Management's Discussion and Analysis of Financial Condition and Results Operations
Ayala Corporation’s consolidated net income attributable to equity holders ending December 31, 2012 amounted to P10.6 billion, 12.% higher than net income in 2011. Core net income reached P11.6 billion, 32% higher than prior year. This excludes the impact of the accelerated depreciation of Globe Telecom as a result of its network modernization program and the revaluation gains realized at AG Holdings and Integrated Micro-Electronics Inc. (IMI) last year.
CONSOLIDATED SALES OF GOODS AND SERVICES
Ayala’s Consolidated Sales of Goods and Services for the year reached P104.1 billion, 20% higher than previous year. This was mainly driven by the strong revenue performance of its real estate, water and electronics businesses.
Ayala Land’s total revenues grew by 23% to P54.5 billion with its property development business up by 31% versus last year on strong bookings of its residential products, continued completion of projects, and higher commercial lot sales particularly from its NUVALI development. Its commercial leasing business grew by 18% to P8.8 billion with contribution from new malls, higher occupied mall and office gross leasable areas, and higher lease rates. Revenues from its construction and property management business surged by 38% to P20.5 billion on the back of increasing order book from Ayala Land and new management contracts. In the meantime, its hotels and resorts business also rose by 9% to P2.4 billion. Ayala Land’s consolidated net income in 2012 reached P9 billion, 27% higher compared to prior year driven by the strong revenue growth across all business lines and further improvement in margins.
Ayala Land spent P71 billion in capital expenditures for its pipeline of projects and land acquisitions in 2012 which included the 74-hectare Food Terminal Inc. property in Taguig. This coming year, Ayala Land has earmarked P66 billion in capital expenditures to fund its land acquisition and project completions.
Water and Wastewater Services
Manila Water Company Inc. posted a net income of P5.4 billion, 28% higher than the previous year. Revenues increased by 21% on a combination of growth in billed volume from the East Zone and new expansion areas outside of the East Zone as well as tariff increase.
Manila Water’s growth during the year was partly driven by the contribution of new businesses, which accounted for 5% of revenues and nearly 7% of net income. The company expects to see continued growth in billed volume within the East Zone, coupled with higher contributions from its new businesses in the coming year. Manila Water has been building its pipeline of new businesses outside the East Zone with the acquisition of a 49% stake in Vietnam’s Thu Duc Water BOO Corporation in 2011 and a 47.35% stake in Kenh Dong Water Supply Joint Stock Company in 2012. The company is looking to finalize its acquisition from Suez Environnement of a 51% equity stake in Indonesia’s PT PAM Lyonnaise Jaya, which operates the water supply concession contract in West Jakarta.
Integrated Micro-Electronics Inc. (IMI) posted consolidated sales revenues of US$661.9 million in 2012, 15% higher than 2011 levels as a result of the full-year consolidation of its European business coupled with order expansion of key customers. IMI recorded a substantial improvement in net income to US$5.4 million from US$3.3 million in 2011.
EQUITY IN NET EARNINGS
Equity in net earnings reached P8.5 billion in 2012, 10% higher than last year. The rise was mainly due to higher equity income from its banking unit as parent company Ayala Corporation (AC) increased its ownership stake by 10% in the bank from 33% to 44%. This was partly offset by the lower equity earnings from its telecom unit, Globe Telecom (Globe). Equity earnings from Globe registered a 29% decline versus last year due to the impact of the accelerated depreciation arising from its network modernization program.
Bank of the Philippine Islands (BPI) registered a net income of P16.3 billion in 2012, 27% higher than prior year. The improvement was a result of a 13% rise in revenues owing to higher net interest income and a 25% surge in non-interest income as a result of securities trading gains. The bank’s strong loan growth was sustained at nearly 16%. While net interest income expanded as a result of a higher average asset base, net interest margin contracted slightly by 10 basis points following the BSP’s cut in policy rates last year coupled with competitive lending across banks. Despite this, BPI’s asset quality continued to improve with its net 30-day NPL ratio down to 1.46% from the 1.87% recorded in 2011. BPI’s operating expenses grew by 6% with cost-to-income ratio improving significantly to 52.48% from 56.19% the previous year. These strong financial results translated to a return on equity of 17.5% in 2012.
Globe Telecom’s core net income rose by 2% in 2012 to P10.3 billion. Its service revenues stood at a record high of P82.7 billion, a 6% hike from last year. This improvement was a result of an overall increase in subscriber base and improvements across key product segments. Mobile revenues expanded 6% to P67.4 billion, also a new record high, primarily driven by the postpaid business, which grew by 23% to P23.1 billion. Prepaid revenues, on the other hand, dipped marginally by 2% to P44.3 billion.
Broadband revenues likewise posted a new record high of P8.7 billion, a 16% jump from last year as subscriber base expanded by 18%. The strong performance of both Tattoo On-the-Go and Tattoo @Home broadband segments cushioned the decline in fixed line voice revenues. Operating expenses and subsidy increased by 19% to P38.9 billion, keeping earnings before interest taxes depreciation and amortization (EBITDA) flat at P35 billion. The impact of the accelerated depreciation from its ongoing network modernization resulted in a 30% decline in Globe’s reported net earnings to P6.9 billion.
INTEREST AND OTHER INCOME
Consolidated interest income increased by 29% to P4.2 billion mainly due to higher interest income from cash and cash equivalents of Ayala Land and international businesses. This was partly offset by the decline in interest income arising from lower investible funds at the parent company as well as at Manila Water.
Other Income declined by 15% to P8.2 billion as the company recognized a gain realized from Ayala’s exchange of ownership in ARCH Capital Management with the Rohatyn Group as well as the bargain purchase gain realized from IMI’s acquisition of the EPIQ group in 2011.
COSTS AND EXPENSES
Consolidated cost of sale of goods and services increased by 19% to nearly P74.7 billion with growth largely in line with the increase in sales of the real estate, electronics, and automotive businesses. In the meantime, consolidated General and Administrative Expenses (GAE) rose by 14% to P12.4 billion mainly from higher manpower costs across the group. The increase in GAE was also due to higher maintenance and power costs related to the expansion of facilities, particularly of Manila Water.
INTEREST AND OTHER CHARGES
Consolidated interest and other financing charges increased by 28% to P7.8 billion mainly due to higher short-term and long-term debt of Ayala Land for its land banking initiatives and other projects. Other charges, however declined by 13% to P6.9 billion as the prior year reflected impairment and other losses recognized by IMI and Manila Water.
BALANCE SHEET HIGHLIGHTS
Consolidated cash and short-term investments combined grew by 40% to P77.1 billion as of the end of 2012 from P55.2 billion at the beginning of the year. The increase was due to proceeds from new loans and the bond offerings by the parent company and Ayala Land. The placement of AC parent company’s and Ayala Land’s treasury shares likewise contributed to the higher consolidated cash balance.
Short-term investments declined by 82% to P297 million following the maturities of investments that were in turn used to retire loans at the parent company or were deployed for the operations of the water business and for property acquisitions at Ayala Land.
Accounts receivable expanded by 34% to nearly P42 billion mainly as a result of higher real estate sales and improved sales of the water as well as the automotive groups. Overall, total current assets increased by 36% to P168.4 billion.
Total non-current assets rose by 37% to P320 billion from P234 billion the prior year. This was mainly accounted for by the significant increases in Land and Improvements, long-term Investments, and Property, Plant, and Equipment. Land and Improvements more than doubled to P47.5 billion as a result of the increased land banking activities and increased number of new projects of Ayala Land. Similarly, Investments in Real Properties also grew by 19% to P39.4 billion mainly from new acquisitions and developments of the real estate group.
Investments in associates, joint ventures and others also rose by 36% to P108.6 billion as the parent company made additional investments in line with its initiatives in the power sector and as it increased its stake in BPI from 33% to 44%. Higher equity earnings from associates also contributed to the increase.
Finally, Property and Equipment increased by 79% to P24.8 billion as a result of the higher capital expenditures of the real estate group particularly for improvements in its facilities and hotel operations.
On the liabilities side, total current liabilities expanded by 68% to P116.3 billion. This was due largely to the increase in Ayala Land’s customer deposits, project cost accruals, and payables from its various real estate projects. The increase also included the P12.8 billion balance payable for the 10% stake in BPI which AC acquired from the Development Bank of Singapore last October 2012.
Consolidated debt grew by 59% to P170 billion as of the end of the year from P106.7 billion at the start of the year due to the increase in loans at the parent level and at Ayala Land. Ayala parent company issued last May 2012 a P10-billion fifteen-year corporate bond. Subsequently, it issued a P10-billion seven-year corporate bond in November 2012 to fund new investments mainly in the power and transport infrastructure sectors. Ayala Land likewise issued a P15-billion ten-year corporate bond last April 2012 as well as in October 2012 as it continued to gear up for its land acquisition and development plans.
Total stockholders’ equity reached P203 billion. Consolidated current ratio and debt to equity ratio remained healthy at 1.45x and 1.35x, respectively as of the end of 2012. Consolidated net debt-to-equity ratio was at 0.74 to 1 while net debt-to-equity at the parent level was at 0.27 to 1.