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annual report 2003/04 carlo gavazzi group

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at a glance · gain of market share despite declining demand · improvement of gross profit margin by 3.6 percentage points and reduction of operating expenses by 1.5 demonstrate successful turn-around · ebit improves by chf 8.9 million to 4 of revenue · regained profitability permits resumption of dividend payment · equity increased to 51 of total assets and net interest-bearing debt reduced to 18 of equity evidencing the group s financial solidity · positive development expected to continue during 2004/05 2003/04 206.5 203.8 8.5 5.2 10.4 17.4 95.9 2002/03 208.9 204.8 0.4 2.7 5.8 37.2 89.7 1.1 0.5 79.3 53.2 6.9 chf million bookings operating revenue ebit net income cash flow interest-bearing debt shareholders equity operating revenue by business unit chf million 72 automation components 146 28 electronic packaging 58 carlo gavazzi group

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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 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 1999/00 418.0 225.0 449.2 130.7 41.3 29.1 23.2 10.6 17.8 12.2 11.5 156.3 54.3 31.6 116.5 288.3 50.5 31.0 52.7 203.5 40.0 9.0 121.1 373.6 2 503 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 carlo gavazzi group

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information for investors 2003/04 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 2002/03 2001/02 2000/01 1999/00 number 1 600 000 1 600 000 1 600 000 1 600 000 1 600 000 45.0 45.0 45.0 45.0 46.0 80.4 80.4 80.4 80.4 81.0 the registered shares are not traded on the stock exchange number chf chf chf number factor chf chf chf 1000 chf chf 1000 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 25.5 375 280 54.0 19.0 164 182 82 1090 10.7 15.3 174 114 026 25.4 94.2 4.0 2.4 2 781 26.1 restriction of voting rights there are no limits on registration or voting rights conditional share capital as of march 31 2004 35 270 bearer shares for issue to employees and members of the board of directors chf 1 763 500 of the company or subsidiaries future events shareholders meeting 2003/04 interim report 2004/05 press and financial analysts meeting 2004/05 shareholders meeting 2004/05 based on continuing operations only proposal of the board of directors july 22 2004 at the congress center metalli zug november 26 2004 june 23 2005 at the hotel widder zurich july 26 2005 at the congress center metalli zug carlo gavazzi group

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information for investors share price 1.4.2003 ­ 31.3.2004 90 80 70 60 50 40 30 20 10 0 31.03.03 30.04 31.05 30.06 31.07 31.08 30.09 31.10 30.11 31.12 31.01 28.02 31.03.04 carlo gavazzi bearer share spi extra share volume 1.4.2003 ­ 31.3.2004 5000 4000 3000 2000 1000 0 apr may june july aug sept oct nov dec jan feb mar carlo gavazzi bearer share share price 1.4.1999 ­ 31.3.2004 400 350 300 250 200 150 100 50 0 31.03.99 31.03.00 31.03.01 31.03.02 31.03.03 31.03.04 carlo gavazzi bearer share spi extra carlo gavazzi group

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applic-actions carlo gavazzi industrial world is best observed through applications and better understood in action application of components for automation and electronic systems improve processes controls movements and communication applications of carlo gavazzi products ideas and people in action become solutions contributing to technological evolution the decision to represent company applications and people in action has naturally led the photographic choice to paola mattioli one of the few world recognised portrait specialist able to see through people and industrial realities with the same degree of intensity her 30-year experience in the mirroring process of human technology has challenged faag aesthetic direction and research of this report issue as well indicating the metal element as the reflecting surface between human and mechanical expression a wide group of collaborators has joined the programme to implement it at various stages the application of sensors in the mechanical field of packaging machinery and the use of barriers for robotic safety have been chosen to represent the automation components business unit thanks to the excellent research provided by glauco vitali and to the help on location for shooting of massimo marcatelli valerio fustini of ima and enrico berni of mtp the application of electronic packaging in the telecom environment is best represented by the partner telecom company lucent where the integrated data transportation of the internet back-bone becomes visible thanks to the interest demonstrated by massimo sangiovanni and the technical settings of davide manzella at the milanese labs roberto spaiardi psp digitalab and studio parolini have expressed great quality of image postproduction work with a 4-colour special adaptation of black and white photo files to obtain best results continuity in of the collaboration with partner printer simone kalt of kalt-bucher druck ag is evidenced in the clean cut of the graphic choices she also granted special availability hosting board and management shooting session the result of all joint efforts on the applications in action programme determine carlo gavazzi reality reporting 2004 applic-actions carlo gavazzi group

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index carlo gavazzi group 4 6 8 10 14 18 letter to the shareholders review of operations group profile automation components electronic packaging corporate governance financial statements 27 45 consolidated financial statements of the carlo gavazzi group financial statements of carlo gavazzi holding ag appendices 51 52 group companies credits

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letter to the shareholders review of operations group profile automation components electronic packaging corporate governance letter to the shareholders dear shareholders throughout the reporting period difficult conditions persisted in most markets in which the carlo gavazzi group operates nonetheless the company realised major improvements in market coverage operational excellence and financial performance fulfilling last year s pledge to return to profitability the company achieved a net income of chf 5.2 million an improvement of chf 7.9 million over the previous year with many new projects under development an extended product range dedicated market segment focus a lean structure and signs of market recovery your company s performance should continue to improve during the current financial year automation components demand in the business unit s main market segments werner s welti in the european union usa and japan declined chairman of the board during 2003 on average by 1.9 according to a study by the european commission however after three years of contracting demand signs of an emerging economic recovery became visible in the fourth quarter of the financial year the business unit expects this trend to gain momentum during 2004/05 with an internal growth of bookings and operating revenue in swiss francs of 8.5 and 5.2 respectively the automation components business unit mastered successfully last year s challenges and continued to expand its market share manufacturing efficiency improvement programmes were vigorously enacted and consequently enabled the unit to increase the gross profit margin despite ongoing market price erosion and to improve operating profit by chf 2.2 million to chf 10.6 million or 7.3 of revenue with the objective of further improving group management believes its performance automation components transferred part of the sensor that the deployed strategies production from its danish facility to along with the growing lithuania this location offers confidence for an economic significantly lower labour-cost and is recovery should permit the close enough geographically to denmark to guarantee timely production while company to return to growth maintaining the traditional high quality and to further improve supported by ongoing product profitability innovation programmes the business unit will continue to expand the revenue of its core products sensors controls solid-state switching devices and safety products at a rate well in excess of the market growth thereby gaining market share the unit will continue to focus on offering dedicated solution-packages to target 4 carlo gavazzi group market segments where it plans to increase its revenue annually by a two-digit percentage figure electronic packaging for the third consecutive year the unprecedented business retrenchment and realignment in the us telecom industry the main market of our electronic packaging business unit continued during the reporting period capital spending by service providers declined again by more than 10 before beginning to stabilize towards the end of the financial year despite these unfavourable market conditions the business unit succeeded in stabilizing its us dollar revenue at the previous year s level and significantly improved its operations with the objective of serving customers better while strengthening the economic and competitive position of the business unit many difficult decisions such as resizing the work force general cost reductions and rationalization of business processes were successfully implemented as a result of these efforts the business unit regained profitability and improved operating profit against the previous year by an impressive chf 6.8 million or 12 of revenue although electronic packaging has essentially completed its restructuring process adjustments will always be necessary in order to respond to market requirements the business unit also made progress in strategic areas particularly in accessing new market segments and thereby reducing its dependency on the telecom sector the unit s core competencies open bus architecture and up to level 5 integration capabilities were instrumental in developing successfully applications for high-speed high-volume data processing in the medical market where a first significant order could be secured furthermore recently established partnerships with leading manufacturers of active boards are developing favourably customers benefit from these co-operations by having the opportunity of purchasing fully integrated customised systems rather than active boards only these partnerships also offer additional channels to the market and are expected to generate incremental business volume in the future the business unit has continued to expand its technological base and integration know-how and offers today a broader range of products and services compared with its traditional portfolio reflected by the name electronic packaging its current products services and competencies in electronic packaging backplanes chassis enclosures fabric and connectivity switch fabric and i/o solutions embedded computing computer platforms and system integration fulfilment sale of 3rd party active boards

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are better represented by the new business unit name computing solutions that will become effective july 1 2004 while continuing to focus on delivering sustainable profitable growth in the current financial year the business unit is also looking for additional opportunities in the industrial market segments where its proprietary know-how can contribute significant value to potential customers strict cost and expenses management will continue and investments will predominantly be made in the development and the application of new bus structures such as advanced telecom computing architecture and switch fabric the business unit s marketing and sales organisation is committed to proactively focus on the applications and proximity of customers today the business unit has the structure to benefit over-proportionally from the developing economic upswing its first priority remains to contribute addedvalue to customers in selected market segments by providing them with dedicated and competitive packaging connectivity and computing solutions financial results operating revenue stabilized at the previous year s level but increased currency neutral by 1 in addition thanks to efficiency improvements and cost saving measures introduced throughout the group gross profit margin increased by 3.6 percentage points to reach 40.1 while operating expenses were reduced by 1.5 to 35.8 of operating revenue as a result ebit and net profit before taxes and minority interests improved by chf 8.9 million and chf 9.4 million respectively net income reached chf 5.2 million interest-bearing debt decreased by 53 to reach chf 17.4 million and equity now equals 51 of total assets in line with the company s policy to pay dividends in relation to its net income the board of directors will propose to the annual shareholders meeting to pay a dividend of chf 2 per bearer share for the reporting year after two years of underperformance and in line with the improvement in operations your company s share price rose in the reporting period by 186 outperforming the spi extratm that rose by 60 board of directors at the forthcoming annual shareholders meeting uberta gavazzi theodore h elliott jr and stephan g schibli will retire from the board of directors following statutory age regulations the board appreciates the valuable contributions and support of the three retiring colleagues during many years and wishes them a healthy and happy future strategy both business units remain committed to innovate products and services according to customer requirements thus helping them to add value to their products in order to enhance market position the group intends to expand its customer base in selected market segments and its application knowhow therein with a flexible and cost effective manufacturing strategy extended distribution channels and a strong emphasis on expanding sales in selected geographical markets the group is confident of expanding its profitable internal growth the automation components business unit is currently evaluating the manufacturing of selected components in china which will enhance the unit s sales in south east asia after the completed restructuring in the us and the attained favourable balance sheet ratios the group is more inclined to consider external growth should an acquisition opportunity develop positive development to continue over the past year group management has developed a three-year strategic plan aimed at growing our business for the long-term management has defined where it wants the group to be in 2006/07 and what it requires to accomplish this revision of the strategies has commenced accordingly and the resulting action plans are being implemented group management believes that those actions along with an economic recovery should permit the company to return to growth and to further improve profitability the mid-term target of achieving a return on equity in excess of 10 remains unchanged acknowledgements on behalf of the board of directors i wish to express my thanks and appreciation to our employees who have shown a very strong commitment and readiness in adapting to the required changes and challenges my thanks go to our customers who continued to rely on carlo gavazzi products and who provide us with valuable input in regard to new products and services these co-operations will motivate us to further improve our offering of state-of-the-art products and solutions finally i would like to thank our shareholders for their continuous support werner s welti chairman of the board carlo gavazzi group 5

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letter to the shareholders review of operations group profile automation components electronic packaging 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 head office in lainate milan italy and electronic packaging with head office in brockton ma usa automation components business unit accounted for 72 of operating revenues and electronic packaging business unit generated 28 their relative size has been exclusively affected by the revaluation of the euro by 5.5 and the devaluation of the us dollar by 10.8 against the swiss franc bookings and backlog packaging business unit the workforce stood at 162 employees a reduction of 9 the reduction in the group s headcount to 999 led to a decrease in personnel expenses to chf 65.5 million or by 4.4 consolidated bookings stabilised at chf 207 million the second semester was clearly stronger than the first half of the financial year the automation components business unit posted an increase of 8.5 currency neutral 5.7 in bookings the bookings from the electronic packaging business unit from the telecom industry and the low-margin fulfilment business declined in line with the market whereas the traditional electronic packaging business developed favourably the order backlog of the group remained at previous years level of 21 of revenues at year-end corresponding to work on hand for approximately two and a half months income statement geographical revenue distribution 2003/2004 39 north america 38 europe without italy 19 italy 19 italy 4 rest of the world 4 rest of the world 2002/2003 42 north america 35 europe without italy consolidated operating revenue remained stable at chf 204 million automation components business unit had revenues of chf 146 million an increase of 5 over the previous year of which 2.8 was currency induced the electronic packaging business unit showed revenues of usd 44 million as in the previous year following the usd decline revenue in swiss francs decreased by 12.4 in this business unit for the second consecutive year the gross profit margin of the group increased substantially in the reporting period by 3.6 percentage points to reach 40.1 the automation components business unit increased its margin by 1.0 percentage point and the electronic packaging business unit by 5.8 percentage points consequently the groups gross profit rose by chf 7 million compared with the previous year cost reduction programmes further reduced selling general and administrative expenses by 1.5 to chf 73.0 million in the electronic packaging business unit the operating expenses were reduced by 20.5 significantly contributing to the turn around the automation components business units headcount amounted to 831 down by 23 whereas in the electronic 6 carlo gavazzi group thanks to cost saving programmes and a substantial increase in margin the carlo gavazzi group generated an ebit of chf 8.5 million up by chf 8.9 million from the previous year while the automation components business unit increased its operating margin by 1.2 percentage points to 7.3 the electronic packaging business unit improved the same ratio from ­7.2 to 3.6 lower net interest-bearing debt helped to reduce the interest burden from chf 1.7 million to chf 1.3 million or 0.6 of operating revenue the profit before tax and minorities increased to chf 6.8 million after a loss of chf 2.6 million in the previous year the higher pre tax-profit resulted in an increase in income taxes by chf 1.6 million to chf 1.7 million.

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with a net income of chf 5.2 million the carlo gavazzi group now shows a return on equity roe of 5.4 and a return on capital employed roce of 7.5 both ratios up from previously negative values balance sheet cash flow key figures chf million bookings operating revenue gross profit sg&a expense ebit net income cash flow 2003/04 206.5 203.8 81.7 73.0 8.5 5.2 10.4 2002/03 208.9 204.8 74.7 74.1 -0.4 -2.7 5.8 -1.1 -0.5 +9.4 -1.5 +79.3 the net working capital of the group decreased by chf 3.7 million trade-accounts receivable amounted to chf 52.8 million representing a collection period of 83 days inventory levels remained stable at chf 30.9 million corresponding to 4.5 turns fixed assets were reduced by chf 9.9 million mainly as a result of the sale of two unused buildings goodwill decreased by chf 0.3 million due to the devaluation of the us dollar against the swiss franc net cash from operating activities amounted to chf 15.3 million investments of chf 3.5 million and disposals of fixed assets of chf 9.3 million resulted in a cash generation from investing activities of chf 5.8 million as a consequence and including the currency effect net interest-bearing debt decreased by chf 19.8 million to chf 17.4 million total equity amounted to chf 95.9 million an increase of chf 6.2 million including a positive currency translation difference the equity ratio of 51 and the strongly reduced net interest-bearing debt evidences the solid financial position of the carlo gavazzi group carlo gavazzi group 7

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letter to the shareholders review of operations group profile automation components electronic packaging corporate governance group profile our mission our objectives 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 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 in its factories in denmark italy malta and lithuania electronic control components for the global industrial automation markets 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 controls systems lifts and elevators as well as heating ventilation and airconditioning 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 17 whollyowned sales companies and through more than 40 independent national distributors the electronic packaging 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 level 5 systems whereas its fulfilment activity offers complete telephony solutions the electronic packaging 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 electronic packaging corporate governance automation components a challenging year the first nine months of the reporting period proved to be challenging for the business unit although a number of macro-economic indicators had shown a slow improvement at the beginning of the financial year investments in industrial automation failed to follow suit as quickly as expected reflecting the uncertainties prevailing in the markets more recently encouraging signs of a modest recovery have emerged while more accentuated in south east asia and in north america the increase in market demand for automation components in europe remained fragile dino masili group executive entire asian pacific area which is covered by independent distributors thanks to the strengthened market presence coupled with the increasing demand for automation components the malaysian company enjoyed a 25 growth of revenue in the year under review sales to customers in this area now account for seven percent of total business unit revenue management expects sustained market growth in this region over the next years in order to enhance further its market position the business unit will hire additional sales personnel and establish a regional logistics hub in malaysia to better serve its customers in the territory innovative products new product lines are designed to respond to emerging requirements from the industrial automation markets and to complete product packages for targeted applications sensors design-in of state-of-the-art microprocessor technology significantly improves the versatility and user friendliness of sensing devices customers appreciate the teach-in feature which provides auto-adjustment of the sensing distance independent of the size and colour of the object to be detected in addition to this function the complete series of capacitive sensors launched recently also includes self-adjustment capabilities to avoid malfunction in case of high humidity or condensing water and dirt present on the sensor surface furthermore the sensors detect the type of electrical load and automatically configure the output parameters users benefit from all these features by a simple time-saving installation process and avoid damages through miswiring solid-state switching devices solid-state soft starters are efficient and inexpensive solutions to reduce mechanical wear-out and noise emission generated when starting stopping or reversing electrical motors noise is a particular issue in heating ventilation and air conditioning systems installed in buildings employing many motors driving pumps and ventilators to serve this market segment better the range of soft starters was expanded to include models featuring reduced physical dimensions and higher power up to 22kw safety the market for safety devices is growing rapidly as a consequence of the implementation of stringent rules financial performance continued focus in offering solution packages to the selected market segments allowed automation components to grow bookings and operating revenue by 8.5 and 5.2 respectively currency neutral 5.7 and 2.4 market demand declined by 1.9 however the business unit once more gained market share unabated efforts to further enhance the efficiency in all manufacturing facilities contributed to an increase of the gross margin despite the continued market price erosion thanks to stringent cost control measures operating profit increased for the second consecutive year by 26 to reach 7.3 of revenue production transfer to lithuania in order to further improve its competitiveness a part of the sensor production was transferred from the danish facility to lithuania the new plant which started production in december 2003 the business unit succeeded will gradually increase employment so in growing revenue and as to become fully operational towards gaining market share the end of the current year the full effect resulting from the reduced manufacturing costs will become visible in the financial year 2004/05 all expenses related to the production transfer were charged to the income statement during the reporting period expansion in asia and pacific the business unit established its malaysian sales company three years ago as a bridgehead for its sales activities in the local market as well as for the 10 carlo gavazzi group

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