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Connect Group: Press release: Annual results 2011

Management discussion and analysis of the results

Annual figures
Connect Group NV (Euronext Brussels: CONN) reports an annual sales figure of EUR 148.2 million compared to EUR 133.5 million in 2010 (+ 11.0 percent). The gross margin on sales increased from 11.4 percent to 13.9 percent, reflecting better product mix and cost control. R&D, administration and selling expenses remained virtually unchanged.
Other operating income in 2010 consisted primarily of a gain on the sale of a property in Germany.
Other operating expenses in 2011 include a kEUR 1,250 valuation allowance on part of a customer receivable. In 2010, a valuation allowance of kEUR 1,250 had already been recorded on the same customer receivable.  The total receivable from this problem customer is therefore reserved against. In the ultimate event of payment by the customer, these reserves will be reversed.
The operating result improved from a loss of kEUR 167 in 2010 to a profit of kEUR 5,030 in 2011 (3.4 percent of sales). As a result of lower interest rates (both the basic interest rate and the bank margin) and a lower average outstandings, the net financial result reduced from an expense of kEUR 2,435 to one of kEUR 1,600 in 2011. The group got its equal in a tax dispute, as a result of which an earlier tax provision of kEUR 305 was no longer needed. This improved the result by kEUR 305.
In this way the profit from the contract manufacturing business (continuing operations) for 2011 was kEUR 3,735 compared to a loss of kEUR 2,626 in 2010.
"After the difficult years of 2009 - and then the sale of Automation in 2010 - and the component shortages, we are pleased with the results of 2011," says CEO Luc Switten. "The sales figure and the net profit of EUR 3.7 million are within expectations".

In 2011, no transactions were executed for the Automation activity that was discontinued in 2009.
In 2010 a profit of kEUR 1,495 was still recorded for the discontinued operation.
This income in 2010 related to reversal of a customer provision (kEUR 1,095) recorded prior to the end of the activity and the reversal of a write-down of kEUR 400 on the receivable against the buyer of the discontinued operation.

In this way the net group result improved from a loss of kEUR 1,131 to a profit of kEUR 3,735 (2.5 percent of sales).

Quarter
Sales during the 4th quarter decreased from EUR 34.2 million in the third quarter to EUR 31.5 million.  Sales for the 4th quarter of 2010 were EUR 37.2 million.
The order book at year-end remained at EUR 70.7 million (unchanged compared to 3rd quarter 2011).
During the 4th quarter of 2011, the group continued the operating integration of SAP at 3 main facilities (Romania, Germany and Belgium-Ieper). This SAP start-up and the associated changes in all operating activities significantly impacted production during the 4th quarter. The switch-over necessitated the stopping of the 3 factories for more than 1 week, with production at a lower level for several weeks in order to ensure quality.  We can report that the transition was successful.
This has meant, however, that in the 4th quarter we were unable to deliver the sales requested by customers (estimated 3 to 4 million of delivery arrears). This has directly impacted the 4th quarter results as lower sales immediately result in an absolute lower gross margin and lower profits.
 "Despite the temporary negative impact on actual deliveries in the 4th quarter, we are pleased that we have finally taken and completed this important step," says Luc Switten. "With this switch-over, all the print board assembly plants are now operating with SAP and working methods can all be inter-coordinated. This will in future enable us to make major improvements to our working methods and to operate more efficiently. In 2012 we are planning to further optimize the systems at our print board assembly plants. From 2013 we will also be switching the Kampenhout and Rijen facilities and the cable part of the Romanian plant to SAP."

Balance sheet
Trade receivables decreased from EUR 27.7 million at end-2010 to EUR 25.7 million at end-2011. This decrease is entirely attributable to the lower 4th quarter 2011 sales.
During 2011 initiatives were taken to structurally reduce inventories. As a result inventories decreased from EUR 38 million at end-2010 to EUR 34.4 million at end-2011.
In 2011, EUR 1.3 million of new investments (mainly replacement investments) were undertaken. With annual depreciation of EUR 3.6 million, this produced a decrease in tangible and intangible fixed assets during the year from EUR 13.4 million to EUR 11.1 million.
The group's total bank financing capacity in 2011 remained unchanged. The group uses accounts receivable factoring, a EUR 10 million short-term credit line and a EUR 10 million long-term (5 year) credit line (repayable in EUR 2 million a year installments – EUR 7.5 million outstanding end 2011).
A EUR 5 million subordinated loan put up by several shareholders was converted in early 2011 into capital, thereby decreasing long-term debt by EUR 5 million.
As a result of the improved inventory situation and procurement policy, trade payables decreased from EUR 26.5 million to 19.9 million.
The group was in compliance with its bank covenants at the end of 2011.  

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:
1. 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.
2. Currency risk:
a. 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.
b. Production takes place partly in Romania and the Czech Republic: large fluctuations of these currencies against the Euro can impact costs.
c. Since foreign currency needs cannot be accurately timed, the group does not cover its foreign currency positions.
3. The group has a credit agreement with its bankers that includes a minimum solvency ratio covenant, equity and cash flow. For year-end the group obtained a waiver for not meeting the established solvency ratio from its bankers.
4. Customer insolvency can have a major impact on the results


Outlook for 2012
The current economic climate makes it difficult to establish clear expectations for 2012. As a subcontractor, Connect Group is very much dependent on the general evolution of its customers and cannot itself force volume increases.  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 2012 for Belgium.
The order book is growing despite the caution that we observe among our customers.

Significant events in 2011

Conversion subordinated loan 
Following the publication of the annual results for 2010 at the end of March 2011, all Connect Group bondholders who subscribed to the convertible subordinated loan of EUR 5 million in April 2010, decided to convert their bonds into shares. Consequently, the Connect Group’s equity increased by EUR 5 million and its financial debt decreased by EUR 5 million. This conversion resulted in the issuance of 3,355,600 new shares with the same rights as existing shares, bringing the total number of issued shares to 10,290,024. This conversion was carried out on 5 May 2011.

As a result of this conversion the shareholders’ structure is as follows:

Shareholders name Number declared %
Huub Baren BVBA 2,166,155 21.05%
QuaeroQ cvba 2,120,781 20.61%
LRM NV 1,870,786 18.18%
Luc Switten 426,369 4.14%
Other below the reporting threshold 3,705,933 36.02%
Total 10,290,024 100%

Change in compostion of the Board of Directors 
As part of the change in shareholderstructure, Erik Dejonghe and Huub Baren resigned from the Board of Directors and 3 new directors were appointed. These appointments were approved at an Extraordinary General Meeting, held on 8 August 2011, as follows:
o Adprimum bvba, permanently represented by Robert Van Hoofstat;
o Mentofacturing bvba, permanently represented by Willy Hendrickx; and
o Peter Watteeuw.
These appointments will expire at the Annual General Meeting of 28 April 2015.

Dominique Moorkens was appointed as new Chairman of the Board.


Announcement acquisition of Halin 
On 16 December 2011, the shareholders of Halin Group at Veldhoven (Netherlands) and Connect Group announced that they have reached agreement for Connect Group to acquire 100 percent of the shares of Halin Group.  The transfer of the shares and the closing took place at 6 January 2012.
The acquisition price is set at a maximum of kEUR 1,100, but can be kEUR 250 lower is a number of conditions are not fulfilled.
Halin Group consists of 4 companies: Halin Group BV, Halin Electronics BV, Halin Industrial Solutions BV and Halin Communication Technology BV. Halin Communication Technology BV is not included in the takeover.
Just like Connect Group, Halin Group is an electronics - mechatronics subcontractor, operating primarily on the Dutch market.  The Halin Group employs around 120 people at Veldhoven, Netherlands, and has an annual turnover of around EUR 20 million.   Major references for Halin include Philips and Axon Digital Design.

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