Net loss for the famous Italian company, which is celebrating the occasion of its 80th anniversary this year, jumped sharply from -5.6 million euros during the first half of 2009 to -29.5 million euros during the first half of this year and the stripping out of the balance sheet of financials relating to the partially unfavourable Mitsubishi arbitration decision meant that shareholder equity nearly halved. Pininfarina foresees little improvement during the rest of the year and full-years losses will be posted. However it is widely believed that a buyer is waiting in the wings.

The ambitious "Bluecar" joint venture project remains stalled with both parties, Pininfarina and its French 50-50 partner, Bolloré, at loggerheads over the direction to take to realise the electric urban car. Interesting Pininfarina hints in its report at a built-in release mechanism that is available for one party to buy out the other, hinting that the on-going differences between the two partners could well be irrevocable.

Revenue from Pininfarina's more resilient services sector has nosedived this year as well although much of this is due to internal work drying up as well as the downturn in the wider automobile industry meaning that contracts have been put on hold.

Pininfarina's payroll has shrunk by more than a half compared to the mid-point of last year (if Pininfarina Sverige is discounted). There were 847 employees at June 30 comapred to 1,854 a year earlier. (709 employees on the payroll of Pininfarina Sverige at June 30 compared to 692 at the same point a year earlier. It is worth mentioning that last year Pininfarina transferred 900 employees to the new DeTomaso Automobili concern in connection with the disposal of its key Turin-located Grugliasco contract engineering facility.

Production of Alfa Romeo's Brera and Spider will also cease in the autumn. These two models have been built by Pininfarina since 2005 and 2006 respectively but saw little market success, criticised in particular for excessive weight and poor handling, and during the last two years their production has virtually come to a standstill, though there was a small recent boost when the limited-edition Brera Italia Independent was launched. Born during the era of Fiat Group's collaboration with GM, the sports coupé and its convertible sister use a platform derived from the U.S. carmaker's portfolio. However they both received highly acclaimed new turbo petrol engines during the last model year in an attempt to galvanise sales. The Brera and Spider are built at the Grugliasco factory which is now actually owned by DeTomaso Automobili, completing the Alfa Romeo contract was built into the sale of the plant.

Pininfarina Half Year Financial Report

In the automotive industry, which is the market where the Pininfarina Group operates, conditions remained negative, particularly in Europe, during the first half of 2010, even though some signs of a turnaround seem to bode well for the future. In this environment, the Group was able to minimize the negative impact of the economic environment to different degrees, depending on the type of business activity. In any case, net of the extraordinary event represented by the Mitsubishi arbitration award the result for the period was in line with expectations and the Financial Plan upon which the Rescheduling Agreement currently in effect with the Lender Institutions is based.

Compared with June 30, 2009, the data for first half of 2010 show a modest reduction in value of production, an increase in negative EBIT and a larger net loss. On the other hand, the net financial position improved significantly compared both with December 31, 2009 and June 30, 2009. At June 30, 2010, consolidated value of production totaled 127 million euros, or 8.6% less than in the first half of 2009 (139 million euros). Reduced activity in the service area—particularly the engineering operations, which are most sensitive to delays by carmakers in decisions to develop new models—accounts for most of this decrease. EBITDA (equal to the profit or loss from operations before depreciation, amortization and additions to provisions), which had been positive by 1 million euros in the first half of 2009, turned negative by 23.5 million euros at June 30, 2010, due mainly to a charge of 22.6 million euros recognized in connection with the Mitsubishi arbitration award. EBIT (equal to the profit or loss from operations) was negative by 32.6 million euros, compared with a negative balance of 8.9 million euros at June 30, 2009. The loss incurred in 2010 reflects the impact of the Mitsubishi arbitration award (28.5 million euros), offset in part by lower depreciation and amortization and a decrease in net additions to provisions made possible by reduction of some provisions for risks (totaling about 8.5 million euros) that were no longer deemed necessary, given the end of the production order for Ford. Net financial income amounted to 0.5 million euros, compared with net financial income of 1.8 million euros in the first six months of 2009. This decrease is mainly due to the following factors: a change in the types of investments compared with the first half of 2009, with a preponderance of money market instruments, which have lower yields but are less exposed to the risk of fluctuations in rates; a reduction in interest income generated by volumes invoiced for the Alfa Romeo production order; and a lower interest rate charged on the loans provided to the Pininfarina Sverige joint venture. The shortfall in interest income was proportionately larger than the decrease in interest expense, which reflected the combined impact of a reduction both in gross indebtedness and in interest rates paid.

Valuation adjustments totaled 3 million euros (1.3 million euros at June 30, 2009). They are the net result of the following factors: a positive contribution of 3.2 million euros (the Group’s pro rata interest in net profit) provided by the Pininfarina Sverige A.B. joint venture (2.9 million euros at June 30, 2009) and a negative contribution of 0.2 million euros (loss of 1.6 million euros a year ago) attributable to the Véhicules Electriques Pininfarina Bolloré SAS joint venture.

The Mitsubishi arbitration award notified to the parties in July—had a major impact on the data for the first half of 2010. Pininfarina was a party to arbitration proceedings activated by Mitsubishi before the International Chamber of Commerce in Paris, in which Mitsubishi was seeking compensation for damages of about 43.4 million euros. The Company completely rejected Mitsubishi’s claim and, in turn, filed for arbitration, asking that the Board of Arbitrators find Mitsubishi liable and, consequently, order it to pay compensation for the damages suffered by Pininfarina and for the repayment of the investments made pursuant to contract. The outcome of the proceedings was partly favorable to Pininfarina, to whom the Board of Arbitrators awarded 37.9 million euros plus interest as repayment of the investment made under a contract to develop and produce the Mitsubishi Colt Cabrio automobile. The Board also ruled that 13.8 million euros already paid by Mitsubishi to the company would not have to be returned to Mitsubishi. However, the Board of Arbitrators also partially granted some of Mitsubishi’s claims totaling 20.5 million euros plus interest. As a result, the Board of Arbitrators ordered Mitsubishi to pay to Pininfarina the net amount of 17.4 million euros plus interest, which, as of today’s date, brings the total to 19.2 million euros. Based on the terms of the arbitration award, the Company’s financial statements at June 30, 2010 recognize a negative effect of 28.5 million euros (22.6 million euros for the amount that Pininfarina owes to Mitsubishi, with an impact on EBITDA, and 5.9 million euros for a partial writedown of Mitsubishi’s financial receivables, with an impact on EBIT). In terms of cash flow, as a result of the Mitsubishi arbitration award, Pininfarina will receive about 19.2 million euros from Mitsubishi. This amount will be used to reduce the gross indebtedness owed to the Lender Institutions, consistent with the terms of the Rescheduling Agreement currently in effect. The development described above is the reason why EBITDA were negative by 29.2 million euros, due to a charge of 28.5 million euros attributable to the Mitsubishi arbitration award, compared with negative EBITDA of 5.8 million euros in the first half of 2009.

Income taxes totaled 0.3 million euros, as against a tax benefit of 0.2 million euros at June 30, 2009. The net loss for the first six months of 2010 totaled 29.5 million euros, including 28.5 million euros attributable to the Mitsubishi arbitration award, compared with a net loss of 5.6 million euros at June 30, 2009.

Group interest in shareholders’ equity decreased from 48.7 million euros at December 31, 2009 to 22.2 million euros at June 30, 2010. The shareholders’ equity of Pininfarina S.p.A. totaled 29 million euros at June 30, 2010, for a decrease of 33.7 million euros compared with the amount at December 31, 2009 (62.7 million euros).

The net financial position, while negative by 37.7 million euros, improved compared with net borrowings of 43.7 million euros at December 31, 2009 (net borrowings of 79.9 million euros at June 30, 2009). The improvement of 6 million euros is the net result of a reduction of about 48.4 million euros in indebtedness owed to banks and leasing companies for repayments made during the period, which was proportionately larger compared with the amount of liquid assets absorbed by changes in working capital and the reduction in loans receivable.

In Sweden, Pininfarina Sverige A.B. sold 6,125 Volvo C70 automobiles, an increase of 55% compared with the 3,960 units shipped in the first six months of 2009. The increase in demand, which occurred both in Europe and North America, demonstrates the continuing appeal of this product, five years after its launch. The positive contribution provided by this joint venture to the Group’s income statement increased, rising from 2.9 million euros in the first half of 2009 to 3.2 million euros in the same period this year.

The service operations reported value of production totaling 22.1 million euros for the first six months of 2010, compared with 41.4 million euros at June 30, 2009 (-46.6%), accounting for 17.4% of the Group’s total value of production (29.8% at June 30, 2009). This percentage decrease is due in part to the higher contribution provided to total value of production by the manufacturing operations. A comparison of the data for the first half of 2009 and 2010 shows that while the business volume of the Styling activities held relatively steady, the engineering services suffered from the lack of activity for the development of the electric car, which generated significant business in 2009 but was absent in 2010. The service operations reported negative EBIT of 2.4 million euros, as against positive EBIT of 5.3 million euros at June 30, 2009. This deterioration in profitability is mainly the result of a decrease in business activity, a reduction in the margins earned on the current order portfolio, caused by the current market situation, and the inclusion of an extraordinary gain in the balance at June 30, 2009 (out-of-period income of about 1.2 million euros), which was not the case this year.

The extraordinary negative impact of the Mitsubishi arbitration award on the results of Pininfarina S.p.A. and the Group caused a significant reduction in shareholders’ equity amounting to 28.5 million euros. Specifically, Pininfarina S.p.A. shows shareholders’ equity that is about 1.1 million euros less than its share capital. However, management, which monitors the value of this account on an ongoing basis, does not believe that the situations referred to in Articles 2446 and 2447 of the Italian Civil Code are likely to occur in the near future. Signs of an improvement in market conditions began to surface in the second quarter of this year, as demonstrated by numerous commercial contacts initiated with European and Chinese customers, some of which resulted in negotiations that are already at an advanced stage. Therefore, it seems possible that the service activities will return to an adequate level in the coming months in Italy, while the turnaround is already under way in the German market. The electric car project, a key component of the Group’s Industrial Plan, suffered a decision making stalemate during the first half of 2010 caused by differences in the strategic objectives (caused in part by the different policies announced by the Italian and French governments with regard to incentives for electric cars) pursued by the Pininfarina and Bolloré groups, 50-50 partners in the Véhicules Electriques Pininfarina Bolloré SAS joint venture. However, recent contacts seem to indicate that a positive solution to the stalemate may be possible, producing economic and financial results in line with the projections of the current Industrial and Financial Plan approved by the Lender Institutions. If a mutually agreeable solution cannot be found, the procedure set forth in the joint venture agreement provides for a predetermined mechanism by which a partner can buy/sell the shares from/to the other partner, thereby resolving the stalemate.

As it is well known, Pininfarina S.p.A. is in the process of being sold and it is reasonable to believe that, now that two situations of key importance for the Group’s viability as a going concern and its valuation (dispute at the appellate level with the Revenue Agency and Mitsubishi arbitration award) have been resolved, a sale and a resulting strengthening of the balance sheet will occur more quickly. The Lender Institutions never failed to provide their constructive and essential support to the Group, since the conclusion of the Agreements signed on December 31, 2008, and no signals of a different nature have been perceived thus far. In terms of liquidity, the current agreements with the Lender Institutions enabled the Group to maintain a significant amount of resources, sufficient to avoid any concern over the medium term. The handling of the current net financial position is evidence of the Company’s confidence in this regard. From the signing of the debt restructuring agreements to today, the Company repaid on time about 87 million euros, which will increase to about 106 million euros with the liquidity provided by the Mitsubishi arbitration award, which, pursuant to the Rescheduling Agreement, must be used for debt repayment.

In view of the considerations provided above, while there are still risks concerning the ability of the Group and the Company to continue operating as a going concern, now that significant sources of uncertainty (dispute with the Revenue Agency and Mitsubishi arbitration award) have been removed, the Directors have confidence in the effectiveness of the activities that are being implemented to restore the financial and industrial health of the Pininfarina Group.