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Elektrobit Corporation (EB) Financial Statement Bulletin 2013

Thu 20th February, 2014 6:01am

http://pdf.reuters.com/htmlnews/8knews.asp?i=43059c3bf0e37541&u=urn:newsml:reuters.com:20140220:nHUGdx5H


STOCK EXCHANGE RELEASE


Free for publication on February 20, 2014, at 8.00 a.m. (CET+1)


Elektrobit Corporation (EB) Financial Statement Bulletin 2013

IN 2013 COMPARABLE NET SALES GREW AND OPERATING PROFIT IMPROVED CLEARLY FROM THE PREVIOUS YEAR

 

From the beginning of 2013 EB has applied the new IFRS10 and IFRS11 standards. As a result the
proportion of net sales and operating result of e.solutions GmbH, a jointly owned company of EB
and AUDI, to be consolidated into Elektrobit group's consolidated financial statements has
changed. For comparability, all 2012 figures presented for comparison are restated assuming that
the proportionate consolidation method would have been applied already in 2012.

EB's figures are divided between Continuing and Discontinuing Operations as provided by the IFRS5
standard. In this interim report, Test Tools product business, sold on January 31, 2013, is
classified as Discontinuing Operations.

 

SUMMARY OCTOBER - DECEMBER 2013

·         Net sales of the October - December 2013 from continuing operations grew to EUR 59.5
million (restated net sales of EUR 48.2 million, 4Q 2012), representing an increase of 23.4 %
year-on-year.

·         Operating profit from continuing operations was EUR 5.7 million (restated operating
profit of EUR -0.5 million including non-recurring items of approximately MEUR 4 weakening
Wireless Business Segment operating result, 4Q 2012).

·         Net cash flow was EUR -0.9 million (EUR -1.4 million, 4Q 2012). Net cash flow includes
the repayment of capital of EUR 14.3 million, distributed in December 2013.

·         Earnings per share from continuing operations were EUR 0.039 (EUR -0.001, 4Q 2012) and
earnings per share from continuing and discontinuing operations were EUR 0.039 (EUR 0.006, 4Q
2012).

·         Extraordinary General Meeting held on December 4, 2013, decided to distribute funds to
shareholders as a repayment of capital, amounting to EUR 0.11 per share. The repayment of total
EUR 14,311,096.25 was paid on December 17, 2013.

·         In December EB raised its operating result guidance for 2013 due to better than expected
fourth quarter and gave more precise net sales outlook for 2013.

 

SUMMARY JANUARY - DECEMBER 2013

·         Net sales of the January - December 2013 from continuing operations grew to EUR 199.3
million (restated net sales of EUR 173.9 million, 2012), representing an increase of 14.6 %
year-on-year.

·         Operating profit from continuing operations was EUR 8.1 million including non-recurring
costs of approximately EUR 0.8 million resulting from the cost saving measures in the Wireless
Business Segment in the first quarter of 2013 (restated operating profit of EUR 1.1 million
including non-recurring items of approximately MEUR 4 weakening Wireless Business Segment's
operating result in 2012).

·         Net cash flow was EUR 28.7 million including non-recurring net cash flow of about EUR 28
million resulting from the sale of the Test Tools product business (EUR 5.1 million, 2012) and
repayment of capital of EUR 14.3 million, distributed in December.

·         Earnings per share from continuing operations were EUR 0.051 (EUR 0.008, 2012) and
earnings per share from continuing and discontinuing operations were EUR 0.238 (EUR 0.017, 2012).

·         A total of 688,185 new shares were subscribed during 2013 by virtue of the option rights
2008A and 2008B. The share subscription prices were recorded in the Company's invested
non-restricted equity fund. After the registration of the new shares, the number of shares in
Elektrobit Corporation's totaled 130,100,875.

·         The Board of Directors proposes that the Annual General Meeting to be held on April 10,
2014 resolve to pay EUR 0.02 per share, as dividend based on the adopted balance sheet for the
financial period of January 1, 2013 - December 31, 2013. 
 
 Group, continuing operations (MEUR)                   4Q 13      4Q 12     2013       2012  
                                                                restated            restated 
 NET SALES                                              59.5        48.2   199.3       173.9 
 OPERATING PROFIT / LOSS                                 5.7        -0.5     8.1         1.1 
 Operating profit / loss, % of net sales               9.6 %      -1.0 %   4.1 %       0.6 % 
 Operating profit /loss without non-recurring items      5.7         3.6     9.0         5.1 
 EBITDA                                                  8.1         1.5    17.2         8.1 
 CASH AND OTHER LIQUID ASSETS                           43.0        14.3    43.0        14.3 
 EQUITY RATIO (%)                                     65.1 %      54.5 %  65.1 %      54.5 % 
 EARNINGS PER SHARE (EUR)                              0.039      -0.001   0.051       0.008 
 
 
 Automotive Business Segment (MEUR)         4Q 13      4Q 12    2013       2012  
                                                     restated           restated 
 NET SALES                                   41.1        31.9  138.3       110.6 
 OPERATING PROFIT / LOSS                      5.4         2.6    8.5         3.3 
 Operating profit / loss, % of net sales   13.2 %       8.2 %  6.2 %       2.9 % 
 EBITDA                                       7.0         3.8   14.6         7.3 
 
 
 Wireless Business Segment, continuing operations (MEUR)   4Q 13      4Q 12   2013       2012 
                                                                  
restated         
restated 
 NET SALES                                                  18.4       16.4   61.2       63.5 
 OPERATING PROFIT / LOSS                                     0.3       -3.2   -0.5       -2.2 
 Operating profit / loss, % of net sales                    1.6%     -19.4%  -0.8%     -3.5 % 
 Operating profit /loss without non-recurring items          0.3        0.9    0.4        1.8 
 EBITDA                                                      1.1       -2.3    2.5        0.7 
 
 
EB'S CEO JUKKA HARJU

"During the last quarter of 2013 EB's net sales grew strongly by 23.4 per cent from the previous
year. Operating profit improved clearly and was 9.6 per cent of net sales, mainly due to the good
operating result of the Automotive Business Segment. Good operating result of the Automotive
Business Segment was affected by the higher software license sales on the latter half of the year
and other seasonality factors, as well as well-developed net sales and improved profitability of
projects. Also Wireless Business Segment's net sales grew from previous year and operating result
was slightly positive in the fourth quarter.

Altogether EB's financial development in 2013 was good. Net sales grew by 14.6 per cent from the
previous year and was EUR 199.3 million. Operating profit of the whole year improved clearly from
last year to EUR 8.1million. I am pleased to say EB reached its main goal for 2013 - to grow its
operating profit from the previous year.

Automotive Business Segment developed according to our objectives in 2013. Net sales continued its
strong growth which has lasted for many years, as car manufacturers continue to investment in the
development of software solutions for new car models. A significant proportion of the growth in
the net sales came from the rapid growth of e.solutions GmbH, the jointly owned company with AUDI.
During the year EB was selected as the supplier for several long-term product development and
product customization projects for leading car manufacturers, which strengthens EB's market
position as partner for car manufacturers and will bring net sales for many years forward.
Operating profit in Automotive Business Segment improved clearly from the previous year and was
6.2 per cent of net sales. Most important factors for the improvement of operating profit were the
growth of the services and software sales, improved project management and actions to improve the
cost structure.

In Wireless Business Segment the net sales in 2013 decreased slightly from previous year due to
the decreased demand in the wireless telecommunication R&D services market. In the last quarter EB
started the product deliveries of the tactical communication system for Finnish Defence Forces and
delivered a batch of special terminal products for one customer for the authority use. These
product deliveries generated product based net sales of EUR 6.9 million in the fourth quarter, the
rest of the net sales being R&D services sales. Operating result in 2013 remained slightly
negative, despite of the cost saving measures taken to improve the cost structure. In addition to
the decreased net sales, the profitability was negatively affected in 2013 by the ongoing
investments into the marketing and product development of products targeted for the global defense
and other authority markets, which investments are expected to start gradually generating net
sales from the latter half of 2014 onwards.

EB's balance sheet and financial position strengthened during 2013 due to the good operative cash
flow and the sale of the Test Tools product business in the beginning of the year. Net cash flow
was EUR 28.7 million and equity ratio raised up to 65.1 per cent.

EB paid dividend of EUR 0.01 per share in April and distributed repayment of capital of EUR 0.11
per share in December. Company's share price increased strongly towards the end of the year and
the daily trading volume of shares grew significantly.

In 2014 our main target is to grow our net sales and operating profit from the previous year. "

 

OUTLOOK FOR 2014

EB expects for the year 2014 that net sales and operating result will grow from the previous year
(net sales of EUR 199.3 million and operating profit of EUR 8.1 million, in 2013). Net sales
growth rate in 2014 is expected to be slower than in the previous year (net sales growth 14.6 per
cent, 2013). Net sales and operating result are expected to mainly accumulate during the latter
half of the year mostly due to the seasonality factors of Automotive Business Segment.

The growth of net sales and operating result in 2014 is expected to come mainly or wholly from the
Automotive Business Segment, where the demand for EB's software solutions is expected to remain
good. The demand for R&D services in Wireless Business Segment is driven by the implementations of
LTE (Long Term Evolution) technology and by the growing need to wirelessly connect various
consumer and professional devices to other equipment. The demand for R&D services in the mobile
communication market is expected to decrease slightly from the previous year.  EB aims at bringing
its Wireless Business Segment's products to the global defense and other authority markets, and
expects to start gradually generating net sales from these markets from the latter half of 2014
onwards.

More specific market outlook is presented under sections "market outlook for the Automotive
Business Segment" and "Market outlook for the Wireless Business Segment".

The profit outlook for the year 2014 does not include possible non-recurring income or costs
related to the reorganization cases of TerreStar Networks Inc. More information about the
reorganization cases of TerreStar Networks and the amount of the receivables and collecting the
receivables as well as other uncertainties regarding the outlook is presented in the "Identified
Risks and Uncertainties".  

 

INVITATION TO A PRESS CONFERENCE

EB will hold a press conference on the Financial Statement 2013 for media, analysts and
institutional investors in Finland, Helsinki, in Hotel Kämp, Pohjoisesplanadi 29, on Thursday,
February 20, 2014, at 14.00 p.m. (CET+1). The conference will also be held as a conference call
and the presentation will be shown simultaneously in the Internet through WebEx. The conference
will be held in English. For more information please go to www.elektrobit.com/investors
http://www.elektrobit.com/investors . 

 

ELEKTROBIT CORPORATION (EB)

EB creates advanced technology and turns it into enriching end-user experiences. EB is specialized
in demanding embedded software and hardware solutions for wireless and automotive industries. The
net sales from continuing operations in 2013 totaled EUR 199.3 million and operating profit of EUR
8.1 million, in 2013. Elektrobit Corporation is listed on NASDAQ OMX Helsinki. www.elektrobit.com
http://www.elektrobit.com/ . 

 

ELEKTROBIT CORPORATION (EB) FINANCIAL STATEMENT BULLETIN 2013

 

From the beginning of 2013 EB has applied the new IFRS10 and IFRS11 standards. As a result the
proportion of net sales and operating result of e.solutions GmbH, a jointly owned company of EB
and AUDI, to be consolidated into Elektrobit group's consolidated financial statements has
changed. For comparability, all 2012 figures presented for comparison are restated assuming that
the proportionate consolidation method according to the above mentioned standards would have been
applied already in 2012.

EB's figures are divided between Continuing and Discontinuing Operations as provided by the IFRS5
standard. In this interim report, Test Tools product business, sold on January 31, 2013, is
classified as Discontinuing Operations. 

 

FINANCIAL PERFORMANCE DURING JANUARY-DECEMBER 2013, CONTINUING OPERATIONS

 

EB's net sales from continuing operations during January-December 2013 grew by 14.6 per cent
year-on-year to EUR 199.3 million (restated net sales of EUR 173.9 million, 1-12 2012). Operating
profit from continuing operations was EUR 8.1 million including the non-recurring cost of
approximately EUR 0.8 million resulting from the cost saving measures in the Wireless Business
Segment during the first quarter of 2013 (restated operating profit of EUR 1.1 million, 1-12 2012
including non-recurring items of approximately MEUR 4 weakening Wireless Business Segment's
operating result). Operating profit from continuing operations without these non-recurring costs
was EUR 9.0 million (restated operating profit of EUR 5.1 million, 1-12 2012).

Net sales of Automotive Business Segment in January-December 2013 grew to EUR 138.3 million
(restated net sales of EUR 110.6 million, 1-12 2012), representing 25.0 per cent growth
year-on-year. A significant proportion of the growth in the net sales came from the rapid growth
of e.solutions GmbH, the jointly owned company with AUDI. Operating profit was EUR 8.5 million
(restated operating profit of EUR 3.3 million, 1-12 2012). Operating profit improved year-on-year
due to the growth of the service and software sales, and improved management of projects and
measures to improve the cost structure. At the beginning of 2013 EB was selected as the supplier
for several long-term product development and product customization projects for leading car
makers. A pricing model, where a part of the product development fee is moved to license fee based
on the actual delivery volumes of new cars, was increasingly often taken into use in the largest
projects. When using this pricing model, which is common in the automotive industry, the project
specific positive operating result and cash flow will be typically reached first during the car
production years.

The Wireless Business Segment's net sales from continuing operations in January-December 2013
decreased by 3.7 per cent year-on-year, to EUR 61.2 million (EUR 63.5 million, 1-12 2012). The
decrease in the net sales was due to decline in the demand for R&D services in the wireless
telecommunications market. In the fourth quarter EB started the product deliveries of the tactical
communication system to Finnish Defence Forces and delivered a batch of special terminal products
to one customer for the authority use. These product deliveries generated product based net sales
of EUR 6.9 million in the fourth quarter, the rest of the net sales being R&D services sales. The
operating loss from continuing operations of the Wireless Business Segment in January-December
2013 was EUR -0.5 million including the non-recurring cost of approximately EUR 0.8 million
resulting from the cost saving measures in the first quarter of 2013 (operating profit of EUR -2.2
million including non-recurring items of approximately EUR 4 million weakening operating result,
1-12 2012). In addition to the decreased net sales, the profitability was negatively affected in
2013 by the ongoing investments into the marketing and product development of products targeted
for the global defense and other authority markets, which investments are expected to start
gradually generating net sales from the latter half of 2014 onwards. Operating result of Wireless
Business Segment in January-December 2013 without non-recurring costs was EUR 0.4 million (EUR 1.8
million, 1-12 2012).

EB and Anite plc signed an agreement on January 28, 2013, under the terms of which EB agreed to
sell its Test Tools product business to Anite ("the Transaction"). The Transaction comprised the
sale of the shares of EB's subsidiary Elektrobit System Test Ltd., a company based in Oulu,
Finland, and certain related other assets in the USA and China. EB's Test Tools product business
provided radio channel emulation tools and testing solutions for the development of the wireless
technologies and was part of EB's Wireless Business Segment employing a total of 54 persons in
Finland, USA and China. The EUR 31 million cash consideration paid for EB's Test Tools product
business, sold in January 2013, has been adjusted by EUR 0.9 million based upon the level of net
working capital and cash and debt in the Test Tools product business at the date of the
transaction. Adjustment improves EB's operating result from discontinued operations in the
reporting period and cash flow of the fourth quarter 2013 with EUR 0.9 million. In the aggregate,
the sale of the Test Tools product business resulted in a non-recurring net profit of about EUR 24
million and a non-recurring net cash flow of about EUR 28 million in 2013. 
 
 CONSOLIDATED INCOME STATEMENT (MEUR)                          1-12 2013   1-12 2012 
                                                              
12 months  
12 months 
                                                                           
restated 
 CONTINUING OPERATIONS                                                               
 Net sales                                                         199.3       173.9 
 Operating profit / loss                                             8.1         1.1 
 Financial income and expenses                                      -0.9        -0.5 
 Result before tax                                                   7.2         0.6 
 RESULT FOR THE PERIOD FROM CONTINUING OPERATIONS                    6.7         1.1 
 RESULT FOR THE PERIOD FROM DISCONTINUING OPERATIONS                24.3         1.2 
 RESULT FOR THE PERIOD                                              30.9         2.3 
 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD                          30.9         1.6 
                                                                                     
 Result for the period attributable to:                                              
 Equity holders of the parent                                       30.9         2.3 
 Non-controlling interests                                                           
 Total comprehensive income for the period attributable to:                          
 Equity holder of the parent                                        30.9         1.6 
 Non-controlling interests                                                           
                                                                                     
 Earnings per share from continuing operations, EUR                0.051       0.008 
 
 
·         Cash flow from operating activities was EUR 34.7 million (EUR 6.8 million, 1-12 2012).

·         Net cash flow was EUR 28.7 million including non-recurring net cash flow of about EUR 28
million resulting from the sale of the Test Tools product business (EUR 5.1 million, 1-12 2012).

·         Equity ratio was 65.1% (54.5%, 1-12 2012).

·         Net gearing was -46.1% (6.1%, 1-12 2012).

 

 

QUARTERLY FIGURES, CONTINUING OPERATIONS

Elektrobit Group's net sales and operating result, Continuing Operations, MEUR: 
 
                                                       4Q 13  3Q 13  2Q 13  1Q 13      4Q 12  
                                                                                     restated 
 Net sales                                              59.5   45.7   47.9   46.2        48.2 
 Operating profit (loss)                                 5.7    1.0    0.7    0.7        -0.5 
 Operating profit (loss) without non-recurring costs     5.7    1.0    0.7    1.5         3.6 
 Result before taxes                                     5.5    0.9    0.2    0.6        -0.9 
 Result for the period                                   5.0    0.8    0.2    0.6        -0.1 
 
 
Non-recurring items are exceptional gains and costs that are not related to normal business
operations and occur only seldom. These items include capital gains or losses, significant changes
in asset values such as write-downs or reversals of write-downs, significant restructuring costs,
or other items that the management considers to be non-recurring. When evaluating a non-recurring
item, the euro translation value of the item is considered, and in case of a change in an asset
value, it is measured against the total value of the asset.

Non-recurring items during 2012 and 2013 in Wireless Business Segment were  as follows:

·         Non-recurring costs related to collecting the receivables from TerreStar Companies of
EUR 1.2 million, during 2012

·         Non-recurring income of USD 13.5 million resulting from the settlement payment in the
reorganization cases of TerreStar Corporation, and non-recurring positive cash flow effect of
approximately EUR 10.8 million in the third quarter of 2012

·         non-recurring items of approximately EUR 4 million in total, booked in the fourth
quarter of 2012, as result of the financial challenges faced by a US based customer of EB's
subsidiary, Elektrobit Inc., and

·         non-recurring cost of approximately EUR 0.8 million resulting from the cost saving
measures in the Wireless Business Segment in the first quarter of 2013.

 

Net sales and operating profit development by Business Segments and other businesses, continuing
operations, MEUR: 
 
                                     4Q 13   3Q 13  2Q 13   1Q 13      4Q 12 
                                                                   
restated 
 Automotive                           41.1    34.1   32.5    30.5       31.8 
 
 Net sales to external customers   
 0.0   
 0.0  
 0.1   
 0.0      
 0.0 
 
 Net sales to other segments       
 5.4   
 1.9  
 0.1   
 1.1      
 2.6 
 
 Operating profit (loss)                                                   
 Wireless                             18.3    11.5   15.4    15.8       16.4 
 
 Net sales to external customers   
 0.0   
 0.0  
 0.0   
 0.0      
 0.0 
 
 Net sales to other segments       
 0.3  
 -0.9  
 0.6  
 -0.4     
 -3.2 
 
 Operating profit (loss)                                                   
 Other businesses                      0.0     0.0    0.0     0.0        0.0 
 
 Net sales to external customers   
 0.0   
 0.0  
 0.1  
 -0.0      
 0.1 
 
 Operating profit (loss)                                                   
 Total                                59.5    45.7   47.9    46.2       48.2 
 
 Net sales                         
 5.7   
 1.0  
 0.7   
 0.7     
 -0.5 
 
 Operating profit (loss)                                                   
 
 
The distribution of net sales by market areas, continuing operations, MEUR and %: 
 
               4Q 13     3Q 13     2Q 13     1Q 13      4Q 12 
                                                    
oikaistu 
 Asia            2.3       1.9       1.7       1.9        2.4 
             
 3.9 %   
 4.3 %   
 3.6 %   
 4.2 %    
 4.9 % 
 Americas        8.0       6.0       6.4       6.2        6.4 
            
 13.4 %  
 13.2 %  
 13.4 %  
 13.3 %   
 13.2 % 
 Europe         49.2      37.7      39.7      38.1       39.5 
            
 82.7 %  
 82.5 %  
 83.0 %  
 82.5 %   
 81.9 % 
 
 
SIGNIFICANT EVENTS DURING THE REPORTING PERIOD

 

EB lowered its profit guidance for 2012 due to the weaker than expected fourth quarter on January
10, 2013. The reason for the weakening of the fourth quarter was the non-recurring items of
approximately EUR 4 million in total, booked as result of the financial challenges faced by a US
based customer of EB's subsidiary, Elektrobit Inc. According to the lowered guidance, EB expected
the operating result of the fourth quarter of 2012 to be approximately between EUR -0.4 million
and EUR 1.1 million (EUR 3.5 million, 4Q 2011), the operating result of the second half of 2012 to
be approximately between EUR 1.7 million and EUR 3.2 million (EUR 0.4 million, 2H 2011), and the
operating result of the whole year 2012 to be approximately between EUR 2.2 million and EUR 3.7
million (operating loss of EUR -4.0 million in 2011). The expected operating results presented
above included non-recurring items that caused the lowering of the fourth quarter profit guidance,
as well as non-recurring income and costs related to the reorganization processes of TerreStar
companies, booked earlier in 2012. the Company expected the outlook for the net sales to develop
as estimated earlier and thus EB expected that the net sales of the fourth quarter of 2012 will be
approximately EUR 57 million (EUR 49.0 million, 4Q 2011), the net sales of the second half of 2012
was expected to be approximately EUR 104 million (EUR 86.1 million, 2H 2011) and the net sales of
the whole year 2012 was expected be approximately EUR 200 million (EUR 162.2 million in 2011).

EB and Anite plc signed an agreement with on January 28, 2013, under the terms of which EB agreed
to sell its Test Tools product business to Anite ("the Transaction"). The Transaction comprised
the sale of the shares of EB's subsidiary Elektrobit System Test Ltd., a company based in Oulu,
Finland, and certain related other assets in the USA and China. EB's Test Tools product business
provided radio channel emulation tools and testing solutions for the development of the wireless
technologies and was part of EB's Wireless Business Segment employing a total of 54 persons in
Finland, USA and China.  The cash consideration paid by Anite to EB as a result of the Transaction
was EUR 31.0 million on a cash and debt free basis subject to a post completion adjustment based
upon the level of net working capital and cash and debt in the Test Tools product business on
January 31, 2013. The closing of the Transaction resulted in a non-recurring net profit of about
EUR 23 million and non-recurring net cash flow of about EUR 28 million in the first quarter of
2013. The cash consideration paid for EB's Test Tools product business has been adjusted by EUR
0.9 million based upon the level of net working capital and cash and debt in the Test Tools
product business at the date of the transaction on January 31, 2013. Adjustment improves EB's
operating result from discontinued operations in the reporting period and cash flow of the fourth
quarter 2013 with EUR 0.9 million. In the aggregate, the sale of the Test Tools product business
resulted in a non-recurring net profit of about EUR 24 million and a non-recurring net cash flow
of about EUR 28 million in 2013.

EB gave advance information on its fourth quarter and full year 2012 net sales and operating
results on January 28, 2013. EB announced also to report its 2012 financial results, as provided
by the IFRS5 standard, divided between Continuing and Discontinuing Operations, and that the Test
Tools product business is classified as Discontinuing Operations in the 2012 financial statements.


Simultaneously with the announcement of the Financial Statement Bulletin 2012 on February 19,
2013, EB announced it will apply the new IFRS10 and IFRS11 standards from the beginning of 2013
and therefore will consolidate e.solutions GmbH, the jointly owned company with Audi Electronics
Venture GmbH (AEV), applying the proportionate consolidation method. As a result of the change in
the method of consolidation, the proportion of net sales and operating result of e.solutions GmbH
to be consolidated into Elektrobit group's financial statements will decrease from the previous
100% to 51%. According to the rules of the proportionate consolidation method, the consolidated
statement will also include 49% of the net sales from other Elektrobit group companies to
e.solutions GmbH.

EB started measures to improve its cost structure in the Wireless Business Segment on February 19,
2013. The measures were completed on April 4, 2013 and the Company estimates to reach the targeted
approximately EUR 2 million annual cost savings in its Wireless Business Segment, fully effective
from the second half of 2013 on. The measures resulted non-recurring costs of approximately EUR
0.8 million that affect negatively the Company's operating result of the first quarter of 2013.
The underlying reasons for the measures to improve the cost structure were the changed business
requirements. As part of these measures, EB reduced its personnel in the Wireless Business Segment
globally by altogether 32 persons, 8 of them in Finland. In addition, EB also concentrated some of
its Wireless Business Segment operations to Finland and moved the centre of its US operations from
west coast to east coast, where many of the public sector customers are located.

On August 22, 2013 EB concluded personnel negotiations that were started on August 8, 2013 in
Wireless Business Segment and decided to adjust its cost level to correspond the weakened demand
outlook for the rest of the year. The temporary layoffs were estimated to last no longer than
until the end of January 2014. With temporary layoffs EB aimed at EUR 1.5 million cost savings,
which were expected to materialize mainly during the fourth quarter. The need for temporary
layoffs and thereby actual cost savings may however change as the outlook for the rest of the year
specifies.

EB decided on November 15, 2013 that no further temporary layoffs will be made. Between September
2013 and January 2014 EB temporarily laid off altogether 74 employees for a maximum of 90 days,
part or full-time. With these measures the company estimated to reach approximately EUR 0.8
million cost savings, which were expected to materialize mainly during the last quarter of the
year. Due to the Wireless Business Segment's specified outlook for the rest of the year, the
amount of temporary layoffs was reduced from the earlier estimated maximum amount. The
materialized temporary layoffs were reduced to 64 persons and the cost savings achieved were EUR
0.6 million.

The Extraordinary General Meeting of Elektrobit Corporation was held on Wednesday December 4,
2013. The General Meeting resolved in accordance with the proposal of the Board of Directors that
on the basis of the financial statements adopted for the financial period ended on December 31,
2012, funds from the invested non-restricted equity fund be distributed to shareholders as a
repayment of capital, with the capital repayment amounting to EUR 0.11 per share. The aggregate
amount of the distribution based on the number of shares as of the date of the General Meeting
would amount to EUR 14,311,096.25. The repayment of capital was paid to shareholders recorded in
the company's register of shareholders maintained by Euroclear Finland Ltd. on the record date of
the capital repayment, December 10, 2013. The repayment of capital was made on December 17, 2013.

EB raised its profit guidance for 2013 due to the better than expected last quarter and gave a
more precise net sales outlook for 2013 on December 17, 2013. The reason for the improved
operating result outlook  of the last quarter was higher than expected net sales and better
profitability in projects in the Automotive Business Segment. EB expected the operating result of
the whole year 2013 to be approximately at level of EUR 8 million (restated operating profit
without non-recurring items of EUR 5.1 million, in 2012). Net sales was expected to grow slightly
more than expected in the last quarter and net sales of 2013 to be approximately at the level of
EUR 200 million (restated net sales of EUR 173.9 million, in 2012).

 

Stock options

 

The Board of Directors of Elektrobit Corporation decided on June 5, 2013 on the transfer of stock
options 2008A and 2008B to the Finnish book-entry system and to apply for listing of 1.400.000
stock options 2008A and of 1.400.000 stock options 2008B on the official list of NASDAQ OMX
Helsinki. The trading with the stock options started on June 17, 2013. The share subscription
period for stock options 2008A will end on March 31, 2014. The share subscription period for stock
options 2008B will end on March 31, 2015.

Pursuant to series 2008A-B stock options a total of 97,500 new shares were subscribed for between
April 2 and June 20, 2013, a total of 120,834 new shares were subscribed for between June 21 and
August 22, 2013, a total of 89,356 new shares were subscribed for between August 22 and October 8,
2013 and a total of 380,495 new shares were subscribed for between October 21, 2013 and November
21, 2013. The share subscription prices were recorded in the Company's invested non-restricted
equity fund. The respective increases in the number of the Company's shares were entered into the
Finnish Trade Register on July 5, 2013, September 6, 2013, October 18, 2013, and December 4, 2013.
The trading with the registered shares started on July 8, 2013, September 9, 2013, on October 21,
2013, and on December 5, 2013 in NASDAQ OMX Helsinki Ltd. After the registration of the new
shares, the number of shares in Elektrobit Corporation's totaled 130,100,875. More information and
the terms and conditions of stock options 2008 are available in www.elektrobit.com/investors in
the Company's web pages.

The Extraordinary General Meeting of Elektrobit Corporation, held on Wednesday December 4, 2013,
resolved in accordance with the proposal of the Board of Directors that on the basis of the
financial statements adopted for the financial period ended on December 31, 2012, funds from the
invested non-restricted equity fund be distributed to shareholders as a repayment of capital. As a
result of the capital repayment the subscription prices of shares pursuant to the series 2008A-C
stock options has been reduced with the amount of the capital repayment per share on the record
date of the capital repayment in accordance with the terms of the stock options. Hence the share
subscription price pursuant to stock options 2008A has reduced to EUR 0.07, pursuant to stock
options 2008B to EUR 0.73 and pursuant to stock options 2008C to EUR 0.61.

The Board of Directors of Elektrobit Corporation has decided on the transfer of series 2008C stock
options to the Finnish book-entry system on December 20, 2013 and to apply for listing of
1.400.000 stock options 2008C on the official list of NASDAQ OMX Helsinki. Application was made
for the listing to commence on April 1, 2014. The share subscription period for series 2008C stock
options will commence on April 1, 2014 and will end on March 31, 2016. The share subscription
price for series 2008C stock options is EUR 0.61 per share. The amount of the dividend or the
amount of the distributable non-restricted equity decided before share subscription will be
deducted from the share subscription price as per the dividend record date or the record date of
the repayment of equity.

 

BUSINESS SEGMENTS' DEVELOPMENT DURING OCTOBER-DECEMBER 2013 AND MARKET OUTLOOK

EB's reporting is based on two segments which are the Automotive and Wireless Business Segments.

 

AUTOMOTIVE

 

In Automotive Business Segment EB offers software products and R&D services for carmakers, car
electronics suppliers and other suppliers to the automotive industry. The offering includes in-car
infotainment solutions, such as navigation and human machine interfaces (HMI), as well as software
for electronic control units (ECU) and driver assistance (DA). By combining its software products
and R&D services, EB is creating unique, customized solutions for the automotive industry. EB's
software products are: EB street director navigation software, EB GUIDE HMI development and speech
dialogue platform, EB tresos product line of software components used in ECUs and tools for their
configuration, and EB Assist, an extensive product line with tooling and a software development
kit for driver assistance solutions. These software products generate license fees, often combined
with supply of R&D services for customized solutions.

EB and Audi's subsidiary, Audi Electronics Venture GmbH (AEV), have a jointly owned company
e.solutions GmbH that is currently developing infotainment software and provides systems
engineering and systems integration services for Volkswagen Group car models. EB also delivers
products and R&D services to the joint venture. EB owns 51% of e.solutions GmbH and AEV 49%.

 

Development of the Automotive Business Segment in October - December 2013

EB's net sales in Automotive Business Segment continued its strong growth during the fourth
quarter of 2013 and amounted to EUR 41.1 million (restated net sales of EUR 31.9 million, 4Q
2012), representing a growth of 29.1 % year-on-year. A significant proportion of the growth in the
net sales came from the growth of e.solutions GmbH, a jointly owned company with AUDI. The
operating profit was EUR 5.4 million (restated operating profit of EUR 2.6 million, 4Q 2012). The
good operating result in the fourth quarter was affected by the software license sales focusing to
the latter half of the year and by other seasonality factors, as well as improved profitability of
projects.

The demand for automotive software products and services developed well. The software license
income grew from previous year i.a. from in-car navigation systems and EB GUIDE development
platform, used for developing Human Machine Interfaces (HMIs).

EB continued its R&D investments into the automotive software products and tools. In October EB
announced a new version of its HMI development platform, EB GUIDE 5.5, which includes a wide-range
of consumer-inspired features including 3D content import, compelling graphical animations and
effects, speech recognition for dynamic data, as well as multi-touch and touch gesture recognition
for smartphone-like user interaction. EB GUIDE 5.5 also enables carmakers and suppliers to create
multi-modal HMIs enriched with HTML5 application-like content.

 

Automotive Business Segment Market Outlook

 

As the global economy is showing signs of recovery, the global car market is expected to grow by
3% in 2014 according to the forecast made by VDA (Verband der Automobilindustrie). For several
years carmakers have continued to invest in automotive software for new car models and the market
for software products and services is estimated to continue growing during 2014. The demand for
EB's products and services is estimated to develop positively year-on-year during 2014 in
Automotive Business Segment. 

The market for electronics and software for cars is estimated to continue growing in a long term.
The study "Future Industry Structure of Automotive (FAST) Electronics 2025" from Berylls assumes a
growth of automotive electronics from EUR 215 billion in 2012 to EUR 456 billion in 2025 (CAGR
6%). 

 

Growth in automotive software market is mainly driven by:

*The majority of in-vehicle innovations come from electronics and software. Carmakers can develop
more vehicle features and create product differentiation as software innovation allows for great
product innovation jumps in the areas of comfort, information and entertainment, powertrain and
communication.
*The software and hardware in electronics solutions will be gradually separated from each other in
order to speed up the innovation and to improve the quality and cost efficiency.
*Consumers expect in the car the same richness of features and user experience they know from the
internet and mobile devices, and therefore infotainment systems become increasingly common in all
car price categories.
*Mobile connectivity will become one of the fastest-growing Internet-connected device platforms
among other connected consumer electronics devices, such as media tablets and smartphones. Gartner
estimates that by 2016, the majority of car buyers in automotive markets like in the U.S. and the
Western Europe will view the availability of in-vehicle, web-enabled dynamic content as a key
buying criterion when considering a standard brand car. This tipping point will be reached even
sooner - during 2014 - for premium-brand cars.
*Connected Car solutions and cloud connections enable bringing of new applications and
enhancements to car functions, for example real-time traffic information for navigation. The
increasing demand to better integrate mobile devices with the car has been reflected in consumer
electronics companies such as Apples "iOS in the Car" or Google's announcement of Open Automotive
Alliance.
*New Active Safety Systems and Driver Assistance applications are being brought to markets as
automated driving is becoming one of the key trends in the markets.

 

 

WIRELESS

 

In the Wireless Business Segment EB offers products and product platforms for defense, public
safety and other authorities markets as well as for industrial use. Further EB offers product
development services and customized solutions for wireless communications markets and for
companies needing wireless connectivity for their products. EB's products in the Wireless Business
Segment are the EB Tactical Wireless IP Network for tactical communications, EB Tough VoIP for
tactical IP-based communication, EB Wideband COMINT Sensor for signals intelligence. The product
platforms are EB Counter RCIED Platform for electronic warfare, the Android-based EB Specialized
Device Platform and EB LTE Connectivity Module for specialized markets. For the latest wireless
technologies and applications EB offers a broad range of R&D services such as consulting,
integration, and development of software and hardware.

 

Development of the Wireless Business Segment in October - December 2013

 

Net sales of continuing operations of the Wireless Business Segment during the last quarter of
2013 grew by 12.0 per cent year-on-year to EUR 18.4 million (EUR 16.4 million, 4Q 2012). Operating
profit from continuing operations was EUR 0.3 million (operating loss of EUR -3.2 million
including non-recurring items of approximately MEUR 4.0 that were booked due to the financial
problems of a US-based large customer of EB, 4Q 2012).

In the last quarter EB started the product deliveries of the tactical communication system to
Finnish Defence Forces and delivered a batch of special terminal products to one customer for the
authority use. These product deliveries generated product-based net sales of EUR 6.9 million in
the fourth quarter, the rest of the net sales being R&D services sales. Net sales and operating
result were negatively affected by the decreasing demand from a significant customer in the second
half of 2013 due to which the company started cost level adjustment measures.

Between September and November 2013 EB gave temporary layoff notice to 74 employees for maximum of
90 days, part of full time. On November 15, 2013 EB decided, that no new temporary layoffs will be
given. With these measures the company estimated to target approximately EUR 0.8 million cost
savings, that were expected to materialize mainly during the fourth quarter. As the demand outlook
of Wireless Business Segment became more accurate, it was possible to decrease the amount of
temporary layoffs from previously estimated maximal amount. The materialized amount of temporary
layoffs decreased to 64 employees and the cost savings were EUR 0.6 million.

 

Wireless Business Segment Market Outlook

 

In the Wireless Business Segment, EB's customers operate in various industries, each of them
having own industry specific factors driving the demand. A common factor creating demand among the
whole customer base is the introduction of new technologies. In 2014 the implementation of LTE
(Long Term Evolution) technology is expected to continue to be important technological change
driving the demand. Due to the long history in developing smart phones and mobile communication
devices, EB is in a good position to offer solutions, where e.g. mastering of multi-radio
technologies and end-to-end system architectures covering both terminals and networks is needed.

Following factors are estimated to create demand for EB's products and services in 2014 and
beyond:

*In the mobile infrastructure equipment market the use of LTE technology is expected to continue
strong. This creates the need for services for LTE base station design. There is a wide range of
frequencies allocated for LTE globally thus creating a need to develop multiple products to cover
the market, and creating demand for R&D services for design of product variants.
*The trend of adopting new commercial technologies, such as LTE and smart phone related operating
systems and applications, is expected to continue in special verticals such as public safety. The
specific LTE frequency band allocations for authorities create demand for customized LTE devices,
such as EB's specialized terminals, tablets and communication modules.
*The need for R&D services for connected devices for business or consumer use, such as smart watch
and other Wearable devices is evolving and creating demand for customized solutions based on EB's
product platforms.
*In the defense market's tactical communication the need for larger amounts of information data
grows, generating demand for broadband networks, such as EB's customized IP (Internet Protocol)
based tactical communications solutions.

 EB aims at bringing its products to the global defense and other authorities markets, where they
are expected to start gradually generating net sales from the latter half of 2014 onwards. The
public defense budget cuts affect negatively on the demand for products and product development
services in Europe and also all over the world, simultaneously increasing the competition between
the suppliers.

The defense, authorities and national security markets are by their nature slowly developing
markets. They are characterized by long sales cycles driven by purchasing programs of national
governments, and the purchases of the selected products take place over several years.

 

RESEARCH AND DEVELOPMENT

 

EB continued its investments in R&D in the automotive software products and tools in Automotive
Business Segment, and in products and product platforms for the defense and public safety markets
in Wireless Business Segment.

The total R&D investments for continuing operations during January-December 2013 were EUR 18.5
million (restated EUR 22.0 million, 1-12 2012), equaling 9.3% of the net sales (restated 12.6%,
1-12 2012). The share of R&D investments in Automotive Business Segment was EUR 14.3 million
(restated EUR 17.9 million, 1-12 2012) and in Wireless Business Segment in continuing operations
EUR 4.2 million (EUR 4.1 million, continuing operations, 1-12 2012).

EUR 0.0 million of R&D investments of the reporting period were capitalized (EUR 2.9 million, 1-12
2012). The amount of capitalized R&D investments at the end of December 2013 was EUR 12.0 million
(EUR 13.5 million, 31.12.2012). A significant part of these capitalizations is related to customer
agreements of Automotive Business Segment, where future license fees, based on the actual car
delivery volumes, are expected to accumulate in the coming years. Depreciations of R&D investments
were EUR 1.6 million during the reporting period (EUR 0.9 million, 1-12 2012).

The total negative effect, caused from research and development investments, their capitalizations
and their depreciation, on EB's income statement in 2013 was EUR 20,1 million (EUR 19,9 million,
2012).

 

OUTLOOK FOR 2014       

EB expects for the year 2014 that net sales and operating result will grow from the previous year
(net sales of EUR 199.3 million and operating profit of EUR 8.1 million, in 2013). Net sales
growth rate in 2014 is expected to be slower than in the previous year (net sales growth 14.6 per
cent, 2013). Net sales and operating result are expected to mainly accumulate during the latter
half of the year mostly due to the seasonality factors of Automotive Business Segment.

The growth of net sales and operating result in 2014 is expected to come mainly or wholly from the
Automotive Business Segment, where the demand for EB's software solutions is expected to remain
good. The demand for R&D services in Wireless Business Segment is driven by the implementations of
LTE (Long Term Evolution) technology and by the growing need to wirelessly connect various
consumer and professional devices to other equipment. The demand for R&D services in the mobile
communication market is expected to decrease slightly from the previous year.  EB aims at bringing
its Wireless Business Segment's products to the global defense and other authority markets, and
expects to start gradually generating net sales from these markets from the latter half of 2014
onwards.

More specific market outlook is presented under sections "Market outlook for the Automotive
Business Segments" and "Market outlook for the Wireless Business Segment".

The profit outlook for the year 2014 does not include possible non-recurring income or costs
related to the reorganization cases of TerreStar Networks Inc. More information about the
reorganization cases of TerreStar Networks and the amount of the receivables and collecting the
receivables as well as other uncertainties regarding the outlook is presented in the "Identified
Risks and Uncertainties". 

 

RISKS AND UNCERTAINTIES

 

Risks and uncertainties

 

EB has identified a number of business, market and finance related risk factors and uncertainties
that can affect the level of sales and profits.

 

MARKET RISKS

 

In the ongoing financial period, global economic uncertainty may affect the demand for EB's
services, solutions and products and provide pressure on e.g. pricing. In the short term such
uncertainty may affect, in particular, the utilization and chargeability levels and average hourly
prices of R&D services.

As EB's customer base consists mainly of companies operating in the fields of automotive and
telecommunications and defense and public safety authorities, the company is exposed to market
changes in these industries. In both of EB's business segments a significant part of net sales
accumulates from just a few customers. In the Automotive business segment a significant part of
net sales tied to projects carried out with different Volkswagen Group companies. EB and Audi's
subsidiary, Audi Electronics Venture GmbH (AEV), have a jointly owned company e.solutions GmbH
that is developing infotainment software and provides systems engineering and systems integration
services for Volkswagen Group car models. EB also delivers products and R&D services to the
jointly owned company. In addition, EB delivers products and R&D services directly or through
TIER1 suppliers to different Volkswagen Group companies. In the Wireless business segment a
significant part of net sales accumulates from selling R&D services to a certain mobile
communications equipment manufacturer and from selling products and R&D services to the Finnish
Defence Forces. Deviation in anticipated business development with such customer concentrations
may translate as a significant deviation in the EB's outlook, both in terms of net sales and
operating result, during the ongoing financial period and thereafter. EB seeks to expand its
customer base on a longer term and reduce dependence on individual companies and hence the company
will thereby be mainly affected by the general business climate in automotive and
telecommunication industries. The more specific market outlook has been presented under the
"Market Outlook for the Automotive Business Segment" and "Market Outlook for the Wireless Business
Segment" section.

 

BUSINESS RELATED RISKS

 

EB's operative business risks are mainly related to following items: uncertainties and short
visibility on customers' product program decisions, their make or buy decisions and on the other
hand, their decisions to continue, downsize or terminate current product programs, execution and
management of large customer projects, ramping up and down project resources, availability of
personnel in labor markets (in particular in Germany), accessibility on commercially acceptable
terms and on the other hand successful utilization of the most important technologies and
components, competitive situation and potential delays in the markets, timely closing of customer
and supplier contracts with reasonable commercial terms, delays in R&D projects, realization of
expected return on capitalized R&D investments, obsolescence of inventories and technology risks
in product development causing higher than planned R&D costs. Revenues expected to come from
either existing or new products and customers include normal timing risks. EB has certain
significant customer projects and deviation in their expected continuation could result also
significant deviations in the Company's outlook. In addition there are typical industry warranty
and liability risks involved in selling EB's services, solutions and products. 

EB's product delivery business model faces such risks as high dependency on actual product
volumes, timing risks and potential delays in the markets. The above-mentioned risks may manifest
themselves as lower amounts of product delivered or higher costs of production, and ultimately, as
lower profit. EB's net sales from the automotive industry is currently primarily driven by the
development of software for electronic devices to be used in new car models, and sales of licenses
for in-car software and  software development tools. EB aims at developing its business model to
be more based on software products, which is expected to increase the direct dependency of net
sales on production volumes over the forthcoming years. The dependency on EB's net sales on car
delivery volumes is also increased by EB's customers tending to allocate a part of the software
development costs to be paid in license fees based on the actual car delivery volumes. When using
this pricing model, which is common in the automotive industry, the project specific operating
result and positive cash flow will be typically reached first during the car production years and
this may cause significant additional financing needs for the R&D phase. However this model can
offer EB also an opportunity for higher cumulative income, in case the take rate of additional
software products or services, like in-car navigation system in the new cars sold, would be higher
than originally estimated. This is dependent among others on the amount of additional software
products and services, such as in-car navigation, chosen to new cars at the time of purchase.

Some of EB's businesses operate in industries that are heavily reliant on patent protection and
therefore face risks related to management of intellectual property rights, on the one hand
related to accessibility on commercially acceptable terms of certain technologies in the EB's
products and services, and on the other hand related to an ability to protect technologies that EB
develops or licenses from others from claims that third parties' intellectual property rights are
infringed. Additionally, parties outside of the industries operate actively in order to protect
and commercialize their patents and therefore in their part increase the risks related to the
management of intellectual property rights. At worst, claims that third parties' intellectual
property rights are infringed, could lead to substantial liabilities for damages. Also EB has
received a formal request from one of its customers for indemnification that is unspecified both
in terms of the basis of liability and the amount claimed. Based on information available it does
not seem likely that the claim would result in significant liability in the short term. It is
possible that, based on later information, the above views may need to be reconsidered. In
addition, the progress of the customer projects and delivery capability may be also affected by
potential challenges in global accessibility of key technologies and components on commercially
acceptable terms. In the Wireless business segment accessibility of chipsets to provide
LTE-capabilities on commercially acceptable terms may affect the development and delivery of
competitive special terminal products.

 

FINANCING RISKS

 

Global economic uncertainty may lead to payment delays, increase the risk for credit losses and
weaken the availability and terms of financing. To fund its operations, EB relies mainly on income
from its operative business and may from time to time seek additional financing from selected
financial institutions. Currently EB has a committed overdraft credit facility agreement of EUR 10
million and committed revolving credit facility agreement of EUR 10 million, valid until June 30,
2014. These agreements include financial covenants related to group's equity ratio and earnings
before interest and taxes (EBITDA), to be reviewed semiannually. There is no assurance that
additional financing will not be needed in case of clearly weaker than expected development of
EB's businesses or in case customer commitments of Automotive Business Segment would represent
more than planned funding for R&D phase.

Customer dependency in some parts of EB's business may translate as accumulation of risk with
respect to outstanding receivables and ultimately with respect to credit losses. EB asserted
claims for its receivables in the amount of approximately USD 25.8 million (EUR 18.8 million as
per exchange rate of February 19, 2014) in the Chapter 11 cases of its customers TerreStar
Networks Inc. and its parent company TerreStar Corporation filed in 2010 and 2011. In addition to
the booked receivables, EB asserted claims for additional costs in the amount of approximately USD
2.1 million (EUR 1.5 million as per exchange rate of February 19, 2014) resulting mainly from the
ramp down of the business operations between the parties. Thus, EB asserted claims against each of
the TerreStar entities in amounts totaling USD 27.9 million (EUR 20.3 million as per exchange rate
of February 19, 2014).  Due to uncertainties related to the accounts receivable, EB booked an
impairment of the accounts receivable in the amount of EUR 8.3 million during the second half of
2010.

By order of the bankruptcy court dated August 24, 2012, Elektrobit Inc., a subsidiary of EB, and
TerreStar Corporation and certain of its preferred shareholders, entered into a full and final
settlement of various disputes that had arisen between them in the TerreStar Corporation
reorganization cases.  Pursuant to this settlement, on August 28, 2012 TerreStar Corporati
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