Elcoteq SE Stock Exchange Release February 7, 2007 at 9.00 am (EET) ELCOTEQ SES FINANCIAL STATEMENTS BULLETIN JANUARY - DECEMBER 2006 Elcoteq SEs net sales in 2006 increased by roughly 3% on the previous year to 4,284.3 million euros (4,169.0 million euros in 2005). Operating income was 43.9 million euros (76.5). Cash flow for the full year amounted to -20.8 million euros (24.4). Financial Year 2006 * Net sales rose roughly 3% to 4,284.3 million euros (4,169.0) * Operating income was 43.9 million euros (76.5) * Income before taxes was 19.2 million euros (59.3) * Earnings per share (EPS) were 0.38 euros (1.34) * Rolling 12-month return on capital employed was 9.1% (17.6%) * Cash flow after investing activities was -20.8 million euros (24.4) * Interest-bearing net debt was 128.0 million euros (90.3) * The Board proposes a dividend of 0.20 euros per share Final Quarter in 2006 * Net sales totaled 1,104.6 million euros (1,182.0 in fourth quarter of 2005 and 1,169.1 in the third quarter of 2006) * Operating income was 6.9 million euros (25.5) * Income before taxes was -0.8 million euros (19.7) * Earnings per share (EPS) were -0.01 euros (0.48) * Cash flow after investing activities was 41.2 million euros (5.5) In preparing the financial statements for 2006 Elcoteq SE has applied the recognition and measurement principles of the International Financial Reporting Standards (IFRS), which Elcoteq adopted at the beginning of 2004. Market Review The electronics manufacturing services (EMS) market continued to grow also in 2006, with total growth reaching almost 15%. According to research company iSuppli, the original design manufacturing (ODM) segment grew by approximately 15% in 2006 and the traditional EMS business by about 13%, the main drivers being an increase in outsourcing and strong growth in the mobile phone market, especially in Asias growth markets China and India. Roughly one billion new mobile phones were sold worldwide during 2006, which was some 20% more than one year earlier. The communications networks market increased by approximately 7% in 2006. Despite its modest increase in net sales, Elcoteq retained its position as the worlds fourth largest EMS provider to communications technology companies in 2006 with a market share of roughly 7%. Financial Year 2006 Elcoteqs 2006 net sales showed a slight increase on the previous year to 4,284.3 million euros (4,169.0). Operating income amounted to 43.9 million euros (76.5), or 1.0% of net sales. Income before taxes was 19.2 million euros (59.3) and net profit was 12.1 million euros (41.3). Earnings per share (EPS) were 0.38 euros (1.34). Net sales were below target especially in terminal products, but also in the networks business and in all the geographical areas. The modest growth in net sales was to a great extent due to lower sales to companies within the Nokia group compared with the previous year, owing to an unfavorable product mix and intensified competition. Net sales to other customers than companies belonging to the Nokia and Ericsson groups grew 13% compared with 2005. Operating income in 2006 did not reach the previous years level and the operating margin declined owing to lower than forecast production volumes, strong fluctuations in volumes especially in Europe and the Americas, tougher competition, and the still weak level of capacity utilization in the newest manufacturing plants. The strong fluctuations in volumes and the intensification of competition weakened especially the profitability of the Terminal Products business area. The Groups net financial expenses amounted to 23.7 million euros (16.0). Roughly half of the increase in financial expenses was the result of higher interest rates in both the euro and foreign currencies. Financial expenses were also increased by average growth in Elcoteqs debt portfolio and the sale of accounts receivable. Fourth-Quarter Net Sales and Result Fourth-quarter net sales were slightly below the third quarters level and totaled 1,104.6 million euros (1,182.0 in the fourth quarter of 2005 and 1,169.1 in the third quarter of 2006). The slight decrease on the previous quarter was attributable to lower production volumes for Terminal Products in Europe and Asia-Pacific. Operating income in the fourth quarter was 6.9 million euros (25.5 in the fourth quarter of 2005 and 16.6 in the third quarter of 2006) and income before taxes amounted to -0.8 million euros (19.7). The profitability of Terminal Products weakened compared to the third quarter owing to lower production volumes especially in Europe. The performance of the Communications Networks business area declined as a result of changes in the product mix and costs arising from the ramp-up of certain new products. Financing and Cash Flow Liquidity was good throughout the review period. At the end of December Elcoteq had unused but immediately available credit limits totaling 293.8 million euros (293.5 million euros at the end of the third quarter and 293.5 million euros at the end of 2005). Of this total, the 230 million euro syndicated loan is a committed credit limit. There were no open issues of the companys 200 million euro commercial paper program at December 31, 2006. Interest-bearing net debt at the end of December amounted to 128.0 million euros (90.3), and gearing stood at 0.4 (0.3). The solvency ratio was 26.1% (26.0%). Cash flow from sold accounts receivable was 187.7 million euros (148.8 at the end of 2005 and 183.0 at the end of the third quarter in 2006). Return on capital employed was 9.1% (17.6%). In March Elcoteq issued subordinated notes in the nominal amount of 30 million euros and with a maturity of five years. The notes carry a fixed annual coupon of 5.55%. The company is using the notes to extend the average maturity of its loan portfolio and to strengthen its financial structure. Cash flow after investing activities was -20.8 million euros (24.4) for the full year 2006, and 41.2 million euros (5.5) for the fourth quarter. Despite the modest growth in net sales, cash flow in 2006 was negative owing to weaker income flow, the relatively high level of investments and to a slight weakening of turnover of working capital. The average turnover of working capital at the end of 2006 was roughly ten days. Turnover improved slightly during the fourth quarter compared with the third quarter but was weaker than one year earlier, due particularly to fluctuations in production volumes. Capital Expenditures Gross capital expenditures on fixed assets in 2006 totaled 116.9 million euros (123.6) or 2.7% of net sales. Depreciation amounted to 82.7 million euros (78.2) or 1.9% of net sales. Investments were allocated to increases in assembly capacity, mainly in Asia-Pacific and Europe. Capital expenditures in the final quarter amounted to 32.3 million euros (35.4). Elcoteq has also increased its manufacturing capacity through operating leases worth roughly 26.8 million euros (25.2) in 2006. Personnel At the end of December the Group employed 23,298 (19,802) people: 705 (869) in Finland and 22,593 (18,933) in other countries. The geographical distribution of the workforce was as follows: Europe 11,682 (9,984), Asia- Pacific 7,409 (6,086) and Americas 4,207 (3,732). The average number of employees directly employed by the company during 2006 was 16,651 (15,242). Wages, salaries and other personnel expenses in 2006 amounted to 205.9 million euros (202.6). In March 2006 Elcoteq began personnel negotiations concerning personnel at the Lohja manufacturing plant, the companys product development unit and the NPI (New Product Introduction) unit in Finland. The negotiations were completed in April and resulted in the termination of 65 work contracts and 15 temporary lay-offs on production and financial grounds. Environment Elcoteq has a certified quality and environmental system covering all its units. The main environmental projects affecting the companys operations relate to the European Unions new environmental directives on electrical and electronic equipment. Elcoteq shifted to lead-free manufacturing and products that comply in full with the RoHS directive in stages as its customers required, completing this process by July 1, 2006. The companys environmental performance is described in more detail in a separate Corporate Responsibility Report to be published in 2007. Research and Development Elcoteqs research and development costs in 2006 totaled approximately 6.8 million euros (7.1) or 0.15% of net sales. The companys R&D activities and expenditures cover, among other things, equipment and process development for production and production testing needs, research and development related to the platforms, software, electronics, mechanics and testing and verification environments for mobile phones, and the development of radio modules and technologies for mobile phones. Business Area Performance Elcoteq has two business areas: Terminal Products and Communications Networks. In 2006 Terminal Products contributed 82% (82.5%) and Communications Networks 18% (17.5%) of Elcoteqs consolidated net sales. In 2006 companies belonging to the Nokia and Ericsson groups accounted for altogether 66% (69%) of Elcoteqs net sales. In addition to these companies, Elcoteqs top five customers include RIM, Sony Ericsson and Thomson. Terminal Products Net sales of the Terminal Products business area in 2006 grew roughly 2% on the previous year to 3,512.1 million euros (3,439.0). The segments operating income was 68.4 million euros (95.0) or 1.9% of net sales. Net sales in the final quarter of the year totaled 898.6 million euros (999.5) and the segments operating income was 13.2 million euros (32.2). Home communications products grew clearly as a proportion of Terminal Products total net sales compared with 2005. Concerning customers, development was particularly positive with RIM and Philips. In order to respond more effectively to the needs of its different customers and to boost its global sales and business development, Elcoteq has established two new sales and business development organizations within Terminal Products. These are Personal Communications, which includes mobile phones, and Home Communications, which covers products such as set-top boxes and electronics for flat-screen TVs. The central goal of Terminal Products in 2007 is to broaden and balance its customer base, and to raise profitability especially in the manufacturing of home communications products. Elcoteq expects that net sales of its Terminal Products business area will grow at the same pace as the EMS market during 2007. Communication Networks Net sales of the Communications Networks business area in 2006 rose roughly 6% on the year before to 772.3 million euros (730.1). The segments operating income was 22.4 million euros (23.2) or 2.9% of its net sales. Net sales in the fourth quarter of 2006 amounted to 206.0 million euros (182.6) and the segments operating income was 5.7 million euros (2.9). Elcoteq and Andrew Corporation signed a global long-term manufacturing supply agreement which further strengthens Elcoteqs position as a strategic partner to Andrew Corporation in Europe and the Americas. The agreement is expected to raise Elcoteqs net sales by some 80 million euros in 2007. As part of the agreement Elcoteq acquired Andrews manufacturing operations in Arad, Romania, along with the plants machinery, equipment and inventories. Roughly 8 million euros of the acquisition price was paid in September. The remainder of the acquisition price could be substantially lower than the 15 million euros estimated at the time of acquisition (see enclosure 8). Elcoteq expects net sales of the Communications Networks business area to grow clearly and its market position to strengthen during 2007. Elcoteq intends to raise the profitability of Communications Networks and increase its business volume so that its contribution to the Groups net sales in clearly higher than at present. Geographical Areas Elcoteq has three geographical areas: Europe, Asia-Pacific and Americas. In 2006 the geographical areas contributed to the Groups net sales as follows: Europe 57% (56%), Asia-Pacific 25% (26%) and Americas 18% (18%). Europe Net sales from the geographical area Europe totaled 2,425.4 million euros (2,345.0). To simplify its corporate structure Elcoteq SE incorporated some of its operations in Finland into two subsidiaries on October 1, 2006: one is principally responsible for the Groups support functions and the other for the Lohja manufacturing plant and the Finnish New Product Introduction (NPI) center. Incorporation did not change Elcoteqs organizational structure based on business and geographical areas, or the status of its employees or reporting responsibilities in Finland or elsewhere. Elcoteq increased its capacity in Pecs, Hungary, by leasing a further 7,000 square meters of storage and production space. The extra capacity raised the number of employees in Hungary by roughly 10%. The company also expanded into Romania, following the agreement with Andrew Corporation, and began the manufacture of products for Andrew Corporation and PCTL at its plant in St. Petersburg, Russia. In December Elcoteq sold the property in which its Tallinn manufacturing plant operates to an Estonian investment company for about 10 million euros, recording a capital gain of 1.7 million euros on the deal. Elcoteq continues to operate in these facilities under an operating lease. Asia-Pacific Net sales from the Asia-Pacific geographical area totaled 1,094.1 million euros (1,069.4). Manufacturing volumes increased clearly more than sales. With respect to the plants in China, a positive development in 2006 was balancing of the customer base and an increase in manufacturing volumes of communications networks and home communications products. Manufacturing volumes at the Indian plant developed positively likewise, although they had still not reached the target level by the end of the year. A new unit for the product development services organization was set up in Beijing, China in 2006 in order to further increase Elcoteqs product development services offering in the Asia-Pacific region. Americas Net sales from the Americas geographical area amounted to 764.8 million euros (754.6). Elcoteqs manufacturing plants in Manaus, Brazil, and in Juarez, Mexico, moved into new premises in May. This is resulting in more efficient use of the production and office premises and improving the level of service to existing and future customers in the Americas. Elcoteq expanded co-operation with Andrew Corporation in Mexico, where the company began the manufacturing and system assembly of network products. Business with Terminal Products customer RIM developed well. Decisions of the Annual General Meeting The Annual General Meeting of Elcoteq SE, held on March 23, 2006, 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, MSc, and Mr Jorma Vanhanen, founder-shareholder of Elcoteq SE. The terms of office of the Board members 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 Mr Sjöman, Mr Vanhanen and Mr Toivola as this committee's other members. Mr Piippo was elected chairman of the Working Committee and Mr Sjöman, Mr Vanhanen and Mr Toivola as this committee's other members. Mr Toivola was elected chairman of the Compensation Committee and President Ahtisaari, Mr Horstia and Mr Kasanen as this committee's other members. The Board elected Mr Toivola chairman of the Audit Committee and President Ahtisaari, Mr Horstia and Mr Kasanen as this committee's other members. The Annual General Meeting re-appointed the firm of authorized public accountants KPMG Oy Ab under the supervision of principal auditor Mr Mauri Palvi (APA) as the company's auditors. The Annual General meeting authorized the Board of Directors to float one or several convertible bonds and/or to issue stock options and/or to raise the share capital in one or several installments through a rights issue within one year from the Annual General Meeting. When issuing convertible bonds, stock options or new shares the Board shall be entitled to issue at most 6,234,315 new Series A shares of nominal value 0.40 euros per share for subscription. However, the valid and unexercised authorizations of the Board of Directors concerning the total number of share capital increases and the votes carried by the new shares issued shall not exceed one-fifth of the Company's total registered share capital and aggregate number of votes carried by the shares at the time of the authorization and the Board's decision to raise the share capital. The Meeting also authorized the Board of Directors within one year from the Annual General Meeting to purchase or dispose of the Company's own shares to the extent that the nominal value of the purchased shares and the votes carried by these shares shall not exceed five (5) percent of the company's share capital and the aggregate number of votes conferred by all the shares. These authorizations are in force until March 23, 2007. Shares and Shareholders At the end of 2006 the companys share capital totaled 12,615,730.80 euros and there were altogether 31,539,327 shares comprising 20,962,327 Series A shares and 10,577,000 Series K shares. All the K shares are held by the companys three principal owners. During 2006 altogether 435,750 new A shares were subscribed under the 2001 stock options scheme. Elcoetq had 11,693 shareholders on December 31, 2006. There were 8,039,881 nominee-registered and foreign-registered shares, which represented 25.5% of the total number of shares and 6.3% of the votes outstanding. Boards Proposal to Transfer the Domicile to Luxembourg Elcoteq SEs Board of Directors will propose to the Annual General Meeting on March 22, 2007 that Elcoteqs domicile and registered office be transferred to Luxembourg. The purpose underlying the transfer of domicile is to implement Elcoteq's globalization strategy and to create an effective structural basis for ensuring the continuous improvement of the company's competitiveness. The Board of Directors has, as of December 21, 2006, prepared a Transfer Proposal, a Report and proposed new Articles of Association, which have been registered and published in the manner required by Finnish law. Should the AGM carry the Board's proposal the transfer could take place on January 1, 2008. Action Plan to Improve Competitiveness and Profitability Elcoteq announced in December 2006 that it would begin implementation of an action plan to accelerate improvements to the companys competitiveness, profitability and cost-efficiency. The target is to achieve annual savings in the amount of 20 million euros. The action plan could contain, among other things, reorganizations and structural changes especially in Europe and the Americas. The company will begin personnel negotiations with employee representatives in Finland in February 2007. The need for possible personnel reductions in Finland is estimated to be at most roughly 500 people. The company estimates that the action plan will incur one-time costs in the order of 20 million euros in 2007. Most of the one-time costs will probably be recognized in the first-quarters result. Most of the impact of the plan will start to become visible in Elcoteqs result in the latter part of 2007. In addition to the aforementioned action plan, Elcoteq is also undertaking several other measures designed to raise its profitability and competitive efficiency. These include a global program of production efficiency enhancing measures at all the companys manufacturing plants and the adoption of a new contract and invoicing model in Europe. The Boards proposal to transfer the companys domicile is likewise part of the measures aimed at improving competitiveness. Prospects Market research institutes forecast more than 10% annual growth in the EMS and ODM markets in the years ahead, and an approximate 10% increase in sales of mobile phones during 2007. The market value is expected to remain at the previous years level owing to a continuous decline in average mobile phone prices. The end-product market for communications networks is forecast to grow by about 9% in 2007. The major growth areas are the developing countries of Asia-Pacific and Latin America, where the number of mobile phone users is increasing rapidly. Elcoteqs strategy is to focus on serving communications technology companies. The company is developing an end-to-end ODM service chain for precisely the needs of these customers. Elcoteq supplements its own service portfolio by working in co-operation with various design companies and component suppliers. Balancing of the customer base and expansion into new product areas that suit the companys operating model and manufacturing processes will continue to be key goals alongside strengthening of the service offering. Net sales in the first quarter of 2007 are forecast to be at the same level as one year earlier. The operating income, before the possible one- time costs arising from the action plan, is expected to be a loss owing to the companys heavy cost structure with respect to market conditions and weak capacity utilization. The cost structure will be rectified with the action plan and capacity utilization at the manufacturing plants will be improved through more intensive sales efforts. Most of the impacts of these measures will be visible in the companys result in the latter part of 2007. Elcoteq forecasts that its net sales in 2007 will increase in pace with the EMS market in general and that its operating income, excluding one- time items, will improve compared with 2006. Boards Dividend Proposal The Board of Directors proposes to the Annual General Meeting on March 22, 2007 that a dividend of 0.20 euros per share be paid on the financial year 2006, i.e. roughly half of the companys net profit. Annual General Meeting 2007 Elcoteqs Annual General Meeting will be held in Helsinki on March 22, 2007. The Boards Nomination Committee proposes to the Annual General Meeting that the Boards current members be re-elected. All have given their consent to re-election. The invitation to the of meeting and the matters to be submitted to the Annual General Meeting for its decision will be published in a stock exchange release on February 21, 2007, on the companys website www.elcoteq.com, and in the Finnish newspapers Kauppalehti and Helsingin Sanomat. The company will also mail the invitation to all shareholders whose address in known to the company. Espoo, Finland, February 6, 2007 Board of Directors Further information: Jouni Hartikainen, President and CEO, tel. +358 10 413 11 Teo Ottola, CFO, tel. +358 10 413 1240 Reeta Kaukiainen, Director, Communications and IR, tel. +358 (0)10 413 1742, GSM +358 50 522 0924 Press Conference Elcoteq will hold a combined conference, conference call and webcast in the Paavo Nurmi Room of Hotel Kämp (address: Pohjoisesplanadi 29, Helsinki) starting at 2.30 pm on Wednesday February 7, 2007. The language of the conference will be English. To participate in the conference call, please phone 5-10 minutes before the start of the conference on +44 20 7162 0125, code Elcoteq. The conference can also be heard direct as a webcast on the internet or as a recording on Elcoteqs website www.elcoteq.com. The presentation material (pdf file) shown at the conference will be available on the companys website, www.elcoteq.com, from about 11.00 (EET) on February 7. Elcoteq publishes its interim report for the first three months of 2007 at 9.00 (EET) on April 26. ENCLOSURES 1 Income statement 2 Balance sheet 3 Cash flow statement 4 Calculation of changes in shareholders' equity 5 Segment reporting 6 Personnel 7 Key figures 8 Impact of business combinations on the consolidated financial statements 9 Assets pledged and contingent liabilities 10 Quarterly figures APPENDIX 1 CONSOLIDATED INCOME STATEMENT, (IFRS), EUR 1,000 Jan. 1 - Jan. 1 - Dec. 31, 2006 Dec. 31, 2005 NET SALES 4,284,333 4,169,046 Change in work in progress and finished goods 17,339 -11,163 Other operating income 6,970 5,809 Production materials and services -3,787,467 -3,638,528 Personnel expenses -205,871 -202,596 Depreciation -82,701 -78,238 Writedowns - -279 Depreciation and writedowns, total -82,701 -78,517 Other operating expenses -188,700 -167,565 OPERATING INCOME 43,902 76,486 Financial income, total 3,165 4,788 Financial expenses, total -26,847 -20,751 Share of the losses of associated companies -985 -1,178 INCOME BEFORE TAXES 19,237 59,346 Income taxes -4,651 -18,442 NET INCOME 14,586 40,904 ATTRIBUTABLE TO: Equity holders of the parent* 12,065 41,271 Minority interests 2,521 -367 14,586 40,904 Earnings per share calculated on profit attributable to equity holders of the parent company Earnings per share (EPS), EUR 0.38 1.34 Earnings per share (EPS), diluted, EUR 0.37 1.28 * Net profit reported by the company APPENDIX 2 CONSOLIDATED BALANCE SHEET (IFRS) Dec. 31, 2006 Dec. 31, 2005 ASSETS, EUR 1,000 Non-current Assets Intangible assets Intangible rights 7,625 6,439 Product development costs 4,199 1,889 ADP software 7,182 7,629 Advance payments and construction in progress 682 5,731 Goodwill 10,578 10,615 Goodwill on consolidation 15,098 15,098 45,365 47,400 Tangible assets Land and water areas 2,611 3,952 Investment properties 1,846 2,042 Buildings 71,252 79,033 Machinery and equipment 164,307 149,621 Advance payments and construction in progress 5,005 10,085 245,021 244,734 Investments Shares and equity interests in associated companies 2,261 2,426 Receivables from associated companies 87 262 Other shares and equity interests 11,379 11,399 13,728 14,087 Long-term receivables Deferred tax assets 15,218 10,010 Other loans receivable 99 4 15,317 10,014 Non-current assets, total 319,431 316,235 Current Assets Inventories Raw materials 286,646 270,368 Work in progress 32,727 24,678 Finished goods 39,031 33,304 Advance payments 620 12 359,025 328,362 Current receivables Accounts receivable 348,305 352,713 Loans receivable 2,188 7,976 Other receivable 26,242 44 ,312 Prepaid expenses and accruals 18,784 16,441 Tax assets based on taxable income in year 7,346 - 402,865 421,442 Cash and equivalents 82,298 101,351 Current assets, total 844,187 851,155 ASSETS, TOTAL 1,163,618 1,167,390 SHAREHOLDERS' EQUITY AND LIABILITIES, EUR 1,000 Equity attributable to equity holders of the parent Share capital 12,616 12,441 Additional paid-in capital 218,704 215,988 Other reserves 8,369 8,369 Translation differences -1,864 -2,883 Retained earnings 43,767 21,794 Net income for the year 12,065 41,271 Equity attributable to equity holders of the parent, total 293,656 296,980 Minority interests 9,647 6,885 Total equity 303,303 303,865 Liabilities Long-term liabilities Subordinated notes 139,087 108,978 Medium-term notes 39,966 39,956 Loans from pension plans 1,213 1,678 Other debt 64 628 Deferred tax liability 5,111 3,062 185,440 154,302 Payments due within one year -605 -702 Long-term liabilities, total 184,835 153,600 Current liabilities Loans from financial institutions 30,096 40,691 Loans from pension plans 462 465 Advances received 518 216 Accounts payable 578,774 582,602 Other current liabilities 12,444 11,262 Accrued expenses 49,193 64,211 Tax liabilities based on taxable income in year 2,179 7,698 Provisions 1,816 2,780 Current liabilities, total 675,480 709,925 Liabilities, total 860,315 863,525 SHAREHOLDERS' EQUITY AND LIABILITIES, TOTAL 1,163,618 1,167,390 APPENDIX 3 CONSOLIDATED CASH FLOW STATEMENT (IFRS), EUR 1,000 Jan. 1 - Jan. 1 - Dec. 31, 2006 Dec. 31, 2005 CASH FLOW FROM OPERATING ACTIVITIES Income before taxes 19,237 59,345 Adjustments: Scheduled depreciation and amortization 82,701 78,517 Unrealized foreign exchange gains and losses -11,427 13,629 Other non-payment-related income and expenses 1,275 831 Financial income and expenses 26,703 19,439 Other adjustments -4,266 768 Cash flow before change in working capital 114,223 172,530 Change in working capital: *) Change in non-interest-bearing current receivables 3,807 -122,088 Change in inventories -39,558 -9,986 Change in non-interest-bearing current liabilities 19,690 115,222 Cash flow from operating activities before financial items and taxes 98,162 155,677 Interest and other financial expenses -21,443 -16,140 Operations-related interest income 2,055 2,725 Income taxes paid -13,813 -14,018 Cash flow from operating activities 64,961 128,244 CASH FLOW FROM INVESTING ACTIVITIES Purchases of tangible and intangible assets -101,279 -126,626 Proceeds from disposal of tangible and intangible assets 17,173 20,630 Acquisitions -7,619 - Disposals 6,001 2,146 Repayment of loans receivable 1 17 Cash flow from investing activities -85,724 -103,834 CASH FLOW FROM FINANCING ACTIVITIES Proceeds from share issue 2,890 3,369 Change in current debt -7,459 -25,757 Issuance of long-term debt 29,839 79,529 Repayment of long-term debt -466 -4,450 Dividends paid -20,573 -19,959 Cash flow from financing activities 4,231 32,731 CHANGE IN CASH AND EQUIVALENTS -16,532 57,141 Cash and equivalents on January 1 101,351 39,239 Effect of exchange rate changes on cash held -2,521 4,972 Cash and equivalents on December 31 82,298 101,351 *) The change in working capital includes the change in sold accounts receivable. The impact of this change is to improve cash flow by 38.9 million euros during the reporting period 1-12/2006 and to weaken by 15.2 million euros during 1-12/2005. APPENDIX 4 CALCULATION OF CHANGES IN SHAREHOLDERS´EQUITY (IFRS), EUR 1,000 Attributable to equity holders of the parentMinority Total interestsequity Share Additional Other TranslationRetained Total capital paid-in reserves differ-earnings capital rences BALANCE AT JAN. 1, 2006 12,441 215,988 8,369 -2,883 63,065296,980 6,885303,865 Issue of share capital 174 2,716 2,890 2,890 Equity hedge of subsidiaries 1,935 1,935 1,935 Translation differences -915 -915 240 -675 Share based payments 1,275 1,275 1,275 Dividends -20,573-20,573 -20,573 Net income 12,065 12,065 2,521 14,586 BALANCE AT DEC. 31, 2006 12,616 218,704 8,369 -1,864 55,831293,656 9,647303,303 BALANCE AT JAN. 1, 2005 12,256 212,226 8,354 -2,687 40,116270,265 6,575276,840 Issue of share capital 185 3,184 3,369 3,369 Transfer to translation difference 578 -578 - - Increase in other reserves 15 -15 - - Equity hedge of subsidiaries -2,602 -2,602 -2,602 Translation differences 2,999 2,999 330 3,329 Share based payments 1,637 1,637 1,637 Ownership change Of group companies - 348 348 Dividends -19,959-19,959 -19,959 Net income 41,271 41,271 -367 40,904 BALANCE AT DEC. 31, 2005 12,441 215,988 8,369 -2,883 63,065296,980 6,885303,865 APPENDIX 5 SEGMENT REPORTING Elcoteq has organized its business operations into two business areas: Terminal Products and Communications Networks. Elcoteq reports these as its primary segments applying the principles defined in IAS 14 (Segment Reporting). As its secondary segments Elcoteq reports its three geographical areas: Europe, Asia-Pacific and Americas. Segment reporting is based on the companys internal reporting system. Accounting Principles There are no intersegment sales between the primary segments. The net sales of the secondary segments are based on where the segments assets are located. Net sales according to customer location are shown under Breakdown of net sales by market. The items shown for the segments are those that are either directly attributable to the segments or that can be reasonably allocated to them. The segments assets comprise intangible and tangible rights, investments in associated companies, inventories, accounts receivable and allocatable prepaid expenses and accruals. The segments liabilities are its accounts payable and allocatable accrued expenses. Non-Allocated Items Non-allocated expenses in the income statement consist of the expenses of the Groups corporate office. Non-allocated assets consist mainly of cash and bank receivables as well as prepaid expenses and accruals not allocated to the segments. Non-allocated liabilities are mainly interest-bearing liabilities, deferred tax liabilities and accrued expenses not allocated to the segments. Investments in associated companies that cannot be allocated to the segments are entered under non-allocated assets. Business Areas The Terminal Products business area designs and manufactures terminal devices based on the most advanced wireless communications technology. Its products include mobile phones and their accessories, cordless phones and set-top boxes. Communications Networks business area serves customers operating in the areas of mobile phone networks, wireless local area networks, and broadband networks. The business areas products include base station equipment such as plug-in units and routers for mobile phone networks, and broadband network products. BUSINESS AREAS IN 2006, MEUR TerminalCommunicationsNon-allocated Total Products Networks Net sales 3,512.1 772.3 - 4,284.3 Depreciation 56.0 22.1 4.6 82.7 Operating income 68.4 22.4 -46.8 43.9 Share of associated companies' results 0.0 0.0 -1.0 -1.0 Assets 710.8 322.3 130.5 1,163.6 Investments in associated companies 0.2 1.7 0.3 2.3 Liabilities 470.6 145.4 244.3 860.3 Capital expenditures 85.4 23.5 7.9 116.9 Sold accounts receivable* 131.7 56.0 - 187.7 BUSINESS AREAS IN 2005, MEUR TerminalCommunicationsNon-allocated Total Products Networks Net sales 3,439.0 730.1 - 4,169.0 Depreciation 55.1 18.9 4.6 78.5 Operating income 95.0 23.2 -41.7 76.5 Share of associated companies' results 0.0 -0.3 -0.9 -1.2 Assets 737.7 277.7 152.1 1,167.4 Investments in associated companies 0.2 1.9 0.3 2.4 Liabilities 491.9 129.1 242.6 863.5 Capital expenditures 88.5 30.9 4.2 123.6 Sold accounts receivable* 96.1 52.7 - 148.8 * not included in the segment's assets Geographical areas Elcoteq's geographical areas are Europe, Asia-Pacific and Americas. GEOGRAPHICAL AREAS IN 2006, MEUR EuropeAsia-Pacific Americas Non- Total allocated Net sales 2,425.4 1,094.1 764.8 - 4,284.3 Assets 618.3 263.1 164.0 118.1 1,163.6 Capital expenditures 49.4 40.5 19.0 7.9 116.9 Sold accounts receivable* 152.7 29.3 5.7 - 187.7 GEOGRAPHICAL AREAS IN 2005, MEUR EuropeAsia-Pacific Americas Non- Total allocated Net sales 2,345.0 1,069.4 754.6 - 4,169.0 Assets 541.8 291.6 184.2 149.9 1,167.4 Capital expenditures 72.2 37.8 9.5 4.2 123.6 Sold accounts receivable* 132.0 - 16.8 - 148.8 * Not included in the segment's assets BREAKDOWN OF NET SALES BY MARKET, MEUR 2006 2005 Europe 2,342.5 2,857.4 Americas 905.7 767.4 Asia-Pacific 1,036.2 544.3 4,284.3 4,169.0 APPENDIX 6 PERSONNEL The Group had on average 16,651 (15,242) employees during the year, distributed geographically as follows. At Dec. 31 At Jan. 1 Change Average Finland 668 789 -121 737 Brazil 176 204 -28 214 Hong Kong 60 52 8 47 India 777 299 478 568 Japan 4 4 - 4 China 5,323 5,255 68 5,247 Luxembourg 1 - 1 1 Mexico 3,138 2,353 785 2,744 Romania 201 - 201 55 Sweden 7 7 - 7 Germany 453 419 34 428 Switzerland 9 8 1 8 Hungary 3,311 2,523 788 2,774 USA 157 103 54 121 Russia 483 281 202 351 Estonia 2,937 3,454 -517 3,345 Total 17,705 15,751 1,954 16,651 On December 31, 2006 the Group employed 23,298 people, of whom 17,705 were on Elcoteq's payroll. APPENDIX 7 FIVE YEARS IN FIGURES 2006 2005 2004* 2003 2002 OPERATIONS Net sales, MEUR 4,284.3 4,169,0 2,921,8 2,235,7 1,840,2 of which outside Finland, % 89.7 81.4 86.2 81.0 77.5 Gross capital expenditures, MEUR 116.9 123.6 128.3 68.1 78.0 (does not include operating leases) Employees, average 16,651 15,242 13,065 11,044 8,127 PROFITABILITY Operating income before depreciation and amortization (EBITDA) 126.6 155.0 117.6 88.1 74.7 Operating income, MEUR 43.9 76.5 57.3 30.5 25.5 as percentage of net sales, % 1.0 1.8 2.0 1.4 1.4 Income before taxes, MEUR 19.2 59.3 44.9 22.5 18.6 as percentage of net sales, % 0.4 1.4 1.5 1.0 1.0 Net income ***, MEUR 12.1 41.3 30.7 20.7 16.1 as percentage of net sales, % 0.3 1.0 1.1 0.9 0.9 Return on equity (ROE), % 4.8 14.1 15.1 8.2 7.4 Return on investment (ROI/ROCE), % 9.1 17.6 19.5 10.2 9.2 FINANCIAL RATIOS Current ratio 1.2 1.2 1.1 1.2 1.2 Solvency, % 26.1 26.0 30.5 32.6 36.6 Gearing 0.4 0.3 0.4 -0.0 -0.1 Interest-bearing liabilities, MEUR 210.3 191.7 137.4 63.3 42.6 Interest-bearing net debt, MEUR 128.0 90.3 98.2 -0.4 -33.4 PER SHARE DATA Earnings per share (EPS), EUR 0.38 1.34 1.01 0.70 0.54 Diluted earnings per share (EPS), EUR 0.37 1.28 0.96 0.67 - Shareholders' equity per share ***, EUR 9.31 9.55 8.82 8.46 8.40 Share price at the end of the year, EUR 9.78 20.15 17.89 15.98 10.80 Dividend per share **, EUR 0.20 0.66 0.65 0.90 0.40 Payout ratio **, % 52.3 49.7 49.6 131.0 73.5 Dividend yield **, % 2.0 3.3 3.6 5.6 3.7 P/E ratio 25.7 15.0 14.1 22.9 19.7 Adjusted weighted average number of shares in issue during the period shares 31,338,61130,764,70530,420,47329,572,82629,49 1,652 Adjusted number of shares in issue at the end of the period Shares 31,539,32731,103,57730,640,87730,190,52729,49 1,652 * The key figures for the income statement and earnings per share are calculated on continuing operations. Other key figures include the impact of the discontinued operation. ** The dividend in 2006 is the proposal of the Board of Directors to the Annual General Meeting. *** Amount attributable to equity holders of the parent company. The net income for 2004 does not include the income of the discontinued operation. Financial statements have been prepared in compliance with the IFRS standards beginning from January 1, 2003. Financial statement 2002 has been prepared in compliance with the Finnish Accounting Act, which came into effect on December 31, 1997. APPENDIX 8 IMPACT OF BUSINESS COMBINATIONS OF THE CONSOLIDATED FINANCIAL STATEMENTS, EUR 1,000 Elcoteq signed a manufacturing supply agreement with Andrew Corporation in September 2006 under which Elcoteq took over Andrews subsidiary in Arad, Romania, as well as the machinery, equipment and inventories related to the acquired operations. The assets and liabilities were acquired at fair value and will be used in the manufacture of products to be supplied to Andrew Corporation. The impact of this supply agreement on the companys result in 2006, assuming that the agreement had been signed at the beginning of 2006, cannot be reliably determined because the pricing method for the production operation transferred to Elcoteq as a result of the agreement was not the same as before the agreement took effect. Elcoteq did not acquire new businesses in 2005. The assets and liabilities acquired in business combinations are valued at their fair values. Assets and liabilities acquired in business combinations in 2006 and 2005: 2006 2006 2005 2005 Fair Value Book Value Fair ValueBook Value Non-current assets Intangible assets 1 1 - - Tangible assets 2,831 2,831 - - Current assets Inventories 5,122 4,864 - - Current receivables 824 824 - - Cash and equivalents 406 406 - - Assets total 9,184 8,926 - - Liabilities Current liabilities 1,159 1,159 - - Acquisition cost 8,025 7,767 - Acquisition price paid in cash 8,025 Cash and equivalents of acquired subsidiary -406 Impact on cash flow 7,619 APPENDIX 9 ASSETS PLEDGED AND CONTINGENT LIABILITIES, EUR 1,000 2006 2005 ON BEHALF OF OTHERS Guarantees 8 8 LEASING COMMITMENTS Operating leases, production machinery (excl. VAT) 48,155 45,620 Rental commitments, real-estate (excl. VAT) 27,612 25,898 DERIVATIVE CONTRACTS Foreign currency derivative instruments Forward contracts, transaction risk Nominal value 275,444 378,905 Fair value -5,101 -1,358 Forward contracts, translation risk Nominal value 35,533 28,857 Fair value 285 -129 Forward contracts, financial risk Nominal value 131,085 98,143 Fair value -46 -996 Interest rate and foreign exchange swap contracts Nominal value 4,000 2,500 Fair value 117 -180 The derivatives have been valued using the market prices and the exchange reference rates of the European Central Bank on the balance sheet date. The figures include also the closed positions. OTHER COMMITMENTS In calculating value-added tax for China in 2006, Elcoteq has applied a method that has so far not received the written approval of the tax authorities. Should this approval not be forthcoming, the effect would be to reduce Elcoteq´s result substantially. During previous years Elcoteq has been granted the approval afterwards and therefore the company has estimated the risk to be small and has made no provision. Group companies are engaged in certain court cases. These are not expected to have a significant effect on the Groups result. APPENDIX 10 QUARTERLY FIGURES INCOME STATEMENT, MEUR Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2006 2006 2006 2006 2005 2005 2005 2005 NET SALES 1,104.6 1,169.11,029.6 981.11,182.0 1,194.7 982.1 810.3 Change in work in progress and finished goods -8.1 19.4 -6.5 12.6 2.1 1.7 -9.8 -5.2 Other operating income 3.2 1.0 1.1 1.7 1.2 1.1 1.8 1.7 Operating expenses -1,070.9-1,151.0 -991.9 -968.2-1,137.8-1,150.5-940.1-780.3 Depreciation and writedowns -22.0 -21.8 -20.1 -18.9 -22.1 -21.4 -18.0 -17.0 OPERATING INCOME 6.9 16.6 12.2 8.3 25.5 25.6 15.9 9.5 % of net sales 0.6 1.4 1.2 0.8 2.2 2.1 1.6 1.2 Financial income and expenses -7.4 -6.2 -5.0 -5.1 -5.6 -4.4 -3.2 -2.8 Share of profits and losses of associates -0.3 -0.2 -0.2 -0.3 -0.2 -0.2 -0.6 -0.2 INCOME BEFORE TAXES-0.8 10.1 7.0 2.9 19.7 21.0 12.1 6.5 Income taxes 1.6 -3.4 -2.0 -0.8 -4.6 -7.4 -3.8 -2.7 NET INCOME FOR THE PERIOD 0.8 6.7 5.0 2.1 15.1 13.7 8.3 3.8 ATTRIBUTABLE TO: Equity holders of the parent -0.3 5.9 4.4 2.1 14.9 13.7 8.3 4.4 Minority interests 1.1 0.8 0.6 -0.0 0.2 0.0 -0.0 -0.6 0.8 6.7 5.0 2.1 15.1 13.7 8.3 3.8 BALANCE SHEET, MEUR Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2006 2006 2006 2006 2005 2005 2005 2005 ASSETS Non-current Assets Intangible assets45.4 47.8 49.4 48.2 47.4 47.5 46.6 43.9 Tangible assets 245.0 263.6 242.1 238.2 244.7 245.4 215.1 206.7 Investments 13.7 14.0 14.0 14.0 14.1 14.1 14.1 14.4 Long-term receivables 15.3 14.2 11.2 10.6 10.0 9.8 16.2 16.5 Non-current assets, total 319.4 339.6 316.7 311.0 316.2 316.8 292.0 281.4 Current assets Inventories 359.0 407.4 366.1 339.6 328.4 363.4 323.2 331.5 Current receivables 402.9 518.1 447.9 425.7 421.4 487.5 462.8 388.6 Cash and equivalents 82.3 102.4 41.0 143.5 101.4 106.7 60.5 70.2 Assets classified as held for sale - - - - - 1.7 - - Current assets, total 844.2 1 028.0 854.9 908.9 851.2 959.3 846.5 790.3 ASSETS, TOTAL 1,163.6 1,367.61,171.71,219.91,167.4 1,276.01,138.51,071 .7 SHAREHOLDERS' EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 12.6 12.6 12.6 12.5 12.4 12.3 12.3 12.3 Other shareholders' equity 281.0 279.9 272.9 267.1 284.5 267.1 252.8 243.3 Equity attributable to equity 293.7 292.5 285.4 279.5 297.0 279.4 265.1 255.6 holders of the parent, total Minority interests 9.6 7.9 7.0 6.7 6.9 7.3 6.9 6.7 Total equity 303.3 300.4 292.5 286.3 303.9 286.7 272.0 262.3 Long-term liabilities Long-term loans 179.7 179.9 179.9 180.0 149.9 150.4 101.1 72.3 Other long-term debt5.2 4.3 4.1 3.7 3.7 4.0 4.2 4.9 Long-term liabilities, total 184.8 184.3 184.0 183.7 153.6 154.3 105.3 77.1 Current liabilities Current loans 30.6 92.0 26.2 38.7 41.2 53.4 69.8 135.9 Other current liabilities 643.1 788.3 666.3 708.9 666.0 778.9 686.6 594.3 Provisions 1.8 2.5 2.7 2.5 2.8 2.7 4.8 2.1 Current liabilities, total 675.5 882.9 695.2 750.0 709.9 835.0 761.2 732.2 SHAREHOLDERS' EQUITY AND LIABILITIES, TOTAL 1,163.6 1,367.61,171.71,219.91,167.4 1,276.01,138.51,071 .7 Personnel on average during the period 17,431 16,930 16,581 15,748 15,903 15,16215,03014,560 Gross capital expenditures, MEUR 32.3 38.5 30.1 16.0 35.4 48.8 17.8 21.6 ROI/ROCE from 12 preceding months, % 9.1 12.1 15.7 16.0 17.6 17.5 17.7 16.8 Earnings per share (EPS), EUR -0.01 0.19 0.14 0.07 0.48 0.44 0.27 0.14 Solvency ratio, % 26.1 22.0 25.0 23.5 26.0 22.5 23.9 24.5 CONSOLIDATED CASH FLOW STATEMENT, MEUR Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2006 2006 2006 2006 2005 2005 2005 2005 Cash flow before change in working capital 23.8 36.8 28.4 25.2 47.3 47.1 48.4 29.7 Change in working capital 30.7 13.7 -73.1 12.6 -11.4 21.6 26.6 -53.7 Financial items and taxes -11.6 -7.7 -6.6 -7.3 -10.3 -8.1 -5.7 -3.3 Cash flow from operating activities43.1 42.6 -51.3 30.6 25.6 60.6 69.3 -27.3 Cash flow from investing activities -1.8 -47.3 -20.3 -16.3 -20.1 -47.1 -22.3 -14.3 Cash flow before financing activities41.2 -4.7 -71.5 14.2 5.5 13.5 47.0 -41.6 Proceeds from share issue 0.5 0.5 1.4 0.5 2.4 0.1 0.1 0.8 Change in current debt -60.9 65.4 -10.3 -1.7 -12.7 -16.8 -67.3 71.0 Issuance of long-term debt - - - 29.8 - 49.4 30.2 - Repayment of long-term debt -0.2 -0.1 -0.2 - -1.1 -0.5 -2.1 -0.7 Dividends paid - - -20.6 - - - -20.0 - Cash flow from financing activities -60.6 65.9 -29.7 28.6 -11.5 32.1 -58.9 71.0 Change in cash and equivalents -19.3 61.1 -101.1 42.8 -6.1 45.7 -11.9 29.4 Cash and equivalents at the beginning of the period 102.4 41.0 143.5 101.4 106.7 60.5 70.2 39.2 Effect of exchange rate changes on cash held -0.8 0.4 -1.4 -0.7 0.7 0.5 2.3 1.5 Cash and equivalents at the end of the period82.3 102.4 41.0 143.5 101.4 106.7 60.5 70.2 BUSINESS AREAS Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2006 2006 2006 2006 2005 2005 2005 2005 Net sales, MEUR Terminal Products898.6 967.9 837.6 808.0 999.5 999.3 795.0 645.2 Communications Networks 206.0 201.2 192.0 173.1 182.6 195.4 187.1 165.1 Total 1,104.6 1,169.11,029.6 981.11,182.0 1,194.7 982.1 810.3 Segment´s operating income, MEUR Terminal Products 13.2 18.6 20.7 15.9 32.2 26.6 19.4 16.9 Communications Networks 5.7 8.8 3.2 4.6 2.9 9.7 8.0 2.6 Group´s non-allocated expenses/income -12.1 -10.8 -11.6 -12.3 -9.6 -10.7 -11.5 -10.0 Total 6.9 16.6 12.2 8.3 25.5 25.6 15.9 9.5 GEOGRAPHICAL AREAS Q4/ Q3/ Q2/ Q1/ Q4/ Q3/ Q2/ Q1/ 2006 2006 2006 2006 2005 2005 2005 2005 Net Sales, MEUR Europe 635.8 659.4 599.7 530.5 641.6 686.5 550.9 466.0 Asia-Pacific 260.3 307.2 272.8 253.8 344.7 321.0 226.6 177.1 Americas 208.5 202.4 157.1 196.8 195.8 187.1 204.5 167.2 Total 1,104.6 1,169.11,029.6 981.11,182.0 1,194.7 982.1 810.3
ELCOTEQ SES FINANCIAL STATEMENTS BULLETIN JANUARY - DECEMBER 2006
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