Annual Report 2010 Bonfiglioli Riduttori S.p.A.

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3 3 Contents 5 Message from the Founder 7 Message from the Chairman Leonardo Prize 11 Power, Control & Green Solutions 15 Financial Highlights 21 Bonfiglioli Group 29 Management Report 53 Consolidated Financial Statements as of December 31, Notes to the consolidated financial statements 99 Independent Auditors Report

4 5 Message from the Founder. The photo to the left shows Clementino Bonfiglioli, Founder of Bonfiglioli. I must admit that we have made great progress in just fifty years. Our company has seen impressive growth and our products have won recognition for their quality worldwide. If I had to do it all again, I d do it exactly as I did the first time round, because I had the full backing of management, my employees and my family. My wife and my children have always given me their full support, even in the most difficult times. They have always encouraged me to carry on. I have built up this company not just for my own satisfaction but for the future, for my family and for my employees, and to see our name, our brand, succeeding. So it s still full speed ahead! Clementino Bonfiglioli April 2006 on the occasion of company s Fiftieth Anniversary.

5 7 Message from the Chairman. The photo to the right shows Sonia Bonfiglioli, Chairman and Managing Director. A big hello to you all! It is my pleasure to invite you to read on and find out how the Bonfiglioli Group is changing. We are all aware that the changes occurring worldwide cannot be stopped. They can only be turned into opportunities. This was my father s conviction, and one that he put into practice with passion and determination throughout his life. Thanks to his drive and inspiration, the Bonfiglioli group has embraced new technologies, found new applications and become a truly global player. We have invested in renewable energy and in the green economy, with the intention of supplying the world not just with products, but with complete, advanced solutions. Today we can look to the future with confidence. We have the ability to win the trust of those who do not yet know us, and to justify the fidelity of those who have been using our products and supporting our company for years. My gratitude goes out to all of them and to all of you. Thank you! Sonia Bonfiglioli

6 Leonardo Prize. The photo to the left shows Sonia Bonfiglioli, Chairman and Managing Director, as she receives the Leonardo Prize at the Quirinale. On top of the advanced technology found in each of its products, the real strength of the Bonfiglioli Group lies in its ability to provide the technical competences needed to develop systems integrating electronic, hydraulic and mechanical sub-systems, and to do so in a unique and exclusive way. The solutions created in this way are always choices of excellence, whether in industrial plant, mobile machinery, or innovative projects in the field of renewable energy systems, especially those based on wind, photovoltaics and biomass. In over fifty years of activity, Bonfiglioli has established itself as an international group capable of leading its reference markets and acting as a reliable partner, drawing inexhaustible energy from continuous improvement and uninterrupted research. Congratulations to every one of you for your contribution to this excellent result. Let us hope that the Leonardo Prize points to a prosperous future for the Bonfiglioli Group. Excerpt of the official motivation for granting Bonfiglioli the 2010 Leonardo Prize, presented to Sonia Bonfiglioli on 25th January 2011 by the President of the Republic Giorgio Napolitano.

7 Power, control and green solutions 11 Providing the power to serve mankind. Energy can be neither created nor destroyed. It can only be transformed. Over fifty years of experience, competence and professionalism have allowed us to integrate electronic, hydraulic and mechanical technology for transforming energy into power to serve mankind. Bonfiglioli offers excellent and international solutions for power transmission and control. We design, manufacture and distribute a complete range of gearmotors, drive systems and planetary gearboxes. Our solutions are used in a vast range of applications all over the world, in industry, mobile machinery and construction, to improve the quality of life and work on a daily basis.

8 12 Power, control and green solutions 13 Bringing power and energy under control. Supporting development while respecting the environment. Power control is the ability to harness, manage and use power. Bonfiglioli designs, develops and manufactures solutions for the widest range of applications, from heavy industry to renewable energy, and from earth moving machines to precision electronics. Our ideas are the result of intensive training, experience in the field and advanced specialisation. Our group recognises and appreciates everybody s contribution, and respects the different cultural identities that inevitably make up a large international team. We all share the common aim of producing tangible results and competitive benefits for our customers, by working together with them and by developing wealth and wellbeing together. Dwindling supplies of fossil fuels and dramatic climate change are clear indications that future energy sources must be natural and based on sun, wind and tide. Another intelligent move is to recover energy from biomass, and transform waste management problems into clean energy solutions. The Bonfiglioli group has always believed in and invested in the green economy and renewable energy sources, and we have developed design and manufacturing capabilities of international repute. Our long experience and vast knowledge of mechanical and electronic technologies have allowed us to develop integrated solutions and complete systems, to design and build even large installations, and to feed valuable energy into the grid. Respect for the environment is a fundamental aspect of every activity within our group. This assertion is clearly demonstrated by our conformity to the strictest international quality standards, highly automated production systems, and strict energy saving policies. Respect for the environment not only pervades our group but inspires increasing levels of investment in sustainable innovation, because we are convinced that the best investment we can make is in our own future.

9 15 Financial Highlights In the aftermath of a critical 2009, 2010 marked a positive and encouraging reversal. Total turnover recovered more than 50% compared to the previous year, with approximately +50% also for the renewable energies Business Units. Good success on the Asian markets appears comforting, in spite of a general outlook that has drastically changed and is still subject to instability. Quick action, flexibility and neverending commitment are the guidelines to follow to put the results achieved in 2010 to good account.

10 16 Financial Highlights 17 Group net sales (euro / milion) Sales by Geographical area (euro / milion) ,6 609,9 +22,3 663,5 +8,8 399,8-39,7 600,1 +50, ,2 124,4 434,6 175,3 450,4 213,1 225,9 173,9 337,2 262, Net Sales Business Unit Industrial Photovoltaic (euro / milion) Net Sales Business Unit Mobile Wind (euro / milion) ,9 291,2 +3,7 255,7 +13,9 207,5-31,3 311,1 +49, ,9 318,7 +13,5 +31,2 361,6 192,3 289,0 +50, ,

11 18 Financial Highlights 19 EBITDA (euro / milion) Group Shareholder s Equity (euro / milion) 80 74,3 73, , ,8 59, ,7 177,1 203,0 210, , Net Investments (euro / milion) Number of employees ,3 54,9 49, , ,

12 21 Bonfiglioli Group A large international Group well-known everywhere for the quality of its products and increasingly appreciated for the complete range of services it offers. This is the Bonfiglioli Group. With a new company structure and highly specialised personnel, a widespread sales network, direct assistance and innovative tools for communicating with its Customers, the Bonfiglioli Group places a vast range of applications to concretely improve the quality of life and work on a daily basis at their disposal.

13 22 Bonfiglioli Group as of December 31, 2010 Bonfiglioli Group 23 Tecnoingranaggi Riduttori S.r.l. Italy Bonfiglioli Transmission USA Inc. Pvt. Ltd. India Bonfiglioli Slovakia S.r.o. Slovakia Bonfiglioli Vietnam Ltd. Vietnam Bonfiglioli Vectron GmbH Germany Bonfiglioli Riduttori S.p.A. 100% 100% Bonfiglioli Transmission S.A. 100% Bonfiglioli Canada Inc. 33,33% Tecnotrans Bonfiglioli S.A. France Bonfiglioli UK Ltd. 100% 100% 100% Bonfiglioli USA Inc. 10% B.E.S.T. Hellas S.A. United Kingdom 100% Bonfiglioli Italia S.p.A. 100% 100% Bonfiglioli Drives (Shanghai) Co., Ltd. 10,05% Bonfiglioli Skandinavien A.B. 80% 100% 98% 100% Italy Bonfiglioli Power Transmission & Automation Technologies JSC Turkey Bonfiglioli Deutschland GmbH Germany Bonfiglioli Osterreich GmbH Austria 0,10% 100% 100% 70% 75% Canada USA China Bonfiglioli Transmission (Aust.) Pty. Ltd. Australia Bonfiglioli Reductores do Brasil Industria e Comercio Ltda. Brazil Bonfiglioli Power Transmission Pty. Ltd. South Africa 75% Bonfiglioli South Africa Pty. Ltd. South Africa Legenda Spain Greece Sweden Production plants Commercial subsidiaries Europe Commercial subsidiaries overseas Associated companies Other companies

14 Our subsidiaries Bonfiglioli Group 25 Bonfiglioli Canada Bonfiglioli France Bonfiglioli United Kingdom Bonfiglioli Deutschland Bonfiglioli Österreich Bonfiglioli Italia Bonfiglioli Türkiye Bonfiglioli China An international presence, to be as close as possible to you and your needs. Customer satisfaction has always been one of Bonfiglioli s key values. It is pursued around the world, and in a wide range of contexts, by a network of subsidiaries located in 17 countries and on 5 continents. Each subsidiary provides rapid and efficient pre-sales and after-sales service, and can guarantee prompt deliveries from local assembly plant and warehouses. In addition to our directly controlled subsidiaries, Bonfiglioli can also rely on an extensive network of authorised dealers, selected for their ability to guarantee excellent pre-sales and after-sales assistance. Bonfiglioli USA Bonfiglioli Brasil Tecnotrans Bonfiglioli Bonfiglioli South Africa Bonfiglioli India Bonfiglioli South East Asia Bonfiglioli Vietnam Bonfiglioli Australia Bonfiglioli New Zealand Bonfiglioli Usa 3541 Hargrave Drive, Hebron, Kentucky Tel Fax industrialsales@bonfiglioliusa.com mobilesales@bonfiglioliusa.com Bonfiglioli Canada Jane Street, Concord, Ontario L4K 4L6 Tel Fax sales@bonfigliolicanada.com Bonfiglioli Brasil Travessa Cláudio Armando 171, Bloco 3-CEP Bairro Assunção, São Bernardo do Campo São Paulo, Brasil Tel Fax bonfiglioli@bonfigliolidobrasil.com.br Bonfiglioli Italia Via Sandro Pertini, lotto 7b, Carpiano, Milano Tel Fax customerservice.italia@bonfiglioli.it Bonfiglioli United Kingdom Industrial Equipment Unit 7, Colemeadow Road, North Moons Moat Redditch, Worcestershire B98 9PB Tel Fax uksales@bonfiglioli-uk.com Mobile Equipment 3-7 Grosvenor Grange, Woolston, Warrington Cheshire WA1 4SF Tel Fax sales@bonfiglioli.co.uk Bonfiglioli France 14 Rue Eugène Pottier BP 19, Zone Industrielle de Moimont II, Marly la Ville Tel Fax btf@bonfiglioli.fr Bonfiglioli Deutschland Sperberweg Neuss Tel Fax info@bonfiglioli.de Bonfiglioli Österreich Molkereistr 4 - A-2700 Wiener Neustadt Tel Fax info@bonfiglioli.at Bonfiglioli Espana TECNOTRANS BONFIGLIOLI S.A. Pol. Ind. Zona Franca sector C, calle F, n Barcelona Tel. (+34) Fax (+34) tecnotrans@tecnotrans.com Bonfiglioli South Africa 55 Galaxy Avenue, Linbro Business Park, Sandton Tel Fax bonfigsales@bonfiglioli.co.za Bonfiglioli Türkiye Atatürk Organíze Sanayi Bölgesi, Sk. No: 17 Çigli - Izmir Tel (pbx) Fax info@bonfiglioli.com.tr Bonfiglioli Vietnam Lot C-9D-CN My Phuoc, Industrial Park 3 Ben Cat, Binh Duong Province, Vietnam Tel Fax salesvn@bonfiglioli.com Bonfiglioli China 19D, No. 360 Pudong Road (S), New Shanghai International Tower, Shanghai, P.R. China Tel Fax bds@bonfiglioli.com.cn Bonfiglioli South East Asia* No 21 Woodlands industrial park E1 #02-03 Singapore Tel /7 Fax sales@bonfiglioli.com.sg Bonfiglioli India PLOT AC7-AC11, Sidco Industrial Estate Thirumudivakkam, Chennai Tel. +91(0) Fax +91(0) / bonfig@vsnl.com Bonfiglioli Australia 2, Cox Place Glendenning NSW 2761 Locked Bag 1000 Plumpton NSW 2761 Australia Tel Fax sales@bonfiglioli.com.au Bonfiglioli New Zealand * 88 Hastie Avenue, Mangere Bridge, Auckland 2022, New Zealand PO Box 11795, Ellerslie Auckland, New Zealand Tel Fax npollington@bonfiglioli.com.au (*) Bonfiglioli Transmission Australia branch

15 26 Organization chart as of December 31, 2010 Bonfiglioli Group Corporate bodies Board of Directors 27 CDA Sonia Bonfiglioli Chairman Luisa Lusardi Vice Chairman Luciano Bonfiglioli Director Roberto Megna Director Tommaso Tomba Director Statutory Auditors Supervisor Committee Lex231 Chairman & CEO and Executive Committee Monica Marisaldi Alessandro Gualtieri Giacomo Iannelli Independent Auditors PriceWaterhouseCoopers Financial and Corporate Services Bonfiglioli Innovation Centre Corporate Quality Marketing & Communication, Corporate Purchasing Executive committee Sonia Bonfiglioli CEO Fausto Carboni General Manager BUMWS Guglielmo Iodice General Manager BUIPV Operation Massimo Sarti General Manager BUIPV Sales & Product Tiziano Pacetti CFO Stefano Rizzo Corporate Director Purchasing and Marketing Business unit Business unit Wind Solutions Mobile Solutions Industrial Solutions Photovoltaic Solutions Local Management Malcolm Lewis Bonfiglioli Transmission PTY Ltd (Australia) Manfredi Ucelli Di Nemi Bonfiglioli Redutores do Brasil Industria e Comercio Ltda (Brazil) Greg Shulte Bonfiglioli Canada & USA Inc. (Canada and U.S.A) Jason Wang Bonfiglioli Drives (Shanghai) Co.Ltd. (China) Gilbert Khawam Bonfiglioli Transmissions S.A. (France) Sonia Bonfiglioli Bonfiglioli Deutschland GmbH (Germany) Siegfried Stadtfeld Bonfiglioli Vectron GmbH (Germany) John Adair Bonfiglioli UK Ltd Mobile & Wind equipment (Grait Britain) Mike McCann Bonfiglioli UK Ltd Industrial equipment (Grait Britain) M. Ganesh Bonfiglioli Transmissions PVT. Ltd. Mobile & Wind equipment (India) PL. Muthusekkar Bonfiglioli Transmissions PVT. Ltd. Industrial equipment (India) Rajat Vashisht Bonfiglioli Italia S.p.A. (Italy) Massimo Sarti Tecnoingranaggi Riduttori s.r.l. (Italy) Marek Kolarik Bonfiglioli Slovakia s.r.o (Slovakia) David Bassas Tecnotrans Bonfiglioli S.A. (Spain) Robert Rohman Bonfiglioli South Africa PTY Ltd. (South Africa) Murat Güracar Bonfiglioli Turkiye (Turkey) Luigi Galimberti Bonfiglioli Vietnam Ltd. (Vietnam)

16 29 Management Report The year 2010 was marked by light and shadows, and distinguished itself as being a year of change. Overall, advanced economies underwent a slow revival and the Italian economy suffered a few additional critical issues. The year 2010 marked an unexpected increase of raw material costs and employment rates were still critical. The greater vitality of the emerging markets of China, India and Brazil rewarded the Bonfiglioli Group s internationalisation decisions, which in this way was able to trigger effective consolidation measures and investments in innovation. (This section has been translated into the English language solely for the convenience of international readers)

17 30 Management Report 31 Management Report Foreword This management report, drawn up in compliance with the provisions of Legislative Decree 127/1991, integrated and interpreted on the basis of CNDC (Italian National Councils of Chartered Accountants) accounting principles, updated by the OIC (Italian Accounting Authority), is submitted as a comment on the results recorded in the consolidated financial statement of the Bonfiglioli Group. Unless otherwise indicated, data are shown in Euro/millions. Reference economic situation The world economy commenced a slow though constant revival during The fears of a double-dip recession (so-called W crisis) fortunately did not materialize and the expansion rate was recorded at +5% at the end of Concerns mainly regarded the advanced economies where it was feared that the initial recovery due to sale of stocks and favourable tax policies would have then collided with a demand not recovering. Luckily the demand levels did not come to a halt and the economic cycle in some Countries was able to get off to a new start in a natural manner. The macroeconomic situation remained critical for other Countries, such as Spain and Italy. The raw material price trend did not stay so favourable. Raw materials increased much more than what analysts expected due to the heavy demand and shocks on supply. The price of oil resumed its upward climb in the summer, recording more than 90 dollars a barrel at the beginning of The increase reflected the strengthened demand, above all by the United States and China. The revival witnessed during 2010 however was not entirely balanced. The global growth of this area settled at +3% in 2010, a modest result especially if we consider the depth of the crisis that struck these economies. Unemployment is still high, and the low growth rates lead us to think that it will be difficult to reabsorb unemployed people in the years to come. The real estate market is still sluggish in many countries, such as the United States. In coming to the analysis of the single geographic areas, in 2010 the GDP of the Euro Zone recorded 1.7% growth (contraction in 2009 was 4.1%). Exports, the leading driving force of the cyclical revival of the area, lost speed as the end of the year approached, associated with the slowdown of the world economy. The GDP in Italy during 2010 recorded total growth of 1.3% (contraction in 2009 was 5.2%, the worst of the area), posting a slowdown compared to the first half of the year. From the demand point of view, the modest increase of consumption of families came hand-in-hand with a deceleration in investments, on which the contraction of purchases of means of transport and the slowdown of spending in machinery and equipment made an impact. This latter component suffered the end of the tax incentives introduced by the Tremonti-ter rules, which expired at the end of June. The main boost for growth of the Italian GDP in 2010 continued to arrive from exports. The U.S. GDP recorded 2.8% growth in 2010 (contraction was 2.6% in 2009). The activity was for the most part supported by private consumption and the accumulation of stocks. Public spending also gave a positive contribution, while fixed investments resumed stagnation in the aftermath of the rebound recorded in the Spring months, reflecting the downturn of those in residential constructions. The United Kingdom recorded growth equal to 1.3% at year-end 2010 (contraction was 2.6% in 2009). Growth was backed by domestic demand with respect to a negative contribution of the net exports. The economy in Japan recorded an increase of its GDP equal to +3.9% in 2010 (-6.3% at the end of 2009). The revival sped up in the major emerging economies and the growth rates in China (+10.3%), India (+10.4%), Russia (+4.0%) and Brazil (+7.5%) were positive also for A glimpse at 2011 marks stability in the revival of the economic system. The International Monetary Fund (IMF) estimated a 4.4% growth of world economy for 2011, prefiguring an additional +4.5% for The U.S. revival is still stable, even in the projections made by the analysts who are estimating a growth of GDP totalling 2.8% for 2011 and 2.9% for Forecasts for the United Kingdom as well have been revised upwards, with 1.7% growth of the 2011 GDP. As far as the growth forecasts for the emerging economies is concerned, the most recent IMF assessments report that China and India will record expansion rates of 9.6% and 8.2%, respectively, in 2011, while Brazil and Russia should respectively enjoy 4.5% and 4.8% growth. Economic activity in the Euro Zone during the first quarter of 2011 continued to draw support from recovery of international trade. IMF s forecasts indicate 1.6% growth of the area for 2011, which should increase to 1.8% in As for Italy, the forecasts of the IMF prefigure 1.1% growth for 2011 and 1.3% for Area of consolidation The area of consolidation as at 31 st December 2010 covers a total of eighteen subsidiaries, including: five manufacturing companies (located in Italy, India, Germany, Slovakia and Vietnam), which produce the various products in Bonfiglioli s extensive range. twelve sales subsidiaries that manage promotion, sales, pre- and after-sales assistance, logistics and customisation, and final assembly of the Group s products, together with Bonfiglioli Power Transmission Pty Ltd, the South African company that has a 75% majority holding in the local subsidiary. The only associated company of the Bonfiglioli Group is a company that has been operating on the Spanish market for more than 40 years, Tecnotrans Bonfiglioli S.A., in which the Group holds a 33.33% stake. With reference to the changes that took place during the year, it is reported that the majority holding in the company Bonfiglioli Skandinavien AB was transferred and the stake was reduced to of the share capital. As at 31 st December 2010 this company was entered amongst the investments in other companies.

18 32 Management Report 33 Analysis of 2010 results In keeping with the amended provisions of art of the Italian Civil Code, the layouts for the Balance Sheet and Income Statement are set out below, reclassified with regard to the last five years operations conducted by the Group. The schemes set out below contain absolute data and percentage data, as well as the main financial and non-financial result indicators. Values Reclassified income statement % of Turnover Reclassified income statement TURNOVER Cost of sales (469.3) (335.3) (513.2) (464.6) (379.5) GROSS MARGIN Structure and operating expenses (103.2) (84.5) (103.1) (94.4) (81.3) EBIT 27.6 (20.0) Financial income and charges (11.4) (9.5) (10.9) (7.3) (4.2) Exchange rate differences 0.5 (1.2) (1.8) (0.2) (0.3) Associated companies result 0.1 (0.4) Extraordinary income and expenses (5.3) (7.3) (1.8) 1.8 (0.3) EBT 11.5 (38.4) Current taxes (11.0) (3.3) (16.5) (20.8) (17.2) Prepaid and deferred taxes CONSOLIDATED PROFIT / LOSS 5.0 (31.8) Minority (0.8) (0.2) (1.3) (0.7) (1.0) NET GROUP PROFIT / LOSS 4.2 (32.0) TURNOVER 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales (78.2)% (83.9)% (77.3)% (76.2)% (76.1)% GROSS MARGIN 21.8% 16.1% 22.7% 23.8% 23.9% Structure and operating expenses (17.2)% (21.1)% (15.5)% (15.5)% (16.3)% EBIT 4.6% (5.0)% 7.1% 8.3% 7.6% Financial income and charges (1.9)% (2.4)% (1.6)% (1.2)% (0.8)% Exchange rate differences 0.1% (0.3)% (0.3)% 0.0% (0.1)% Associated companies result 0.0% (0.1)% 0.1% 0.1% 0.1% Extraordinary income and expenses (0.9)% (1.8)% (0.3)% 0.3% (0.1)% EBT 1.9% (9.6)% 5.1% 7.5% 6.7% Current taxes (1.8)% (0.8)% (2.5)% (3.4)% (3.4)% Prepaid and deferred taxes 0.9% 2.5% 0.8% 0.2% 0.4% CONSOLIDATED PROFIT / LOSS 0.8% (7.9)% 3.3% 4.3% 3.7% Minority (0.1)% (0.1)% (0.2)% (0.1)% (0.2)% NET GROUP PROFIT / LOSS 0.7% (8.0)% 3.2% 4.2% 3.4% In details: AMORT./DEP., WRITE-DOWNS AND PROVISIONS EBITDA In details: AMORT./DEP., WRITE-DOWNS AND PROVISIONS 5.4% 7.3% 3.9% 3.8% 3.8% EBITDA 10.0% 2.3% 11.0% 12.2% 11.4% PERSONNEL COSTS PERSONNEL COSTS 18.1% 22.0% 15.3% 15.1% 16.8%

19 34 Management Report 35 Values Reclassified balance sheet Indicators Description Net Working Capital Fixed assets Other invested capital (14.6) (12.5) (23.1) (28.1) (32.2) Minority (5.1) (4.0) (4.1) (2.2) (6.8) CAPITAL EMPLOYED Economic Net ROE 2.0% (15.8)% 9.0% 14.5% 11.2% (Net profit / Shareholders equity) ROI 7.1% (5.4)% 11.5% 16.0% 15.2% (EBIT / Lending) ROS 4.6% (5.0)% 7.1% 8.3% 7.6% (EBIT / Turnover) Group shareholders' equity 210,4 203,0 233,2 177,1 153,7 Net Cash Position 176,8 170,9 177,9 140,3 95,0 FUNDS average rotation days (base 360) Reclassified balance sheet EBITDA/Turnover 10.0% 2.3% 11.0% 12.2% 11.4% EBITDA/ Net Financial income and charges Incidence of employment costs 18.1% 22.0% 15.3% 15.1% 16.8% Incidence of financial area 1.9% 2.4% 1.6% 1.2% 0.8% Employment costs / Turnover Financial income and charges / Turnover Net Working Capital Fixed assets Other invested capital (9) (11) (13) (17) (23) Minority (3) (4) (2) (1) (5) CAPITAL EMPLOYED Group shareholders' equity Equity and structural Primary structural balance ratio Financial indebtedness ratio (Shareholders equity / Fixed assets) (NCP / Shareholders equity) NCP/EBITDA ratio (NCP / EBITDA) Shareholders equity tangibility ratio (Equity-Intangible assets / Equity) Net Cash Position FUNDS Values Other Average number of employees Annual mean Turnover by geographical area Italy Europe Overseas TOTAL TURNOVER Turnover per employee Net Working Capital Rotation Data expressed in millions of Euro Average no. of days (base 360) % of Turnover Turnover by geographical area Italy 19.4% 18.5% 25.1% 27.0% 29.1% Europe 36.8% 38.0% 42.8% 44.3% 45.9% Overseas 43.8% 43.5% 32.1% 28.7% 24.9% TOTAL TURNOVER 100.0% 100.0% 100.0% 100.0% 100.0%

20 36 Management Report 37 The overall performance of the Group shows a definite reversal compared to 2009, due to the positive contribution not only of the Group companies located in emerging countries (China, India and Brazil), but also of the European subsidiaries (UK at the top of the list). In terms of geographic distribution of sales, the Group s international commitment is confirmed, even if a modest recovery of turnover in Italy is recorded, which however remains 30% lower than the 2008 levels. Turning to an analysis of the main figures in the Income Statement, on a consolidated level, Group gross operating margin (EBITDA) stood at 59.8 million Euros, accounting for 10% of sales, increasing by 7.7 percentage points from 2009 but still lower than the pre-crisis percentages. More precisely, we point out the following: With regard to the Group s asset and liability structure, Net Working Capital increased in absolute value compared to 2009, rising from million Euros to million Euros, as a result of the heavy increase in turnover volumes. Despite this 29.7 million Euros increase, a definite improvement in average rotation was recorded, changing from 151 to 118 average days to return to its pre-crisis level. Net Financial Position recorded a limited increase from to million Euros, a positive sign of a good generation of cash by operations. Net investments amount to 12.9 M with details given below: the Group s turover recorded a 50% increase over 2009 and is positioned at million Euros (-9.5% as to the 2008 record); the cost of sales recorded a 5.7 percentage point improvement, the incidence on turnover changing from 83.9% to 78.2%. This positive trend is due to: The positive performance of the added value, which recorded a 1.1 percentage point increase compared to 2009 attributable to both the composition of the mix of products sold and a more attentive and aggressive saving policy the Group adopted, which made it possible to compensate the increased prices of the raw materials; The better absorption of fixed industrial costs as a reflection of the increased turnover; although they increased in absolute value, from 57.2 million Euros to 65.3 million Euros, they indeed reduce their incidence on turnover by 3.4 percentage points. the structural operating costs increased in absolute value by 18.7 million Euros, but are reduced in terms of percentage impact on the turnover compared to 2009 (17.2% vs 21.1%); the total cost of labour went up from 88.0 million Euros to million Euros, with a percentage impact on turnover that drops from 22.0% to 18.1%; the total percentage incidence of depreciation, amortisation, write-downs and allocations fell by 1.9 percentage points (7.3% vs 5.4%), although it recorded an increase in absolute value of about 3.1 million Euros; net financial expenses and income decreased in terms of incidence on turnover, dropping from 2.4% in 2009 to 1.9% in 2010 (1.6% in 2008). In terms of absolute value net financial charges increased by 1.9 million Euros due to both the Debt Rescheduling Agreement signed in March 2010, which increased the spreads on medium/long-term loans, even if it is partly mitigated by the reduced cost of money; extraordinary income and expenses recorded a negative balance of 5.3 million Euros with incidence equal to 0.9% on the turnover, compared to 1.8% of last year. The item includes various extraordinary charges including the write-down of an industrial property set aside for sale, several allocations to restructuring funds and other extraordinary charges concerning a few group companies. NET INVESTMENTS Values in Euro/millions Land and buildings Plant and machinery Equipment Other assets 1,5 0, Assets in progress (3.2) (3.1) (4.3) 4.6 (0.2) Tangible fixed assets Software, trademarks, patents Consolidation goodwill Other Intangible fixed assets Total Investments

21 38 Management Report 39 With reference to the year 2010, the main investments made by the Group are set out below, involving an overall net outlay of 12.9 million Euro: the investments in plants, machinery and equipment related mainly to the production companies; the parent company strengthened production with new investments amounting to 1.6 million Euros, while the Indian and Tecnoingranaggi production plants invested 4.6,million and 0.9 million Euros, respectively. investments in intangible fixed assets mostly refer to the purchase and implementation of application software concerning development of the SAP project throughout the entire group, whereas the item goodwill increases due to acquisition of the remaining 3% of the share capital of Bonfiglioli Vectron. the increase in other intangible fixed assets is attributable for the most part to improvements to rented premises realised primarily by the Parent company; To the investments already made, investments in progress on and involving a total of 1.6 M divided between the various group companies must be added. They mainly regard renewals and replacements of machinery and plants. Risk management An analysis is set out below of the main risks to which the Group is exposed, these risks being represented by events capable of producing negative effects on the pursuit of the company s objectives and which therefore restrict the creation of value. Risks connected with general economic conditions The economic and financial standing of the Group, as well as its assets and liabilities, are influenced by a number of factors that make up the macro-economic picture in the various countries in which the Group operates: increase or decrease in GDP, consumer and business confidence, interest rate fluctuations, the cost of raw materials and the unemployment rate. Risks connected with the market sectors served The Group manufactures and distributes complete solutions for both the industrial (gearboxes, gearmotors and inverters for industrial applications) and photovoltaic sectors and the mobile (gearboxes and gearmotors for earth-moving machinery, excavators, agricultural machinery) and wind sectors. To better meet the needs of the various markets, the Group adopted an organisation by Business Unit as early as The Industrial-Photovoltaic and Mobile-Wind Business Units were therefore formed, each responsible for their pertinent sectors. The wide range of outlet markets and applications supplied has always provided refuge from economic slumps, by allowing the Group to shift the product offering from sectors in decline to those in growth. Risks connected with financial resource requirements In order to keep the Net Financial Position under constant check and to monitor the business short-term capacity to meet its commitments, short-term cash flow estimates were drawn up in order to make the most appropriate decisions and actions. Credit risk Credit risk is represented by the Group s exposure to potential losses that may stem from the failure by customers to meet their obligations. Customer credit risk is constantly monitored with the use of information and customer assessment procedures and this type of risk has historically had very little scope. Risks connected with exchange and interest rate fluctuations Operating in more than one market at a worldwide level, the Group is naturally exposed to market risks connected with exchange rate and interest rate fluctuations. Exposure to exchange rate fluctuations is linked mainly to the geographical distribution of production and sales activities which generate export flows in foreign currency different from the production currency. In particular, the Group is exposed through its exports from Italy to the USA, Great Britain and Australia. As regards inflows, on the other hand, the risk relates to imports from Japan, in the currency Yen. In keeping with its risk management policies, the Group tries to tackle risks relating to exchange and interest rate fluctuations with the use of short-term hedging financial instruments. Risks connected with the use of derivative financial instruments The Group uses the interest/exchange rate hedging financial instruments referred to in the previous section. The companies in the Group do not use speculative-type derivative financial instruments. Risks connected with employment relations In the various countries in which the Group operates, employees are protected by various laws and by collective labour contracts which provide them with guarantees through local and national representatives. Employees are entitled to be consulted on specific matters, including the reduction in size or closure of departments or reductions in work force. These laws and collective labour contracts applicable to the Group could affect the flexibility with which it redefines or strategically repositions its activities. Risks connected with competition The macroeconomic crisis has had the effect of reducing consumption in almost all sectors in which the products distributed by the Group are used (manufacturing and building in particular) thereby gradually reducing the overall value of the available market and increasing competition. The success of the Group will therefore also depend on its ability to maintain and increase its market share, perhaps expanding into new sectors and emerging countries.

22 40 Management Report 41 Information regarding the environment The Group conducts its activities in accordance with the most highly developed environment protection regulations, and however in full compliance with the rules currently in force, in the various countries in which the Group operates. In any event we can confirm that no damage has been caused to the environment for which companies in the Group have been declared definitively responsible, nor have any definitive sanctions or penalties been imposed on companies in the Group for environmental offences or damage. Human resources The year 2010 was marked by the need to continue managing the impact of the crisis on the one hand, and to reactivate management initiatives supporting revival of the markets in Italy on the other. The total number of group employees rose from 2823 to 3113, 1343 of which are employees of the parent company (1411 as at 31st December 2009) and 1770 employees of other subsidiaries (1412 as at 31st December 2009). The parent company Bonfiglioli Riduttori SpA continued to make use of the Italian state s extraordinary unemployment subsidies during the year, which led to the use of 142,119 hours of Extraordinary Layoff Benefits Fund at Bonfiglioli Riduttori SpA, of which 103,852 were concentrated in the Mobile Wind Solutions Business Unit at the Forlì plant. Use of these subsidies gradually dropped off starting in the early months of 2010 and ended before the date of the initial concession decree, which envisaged the possibility of the Company having recourse to the Extraordinary Layoff Benefits Fund until November 2010, with a company declaration that the state of crisis had come to an end at the end of June The agreement with mobility procedure for 79 employees (out of the 80 expected), to whom mostly workers that during the mobility period accrued the requisites for taking retirement adhered, was then finalised. Still on the parent company level, the platform for renewing the company s supplementary contract that had expired on 31st December 2009 was presented by the trade union representatives in December 2010 and the first joint meetings started during On the organisation level, its review and implementation according to the Business Unit model continued, which led to a further strengthening and focalisation of the Business Units at the end of 2010, attributing also the responsibility of Purchasing the direct BU materials to them, with allocation of the correlated personnel previously managed by the Corporate Purchasing (and Marketing) Department. All plants started a significant reorganisation activity based on the lean manufacturing principles. Representing one of the chief group strategic development lines based on the industrial plans outlined by the Executive Committee, it generated a considerable strain not only on the organisation of work, but also in organising training initiatives and in managing industrial relations supporting these activities. The considerable growth in turnover that the subsidiary Bonfiglioli Vectron recorded was also possible due to the hiring of more than 40 employees during 2010, so resources rose from about 75 units at year-end 2009 to more than 115 units at the end of This addition regarded the strengthening of both the operations area, which had to bear the significant PV turnover increase, and the research and development area in which even more strategic developments of new products and initiatives are expected. The company Bonfiglioli Slovaka was affected by a significant employment increase (+70 units), changing from 137 employees as at 31st December 2009 to 207 as at 31st December A continuous training plan for the production operators was launched at this plant as well, where every three months groups of workers meet to examine topics tied to machine procedures, measurement systems and instruments, process technologies and product in-depth. As regards Bonfiglioli Vietnam, it became necessary to continue supporting the growth phase of the business and limit the negative effect of the high turnover of personnel typical of developing economies. The work force grew from 124 to 204 employees (+80 units) with actions mainly focused on direct personnel and on the operating structure supporting production. Particular attention was given to training and creating a solid group of expert product and technologies engineers. A project for adding recent university graduates was also launched at the end of 2010 to reinforce all of the company s operations: from Quality to Supply Chain, Administration, etc. Financial year 2010 in India was characterised by added growth of personnel necessary for supporting the considerable development of business in this emerging country. The net balance of revenues points to a growth in personnel of 97 units compared to 31 st December 2009, reaching an end-of-year 2010 total of 553 employees. Lean manufacturing made its debut at the Indian company as well, and for this reason training efforts were concentrated on topics such as TPM, 5S, Lean Manufacturing, Six Sigma, SMED and others. Selection and Training Recruiting during 2010 was certainly more active than in 2009, even if focused on the parent company level to the greatest degree and to replacing strategic figures that left during the crisis and had not yet been replaced internally. To be specifically reported with regard to the selection of new resources is the socalled Young People s Project. It is focused on introducing young engineering graduates to various company areas (from Operations to Application Engineering and Sales), and on a project carried out in collaboration with the Universities of Bologna and Shanghai called Almatong. Recourse is more and more frequently being made to internships (university graduates, university and secondary school students), which in general enjoy a good level of satisfaction and allow the company to become familiar with and verify high potential resources on the operations level so they can be added to the organisation as the need arises.

23 42 Management Report 43 As for the training activities carried out in 2010, the operations area (lean production) courses certainly took the lion s share, also for supporting the intense processes of change and continuous improvement initiated at the plants. Other training activities regarded the Outlook IT system, as well as other important areas such as the ISO certifications and motivation and resource management aspects. Agreements that allows activities allocatable to interprofessional funds (Fondimpresa and Fondirigenti) to which the Company adheres were reached for a number of courses. Research and development Research and development activities are performed for Bonfiglioli Riduttori brand gearboxes and electric motors (including Tecnoingranaggi products) at the Lippo di Calderara (BO) site, for Trasmital planetary gearboxes at the Forlì site and for Vectron electronic converters at the Krefeld site in Düsseldorf of the subsidiary Bonfiglioli Vectron Gmbh. As confirmation of the importance assumed by R&D we draw your attention to the fact that overall R&D expenditure in 2010 was in excess of 8.5 million Euros for the Group. The following section contains an overview of the main development projects. Industrial-Photovoltaic Business Unit Series A C F S VF/W In 2010 the Competence Center dedicated to gearmotors was busy revising technical documentation of reference with regard to the redesign of the electric motors for adapting all of the production to the new IE efficiency levels in compliance with the prescriptions of the EuP Directive. Considerable efforts were put forth also in studying and making models from drawings (special modules) aimed at meeting specific needs of the Customers by way of personalising the standard product of reference. The Design Department and Technical Lab worked jointly to develop and fine-tune worm gearboxes with integrated torque-limiting unit by analysing various construction solutions for new applications of the wind sector. As part of the New Technologies for Made in Italy Call for Bids launched by the Ministry for Economic Development, the Nanostrata Programme was approved and started up. The company will be engaged with Italian partners in industrial research and experimental development on the following topics over the next three-year period: testing of new surface tools and finishes, assessment of alternative materials and new production processes for making worm gearboxes and developing new bevel gears having a high reduction ratio. Series HDP HDO The Design Areas devoted itself to expanding the range up to reaching the threshold of 200k Nm by introducing two new sizes of parallel and bevel-helical shaft gearboxes called HDP/HDO-170/180 and respectively featuring a torque rating of 176 and 194k Nm. The components of the smaller sizes at the same time were optimised, which turned into an upgrade of the performances of products in the catalogue. Lastly, considerable effort was also put forth in developing a number of special personalisations and executions upon the specific requests of Customers to face new applications that involved studying dedicated solutions such as, for example, the oversized span of the output bearings adapted for the agitators and mixers sector, and preparation for couplings with the 300 Series gearboxes suitable for various industrial applications. Low backlash high-precision gearboxes Development of specific solutions for special market needs was appreciable and instrumental for acquiring new Customers and applications. Lastly, several activities for the study and testing of solutions aimed at guaranteeing gearboxes with increasingly higher performance in terms of less friction and wear by way of production technologies and new materials were started up as part of the Nanostrata Programme. Electric Motors The development activity continued in Vietnam with technical documentation issued, continuous training of local personnel and validation of the samples. The structure of the documentation was revised and it was adapted to the new production requirements, with the foundations laid for automatic generation of the technical bills of materials. Exceptional effort was dedicated to personalising the basic product and to developing special executions for specific applications. Redesign of the high performance series was concluded with validation of the results during the tests, using the new methods prescribed by the EN Standard. Introduction of the new series entailed revision of all of the sales documentation (motors and gearboxes) and adaptation of the product configuration rules. The efficiency limits dictated by implementation law 640/2009/EC, which rules out the sale of the current general purpose motors with level IE1, also demanded extensive internal management activity Electronic Products Master Plan Bonfiglioli launched the new integrated electronic products development plan during the third quarter of It sets out the guidelines for development of the portfolio of inverters and constitutes the reference for the design decisions of the three-year period. The main guiding principles of the plan are: efficient use of the results of the research activities to increase the value of the series in the range;

24 44 Management Report 45 integration of the electronic technologies with the range of mechanical products of the group; updating the design of the compact series; increasing the power range of the Active and Active Cube series; introducing modern field buses based on Ethernet standards. New Product Projects During the second half of the year development of the Devicenet field bus interface for the entire series of Bonfiglioli Vectron products got off to a start. A second project concerns implementation of the three major field bus profiles based on Ethernet standards: Ethernet TCP/IP, Ethercat and Profinet. A third area of development regards the execution of an advanced interface for acquiring signals from absolute encoders, which will guarantee compatibility of the Active Cube servo drive with the prevailing Endat, Hyperface and SSI standards. Custom projects A variety of new projects for making personalised inverters in lifting, textile and photovoltaic applications were started during The personalisations for the most part regarded developing control software dedicated to the specific regulation needs of primary customers. Three of these projects yielded their positive results already during the year. EROD financed project Bonfiglioli Vectron s activities in the three-year research project called EROD continued. Financed by the Ministry for Economic Development, the study draws together 15 primary Italian companies and its goal is to improve the energy efficiency of machines in five different application areas. Photovoltaic range: catalogue for complete supplies The year 2010 was the year of consolidation of integrated solutions for the photovoltaic business portfolio. This is how the first Bonfiglioli catalogue that highlights the ability to supply turnkey regeneration systems for roof fields and large photovoltaic installations came into being. The IP 55 outdoor series for roof top installations typical of systems with application in commercial roofs was designed and issued during the year. Also worthy of note is the supply made for the largest photovoltaic installation project in Europe (Rovigo) that was realized in the installation of complete systems for a total power of 70 MWp. Mobile-Wind Business Unit Products for mobile machines - Gearboxes for wheel drives Development of wheel gearboxes with dynamic brakes for operating and emergency braking with positive control that are pedal operated and modulated continued, although maintaining the current function of negative parking brakes. These versions are required and imposed by the safety standards that regulate type approval for the circulation of machines, for the most part agricultural, on the road with speeds up to 50 km/h. Then additional versions of wheel drive gearboxes for road compactors on tyres that meet the installation needs of other manufacturer customers were developed. Several versions for special transport forklifts were also developed. Gearboxes for tracked crawlers Development continued with the construction of prototypes of the top of the range gearbox, with bench tests and supply of the prototypes on the first applications, drilling rigs weighing 200 tonnes. Applications for new customers for mini excavators, excavators and skid loaders were developed. Wind turbine products To be able to meet the continuous evolutionary needs of the market, a new size of gearbox for nacelle direction drive suited for turbines of a class higher than 4 MW was designed and developed. Various existing sizes were resumed on the design level to obtain new versions such as to meet the specifications of manufacturer customers in the Asian area. The improvement activity continued alongside. It is aimed at making the products better industrialisable and to reduce their costs in order to maintain a satisfactory level of competitiveness in light of the market pressures that are ripening and to become increasingly competitive, above all by virtue of the new turbine manufacturers in China. Design and development of a new gearbox for nacelle direction drive was started by adding new elements (both functional and structural) such as to consider it the first of a new generation of gearboxes for the new turbines to be developed soon. This product sets itself apart due to its high performance to size ratio, its structural shape with a new solution of turbine installation that has been simplified both as mounting and adjustment of meshing clearance between pinion and teeth of the thrust bearing. Lastly, full integration of the electric motor and brake was achieved with reduced height and improved protection.

25 46 Management Report 47 Activities indirectly affecting the Testing and Experiments production and activities Both design and testing activities were carried out to test materials, thermal treatments, construction solutions alternative to those that exist or are in use, mostly in order to cut costs, simplify the production processes and make assembly in the plants close to the outlet markets (local for local) easier. Then the bench test activities of the Experience Department continued in order to test the creation of prototypes of new models and new versions both for their internal validation and for agreements with customers to type-approve the products for new applications on various types of machines. Of these, also functional low-temperature tests were carried out for application on wind turbines according to specific sector and proprietary standards of certain manufacturers. Bonfiglioli Innovation Center Activities to define and start up the first Bonfiglioli research center called Bonfiglioli Innovation Center (BIC) were started in Germany. A limited staff entirely dedicated to basic research on topics and technologies of general interest for Bonfiglioli products is envisaged. This is why the resources currently being added are equally specialised between the mechanical, electrical and electronic fields. The already frequent and profitable contacts with German universities and technological research centers will be expanded and managed by the new units who will rationalise and broaden the current partnerships. The results of the research activities will make up a wealth of knowledge that the innovation projects for developing new Bonfiglioli products at all of the current Competence Centres in Lippo (BO), Forlì and Krefeld will use. Quality With reference to Quality, the Bonfiglioli Group in 2010 continued to keep its commitment to supporting continuous improvement and customer satisfaction high and laid the foundations for evolving towards seeking out the satisfaction of all of its stakeholders, i.e. everyone who is involved with the company in some way: shareholders, customers, suppliers, employees, the environment and the society in which the company operates. The elements to highlight of the year that has just gone by are: Introduction of the new Corporate Integrated Management System (Quality, Environment, Safety); First Corporate Quality Council; Continuation of the group ISO 9001:2008 Certification project; Leonardo Prize for Italian Quality in 2010 Introduction of the new Corporate Integrated Management System The new Corporate Management System is an important step taken towards the evolution that Bonfiglioli decided to promote with the change from a more classic Quality concept to the more evolved Total Quality concept, i.e. attention paid not only to the customer s satisfaction through simple product conformity, but to Bonfiglioli s commitment to go beyond, creating a cycle of continuous success, guided by a mission and a vision influenced by the needs and expectations of all the interested parties through an extended system of management processes aimed at supplying the results that satisfy all of the stakeholders, namely all of the parties that hold an interest in the company and that can affect its business with their behaviour. First Corporate Quality Council The foundations of this important event were laid during 2010 and it was held on 7th February The meeting created the first opportunity for all representatives of the Quality organisation in the Bonfiglioli group to personally meet each other and discuss the key issues affecting the value of the customer from a quality perspective. Specific training sessions were held to align the knowledge and comprehension of today s processes and initiatives by the group and workshops, and presentations were made with the aim of attaining the following results: Increased awareness of critical problems for customers as well as internal dysfunctionalities, such as frequent claims and delays in receiving answers from other functions; Better understanding of the customer s voice and critical customer requirements; Better understanding of internal quality processes such as claim management, our Lean and Six Sigma/Quality improvement initiatives and the analysis of the root causes of problems; Standardisation of the tools, forms and definitions used to describe and address ustomer problems; Improved teamwork and internal communications as the result of colleagues living in different countries knowing each other personally. The Corporate Quality Council is part of a strategic effort to emphasise the critical importance of quality for Bonfiglioli in the face of rapidly growing customer expectations. Continuation of the group ISO 9001:2008 Certification project Certification to ISO 9001:2008 continues to represent one of the most important objectives for the business standard reached at Bonfiglioli. The Quality Management System at the Bonfiglioli group is applied at all the factories and branches with the aim of guaranteeing that quality standards are improved continuously, as well as the careful rationalisation and integration of internal processes in order to best satisfy the requirements of the customers and all the stakeholders. The subsidiaries of Brazil, the United States, China and Turkey climbed aboard

26 48 Management Report 49 Group ISO 9001 certification during These subsidiaries join the other companies already certified, represented by all of the Group s production plants (Italian and foreign) and by the Italian, French and German subsidiaries. Leonardo Prize for Italian Quality in 2010 This prize, a symbol of excellence and quality, let us join the list of the most important successful Italian companies. The chief reason at the heart of the prize s award was the following: On top of the advanced technology found in each of its products, the real strength of the Bonfiglioli Group lies in its ability to provide the technical competences needed to develop systems integrating electronic, hydraulic and mechanical sub-systems, and to do so in a unique and exclusive way. The solutions created in this way are always choices of excellence, whether in industrial plant, mobile machinery, or innovative projects in the field of renewable energy systems, especially those based on wind, photovoltaics and biomass. In over fifty years of activity, Bonfiglioli has established itself as an international group capable of leading its reference markets and acting as a reliable partner, drawing inexhaustible energy from continuous improvement and uninterrupted research. This important recognition of our professionalism and dedication is cause for enormous pride, and must help us sustain the push towards attaining new, ever more prestigious targets thanks to the continuous search for improvement of our Company and of our way of doing business. Significant events after year end With reference to events occurring after the closure of the accounting year, the following comments are made. Several important organisational changes involving the entire strategic structure of the group were completed and presented in late March A new organisational macro-structure with three operational and independent Business Units backed by four Corporate centres of responsibility to support business development processes was presented. The three Business Units are: Industrial Solutions Business Unit (InS BU), which is focused on managing the original industrial business of the group and whose goal is to increase its competitiveness and focus on the Industrial Automation and Heavy Duty businesses with increasing attention paid to the development of new products and new highperformance solutions for the requests coming from these large and differentiated markets Mobile & Wind Solutions Business Unit (MWS BU), which oversees the development of gearboxes and power solutions with enormous success for large manufacturers of excavators, road construction machines and wind turbines. It above all develops, produces and sells planetary gearboxes (but not only) with the historic and popular Trasmital brand. Not only does this BU develop market opportuni- ties, but its goal is to rationalise its industrial plants to welcome the important opportunities existing today in the emerging markets, first of all including China, India and Brazil Regenerative & Photovoltaic Solutions Business Unit (RePvS BU), which comes out of the acknowledgement of the peculiarities required for the development of these sectors and the willingness to serve them with a dedicated and highly professional approach. This BU depicts the new great development opportunity for the group and the results already shown in 2010, which has just ended, are an excellent introduction (turnover increased from about 7.0M to approximately 50M between 2009 and 2010). Like for the other BUs, development is planned with a worldwide dimension, making use of the group s network of subsidiaries and manufacturing companies. As mentioned, these three Business Units then have recourse to the support and organisation of the following four corporate functions in which the main staff areas common to all the businesses have been concentrated and focused, and which must ensure homogenisation and rationalisation of the processes and procedures to ensure that the sole strong identity of the Bonfiglioli group is maintained and strengthened: Marketing and Communication, in which all of the strategic and operational marketing development activities in addition to the management and rationalisation of a consistent communication activity are concentrated; Finance and Corporate Services (HR and IT), which has the three main staff functions necessary for the control and rational management of the businesses according to developed processes common to all three Business Units Total Quality & Continuous Process Development, which was illustrated above in the chapter on Quality and that represents one of the main points of the group s strategic development and must ensure continuous development and attention devoted to the needs of the customers and all stakeholders of the group Bonfiglioli Innovation Center, described above in the chapter on Research and Development and that depicts a small nucleus of excellence focused on always keeping the group s historic and strong spirit of innovation alive. Also with the need to readapt the goals and actions of the group to the modernized strategic-organisational structure of Bonfiglioli and take a new look at the mid-term targets in light of the trend of the various economies of the various countries in the world that sustained significant and permanent transformations with the global economic crises of late periods - the new Business Plan is being defined for the period and will be completed within a few weeks. This new Business Plan is and includes a renewed way to operate for the entire Bonfiglioli organisation. It is based on several evolved business processes to ensure that consistency and focus of intents necessary in order to be able to successfully compete in today s markets enjoying considerable evolution and change, where a great many of the old paradigms of the past have been abandoned and altered. The Plan contains new, more ambitious financial and economic targets necessary for

27 50 Management Report 51 continuing to ensure the group s development in the long-term and is based on new strategic lines that look to using both lean thinking and manufacturing logics and product development with an integrated mechatronic approach, in the centre of attention and of any activity developed within the group and within the single Business Units. We are aware that these updated strategic methods demand a significant exertion of cultural change of the entire Bonfiglioli organisation, and also for this reason attention to development of Human Resources in Italy and around the world is one more cornerstone at the heart of the new Business Plan. Business outlook Consolidated turnover as at February 2011 amounted to M compared with the 68.3 M as at February 2010, with a total double-digit increase (+60.2%). Orders collected during the first few months of 2010 marked a positive trend, recording intake levels higher than about 25% of those of the same period the year before, with improvements in all Business Units and a significant contribution stemming from the renewable energy sources with which Bonfiglioli has confirmed its position as one of the most important players in both the wind turbine and photovoltaic sectors. In spite of this comforting trend of orders and turnover, the rationalisation and reorganisation operations started in 2009 following the difficult economic crisis continue in order to both continue recovering in terms of profitability and to bring the EBITDA back to the pre crisis levels higher than 11.0% and to optimise use of the capital use, mainly in the working capital, to improve the overall financial indebtedness. With these results in mind, a large number of rationalisation and reorganisation projects were commenced at group level, some of which have already been successfully completed and others still in progress and requiring further time for completion along the entire supply chain. Among other things, this has involved an in-depth revision of the group s supply chain processes and the implementation of a single SAP computer system by all the companies in the group. In the Industrial BU the revision of supply chain processes requires a drastic decentralization of assembly operations for finished products (gearboxes, motors and geared motors) to sales points close to end markets, at the branches and main international BEST distributors, as well as major simplification of production processes at Italian and foreign factories by adopting lean production processes and defining new, more flexible relations with suppliers used. As regards the Mobile and Wind Turbine BU on the other hand, the process of rationalising the supply chain in turn calls for a total revision of planning processes and a reduction in supply lead times, on the basis of a so-called go to market applied to the most important European customers, that, in this way, will be served and followed directly by the factory in Forlì without transfers or storage at the branches in Europe. Financial year 2011 will therefore be an important year for the further finetuning of the new organisation by BUs according to these new strategic guidelines that refer to lean processes and principles. Following the good result of the year that has just ended, which surpassed even the best initial expectations of last year, 2011 should therefore be another year with comforting economic results both in terms of turnover growth and recovery of profitability, which should go back to approaching the pre-crisis results, even though the commitments and costs of the rationalisation and restructuring operations in progress will still weigh on the income statement of Further information Equity shares The parent company does not hold and has never held treasury shares, nor does it hold stakes or shares in controlling companies inasmuch as there is no legal entity that holds a controlling stake in Bonfiglioli Riduttori S.p.A. stock. Clementino Bonfiglioli The year 2010 will unfortunately be remembered for the death of our founder and Chairman, Clementino Bonfiglioli, unforgettable leader of the Group for over fifty years. It comforts us to think that he was in any case able to see the company come out of one of the most dramatic crisis that the world economy has gone through up until today. What gives us even more pleasure is recognising his passion and enthusiasm in the work that our Group does and carries forward each day. In the end, this is what allowed us to achieve a good 2010 marked by strong recovery and renewed energy. Calderara di Reno (Bo), 31 st March 2011 for The Board of Directors The Chairman Sonia Bonfiglioli

28 53 Consolidated Financial Statements as of December 31, 2010 As documented by the analytical data of the Consolidated Financial Statements, the Bonfiglioli Group s reaction to the crisis took shape in 2010 in a brilliant thrust forward, which positively filled the gap of 2009 up to the point of attaining an overall result better than what was forecast in the business plan of the last three years. In the same way, the figures forecast for 2011 confirm a positive trend with a consolidated presence in the emerging markets and a qualified experience in the field of renewable energies. (This section has been translated into the English language solely for the convenience of international readers)

29 54 Consolidated Financial Statement as of December 31, 2010 Consolidated Financial Statements as of December 31, CONSOLIDATED BALANCE SHEET ASSETS (Euro Thousand) (Euro Thousand) B) Fixed assets (net of cumulated depreciation) I. Intangible fixed assets 1) Start up costs ) Patents and rights for the use of intellectual properties ) Concession, licenses, trademarks and similar rights ) Goodwill 5b) Consolidation differences 2,202 3,138 6) Assets in progress and advances ) Other intangible fixed assets 3,310 3,466 Total Intangible fixed assets 6,625 7,303 II. Tangible fixed assets 1) Land and buildings 121, ,343 2) Plant and machinery 56,843 60,543 3) Trade and industrial fixtures 13,280 14,549 4) Other tangible fixed assets 4,939 4,977 5) Construction in progress and advances 2,803 5,673 Total Tangible fixed assets 199, ,085 III. Financial fixed assets 1) Investments b) associated companies 3,660 3,528 d) other companies sub total 3,714 3,556 Total Financial fixed assets 3,714 3,556 B) TOTAL FIXED ASSETS (NET OF CUMULATED DEPRECIATION) 209, ,944 II. Receivables 1) Trade receivables - due within 12 months 150,326 96,113 3) Receivables from associated companies - due within 12 months 8,410 4,920 4bis) Tax receivables - due within 12 months 12,945 6,685 - due within 12 months 7,416 12,523 sub total 20,361 19,208 4ter) Deferred tax assets - due within 12 months 11,788 9,018 - due after 12 months 19,174 16,556 sub total 30,962 25,574 5) Other receivables - due within 12 months 3,456 2,183 - due after 12 months 2,139 2,089 sub total 5,595 4,272 Total Receivables LE DEBITI 215, ,087 IV. Cash at bank and on hand 1) Banks 19,566 65,070 3) Cash on hand Total Cash at bank and on hand 19,674 65,112 C) CURRENT ASSETS I. Inventory 1) Raw materials, supplies and consumables 33,789 20,256 2) Work in progress and semifinished goods 67,438 45,409 4) Finished goods and goods for resale 92,922 79,460 5) Advances Total Inventory 194, ,276 C) TOTAL CURRENT ASSETS 430, ,475 D) Prepaid expenses and accrued income - Other prepaid expenses and accrued income 2, D) TOTAL PREPAID EXPENSES AND ACCRUED INCOME 2, TOTAL ASSETS 642, ,345

30 56 Consolidated Financial Statements as of December 31, CONSOLIDATED BALANCE SHEET LIABILITIES AND SHAREHOLDERS EQUITY (Euro Thousand) (Euro Thousand) A) Shareholders equity I. Share capital 30,000 30,000 III. Revaluation reserves 60,195 60,195 IV. Legal reserve 4,240 4,240 VII. Other reserves - Extraordinary reserve 60,146 89,669 - Consolidation reserve 16,965 16,263 - Foreign exchange currency conversion reserve 480 (5,214) - Other reserves 5,451 5,451 sub total 83, ,169 VIII. Retained earnings (losses) carried forward 28,768 34,328 IX. Net income (loss) of the Group 4,247 (31,970) Group shareholders equity 210, ,962 Minority interests share capital and reserves 4,354 3,760 Minority interests net income(loss) Minority interests 5,142 3,962 A) CONSOLIDATED SHAREHOLDERS EQUITY 215, ,924 B) Reserves for risks and charges 1) Termination indemnity and similar liabilities 1,974 1,723 2) Taxes and deferred taxes liabilities 10,615 10,629 3) Other reserves 12,312 12,399 B) TOTAL RESERVES FOR RISKS AND CHARGES 24,901 24,751 4) Banks - due within 12 months 42,720 74,207 - due after 12 months 129, ,321 sub total 172, ,528 5) Other financial institutions - due within 12 months 4,471 4,515 - due after 12 months 13,355 15,936 sub total 17,826 20,451 6) Advances - due within 12 months 2,671 1,249 7) Trade payables - due within 12 months 153,614 77,603 10) Payables to associated companies - due within 12 months ) Tax payables - due within 12 months 7,044 3,004 - due after 12 months sub total 7,173 3,140 13) Social security - due within 12 months 6,454 4,375 14) Other payables - due within 12 months 17,581 11,190 - due after 12 months 494 1,439 sub total 18,075 12,629 C) EMPLOYEE SEVERANCE INDEMNITY RESERVE 16,632 16,738 D) TOTAL PAYABLES 384, ,043 D) Payables 1) Bonds - due within 12 months due after 12 months 5,433 5,454 sub total 5,665 5,648 3) Payables to shareholders for financing - due within 12 months E) ACCRUED EXPENSES AND DEFERRED INCOME - Other accrued expenses and deferred income E) TOTAL ACCRUED EXPENSES AND DEFERRED INCOME TOTAL LIABILITIES AND SHAREholders EQUITY 642, ,345 Memorandum accounts Guarantees given from third parties in own favour 23,954 5,459 Commitments on investments purchase 1,379 1,379 TOTAL MEMORANDUM ACCOUNTS 25,333 6,838

31 58 Consolidated Financial Statements as of December 31, CONSOLIDATED STATEMENT OF INCOME (Euro Thousand) A) Production value 1) Net revenue from sales and services 600, ,750 2) Change in work in progress, semi-finished and finished goods 30,024 (48,495) 5) Other revenues and incomes: - operating grants others 5,728 4,910 sub total 5,728 5,053 A) TOTAL PRODUCTION VALUE 635, ,308 B) Production costs 6) Raw materials, supplies, consumables & goods for resale 355, ,837 7) Services 113,929 80,508 8) Use of third party assets 5,690 4,487 9) Personnel a) Wages and salaries 82,173 65,298 b) Social contributions 22,306 18,555 c) Severance indemnity 4,364 4,135 e) Other costs - 30 sub total 108,843 88,018 10) Depreciation, amortization and write-downs a) Amortization of intangible fixed assets 2,160 2,512 b) Depreciation of tangible fixed assets 24,558 22,856 d) Provision for doubtful account 2,891 2,665 sub total 29,609 28,033 11) Change in raw materials, supplies, consumables & goods for resale (12,441) 13,584 13) Other provisions 2,647 1,085 14) Other operating expenses 4,263 3,780 B) TOTAL PRODUCTION COSTS 608, ,332 DIFFERENCE BETWEEN PRODUCTION VALUE AND COSTS (A B) 27,586 (20,024) (Euro Thousand) C) Financial income and expenses 16) Other financial income: d) from associated companies: - da imprese collegate other 1, ) Interest expenses and other financial charges: - other (12,905) (10,170) 17bis) Exchange rate gains and losses, net 503 (1,194) C) TOTAL FINANCIAL INCOME AND EXPENSES (10,900) (10,669) D) Adjustments to financial assets 18) Revaluations a) investments ) Write off a) investments - (457) D) TOTAL ADJUSTMENTS TO FINANCIAL ASSETS 132 (457) E) Extraordinary income and expenses 20) Income - other sub total ) Expenses: - other (5,894) (8,262) E) TOTAL EXTRAORDINARY ITEMS (5,361) (7,276) INCOME BEFORE TAXES (A B±C±D±E) 11,457 (38,426) 22) Income taxes - current (10,992) (3,321) - deferred 4,570 9,979 TOTAL INCOME TAXES (6,422) 6,658 23) NET INCOME (LOSS) INCLUDING MINORITY INTEREST 5,035 (31,768) Minority interest income (788) (202) NET INCOME (LOSS) OF THE GROUP 4,247 (31,970)

32 61 Notes to the consolidated financial statements In completing the 2010 consolidated financial statements, to whose items direct reference is made, the notes on the following pages include the statement of reconciliation between shareholders equity and the result of the Parent Company, as well as the consolidated cash flow statement. (This section has been translated into the English language solely for the convenience of international readers)

33 Notes to the consolidated financial statements Notes to the consolidated financial statements as at 31 st December 2010 Foreword The consolidated financial statements have been prepared in compliance with Italian Legislative Decree no. 127 dated 9th April The Notes include the reconciliation statement between shareholders equity and the net income of the Parent company and the same items in the consolidated financial statements; in addition, the consolidated cash-flow statement has been annexed to the Notes. As regards the nature of the activities conducted by the Group and developments occurring, as well as events arising after the date of the consolidated financial statements, reference is made to the contents of the Management Report. All figures in the financial statements and the relative Notes are expressed in thousands of Euros (K ), unless otherwise indicated. Form and contents of the consolidated financial statements The consolidated financial statements include the financial statements of companies within the Bonfiglioli Group, namely the parent company Bonfiglioli Riduttori Spa and the Italian and foreign subsidiaries in which the company holds more than 50% of the capital, either directly or indirectly, or exercises management and control in relation to specific agreements to this effect. The financial statements of the Group Companies utilised for the integral consolidation were approved by the shareholders meetings of the individual companies concerned, suitably modified wherever necessary to unify them with the accounting principles adopted by the Group, which comply with the financial principles imposed by law. If the relative financial statements had not yet been approved by the respective general meetings when the consolidated financial statement was drawn up, the draft financial statements prepared for approval by the respective Boards of Directors were utilised. If the financial year of companies closes on a date other than 31st December, interim financial statements were drawn up at 31st December utilising the Group accounting principles. The Group companies operate exclusively in the manufacture and sale of gear motors, speed variators and drive transmission components in general. The subsidiary companies included in the consolidation area at 31 December 2010 are as follows: Denomination Country Currency Share Capital Shareholding 31/12/10 31/12/09 Bonfiglioli Riduttori SpA Italy 30,000,000 Parent Company Bonfiglioli Canada Inc. Canada CAD 4,000, % 100% Bonfiglioli U.S.A. Inc. U.S.A. USD 4,000, % 100% Bonfiglioli Deutschland GmbH Germany 3,000, % 100% Bonfiglioli Transmissions SA France 1,900, % 100% Bonfiglioli Transmission (Aust) Pty Ltd. Australia AUD 7,500, % 100% Bonfiglioli U.K. Ltd Great Britain GBP 200, % 100% Bonfiglioli Power Transmissions Pty Ltd. South Africa ZAR 64,000 75% 75% Bonfiglioli South Africa Pty Ltd (*) South Africa ZAR 10,000,000 56,25% 56,25% Bonfiglioli Transmission Pvt Ltd. India INR 400,000, % 100% Bonfiglioli Drives (Shanghai) Co. Ltd China USD 1,000, % 100% Bonfiglioli Vectron Gmbh (**) Germany 500, % 97% Tecnoingranaggi Riduttori Srl Unip. Italy 96, % 100% Bonfiglioli Italia Spa Unipersonale Italy 16,000, % 100% Bonfiglioli Slovakia Sro Slovakia 14,937, % 100% Bonfiglioli Power Trasmission Jsc Turkey TRY 4,500,000 98,1% 75% Bonfiglioli Vietnam Ltd Vietnam USD 10,000,000 80% 80% Bonfiglioli Redutores do Brasil Brazil BRL 2,000,000 70% 70% Bonfiglioli Osterreich GmbH (**) Austria 35, % 100% (*) Subsidiary indirectly controlled through Bonfiglioli Power Transmission Pty Ltd (**) Subsidiary indirectly controlled through Bonfiglioli Deutschland GmbH With reference to the changes made during the year, we draw your attention to the following matters: In May the reserved share capital in the Turkish subsidiary Bonfiglioli Power Transmission & Automation Technologies JSC was increased from 500 KTRL to 4,500 KTRL. The foregoing increase, not subscribed by the minority shareholders, increased the Group s stake from 75% to 98.1%; the sale of the majority holding in the company Bonfiglioli Skandinavien AB. was also completed in May, retaining a 10% minority interest. After this sale, the Scandinavian company will continue to distribute group products in the area as B.E.S.T. dealer; the purchase of the remaining 3% of the share capital of the subsidiary Bonfiglioli Vectron GmbH for a total of 310 K was completed in October.

34 Notes to the consolidated financial statements Drafting principles The structure of the balance sheet and the income statement are as required by Italian Legislative Decree 127/91. Items preceded by Arabic numerals having zero contents have been omitted both in the current and in previous financial statements. The balance sheet provides separate indication of shareholders equity and the minority interests share of profits. No items of assets and liabilities are recorded under more than one caption of the tables. Consolidation principles A. In preparing the financial statements for the consolidated companies, the net assets method is used (line-by-line), consisting in recording all the captions under assets and liabilities and in the income statement in their entirety. B. The book value of consolidated equity investments was written off against the related equity at the time of first consolidation and the resulting differences, if negative, were recognised under a specific item of consolidated equity denominated Consolidation Reserve. Any positive differences existing at the time of first consolidation were recorded in the consolidated financial statements, where possible, under the items of assets of the companies included in the consolidation area, or under the assets caption Consolidation differences for differences that, despite their characteristics of deferment affecting more than one year, could not be allocated to specific items under assets. In contrast, if these items were not considered to be deferred to more than one year, they were deducted from the consolidation reserve. C. The positive differences recorded were amortised in accordance with the rates utilised for the assets to which they refer; the consolidation difference is amortised throughout the estimated future working life of the assets in question. D. The results achieved, following initial consolidation, were entered under a specific caption of consolidated equity denominated Retained earnings and losses carried forward. E. Any profits and losses that have yet to be realised in relation to third parties deriving from transactions between Group companies were eliminated, as were the items that give rise to payables, receivables, costs and revenues. F. The dividends distributed by the Companies within the Group were cancelled. G. The portions of shareholders equity and profit due to minority shareholders of the consolidated subsidiaries were deducted from the Group portions and recorded separately under specific captions of consolidated equity and in the income statement. H. The financial statements of foreign companies were converted to euro, applying the year-end exchange rate for all assets and liabilities and the average exchange rate calculated over the full twelve months for captions in the income statement. The items of equity, existing at the date of initial consolidation, are converted at the exchange rates effective at that date, while subsequent changes are converted at the historic exchange rates effective at the date of the relative transactions. Conversion differences arising both from the conversion of equity captions to the year-end rates with respect to the historic rates, and existing between the average exchange rates and year-end exchange rates for the income statement, are recorded under a specific caption of consolidated equity denominated Currency conversion reserve. The exchange rates utilised for companies operating outside the Euro area are as follows: Company Currency B.S. exchange rate 2010 P.L. exchange rate 2010 B.S. exchange rate 2009 I. The following company is consolidated using the net equity method: P.L. exchange rate 2009 Bonfiglioli U.K. Ltd GBP Bonfiglioli Canada Inc. CAD Bonfiglioli USA Inc. USD Bonfiglioli Transmission (Aust) Pty Ltd. AUD Bonfiglioli Power Transmissions Pty Ltd. ZAR Bonfiglioli Transmission Pvt Ltd. INR Bonfiglioli Drives (Shanghai) Co. Ltd. CNY Bonfiglioli Power Trasmission JSC TRY Bonfiglioli Redutores Do Brasil Ltda BRL Bonfiglioli Vietnam Ltd VND 26, , , ,846.2 Denomination Headquarters Share capital % stake Tecnotrans Bonfiglioli Sa Barcelona (Spain) 2,175, %

35 Notes to the consolidated financial statements Valuation criteria The accounting principles and valuation criteria adopted in drafting the financial statements are in compliance with the principles of the Italian Civil Code and the accounting standards prescribed by the Italian National Council of Chartered Accountants as updated by the Italian Accounting Authority (O.I.C.). Where such principles are lacking or insufficient, the point of reference is provided by international accounting standards (IAS/IFRS) where these latter are in compliance with Italian legal requirements. The consolidated financial statements were prepared in accordance with the general principles of clarity, truthfulness and fairness; specifically: valuation of the items of the financial statements was carried out in accordance with the general principles of prudence and economic competence in a prospective of ongoing business; account was taken of the risks and losses relating to the year, even when such risks and losses became known after the end of the year; the statements refer exclusively to profits realised at the closing date of the financial year; income and expenses are considered to be relative to the year irrespective of the effective collection or payment dates; dissimilar components covered by single captions have been valued separately; the valuation principles are unchanged with respect to those utilised in the previous year. You should remember that in 2008, in compliance with Italian Legislative Decree 185/2008, immovable assets of the Italian companies were revaluated at market value appraised in a technical report prepared by an external expert, whenever other objective factors on which a calculation could be based were not available. As illustrated below, the effects of this revaluation have impacted the income statement of 2010; no exceptional cases occurred that justified a departure from the provisions of legislative enactments. Specifically, the valuation criteria adopted in the preparation of the financial statements are as specified below. Intangible fixed assets Intangible fixed assets are recorded at purchasing cost increased by ancillary expenses or, if the assets were internally constructed, on the basis of the costs sustained directly or indirectly, entered in respect of the attributable portion. The cost, calculated as illustrated above, may be revaluated in certain cases if this action is permitted by the relative laws. Intangible fixed assets were systematically amortised on the basis of the following rates: Start-up and expansion costs 20% Patent rights and utilisation of intellectual property rights 33.33% - 50% Concessions, licences, trademarks and similar rights 33.33% Goodwill 10 20% Other 20% (*) (*) or other specific rates tied, for example, to the term of the contracts to which the fixed assets refer Tangible fixed assets Plant and equipment are recorded in the financial statement at purchasing cost or construction cost, inclusive of all directly connected ancillary expenses and adjusted in the event that specific laws allow assets value to be adapted to the changes occurred in the buying power of the currency. The revaluation figure for an asset does not exceed the value actually attributable to it with reference to its likely economic use by the company or, if it does exceed this level, with reference to its sale value. Assets acquired by means of leasing contracts are recorded in accordance with the requirements of international accounting standard IAS no. 17 which is, in turn, implemented by the accounting principle set down by the National Council of Chartered Accountants with reference to the consolidated financial statements. The financial method is therefore applied, involving the attribution of the historic cost of the relative goods under assets, recording of the debt under liabilities and entry of the relative financial expenses and depreciation amounts in the income statement. Provisions made in lieu of depreciation are systematically allocated by the application of rates that are considered to accurately reflect the residual useful working life of the assets to which they refer. Ordinary costs for maintenance and repair are treated as operating costs; while extraordinary costs that extend the useful life or increase production capacity are added to the value of the asset. The ordinary annual rates utilised for the depreciation of tangible assets are as follows: Land and buildings 2% to 10% Plant and machinery 10% to 25% Industrial / commercial equipment 10% to 30% Other assets 10% to 30%

36 Notes to the consolidated financial statements Equity investments held as fixed assets The equity investment in the associated company Tecnotrans Bonfiglioli SA is entered on the basis of the net equity criterion, i.e. for an amount equivalent to the corresponding portion of shareholders equity resulting from the latest financial statement of the company after deducting dividends and after recording any further consolidation adjustments having a significant impact. The other investments are recorded at their purchase cost adjusted, when necessary, for lasting loss in value. Inventories Inventories are valued in accordance with the general principle of the lower between purchaseing cost and market value: raw materials are valued adopting the FIFO method; work in progress is valued according to the stage of completion reached on the basis of the cost of materials, labour, industrial depreciation and indirect production costs; semi-finished and finished products are valued adopting the FIFO method, on the basis of the cost of materials, labour, industrial depreciation and other production costs; obsolete or slow-moving materials and products are valued according to their estimated useful life or future market value, by means of an entry under write-down provisions. Infra-group profits present within the inventories of the consolidated companies are eliminated. Receivables Receivables are entered at their presumed realisation value through direct writedown of bad debts and entry of write-down provisions. Cash at banks and on hand Cash at banks and on hand is entered at nominal value, considered to represent the presumed realisation value. Accruals and deferments For multi-year transactions, accruals and deferments are calculated on a pro tempore basis, so as to enter the relevant cost and revenue portion shared by two or more years. Specifically, accrued income and deferred charges refer to revenues and costs of the year, although formally recorded in the following year; prepaid expenses and deferred income refer to expenses and income materially occurred during the current year, but that relate to future years. Reserves for risks and charges Reserves for risks and charges consider the provisions allocated to cover losses, or debts of a given nature and certain or probable existence, for which however the exact amount or contingency date was not known at year-end. The allocations reflect the best possible estimation of the relative amounts based on available information. Risks for which a liability is only possible and not certain are illustrated in the Notes to the financial statements, without allocating a specific risks and charges provision. Employees severance indemnity The severance indemnity reserve is commensurate with the amounts payable to the employees on the workforce at the closing date of the year, in compliance with statutory legislation and the applicable collective employment contracts. Payables Payables are entered at their nominal value with regard to the principal, while interest is entered under payables if already due, and under accruals, according to the accrual principle if not yet due. Cost and revenue recognition Sales revenues and purchasing costs are recognised at the time of transfer of ownership, which generally occurs at the time of shipment or at the time of receiving respectively, net of returns, discounts, allowances and premiums; the other revenues and costs (supplies of services, financial, etc.) are recorded in accordance with the accrual principle. Costs and revenues arising between Group companies and infra-group dividends are eliminated. Taxes Income taxes are recorded based on the estimated tax burden for the year with reference to statutory tax regulations and taking account of exemptions and concessions applicable. Deferred and pre-paid taxes are recorded to take account of the fiscal effects both in relation to items of income or costs that concur in forming the profit for the year other than the year in which they contribute to forming the taxable income and in order to reflect the deferred fiscal effects relative to the consolidation adjustments. Captions stated in foreign currency Transactions in foreign currency are converted into euro at the historic exchange rates on the transaction dates. Exchange rate gains and losses incurred at the time of collection of receivables and settlement of payables in foreign currency are recorded in the income statement under financial income and expenses. Receivables and payables existing at year-end expressed in currencies other than Euro

37 Notes to the consolidated financial statements were converted at the exchange rates effective at year-end, also considering existing hedging contracts. The difference arising from these transactions (gain or loss) was verified and reflected in the income statement for the year, with the matching receivable or payable entry. Specifically, with regard to captions in foreign currency for which forward contracts were taken out to hedge against the relative exchange risk, the following valuation principle was adopted: the difference generated between the value in Euro determined by the adoption of the historic exchange rate at the time of registration of the transaction and the amount in Euro determined on the basis of the contractual spot exchange rate established was entered in the income statement with a matching trade receivable or payable entry; the discount or premium involved in the transaction was recorded on an accrual basis with respect to its duration. Derivatives Contracts taken out to cover exchange risks are valued consistent with the underlying financial transactions to which they refer. Exchange rate or interest rate swap contracts that are not correlated to the receivables and/or payables entered at the reference date of the financial statements are valued separately. If, in relation to the separate valuation, losses are predicted, these are recognised in the income statement and reflected in a specific risks reserve; if the valuation points to the likelihood of profits, these are deferred to the moment of their effective realisation. Derivative contracts are valued in the same manner as the hedged asset or liability or as the contractual undertaking assumed at the date of the financial statements. If the existence of a hedging relationship with the underlying financial transactions is not proven or insufficiently documented, a fair value assessment is made of said financial instruments and, also on the basis of this latter valuation, any possible latent losses are estimated, making a commensurate allocation to the risks and charges reserve. Commitments and guarantees Contractual commitments and guarantees are entered under commitments at the value resulting from the contractual undertaking after deducting any liabilities that have already been recorded. Significant events occurring after the closing of the year No significant event such as to have to report it in these Notes occurred after the end of the year. Comments on the single captions of the financial statements BALANCE SHEET FIXED ASSETS Intangible fixed assets Description: Opening balance Increases Decreases Other changes Closing balance Historic cost Start-up and expansion costs Patents & rights to use intellectual property 15, (13) 4 15,793 Concessions, licences, trademarks 2, (1) 84 2,456 Consolidation differences 19, ,143 Assets in progress and advances (31) 437 Other 4, ,728 Total (A) 42,076 1,390 (14) ,619 Accumulated depreciation Start-up and expansion costs Patents & rights to use intellectual property 15, (9) - 15,554 Concessions, licences, trademarks 1, (1) 48 2,029 Consolidation differences 16,857 1, ,941 Other ,418 Total (B) 34,773 2,160 (10) 71 36,994 Net values Start-up and expansion costs 21 (11) Patents & rights to use intellectual property 307 (68) (4) Concessions, licences, trademarks Consolidation differences 3,138 (936) - - 2,202 Assets in progress and advances (31) 437 Other 3,466 (243) ,310 Total (A-B) 7,303 (770) (4) 96 6,625 The other changes column includes cancellations of the fully amortised items and the effect of the exchange rate fluctuation as well as reclassifications made for a more homogeneous presentation of various items. The column change in consolidation area in the tables that follow reflect the balances as at 31st December 2009 of the Swedish company, which exited the Group during 2010.

38 Notes to the consolidated financial statements Start-up and expansion costs These cover start-up costs and expenses incurred in amending the articles of association of the company Bonfiglioli Italia SPA, recorded in the statement with the consent of the Panel of Auditors. Industrial patent rights and utilisation of intellectual property rights This caption includes deferred expenses sustained for the registration of industrial patents and the costs sustained for application software purchased outright and/or under open term license. The increase in the year is mainly due to the purchase and implementation of software for IT resource planning of the companies. In keeping with art. 10 of Italian Law 72/83 the values resulting from monetary revaluation are indicated below: Assets in progress and advances The decrease in the year in assets in progress and advances is mainly due to completion by the Parent company of implementation of new software, which began during the previous year. The increase in the year is tied to software licences acquired from the Parent Company but not yet used. Other In the most part these costs are composed of maintenance increases in the value of third parties assets. Tangible fixed assets Description Riv. L. 342/2000 Patent rights and utilisation of intellectual property rights 5,547 Description: Opening balance Increases Decreases Change in area Other changes Closing balance TOTAL (A) 5,547 Historic cost This revaluation had no effect on the income statement for the year since it had already been fully amortised. Concessions, licences, trademarks and similar rights In the most part these costs are constituted by trademark registration charges. Goodwill and consolidation differences The value recorded stems from differences upon consolidation, amounting to goodwill, recorded in the financial statement with the consent of the Panel of Auditors, namely: Company Goodwill Amortisation Tecnoingranaggi Srl 1,996 10% Bonfiglioli Transmission France SA 19 20% Bonfiglioli Redutores Do Brasil Ltda 69 20% Bonfiglioli Vectron GmbH % TOTAL 2,202 The consolidation difference pertaining to the investment in the subsidiary Bonfiglioli Vectron GmbH (Germany) was recognised during 2010 after acquiring the remaining 3% of share capital. Land and buildings 137, (208) - (2,352) 135,543 Plant and machinery 194,920 5,844 (10,976) (240) 2, ,512 Industrial and commercial equipment 61,981 4,726 (1,147) ,122 Other assets 16,578 1,462 (313) (170) ,969 Assets in progress and advances 5,673 1,322 (341) - (3,851) 2,803 TOTAL (A) 416,932 13,677 (12,985) (410) (2,265) 414,949 Accumulated depreciation Land and buildings 11,437 3,184 (17) - (710) 13,894 Plant and machinery 134,377 13,499 (10,546) (141) (1,520) 135,669 Industrial and commercial equipment 47,432 6,240 (981) ,842 Other assets 11,601 1,635 (283) (143) ,030 TOTAL (B) 204,847 24,558 (11,827) (284) (1,859) 215,435 Net values Land and buildings 126,343 (2,861) (191) - (1,642) 121,649 Plant and machinery 60,543 (7,655) (430) (99) 4,484 56,843 Industrial and commercial equipment 14,549 (1,514) (166) ,280 Other assets 4,977 (173) (30) (27) 192 4,939 Assets in progress and advances 5,673 1,322 (341) - (3,851) 2,803 TOTAL (A-B) 212,085 (10,881) (1,158) (126) (406) 199,514

39 Notes to the consolidated financial statements The column other changes includes exchange rate differences and reclassification of individual captions. With reference to the item Land and Buildings, the other changes column also includes the issue of previous IAS 17 revaluations on immovable assets whose value was brought back into line with the appraisal value. For an analysis of the investments made during the year we refer you to the Management report. Within the meaning and for the purposes envisaged in article 10 of Italian Law no. 72 dated 19/03/1983 and subsequent amendments and additions thereto, an indication is provided of assets still recognised in equity for which monetary revaluation has been carried out, specifying the relative net amounts: Description: Rev. L. 72/83 Rev. L. 413/91 Rev. L. 342/00 Rev. L. 2/09 It is clarified that the revaluation pursuant to Italian Law 2/2009 has led to a K 274 increase in depreciation on the 2010 income statement. Other Land and buildings 406 2,264-44, ,706 Plant and machinery , ,423 Industrial / commercial equipment Other assets TOTAL 1,080 2,264 17,979 44, ,514 Total The following table gives details of the associated shareholding: Company Tecnotrans Bonfiglioli SA Headquarters Barcelona (Spain) Share capital 2,175 K Share held 33.33% Shareholders' equity at 31/12/ ,980 K Profit at 31/12/ K Book value 3,660 K Working capital Inventory Raw, subsidiary and expendable materials 33,789 20,256 13,533 Work in progress and semi-finished goods 67,438 45,409 22,029 Finished goods and goods for resale 92,922 79,460 13,462 Advances TOTAL 194, ,276 49,440 Financial fixed assets Investments The following table provides a breakdown of the Investments item and the changes that occurred during the year: Description: Opening balance Increases Decreases Other changes Closing balance INVESTMENTS - in associated companies 3, ,660 - in other companies TOTAL 3, ,714 The foregoing amounts are net of obsolescence reserve, made up as follows: Raw and expendable materials 5,663 4, Semi-finished products 10,206 9,153 1,053 Finished goods 7,864 7, TOTAL 23,733 20,986 2,747 Changes in the provision are shown below: The increases of the year refer to the investment in the company Bonfiglioli Skandinavien AB, which brought the stake to 10.05%. The other changes entry refers to the portion of profit for the year attributable to the associated company Tecnotrans Bonfiglioli SA (K 132), an investment valued using the net equity method. Provision for inventory obsolescence Opening value 20,986 14,832 Increases 3,095 5,932 Decreases (1,226) (16) Change in consolidation area (22) - Other changes Closing value 23,733 20,986

40 Notes to the consolidated financial statements The increase in stocks compared to 2009 is attributable to the considerable increase of Group sales. The stock rotation index however improved (from an average of 131 days in 2009 to an average of 117 days in 2010). Receivables Trade receivables Other receivables Tax receivables 20,361 19,208 1,153 Prepaid taxes 30,962 25,574 5,388 Receivables from others 5,595 4,272 1,323 TOTAL 56,918 49,054 7,864 Trade receivables from customers 161, ,068 56,311 Receivables from associated companies 8,410 4,920 3,490 (minus) Bad debt reserve (11,053) (8,955) (2,098) TOTAL 158, ,033 57,703 The increased trade receivables is also to be attributed to the increased Group sales (+50% compared to 2009). Receivables from the associated company Tecnotrans Bonfiglioli SA relate to amounts due from the sale of goods and services, which was conducted at arm s length conditions. Receivables from customers are recorded net of provision for bad debts, a breakdown of which is given below: Tax receivables can be broken down as follows: Tax Receivables Short-term receivables VAT credits 12,922 4,790 Direct tax credits - 1,833 Other Total short-term tax credits 12,945 6,685 Mid-long-term receivables VAT refunds 7,299 12,394 Direct tax refunds Total mid-long-term tax credits 7,416 12,523 Total 20,361 19,208 Provision for bad debts Opening value 8,955 6,846 Provisions 2,891 2,655 Applications (907) (555) Other changes 114 (1) Closing value 11,053 8,955 The increase in short-term VAT receivables is to be attributed to the VAT receivables of the Parent Company and Italian subsidiary Bonfiglioli Italia S.p.A., which will be refunded during The VAT refunds under mid-long-term receivables entry is attributable to the VAT credit in favour of the Indian branch, which is to be refunded over the next five years. Breakdown of trade receivables by geographical area: Changes in pre-paid taxes are as follows: Trade receivables Italy 54,923 31,322 Europe 47,991 28,573 Overseas 55,822 41,138 TOTAL 158, ,033 Opening balance 25,574 15,122 Provisions 7,628 11,213 Applications (2,443) (788) Other changes Closing Balance 30,962 25,574

41 Notes to the consolidated financial statements Other receivables can be broken down as follows: Accrued income and deferred charges Other receivables Short-term receivables Receivables from employees Advances to suppliers 1, Deposits 1, Receivables for customs duties Receivables from social security institutions 39 1,116 Other Total other short-term receivables 3,456 2,183 Mid-long-term receivables Receivables for pensions fund insurance 1,986 1,746 Guarantee deposits Other 2 36 Total other mid-long-term receivables 2,139 2,089 TOTAL 5,595 4,272 TOTAL 2, ,187 Breakdown: Advertising Insurance policies Bank commissions re-scheduling 1,418 - Hire charges and rentals Non competition outgoing shareholder Turkey Other TOTAL 2, The increase in advances to suppliers is attributed to advances paid in the most part by the Parent Company. The increase in deposits, whose return is expected during the year, is attributed to machinery leasing operations. The decrease in receivables from social security institutions comes from the return of the Layoff Benefits Fund advance. There are no receivables due in a period beyond five years. Cash at banks and on hand The increase in the item is attributed to the accounting of the bank commissions on the re-scheduling agreement having a multi-year term. Shareholders equity At 31/12/2010 the overall share capital of 30,000,000 was represented by 30,000,000 ordinary shares with par value of 1 each. Bank and post office deposits 19,566 65,070 (45,504) Cash and cash equivalents TOTAL 19,674 65,112 (45,438) RECONCILIATION STATEMENT BETWEEN NET EQUITY AND INCOME FOR THE YEAR AT 31 December 2010 OF PARENT COMPANY BONFIGLIOLI RIDUTTORI SpA. Result for the year Net equity Bonfiglioli Riduttori S.p.A. statutory financial statement (5,477) 174,773 For a comprehensive evaluation of the change in the Group net cash position we invite you to refer to the section in which the company s debts are analysed and to the cashflow statement. Accounting of the shareholders equity and results of consolidated and associated equity investments to replace book value in the financial statement of the Parent company, net of infra-group dividends 15,076 64,175 Shareholders equity and profit attributable to minority interests (788) (5,142) Elimination of infragroup profits on stock (6,116) (25,884) Reversal of infragroup contribution 363 (2,370) Leasing agreements recorded using financial method 1,229 5,027 Other (40) (87) Consolidated Group financial statement 4, ,492

42 Notes to the consolidated financial statements STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS EQUITY AS AT 31 ST DECEMBER 2010 TOTAL Net income (Net loss) Other reserves Retained earnings carried forward Other Currency conversion reserve Consolid. reserve Revaluation reserve Legal reserve Share capital Balance as at 31/12/ ,000 3,000 20,847 16,263 (4,087) 71,563 13,827 25, ,058 Allocation of 2007 profit ,934 7,820 (25,645) - Monetary revaluation pursuant to Italian Law 2/ , (1,264) - 38,084 Currency conversion differences (2,858) (2,858) Net income (Loss) of the Group for ,917 20,917 Balance as at 31/12/ ,000 3,891 60,195 16,263 (6,945) 88,497 20,383 20, ,201 Allocation of 2008 profit ,623 13,945 (20,917) - Currency conversion differences , ,731 Net income (Loss) of the Group for (31,970) (31,970) Balance as at 31/12/ ,000 4,240 60,195 16,263 (5,214) 95,120 34,328 (31,970) 202,962 Allocation of 2009 profit (29,523) (2,447) 31,970 - Currency conversion differences , ,668 Other changes (3,113) - (2,385) Net income (Loss) of the Group for ,247 4,247 Balance as at 31/12/ ,000 4,240 60,195 16, ,597 28,768 4, ,492 The change in the currency conversion provision is mainly due to the strengthening of all the major currencies against the Euro. The change in profits and losses carried forward is mainly due (1.9 M ) to the change in the IAS 17 value of the buildings, as mentioned in the section dedicated to the tangible fixed assets. Minority shareholders equity Minority profit/loss Minority capital and reserves Minority interests shareholders equity Balance as at 31/12/ ,760 3,962 Allocation of net income for 2009 (202) Distribution of dividends - (234) (234) Currency conversion differences Other changes Net income for 2010 attributable to minority interests Balance as at 31/12/ ,354 5,142 Amongst the other changes, the effects of transferring the majority holding in the Swedish subsidiary, the increase in share capital of the Turkish subsidiary and acquisition of the 100% stake in the subsidiary Bonfiglioli Vectron GmbH were allocated. The caption originates from the attribution to minority shareholders of the portion of shareholders equity and net income deriving from the full consolidation of the following companies: Profit Capital and Total Profit Capital and Total Company reserves reserves Bonfiglioli Vectron GmbH (7) Bonfiglioli Power Transmission Pty Ltd (*) 435 2,629 3, ,748 2,267 Bonfiglioli Skandinavien AB Bonfiglioli Power Transmission JSC (2) (381) 134 (247) Bonfiglioli Do Brasil Ltda Bonfiglioli Vietnam Ltd - 1,337 1,337-1,337 1,337 TOTAL 788 4,354 5, ,760 3,962 (*) also includes the results recorded by Bonfiglioli South Africa Pty Ltd.

43 Notes to the consolidated financial statements Reserves for risks and charges Other reserves for risks and charges This caption can be broken down as follows: Statutory retirement pay fund and similar obligations 1,974 1, Description Opening balance Provisions Applications Other changes Balance closing Deferred Tax Provision 10,615 10,629 (14) Other provisions 12,312 12,399 (87) TOTAL 24,901 24, Product warranties 5,408 2,397 (519) 39 7,325 Legal risks Other 6,491 1,507 (3,583) 72 4,487 Total 12,399 3,904 (4,102) ,312 Statutory retirement pay fund and similar obligations This item shows the sales agents indemnity reserve, which saw the following changes: Opening value 1,723 1,801 Provisions Applications (15) (159) Other changes - 1 Closing value 1,974 1,723 Deferred taxes With reference to the deferred tax provision, changes in the year are broken down as follows: Deferred Tax Provision Opening value 10,629 10,170 Provision for deferred taxation 1, Applications/releases (739) (386) Other changes (629) 13 Closing value 10,615 10,629 Other changes is attributed to the mentioned change in value of the immovable assets pursuant to IAS 17. The item Other mainly includes the Business reorganisation fund set up by the Parent company and French subsidiary and totalling 3.2 M and the remainder of a customs duties fund created by the American subsidiary in 2008 for a total of 0.3 M. The decreases of the year refer to utilisation of the restructuring fund by the Parent Company. Employees severance indemnity reserve Changes in the severance indemnity fund in 2010 were as follows: Opening balance 16,738 16,902 Provisions 4,364 4,135 Applications (5,232) (4,371) Other changes Closing balance 16,632 16,738 In keeping with the provisions of Italian legislation relating to companies with an employed work force exceeding fifty, with effect from January 1st, 2007, sums allocated to the severance indemnity reserve are paid by the company into the individual pension funds held by the organisations indicated by each employee or by welfare bodies; the provisions caption therefore reflects increases in the severance indemnity reserve relating to members of the group for which a reserve of this kind is still held by the company. Other changes include revaluation of the pension funds of the German subsidiaries due to a change in legislation.

44 Notes to the consolidated financial statements The number of employees in the workforce during the year was as follows (spot and average data): Financial borrowings 31/12/ /12/ average 2009 average Executives and managers White collar and middle management 1,207 1,110 1,164 1,056 Direct and indirect blue collar 1,705 1,568 1,638 1,594 Temporary staff Total 3,113 2,827 2,980 2,787 Payables Bonds Overdrafts, financing < 12 months 38,404 66,090 (27,686) Financing with term > 12 months 134, ,438 (9,330) Total due to banks 172, ,528 (37,016) Amounts due to shareholders Amounts due to other financial inst. 17,826 20,451 (2,625) Bonds 5,665 5, (minus) Cash at banks and on hand (19,674) (65,112) 45,438 Net Cash Position 176, ,893 5,864 Bonds 5,665 5, This item shows the following payables: a debenture loan issued by the Parent Company on 8th September 2005 maturing on 31st December 2020, which is liable to interest at an annual rate of 1.6%. The foregoing loan, issued for a total of K 3,750, is recorded in the financial statements as at the end of 2010 for K 2,750. The entire amount of the remaining debt recorded is collectable in full after five years; a bond issued by the subsidiary Bonfiglioli USA Inc. for a total of KUSD 5,000 to support the investment made for the construction of the new factory premises completed during the year. At the end of 2010 the residual value recorded for the loan is KUSD 3,895. The amount due next year totals KUSD 310 (K 232), the debt falling due beyond next year but within a period of 5 years is KUSD 975 (K 730) while the portion due beyond five years totals KUSD 2,610 (K 1,953). It is pointed out that the loan issued by Bonfiglioli USA Inc. is secured by a mortgage on the company s assets. The caption Due to other financial institutions includes both the medium/long-term loans received from institutions other than banks (Ministry of Industry pursuant to Law 46 SIMEST Law 394) and also the residual portions of capital of leasing contracts recorded in accordance with IAS no. 17. The figure is recorded at face value with regard to the principal, whilst the interest due at the end of the year is recorded on an accrual basis. Changes occurring during the year with reference to bank loans with a term of over 12 months and amounts due to other financial institutions are detailed in the following table: Amounts due to shareholders for financing Amounts due to shareholders This item concerns a short-term financing granted to the Brazilian branch by the minority shareholder. This debt, which is interest-bearing at Brazilian market rates, is repayable upon revocation. The change during the year is totally due to exchange rate delta.

45 Notes to the consolidated financial statements Guarantees Beyond 5 years Beyond 12 months Within 12 months Balance as at 31/12/2010 Exchange rate delta Amounts repaid Amounts loaned Balance as at 31/12/2009 Company Financing with term > 12 months Bonfiglioli Riduttori SpA 113,497 2,689 (7,756) - 108, ,166 25,520 Tecnoingranaggi Riduttori Srl (*) Bonfiglioli Trans. (Aust.) Pty Ltd 5,019 - (2,869) 471 2, , (*) Bonfiglioli Deutschland GmbH 5,225 - (290) - 4, ,402 3,228 (*)(**) Bonfiglioli Transmission France Sa (24) (*) Bonfiglioli Transmission VT LTD 5,291 2,474 (2,769) 308 5,304 2,088 3,216 - (*)(***) Bonfiglioli Slovakia Sro 7,128 - (872) - 6, ,488 1,896 (*) Bonfiglioli Power Transmission JSC 3, (1,006) 119 3, , (*)(****) Bonfiglioli Vietnam Ltd 2,116 1,653 (2,116) - 1, ,089 - (*) Bonfiglioli Power Transmissions Pty Ltd (10) Total Financing with term > 12 months 143,438 7,483 (17,712) ,108 4,316 96, Amounts due to other financial institutions Bonfiglioli Riduttori Spa 17, (4,158) - 13,772 3,959 8,011 1,802 Bonfiglioli Italia Spa (369) Bonfiglioli Transmission PVT Ltd 2, , , Bonfiglioli USA Inc (28) Bonfiglioli Slovakia sro Tecnoingranaggi Riduttori Srl Bonfiglioli Deutschland GmbH (118) Total due to other financial institutions 20,451 1,799 (4,673) ,826 4,471 10,848 2,507 (*) Parent Company Sureties (**) 5.8 M loan secured by pledge on owned factory premises (***) 14.2 M credit lines (short- and M/L-term) secured by pledge on assets of the company (****) 1 M loan secured by pledge on owned factory premises Trade payables Advances 2,671 1,249 1,422 Trade payables due to suppliers 153,614 77,603 76,011 Amounts due to associated companies Total 156,351 78,894 77,457 Breakdown of trade payables by geographical area: Italy 109,209 55,636 Europe 22,217 11,805 Overseas 24,925 11,453 Total 156,351 78,894 The increase in trade payables is attributed to the increased volumes tied to the growth in Group sales during Other payables 31/12/ /12/2009 Variazioni Tax payables 7,173 3,140 4,033 Amounts due to social security 6,454 4,375 2,079 Other payables 18,075 12,629 5,446 Total 31,702 20,144 11,558

46 Notes to the consolidated financial statements Tax payables include the following items: Accrued expenses and deferred income Tax Payables Short-term payables Direct taxes payable 4,884 - Employees taxes 1,940 2,264 Substitution tax Other Total short-term tax payables 7,044 3,004 Mid-long-term payables Substitution tax Total mid-long-term tax payables Total 7,173 3,140 TOTAL (530) This item can be broken down as follows: Interest payable on loans Insurance policies Exchange rate fluctuations Other TOTAL Other payables can be broken down as follows: Other payables Short-term payables Amounts due on acquisition of shareholdings 1,960 1,915 Amounts due to employees 13,500 7,897 Right to use land - Vietnam Currency exchange losses Other 1,181 1,003 Total other short-term payables 17,581 11,190 Mid-long-term payables Amounts due on acquisition of shareholdings Right to use land - Vietnam Other Total other mid-long-term payables 494 1,439 Total 18,075 12,629 Memorandum accounts The following memorandum accounts are included at the foot of the balance sheet: TOTAL 25,333 6,838 18,495 Guarantees granted by third parties refer to sureties issued on behalf of the Group by banks in favour of banks for tax rebate applications, medium-/long-term guarantees in favour of banks for the concession of loans, and in favour of third parties in relation to contractual undertakings or debts. To this 1.4 M is added, representing commitments for the acquisition of shareholdings (Vietnam) taken up by the Parent company. The considerable increase of the year is attributed to the issue of guarantees on the VAT refund of the Parent Company and of the subsidiary Bonfiglioli Italia S.p.A.. Income statement Net revenues from sales and services TOTAL 600, , ,306

47 Notes to the consolidated financial statements Sales were made in the following geographical areas: This caption includes outsourced processes in the amount of K 47,142 (K 31,901 Values in M Italy % % 18.5 in 2009), costs for commission, transport, advertising and other commercial services, remuneration of the Board of Directors and auditing bodies, insurance policies, consultancy, bank charges, electrical power, external labour, logistics and security services, travel expenses and other minor items. Europe Overseas TOTAL Costs for leased assets For more details on the trend of the Group, we refer you to the Management report. Other revenues and income TOTAL 5,728 5, TOTAL 5,690 4,487 1,203 This item mainly concerns the lease of IT systems, motor vehicles, rentals for the lease of plants and external depots and royalties paid to third parties. Personnel costs This item can be broken down as follows: Operating grants Refund for packaging and transport costs 2,362 1,374 Refunds for defective processing/material Minor sales 1,361 1,816 Capital gains and contingent assets Other Total 5,728 5,053 Costs for raw materials, supplies, consumables and goods TOTAL 355, , ,845 Costs for services Salaries and wages 82,173 65,298 16,875 Social security contributions 22,306 18,555 3,751 Employees severance indemnity 4,364 4, Other costs - 30 (30) Total 108,843 88,018 20,825 Amortisation/depreciation and write-downs Amortisation of intangible fixed assets 2,160 2,512 (352) Amortisation of tangible fixed assets 24,558 22,856 1,702 Bad debts provision 2,891 2, Total 29,609 28,033 1,576 TOTAL 113,929 80,508 33,421

48 Notes to the consolidated financial statements Other provisions This caption can be broken down as follows: TOTAL 2,647 1,085 1,562 Mainly reflects allocations made in the year to product warranty provisions. Other operating costs TOTAL 4,263 3, This caption is a residual item and it includes expenses and charges that cannot be classified under the previous headings. It relates to local duties, general production, commercial, and minor administrative expenses, capital losses of an ordinary nature, and other minor items. Interest receivable and financial income Interest on amounts due to banks 1,416 1,651 Interest payable on loans 7,338 6,841 Interest payable on leasing/business contracts Interest payable on bonds Premiums and expenses on derivatives (IRS and forward contracts) 2, Cash discounts distributed Other TOTAL 12,905 10,170 Exchange rate gains/losses TOTAL 503 (1,194) 1,697 This amount can be broken down as follows: TOTAL 1, This caption can be broken down as follows: Currency exchange gains 12,598 9,186 Currency exchange losses (12,095) (10,380) TOTAL 503 (1,194) Interest receivable from associated companies 6 14 Bank interest receivable Leasing rentals indexation Financial income from hedging transactions Cash discounts received Commercial and other interest receivable TOTAL 1, Interest payable and financial expenses Adjustments of financial assets TOTAL 132 (457) 589 This caption includes, in particular, the following items: Share of the result of the associated company Tecnotrans 132 (429) Write-down of investment in OMEGA - (28) TOTAL 132 (457) TOTAL 12,905 10,170 2,735

49 Notes to the consolidated financial statements Extraordinary income and expenses TOTAL (5,361) (7,276) 1,915 This caption includes, in particular, the following items: Insurance refunds Tax refunds from past years Contingent assets Contingent liabilities (682) (574) Taxes from past years (225) (134) Extraordinary restructuring expenses (3,444) (3,000) Provision to funds (1,543) (4,554) TOTAL (5,361) (7,276) The increase in the remuneration to Directors recorded in the year came after the decision of the Board of Directors of the Parent company to totally give up their pay in the previous year. Operations with related parties The Group has business relations with B.R.T. S.p.A., owned by shareholders and Directors of Bonfiglioli Riduttori S.p.A.. The company B.R.T. S.p.A. supplies spare parts on behalf of Bonfiglioli Riduttori S.p.A. in Italy and, partly, abroad. The business relations relate to the sale of Bonfiglioli components and products under normal market conditions and, taken as a whole, do not account for a significant figure, considering the size of the Group. It is also pointed out that B.R.T. S.p.A. rents out 2 factory premises adjacent to the main factory premises to Bonfiglioli Riduttori S.p.A., all under normal market conditions. Derivative financial instruments Derivatives In the drive to hedge financial risks the Group has entered into the following derivative contracts: Current, deferred and prepaid taxes Underlying Interest rates and debt instruments Exchange rates Current taxes (10,992) (3,321) (7,671) Deferred taxes (615) (446) (169) Prepaid taxes 5,185 10,425 (5,240) Total (6,422) 6,658 (13,080) Further information Before closing this report, in order to complete the information required by article 38 of Italian Legislative Decree 127/1991 and other provisions of the Italian Civil Code, the following further information is set out below: Remuneration paid to directors and statutory auditors During the year the following amounts were paid out as remuneration to Group Directors and auditing bodies: Type of transaction Notional value Fair value Notional value Fair value Pos. Neg Pos. Neg Unlisted financial derivatives - Forward contracts Sale of USD MUSD 11.7 n/a n/a Sale of GBP MGBP 2.0 n/a n/a Sale of AUD MAUD 16.9 n/a n/a Purchase of Yen MYEN n/a n/a Purchase of USD MUSD 1.3 n/a n/a IRS M 42.5 K 126 COLLAR M 35 K 620 The exchange rate hedging operations relate exclusively to ordinary non-speculative hedging management operations involving credits and debts expressed in foreign currency Directors Auditors TOTAL 1, Calderara di Reno (Bo), 31 st March 2011 for THE BOARD OF DIRECTORS CHAIRMAN Sonia Bonfiglioli

50 96 Consolidated cash-flow statement Notes to the consolidated financial statements 97 (in K ) A) OPENING NET CASH POSITION (170,893) (177,912) B) Operating activities Group profit (loss) 4,247 (31,970) Minority interest income Depreciation, amortisation and writedowns 29,609 28,061 Provision to severance indemnity fund and other funds 7,011 5,220 Associated companies result (132) 429 First level Cash Flow 41,523 1,942 Decrease (Increase) in trade receivables (60,594) 44,353 Decrease (Increase) in inventory (49,440) 58,771 Decrease (Increase) in other assets (9,051) (6,532) Decrease (Increase) in trade payables 76,035 (63,586) Decrease (Increase) in other liabilities 13,450 (7,491) Application of severance indemnity fund and other funds (6,174) (1,148) B. Cash flow originating from (used for) operating activities 5,749 26,309 C) INVESTING ACTIVITIES Net investments in tangible and intangible fixed assets (12,954) (18,830) (Increase) of investments and change in value of fixed assets C. Cash flow originating from (used for) investing activities (12,080) (18,830) D) FINANCING ACTIVITIES Variation in minority shareholders equity (608) (1,405) Change in Currency conversion reserve 5,668 1,731 (Profits) Losses on exchange rates on tangible and intangible fixed assets (4,189) (786) Other (404) - D. Cash flow originating from (used for) financing activities 467 (460) E) CASH FLOW FOR THE YEAR (B+C+D) (5,864) 7,019 F) CLOSING NET CASH POSITION (A+E) (176,757) (170,893)

51 99 Independent Auditors Report The report on the auditing activities carried out by Independent Auditors PriceWaterhouseCoopers SpA is presented in the following pages. (This section has been translated into the English language solely for the convenience of international readers)