Annual Report 1999/2000 Carlo Gavazzi Group

Transcription

1 Annual Report 1999/2000 Carlo Gavazzi Group

2 At a Glance Best operational result since 1985 Operating revenue exceeds the CHF 400 million mark significantly, reaching CHF 449 million mportant step in focusing strategy achieved by sale of various participations Automation Components improves operating result despite flat revenue development Engineering and Contracting increases revenue significantly and doubles operating profit Electronic Packaging continues to boost bookings and revenue and achieves record earnings (CHF million) 1999/ /99 % Bookings Operating revenue EBT Net income Cash flow nterest-bearing debt Shareholders equity Operating revenue (CHF million) Operating revenue by business unit (CHF million) /96 96/97 97/98 98/99 99/ % 36 % 33% Electronic Packaging 161 Automation Components 148 Engineering and Contracting 141

3 Five-Year Financial Summary (CHF million) 1999/ / / / /96 Bookings Order backlog Operating revenue Gross profit EBTDA EBT Earnings before taxes and minorities Net income Cash flow* Net cash provided by operating activities** Free cash flow*** Depreciation and amortization Additions to fixed assets Accounts receivable nventories Uncompleted contracts, net Net working capital Current assets Fixed assets, net ntangible assets, net nterest-bearing debt Current liabilities Long-term liabilities Minorities Shareholders equity Total liabilities and shareholders equity Number of employees (average) EBT Net income (CHF million) (CHF million) /96 96/97 97/98 98/99 99/ /96 96/97 97/98 98/9999/ * Net income + depreciation + amortization + change in provisions gain (loss) on sale of investments or assets ** As defined by US GAAP (page 29) *** Net cash provided by operating activities purchase of fixed assets, net

4 nformation for nvestors Share price (CHF) Carlo Gavazzi bearer share Vontobel Small Companies Price ndex Share volume (CHF) Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Carlo Gavazzi bearer share Share price (CHF) Carlo Gavazzi bearer share Vontobel Small Companies Price ndex

5 nformation for nvestors 1999/ / / / /96 Registered shares Nominal value CHF 100 Shares issued Number Share of capital % Share of voting rights % Share price The registered shares are not traded on the stock exchange Bearer shares Nominal value CHF 500 Shares issued Number Share of capital % Share of voting rights % Share price as of March 31 CHF Share price high CHF Share price low CHF Average daily volume Number P/E Ratio Factor Earnings per share CHF Book value per share CHF Stock market capitalization CHF in percentage of revenue % in percentage of equity % Dividend per share CHF 40* dividend yield % 2.4* total pay-out CHF * pay-out ratio % 26.1* Share ownership as of March 31, 2000 Voting rights > 5% Capital rights > 5% Gavazzi Family (direct and indirect) 81.2 % 46.6 % A&A Actienbank (Bull & Bear AG) 8.6 % Vontobel Swiss Small Companies Fund 7.8 % CS Group various funds 5.7 % Restriction of voting rights There are no limits on registration or voting rights Conditional share capital as of March 31, bearer shares For issue to employees and members of the board of directors (CHF ) of the company or subsidiaries Future events Shareholders meeting July 28, 2000, at 11:00, at the Congress Center Metalli, Zug nterim report 2000/01 December 1, 2000 Press and financial analysts meeting 2000/01 June 14, 2001, at 10:30, at the Hotel Widder, Zurich *Proposal of the Board of Directors

6 ndex Carlo Gavazzi Group 4 Group Profile 6 Letter to the Shareholders 8 Review of Operations 10 Automation Components 14 Engineering and Contracting 18 Electronic Packaging 22 Board of Directors and Management 24 Consolidated Financial Statements Carlo Gavazzi Holding AG 44 Financial Statements Appendices 50 Group Companies and Contact Persons 55 Carlo Gavazzi on the nternet 56 Glossary 3

7 Group Profile Our mission The Carlo Gavazzi Group is an innovator in the design, manufacturing and marketing of electronic and electric equipment targeted at the global markets of industrial automation, energy and environment and information processing. Our structure Carlo Gavazzi is a diversified, internationallyactive industrial group organized in three business units under the umbrella of a holding company. t is the function of the holding company to ensure planning and development of the group s business portfolio, to choose a coherent set of strategies and objectives, to monitor their implementation and the efficiency of the corresponding management tools and processes, to select the upper-level management, to directly manage corporate finance, controlling, tax planning, management information systems, communication and investor relations. The business units operate separately within the framework of defined strategies and objectives; they are responsible for research and development, manufacturing, quality assurance, marketing and sales, human resources, logistics, finance and control. Group executives lead their business units as autonomous businessmen with strong entrepreneurial drive and full profit and loss and balance sheet responsibility. Our objectives For customers To provide them with technologically innovative and competitive solutions, in compliance with their requirements and expectations. For employees To create an environment conducive to their professional and personal development. For shareholders To obtain a fair and equitable return on their investment through sustained development of our core activities. Our principles Customer focus To create added value for our customers by identifying and meeting their requirements and establishing long-term partnerships. Organization To adapt structures and processes to market needs and delegate responsibility. Corporate culture To promote an environment conducive to mutual respect and cooperation. Management style To mark clear leadership and integrity by doing what we say. 4 CARLO GAVAZZ GROUP

8 Our activities Automation Components Business Unit This unit designs and manufactures in its own factories, located in Denmark, taly and Malta, electronic and electromechanical control components for the global industrial automation markets. Products (sensors, monitoring relays, timers, solid-state relays, electronic motor controllers and fieldbus systems) provide automation solutions for machinery, equipment, plants and buildings. Typical customers are original equipment manufacturers of packaging machines, plastic-injection moulding machines, conveying and material handling equipment and lifts. Products are marketed across Europe and North America through a network of 16 wholly-owned Carlo Gavazzi sales companies and in other countries by more than 40 independent national distributors. Engineering and Contracting Business Unit This unit is a turnkey supplier of electrical, instrumentation and control packages for energy production and distribution as well as for environmental protection and industrial process applications. t also engages in the turnkey supply of smaller power plants fuelled by renewable energy sources, electrical substations and water treatment plants. The range of services includes project management, engineering, procurement, installation, commissioning, maintenance and training. Customers are public and independent power producers, municipalities and industrial companies in taly, the Middle East and the Asian Pacific Basin. Electronic Packaging Business Unit This unit designs, manufactures and markets in the USA enclosures and cabinets for the packaging and interconnection of electronic system modules. The use of its high-speed backplanes allows fast and interference-free data transfer among these modules. The system integration activity provides customers with complete and fully-tested systems on a turnkey basis. Recently, the portfolio was extended to include the design and manufacture of industrial PCs and /O-solutions. Electronic Packaging operates manufacturing facilities both on the East and West Coasts of the USA. The unit s main customers are manufacturers of commercial and military telecommunication equipment, mass-storage solutions for data processing, specialized computers, medical equipment and systems for industrial automation. 5

9 Letter to the Shareholders Dear shareholders, Review of the year n our report one year ago, we indicated that the unsatisfactory results represented only a temporary setback. Today, we can confirm that the Carlo Gavazzi Group has promptly rebounded in the year under review, exceeding many expectations. Operating revenue increased again, but most importantly, the best operational result in the last 15 years has led to a net income now approaching a more satisfactory level. This year has been characterized by a positive market development in all our businesses. Especially the telecommunication markets, which have become very relevant for the Electronic Packaging Business Unit, have shown sustained growth. Shares of Carlo Gavazzi Holding AG have appreciated by 70% during 1999/00, in the anticipation of positive results after the half-year closing and as a consequence of our systematic divestment of non-core activities. The simplified organization has become more transparent and this has helped both to achieve better results and to obtain higher awareness among the financial community. Financial results The declared target for the year was a substantial improvement in profitability. We have introduced the Economic Value Added (EVA) measurement, which now forms part of the management incentive schemes. The consistent focus both on the bottom line and all elements of the balance sheet has proved to be the right mix at a time where one of our major aims has been to establish consistency in the results. Bookings have not reached the high level of the previous year due to the specific nature of the business in Engineering and Contracting. The high backlog in this field is, however, sufficient to maintain a high-growth revenue rate over the current year. On a comparable basis, operating revenue has grown by 24% to an all-time high CHF 449 million in spite of divestments of non-core activities. EBT has more than doubled to a respectable CHF 27 million. Our net income reached CHF 10.6 million, the first time that the Carlo Gavazzi Group has achieved a double-digit result after the dissolution of the joint venture with Omron in the mid 1980 s. The net effect of the above-mentioned divestments has not been material for the achievement of the 1999/00 results. The reduction in interest-bearing debt from CHF 96 million to CHF 53 million and the improvement of net operating assets has contributed to the generation of substantial Economic Value during the year under review. As a consequence of these results, the board of directors will propose to the annual general meeting the payment of a dividend of CHF 40 per bearer share. Development of the business units During the year, Automation Components has essentially completed its streamlining process, resulting in manufacturing sites in Denmark, taly and Malta, each dedicated to single product lines. This has allowed the business unit to start gaining benefits from economies of scale. n addition, R&D spending was further increased during the year, leading to a significant launch of innovative products at the March 2000 Hanover Fair. Having reached a stable and well performing level as documented by the past results, our expectations for this business unit are now justifiably high for the current year. Electronic Packaging benefitted from positive impulses in the telecommunication, military and medical industries. This support from the market, combined with productivity improvements and consistent cost reductions, has allowed the unit to return to a healthy level of profitability. After four years of over 20% annual growth we expect in the near future a consolidation of the business. This will result in a reduced growth until the new products, high-end industrial PCs, can make substantial inroads in the market. The overall outlook for this unit is positive. n Engineering and Contracting we benefitted from the growing demand for biomass plants in taly. The concentration of the business in this special market segment has started to pay off. Our international subsidiaries in Saudi Arabia, Egypt and Malaysia all recorded high growth rates and good margin developments. After the high order intake during 1998/99, we have this year directed our efforts towards margin quality, particularly in taly. The results show a positive impact. With the present backlog we believe that Engineering and Contracting can reach acceptable returns in the current year. Leonardo E. Vannotti Chairman of the Board Ulf Berg Chief Executive Officer Strategic direction Over the past three years we have followed a consistent strategy of focusing the group towards a 6 CARLO GAVAZZ GROUP

10 high-tech business. t has been our aim to maintain a diversified portfolio, but to limit it to those activities befitting our resources. n the chosen segments we intend to grow and achieve sustainable positions over time so as to become identified as leaders. We have therefore divested the micro-conglomerate Cefra, comprising the trading businesses of CG Componenti, the steel structure business of FT Ferrotubi and the sterilization business of Gammatom. n addition, we have separated ourselves from the AC-drives business. While performing such streamlining operations, the growth options for other portions of the business are limited. Nevertheless, we are of the opinion that we have not missed major opportunities. Growth during this period was concentrated on Electronic Packaging and Engineering and Contracting. t can now be expected that we will turn our sights towards expansion of the high-tech businesses. This will be our goal not only in 2000/01, but also medium-term and we will exploit all avenues at our disposal. t comprises enhancing R+D efforts to accelerate product innovation, capitalizing on our broad existing sales network to reach new market segments, exploiting T to be at the forefront of the new business processes and finally looking for outside opportunities to broaden and complement our offering. Since some of the markets in which we operate have a certain degree of volatility, we will privilege operational excellence and maintain and even improve on our fast reaction quality that has served us well in the past. Outlook The business climate is presently positive in Europe and the US our main areas of activity. Signs of recovery are also evident in Asia. During the first months of the current year, we have seen improved interest for our sensor and solid-state switching products as well as industrial PCs. Engineering and Contracting is presently completing a number of biomass plants which were ordered two years ago, and we expect a revenue push during the current year from this business unit. The board of directors and group management have set as a priority for the coming years to keep consistency and predictability in the group performance. Having now reached a stable structure, the group should be able to exploit the market opportunities and further improve on the results of the year 1999/00. Thanks The focus and cost-cutting processes combined with the efforts to regain strategic and market momentum have represented a tremendous challenge to all people involved. We want to thank all our employees for their commitment and achievement, which now have materialized in the results of the year under review. Our thanks go also to our customers and shareholders who have shown confidence in our company. Leonardo E. Vannotti Ulf Berg Chairman of the Board Chief Executive Officer Parting of Leonardo Vannotti With this year s annual shareholders meeting, Leonardo Vannotti leaves his position as chairman and director of the Carlo Gavazzi Group. Leonardo Vannotti joined the group as a director in September 1995 and was elected chairman in During this time his achievements have been two-fold: The Carlo Gavazzi Group turned an important financial corner with turnover growing from CHF 270 million to CHF 450 million and earnings per share reaching CHF 153, the best group result in the last 15 years. Through his high personal standards, ethics and trustworthiness, Leonardo Vannotti has attained a marked improvement in the entrepreneurial drive and motivation of the personnel in many areas of the group and its operating units. Directors and group management thank Leonardo Vannotti for the fruitful cooperation and for the outstanding contributions he made to the company s performance. We wish him all the best for his future entrepreneurial endeavours. Directors and employees of the Carlo Gavazzi Group 7

11 Review of Operations Structure Effective April 1, 1999, the Feme activities (electromechanical components) have been integrated into the Automation Components Business Unit. n addition, the Cefra Group companies were divested during the year under review. As a result of this reorganization, the Carlo Gavazzi Group has achieved a clear structure with three separate business units, each positioned in clearly defined markets with individual growth and profit potential. The three business units are now also balanced in regard to size, with revenues amounting to approximately CHF 150 million each. Bookings and backlog Compared with the previous year, consolidated bookings decreased by CHF 39 million to CHF 418 million. The financial results of the individual business units (pages 10, 14 and 18) show that the decline is attributable to the Engineering and Contracting Business Unit and results from the cyclical award of large projects in the engineering and contracting type of business. Nevertheless, the backlog accumulated in this business unit over the last three years remains high and will support additional revenue growth during the current year. n contrast, all other business units have achieved an increase in bookings. ncome statement Consolidated operating revenue increased by CHF 66.7 million to CHF million. After adjustment for the loss in revenue due to the de-consolidation of Carlo Gavazzi Cefra SpA, Carlo Gavazzi Componenti SpA, Gammatom SpA and the German drives business, the internal growth was even more pronounced and amounted to CHF 86.7 million or 24%. All business units Geographical revenue distribution 1999/ /99 18 % 9 % 33% North America taly Europe without taly Rest of the world 40% 21 % 9 % 39 % North America taly Europe without taly Rest of the world 31% Key figures (CHF million) 1999/ /99 % Bookings Operating revenue Gross profit SG&A expense EBT Net income Cash flow contributed to this revenue growth, with Electronic Packaging achieving the strongest increase of 51%, followed by Engineering and Contracting with 25% and Automation Components with a relatively modest 2%. The strong performance of Electronic Packaging in the USA influenced the group s geographical revenue distribution significantly. Gross profit improved by CHF 16.3 million to CHF million due to the increase in volume. The reduction of the consolidated gross margin by 0.8 percentage points to 29.1% is attributable to the different growth rates in the three business units, which led to a changed composition of the consolidated margin. Analyzing the gross margin of the individual business units, all three units show margin improvements of 1.1 to 1.8 percentage points. Selling, general and administration expense (SG&A) increased by CHF 2.6 million to CHF 99.2 million or 3%. On a comparable basis, taking into account the abovementioned divestitures, such costs rose by 10%. However, these expenses as a percentage of revenue decreased from 25 % in the previous period to 22%. Despite the revenue growth of 17%, the average number of personnel remained stable at approximately employees. Out of this total workforce, 870 employees of the Engineering and Contracting Business Unit are employed on a project-related basis. Total personnel expenses remained constant at CHF million compared with CHF million in the previous year. Research and development expenditure increased only marginally by CHF 0.2 million to CHF 10.5 million. This rise in cost results mainly from the increased focus on the development of the industrial PC activity in the USA, which alone absorbed R&D resources of CHF 1.9 million. Expressed as a percentage of the relevant revenue, this future-orientated expense reached 3.4%. As in the past, such expenditure was charged in full to the income statement. 8 CARLO GAVAZZ GROUP

12 Amortization of intangible assets resulted in a charge to the income statement of CHF 4.5 million, an increase of CHF 1.2 million compared with the previous year. This development is mainly the consequence of the sale of the drives activity in Germany, which resulted in the total write-off of the remaining goodwill related to this company. Due to the sale of this activity, the future amortization expense on a group level will be lower by CHF 0.8 million. Restructuring and other expense or income includes capital gains of CHF 11.3 million from the sale of participations and the sale of a building in the vicinity of Milan. This capital gain was neutralized by provisions made mainly for expected redundancy costs in taly and write-offs of investments. With earnings before interest and tax (EBT) of CHF 27.1 million or 6.0% of revenue, the Carlo Gavazzi Group has clearly rebounded after the poor results in the previous year. The increase amounted to CHF 14.2 million and represents a more than doubling of the last year s result. As in the past, Automation Components and Electronic Packaging remained the group s traditional main source of earnings with operating profits of CHF 11.0 million and CHF 13.8 million, respectively. n addition and in contrast to the previous years, Engineering and Contracting reported a marked increase in operating profit, reaching CHF 10.6 million. Consequently, all business units of the Group achieved operating profit levels of over 7% of revenue. Earnings before income taxes and minorities reached CHF 21.2 million. After the deduction of taxes (40% of pre-tax earnings) and a charge of CHF 1.9 million for minorities (mainly due to the minority shareholders of the foreign subsidiaries of Engineering and Contracting), the group was able to report a net income of CHF 10.6 million. This represents the best result for 15 years and, with the exception of last year, shows a continuation of the steady annual result improvements since As a result of this double digit earnings number, the return on equity (ROE) climbed to 8.8%. The return on the capital employed (pre-tax calculation) amounted to 12.6%. With CHF 17.8 million or 4.0% of revenue, cash flow (excluding capital gains) increased by CHF 8.7 million compared with the previous year. Due to the strong reduction of net working capital, the impact on net cash provided by operating activities was even more pronounced reaching CHF 37.4 million, an improvement of CHF 40.1 million over last year. This implied that the free cash flow (net cash provided by operating activities minus investments) reached CHF 25.9 million, which in turn impacted the interest-bearing debt positively. Balance sheet Despite the increase of nearly 20% in revenue, net working capital decreased by CHF 20.0 million or 15% to CHF million. Assets employed in trade receivables increased by CHF 22% to CHF million, however, the average payment period, decreased from 97 to 87 days. The value of inventories at CHF 54.3 million remained fairly constant but inventory turnover (calculated on the basis of cost of goods sold) increased from 3.5 times to 4.9 times in the year under review. The net decrease in work in progress in the order of CHF 6.3 million or 17% reflects the stringent measures employed in the Engineering and Contracting Business Unit to decrease interest costs and to make the projects self-financing whenever possible. As a result of the sale of the German drives business, the value of intangible assets decreased by CHF 2.3 million in addition to the annual amortization charge. At the end of the reporting period, interest-bearing debt contracted by CHF 43.5 million to CHF 52.7 million. This development was mainly driven by higher reported earnings and due to the fact that despite the growth in revenue, net working capital decreased significantly. Debt owed to financial institutions at year-end was thus CHF 77.4 million or 60% lower than the shareholders equity including minority interests. Key figures (CHF million) 1999/ /99 % Net working capital Current assets Fixed assets, net ntangible assets, net nterest-bearing debt Minorities Shareholders equity Total liabilities and equity Shareholders equity increased over-proportionally to CHF million due to the positive currency translation adjustments of CHF 4.2 million, which resulted from the strong US dollar against the Swiss franc. n relation to total assets, shareholders equity including minorities climbed to 35% against 33% at the close of the previous year. 9

13 Automation Components Review of operations Change for the better n Europe, where the Automation Components Business Unit generates about 80 % of its operating revenue, demand was weak during the first half of the year under review. n the second half, an upswing was noticed and, particularly in the fourth quarter, domestic market-oriented OEMs started to thrive. The North American and the Asian market environment on the other hand offered good opportunities from the beginning of the year under review. The prospects for the current financial year look promising, as the European markets seem to be on a firm upward trend. Financial performance The Feme activities with design, manufacturing and sales of industrial and pcb-relays, switches for energy distribution and safety relays for the railway sector have been consolidated in the Automation Components Business Unit from the beginning of the financial year. For comparison purposes, the numbers for the previous year have been adjusted accordingly. Due to the sluggish market development, the interim results showed a slight decrease in bookings and revenue against the previous year. However, following the improvement of the market environment, the business unit achieved a positive development both in bookings and revenue for the full year. After taking into account the de-consolidation of the German AC-drives activities, the improvement amounted to 3.7 % and 3.2 %, respectively on a comparable basis against the previous year. Despite the 10 % increase in R & D to accelerate product innovation and a further price erosion in some of the product lines, operating profit increased proportionally to reach 7.4 % of operating revenue. Key factors for this achievement were a focus on lean management in the sourcing companies as well as in the sales organizations, successes in the outsourcing of certain sub-assemblies, and a further streamlining of the production processes. The transfer of the manufacturing of similar product designs to dedicated centres of competence was completed during the year. The concerted efforts to focus the sourcing companies led to an improvement of the gross margin which also contributed to the positive result. mportant events n order to benefit from the synergies in the sales area, the Feme business with facilities in the Milan area was integrated into Automation Components at the beginning of the year. As a result, all component activities are now concentrated in a single business unit. n line with the strategy to focus on core activities, the business unit sold its AC-variable-speed drives business located in Gemmrigheim, Germany, to the talian drives specialist SE SpA, effective December 31, Strong emphasis was given to customer orientation in our Danish plant. First results, achieved within a year after inception, are a much improved response time and a shortening of the throughput time by 40 %. n Denmark, an application centre for sensor devices was established. A dedicated team of engineers seeks to develop customized products in close interaction with customers. The first results in terms of increased sales volume are promising. The process of converting the plants into clear competence centres was completed this year by strengthening the R & D team and product management for solid-state switching devices in the Malta sourcing unit and by concentrating monitoring and controls activities in Belluno, taly. New business software was introduced in two sourcing units and several national sales companies as a pilot programme to establish a uniform T platform and to improve monitoring and control of the business processes, particularly in the sales area. Dino Masili, Group Executive We have streamlined our structure. Now, we ll focus on growth. Financial results (CHF million) 1999/ /99 % Bookings Operating revenue Operating profit Number of employees Sensors prerequisite for all automation tasks. Carlo Gavazzi photoelectric sensors continuously detect presence or absence of freshly-baked bread, transmitting front-end information to the production line s control system. 10 CARLO GAVAZZ GROUP

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15 On the sales side, a highlight was a long-term contract for private-label capacitive proximity sensors with a major international sensor supplier. Also, substantial bookings were generated through our independent distributors in South Korea, Malaysia, the Philippines and Taiwan, the latter three supported by the Malaysian sales office which was opened in Kuala Lumpur in the previous year. Product launches A number of new products were launched to complement the existing product lines. Solid-state relays: The new panel-mount series designed for load currents up to 100 ampere feature an innovative mechanical construction that eliminates the moulding mass. This design together with the surface-mount technology used for the control board contributes to the superior reliability of the products. The series include relays for heavy-duty applications in motor switching and control of HVAC systems and also respond to a wide spectrum of lower-current applications like medical, office and domestic equipment. Solid-state switching for heaters: The line of DN-rail mountable solid-state contactors was extended with analogue full-cycle versions featuring precise control of electrical heaters. The main demand comes from the plastic injection moulding machine sector, where the infra-red heating in the PET-bottle manufacturing process is a typical example. Capacitive sensors: The range of capacitive proximity sensors which comprised 30 mm cylindrical and flatpack sensors was complemented with an 18 mm cylindrical sensor to meet customers needs. This will help to further exploit the potential of this well-growing product range. Wind-sensor: A wind-sensor with no movable parts was developed in close cooperation with an internationally leading wind turbine manufacturer. This innovative, electronic product measures the direction of the wind for blade-orientation and the wind-speed to shut down the system over and above a speed of 36 km/h. The product will open new opportunities, not only in wind turbine applications. Field- and nstallationbus: Specific modules were added to the Dupline bus system to make it even more powerful for applications in building installations. These include a new, Windows -based, user-friendly controller, intelligent light switches, a remote relay for decentralized installations and a touch-screen. Focus and strategy The year under review has been a year of streamlining the structure. Starting from this platform, management will now focus on growth targets. To achieve growth, the development effort to expand the product range has been substantially increased and the sales processes have been optimized. t is expected that the high number of product innovations, planned for launch during the first quarter of the current financial year, will start contributing to this growth. The completion of the installation of a new sales software in the national sales companies will lead to improved effectiveness in following up prospective buyers and ultimately in enhanced customer satisfaction. Good results in this respect have been achieved in Spain and Denmark where the system is already in operation. n regard to the product/market mix, the focus on the currently served market segments will be sustained. However, additional, promising opportunities will be pursued. Examples are applications around intensive animal farming in the agricultural segment, where attractive new businesses in the level-sensing field have been identified and captured. The general direction of product development will continue with concentration on solid-state switching, sensing and controlling devices. The two most important strategic targets for product development will be to attain leadership for solid-state relays and a high innovation rate in the field of sensing devices. Miniaturizing sensors, exploiting ideas for capacitive sensors and exploring the field of vision systems will open roads towards higher-margin products. n addition to the classic direct sales and distributor channels, Automation Components will establish an e-business channel. The first e-commerce channel will go live in North America during the first quarter of the current financial year. n Europe, preparatory activities related to the T basis for this initiative are under way. A business re-engineering process has been initiated in the electromechanical devices sourcing unit to further increase the productivity and to cope with the anticipated reduction of demand for customized switches for energy distribution. 12 CARLO GAVAZZ GROUP

16 Sensing, switching, controlling and data transmission devices manufactured and marketed by Automation Components cover a considerable part of product requirements in industrial automation. Expectations for 2000/01 The trends of the last quarter of the year under review and the common perception that Europe, the main market for Automation Components, is on an upward trend, give confidence for the current financial year. The business unit expects to be part of a modest growth in the automation industry. With new products scheduled for launch in the first quarter, the appropriate tools are at hand. Although the quantity of products shipped is expected to rise considerably, the revenue-growth will be limited due to the continuous price erosion in some of the product lines. Management forecasts a single digit growth in bookings and operating revenue. Despite higher expenses for R & D and sales, operating profit is expected to increase overproportionally. Actual and future industrial requirements in electronic switching were the benchmarks for this new generation of solid-state relays. The innovative mechanical and electrical design can be seen as a milestone underlining the unit s leading position in this market. Operating revenue (CHF million) A new line of monitoring relays and timers meets customers demand for differentiated functional complexity. OEMs, panel builders and distributors appreciate this modular concept, simplifying procurement and contributing to stock reduction /96 96/97 97/98 98/99 99/ Operating profit (CHF million) Measurement of mains quality and energy consumption as well as load control are gaining in importance. The microprocessor-based smart power quality analyzer provides the operator or the control system with all relevant energy management data. 95/96 96/97 97/98 98/99 99/

17 Engineering and Contracting Review of operations Business environment Engineering and Contracting was confronted with a slow-down of activities in the main market segments it serves in taly, while the overseas operations saw a positive market development during the year under review. The Energy Division is focusing on the realization of small power plants fuelled by biomass. The interest in these plants was high, although the financial closings were delayed. Furthermore, the ENEL privatization following the deregulation of the electricity market led to a certain level of regulatory uncertainty amongst investors. The nstallation Division faced a scenario characterized by lower industrial investments and, coupled with this, a reduced number of sizeable projects tendered. The environment for the Control Systems Division proved to be more stable, although it was characterized by intense competition. n the water treatment and distribution sector, the progress in deregulation continued to be slow. The delay in the privatization of the water supply facilities caused a reduction of public investments and consequently fewer projects tendered. n anticipation of this difficult market environment, the business unit explored additional, promising fields of endeavour to bridge the gap. The talian infrastructure market with ongoing revamping activities including all the projects related to the upgrading of the facilities for the Rome 2000 jubilee offered ample opportunities. These were successfully pursued and some projects were executed during the year under review. Egypt, Malaysia and Saudi Arabia offered room for growth for the development of the business unit s foreign subsidiaries. n Egypt, a number of major projects are under way in connection with the increasing demand for natural gas exploitation. n Malaysia, the oil and gas market is also becoming more attractive. After the economical instability and recession of the previous years, the country is now back on an annual growth rate of 8 %. The Saudi Arabian market was moderately positive and further impulses form the oil and gas sector are expected here. After the significant growth during the two previous years, the subsidiary consolidated its position as leader in the electrical and instrumentation erection activities in this country. Results All of the talian divisions as well as the foreign subsidiaries contributed to the sharp increase in operating revenue. Following the high order intake during the previous year which resulted in a record order backlog of close to CHF 250 million, Engineering and Contracting directed its efforts towards a selected acquisition of projects with higher margins. Compared with the previous year, operating profit more than doubled. Main contributors to this improved result were again the foreign subsidiaries as well as Carlo Gavazzi dross with its activities in the water sector. The talian divisions, albeit positive in their trend, did not yet reach the targeted profitability levels. GianMaria Gabrieli, Group Executive All businesses improved during the year. We will continue to focus on operational excellence. mportant projects completed or under execution The Energy Division completed the basic design and detailed engineering for the 10 MW biomass-fuelled turnkey power plant in Crotone, Calabria, taly. Orders for the main components have been placed and site activities are in progress. The installation of the boiler and completion of the civil works will be executed during the current financial year. The basic design for a similar project in Bando d Argenta, Emilia Romagna, taly, was completed and civil work was initiated in April Financial results (CHF million) 1999/ /99 % Bookings Operating revenue Operating profit Number of employees Engineering know-how for reliable water treatment and distribution. Carlo Gavazzi has a leading position in projects for the water cycle. Core activities are turnkey wastewater treatment plants as well as design, procurement and realization of control and instrumentation systems for water networks. 14 CARLO GAVAZZ GROUP

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19 Also under execution is the engineering, procurement and construction of the electrical and instrumentation package for the 250 MW co-generation power plant in Servola, close to Triest, taly. The Energy Division is responsible for design and definition of the electrical equipment and the components as well as for the installation activities. The recently created ndustry Division started project activities for a technological park located in Turin, taly. The scope of work carried out by the division includes detailed electrical design, procurement and installation of low and medium-voltage electrical equipment along with safety systems such as closed-circuit TV, access control, trespassing supervision and fire protection. A fully computerized main control room supervises and controls all these systems. An optical fibre system serving as network for the collection of connection points within the entire area is also part of the scope of work. Among other projects in realization in connection with the Giubileo 2000, the Great Jubilee of the Year 2000 in the Vatican, the ndustry Division executed the refurbishment of the electrical systems of three midtown and two suburban subway stations as well as five connecting tunnels of the Rome subway. The scope of work included detailed design, procurement and the installation of electrical equipment. n addition, the division carried out the new signaling and telecontrol system of the lighting and power plants, along with the monitoring of the emergency lighting system. A great challenge was to realize all the installations while the subway was in operation. The division therefore not only had to take care of all safety measures for transiting passengers, but also to avoid any disruption or even shut-down of the subway services. n the steel sector, the Control Systems Division completed the automation system for a steel-pipe manufacturing plant. For this large and complex project, the division s role was one of a system integrator as its scope of work covered all main processes and included the erection of the plant s electrical, instrumentation and control systems. During the year under review, CG dross progressed with the execution of the radiation monitoring system. t manufactured, tested and installed 120 out of the total fully-automated measuring units ordered for this nationwide network. The entire system will be completed in the current financial year. The business unit s Egyptian subsidiary successfully completed installations in the gas treatment plant in Obayed. An important part of the scope of work was the erection of three furnaces including chimneys, each of them 62 metres high. Each of the furnaces consisted of three sub-assemblies of eight metres in height and 25 tons in weight. New projects n Egypt, an order was received for the installation of the Lube oil expansion project in the Alexandria Petrochemical Complex in consortium with two partners. The consortium s scope of work covers the overall construction activities such as civil, piping, steel structures, electrical and instrumentation and precommissioning. The Egyptian subsidiary has been appointed to the leadership of the consortium. The Malaysian subsidiary has been awarded a large project of electrical work for the acrylics complex in the Gebeng industrial area, Kuantan. The scope of work of this project was the detail design, procurement of the equipment and material, installation, test commissioning and authority certificates. The whole project has been completed and is successfully in operation. n taly, control systems for electrical substations feeding railway lines are considered a promising and growing market. The Control Systems Division initiated the design of dedicated products to address this strategic market. G-Evolution and G-Expert are almost completed and will soon go live in their first applications. G-Evolution is a new, advanced system software designed to control the operation of an electrical substation. t is applied for the first time in three railway power conversion substations that feed power along the Tirrenica-Line running between Viareggio and Grosseto on the North-West coast of taly. The railways 5-year plan to enhance their partially obsolete network also includes a new diagnostic and maintenance concept aiming at a drastic improvement of the service availability. The new product, G-Expert, was developed in close cooperation with the State Railways. t interprets monitoring, supervision and maintenance knowledge of an expert operator related to all the critical components responsible for operational availability of substations. This unique and sophisticated product is now ready to be installed in all substations owned by this customer. There is also potential for a utilization in other, similar application areas. Future strategy Building on the experience gained and the solid presence achieved in the year under review, Engineering and Contracting will continue to grow its technical knowhow in the area of turnkey projects. With the target to become a leading biomass power plant provider in taly through an active partnership with an important 16 CARLO GAVAZZ GROUP

20 Engineering and Contracting realizes plants and installations for the production and distribution of electrical energy, for the treatment and distribution of water and gas, for environmental monitoring purposes and for industrial process control in taly, the Middle and the Far East. US-based PP, the business unit will develop standard solutions for the design of small power plants fuelled by biomass. n order to further expand its activities in the growing water facilities sector, Engineering and Contracting will actively seek partnership with a water utility. On an international level, the Saudi Arabian subsidiary which has already reached a leading position in its field, will expand into facility management to sustain future growth. n addition to the other successful operations in Egypt and Malaysia which have plans to grow further, a subsidiary has been set up recently in Greece to capture opportunities in this growing market. Outlook 2000/01 As a consequence of the award of some larger projects negotiated during the year under review being shifted into the new year, bookings are expected to reach close to CHF 170 million. Management is confident of increasing operating revenue by a doubledigit figure and further improving operating profit. Given the efforts in cost reduction and efficiency enhancements, it is expected that the business unit s talian divisions will also take an appreciable step towards enhanced earning levels. Engine room with the two turbine units of the 170 MW conventional steam turbine power plant in Rades, Tunisia. The business unit completed its installation activities related to the electrical systems and instrumentation. The redesign and reconstruction of the water treatment facilities of the Villa d Este in Tivoli, 30 km outside Rome, allowed the re-opening of this tourist attraction which is famous for its splendid fountains. Operating revenue (CHF million) /96 96/97 97/98 98/99 99/ The nationwide radiation monitoring system in taly will ultimately comprise 1200 measuring units connected to a control centre. Each unit contains a Geiger-Muller detection head, electronic circuitry for self-adjustment and a modem for data transmission. Operating profit (CHF million) /96 96/97 97/98 98/99 99/ Three railway power conversion substations on taly s North-West Coast were equipped with an advanced control system for the operation of the substation. An additional supervisory system takes care of signaling controls and train tracking. 17

21 Electronic Packaging Review of operations mproved market conditions An improvement of business conditions in the Asian market and in the semiconductor industry restored purchasing confidence at several key customers. Sales to telecommunication suppliers that were down substantially last year returned to previous levels. Concerns voiced that Y2K uncertainties and the fall in profitability of some leading computer manufacturers might adversely affect Electronic Packaging s order intake during the second half of the year, fortunately did not materialize. Regained earnings performance For the third consecutive year, Electronic Packaging achieved above-average growth in bookings and operating revenue. The positive trend experienced during the first half of the reporting year was sustained during the last quarters of the financial year and, subsequently, the year ended with a record revenue of CHF million, up 51 % over the previous year. Higher productivity has improved asset utilization and resulted in a proportional reduction of indirect expenses. Cost-cutting measures implemented during the reporting period have increased margins and reduced the cost of goods sold. As a consequence, operating profit developed in line with the forecast, reaching a sound 8.6 % on sales. After a year with significant investments in new technologies which were partly the cause for the disappointing result of the previous year, the business unit has, as anticipated in the interim report, returned to its traditional high profit level in the year under review. Contribution of new products During the year, the sales volume of several new products began to take off. ncreased sales of CompactPC architecture systems, single board computers, industrial PC chassis and ControlTower, an evolving product for server management, all contributed to increased revenues. Continuing growth in integration Systems integration continued to post the highest sales gains. Orders for the latest generation of telecommunication servers grew an additional 45 % over last year s record pace. Additional manufacturing space was added to accommodate growth in the systems integration products. Programme management and test engineering were expanded through the creation of a separate ntegrated Products Group. Electronic Packaging is the only supplier that offers complete vertical integration from a single source. Customers are offered a menu of services including a customized statement of work, mechanical and electrical design, software loading, and functional system testing. System level agency certifications are also provided through all relevant standardization bodies. Jeff Russell, Group Executive Rugged chassis for SLVR programme Commercial off-the-shelf (COTS) rugged chassis continued to become a larger portion of the business unit s annual sales. Orders totalling in excess of CHF 8 million were booked and shipped during the reporting period for the Navy s multiyear Submarine Low frequency VME Receiver (SLVR) programme. This upgrade programme is intended to provide the Navy s next generation communications receiver for submarine tactical and strategic message traffic. The open system architecture utilizes rugged VME and VX chassis that will replace four systems currently used in submarine radio rooms. A letter of appreciation for Electronic Packaging s support of the SLVR Programme was received from Rear Admiral John A. Gauss, U.S. Navy, Space and Naval Warfare Systems Command. The While continuing to invest in new products, we have achieved a record result. Our next goal is to capitalize on these product innovations. Financial results (CHF million) 1999/ /99 % Bookings Operating revenue Operating profit Number of employees Sophisticated equipment for air traffic control. Data processing and transmission are key elements in air traffic control and air defence installations. Carlo Gavazzi has designed the equipment rack for an air traffic control system that extracts and displays the beacon signal which identifies the aircraft. 18 CARLO GAVAZZ GROUP

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23 letter specifically commented on the success of the chassis in meeting the difficult 901D near-miss shock test. Turnkey surgical equipment The business unit continued to be a key supplier of turnkey products for the medical industry. CaverMap Surgical Aid devices were manufactured throughout the year for the UroMed Corporation. The device assists the surgeon in avoiding cavernosal nerve damage during prostate and colorectal surgery. This equipment is currently in use at over 100 medical institutions throughout the United States. Each unit is fabricated and totally tested in Electronic Packaging s integration department. The installation of PCMCA memory cards provides advanced mathematical algorithms for selfdiagnostic testing features. Every unit is subjected to a 24-hour system test to ensure the performance reliability required by the medical industry. Over 100 devices were tested and delivered during the year under review. An article describing the technological benefits of the CaverMed product was published in the Health Journal section of the October 15, 1999 issue of the Wall Street Journal. Computer Systems Group During the reporting period the Computer Systems Group focused on new product development and the introduction of state-of-the-art single board computers. New PCMG and CompactPC compliant boards utilizing the latest ntel processor chips were offered for industrial and telecommunication applications. A host of on-board features including SCS, DE, Ethernet and video functions is provided. The boards support a wide variety of processor frequencies and are designed to support next generation processors. Shipments of ndustrial PC chassis and systems commenced during the year. Series 583 and 586 chassis with PCMG boards and series 585 chassis with CompactPC boards were shipped. The latter received a Best of Communications Solutions award at the 1999 CT Exposition in Las Vegas. New product development focused on the creation of standard chassis systems with redundant power supplies, system level alarming and high port counts for /O cards. Support for up to 20 card slots can be provided. Additional components such as disk drives, floppy drives, memory and operating system options may be added to the chassis configuration. Customers can choose to receive a turnkey, fully configured and tested system. Additional design resources were added to support custom designs for single board computers and full system level integration. Aurora Technologies nc. The year under review was a repositioning period for Aurora Technologies as the division s product mix changed. Less emphasis was placed on traditional lines like SBus products with increased focus on new products designed to support the high-growth e-commerce businesses. PC, CompactPC and the new ControlTower systems designed for effective management of nternet server consoles became the primary product focus. Aurora Technologies was selected as the /O partner on a new CompactPC telecom switch for a large US OEM telecom company. During the year under review, Aurora Technologies also released the first Linux console management system. Approximately 25 % of all new server placements world-wide in 1999 used the Linux operating system. Projections for new server placements by the year 2003 exceed USD 1 billion annually. Strategy The immediate strategy focuses on the expansion of the business unit s existing position as the industry leader in the custom integration of high-speed packaging and interconnection systems. As the leading supplier of VME products over the last decade, Electronic Packaging is in a most favourable position to continue that leadership in the growing high-speed data market. Vertical integration, design and manufacturing centres in key market areas and the experience with high-speed backplanes and fully integrated systems makes the business unit the logical choice for customers. For new high-speed products that utilize industrial PCs and CompactPC, customers can obtain stand-alone components or fully tested turnkey systems. Continued expansion of products and service offerings coupled with physical presence in key market areas will maintain the position as the industry leader in high-speed packaging. Outlook for 2000/01 Management remains cautiously optimistic that the improved business climate will continue through the current financial year. The expanding product portfolio and customer base make Electronic Packaging less susceptible to downturns in a particular market segment. The expanding product offerings and level of 20 CARLO GAVAZZ GROUP

24 Standard and custom-designed enclosures complemented by proprietary industrial PCs enable Electronic Packaging to provide integrated solutions. services make it easier for customers to outsource entire programmes. Of great concern is the increasing war for talent in the US electronics sector. Attracting and recruiting electronics design engineers are prerequisites for the timely achievement of the business unit s ambitious product innovation plans, particularly those of the Computer Systems Division. After a three-year period of significant growth, management forecasts for the current year a somewhat less dynamic development of operating revenue. A shift in the ratio of integration revenue towards proprietary high-tech product sales with higher added value will contribute to a further positive development of the operating profit. This newest generation telecom server is typical for system integration activities. They include the integration of mechanical and electronic subassemblies followed by software loading and overall testing procedures. Rugged chassis that withstand the near-miss shock test protect communications receivers installed in the US Navy s submarine fleet. Operating revenue (CHF million) /96 96/97 97/98 98/99 99/ Newly designed CompactPC systems to meet the fast growing demand from many application areas such as telecommunication, industrial control, process control and robotics. Operating profit (CHF million) /96 96/97 97/98 98/99 99/ Expansion chassis provide an economical means to increase slot capacity in any PC-compliant system. They represent an excellent addition to server machines with limited PC slots and a need for more /O-capability. 21

25 Board of Directors and Management Board of Directors Honorary Chairman Riccardo Gavazzi, Zug Elected until Chairman Leonardo E. Vannotti, Ennetbaden AG (until ) Enzo Urbani, Baar ZG (as from ) 2001 Directors Hans Eisenring, Zollikofen BE 2001 Jean-Pierre Etter, Grand-Lancy GE 2000 Uberta Gavazzi Resta-Pallavicino, Zug 2002 Antonio Rossetti, Basle 2000 Stephan G. Schibli, Cham ZG 2001 Werner S. Welti, Dietikon ZH 2002 After three years of service in the Board, Guido R. Vitale for personal reasons decided not to stand for re-election. The Board thanks him for his valuable contributions. Secretary to the Board Anthony M. Goldstein Statutory Auditors PricewaterhouseCoopers AG, Zug Corporate Office Chief Executive Officer Chief Financial Officer Business Development Ulf Berg Felix Thöni Felix Stöcklin Executive Management From left to right: Felix Stöcklin, Jeff Russell, Dino Masili, Ulf Berg, GianMaria Gabrieli, Felix Thöni 22 CARLO GAVAZZ GROUP