Elcoteq SE's Financial Statements Bulletin, January 1 - December 31,
2007
Elcoteq SE
Stock Exchange Release
February 6, 2008 at 9.00 am (EET)
ELCOTEQ SE'S FINANCIAL STATEMENTS BULLETIN, JANUARY 1 - DECEMBER 31,
2007
Elcoteq SE's net sales in 2007 declined about 6% on the previous year
and amounted to 4,042.9 million euros (4,284.3 million euros in
2006). Operating income was -96.3 million euros (43.9); excluding
restructuring
expenses, it was -46.1 million euros. Full-year cash flow after
investing activities was -11.1 million euros
(-20.8).
Financial Year 2007
- Net sales declined by about 6% to 4,042.9 million euros (4,284.3)
- Operating income was -96.3 million euros (43.9). Operating income
includes restructuring expenses amounting to 50.2 million euros,
excluding which operating income was -46.1 million euros
- Income before taxes was -122.8 million euros (19.2)
- Earnings per share (EPS) were to -3.37 euros (0.38)
- Rolling 12-month return on capital employed was -19.6% (9.1%)
- Cash flow after investing activities was -11.1 million euros
(-20.8)
- Interest-bearing net debt amounted to 144.5 million euros (128.0)
- The Board of Directors proposes that no dividend will be paid for
2007
Fourth Quarter of 2007
- Net sales were 1,062.4 million euros (1,104.6 in the fourth quarter
of 2006 and 1,059.7 in the third quarter of 2007)
- Operating income was -24.9 million euros (6.9). Operating income
includes restructuring costs amounting to 15.3 million euros,
excluding which operating income was -9.6 million euros
- Income before taxes was -31.2 million euros (-0.8)
- Earnings per share were -1.06 euros (-0.01)
- Cash flow after investing activities was 21.9 million euros (41.2)
Elcoteq SE's consolidated financial statements for 2007 have been
prepared using IFRS recognition and measurement principles. The
comparative figures presented in the bulletin are the figures for the
corre-sponding period of the previous year, unless stated otherwise.
Market Review
Assembly value in the global electronics market amounted to roughly
1,000 billion US dollars in 2007. Communications technology
represented some 230 billion US dollars of this total. Market
research institutes report that the electronics manufacturing
services (EMS) and original design manufacturing (ODM) market grew
approximately 15% in 2007. Global sales of mobile phones amounted to
about 1,140 million units, up around 15% on previous year. In home
communications, sales growth was particularly strong in flat screen
TVs. The value of the market for communications network equipment
rose by about 8% compared with the previous year.
In 2007, the consolidation trend made itself felt among EMS players
as well. In terms of market share, El-coteq was the world's third
largest EMS provider to communications technology companies and the
leading European player in the business. The company held a market
share of around 7%.
Financial Year 2007
Elcoteq's 2007 net sales declined slightly on the previous year and
amounted to 4,042.9 million euros (4,284.3). Operating income was
-96.3 million euros (43.9), representing -2.4% of net sales. Income
before taxes was -122.8 million euros (19.2) and net profit was
-108.4 million euros (12.1) after the recognition of deferred tax
assets. Earnings per share (EPS) amounted to -3.37 euros (0.38).
Earnings include 50.2 million euros in restructuring expenses.
The decline in the Group's net sales was due to an unanticipated
change in the ordering procedures of the biggest customer, as a
result of which incoming orders fell significantly short of the
customer's forecasts during the review year. Sales to other customers
grew by almost 30% on the previous year.
Operating income for 2007 was a loss. The company's profitability was
burdened especially by the afore-mentioned significantly
lower-than-expected volumes, pricing based on expected volume growth
as well as surplus capacity that had been reserved on the basis of
customer's forecasts. Furthermore, production vol-umes at Elcoteq's
German plant fell in the second half of 2007 due to mergers and
acquisitions that took place in the communications networks market in
2006, driving the plant's operations into unprofitability. Capacity
utilization at the St. Petersburg plant was low. In addition,
earnings were weakened by production problems, particularly in
Mexico.
The company launched two action plans during the review year with a
view to ensuring cost-effectiveness and improving profitability and
competitiveness globally.
The Group's net financial expenses amounted to 26.1 million euros
(23.7). The rise in the interest level was the major reason behind
the growth in financial expenses.
Fourth-quarter Net Sales and Earnings
Fourth-quarter net sales in 2007 grew only slightly on the third
quarter and amounted to 1,062.4 million eu-ros (1,104.6 in the fourth
quarter of 2006 and 1,059.7 in the third quarter of 2007). The
primary reason under-lying the modest quarter-on-quarter development
of net sales was that demand in Communications Net-works
underperformed expectations.
Operating income in the fourth quarter was -24.9 million euros (6.9
in the fourth quarter of 2006 and -0.1 in the third quarter of 2007)
and income before taxes was -31.2 million euros (-0.8). Operating
income exclusive of restructuring expenses was also negative in the
fourth quarter at -9.6 million euros. This was primarily due to the
significant weakening of the profitability of Communications Networks
on the heels of a strong decline in production volumes compared with
the previous quarter, particularly in Europe, and the produc-tion
problems in Mexico.
Financing and Cash Flow
Liquidity was good throughout the review period. At the end of
December 2007, Elcoteq had unused but immediately available credit
limits totaling 296.5 million euros (296.1 million euros in the third
quarter of 2007 and 293.8 million euros at the end of 2006). Of this
total, the 230 million euro syndicated loan is a committed credit
limit from a bank syndicate. Commercial papers issued by the company
from its 200 mil-lion euro commercial paper program had a total par
value of 24.0 million euros on December 31, 2007.
At the end of December, the Group's interest-bearing net debt
amounted to 144.5 million euros (128.0) and gearing was 0.7 (0.4).
The solvency ratio was 18.1% (26.1%). Cash flow from sold accounts
receivable amounted to 226.5 million euros (187.7 at the end of 2006
and 207.4 at the end of the third quarter of 2007). Return on capital
employed (ROCE) was -19.6% (9.1%).
Cash flow after investing activities in 2007 was -11.1 million euros
(-20.8), while it was 21.9 million euros positive in the fourth
quarter (41.2). In spite of good working capital management and lower
than usual in-vestments, cash flow in 2007 remained negative due to
the unsatisfactory earnings trend.
Capital Expenditures
The Group's gross capital expenditures on fixed assets in 2007
amounted to 67.2 million euros (116.9), or 1.7% of net sales.
Depreciation was 79.8 million euros (82.7), representing 2.0% of net
sales. Investments were primarily earmarked for production machinery.
In the fourth quarter, investments amounted to 27.8 million euros
(32.3). In addition, operating leases of machinery totaled about 3.4
million euros (26.8) in 2007.
Personnel
At the end of December, the Group employed 24,222 (23,298) people:
260 (705) in Finland and 23,962 (22,593) elsewhere. The geographical
distribution of the workforce was as follows: Europe 10,936 (11,682),
Asia-Pacific 7,598 (7,409) and the Americas 5,688 (4,207). The
average number of Elcoteq employees on the
company's direct payroll in 2007 was 19,131 (16,651). The expansion
of the service offering to more labor-intensive box build and
after-market services in Hungary and Mexico contributed to the rise
in the person-nel count. Box build means that products are delivered
directly into the customer's distribution channel in consumer
packages.
Wages, salaries and other personnel expenses in 2007 amounted to
206.2 million euros (205.9).
Environment
Elcoteq's environmental management system corresponds with the
requirements of the ISO 14001:2004 standard. All Elcoteq units
operate within a multisite certificate for quality and environmental
management. The company intends to link its plant in Romania to the
certificate in 2008. The key environmental devel-opment projects
having a bearing on the company's business operations in 2007
concerned meeting the re-quirements of the European Union's REACH
Regulation and developing the environmental competence of experts in
the supply chain. Further details on Elcoteq's environmental issues
will be presented in the elec-tronic corporate responsibility report
that will be published in the summer of 2008.
Research and Development
Elcoteq's research and development costs in 2007 totaled
approximately 4.6 million euros (6.8), or 0.1% of net sales. In
addition, the company had some 8 million euros of other development
costs. The company's R&D activities and expenditures cover, among
other things, equipment and process development for pro-duction and
production testing needs, research and development related to the
platforms, software, elec-tronics, mechanics and testing and
verification environments for mobile phones, and the development of
radio modules and technologies for mobile phones.
Trends of the Business Areas
Elcoteq's reporting on 2007 covers two business areas: Terminal
Products and Communications Networks. In 2007, Terminal Products
contributed 79% (82%) and Communications Networks 21% (18%) of the
Group's net sales.
Elcoteq has continued to balance its customer portfolio in line with
its key strategic focus. In 2007, Elcoteq's largest customers (in
alphabetical order) were Ericsson, Nokia Mobile Phones, Nokia Siemens
Networks, Philips, Research in Motion (RIM), Sony Ericsson and
Thomson. No single customer accounted for over 40% of consolidated
net sales.
Terminal Products
Net sales of the Terminal Products business area in 2007 were down
about 8.5% on the previous year and amounted to 3,212.0 million euros
(3,512.1). The segment's operating income was -41.0 million euros
(68.4); excluding restructuring expenses, it was -5.1 million euros.
Fourth-quarter net sales came in at 849.9 million euros (898.6) and
the segment's operating income was 1.3 million euros (13.2).
Most of the customers of the Terminal Products business area posted
substantial net sales growth compared with the previous year. Elcoteq
continued to balance its customer base in 2007. Business with RIM and
Phil-ips in particular saw growth.
Box build deliveries saw growth in 2007 and sales of after-market
services also increased.
In October 2007, the company announced its plan to launch a new, more
customer-centric organization. The new organization was adopted on
January 1, 2008. As from the beginning of 2008, Terminal Products
will be reported on as two separate business areas: Personal
Communications (including mobile phones and their components) and
Home Communications (including set-top boxes and electronics for
flatscreen TVs).
Communications Networks
Net sales of Communications Networks in 2007 rose by about 7.6% on
the previous year and amounted to 831.0 million euros (772.3). The
segment's operating income was -17.3 million euros (22.4); excluding
re-structuring expenses, it was -3.3 million euros. Fourth-quarter
net sales in 2007 amounted to 212.5 million euros (206.0) and the
segment's operating income to -17.2 million euros (5.7).
The business operations of Communications Networks have seen strong
growth in Asia. Elcoteq has also expanded its service portfolio to
box build, logistics and supply chain management services, as
customers are expecting their manufacturing partners to provide
broader service packages.
During the review year, Elcoteq announced two new customer accounts
in the manufacture of WiMAX products. In March, Elcoteq and Redline
Communications Inc. signed a cooperation agreement focusing on the
Americas, and in October, an agreement was made with Telsima
Corporation for the box build manu-facture of products at the
Bangalore plant in India.
Following the organizational change that came into effect as from the
beginning of 2008, the Communica-tions Networks business area will
still be reported on separately.
Geographical Areas
Elcoteq has three geographical areas: Europe, Asia-Pacific and the
Americas. Elcoteq's net sales in 2007 were derived from these areas
as follows: Europe 52% (57%), Asia-Pacific 27% (25%) and the Americas
21% (18%).
Europe
Europe's net sales amounted to 2,076.3 million euros (2,425.4). Of
Elcoteq's plant floor space, 54% is located in Europe (about 114,700
square meters). The largest volume plants are located in Pecs,
Hungary, and in Tallinn, Estonia.
Personnel negotiations were held in the spring of 2007 in Finland.
These negotiations resulted in 326 redun-dancies on financial and
production grounds at the Lohja plant, the NPI organization in
Finland, the Group's office in Espoo, Finland and the product
development organization in Salo, Finland. As part of the global
streamlining of operations, production at the Lohja plant ceased at
the end of June. The Lohja manu-facturing facility was sold to Sponda
Kiinteistörahasto in October.
As part of the drive to streamline operations for higher
cost-effectiveness, the company agreed on the sale of its subsidiary
in Offenburg, Germany, in December 2007. The German competition
authorities approved the deal in January 2008. In addition, the
company has announced that it seeks to scale down or divest its St.
Petersburg unit in Russia.
Elcoteq reduced its holding in Imbera Electronics Oy to 15%. Imbera
Electronics Oy is a joint venture estab-lished by Elcoteq and the
Aspocomp Group in 2002 on a 50-50 basis.
Asia-Pacific
Asia-Pacific's net sales amounted to 1,110.9 million euros (1,094.1).
Of Elcoteq's plant floor space, 34% is lo-cated in Asia (about 70,800
square meters). The largest volume plants are located in Beijing,
Dongguan and Shenzhen in China as well as Bangalore, India.
The Chinese plants generated higher sales for Communications Networks
in 2007. Efficiency-boosting measures have been initiated at the
Chinese plants as part of the global action plan.
Americas
Net sales in the Americas amounted to 855.7 million euros (764.8). Of
Elcoteq's plant floor space, 12% is lo-cated in the Americas (about
25,800 square meters). The largest volume plant is located in
Monterrey, Mex-ico.
As part of the drive to boost capacity utilization, a decision was
made to close down production at the Juarez plant in Mexico and move
operations primarily to the company's plants in China and the
Monterrey plant in Mexico. Production at the Juarez plant ceased at
the end of the third quarter. Production problems continued at the
Monterrey plant during the review period due to the rapid expansion
of operations. Spe-cific measures have been implemented to rectify
the problems.
Decisions of the Annual General Meeting
The Annual General Meeting of Elcoteq SE, held on March 22, 2007,
elected seven members to the Board of Directors. The composition of
the Board remained unchanged. The following persons were re-elected:
President Martti Ahtisaari; Mr. Heikki Horstia, Vice President,
Treasurer, Wärtsilä Corporation; Dr. Eero Kasanen, Rector of the
Helsinki School of Economics; Mr. Antti Piippo, principal owner and
founder-shareholder of Elcoteq SE; Mr. Henry Sjöman,
founder-shareholder of Elcoteq SE; Mr. Juha Toivola, Master of Arts,
and Mr. Jorma Vanhanen, founder-shareholder of Elcoteq SE. The terms
of office of the Board mem-bers extend until the end of the following
Annual General Meeting. Ahtisaari, Horstia, Kasanen and Toivola are
independent Board members, and they represent more than half of the
Board's members.
Convening after the Annual General Meeting, the Board of Directors
elected Mr. Piippo as its chairman and Mr. Toivola as the deputy
chairman. Mr. Piippo was elected chairman of the Nomination Committee
and Working Committee and Mr. Sjöman, Mr. Toivola and Mr. Vanhanen as
the other members of these com-mittees. Mr. Toivola was elected
chairman of the Compensation Committee and Audit Committee and Mr.
Ahtisaari, Mr. Horstia and Mr. Kasanen as the other members of these
committees.
The Meeting appointed the firm of authorized public accountants KPMG
Oy Ab under the supervision of principal auditor Mr. Mauri Palvi
(APA) as Elcoteq SE's auditor and after January 1, 2008 the auditor
will be KPMG Audit S.à.r.l.
The Meeting approved the transfer of the company's domicile from the
city of Lohja in Finland to the Grand Duchy of Luxembourg.
The Annual General Meeting authorized the Board of Directors to
issue, in one or several installments, Se-ries A shares and/or to
issue specific rights entitling to shares pursuant to Chapter 10 §1
of the Finnish Companies Act, in the total amount of 15,527,573
Series A shares. Based on the authorization to issue shares, the
Board may issue either new shares or those in the company's
possession.
Furthermore, the Meeting authorized the Board of Directors to
purchase at most 1,576,994 of the company's own Series A shares in
public trading in order to develop the company's capital structure,
to use as consid-eration in corporate acquisitions or when the
company acquires assets related to its business, and as part of the
company's personnel incentive scheme, in the manner and scope
determined by the Board, and other-wise to dispose of or nullify
these shares. The purchase price of the shares to be purchased shall
be based on the share price in public trading such that the
subscription price corresponds to the fair value of the shares formed
in public trading at the time of purchase. The holders of the
company's Series K shares have given their approval to the effect
that the decision will not be used to purchase the Series K shares in
their posses-sion. The purchase of own shares will reduce the
company's distributable funds.
The authorizations were not exercised and they became void when the
company was redomiciled,
on January 1, 2008.
Shares and Shareholders
At the end of 2007, the company's share capital totaled 13,041,167.60
euros and there were altogether 32,602,919 shares comprising
22,025,919 Series A shares and 10,577,000 Series K shares. All the K
shares are held by the company's three principal owners. During 2007,
altogether 1,063,592 new A shares were sub-scribed under the 2001
stock options scheme.
Elcoteq had 10,098 registered shareholders on December 31, 2007.
There were 7,697,179 nominee-registered and foreign-registered
shares, which represented about 23.6% of the total number of shares
and 6.0% of the votes outstanding.
When the company was redomiciled on January 1, 2008, the Series K
shares were converted to K founders' Shares. The number of K
founders' Shares is tenfold that of the former Series K shares, but
their par value is one-tenth of the Series A shares. According to the
new Articles of Association, Elcoteq shares confer finan-cial rights
in proportion to their par value. The differences in the voting and
financial rights conferred by the different share series thus remain
unchanged after the transfer of domicile.
Actions to Improve Cost-effectiveness, Profitability and
Competitiveness
One-time restructuring expenses under the action plan announced in
December 2006 amounted to about 35 million euros, which were for the
most part recognized in the first-quarter result for 2007. In
addition to previously estimated expenses, which were primarily
related to the product development organization and the closure of
the Lohja and Juarez plants, the company wrote down its
design-related Cellon holding. Of the expenses, about 8 million euros
affected cash flow. The measures taken are described in the
Geographi-cal Areas section above.
In October, Elcoteq announced that it will continue the action plan
that was started at the beginning of 2007 by launching further
actions. The new streamlining plan had three major focuses:
downsizing unprofitable operations, achieving additional operational
savings, especially through stepping up efficiency in materials
management, and adopting a new customer-centric organization model.
Elcoteq announced in December that it will divest its subsidiary in
Offenburg, Germany, and seek to scale down or divest its St.
Petersburg unit. The company estimates that this new streamlining
program, combined with measures to boost produc-tion efficiency, will
result in one-time expenses of about 15 million euros. The expenses
were recognized in the fourth-quarter result of 2007. The one-time
expenses do not have a significant cash-out effect.
The company expects these action plans to yield annual savings
totaling about 90-100 million euros. The measures that have already
been implemented - such as closing down production at the Lohja plant
in Finland at the end of June 2007 and at the Juarez plant in Mexico
at the end of the third quarter of 2007 as well as the agreement to
sell the Offenburg subsidiary in Germany in December 2007 - result in
savings that will have a full effect on the Group's result after the
end of the first quarter of 2008. Savings from other measures - such
as the scaling down or divestment of the St. Petersburg plant as well
as measures to boost operational efficiency - will come into effect
on a gradual basis during 2008.
The actions are carried out in areas that will not limit the
company's service offering or its possibilities for growth. In
addition, the company will continue to boost operational efficiency,
especially in materials man-agement and the use of production
machinery.
The new organization model came into effect on January 1, 2008.
Elcoteq will from now on report on three separate business areas:
Personal Communications, Home Communications and Communications
Net-works. Group functions will support the business areas by
focusing on improving company-level profitabil-ity, bolstering
synergy benefits and business development.
New Incentive Scheme
In October, Elcoteq's Board of Directors decided on a share
subscription plan for the motivation and com-mitment of the Group's
key personnel. Rewards from the plan are based on reaching the
targets set by the Board of Directors for the consolidated income
before taxes for the full year 2008. Based on the achieved targets
the company would issue a maximum of 1,500,000 new Series A shares,
of which 50% would be is-sued in March 2009 and the remaining 50% in
November 2009. The shares have not as yet been allocated.
Events after the end of the Review Period - Change of Domicile
Elcoteq SE was redomiciled to the city of Luxembourg in the Grand
Duchy of Luxembourg on January 1, 2008, in accordance with the
decision of the Annual General Meeting on March 22, 2007. The
company's domicile until December 31, 2007 was Lohja, Finland.
Now that the company has been redomiciled, Elcoteq's new Articles of
Association have entered into force. Annual General Meetings will be
held on March 23 in the city of Luxembourg. If said date is a
national holiday or bank holiday in Luxembourg or Finland, the Annual
General Meeting will be held on the next day. Shareholders can
participate in the meeting via a remote access at an event held in
Helsinki. The 2008 Annual General Meeting will be held on Tuesday,
March 25, 2008.
The transfer of domicile will not affect trading in the company's
Series A shares, which will continue as usual on the Helsinki Stock
Exchange.
Expanding the IEMS Offering
Elcoteq fine-tuned its service offering in 2007 in response to the
rapidly changing outsourcing needs of its customers. The company
seeks to be able to cater to selected customer segments in all major
market areas, initially with a key focus on Personal Communications.
Elcoteq aims to become the leading provider of integrated electronics
manufacturing services (IEMS). As an IEMS company, Elcoteq's main
concept is to refine its electronics manufacturing and product
development services, especially by adding technical expertise in
mechanics into the mix.
Negotiations on IEMS implementation have been ongoing with different
parties. The company's aim is to carry out the necessary measures to
expand the service offering by the end of 2008.
Short-term Risks and Uncertainties
The most important short-term challenges for Elcoteq's business
operations concern the company's ability to further improve its cost
structure and profitability. To rise to these challenges, the company
must develop its service offering in line with the changing needs of
customers and improve its agility in reacting to changes in customer
demand.
Prospects
Market research agencies estimate annual growth of over 10% in the
EMS and ODM markets in the future as well. Research agencies estimate
that unit sales of mobile phones will see growth of about 11% in
2008, but that net sales growth in the market will remain at 7% due
to the decline in average handset prices. Growth of about 9% is
forecast for the EMS market in the Home Communications business area.
Key segments in this business - such as the market for flatscreen TVs
- are forecast to see annual growth of about 20%. The communications
network equipment market is expected to grow by about 7% in 2008.
Elcoteq aims to become the leading provider of integrated electronics
manufacturing services (IEMS)
catering to selected customer segments in all major market areas. The
company has three main strategic themes: expand service offering,
focused growth and operational excellence.
The company seeks to improve its operating income substantially in
2008. The company believes that the cost-savings and higher
operational efficiency from the action plans will enable it to reach
an operating in-come level of about two percent in 2008.
The main objective of the Personal Communications business area for
2008 is to ensure profitability by step-ping up the efficiency of its
operating procedures. Personal Communications is not expected to
increase its net sales, although profitable growth is foreseen with
numerous customers.
The focuses of the Home Communications business area in 2008 are to
improve profitability and enlarge the customer base. Elcoteq expects
growth in the net sales of Home Communications in 2008 to outpace
that of the business area's EMS market.
Elcoteq anticipates that the Communications Networks business area
will post net sales growth and bolster its market position in 2008.
Elcoteq seeks to improve the profitability of Communications
Networks.
Board's Dividend Proposal
The Board of Directors proposes to the Annual General Meeting to be
held on March 25, 2008, that no
dividend will be paid for the 2007 financial year.
Annual General Meeting 2008
Elcoteq's Annual General Meeting will be held in Luxembourg on March
25, 2008. Shareholders can
participate in the meeting via a remote access at an event held in
Helsinki.
The Board's Nomination Committee proposes to the Annual General
Meeting that the Board's current members be re-elected. All have
given their consent to re-election.
Luxembourg, February 5, 2008
Board of Directors
Further information:
Jouni Hartikainen, President and CEO, tel. +358 10 413 11
Mikko Puolakka, CFO, tel. +358 10 413 11, mobile +41 79 618 0302
Tuula Hatakka, SVP, Treasury and Investor Relations, tel. +358 10 413
1808, mobile +358 50 340 5478
Press Conference and Webcast
Elcoteq will hold a combined press conference, conference call and
webcast in English at 2.30 pm (EET) on Wednesday, February 6, 2008,
in the Mansku Cabinet of Hotel Simonkenttä (Simonkatu 9, Helsinki,
Finland).
To participate by phone, please call 5 - 10 minutes before the start
of the press conference on +44 20 7162
0125 (Europe) or +1 334 323 6201 (the USA). The password is Elcoteq.
The press conference can also be followed as a live webcast or later
as a recording via Elcoteq's website
www.elcoteq.com.
The presentation material (pdf file) shown at the conference will be
available on the company's website, www.elcoteq.com, from about 11.00
am (EET) on February 6.
Elcoteq will publish its interim report for the first quarter of 2008
at 9.00 am (EET) on April 23. The com-pany's Annual Report will be
published during the week beginning on March 3.
ENCLOSURES
1 Consolidated income statement
2 Consolidated balance sheet
3 Consolidated cash flow statement
4 Calculation of changes in shareholders' equity
5 Segment reporting
6 Personnel
7 Formulas for the calculation of key figures
8 Five years in key figures
9 Restructuring expenses
10 Assets and liabilities classified as held for sale
11 Assets pledged and contingent liabilities
12 Quarterly figures
