Notes to the income statement and OCI

EBIT

5. Notes to the income statement and OCI

5.1 Operating result (EBIT) by function

Bekaert’s consolidated sales were down 8.5%. Weak market demand, primarily during the first half of 2009, and lower raw material prices
year-on-year drove an organic sales decline of 16.9%. This was partly compensated by the integration of Prodac SA (Peru)
and Ideal Alambrec SA (Ecuador) in Latin America, which added 5.9%, and a minor positive effect of currency movements, which contributed 2.5%.

Overall gross profit is 11.2% down, mainly due to an unfavorable margin impact from decreasing wire rod prices during the first half of 2009, and a lower sales volume in the mature markets, partially offset by better volumes in Asia Pacific.

Sales in EMEA decreased with 29%, reflecting a lower volume (mainly due to weak demand in the first half year) and lower average sales prices due to lower wire rod prices. Increased volume, stable prices and cost control measures resulted in an important profitability improvement in the second half of 2009.
Also North America was confronted with weaker demand across all sectors, but primarily in automotive and construction.
The growth in Latin America reflects the integration of Prodac SA (Peru) and Ideal Alambrec SA (Ecuador). Organic sales and results remained stable despite the economic downturn.
The sales growth of 14% in Asia Pacific is mainly the result of a strong volume increase partly offset by a lower price due to cheaper wire rod. After a very weak start in 2009, sales volume in China increased continuously and the plants were operating at very high capacity utilization levels and at low cost. The entities in South-East Asia remained resilient throughout the crisis.

Despite an increase of the selling and administrative expenses with € 13 million due to the integration of Prodac SA and Ideal Alambrec SA, those overheads decreased substantially thanks to cost reduction measures (mainly in EMEA and North America), and a release of bad debt reserves mainly in China.

Own research and development expenses remained at a similar high level, but investments in venture capital were put on hold.

Government grants relate mainly to subsidies in China (€ 4.2 million) and Belgium (€ 0.7 million). There are no indications that the conditions attaching to those grants will not be complied with in future and therefore it is not expected that subsidies may have to be refunded.

The 2009 restructuring costs relate mainly to the restructuring programs announced in 2008 concerning the Belgian operational footprint and relocation of assets in Zwevegem and Slovakia (€ 11 million). Restructuring costs include impairment losses amounting to € 4.7 million.

Impairments on goodwill and assets were booked for Combustion - drying (€ 5.1 million), Diamond Like Coatings (€ 3.0 million) and advanced filtration (€ 0.8 million).

5.2 Operating result (EBIT) by nature

The table below provides information on the major items contributing to the operating result (EBIT), categorized by nature.

Miscellaneous includes marketing expenses, IT, consulting, travel, export duties and others.

Financial results

5.3 Interest income and expense

The increase in interest expense on financial liabilities reflects the higher average debt level (+ € 175.5 million based on monthly averages) as well as higher interest rates partially due to the replacement of short-term debt with long-term debt (cf. note 6.16 ‘Interest-bearing debt’). Interest expense on financial liabilities carried at amortized cost relates to all interest-bearing debt which is not hedged by a fair value hedge. Interest expense on financial liabilities carried at fair value relates both to interest-bearing debt hedged by a fair value hedge and to interest-rate risk mitigating derivatives (see note 7.3 ‘Financial risk management and financial derivatives’). Since interest-rate risk mitigating derivatives were used in connection with financial liabilities only, all interest expense adjustments from those derivatives are recorded as interest expense on financial liabilities at fair value.

The interest element of interest-bearing provisions relates mainly to the interest expense net of the expected return on plan assets of defined-benefit plans (see note 6.14 ‘Employee benefit obligations’).

5.4 Other financial income and expenses

Value adjustments include changes in the fair value of all derivatives, other than those designated as cash flow hedges, and of all debt hedged by fair value hedges (cf. note 7.3 ‘Financial risk management and financial derivatives’). Unrealized exchange results relate to the effect of translating monetary balance sheet items at closing rates and realized exchange results relate to transactions other than normal trading sales and purchases. ‘Translation gain on Vicson SA’ represents the one-time effect of translating the monetary items of Vicson at the parallel rate against the bolivar fuerte at balance sheet date (cf. note 3.2 ‘Critical judgments in applying the entity’s accounting policies’).

Taxes

5.5 Income taxes

Relationship between tax expense and accounting profit

In the table below, accounting profit is defined as the result before taxes.

Tax losses in certain high tax jurisdictions lead to a lower theoretical tax expense. Tax losses on a legal entity level were incurred as a consequence of the economic downturn in some segments. The total actual tax expense subsequently increased as a consequence of the
non-recognition (allowance) of certain related deferred tax assets. Other tax rates and special tax regimes reflect temporary tax holidays and notional interest deduction. Taxes on distributed and undistributed earnings reflect a one-time positive impact due to changes in cash repatriation strategy.

Share in JVs

5.6 Share in the results of joint ventures and associates

As a consequence of the worldwide economic downturn which started in the fourth quarter of 2008, the joint ventures in Latin America generally reported shrinking profits over 2009. The significant drop in results in Belgo Bekaert Arames Ltda and subsidiary relates to the economic downturn in Brazil, mainly in the first semester. Only BMB, the Brazilian steel cord company whose functional currency is the US dollar, managed to improve profits after a negative result in 2008 which was largely driven by a substantial devaluation of the Brazilian real. Since the closure of its steel cord plant, BOSFA Pty Ltd solely acts as a sales office for building products; its negative result relates to an impairment of the steel cord building.

Refer to note 7.8 ‘Subsidiaries, joint ventures and associates’ for the list of legal entities related to this note.

EPS

5.7 Earnings per share

The weighted average closing price during 2009 was € 75.43 per share (2008: € 88.53 per share). The following options and subscription rights were out of the money, and therefore antidilutive, for the period presented, but could potentially dilute basic earnings per share in the future
(cf. note 6.11 ‘Ordinary shares, treasury shares, subscription rights and share options’).

Total comprehensive income

5.8 Total comprehensive income

Total comprehensive income includes both the result of the period recognized in the income statement and the other comprehensive income recognized in equity. Other comprehensive income includes all changes in equity other than owner-related changes, which are analyzed in the statement of changes in equity.

The following table analyzes the deferred taxes booked in equity by item of other comprehensive income:

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