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HMS Networks

Quarterly Report Oct 21, 2010

2921_10-q_2010-10-21_d478a316-e5e2-4acc-af3b-5bebae035b0f.pdf

Quarterly Report

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First nine months 2010

  • Sales increased with 47 % and operating profit increased by a factor of four
  • Net sales for the first nine months increased to SEK 252.9 m (172.3), corresponding to a 58 % increase in local currencies. Net sales for the last twelve months amounted to SEK 325.1 m (250.2)
  • Operating profit reached SEK 63.7 m (15.3), equal to a 25.2 % (8.9) operating margin. For the last twelve month period operating margin amounted to 24.4 % (16.9)

  • Order intake for the first nine months increased with 44 % to SEK 254.7 m (176.8)

  • Cash flow from operating activities improved with SEK 36.6 m reaching SEK 49.5 m (12.9)
  • Profit after taxes totaled SEK 46.6 m (9.0) and earnings per share amounted to SEK 4.10 (0.83)
  • Net sales for the third quarter amounted to SEK 87.6 m (56.7) and operating result reached SEK 23.5 m (13.3)
Quarterly data Q3 Q2 Q1 Q4 Q3 Q2
2010 2010 2010 2009 2009 2009
Net sales (SEK m) 87.6 89.2 76.1 72.2 56.7 50.0
Order intake (SEK m) 86.9 89.7 78.1 81.0 59.7 60.2
Operating profit (SEK m) 23.5 22.2 17.9 15.8 13.3 ‐3.0
Gross margin (%) 61.6 60.2 58.5 60.1 60.4 53.5
Operating margin (%) 26.8 24.9 23.6 21.9 23.5 ‐6.0
Earnings per share (SEK) 1.46 1.48 1.16 1.02 0.84 0.34

Comments of the CEO

It is a great pleasure to see that we now have completely recovered from the downturn in sales that we experienced in 2009. Net sales for the last twelve months reached SEK 325 m exceeding the 2008 sales volume with some percentage points. We have now initialized a new and exciting phase of expansion in the history of HMS. The present activities to accomplish a long term profitable growth includes extended resources in staff, product launches, and further improvements in the efficiency of our operations

The recovery we reported during the first half year leveled out during the third quarter and stabilized on a historical high level. We have experienced a continued uncertainty in the market during the third quarter resulting in an irregular order intake. The development in Europe especially on the German market continued on a good level but the Japanese market was weak during the third quarter.

As a part of our long term strategy we continue to strengthen our resources within product development, sales and marketing. These activities continue according to the plan established for the present year. During the year we have employed 21 new staff members. The effects of the increase in our resources will affect the cost level during the second half of 2010 but In the long term this will strengthen our market position

HMS Networks is a world‐leading supplier of communication technology for industrial automation. Sales totaled SEK 325 million for the last twelve months. Over 90% of these sales were to customers located outside Sweden. All product development and parts of the manufacturing are performed at the head office in Halmstad. Sales offices are located in Tokyo, Beijing, Karlsruhe, Chicago, Milan and Mulhouse. HMS has 164 employees and produces network interface cards and products to interconnect different networks under the trademark Anybus®. The network interface cards are embedded in automation equipment such as robots, control systems, motors and sensors. This allows subcomponents in machines to communicate with one another and with different networks in order to build more efficient and flexible manufacturing systems. HMS is listed on NASDAQ‐OMX Nordic Exchange in Stockholm in the category Small Cap, Information Technology.

Net sales

150 000 200 000 250 000 300 000 350 000 50 000 60 000 70 000 80 000 90 000 100 000 kSEK Revenues kSEK Net sales for the last twelve months amounted to SEK 325.1 m (250.2). In total the revaluation of the Swedish currency in relation to the major HMS currencies had a SEK 19.7 m negative effect on net sales compared to the previous twelve month period. The order intake for the last four quarters amounted to SEK 335.7 m (251.2).

0 50 000 100 000 0 10 000 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 Revenues by quarter Revenues 4 quarter rolling Net sales for the third quarter totaled to SEK 87.6 m (56.7), corresponding to a 54 % increase compared to the same quarter the previous year. Adjusted for SEK ‐5.0 m in currency effects the increase amounted to 63.2 %. Order intake increased with SEK 27.7 m to SEK 86.9 m (59.2) corresponding to a 55.2 % increase

The graph shows turnover per quarter on the bars referring to the scale on the left axis. The line shows turnover for the latest 12 month period referring to the scale on the axis to the right.

The graph shows operating result per quarter in the bars referring to the scale on the left axis. The line shows operating result for the last 12 month period referring to the scale on the axis to the right.

Operating profit

10.9 m compared to the previous year.

30 000

in local currencies.

Operating profit totaled to SEK 79.5 m (42.3) for the last four quarters, equivalent to an operating margin of 24.4 %. Currency effects had e negative impact on the operating result with SEK

The operating profit for the third quarter 2010 totaled to SEK 23.5 m (13.3). Changes in exchange rates had a SEK 2.8 m negative impact compared with the same period the previous

Equity

year.

The Group's equity amounted to SEK 276.1 m. The total number of shares at the end of the year was 11,152,900. After full dilution, the total number of shares is 11,322,400. The Group's equity/assets ratio improved to 71.5 % (64.5).

Change in Group Equity
(SEK 000s)
Sep 30
2010
Sep 30
2009
Dec 31
2009
Balance at 1 January 240,434 224,426 224,426
Total comprehensive income for the period 46,864 19,387 28,961
Warrants 0 937 3,384
Dividends -11,153 -16,337 -16,337
Closing balance 276,145 228,413 240,434

Currency effects

Assets and liabilities in foreign currencies are revaluated at closing date. Currency hedging contracts are revaluated at the date of closing and are also affecting the result on the date of expiration. Changes in book value due to revaluation of operating balance sheet items and currency hedging contracts are disclosed as other income and other expenses. Changes in book value related to assets in foreign currencies i.e. liquid funds, are disclosed as financial income and expenses. Net sales and expenses are affected by changes in exchange rates. This will have an impact on income and expenses. Net sales consist of 60 % in EURO, 18 % in USD, 11 % in Japanese Yen and 11 % in SEK and other currencies. Cost of goods sold consists of 52 % in EURO, 19 % in USD and 2 % in Japanese Yen. Operating expenses consists of 15 % in EURO, 8 % in USD, 9 % in Japanese Yen and 68 % of SEK. The group applies a policy for currency hedging described in the annual report

Tax

The tax charge for the period was SEK 17.2 m (3.5). The tax charge for the current period has been calculated on the basis of the tax situation applying to the Group at present and the profit development of the reporting entities belonging to the Group.

Cash flow, investments and financial position

Cash flow from operating activities amounted to SEK 49.5 m (12.9) for the first six months.

The investments in tangible assets for the period totaled SEK 3.3 m (2.0). Investments in intangible assets for the period totaled SEK 5.6 m (3.8) and comprise internal development projects.

At the end of the period the cash equivalents totaled SEK 43.7 m (31.5) and unutilized credit facilities SEK 20.0 m. The Group's net debt decreased to SEK 0.0 m (49.7) compared to SEK 30.3 m at the beginning of the year. During the second quarter HMS distributed dividend payments to its shareholder equal to SEK 1.00 per share, in total SEK 11.5 m.

Important events

  • HMS Japanese operation is expanded and moves into new premises in Shin‐Yokohama.
  • HMS signs agreements with two new partners to strengthen the market position in East‐Europe.
  • Customized network cards supporting Profibus‐DPV1 and Ethernet (Modbus TCP and Ethernet/IP) for installation in electrical motor drives are launched.
  • HMS signs agreement with two new partners to further strengthen the market position in the Middle East.
  • During the first quarter HMS successfully recertified its ISO 9001:2008 quality system.
  • HMS receives a SEK 2.5 m order from one of the largest manufacturers of frequency converters in Japan.
  • During the first nine months the group hired 21 new employees.
  • Intellicom Innovation AB, a member of the HMS Group, receives a break through order in the area of energy and building automation.

Outlook

A continued inflow of Design Wins, a broader product offering within the Gateway product family, a strengthened customer focus and an expansion of the HMS sales channels supports the HMS Group long term growth. At present the HMS Group implements an expansion plan mainly by hiring new employees. Consequently we anticipate higher operating expenses for the second half of the year and going forward. At present the electronics market for components is strained resulting in longer supply chain lead times. This could implicate difficulties in HMS ability to deliver products. The future development of the global economy and its effects on the market for the HMS product offering is still unpredictable but the HMS comprehensive goals are unchanged. A long term average growth of 20 % per year and an operating margin above 20 %. The Company´s strategy to reach these goals includes a continued effort to build a strong portfolio of Design Wins within embedded network cards and to broaden the offer in the Gateway product area to penetrate the existing market and to expand into closely related areas within network technology based on the Company´s technology platform.

Accounting policies

This interim report has been prepared in accordance with the Swedish Annual Accounts Act and IAS 34, for Interim Reporting. Amendments to existing standards, new interpretations and new standards that came into effect as of January 1, 2010 did not affect the Groups reporting as of September 30, 2010.

HMS continues to apply the same accounting principles and valuation methods as those described in the most recent Annual Report.

HMS Networks AB´s share

HMS Networks AB (publ) is listed on the NASDAQ‐OMX Nordic Exchange in the category Small Cap, Information Technology. The total number of shares amounted to 11,152,900.

Risk management

The HMS Group is exposed to business and financial risks through its operations. These risks have been described at length in the Company's annual report 2009. In addition to the risks described in these documents, no additional significant risks have been identified.

The parent company

The Parent Company's operations are primarily focused on Group‐ wide management and financing. Apart from the Group's CEO, the Parent Company has no employees. The operating profit for the first six months amounted to SEK 0.5 m (1.2). Cash and cash equivalents amounted to SEK 0.3 m (0.0) and borrowing amounted to SEK 42.9 m (79.2).

Nomination committee

In accordance with principles adopted at HMS 2010 annual general meeting, the following persons have been assigned to be a part of the Nomination Committee: Nicolas Hassbjer representing 29% of the shares, Jan Svensson, Investment AB Latour, representing 15% of the shares, KG Lindvall, Swedbank Robur Fonder AB representing 10 % of the shares and Urban Jansson, Chairman of the Board. At a meeting following the assignment Jan Svensson was elected as the Chairman of the nomination committee.

Reporting occasions

  • Year‐end report will be published on February 2, 2011
  • Annual general meeting will be held on April 14, 2011
  • 1 Q report will be published on April 14, 2011
  • Half year report will be published on July 14, 2011
  • 3 Q report will be published on October 26, 2011

Halmstad October 21, 2010

Urban Jansson
Chairman of the Board
Staffan Dahlström
Chief Executive Officer
Nicolas Hassbjer
Vice Chairman of the Board
Göran Sigfridsson
Henrik Johansson Ray Mauritsson
Gunilla Wikman Charlotte Brogren

Further information can be obtained from: CEO Staffan Dahlström, on telephone +46 (0) 35‐17 29 01 or CFO Gunnar Högberg, on telephone +46 (0) 35‐17 29 95 See also: http://investors.hms.se

Review report

We have reviewed this report for the period 1 January 2010 to 30 September 2010 for HMS Networks AB (publ). The board of directors and the CEO are responsible for the preparation and presentation of this interim report in accordance with IAS 34 and the Swedish Annual Accounts Act. Our responsibility is to express a conclusion on this interim report based on our review.

We conducted our review in accordance with the Swedish Standard on Review Engagements SÖG 2410, Review of Interim Report Performed by the Independent Auditor of the Entity. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Standards on Auditing in Sweden, RS, and other generally accepted auditing standards in Sweden. The procedures performed in a review do not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Based on our review, nothing has come to our attention that causes us to believe that the interim report is not prepared, in all material respects, in accordance with IAS 34 and the Swedish Annual Accounts Act, regarding the Group, and with the Swedish Annual Accounts Act, regarding the Parent Company.

Halmstad, October 21, 2010 PricewaterhouseCoopers

Olof Enerbäck Authorised Public Accountant Auditor in charge

Financial accounts

Key ratios

Group Q3
2010
Q3
2009
Q1-Q3
2010
Q1-Q3
2009
Q1-Q4
2009
Q4 2009
-Q3 2010
Net increase in revenue (%) 54.4 -31.6 46.8 -27.8 -22.8 29.9
Gross margin (%) 61.6 60.4 60.2 57.6 58.4 60.2
Operating margin EBIT (%) 26.8 23.5 25.2 8.9 12.7 24.4
Return on capital employed (%)* 25.9 13.9 25.9 13.9 10.5 25.9
Return on total equity (%)* 23.0 13.5 23.0 13.5 8.8 23.0
Working capital in relation to sales (%)* 8.4 9.2 8.4 9.2 7.6 8.4
Capital turnover rate 0.89 0.69 0.89 0.69 0.67 0.89
Debt/equity ratio 0.00 0.22 0.00 0.22 0.13 0.00
Equity/assets ratio (%) 71.5 64.5 71.5 64.5 70.0 71.5
Capital expenditure in property, plant and equipm. (SEK 000s) 1,471 856 3,324 2,008 2,423 3,739
Capital expenditure in intagible fixed assets (SEK 000s) 2,144 1,041 5,649 3,827 4,955 6,776
Depreciation of property, plant and equipment (SEK 000s) -1,004 -1,011 -3,062 -3,092 -4,154 -4,124
Amortisation of intangible fixed assets (SEK 000s) -1,205 -995 -3,616 -2,977 -4,075 -4,713
Number of employees (average) 170 151 163 153 154 161
Revenue per employee (SEK m)* 1.9 1.7 2.0 1.6 1.6 2.0
Cash flow from operating activities per share, SEK 1.86 1.00 4.44 1.22 2.89 6.07
Cash flow from operating activities per share, diluted, SEK 1.86 0.96 4.44 1.17 2.79 6.07
Basic number of shares, average, thousands 11,153 10,572 11,153 10,572 10,717 11,153
Number of shares, diluted average, thousands 11,153 11,106 11,153 11,110 11,121 11,153

* The key ratio has been translated into 12 months rolling value when applicable.

Income statements

Group
(SEK 000s)
Q3
2010
Q3
2009
Q1-Q3
2010
Q1-Q3
2009
Q1-Q4
2009
Q4 2009
-Q3 2010
Revenue 87,579 56,735 252,883 172,321 244,536 325,098
Cost of goods and services sold -33,648 -22,490 -100,711 -73,011 -101,818 -129,518
Gross profit 53,931 34,245 152,172 99,310 142,718 195,579
Sales and marketing costs -15,668 -12,223 -48,196 -39,385 -54,983 -63 793
Administrative expenses -6,149 -4,442 -17,989 -15,469 -20,854 -23,375
Research and development costs -7,376 -5,958 -22,826 -21,281 -29,211 -30,756
Other operating income 1,576 3,610 4,734 4,474 5,991 6,250
Other costs -2,812 -1,883 -4,219 -12,326 -12,535 -4,427
Operating profit 23,502 13,349 63,676 15,323 31,125 79,479
Financial income 5 6 726 1,444 1,841 1,123
Financial costs -804 -932 -571 -4,280 -4,514 -806
Profit before tax 22,702 12,423 63,831 12,488 28,452 79,796
Tax -6,123 -3,506 -17,217 -3,506 -7,782 -21,493
Profit for the period 16,580 8,917 46,614 8,982 20,671 58,303
Profit attributable to shareholders of the parent company 16,282 8,886 45,693 8,730 20,116 57,079
Profit attributable to minority interest 298 31 920 251 555 1,224
Basic earnings per share, SEK 1.46 0.84 4.10 0.83 1.88 5.12
Earnings per share, diluted, SEK 1.46 0.80 4.10 0.79 1.81 5.12

Statements of comprehensive income

Group
(SEK 000s)
Q3
2010
Q3
2009
Q1-Q3
2010
Q1-Q3
2009
Q1-Q4
2009
Q4 2009
-Q3 2010
Profit for the period 16,580 8,917 46,614 8,982 20,671 58,303
Other comprehensive income
Cash flow hedges 1,841 3,823 910 14,096 11,469 -1,717
Translation differences -144 -2 -421 16 -163 -600
Income tax relating to components of other comprehensive
income -484 -1,005 -239 -3,707 -3,016 452
Other comprehensive income for the period, net of tax 1,213 2,816 250 10,405 8,290 -1,865
Total comprehensive income for the period 17,792 11,733 46,864 19,387 28,961 56,438
Profit attributable to:
Owners of the parent 17,494 11,702 45,944 19,135 28,406 55,214
Minority interest 298 31 920 251 555 1,224

Balance Sheets

Group Sep 30 Sep 30 Dec 31
(SEK 000s) 2010 2009 2009
ASSETS
Goodwill 236,071 236,071 236,071
Other intangible assets 16,685 14,622 14,652
Property, plant and equipment 8,707 9,196 8,564
Deferred tax assets 749 779 802
Total fixed assets 262,212 260,668 260,089
Inventories 19,544 14,495 13,043
Trade and other receivables 44,158 30,634 33,098
Other current receivables 10,821 12,057 7,073
Cash and cash equivalents 43,669 31,541 25,512
Total current assets 118,193 88,727 78,724
TOTAL ASSETS 380,405 349,395 338,814
EQUITY AND LIABILITIES
Equity 271,801 225,293 237,010
Minority interest in equity 4,344 3,120 3,423
Total equity 276,145 228,413 240,434
Liabilities
Non-current liabilities 43,589 81,246 55,828
Deferred income tax liabilities 12,194 11,126 11,319
Total non-current liabilities 55,783 92,371 67,147
Trade payables 23,220 14,552 16,432
Other current liabilities 25,257 14,059 14,800
Total current liabilities 48,477 28,611 31,233
TOTAL EQUITY AND LIABILITIES 380,405 349,395 338,814

Cash flow statements

Group Q3 Q3 Q1-Q3 Q1-Q3 Q1–Q4 Q4 2009
(SEK 000s) 2010 2009 2010 2009 2009 -Q3 2010
Cash flow from operating activities before changes in working
capital 21,260 12,533 57,569 8,699 25,620 74,490
Cash flow from changes in working capital -531 -1,949 -8,036 4,166 5,371 -6,831
Cash flow from operating activities 20,729 10,584 49,533 12,865 30,991 67,659
Cash flow from investing activities -3,616 -1,897 -8,973 -5,835 -7,379 -10,517
Cash flow from financing activities -3,750 -18,734 -22,403 -41,666 -64,277 -45,014
Cash flow for the period 13,363 -10,047 18,157 -34,636 -40,665 12,128
Cash and cash equivalents at beginning of the period 30,306 41,588 25,512 66,177 66,177 31,541
Cash and cash equivalents at end of period 43,669 31,541 43,669 31,541 25,512 43,669

Changes in current receivables/liabilities related to derivate financial instruments are reported as cash flow from operating activities before changes in working capital.

Quarterly data
Revenue per region Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
(SEK 000s) 2010 2010 2010 2009 2009 2009 2009 2008 2008 2008 2008 2007
EMEA 57,441 53,697 47,979 46,284 38,184 34,789 40,320 46,658 51,226 50,451 52,256 42,895
Americas 15,715 14,206 12,611 13,373 10,892 8,221 15,431 16,911 19,718 15,786 11,307 13,112
Asia 14,423 21,339 15,471 12,558 7,659 6,959 9,865 14,351 12,022 13,884 11,993 11,727
Income statement Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
(SEK 000s) 2010 2010 2010 2009 2009 2009 2009 2008 2008 2008 2008 2007
Revenue 87,579 89,242 76,061 72,215 56,735 49,969 65,616 77,920 82,966 80,121 75,556 67,734
Gross profit 53,931 53,723 44,518 43,408 34,245 26,752 38,313 53,747 46,597 42,682 38,816 36,318
Gross margin 61.6% 60.2% 58.5% 60.1% 60.4% 53.5% 58.4% 69.0% 56.2% 53.3% 51.4% 53.6%
Operating profit 23,502 22,242 17,932 15,802 13,349 -2,989 4,963 26,979 21,435 18,024 18,594 8,704
Operating margin 26.8% 24.9% 23.6% 21.9% 23.5% -6.0% 7.6% 34.6% 25.8% 22.5% 24.6% 12.9%
Profit before tax 22,702 22,834 18,295 15,965 12,423 -4,964 5,028 25,621 21,722 17,187 16,422 6,706

Parent Company

Income Statements

Parent company
(SEK 000s)
Q3
2010
Q3
2009
Q1-Q3
2010
Q1-Q3
2009
Q1-Q4
2009
Q4 2009
-Q3 2010
Revenue 1,482 1,191 5,102 5,345 7,284 7,041
Cost of sales and services 0 0 0 0 0 0
Gross profit 1,482 1,191 5,102 5,345 7,284 7,041
Administrative expenses -1,329 -955 -4,649 -4,149 -5,784 -6,284
Other costs - net 0 0 0 0 0 0
Operating profit 153 237 453 1,196 1,500 757
Profit from participations in group companies 0 74,926 0 74,926 74,926 0
Interest expense and similar items -153 -309 -453 -1,314 -1,496 -635
Profit before tax 0 74,854 0 74,809 74,931 122
Appropriations 0 0 0 0 -8 -8
Tax 0 0 0 0 -12 -12
Profit for the period 0 74,854 0 74,809 74,911 102
Parent company
Sep 30
Sep 30
Dec 31
(SEK 000s)
2010
2009
2009
ASSETS
Financial fixed assets
244,039
244,039
244,039
Total financial fixed assets
244,039
244,039
244,039
Other receivables
333
215
565
Cash and cash equivalents
293
17
143
Total current assets
627
231
708
TOTAL ASSETS
244,666
244,270
244,747
EQUITY AND LIABILITIES
Equity
155,451
164,055
166,604
Untaxed reserves
8
0
8
Liabilities
Non-current liabilities
42,868
79,175
54,118
Trade payables
162
88
972
Liabilities to Group companies
44,725
153
22,592
Other current liabilities
1,452
799
453
Total current liabilities
46,339
1,040
24,018
TOTAL EQITY AND LIABILITIES
244,666
244,270
244,747
Balance Sheets

Definitions

Return on shareholders' equity Share of profit after tax attributable to the parent company's share‐ holders in relation to the average shareholders' equity excluding minority shares.

Return on capital employed

Share of the profit after financial income in relation to the average capital employed.

Capital employed

Total assets less non interest‐bearing current liabilities and provisions, as well as total deferred tax liabilities.

Capital turnover rate

Operating income in relation to total assets.

Earnings per share

Share of the profit after tax attributable to the parent company's shareholders in relation to the average number of outstanding shares.

Earnings per share after dilution

Share of the profit after tax attributable to the parent company's shareholders in relation to the average number of outstanding shares with addition for the average number of shares that are added when converting the outstanding number of convertible securities and options.

Working capital Current assets less cash equivalents and current liabilities.

Operating margin

Operating income in relation to net sales.

Equity/assets ratio

Shareholders' equity in relation to total assets.

Net debt

Long‐term and current financial liabilities less financial assets.

Net debt/equity ratio

Net debt in relation to share‐ holders' equity including minority shares.

Our Vision

"The vision of HMS is that all automation devices will be intelligent and networked. HMS shall be the market leader in connectivity solutions for industrial devices".

Our Mission

"We provide world class solutions to connect industrial devices to networks and products enabling interconnection between different industrial networks".

Our purpose

"To create long term value for our customers, employees and investors".

HMS Networks AB (publ) Org.Nr. 556661‐8954 Box 4126 300 04 Halmstad Sweden Tel: +46 35 172 900 Fax: +46 35 172 909 http://investors.hms.se

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