The Board of Directors and the President of Lagercrantz Group AB (publ), organisation number 556282-4556, hereby submit their Annual Accounts and consolidated financial statements for the 2008/09 operating year.
BUSINESS
Lagercrantz Group AB (publ) and its subsidiaries are a technology trading group in electronics, electrics, communication and adjacent areas. The Group’s products and services are distinguished by high technology content.
The Group is active in specific product segments and with a distinct niche focus. The Group is characterised by decentralised business responsibility where each subsidiary has significant responsibility for its chosen strategy. The Lagercrantz Group consists of the Parent Company, Lagercrantz Group AB, and some 25 subsidiaries, which are organised in three divisions: Electronics, Mechatronics and Communications.
NET REVENUE AND RESULT
Lagercrantz Group’s net revenue for 2008/09 (1 April 2008–31 March 2009) amounted to MSEK 2,138 (2,172). Acquired units contributed with MSEK 53 in revenue during the year.
Forceful action was taken during the third and fourth quarter to adapt the Group’s operations to a clear economic downturn. Action was concentrated on measures to cut costs and streamline the use of capital. During the fourth quarter some 60 permanent employees and more than 15 temporary employees have left the Group. Further personnel reductions were initiated during the fourth quarter, which means that a total of about 110 persons have left the Group since September 2008. Further more a general restraint on costs is prevailing. Certain structural action has also been taken, which means that the subsidiaries in the U.K. and Switzerland in division Electronics have been integrated with other profit centres. Streamlining the use of capital has mainly taken the form of reducing inventories trade receivables. Thanks to focused efforts in this regard, trade receivables declined sharply during the second six month period and cash flow improved.
As a consequence of the above mentioned action, the fourth quarter was impacted by items affecting comparability in an amount of approximately MSEK –17. Total items affecting comparability for the year amounted to MSEK –21 compared with a positive effect of MSEK 4 in the preceding year. The operating result for 2008/09 amounted to MSEK 105 (131), and not including items affecting comparability to MSEK 126 (127). The operating margin, not including items affecting comparability, increased to 5.9 percent (5.8).
The result after net finance items was MSEK 94 (121) for the full year. The corresponding figures not including items affecting comparability were MSEK 115 (117).
Changes in foreign exchange rates affected the Group’s result after net finance items by a total of MSEK +4 (–2) during the full year. The period’s result for 2008/09 amounted to MSEK 68 (91), equivalent to earnings per share of SEK 3.05 (3.92).
PROFITABILITY AND FINANCIAL POSITION
The return on capital employed for 2008/09 was 17 percent as compared with 21 percent for the preceding year. The corresponding return not including items affecting comparability was 20 percent for both years. The return on equity was 14 percent (21) and not including items affecting comparability 17 percent (20). The return on equity was affected by, inter alia, the weaker Swedish krona when translating foreign subsidiaries in an amount of approximately MSEK 39 (3). Equity per share amounted to SEK 23.60, as against SEK 20.40 at the beginning of the year. The equity ratio at the end of the period was 49 percent compared to 44 percent at the beginning of the year. The Group showed a financial net liability at the end of the period of MSEK 78, as compared with MSEK 93 at the beginning of the year. At the end of the year there was a positive balance of MSEK 7 on the Parent Company’s committed credit facility as against utilisation of MSEK 19 at the beginning of the period. The net debt equity ratio for the Group is unchanged at 0.2 times.
CASH FLOW AND CAPITAL EXPENDITUReS
Cash flow from operating activities amounted to MSEK 137 (120) during 2008/09 and to MSEK 56 (82) during the fourth quarter. Cash flow per share from operating activities amounted to SEK 6.15 (5.17) during 2008/09. Efforts to reduce working capital have meant that the Group’s inventories and trade receivables were reduced sharply towards the end of the year. Investments in non-current assets amounted to MSEK 23 (gross) (25) and in corporate acquisitions MSEK 57 (27) for the full year. During the year – all during the third quarter – shares were repurchased for the equivalent of MSEK 11 (37). Dividends were paid in the amount of MSEK 34 (30). Last year’s cash flow was affected by sales of real property for MSEK 70.
NET REVENUE AND RESULT BY DIVISION
Electronics
Net revenue for 2008/09 amounted to MSEK 272 (778). Flagging demand was seen during the year. First hit were the businesses in Germany and the UK. The effects of weaker demand spread gradually during the year to most companies in the division. Cost-cutting measures were therefore taken in the division’s companies during the year. In addition, the UK and Swiss operations were shrunk and consolidated with other units in the division so as to create increased cost efficiency. In total, this has meant that the division was affected by items affecting comparability in the amount of MSEK -4 (0), a major portion thereof during the fourth quarter.
In part, a higher gross margin as a result of changed product mix helped offset the decline in revenue. The operating result declined to MSEK 24 (38); MSEK 28 (38) not including items affecting comparability.
Mechatronics
Net revenue amounted to MSEK 628 (604). Even though the year’s revenue exceeded last year’s figure, a sharp decline was recorded towards the end of the year. Since a major part of the division’s operations are aimed at customers in manufacturing, prompt action has been taken to adapt capacity to the lower level of demand. This work includes a lower rate of capital expenditures and personnel reductions. Action has also been taken to reduce working capital. The cost of these measures was charged to earnings in an amount of approximately MSEK 4 (0) during the year. Not including these costs, the result was MSEK 53 (50), equivalent to a margin of 8.4 percent (8.3). The reported result amounted to MSEK 53 (50).
Communications
Net revenue amounted to MSEK 783 (790). Among the division’s various businesses, revenue increased in the area of digital image transmission/technical security, especially because the acquisition of COBS is included from September 2008. In the access and software area revenue declined during the year. Action was taken in most companies in the division to meet the lower demand. In total, this meant that the division was impacted by items affecting comparability in an amount of MSEK –5 (0) during the fourth quarter. Operating profit for the year was MSEK 57 (51), equivalent to an operating margin of 7.3 percent (6.6) not including items affecting comparability. The reported result amounted to MSEK 57 (51).
PARENT COMPANY AND OTHER CONSOLIDATION ITEMS
The Parent Company’s net revenue for the full year amounted to MSEK 26 (26) and the result after net finance items was MSEK 77 (32). This result includes exchange rate adjustments on intra-Group lending in the amount of MSEK 3 (-1). Dividends from subsidiaries amounted to a net of MSEK 140 (81). Investments in non-current assets amounted to MSEK 0 (0). The Parent Company has an approved committed credit facility of MSEK 250. At year-end the balance was a positive MSEK 7, compared to utilisation of MSEK 19 at the beginning of the financial year. The Parent Company has a long-term acquisition credit in the amount of MSEK 69. In addition, the Company held liquid funds of MSEK 0 compared to MSEK 0 at the beginning of the financial year. The Parent Company’s equity ratio was 65 percent at the end of the period compared to MSEK 56 percent at the beginning of the period.
Among Parent Company/Other consolidation items are items affecting comparability, which during 2008/09 had a total negative impact on profit of MSEK 9, as against a positive effect of MSEK 4 in the preceding year. Costs during the fourth quarter amounted to MSEK 5, primarily referring to personnel reductions and other restructuring. Last year the corresponding quarter was affected positively by items affecting comparability in a net amount of MSEK 4, pertaining mostly to real property sales.
EMPLOYEES
At the end of the period the number of employees in the Group was 742, as compared with 763 at the beginning of the period. The number of employees increased during the year to a maximum of 810 persons during September 2008 due to acquired businesses. The decrease during the later part of the year is explained by the cost reduction action taken in the Group.
SHARES, REPURCHASES AND MAJOR SHAREHOLDERS
The share capital amounted to MSEK 48.9 at the end of the period. The distribution on classes of shares is 1,094,654 class A shares and 22,078,655 class B shares, a total of 23,173,309 shares. Class A shares entitle their holders to 10 votes; class B shares entitle their holders to one vote per share. The Company’s share capital shall be not less than SEK 25 million (25,000,000) and not more than SEK 100 million (100,000,000). The number of shares shall be not less than 12,500,000 and not more than 50,000,000.
The class A share is not listed. Both classes of shares entitle their holder to the same rights with respect to the Company’s assets and earnings. Each share has a quotient value of SEK 2.11. The Articles of Association allow for conversion of class A shares to class B shares. During the financial year 1,344 class A shares were converted to class B shares on request from a single shareholder.
The 2008 Annual Meeting resolved to authorise the Board of Directors to repurchase shares up to 10 percent of the total number of shares outstanding until the next Annual Meeting. Repurchases shall be made via the stock exchange. The mandate included the option of using shares held in treasury as payment for acquisitions and to cover the Company’s obligations under incentive programmes.
During the year 500,000 shares were acquired for a total of approximately MSEK 11. At the Year-end Lagercrantz hold 1,195,500 class B shares in treasury, equivalent to 5.2 percent of the total number of shares outstanding and 3.6 percent of the votes in Lagercrantz. Repurchased shares cover, among other things, the Company’s obligation under outstanding incentive programmes with a total of 695,500 options granted (awards 2006, 2007 and 2008) where the redemption price is SEK 36.00, SEK 44.40 and SEK 36.80 per call option, respectively (see Note 6 for further information). The average cost of repurchased shares amounts to SEK 25.57 per share.
On 31 March 2009 the number of shareholders was 3,497. Three shareholders have more than 10 percent of the votes: Anders Börjesson with family, 13.4 percent Tom Hedelius with family, 11.4 percent and Pär Stenberg, 10.1 percent. Skandia Liv, with 10.2 percent of the capital is the largest single shareholder in terms of holding.
ARTICLES OF ASSOCIATION AND CERTAIN AGREEMENTS
The Articles of Association stipulate that members of the Board of Directors shall be elected by the annual meeting of shareholders. The Board of Directors shall be comprised of a minimum of three and a maximum of nine directors.
There are no significant agreements to which the Company is a party that are activated or changed as a result of a change of control due to a public take-over offer. There are no agreements between the Company and its directors or employees that prescribe remunerations if such person as a result of a public take-over offer resigns.
CORPORATE ACQUISITIONS
Acquisitions this year were COBS AB with day of taking possession during the second quarter of the year and CAD Kompagniet A/S in Denmark during the first quarter. Both companies are part of division Communications. The acquired businesses have affected consolidated net revenue in an amount of approximately MSEK 53 and the consolidated result before taxes by MSEK 1 during 2008/09. Had all acquisitions taken place at the beginning of the financial year the effect on consolidated revenue and result before taxes would have been approximately MSEK 72 and MSEK 3, respectively.
TRANSACTIONS WITH CLOSELY RELATED PARTIES
Transactions between Lagercrantz and closely related parties with a significant impact on the Company’s financial position and results have not occurred.
WORK OF THE BOARD OF DIRECTORS
The Board of Directors held six meetings during the 2007/08 operating year during which minutes were taken, one of which was a statutory Board of Directors meeting in conjunction with Annual General Meeting.
The Board of Directors has rules of procedure that are confirmed on an annual basis at the statutory Board of Directors meeting. The rules of procedure lay down the division of labour between the Board of Directors and the President, the Chairman’s and the President’s responsibility and the forms for the financial reporting.
The President is a member of the Board of Directors and presents reports at Board of Directors meetings. The Board has appointed the Group’s Executive Vice President to serve as secretary. The Board of Directors has a quorum when at least four directors are present and, where possible, decisions are made after discussion that leads to consensus. The Board of Directors was complete at all meetings during the year.
During regularly scheduled Board of Directors Meetings the Company’s economic and financial position are dealt with; one item on the agenda deals with acquisitions. The Board of Directors is kept informed by way of information in writing about the Company’s business and other relevant information.
During 2008/09 the Board of Directors devoted special attention to issues surrounding acquisitions, structure and market situation. The work of the Board of Directors was subsequently marked by structural issues and action programmes to meet the economic downturn. The Board of Directors also held one meeting solely aimed at discussing the Group’s position and strategy.
The work of the Board of Directors is evaluated annually following an established procedure. The most recent evaluation was dealt with during a meeting in the month of February Among items discussed are:
- Agenda and material for the Board of Directors
- Number of meetings
- Strategic plan and orientation
- Audit review
- Overall responsibility
- Competence
- Work of the Chairman
- Meeting technique and group dynamics
SOCIAL RESPONSIBILITY
Lagercrantz builds its long-term development on responsible enterprise with respect to moral values and businessmanship. The Group’s business is based on long-term and strong relationships with customers and suppliers, as well as good ethics and great respect for all individuals in the company as well as with external contacts.
Much like in other parts of the Group’s business, the concrete work with social responsibility is highly decentralised within the framework of the guidelines Lagercrantz has adopted and which is based on the ethics policy adopted by IT & telecom companies in Almega 15 October 2008. This policy can be seen at Lagercrantz Group’s website and includes important basic principles with respect to: Discrimination, Work Environment, Environment, Intangible Rights, Child Labor, Bribery and Corruption.
ENVIRONMANTAL IMPACT
Responsibility for improving the environment and participating in a sustainable development is an important prerequisite for the Group’s business. The principal activity consists of trading and distribution and only a small number of companies in the Group have their own manufacturing operations. The Group’s impact on the environment is therefore limited and is mainly associated with transportation of finished goods, business travel and waste management. The Group’s companies are continually working on reducing the environmental impact of their operations. Environmental work is conducted locally, based on the specific conditions for each individual company. The Group’s companies strive for high efficiency in their use of energy and natural resources, promote systems for renewed use and recycling of material and energy and also prevent and limit environmental pollution. The ambition is to be sensitive to customers’ and suppliers’ wishes, thereby meeting the market’s demands for proactive environmental work. Several of the companies in the Group work with quantitative goals in their environmental efforts. In one subsidiary the Group conducts business that requires a permit under the Swedish Environmental Act. The permit refers to “facilities for engineering industry with surface treatment.” There are no known threats from an environmental viewpoint that could jeopardise the Group’s operations.
RESEARCH AND DEVELOPMENT
In the interest of strengthening and developing Lagercrantz Group’s position as one of the leading suppliers of solutions in electronics, electrics and communication, the Group assigns resources primarily to development of different concepts for customers and co-operation partners, and certain establishment of proprietary trademarks. Activities during 2008/09 included product development. Expenditure for research and development constitutes less than one percent of revenue. Outlays for development of certain software and development of a new product generation in embedded computing was capitalised during the year.
RISKS AND FACTORS OF UNCERATINTY
Lagercrantz Group’s result, financial position and the future development are affected by internal factors over which the Company exerts control, as well as by external factors where opportunities to affect the course of events are limited. The most important risk factors are the state of the economy, structural changes on the Group’s markets, supplier and customer dependence, the competitive situation and financial risks. During 2008 and beginning of 2009 unrest in the world financial markets and a global weakening of the economy have contributed to creating increased uncertainty and have affected demand for several of the Group’s companies. The Group is therefore taking a number of measures with respect to costs, capital tied up in receivables and inventory and capital spending. All companies are also very watchful of the continued development. Because of the nature of Lagercrantz Group’s operations, with some 25 operating subsidiaries active in several geographic markets and in different market segments, the business risks are significantly curtailed.
The economic situation
Lagercrantz is affected by the overall economic development, typically measured in terms of GDP growth. Since Lagercrantz almost exclusively sells its products and services to companies and government agencies, it is primarily these entities’ purchasing plans that affect Lagercrantz. Lagercrantz tries to meet the risks that result from cyclical changes in the economy by sector diversification and niche focus. Sector diversification means that, seen across the entire Group, its customers will find themselves in different phases on an economic cycle. As a consequence of the Group’s niche focus, the Group is less dependent on one or a few end markets for its growth and profitability. This means that cyclical changes in one sector, transportation for instance, or one country, may have major impact on an individual company niched towards parts of this sector or geography, but will have less effect on the Group’s overall development. Lagercrantz Group endeavours to have a growing part of its sales in the form of aftermarket sales and service revenue, which is deemed to be less sensitive to economic cycles than investment-type goods.
Structural changes
Lagercrantz works actively on increasing the value element in its offer, irrespective of customer group. This has clearly been a contributing reason for the Group’s improved profitability, and the fact that the Group continues to be a prioritised supplier to many customers. An important part of this work has been to be more selective in choosing customers and market segments where the Group has an opportunity of creating a strong market position, which makes it more difficult to replace us with another supplier.
Another structural change that affects our business is the ever more rapid technological development and overall shorter product life cycles. This places ever more rigorous demands on the companies to stay close to the customers in order to catch new trends and to know when it is commercially warranted to adopt a new technology area, or to phase out an existing one.
Supplier and customer dependence
Dependency on individual suppliers is one of the most important operational risks for an individual subsidiary to handle. Many of the companies in the Group have developed their business based on one or a few strong supplier relationships. If one of these were to disappear, it would hurt the company, especially in the short term before alternatives have been located. In order to minimise this risk the subsidiaries work closely with their suppliers so as to create strong relationships at multiple levels. The Group also increasingly works on analysing supplier and customer relationships based on contract structure, product liability issues and insurable risks to minimise the consequences of the loss of a supplier or customer.
Overall in the Group, there is a large number of suppliers and distribution agreements and of these some 20 are of such major economic importance that special action would be required if one or more of these were lost. No individual supplier represents more than 10 percent of the Group’s aggregate sales. A number of supplier agreements expire and are added each year in the normal course of business, however.
Lagercrantz has a broad customer structure, split over a number of industry segments and geographic markets. No customer represents more than about 5 percent of the Group’s aggregate sales.
Competitive situation
In general, it can be said that the market segments where Lagercrantz is active are marked by change and increased consolidation, even if there are major variations. In the electronic industry in particular, the consolidation that swept the market in the beginning of the 2000s, created pricing pressures in the area of standard components to major customers. There are nevertheless still many niches that offer good profitability, especially because the customer structure there is different, with more small and local customers. This is the type of niche where Lagercrantz wants to be. In other areas where Lagercrantz is active, moves among customers led to a situation where the remaining players compete for the same customers and organic growth is low. This is the case in the wiring harness business. Here Lagercrantz attempts to assume a unique position through flexible production, high quality and strong customer relationships. In several other markets where Lagercrantz Group’s businesses are active, market growth is so good and the degree of consolidation so low that the competitive situation allows for growth as well as improved profitability.
Seasonal variations
Lagercrantz Group’s business is only to a limited degree marked by seasonal variations. Operations normally follow the seasonal pattern for the manufacturing industry, which means lower sales during holiday periods. Based on a historical pattern, just short of half of the result is generated during the first two quarters, and just over half during the last two quarters of the financial year, October to March in other words. Deviations from this pattern may appear when rapid economic changes occur during a financial year, like those experienced during 2008/09.
Financial risks and sensitivity analysis
For an account of the Group’s and the Parent Company’s financial risks and a sensitivity analysis, reference is made to Note 41.
ACCOUNTING POLICIES AND COMMENTS
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretations statements by the International Financial Reporting Interpretations Committee (IFRIC), as approved by the EU Commission for application within EU. Recommendation RR 30:05 Supplementary rules for consolidated accounting of the Swedish Financial Accounting Standards Council has also been applied.
The Parent Company applies the same accounting policies as the Group, except in the cases stated in the section “Parent Company accounting policies” in Note 1. Any discrepancies that do exist between the Parent Company’s and the Group’s policies are prompted by limitations in applying IFRS to the Parent Company as a result of the Swedish Annual Accounts Act (ÅRL) and the Swedish act on securing pension obligations, and in certain cases for tax reasons.
PRINCIPLES FOR COMPENSATING SENIOR MANAGEMENT
Guidelines resolved by the 2008 Annual Meeting for compensating members of senior management are set forth in Note 6 of this Annual Report.
The proposal of the Board of Directors to the 2009 Annual Meeting for guidelines mean that compensation to the President and other members of senior management may consist of basic salary, variable compensation, pension, other benefits and financial instruments. The aggregate compensation should be adjusted to market conditions and be competitive and should be commensurate with responsibility and authority. The annual variable portion of the compensation should be maximised and never exceed the fixed salary. The variable portion should also be based on actual performance relative to set goals, and on individual performance.
The retirement age shall be 60–65 years and in addition to the ITP plan, there should in the normal instance only be defined contribution pension plans. In case of termination, there may be severance pay equivalent to a maximum of one year’s salary. There shall be no other share-price-based incentive programmes than the present incentive programme.
In individual cases and if special reasons exist, the Board of Directors may diverge from the above guidelines.
EVENTS AFTER THE BALANCE SHEET DATE
No for the Company significant events have occurred after the balance sheet date, 31 March 2009.
Future development
The Group’s two most important future tasks are to continue raising profitability and to continue focusing on growth, particularly through acquisitions. The short-term focus is to adapt costs in the Group to the level of demand prevailing in the beginning of 2009, and to continue streamlining efforts in the use of working capital.
DIVIDEND
The Board of Directors proposes a dividend of SEK 1.50 (1.50) per share. The dividend is equivalent to a total of MSEK 33 (34) and constitutes 49 percent of the year’s earnings. The size of the dividend is based on consideration to the Group’s capital structure and future possibilities for expansion. The Board of Directors is of the opinion that the proposed dividend leaves room for the Group to fulfil its obligations and to make the necessary capital expenditures.
