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annual report 2004 05

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at a glance · · · · · operating revenue in local currency increased by 2 net income of chf 6.8 million improved by 31 net interest-bearing debt halved from chf 17.4 million to chf 8.3 million equity of chf 101 million reached 57 of total assets automation components revenue in local currency rose by 9.6 and operating profit reached 9.6 of revenue · computing solutions revenue in local currency dropped by 17.8 leading to an operating loss of 1.7 of revenue chf million bookings operating revenue ebit net income cash flow interest-bearing debt shareholders equity 2004 05 207.0 201.8 10.0 6.8 10.7 8.3 100.8 2003 /04 206.5 203.8 8.5 5.2 10.4 17.4 95.9 0.2 -1.0 17.6 30.8 2.9 52.3 5.1 operating revenue by business unit chf million 78 automation components 158 22 computing solutions 44

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five-year financial summary chf million bookings order backlog operating revenue gross profit ebitda ebit earnings before taxes and minorities net income from continuing operations net income including discontinued operations cash flow depreciation and amortisation additions to fixed assets accounts receivable inventories uncompleted contracts net net working capital current assets fixed assets net intangible assets net interest-bearing debt net current liabilities long-term liabilities minorities shareholders equity total liabilities and shareholders equity number of employees average 2004 05 207.0 45.5 201.8 84.2 14.4 10.0 8.9 6.8 ­ 10.7 4.4 4.6 64.3 31.4 ­ 52.2 111.3 22.5 32.6 8.3 61.5 13.1 0.1 100.8 175.5 1 037 2003 04 206.5 43.2 203.8 81.7 13.8 8.5 6.8 5.2 ­ 10.4 5.3 3.5 57.7 30.9 ­ 46.0 111.6 22.8 33.0 17.4 74.1 16.2 0.2 95.9 186.4 999 2002 03 208.9 42.4 204.8 74.7 6.0 -0.4 -2.6 -2.7 ­ 5.8 6.4 4.7 59.9 31.0 ­ 49.7 110.2 32.6 33.5 37.2 82.7 22.9 0.5 89.7 195.8 1 033 2001 02 252.8 42.8 263.3 88.5 14.6 6.8 4.0 2.1 -40.4 8.1 7.8 4.7 68.9 41.3 ­ 62.8 127.0 38.5 35.9 33.0 79.6 27.0 0.6 96.8 204.0 1 198 2000 01 495.6 203.0 500.5 143.0 41.7 30.5 25.4 13.9 ­ 24.8 11.2 12.6 150.9 57.3 48.0 105.1 322.9 53.1 32.5 41.6 225.2 50.7 6.6 130.0 412.5 2 708 not comparable with subsequent periods due to disposal of engineering and contracting business unit net income depreciation amortisation change in provisions gain loss on sale of investments or assets

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information for investors 2004 05 registered shares nominal value chf 10 shares issued share of capital share of voting rights share price bearer shares nominal value chf 50 shares issued share of capital share of voting rights share price as of march 31 share price ­ high share price ­ low average daily volume p/e ratio basic earnings per share book value per share stock market capitalisation ­ in percentage of revenue ­ in percentage of equity dividend per share ­ dividend yield ­ total pay-out ­ pay-out ratio 2003 04 2002 03 2001 02 2000 01 number 1 600 000 1 600 000 1 600 000 1 600 000 45.0 45.0 45.0 45.0 80.4 80.4 80.4 80.4 the registered shares are not traded on the stock exchange 1 600 000 45.0 80.4 number chf chf chf number factor chf chf chf 1 000 chf chf 1 000 390 710 55.0 19.6 116 121 74 962 12.1 9.6 142 82 400 40.8 81.7 5.0 4.3 3 554 52.3 390 710 55.0 19.6 80 83 28 708 11.0 7.2 135 56 500 27.7 58.9 2.0 2.5 1 421 27.6 390 710 55.0 19.6 28 80 28 258 ­ -3.8 126 19 900 9.7 22.2 ­ ­ ­ ­ 390 710 55.0 19.6 71 240 66 629 24.5 2.9 136 50 460 19.2 52.1 ­ ­ ­ ­ 390 710 55.0 19.6 243 270 141 604 12.3 19.7 183 172 703 34.5 132.8 5.0 2.1 3 554 25.5 restriction of voting rights there are no limits on registration of voting rights conditional share capital as of march 31 2005 35 270 bearer shares for issue to employees and members of the board of directors chf 1 763 500 of the company or subsidiaries financial calendar shareholders meeting 2004 05 interim report 2005 06 press and financial analysts meeting 2005 06 shareholders meeting 2005 06 july 26 2005 at the congress center metalli zug november 18 2005 june 22 2006 at the hotel widder zurich july 27 2006 at the congress center metalli zug based on continuing operations only proposal of the board of directors

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information for investors share price 1.4.2004 ­ 31.3.2005 chf 140 120 100 80 60 40 20 0 apr may june july aug sept oct nov dec jan feb mar carlo gavazzi bearer share spi extratm rebased share volume 1.4.2004 ­ 31.3.2005 number 18 000 16 000 14 000 12 000 10 000 8 000 6 000 4 000 2 000 0 apr may june july aug sept oct nov dec jan feb mar carlo gavazzi bearer share share price 1.4.2000 ­ 31.3.2005 chf 300 250 200 150 100 50 0 31.03.00 31.03.01 carlo gavazzi bearer share 31.03.02 tm 31.03.03 31.03.04 31.03.05 spi extra rebased

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annual report 2004 05 carlo gavazzi group

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index carlo gavazzi group 4 letter to the shareholders 6 review of operations 8 group profile 10 automation components 14 computing solutions 18 corporate governance financial statements 27 consolidated financial statements of the carlo gavazzi group 45 financial statements of carlo gavazzi holding ag appendix 51 group companies

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letter to the shareholders review of operations group profile automation components computing solutions corporate governance letter to the shareholders dear shareholders carlo gavazzi successfully built on the turnaround achieved last year net income increased by 31 from chf 5.2 million to chf 6.8 million yielding a 6.7 return on equity bookings of chf 207 million and operating revenue of chf 202 million though flat in swiss francs increased in local currency by 3 and 2 respectively the carlo gavazzi share price rose by 46 in the reporting period again clearly outperforming the spi extratm which increased by 17 the company will retain its lean structure and its focus on strategic market segments the group s global market position should further improve during the current financial year though the forecasted economic slowdown in most markets carlo gavazzi serves may hinder the continued positive performance strategy the company invested heavily in product innovation as well as in marketing and sales it made every effort to fully understand customers applications and future requirements so as to provide them with innovative solutions on a timely basis to facilitate doing business with the company speed and quality of service to customers were further improved efforts were made to lower manufacturing costs and to preserve the group s gross profit margin by setting up an own manufacturing base in china and whollyowned national sales companies covering china and south east asia the company has significantly expanded its geographical revenue base a very important priority for the current year is improving the performance of computing solutions to chf 6.8 million group profit and the ongoing asset management programme contributed to the decrease in interest-bearing debt by chf 9.1 million to reach chf 8.3 million equity increased to chf 101 million now reaching 57.4 of total assets in light of the group s improved financial performance and its solid balance sheet the board of directors will propose to the annual shareholders meeting to pay a dividend of chf 5 per bearer share for the reporting year the business units automation components the market demand for products offered by the automation components business unit grew in the reporting period by approximately 4 thanks to the focus on a selected number of market segments in factory and building automation net income increased by 31 from chf 5.2 million to chf 6.8 million yielding a 6.7 return on equity business unit revenue grew by more than 8 clearly outpacing the market growth unabated efforts in the extension of the product range to even better meet the application needs of our customers should allow this business unit to maintain its growth well above market demand improvement of manufacturing processes strict cost control and economy of scale effects helped to significantly improve operating profit now reaching almost 10 of operating revenue in the current year substantial efforts will be made to further develop the business unit s position in the usa and in south east asia while the revenue expansion in the usa is expected to originate primarily from investments in additional marketing and sales personnel the contemplated expansion in asia is built on the establishment of a proprietary sales network in china and south east asia and on the new manufacturing facility in mainland china financial results the automation components business unit succeeded in increasing its operating revenue in swiss francs by 8.1 however revenue of the computing solutions business unit declined by 18 in us dollars and by 24 in swiss francs mainly as a result of the shrinking demand from one large telecom customer on a positive note this business unit succeeded in building up its backlog by almost usd 4 million which will be delivered in the current financial year werner s welti chairman of the board as a result of continued improvements in manufacturing processes and stringent cost control gross profit margin rose by 1.6 percentage points to reach a record high of 41.7 as operating expenses were stabilised at the previous year s level ebit improved by chf 1.5 million to reach chf 10.0 million or 5 of operating revenue and net income increased 4 carlo gavazzi group

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computing solutions though we believe that the market for telecommunication equipment has stabilised the performance of the computing solutions business unit in the reporting period was strongly affected by the shrinking demand from one large telecom customer which now accounts for less than 6 of the business unit s revenue down from 14 in the previous year the reduced sales volume to this customer masks the business unit s success in gaining new customers in new market segments such as medical and industrial as a result of the lower operating revenue and the resulting missing overhead absorption both gross profit and gross profit margin deteriorated though operating expenses were timely reduced the reduction could not fully offset the shrinking gross profit leading to an operating loss of usd 0.6 million the business unit s strategic orientation to provide its customers with integrated state-of-the-art computing solutions and to remain a leader in the evolving open architecture bus structures will be vigorously pursued disposing of most elements of the value chain the business unit is well placed to provide innovative solutions and to add value to its customers with a lean structure and a solid backlog the business unit is expected to improve its performance in the current year outlook going forward the challenge is to ensure the continuation of gaining market share in a global market that has slowed down considerably over the last six months carlo gavazzi intends to do this by working closely with customers and investing in the key areas of product development as well as marketing and sales in addition it will continue to seize all opportunities to further improve its operating systems and processes and continue to control costs and expenses the expansion of the activities in the usa and the establishment of the operation in asia-pacific present a great opportunity to the company although resources will be required to be successful the group has the people the relationships and the portfolio to meet the challenges faced in an increasingly competitive market acknowledgements the results attained reflect the dedication and achievements of employees throughout the company with creativity and hard work they have added value to all stakeholders and will do so in future on behalf of the board of directors i wish to express my gratitude for their most valuable contributions my thanks go to our customers who rely on carlo gavazzi products and services and for the partnership they have entered with our company finally i would like to thank our shareholders for their continued trust in the management and the board of directors obituary on april 3 2005 riccardo gavazzi honorary chairman of the board of carlo gavazzi holding ag passed away at the age of 79 riccardo gavazzi took the helm of the company in 1957 from his father and founder riccardo gavazzi graduated in electrical engineering from the politecnico of milan in 1947 and acted as the group s managing director until 1991 and thereafter as chairman of carlo gavazzi holding ag until 1996 when he retired due to statutory age limitation he was subsequently elected honorary chairman of the board of directors as a visionary and entrepreneur he expanded the italianbased company into a global industrial group he was a charismatic leader who successfully directed the group with much care and intellect the group has lost a great entrepreneur a humble man of integrity and a good friend who will always be retained in good memory werner s welti chairman of the board changes in management in february 2005 hanspeter schraner was appointed chief financial officer he took office on may 2 2005 as replacement for david walther who left the group effective april 19 2005 mads lillelund was elected president and ceo of the computing solutions business unit he followed jeff russell who left the business unit after 19 years carlo gavazzi group 5

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letter to the shareholders review of operations group profile automation components computing solutions corporate governance review of operations structure the organisational structure of the group remained unchanged in the year under review it is composed of the two business units automation components with its head office in lainate milan italy and computing solutions with its head office in brockton ma usa the automation components business unit accounted for 78.2 of operating revenues and the computing solutions business unit generated 21.8 thereof currencies while the group operates globally and reports its financial results in swiss francs chf foreign exchange rate movements between the chf and both the euro eur and the us dollar usd are of particular importance the usd weakened against the chf by 7.6 from an average rate of 1.32 in 2003 04 to 1.22 in 2004 05 and the eur weakened against the chf by 0.5 from an average rate of 1.546 in 2003 04 to 1.539 in 2004 05 the gross profit margin of the group increased by 1.6 percentage points to reach 41.7 an improvement for the third consecutive year cost of sales decreased by chf 4.5 million or 3.7 to chf 117.6 million from chf 122.1 million in the previous year cost of goods sold as a percentage of revenues was 58.3 in 2004 05 and 59.9 in 2003 04 considerable sales growth and higher volumes allowed automation components to gain market share both sales growth and tight cost control in operations allowed the business unit to increase gross profit margin by 1.5 percentage points over the previous year the computing solutions business unit managed to decrease the overall cost base however its manufacturing overhead had to be absorbed by a lower sales volume which negatively affected gross profit margin by 3.8 percentage points compared with the previous year consolidated operating expenses increased by chf 1.0 million or 1.4 to chf 74.2 million from 73.2 million in the previous year eliminating the effects of the newly introduced profit-sharing plan the group managed to keep the operating expenses almost at prior year s level consolidated earnings before interest and taxes rose by chf 1.5 million or 17.8 to chf 10.0 million from chf 8.5 million in the previous year while the automation components business unit increased its operating profit by 2.3 percentage points from 7.3 to 9.6 the same ratio dropped from 3.5 to -1.5 in the computing solutions business unit lower interest-bearing debt helped to reduce net interest expense by chf 0.5 million or 39.7 to chf 0.8 million from chf 1.3 million in the previous year even though taxes rose in absolute terms from chf 1.7 million in 2003 04 to chf 2.1 million in 2004 05 the tax rate income tax in proportion to earnings before taxes was reduced from 25.3 to 24.2 consolidated net income increased by chf 1.6 million or 31.7 to chf 6.8 million from chf 5.2 million in the previous year earnings per share were up from chf 7.20 to chf 9.59 return on equity improved from 5.4 to 6.7 and return on employed capital improved from 7.5 to 9.2 bookings and backlog despite a negative currency effect of approximately chf 6.4 million consolidated bookings stabilised at chf 207.0 million the book-to-bill ratio on group level amounted to 102.6 and provides for a good start into the new financial year in the automation components business unit bookings increased by 6.8 in local currencies and by 5.3 in chf terms the computing solutions business unit reported a decline in bookings by 5.9 in local currency and 13.1 in ch terms the order backlog of the group remained at previous year s level of 22.5 of operating revenue at year-end corresponding to work on hand for approximately two and a half months income statement excluding currency effects the group s operating revenue increased by 1.9 operating revenue in chf terms decreased by chf 2.0 million or 1.0 to chf 201.8 million from chf 203.8 million in the prior year excluding currency effects operating revenue at the automation components business unit increased by 9.7 in chf terms revenues of chf 157.7 million increased by chf 11.8 million or 8.1 over the previous year this growth is the result of the sustained strategic focus on offering specific solutions to defined market segments the computing solutions business unit s operating revenue decreased by 17.7 in local currency in chf terms operating revenue of chf 44.0 million decreased by chf 13.8 million or 24.0 from the previous year the drop was primarily triggered by significant lower demand of our customers in the telecommunications industry 6 carlo gavazzi group

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balance sheet and cash flow trade accounts receivable decreased by 6.2 to chf 49.5 million representing a collection period of 85 days inventories increased by 1.7 to chf 31.4 million corresponding to 3.9 turns trade payables decreased by 3.8 to chf 23.5 million representing a payment period of 72 days non-current assets including goodwill decreased by chf 10.6 million to chf 64.2 million interest-bearing debt was reduced by chf 9.1 million or 52.4 to chf 8.3 million from chf 17.4 million in the previous year net cash from operating activities amounted to chf 14.1 million investment activities resulted in a cash outflow of chf 4.6 million adjusted for investments the free cash flow amounts to chf 9.5 million compared with the previous year the major drop in free cash flow by 54.9 from chf 21.0 million to chf 9.5 million is mostly attributable to last year s high proceeds from the sale of fixed assets the generated free cash flow was instrumental to further reduce the interest-bearing debt total equity amounted to chf 100.8 million an increase of chf 4.8 million including a negative currency translation effect of chf 1.0 million and dividend payment of chf 1.4 million the equity ratio of 57.4 and the reduced net interest-bearing debt evidence the solid financial position of the carlo gavazzi group geographical revenue distribution 2004 2005 34 north america 43 europe without italy 20 italy 3 rest of the world 4 rest of the world 2003 2004 39 north america 38 europe without italy 19 italy key figures chf million bookings operating revenue gross profit operating expense ebit net income free cash flow 2004 05 207.0 201.8 84.2 74.2 10.0 6.8 9.5 2003 04 206.5 203.8 81.7 73.2 8.5 5.2 21.0 0.2 -1.0 3.1 1.4 17.6 31.7 -54.8 carlo gavazzi group 7

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letter to the shareholders review of operations group profile automation components computing solutions corporate governance group profile our mission carlo gavazzi is a diversified internationally active electronics group designing manufacturing and marketing electronic equipment targeted at the global markets of industrial automation and information processing our objectives to provide our customers with technologically innovative high quality and competitive solutions in compliance with their requirements and expectations to create an environment conducive to our employees professional and personal development our structure under the umbrella of a holding company headquartered in switzerland carlo gavazzi is organised in two business units it 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 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 marketing and sales human resources logistics finance and control group executives lead their business units in line with the holding s objectives as businessmen with strong entrepreneurial drive and responsibility to obtain a fair and equitable return for our shareholders through sustained development of our core activities our principles to create added value for our customers with our products and services in order to strengthen their market positions and establishing long-term partnerships to adapt structures and processes to market needs and delegate responsibility to promote an environment conducive to mutual respect and cooperation to mark clear leadership and integrity by doing what we say 8 carlo gavazzi group

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our activities the automation components business unit designs and manufactures electronic control components for the global industrial automation markets in its factories in denmark italy lithuania malta and the people s republic of china the products sensors monitoring relays timers energy management systems solid-state relays electronic motor controllers safety devices 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 door and entrance control systems lifts and elevators as well as heating ventilation and air-conditioning devices value-added resellers and distributors are other effective channels to the market the products are marketed across europe north america and asia through a network of 18 wholly-owned sales companies and through more than 40 independent national distributors the computing solutions business unit designs manufactures and markets in the usa standard and custom products supporting open architecture bus structures such as vme compactpci and advancedtca as well as switch fabric technologies the products include enclosures and high-speed backplanes fabric connectivity solutions as well as embedded computer systems the unit s system integration expertise provides customers with complete fully tested and certified systems whereas its fulfilment activity is a direct source for active boards motherboards and single board computers the computing solutions business unit operates manufacturing facilities both on the east and west coasts of the usa the unit s main customers are manufacturers of commercial and military telecommunications equipment mass-storage units for data processing speciality computers medical equipment and systems for industrial automation carlo gavazzi group 9

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letter to the shareholders review of operations group profile automation components computing solutions corporate governance automation components business climate demand for automation components revived in the reporting period although regionally diverse the accessible global market demand for automation components rose by 4 over the previous year with a revenue growth of 9.7 in local currency the business unit clearly outpaced market growth and once more gained market share the south east asian countries notably china showed the strongest increase in demand followed by north america however overall demand in europe continued to stagnate and even softened slightly since january 2005 financial performance the sustained strategic focus on offering application solutions to the chosen market segments coupled with the increased demand for automation components allowed the business unit to increase bookings and operating revenue in local currency by 6.8 and 9.7 respectively expressed in swiss francs these increases amounted to 5.3 and 8.1 efficiency improvements at all levels and the positive impact from outsourcing a part of the sensor production to lithuania resulted in an increase of the gross profit by 1.6 percentage points over the prior year as operating expenses grew only moderately operating profit rose by 42.5 to reach 9.6 of operating revenue compared with 7.3 in the previous year resources were invested in north america in sales and marketing in addition tailor-made product packages were developed to fully serve selected market segments in this region a foothold in asia-pacific the high pace of industrialisation also supported by the relocation of many manufacturing bases from highly developed industrial countries has led to a strong increase in demand for automation solutions in the asia-pacific area to further enhance its presence in this region and to comply with its ambition to become a recognised brand in this part of the world the business unit invested simultaneously in sales with innovative solutions for the market segments served we help customers to add value to their products strategic focus to sustain organic growth and profitability automation components continued its strong marketing and sales focus in the chosen market segments within factory and building automation providing innovative solutions for applications in the targeted markets led to encouraging results global sales to these market segments grew by 20 clearly outperforming the total sales growth of the business unit the north american and south east asian markets offer a potential that equals the european market however both of them are growing substantially faster with 77 of its operating revenue currently realised in europe the business unit has reached a considerable market share in its traditional home market but is clearly underrepresented in the faster growing regions of the world therefore as a prime objective automation components intends to increase significantly its market coverage in the attractive and dynamic north american and asian markets with this objective additional human and manufacturing infrastructures accordingly automation components set up recently a regional headquarters for asia-pacific in singapore acquired its local distributors in singapore and hong kong and established its own manufacturing base in kunshan near shanghai china the availability of fully-trained and fully-dedicated sales personnel and the sourcing from the local manufacturing operation should allow the business unit to quickly expand its position in south east asia it is planned to gradually increase the number of regional sales offices in that area dino masili group executive application-oriented product innovation to provide oem customers from the chosen market segments with a full package of automation components the business unit together with its customers identifies future product requirements and specifications new products generally follow the main trends towards miniaturisation communication capabilities and safety features in the reporting period automation components introduced a large number of new products such as solid-state relays offering diagnostic 10 carlo gavazzi group

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