred assets:

Fair value of the assets 543 9,208 745 10,496

Fair value of the liabilities (543) (8,480) (745) (9,768)

Net position - 728 - 728

Other financial assets also include the cash with a pre-determined use restricted to the repayment of the securitization debt.

At December 31, 2011 receivables sold and financed through both securitization and factoring transactions which do not meet IAS 39 derecognition requirements totaled €8,377 million and were included in Current receivables.

Fiat Industrial Consolidated Financial Statements

191


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

For completeness of information, it is recalled that the Group has discounted receivables and bills without recourse having due dates after December 31, 2012 amounting to €763 million (€980 million at December 31, 2011, with due date after that date), which refer to trade receivables and other receivables for €708 million (€897 million at December 31, 2011) and receivables from financing for €55 million (€83 million at December 31, 2011).

20. Current securities

Current securities consist of short-term or marketable securities which represent temporary investments but which do not satisfy all the requirements for being classified as cash equivalents. In particular:

(€ million) At December 31, 2012 At December 31, 2011

Current securities available-for-sale 4 68

Total Current securities 4 68

At December 31, 2011, this item included investments of €62 million in Brazilian sovereign bonds held by Banco CNH Capital S.A. and sold during 2012.

21. Other financial assets and Other financial liabilities

These items consist of derivative financial instruments measured at fair value at the balance sheet date. Specifically:

At December 31, 2012

At December 31, 2011

(€ million)

Positive fair value

Negative fair value

Positive fair value

Negative fair value

Fair value hedges:

Interest rate risk - Interest rate swaps 68(3) 54 (2)

Total Fair value hedges 68(3) 54 (2)

Cash flow hedges:

Currency risks - Forward contracts, Currency swaps and Currency options 31(42) 32 (102)

Interest rate risk - Interest rate swaps - (30) - (27)

Other derivatives - - - (1)

Total Cash flow hedges 31(72) 32 (130)

Derivatives for trading 22(22) 32 (25)

Other financial assets/(liabilities) 121(97) 118 (157)

The fair value of derivative financial instruments is calculated by using market parameters at the balance sheet date and using valuation techniques widely accepted in the financial business environment. In particular: the fair value of forward contracts and currency swaps is calculated by taking the prevailing exchange rate and interest rates in the two currencies at the balance sheet date; the fair value of currency options is calculated using appropriate valuation techniques and market parameters at the balance sheet date (in particular exchange rates, interest rates and volatility rates); the fair value of interest rate swaps and forward rate agreements is calculated using the discounted cash flow method;

192


LOGO

 

the fair value of derivatives hedging interest rate risk and currency risk is calculated using the exchange rate at the balance sheet date and the discounted cash flow method; the fair value of derivatives hedging commodity price risk is calculated using the discounted cash flow method, taking (if available) the market parameters at the balance sheet date (and in particular the future price of the underlying and interest rates).

The overall increase in Other financial assets from €118 million at December 31, 2011 to €121 million at December 31, 2012, and the decrease in Other financial liabilities from €157 million at December 31, 2011 to €97 million at December 31, 2012 is mostly due to changes in exchange rates and interest rates during the year.

As this item consists principally of hedging instruments, the change in their value is offset by the change in the value of the hedged item.

Derivatives for trading consist mainly of derivatives (mostly currency based derivatives) acquired to hedge receivables and payables subject to currency risk and/ or interest rate risk which are not formally designated as hedges at Group level.

At December 31, 2012, the notional amount of outstanding derivative financial instruments is as follows:

(€ million) At December 31, 2012 At December 31, 2011

Currency risk management

Interest rate risk management

Other derivative financial instruments

Total notional amount

6,967

4,412

5

11,384

6,800

3,971

20

10,791

At December 31, 2012, the notional amount of Other derivative instruments consists of the notional amount of derivatives linked to commodity prices hedging specific exposures arising from supply agreements. Under these agreements there is a regular updating of the prices on the basis of trends in the quoted prices of the raw material.

The following table provides an analysis by due date of outstanding derivative financial instruments at December 31, 2012 based on their notional amounts:

At December 31, 2012

(€ million)

Currency risk management

Interest rate risk management

Other derivative financial instruments

Total notional amount

due within one year

6,798

967

5

7,770

due between one and five years

169

2,598

-

2,767

due beyond five years

-

847

-

847

Total

6,967

4,412

5

11,384

Cash flow hedges

The effects on profit or loss mainly refer to the management of the currency risk and, to a lesser extent, to the hedges relating to the debt of the Group’s financial companies and Group treasury.

The policy of the Group for managing currency risk normally requires that future cash flows from trading activities which will occur for accounting purposes within the following twelve months, and from orders acquired (or contracts in progress), whatever their due dates, be hedged. As a result, it is considered reasonable to suppose that the hedging effect arising from this and recognized in the cash flow hedge reserve will be recognized in profit or loss, mainly during the following year.

Fiat Industrial Consolidated Financial Statements

193


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

In 2012 the Group reclassified losses of €89 million (losses of €14 million in 2011) stated net of the tax effect, to the following profit or loss items; these had previously been recognized directly in Other comprehensive income:

(€ million) 2012 2011

Currency risk:

Increase/(decrease) in Net revenues (43) (13)

Decrease/(increase) in Cost of sales (46) 25

Financial income/(expenses) (13) (9)

Interest rate risk:

Decrease/(increase) in Cost of sales (9) (18)

Financial income/(expenses) (5) (2)

Taxes income/(expenses) 27 3

Total recognized in profit or loss (89) (14)

The ineffectiveness of cash flow hedges was not material in 2012 or 2011.

The total economic effect of hedges which subsequently turned out to be in excess of the future flows being hedged (overhedges) amounted to €6 million in 2012 (not significant in 2011).

Fair value hedges

The gains and losses arising from the measurement of interest rate and currency derivatives (mostly for managing currency risk) and interest rate derivatives (for managing the interest rate risk) recognized using fair value hedge accounting and the gains and losses arising from the respective hedged items are set out in the following table:

(€ million) 2012 2011

Interest rate risk:

Net gains/(losses) on qualifying hedges 64 51

Fair value changes in hedged items (64) (51)

Net gains/(losses) - -

The ineffective portion of transactions treated as fair value hedges was not significant in 2012 or 2011.

22.

 

Cash and cash equivalents

Cash and cash equivalents consist of:

(€ million) At December 31, 2012 At December 31, 2011

Cash at banks 3,623 4,441

Cash with a pre-determined use 670 728

Money market securities 318 470

Total Cash and cash equivalents 4,611 5,639

194


LOGO

 

Amounts shown are readily convertible into cash and are subject to an insignificant risk of changes in value. The carrying amount of cash and cash equivalents is in line with their fair value at the balance sheet date.

Cash with a pre-determined use mainly consists of amounts whose use is restricted to the repayment of the debt relating to securitizations classified as Asset-backed financing.

The credit risk associated with Cash and cash equivalents is considered not significant, because it mainly relates to deposits spread across primary national and international financial institutions.

23. Assets held for sale

At December 31, 2012 and 2011, Assets held for sale consist of buildings and factories owned by CNH and Iveco. The items included in Assets held for sale may be summarized as follows:

(€ million) At December 31, 2012 At December 31, 2011

Property, plant and equipment 25 15

Total Assets 25 15

24. Equity

Consolidated equity at December 31, 2012 exceeds that at December 31, 2011 by €311 million. The increase in equity is mainly the result of the profit for the year of €921 million, partially offset by the dividend distributed for €480 million and by the decrease in the translation reserve of €272 million arising from changes in the exchange rates used to translate the financial statements of subsidiaries denominated in currencies than the Euro.

Share capital

Share capital, fully paid-in, amounts to €1,919 million at December 31, 2012 and consists of 1,222,568,882 shares each with a par value of €1.57.

Each share entitles the holder to share pro rata in any earnings allocated for distribution and any surplus assets remaining on a winding-up. In addition, each share entitles the holder to vote without any restrictions.

Net profit as reported in the annual financial statements is allocated as follows:

5% of net profit must be allocated to the legal reserve until the amount of such reserve is equivalent to one-fifth of share capital; further allocations may be made by shareholders to the legal reserve or the extraordinary reserve or the retained earnings reserve, together with any other allocations they may resolve; to each share any remaining profit which shareholders may resolve to distribute.

Where the Board of Directors sees fit in relation to the operating results and within the conditions established by law, it may authorize the payment of interim dividends during the year.

In the event of a winding-up, the Company’s assets shall be distributed in an equal pro rata amount to all shares.

Fiat Industrial Consolidated Financial Statements

195


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

Following the resolution adopted by shareholders in an extraordinary general meeting held on April 5, 2012, on May 21, 2012, the procedure commenced for the mandatory conversion of all the 103,292,310 preference shares and 79,912,800 savings shares of Fiat Industrial S.p.A. into 130,241,397 of the Company’s ordinary shares having the same features as the outstanding ordinary shares, with enjoyment rights from January 1, 2012, using a ratio of 0.700 for the preference shares and 0.725 for the savings shares. The mandatory conversion of the preference and savings shares of Fiat Industrial S.p.A. had already been approved by the respective special shareholders’ meetings held on April 3, 2012. Pursuant to article 2437-quater of the Italian civil code, withdrawal rights were granted to the holders of preference shares and savings shares who did not vote in favor of the relative resolutions at a liquidation value of €4.156 for each preference share and €4.336 for each savings share, and these had to be exercised no later than fifteen days from the date of registration of these resolutions in the Companies’ Register, namely April 28, 2012; the conversion of the shares was further also subject to the requirement that the payment made if withdrawal rights are exercised should not exceed €56 million for the preference shares and €44 million for the savings shares. On the expiry of the term for exercising withdrawal rights, withdrawal notifications for 12,476 preference shares equivalent to €51,850 and 23,664 savings shares equivalent to €102,607 had been received. As a result, the conditions precedent for the conversion to proceed were satisfied.

For completeness of information it is recalled that, until the conversion described above, the Net profit reported in the annual financial statements had to be allocated as follows: to the legal reserve, 5% of net profit until the amount of such reserve was equivalent to one-fifth of share capital; to savings shares, a dividend of up to €0.093 per share; further allocations to the legal reserve, allocations to the extraordinary reserve and/or retained profit reserve as may be resolved by Shareholders; to preference shares, a dividend of up to €0.093 per share; to ordinary shares, a dividend of up to €0.0465 per share; to savings shares and ordinary shares, in equal amounts, an additional dividend of up to €0.0465 per share; to each ordinary, preference and savings share, in equal amounts, any remaining profit which Shareholders would resolve to distribute.

When the dividend paid to savings shares in any year amounted to less than €0.093, the difference would have been added to the preferred dividend to which they were entitled in the following two years.

196


LOGO

 

The following table provides a reconciliation between the number of Fiat Industrial S.p.A. shares outstanding at December 31, 2010 and the number of shares outstanding at December 31, 2012:

(number of shares in thousands)

At December 31, 2010

Capital increase

(Purchases)/Sales of treasury shares

At December 31, 2011

Conversion of preference and savings shares on May 22, 2012

Capital increase

(Purchases)/Sales of treasury shares

At December 31, 2012

Ordinary shares issued 80 1,092,248 - 1,092,328 130,241 - - 1,222,569

Less: Treasury shares - - - - - - (9) (9)

Ordinary shares outstanding 80 1,092,248 - 1,092,328 130,241 - (9) 1,222,560

Preference shares issued - 103,292 - 103,292 (103,292) - - -

Less: Treasury shares - - - - - - - -

Preference shares outstanding - 103,292 - 103,292 (103,292) - - -

Savings shares issued - 79,913 - 79,913 (79,913) - - -

Less: Treasury shares - - - - - - - -

Savings shares outstanding - 79,913 - 79,913 (79,913) - - - -

Total Shares issued by Fiat Industrial S.p.A. 80 1,275,453 - 1,275,533 (52,964) - - 1,222,569

Less: Treasury shares - - - - - - (9) (9)

Total Fiat Industrial S.p.A. outstanding shares 80 1,275,453 - 1,275,533 (52,964) - (9) 1,222,560

Policies and processes for managing capital

Italian laws and regulations regarding the share capital and reserves of a joint stock corporation establish the following: the minimum share capital is €120,000; any change in the amount of share capital must be approved in a general meeting by shareholders who may delegate powers to the Board of Directors to increase share capital up to a predetermined amount for a maximum period of five years; the general meeting of shareholders is also required to adopt suitable measures when share capital decreases by more than one third as the result of ascertained losses and to reduce share capital if by the end of the following year such losses have not fallen by at least one third. If as the consequence of a loss of more than one third of capital this then falls below the legal minimum, shareholders in general meeting are required to approve a decrease and simultaneous increase of capital to an amount not less than this minimum or must change the company’s legal form; as discussed previously the share in profits due to each share is determined by the bylaws of Fiat Industrial S.p.A.; an additional paid-in capital reserve is established if a company issues shares at a price exceeding their nominal value. This reserve may not be distributed until the legal reserve has reached one fifth of share capital; a company may not purchase treasury shares for an amount exceeding the distributable profits and available reserves stated in its most recently approved financial statements. Any purchase must be approved by shareholders in general meeting and in no case may the nominal value of the shares acquired exceed one fifth of share capital.

Fiat Industrial Consolidated Financial Statements

197


LOGO

 

CONSOLIDATED

FINANCIAL

STATEMENTS

AT DECEMBER 31,

2012

NOTES

With the Demerger completed the Group announced a dividend policy for 2011, a year of transition, with the intention of distributing 25% of consolidated profit with a minimum pay-out of €100 million, reserving the duty of drafting a dividend policy for subsequent years to the Board of Directors. For 2011, shareholders approved the distribution of a total dividend of €240 million at the Annual General Meeting held on April 5, 2012 on the basis of the Board of Directors’ proposal. The dividend was determined as follows:

€0.185 per ordinary share, for a total of €202.1 million;

€0.185 per preference share, for a total of €19.1 million;

€0.2315 per savings share, for a total of €18.5 million.

On February 1, 2012 the Board of Directors reviewed options relating to the dividend policy. In view of the consistent performance of the businesses and the Group’s substantial cash generation capabilities, it is of the opinion that Fiat Industrial could distribute between 25% and 35% of its consolidated net income for any one year, with a minimum pay-out in normal circumstances of €150 million.

The objectives identified by the Group for managing capital are to create value for shareholders as a whole, safeguard business continuity and support the growth of the Group. As a result, the Group endeavors to maintain an adequate level of capital that at the same time enables it to obtain a satisfactory economic return for its shareholders and guarantee economic access to external sources of funds, including by means of achieving an adequate rating.

The Group constantly monitors the evolution of its debt/equity ratio and in particular the level of net debt and the generation of cash from its industrial activities.

To reach these objectives the Group aims at a continuous improvement in the profitability of the business in which it operates. Further, in general, it may sell part of its assets to reduce the level of its debt, while the Board of Directors may make proposals to Shareholders in general meeting to reduce or increase share capital or, where permitted by law, to distribute reserves. In this context the Group may also purchase treasury shares without exceeding the limits authorized by Shareholders in general meeting, with the same logic of creating value, compatible with the objectives of achieving financial equilibrium and improving its rating.

In this respect capital means the value brought into Fiat Industrial S.p.A. by its shareholders (share capital plus the additional paid-in capital reserve less treasury shares, equal to €2,375 million at December 31, 2012 and to €2,375 million at December 31, 2011) and the value generated by the Group in terms of the results achieved by operations (retained earnings and other reserves, equal in total, before the result for the year, to €2,534 million at December 31, 2012 and to €1,924 million at December 31, 2011, excluding gains and losses recognized directly in equity and non-controlling interests).

Treasury shares

At their General Meeting on April 5, 2012 Shareholders authorized the purchase and disposal of treasury shares, including through subsidiaries. This authorization provides for the purchase of a maximum number of shares, not to exceed the legally established percentage of share capital or an aggregate amount of €0.5 billion. This authorization could be used to service an equity instrument incentive plan designed to provide long-term incentives which was approved by shareholders at the same general meeting; the authorization may also be used for other purposes permitted by law and does not oblige the Company to purchase treasury shares. The buy-back authorization is valid for a period of 18 months from April 5, 2012 and any buy-backs must be carried out in the manner established by law and at a price which is within 10% of the reference price published by Borsa Italiana on the date prior to the purchase.

198


LOGO

 

At December 31, 2012 treasury shares consisted of 8,528 ordinary shares for a total amount of €66 thousand or 0.0007% of share capital for a total nominal amount of €13 thousands. Treasury shares arise from the monetization by the Company of the excess fractions of ordinary shares arising following the exact application of the conversion ratio as part of the mandatory conversion into ordinary shares of all the preference and savings shares as noted above.

If the Company decides to commence a buyback plan of its own shares, details of the related Program will be publicly disclosed in advance in accordance with applicable regulations and any transactions will be reported on a daily basis to the market and the regulatory authorities.

Capital reserves

At December 31, 2012 capital reserves amounting to €435 million (€452 million at December 31, 2011) consisted mainly of the share premium reserve.

Revenue reserves

Revenue reserves consist mainly of the following: the legal reserve of Fiat Industrial S.p.A. of €231 million at December 31, 2012 (€215 million at December 31, 2011); retained earnings of €1,487 million at December 31, 2012 (€1,085 million at December 31, 2011); profits attributable to the owners of the parent of €810 million at December 31, 2012 (€624 million at December 31, 2011); the share-based payment reserve of €6 million at December 31, 2012.

Other comprehensive income

Other comprehensive income may be analyzed as follows:

(€ million) 2012 2011

Gains/(losses) on cash flow hedging instruments arising during the year (71) (60)

Gains/(losses) on cash flow hedging instruments reclassified to profit or loss 116 17

Gains/(losses) on cash flow hedging instruments 45 (43)

Gains/(losses) on the remeasurement of available-for-sale financial assets arising during the year - -

Gains/(losses) on the remeasurement of available-for-sale financial assets reclassified to profit or loss - -

Gains/(Losses) on the remeasurement of available-for-sale financial assets - -

Exchange gains/(losses) on translating foreign operations arising during the year (225) (66)

Exchange gains/(losses) on translating foreign operations recl