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Connect Group reports annual results 2012

ANNUAL RESULTS :

Sales of EUR 141.6 million compared with EUR 148.2 in 2011.
Profit of kEUR 3,034 compared with kEUR 3,735 in 2011.
The total order book at end-2012 amounted to EUR 77 million (EUR 70.7 million at end-2011).
Total financial debt decreased from EUR 31 million at end-2011 to EUR 20 million at end-2012.

Fall in operating result from continuing operations (before goodwill impairment) from kEUR 5,030 in 2011 to kEUR 1,458 in 2012.
Goodwill impairment of kEUR 1,633 turns net operating result from continuing operations into a kEUR 175 loss.
One-off income of kEUR 4,500 from discontinued operations with the final settlement of the sale of the Automation activity in late 2009.
 

RESULTS 2ND HALF:

Sales of EUR 61.7 million compared with EUR 65.7 million in 2011.
Profit of kEUR 1,162 compared with kEUR 1,511 in H2 2011.

Operating result (before goodwill impairment) of kEUR -1,289 compared with kEUR 2,273 in H2 2011.
Goodwill impairment of kEUR 1,633, giving a net operating result from continuing operations in H2 of KEUR -2,922.
One-off income from discontinued operations of KEUR 4,500 with the final settlement of the sale of the Automation activity in late 2009.

Management discussion and analysis of the results

Luc Switten (CEO) : After a good 2011, 2012 looked set to be a relatively good year. The order book at end-2011 stood at over EUR 70 million, while the acquisition of Halin Group at the end of 2011 gave us a clear road map for the Dutch market. The general economic situation was somewhat more hesitant but seemed under control. The first six months of 2012 were also as expected. During early summer, however, it became clear that the general fear of economic downturn was bearing increasingly heavily on the economy and on customer behaviour. On the one hand orders were still being placed, on the other we were being frequently asked to postpone deliveries. These two conflicting movements are highly detrimental to our operational management. Production capacities are initially planned on the basis of an order book delivery prognosis. Thus a postponement of the effectively demanded delivery leads to unused production capacity and replanning, both negatively affecting results. Deliveries in the last three months of 2012 plummeted, with a very negative impact on the figures for the 2nd half and undoing the positive results of the first half. 

Despite these lower year-end figures, we look to 2013 with confidence for several reasons:

• In 2012, we gained several new clients and the order book at end-2012 stood at over EUR 77 million, leading us to assume that 2013 will be up to the mark.
• Customers have given a very positive welcome to our newly introduced TiaS (Technology is a Service) program. Customers are asking to obtain more technology from us.  We see a strong demand for this service and have already logged a number of successes with certain customers that strengthen customer loyalty. We are also seeing that new customers view this service as an additional argument to order from us.
• The integration in the Netherlands is now behind us.  In less than 1 year we have succeeded in integrating all our facilities in the Netherlands, with 1 facility per location and with the workforce adapted to market demand. This will definitely deliver add value starting in 2013.
• Our focus on specific target markets like Railway and Healthcare is bringing clear results. We have successfully concluded long-term agreement with a number of customers in these sectors, already securing revenue streams out beyond 2013.  This is new for our company. In the past we had at best annual contracts and orders. Today we have contracts running over several years. For the sake of clarity, the order book figure contains only the portion of the contracts to be delivered within the year.
• The balance sheet of the group improved significantly. Inventories and receivables were under control and total financial debt decreased from more than EUR 31 million to EUR 20 million.

In summary, we believe that, despite the poorer 2012 year-end figures, Connect Group stands stronger than one year ago. We therefore look to the long-term future of Connect Group with confidence.

Annual figures

Connect Group NV (Euronext Brussels: CONN) reports annual sales of EUR 141.6 million compared with EUR 148.2 million in 2011 (down 4.4 percent). The drop in sales occurred mainly in the 2nd half and more specifically in November and December.  While order intake (order book at end-2012 of 77 million vs. 70.7 million at end-2011) remained adequate, many customers decided to postpone delivery of already-ordered items to 2013. It is clear that the general economic situation is making many companies more prudent and is leading them to postpone orders as long as possible.  All possible measures were immediately taken to adapt the cost structure to the deteriorating market. The personnel structure was modified and inventories ran as low as possible. These structural adjustments initially bring additional costs which weighed on 2012 results. In 2012 Connect Group paid kEUR 989 restructuring costs.

The gross margin on sales decreased from 13.9 percent to 11.5 percent, reflecting the product mix.  The acquisition of the Halin group increased research and development as well as administration and selling expenses. These various departments were merged at the end of 2012, and the corresponding costs can be expected to decline in 2013.

Other operating expenses included in 2011 a kEUR 1,250 write-off on a customer receivable. In 2012 this customer made partial payments, allowing kEUR 550 of provisions recorded on this item to be reversed into 'Other operating income'. If this customer continues to make partial payments in 2013, this will permit the further reversal of provisions of up to EUR 1.2 million. Given this customer’s specific situation, the Board of Directors decided to reverse previously recorded provisions only when funds are actually received on account.

The operating result from continuing operations before goodwill impairment reduced from a profit of kEUR 5,030 in 2011 to a profit of kEUR 1,458 in 2012.

The Board of Directors has performed an impairment analysis for the entire group and has decided,
on the basis of various valuation models, to write off EUR 1,633 of goodwill against income.
In 2011, no transactions were executed in respect of the Automation activity that was discontinued in 2009. In December 2012, a settlement was concluded with the purchasers of the Automation activity in connection with their contractual obligation to pay to Connect Group 50 percent of the adjusted profit of the acquired business for the period 2010-2012.  As a result of this settlement, the buyer paid to Connect Group at 28 December 2012 the sum of EUR 4.5 million as final settlement for this contractual obligation and EUR 2 million as payment for the outstanding debt to Connect Group. The EUR 4.5 million was recorded as a result from the discontinued Automation activity.

As a result of lower interest rates and lower average outstandings, the net financial result reduced from kEUR 1,600 in 2011 to kEUR 1,290 in 2012.
In 2011 the group won its case in a dispute with the tax administration, with the result that an earlier tax provision of kEUR 305 was no longer needed. This improved the 2011 performance by kEUR 305.

In this way the net group result from continuing operations (before goodwill impairment) for 2012 was kEUR 167 compared with kEUR 3,735 in 2011.
Group profit fell from kEUR 3,735 to kEUR 3,034.

2nd Half

At EUR 61.7 million, sales for the H2 2012 were below expectations. Although the order intake was adequate, many customers decided to postpone already ordered deliveries to 2013. It is clear that the general world economic situation is making many companies prudent and is leading them to postpone orders as long as possible and keep inventories low. This directly impacted the 2nd half results as lower sales immediately produce a lower gross margin in absolute terms and a lower operating result.

The total order book at end-2012 amounted to EUR 77 million (EUR 70.7 million at end-2011).

Balance sheet

Trade receivables decreased from EUR 25.7 million at end-2011 to EUR 18.8 million at end-2012. This decrease is attributable to the lower sales of the last 2 months of 2012 and good receivables collection at the end of the year. 

During 2012 further initiatives were taken to structurally reduce inventories. As a result inventories decreased from EUR 34.4 million at end-2011 to EUR 33.5 million at end-2012.
Given that at the start of 2012 another EUR 4 million of inventory entered the books as a result of the Halin Group acquisition, this is a fall of more than 10 percent.

In 2012, EUR 2.5 million of new investments (both replacement and technology investments) were undertaken. EUR 0.7 million of intangible assets were also acquired in the Halin acquisition.  With annual depreciation of EUR 3.5 million, this produced a decrease in tangible and intangible fixed assets from EUR 11.1 million at end-2011 to EUR 10.7 million at end-2012.

The group's total bank financing capacity in 2012 remained unchanged. The group uses factoring for its receivables, a short-term EUR 10 million credit line and a long-term (5 years) EUR 10 million credit line, repayable in an amount of EUR 2 million per year (with EUR 5 million outstanding at the end of 2012) and a number of smaller bridging loans in conjunction with the Halin acquisition. The total financial debt decreased from EUR 31.6 million at end-2011 to EUR 20.9 million at end-2012 with the final concluding of the sale of the Automation activity (impact: EUR 6.5 million) and the improved working capital situation.

Trade payables decreased from EUR 19.8 million to 16.2 million.

The group was in compliance with its bank covenants at the end of 2012.

An analysis of the company’s risk management can be found in the annual report and is available on the internet (www.connectgroup.com).

The most significant risks for the company are:
• The production is completeley dependent on the availability of all components at the moment that production starts up. If component availability slows down, sales too will be delayed.
• Currency risk:
 The group buys a portion of its components in dollars/yen, the exchange rate risk on which is only partially covered in the selling price.
 Production takes place partly in Romania and the Czech Republic: large fluctuations of these currencies against the Euro can impact costs.
 Since foreign currency needs cannot be accurately timed, the group does not cover its foreign currency positions.
• The group has a credit agreement with its bankers that includes a minimum solvency ratio covenant, equity and cash flow. The group has complied with its bank covenants at the end of 2012 and expects also to comply with its covenants in 2013.
• Customer insolvency can have a major impact on the results.
• Risk of order postponements, leading to a temporary under-coverage of costs incurred.

Outlook for 2013

The current economic climate makes it difficult to establish clear expectations for 2013. As a subcontractor, Connect Group is very much dependent on the general evolution of its customers.  On the one hand, Connect Group is strongly positive about its position with its customers and its acquiring of new customers. On the other hand, the general economic outlook is cloudy, with expectations of zero general economic growth for 2013.

Significant events in 2012

Integration Halin group

As of January 2012, the Dutch group Halin became fully integrated into Connect Group data. Immediately following the takeover, Connect Group embarked on the integration of Halin. The names of Halin companies were changed to Connect Group and, following a study, it was decided to centralize all Dutch-based Connect Group activities at the Veldhoven premises. The merger process was fully completed in 2012. At first the merger led to certain additional costs and efficiency losses but, from 2013 onwards, integration should result in a stronger commercial and operational entity in the Netherlands, in a position to leverage the Connect Group production plants in Romania and the Czech Republic to keep production costs down.

Final settlement sale Automation division

Annual results 2012 improved by EUR 4.5 million as a result of the "earn-out" clause in the contract of sale concluded in late 2009 for the Automation division. Alongside the fixed selling price of EUR 2 million, this contract also provided for an additional variable portion of the purchase price equal to 50 percent of the division's adjusted accumulated profits for the period 2010 to 2012.
The final settlement and payment, which were due by the end of 2013, took place by 31/12/2012.
All rights and obligations of both parties to this agreement are thus finally settled.

Introduction TiaS-program (‘Technology is a Service’)

End 2012 Connect Group introduced its new program ‘Technology is a Service’ or ‘TiaS’. Under this banner, Connect Group will offer a full range of services to develop products and solutions, and to maintain products and solutions in line with customers' goals, in the most efficient ways possible. The services will be tailored to each customer's needs, and can include managing the manufacturing requirements during the entire lifecycle.
This approach guarantees that each customer always has the right technology required for its products, and can keep them attractive, competitive and relevant in the market,.
Preparing to launch the new TiaS strategy involved a number of internal changes. The company has placed all its technological knowledge and skills into a new technology division, with a team of around 50 employees making every effort to put real power behind the TiaS-approach.

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