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Elcoteq SE’s Financial Statements Bulletin January-December 2005


February 9, 2006, Elcoteq SE’s net sales in 2005 rose 43% on the previous year to more than four billion euros. Operating income improved as well, totaling 76.5 million euros (57.3 in 2004). Cash flow for the full year was clearly positive. The main events in Elcoteq’s financial year were the opening of new manufacturing plants in India and Russia and the conversion of the company’s form into a European company (SE).

Financial Year 2005
* Net sales increased 43% to 4,169.0 million euros (2,921.8)
* Operating income improved 34% on the previous year to 76.5 million euros (57.3)
* Income before taxes was 59.3 million euros (44.9)
*Earnings per share (EPS) were 1.34 euros (1.01)
* Rolling 12-month return on capital employed (ROCE) was 17.6% (19.5%)
* Cash flow after investing activities was 24.4 million euros (-80.3)
* Interest-bearing net debt was 90.3 million euros (98.2)
* The Board proposes a dividend of EUR 0.66 per share

Final Quarter in 2005
* Net sales increased 37% on the same period last year to 1,182.0 million euros (864.6 in Q4/2004 and 1,194.7 in Q3/2005)
* Operating income rose roughly 25% to 25.5 million euros (20.4)
* Income before taxes was 19.7 million euros (14.6)
* Earnings per share (EPS) were 0.48 euros (0.42)
* Cash flow after investing activities was 5.5 million euros (-44.0)

In preparing the financial statements for 2005 Elcoteq SE has applied the recognition and measurement principles of the International Financial Reporting Standards (IFRS), which Elcoteq adopted at the beginning of 2004. The comparison figures for the income statement and earnings per share in the descriptive section are the figures for continuing operations in the same period of 2004 unless otherwise stated. The other comparison figures include the impact of the discontinued operation.

IFRS 2 (Share-Based Payments) and IFRS 5 (Non-Current Assets Available for Sale and Discontinued Operations) were adopted at the beginning of 2005, which has caused changes to the 2004 comparison figures. The changes necessitated by these standards have been applied retrospectively to the 2004 comparison figures in the manner required by the standards. The impacts of the changes on the 2004 income statement are described in the first interim report for 2005.

Market Review

The upward trend in the communications technology end-markets that started towards the end of 2002 continued in 2005. In the same period the market for original design manufacturing (ODM) and electronics manufacturing services (EMS) grew at an average annual rate of roughly 15%. In 2005 the ODM business grew by approximately 25% and the traditional EMS business by around 10%, driven principally by strong demand for mobile phones. According to estimates by market research institutions more than 800 million mobile phones were sold in 2005, which was almost 25% more than in the previous year. The market for communications network equipment grew by some 10% in 2005.

Elcoteq consolidated its position as an EMS provider to communications technology companies in 2005. Elcoteq’s market share was about 8%, which makes the company the fourth largest in its field.

Growth in the number of mobile phones is forecast to continue rising in 2006. The largest growth markets are countries in Asia-Pacific and Latin America - India, China, Russia and Brazil, where the number of mobile phone users is growing. The communications network equipment segment is expected to grow by slightly less than 10% in 2006. In the communications technology sector, the ODM and EMS market is forecast to show annual growth of around 10% over the next few years.

Financial Year 2005: Net Sales and Result Improved

Elcoteq’s net sales in 2005 rose 43% to 4,169.0 million euros (2,921.8). Operating income was 76.5 million euros (57.3), or 1.8% of net sales. Income before taxes amounted to 59.3 million euros (44.9) and net profit was 41.3 million euros (30.7). Earnings per share showed a clear improvement, standing at 1.34 euros (1.01).

A prominent factor underlying the growth in net sales was continued strong demand for mobile phones. Net sales increased in all geographical areas. Growth was strongest in the Americas, where net sales more than doubled compared to the previous year, due largely to the acquisition of the Thomson business at the end of 2004. Thomson accounted for almost 250 million euros of the Group’s net sales in 2005. Net sales in Asia-Pacific rose by some 50% on the previous year, and net sales in Europe by some 30%.

Operating income in 2005 was a distinct improvement on 2004. The operating margin, however, was down on the previous year due to the still weak capacity utilization levels and ramp-up costs of the new manufacturing plants and to changes in the Terminal Products business area, where unit growth of manufactured products was smaller than sales growth as the product mix shifted to products requiring higher-value materials. Despite the reduction in margins, return on capital employed in Terminal Products was good in 2005. The profitability of the Communications Network Equipment business area improved as well, although this segment’s operating income and return on capital employed are still not satisfactory.

The Group’s net financial expenses amounted to 16.0 million euros (11.3). The increase was especially attributable to a change in the debt structure and to greater average use of the accounts receivable sales programs due to the growth in sales. The addition of subordinated notes to the company’s portfolio of financial instruments, coupled with longer loan maturities, strengthen the company’s capital structure.

Fourth-Quarter Net Sales and Result

Demand for services during the fourth quarter was on a par with the third quarter. Net sales in the fourth quarter totaled 1,182.0 million euros (864.6 for Q4/2004 and 1,194.7 for Q3/2005). The slight decrease in net sales from the previous quarter arose from lower sales by the Communications Network Equipment business area. Operating income in the fourth quarter amounted to 25.5 million euros (20.4 for Q4/2004 and 25.6 for Q3/2005) and income before taxes was 19.7 million euros (14.6).

The operating income of Terminal Products improved compared to the third quarter due to higher production volumes. The product mix shifted towards products requiring lower-cost materials. The profitability of the Communications Network Equipment business area, on the other hand, weakened clearly owing both to a decline in manufacturing volumes and to an unfavorable product mix.

Financing and Cash Flow

Liquidity was good throughout the period. At the end of December Elcoteq had unused but immediately available credit limits totaling 293.5 million euros (292.4 at the end of Q3/2005 and 289.9 at the end of 2004). There were no open issues of the company’s 200 million euro commercial paper program at December 31, 2005 (40.0 million euros at December 31, 2004).

Interest-bearing net debt at the end of December amounted to 90.3 million euros (98.2), and gearing was 0.3 (0.4). The solvency ratio was 26.0% (30.5%). Cash flow from sold accounts receivable totaled 148.8 million euros (213.9 at the end of Q3/2005 and 164.0 at the end of 2004). Return on capital employed was 17.6% (19.5%).

In May Elcoteq issued notes totaling 20 million euros and subordinated notes totaling 10 million euros in two private placements. The terms of the subordinated notes are identical to the subordinated notes issued in December 2004. The subordinated notes mature on December 22, 2011 but the company has the right to redeem the notes prematurely at six-month intervals from December 22, 2009. In September Elcoteq issued subordinated notes in the nominal amount of 50 million euros with a maturity of five years in a private placement issue.

In 2005 cash flow after investing activities was 24.4 million euros (-80.3) and 5.5 million euros (-44.0) in the final quarter. Despite the strong growth in net sales cash flow in 2005 was clearly positive, due to effective working capital management. Average turnover of working capital was roughly one week at the end of the year, which is an outstanding result compared to other companies in this sector. Compared to 2004 the improvement in turnover of working capital was particularly strong in Communications Network Equipment.

Capital Expenditures

Gross capital expenditures on fixed assets in 2005 totaled 123.6 million euros (128.3), or 3.0% of net sales. Depreciation amounted to 78.2 million euros (60.4), or 1.9% of net sales. The largest single investment item was the new manufacturing plant in St. Petersburg, Russia. Other major investment items included the addition of assembly capacity in Europe and Asia-Pacific. Capital expenditures in the fourth quarter totaled 35.4 million euros (45.2).

Elcoteq also increased its manufacturing capacity through operating leases worth roughly 25.2 million euros (35.3) in 2005.


At the end of the December the Group employed 19,802 (19,480) people: 869 (817) in Finland and 18,933 (18,663) in other countries. The geographical distribution of the workforce was as follows: Europe 9,984 (10,008), Asia-Pacific 6,086 (5,364) and Americas 3,732 (4,108). The average number of employees directly employed by the company during 2005 was 15,242 (13,065).


Elcoteq has a certified quality and environmental system covering all its units. The company’s environmental management system was updated in 2005 to comply with the requirements of the new ISO 14001:2004 standard. The company’s environmental performance is described in more detail in a separate Corporate Responsibility Report to be published in 2006.

Business Area Performance

Elcoteq has two business areas: Terminal Products and Communications Network Equipment. In 2005 net sales of Terminal Products contributed 82.5% (79%) and net sales of Communications Network Equipment 17.5% (21%) of Elcoteq’s consolidated net sales.

In 2005 companies within the Nokia and Ericsson groups accounted for altogether 69% (73%) of Elcoteq’s net sales. In addition to these companies, Elcoteq’s top five customers included Siemens, Sony Ericsson and Thomson.

Terminal Products

Net sales of the Terminal Products business area in 2005 rose on the previous year by approximately 50% to 3,439.0 million euros (2,300.0). The segment’s operating income was 95.0 million euros (77.7), or 2.8% of net sales. Net sales in the fourth quarter of the year totaled 999.5 million euros (688.8) and the segment’s fourth-quarter operating income was 32.2 million euros (28.3). Underlying the growth in full-year net sales was good demand for mobile phones.

The strategic goal of Elcoteq’s Terminal Products business area is to further broaden and balance its customer base. Established customer relationships as well as newer customer accounts, for example with Thomson and RIM, developed well during 2005. Home communications represented a larger share of Terminal Products’ net sales than in the previous year. This product group includes set-top boxes and electronics for flat-screen televisions.

Elcoteq estimates that the net sales of its Terminal Products business area will grow in 2006 more rapidly than overall growth in the EMS market.

Communications Network Equipment

Net sales of the Communications Network Equipment business area in 2005 grew 17% on the previous year to 730.1 million euros (621.8) and the segment’s operating income was 23.2 million euros (16.1), or 3.2% of net sales. Net sales grew faster than infrastructure market growth. Net sales in the final quarter of 2005 were 182.6 million euros (175.9) and the segment’s operating income was 2.9 million euros (2.5).

Elcoteq expects the market share of its Communications Network Equipment business area to strengthen in 2006 and its net sales to grow compared to 2005. Elcoteq’s aim is to raise the profitability of Communications Network Equipment and to increase its share of the Group’s net sales.

Geographical areas

Elcoteq has three geographical areas (GAs): Europe, Asia-Pacific and Americas.

In 2005 the geographical areas contributed to the Group’s net sales as follows: Europe 56% (63%), Asia-Pacific 26% (25%) and Americas 18% (12%).


Net sales of GA Europe were 2,345.0 million euros (1,843.1).

Elcoteq’s new manufacturing plant in St. Petersburg, Russia was completed in September. The plant has a total floor space of approximately 15,000 square meters and it currently employs almost 300 people. The total investment in the plant between 2004 and 2005 amounted to roughly 27 million euros which, among other things, includes the land, the plant’s construction and utilities, as well as machinery investments.

Elcoteq sold its subsidiary in Überlingen, Germany, Elcoteq Elektronik GmbH and its manufacturing plant to the German company Rafi GmbH & Co. KG on December 31, 2005. The divested company had an enterprise value of roughly 6 million euros. The sale of the plant did not affect Elcoteq’s 2005 result. The plant’s net sales in 2005 amounted to approximately 25 million euros.

A new office was opened in Budapest in the spring which functions as the headquarters of Elcoteq’s GA Europe.


Net sales of GA Asia-Pacific increased by some 50% to 1,069.4 million euros (714.1). In 2005 Elcoteq expanded its service offering in China by starting to deliver larger product entities.

Elcoteq opened a new manufacturing plant in Bangalore, India, in spring 2005. In India Elcoteq operates in rented premises with a floor space of about 5,500 square meters and at the end of the year the company employed roughly 300 people. The plant caters to the needs of both terminal products and communications network equipment customers.

In the autumn Elcoteq sold the machinery used to manufacture industrial electronics at the Beijing plant, along with the inventory of this business, to Enics Electronics Beijing Limited.


Net sales of GA Americas more than doubled on the previous year to 754.6 million euros (364.6). The increase was especially due to the acquisition of the Thomson business in Mexico at the end of 2004, which made Elcoteq one of the world’s leading manufacturers of set-top boxes.

Decisions of the Annual General Meeting

Elcoteq’s Annual General Meeting was held in Helsinki on March 23, 2005. The AGM approved the Board’s proposal that the Board be authorized to float one or several convertible bond loans and/or to issue stock options and/or to raise the share capital in one or several installments through a rights issue. The company’s share capital may be increased by at most 2,456,468.80 euros under this authorization. This authorization is in force for one year from the decision of the Meeting, i.e. until March 23, 2006.

The Meeting elected seven members to the Board of Directors: President Martti Ahtisaari; Mr Heikki Horstia, Vice President, Treasurer, Wärtsilä Corporation; Dr Eero Kasanen, Rector of the Helsinki School of Economics; Mr Antti Piippo, principal owner and founder-shareholder of Elcoteq SE; Mr Henry Sjöman, founder-shareholder of Elcoteq SE; Mr Juha Toivola, MSc, and Mr Jorma Vanhanen, founder-shareholder of Elcoteq SE. The terms of office of the Board members extend until the end of the following Annual General Meeting. Mr Ahtisaari, Mr Horstia, Mr Kasanen and Mr Toivola are independent Board members.

Convening after the Annual General Meeting, the Board of Directors elected Mr Piippo as its chairman and Mr Toivola as the deputy chairman. Mr Piippo was elected chairman of the Nomination Committee and Mr Sjöman, Mr Vanhanen and Mr Toivola as this committee’s other members. Mr Piippo was elected chairman of the Working Committee and Mr Sjöman, Mr Vanhanen and Mr Toivola as this committee’s other members. Mr Toivola was elected chairman of the Compensation Committee and Mr Ahtisaari, Mr Horstia and Mr Kasanen as this committee’s other members. The Board elected Mr Toivola chairman of the Audit Committee and Mr Ahtisaari, Mr Horstia and Mr Kasanen as this committee’s other members.

The AGM decided to re-elect the firm of authorized public accountants KPMG Oy Ab under the supervision of principal auditor Mr Mauri Palvi (APA) as the company’s auditors.

Extraordinary General Meeting: Elcoteq Becomes a European Company

An extraordinary general meeting was held on September 27, 2005. The EGM decided to convert Elcoteq from a public limited company into a European company (SE, Societas Europaea). Since October 1, 2005 the company’s new name has been Elcoteq SE.

Shares and Shareholders

During 2005 altogether 462,700 new A shares were registered as a result of subscriptions under the 2001 stock options scheme. At the end of 2005 the company’s share capital totaled 12,441,430.80 euros and there were altogether 31,103,577 shares divided into 20,526,577 Series A shares and 10,577,000 Series K shares. All the K shares are held by the company’s three principal owners.

Elcoteq had 11,694 registered shareholders on December 31, 2005. There were a total of 8,382,054 nominee-registered and foreign-registered shares, or 26.95% of the total number of shares and 6.64% of the votes outstanding.


Market research institutions forecast annual growth of roughly 10% for the ODM and EMS business in communications technology in the coming years. The same level of growth is also forecast in the end-markets for mobile phones and communications network equipment. The largest growth areas are countries in Asia-Pacific and Latin America, where the number of mobile phone users is growing.

Elcoteq believes that the use of ODM services, particularly in mobile phones, will become more prevalent and demand for this type of services is also growing in communications network equipment. Elcoteq will continue gradual expansion of its service network and will supplement its own expertise through collaboration with various design companies and component suppliers.

Alongside strengthening of the service offering, the Group’s key strategic goals will continue to be balancing the customer portfolio and expanding operations into new product areas that support the company’s operating model. Home communications is considered one potential growth area.

Elcoteq estimates that its net sales in 2006 will increase faster than the average growth in the EMS market and that operating income will improve compared to the previous year.

Net sales in the first quarter of 2006 are expected to grow compared to the same period last year but to remain below the level in the final quarter of 2005. Operating income is forecast to be slightly below the level in the first quarter last year.

Board’s Dividend Proposal

The Board of Directors proposes to the Annual General Meeting on March 23, 2006 that a dividend of 0.66 euros be distributed on the financial year 2005, representing about half of the company’s net profit for the year.

Annual General Meeting 2006

Elcoteq’s Annual General Meeting in 2006 will be held in Helsinki on March 23. The Nomination Committee of the Board of Directors will propose to the AGM that Board’s current members be re-elected. The members have consented to their re-election.

The invitation to the meeting and the agenda of the meeting will be published on March 3, 2006 as a stock exchange release, on the company’s website at and in the Finnish newspapers Kauppalehti and lltalehti.

Press Conference

Elcoteq will hold a conference for media representatives and analysts in the Bulsa-Freda Cabinet of the Scandic Hotel Simonkenttä (1st floor), Simonkatu 9, Helsinki, starting at 1.00 pm (EET) on Thursday, February 9, 2006

Web Conference and Call for Investors and Analysts

A web conference and call in English will be held on Thursday, February 9, 2006 starting at 3.30 pm EET (1.30 pm UK time). To participate by phone, please link in to and call +44 20 7162 0125, code Elcoteq.

A recording of the web conference can be heard until February 14, 2006 on +44 20 7031 4064, code 691451.

Elcoteq releases its January-March 2006 interim report at 9.00 am (EET) on April 27, 2006.


The following conversion rate is used in this financial statements bulletin:
1 EUR = 1.1797 USD


1 Income statement
2 Balance sheet
3 Cash flow statement
4 Calculation of changes in shareholders’ equity
5 Segment reporting
6 Personnel
7 Key figures
8 Assets pledged and contingent liabilities
9 Quarterly figures
10 Segment information


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