1) Amortization of intangible fixed assets related to acquisitions (after tax).
2) The one-off income and expenses in 2016 were impairments, on balance, of € 0.2 million (2015: €1.5 million) and tax income of € 3.0 million (2015: € 0.3 million). In Q4 2016, this amounted to, on balance, income of € 2.9 million (Q4 2015: € 0.8 million expense).
Alexander van der Lof, CEO of technology company TKH:
"We were able to close the year 2016 with a good fourth quarter, in which we saw a recovery of both turnover and order intake at Industrial Solutions, in particular in the sub-segment manufacturing systems. Thanks to preparations we had made in the preceding quarters in terms of the organization of the production capacity, we were able to realize the higher production volumes efficiently. Although order intake in China remains low, the order intake from the top five tire manufacturers increased in the fourth quarter. In Building Solutions, important steps were taken in preparation for the targeted growth in our vertical growth markets. We will start production on the first of our larger order in the new plant for subsea connectivity in the second quarter of 2017. In Machine Vision, we made a breakthrough with distinctive 3D technology for producers of consumer electronics of which we made the first deliveries in the fourth quarter. Higher R&D spending had a slightly negative impact on the ROS, but create a good perspective for the realization of the growth in our vertical growth markets."
In 2016, turnover declined by € 34.2 million (2.5%) to € 1,341.0 million (2015: € 1,375.2 million). Turnover declined organically by 0.8%. The divestment of Parking & Protection resulted in a 0.4% decline in turnover, while acquisitions accounted for a 0.1% increase in turnover. Lower raw materials prices had a negative impact of 0.9% on turnover. On average weaker foreign currencies vis-à-vis the euro had a negative impact of 0.5% on turnover.
Organic turnover in Industrial Solutions was down 3.7% in 2016, while the fourth quarter showed organic growth of 6.8%. At Telecom Solutions, turnover increased organically by 2.4% in 2016, while Building Solutions recorded organic turnover growth of 1.5%. The contribution from Industrial Solutions to overall turnover in 2016 declined to 44.5% from 45.6% in 2015, while the contribution from Building Solutions increased to 42.9% from 42.3%. Telecom Solutions saw its contribution increase to 12.6%, from 12.1%.
The gross margin rose to 47.1% in 2016, from 46.0% in 2015, thanks to an improved product mix and on average lower raw materials prices. Operating costs were 0.9% higher than in 2015. Operating costs as a percentage of turnover increased to 36.1% in 2016, from 34.9% in 2015. This relative increase was largely due to an increase in R&D spending, in particular at Building Solutions to prepare for the targeted growth in our vertical growth markets, combined with lower turnover levels. R&D spending increased to € 50.3 million in 2016 (2015: € 46.5 million). Depreciations came in at € 22.1 million and were € 0.7 million higher than in 2015, due to the higher level of investments.
The operating result before amortization of intangible assets and one-off income and expenses (EBITA) was down 3.3% at € 146.5 million in 2016, from € 151.5 million in 2015. The EBITA at Telecom Solutions was up 13.3%. At Building Solutions, the EBITA was down 3.5% and at Industrial Solutions the EBITA was 6.3% lower. ROS came in lower at 10.9% (2015: 11.0%).
Amortization costs increased by € 1.0 million to € 32.6 million in 2016, due primarily to higher R&D spending. In addition, TKH recognized impairments of on balance € 0.2 million.
In 2016, financial expenses declined by € 0.7 million to € 7.5 million. This improvement was due to a lower average outstanding net bank debt. Currency exchange rates had a negative impact of € 0.1 million in 2016, compared to a positive impact of € 0.4 million in 2015. The result from participations came in € 0.3 million higher.
The tax rate declined to 18.4% (2015: 20.6%) on the back of one-off tax income of on balance € 2.6 million, due to the recognition of a deferred tax asset as a result of the valuation of previously unrecognized tax losses. As in previous years, the application of the Dutch innovation box rate had a positive impact on the tax rate.
Net profit before amortization and one-off income and expenses attributable to shareholders amounted to € 94.4 million in 2016 (2015: € 99.9 million), a decline of 5.6%. Net result for 2016 fell to € 87.3 million (2015: € 88.3 million). Earnings per share before amortization and one-off income and expenses came in at € 2.25 (2015: € 2.40). Ordinary earnings per share were € 2.04 (2015: € 2.07).
The cash flow from operating activities was € 103.4 million (2015: € 181.6 million). This decline was due to an increase in working capital, while working capital declined in 2015. At year-end 2016, working capital as a percentage of turnover had risen to 13.4% (2015: 11.3%). Net investments in tangible fixed assets were € 45.5 million in 2016 (2015: € 38.5 million). A large proportion of these were investments in production facilities, including an expansion of capacity for the sub-segments vision & security systems, building connectivity systems and manufacturing systems. In addition, we invested € 28.9 million in intangible fixed assets in 2016 (2015: € 25.4 million), largely in R&D, patents, licenses and software. Expenditures related to acquisitions came in at € 0.8 million.
Solvency rose to 46.7% in 2016 (2015: 42.2%). The net bank debt calculated in line with the bank covenants stood at € 166.1 million at year-end 2016, up € 5.1 million from year-end 2015. The net debt/EBITDA ratio came in at 1.0. TKH operates well within the ratios agreed with its banks. At the end of 2016 an amended committed credit facility of € 350 million was negotiated with a group of banks, which was formalized in January 2017, with a term of five years and an option for two one-year extensions. The new facility is subject to the same financial covenants as the previous facility in terms of debt leverage, namely a maximum ratio of 3.0. The interest coverage ratio does not apply any more.
TKH had a total of 5,509 employees (FTEs) at year-end 2016 (2015: 5,387). In addition, the company had 439 temporary employees (FTEs) (2015: 441 FTEs). Based on the growth plans, further growth is expected in the coming years.
Progress realization targets and implementation strategy
The past year, TKH kept a sharp focus on the core technologies and seven vertical growth markets, which are the growth pillars within the three Solutions segments and the basis of our growth targets.
In 2016 innovations once again made a significant contribution to TKH’s turnover, at 19.0% (2015: 23.5%), and exceeded our goal of generating 15% of turnover from innovations launched in the market over the past two years.
In 2016, turnover growth in the vertical growth markets lagged somewhat behind expectations.
The continued reluctance to invest within the Tire Building Industry in China and a decline in investments in the Marine & Offshore sector, had a negative short-term impact on our growth. Over the past year we took numerous steps to bolster the foundations for growth. With the introduction of new technologies and strengthening our market position in combination with further internationalization, we increase our future market share within the vertical growth markets. Thanks to these steps, the perspective for growth remains positive and we confirm the previously communicated expectation that growth will materialize from 2018. Based on our defined plans and the progress we have made, we expect to record turnover growth of € 300 to € 500 million in our vertical growth markets over the next three to five years.
We are on track to realize our medium-term ROS and ROCE targets of 11-12% and 20-22% respectively, which we increased in early 2016. Although this year the ROS and ROCE came in at the lower end of the bandwidth, the ROS of 12.8% in the fourth quarter confirms TKH’s potential.
Developments per solutions segment
Telecom Solutions develops, produces and supplies systems ranging from basic outdoor infrastructure for telecom and CATV networks through to indoor home networking applications. The focus of the business is on the delivery of completely worry-free systems for its clients, thanks to the system guarantees it provides. Around 40% of the portfolio consists of hub-to-hub optical fibre and copper cable systems. The remaining 60%, consisting of components and systems in the field of connectivity and peripherals, is deployed primarily in network hubs.