Both the inflow of orders and the order backlog were high during the second quarter. The turnover fell somewhat as a result of temporarily reduced production capacity caused by the planned restructuring in the Norwegian EMS operation, Kitron AS. The restructuring is now completed.

Kitron's operating income during the quarter was 6.3 per cent lower than in the same quarter 2005 and amounted to NOK 395.2 million (NOK 421.6 million). The reduction occurred within Electronic Manufacturing Services (EMS) in the Norwegian and Swedish operations.

The reduction in turnover in the Norwegian EMS operation is mainly the result of a temporary reduction in production capacity associated with the restructuring of Kitron AS. Considerable resources were used during the second quarter on completing the collocation project in the Norwegian EMS operation. Production lines, test equipment and other equipment for about 20 customers have been moved from Kilsund to Hisøy. In addition surface assembly lines, soldering lines, a paint robot and a stock of about 11,000 different components have been moved. Almost all of the 287 employees at the Kilsund factory have been transferred and integrated into the production, stores and customer team on Hisøy. As a result of the relocation the production in Arendal have had a total down-time of one week, causing reduced production and delivery of about NOK 20 million during the second quarter.

Furthermore, both the Norwegian and the Swedish EMS operations have experienced a strong increase in demand following production of prototypes during the second quarter. This provides exciting opportunities for future production orders but at the same time has reduced ordinary production capacity to a certain extent. Kitron's EMS operation in Lithuania had a 30 per cent growth compared to the corresponding period last year.

The group's geographic distribution of operating income shows that Norway and Sweden are of equal dimensions for the first half of 2006. Sweden's share of the total turnover is however increasing and represents 47 per cent of the total turnover in the second quarter of 2006 as against 37 per cent of the total turnover during the same period last year. Norway represents 45 per cent during the second quarter of 2006 as against 53 per cent during the same period last year.

The gross margin amounted to 40.7 per cent during the quarter. This represents an increase of 0.2 percentage points over the second quarter last year and the result is considered satisfactory.

Profit Kitron's operating profit for the second quarter was NOK 5.7 million compared to NOK 6.4 million for the corresponding period last year. The reduction is largely a result of the temporary reduction in turnover as well as one-off cost related to payroll. The company's payroll costs were NOK 3.4 million lower during the second quarter compared to the corresponding period last year. Since the accounts for the second quarter were subject to an extra one-off cost of NOK 6.3 million related to payroll, the actual payroll reduction was NOK 9.7 million.

Other operating costs were reduced by NOK 3.2 million compared to the corresponding period last year. Therefore the actual total savings were NOK 12.9 million over the quarter. Measures have been implemented according to plan and were mainly completed during the second quarter. The measures are expected to provide full impact from the third quarter.

Balance sheet The company's final balance as at 30 June 2006 amounted to NOK 668.5 million against NOK 590.8 million at the same time last year. Group equity was NOK 164.0 million, corresponding to an equity ratio of 24.5 per cent. The capital tied up in stocks represented NOK 282.2 million as at 30 June 2006 against NOK 231.0 million at the same time in 2005.

Group capitalised interest-bearing debt totalled NOK 104.8 million as at 30 June 2006 of which long-term interest-bearing debt amounted to NOK 4.5 million. Capitalised interest-bearing debt at the end of the second quarter of 2005 was NOK 37.6 million. The increase is mainly a result of higher overdraft drawings at the end of the period this year.

Market trends The EMS market is expected to experience an annual growth of 10-12 per cent during the period up to 2010. Data and telecom is the leading segment in the electronics industry and it is also this market segment that is expected to contribute most to growth in the EMS market from now on. In addition to general growth in the electronics industry it is also expected that production outsourced to EMS suppliers will increase from 23 per cent in 2005 to 29 per cent in 2010 (Source: ETP - The Worldwide Electronics Manufacturing Services Market, Third Edition). This corresponds well with the trend Kitron has observed in the Nordic EMS market where product proprietors increasingly outsource more links in the value chain.

The second quarter was marked by a strong increase in the demand for production of prototypes, mainly from existing customers. For Kitron this represents exciting signals on potential future production orders. To expand the capacity for production of prototypes it has been decided to establish two NPI (New Product Introduction) centres, one in Norway and one in Sweden.

High order inflow Kitron's total inflow of orders during the second quarter of 2006 amounted to NOK 477 million. That is an increase of 19 per cent over the order inflow in the second quarter of 2005 (NOK 401 million) and an increase of well over four per cent on the order inflow in the fourth quarter last year (NOK 458 million). The high order inflow shows that Kitron's marketing efforts have paid off and this bodes well for the future.

Prospects The restructuring work in Kitron has provided the planned results and is expected to provide further benefits in the time ahead. This, combined with positive development in the market, makes Kitron expect favourable trends in turnover and profitability from now on.

To ensure that Kitron will secure at least its share of the expected growth in the market, the marketing work will focus more than previously on international customers through better utilisation of the company's competitive advantages across the group. In this way capacity and market opportunities will be strengthened.

Kitron will continue to work to identify new improvement opportunities to further strengthen the operation and profitability in 2006.

For more information, please contact: CEO Jørgen Bredesen, tel +47 48 25 25 84 CFO Morten Jurs, tel +47 99 16 79 22

The full report with tables can be downloaded from the following link: