INCAP GROUP FINANCIAL STATEMENTS FOR 2004: TURNAROUND TO GROWTH TRACK

 

 
  • net turnover rose by 16% on the previous year to EUR 75.7 million (2003: 65.2 million).
  • profitability improved and operating profit was EUR 1.6 million (2003: a loss of 1.9 million), or 2.1% of net turnover
  • earnings per share were EUR 0.09 (0.20 negative)
  • deferred tax receivables of EUR 1.7 million were booked to extraordinary income and a write-down of EUR 3.9 million was booked to extraordinary expenses in connection with structural arrangements for the aluminium machining and plating operations
  • there was favourable growth in demand, and co-operation with strategic customers was expanded
 
 
NET TURNOVER AND FINANCIAL PERFORMANCE IN OCTOBER-DECEMBER
 
The fourth-quarter net turnover was the best of the entire year, as it was a year ago. Net turnover for the period increased by 30% on the previous quarter and was EUR 21.7 million, representing growth of 9% on the same quarter a year ago (Oct.-Dec. 2003: 20.0 million).
 
Operating profit in October-December was EUR 0.4 million (a loss of 0.1 million). Earnings per share for the period were EUR 0.03 (0.01 negative).
 
 
 
 
FULL-YEAR NET TURNOVER AND FINANCIAL PERFORMANCE IN 2004
 
Consolidated net turnover rose by 16% on the previous year to EUR 75.7 million (2003: 65.2 million). Incap generated operating profit of EUR 1.6 million (a loss of 1.9 million). Deferred tax receivables of EUR 1.7 million were booked to extraordinary income in 2004. A total of EUR 3.9 million of write-downs were made for structural arrangements within aluminium machining and plating operations and booked to extraordinary expenses. Owing to these non-recurring items, the full-year result was a loss of EUR 1.2 million.
 
Earnings per share were EUR 0.09 (0.20 negative) and equity per share was EUR 1.00 (1.06). The Group’s equity ratio was 32% (34%) and total assets were EUR 36.1 million (37.7 million).
 
 
 
 
TREND IN THE OPERATING ENVIRONMENT
 
The improved demand towards the end of 2003 remained at a good level in 2004 as well. Competition amongst providers of electronics manufacturing services was still tight. The continuous need to lower production costs led to an increase in outsourced manufacturing, especially in labour-intensive operations, to countries with a low cost level. It was still difficult to read the trend in the market, and there were rapid changes in demand.
 
 
DEVELOPMENT OF INCAP’S OPERATIONS
 
Incap retained its strong position as a manufacturing services partner of its strategic customers. Delivery agreements were expanded to both new products and ever-larger integrated deliveries.
 
A balanced customer mix and sectoral structure was maintained in line with Incap’s strategy. Deliveries to the telecommunications sector increased faster than other client industries, and demand for security and healthcare technology products also picked up.
 
The development of engineering design services has moved ahead thanks to actions aimed at commercialising services, beefing up Incap’s own personnel resources and expanding co-operation with consulting and engineering companies. Sales and marketing resources were also strengthened.
 
A special efficiency-boosting area was materials management, where the aim was to bring about a substantial increase in the inventory turnover rate, to improve delivery reliability and to shorten production throughput times.
 
There was increased interest in electronics manufacturing located in Estonia. On the basis of a study concerning various expansion alternatives, it was decided to triple the production capacity of the unit in Kuressaare.
 
It was decided to lease an SMD assembly line and ancillary optical quality inspection device for the electronics unit in Vuokatti. In order to modernise the machinery capacity for sheet metal fabrication in Helsinki, an agreement was signed, after the close of the financial year, on the purchase of a modern punch press with integrated laser cutting. Due to increased demand for RFID applications, a new chemical milling line was purchased for Ultraprint Oy.
 
Preparations for complying with the lead-free process required by the RoHS directive were continued. The first manufacturing line employing the lead-free process went into operation towards the end of the year, and Incap’s electronics manufacturing will go over to a lead-free process during 2005, before the deadline specified in the directive. Product and component traceability was developed further within electronics manufacturing.
 
BUSINESS DEVELOPMENT PRIORITIES
 
In accordance with its strategy, Incap will concentrate on technically demanding products that have medium-sized or small production volumes and whose manufacture calls for a very flexible way of working. The present operational model and customer base support the chosen strategy, which highlights Incap’s present strengths: flexibility, quick response and professionalism.
 
Incap’s objective is to secure a solid position as a European electronics and mechanical fabrication contract manufacturer. Instead of concentrating on a specific industry, the target is to maintain a balanced customer mix.
 
Services covering a product’s entire life cycle are being developed in mainline manufacturing and especially within design functions. Incap is strengthening further its ability to deliver integrated product packages incorporating electronics and mechanical fabrication and is ready to take on a broad responsibility for the customer’s manufacturing and services connected with it.
 
Incap is seeking a strong increase in its volume of operations primarily through organic growth, but it is also prepared to expand its scope by means of M&A arrangements and by taking on customers’ outsourcing of their entire production.
 
Measures aiming at improving profitability and boosting efficiency are continuing.
 
FINANCING AND CASH FLOW
 
The Group’s liquidity was satisfactory: the quick ratio was 0.9 (0.7) and the current ratio 1.6 (1.5). Cash flow from operations was EUR 1.6 million (4.6 million) and the change in cash flows was a decrease of EUR 0.8 million (increase of 0.6 million).
 
Consolidated shareholders’ equity amounted to EUR 11.7 million at the close of the report period (12.9 million). Liabilities totalled EUR 24.4 million (24.8 million), of which interest-bearing liabilities amounted to EUR 11.0 million (13.1 million).
 
Net financial expenses were EUR 0.6 million (0.9 million) and depreciation EUR 2.8 million (3.6 million). Net debt decreased to EUR 9.1 million (12.8 million) and the gearing ratio was 91% (92%). Interest-bearing net debt amounted to EUR 10.6 million at the close of the financial year (11.9 million). The equity ratio was satisfactory: 32% (34%). The Group’s liquid assets at 18 February 2005 amounted to EUR 2.3 million, of which EUR 1.8 million consisted of unused credit facilities. The company estimates that available funds will suffice at least in accordance with the liquidity plan that has been drawn up for the next 12 months.
 
CAPITAL EXPENDITURES
 
The Group’s capital expenditures in the financial year totalled EUR 0.4 million (EUR 0.5 million), or about 1% of net turnover (1%). The largest single capital expenditure item was a chemical milling line that had a price tag of about EUR 0.3 million. Other capital expenditures went mainly for replacing equipment and for software.
 
RESEARCH AND DEVELOPMENT
 
Spending on research and development amounted to EUR 1.9 million (2.0 million), or 3% of net turnover (3%). Incap’s research and development activities consist largely of the development of the company’s own processes and the chief areas of the R&D effort in 2004 were the development of traceability and the lead-free process. Research and development expenditure has been booked to expenses for the financial year.
 
PERSONNEL
 
At the beginning of the year the Incap Group had a payroll of 552 employees and at the end of the year it had 544 employees. The number of laid-off staff decreased from 51 employees at the beginning of the year to 19 employees at 31 December 2004. New staff were hired for sales, purchasing and design services.
 
CORPORATE GOVERNANCE
 
In its corporate governance, Incap observes the new Corporate Governance recommendation that was published by the Helsinki Stock Exchange, the Central Chamber of Commerce and the Confederation of Finnish Industry and Employers and came into force at the beginning of July 2004. The updated corporate governance principles according to the recommendation were approved at a meeting of Incap Corporation’s Board of Directors in June.
 
ANNUAL GENERAL MEETING
 
The Annual General Meeting of Incap Corporation was held on 20 April 2004 in Oulu. The Annual General Meeting adopted the consolidated and parent company financial statements for 2003 and granted release from liability to the responsible officers. No dividend was paid for the 2003 financial year.
 
The Annual General Meeting authorised the Board of Directors to decide on increasing the share capital through one or more rights issues and/or the floating of one or more issues of convertible bonds and/or the granting of stock options such that the authorisation provides for raising the company’s share capital by a maximum of 4,092,775.68 euros (not an exact figure).
 
In May 2004 the Board of Directors exercised part of its authorisation to implement a stock option scheme targeted at the Group’s key employees. At 31 December 2004 the Board of Directors had a valid authorisation to increase the share capital by EUR 3,033,191.74.
 
BOARD OF DIRECTORS
The Annual General Meeting re-elected Seppo Arponen, Kalevi Laurila, Jorma Terentjeff and Juhani Vesterinen to seats on the Board of Directors. Timo Leinilä and Sakari Nikkanen were elected new members of the Board of Directors. From amongst its number, the Board of Directors re-elected Jorma Terentjeff chairman.
 
AUDITORS
 
The independent firm of accountants Ernst & Young Oy was the company’s auditor, with Rauno Sipilä, Authorised Public Accountant, acting as principal auditor.
 
ADOPTION OF IFRS STANDARDS (IAS)
 
The Incap Group will adopt financial reporting in accordance with international IFRS standard in its 2005 financial statements, and the first IFRS interim report will be published for January-March 2006. Information on the effects on financial figures of the transition to IFRS standards will be presented during 2005.
 
SHARE AND SHARE PRICE TREND
 
The number of shares is 12,180,880. The price of the Incap Corporation share varied in the range of EUR 1.65 to EUR 2.59, and the share price at the close of the year was EUR 1.90. Share turnover was 28%.
 
At the end of the report year the company had 976 shareholders. The company’s market capitalisation at 31 December 2004 was EUR 23.1 million.
 
STOCK OPTIONS
 
The subscription period for the Group’s 1998 stock option scheme expired on 30 November 2004. Warrants have not been exercised to subscribe for shares.
 
In May 2004 the company introduced a new stock option scheme that commits key personnel to ownership of Incap shares on a long-term basis. A total of 630,000 option rights were granted, entitling their holders to subscribe for an equal number of shares. On the basis of the subscriptions, Incap’s share capital can rise by a maximum of about EUR 1,058,400. In the first phase, stock options were allocated to thirteen Incap Group key employees, who at the same time gave their commitment to abide by the terms of the company’s long-term share ownership programme. It was a condition for granting of the stock options that the optionholder would first purchase a given amount of Incap shares.
 
The Board of Directors directed a total of 702,000 warrants at Varma Mutual Pension Insurance Company entitling the holders of said warrants to subscribe for an equal number or shares. The subscription period for the shares commenced on 1 June 2003 and it ends on 31 December 2005. The subscription price of the shares is EUR 2.50 per share. If Varma exercises its option rights-based warrants in their entirety, the shareholding of Varma Mutual Pension Insurance Company in Incap Corporation will be 5.4% of the company’s share capital and voting rights.
 
ANNUAL GENERAL MEETING IN 2005 AND BOARD PROPOSAL FOR THE DISPOSAL OF PROFITS
 
The Annual General Meeting of Incap Corporation will be held on Thursday, 31 March 2005 beginning at 2.00 p.m. in the Hotel Lasaretti at the address Kasarmintie 13, 90100 Oulu. The Board of Directors will propose to the Annual General Meeting that the loss for the financial year be transferred to the retained earnings account and that no dividend be distributed for the 2004 financial year.
 
EVENTS AFTER THE CLOSE OF THE FINANCIAL YEAR
 
The Board of Directors authorised the company’s management in January 2005 to explore measures whereby the company could exit its loss-making aluminium machining and plating operations. The market situation for these services has changed materially and the demand for machining in particular declined markedly during 2004. The negotiations with the personnel employed in the machining and plating operations, in accordance with the Co-determination Act, have been started and a solution will be sought as quickly as possible.
 
OUTLOOK FOR 2005
 
According to the forecasts of various research institutes, the growth outlook for electronics manufacturing services is good. It is believed that manufacturing volumes of electronics products will grow and there will be a further increase in the outsourcing of production.
 
Incap is seeking to boost its net turnover both by strengthening its position as a supplier to present customers and by cultivating new customer relationships over the long term. On the basis of the forecasts made by customers, Incap Group’s net turnover in 2005 is estimated to grow moderately. The Group’s profitability is expected to improve from the level reached in 2004 thanks to a rise in net turnover, enhanced materials functions and an improvement in productivity. Structural arrangements within machining and plating functions are estimated to improve the Group’s result right from 2005.
 
 
Incap’s Interim Report for January-March 2005 will be published on Tuesday, 26 April 2005.
 
 
INCAP CORPORATION
Board of Directors
 
 
Juhani Hanninen
President and CEO
 
The full report including tables can be downloaded from the link below.