November 12, 2008
Fiscal 2008: Profit target achieved despite adverse environment
- Sales: Up 3 percent to EUR 1.478 billion
- EBIT: Up 22 percent to plus EUR 105 million
- Earnings per share: Up to plus EUR 0.99 (fiscal 2007: plus EUR 0.78)
Net cash flow: Up to plus EUR 43 million (fiscal 2007: plus EUR 31 million)
- Sales: Up to EUR 382 million (up 1 percent year on year, up 4 percent sequentially)
- EBIT: Plus EUR 23 million (including a special one-time charge)
(Q4 2007: plus EUR 11 million; Q3 2008: plus EUR 28 million)
1. Q4 2008
In the first half of Q4 2008 (July 1 through September 30, 2008), demand for EPCOS’ products still remained stable. The company was able to boost its sales to EUR 382 million, up from the figures both a year ago and in the previous quarter.
Earnings before interest and tax (EBIT) were EUR 23 million. This figure includes special charges of about EUR 6 million relating to EPCOS’ combination with the components business of TDK. If these charges were excluded, operating earnings would – as forecasted – have been at the same level as in the previous quarter.
1.1.1. Comparison with Q3 2008
|EUR million||Q3 2008||±||Q4 2008|
Business with almost all industries served contributed to the sequential increase in sales in Q4 2008. Sales of products for automotive electronics applications dropped as declining automotive production figures also negatively impacted EPCOS’ business toward the end of the quarter.
Decreased demand in the automotive industry also affected the regional breakdown of EPCOS’ sales – especially in Germany, where sales were down 5 percent. Sales in other European countries remained stable. Sales growth was driven by double-digit growth in Asia and a mid-single-digit percentage increase in sales in the NAFTA region.
Sales by business segments
|EUR million||Q3 2008||±||Q4 2008|
|Capacitors and Inductors||144||+8%||156|
Compared to the previous quarter, sales at Capacitors and Inductors rose to EUR 156 million in the period under review. All product groups contributed to this increase in sales. Business with power capacitors, which improve energy efficiency in power distribution networks, for example, was particularly positive.
In the Ceramic Components segment sales declined to EUR 119 million due to weaker business with products for applications in automotive electronics.
Sales of surface acoustic wave (SAW) components were up to EUR 107 million. Sequentially, demand improved for both multimedia filters for use in entertainment electronics equipment and for radio frequency filters and modules for use in mobile communication applications. Part of this positive development was attributable to Christmas business expected by customers. The roll-out of new UMTS handsets likewise contributed to higher sales, as EPCOS occupies an even better position in this market segment than for simpler mobile devices.
1.1.2. Comparison with Q4 2007
|EUR million||Q4 2007||±||Q4 2008|
In Q4 2008, sales for the EPCOS Group as a whole were slightly higher than in the same quarter a year earlier. Business with customers in the information and communications sector generated double-digit growth, as did business with distributors. Sales of products for industrial electronics applications posted single-digit growth. In this area, growth was once again driven primarily by the trend toward greater energy efficiency in energy, drive and lighting systems. Positive business development in these industries more than made up for declining sales of components for automotive and consumer electronics applications.
Regionally, the significantly weakened business with the automotive electronics industry is reflected above all in a single-digit decline in EPCOS’ sales in Germany. Nevertheless, highsingle-digit growth in Asia and a slight increase in sales to both Europe without Germany and the NAFTA region were more than enough to compensate for this decline.
Sales by business segments
|EUR million||Q4 2007||±||Q4 2008|
|Capacitors and Inductors||137||+13%||156|
Sales growth was strongest in the Capacitors and Inductors segment, which posted a yearon-year sales increase of 13 percent in Q4 2008. Sales of all product groups contributed to this positive development. In particular, demand for components to be used in industrial electronics applications remained strong.
Sales at Ceramic Components were down 13 percent. This segment especially has been affected by the sales crisis in the automobile industry. The sharpest drop was recorded in sales of piezo actuators for fuel injection systems.
SAW Components increased its sales by 4 percent in Q4 2008. Sales of multimedia filters were down year on year, but were more than offset by the stronger demand for SAW products for mobile communication applications.
EBIT by business segments
|EUR million||Q4 2007||Q3 2008||Q4 2008|
|Capacitors and Inductors||-5.0||+11.6||+11.9|
The Capacitors and Inductors segment again achieved double-digit EBIT of EUR 11.9 million in the quarter under review. The EBIT margin remained unchanged at around 8 percent.
Despite lower sales, Ceramic Components recorded EBIT of EUR 10.7 million and an EBIT margin of 9 percent.
At SAW Components, EBIT improved to EUR 6.9 million sequentially. The EBIT margin was more than 6 percent. In Q4, this segment was once again affected by the strength of the euro against the US dollar and the Japanese yen. Both exchange rates were unfavorable to EPCOS. As a result, EPCOS yet again had to contend with substantial price erosion in the double-digit percentage range.
|EUR million||Q4 2007||Q3 2008||Q4 2008|
|Earnings per share |
(in EUR, undiluted)
In Q4 2008, the EPCOS Group achieved EBIT of EUR 23.1 million. As noted in section 1, this figure includes special charges relating to the business combination with TDK’s components business.
Net income was EUR 8.8 million. In the context of TDK’s acquisition of a majority stake in EPCOS, investors can prematurely redeem the convertible bond issued by EPCOS in 2003. This reduction in the bond’s scheduled maturity is associated with the need for around EUR 7 million in compound interest, which burdens the net income.
Earnings per share were EUR 0.14.
Net cash flow was plus EUR 24 million in the quarter under review. Net income and a significant inventory rundown had a positive impact on this figure.
2. Review of fiscal 2008
The business environment grew increasingly adverse in the course of fiscal 2008. From quarter to quarter, it became more difficult for EPCOS to meet its sales and earnings targets. Even so, the company did largely manage to achieve its goals – clear evidence that ongoing measures to sharpen the company’s competitive edge are having a sustainable impact.
“We can look back on a successful fiscal 2008 overall. Although the economic climate became increasingly difficult, we were able to maintain the course of growth achieved since 2006 and improve our earnings by more than 20 percent,” said EPCOS President and CEO Gerhard Pegam, summing up the fiscal year just ended at the company’s annual press conference in Munich. “At the same time, we had been looking for a strong and preferably Japan-based partner – and have found an ideal solution in the technology company TDK. Combining EPCOS with the components business of TDK will create a new global leading manufacturer of components, modules and systems, a company that can offer its customers a comprehensive and highly competitive portfolio of products and services.”
|EUR million||Fiscal 2007||±||Fiscal 2008|
EPCOS’ sales rose 3 percent to around EUR 1.48 billion in fiscal 2008. The company achieved this growth despite again having to struggle with the strength of the euro and the resulting negative currency translation effects. The direct translation of sales denominated in non-euro currencies cost EPCOS growth of about 4 percentage points year on year. “Adjusted for currency effects,” Pegam noted, “EPCOS thus grew by 7 percent.”
In the fiscal year under review, EPCOS posted single-digit growth in its sales of products for industrial electronics applications, for information and communication technology applications and to distributors. At the same time, sales of components for consumer electronics applications dropped by a single-digit figure. Sales to automotive electronics customers weakened noticeably in the second half of the fiscal year, but remained virtually stable for the year as a whole.
Regionally, Germany and the other European countries accounted for most sales growth. Unfavorable currency translation effects kept sales roughly stable in Asia and the NAFTA region.
|EUR million||Fiscal 2007||Fiscal 2008|
|Earnings per share (in EUR, undiluted)||+0.78||+0.99|
In fiscal 2008, EPCOS once again significantly improved its earnings indicators. This achievement is all the more remarkable because the translation of sales and expenses denominated in non-euro currencies and higher price erosion due to exchange rates placed a burden on earnings in the double-digit-million-euro range.
EBIT rose 22 percent to EUR 105 million. The EBIT margin improved by 1 percentage point to
7 percent. Excluding the costs incurred in the course of the combination with TDK’s components business, EPCOS thus exactly hit its own earnings forecast.
Net income was up 25 percent to EUR 64 million. Earnings per share increased by 27 percent to EUR 0.99.
Net cash flow improved by 39 percent to plus EUR 43 million. Higher Group earnings in particular had a positive impact on this indicator, and stood against an increase in net working capital as well as capital expenditures that were higher than depreciation and amortization.
At September 30, 2008, EPCOS employed about 21,200 people worldwide, a year-on-year increase of 16 percent. This increase was attributable primarily to volume growth, the firsttime consolidation of the EPCOS Xiamen joint venture and the insourcing of production activities previously contracted out to external suppliers. Human resources were increased in countries with low labor costs – above all in China, but also in Indonesia, for example, where EPCOS built and opened a new factory to manufacture temperature sensors.
In the period under review, the share of EPCOS employees in countries with low labor costs rose by 4 percentage points to 82 percent. EPCOS currently employs nearly two thirds of its people
(62 percent) in Asia, 21 percent in Europe without Germany, 9 percent in Germany and 8 percent in North and South America.
3. Business combination with TDK’s components business
As they prepare for a combined future under the roof of a new company (still to be formed), EPCOS and TDK are progressing well and according to schedule. TDK’s public tender offer to EPCOS’ shareholders has been completed successfully. TDK now holds more than 94 percent of EPCOS’ shares. With the exception of Brazil, China and South Korea, all relevant antitrust authorities have already approved the transaction without any further conditions.
The future time frame remains unchanged. Several working groups involving representatives of both companies have already been formed and are advancing the process of integration. Provided that the TDK general meeting in June 2009 approves the carve-out of the relevant components business from the TDK Group – and there is no doubt that it will do so – TDK will move swiftly to effect this carve-out. The new company which will then own the majority stake in EPCOS will probably be formed in just under a year.
The economic environment is becoming increasingly gloomy. EPCOS is thus confronted by a series of negative factors that are beyond its control. The crisis on the world’s financial markets does not appear to be over; and it is not yet possible to assess the full impact of this crisis on the global economy. The automotive industry has clearly been hit very hard by the economic slowdown. Since products used in automotive electronics applications account for the largest single share of EPCOS’ sales, declining sales of mid-range and premium cars in particular will place a burden on business development, as electronic content is especially high in both these vehicle categories.
At present, significant fluctuations in energy and material costs and the high volatility of exchange rates are largely responsible for the general climate of uncertainty on the markets. EPCOS also sees positive opportunities in the trend in exchange rates witnessed in recent weeks, in which the euro has weakened considerably against the US dollar and the Japanese yen. However, any positive effects from this exchange rate development would not affect EPCOS’ business for several months.
Looking at business development in Q1 2009, difficult economic conditions in general and the current massive slump in demand from the automotive electronics industry in particular lead EPCOS to expect a significant sequential decline in sales and earnings against the previous quarter.
EPCOS AG is a leading manufacturer of electronic components, modules and systems headquartered in Munich. With its broad portfolio EPCOS offers a comprehensive range of products from a single source and focuses on fast-growing and technologically demanding markets, in particular in the areas of information and communication technology, automotive electronics, industrial electronics and consumer electronics. The EPCOS Group has design and manufacturing locations and sales offices in Europe, Asia, and in North and South America.
Electronic components are found in every electrical and electronic product and are indispensable for their flawless operation. Products from EPCOS store electrical energy, filter frequencies, and protect against overvoltage and overcurrent.
In fiscal 2008 (October 1, 2007, to September 30, 2008), EPCOS posted sales of EUR 1.48 billion. At the end of the fiscal year, the company employed about 21,200 people worldwide.
N.B. All financial data has been compiled to IFRS and is not audited.
Live transmission of conference call
On November 12, 2008, the Management Board of EPCOS will inform analysts and investors of business performance in the fourth quarter of fiscal 2008 at a conference call starting at 12 noon, Central European Time, 6 a.m., US Eastern Standard Time. This conference can be followed live at the EPCOS corporate website (www.epcos.com/conferencecall). A transcript of the speeches will be available for downloading after the end of the conference call.
This document may contain forward-looking statements with respect to EPCOS’ financial condition, results of operations, business, strategy and plans. In particular, statements using the words “expects”, “anticipates” and similar expressions, and statements with regard to management goals and objectives, expected or targeted revenue and expense data, or trends in results of operations or margins are forwardlooking in nature. Such statements are based on a number of assumptions that could ultimately prove inaccurate, and are subject to a number of risk factors, including changes in our customers’ industries, slower growth in significant markets, changes in our relationships with our principal shareholders, the ability to realize cost reductions and operating efficiencies without unduly disrupting business operations, currency fluctuations, unforeseen environmental obligations, and general economic and business conditions. EPCOS does not assume any obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.