2012 ANNUAL REPORT ANSALDO STS GROUP

Transcription

1 2012 ANNUAL REPORT ANSALDO STS GROUP

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3 2012 Annual Report Ansaldo STS Group (Translation from the Italian original which remains the defi nitive version)

4 Contents 1 Company Bodies and Committees 4 Directors report at 31 December Financial position and results of operations of the Group Introduction Key performance indicators Net financial position Non-IFRS alternative performance indicators Related party transactions Performance The market and commercial situation Sales information Signalling - performance by Business Unit Performance of the Transportation Solutions Business Unit Reconciliation between the profit for the year and equity of the parent and the group at 31 December Key events of and after the reporting period 20 4 Risks and uncertainties Strategic risks Changes in the macroeconomic and market context and streamlining programmes Innovation: a competitive factor Operational risks Country risk for new markets Reliance on public customers and construction contracts Budgeting and risk management project planning Third parties (subcontractors, sub-suppliers and partners) Adequacy of and efficiency in developments and technical references Liability to customers or third parties for product defects or delivery delays Legal disputes Human resource management Health, safety and environmental compliance Financial risks Ability to finance a high level of current assets and obtain guarantees IT risks IT system management 25 5 The environment 26 6 Research and development 29 7 Human resources and organisation The parent Ansaldo STS Subsidiaries Headcount at 31 December Data protection document Incentive plans The stock grant plan Cash plans Investments held by directors 34 8 Financial disclosure 35 9 Corporate Governance and ownership structure pursuant to Article 123-bis of Legislative decree no. 58 of 24 February 1998 and subsequent amendments (the Consolidated Finance Act) 37 Consolidated Financial Statements at 31 December 2012 and notes thereto 10 Consolidated financial statements Income statement Statement of comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity 43 2

5 11 Notes to the consolidated financial statements at 31 December General information Basis of preparation Accounting policies Effects of amendments to the IFRS Segment reporting Notes to the statement of financial position Related party assets and liabilities Intangible assets Property, plant and equipment Equity investments Loans and receivables and other non-current financial assets Inventories Work in progress and progress payments and advances from customers Trade receivables and loan assets Financial assets measured at fair value through profit or loss Tax assets and liabilities Other current financial assets Cash and cash equivalents Share capital Retained earnings or losses carried forward, including profit for the year and consolidation reserves Other reserves Equity attributable to non-controlling interests Loans and borrowings Provisions for risks and charges and contingent liabilities Employee benefits Other current and non-current liabilities Trade payables Derivatives Guarantees and other commitments Notes to the income statement Impact of related party transactions on profit or loss Revenue Other operating income Purchases and services Personnel expense Amortisation, depreciation and impairment losses Other operating expense Internal work capitalised Net financial expense Share of profits of equity-accounted investees Income taxes Earning per share Cash flows from operating activities Financial risk management Key managers remuneration Outlook Information pursuant to article 149-duodecies of Consob Issuer regulation 92 Statement on the Consolidated Financial Statements 21 Statement on the Consolidated Financial Statements pursuant to article 81-ter of Consob regulation no of 14 May 1999 and subsequent amendments and integrations and article 154-bis.2 of Legislative Decree no. 58 of 24 February 1998 and subsequent aendments and integrations 93 External Auditors Report 94 3

6 Company Bodies and Committees 1 Company Bodies and Committees BOARD OF DIRECTORS (for the three-year period) ALESSANDRO PANSA Chairman GIANCARLO GRASSO Deputy chairman SERGIO DE LUCA Chief executive offi cer GIOVANNI CAVALLINI 2 MAURIZIO CEREDA 1 2 PAOLA GIRDINIO 1 BRUNO PAVESI 2 BOARD OF STATUTORY AUDITORS (for the three-year period) GIACINTO SARUBBI Chairman RENATO RIGHETTI MASSIMO SCOTTON SUBSTITUTE STATUTORY AUDITORS (for the three-year period) BRUNO BORGIA PIETRO CERASOLI TATIANA RIZZANTE ATTILIO SALVETTI 1 GRAZIA GUAZZI Board secretary INDEPENDENT AUDITORS (for the period) KPMG S.p.A. 1. Member of the risk and control committee. 2. Member of the appointments and remuneration committee. 4

7 Signalling and Transportation Solutions 2012 Annual Report Ansaldo STS Group Directors report at 31 December

8 Financial position and results of operations of the Group Key performance indicators 2 Financial position and results of operations of the Group 2.1 Introduction Ansaldo STS group recognised a profit of 75,696 thousand for the year ended 31 December 2012, compared to 73,056 thousand for the previous year. Revenue came to 1,247,849 thousand, compared to 1,211,944 thousand and the ROS was 9.4%, compared to 9.6% in the previous year. New orders totalled 1,492,346 thousand, compared to 2,163,745 thousand in 2011 (which included the maxi contract to build the Honolulu underground). Specifically: new orders of 642,712 thousand for the Transportation Solutions business unit, mainly related to contracts under the master agreement with Rio Tinto in Australia; New orders of 893,197 thousand in the Signalling business unit include the order for technological systems for the Brescia-Treviglio high-speed section in Italy, the contract with Southeastern Pennsylvania Transportation Authority (SEPTA) to supply the Positive Train Control (PTC) integrated signalling system in the USA, the Roy Hill project in Australia for the development of systems for a mining transport railway line featuring innovative satellite technology to pinpoint the train s location, a contract in the United Arab Emirates for the new Shah-Habshan-Ruswais line and the contract related to the Honam high-speed line in South Korea. The order backlog at 31 December 2012 totalled 5,683,253 thousand, compared to 5,452,770 thousand at 31 December In the broader context of the global financial crisis, the group s 2012 performance was positive and in line with forecasts. The delivery of systems in Riyadh and Genoa, the CBTC (Communication Based Train Control) signalling system in Chengdu (China) and of the Milan Line 5 and Brescia underground (in early 2013) represent technological successes and the achievement of targets. Despite the serious financial and economic crisis, the group s reference market is generally solid, with international growth rates of 2-3% p.a.. Competition between key international players has however dramatically intensified in recent years, leading to falling unit prices. The group is responding to this issue by introducing plans to contain production and operating costs. With reference to the group s corporate and governance structure: in March 2012, Ansaldo STS S.p.A. s board of directors approved the closure of the subsidiary, Ansaldo STS Sistemas de Transporte e Sinalização Limitada, with registered office in Brazil. The decision was based on an in-depth analysis of the Brazilian market and ASTS group s position within it. The closure took effect from 23 May 2012; in September 2012, the dormant indirect subsidiary, Ansaldo STS Finland OY, was put into liquidation. The liquidation process will be completed within the first half of Any commercial opportunities arising in these countries will be pursued in partnership with local operators or other legal entities of the group. 2.2 Key performance indicators ( 000) Change New orders 1,492,346 2,163,745 (671,399) Order backlog 5,683,253 5,452, ,483 Revenue 1,247,849 1,211,944 35,905 Operating profit (EBIT) 117, , Adjusted EBIT 123, ,459 5,067 Profit for the year 75,696 73,056 2,640 Net working capital (48,147) (89,031) 40,884 Net invested capital 167, ,462 32,722 Net financial position (301,982) (289,674) (12,308) Free operating cash flow 37,569 7,219 30,350 ROS 9.4% 9.6% -0.2 p.p. ROE 17.0% 18.1% -1.1 p.p. EVA 62,514 63,243 (729) Research and development 32,260 33,900 (1,640) Headcount (no.) 3,991 4,100 (109) Consolidated profit for 2012 totalled 75,696 thousand, compared to 73,056 thousand in Revenue came to 1,247,849 thousand, up 35,905 thousand over the previous year ( 1,211,944 thousand). The increase is largely due to the Transportation Solutions business unit for works carried out under the master agreement with Rio Tinto (RAFA). The Signalling business unit recognised revenue of 725,588 thousand, including amounts with other business segments, substantially in line (down 2,787 thousand) with the previous year ( 728,375 thousand). The Transportation Solutions business unit recognised revenue of 564,853, up 52,586 thousand over the previous year ( 512,267 thousand). This figure also includes amounts with other business segments. Compared to 2011, eliminations between the two business units were up 13,894 thousand (see paragraph 12). 6

9 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Revenue for ( m) and contribution of the business units 1,248 1, December % % December 2011 Signalling Business Unit Transportation Solutions Business Unit Operating profit (EBIT) came to 117,073 thousand, up 953 thousand over 2011 ( 116,120 thousand). ROS was 9.4%, compared to 9.6% in the previous year, including additional non-recurring expense, especially in relation to restructuring. Specifically: the Signalling business unit recognised operating profit of 62,530 thousand, compared to 75,079 thousand, with a 12,549 thousand decrease due to the different mix and profitability of the projects in the two years; the Transportation Solutions business unit recognised operating profit of 69,130 thousand, up 14,121 thousand on the previous year ( 55,009 thousand), due to greater volumes and the different mix and profitability of the contracts in the two years. EBIT and ROS for ( m) December December % 9.6% A reclassified income statement, reclassified statement of financial position, the net financial position and a reclassified statement of cash flows follow to provide further disclosure on the group s financial position, results of operations and cash flows. Reclassified income statement ( 000) Revenue 1,247,849 1,211,944 Purchases and personnel expense (*) (1,122,374) (1,075,627) Amortisation, depreciation and impairment losses (20,768) (13,410) Other net operating income (expense) (**) 17,922 (533) Change in work-in-progress, semi-finished products and finished goods 897 (3,915) Adjusted EBIT 123, ,459 Restructuring costs (6,453) (2,339) Operating profit (EBIT) 117, ,120 Net financial expense (2,956) (768) Income taxes (38,421) (42,296) Profit for the year 75,696 73,056 attributable to the owners of the parent 75,665 72,956 attributable to non-controlling interests Earnings per share Basic and diluted ¹ 1. Recalculated following the bonus issue of 9 July Notes to the reconciliation between the reclassified income statement and the income statement included in the consolidated financial statements: (*) Includes the captions Purchases, Services, Personnel expense and Accrual to (use of) the provision for expected losses to complete contracts (net of Restructuring costs ), and net of Internal work capitalised. (**) Includes the net amount of Other operating income and Other operating expense (net of restructuring costs and impairment losses and Accrual to (use of) the provision for expected losses to complete contracts). 7

10 Financial position and results of operations of the Group Key performance indicators Briefly: Revenue totalled 1,247,849 thousand and increased 35,905 thousand over the previous year. Overall expense rose due to the increase in activities. Adjusted EBIT was 123,526 thousand, up 5,067 thousand over The operating profit of 117,073 thousand was 953 thousand higher than that of Profit for the year increased by 2,640 thousand to 75,696 thousand, mainly due to the combined impact of greater financial expense and lower taxes. Reclassified statement of financial position ( 000) Non-current assets 264, ,047 Non-current liabilities (49,665) (46,554) 215, ,493 Inventories 131, ,936 Contract work in progress 313, ,302 Trade receivables 748, ,069 Trade payables (500,563) (431,851) Progress payments and advances from customers (710,720) (706,735) Working capital (17,856) (45,279) Provisions for risks and charges (15,842) (23,136) Other liabilities, net (*) (14,449) (20,616) Net working capital (48,147) (89,031) Net invested capital 167, ,462 Equity attributable to the owners of the parent 468, ,014 Equity attributable to non-controlling interests 427 1,122 Equity 469, ,136 Net financial position (301,982) (289,674) Notes to the reconciliation between the reclassified statement of financial position and the statement of financial position included in the consolidated financial statements: (*) Includes Tax assets and Other current assets, net of Tax liabilities and Other current liabilities. Net invested capital totalled 167,184 thousand, compared to 134,462 thousand in The 32,722 thousand increase is due to the 8,162 thousand decrease in non-current items and the 40,884 thousand increase in net working capital. The change in working capital is due to the joint effect of increased work in progress and trade receivables, only partly offset by the increase in trade payables and progress payments and advances from customers. The group s net financial position (loan assets and cash and cash equivalents greater than loans and borrowings) was 301,982 thousand, compared to 289,674 thousand at 31 December 2011 (up 12,308 thousand), after the 28,000 thousand dividend payment ( 33,592 thousand in 2011). It includes the 70,643 thousand advance received from the Russian customer, Zarubezhstroytechnology ( ZST ), for the project for the development of signalling, automation, telecommunication, power supply, security and ticketing systems on the Sirth to Benghazi section in Libya. 8

11 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 2.3 Net financial position ( 000) Current loans and borrowings 18,188 14,535 Non-current loans and borrowings Cash and cash equivalents (146,837) (160,928) BANK LOANS AND BORROWINGS (128,649) (146,124) Related party loan assets (120,533) (2,531) Other loan assets (52,987) (110,812) Current financial assets at fair value through profit or loss - (30,756) LOAN ASSETS (173,520) (144,099) Related party loans and borrowings - - Other current loans and borrowings Other non-current loans and borrowings OTHER LOANS AND BORROWINGS NET FINANCIAL POSITION (301,982) (289,674) The group s net financial position totalled 301,982 thousand at the reporting date, compared to 289,674 thousand at 31 December The reclassified statement of cash flows for the year ended 31 December 2012 follows: ( 000) Opening cash and cash equivalents 160, ,320 Gross cash flows generated by operating activities 153, ,299 Changes in other operating assets and liabilities (58,279) (67,235) Funds from operations 95,027 60,064 Change in working capital (51,001) (42,657) Cash flows from operating activities 44,026 17,407 Cash flows used in ordinary investing activities (6,457) (10,188) Free operating cash flow 37,569 7,219 Strategic transactions (216) (6,302) Other changes in investing activities 14 (44) Cash flows used in investing activities (6,659) (16,534) Dividends paid (28,000) (33,592) Cash flows generated by (used in) other financing activities (22,849) 38,955 Cash flows from (used in) financing activities (50,849) 5,363 Exchange rate gains and losses, net (609) 1,372 Closing cash and cash equivalents 146, ,928 Cash and cash equivalents totalled 146,837 thousand at the reporting date, down by 14,091 thousand over the prior year figure. The main changes in the statement of cash flows were as follows: cash flows from operating activities totalled 44,026 thousand, an increase of 26,619 thousand over 2011; cash flows used in investing activities of 6,659 thousand, down 9,875 thousand over 2011 ( 16,534 thousand); cash flows used in financing activities of 50,849 thousand, compared to the cash flows from financing activities of 5,363 thousand in 2011; dividends of 28,000 thousand were paid in 2012 ( 33,592 thousand in 2011). Free operating cash flow (FOCF) before strategic transactions totalled 37,569 thousand, compared to 7,219 thousand for 2011; the 30,350 thousand increase mainly relates to the change in funds from operations (FFO). 9

12 Financial position and results of operations of the Group Non-IFRS alternative performance indicators 2.4 Non-IFRS alternative performance indicators Ansaldo STS S.p.A. s management also assesses the performance of the group and the business segments using certain indicators that are not defined by the IFRS. The components of each indicator are described below as required by CESR/05-178b Communication: Operating profit (EBIT): earnings before interest and taxes, before any adjustment. EBIT excludes gains or losses on unconsolidated equity investments and securities, as well as any gains or losses on sales of consolidated equity investments, which are classified under financial income and expense or share of profits (losses) of equity-accounted investees if related to equity-accounted investments. Adjusted EBIT (Adj): is the EBIT as described above, net of the following items where applicable: - any impairment of goodwill; - amortisation of the portion of purchase price allocated to intangible assets acquired as part of business combinations, pursuant to IFRS 3; - restructuring costs in relation to defined and significant plans; - other income or expense not of an ordinary nature, i.e., related to particularly significant events unrelated to ordinary activities. A reconciliation of EBIT and Adjusted EBIT for the two years is set out below: ( 000) Operating profit (EBIT) 117, ,120 Restructuring costs 6,453 2,339 Adjusted EBIT 123, ,459 Free operating cash flow (FOCF): this indicator is the sum of cash flows from (used in) operating activities and cash flows from (used in) investing and disinvesting in property, plant and equipment, intangible assets and equity investments, net of cash flows from acquisitions or sales of equity investments which are deemed strategic due to their nature or importance. The reclassified statement of cash flows set out in paragraph 2.3 shows how FOCF is arrived at for the current and previous years. Funds from operations (FFO): this indicator is the cash flows from (used in) operating activities, net of changes in working capital. The reclassified statement of cash flows set out in paragraph 2.3 shows how FFO is arrived at for the current and previous years. Economic value added (EVA): is the difference between EBIT net of income taxes and the cost of the average invested capital of the current and previous years measured on the basis of the weighted average cost of capital (WACC). Operating working capital: comprises trade receivables and payables, inventories, work in progress, progress payments and advances from customers and provisions for risks and charges. Net working capital: is operating working capital less other current assets and liabilities. Net invested capital: is the sum of non-current assets, non-current liabilities and net working capital. Net financial position or debt: the calculation method used complies with paragraph 127 of the CESR/05-054b recommendations implementing Regulation (EC) no. 809/2004. New orders: the sum of the contracts agreed with customers during the year that meet the contractual requirements to be recorded in the orders book. Order backlog: is the difference between new orders and revenue for the year (less the change in contract work in progress). This difference is added to the backlog for the previous year. Headcount: is the number of employees recorded in the relevant register on the reporting date. Return on Sales (ROS): is the ratio of EBIT to revenue. Return on Equity (ROE): is the ratio of the profit or loss for the year to the average amount of equity at the reporting date and the previous year reporting date. Research and development expense: total expense incurred for research and development, both expensed and sold. Research expense taken to profit or loss usually relates to general technology, i.e., aimed at gaining scientific knowledge and/or techniques applicable to various new products and/or services. Sold research expense represents that commissioned by customers and for which there is a specific sales order and it is treated exactly like an ordinary order (sales contract, profitability, invoicing, advances, etc.) in accounting and management terms. 10

13 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 2.5 Related party transactions Transactions with related parties relate to ordinary operations. They take place on an arm s length basis (unless governed by specific contractual terms), as does the settlement of interest-bearing receivables and payables. They mainly comprise the exchange of goods, the provision of services and the obtaining/granting of financing from and to the parent, associates, joint ventures, consortia and unconsolidated subsidiaries. During the year, no atypical and/or unusual transactions took place. With effect from 2011, the only impact of the application of IAS 24 (revised) related to disclosure requirements with reference to related parties, entailing the restatement of comparative figures shown in the schedules to consider as related parties those entities under the control or significant influence of the Ministry of Economy and Finance ( MEF ). Related party transactions (see notes 13 and 14 to the consolidated financial statements for greater detail) are as follows at 31 December 2012 and ( 000) Ultimate parent Unconsolidated subsidiaries Associates Joint ventures (*) Consortia (**) Other group companies MEF Total Non-current assets - financial other - - 5,373 1, ,779 Current assets - financial 120, ,533 - trading ,473 2,114 22,201 11,626 90, ,966 - other , ,555 Non-current liabilities - financial other Current liabilities - financial trading ,573-1,214 44,709 1,703 58,741 - other ( 000) Ultimate parent Unconsolidated subsidiaries Associates Joint ventures (*) Consortia (**) Other group companies MEF Total Revenue ,780 11,148 9,769 14, , ,305 Other operating income , ,633 Expense 4, ,915-2,359 25,389 1,695 80,536 Financial income Financial expense (49) Other operating expense (*) Portion not eliminated on proportionate consolidation (**) Consortia subject to significant influence or common control ( 000) Ultimate parent Unconsolidated subsidiaries Associates Joint ventures (*) Consortia (**) Other group companies MEF Total Non-current assets - financial other - - 1,540 1, ,765 Current assets - financial 2, ,531 - trading 365 1,237 13,606 13,513 32,596 15,040 56, ,130 - other , ,509 Non-current liabilities - financial other Current liabilities - financial trading ,969 1, , ,984 - other as defined by CONSOB communication no. DEM/ of 28 July

14 Financial position and results of operations of the Group Performance ( 000) Ultimate parent Unconsolidated subsidiaries Associates Joint ventures (*) Consortia (**) Other group companies MEF Total Revenue ,095 12,042 13,760 18, , ,934 Other operating income Expense 3,218 1,945 41, ,754 35,842 1,864 87,025 Financial income Financial expense (105) Other operating expense (*): Portion not eliminated on proportionate consolidation. (**): Consortia subject to significant influence or common control. Finally, the group s corporate governance framework includes specific guidance on conduct to ensure related party transactions comply with criteria of procedural and substantial correctness. Related party transactions between the parent and related parties take place on an arm s length basis. 2.6 Performance The market and commercial situation Despite the increasingly challenging competitive scenario, the group s sales activities were intense in 2012, generating new orders of 1,492,346 thousand ( 2,163,745 thousand in 2011). Signalling Business Unit New orders for 2012 totalled 893 million ( 1,046 million for 2011). Key events of the year are described below. ITALY New orders totalled approximately 206 million. Key new orders included the contract for the Brescia-Treviglio high-speed section (57 kms) for roughly 70 million, which includes the design, construction, installation, roll-out of the signalling (level 2 and multistation ERTMS (European Rail Traffic Management System/ETCS (European Train Control System)) and automation systems, and the 34 million order to overhaul the Brescia central automated system (ACC) which, due to the complexity of movements within the station areas, also requires the installation of a movement supervision system (SSA-CR). Other important new orders include those for the sale of components and maintenance of rail and on-board equipment for approximately 37 million, as well as several works on the existing high-speed line, such as those related to the completion and technological improvements on the Milan-Bologna and Rome-Naples sections for a total of 17 million. REST OF EUROPE In France, new orders approximated 56 million, including in relation to the sale of components and spare parts ( 26 million), as well as contracts for upgrade activities on high-speed passenger lines. In the United Kingdom, new orders approximated 8 million, related to maintenance activities and minor variations, especially for the Cambrian line; in Germany, new orders of around 8 million related mainly to the sale of on-board equipment for Velaro trains, in Sweden approximately 7 million for components for the maintenance of rail and on-board equipment, in Turkey approximately 3 million related to order variations on the Mersin-Toprakkale line and, finally, in Spain approximately 2 million for maintenance activities on existing highspeed lines. AMERICA In the USA, new orders totalled approximately 157 million, including 73 million related to the contract agreed with the Southeastern Pennsylvania Transportation Authority (SEPTA) for the supply of the Positive Train Control (PTC) integrated signalling system to increase railway transport safety in the regional railway system. Other significant orders related to the sale of components (approximately 43 million) and maintenance for the CSX control room (over 12 million). New orders in Canada exceeded 48 million, the largest two of which relate to the Toronto underground. NORTH AFRICA AND THE MIDDLE EAST In the United Arab Emirates, via the Italo-Indian joint venture comprising Saipem-Tecnimont-Dodsal, the group won a contract (approximating 59 million) for the first line of the new Shah-Habshan-Ruwais line under construction, owned by Etihad Rail (the United Arab Emirates railways). Under the agreement, signalling, automation and telecommunication systems and other minor systems for passenger and freight traffic management and control will be supplied for the line of some 260 kms, which will connect the Shah industrial complex with the Ruwais port. 12

15 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group ASIA PACIFIC In Australia, new orders totalled approximately 187 million, including the 118 million Roy Hill order for the development of systems for a mining transport railway line featuring innovative satellite technology to pinpoint the train s location, considerably simplifying line set-up and the consequent maintenance expense. There were also orders related to the extension of the NSR (Northern Suburbs Rail) Clarkson- Jindalee line ( 15 million), Xstrata Plc s Ravensworth North line for mining in the Upper Hunter Valley in New South Wales worth around 8 million and numerous activities related to contract variations. In India, new orders approximated 17 million related almost fully to contracts to upgrade the interlocking systems of certain stations of the complex passenger railway network. New orders totalled around 16 million in China, including the important order related to Line 2 of the Hangzhou underground for over 10 million, as well as a further approximate 4 million in the railway sector related to the sale of components and maintenance services. Finally, new orders of over 86 million were acquired in South Korea during the year. Key orders relate to the high-speed Honam line ( 47 million), the order related to the supply of on-board equipment for 22 KTX - II trains ( 13 million) and the sale of on-board equipment to the Korean multinational Hyundai-Rotem for 80 locomotives of the Turkish Railways (TCDD) to upgrade the fleet to European ERTMS/ETCS standards (approximately 10 million). Transportation Solutions Business Unit New orders acquired during the year totalled 643 million, compared to 1,256 million in the previous year, which included the Honolulu contract. Generally, the global macroeconomic scenario is still affected by the financial crisis, leading to delays in several projects, and the relevant development programmes do not fully cover the cost of the main projects to expand the transport systems. Demand for technological solutions continues to grow in the driverless underground railway business segment. Key events of the year are described below. ITALY New orders totalled 98 million and comprise: orders and variations related to Line 1 of the Naples underground as part of activities on the Dante- Garibaldi section for the development of the temporary operating control room (shuttle); the upgrade of the definitive operating control room and for the safety project for the entire line for a total of 23 million; the settlement agreement for Line C of the Rome underground ( 36 million) and the extension of Line B1 Conca d oro-ionio ( 3 million). A new contract was won in relation to the Italian high-speed railway for the Brescia-Treviglio section ( 12 million) and orders for the Rome-Naples line ( 11 million). With respect to the contract won for Line 4 (S. Cristoforo-Linate) of the Milan underground, the financing agreements for the joint venture comprising Impregilo (lead contractor), Astaldi, AnsaldoSTS, AnsaldoBreda, Sirti and ATM Milano have not yet become effective but are expected to in the first half of However, based on the obligations taken on as part of the ancillary agreement and its appendices, the joint venture commenced the relevant activities. REST OF EUROPE In Denmark, new orders totalled 120 million in relation to variations and price revisions on existing contracts. Ansaldo STS group was short-listed for the construction of the city of Aarhus first urban tram system; the tender is expected to be announced before the end of NORTH AFRICA AND THE MIDDLE EAST A 16 million order was acquired for the operation and maintenance of the APM Princess Noura University driverless underground in Riyadh, constructed and rolled out this year. Ansaldo STS was successfully short-listed for the Riyadh driverless underground. The winner is expected to be announced in the first half of The offer for the Lusail tramway has been submitted, featuring the Tramwave overhead line-free solution. The winner is expected to be announced in early ASIA PACIFIC New orders acquired in Australia came to 408 million relating to specific contracts under the master agreement with the Rio Tinto mining company. The largest amount relates to the Autohaul project totalling AUD317 million (approximately 253 million). In India, certain underground projects are scheduled for the short- and medium-term and potential partnerships are being evaluated with local contractors. Interest in the company s innovative overhead line-free Tramwave solution is strong in China. A strategic agreement was reached in July with the China-based CNR Dalian and the Taiwan-based General Resources Company, licensing the TramWave technology to the joint venture that will be formed by CNR Dalian and General Resources Company. The innovative TramWave solution offers overhead line-free electric power supply and was developed and patented by Ansaldo STS for use in urban transport systems, eliminating the visual impact of traditional overhead lines. 13

16 Financial position and results of operations of the Group Performance It is hoped that this agreement will lead to a profitable and long-term collaboration so that the many opportunities offered by the Chinese tram market can be exploited. This agreement is also an ideal starting point for more far-reaching collaboration in the mass transit sector with the same partner companies Sales information New orders for the reporting period totalled approximately 1,492,346 thousand, compared to 2,163,745 thousand in the previous year, with a 671,399 thousand decrease. New orders acquired by the Signalling business unit amounted to 893,197 thousand and those of the Transportation Solutions business unit to 642,712 thousand. Key orders acquired by the Signalling business unit in 2012 were as follows: Country Project Customer Amount ( m) Australia Roy Hill 1 Hancock Prospecting USA PTC SEPTA 73.4 Italy HSL MI VR (Brescia Treviglio) Consorzio Saturno 70.2 UAE Abu Dhabi GCC - Abu Dhabi section 1 SAIPEM 58.8 South Korea HSL Korea - Honam Line LSIS 47.3 Italy Brescia ACC RFI 34.4 Canada Extension Phases 2, 3 & 4 TTC 22.8 Canada TTC North Spadina Extension TTC 18.3 Italy HSL Italy variations MI-BO - RM-NA RFI 16.7 Australia Butler Extension - Northern Suburbs Railway (NSR) Public Transport Authority WA 14.7 South Korea On-board equipment ROTEM 13.0 Italy SSB - ATCS variation on 4th application contract Trenitalia 10.9 China Hangzhou line 2 INSIGMA 10.3 USA Components, Service & Maintenance Various 54.5 Italy Components, Service & Maintenance Various 36.8 France Components, Service & Maintenance Various 26.1 Key orders acquired by the Transportation Solutions business unit in 2012 were as follows: Country Project Customer Amount ( m) Australia AutoHaul Rio Tinto Australia RCE 353 & ECP Rio Tinto Australia Various contracts Rio Tinto 54.4 Denmark Copenhagen Ring variation order Metroselskabet 78.9 Denmark Copenhagen Ring - O&M variation orders Metroselskabet 41.4 Italy Rome underground Line C RomaMetropolitane 35.7 Saudi Arabia Riyadh - O&M variation order PMU 16.0 Italy Line 1 of Naples underground - Colli Aminei PCO Metropolitana di Napoli 13.2 Italy HSL MI VR (Brescia Treviglio) Consorzio Saturno 11.8 Italy HSL RO NA variation order Iricav Uno 11.3 Italy Line 1 of the Naples underground - variation order Dante-Garibaldi Metropolitana di Napoli 10.1 New orders for 2012 ( m) and contribution of the business units 2,164 1, December % % December 2011 Signalling Business Unit Transportation Solutions Business Unit The order backlog at 31 December 2012 totalled 5,683,253 thousand, up 230,483 thousand over 31 December ,712 thousand relates to projects in Libya which are currently halted. The order backlog of the Signalling business unit amounted to 2,616,684 thousand ( 2,383,511 thousand net of transactions with the Transportation Solutions business unit). 14

17 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group The order backlog of the Transportation Solutions business unit amounted to 3,388,258 thousand ( 3,299,742 thousand net of transactions with the Signalling business unit). Order backlog at 31 December 2012 and 2011 and contribution of the business units 5, December % % 39 5, December 2011 Signalling Business Unit Transportation Solutions Business Unit Signalling - performance by Business Unit ( 000) Change New orders 893,197 1,045,870 (152,673) Order backlog 2,616,684 2,341, ,317 Revenue 725, ,375 (2,787) Operating profit (EBIT) 62,530 75,079 (12,549) ROS 8,6% 10,3% -1,7 p,p, Operating working capital 103, ,449 (7,744) Research and development 30,566 32,475 (1,909) Headcount (no.) 2,971 3,081 (110) (The amounts shown in the table include inter-segment transactions). Revenue for 2012 came to 725,588 thousand, compared to 728,375 thousand in the previous year. The key production activities are summarised below. ITALY RAILWAYS - HIGH SPEED The high-speed programme for the original sections (Turin-Milan-Bologna-Florence-Rome-Naples) is largely complete. Works continue on systems to resolve minor issues that do not compromise the safety of train operations. Simultaneously, the activities necessary for the complex technical/administrative testing procedure continue for each section. RAILWAYS - ON-BOARD ATCS/ERTMS In the On-board systems line, production mainly related to the supply of new rolling stock to AnsaldoBreda S.p.A., Stadler (Flirt train ATCS set-up for Strutture Trasporto Alto Adige and set-up options for other Flirt trains for Ferrovie Nord Milano and Ticino-Lombardia consortium), Vossloh and Siemens. Specifically, supply continued of Vivalto double-decker carriages to Trenitalia for high-frequency trains (TAF) and Electric Multiple Unit (EMU) bidirectional trains. Activities also continued for the development of ERTMS systems for the new Zefiro V300 high-speed trains for the Trenitalia fleet. Finally, negotiations were finalised with Trenitalia for the contract to upgrade the ETR 500 fleet and establishing the fees for additional services requested under the ATCS master agreement. RAILWAYS - CENTRAL AUTOMATED SYSTEM (ACC) In the Station equipment line, activities continued on several projects, including: the final stage of the Mestre ACC, Trento Malé ACC, Tel station (Merano-Malles) ACC, Rebaudengo ACC (system delivered to the customer and rolled out in December 2012), Palermo Centrale ACC (finalisation of cabin installation and related power supply), the Genoa junction ACC (materials supply) and the upgrade of the Voghera ACC. The ACC in Chieri was rolled out. Activities also continued for the reconfiguration of the ATCS SST (wayside systems) for the Turin, Naples, Genoa and Verona sections, as well as automation activities comprising both modifications and revamping of existing CTCs (Centralised Traffic Control) (including Siena and Cremona, which have been rolled out) and SCC (command and control system) activities (Venice and Palermo). Negotiations are still underway with the customer for the finalisation of a variation to the Turin-Padua section. MASS TRANSIT Key activities related to the roll-out of the De Ferrari-Brognole section of the Genoa underground and Line B1 of the Rome underground and the extension of Line 1 of the Naples underground. 15

18 Financial position and results of operations of the Group Performance REST OF EUROPE (This section includes Turkey and the former Soviet Republics) In France, activities mainly related to on-board systems (TGV Rhin- Rhône, LGV SEA, Bretagne Pays de la Loire BPL) and equipment (Thalys) for the country s high-speed network, as well as the usual maintenance, assistance and production contracts for individual parts. In Sweden, production mainly related to the Ester and Red Line projects. In the United Kingdom, the completion of the Cambrian line project (the first line in Britain to be equipped with the European level 2 ERTMS standard) has been put back to next year due to additional requests of the customer with respect to a new RBC (radio block centre) version for which commissioning has been completed. Activities in Germany were cut to a minimum for both the POS (Paris-Ostfrankreich-Südwestdeutchland) project and the set-up of the Rostock-Berlin line, pending the customer s review of the project inputs. The customer has requested an extension to the scope of work for the on-board project to supply 30 multistandard facilities for 15 Velaro high-speed trains. In Sochi, Russia, assistance was provided in assembling Itarus RBC and power supply systems for the roll-out of the ERTMS standard in the region and the communication protocol testing stage is progressing. In Turkey, in-depth design activities continued for the Mersin-Toprakkale line, as did the on-site installation activities. Production for the Ankara underground comprised design activities and the continuation of on-site installation for the first lot. NORTH AFRICA AND THE MIDDLE EAST Works in Tunisia are almost complete and negotiations are underway with the customer for the partial extension of the work schedule so as to avoid the application of penalties. In Libya, activities for the project to develop the signalling, telecommunications, security and power supply systems for the Ras Ajdir Sirth and Al Hisha Sabha sections were suspended straight after the well-known riots started, and they have not yet recommenced. In a letter dated 21 February 2011, the customer, a construction company of the Russian railways, Zarubezhstroytechnology (ZST), also halted a project to develop a similar system for the Sirth Benghazi section. Negotiations are underway with this company to agree an extension to the period of the contract s suspension. It is presently difficult to say when production for these contracts will resume, given the situation in the country. As previously reported, the currently recognised asset is more than offset by the amount of progress payments. In the United Arab Emirates initial activities linked to preliminary design were completed and interim design and procurement activities are underway for the Abu Dhabi project (Shah-Habshan-Ruwais Line). Initial FAT certifications were successful for the RBC (Radio Block Centre) buoys and cabinets. AMERICA Production activities focused both on long-term projects and the sale of components. With respect to the former, there was intense activity for the customer, Union Pacific, for the OTP/CADX project. Ansaldo STS USA INC. won the contract in 2005 to develop and roll out Next Generation Computer Aided Dispatch (CAD) and an Optimizing Traffic Planner (OTP) system, as well as subsequent maintenance activities until They also included activities for the customer, Southeastern Pennsylvania Transportation Authority (SEPTA), for the procurement, design, construction and installation of a Positive Train Control (PTC) system on 13 lines. The scope of the work includes testing the system control centres and wayside, communication and vehicle components. Contracts were finalised during the year with all subsuppliers (Burns, PHW, Farfield and ARINC) and wayside and communication design and configuration activities have commenced. ASIA PACIFIC Production in Australia focused on the alliances with local mining companies. With respect to Newcastle, installations and commissioning have been completed. Renegotiations of the Program Alliance Agreement with QR National are underway, pending the finalisation of a sales agreement. Start-up activities are underway for the new Roy Hill project. Production in India mainly focused on the KFW and TPWS projects. With respect to the first, during the year commissioning commenced for five stations, six block sections, two medium yards and the H-H-H (three hot systems, one for each side of the station plus one for the station itself) conversion for three of these stations. Engineering and construction & commissioning activities were completed for stage 4, while the CTC is in the final stage. Construction of the centralised traffic control building was also completed. The project s extension until December 2013 has been approved, as well as a variation on the third line. Last year, activities were forecast to be completed between the end of 2012 and the first half of Considerable expense was incurred in 2012 for internal and outsourced engineering activities. This negatively impacted profitability, mainly as a result of the re-working (the retrofit for stations already completed and changes for new ones) requested by the customer. The cost of completion has therefore been re-estimated to include the activities that will have to be rolled out in order to deliver the stations in line with the new project delivery date agreed with the customer. With reference to the NORTH TPWS project, system maintenance training was provided during the year to Indian railway personnel and the performance parameters were monitored. The additional works and on-board installations on all this line s locomotives were completed. The customer also approved an extension, with works to be completed next year. The SOUTH TPWS project was expected to be completed in the first half of 2012, however, there were significant unforeseeable issues 16

19 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group along the line during the year, particularly in relation to the installation of materials, necessitating additional engineering and construction & commissioning activities. The projects had to be redesigned, particularly as regards defect liability period activities, which impacted profitability. The Calcutta underground project is still in its early stages with the start-up of engineering, procurement and contract management activities. Planning and identification of key suppliers for the system s construction is underway. In Korea, the supply of equipment for the E-loco EMU locomotives was completed, performance testing was successful and system specifications were endorsed for certain types of locomotives for which all equipment was also supplied. System specifications were finalised and technical mechanical plans drawn up for the other types of locomotives and the hardware plans were completed. Performance testing is underway. In China, the ZhengXi Line project is almost complete, with activities relating to the transfer of technology (ToT) to the local partner, Hollysys, which is subject to final approval by MOR (the Ministry of Railways of China). On-board systems issues have been resolved and laboratory and on-site testing carried out together with Hollysys. This entailed the release of a new version of the on-board software featuring a safety case, which has already been installed on the trains. Certain cabling hardware modifications necessary to resolve the issues are currently being defined in conjunction with MOR. Operating profit (EBIT) of the Signalling business unit for the year ended 31 December 2012 came to 62,530 thousand (8.6% as a percentage of revenue), compared to 75,079 thousand (10.3% as a percentage of revenue) in the previous year, due to the different mix of contracts and profitability in the two years. Operating working capital at 31 December 2012 was 103,705 thousand, a decrease on the 111,449 thousand at 31 December 2011, due to the decreased inventories and net work in progress. Research and development expense for the year equalled 30,566 thousand, compared to 32,475 thousand in the previous year. The headcount at 31 December 2012 numbered 2,971 (3,081 employees at 31 December 2011). Streamlining of the Riom and Batesburg production facilities was completed in 2012 with the outsourcing of certain activities and related resources Performance of the Transportation Solutions Business Unit ( 000) Change New orders 642,712 1,256,058 (613,346) Order backlog 3,388,258 3,442,345 (54,087) Revenue 564, ,267 52,586 Operating profit (EBIT) 69,130 55,009 14,121 ROS 12,2% 10,7% +1,5 p.p. Operating working capital (129,106) (172,411) 43,305 Research and development 1,695 1, Headcount (no.) (The amounts shown in the table include inter-segment transactions). Revenue generated by the Transportation Solutions business unit in 2012 amounted to 564,853 thousand, compared to 512,267 thousand in the previous year. Volumes generated in Italy accounted for 43% and those generated abroad for 57%, with 57% of volumes in the underground sector. Production mainly related to the following projects: Line C of the Rome underground, high-speed railways, Copenhagen, the Milan underground, the Genoa underground, Alifana, Line 6 and Line 1 of the Naples underground, the Brescia underground, the Riyadh underground, the Honolulu underground and the Australian Rio Tinto project. The key production activities are summarised below. ITALY HIGH-SPEED RAILWAYS: Interconnections continued to be rolled out and works performed under warranty on those lines already in operation in the high-speed line. With respect to the Rome-Naples section, arbitration between TAV and IRICAV UNO consortium was concluded in June, with the award in favour of IRICAV UNO. The customer has stated its intention to appeal against the award. Negotiations are underway for a settlement to finalise the outstanding litigation. The arbitration between RFI/TAV and the IRICAV DUE consortium was also concluded in May for the Verona-Padua section; under the award, RFI/TAV shall partially compensate IRICAV DUE and the 1992 Agreement is still valid and in effect. RFI has already paid IRICAV DUE the amount set in the award but has not yet forwarded IRICAV DUE the definitive project for the section in order to commence the execution plan. 17

20 Financial position and results of operations of the Group Performance GENOA UNDERGROUND: The De Ferrari/Brignole functional section was opened to the public in December. A variation enabling the conclusion of works in May 2014 is under approval by the Genoa municipality. ALIFANA REGIONAL LINE: Following the halt of all activities related to the Piscinola-Aversa section, the group deemed it necessary to redetermine and agree a suspension of the physical activities so as not to incur extra costs. With reference to the Piscinola-Capodichino section, as the customer failed to fulfil its commitments, a review of the claims was commenced and there is a court order imposing the customer to pay outstanding receivables. NAPLES UNDERGROUND LINE 6: The progress of works for the year was in line with the schedule; it mainly comprised the continuation of civil works on the sites related to the sixth Rider (Mergellina-Municipio functional section) and progress on the testing of the signalling system s trackside equipment. Specifically, the civil works on the stations A. Mirelli and S. Pasquale are at an advanced stage (the excavation has reached the bottom and construction has commenced of the internal structures), while the Chiaia and Municipio stations are still subject to various issues compromising the normal progress of the executive stage. The contract manager delivered the works for the technological systems in November, thus enabling the commencement of the procurement process which will take place in the first few months of 2013 with a view to having the main systems ready for testing by year end. ROME UNDERGROUND LINE C: In 2012, CIPE (Interministerial economic planning committee) approved funding for the settlement agreement between the parties and the T3 section for which the contractual formalisation is yet to take place. With reference to the progress of on-site activities, testing (including integrated system testing) is substantially complete on the Pantano- Torre Gaia section. Integrated system testing is underway for the Torre Gaia-Centocelle tunnel section, which is the first to be rolled out. Certain variations have become necessary for Metro C, reducing work shifts dedicated to testing and pre-operational activities. Consequently, Roma Metropolitane and Metro C are working on a new roll-out plan which foresees the above activities and which provides for the launch of the pre-operational stage by the general contractor in the first part of 2013 directly on the Pantano-Centocelle section, to avoid efficiency losses. MILAN UNDERGROUND LINE 5: Assembly activities have been completed for the functional section from Bignami to Zara and the systems rolled out. The ATC proof tests and final integrated system testing have been completed. The functional section will be rolled out in February No particular issues have arisen in relation to the activities to complete the Zara to Garibaldi section and its roll-out is slated for the end of With reference to the line s extension from Garibaldi (excluded) to the San Siro station, the executive design is substantially complete and orders for all main supplies have been issued. Testing of the signalling and telecommunications materials is nearing completion. Due to delays in delivery from the customer, there is presently a difference between the final date for the work compared to the contractually-agreed programme. An agreement has been reached with the Milan municipality for a situation that, although on a smaller scale (skipping some stations), will allow the partial opening of the Garibaldi to San Siro line by the contractually-agreed date of April 2015 (in time for EXPO 2015) and the completion of all works and the opening of the complete line by October NAPLES UNDERGROUND LINE 1: During the year, the technological works were completed in relation to the Toledo station opened in September. Activities are also underway on the other sites that will lead to the completion of the Dante-Garibaldi section in its final configuration, except for the Municipio and Duomo stations, by the end of BRESCIA UNDERGROUND: The procurement and assembly activities have been completed and the integrated system testing for the start-up (first year of commercial operation) configuration is substantially complete. Performance testing, which involves a greater number of vehicles, is yet to be completed. The system is at a pre-operational stage and ministerial approval for the start-up of commercial operations will be received in March REST OF EUROPE THESSALONIKI UNDERGROUND: Technical meetings continued with the customer, Attiko Metro, to formalise the technical acceptance of the compliance matrix of the CBTC signalling system, and concluded positively in December. With respect to the general final design, the customer has officially approved the Greek version of the Telecom system and partially approved that of the Security Management System (SMS); the English version for the third rail system has been partially approved and the approval procedure for depot equipment is almost complete. A remedy of petition was formally brought before the Greek court at the end of November, representing the parent s claim for damage incurred during the design stage. Moreover, an official claim was lodged in October with the joint venture for the ATC signalling system proposed during the bidding stage and never accepted by the customer. Internal consultations and analyses also continued with a view to agreeing new timelines between the members of the joint venture. COPENHAGEN: All detailed design documentation ( DD ) was issued in the fourth quarter of DD milestones for the CMC (civil works for the depot) and passenger vehicles subsystems have been reached. The supplier of civil works for the depot has completed the activities related to the foundations of buildings E (internal washing) and F (external washing). Activities are underway for the construction of buildings A, B, C and D (electricity substation, offices and depot workshop), cable laying and piping. 18

21 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group The first factory-based testing of power supply and depot workshop equipment has been successfully completed. NORTH AFRICA AND THE MIDDLE EAST RIYADH AUTOMATED PEOPLE MOVER SYSTEM (APM): The building design activities have been completed, as have the interfacing activities with the civil works. All monitoring activities have also been completed, as well as the key activities for roll-out. The system has been running automatically since September 2012; at such time, following the signing of the contract, Ansaldo STS group commenced operation and maintenance activities. As well as activities necessary to consolidate system performances, the roll-out of the automated depot equipment (AMR: automatic meter reading, MMIS: man-machine interface systems and the washing plant), the roll-out of the automatic operation of some vehicles (five vehicles were not available for the implementation) and integrated system testing are yet to be completed. Once these pending issues have been resolved and system performance established, system demonstration activities necessary for the system s handover can commence by mid AMERICA HONOLULU RAIL TRANSIT PROJECT: Approval of the first of three planning stages (definitive design) is underway and activities related to the second stage (interim design) are commencing. The customer officially approved the works schedule in November Subcontract agreements between Ansaldo Honolulu JV and key electrical traction, telecommunications and security and fire prevention partners have been signed in recent months. ASIA PACIFIC TAIPEI UNDERGROUND CIRCULAR LINE: The customer divided the last civil works package, which had not yet been awarded, into two contracts; only the first of these has been awarded. An extension of time was agreed with the customer at the end of 2012 and a new CBS (contract baseline schedule) will be drawn up in the first few months of AUSTRALIA: Production of the reporting period related to projects under the master agreement with Rio Tinto (RAFA). The key production activities of the year related to RCE283, Hope Down 4, Driver Assist, OSS (Overspeed Sensor System) and ECP (Electronically Controlled Pneumatic brakes). Start-up activities are proceeding as scheduled for the AutoHaul and ECP Installation Phase projects. Operating profit (EBIT) of the Transportation Solutions business unit for 2012 came to 69,130 thousand (12.2% as a percentage of revenue), compared to 55,009 thousand (10.7% as a percentage of revenue) in the previous year. This increase is due to the increased volume and the different mix of contracts in the two years. Operating working capital at 31 December 2012 was negative by 129,106 thousand, compared to a negative 172,411 thousand at 31 December The increase is mainly due to the change in net work in progress. Research and development expense taken to profit or loss totalled 1,695 thousand, compared to 1,425 thousand in the previous year. The headcount at 31 December 2012 numbered 631, up 31 employees on the 600 employees at 31 December This rise is linked to the increase in volumes, particularly in Australia. 2.7 Reconciliation between the profit for the year and equity of the parent and the group at 31 December 2012 ( 000) Equity of which: profit for the year Parent s equity at 31 December 2012 and profit for the year then ended 344,396 50,738 Difference between the equities shown in the annual financial statements (including profits for the year) compared with carrying amounts of investments in consolidated companies 78,017 21,125 Goodwill 34,569 - Consolidation adjustments for: Dividends from consolidated companies Translation differences 4, Impairment losses recognised on consolidated companies and loan assets of subsidiaries 7,477 3,837 - Other adjustments - (35) Total attributable to the owners of the parent 468,739 75,665 - Non-controlling interests Total equity at 31 December 2012 and profit for the year then ended 469,166 75,696 19

22 Key events of and after the reporting period 3 Key events of and after the reporting period Through its subsidiary, Ansaldo STS Australia PTY LTD, the group was awarded a 118 million (AUD151 million) contract in May 2012, for the supply of the first two stages of a signalling and communication system for the 342 km railway line for heavy mining-related traffic for the Roy Hill Iron Ore project, in the Pilbara region of Western Australia. The signalling solution proposed by Ansaldo STS is a cutting-edge technological innovation. It features centralised shunting and Automatic Train Protection (ATP), using satellite positioning. This solution is backed by Ansaldo STS s expertise and products and represents a new frontier in the railway sector, paving the way to the signalling systems of the future and offering significant advantages in terms of efficiency, availability, quality and safety. Again in Australia, two contracts totalling 289 million (AUD362 million) were agreed in June 2012 as part of the master agreement with Rio Tinto. The first of these, AutoHaulTM, worth around 253 million (AUD317.5 million), covers the development and supply of an automated train management system for the 1,500 km railway network for the heavy transport of steel for Rio Tinto Iron Ore, in the Pilbara region of Western Australia. Completion of the automated railway for heavy transport is slated for 2015 and it will represent the first of its kind globally, significantly increasing the flexibility and capacity of Rio Tinto Iron Ore s mining railway network. The highly-specialised modular signalling system includes the implementation of a centralised vital safety server, for the safe and flexible management of train manoeuvring and a driving module installed on board enabling fully automated control of the trains. The second contract, worth approximately 36 million (AUD44.7 million), is also part of the master agreement with Rio Tinto Iron Ore (RAFA), for improvements to locomotive control systems. Moreover, again in Australia, a contract worth a total 65 million (AUD80 million) was agreed in July for the supply of signalling, communication and transmission systems as part of the important RCE 353 (Rail Capacity Enhancement Project 353) project for Rio Tinto s heavy transport railway line in the Pilbara region. These important contracts are the last in a series of projects for heavy, mining-related transport for Rio Tinto Iron Ore awarded to Ansaldo STS Australia under the master agreement signed in November 2010 between Ansaldo STS and Rio Tinto Iron Ore (RAFA). A strategic agreement was reached in July with the China-based CNR Dalian and the Taiwan-based General Resources Company, licensing the TramWave technology to the joint venture that will be formed by CNR Dalian and General Resources Company. The innovative TramWave solution offers overhead line-free electric power supply and was developed and patented by Ansaldo STS for use in urban transport systems, eliminating the visual impact of traditional overhead lines. It is hoped that this agreement will lead to a profitable and long-term collaboration so that the many opportunities offered by the Chinese tram market can be exploited. This agreement is also an ideal starting point for more far-reaching collaboration in the mass transit sector with the same partner companies. On 9 July 2012, as approved by the board of directors on 23 May 2012, the parent, Ansaldo STS S.p.A., carried out the third instalment of the bonus issue approved by the shareholders in their extraordinary meeting of 23 April Following the issue of this third instalment, the parent s share capital now equals 80,000,000, comprising 160,000,000 ordinary shares of a nominal amount of 0.50 each. In February 2013, the Ansaldo STS group company, Metro 5 S.p.A., completed the first section of Milan s automatic light rail ( Line M5 ) from Bignami to Zara. The project received project financing and was carried out by the operator Metro 5 S.p.A., which is owned by Ansaldo STS S.p.A., AnsaldoBreda, Astaldi and Alstrom. The operator is in charge of its operation and maintenance for the next 30 years through the operations and experience of ATM, which also manages Milan s other underground lines. The current route covers seven stations, from Bignami in the Fulvio Testi area to Zara. It is slated to reach Garibaldi station by the end of 2013 and as far as San Siro in 2015, offering passengers a line almost 13 kms long and taking 26 minutes, with 19 stations integrated with Milan s other public transport systems. Ansaldo STS group is a key player in Milan s new automatic light rail system, having designed, supplied and implemented the signalling system featuring driverless technology and requiring neither a driver on board the trains or personnel at the stations. Ansaldo STS group won a 26.9 million contract through its Spanish subsidiary in the first few months of 2013 for the maintenance of the railway traffic control and signalling and associated systems for the Madrid-Puigverd de Lleida high-speed line. The fully automated driverless Brescia underground was handed over at the beginning of March 2013, a result of the partnership between Ansaldo STS, Ansaldobreda and Astaldi. 20

23 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group In February, a pre-trial detention order was issued against the chairman and the CEO of the ultimate parent, Finmeccanica, as part of investigations relating to transactions carried out by the Finmeccanica group company, Agusta Westland, with the Indian government, for crimes allegedly committed in the years he was CEO of that company. To the extent of our knowledge and based on the information we have, the events under investigation, which led to this order, are completely unrelated to Finmeccanica s transport business and, specifically, to Ansaldo STS group. Therefore, at present, these events are unlikely to cause interruptions or risks to Ansaldo STS group s contracts in India that could have a significant effect on the financial position and results of operations of the parent and the group. On 4 March 2013, in Naples, part of a building collapsed in Riviera di Chiaia, near the building site for Line 6 of the underground, for which the group is the operator. The causes of the collapse are not yet known and all relevant investigations are being carried out. The building site has been seized and operating activities will be carried out in conjunction with the relevant authorities. Based on available information, this event is not expected to have a significant impact on the group s financial position and results of operations. 21

24 Risks and uncertainties Strategic risks 4 Risks and uncertainties The risks described below stem from a consideration of the features of Ansaldo STS group s market and business, together with the key findings of the updated risk assessment of processes. Risk assessment aims at identifying the main risks for those processes identified as relevant, and the related mitigating actions, as well as defining additional actions to be taken to further reduce the risk or improve process performance. Ansaldo STS s risk assessment process is based on the Committee of Sponsoring Organisations of the Treadway Commission s (COSO) internationally-recognised Enterprise Risk Management framework and seeks to integrate risk assessment into the processes of planning, pursuing corporate targets and internal control in order to create value while properly managing risks and exploiting opportunities. The key risks and uncertainties faced by Ansaldo STS and the group are outlined below following the classification adopted by the group (strategic, operational, financial and IT risks). Risks may exist that have not yet been identified or that are deemed immaterial but which could nonetheless impact group operations. Reference should be made to the notes to the consolidated financial statements for information on the management of financial risks (market, liquidity and credit). 4.1 Strategic risks Changes in the macroeconomic and market context and streamlining programmes Ansaldo STS group operates internationally and is exposed to risks arising from macroeconomic changes and a reference market presenting the greatest opportunities in emerging nations and those with the highest growth rates. Projects are also tending to grow in size and scope and there is an increasingly consolidated trend towards the standardisation of products and technological solutions, especially in the signalling business unit. Although overall market volumes are growing strongly, competition is more intense, pushing down prices, and this market situation could negatively impact Ansaldo STS group s competitive edge and performance. Further market consolidation following Siemens purchase of Invensys signalling business unit and ongoing uncertainty as to the ownership and operating structure of AnsaldoBreda (the key partner in the vehicles business segment) could also have a further negative impact on the group s competitive position. Macroeconomic factors that could impact the group s operations include the growth rate in the reference countries and public spending on infrastructure. The present uncertainty in financial markets, the slowdown in international economic growth and the sovereign debt crisis and consequent plans to reduce public debt (both underway or announced) in various countries could generate delays or reductions in new orders, delays in payments and less favourable financial terms on new contracts, having a negative impact on group performance. Given the many variables in the macroeconomic and market context, the group s strategy may not be fully up to date and adjusted, with a negative impact on Ansaldo STS group s competitiveness and performance. A key element of the group s strategy is to optimise its operating structure by standardising the solutions and products offered and greater resource use efficiency/optimisation in project implementation. Streamlining projects commenced in 2010 to reduce both external and internal costs via operating process optimisation. The anticipated benefits have been partly seen, especially in administrative and sales overheads. Further benefits are expected from the projects commencing or currently being rolled out to give the group s operating procedures an interfunctional focus. Progress is subject to ongoing and structured monitoring given the risk that plans to streamline the group s operating structure may not be implemented as planned or that their results are weaker than expected or take longer than expected, thus negatively affecting the group s profits Innovation: a competitive factor The group s business units of transportation and signalling solutions feature a high level of technological innovation and this represents an important competitive factor. Ansaldo STS group s ability to anticipate technological changes and implement an efficient investment policy is therefore paramount. If it fails to accurately assess innovation requirements, the contents of innovation and development projects, their benefits and related priority, the group runs the risk of not responding to market needs, a low return on investments in innovation/the project, and lost sales. Processes to determine the product portfolio and the regular assessment of products technical competitiveness are in place to mitigate these risks. The features and degree of technological innovation of the group s products and technical solutions generate a risk of obsolescence. There are specific processes in place to ensure its effective management. 22

25 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 4.2 Operational risks Country risk for new markets The group s policy of penetrating new markets, particularly those with the highest rates of development, expose it to risks such as: political, social and economic instability, not accurately evaluating local legislation (as applies to companies, tax and signalling system validation), the challenge of protecting intellectual property, exchange rate fluctuations, as well as the creditworthiness of counterparties, which can negatively impact the group s financial position and results of operations. Country risk is assessed when the group decides which offers and bids to make. How to mitigate the risk and the formalisation of any mitigating actions are also contemplated at the time the proposals are prepared. Reference should be made to the paragraph of this report covering the halt of the contracts in Libya due to the riots in that country and the accumulated delays on the Greek contract which are exacerbated by Greece s current economic woes Reliance on public customers and construction contracts Group operations are highly dependent on public customers and, particularly in the transportation solutions business unit, on construction contracts of a significant amount. Delays, amendments, revisions or cancellations of one or more significant contracts acquired could negatively impact the group s operations and its financial position and results of operations. Assessing construction contracts using the percentage of completion method requires the estimate of costs to complete the activities, project risks (technical, legal, tax and commercial) and contract progress. These estimates are based on assumptions related to the impact of future events which, by their very nature and given the complexity of the projects underway, may not occur as envisaged, thus negatively impacting the project s financial and economic performance. The following factors mitigate such risks: market diversification and monitoring of country and compliance risk; structured project review processes involving senior management; the regular review and adjustment of contract estimates the adoption of risk management processes both at the time the offer is made and throughout project implementation, as well as lifecycle management processes involving the regular comparison of physical and accounting progress and phase review processes Budgeting and risk management project planning Ineffective project control processes could mean the project team cannot implement the project within the set budget and timeframes, especially complex projects. Likewise, risk management may not be effective if based on incomplete or inaccurate information, or if it is not adequately defined and monitored. These risks could cause delays in identifying issues during project roll-out and inaccurate reporting and planning, with a consequent negative impact on the group s financial position and results of operations. To mitigate this risk, there are formalised and monitored processes to check physical and accounting progress and risk management, clear allocation of responsibilities within the project team, managerial review of project performance, review of the estimates at the time the bid is made and an independent review carried out by the risk management department. Specific initiatives are underway to improve the design of the group s control processes Third parties (subcontractors, sub-suppliers and partners) The group makes considerable use of subcontractors to supply subsystems or assembly and installation services and of subsuppliers for goods or services in both its business units. The group s ability to fulfil its obligations to customers therefore relies on both subcontractors and subsuppliers properly fulfilling their contractual obligations. A breach thereby could in turn cause a breach by Ansaldo STS group, negatively impacting its reputation and, unless it is possible to obtain compensation from the subcontractors and subsuppliers, the group s financial position and results of operations. Moreover, particularly in the transportation solutions business unit, the group also carries out contracts in conjunction with other operators. In these cases, each operator generally has joint and several liability vis-a-vis the customer for the completion of the entire contract. In the event of a breach or damage caused to the customer by an operator, Ansaldo STS group could be called on to replace the operator causing the breach or damage, and to compensate the damage caused to the customer in full, without prejudice to the group s right of recourse vis-a-vis the defaulting operator. If the right of recourse against the operator responsible for the breach or damage is ineffective or protracted, this could negatively impact the group s operations as well as its financial position and results of operations. Moreover, the preliminary assessment and consequent selection of partners, subcontractors and subsuppliers in new markets may be inadequate, with negative impacts on the group s order backlog, reputation, financial position and results of operations and on the effectiveness of partnership governance (for instance, differences of opinion between the partners, misalignment of risks and costs/ benefits for the individual partners). To mitigate these risks, the group has processes in place to select and evaluate subcontractors and subsuppliers, it works with known and reliable partners, it defines, agrees and manages appropriate contractual and JV clauses, it has risk management processes, and it requests adequate guarantees, where applicable. These processes involve specific scouting and assessment activities when choosing subcontractors and partners in new markets. Initiatives are underway to improve the identification and evaluation of subcontractors and subsuppliers in the bid stage. 23

26 Risks and uncertainties Operational risks Adequacy of and efficiency in developments and technical references Development projects that do not come in on time and on budget or that do not clearly understand and identify the requirements could negatively impact profits, delivery times and customer satisfaction. Moreover, if the group does not have adequate market and operating references for products, this could lead to lost sales and non-compliant project implementation, negatively impacting the group s competitiveness and its financial position and results of operations. Planning and control processes are in place for development activities to ensure proper priority is given, and timing and cost controls. The risk that the group may not have adequate references for new products is carefully assessed at the time the bid is considered and managed through recovery plans monitored by senior management during project roll-out Liability to customers or third parties for product defects or delivery delays Technological complexity and tight delivery times for group products and systems could leave the group liable for delays in or failure to supply contractually-agreed products or services, for their non-compliance with customer requirements (for instance, due to design or construction faults) and for breaches of and/or delays in marketing, the provision of post-sales services and product maintenance and servicing. Moreover, many products and systems supplied by the group are subject to certifications and approval, including by third-party bodies. Such liability could be directly attributable to the group or to third-party operators such as subsuppliers or subcontractors. These risks could negatively impact the group s operations, its financial position and results of operations and its reputation, and could also result in the group incurring costs to repair faulty products or their withdrawal from the market in extreme cases. Even if adequate insurance is in place, the sum insured could be exceeded or the premiums could be raised following a claim, negatively impacting the group s financial position and results of operations. To mitigate these risks, the group agrees specific insurance coverage, carefully supervises its engineering, validation and returns monitoring processes and identifies mitigating actions and provides for contingencies in the bid quote in conjunction with the risk management process Legal disputes The complexity of dealings with third parties (customers, subcontractors/subsuppliers and partners), the content of systems and products developed, as well as specific business risks expose the group to a significant risk of legal disputes. Legal disputes could also relate to the awarding of bids. The settlement of disputes could be complex and take a long time, leading to delays in completing projects and negative impacts on the group s operations and its financial position and results of operations. To mitigate this risk, there are risk management processes in place during both the bid and management stages, contractual clauses are examined carefully in conjunction with the legal department, and a prudent approach is adopted in recognising specific items under contract costs and provisions for risks Human resource management The group supplies products and systems featuring cutting-edge technology on a global scale and to do so, it requires human resources with specific expertise, which can be difficult to procure on the labour market. The success of the business development plans, especially in new markets, also depends on the group s ability to attract, retain and develop the skills of its human resources, particularly in order to operate in a context of a global market and group. To mitigate this risk, human resource management policies reflect the business needs. The group also has an integrated human resource management and development system under which regular checks of expertise and performance are carried out and relevant training initiatives identified, as well as enabling the best possible allocation of resources. Processes are also in place to identify the most talented resources and plot career paths for them. The Future leaders programme was launched in 2012 to promote the growth of human resources showing the greatest potential (reference should be made to the section covering human resources in chapter 7). There are critical issues in relation to the adequacy of certain organisational roles of the work groups which could compromise the achievement of some of the benefits expected from organisation by bid and project team. Specific initiatives are underway to strengthen these roles. Specific training plans are also being finalised for managers and talented human resources Health, safety and environmental compliance The group has to comply with health, safety and environmental legislation in the various countries in which it operates. Failure to comply with such legislation as a result of operating processes which are not adequately monitored or, especially in new markets, due to an inadequate evaluation of such requirements could expose the group to risks having significant impacts on the group s operations, its financial position, and results of operations and its reputation. To mitigate this risk, the group adopts health, safety and environmental management systems ensuring rigorous compliance with legislation in accordance with best practices and subject to internal and external monitoring. These management systems are certified (to OHSAS standard for workplace safety and ISO14001 for the environment) in most of the group s key companies. Requirements in new markets are evaluated at the time the bid is prepared and the assistance of external consultants is also sought. Policies and procedures have also been set to ensure a consistent approach throughout the group s various companies while still allowing for specific local legislation. 24

27 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 4.3 Financial risks Ability to finance a high level of current assets and obtain guarantees To carry out contracts the group requires: - adequate financing of current assets; - bank and/or insurance guarantees issued to the customer in the various project stages (bid bond, advance payment bond, performance bond, retention money bond and warranty bond) and/or guarantees issued by the parent (ultimate parent guarantees). Current assets are usually funded by customer advances and progress payments. The group s ability to obtain guarantees at good rates depends on the evaluation of the group s financial position and results of operations, which is usually based on various indices including the group s own analysis of its financial position, analysis of the contract risk and experience and competitive positioning in the reference sector. The group believes it complies with the relevant parameters. At 31 December 2012, Ansaldo STS group had guarantees of 3,588,954 thousand ( 2,857,361 thousand at 31 December 2011). Difficulty in negotiating suitable financial terms for new contracts, payment delays and/or suspension and deterioration of existing terms of payments, or the group s inability or greater difficulty in obtaining guarantees at good rates, would negatively impact the parent and group s operations and their financial position and results of operations. To mitigate these risks, the group has commercial and contract management policies focussed on financial aspects, centralised treasury management which optimises the cash flows of the various group companies, the group s financial position is solid and the contract parameters are assessed right from the time of the bid stage. Although still negative, working capital is improving in the present economic and market context and cash flows are down, due to delays in collections and a corresponding increase in overdue positions due to delays in public funding of projects underway in both Italy and abroad. These positions are monitored closely and specific initiatives are in place to mitigate their impact. 4.4 IT risks IT system management IT systems are a vital part of the group s operating structure and their management must be in line with the group s strategic objectives. IT solutions that do not match business needs, or upgrades thereof that do not meet users needs, or inefficient system management, could compromise the efficiency and effectiveness of group operations. Moreover, the unavailability of interruption of IT services or data loss or damage (including as a result of hacking) could compromise group operations. To mitigate this risk, the IT policies were set in consideration of the organisational and process change initiatives. Moreover, the group has a governance system based on best practices and follows structured and monitored processes for hardware and software management. 25

28 The environment 5 The environment Ansaldo STS group has pursued sustainability in recent years in the belief that respecting environmental and social values leads to the creation of long-term value for the business. In its Sustainability report, the group transparently discloses its values, strategies, policies and decisions in terms of economic, environmental and social sustainability. From an environmental point of view, Ansaldo STS group is involved: as a producer, committed to pursuing environmental protection policies not only by just complying with existing laws, legislation and directives but by pursuing ongoing improvement in the environmental impact of its products and production processes; as a supplier of railway operators, in the knowledge that offering increasingly evolved, safe and reliable railway traffic control and automation products promotes the rapid development of the most environmentally-friendly transport system available today, thus attracting ever-greater numbers of freight and passenger transport service users. Strategic orientation and management approach The group has implemented an Integrated Management System (IMS) for environment, safety and quality issues. At group level, it set policies and procedures to ensure the controlled management of the processes and workplace safety and environmental protection activities. Each group company subsequently set local policies in relation to the environment, safety and instructions, based on the framework of legislative requirements and group policies and procedures, in order to achieve the following objectives: ensuring compliance with legal requirements applicable to its processes in the various countries in which its subsidiaries operate, by formalising procedures that increase awareness of the applicable legislative framework; identifying significant direct and indirect environmental issues in order to reduce and control the related impact, both as relates to the group and its suppliers and partners; defining key indicators with a view to facilitating the assessment of performance. Ansaldo STS recommends its subsidiaries follow the ISO framework and EMAS (Eco-Management and Audit Scheme) regulation in developing their management systems and certification is regarded as key to developing an ingrained environmental awareness both among group personnel and suppliers and subcontractors. Innovation and the diffusion of good practices The demands of the market and the experience that some subsidiaries have consequently gained have led to the development of environmental management systems and subsequent ISO certification, which Ansaldo STS is extending to all group companies; the possibility of extending the EMAS regulation to the other production facilities is still under consideration. The table below shows the current status of certifications gained or in the process of being certified: COUNTRY NON-PRODUCTION FACILITIES ISO 9001 ISO ISO GREAT BRITAIN Bravington House yes yes yes IRELAND Kerry, Ireland sold sold sold FRANCE Les Ulis yes yes yes SPAIN Madrid yes yes yes SWEDEN Solna yes yes yes ITALY Genoa yes yes yes Naples yes yes yes Piossasco yes yes yes UNITED STATES OF AMERICA Pittsburg yes yes 2014 Batesburgh yes yes 2014 ASIA PACIFIC Banyo Brisbane yes 2013 yes Viola Brisbane yes 2013 yes Kolkata yes 2013 yes Noida yes 2013 yes Bangalore yes 2013 yes Chennai yes 2013 yes Karratha yes 2013 yes Kuala Lumpur Office yes 2013 yes Kuala Lumpur Factory yes 2013 yes Melbourne closed closed closed Newcastle yes 2013 yes Perth yes 2013 yes Sydney yes 2013 yes 26

29 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group COUNTRY PRODUCTION FACILITIES ISO 9001 ISO ISO UNITED STATES OF AMERICA Batesburg yes yes 2014 FRANCE Riom yes yes yes ITALY Tito yes yes+emas yes Commitment to fight climate change Ansaldo STS group has developed a carbon management strategy and is committed to the fight against climate change, in the belief that improving environmental performance will contribute to protecting the planet and offering the group the opportunity to create value. The following principles underpin Ansaldo STS group s climate strategy: 1. a global approach in developing mechanisms that take into account the commitment of all Ansaldo STS group facilities; 2. reasonable and achievable long-term targets in order to give a clear and realistic view of the actions to be taken; 3. support in developing advanced technological solutions. Consolidating the carbon management strategy involves defining an overall target for emissions reduction. Communication, training and education Ansaldo STS group is increasingly focussed on training related to environmental issues. Its specific training programme is fundamental to fostering a sense of environmental responsibility and constructive environment-related dialogue among group employees and suppliers/contractors. Ansaldo STS group s training and educational programmes are designed to increase awareness of: the importance of complying with the environmental policy and the environmental management system procedures and requirements; actual or potential significant environmental impacts of activities and the environmental benefits that each individual can pursue; roles and responsibilities in order to comply with the environmental policy and environmental management system procedures and requirements, including the preparation of contingency and response plans; the potential consequences of deviating from the operating procedures; the potential offered by the effective implementation of a combined quality, environment and safety policy for Ansaldo STS s business development and for the development of railway transport. Subsequent environmental management system training sessions are held for personnel based on the specific corporate processes and related environmental aspects relevant to their activity. Records are kept of all training provided to personnel in its facilities. Training and educational sessions are coordinated by experts, who also produce relevant documentation. General environment-related information The operations of Ansaldo STS s subsidiaries mainly comprise office-based activities; Ansaldo STS group has full responsibility therefor in terms of direct and indirect environmental aspects. The operations of several production facilities are fully compliant with the concepts of environmental protection and are among those which have been certified or for which the certification process is underway. The Italian production facility (Tito-PZ) is also EMAS-certified. Management of water resources Water consumption is purely for sanitary uses, except for at the Batesburg facilities, and is monitored and subject to regular sampling. Ansaldo STS has rolled out water-saving initiatives in recent years, such as the installation of automatic sensor taps. Generation and management of special waste The activities carried out at the facilities involve the generation of non-toxic special waste, mainly paper and cardboard packaging and plastic packaging. This is handled by companies authorised for its transport and recycling. Hazardous special waste generated by maintenance activities are disposed of by the global service companies contracted by ASTS. 27

30 The environment Energy consumption, CO 2 emissions, emission trading and other emissions Energy consumption mainly stems from heating, lighting and utility power; it is monitored and is in line with consumption levels reported for similar businesses. Ansaldo STS has obtained RECS (Renewable Energy Certificate System) certification for the consumption of electrical energy at its Italian facilities. RECS certificates (issued for every 1MWh) attest to the use of renewable energy sources. Through the purchase and subsequent withdrawal of the certificate from the market, Ansaldo STS demonstrates its environmental commitment as it pays a higher amount than it would for electricity from conventional sources. Management of dangerous substances Dangerous substances used in group processes are handled in full respect of the environment by adopting all possible precautions set out in technical literature and in compliance with REACH (EU) regulations. 28

31 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 6 Research and development The centrally-coordinated research and development expense generated by the Signalling and Transportation Solutions business units and taken directly to profit and loss totalled 35.3 million in 2012 (2011: 37.7 million), against grants and services approximating 3.0 million (2011: 3.8 million). Key activities of the year are described below: Signalling Research and development expense totalled 33.1 million in 2012 (2011: 36 million), against grants of 2.5 million (2011: 3.5 million). In respect of externally-funded projects, the following projects funded by the Ministry of Production Activities (Industria Sustainable Mobility) for intermodality are drawing to a close: SISTEMA - involving the study of railway movement at ports. The project will be completed in early 2013 with a demonstration in the Port of Genoa. SLIMPORT - a project coordinated by SelexElsag within which the group coordinates the Slim Rail sub-project, involving the design of a rail-based port-inner harbour container transfer system. The project was completed in As part of the National Operational Programmes, the following activities were carried out using the Campania region funds: SICURFER - development and piloting of technologies to monitor railway infrastructures in order to raise safety and security levels. DIGITAL PATTERN DEVELOPMENT - a project coordinated by Fiat for the development of simulation systems used in the design and production of road and rail transport systems and components; the group is involved in developing the rail traffic simulation systems. Activities commenced in early VERO (Virtual Engineering for Railways and automotive) - the project supports the construction of simulators to determine the optimal size of signalling systems. The project will commence in early 2013 following a delay in funding approval which has now been obtained. EU-funded projects include those related to signalling (INESS), infrastructure monitoring (ALARP, RESTRAIL and MAXBE), safety (CESAR and EXCROSS) and security (PROTECTRAIL, SECUR-ED and EXCETERA). The developments concerning the use of satellite technologies in signalling systems which commenced during the year played a central role. Activities commenced in the second half of 2012 related to satellite positioning and the ERTMS (European Rail Traffic Management System) satellite system (which will use the RBCs - radio block centres), following increasing demand in the rail market, particularly as relates to freight (the Roy Hill contract acquired by ASTS Australia); specifically: The type of satellite receiver to be used in the positioning component ( localisation device system or LDS ) has been identified. The precise functional requirements of the satellite positioning system are being finalised under the virtual buoy principle, to support the first Australian contract for Roy Hill. This work will also represent a reference point for the European standardisation of the new ERTMS satellite system, in which Ansaldo is WP leader within Unisig. Field testing is scheduled (and the related architecture identified) to take place in an actual railway context to compare the coordinates obtained from the existing system (ATCS - Advanced Train Control System), which are known to be accurate, with those calculated based on satellite data. The aim of this testing is to evaluate positioning accuracy, improve the precision algorithms if necessary, and enable them to be reproduced in the laboratory as part of the integration of the system comprising LDS, on-board and trackside application simulation. Fine-tuning the positioning function will also represent a starting point for the integration of the ERTMS satellite system, for which the feasibility of a pilot site in Sardinia is under consideration. Again in respect of the Australian market and the above-mentioned RBC system (this time without satellite positioning, but using traditional positioning methods), a cutting-edge project is being rolled out to add to the existing traditional system a radio block derived from the ERTMS system but tailored to the specific freight-related needs, to be integrated with the driverless automatic train operation (ATO) system. Using the satellite system as backup infrastructure for traditional radio systems (VHF) is another highly innovative step. Funding (3INSAT) has been obtained from the European Space Agency (ESA) for these development activities: Ansaldo STS heads up a business consortium which includes RFI and the German research centre, DLR. The project will also include the study and a pilot in Sardinia of the possibility of using communication networks other than GSMR (such as public GSM and TETRA) in railway signalling; these activities will support the developments stated above in point 4 for the recently acquired Rio Rinto AutoHaul contract. 29

32 Research and development Development activities also took place on the following projects which do not receive external funding: StandardRBC/ERTMS Standard BALISE Reduced-size BALISE SIGNAL ENCODER ON BOARD CBTC (COMMUNICATION BASED TRAIN CONTROL) INTERLOCKING MULTIFUNCTION PORTAL Transportation Solutions Research and development expense for the Transportation Solutions business unit totalled 2.2 million in 2012 (2011: 1.7 million), against grants of 0.5 million (2011: 0.3 million). The following financed projects are underway: SITRAM: the project is funded by the Ministry of Economic Development (MED) using the Industria 2015 scheme. It comprises the design and piloting of cutting-edge technological solutions for energy captation without overhead lines (TramWave ) and increased efficiency of the energy cycle and security. The modular TramWave solution was developed and industrialised in this context, and a 600-metre section of the Naples-Poggioreale line was equipped for system functionality and safety testing. Given the delayed issue of the definitive decree, an 18-month extension was requested and approved, taking the project end date to June PIEZORAIL: this project is funded by the Ministry for the Environment; its scope is to design and pilot innovative solutions to produce electrical energy with the passing of trains by putting piezoelectric pads under tramway and underground rail tracks. Importantly, a testing site is being set up in the Naples facilities. The project was completed in January 2013 with the testing and field trials of the results offered by adopting these solutions. The SFERE research and development project funded by the Ministry for University and Research commenced in the last quarter of Its aim is to develop solutions to control energy flows and to pilot integrated solutions involving the installation of supercapacitators. The MBAT project funded by the Artemis JV (a public-private player that grants European Commission funding the innovation of embedded systems) and the Ministry for University and Research was launched in early Its scope is to improve the efficiency and effectiveness of embedded systems development and testing with a view to greater rail system safety and availability. Research and development expense for the year totalled 32,260 thousand, down 1,640 thousand over the previous year (2011: 33,900 thousand). The activities generated by the Signalling business unit totalled 30,566 thousand (down 1,909 thousand on the previous year) and mainly related to the following companies: Ansaldo STS S.p.A.: 13,652 thousand Ansaldo STS France S.A.S.: 11,730 thousand Ansaldo STS USA Inc.: 5,079 thousand The activities developed by the Transportation Solutions business unit totalled 1,695 thousand, up 270 thousand on the previous year. 30

33 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 7 Human resources and organisation Specific initiatives in line with the group s strategic targets to streamline operations, develop expertise and for international integration were rolled out in Streamlining policies In respect of the streamlining policies referred to in the KORU (Key Operational Results Unfolded) internal project, the reduction of personnel numbers continued in 2012 due to resources whose skills no longer meet the group s business needs, through various programmes (redundancy schemes in Italy, trade union agreements in France and make or buy strategies in the US), as well as exploiting the interfunctional synergies generated by global process and expertise integration and shifting the balance between internal/external expertise towards the group s core competencies. This resulted in a reduction in expenses, without affecting service quality, and a reduction in the percentage impact of personnel numbers. Development of expertise Initiatives have been rolled out to foster and monitor the skills and performance of group personnel right from the time they join the group. Specifically, the Global recruiting & job posting process was implemented, which identifies global professional profiles and offers employees professional growth and development opportunities. Mapping of all work levels was also completed as part of the Global Job System and this was followed by a comparison of group employees skills against the profiles. Initiatives to develop project team expertise were rolled out in 2012 in response to specific training needs, and two sessions were held of the Key roles empowerment programme. A Global Induction programme fully available on-line was also launched for new employees with a view to spreading a corporate culture and identity based on the group s core values. International integration The success of the group depends on the proper implementation of the global organisational model launched at the end of the FFDB process and various initiatives were therefore undertaken to increasingly integrate and globalise the group s various departments: key positions increasingly held by resources from all the major entities (Australia, India, France and the USA); increasing the number of employees involved in global secondment schemes to foster international expertise and integration; strengthening interbusiness and intergeographic synergies thanks to the internal mobility of resources; activating the first localisation strategies. The Future Leaders plan launched in 2012 deserves special mention. It forms part of the Talent Management process and its scope is to identify, develop and encourage those individuals demonstrating the distinctive characteristics necessary for the leaders of Ansaldo STS group. The future leaders must be real agents of change, encourage team spirit, be internationally-minded and be prepared to work with dedication and commitment anywhere in the world, while taking on increasing responsibility. The initiative is open to all group employees. The selection process is based on increasingly complex objective testing, the results of the candidates most recent performance reviews, as well as personal motivation as expressed in a covering letter. The final stage of the Future Leaders programme involved individual interviews with senior management and was completed in December Twenty top talents were subsequently identified and assigned to work on strategic projects in the near future The parent Ansaldo STS Members of the parent s senior management appointed as per the most recent resolution dated 5 April 2011 have not changed in 2012 and they are as follows: Chairman of the board of directors: Alessandro Pansa; Deputy chairman of the board of directors: Giancarlo Grasso; Chief executive officer: Sergio De Luca. In its meeting of 27 January 2012, the board of directors unanimously approved the following changes, proposed by the CEO, to Ansaldo STS group s first-level organisation of the Company Secretary & General Counsel, Standard Processes, Quality & IT Services and Strategy positions, effective 1 October

34 Human resources and organisation International integration On 5 March 2012, the board also acknowledged that the International Special Project position has been cancelled and conferred the role of Senior Vice President Delivery of the Transportation Solutions business unit on Michele Fracchiolla. With effect from 1 September 2012, Ansaldo STS s board of directors appointed Christian Andi Chief Financial Officer in place of Alberto Milvio and simultaneously appointed him in charge of the Finance department. This followed the resolutions approved by the board during its meeting of 26 July In its meeting of 27 September 2012, the board of directors unanimously approved the following changes, proposed by the CEO, to Ansaldo STS group s first-level organisation of the Company Secretary & General Counsel, Standard Processes, Quality & IT Services and Strategy positions, effective 1 October 2012: - to eliminate the Company Secretary & General Counsel position held by Mauro Gigante so the following departments report directly to the CEO: i) Legal Business Affairs & Litigation, confirming Filippo Corsi as its head; ii) Corporate Affairs & Group Insurances, confirming Grazia Guazzi as its head; iii) External Communication, confirming Roberto Alatri as its head. - to appoint Grazia Guazzi (in charge of the Corporate Affairs & Group Insurances department) as the new secretary to the board of directors; - to close the Standard Processes, Quality & IT Services department and allocate the related activities to other departments, specifically: i) IT Services activities to the CFO s department; ii) Process Improvement & Quality activities to the Strategy department; iii) personnel development activities to the Human Resources department; iv) to change the name of the Strategy department to Strategy, Quality & Improvement. Ansaldo STS s first-level organisational structure is therefore as follows: Reporting to the CEO, Sergio De Luca: - Signalling business unit: Emmanuel Viollet; - Transportation Solutions business unit: Sergio De Luca, ad interim; - Standard Platforms & Products business unit: Giuseppe Gaudiello; - Innovation & Competitiveness: Giovanni Bocchetti; - Legal Business Affairs & Litigation: Filippo Corsi - Corporate Affairs & Group Insurances: Grazia Guazzi - External Communication: Roberto Alatri - Chief Financial Officer: Christian Andi; - Human Resources: Stefano Palmieri; - Risk Management: Roberto Passalacqua; - HSE & Facility Management: Giuseppe Spezzi; - Security: Giovanni Rapiti; - Strategy, Quality & Improvement: Marco Fumagalli Reporting to the chairman of the board of directors: - Internal Audit: Mauro Giganti. The board of directors unanimously approved Ansaldo STS group s 2011 Sustainability report on 30 March In their meeting of 28 June 2012, the board of directors unanimously authorised the secondment of Giovanni Rapiti to AnsaldoBreda S.p.A. for a period of roughly one year, on a part-time basis and against payment. In the same meeting, the board of directors unanimously appointed Antonio Liguori Branch Manager and, as such, as legal representative of the parent s permanent establishment in Thessaloniki, conferring on him all powers for the management of the branch and related and consequent activities; this followed the resignation of Mario Picone Subsidiaries The country representatives of Ansaldo STS s major entities are as follows: Country Representative Ansaldo STS France S.A.S.: Emmanuel Viollet (Président de la Société). Country Representative Ansaldo STS USA Inc.: Thomas Lawton (President & Chief Executive Officer). Country Representative Ansaldo STS Australia PTY LTD: Lyle Jackson. Country Representative Ansaldo Railway System Trading (Beijing) Ltd: Davide Cucino (Chairman of the Board of Directors). The headcount may be analysed as follows: 32 COMPANY/REGION Change ASTS Italy* 1, (51) ASTS France** (28) ASTS USA (93) ASTS APAC ASTS China (12) (*) Includes the employees of ASTS Germany. (**) Includes the employees of ASTS UK and ASTS Sweden.

35 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Streamlining of the production facilities in France and the USA continued in 2012, while the redundancy scheme ended in Italy. The increase in the APAC headcount is due to the increase in activities for the Rio Tinto project and the demand for personnel by the Balfour Beatty JV for the Malaysian project Headcount at 31 December 2012 The group s headcount at 31 December 2012 numbered 3,991, down a net 109 employees (2.7%) on the 4,100 employees at 31 December It may be analysed by business unit at 31 December 2012 as follows: Signalling business unit: 2,971 employees, equal to 74.4% of total employees; Transportation Solutions business unit: 631 employees, equal to 15.8% of total employees; Other activities: 389 employees, equal to 9.7% of total employees. Headcount by Business Unit at 31 December (no.) 3,991 4, % December % December 2011 Signalling Business Unit Transportation Solutions Business Unit Other 7.2 Data protection document Disclosure pursuant to Legislative decree no. 196 of 30 June 2003 (personal data protection code) Pursuant to paragraph 26 of the Technical requirements governing minimum security measures, which forms Annex B to Legislative decree no. 196 of 30 June 2003 (personal data protection code), the Data protection document for the processing of personal data was updated in This document contains the information required by paragraph 19 of Annex B and describes the security measures implemented by the parent to minimise the risk of destruction or loss, including accidental, of personal data, unauthorised access or unapproved processing, or processing that does not comply with the purposes for which it was gathered. 7.3 Incentive plans Ansaldo STS has developed and approved: - a medium-term stock grant plan; - a long-term cash incentive plan. These plans form part of a series of short-, medium- and long-term incentive plans, and represent a considerable portion of group management s total remuneration. They are also designed to peg a significant portion of managers remuneration to the achievement and improvement of financial ratios, as well as strategic objectives that are especially important for the group s creation of value. Moreover, on 23 April 2010, the shareholders of Ansaldo STS approved a stock plan for for a maximum of 50 employees that are key to particularly strategic projects for the group, which are fundamental to achieving its financial targets. The plan is mainly targeted at middle management and is designed to foster a sense of belonging to the group, strengthen the concept of performance/remuneration, and encourage the retention of resources deemed key to achieving ambitious group objectives The stock grant plan On 1 March 2012 a two-year stock grant plan for a maximum of 56 employees plus the CEO and key management personnel was approved by the appointments and remuneration committee and subsequently ratified by the shareholders in their meeting of 7 May The plan s vesting conditions are the same as those of the 2011 plan (EVA, FOCF and the share performance against the FTSE Italia All-share). The stock grant plan differs from previous plans as it complies with the recommendations of article 7 of the Code of conduct, as modified in March 2010 by Borsa Italiana S.p.A. s corporate governance committee, and of the current article 6 of such code, as amended in December The main changes represent the introduction of: a three-year vesting period for all beneficiaries; a two-year lock-up period for 20% of the shares due to the CEO and key managers; a very thin (2.5%) tolerance band, within which a proportional amount of the shares will vest on a linear basis, for each objective. The group calculated the shares due for 2011 under the stock grant plan based on the achievement of the relevant vesting conditions. 33

36 Human resources and organisation Investments held by directors The total shares due numbered 10,640; 8,206 shares were actually made available to the beneficiaries on 3 December 2012 after the relevant amounts were withheld for Italian participants under applicable tax laws. The group checked that the vesting conditions for the 2011 stock grant plan were achieved and calculated the shares due. The total shares due numbered 69,243; 47,912 shares were actually handed over to the beneficiaries on 3 December 2012 after the relevant amounts were withheld for Italian participants under applicable tax laws Cash plans There was no outlay in 2012 in relation to the and cash plans for the CEO and the eligible key managers, as the related vesting conditions were not achieved. Likewise, no amount is expected to be paid out in 2013 as the vesting conditions included in the plan for 2012 were not achieved. 7.4 Investments held by directors Following the amendments made by CONSOB (the Italian commission for listed companies and the stock exchange) with resolution no of 23 December 2011 to the Regulation adopted with resolution no of 14 May 1999 (the Issuer Regulation ), information on investments held in the issuer or companies controlled thereby by members of management bodies, general managers and key managers, as well as their spouses, unless legally separated, and minor children, directly or via subsidiaries, trustees or nominees referred to in the repealed article 79 of such regulation is now presented in compliance with the provisions of article 84-quater.4 of the regulation, in the remuneration report prepared pursuant to article 123-ter of Legislative decree no. 58/98 and in compliance with schedule 7-bis of annex 3 to the Issuer Regulation. The remuneration report is made available to the public as provided for by law and regulations. 34

37 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 8 Financial disclosure Financial market transactions The Investor relations department liaises constantly with analysts and investors in order to grasp market disclosure requirements and accurately target communications from senior management. The aim is to ensure the group, in terms of its business model and strategies, is accurately evaluated by the financial market. A relationship of trust has to be built up and maintained to ensure information is properly disclosed. Financial analysts are viewed as important reference points to understanding the group, its business and the strategies adopted by management. Total actual coverage fell to 15 investment banks in 2012, compared to 17 in the previous year, due to changes within the brokers internal organisation. Some of these investment banks provide regular sector research and competition analyses, which the Investor relations department collects, examines and discloses internally, together with official market communications. Investor relations activities are planned and implemented on the basis of the annual communication plan. Road shows, conferences and events numbered 26 in 2012 (35 in 2011 and 42 in 2010); market analyses, policies and strategies underlying the group s business operations were presented at these events. An Investor day is held to update the financial community, in order to facilitate an accurate evaluation of Ansaldo STS s share and its operating sector; preliminary reporting date figures, an orientation for the coming year and future objectives are also disclosed at this time. The website is another vital tool for communication and relations with investors, institutions and the market (and, more generally, the public). Winning the Best Improver 2012 award awarded by KWD Webranking (an agency that monitors and evaluates the quality of websites of listed companies and prepares an annual ranking) for the second year running confirmed the success of this tool. The criteria followed to determine the ranking are broken down for each aspect of corporate communication, relations with investors and with the media, the use of social networks and the transparent handling of governance information. In recent months, Ansaldo STS has risen to 14 th position from its previous 26 th (40 th in 2010). The 2012 Sustainability report, which is subject to review, will be presented to the shareholders in their 2013 meeting. Share performance The official share price in the 31 December 2011 to 28 December 2012 period went from 6.44 (calculated on a like-for-like basis following the bonus issue of 9 July 2012) to 7.07, representing an annual increase of around 9.8%. The third instalment of the bonus issue was carried out on 9 July 2012 with the issue of a further 20,000,000 new shares, distributed to eligible shareholders in the ratio of one share to every seven held. The share s high for the year of 7.07 was recorded on 28 December 2012 and its low of 4.47 on 1 June An average 903,015 shares were traded daily in the year. The share s performance did not follow the reference indices, with the FTSE Italia All-Share up 8.4% in 2012, while the FTSE Italia STAR rose 16.6%. The average of analysts guide prices at the end of 2012 was 7.56; those of the latter part of the year in particular are similar to the year-end market price. The share s performance in the second half of the year was impacted by news of a possible sale by the majority shareholder and even more so since the consolidation process got underway within the group s reference sector, with the purchase of a competitor (Invensys PLC) by another large player (Siemens AG). This news generated increased speculation on the share but no high speculative funds bought shares. The market s perception of the Ansaldo STS share is that it is defensive and anti-cyclical, and its sector is perceived to have growing reference business; this also reflects management s ability to seize new and important opportunities at international level. 130 Ansaldo STS S.p.A. Italy FTSE Italia Star Italy FTSE Italia All-Share % 9.55% 8.36% Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 35

38 Financial disclosure Key shareholders at 31 December 2012 Shareholder No. of shares % held Finmeccanica SpA 64,104,865 40,066 UBS AG 4,315,487 2,697 Altrinsic Global Advisors LLC 3,347,200 2,092 Key data per share Earnings per share ( ) ** Basic and diluted EPS Dividend per share 0.18* (*) proposed to the shareholders. (**) Recalculated following the bonus issue of 9 July The parent distributed dividends for the first time in 2007, one year after its stock market listing on 29 March The amount proposed to the shareholders to be distributed as dividends in 2012 totalled 28,800 thousand, compared to 28,000 for

39 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 9 Corporate Governance and ownership structure pursuant to Article 123-bis of Legislative Decree no. 58 of 24 February 1998 and subsequent amendments (the Consolidated Finance Act) The Ansaldo STS S.p.A. shares have been listed on the Star segment of the markets organised and managed by Borsa Italiana S.p.A. since 29 March 2006 and have been included on the FTSE MIB index since 23 March With the approval of the board of directors given on 19 December 2006, Ansaldo STS adopted the Code of conduct endorsed by Borsa Italiana S.p.A. in March 2006 and came into line with its requirements during Borsa Italiana S.p.A. s corporate governance committee adopted a new Code of conduct in December On 18 December 2012, Ansaldo STS s directors resolved to comply with the principles of this new code and to update its own governance systems to reflect them. Detailed disclosure on the parent s corporate governance structure and the measures taken following the adoption of the 2011 Code of conduct is provided in the section of the directors report covering corporate governance and the adoption of the Code of conduct for listed companies related to 2012, published together with this annual report. After setting the number of directors at nine, the shareholders appointed the parent s new board of directors for on 5 April 2011: Alessandro Pansa (Chairman), Giancarlo Grasso, Sergio De Luca, Maurizio Cereda, Attilio Salvetti, Paola Girdinio, Tatiana Rizzante, Giovanni Cavallini and Filippo Giuseppe Maria Milone. Mr. Milone subsequently resigned from the board of directors effective 13 December To replace Mr. Milone, the board of directors co-opted Bruno Pavesi as director, on 30 March Mr. Pavesi s appointment as a director was approved by the shareholders in their meeting of 7 May At the same meeting of 5 April 2011, the shareholders also appointed the board of statutory auditors for , comprising Giacinto Sarubbi (Chairman), Renato Righetti and Massimo Scotton, and appointing Bruno Borgia and Pietro Cerasoli as substitute auditors. The board of directors also appointed the members of the current internal control committee (now the risk and control committee) on 5 April 2011 ( Attilio Salvetti Chairman, Maurizio Cereda and Paola Girdinio), the remuneration committee (now the appointments and remuneration committee) (Maurizio Cereda chairman, Giovanni Cavallini and Filippo G. M. Milone); following the resignation of Mr. Milone and his replacement with Mr. Pavesi, the latter was also appointed to the remuneration committee with effect from 30 March The company s Chief financial officer, Alberto Milvio, was appointed manager in charge of financial reporting. Also on 5 April 2011, the board of directors appointed Sergio De Luca as CEO, Giancarlo Grasso as deputy chairman of the board of directors and Mario Orlando, the parent s general secretary, as board secretary. This position was subsequently conferred on Mauro Gigante, by the board of directors on 22 September 2011, as the parent s new general secretary, replacing Mario Orlando, who became Finmeccanica s Group General Counsel. Finally, on 27 September 2012, the board of directors appointed Grazia Guazzi (in charge of the parent s Corporate Affairs & Group Insurances department) as the new secretary to the board of directors, to replace Mauro Gigante who ceased to hold any role within Ansaldo STS group from 1 October The parent s board of directors also appointed Christian Andi as the parent s new chief financial officer, with effect from 1 September 2012, and, subject to the board of statutory auditors approval, as manager in charge of financial reporting pursuant to article 154-bis of Legislative decree no. 58/1998, replacing Alberto Milvio. On their appointment and/or cooptation, the directors, Giovanni Cavallini, Maurizio Cereda, Paola Girdinio, Tatiana Rizzante, Attilio Salvetti and Bruno Pavesi, confirmed they meet the requirements for independence of current legislation and the Code of conduct. The board of directors also assessed these requirements and the board of statutory auditors, in turn, checked the criteria adopted by the board were properly applied. The board then subsequently checked the independence requirements were still complied with in their meetings of 13 December 2011 and 18 December 2012, during which the board (i) examined the results of the regular surveys carried out on company directors positions as directors or statutory auditors in other listed, financial, banking, insurance or large-sized companies, as notified by each director; (ii) acknowledged the statements made by the independent directors and confirmed they continue to meet the independence requirements required by current legislation and the Code of conduct. Also in the meeting of 5 April 2011, pursuant to the requirements of the 2006 Code of conduct, after discussion with the internal control committee (now the risk and control committee), the company s board of directors also appointed the CEO, Sergio De Luca, as executive director in charge of supervising the operation of the internal control system and Mauro Giganti, who heads up the company s internal audit department, as the internal control manager. On 18 December 2012, Ansaldo STS s board of directors, pursuant to article 7 of the new Code of conduct approved by Borsa Italiana S.p.A. s corporate governance committee in December 2011, confirmed the CEO, Sergio De Luca - formerly executive director in charge of supervising the operation of the internal control system under article 8.C.5 of the 2006 Code of conduct - as director in charge of the internal control and risk management system under article 7.C.4 of the new Code of conduct; moreover, on Mr. De Luca s proposal, with the approval of the internal control committee and having consulted the board of statutory auditors, the board of directors confirmed Mauro Giganti - formerly in charge of internal control under article 8.C.6 of the 2006 Code of conduct - as manager of the Internal audit department under article 7.C.5 of the new Code of conduct. Pursuant to the Code of conduct, during the first meeting of the board of statutory auditors, also held on 5 April 2011, the statutory auditors, Giacinto Sarubbi, Renato Righetti and Massimo Scotton, also confirmed they meet the independence requirements of current legislation and stated thereby at the time of their appointment. Possession of the independence requirements was subsequently checked and confirmed by the members of the board of statutory auditors also during the meetings held on 27 January 2012 and 18 December

40 Corporate Governance and ownership structure pursuant to Article 123-bis of Legislative Decree no. 58 of 24 February 1998 and subsequent amendments (the Consolidated Finance Act) During the fi rst half of the year, a specialised company completed its assessment of the operation of the board of directors and its internal committees. The fi ndings of this assessment showed that Ansaldo STS s board of directors fully complies with the requirements of the Code of conduct and its operation compares favourably with international Corporate Governance best practices. On 29 October 2012, the parent s board of directors engaged a specialised company to evaluate the board of directors and its internal committees for The company also published its 2011 Sustainability report in the fi rst half of Such report was reviewed by PricewaterhouseCoopers. With respect to the independent auditors appointed to perform the legally-required audit of Ansaldo STS S.p.A. s fi nancial statements, in their meeting of 7 May 2012, the shareholders assigned the new audit engagement for the period to KPMG S.p.A. For the reasons extensively described in the documentation prepared pursuant to current legislation for such meeting and available at the following website: the shareholders approved this appointment following the termination for just cause, by the shareholders in the same meeting of 7 May 2012, of the previous independent audit engagement assigned to PricewaterhouseCoopers. This was decided in order to avoid differences between the parent and Ansaldo STS group s audit engagements, after the expiry (at the meeting of the shareholders called to approve the 2011 fi nancial statements) of the legally-required audit engagement of the ultimate parent, Finmeccanica, which was also performed by PricewaterhouseCoopers. Accordingly, the shareholders decided to appoint the same independent auditors for its legally-required audit for as the ultimate parent, Finmeccanica, had appointed through its relevant procedure, i.e., KPMG. This meant the company was able to draft, also for the future, a group-level work plan offering streamlined and optimised costs for the company and greater effi ciency in audit activities. Finally, on 5 March 2012, the board of directors approved the parent s 2012 remuneration policy, in compliance with the recommendations of article 7 of the 2006 Code of conduct (as amended in March 2010), on the basis of the proposal prepared by the appointments and remuneration committee dated 1 March After discussion with the appointments and remuneration committee, the board of directors subsequently approved the remuneration report prepared by the parent pursuant to article 123-ter of the Consolidated fi nance act and article 84-quater of the Issuers regulation, in its meeting of 30 March Finally, pursuant to article 123-ter.6 of the Consolidated fi nance act, in their meeting of 7 May 2012, the shareholders approved the fi rst part of the above-mentioned report required by article 123-ter.3 of the Consolidated fi nance act, which describes the company s remuneration policy for its offi cers and key managers, and the procedure followed to implement and describe this policy. Pursuant to article 70.8 of the Issuer regulation, we note that, in their meeting of 28 January 2013 and as permitted by articles 70.8 and 71.1-bis of the Issuer regulation, the parent s board of directors resolved to opt-out of the requirement to prepare the required documents at the time of signifi cant transactions such as mergers, demergers, share capital increases via contributions in kind, acquisitions and sales. The key corporate governance tools the parent has implemented in compliance with the most recent legislative and regulatory requirements, those required by the Code of conduct and national and international best practices, are as follows: By-laws; Code of ethics; Organisational, management and control model pursuant to Legislative decree no. 231/01; Shareholders meeting regulations; Board of directors regulations; Risk and control committee regulations; Appointments and remuneration committee regulations; Related party transactions - Procedure adopted pursuant to article 4 of Consob regulation no of 12 March 2010; Procedure for the handling of privileged information; Internal dealing code of conduct. For further details on the parent s corporate governance, reference should be made to the Corporate governance report, comprising all disclosure required by article 123-bis of the Consolidated fi nance act, available on the company s website Genoa, 5 March 2013 On behalf of the Board of Directors The Chairman Alessandro Pansa (signed on the original) 38

41 Signalling and Transportation Solutions 2012 Annual Report Ansaldo STS Group Consolidated Financial Statements at 31 December 2012 and notes thereto 39

42 Accounting Statements Consolidated Statement of Comprehensive Income 10 Consolidated Financial Statements 10.1 Income statement ( 000) Note of which, related parties of which, related parties Revenue ,247, ,305 1,211, ,934 Other operating income ,325 1,633 24, Purchases 14.4 (266,635) (13,732) (244,599) (24,232) Services 14.4 (538,371) (66,804) (537,675) (62,793) Personnel expense 14.5 (311,988) - (296,560) - Amortisation, depreciation and impairment losses 14.6 (20,768) - (13,410) - Other operating expense 14.7 (32,514) (116) (24,956) (100) Changes in finished goods, work-in-progress and semi-finished products (3,915) - (-) Internal work capitalised , Operating profit 117, ,120 Financial income , , Financial expense 14.9 (23,593) (62) (27,529) - Share of profits of equity-accounted investees , Pre-tax profit 114, ,352 Income taxes (38,421) - (42,296) - Profit for the year 75,696 73,056 attributable to the owners of the parent 75,665 72,956 attributable to non-controlling interests Earnings per share Basic and diluted * (*) Recalculated following the bonus issue of 9 July Statement of comprehensive income ( 000) Profit for the year 75,696 73,056 Other comprehensive income - Actuarial gains (losses) on defined benefit plans (2,419) 1,329 - Net change in cash flow hedges - - fair value (5,596) (1,320) transfer to profit or loss (386) 4,587 - Exchange rate gains 2,724 1,462 - Income tax on other comprehensive (income)/expense 1,763 (26) Other comprehensive (income)/ expense, net of taxes (3,914) 6,032 Total comprehensive income for the year 71,782 79,088 Attributable to: - the owners of the parent 71,692 79,016 - non-controlling interests

43 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 10.3 Statement of financial position ( 000) Note of which, related parties of which, related parties ASSETS Non-current assets Intangible assets ,062-54,348 - Property, plant and equipment ,099-93,886 - Equity investments ,735-37,561 - Loans and receivables ,345 6,779 18,232 2,765 Deferred tax assets ,127-42,209 - Other non-current assets ,628-23, , ,047 Current assets Inventories , ,936 - Contract work in progress , ,302 - Trade receivables , , , ,130 Current financial assets at fair value through profit or loss ,756 - Tax assets ,081-18,618 - Loan assets , , ,343 2,531 Derivatives ,627-8,688 - Other current assets ,061 1,555 45,434 1,509 Cash and cash equivalents , ,928-1,600,553 1,471,074 Total assets 1,865,549 1,741,121 EQUITY AND LIABILITIES Share capital ,998-69,998 - Reserves , ,016 - Equity attributable to the owners of the parent 468, ,014 Equity attributable to non-controlling interests ,122 - Total equity 469, ,136 Non-current liabilities Loans and borrowings Employee benefits ,724-29,159 - Deferred tax liabilities ,102-6,379 - Other non-current liabilities ,839-11,016-49,665 46,992 Current liabilities Progress payments and advances from customers , ,735 - Trade payables ,563 58, ,851 45,984 Loans and borrowings ,375-14,915 - Tax liabilities ,727-1,977 - Provisions for risks and charges ,842-23,136 - Derivatives ,108-5,818 - Other current liabilities , , ,346,718 1,269,993 Total liabilities 1,396,383 1,316,985 Total liabilities and equity 1,865,549 1,741,121 41

44 Accounting Statements Statement of cash flows 10.4 Statement of cash flows ( 000) of which, related parties of which, related parties Cash flows from operating activities: Gross cash flows from operating activities 153, ,299 - Change in working capital (51,001) (24,263) (42,657) (55,729) Changes in other operating assets and liabilities (19,426) (3,760) (14,760) (1,697) Net interest paid (6,253) 90 (4,608) 648 Income taxes paid (32,600) - (47,867) - Cash flows from operating activities 44,026 17,407 Cash flows from investing activities: Acquisitions of companies, net of cash acquired Investments in property, plant and equipment and intangible assets (10,462) - (10,543) - Sales of property, plant and equipment and intangible assets 3, Acquisition of equity investments, net of cash acquired (376) Sales of equity investments Other investing activities 14 - (44) - Cash flows used for strategic transactions (216) - (6,302) - Cash flows used in investing activities (6,659) (16,534) Cash flows from financing activities: Net change from other financing activities (50,849) (118,640) 5, ,512 Dividends paid to non-controlling investors Cash flows generated by/(used in) financing activities (50,849) 5,363 Net increase/(decrease) in cash and cash equivalents (13,482) - 6,236 - Exchange rate gains (losses) (609) - 1,372 - Opening cash and cash equivalents 160, ,320 - Closing cash and cash equivalents 146, ,928 42

45 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 10.5 Statement of changes in equity Changes in equity are shown in the following table: ( 000) Share capital Retained earnings and consolidation reserves Hedging reserve Stock grant reserve Translation reserve Other reserves Equity attributable to the owners of the parent Equity attributable to noncontrolling interests Total equity Equity at 1 January , ,977 (2,386) 3,338 (554) 59, ,411 1, ,461 Change in consolidation scope Change in consolidation reserves Net change in stock grant reserve (3,111) - - (3,111) - (3,111) Other comprehensive income/(expense), net of taxes - 1,329 3,267-1,490 (26) 6,060 (28) 6,032 Bonus issue of 20,000,000 shares 10, (10,000) Allocation of profit for the year to the legal reserve Dividends - (33,592) (33,592) - (33,592) Allocation of profit for the year to the reserve for legal reserve adjustment Net change in treasury shares Other changes Profit for the year ended 31 December , , ,056 Equity at 1 January , , , ,014 1, ,136 Change in consolidation scope (783) (13) Change in consolidation reserves (2) (2) Net change in stock grant reserve , ,263-1,263 Other comprehensive income/(expense), net of taxes - (2,419) (5,982) - 2,665 1,763 (3,973) 59 (3,914) Bonus issue of 20,000,000 shares 10, (10,000) Allocation of profit for the year to the legal reserve Dividends - (28,000) (28,000) - (28,000) Allocation of profit for the year to the reserve for legal reserve adjustment Net change in treasury shares Other changes Profit for the year ended 31 December , , ,696 Equity at 31 December , ,008 (5,101) 1,490 4,279 41, , ,166 43

46 Notes to the Consolidated Financial Statements at 31 December 2012 General information 11 Notes to the Consolidated Financial Statements at 31 December General information Ansaldo STS is a company limited by shares with its registered office in Via Paolo Mantovani 3-5, Genoa, and a branch in Via Argine 425, Naples. It has been listed on the Star segment of the stock exchange managed by Borsa Italiana S.p.A. since 29 March 2006 and included in the FTSE MIB index since 23 March Ansaldo STS S.p.A. is a subsidiary of Finmeccanica S.p.A., with its registered office in Piazza Monte Grappa 4, Rome, which manages and coordinates the company. These consolidated financial statements were authorised for publication on 5 March On 9 July 2012, as approved by the board of directors on 23 May 2012, the company carried out the third instalment of the bonus issue approved by the shareholders in their extraordinary meeting of 23 April Following the issue of this third instalment, the company s share capital now equals 80,000,000, comprising 160,000,000 ordinary shares of a nominal amount of 0.50 each. Ansaldo STS group operates internationally in the design, construction, marketing and sales of solutions, systems, products, components and services in the above-ground and underground railway Signalling and Transportation Solutions business units. Ansaldo STS S.p.A., as parent, also exercises industrial and strategic guidance and control, coordinating the activities of its operating subsidiaries (together, Ansaldo STS group or the group ), which operate in the above industrial sectors. Ansaldo STS group s origins lie in transport signalling and system activities, which were carried out by Ansaldo Transporti (Finmeccanica group) until the second half of the 1990s. The incorporation of Ansaldo Signal N.V. in 1996 and Ansaldo Trasporti Sistemi Ferroviari S.p.A. in 2000 (along with the incorporation of AnsaldoBreda S.p.A. for the vehicles sector in the same year) entailed a reorganisation of the entire transport sector, whereby Finmeccanica gained full control of Ansaldo Signal N.V., Ansaldo Trasporti Sistemi Ferroviari S.p.A. and AnsaldoBreda S.p.A.. Meanwhile, Finmeccanica S.p.A. acquired S.I.C. Società Italiana Comunicazioni S.r.l. in 1996, and the latter s name was changed to EuroSkyway S.r.l. in It went into liquidation in April To implement the strategic decision taken by Finmeccanica S.p.A. in the second half of 2005 to list the signalling and transportation solutions operations on the stock market, after having standardised these activities using a single management model with a view to exploiting industrial and commercial synergies, at the end of 2005, the sole quotaholder of EuroSkyway S.r.l. (Finmeccanica S.p.A.) resolved to reverse the company s liquidation and then transform it into a company limited by shares, change the company s name to Ansaldo STS S.p.A. and change its business object to above-ground and underground railway signalling and transportation systems. After this transaction was completed, as previously discussed, in February 2006, Ansaldo STS S.p.A. acquired 100% of Ansaldo Signal N.V. and Ansaldo Trasporti Sistemi Ferroviari S.p.A. from Finmeccanica S.p.A.. Ansaldo STS S.p.A. has been listed on the stock exchange since 29 March Specifically, Finmeccanica S.p.A. sold 60 million shares of the company (equal to 60% of the share capital) to the market at the price of 7.80 per share, retaining the remaining 40 million shares (equal to 40% of the share capital). At the time the investments in Ansaldo Signal N.V. and Ansaldo Trasporti Sistemi Ferroviari S.p.A. were acquired (24 February 2006), all companies operating globally in the signalling activities were owned by Ansaldo Signal N.V., while the transportation solution companies were held by Ansaldo Trasporti Sistemi Ferroviari S.p.A.. After the stock market listing, a reorganisation of the group was launched to streamline the current control chain of the subsidiaries and to reduce the group s corporate structure costs. This reorganisation saw the completion of the following key transactions between 2007 and Some investments in group companies in the Asia/Pacific area were reallocated, as these markets are gaining increasing importance for the group and considering the close industrial and commercial ties between the companies. Accordingly, with effect from 1 January 2008, Ansaldo STS Australia PTY Ltd. controls the Indian and Malaysian operating companies and is under the direct control of the parent, Ansaldo STS S.p.A.. Moreover, two new companies were incorporated: Ansaldo STS Southern Africa (Botswana) and Ansaldo STS South Africa PTY Ltd. (now Ansaldo STS - Sinosa Rail Solutions South Africa Pty Ltd). These companies operate in the quickly expanding southern African markets, under the control of Ansaldo STS Australia PTY Ltd. In Italy, the two operating companies active, respectively, in the Signalling and Transportation Solutions business units, Ansaldo Segnalamento Ferroviario S.p.A. and Ansaldo Trasporti Sistemi Ferroviari S.p.A., were merged into the parent, Ansaldo STS S.p.A., listed on the stock exchange. The merger took effect for legal, accounting and tax purposes on 1 January The Dutch sub-holding company, Ansaldo Signal N.V., was merged into Ansaldo STS S.p.A. with legal, accounting and tax effect from 1 October This transaction entailed the transfer of all investments held by Ansaldo Signal N.V. to Ansaldo STS S.p.A.. As stated, Ansaldo STS group has two business units in the above-ground and underground railway sectors: Signalling and Transportation Solutions. Signalling comprises the design, production, management and maintenance of signalling systems, subsystems and components for above-ground and underground railway transport. The key operating companies in this business unit are the parent Ansaldo STS S.p.A. (as a result of the merger of Ansaldo Segnalamento Ferroviario S.p.A.) in Italy, Ansaldo STS France S.A. in France, Ansaldo STS Australia PTY Ltd. in Asia/ Pacific and Ansaldo STS USA Inc. in America. Transportation Solutions comprises the design and development of integrated transport systems, of which signalling is an essential part. More specifically, it involves designing and planning ways to integrate design and development activities for the technological components of the system, i.e., the track, signalling, power supply, telecommunications and vehicles (for both above-ground and underground trains), as well as any other technological works that, as a whole, represent an integrated transport system. The finished integrated transport system product, whether for above-ground or underground railways, is then delivered on a turnkey basis to the customer. The group can also offer signalling and transportation systems services separately, tailored to customer s specific needs. The key core expertise for these activities is centralised in Italy at the parent, Ansaldo STS S.p.A., following the merger of the subsidiary, 44

47 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Ansaldo Trasporti Sistemi Ferroviari S.p.A., which was focused exclusively on this sector. All foreign group companies originally active in the Signalling field are now honing their expertise and increasing their commercial foothold also in the Transportation Solutions sector Basis of preparation Ansaldo STS group s consolidated financial statements at 31 December 2012 are drafted in accordance with the International Financial Reporting standards (IFRS) endorsed by the European Commission pursuant to EC regulation no. 1606/2002 of 19 July 2002, integrated by the interpretations of the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) issued by the International Accounting Standard Board (IASB) applicable at such date. These consolidated financial statements have been prepared on a cost basis, except for those captions which, as required by the IFRS, are to be recognised at fair value, as described in the relevant accounting policies. They are comprised of an income statement, a statement of comprehensive income, a statement of financial position, a statement of cash flows, a statement of changes in equity and the notes thereto. As permitted by IAS 1, assets and liabilities are presented in the statement of financial position as current and non-current, while income statement captions are shown by nature. The statement of cash flows was prepared using the indirect method. Amounts are shown in thousands of euros unless stated otherwise. The consolidated financial statements of Ansaldo STS group at 31 December 2012 were approved and authorised for publication by the board of directors in accordance with ruling legislation on 5 March These consolidated financial statements have been prepared in accordance with the IFRS and audited by KPMG S.p.A Accounting policies Basis and scope of consolidation Ansaldo STS group s consolidated financial statements at 31 December 2012 include the financial statements at 31 December 2012, or at the date of the most recently approved financial statements, of the companies/entities in the consolidation scope (the consolidated entities ) drafted pursuant to the IFRS applied by Ansaldo STS group. The consolidated entities are listed below, showing the group s related direct or indirect interest therein: Companies consolidated on a line-by-line basis COMPANY INVESTMENT TYPE REGISTERED OFFICE SHARE/ QUOTA CAPITAL ( 000) CURRENCY INVESTMENT % ANSALDO STS AUSTRALIA PTY LTD Direct Eagle Farm (Australia) 5,026 AUD 100 ANSALDO STS SWEDEN AB Direct Solna (Sweden) 4,000 SEK 100 ANSALDO STS FINLAND OY (In liq.) Indirect Helsinki (Finland) 10 EUR 100 ANSALDO STS UK LTD Direct London (United Kingdom) 1,000 GBP 100 ANSALDO STS IRELAND LTD Direct Tralee (Ireland) 100 EUR 100 ACELEC Société par actions simplifiée Indirect Les Ulis (France) 168 EUR 100 ANSALDO STS ESPANA SA Indirect Madrid (Spain) 1,500 EUR 100 ANSALDO STS BEIJING LTD Indirect Beijing (China) 837 EUR 80 ANSALDO STS HONG KONG LTD Indirect Hong Kong (China) 100 HKD 100 ANSALDO STS FRANCE Société par actions simplifiée Direct Les Ulis (France) 5,000 EUR 100 UNION SWITCH & SIGNAL INC Indirect Greenville (Delaware USA) 1 USD 100 ANSALDO STS MALAYSIA SDN BHD Indirect Petaling Jaya (Malaysia) 3,000 MYR 100 ANSALDO STS CANADA INC Indirect Kingstone (Canada) 0 CAD 100 ANSALDO STS USA INC Direct Wilmington (Delaware USA) USD 100 ANSALDO STS USA INTERNATIONAL CO Indirect Wilmington (Delaware USA) 1 USD 100 ANSALDO STS USA INT. PROJECTS CO Indirect Wilmington (Delaware USA) 25 USD 100 ANSALDO STS TRANSPORTATION SYSTEMS INDIA PVT LTD Indirect Bangalore (India) 1,312,915 INR 100 ANSALDO STS DEUTSCHLAND GMBH Direct Munich (Germany) 26 EUR 100 ANSALDO RAILWAY SYSTEM TRADING (BEIJING) LTD Direct Beijing (China) 1,500 USD 100 ANSALDO STS-SINOSA RAIL SOLUTIONS SOUTH AFRICA (PTY) LTD Indirect Frankenwald, (Sud Africa) 2 ZAR 51 ANSALDO STS SOUTHERN AFRICA PTY LTD Indirect Gaborone (Botswana) 0.1 BWP

48 Notes to the Consolidated Financial Statements at 31 December 2012 Basis of preparation Companies consolidated on a proportionate basis COMPANY INVESTMENT TYPE REGISTERED OFFICE SHARE/ QUOTA CAPITAL ( 000) CURRENCY INVESTMENT % BALFOUR BEATTY ANSALDO SYSTEMS JV SDN BHD Indirect Kuala Lumpur (Malaysia) 6,000 MYR 40 KAZAKHSTAN TZ-ANSALDO STS ITALY LLP Direct Astana (Kazakhstan) 22,000 KZT 49 Companies measured using the equity method COMPANY INVESTMENT TYPE REGISTERED OFFICE SHARE/ QUOTA CAPITAL ( 000) CURRENCY INVESTMENT % ECOSEN CA (Venezuela) Indirect Caracas (Venezuela) 1,310 VBF 48 ALIFANA SCARL Direct Naples (Italy) 26 EUR ALIFANA DUE SCARL Direct Naples (Italy) 26 EUR PEGASO SCARL (in liq.) Direct Rome (Italy) 260 EUR METRO 5 SpA Direct Milan (Italy) 50,000 EUR 24.6 Metro Brescia S.r.l. Direct Brescia (Italy) 500 EUR 40.4 INTERNATIONAL METRO SERVICE S.r.l. Direct Milan (Italy) 700 EUR 49 On 30 March 2012, Ansaldo STS S.p.A. s board of directors approved the closure of Ansaldo STS Sistemas de Transporte e Sinalização Limitada, with registered office in Brazil. The closure took effect from 23 May 2012, as per the resolution taken by the shareholders of Ansaldo STS Sistemas de Trasporte e Sinalização Limitada on such date. On 28 September 2012, the indirect dormant subsidiary Ansaldo STS Finland OY was put into liquidation. The liquidation process will be completed within the first half of Subsidiaries and jointly-controlled entities Entities over which Ansaldo STS group has control by owning directly or indirectly more than half of the voting rights or by exerting the power to govern the financial and operating policies of entities/companies, so as to obtain benefits from their activities, including regardless of the percentage of equity investments, are consolidated on a line-by-line basis. Entities whose consolidation would be irrelevant in both quantitative and qualitative terms for a true and fair presentation of the group s financial position, financial performance and cash flows are not consolidated but measured using the equity method. The assessment of relevancy is made with reference to an entity s operating procedures (e.g., consortium entities not limited by shares and controlling investments in consortia limited by shares which do not present their own results of operations as they recharge their costs to their investors and whose financial statements, net of infragroup assets and liabilities, shows immaterial amounts) or status (e.g., entities no longer operative that do not have assets or employees or entities whose liquidation procedures are almost completed). Investments (including special purpose entities) in jointly controlled entities are consolidated on a proportionate basis, that is, assets and liabilities, costs and revenue are only consolidated to the extent of the investment percentage, thereby not including third-party interests. All subsidiaries are consolidated from the date control commences, until such time as control ceases. Business combinations are recognised using the acquisition method, whereby the acquirer purchases the acquiree s net assets and recognises the acquiree s assets, liabilities and contingent liabilities. The consideration for the transaction includes the acquisition-date fair values of the assets transferred, liabilities assumed, equity instruments issued and any other transaction cost. Any difference between the consideration paid and the acquisition-date fair value of the acquired assets and liabilities is allocated to goodwill. If the purchase price allocation process gives rise to negative goodwill, it is recognised in profit or loss at the acquisition date. Acquisition-related costs are recognised in profit or loss when the related services are rendered. In the event of acquisition of investments in not wholly-owned subsidiaries, goodwill is recognised only to the extent of the parent s share. Non-controlling interests are calculated in proportion to the equity investments held by minority interests in the acquiree s identifiable net assets. In a business combination achieved in stages, when control is taken, the previously-held equity interests in the acquiree are remeasured at fair value and the resulting gain or loss is recognised in profit or loss. Balances related to transactions between consolidated entities are eliminated, specifically, receivables and payables in place at year end, costs and revenue and financial income and expense and other items recognised in profit or loss. Gains and losses between consolidated entities and the related tax adjustments are also eliminated. The reporting period of all consolidated companies ends on 31 December. The group s consolidated financial statements are based on the figures at 31 December

49 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Other equity investments Investments (generally of between 20% and 50%) in entities over which the group has significant influence are measured using the equity method. When the equity method is applied, the carrying amount of the investment equals equity adjusted, where necessary, to reflect the application of IFRS. It includes any goodwill, net of impairment losses, arising on acquisition, as well as on consolidation. Gains and losses on transactions between equity-accounted investees and consolidated entities are eliminated. Any impairment losses exceeding the carrying amount of the investment are recognised under the provision for risks on equity investments. The fair value of equity investments in portfolio, provided that such criterion is applicable, is calculated based on the bid price of the last trading day of the month to which the IFRS financial statements refer (31 December 2012 in the case of these consolidated financial statements), or based on financial valuation techniques for unquoted instruments. Any equity investments held for sale, such as those acquired solely for the purpose of disposal within twelve months, are classified separately as assets held for sale. Segment reporting Operating segments were identified by management in line with the management and control model adopted, reflecting the business units in which the group is active (Signalling and Transportation Solutions). Functional currency The balances included in the financial statements of each group company/entity are recognised in the currency of the primary economic environment in which the company/entity operates (functional currency). The consolidated financial statements of Ansaldo STS group are presented in euros, which is the parent s functional currency. Foreign currency transactions Foreign currency monetary items (cash and cash equivalents, assets and liabilities to be received or settled in established or determinable monetary amounts, etc.), as well as non-monetary items (advances to suppliers of goods and/or services, etc.), are initially recognised at the exchange rate ruling when the transaction is performed. Subsequently, monetary items are translated into the functional currency at the closing rate and any exchange rate gains or losses are taken to profit or loss. Non-monetary items are maintained at the exchange rate ruling at the transaction date, unless continuing adverse economic trends affect the rate, in which case exchange rate differences are taken to profit or loss. Translation of financial statements of foreign operations Financial statements expressed in a foreign currency (except for currencies of hyperinflationary economies, which is not currently the case of the group) are translated into the functional currency as follows: assets and liabilities are translated at the closing rate; costs and revenue, income and expense are translated at the average exchange rate of the year or at the rate ruling at the date of the transaction if this varies significantly from the average rate; exchange rate gains or losses arising from the translation of captions at a rate that differs from the closing rate and from the translation of opening equity at a rate that differs from the closing rate are taken to the translation reserve. The translation reserve is released to profit or loss when the investment is sold. Goodwill and fair value adjustments relating to the acquisition of foreign operations are recognised as assets and liabilities of the foreign operation and translated at the closing rate. The following exchange rates were adopted to translate the foreign currency financial statements and balances for the current and previous years: Spot rate at 31/12/2012 Spot rate at 31/12/2011 Average rate year ended 31/12/2012 Average rate year ended 31/12/2011 USD CAD GBP HKD SEK AUD INR MYR BRL CNY VEB 5, , , , BWP ZAR KZT JPY

50 Notes to the Consolidated Financial Statements at 31 December 2012 Basis of preparation Intangible assets Intangible assets are identifiable non-monetary assets without physical substance that generate future economic benefits for the group. They are recognised at purchase and/or production cost, including directly related charges incurred to prepare them for use, net of accumulated amortisation, except for assets with an indefinite useful life, and any impairment losses. Amortisation begins when the asset becomes available for use and is calculated systematically over the residual useful life of each asset. Amortisation is calculated considering the actual use of the asset in the year in which an intangible asset is initially recognised. (i) Goodwill Goodwill recognised as an intangible asset arises from business combinations and reflects an excess in the acquisition cost of a business or business unit over the total fair value at the acquisition date of acquired assets and liabilities. As it has an indefinite useful life, goodwill is not amortised. Instead, it is tested for impairment at least once a year, unless the market and management indicators identified by the group show that the test has to be conducted when preparing interim financial statements. For impairment testing purposes, goodwill acquired in a business combination is allocated to individual or groups of cash-generating units (CGUs) that are expected to benefit from the synergies of the combination. The CGUs through which the group operates in the different market sectors, are identified as the smallest business segments that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill on acquisitions of consolidated companies is recognised in intangible assets, while that related to unconsolidated subsidiaries or associates is included in the carrying amount of equity investments. (ii) Concessions, licences and trademarks These include trademarks identifying the origin of products or goods from a specific company and licences to use know-how, software or the property of others. The costs, including direct and indirect expenses incurred to obtain these rights, are capitalised after the rights have been acquired and are amortised systematically over the shorter of the period of expected use and the period for which the right has been acquired. (iii) Research and development expense Research expense is taken to profit or loss when incurred. Internally generated intangible assets and the related development expense are recognised only when all the following conditions exist simultaneously: the asset can be identified; the asset may generate future economic benefits; the cost to develop the asset can be measured reliably; there is a reference market for the product generated by the development activity. When these conditions are not met, development expense is recognised in profit or loss when incurred. This expense, which is capitalised only when the four above conditions are met, is amortised on a straight-line basis over the asset s useful life. Leased assets (i) Finance leases where group companies are lessees As lessee, at the date of initial recognition, the group recognises leased assets under assets and recognises a financial liability at the same time equal to the lower of the asset s fair value and the present value of minimum future payments due at inception of the lease, using the implicit interest rate of the lease or the marginal interest rate of the loan. Subsequently, the group takes amortisation applied to the asset and interest separated from the payments of the year to profit or loss. (ii) Finance leases where group companies are lessors At the date of initial recognition, the leased asset is derecognised and a receivable of an amount equal to the net investment in the lease is recognised. The net investment in the lease is the aggregate of the minimum lease payments and any unguaranteed residual value, discounted at the interest rate implicit in the lease. Subsequently, the group expenses finance income over the lease term on a systematic basis, to reflect a constant periodic rate of return on the residual net investment. Estimated unguaranteed residual values are reviewed regularly to check if any impairment indicators exist. (iii) Operating leases Operating lease income and expense are taken to profit or loss over the lease term on a straight line basis. Property, plant and equipment Property, plant and equipment are measured at purchase or construction cost, net of accumulated depreciation and any impairment losses. Cost includes direct charges incurred to prepare assets for use and any disposal and removal costs that will be incurred to restore the site to its original conditions. 48

51 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Costs for ordinary and/or routine maintenance and repairs are taken directly to profit or loss when incurred. Costs to expand, upgrade or improve owned or leased assets are capitalised only to the extent they meet the requirements to be classified separately as assets or part of an asset. Grants related to assets are taken as a direct decrease in the cost of the asset to which they relate. The carrying amount of each asset is depreciated on a systematic basis. Depreciation is calculated on a straight-line basis each year over the residual useful lives of assets. Depreciation is calculated considering the actual use of the asset in the year in which an item of property, plant and equipment is initially recognised. The following table lists depreciation periods for each item of property, plant and equipment: Land: indefinite useful life Buildings: years Plant and machinery: 5-10 years Equipment: 3-7 years Other assets: 3-8 years The estimated residual value and the useful life of an asset are reviewed periodically. Depreciation of an asset ceases on the date the asset is sold or classified as held for sale. If a depreciable asset is comprised of separately identifiable components with useful lives that differ significantly from the other components comprising the asset, depreciation is calculated separately for each component, using the component approach. Profits and losses on the sale of assets or groups of assets are measured by comparing the selling price with the related carrying amount. Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (qualifying assets) are capitalised as part of the cost of that asset. Investment property Property held to earn rentals or for capital appreciation is classified under Investment property and is measured at purchase or production cost, increased by transaction costs, if any, and net of accumulated depreciation and any impairment losses. Impairment losses Assets with an indefinite useful life are not depreciated/amortised, but are tested for impairment annually. Depreciable assets are tested to check whether there is any indication that they may be impaired. If any such indication exists, the recoverable amount of the asset is estimated and any excess thereof is recognised in profit or loss. Recoverable amount is the higher of an asset s fair value less costs to sell and its value in use, calculated based on the discounted cash flow model. The discount rate includes the risks specific to the asset for which the future cash flow estimates have not been adjusted. Assets that do not generate independent cash flows are tested based on the cash-generating unit. When, subsequently, impairment losses no longer exist, the carrying amount of the asset is increased to the carrying amount of the assets which shall not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Reversals of impairment losses are recognised in profit or loss. An impairment loss recognised for goodwill is never reversed. Inventories Inventories are measured at the lower of cost, calculated using the weighted average cost method, and net realisable value. Financial expense and overheads are not included in inventories. Net realisable value is the estimated selling price in the ordinary course of business considering any costs of completion and the estimated costs necessary to make the sale. Contract work in progress Contract work in progress is recognised in accordance with the percentage of completion method whereby contract cost, revenue and contract profits (losses) are recognised using the percentage of completion method, which is calculated as the costs incurred at the measurement date and total estimated project costs or based on the product units delivered. The measurement reflects the best estimate of the stage of completion at the reporting date. The group periodically updates these estimates. Any profits or losses are recognised in the year in which the adjustments are made. The expected loss on a contract is recognised entirely under operating costs when it becomes reasonably foreseeable, along with an accrual to the provision for expected losses to complete contracts. Contract work in progress is recognised net of any allowances, expected losses and progress payments and advances relating to contracts in progress. This analysis is performed individually for each contract, recognising the positive difference (work in progress in excess of progress payments and advances) under contract work in progress and the negative difference under progress billings. If the amount recognised under progress billings is not collected at the preparation date of the annual and/or interim financial statements, a balancing entry is recognised under trade receivables. Contracts with consideration in a currency other than the functional currency (the euro for the group) are measured by translating the portion of consideration accrued, as per the percentage of completion method, at the closing rate. However, under the group s policy governing currency risk, all contracts whose cash inflows and outflows are significantly exposed to exchange rate fluctuations are adequately hedged, as described in the section on Hedging construction contracts against currency risk. 49

52 Notes to the Consolidated Financial Statements at 31 December 2012 Basis of preparation Loans and receivables and financial assets Financial assets are classified as follows: financial assets at fair value through profit or loss; loans and receivables; held-to-maturity investments; available-for-sale financial assets. Financial assets are classified by management upon initial recognition. (i) Financial assets at fair value through profit or loss This category includes financial assets acquired for the purpose of trading in the short term, in addition to derivative instruments, in relation to which reference should be made to the paragraph below. The fair value of these instruments is based on the bid price at the reporting date: the fair value of unquoted instruments is determined using generally accepted financial valuation techniques. Fair value gains or losses of the financial instruments included in this category are recognised immediately in profit or loss. Classification as current or non-current reflects management expectations about trading: they are included under current assets when they are expected to be traded within twelve months of the reporting date or when they are recognised as held for trading. (ii) Loans and receivables This category includes non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value, adjusted to reflect any transaction costs, and subsequently measured at amortised cost using the effective interest method. If there is objective evidence of impairment, the carrying amount of the asset is discounted to the estimated future cash flows. Impairment losses are recognised in profit or loss. If, in subsequent years, the reasons underlying the impairment loss cease to exist, the impairment loss is reversed to the extent of the carrying amount the asset would have had based on amortised cost had the impairment not been recognised. They are included in the current section, except for those which are due after more than twelve months after the reporting date which are therefore included under the non-current section. (iii) Held-to-maturity investments These are non-derivative financial assets with fixed maturity that the group has the positive intention and ability to hold to maturity. They are classified under current assets when their contractual maturity is within twelve months. If there is objective evidence of impairment, the carrying amount of the asset is reduced to that of discounted future cash flows: impairment losses identified by means of impairment tests are recognised in profit or loss. If, in subsequent years, the reasons underlying the impairment loss cease to exist, the impairment loss is reversed to the extent of the carrying amount the asset would have had based on amortised cost had the impairment not been recognised. (iv) Available-for-sale financial assets These are non-derivative financial assets that are designated as available for sale or are not classified under any of the above categories. They are measured at fair value, which is based on market prices at the annual or interim reporting date, or on financial valuation models and techniques. Fair value gains or losses are taken to an equity reserve ( reserve for available-for-sale financial assets ) which is released to profit or loss only when the financial asset is actually sold or, in the case of cumulative losses, when the impairment loss recognised in equity will not be recovered. Classification under current or non-current assets depends on management choices about the asset and its actual trading possibilities. Assets that are expected to be realised within twelve months are recognised as current assets. If there is objective evidence of impairment, the carrying amount of the asset is reduced to that of discounted future cash flows: impairment losses previously recognised under equity reserves are released to profit or loss. For non-equity instruments, if the reasons underlying the impairment loss cease to exist, the impairment loss is reversed. Derivatives Derivatives are always classified as assets held for trading and measured at fair value through profit or loss, unless they qualify for hedge accounting and are effective in hedging the underlying assets, liabilities or commitments of the group. Specifically, the group uses derivatives as part of its strategies of hedging the risk of fluctuations in expected cash flows on contractual or highly probable transactions (cash flow hedges) or fluctuations in the fair value of recognised assets or liabilities or due to contractual commitments (fair value hedges), using the so-called forward instruments which, sometimes, despite a substantial and operating hedging effect, do not qualify for hedge accounting under IAS 39. Specifically, fluctuations in the fair value of these instruments and the related underlying items are recognised immediately in profit or loss, under financial items. For information on the policy governing the currency risk on construction contracts, reference should be made to the section on Hedging construction contracts against currency risk. The effectiveness of hedges is documented at the inception of the transaction, as well as periodically at each annual or interim reporting date. Hedge effectiveness is measured by comparing the variations in the fair value of the hedging instrument with those of the hedged item (dollar offset ratio), or, for more complex instruments, using statistical analysis based on risk variations. 50

53 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group (i) Fair value hedges Changes in the fair value of derivatives designated as fair value hedges and which qualify as such are recognised in profit or loss, as are changes in the fair value of the underlying assets or liabilities attributable to the risk eliminated by the hedging transaction. (ii) Cash flow hedges Changes in the fair value of derivatives designated as cash flow hedges and which qualify as such are recognised to the extent of the portion determined to be effective, in a specific equity reserve ( hedging reserve ). This is subsequently reclassified to profit or loss when the forecast transaction affects profit or losses. The change in the fair value of the ineffective portion is recognised immediately in profit or loss. If the forecast transaction is no longer highly probable, the relevant portion of the hedging reserve is released immediately to profit or loss. If the hedging instrument is sold or no longer hedges the risk for which it was agreed, the relevant portion of the hedging reserve continues to be recognised until the underlying contract takes place. (iii) Determining the fair value of financial instruments The fair value of financial instruments quoted on active markets is calculated using the bid price at the reporting date. The fair value of unlisted derivatives is measured using financial valuation techniques. Specifically, the fair value of interest rate swaps is calculated discounting the future cash flows, while that of currency forwards is determined on the basis of market rates at the reporting date and the exchange rate spreads between the relevant currencies. Financial assets and financial liabilities carried at fair value are classified based on the three following hierarchy levels which reflect the significance of the inputs used in measuring fair value. Specifically: Level 1: financial assets and financial liabilities whose fair value is calculated based on quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: financial assets and financial liabilities whose fair value is calculated based on inputs other than the quoted prices referred to in level 1 that may be observed either directly or indirectly; Level 3: financial assets and financial liabilities whose fair value is calculated based on unobservable market data. Cash and cash equivalents This caption includes cash on hand, deposits and current accounts with banks or other credit institutions available for current transactions, post office current accounts and other equivalents. They are recognised at fair value. Equity (i) Share capital Share capital is comprised of the parent s subscribed and paid-in share capital. Any costs closely related to the issue of shares are classified as a decrease in share capital when they are directly related to such operation, net of deferred taxation. (ii) Treasury shares They are classified as a decrease in equity. Profits and losses on the sale, issue or cancellation of treasury shares are not recognised in profit or loss. (iii) Retained earnings or losses carried forward and consolidation reserve They include current and previous year profit or loss to the extent of the portion which was not distributed or taken to reserves (earnings) or which is to be covered (losses). This caption also includes transfers from other equity reserves when they are released and the effects of changes in accounting policies and errors. (iv) Other reserves They include, inter alia, the fair value reserve related to items recognised at fair value with a balancing entry in equity, the hedging reserve related to the portion determined to be effective, the stock grant reserve and that related to defined benefit plans as share-based payments as well as the reserve for actuarial components on defined benefit plans recognised directly in equity. Payables and other liabilities They are initially recognised at fair value, less any transaction costs, and subsequently measured at amortised cost, using the effective interest method. They are classified under current liabilities, unless the group has the contractual right to settle its obligations after at least twelve months of the interim or annual reporting date. Deferred taxes Deferred taxes are recognised in respect of temporary differences between the carrying amounts of assets and liabilities and their tax base. Deferred tax assets and liabilities are measured at the tax rates that are expected to be enacted when realising assets and settling liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable profits will be available in the years the related temporary differences reverse against which the deductible temporary differences can be utilised. 51

54 Notes to the Consolidated Financial Statements at 31 December 2012 Basis of preparation Employee benefits (i) Post-employment benefits: Several pension (or supplementary) schemes are in place. They can be analysed as follows: Defined contribution plans under which the group pays fixed contributions into a separate entity (e.g. a fund) and has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay employees benefits relating to employee service. Contributions payable to a defined contribution plan are recognised only when employees have rendered service in exchange for such contributions; Defined contribution plans whereby the group has an obligation to provide the agreed benefits to current and former employees and bears the actuarial and investment risks of the plan. Consequently, the cost of this plan is not calculated based on the contributions of the year, rather, on the basis of demographic and statistical assumptions and salary increase trends, using the projected unit credit method. The group recognises the latter using the equity option method, whereby the carrying amount of the recognised liability reflects that of the relevant actuarial valuation, fully and immediately recognising actuarial gains and losses when they arise with a direct balancing entry in equity in the actuarial reserve. (ii) Other long-term employee benefits and post-employment benefits Some group company employees are granted certain benefits such as jubilee benefits and seniority bonuses which are sometimes paid after retirement (such as medical benefits). The accounting treatment is the same as that applied to defined benefit plans, hence the projected unit credit method is used. However, with respect to other long-term benefits, any actuarial gains and losses are recognised immediately and entirely in profit or loss when they arise. (iii) Termination benefits Termination benefits are recognised as a liability and an expense when the group is demonstrably committed to terminating the employment of an employee or group of employees before the normal retirement date or providing termination benefits as a result of an offer made in order to encourage voluntary redundancy. Termination benefits do not generate future economic benefits for the company and, accordingly, are immediately expensed. (iv) Stock grant plans Stock option and stock grant plans are in place for the group s senior management. The theoretical benefits granted to the beneficiaries are recognised in profit or loss for the years covered by the plan, with a balancing entry in equity. These benefits are calculated by measuring the fair value of the relevant instrument using valuation techniques which include market conditions, if any, and by adjusting the number of options that are expected to be granted at each reporting date. Provisions for risks and charges The provisions for risks and charges are recognised against certain or probable losses and expenses for which the group is uncertain of the timing and/or amount at the reporting date. Provisions for risks and charges are recognised if, at the reporting date, as a result of a past event, the group has a legal or constructive obligation that will lead to an outflow of resources which can be estimated reliably. The amount recognised as a provision is the best estimate of the discounted outlay required to settle the obligation. The discount rate used reflects current market assessments and the additional effects of the risk specific to the liability. Changes in estimates are recognised in profit or loss when they take place. Risks for which liabilities are only possible are disclosed in a specific section of the notes on commitments and risks. They are not provided for. Revenue Revenue is measured at the fair value of the consideration received, net of any discounts and volume rebates. Revenue also includes changes in work in progress, with respect to which reference should be made to the note to Contract work in progress. Revenue relating to the sale of goods is recognised when the group has transferred to the buyer the significant risks and rewards of ownership of the goods which generally coincides with transfer of title or possession to the buyer, or when the revenue can be measured reliably. Revenue from the rendering of services is recognised based on the percentage of completion method, provided that it can be estimated reliably. For information on the estimates related to the process applied to measure construction contracts reference should be made to note 4.3. Grants Government grants, including non monetary grants at fair value, are only recognised when there is reasonable assurance that the group will comply with the conditions attaching to them and that the grants will be received. Grants related to income are recognised on an accruals basis and in direct correlation with costs incurred when their allocation has been formally approved. Grants related to assets are recognised in profit or loss directly in line with the depreciation/amortisation of the assets/projects to which they relate and are recognised as a direct reduction in depreciation/amortisation. 52

55 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Financial income and expense Interest income and expense are recognised on an accruals basis using the effective interest method, i.e., at the interest rate that makes all cash inflows and outflows (including any premiums, discounts, commissions, etc.) comprising the transaction financially equivalent. Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (qualifying assets) are capitalised as part of the cost of that asset. Dividends Dividends are recognised in profit or loss when the right to receive payment is established. This usually coincides with the shareholders resolution approving their distribution. Dividends paid to the shareholders of Ansaldo STS S.p.A. are considered as a change in equity and recognised as a liability in the year in which the distribution was approved by the company s shareholders. Related party transactions All related party transactions take place on an arm s length basis. Costs Costs are recognised if they are pertinent to the group s business and on an accruals basis. Income taxes Income taxes are recognised based on an estimate of taxable income in accordance with ruling legislation, taking into account any applicable exemptions and tax assets. Current taxes are recognised in profit or loss, except for those related to captions that are directly taken to equity or comprehensive income, in which case the tax effect is recognised directly in equity or comprehensive income. They are offset when they are levied by the same taxation authority, there is a legally enforceable right to set off the recognised amounts and settlement on a net basis is expected. New reporting standards (IFRS) and interpretations (IFRIC) At the preparation date of these financial statements, the EU has endorsed several standards and interpretations which are not yet mandatory and which the group will apply in the next few years. The main changes and potential impacts on the group are as follows: IAS 1 Amendment IFRS - IFRIC Presentation of financial statements IFRS 7 Amendment Financial instruments - Disclosures IAS 27 Revised IAS 28 Revised Separate financial statements Investments in associates and joint ventures IAS 32 Amendment Financial instruments - Presentation Impacts on the group The amendments to this standard are intended to improve the presentation of items of other comprehensive income, facilitating the distinction between captions that may or may not be reclassified to the income statement. The group will apply this standard starting from 1 January This standard requires disclosure about the effects or the potential effects of offsetting financial assets against financial liabilities on the consolidated statement of financial position. No significant effects are expected for the group. The group will apply this standard starting from 1 January The revision of this standard coincided with the approval of IFRS 10, limiting the scope of application to separate financial statements only. Given the nature of the amendment, its application is not expected to have any significant effect on the group s financial statements. The group will apply this standard starting from 1 January This standard was amended, specifying how to apply the equity method. Application of this amendment will have no effect on the group s financial statements as this standard only applies to separate financial statements. The group will apply this standard starting from 1 January This standard clarifies when financial assets can be offset against financial liabilities. Application of this amendment is not expected to have any significant effect on the group s financial statements. The group will apply this standard starting from 1 January IFRS 11 Joint arrangements This standards eliminates the possibility of using the proportionate consolidation method for joint arrangements, which will qualify as joint ventures as per IFRS 11. The consolidated financial statements will include the relevant portion of revenue, expense, assets and liabilities of the joint operations. The group currently consolidates its joint ventures using the proportionate consolidation method, consolidating the figures shown in note 41. Following the application of the new standard, profit or loss figures will be grouped into one caption, including the relevant portion of profits or losses of the joint ventures, while, in the statement of financial position, figures will be presented under equity investments, without any impact on the group s equity. The group will apply this standard starting from 1 January

56 Notes to the Consolidated Financial Statements at 31 December 2012 Basis of preparation Significant accounting policies The most significant accounting policies which require that directors prepare estimates based on a greater degree of subjectivity and for which a change in one of the underlying conditions would have a significant impact on the consolidated financial statements are described below: Provisions for risks and expected losses to complete construction contracts: the group operates in extremely complex business segments and with complex contractual arrangements which are recognised using the percentage of completion method. Profits or losses recognised in profit or loss reflect contract progress and the profits which will be recognised for the entire contract once it is completed. Consequently, for the purposes of correctly recognising work in progress and profits related to works yet to be completed, management is required to make an accurate estimate of expected costs to complete, expected increases and delays, additional costs and penalties which could have an impact on the expected profit. In order to better assist management s estimates, the group has adopted contract risk management and analysis procedures which identify, monitor and quantify the risks related to contract performance. Carrying amounts reflect management s best estimate at that time, assisted by the above procedural tools. Moreover, the group s business activities cover segments and markets in which disputes (both where the group is claimant and defendant) are generally only settled after a significant time lapse, especially in cases where the counterparty is a state body. This requires that management predicts the outcome of such disputes which will then be considered in the assessment of the contract. Estimating expected losses entails the assumption of estimates which depend on factors that can change over time and that could have a significant effect on directors current estimates made to prepare consolidated financial statements. Impairment losses: the group s assets with an indefinite useful life are tested for impairment at least once each year or more often if there is evidence of impairment. Likewise, all assets showing evidence of impairment are tested, also when depreciation/amortisation has already begun. Impairment tests are usually performed using the discounted cash flow method; however, this method is considered highly sensitive to the assumptions included in the estimate of future cash flows and of the interest rates applied. For the purposes of these valuations, the group uses the plans approved by the bodies of individual subsidiaries and financial parameters which are in line with those reflecting the current trend of reference markets. Hedging construction contracts against currency risk: to avoid the risk of fluctuations in foreign currency cash inflows and outflows on construction contracts, the group specifically hedges the individual cash flows expected on the contract. Hedges are agreed when commercial contracts are signed. Currency risk is usually hedged using plain vanilla (forward) instruments. If the hedge is not deemed effective, fair value gains or losses on these instruments are immediately expensed as financial items and the related underlying item is measured as if it were not hedged, hence it is exposed to the currency risk. The effects of this accounting treatment are described in the section on financial income and expense. Hedges which fall under the first case are recognised as cash flow hedges, considering the premium or the discount as the ineffective part in the case of forwards, or time value in the case of options. The ineffective part is recognised under financial items Effects of amendments to the IFRS The group has adopted IFRS 7 Financial instruments: disclosures - amendment with effect from 1 January This amendment establishes additional disclosures to be provided about transfers of financial assets that are not derecognised or in the event of any continuing involvement in transferred financial assets. It only affects the disclosure provided in financial statements. 54

57 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 12 Segment reporting Reference should be made to paragraph 2.4 of the directors report for information on the indicators that management uses to assess the performance of the group. The group operates in two business units: via the Signalling business unit, in the above-ground and underground railways segment and, via the Transportation Solutions business unit, in the transportation systems segment. Reference should be made to the directors report for a more in-depth analysis of the main programs, outlook and revenue and adjusted gross operating profit (loss) for each business unit. The results of the business units for the year, compared to those of the corresponding year, are as follows: Operating profit (loss) by business unit ( 000) Signalling Transportation Solutions Other activities Eliminations Total Revenue 725, ,853 - (42,592) 1,247,849 Other operating income 15,942 11,635 27,559 (17,811) 37,325 External costs (442,592) (432,066) 28,755 43,072 (802,831) Personnel expense (211,173) (64,869) (35,946) - (311,988) Other operating expense (16,989) (5,012) (28,324) 17,811 (32,514) Amortisation, depreciation and impairment losses (8,246) (5,411) (7,111) - (20,768) Operating profit (loss) 62,530 69,130 (15,067) ,073 Operating profit (loss) by business unit ( 000) Signalling Transportation Solutions Other activities Eliminations Total Revenue 728, ,267 - (28,698) 1,211,944 Other operating income 7,884 2,829 30,659 (16,949) 24,423 External costs (434,933) (404,120) 14,757 38,975 (785,321) Personnel expense (216,982) (49,690) (29,888) - (296,560) Other operating expense (2,244) (5,835) (24,842) 7,965 (24,956) Amortisation, depreciation and impairment losses (7,021) (442) (5,947) - (13,410) Operating profit (loss) 75,079 55,009 (15,261) 1, ,120 Working capital by business unit ( 000) Signalling Transportation Solutions Other activities Eliminations Total Inventories 112,250 45, (26,931) 131,584 Net contract work in progress (210,720) (213,834) - 26,930 (397,624) Trade receivables 408, ,877 5,865 (63,049) 748,747 Trade payables (195,121) (355,042) (13,449) 63,049 (500,563) Provisions for risks and charges (10,758) (3,847) (1,237) - (15,842) Operating working capital 103,705 (129,106) (8,296) (1) (33,698) Other liabilities, net - - (14,449) - (14,449) Net working capital 103,705 (129,106) (22,745) (1) (48,147) 55

58 Segment reporting Working capital by business unit ( 000) Signalling Transportation Solutions Other activities Eliminations Total Inventories 117,730 37, (25,861) 129,936 Net contract work in progress (177,964) (271,331) - 25,862 (423,433) Trade receivables 360, ,725 6,962 (58,709) 680,069 Trade payables (170,426) (306,426) (13,711) 58,712 (431,851) Provisions for risks and charges (17,982) (3,870) (1,284) - (23,136) Operating working capital 111,449 (172,411) (7,457) 4 (68,415) Other liabilities, net - - (20,614) (2) (20,616) Net working capital 111,449 (172,411) (28,071) 2 (89,031) A breakdown of revenue by geographical segment is as follows: Revenue ( 000) Italy 445, ,665 Rest of Europe 251, ,270 North America 123, ,636 Asia/Pacific 385, ,288 Other 42,551 75,085 Total 1,247,849 1,211,944 Investments by geographical segment ( 000) Italy 114, ,639 Rest of Western Europe 10,551 11,467 North America 12,059 14,864 Asia/Pacific 5,013 5,264 Total 142, ,234 56

59 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 13 Notes to the Statement of Financial position 13.1 Related party assets and liabilities Related party trading transactions generally take place on an arm s length basis, as does the settlement of interest-bearing receivables and payables where not governed by specific contractual conditions. The relevant statement of financial position balances are shown below. The statement of cash flows presents the impact of related party transaction on cash flows. Moreover, from 2011, the amended disclosure requirements of IAS 24 (revised) with reference to related parties exclusively entail the restatement of comparative figures shown in the financial statements schedules to consider as related parties those entities under the control or significant influence of the Ministry of Economy and Finance ( MEF ). Financial Assets at 31 December 2012 ( 000) Noncurrent loan assets Other non-current financial assets Current loan assets Trade receivables Other current financial assets Total Parent Finmeccanica S.p.A , ,104 Subsidiaries Alifana S.c.r.l Alifana Due S.c.r.l Associates International Metro Service S.r.l ,112-2,112 Metro 5 S.p.A. - 3,828-8,800-12,628 Pegaso S.c.r.l. (in liq.) Metro Service S.p.A ,892-1,892 Metro 5 Lilla S.r.l ,473-28,473 Metro Brescia S.r.l. - 1, ,741 Joint ventures (*) Balfour Beatty Ansaldo Systems JV Sdn Bhd ,010-6,010 Kazakhstan TZ - Ansaldo STS Italy LLP - 1,224-1,928-3,152 Consortia Saturno consortium ,640 1,360 5,000 Ascosa Quattro consortium ,157-1,157 Ferroviario Vesuviano consortium ,113-14,113 MM4 consortium San Giorgio Volla Due consortium , ,630 San Giorgio Volla consortium ,421-1,421 Joint ventures (*) AnsaldoBreda S.p.A , ,899 Selex Elsag S.p.A Selex Sistemi Integrati S.p.A Ansaldo Energia S.p.A Selex Galileo S.p.A I.M. Intermetro S.p.A Other group companies Ferrovie dello Stato group ,880-86,880 Eni group ,956-3,956 Enel group Total - 6, , ,966 1, ,833 % of the total at the reporting date 30% 69% 23% 3% (*) Portion not eliminated on proportionate consolidation. 57

60 Notes to the Statement of Financial position Related party assets and liabilities Financial Assets at 31 December 2011 ( 000) Noncurrent loan assets Other non-current financial assets Current loan assets Trade receivables Other current financial assets Total Parent Finmeccanica S.p.A , ,041 Subsidiaries Alifana S.c.r.l Alifana Due S.c.r.l ,114-1,114 Associates International Metro Service S.r.l Metro 5 S.p.A. - 1,540-6,548-8,088 Pegaso S.c.r.l Metro Service ,606-1,606 Metro 5 Lilla S.r.l ,434-5,434 Joint ventures (*) Balfour Beatty Ansaldo Syst. JV SDN BHD ,585-11,585 Kazakhstan TZ - Ansaldo STS Italy LLP - 1,225-1,928-3,153 Consortia Saturno consortium ,085 1,360 15,445 Ascosa quattro consortium ,111-1,111 Ferroviario Vesuviano consortium ,997-13,997 San Giorgio Volla Due consortium , ,986 San Giorgio Volla ,421-1,421 Other group companies Ansaldo Breda S.p.A ,928-13,928 Selex Elsag S.p.A Selex Communication S.p.A Elsag Datamat S.p.A Selex Sistemi Integrati S.p.A Galileo Avionica I.M. Intermetro S.p.A. (in liq.) AgustaWestland S.p.A Other - MEF Ferrovie dello Stato group ,773-56,773 Eni group Enel group Total - 2,765 2, ,130 1, ,935 % of the total at the reporting date 15% 2% 20% 3% (*) Portion not eliminated on proportionate consolidation. 58

61 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Financial Liabilities at 31 december 2012 ( 000) Non-current loans and borrow-ings Other non-current financial liabilities Current loans and borrow-ings Trade payables Other current financial liabilities Total Parent Finmeccanica S.p.A Subsidiaries Alifana S.c.r.l Alifana Due S.c.r.l Associates International Metro Service S.r.l Metro Service S.p.A ,441-10,441 Metro 5 S.p.A Pegaso S.c.r.l. (In liq.) Joint ventures (*) Balfour Beatty Ansaldo Syst. JV SDN BHD Kazakhstan TZ - Ansaldo STS Italy LLP Consortia Saturno consortium Ascosa Quattro consortium Team consortium San Giorgio Volla Due consortium Ferroviario Vesuviano consortium San Giorgio Volla consortium MM4 consortium Cesit consortium Cris consortium Other group companies Finmeccanica Group Service S.p.A AnsaldoBreda S.p.A ,377-3,377 Selex Elsag S.p.A ,331-40,331 Finmeccanica North America Inc Fata Logistic System S.p.A Fata S.p.A Electron Italia S.r.l MetroB S.r.l E-Geos S.p.A Other - MEF Ferrovie dello Stato group ,695-1,695 Eni group Enel group Total , ,138 % of the total at the reporting date 12% 0.4% (*) Portion not eliminated on proportionate consolidation. 59

62 Notes to the Statement of Financial position Related party assets and liabilities Financial Liabilities at 31 december 2011 ( 000) Non-current loans and borrow-ings Other non-current financial liabilities Current loans and borrow-ings Trade payables Other current financial liabilities Total Ultimate parent Finmeccanica S.p.A Subsidiaries Alifana S.c.r.l Alifana Due S.c.r.l Associates International Metro Service S.r.l Metro Service ,968-5,968 Metro 5 S.p.A Pegaso S.c.r.l Joint ventures (*) Balfour Beatty Ansaldo Syst. JV SDN BHD Kazakhstan TZ - Ansaldo STS Italy LLP ,176-1,176 Consortia Saturno consortium Ascosa Quattro consortium Team consortium San Giorgio Volla Due consortium Ferroviario Vesuviano consortium San Giorgio Volla consortium MM4 consortium Cesit consortium Cris consortium Other group companies Finmeccanica Group Service S.p.A AnsaldoBreda S.p.A Elsag Datamat S.p.A ,776-1,776 Selex Elsag S.p.A ,193-33,193 Finmeccanica North America Inc Selex Electron Systems S.p.A (2) - (2) Fata Logistic System S.p.A Fata S.p.A Electron Italia S.r.l MetroB S.r.l E-Geos S.p.A Telespazio S.p.A Other - MEF Ferrovie dello Stato group Eni group Enel group Total , ,081 % of the total at the reporting date 11% 0.1% (*) Portion not eliminated on proportionate consolidation. 60

63 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 13.2 Intangible assets ( 000) Goodwill Other development expense Patent and similar rights Concessions, licences and trademarks Assets under development Other Total At 31 December , ,008 12,038 5,852 54,348 Change in the consolidation scope Acquisitions - - 1, , ,908 Capitalisations Sales/disposals (502) (1,149) (1,651) Amortisation and impairment losses - (73) (2,487) (586) - (2,148) (5,294) Other changes Opening net exchange rate gains (losses)/average rate (5) Reclassifications ,946 - (11,405) At 31 December , , ,026 3,560 51,062 Intangible assets amount to 51,062 thousand, while investments of the year are equal to 3,413 thousand and amortisation and impairment losses to 5,294 thousand. The following should be noted with respect to patents and similar rights: - following its roll-out and implementation, the group s New Controlling Model in the new SAP ECC 6.0 transnational platform was transferred to non-current assets in early 2012; - the Product Data Management (PDM) concerning the implementation of Team Center as the sole product data management system, integrated with SAP; - the development of new technical tools at the Tito Scalo plant (PZ). The following should be noted with respect to development expense: - the increase in the Satellite and Rail Telecom project to develop satellite technologies for new railway signalling systems. This project is co-financed with the European Space Agency and the Galileo Supervisory Authority. During the year, intangible assets were sold against a consideration of 1,651 thousand. They mainly related to the subsidiary Ansaldo STS USA Inc. which simultaneously also derecognised the related amount of goodwill ( 498 thousand). Goodwill totalling 34,569 thousand is allocated to the Signalling and the Transportation Solutions business units for 18,022 thousand and 16,547 thousand, respectively. Goodwill is tested for impairment at year end in accordance with group procedures. Impairment testing was conducted on goodwill of the relevant cash-generating units (CGUs), Signalling and Transportation Solutions, comparing the carrying amount with the higher of the CGU s value in use and the amount recoverable through sale. Specifically, value in use is calculated based on the discounted cash flow model, applying the unlevered version to the cash flows from the five-year plans approved by management ( ), which are projected beyond the horizon covered by the terminal value method, using growth rates below those of the markets in which the individual CGUs operate (2% in 2012, in line with the previous year). Where available, the related basic macro-economic assumptions are determined using external sources of information, while the profitability and growth estimates assumed in the plans are defined by management based on past experience and expectations about the developments of the markets in which the group operates. The cash flows used are those generated by company assets, in their present conditions, before financial expense and taxes. They include capital expenditure and monetary changes in working capital and exclude cash flows from financing activities, non-recurring events or dividend distribution. These cash flows are discounted using the WACC (Weighted Average Cost of Capital) method which is calculated based on the Capital Asset Pricing Model. Average WACC at 31 December 2012 (8.26%) was revised from that of the previous year (9.5%) based on a reasonable estimate of the economic performance of the markets in which Ansaldo STS group operates. The tests did not identify any impairment of goodwill or any external indicators of impairment losses. The result would have been the same had the interest rates used to discount cash flows been increased by 50 basis points, or had the growth rate used to calculate terminal value been reduced by 50 basis points. The basic assumptions underlying the projected cash flows for the five-year plans approved by management are described in detail in the directors report to which reference should be made. 61

64 Notes to the Statement of Financial position Equity investments 13.3 Property, plant and equipment ( 000) Land and buil-dings Plant and machinery Equipment Assets under construction Other assets Leased assets Advances to third-party suppliers of materials Total At 31 December ,091 7,946 6,690 2,537 10, ,886 Acquisitions ,167 2,364 3, ,799 Capitalisations Sales (284) - (26) (2) (317) - - (629) Impairment losses (67) - - (67) Depreciation and impairment losses (2,364) (2,217) (1,855) - (3,731) - - (10,167) Opening net exchange rate gains (losses)/average rate (55) (84) (9) (25) (47) - - (220) Reclassifications 544 1, (3,000) 776 (179) At 31 December ,121 8,290 6,349 2,194 10, ,099 Property, plant and equipment amount to 91,099 thousand (31 December 2011: 93,886 thousand). They include the building located in Genoa, Via Mantovani 3/5, owned by the parent Ansaldo STS S.p.A. which it purchased from the ultimate parent Finmeccanica S.p.A. in December 2005, against a consideration of 62,378 thousand. Investments of the year amount to 8,119 thousand and mainly relate to the following: Ansaldo STS S.p.A. ( 2,554 thousand), mainly for restructuring works and the purchase of tools for the Tito plant; Ansaldo STS France S.A.S. ( 1,339 thousand), mainly for the purchase of technical laboratory and production tools, improvements to the Riom office and new purchases for the Les Ulis office; Ansaldo STS USA Inc. ( 2,062 thousand), mainly for maintenance at the Batesburg plant and works at the Pittsburgh office; the Asia/Pacific area (Australia, India and Malaysia and the Ansaldo STS Balfour Beatty Ansaldo Systems joint venture) for 2,102 thousand, mainly for the reorganisation of sites. Depreciation and impairment losses of the year amount to 10,234 thousand, while net exchange rate losses total 220 thousand Equity investments Equity investments in unconsolidated companies measured at cost: ( 000) At 31 December ,134 Change in the consolidation scope - Acquisitions/subscriptions and capital increases 587 Reversals of impairment losses/impairment losses 5 Sales/returns - At 31 December ,726 Equity-accounted investments 15,009 Total equity investments 37,735 62

65 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group List of equity investments in thousands of euros: Investment % Total assets Total liabilities Year Currency 000 Metro 5 S.p.A. (*) 24.60% 302, ,535 2 Euro 12,289 International Metro Service S.r.l. (*) 49.00% 17,935 5,777 2 Euro 2,365 Pegaso S.c.r.l. (In liq.) (*) 46.87% 6,183 5,923 2 Euro 122 Alifana S.c.a.r.l. (*) 65.85% Euro 17 Alifana Due S.c.r.l. (*) 53.34% 1,092 1,066 3 Euro 14 Metro Brescia S.r.l. (*) 40.40% Euro 202 Total equity-accounted investments 15,009 Metro C S.c.p.A % 454, ,524 2 Euro 21,000 I.M. Intermetro S.p.A. (in liq.) 16.67% 161, ,359 2 Euro 523 Tram di Firenze S.p.A. 3.80% 80,337 75,221 2 Euro 266 Iricav uno consortium 17.44% 3,469,206 3,468,686 2 Euro 91 Iricav due consortium 17.05% 50,677 50,161 2 Euro 88 Ferroviario Vesuviano consortium 25.00% 236, ,189 2 Euro 39 S. Giorgio Volla consortium 25.00% 6,174 6,102 3 Euro 18 S. Giorgio Volla 2 consortium 25.00% 51,022 50,950 3 Euro 18 Cris consortium 1.00% 3,821 1,376 2 Euro 24 Ascosa Quattro consortium 25.00% 61,697 61,640 2 Euro 14 Siit S.c.p.a 2.30% Euro 14 Cesit consortium 25.00% Euro 21 Saturno consortium 33.34% 2,362,270 2,362,239 3 Euro 10 Train consortium 4.55% 33,231 32,051 3 Euro 6 Sesamo S.c.a.r.l. 2.00% Euro 2 Isict consortium 10.00% Euro 4 Cosila consortium 0.92% Euro 1 MM4 consortium 18.20% n.a. n.a. n.a. Euro 36 RadioLabs consortium (*) 25.00% 1,577 1,412 3 Euro 52 MetroB S.r.l. 2.47% n.a. n.a. n.a. Euro 494 D.I.T.S. Development & Innovation in Transportation Systems S.r.l % n.a. n.a. n.a. Euro 5 Total equity investments recognised at cost 22,726 Total equity investments 37,735 (**) Equity-accounted investees figures figures figures N/A: set up in 2012 The following table shows a list of joint ventures and financial statements highlights in thousands of euros: ( 000) Non-current assets Current assets Non-current liabilities Current liabilities Revenue Costs Balfour Beatty Ansaldo Syst. JV SDN BHD 4, , , , ,262 Kazakhstan TZ - AnsaldoSTS Italy LLP 35 24,166 4,734 19, Equity investments at year end amounted to 37,735 thousand, of which 15,009 thousand was measured using the equity method and 22,726 thousand at cost. The 592 thousand change on 2011, which relates to equity investments measured at cost, is mainly due to the subscription of the equity investment in MetroB S.r.l. ( 494 thousand), a company incorporated to manage line B of the Rome underground, the acquisition of the units in the RadioLabs consortium ( 52 thousand) and the MM4 consortium ( 36 thousand) set up to construct line 4 of the Milan underground. The 418 thousand decrease in the carrying amount of equity-accounted investees on 2011 (31 December 2012: 15,009 thousand and 31 December 2011: 15,427 thousand) is mainly due to the write-off of the investment in Ansaldo STS Sistemas de Trasporte e Sinalização Limitada of 414 thousand, of which 343 thousand to partially repay principal, 58 thousand relating to the residual amount not yet reimbursed which was consequently impaired and 13 thousand reflecting exchange rate gains and losses and the 4 thousand loss incurred by Metro 5 S.p.A.. 63

66 Notes to the Statement of Financial position Inventories The consolidation effect of equity-accounted investees amounts to 3,530 thousand in 2012 and relates to the profit of International Metro Service S.r.l. ( 3,592 thousand), the loss of Metro 5 S.p.A. ( 4 thousand) and the loss on the liquidation of the Brazilian subsidiary ( 58 thousand) Loans and receivables and other non-current financial assets ( 000) Guarantee deposits 1,946 2,106 Other 13,620 13,361 Other non-current related party loans and receivables 6,779 2,765 Non-current loans and receivables 22,345 18,232 Other prepayments - Finmeccanica 24,628 23,811 Other non-current assets 24,628 23,811 Non-current loans and receivables at 31 December 2012 amount to 22,345 thousand, up by 4,113 thousand on 2011, mainly as a consequence of the increase in current related party loans and receivables. Other non-current related party loans and receivables amount to 6,779 thousand and mainly relate to the parent Ansaldo STS S.p.A.. They may be analysed as follows: - 3,827 thousand due from Metro 5 S.p.A.; - 1,224 thousand as an advance to the Kazakhstan joint venture TZ - AnsaldoSTS Italy LLP; - 1,545 thousand due from Metro Brescia S.r.l.; thousand due from the MM4 consortium. Other includes 11,005 thousand which mainly relates to the Pittsburgh facilities lease of the US subsidiary Ansaldo STS USA INC. and 2,285 thousand which reflects the relevant portion of the advance paid by the partners to the joint venture, Metropolitana Salonicco, which was contracted to construct this underground. The group also participates in the expenses that the joint venture has incurred and will incur to start up the contract. The advance will be repaid as per the agreements which are currently being discussed by the partners. Other non-current assets amount to 24,628 thousand and mainly relate to the non-current portion of deferred costs for the licence to use the Ansaldo trademark for a 20-year period. With reference to the trademark, Ansaldo STS S.p.A. agreed a contract with Finmeccanica S.p.A. on 27 December 2005 allowing the latter to use the Ansaldo trademark on the market. Against the advance payment of royalties of 32,213 thousand, this contract gives Finmeccanica the exclusive right to use this trademark until 27 December 2025 within the group s business segments Inventories ( 000) Raw materials, consumables and supplies 24,892 30,147 Work-in-progress and semi-finished products 17,980 16,614 Finished goods 11,104 11,582 Advances to suppliers 77,608 71,593 Total 131, ,936 Inventories are substantially in line with the 2011 balance despite the different mix in individual components. They are shown net of the relevant allowance of 6,953 thousand (31 December 2011: 6,944 thousand). 64

67 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 13.7 Work in progress and progress payments and advances from customers ( 000) Advances from customers (40,036) (30,090) Progress payments (1,572,751) (1,195,322) Work in progress 1,934,916 1,508,714 Provision for expected losses to complete contracts (9,033) - Work in progress (net) 313, ,302 Advances from customers (390,371) (403,530) Progress payments (3,500,233) (3,875,598) Work in progress 3,184,132 3,572,393 Provision for expected losses to complete contracts (4,248) - Progress payments and advances from customers (net) (710,720) (706,735) Work in progress, net of progress payments and advances from customers (397,624) (423,433) Work in progress is usually recognised under assets when the related gross carrying amount is higher than advances from customers, or under liabilities when advances are greater than the relevant work in progress. The overall net amount increased 25,809 thousand on 2011, mainly due to the higher amount of net contract work in progress. Starting from 2012, the provision for expected losses to complete contracts is shown separately. This provision reflects losses not yet incurred but for which a provision was recognised on an accruals basis when the contract budget corresponds to a loss. The provision refers to the relevant contracts. Specifically, 9,033 thousand reflects the decrease in contract work in progress and 4,248 thousand the increase in progress payments and advances from customers. 8,143 thousand of the provision relates to the subsidiary Ansaldo STS Transportation Systems India Private Limited and the two projects, KFW and TPWS, the quotations of which were revised during the year to include all liabilities and future risks, based on the information available at the time. Total advances from customers amount to 430,407 thousand (31 December 2011: 433,620 thousand). The net balance of work in progress includes net advances of 182,797 thousand related to the contracts in Libya, which are currently halted given the well-known events which have affected this country over the past few years. As described in the directors report, these advances largely cover the works performed to date which are yet to be invoiced. As a consequence, at the reporting date, there are no probable risks which would require any accrual Trade receivables and loan assets ( 000) Trade receivables Loan assets Trade receivables Loan assets Third parties 579,781 52, , ,812 Total third parties 579,781 52, , ,812 Related parties 168, , ,130 2,531 Total 748, , , ,343 Third party trade receivables amounted to 579,781 thousand at 31 December 2012, up 32,842 thousand over 31 December 2011 ( 546,939 thousand). The increase is mainly due to greater receivables from the parent Ansaldo STS S.p.A.. In this respect, the increase in the receivables due from the Naples Municipality and Metro C S.c.p.A. and the Arabian, Danish and US customers should be noted following the progress on the related projects. The increase in the amount due from the Naples Municipality reflects the roughly 35 million recognised in the first few days in January 2013, while the increase in the Danish contract is due to the greater progress compared to collections of the year. Related party trade receivables rose to 168,966 thousand on the 133,130 thousand balance at 31 December They mainly relate to the amounts due from Ferrovie dello Stato S.p.A.. Third party loan assets at 31 December 2012 amounted to 52,987 thousand (31 December 2012: 110,812 thousand) and mainly related to amounts due from the parent and the Malaysian group companies. Specifically: - 28,443 thousand reflects the euro equivalent amount of the Libyan dinar advance on the first of the two contracts in Libya obtained by the parent and deposited in a local bank and tied up pending the resumption of activities; - 24,544 thousand reflects the short-term deposits made by the Malaysian group companies at year end with leading banks as a consequence of year-end collections. Related party loan assets amount to 120,533 thousand (31 December 2011: 2,531 thousand) and mainly relate to the joint current account and two short-term deposits in place between the parent and Finmeccanica S.p.A.. With respect to CONSOB communication no. DAC/RM/ of 9 April 1997, we note that, during the year, the group did not factor receivables on either with or without recourse, with the exception of the French subsidiary. 65

68 Notes to the Statement of Financial position Other current financial assets Ansaldo STS France S.A.S. factored without recourse unexpired receivables due from third parties for 8,752 thousand at 31 December 2012 (31 December 2011: 10,145 thousand) Financial assets measured at fair value through profit or loss At 31 December 2012, there were no financial assets measured at fair value through profit or loss. At 31 December 2011, they amounted to 30,756 thousand and related to two transactions: one carried out by the parent and the other by the French subsidiary; specifically: the parent had purchased Eurobonds of a nominal amount of 25,000 thousand and a fixed interest rate of 4.5%; their fair value was 24,743 thousand at the end of These bonds were quoted on the Luxembourg stock exchange and classified as Current financial assets measured at fair value through profit or loss. In August 2012, the second coupon matured and was collected at the time of the expiry and repayment of the residual invested capital, generating annual interest of 734 thousand. Following the fair value recognition at 31 December 2011, interest income generated financial income from fair value measurement of 258 thousand, being the difference between the nominal amount and transfer of fair value; on 30 December 2011, the French subsidiary invested excess liquidity ( 6,013 thousand) from year-end collections in a French fund, Fonds Commun de Placement (FCP). This investment guaranteed a yield in line with the EONIA rate (Euro OverNight Index Average) and was repayable on demand. The fund was repaid in early Tax assets and liabilities ( 000) Assets Liabilities Assets Liabilities Direct taxes 25,081 5,727 18,618 1,977 Total 25,081 5,727 18,618 1,977 Direct tax assets at 31 December 2012 amount to 25,081 thousand, up 6,463 thousand on the 18,618 thousand at 31 December The increase is mainly due to a tax asset recognised by the parent in December 2012 in connection with the application for refund pursuant to article 2.1-quater of Decree Law no. 201/2011, related to the smaller IRES due for the period as a result of the IRAP deductibility on personnel expense ( 3,555 thousand) and the tax asset for research and development of the US group. Direct tax assets relate to the parent Ansaldo STS S.p.A. ( 10,493 thousand), the companies of the Ansaldo STS France group ( 8,538 thousand), the US group ( 5,224 thousand) and Australian group companies ( 766 thousand). In addition to the above, the direct tax assets pertaining to the parent, Ansaldo STS, also relate to the IRAP credit of the year ( 274 thousand) and the foreign tax assets ( 5,899 thousand). Direct tax liabilities amount to 5,727 thousand, up 3,750 thousand on the 1,977 thousand at 31 December They mainly relate to the parent ( 561 thousand) for IRES, ASTS France subsidiaries ( 740 thousand), ASTS Australia subsidiaries ( 2,695 thousand) and Ansaldo STS Sweden A.B. ( 1,725 thousand) Other current financial assets ( 000) Prepayments - current portion 12,329 12,870 Research grants 10,302 7,743 Employees 1, Social security institutions Guarantee deposits Indirect and other tax assets 19,430 13,379 Other financial assets 12,339 8,730 Total other current financial assets 55,506 43,925 Related parties 1,555 1,509 Total 57,061 45,434 Third party other current financial assets amount to 55,506 thousand, up 11,581 thousand on the 43,925 thousand at 31 December The parent s research grants rose during the year, as did indirect taxes due to the greater VAT credit. Other related party current financial assets amount to 1,555 thousand and are in line with the previous year ( 1,509 thousand). 66

69 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Cash and cash equivalents ( 000) Cash-in-hand Bank accounts 146, ,678 Total 146, ,928 Cash and cash equivalents at 31 December 2012 amounted to 146,837 thousand and relate to Ansaldo STS S.p.A. ( 73,771 thousand), Ansaldo STS USA group ( 20,121 thousand), Ansaldo STS Australia ( 24,984 thousand) and Ansaldo STS France group ( 12,619 thousand). They fell by 14,091 thousand on 31 December 2011 following the lower cash and cash equivalents of Ansaldo STS S.p.A.. Reference should be made to paragraph 2.3 for a discussion of the changes in the group s financial position. The parent collected approximately 35 million from the Naples municipality in early January Share capital in Euros Treasury shares Share capital No. of shares Nominal amount Total Outstanding shares 100,000,000 50,000,000 (806,054) 49,193, December ,000,000 50,000,000 (806,054) 49,193,946 Bonus issue as resolved by the shareholders in their meeting of 23 April ,000,000 10,000,000-10,000,000 Use of treasury shares for SGP , , December ,000,000 60,000,000 (292,411) 59,707,589 Bonus issue as resolved by the shareholders in their meeting of 23 April ,000,000 10,000,000-10,000,000 Use of treasury shares for SGP , , December ,000,000 70,000,000 (1,825) 69,998,175 Bonus issue as resolved by the shareholders in their meeting of 23 April ,000,000 10,000,000-10,000,000 Use of treasury shares for SGP December ,000,000 80,000,000 (1,692) 79,998,308 The fully paid-up share capital amounts to 80,000,000 and is comprised of 160,000,000 ordinary shares with a nominal amount of 0.50 each. On 9 July 2012, as resolved by the shareholders in their extraordinary meeting of 23 April 2010, the company carried out the third instalment of the bonus issue ( 10,000,000), issuing 20,000,000 ordinary shares with a nominal amount of 0.50 each. During the above meeting, pursuant to article 2442 of the Italian Civil Code, the shareholders approved a bonus issue of 50,000,000 thousand, to be carried out using available reserves: specifically, 47,678, from the Capital injection reserve, which will be consequently zeroed, and 2,321, from the reserve for Negative goodwill which will be decreased by the same amount. The share capital increase will be carried out by 31 December 2014, with the issue of 100,000,000 ordinary shares of a nominal amount of 0.50 each, in five equal instalments of 10,000,000 each, consisting of 20,000,000 newly-issued ordinary shares with a nominal amount of 0.50 each. Treasury shares are equal to 1.7 thousand and relate to the 3,383 residual shares following the completion of the process to purchase and grant shares to the group managers who are part of the Stock grant plan ( SGP ). At 31 December 2012, share capital was as follows: Shareholder % held Finmeccanica SpA UBS AG Altrinsic Global Advisors LLC Other shareholders with an investment of less than 2%

70 Notes to the Statement of Financial position Other reserves Retained earnings or losses carried forward, including profit for the year and consolidation reserves Retained earnings: ( 000) At 31 December ,670 Changes in the consolidation scope 92 Actuarial loss on defined benefit plans (2,419) Profit for the year 75,665 Dividends (28,000) At 31 December ,008 At 31 December 2012, retained earnings, including profit for the year and consolidation reserves, amounted to 347,008 thousand. The increase is due to the profit for the year of 75,665 thousand, the dividend distribution of 28,000 thousand and the actuarial loss on defined benefit plans Other reserves ( 000) Legal reserve Reserve for legal reserve adjustments Hedging reserve Stock grant reserve Deferred tax reserve Translation reserve Other Total 31 December ,000 6, (454) ,756 51,346 Reclassification from retained earnings or losses carried forward and consolidation reserves Change in the consolidation scope Transfers to profit or loss - - (386) (386) Exchange rate gains ,665-2,665 Increase/decrease , ,263 Fair value gains (losses) - - (5,596) - 1, (3,833) Reserve for legal reserve adjustments 2,000 (2,000) Bonus issue (10,000) (10,000) Other changes December ,000 4,000 (5,101) 1,490 1,309 4,279 19,756 41,733 Legal reserve The Legal reserve amounts to 16,000 thousand (31 December 2011: 14,000 thousand). The 2,000 thousand increase is a consequence of the shareholders decision taken during their meeting to approve the 2009 financial statements to adjust this reserve, bringing it to 20% of share capital, in addition to allocating 5% of the profit for the year to reserves. Moreover, having decided to increase share capital by 50,000 thousand in five equal instalments in order to ensure that this reserve is always equal to 20% of share capital, a reserve for legal reserve adjustments was set up which converts automatically into a legal reserve when the bonus issue becomes effective. During the year, as resolved by the shareholders, following the third instalment of the share capital increase, 2,000 thousand was transferred from the reserve for legal reserve adjustments to the legal reserve. Reserve for legal reserve adjustments This reserve amounts to 4,000 thousand. It was set up in 2010 for an amount of 10,000 thousand when allocating the 2009 profit as resolved by the shareholders in their meeting called to approve the 2009 financial statements and the bonus issue. Based on the above resolution, on 9 July 2012, following the third instalment of the 10,000 thousand bonus issue, the legal reserve was adjusted to 20% of share capital using 2,000 thousand of the legal adjustment reserve. Hedging reserve This reserve comprises the fair value gains or losses on the derivatives the group uses to hedge its foreign currency or interest rate exposure (- 5,101 thousand at 31 December 2012), gross of deferred tax effects, until such time as the hedged underlying affects profit or loss. When this takes place, the reserve is reclassified to profit or loss to offset the effects of the hedged transaction. 68

71 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Stock grant reserve This reserve rose to 1,490 thousand from the 1,263 thousand balance at 31 December It may be analysed as follows: thousand related to awarding of shares in the years from 2007 to ,061 thousand accrued to the Stock grant plan for managers other than senior managers and the Stock grant plan for managers for 2012 (shares will be awarded in December 2013). Deferred tax reserve The deferred tax reserve equalled 1,309 thousand and changed in relation to the recognition of deferred taxation generated by: actuarial gains (losses) following the adoption of the equity method for defined benefit plans and fair value gains and losses on hedging transactions. Translation reserve This reserve is used to recognise the exchange rate gains and losses generated by the translation of the financial statements of consolidated companies (31 December 2012: 4,279 thousand). The largest amounts are generated by the consolidation of the subsidiaries Ansaldo STS USA and Ansaldo STS Australia. Other Other reserves relate to the capital injection of 17,679 thousand recognised in the parent s financial statements. This reserve was set up in 2006 following the capital injection received from the ultimate parent, Finmeccanica. The 10,000 thousand decrease refers to the shareholders approval of the 2009 financial statements and the bonus issue. In their meeting, the shareholders decided to allocate the entire reserve for capital injections and that for negative goodwill ( 2,321 thousand) to the bonus issue. On 9 July 2012, following the issue of the third of the five instalments of the bonus issue, 10,000 of the reserve for capital injections was allocated to share capital. This caption also includes the revaluation reserve and the reserves set up following the parent s receipt of research grants Equity attributable to non-controlling interests Equity attributable to non-controlling interests: ( 000) At 31 December ,122 Change in the consolidation scope (783) Profit for the year attributable to non-controlling interests 31 Consolidation reserve attributable to non-controlling interests (2) Translation reserve attributable to non-controlling interests 59 At 31 December Equity attributable to non-controlling interests relates to Ansaldo STS Beijing Ltd., with its registered office in Beijing (China) (20%), controlled by Ansaldo STS France S.A.S. and Ansaldo STS Sinosa Rail Solutions South Africa PTY (LTD) (49%), controlled by Ansaldo STS Australia PTY Ltd Loans and borrowings ( 000) Current Non-current Total Current Non-current Total Bank loans and borrowings 18,188-18,188 14, ,804 Other loans and borrowings Total 18,375-18,375 14, ,353 69

72 Notes to the Statement of Financial position Loans and borrowings Changes of the year are as follows: ( 000) Increases Decreases Reclassifications Other changes Bank loans and borrowings 14,804 5,242 (849) - (1,009) 18,188 Other loans and borrowings 549 3,771 (169) (410) (3,554) 187 Total 15,353 9,013 (1,018) (410) (4,563) 18,375 Bank loans and borrowings The current portion of bank loans and borrowings amounts to 18,188 thousand. Of this amount, 17,917 thousand relates to Ansaldo STS Transportation Systems India Private Limited and 271 thousand to the parent, Ansaldo STS. The 3,384 thousand increase is mainly due to the Indian subsidiary. Other loans and borrowings Other loans and borrowings mainly relate to subsidised research project funding. The 362 thousand decrease is mainly due to the repayment of the instalments of the year. Financial position The repayment schedule and exposure to interest rate fluctuations for group financial liabilities are as follows: 31 December 2012 ( 000) Bank loans and borrowings Other Total Floating rate Fixed rate Floating rate Fixed rate Floating rate Fixed rate Within one year 17, , years After five years Total 17, , Bank loans and borrowings Other Total 31 December 2011 ( 000) Floating rate Fixed rate Floating rate Fixed rate Floating rate Fixed rate Within one year 13, ,729 1, years After five years Total 13,686 1, ,729 1,624 The following disclosure is presented in accordance with the format required by CONSOB communication no. DEM/ of 28 July 2006: ( 000) A. Cash-in-hand B. Other cash and cash equivalents (bank current accounts) 146, ,678 C. Securities held for trading - 30,756 D. CASH AND CASH EQUIVALENTS (A+B+C) 146, ,684 E. CURRENT LOAN ASSETS 173, ,343 F. Current bank loans and borrowings 18,188 14,535 G. Current portion of non-current loans and borrowings - - H. Other current loans and borrowings I. CURRENT FINANCIAL DEBT (F+G+H) 18,375 14,915 J. NET CURRENT FINANCIAL POSITION (I-E-D) (301,982) (290,112) K. Non-current bank loans and borrowings L. Bonds issued - - M. Other non-current financial liabilities N. NON-CURRENT FINANCIAL DEBT (K+L+M) O. NET FINANCIAL POSITION (J+N) (301,982) (289,674) 70

73 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Provisions for risks and charges and contingent liabilities ( 000) Product warranties Disputes with employees Restructuring Other Total At 31 December , ,367 5,351 23,136 Accruals 1, , ,614 Reversals (2,662) - (744) (511) (3,917) Utilisation (5,227) (212) (2,602) (6) (8,047) Other changes At 31 December , ,460 15,842 Current 15, ,367 5,351 23,136 Non-current At 31 December , ,367 5,351 23,136 Current 9, ,460 15,842 Non-current At 31 December , ,460 15,842 At 31 December 2012, the provision for risks and charges amounted to 15,842 thousand, down 7,294 thousand on 31 December The decrease is mainly due to the parent ( 2,184 thousand) following the redundancy procedure, Ansaldo STS USA group ( 1,254 thousand) and the subsidiary Ansaldo STS France S.A.S. ( 3,079 thousand), mostly in relation to the provision for product warranty. In relation to the provisions for risks, the activities of the Ansaldo STS group companies relate to business segments and markets where disputes are generally only settled after a significant time lapse, especially in cases where the counterparty is a public body. Provisions have been made for risks that are probable and for which the amount can be determined. Based on current information, specific provisions have not been set aside for the various disputes in which the group is defendant as they are expected to be resolved satisfactorily and without significantly impacting results Employee benefits The amount of and changes in post-employment benefits and the defined benefit plans are as follows: ( 000) Italian post-employment benefits 19,263 18,380 Defined benefit pension plans 11,461 10,779 Total 30,724 29,159 Italian post-employment benefits Defined benefit plans ( 000) Present value of obligations 19,263 18,380 11,461 10,779 Total 19,263 18,380 11,461 10,779 ( 000) Italian postemployment benefits Defined benefit plans At 31 December ,380 10,779 Current costs Benefits paid (2,432) (269) Other changes - (19) Actuarial losses taken to equity 2,419 4 At 31 December ,263 11,461 71

74 Notes to the Statement of Financial position Trade payables The amount recognised in the income statement is as follows: Italian post-employment benefits Defined benefit plans ( 000) Current service costs Interest expense Recognised actuarial gain (loss) 2,419 (1,329) (15) - Total 3,315 (425) The following main actuarial assumptions were used: Italian post-employment benefits Defined benefit plans Discount rate (p.a.) 2.6% 4.1% 3.0% 4.0% Salary increase rate N.A. N.A. 2.5% 2.5% Turnover rate 4.4% - 9.2% 4.4% - 9.2% N.A. 3.6% Other current and non-current liabilities ( 000) Current Non-current Current Non-current Employees 30,314 6,199 28,403 5,648 Indirect and other tax liabilities 17,962-19,630 - Amounts due to social security institutions 13,567-13,043 - Other 29,143 4,640 24,388 5,368 Total other third party liabilities 90,986 10,839 85,464 11,016 Other related party liabilities Total 91,383 10,839 85,561 11,016 Other current and non-current third party liabilities amount to 101,825 thousand, up 5,345 thousand on the 96,480 thousand at 31 December 2011, as shown in the table. Other current and non-current related party liabilities amount to 397 thousand (31 December 2011: 97 thousand). Other third party liabilities are mainly due to the outstanding 75% of the consideration to be paid for the acquisition of the investment in Metro C S.c.p.A. ( 15,750 thousand) and advances for R&D grants of the parent of 6,065 thousand Trade payables ( 000) Trade payables 441, ,867 Total trade payables 441, ,867 Related party trade payables 58,741 45,984 Total 500, ,851 Trade payables rose 55,955 thousand on 2011, mainly in relation to suppliers with whom back-to-back contracts were entered into in respect of the end customer s credit position. Related party trade payables rose 12,757 thousand on They mainly relate to payables due to related parties (mainly Selex Elsag S.p.A. and Ansaldo Breda S.p.A.) and the associate Metro Service AS. Trade payables include maturity factoring for 16,445 thousand attributable to the parent ASTS. This tool enables the group s suppliers to carry out factoring transactions which entail the transfer and collection of amounts due from the group for the supply of goods and/or services, allowing the group to further extend settlement of trade payables, bearing the related interest. There are no trade payables due after five years. 72

75 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group Derivatives Derivative assets and liabilities may be analysed as follows ( 000) Assets Liabilities Assets Liabilities Trading Fair value hedges 3, , Cash flow hedges 1,472 3,838 5,544 4,876 Currency hedges 4,627 4,108 8,688 5,818 Derivative assets decreased by a net 4,061 thousand, due mainly to Ansaldo STS USA group following the fair value gains and losses on hedging transactions. Also derivatives liabilities fell by 1,710 thousand, mainly as a consequence of the change in the fair value of the transactions carried out by the Asia/Pacific subsidiaries. Fair value measurement The group does not hold listed derivative instruments at 31 December The fair value of unlisted derivatives is measured using financial valuation techniques. Specifically, the fair value of currency forwards is determined on the basis of market rates at the reporting date and the exchange rate spreads between the relevant currencies. The fair value of swaps is calculated discounting the future cash flows at market rates. Hedges are mainly undertaken with banks. The group has contracts in place for the following notional foreign currency amounts at the reporting date: ( 000) Euro 153, ,917 US dollar 97,368 81,546 Pound sterling 9,889 11,221 Swedish krona 32,293 23,838 Australian dollar 42,261 20,790 Hong Kong dollar Abu Dhabi Dirham 19,603 - Although it is exposed to the risk of fluctuations in interest rates, the group does not hedge interest rate risk Guarantees and other commitments Leases The group is party to certain operating leases, mainly for use of property, plant and equipment. Minimum future repayments are as follows: ( 000) Operating leases Within one year 4,466 Between two and five years 11,557 After five years 5,213 21,236 Guarantee portfolio Sureties and bonds issued by banks or insurance companies to customers for trading transactions play a fundamental role in the finalisation of national/international tenders and a basic requirement in the awarding of contracts. Bid bond This guarantee is required to participate in bids. Usually, it has a 3/6-month term and reflects 1-3% of the basic bid amount or the estimated bid amount. Because of its nature, the total value of the bid bond with respect to guarantees is usually modest. At 31 December 2012, it accounted for 48 million in the guarantee portfolio. 73

76 Notes to the Statement of Financial position Guarantees and other commitments Performance bond This guarantee ensures the successful performance of the project or the supply. It is usually required when signing contracts. The term of performance bonds reflects that of the works or the supply for which they were issued. They can be of a short-term nature in the case of supply contracts, while they can reach the maximum term for turn-key contracts as they include the Operation & Maintenance stage. The amount depends on the type of contract and the relevant context. Usually, it ranges between 10-15% of the contractual value. At 31 December 2012, performance bonds accounted for a significant 756 million in the guarantee portfolio. Retention money bond Where contractually provided for, the retention money bond represents the guarantee given to release the amounts held by the customer as a guarantee on the services provided and invoiced. Guarantees are released progressively and for minimum amounts (for example, 5% of works/supplies performed and invoiced). Where not explicitly provided for in the contract, the bond can be also be released upon completion of works. This type of guarantee accounted for approximately 105 million in the guarantee portfolio at 31 December Advance payment bond The advance payment bond, also called down payment bond, enables the customer to recover an advance payment made to the supplier at the beginning of the project/supply. It decreases as the advance is reabsorbed through the invoicing of the supplier to the customer. The amount of this guarantee varies on the basis of the contract type and of the context in which it has been issued. Generally, it can vary from 10% to 15% of the contractual amount up to 25%-35% in some international contexts. At 31 December 2012, this type of guarantee amounted to over 750 million. Counter guarantee Counter guarantees are another type of guarantee. They are presented by the parent Ansaldo STS S.p.A. in the scope of contracts agreed as member of consortia and joint ventures. At 31 December 2012, this type of guarantee amounted to approximately 250 million. Parent company guarantee The parent company guarantee represents the guarantee given by the ultimate parent in favour of third parties to guarantee the commitments of a subsidiary. This guarantee can arise for various reasons that go from the direct granting of commercial guarantees taking the place of banks (for example, for advance, performance and retention bonds) to the guarantee for direct credit lines granted by banks to group companies. This second type of guarantee is of primary importance for newcos or small-sized companies, that find it more difficult to obtain significant credit lines granted directly by banks. Therefore, this tool is very useful to start operating in new markets/countries by forming small local companies with the objective of developing them over time, while providing them with adequate financial support from inception. At 31 December 2012, ultimate parent guarantees amounted to over 1,208 million. The group has the following guarantees at 31 December 2012: Direct guarantees and hold harmless agreements for guarantees issued by third parties in the interest of the group to customers and other third parties ( 000) Signalling Transportation Solutions Total Personal guarantees issued by Finmeccanica (parent company guarantees) and Finmeccanica Finance S.A. (advance payment bonds, performance bonds and retention money bonds) to customers for trading transactions , ,493 Personal guarantees issued by Ansaldo STS (parent company guarantee) to customers for trading transactions 684, ,916 Sureties and bonds (advance payment bonds, performance bonds, bid bonds and retention bonds) issued by banks or insurance companies to customers for trading transactions 950,268 1,387,038 2,337,306 of which, counter-guaranteed by Finmeccanica 26, , ,834 of which, counter-guaranteed by Ansaldo STS 913, ,053 1,712,024 Direct and other guarantees issued by Finmeccanica and Ansaldo STS, banks or insurance companies to other third parties for non-contractual/trading guarantees (financial transactions and tax) 35,265 7,974 43,239 of which, issued or counter-guaranteed by Finmeccanica - 7,973 7,973 of which, issued or counter-guaranteed by Ansaldo STS 35,265-35,265 Total 1,670,459 1,918,495 3,588,954 74

77 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 14 Notes to the Income Statement 14.1 Impact of related party transactions on profit or loss ( 000) Revenue Other operating income Costs Financial income Financial expense Other operating expense Ultimate parent Finmeccanica S.p.A , Subsidiaries Alifana S.c.r.l (2) Alifana Due S.c.r.l Associates International Metro Service S.r.l. 1,701 5 (131) Metro 5 S.p.A. 16, , Pegaso S.c.r.l. (in liq.) Metro Brescia S.r.l (39) Metro 5 Lilla S.r.l. 19, Metro Service S.p.A , Joint ventures (*) Balfour Beatty Ansaldo Syst. JV SDN BHD 11, (49) - Kazakhstan TZ - Ansaldo STS Italy LLP Consortia Ascosa Quattro consortium Cesit consortium Ferroviario Vesuviano consortium 10 1, Cris consortium SESM consortium San Giorgio Volla consortium San Giorgio Volla consortium MM4 consortium Saturno consortium 8,832-1, Other group companies AnsaldoBreda S.p.A. 12, , Electron Italia S.r.l Selex Elsag S.p.A. 1,170-15, Fata S.p.A Fata Logistic System S.p.A , Finmeccanica North America Inc Finmeccanica UK LTD Finmeccanica Group Service S.p.A I.M. Intermetro S.p.A E-Geos S.p.A Other - MEF Ferrovie dello Stato group 146,859-1, Eni group 9, Enel group Total 230,305 1,633 80, % of the total for the year 18% 4% 10% 1% 0.3% 0.4% (*) Portion not eliminated on proportionate consolidation. 75

78 Notes to the Income Statement Impact of related party transactions on profit or loss ( 000) Revenue Other operating income Costs Financial income Financial expense Other operating expense Ultimate parent Finmeccanica S.p.A , Subsidiaries Alifana S.c.r.l Alifana Due S.c.r.l , Associates International Metro Service S.r.l. 1, Metro Service A.S , Metro 5 S.p.A. 11, Metro 5 Lilla S.r.l. 3, Pegaso S.c.r.l. 42-1, Joint ventures (*) Balfour Beatty Ansaldo Syst. JV SDN BHD 10, (105) - Kazakhstan TZ-Ansaldo STS Italy LLP 1, Consortia Saturno consortium 11, , Ascosa Quattro consortium SanGiorgio Volla consortium 1, Ferroviario Vesuviano consortium Cesit consortium Cris consortium SESM consortium S.c.a.r.l SanGiorgio Volla consortium Other group companies AnsaldoBreda S.p.A. 17,564-19, Fata Logistic Systems S.p.A , Fata S.p.A Finmeccanica Finance S.A Finmeccanica Group Service S.p.A , Finmeccanica North America Inc Finmeccanica Consulting S.r.l Elsag Datamat S.p.A , Selex Elsag S.p.A , Selex Sistemi Integrati S.p.A Selex Communication S.p.A. - - (6) Selex Service Management S.p.A I.M. Intermetro S.p.A Oto Melara S.p.A. - - (2) Westland Industries LTD Aeronautica Macchi S.p.A. - - (1) Electron Italia S.r.l Ansaldo Energia S.p.A. - - (2) Telespazio S.p.A Other - MEF Ferrovie dello Stato group 149, Eni group Enel group Total 210, , % of the total for the year 17% 1% 11% 2% 0.0% 0.4% (*) Portion not eliminated on proportionate consolidation. 76

79 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 14.2 Revenue ( 000) Sales 695, ,810 Services 115,297 49, , ,706 Change in work in progress 206, ,304 Third party revenue 1,017,544 1,001,010 Related party revenue 230, ,934 Total revenue 1,247,849 1,211,944 Third party revenue amounted to 1,017,544 thousand in 2012, up by 16,534 thousand on the 1,001,010 thousand in Related party revenue rose by 19,371 thousand on the previous year mainly as a consequence of the increased activities with the related companies Metro 5 and Metro 5 Lilla and with ENI group for the launch of the Abu Dhabi project. Revenue by business unit is discussed in earlier sections of these notes Other operating income ( 000) R&D grants 3,067 3,781 Gains on sales of property, plant and equipment and intangible assets 2, Reversals of impairment losses on loans and receivables 270 1,867 Reversals of provisions for risks and charges 3,917 5,155 Insurance compensation Royalties 984 1,900 Financial income and exchange rate gains on operating items 10,338 5,858 Tax asset for R&D 3,325 3,638 Other operating income 11,312 1,823 Other third party operating income 35,692 24,271 Other related party operating income 1, Total other operating income 37,325 24,423 Other operating income amounted to 37,325 thousand, up 12,999 thousand on the previous year. The increase is mainly related to the gain recognised by the subsidiary Ansaldo STS USA INC. on sales of intangible assets, mainly software, to a local company, to the increase in interest on operating items of the parent Ansaldo STS S.p.A. and to exchange rate gains on foreign currency transactions carried out by the group subsidiaries Purchases and services ( 000) Materials 247, ,161 Change in inventories 5,569 5,206 Services 446, ,342 Rentals and operating leases 25,538 22,540 Total third party purchases and services 724, ,249 Total related party purchases and services 80,536 87,025 Total purchases and services 805, ,274 Total purchases and services rose by 22,732 thousand on the previous year, mainly as a result of increased production. Specifically, third party costs rose by 29,221 thousand, while costs for purchases from related parties fell by 6,489 thousand, mainly attributable to the related company Ansaldo Breda S.p.A.. 77

80 Notes to the Income Statement Amortisation, depreciation and impairment losses 14.5 Personnel expense ( 000) Wages and salaries 249, ,834 Stock grant plans 2, Social security and pension contributions 49,430 50,342 Italian post-employment benefits Other defined benefit plans Other defined contribution plans 4,001 4,066 Recovery of personnel expense (1,130) (681) Disputes with personnel - 25 Restructuring costs 7,014 2,339 Other costs 635 4,069 Total 311, ,560 The headcount at 31 December 2012 numbered 3,991, down 109 employees on the previous year. They are grouped by business unit as follows: Signalling: Transportation Solutions: Other activities: 2,971 employees 631 employees 389 employees The average headcount on the payroll in 2012 numbered 4,010, compared to 4,125 employees in 2011, down by 115 employees. Personnel expense came to 311,988 thousand (2011: 296,560 thousand) and includes the restructuring costs of the year. This 15,428 thousand increase (+5.2%) is mainly due to unfavourable exchange rate fluctuations of the American and Australian dollar and higher restructuring costs, offset in part by the reduction in average headcount. The stock grant plan cost is recognised on an accruals basis in the year in which the services are rendered. The amount therefore relates to the portion of the shares related to the 2012 vesting conditions, which will be allocated in December 2013 after checking they have been met ( 2,061 thousand). The expense is determined on the basis of the estimated number of shares to be allocated and their fair value at the date the related plan was approved by the appointments and remuneration committee ( 10,264 per share for the plan, unit value calculated at the date the plan was approved by the appointments and remuneration committee) and re-calculated following the bonus issue of 9 July 2012, per share for the two-year plan, unit value calculated at the date the plan was approved by the appointments and remuneration committee following the bonus issue of 9 July The Italian post-employment benefit and other defined benefit plan expense represent only the service cost. Indeed, following the adoption of the equity method, interest cost is classified under financial expense Amortisation, depreciation and impairment losses ( 000) Amortisation and depreciation: - intangible assets 5,294 2,983 - property, plant and equipment 10,167 10,084 15,461 13,067 Impairment losses: - current loans and receivables 5, other assets , Total amortisation, depreciation and impairment losses 20,768 13,410 Amortisation and depreciation rose by 2,394 thousand on 2011, mainly following the completion of the operating projects forming part of the broader reorganisation plan (FFDB). They are detailed in the schedules related to property, plant and equipment and intangible assets. Impairment losses of 5,307 thousand relate to trade receivables, mainly as a consequence of the accrual to the allowance for impairment made by the parent. 78

81 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 14.7 Other operating expense ( 000) Accruals to the provisions for risks and charges 1,883 6,602 Losses to complete contracts 12,976 - Membership fees Losses on sales of property, plant and equipment and intangible assets Realised exchange rate losses on operating items 5,921 6,169 Unrealised exchange rate losses on operating items 838 1,628 Interest and other operating expense 3,776 2,501 Indirect taxes 3,335 2,522 Other operating expense 2,569 4,734 Total other third party operating expense 32,398 24,856 Other related party operating expense Total other operating expense 32,514 24,956 Other operating expense, mainly the portion related to third parties, rose 7,558 thousand from 24,956 thousand in 2011 to 32,514 thousand in The most significant amount arises from actual losses to complete contracts, mainly attributable to the Indian subsidiary Ansaldo Transportation Systems India Private Limited, mitigated by the decrease in the accruals to the provision for risks and charges. As indicated in the section on Accounting policies, starting from 2012, expected losses to complete contracts are no longer recognised against revenue, rather under Other operating expense Internal work capitalised ( 000) Internal work capitalised (1,278) (868) Internal work capitalised mainly relate to: - the parent Ansaldo STS S.p.A., with respect to the Satellite and Rail Telecom project to develop satellite technologies for new railway signalling systems. This project is co-financed with the European Space Agency and the Galileo Supervisory Authority; - the French subsidiary Ansaldo STS France S.A.S., with respect to costs for the internal construction (personnel, materials and services) of intangible assets and property, plant and equipment Net financial expense ( 000) Income Expense Net Income Expense Net Interest and fees 1,903 5,882 (3,979) 2,528 2,769 (241) Exchange rate gains and losses 11,942 14,047 (2,105) 17,415 18,399 (984) Fair value gains and losses 3,015 1,239 1,776 6,164 3,019 3,145 Interest on Italian post-employment benefits (657) (681) Interest on other defined benefit plans (451) (435) Other financial income and expense 95 1,255 (1,160) 2 2,226 (2,224) Total net financial expense 16,955 23,531 (6,576) 26,109 27,529 (1,420) Net related party financial income Total 17,107 23,593 (6,486) 26,757 27,529 (772) In 2012, third party net financial expense amounted to 6,576 thousand, up 5,156 thousand on the 1,420 thousand in The increase is due to lower financial income, mainly attributable to the following: the 3,738 thousand decrease in net interest income, which changed from thousand in 2011 to - 3,979 thousand in 2012, mainly due to greater interest expense of the Indian subsidiary Ansaldo Transportation Systems India Private Limited and the parent. The latter, in 2012, recognised smaller interest income ( 734 thousand) on short-term securities (Eurobonds) of a nominal amount of 25,000, at the 4.5% fixed rate and maturing in August 2012 (2011: 1,076 thousand); 79

82 Notes to the Income Statement Income taxes the 1,121 thousand increase in exchange rate differences on 2011; the smaller fair value of derivatives still in place at year end ( 1,369 thousand). In 2012, net income from related parties fell by 558 thousand, mainly as a consequence of smaller income from the ultimate parent Finmeccanica S.p.A.. As shown in the table, interest costs of defined benefit plans amount to 657 thousand in 2012, compared to 681 thousand in Share of profits of equity-accounted investees ( 000) Income Expense Net Income Expense Net Share of profits of equity-accounted investees 3, , Total 3, , The share of profits of equity-accounted investees of 3,530 thousand comprises the profit of the investee International Metro Service S.r.l. ( 3,592 thousand), the loss recognised following the liquidation of the Brazilian subsidiary in May 2012 ( 58 thousand) and the loss of the associate Metro 5 S.p.A. ( 4 thousand) Income taxes This caption comprises: ( 000) IRES 17,953 23,615 IRAP 6,099 7,010 Other foreign taxes 11,844 6,421 Prior year taxes (4,069) 44 Net deferred tax expense 6,594 5,206 Total 38,421 42,296 Income taxes decreased by an overall 3,875 thousand compared to the previous year. Specifically, the decrease is due to the following: - a decrease in IRES ( 5,662 thousand) and IRAP ( 911 thousand) of the year, mainly as a consequence of the smaller pre-tax profit of the parent; - an increase ( 5,423 thousand) in income taxes of foreign companies given the greater pre-tax profit; - a greater accrual for net deferred taxes which rose from 5,206 thousand to 6,594 thousand, up 1,388 thousand on the previous year. The increase is mainly due to the transfer of deferred tax assets on tax losses accrued in 2010 related, in particular, to Ansaldo STS USA Inc. ( 1,709 thousand). - prior year taxes of 4,069 thousand, mainly related to the parent Ansaldo STS S.p.A. following the recognition of the receivable covered by the application for refund pursuant to article 2.1-quater of Decree Law no. 201/2011, related to the lower IRES due for the period as a result of the IRAP deductibility on personnel expense ( 3,555 thousand). The difference between the theoretical and effective tax rates is analysed below: ( 000) amount % amount % Pre-tax profit 114, ,352 - Taxes calculated at ruling tax rates 31, % 31, % Permanent differences (749) (206) -0.2% 4,669 1, % 113,368 31, % 120,021 33, % Different rates on foreign taxes and/or due to losses of the year - 3, % % IRAP and other taxes calculated on a basis other than pre-tax profit - 7, % - 8, % Previous year taxes - (4,069) -3.57% % Total effective taxes recognised in profit or loss 38, % 42, % 80

83 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group At 31 December 2012, the effective tax rate is 33.67%, compared to 36.67% in the previous year. As mentioned earlier, the 3% decrease is mainly attributable to the parent following the recognition of the receivable represented by the application for refund for lower IRES due for the period as a result of the IRAP deductibility on personnel expense ( 3,555 thousand or 3.12% of the pre-tax profit). Income statement Statement of financial position ( 000) Income Expense Assets Liabilities Italian post-employment benefits and pension funds (239) 487 4,485 - Remuneration - - 3,375 - Property, plant and equipment and intangible assets (280) (272) 1, Provisions for risks and charges (4,432) - 9,017 - Research grants - (127) 443 1,601 Allowances for WIP and inventory write-down (282) - 9,918 - Cash flow hedges - defined benefit plans Tax losses (1,098) - 3,407 - Stock grant plan Other 2,894 3,069 5,356 5,303 Total (3,437) 3,157 38,127 8,102 The deferred tax assets generated by the Provisions for risks and charges mainly relate to the US subsidiaries ( 4,282 thousand) and the parent ( 4,542 thousand). The deferred tax assets on tax losses relate to Ansaldo STS France S.A.S. ( 2,920 thousand) and Ansaldo STS Australia PTY ( 487 thousand). The deferred tax assets related to the allowance for inventory write-down mainly relate to the subsidiary Ansaldo STS USA ( 962 thousand) and the parent Ansaldo STS S.p.A. ( 8,518 thousand). Other mainly relates to the parent, Ansaldo STS S.p.A. ( 2,949 thousand), the subsidiary Ansaldo STS Australia ( 631 thousand), the French subsidiary ( 1,128 thousand) and the subsidiary Ansaldo STS USA INC ( 648 thousand). Deferred tax liabilities mainly relate to the parent Ansaldo STS. Deferred tax assets and liabilities include those recognised with a balancing entry directly in equity, on derivatives recognised as cashflow hedges and actuarial gains/losses following the adoption of the equity method for defined benefit plans. This equity item changed as follows during the year: ( 000) Transfers to profit or loss Fair value gains or losses Other changes Deferred taxes recognised in equity (454) - 1,763-1,309 81

84 Earning per share 15 Earning per Share Earnings per share ( EPS ) are calculated by: dividing the profit for the year attributable to holders of ordinary shares by the average number of ordinary shares outstanding in the year, net of treasury shares (basic EPS); dividing the profit for the year by the average number of ordinary shares and those that could arise from the exercise of all options under stock option plans, net of treasury shares (diluted EPS). Basic EPS Average shares outstanding during the year 149,612, ,208,985 Profit for the year (K ) 75,696 73,056 Basic and diluted EPS * *Recalculated following the bonus issue of 9 July For comparative purposes, the EPS was recalculated for Specifically, the average number of ordinary shares outstanding in the year was recounted. This was necessary following the third instalment of the bonus issue on 9 July 2012, when 20,000,000 newly-issued shares with a nominal amount of 0.50 each were freely allocated to the existing shareholders at that date, in the ratio of one new share to every seven shares held. 82

85 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 16 Cash flows from operating activities The following table shows the cash flows from operating activities: ( 000) Profit for the year 75,696 73,056 Share of profits (losses) of equity-accounted investees (3,530) (4) Income taxes 38,421 42,295 Italian post-employment and other employee benefits Stock grant plans 2, Losses on the sale of assets (2,118) (58) Net financial income 6, Restructuring costs 1,735 1,677 Amortisation, depreciation and impairment losses 20,768 13,410 Accruals to/reversals of provisions for risks (2,034) 3,569 Other operating income/expense (270) (1,867) Write-downs/reversals of write-downs of inventories and work in progress 15,183 (7,041) Total 153, ,299 The change in working capital, shown net of the impacts of acquisitions and sales of consolidated companies and exchange rate gains and losses, comprises: ( 000) Inventories (2,081) (2,154) Work in progress and progress payments and advances from customers (38,837) (14,989) Trade receivables and payables (10,083) (25,514) Total (51,001) (42,657) The change in other operating assets and liabilities, shown net of the impacts of acquisitions and sales of consolidated companies and exchange rate gains and losses, comprises: ( 000) Payment of Italian and other post-employment benefits (2,699) (2,709) Taxes paid (32,600) (47,867) Changes in other operating items (22,980) (16,659) Total (58,279) (67,235) Reference should be made to paragraph 2.3 on the group s financial position for a discussion of changes in the statement of cash flows. 83

86 Financial risk management 17 Financial risk management The group s operations expose it to the following financial risks: market risks, related to currency risk, operations in currencies other than the functional currency, interest rate risk; liquidity risks, related to the availability of financial resources and access to the credit market; credit risk, arising from normal trading transactions or financing activities. The group specifically monitors each of these financial risks and acts promptly to contain them including via hedging derivatives. Ansaldo STS group s approach to managing these risks, in line with internal policies, is described below. Currency risk management As described in the treasury management policy, Ansaldo STS group manages currency risk by pursuing the following objectives: limiting potential losses generated by unfavourable exchange rate fluctuations against the currency used by Ansaldo STS S.p.A. and its subsidiaries; limiting forecast or actual costs related to the implementation of currency risk management policies. Currency risk shall only be hedged if it has a material impact on cash flows, compared to the functional currency. Costs and risks related to a hedging policy (hedge, no hedge or partial hedge) must be acceptable in both financial and commercial terms. Currency risk may be hedged using the following tools: purchase and sale of currency forwards: these are the most commonly used cash flows hedges; funding/lending in foreign currency: used to reduce the currency risk related to similar receivable and payable positions with banks or group companies. The use of funding and lending in foreign currency as a hedging instrument shall only take place when consistent with Ansaldo STS group s overall treasury management and financial position (both long- and short-term). The purchase and sale of foreign currency is generally the hedging tool used when foreign markets are not sufficiently liquid or when it is the most cost effective method of hedging. Currency risk hedging There are three main types of currency risk: 1. the economic risk is the impact exchange rate fluctuations can have on capital budgeting decisions (investments, the location of production facilities and supply markets). 2. transaction risk is the possibility that exchange rates may fluctuate between the time a commitment is undertaken to make future collections or payments in foreign currency (price list, budgets, orders preparation and invoicing) and when the actual collection or payment takes place, generating either exchange rate gains or losses. 3. the translation risk is the effect on the financial statements of multinational companies of translating dividends, or of consolidating assets and liabilities when exchange rates adopted for consolidation purposes differ from one reporting period to the next. The Ansaldo STS group hedges the transaction risk in line with the Foreign Exchange Risk management policy, i.e., via the systematic hedge of cash flows generated by firm contractual commitments to buy and sell, in order to fix the exchange rates at the date the construction contracts are agreed, thereby neutralising the effects of exchange rate fluctuations. Cash flow hedges Hedges are entered into at the time sales contracts are agreed, using plain vanilla instruments (currency swaps and forwards) that qualify for hedge accounting under IAS 39. They are recognised as cash flow hedges, whereby the effective portion of fair value gains or losses on hedging derivatives is recognised in the relevant hedging reserve once the hedging strategy is demonstrated to be effective. If the hedge is not deemed effective (i.e., does not fall within the 80% and 125% range), fair value gains or losses on hedging instruments are immediately expensed as financial items and the related fair value gains or losses accumulated in the hedging reserve up to the date of the most recent successful test of effectiveness are reclassified to profit or loss. Fair value hedges These hedge fair value changes in a recognised asset or liability, an unrecognised firm commitment, an identified portion of this asset, liability or irrevocable commitment, related to a particular risk and that could impact profit or loss. 84

87 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group The group hedges fair value gains or losses related to the currency risk on recognised assets and liabilities. Hedges are mainly undertaken with banks. The group has contracts in place for the following notional foreign currency amounts at the reporting date: local currency in 000 Sell12 Buy Sell11 Buy Euro 96,108 56, ,061 99,016 66, ,917 US dollar 74,188 23,180 97,368 54,363 27,183 81,546 Pounds sterling 8,847 1,042 9,889 11, ,221 Swedish krona 3,065 29,228 32,293-23,838 23,838 Australian dollar - 42,261 42,261 13,631 7,159 20,790 Hong Kong dollar Abu Dhabi Dirham 19,603-19, The net fair value of the derivatives in place at 31 December 2012 was a positive 519 thousand. Sensitivity analysis of exchange rates For the purposes of the presentation of market risks, IFRS 7 requires a sensitivity analysis that shows the effects of the assumed changes in the most relevant market variables on profit or loss and equity. Currency risks arise from recognised financial instruments (including trade receivables and payables) or highly probable cash flows denominated in a currency other than the functional currency. Since the US dollar is the primary foreign currency used by the group, a sensitivity analysis was performed on financial instruments denominated in dollars in place at 31 December 2012, assuming a 5% appreciation (depreciation) of the euro against the US dollar. This analysis showed that an appreciation or depreciation of the euro against the US dollar would have the following impact on the group s financial statements: ( 000) +5% - appreciation of the euro against the US dollar % - depreciation of the euro against the US dollar +5% - appreciation of the euro against the US dollar -5% - depreciation of the euro against the US dollar Income statement 2,397 (2,498) 964 (1,066) Hedging reserve (4,574) 4,574 (4,738) 4,738 Translation reserve The sensitivity of the financial position to the euro/us dollar exchange rate fluctuations is substantially unchanged compared to 2011, whereas the impact on the income statement grew considerably. This is due to the fact that the contractual exchange rate was consistent for forex cash flow derivatives in place at 2012 year end and to the increased exposure to infragroup financial positions in US dollars, typically internal and loan accounts. Interest rate risk management Under the policy, the aim of interest rate risk management is to reduce the negative effects of interest rate fluctuations on the group s financial position, results of operations and weighted average cost of capital. Ansaldo STS group manages interest rate risk to pursue the following objectives: stabilising the weighted average cost of capital; minimising Ansaldo STS group s medium- and long-term weighted average cost of capital by focusing on the effects of interest rates on debt funding and equity funding; optimising the return on financial investments within a general risk/return trade-off; limiting costs related to the implementation of interest rate management policies, including direct costs related to the use of specific instruments and indirect costs linked to the internal structure needed to manage the risk. Excess liquidity is invested in the short term. Consequently, financial indebtedness is mainly of a short-term nature. Thanks to joint shortterm management of assets and liabilities, the group s exposure to interest rate fluctuations in the long term is relative neutral. Also in 2012, the group managed this risk without the use of derivatives. 85

88 Financial risk management Sensitivity analysis of interest rates A sensitivity analysis was performed on the assets and liabilities exposed to interest rate risk to assess the impact on profit or loss, assuming a parallel and symmetric 50 basis point rise (fall) (0.5%) in interest rates; the adopted range has been chosen by IFRS for the analysis. The impact of these scenarios on the group s financial statements at 31 December 2012 is summarised in the following table: ( 000) +50 bps -50 bps +50 bps -50 bps Income statement 1,128 (1,128) 1,631 (1,631) Reserves These impacts are the result of greater interest income that would be produced by floating rate net financial debt, in the case of interest rates greater or lower by 50 basis points respectively. The change in interest rates would have no impact on the measurement of recognised financial statements, as there are no financial assets or liabilities (not derivative) recognised at fair value through profit or loss. Moreover, the derivatives entered into by the group are exclusively exchange rate derivatives and a change in the interest rates of the various currencies would have no relevant impacts on fair value at year end. There are no impacts on equity, as the group has no cash flow hedges on the interest rate risk. The results achieved at 31 December 2012 improved on those of the previous year thanks to the reduction in receivables and payables exposed to interest rate fluctuations. Liquidity risk management Ansaldo STS group has rolled out a series of tools to optimise treasury management with a view to the efficient management of cash and cash equivalents and to help its business grow. This was achieved by centralising the treasury function (current accounts between the parent and the group companies) and an active presence on financial markets which has enabled the group to obtain short- and long-term non-revolving cash and unsecured credit lines to meet its needs. It had a net financial position of 301,982 thousand at 31 December 2012 and a net financial position of 289,674 thousand at 31 December Liquidity analysis amounts in thousands of euros figures at ( 000) A Financial liabilities excluding derivatives Within one year Between two and five years After five years Non-current liabilities Other non-current liabilities Current liabilities Related party trade payables 32,763 25,978 - Third party trade payables 434,518 7,304 - Third party financial liabilities ,916 - Total A 467,740 51,260 - B Negative value of derivatives Hedging derivatives 4, Total B 4,108 - Total A + B 471,848 51,260 - The following financial assets were recognised against financial liabilities and trade payables of 523,108 thousand: C - Financial assets Cash and cash equivalents 146,837 Third party trade receivables 579,781 Related party trade receivables 168,966 Loan assets 173,520 Positive value of derivatives 4,627 TOTAL FINANCIAL ASSETS 1,073,731 D Unsecured credit lines 102,845 TOTAL C + D 1,176,576 C+D-(A+B) 653,468 86

89 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group The group has a net credit position and has available liquidity to self-finance and does not have to use banks to finance its operations. Consequently, it has relatively limited exposure to the liquidity market tensions seen in the last part of the year. Credit risk management The group does not have significant credit risks, either in terms of its trading counterparties or its financing and investing activities. Its main customers are public entities or related to public bodies, mostly in the European, US and South-East Asia areas. Ansaldo STS group s typical customer rating is therefore medium-to-high. However, for contracts with customers/counterparties with which the group does not have regular trading transactions, solvency is analysed at the time the offer is placed, in order to identify future credit risks. Given the nature of the group s customers, collection times are longer (and, in certain countries, significantly longer) than those typical of other businesses, leading to overdue amounts, which are sometimes considerable. At 31 December 2012, third party trade receivables amounted to 579,781 thousand (31 December 2011: 546,939 thousand) and were overdue for 338,733 thousand, of which 170,126 thousand by more than 12 months. Third party trade receivables mainly relate to the parent Ansaldo STS S.p.A. ( 452,107 thousand), overdue for 278,753 thousand, of which 162,015 by more than twelve months. The following table gives a breakdown of receivables at 31 December 2012: ( 000) Public bodies Other customers Europe US Other Europe US Other Total - Retentions 10,239 3,033 19,195 5,160 3,627 4,118 45,371 - Not overdue 54,163 1,980 21,988 87,728 6,234 23, ,677 - Overdue by less than six months 18,328 1,420 1,684 20,343 3,699 45,660 91,134 - Overdue between 6 months and 1 year 54, ,678 6,577 8,350 77,472 - Overdue between one and five years 66,875-52,650 44,372-6, ,126 - Overdue by more than five years Total 203,728 6,639 96, ,280 20,137 87, ,781 The allowance for impairment changed as follows: ( 000) January 12,155 13,784 Accruals 5, Releases/Utilisation (631) (2,698) Other changes December 17,079 12,155 During the year, the allowance for impairment rose by 4,924 thousand, mainly as a result of the amounts accrued by the parent Ansaldo STS S.p.A. ( 5,211 thousand). Other changes include the exchange rate gains and losses which arose from the consolidation of foreign subsidiaries. With respect to the credit risk arising from the positive value of derivatives, the counterparties of derivative contracts are mainly banks. The table below breaks down the positive value of derivatives by the counterparty s rating class. The ratings below are based on S&P data. Rating class Positive fair value AA % A+ 8.45% A 56.26% A- 4.17% Total positive fair value 100% 87

90 Financial risk management Classification and fair value of financial assets and liabilities The tables below give a breakdown of group financial assets and liabilities by the accounting categories set out in IAS 39. Financial liabilities are all measured using the amortised cost method, since the group did not use the fair value option. Derivatives are analysed separately ( 000) Fair value through profit or loss Loans and receivables Held to maturity Available for sale Total Fair Value Non-current assets Non-current related party loans and receivables - 6, ,779 6,779 Loans and receivables - 15, ,566 15,566 Current assets Non-current related party loans and receivables - 168, , ,966 Trade receivables - 579, , ,781 Financial assets measured at fair value - 173, , , ( 000) Fair value through profit or loss Amortised cost Total Fair value Non-current liabilities Current liabilities Current related party liabilities - 58,741 58,741 58,741 Trade payables - 441, , ,822 Loans and borrowings - 18,375 18,375 18, ( 000) Fair value through profit or loss Loans and receivables Held to maturity Available for sale Total Fair Value Non-current assets Non-current related party loans and receivables - 2, ,765 2,765 Financial assets measured at fair value Loans and receivables - 15, ,467 15,467 Current assets Current related party loans and receivables - 133, , ,130 Trade receivables - 546, , ,939 Financial assets measured at fair value 30, , , , ( 000) Fair value through profit or loss Amortised cost Total Fair value Non-current liabilities Non-current loans and borrowings Current liabilities Current related party liabilities - 45,984 45,984 45,984 Trade payables - 385, , ,867 Loans and borrowings - 14,915 14,915 14,915 The carrying amount of short-term financial instruments, such as trade receivables and payables, represents a fair approximation of fair value. Derivatives IFRS 7 requires the classification of the fair value of derivatives on the basis of reference parameters that can be inferred from the market or from other financial indicators (for example: exchange rates, interest rate curve, etc.). Financial derivatives on currencies to hedge the currency risk fall within Level 2 of hierarchy since the fair value of these instruments is determined by recalculating the present value through official fixing of year-end exchange and interest rates listed on the market. 88

91 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group The table below shows the fair values of financial instruments in portfolio. Fair value at Fair value at Fair value hierarchy at the reporting date Level 2 Level 2 Assets Interest rate swap trading - - Fair value hedges - - Cash flow hedges - - Currency forwards/swaps/options trading - - Fair value hedges 3,155 3,144 Cash flow hedges 1,472 5,544 Equity instruments (trading) - - Embedded derivatives (trading) - - Liabilities Interest rate swaps trading - - Fair value hedges - - Cash flow hedges - - Currency forwards/swaps/options trading - - Fair value hedges Cash flow hedges 3,838 4,876 Equity instruments (trading) - - Embedded derivatives (trading) - - The group uses cash flow hedges to hedge the currency risk of highly probably future transactions and fair value hedges to hedge the exposure to the currency risk of recognised assets and liabilities. With respect to derivatives hedging future cash flows and outflows in currencies other than the functional currency, the table below shows the maturities of these cash flows, hedged in US dollars Notional (in thousands of USD) Notional (in thousands of USD) Maturity Collection Payment Collection Payment Within one year 14,239 22, ,122 Between one and three years 10,016 1,032 8,550 8,975 Between three and nine years 4, Total 28,260 23,584 9,431 30,173 89

92 Key managers remuneration 18 Key managers remuneration Fees and reumeration paid to those who have the power to plan, manage and control the group, including executive and non-executive directors, are as follows: ( 000) Fees 2,212 3,013 Stock grants Total 2,286 3,658 Directors fees amounted to 2,286 thousand in 2012 (2011: 3,658 thousand). These amounts include fees and any other type of remuneration and social security sums due for the position of director or key manager in the parent or in other companies included in the consolidation scope, which represented a cost for the group. Statutory auditors fees amounted to 210 thousand in 2012 (2011: 192 thousand). The following table gives a breakdown of the parent s directors, statutory auditors and CEO s fees: Person (in Euros) POSITION Fees for the position held in Name and surname Position Date of appointment End of term the reporting company for 2012 Nonmonetary benefits Bonuses and other incentives Other fees Pansa Alessandro Chairman of the BoD 21/11/2005 Approval of 2013 financial statements 75,000 (1) Grasso Giancarlo Deputy chairman 05/04/2011 Approval of 2013 financial statements 50,000 (3) De Luca Sergio Chief executive officer 14/06/2007 Approval of 2013 financial statements 50,000 (2) 66, ,787* Cavallini Giovanni (b) Director 05/04/2011 Approval of 2013 financial statements 70,000 (4) Cereda Maurizio (a) (d) Director 14/06/2006 Approval of 2013 financial statements 95,000 (5) Girdinio Paola (d) Director 05/04/2011 Approval of 2013 financial statements 70,000 (6) Pavesi Bruno (b) Director 30/03/2012 Approval of 2013 financial statements 52,500 (4) Rizzante Tatiana (e) Director 05/04/2011 Approval of 2013 financial statements 75,000 (7) Salvetti Attilio (c) Director 24/03/2006 Approval of 2013 financial statements 75,000 (8) Sarubbi Giacinto Chairman of the board of statutory auditors 01/04/2008 Approval of 2013 financial statements 75,000 15,000** Scotton Massimo Statutory auditor 01/04/2008 Approval of 2013 financial statements 50,000 10,000** Righetti Renato Statutory auditor 05/04/2011 Approval of 2013 financial statements 50,000 10,000** * of which 426,795 as fixed remuneration for the position of CEO in 2012 and 239,992 for variable remuneration paid for the same position in 2011 ** fees for positions on committees (a) Chairman of the appointments and remuneration committee (b) Member of the appointments and remuneration committee (c) Chairman of the risk and control committee (d) Member of the risk and control committee (e) Chairman of the supervisory body in Euros (1) 12 months chairman and BoD fees waived (2) 12 months BoD - Fees transferred back to Ansaldo STS S.p.A. (3) 12 months BoD (4) 9 months BoD + 9 months appoint. and rem. commit. (5) 12 months BoD + 12 RCC +12 months chair. appoint. and rem. commit. (6) 12 months BoD + 12 months appoint. and rem. commit. (7) 12 months BoD and 12 months chair. superv. body (8) 12 months BoD + 12 months chair. RCC Annual unit fees Chairman of the board of directors 75,000 Member of the board of directors 50,000 Chairman of the supervisory body 25,000 Member of the supervisory body n.a. Chairman of the appointments and remuneration committee 25,000 Member of the appointments and remuneration committee 20,000 Chairman of the risk and control committee 25,000 Member of the risk and control committee 20,000 In order to implement an incentive and loyalty scheme for the group s employees and consultants, the parent Ansaldo STS S.p.A. has launched several incentive plans which, upon reaching set company objectives, provide for the awarding of Ansaldo STS S.p.A. shares. With respect to Stock grants, in December 2012, the shares pertaining to 2011 objectives were awarded, using the reserve set up in the previous year. The value of the shares awarded to the personnel involved in the plan was recognised by the parent directly as an equity transaction. Differentials in terms of both fair value (the difference between the time of awarding and delivery) and percentage of awarded shares were recognised in a specific equity reserve (see note 13.15). 90

93 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 19 Outlook The market in which the group operates has an estimated 3% growth rate p.a and its entrenched presence in countries which are expected to grow at above-average rates (Asia, the Middle East, North America and Australia), together with the group s consolidated technological leadership, underpin the strong expectations for the future production volumes and profitability are expected to be in line with those of No forecasts can be made about when the important contracts in Libya will be resumed given the uncertainties surrounding this country. Genoa, 5 March 2013 On behalf of the board of directors the Chairman Alessandro Pansa (signed on the original) 91

94 Information pursuant to Article 149-duodecies of Consob issuer regulation 20 Information pursuant to Article 149-duodecies of Consob issuer regulation The following schedule was prepared in accordance with article 149-duodecies of Consob s Issuer regulation) and shows the fees for 2012 related to audit and non-audit services provided by the audit company or entities belonging to its network. ( 000) Service provider Beneficiary 2012 fees Audit PricewaterhouseCoopers S.p.A. Parent - KPMG S.p.A. Parent 226 PricewaterhouseCoopers S.p.A. Subsidiaries 66 KPMG S.p.A. Subsidiaries - Rete PricewaterhouseCoopers Subsidiaries - Rete KPMG Subsidiaries 496 Attestation services PricewaterhouseCoopers S.p.A. Parent 59 KPMG S.p.A. Parent - PricewaterhouseCoopers S.p.A. Subsidiaries - KPMG S.p.A. Subsidiaries - Rete PricewaterhouseCoopers Subsidiaries - Rete KPMG Subsidiaries - Tax consultancy services PricewaterhouseCoopers S.p.A. Parent - KPMG S.p.A. Parent - PricewaterhouseCoopers S.p.A. Subsidiaries - KPMG S.p.A. Subsidiaries - Rete PricewaterhouseCoopers Subsidiaries 60 Rete KPMG Subsidiaries - Other services PricewaterhouseCoopers S.p.A. Parent 6 KPMG S.p.A. Parent 86 PricewaterhouseCoopers S.p.A. Subsidiaries 167 KPMG S.p.A. Subsidiaries 5 Rete PricewaterhouseCoopers Subsidiaries - Rete KPMG Subsidiaries - 1,171 92

95 Signalling and Transportation Solutions 2012 Annual Report Ansaldo Sts Group 21 Statement on the Consolidated Financial Statements pursuant to Article 81-ter of Consob regulation no of 14 May 1999 and subsequent amendments and integrations and Article 154-bis.2 of Legislative Decree no. 58 of 24 February 1998 and subsequent amendments and integrations 1. the undersigned, Sergio De Luca, as CEO, and Christian Andi as Manager in charge of financial reporting for Ansaldo STS S.p.A., also considering the provisions of article 154-bis.3/4 of Legislative decree no. 58 of 24 February 1998 and subsequent amendments and integrations, state that the administrative and accounting procedures used to draft the consolidated financial statements at 31 December 2012: are adequate in relation to the nature of the business have been effectively applied. 2. There is nothing to report in this regard. 3. Moreover: 3.1 the consolidated financial statements: a) are drafted in compliance with the IFRS endorsed by the European Community, pursuant to EC regulation no. 1606/2002 issued by the European Parliament and Council on 19 July 2002; b) are consistent with the accounting ledgers and accounting entries; c) provide a true and fair view of the financial position and results of operations of the issuer and the companies included in the consolidation scope. 3.2 the directors report provides a reliable analysis of the important events taking place in the year and the financial position and results of operations of the issuer and the companies included in the consolidation scope, together with description of the key risks and uncertainties to which they are exposed. Genoa, 5 March 2013 the CEO Sergio De Luca (signed on the original) the manager in charge of financial reporting Christian Andi (signed on the original) 93

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100 ANSALDO STS S.p.A. Registered Offi ce: Genoa Via Paolo Mantovani, 3-5 Paid-in Share Capital Euro 80,000,000 R.E.A. n Register of Enterprises of Genoa Tax Code A Finmeccanica Company