Management's Discussion and Analysis of Financial Condition and Results of Operations

 2010

Ayala Corporation generated consolidated revenues of P98.1 billion in 2010, 28% higher than the prior year’s P76.3 billion. This was mainly driven by significantly higher sales and service revenues, which rose by 30% to P82.1 billion from P63.2 billion as a result of the strong performance of its real estate and automotive units, as well as the impact of the full consolidation of its water distribution business after Ayala increased its ownership stake in the water company. Consolidated net income reached P11.2 billion, up 37% year-on-year.

Ayala’s real estate unit, Ayala Land Inc. (ALI) achieved record high performance in 2010 as revenues reached an all-time high of P37.8 billion, a 24% growth from prior year’s level. Net income also reached a record P5.5 billion, 35% higher than net income in 2009. Ayala Land’s growth was driven by all its business lines with residential development revenues comprising the bulk and growing by 19%. The robust demand in the domestic property sector resulted in strong take-up of its residential projects. Take-up values of ALI’s residential units across all brands grew significantly with incremental contribution from its fourth residential brand, Amaia. Its leasing revenues also rose by 13%. Revenues from shopping centers grew by 3% while the office segment rose by 21%. Occupied gross leasable area expanded for commercial center and offices by 5% and 35%, respectively, while rental rates increased slightly. In the meantime, revenues from its new foray in hotels and resorts also rose by 33% reflecting the consolidation of the acquisition of 60% of El Nido Resort in Palawan.

Ayala’s automotive business also contributed to consolidated sales and service revenues. Ayala Automotive posted a 6% growth in revenues to P11.5 billion mainly from better service and parts sales, improved performance of collateral business, and higher equity share from Honda Cars Philippines Inc. Ayala Auto registered a 29% growth in net income to P295 million in 2010 from P229 million in 2009.

Manila Water Co. Inc. (MWC) revenues grew 16% year-onyear to P11.0 billion. This was due to the steady growth in water volume sales as billed volume grew by 3.5% despite the El Nino condition, coupled with the impact of a downward adjustment in depreciation expense. Continued improvements in operating efficiency further improved nonrevenue water to 11% in 2010 from 15.8% the prior year. Manila Water registered a net income of almost P3.9 billion in 2010, 23% higher than prior year.

While the electronics manufacturing unit, Integrated Micro- Electronics Inc. was impacted by the lingering effects of the global downturn, it contributed to the group’s revenue growth with a 4% increase in dollar revenues during the year driven by the sustained strong performance of its China operations. Net income, however declined by 53% versus the prior year but excluding one-off expenses earnings were up by 27%.

The robust revenue performance were partly tempered by the effect of the deconsolidation of Integreon, a subsidiary of LiveIt, Ayala’s holding company for its investments in business process outsourcing (BPO).

Ayala’s equity in net earnings of associates and jointly controlled entities declined by 17% to P6.1 billion from P7.4 billion the prior year. The decline mainly reflects the company’s shift in the accounting for its investment in Manila Water from equity method to full consolidation method, following its increased stake in the water company and impairment provisions on one of its BPO investments. In addition, the company also booked an impairment provision on AG Holdings for certain real estate investments in North America.

Intense competition in the telecommunications sector weighed on earnings of its telecom unit, Globe Telecom. While Globe’s net income of P9.7 billion was 22% lower than prior year, performance in the fourth quarter of 2010 was strong as quarter-on-quarter service revenues were up by 7%. This was led by the surge in postpaid plan subscriptions and the increased usage and top-ups in both the Globe Prepaid and TM brands. As a result, Globe expanded total SIM base by 14% to 26.5 million by yearend. On the other hand, the momentum of its broadband Further improvements in broadband’s profitability will also improve consolidated EBITDA margins, which ended the year at 53%.

The decline in equity earnings at the telecom unit were cushioned by the robust growth of Ayala’s banking and financial services unit. The Bank of the Philippine Island (BPI) had another strong year with net income reaching a record P11.3 billion, up 33% for the second consecutive year. Solid business growth and trading gains both fuelled the rise in its earnings. Revenues rose by 13% with net interest income up 10% to P24 billion driven by a 12% increase in its average asset base. Non-interest income was up 18% due to higher gains from securities trading as well as fee-based income. Loan growth was strong across all segments, sustaining double-digit expansion. The bank’s total resources reached P878 billion, up 21% while deposits grew by 24% to P720 billion as the bank introduced new deposit products to address the needs of its various customers.

Other Income rose by 140% to P7.4 billion in 2010 from P3.1 billion in 2009. This was mainly due to the revaluation gain on Ayala’s investments in Manila Water after it increased its stake in the company. In addition, LiveIt also recognized a revaluation gain after the buy-in of a private equity investor in Integreon. These revaluations are in accordance with Philippine Financial Reporting Standards (PFRS).

Consolidated costs and expenses increased by 24% to P79.2 billion, mainly because of a 22% increase in consolidated cost of sales and services. This mainly reflects the impact of the consolidation of Manila Water and expansion of new projects in the real estate group. General and administrative expenses increased by 31% while interest and other financing charges increased by 24%, also largely reflective of the impact of the full consolidation of the water unit.

Other charges were up 44% to P2.1 billion primarily due to the impairment provisions taken by AG Holdings for certain investments in North America.

Over-all, Ayala maintains a very strong financial condition. Consolidated cash reached P57.1 billion by year-end 2010 with consolidated net debt-to-equity of 0.24 to 1. Return on equity was at 10.6%. On a group-wide basis, capital expenditures are expected to reach P79 billion in 2011, 21% higher than capex in 2010, reflecting the group’s optimism on the country’s growth prospects.