Kontron AG raises revenue and earnings

TecDAX-listed Kontron AG, one of the world's leading providers of embedded computer technology with around 2,500 employees, brought the 2008 financial year to a successful conclusion despite the global financial and economic crisis. The targets that had been set and announced - double-digit revenue growth, an even faster rise in profitability, and an extremely solid cash position - were fully achieved despite the deterioration in the economic environment. Consequently, the company continued along the profitable growth path of recent years. In 2008, Kontron AG's total revenue rose to EUR 496.9 million compared with EUR 446.5 million in the previous year.

This corresponds to an 11 percent growth rate. It also reflected a continuous year-on-year rise in revenue from quarter to quarter. In the fourth quarter alone, a new record level of EUR 141 million was achieved. The strong dynamic in business growth was reflected in the strong order intake and in the resulting further growth in orders on the books. Order intake was up from EUR 267.9 million in 2007 to EUR 291.4 million in 2008. Design wins, which provide a key indicator for medium- and long-term growth, also reached a new record level of EUR 317.1 million by the end of the fiscal year, compared with a volume of EUR 273.3 million in the previous year.

EBIT margin at almost 10 percent
Kontron AG's significant revenue growth last year also fed through to further improvement in its earnings and profitability. Operating earnings (EBIT) rose to EUR 48.3 million compared with EUR 46.3 million in the previous year. This resulted in an EBIT margin slightly below 10 percent. High one-off extraordinary effects arising from the sale of the Mobile Computer division, and the acquisition of PLG, which together amounted to almost EUR 7 million in 2007, should be taken into account when drawing a comparison with the previous year's result. Operating earnings rose by around 18 percent year-on-year when adjusted for this factor. Net income came in at EUR 36.3 million compared with EUR 32.6 million in the previous year. Here too, extraordinary effects in the third quarter of 2007 should be taken into account. Earnings per share rose 15 percent from 60 euro cents to 69 euro cents.

Equity ratio at 73.1 percent
The company regards itself as enjoying a highly healthy liquidity position, even in today's global economic crisis, in view of its cash holdings of EUR 53.1 million, a positive net cash position (after deducting liabilities to banks) of over EUR 41 million, as well as an operating cash flow EUR 27.5 million and an equity ratio of 73.1 percent (given total assets of EUR 396.8 million compared with EUR 381.9 million in 2007).

Broadly positioned for the future
Kontron regards itself as well positioned to continue to operate profitably in the market, even given the ongoing global economic crisis, thanks to its high degree of diversification, the company’s ongoing Profit Improvement Program, and the continued trend towards outsourcing. CEO Ulrich Gehrmann commented as follows at today's press conference: "While it is impossible for us to decouple ourselves entirely from the current negative economic situation, the success of our company nevertheless depends to a large extent on our own performance. From this vantage point, economically difficult times not only entail risks, but also opportunities. Given ongoing cost pressure on the customer side, we are able to generate new business as a classic outsourcing partner. This is why we will orient our strategy to an even greater extent towards these potentials, especially in the long-term infrastructure project area." The company aims to boost its EBIT margin from currently slightly below 10 percent to 12 percent by 2011.

Growth in all regions
Kontron AG's dynamic business growth resulted from all regional markets in equal measure. The ongoing growth trend continued in Europe with a rise of around 5 percent compared with the previous year. Kontron generated 46 percent of its total revenue in Europe. The EBIT margin amounted to 11.5 percent.

Business in America experienced further stability in 2008. Although growth of 14 percent was above-average (it was significantly more when adjusted for currency effects), profitability was lent even greater sustainability. For example, the EBIT margin rose from 8.9 percent in the previous year (excluding extraordinary effects arising from the sale of the mobile product line) to 10.9 percent. With 29 percent of total Kontron Group revenue, and rising profit margins, the American continent consequently represents its second most important strategic sales market.

High growth levels, particularly in emerging markets, continued unabated, as in previous years. At 21,1 percent, the highest growth rates were achieved in these regions in 2008. Their share of Kontron Group total revenue was 25 percent. On the earnings site too, Kontron AG's restructuring measures in Asia are already bearing their first fruits. The EBIT margin in emerging markets was up from 6.9 percent in 2007 to 7.6 percent. The successfully implemented strategic reorganization of sales structures had a particularly positive effect in this respect: since January 2008, Kontron has assumed control and management of its sales companies in China, Australia, Japan, and Korea. Further production capacities were also relocated to the Penang location in Malaysia after Kontron acquired 100 percent of the shares in this Malaysian company at the end of June 2008.

Diversification in application areas
Kontron AG's high degree of diversification is having a sustainably positive effect in vertical markets. Weaker growth rates in the automation area of application, particularly for European mechanical and plant engineering companies, were in the main more than compensated for by higher orders in the promising areas of transport/infrastructure, the energy sector, medical and security technology, and telecommunications. In overall terms, the distribution among the seven central vertical markets is as follows: industrial automation 23 percent, telecommunications 22 percent, infotainment 19 percent, security/defense 11 percent, transport/infrastructure 8 percent, the energy sector 10 percent, and medical technology 7 percent. As a consequence, Kontron generated the significantly largest part of its revenue in comparatively defensive areas that are relatively independent of the economic cycle such as medical technology, energy, security, telecommunication and infrastructure.

Strategic purchases strengthen market position
The 2008 acquisition of Rackmount Server's communications business division from Intel^® Corporation represented an ideal opportunity for Kontron AG to complete its product range in the important telecommunications application area. The sales volume for this new acquisition will be around USD 35 million for 2009. Kontron also further expanded its high-margin security technology/aerospace application area in 2008 with the acquisition of the French company Thales Computers S.A.

Joint-venture in Asia cuts materials costs and boosts capacities
Kontron AG's higher profitability resulted particularly from the successful implementation of the Profit Improvement Program. The production location in Penang, Malaysia, which Kontron acquired at the end of 2005, was of central significance in this respect. Gradual relocation of basic production to this location has resulted in significant savings. Asia is already the location of over 60 percent of Kontron's entire production today. The success of these measures was clearly underscored by the figures. In 2005, production costs still amounted to 8.8 percent of total revenue, while this figure has now been cut to 6.6 percent. "Asia also offers further cost-saving potentials, which we can exploit further in the future," CEO Ulrich Gehrmann went on to emphasize. An important step towards the planned medium-term enhancement of the EBIT margin to 12 percent by 2011 was realized in March last year with the founding of a joint-venture with the Taiwanese company Quanta Computer Inc. Taipei, the world's largest producer of laptops, and the related creation of a strategic purchasing team in Taipei. Kontron can now significantly optimize its materials and manufacturing costs on the basis of considerably more favorable Asian purchasing and production terms. A further strategic advantage lies in the option whereby Kontron can now also offer very major volumes of over 100,000 units on a cost-effective basis, and consequently further expand its customer base.

Outlook: Continued profitability in a difficult environment
Now, as before, Kontron AG is operating in a rapidly consolidating market, and ranks as the fastest growing company expanding by organic growth, holding a market share of over 12 percent, according to Ulrich Gehrmann. The company retained its number one ranking in the market in 2008. While its major international competitors are favoring acquisition-led growth, Kontron will continue to prioritize organic growth in the future, as well as targeted strategic acquisitions at fortuitous prices. Specific forecasts are almost impossible to make given the current uncertain global economic prospects, according to Gehrmann. From today's perspective, however, Kontron AG enjoys the "best opportunities to continue to operate profitably in the market" as a result of its broad sector diversification and presence in all important markets. The high order backlog of EUR 291 million at the end of the year and the large volume of design wins of EUR 317 million nevertheless send positive signals, even if markets are peaking, and the automation market, in particular, remains under pressure.

On the other hand, Kontron is realizing rising revenue shares in defensive areas that are comparatively independent of the business cycle such as infrastructure, defense and security, as well as the energy sector, telecommunications and medical technology. Gehrmann went on to add: "We are assuming that today's highly uncertain economic situation persists until 2010, which has prompted us to introduce targeted measures in order to hedge our assets, financing and earnings positions." Given going cost pressure on the customer site, Kontron can also generate new business as a classic outsourcing partner. Gehrmann noted that the very high level of design wins in the first quarter of 2009 in the telecommunications area, as well as in the infrastructure and infotainment application areas, are good signals that confirm this trend.