Annual Report and Sustainability Report 2019

DIRECTORS' REPORT & FINANCIAL STATEMENT

2019 proved to be an eventful year for KONGSBERG

Directors’ Report 2019

2019 proved to be an eventful year for KONGSBERG. The company completed two key acquisitions, achieved a record high order intake, delivered growth in all business areas and launched new products and systems. Kongsberg Maritime (KM) made an excellent start integrating the new area of Commercial Marine (CM). This is the largest integration ever carried out within KONGSBERG and the area has delivered a positive underlying EBITDA in all quarters since the acquisition was completed. Kongsberg Defence & Aerospace (KDA) doubled its order backlog during the year, and signed the single largest contract in KONGSBERG’s history, for the NASAMS air defence system. The acquisition of Aerospace Industrial Maintenance Norway (AIM) strongly positions KDA as a key strategic partner for the Norwegian Armed Forces, including maintenance services. During the year, Kongsberg Digital (KDI) achieved two important breakthroughs. The launch of the Vessel Insight concept and a contract for and delivery of a dynamic digital twin for the Nyhamna process plant are proof that KONGSBERG is well positioned within the field of digitalisation.

KONGSBERG
KONGSBERG
Headquarter
Headquarter
Kongsberg
Number of employees
Number of employees
10 793
Share of employees outside Norway
Share of employees outside Norway
40%
Number of locations, countries
Number of locations, countries
40
Share of revenues outside Norway
Share of revenues outside Norway
82%

Operating revenues rose by 67 per cent to MNOK 24,081 compared to 2018. Adjusted for the effect of acquired companies, revenues increased by 16 per cent. KM recorded an increase of 113 per cent (18 per cent adjusted for the effect of acquired companies), whilst KDA recorded an increase of 19 per cent. Both business areas had a strong increase in order intake, with an increase of MNOK 6,585 for KM and MNOK 9,175 for KDA compared to 2018. Adjusted for the effect of acquired companies, KM increased its order intake by MNOK 146. The total order intake for the Group ended at MNOK 32,452, up from MNOK 16,574 in 2018. EBITDA increased by MNOK 462 to MNOK 1,856 in 2019, excluding IFRS16 effects. Including IFRS16 effects, EBITDA increased to MNOK 2,279.

Profit for the year after tax amounted to MNOK 717 (MNOK 704 in 2018), corresponding to NOK 3.89 per share (NOK 5.58). The Group had a negative cash flow of MNOK 4,426 in 2019 (positive MNOK 7,057 for 2018) and had a net interest-bearing debt of MNOK -1,565 (MNOK -5,706) at the end of the year. At the end of the year Group’s equity was MNOK 12,810 (MNOK 12,626).

Revenues

MNOK

KONGSBERG has a solid financial position, and the Board therefore recommends an ordinary dividend for the 2019 financial year of MNOK 450, equivalent to NOK 2.50 per share (NOK 2.50). A share buy-back programme is also proposed regarding treasury shares for up to MNOK 500, equivalent to approximately NOK 2.77 per share. The board will requests the annual general meeting (AGM) for an authorisation to pay out additional dividend up to MNOK 1,800, corresponding to NOK 10.00 per share. The total proposed dividend represent up to 314 per cent (64 per cent) of the ordinary profit for the year.

Two key acquisitions completed

Acquisition of Rolls-Royce Commercial Marine

On 6 July 2018, KONGSBERG entered into an agreement to acquire Rolls-Royce Commercial Marine (RRCM) from Rolls-Royce Plc. The acquisition was completed on 1 April 2019. The final payment for the company, exclusive cash, was MNOK 4,865. The acquisition of RRCM makes KONGSBERG a more holistic supplier to the maritime industry.

RRCM is a technology enterprise that supplies equipment and maintenance services to most segments within offshore and merchant vessels. The company is considered to be the leading supplier of propulsion systems for offshore vessels, which is also its largest product group. RRCM also supplies deck equipment, stabilising systems, ship design, electrical engineering, automation and control systems, and invests in digital technologies of the future, within e.g. autonomous vessels. RRCM is hereinafter referred to as Commercial Marine (CM).

Acquisition of Aerospace Industrial Maintenance Norway AS

In December 2018, KONGSBERG, through KDA, signed an agreement with the Ministry of Defence to acquire Aerospace Industrial Maintenance Norway AS (AIM). The acquisition was completed on 29 May 2019. AIM was the Norwegian Armed Forces’ organisation that performed maintenance, overhaul and upgrading of the Norwegian Air Force’s planes and helicopters. KONGSBERG also signed an agreement with Patria for shared ownership of AIM in order to further boost delivery capacity and expertise. KONGSBERG is the majority owner with 50.1 per cent, with Patria owning the remaining shares. The acquisition of AIM strengthens KONGSBERG’s role as a strategic partner for the Norwegian Armed Forces’ operational needs, and consolidates KONGSBERG’s position within Maintenance, Repair and Overhaul (MRO). Following the takeover from KONGSBERG, AIM has been renamed Kongsberg Aviation Maintenance Services (KAMS).

The business areas

Kongsberg Defence & Aerospace

MNOK
MNOK
20191)
20181)
Operating revenues
Operating revenues
7 245
6 104
EBITDA
EBITDA
1 157
863
EBITDA margin
EBITDA margin
16.0%
14.1%
Order intake
Order intake
16 060
6 885
Order backlog
Order backlog
20 146
10 744
  1. IFRS16 effects are included in 2019, but not in 2018.

KDA had operating revenues of MNOK 7,245 in 2019, which is MNOK 1,141 higher than in 2018. The Missiles, Aerostructures and Integrated Defence Systems divisions contributed the most growth in 2019. The EBITDA margin ended at 16.0 per cent (13.7 per cent excluding IFRS16) compared to 14.1 per cent in 2018. Profitability improved in most divisions, with the exception of Patria, where the share of net income fell from MNOK 80 in 2018 to negative MNOK 35 in 2019. Adjusted for the contribution from Patria, the EBITDA margin in 2019 was 14.1 per cent (excluding IFRS16) compared to 12.8 per cent in 2018.

The order backlog increased from NOK 10,744 at the end of 2018 to NOK 20,146 at the end of 2019, with an export share of over 90 per cent. This provides a good starting point for positive development of operating revenues in the future.

The Missiles division increased operating revenues considerably in 2019. This is the result of the increase in activity linked to both the Naval Strike Missile (NSM) and the Joint Strike Missile (JSM), which are the division’s main products. These long-range high-precision missiles are world leading with their fifth generation low-signature design.

 In addition to an increase in production in connection with the contract with Malaysia, which was signed in 2018, and the US OTH “Over the Horizon” programme, there has been an increase in activity linked to JSM. The first delivery contracts for JSM were signed in 2019 with Japan. At the same time, activity levels are high, partly as a result of the production of test missiles linked to Norway's JSM integration programme for the F-35. Over the coming years, further increases in activity levels are anticipated within both JSM and NSM as a result of demand for this type of capacity from many countries.

The USA has long been an important customer for KDA. The U.S. Army chose KONGSBERG’s Protector system as its standard remote weapon station in 2007. Since then, KONGSBERG has delivered over 15,000 systems to the USA, partly through the CROWS programme, which has been used for deliveries to the U.S. Navy, the U.S. Air Force and the U.S. Marine Corps. In September 2018, KDA signed a framework agreement with a value of up to MUSD 498 for the next five-year period of the CROWS programme. Over 80 per cent of this framework has already been ordered and the Protech Systems division’s order intake in 2019 was at its highest level since 2011. The number of nations using remote weapon stations across the world increased to 23 during 2019. Of particular interest was Germany, which will use a modified version of ‘drone protection’.

KAMS stood out during the year, partly by signing a major maintenance contract for NH90 helicopters, and the KAMS-Patria combination is now making the company a “one-stop shop” as regards helicopter maintenance.

In 2008, KONGSBERG opened a new factory to produce aircraft components from advanced composite and titanium for the new F-35 combat aircraft, and since 2008, volumes have increased continually year on year. From producing a few parts kits during the early years, production amounted to 160 parts kits in 2019 and is now running at full capacity. A key objective for KONGSBERG is to deliver on time without any quality deviations in the F-35 programme. This puts us in a strong position on a programme that will generate revenues for the Group over the next 20–30 years. In 2019, the Aerostructures division recorded operating revenues in excess of NOK 1 billion for the first time. Kongsberg Aviation Maintenance Services (KAMS), formerly AIM Norway, is now also part of the Aerostructures division. The company was formally taken over on 29 May 2019 and KAMS has now been successfully integrated. KAMS stood out during the year, partly by signing a major maintenance contract for NH90 helicopters, and the KAMS-Patria combination is now making the company a “one-stop shop” as regards helicopter maintenance. Increased maintenance activity is anticipated within KAMS through the strategic collaboration agreement which was signed with the Norwegian Armed Forces in 2019.

Amongst other things, the Integrated Defence Systems (IDS) area supplies the NASAMS air defence system, combat systems for submarines and digital solutions for vehicles used by the Army. The division’s operating revenues exceeded MNOK 2,000 for the first time in 2019. The increase in turnover was driven by strong order intake in recent years and an increase in ongoing deliveries to Lithuania, Indonesia, Australia and Qatar. The latter two contracts were signed in 2019 and are worth MNOK 1,600 for Australia and MNOK 5,600 for Qatar respectively. The contract with Qatar is the single largest contract ever signed in the history of KONGSBERG. Kta naval systems was established in 2018. Kta is a joint venture between KONGSBERG, German ThyssenKrupp Marine Systems (tkMS) and Atlas Elektronik. The company is expected to play a major role in connection with equipment for the new German-Norwegian submarines which has been announced will be ordered. Kta has an exclusive agreement to supply combat systems for all future submarines built by German company tkMS.

KONGSBERG is the largest aerospace industry company in the Nordic region, and the activity within this segment is increasing.

Through Kongsberg Satellite Services (KSAT), KONGSBERG is a world leader in the downloading and distribution of satellite data. KSAT also provides services within areas such as environmental, security and climate monitoring based on satellite data both from the traditional space programmes and from satellite constellations within the New Space segment. KONGSBERG supplies extremely advanced products within major space programmes such as Copernicus and Galileo, as well as supplier to other commercial players within the space industry. KONGSBERG also sees substantial synergies between space and the defence, and will focus on developing solutions with applications in this area going forward.

Investing in defence programmes is an extensive and time-consuming process. The customers for large defence systems are national authorities in the respective countries. These customers consider national security and domestic economic development as significant factors, in addition to price and performance, when purchasing defence equipment. National budgets and policies will therefore have a strong impact on whether and when any contract can be entered into with KONGSBERG. The market is not subject to international free trade agreements and is often characterised more by national protectionism than is seen in most other industries. Predictability in the export regulations with respect to defence material and the application of the regulations is therefore an important framework condition for KONGSBERG.

It is important for the Norwegian defence industry that the Norwegian authorities’ emphasis is on repurchase agreements and agreements that secure market access in connection with purchase of defence equipment from abroad. When the Norwegian Armed Forces make significant investments through foreign suppliers, this often ties up a significant proportion of the defence budget. To ensure that military supplies are well adapted to Norwegian conditions and to guarantee a sustainable and competitive Norwegian defence industry, we emphasise the importance of Norwegian participation in such programmes. Both the Government and the Parliament have stressed the importance of industrial participation for Norwegian industry, and that this is in line with international practice. KONGSBERG will continue to emphasise partnerships with major defence contractors and continue to support the local industry in the business area’s markets further. KONGSBERG’s position as an attractive defence supplier in the international market will continue to be based on close cooperation with the Norwegian Armed Forces. This cooperation forms the platform for the development of leading products that are essential for any modern defence system. This also means increased activity for many of the business area’s approximately 1,500 Norwegian subcontractors, based all over the country.

Kongsberg Maritime

MNOK
MNOK
20191)
20181)
Operating revenues
Operating revenues
16 038
7 545
EBITDA
EBITDA
1 151
594
EBITDA margin
EBITDA margin
7.2%
7.9%
Order intake
Order intake
15 469
8 884
Order backlog
Order backlog
12 095
5 739
  1. IFRS16 effects are included in 2019, but not in 2018.

In 2019, operating revenues amounted to MNOK 16,038, up from MNOK 7,545 in 2018. Growth in the “former KM” amounts to approximately 18 per cent. Commercial Marine (CM) has accumulated operating revenues of MNOK 7,134 (Q2 to Q4), an increase of approximately 10 per cent compared with 2018. EBITDA in 2019 amounted to MNOK 1,151, while the EBITDA margin was 7.2 per cent compared with MNOK 594 (7.9 per cent) in 2018. Excluding IFRS16 effects, the EBITDA is MNOK 855, while the EBITDA margin is 5.3 per cent. In 2019, a total of MNOK 416 in integration and restructuring costs was recognised linked to the integration of CM. A gain of MNOK 107 was also recognised relating to the sale of Kongsberg Evotec. As part of the acquisition of CM, a broad profitability improvement programme was initiated, with the aim of realising annual cost savings totalling MNOK 500 compared with 2018. Throughout 2019, cost savings of MNOK 260 was achieved, which is considerably more than the original schedule of MNOK 200 (adjusted to MNOK 250 in connection with the 2019 Capital Markets Day). The added savings stem from additional identified measures as well as faster-than-anticipated realisation. The target for realising MNOK 500 in annual cost savings is being brought forward by two years relative to the original schedule, from 2022 to 2020. The savings will be made through a raft of measures, including the restructuring of loss-making entities, the merging of locations, consolidation of delivery functions, optimisation of product portfolios and technological initiatives, as well as reductions in overheads.

Order intake during 2019 amounted to MNOK 15,469, equivalent to a book-to-bill ratio of 0.96. The “former KM” had an order intake of MNOK 9,030, a book-to-bill ratio of 1.01, compared with MNOK 8,884 in 2018. CM had an order intake in 2019 of MNOK 8,412 (pro forma for Q1), compared with MNOK 9,901 (pro forma) in 2018.

2019 saw high capacity utilisation and increasing activity levels in aftermarket. KM has a well-established network which supports more than 30,000 vessels fitted with KM equipment.

Order intake and activity levels are strong for the Sensors & Robotics division, particularly within the area of Marine Robotics, where Hugin Superior was launched in 2019. This new autonomous underwater vessel (AUV) offers substantial improvements over previous versions as regards working depth, precision and capacity. AUVs are used for both civilian and military purposes, including seabed surveys, underwater installation inspection and naval minesweeping. KM signed three contracts for Hugin Superior in 2019, all with a value of approximately MUSD 10. On 4 February 2020, KONGSBERG announced that Hydroid Inc. was to be sold to US company Huntington Ingalls Industries for MUSD 350 on a cash- and debt-free basis. The sale is expected to be completed during the first half of 2020. In 2019, Hydroid contributed with operating revenues of MNOK 862 and an EBITDA of MNOK 133 in the Sensors & Robotics division.

2019 saw high capacity utilisation and increasing activity levels in the aftermarket. KM has a well-established network which supports more than 30,000 vessels fitted with KM equipment.Aftermarket accounts for almost half of KM’s turnover. KM’s aftermarket revenues are largely excluded from the order backlog. The competitive situation in traditional vessel solutions has been intensive in recent years, as a consequence of generally low contracts for deliveries. This, combined with the fact that major integrated vessel systems, which include high proportions of third-party deliveries generally result in lower contributions, means that the aftermarket is extremely important for securing increased activity levels and higher profitability in KM.

The contracting of new vessels was at a historically low level in 2019, particularly during the second half of the year. This is also apparent within KM, and the order intake from the new-build market was sluggish in most segments in 2019. One market that stood out in a positive direction in 2019 was LNG. This is a market where KM has traditionally held a strong position. New contracting in this market is at around the same level as in 2018, when the contracting of LNG Carriers reached a historically high level.

Despite generally sluggish activity in the new-build market, some important contracts were signed in 2019, including:

  • Awilco 2 – MNOK 350 delivery which includes a broad system delivery consisting of systems from both the “former KM” and CM.
  • Three new coastguard ships which are to be built by Vard – MNOK 280 for deliveries primarily from the Propulsion & Engines division.

With the introduction of new rules from IMO2020 and a much stronger focus on ESG (Environmental, Social and Governance) in the market generally, demand for environmentally friendly solutions is rising. KM’s system and propulsion deliveries largely comprise systems which contribute to safer and more efficient operations. This reduces both emissions and risk. An example of such a delivery during 2019 was the upgrade of two Golden Energy offshore vessels. A “SAVe Energy Battery System” and a vessel performance management system from KONGSBERG were installed. In a DP2 operation, this reduces the running times of engines by 50 per cent and cuts fuel consumption by approximately 20 per cent. This is equivalent to a reduction of 300 tonnes of CO2 and one tonne of NOx emissions.

For a number of years, KM’s strategy has been to expand the delivery scope for every single vessel. A concept for integrated vessel solutions was launched in 2015, and with the acquisition of Commercial Marine, KM can now expand the concepts further. KM’s deliveries include solutions from bridge to propeller, in addition to deck machinery, which facilitates significant integrated vessel solutions.

In addition to the traditional offshore market, KM supplies products and services to other associated markets, and many of these have shown positive development. Examples are fisheries, research, marine robotics and passenger ships. There has been a positive development in relation to the delivery of modern low-emission and energy-efficient solutions in a number of vessel segments. The strong order intake and underlying improvement in profitability (both in acquired and previous businesses) in 2019 confirms that KM is able to adjust to challenging market conditions.

The Norwegian maritime and offshore industry is important for the export industry. The Board therefore emphasises the need for a governmental industrial policy promoting growth and development in this sector, including competitive conditions and financing solutions.

Other activities

Other activities consist of Kongsberg Digital (KDI), real property, group functions and eliminations between the business areas.

KDI was established in 2016 as an important step for development of the next generation of digitalised products and services within our core areas. KDI took important steps during 2019, both with the launch of the new “Vessel Insight” concept and the breakthrough contract for a dynamic digital twin of the process plant at Nyhamna, which was signed and delivered during the final quarter of the year. The sector is of great strategic importance to KONGSBERG and is an important investment in relation to both the development and the digitalisation that the company sees as being within its core sectors. KDI’s operating revenues rose by 25 per cent during 2019. Profitability has also improved as a result of increased volumes and cost improvements.

Comments to the financial statements

Operating revenues

The Group’s operating revenues in 2019 amounted to MNOK 24,081, up 67 per cent from MNOK 14,381 in 2018. Adjusted for acquired companies, growth in operating revenues amounted to 16 per cent in 2019. KM recorded operating revenues of MNOK 16,038, while KDA recorded corresponding revenues of MNOK 7,245 in 2019.

Distribution of revenue

Per cent
  • Kongsberg Maritime 67 %
  • Kongsberg Defence & Aerospace 30 %
  • Other activities 3 %

EBITDA development

EBITDA amounted to MNOK 2,279 (MNOK 1,856 excluding IFRS16) compared with MNOK 1,394 in 2018, giving an EBITDA margin of 9.5 per cent. EBITDA was affected by MNOK 273 in integration costs and MNOK 143 in restructuring costs linked to the acquisition of RRCM. EBITDA in 2019 also includes a gain of MNOK 107 linked to the sale of Kongsberg Evotec. In 2018, EBITDA was negatively affected by MNOK 110 in integration costs. KDA increased its EBITDA from MNOK 863 to MNOK 1,157 (MNOK 990 excluding IFRS16) from 2018 to 2019, whilst KM’s EBITDA increased from MNOK 594 to MNOK 1,151 (MNOK 855 excluding IFRS16).

Distribution of EBITDA

MNOK

Profit

Profit before tax was MNOK 967, compared to MNOK 844 in 2018. Profit after tax was MNOK 717, equivalent to NOK 3.89 per share in 2019, compared to MNOK 704 in 2018. Return on average capital employed (ROACE) was 10.0 per cent in 2019 (12.5 per cent in 2018).

KONGSBERG’s dividend policy states that the dividend over time shall constitute between 40 per cent and 50 per cent of the company’s profit for the year. The Board proposes an ordinary dividend for the financial year 2019 at the same total level as for the financial year 2018: MNOK 450. This corresponds to NOK 2.50 per share (2.50), as well as a programme for buy-back of treasury shares for up to MNOK 500. In addition, the board will requests the AGM for an authorisation to pay out additional dividend of up to MNOK 1,800, corresponding to NOK10.00 per share. The number of outstanding shares as of 31 December 2019 was 179,990,065.

Cash flow

KONGSBERG had a positive cash flow from operational activities of MNOK 2,006 (MNOK 2,189) in 2019. This primarily consists of an EBITDA of MNOK 2,279, adjusted for changes in net current assets, current liabilities, net changes in investments in associated companies and joint ventures, other accruals and paid taxes.

In 2019, there was a negative cash flow related to investment activities of MNOK 5,174 (MNOK 382). Of this, MNOK 4,464 was linked to the purchase and sale of enterprises, primarily the settlement for Rolls-Royce Commercial Marine. Of this amount, MNOK 534 was related to the net purchase/sale of property, plant and equipment, while MNOK 173 related to capitalised research and development. Cash flow from financing activities is negative in the amount of MNOK 1,258, primarily linked to the repayment of debt, the payment of dividends and interest expenses. 

Net change in cash and cash equivalents, after the effect of exchange rate changes, was MNOK 4,384 (MNOK 7,082).

Capital structure

In 2019, KONGSBERG revised its financial policy, and established the key priority for capital allocation of always having a healthy balance through ensuring that net debt is on a par with EBITDA as a long-term mean, subject to the condition that net debt does not exceed twice the EBITDA. This ensures a balance between creditor and shareholder, and offers security for KONGSBERG’s suppliers and customers. This is important because KONGSBERG is involved in deliveries which extend over many years.

The priorities as regards capital allocation also take into account the company’s dividend policy, and are explained in more detail in Note 5 in the annual report. As of 31 December 2019, KONGSBERG’s ratio for net debt/EBITDA was -0.69.

The Group’s equity as of 31 December 2019 was MNOK 12,810, which represents 32.5 per cent of total assets. The Group’s net interest-bearing debt (cash less interest-bearing debt) was MNOK -1,565. At the year-end, long-term interest-bearing debt mainly consisted of five long-term bonds totalling MNOK 3,450. The Group also had a bond of MNOK 550 maturing in March 2020. As of 2019, the Group’s revolving credit facility of MNOK 2,300 was unused. This facility runs until 15 March 2023.

KONGSBERG has historically experienced substantial fluctuations in working capital due to different payment structures for major projects in KDA. This situation is expected to continue.

Foreign currency

The Group’s financial policy means that important contracts must be hedged against fluctuations in exchange rates upon establishment. These contracts are largely hedged using forward currency exchange contracts (fair value hedges). In special cases, the Group uses forward contracts as cash flow hedges, e.g. in the case of large tenders where there is a very high probability of winning the contract. The Group uses hedge accounting for established forward contracts, which means that changes in the value of hedging instruments and objects are capitalised.

At the end of 2019, the balance of forward contracts related to fair value hedges was MNOK 15,122 measured at the agreed rates. These forward contracts had a net negative fair value of MNOK 60. In addition, the Group held MNOK 229 in cash flow hedges measured at agreed rates, consisting of forward contracts. At the year-end, these forward contracts had a net positive fair value of MNOK 11.


MNOK

MNOK
KONGSBERG
consolidated
Kongsberg
Defence &
Aerospace
Kongsberg
Maritime
Other/
eliminations

OPERATING REVENUES 

OPERATING REVENUES 
2019
2 019
24 081
7 245
16 038
798
2018
2 018
14 381
6 104
7 545
732

EBITDA

EBITDA
2019
2 019
2 279
1 157
1 151
(29)
2018
2 018
1 394
863
594
(63)

EBITDA MARGIN

EBITDA MARGIN
2019
2 019
9.5%
13.7%
7.2%
(3.6%)
2018
2 018
9.7%
14.1%
7.9%
(8.6%)

NEW ORDERS

NEW ORDERS
2019
2 019
32 452
16 060
15 469
923
2018
2 018
16 574
6 885
8 884
805

Outlook for 2020

The order intake was strong during 2019, and the order intake at the start of 2020 was MNOK 33,129, representing a doubling over the previous year.

KONGSBERG entered 2020 with solid positions and a healthy balance. The order intake was strong during 2019, and the order backlog when entering 2020 was MNOK 33,129, representing a doubling from previous year. Approximately MNOK 7,000 of the increase came from acquired companies.

In the beginning of 2020 the world experienced an outbreak of a new virus, COVID-19. The outbreak started in Asia and have now spread to the rest of the world. Norway and several other countries have implemented a series of initiatives to both prevent the spread of the virus and to protect the industry and commerce. Among the initiatives in Norway were closing of all schools and universities, introduction of severe travel restrictions and other initiatives which restrict the people and corporates ability to operate “as normal”. There have also been introduced several initiatives to assist the industry through a challenging situation, that for the majority of the industry will be very demanding. KONGSBERG will also be affected by this situation. The restrictions which so far have been implemented, makes especially the part of the business requiring travel challenging to accomplish. This especially affects the aftermarket operations in KM. At the same time, restrictions that limit people’s ability to freely move around, closing of schools requiring parents’ assisting homebased tuition, employees in quarantine, among others, makes the work/home situation challenging. KONGSBERG has implemented initiatives to protect own employees and business partners to secure as normal operations as possible and. It is still too early to predict the financial consequences caused by the virus outbreak, but it seems likely that KONGSBERG’s activity and results will be affected by this going forward.

Specific consequences of the virus outbreak for the markets that KONGSBERG operates in, are challenging to predict. The defence market has been solid over the recent years and the demand of KONGSBERG’s products and services has been good. Several parts of the maritime market have been challenging in 2019 and the vessel contracting ended at a historical low level. The competition for available projects is high. As a consequence of the ongoing virus outbreak, contracting of new vessels have been low the first months of 2020. Despite this situation, KONGSBERG has good order intake in the beginning of the year. The orders are mainly booked in the division Sensors & Robotics and from the aftermarket, where KONGSBERG has an equipment installed base of over 30,000 vessels.

Of the solid order backlog, approximately half of this or MNOK 16,700 are planned for delivery this year. The order intake from the aftermarket is normally not a part of the order backlog and will come in addition.

Future strategy and priorities in 2020

KONGSBERG is a global technology company that supplies systems and solutions with extreme performance for extreme conditions. KONGSBERG’s deliveries are often of strategic importance for our customers, and contribute to the satisfaction of important societal needs and development trends within sectors such as safety, energy, transport and climate. Our technology makes critical operations for sustainable future solutions possible.

KONGSBERG’s focus is to ensure increased competitiveness, while also laying the foundations for sustainable and profitable growth. Growth will come through a combination of organic growth and acquisitions. Organic growth is based on development and expansion of existing products, services and market positions as well as developing or putting together new products for new markets. KONGSBERG is continually investing in product and system development and aims to maintain a leading position with regard to innovation and technology development within the Group’s core areas.

KONGSBERG has world-leading products and systems for the international defence market. The main focus for KDA is to secure strategically important contracts and achieve growth in selected geographical areas, both through our own activities and in collaboration with partners. KONGSBERG is aiming to continue to be a strategic partner for Norway, to become a leading defence supplier in Northern Europe and to strengthen our position in the USA. Through strong alliances with partners in the US, KONGSBERG has made important breakthroughs with, among other things, missiles and air defence systems in the US market. It is important to consolidate and develop these alliances further. KONGSBERG has a good and long-lasting cooperation with the Norwegian Armed Forces, which is important for continued international success.

KONGSBERG has leading positions in the marine market. Through the acquisition of Rolls-Royce Commercial Marine, KM has expanded its leading position within integrated, advanced maritime solutions, and further strengthened its international sales and service network. Following a successful start to the extraction of synergies in 2019, KM will continue its efforts to extract further synergies. KM has identified two key focus areas: (i) Green shipping, (ii) Intelligent vessels, where our technologies are global leaders and contribute to more effective and more sustainable solutions for the maritime sector.

KDI is well-positioned to become a key player within the digital transformation. In 2019, KDI achieved two important breakthroughs: (i) The launch of “Vessel Insight”, an advanced system for digitally connecting a vessel to shore through the “Kognifai” digital platform (processing of data from the equipment onboard developed for the maritime industry). (ii) Delivery of a “Dynamic Digital Twin” of Nyhamna to Shell. An important area of focus for KONGSBERG is to ensure that KDI has the necessary resources and capacity to take up a strong position within these key sectors.

The business areas’ priorities in 2020

Kongsberg Defence & Aerospace
  • Ensure good implementation of the major ongoing defence programmes.
  • Take up a leading position as a defence supplier in Northern Europe.
  • Further strengthen existing positions in the USA.
  • Consolidate strategically important contracts.
  • Further develop cooperation with Patria, and together with KAMS develop into a strong, international player within military maintenance.
  • Ensure international market opportunities and industrial co-operation related to Norwegian defence investments.
Kongsberg Maritime
  • Continue to work on the harmonisation of products and the extraction of further synergies from the acquisition of RRCM.
  • Improve profitability.
  • Secure and take new market positions, both within new and established main segments.
Kongsberg Digital
  • Continue to invest in digitalisation of the maritime market through “Vessel Insight”.
  • Ensure further development of the sector through order intake from priority areas such as “Dynamic Digital Twin”.
  • Contribute to innovation and digital transformation of the cloud-based platform “Kognifai” through collaboration with partners.
  • Ensure that KDI has the necessary resources at its disposal to take up strong positions within priority sectors.

KONGSBERG shares and shareholders

The price of the KONGSBERG share rose from NOK 117.60 at the end of 2018 to NOK 138.00 at the end of 2019. This gives a market value at the end of 2019 of MNOK 24,840.

KONGSBERG shall provide the equity market with relevant, comprehensive information as the basis for a balanced, correct valuation of the shares. The Group emphasises maintaining an open dialogue with the equity market and media.

The price of the KONGSBERG share rose from NOK 117.60 at the end of 2018 to NOK 138.00 at the end of 2019. This gives a market value at the end of 2019 of MNOK 24,840. Including a dividend of NOK 2.50 per share, the return in 2019 amounted to 19.7 per cent. The benchmark index on the Oslo Stock Exchange (OSEBX) rose by 16.5 per cent during the same period. As of 31 December 2019, KONGSBERG had 12,680 shareholders (11,594). The Group had 895 (902) foreign shareholders, who collectively owned 19.78 per cent (17.37 per cent) of the shares. The Norwegian State, represented by the Ministry of Trade, Industry and Fisheries, is the largest shareholder with 50.001 per cent of the shares. At the end of the year, the ten largest shareholders held a total of 70.79 per cent (71.34) of the shares. The number of shares outstanding is 179.99 million, each with a nominal value of NOK 1.25. By the end of 2019, KONGSBERG held a total of 16,779 (19,869) treasury shares.

KONGSBERG has paid dividends to its shareholders every year since the company was listed in 1993, except for in 2000 and 2001. The dividend policy stipulates that dividend over time shall constitute between 40 per cent and 50 per cent of the company’s profit after tax for the year. In determining the size of dividends, the expected future capital requirements shall be considered.

At the Annual General Meeting on 14 May 2019, an ordinary dividend of NOK 2.50 per share for 2018 was approved.

For the 2019 financial year, the Board proposes paying an ordinary dividend totalling MNOK 450 (MNOK 450), equivalent to NOK 2.50 per share (NOK 2.50 per share), in addition to request the AGM of an authorisation to pay an additional dividend of up to MNOK 1,800, equivalent to NOK 10.00 per share. The dividend represents up to 314 per cent (64.2 per cent) of the profit for the year. The Board will also request the General Meeting an authority to execute a share buy-back programme up to MNOK 500, with purpose of cancelling the shares. Both authorisations are valid until the next Annual General Meeting. In total, including the buy-back programme, it is proposed that up to MNOK 2,750 be returned to the shareholders.

In 2019, a total of 30.3 million (48.9 million) KONGSBERG shares were traded in 146,762 (237,274) transactions. The company works actively to promote interest in the share through activities within the investor markets. KONGSBERG is regularly represented at road shows, meetings and conferences both in Norway and abroad. The goal for 2020 is to maintain the high activity against the investor market. Investor presentations are held in connection with each quarterly report.

The Board believes that employee share ownership is positive. Employees can buy shares in the company through the annual share programme. During the spring of 2019, the Group’s annual share programme for employees was carried out for the 23rd time. Shares are sold to employees with a 20 per cent discount to the market price.

In 2019, employees were offered shares for up to NOK 30,000 after discount. A total of 875,151 (446,868) shares were sold at a price of NOK 98.40 (20 per cent discount on the market price of 115.90). 3,225 (2,269) employees took advantage of the offer.



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Risk factors and risk management

KONGSBERG is exposed to various forms of risk, which the Board monitors by considering individual matters and reporting risk to the Board. The Board is of the opinion that there is a healthy balance between the overall risk and the Group’s capacity to deal with risk. The administration prepares monthly operating reports and quarterly risk reports which are considered by the Board. The administration carries out annual assessments of risk which are more general in nature and are presented to the Board. The administration conducts risk analyses in connection with major investments and customer contacts, strategic initiatives and the acquisition and sale of activity. The Audit Committee is a preparatory body for the Board, dealing with the financial statements and relevant assessment issues, compliance issues, and the evaluation of internal control and risk management within the Group. The Audit Committee meets, as a minimum, in connection with the issue of annual and interim financial statements.

The Group’s activities are international with delivery of high-tech systems and solutions, primarily to customers in the offshore-, merchant marine- and defence market. Market risk could therefore vary somewhat within these different segments. A strong international presence and global dependency means the Group is vulnerable to factors which impact on international trade and the global economy generally.

The outbreak of the new COVID-19 virus in Asia at the beginning of 2020, followed by the spread of the virus throughout the world, is impacting on industry and trade globally. KONGSBERG will also be affected, but it is still too early to predict the outcome of the virus outbreak. Writing this, as of March 2020, Norway and many other countries have implemented severe travel restrictions, schools and kindergartens are closed, a large part of the industry, commerce and public service experience restrictions. The amount of infected people are increasing, and all people are encouraged avoid physical contact, trying to avoid spreading of the virus. KONGSBERG’s operations will also be affected by this situation. Less activity in the after sales market is hence expected. The risk of postponements in projects have increased significantly, both because of temporary close-downs and lack of input factors. A large portion of the customers are influenced, hence there is also a risk of delayed or absence of payments. KONGSBERG has implemented and, are continuously implementing, initiatives to protect own employees and business partners, to the largest degree as possible secure normal operations.

The offshore market comprises exploration, development, production and transport of oil and gas. There are also support functions such as supply services, operational support, as well as maintenance and service on platforms and vessels. KONGSBERG is a supplier of products and services for all these segments. The demand for energy and oil price development will impact the willingness to invest in this market. Investment levels can also vary between the various geographical areas depending on, for example, oil reserves and the level of exploration and production activities. Despite strong development in individual segments such as LNG, there has generally been a negative trend in the oil and gas and offshore markets in recent years. persistent weak market, in which markets that have been strong over the past year are also being affected, will increase the Group’s risk and impact on its activity levels.

Through the acquisition of Rolls-Royce Commercial Marine, the Group has expanded KM’s delivery scope, thus reducing the risk of marginalisation.

The merchant marine market includes all types of vessels from simple dry cargo ships to advanced tankers. Passenger ships in cruise and ferry traffic are also an important part of the market. Contracting of new ships is closely linked with the expected development in transport demand. Global economy development influences the demand for water transport of people, energy, raw materials and manufactured products. The type of ship and geographical areas also influence the market. Within a number of segments, the market for new-build vessels is at a low level compared with previous years, and there is considerable uncertainty linked to further development.

Lower shipbuilding activity has led to increased competition and this involves a risk for KM to be marginalised. More challenging oil and gas fields and increased focus on costs in the industry in general create new niches in the market, which in turn creates the need for new technological solutions. Through the acquisition of RRCM, the Group has expanded KM’s delivery scope, thus reducing the risk of marginalisation.

The acquisition of RRCM in 2019 was a significant transaction for the Group, and it has been crucial to integrate the business into KM successfully and quickly. KONGSBERG has so far achieved this and we are ahead of schedule as regards the integration and restructuring of the company. In the opinion of the Board, the risk linked to the acquisition has been well-managed.

Products and systems are delivered for land-, air- and sea-based defence in the defence market.

Due to strict security requirements and protection of various countries’ own defence industry, it is often difficult for defence suppliers to win defence contracts outside their home country. There is a significant degree of protectionism in Europe and the U.S. as well as for the defence market in general. However, there are still opportunities through long-term relationships and niche products, and this is partially safeguarded through KONGSBERG’s relationships with major foreign defence companies.

Generally speaking, KONGSBERG operates in markets that are highly susceptible to technological developments, ones that may affect KONGSBERG’s leading position with regards to technology. Cyclical fluctuations will also influence these markets to various degrees and at different points in time. Export control regulations and sanctions may result in uncertainty about market opportunities.

The Group’s value creation primarily comprises delivery of systems and solutions of high technological complexity, and deliveries are typically organised as projects. Effective project management is therefore a key success factor in reducing operating risk. KONGSBERG has established project management goals based on internal and external “best practices”, and project managers attend an internal training programme. The projects’ revenues are based on contracts, and the uncertainty is largely related to estimating the remaining costs and determining the percentage of completion, but also counterparty risk and warranty obligations. The Group has established principles for categorising projects in terms of technological complexity and development content. This forms the basis for an assessment of implementation risk and recognition of revenue in the projects.

KONGSBERG is exposed to financial risks such as currency risk, interest risk, credit risk and liquidity risk. The aim is to reduce the financial risk elements in order to improve predictability within the Group. KONGSBERG’s financial risk is managed centrally by guidelines for financial risk management adopted by the Board and included in the Group’s financial policy. The Group’s financial risk management is described in Note 5 to the financial statements, “Management of capital and financial risks”. The Group has a diversified customer base, mainly comprising public sector institutions and larger private companies in numerous countries. Historically, the Group has had low losses on receivables. Measures to limit the risk exposure are implemented continuously where necessary. The Group’s liquidity risk is managed centrally by requiring loans to be renewed well in advance of maturity, and by the use of liquidity forecasts.

With a high proportion of contracts in different currencies, the Group’s revenues are affected by fluctuations in exchange rates. KONGSBERG’s financial policy means that important contracts must be hedged against fluctuations in exchange rates upon establishment, and these are largely hedged using forward currency exchange contracts (fair value hedges). In special cases, the Group uses forward contracts as cash flow hedges, e.g. in the case of large tenders where there is a very high probability of winning the contract.

KONGSBERG has recognised substantial book values in the balance sheet which are justified by future cash flows. Any reduction in cash flows may affect the value of the assets. In 2016, KONGSBERG purchased 49.9 per cent of the shares in Finnish company Patria, which has a book value of MNOK 2.656. Patria's financial performance has deteriorated since the acquisition. Persistently weak results from Patria may make it challenging to justify these values.

KONGSBERG has for several years established and developed compliance functions. Regulations, as well as monitoring and reporting systems, are established for managing risks related to areas such as anti-corruption, export controls and sanctions, supply chains and whistle-blowing. Training within the area of ethics and compliance is carried out in the entire organisation, both in Norway and abroad.

We conduct periodic evaluations of our compliance and anti-corruption programme. The most recent was an external evaluation of Kongsberg Gruppen ASA (parent company) in 2017. In 2017 and 2018, our business areas performed internal audits against the relevant criteria. The evaluations confirm that the programme complies with national and international laws, while providing important input to our work on continuous improvement. A new evaluation will be carried out in 2020.

The Board considers KONGSBERG’s compliance programme to be of a good level.

As a high-tech company, KONGSBERG is constantly exposed to external threats associated with data security and is under constant pressure from different external players. In essence, it is at risk of virus attacks, attempts at hacking, social engineering and phishing scams. Executive management prioritises and focuses on monitoring and measures to prevent attacks. The main focus of the work relating to cyber attacks is on monitoring and preventive measures, where advanced technology is used. This, together with providing employees with information and training, helps to ensure that the Group continuously improves its ability to withstand these threats.

Technology, research and development

A significant portion of the value created by KONGSBERG consists of developing high-tech solutions for domestic and international markets. KONGSBERG’s technology platform has been systematically built up through many years and is an important factor for our competitiveness. Technology transfer between the different parts of the Group is significant. Future-proof technological expertise within digitalisation is being built up in KDI. We are also working with our main technology partners to further develop our technology platform. KONGSBERG continuously invests in product and system development, both internally financed and through customer-funded programmes. Over time, the total costs of product development account for about 10 per cent of operating revenues.

Corporate social responsibility

KONGSBERG shall represent sustainable development characterised by a sound balance between economic performance, value creation and social responsibility. Sustainability and corporate social responsibility are integrated into the Group’s strategy processes. Sustainable technological innovation is a central element in contributing towards solving the major global challenges the world faces. For KONGSBERG, this means business opportunities in several markets viewed in the light of our broad technological and skills platform. We are conscious of the risk associated with our “licence to operate”, both in terms of compliance with laws and regulations, as well as development in terms of resource scarcity, world turmoil, development in global megatrends, etc. KONGSBERG has, and will continue to have, a great focus on anti-corruption and corporate social responsibility in its supplier network, as well as on the follow-up of human and workers’ rights, both in our own organisation and with our business partners. Reference is made to the chapter on corporate responsibility for a more detailed description of the Group’s corporate social responsibility efforts.

Health, safety and the environment

The Board believes that health, safety and environment must be managed in a way that promotes job satisfaction and a sound working environment. Health, safety and the environment is important for KONGSBERG and is part of our licence to operate. One basic principle is that HSE work should be preventive. The Board is closely monitoring the work by reviewing HSE reports quarterly. In 2019, nine common “KONGSBERG Life-Saving Rules” were introduced as a principal theme for the joint “Global HSE Day” campaign. During the year, various training initiatives and campaigns were carried out which, based on risk analyses and incidents that have occurred, are helping to prevent further incidents and promote a strong HSE culture. Risk analyses are carried out regularly and form an important part of the preventive HSE work.

The number of occupational incidents with and without absence (“TRI”) rose from 1.6 in 2018 to 2.3 in 2019 The number of registered incidents which resulted in absence shows an increase from 17 in 2018 to 30 in 2019. These increases are linked to the integration of Commercial Marine in KONGSBERG, which is exposed to somewhat higher risks from an HSE perspective as a result of its activities and operations. Absence due to illness remains low within the Group at 2.6 per cent (the same level as in 2018). For activities in Norway, absence due to illness stands at 3.1 per cent, compared with 3.0 per cent in 2018. There is systematic follow-up of employees on sick leave, with particular focus on getting long-term absentees back to work. Further details about key sustainable figures for HSE are found in the Group’s report on sustainability.

All employees in Norway have access to company health services.

This varies in accordance with local practices and legislation in our foreign business activities. At the end of 2019, 40 per cent of KONGSBERG’s employees were based outside Norway. This requires additional attention and insight with respect to HSE issues in the countries in which we operate.

The integration of the new companies within the Group has also been afforded considerable attention. Through the exchange of experience, good, shared knowledge has been established concerning the various HSE risk areas of the entities concerned.

Geographical distribution of revenues

Per cent
  • Africa 2 %
  • Norway 18 %
  • Australia 2 %
  • Rest of Europe 28 %
  • Central and South America 1 %
  • North America 25 %
  • Asia 24 %

Geographical distribution of employees

Per cent
  • Asia 13 %
  • Norway 61 %
  • Central and South America 1 %
  • Rest of Europe 18 %
  • North America 7 %

Climate and environment

The climate and environmental statement provides an overview of KONGSBERG’s consumption of energy, CO2 emissions and waste processing. The Group’s most significant positive contribution to the climate challenges is that an increasing number of our products and solutions are contributing in various ways to reduced emissions. This is central to our business strategy

A detailed overview of the climate and environmental statement for 2019 can be found in the Group’s 2019 sustainability report (see the chapter on climate).

The Group has adopted a target of reducing annual CO2 greenhouse gas emissions by 20 per cent relative to turnover by the end of 2020, with the baseline in figures as of 31 December 2015. KONGSBERG has changed significantly during 2019, with the acquisition and integration of Commercial Marine and AIM Norway. This significantly changes the climate reporting, and complicates the comparison with previous years.

Compared with 2015 we have not been able to reduce the emissions in absolute figures or relative to revenue. Emission from the Group, excluding acquired companies is on approximately the same level in 2019 as 2015.

The direct and indirect emmision related to energy usage shows a reduction both when comparing to revenue and number of employees. The same goes for the emission related to shipping of goods. Emission related to flights show a slight increase relative to revenue/employees. This is mainly due to increased customer support activity in KM as a result of the acquisition of Commercial Marine. This is an organisation with high travel activity.

No serious incidents related to environmental pollution were reported in 2019.

Personnel and organisation

Number of employees
Number of employees
31 Dec 19
31 Dec 18

Kongsberg Defence & Aerospace

Kongsberg Defence & Aerospace
2 917
2 448
Kongsberg Maritime
Kongsberg Maritime
7 212
3 794
Other
Other
664
600
Total in the Group
Total in the Group
10 793
6 842
Proportion outside Norway
Proportion outside Norway
40%
34%

KONGSBERG has a unique and strong culture that has been developed over several years. Individuals and teams who comply with our values and demonstrate good behaviour are to be appreciated. This culture will help us to attract people with the right skills and behaviour to address the technical challenges of tomorrow in a sustainable manner. Cooperation is fundamental to our business. In 2019, the “Collaboration Award” was given for the second time, recognising teams and projects whose value has been crucial in achieving successful results.

Leadership in KONGSBERG is about creating value and achieving results through people. The key to success lies in the combination of good management and dedicated employees. Managers shall exercise their leadership based on our values, the Corporate Code of Ethics and management principles. Our managers must create an environment in which our employees will prosper and succeed in meeting the strategic priorities of customer satisfaction, innovation and operational excellence. On the basis of this, we have implemented a management development programme, Leadership@KONGSBERG, that will contribute to clarifying and quality-assuring processes for goal-setting, follow-up and evaluation.

An important condition for long-term success is that KONGSBERG properly manages employee competences. The Group is aiming to increase the exchange of knowledge and staff between the business areas. Good work processes and development opportunities are important incentives in recruiting and retaining good employees.KONGSBERG places emphasis on strengthening competences and is continuously working to develop its employees. 54 per cent of KONGSBERG’s employees have college or university level education.

The Group educates skilled workers within several disciplines in cooperation with the education company Kongsberg Technology Training Centre AS, partly owned by KONGSBERG. During 2019, there were 71 apprentices in total. In addition, the company facilitates and stimulates employees to acquire apprenticeship completion certificates as private candidates, known as practice candidates.

Cooperation with employee unions and organisations through established cooperation and representation arrangements are well functioning and constitutes valuable contributions to meeting the Group’s challenges in a constructive manner.

Diversity

Diversity and gender equality add value and increased competitiveness. They expand the mindset and have a positive influence on the company’s strategy and management. We are therefore working systematically to recruit, develop and keep people of different ethnicity, national origin, skin colour, language, religion, life stance, age and gender.

A total of 1,615 (18.7 per cent) of employees are women, and two of five shareholder-elected directors on the Board are women. As of 31 December 2019, the corporate management team included two women. The company considers it important to promote gender equality and prevent discrimination in conflict with the Gender Equality Act. Long- and short-term goals have been established to help increase the percentage of women in the Group, both in terms of employment and in terms of management positions. As far as is possible, KONGSBERG tries to adapt working conditions so that individuals with diminished functional abilities can work for the Group. The Board Compensation Committee has a particular responsibility for follow-up on diversity. In the opinion of the Board, the Group complies with current regulations.

Corporate governance

KONGSBERG’s objective is to secure and increase stakeholder value through profitable and growth-oriented industrial development with a long-term, sustainable and international perspective. Good corporate governance and corporate management shall reduce business-related risk, while the company’s resources shall be utilised in an effective and sustainable manner. Values created should benefit shareholders, employees, customers and society in general.

The Board considers it important to review and update the Group’s corporate governance documents annually to comply with the “Norwegian Code of Practice for Corporate Governance” (NUES).

According to Section 3-3b of the Accounting Act, the company shall prepare a statement on corporate governance. The statement will, pursuant to Section 5-6 of the Public Limited Companies Act, be discussed at the Annual General Meeting. The description in chapter 4 of the annual report is based on the latest revised version of the Norwegian Code of Practice for Corporate Governance of 17 October 2018.

Remuneration to executive management

The Board has a separate Compensation Committee which deals with all significant matters related to wages and other remuneration to senior executives prior to formal discussion and decision by the Board. In line with the Norwegian Companies Act, the Board has also prepared a statement on the remuneration of the Group CEO and Executive Management included in Note 28 to the consolidated financial statements.

Profit for the year and allocation of net profit

The parent company Kongsberg Gruppen ASA made a net profit of MNOK -4 in 2019. The Board proposes the following allocation of profit for the year in Kongsberg Gruppen ASA:

Dividend
Dividend
MNOK
450
From equity
From equity
MNOK
(454)
Total available
Total available
MNOK
(4)

The proposed dividend constitutes 63 per cent of the Group’s ordinary profit for the year.

Going concern

In compliance with Section 3-3a of the Norwegian Accounting Act, it is confirmed that the going concern assumptions continue to apply. This is based on forecasts for future profits and the Group’s long-term strategic prognoses. The Group is in a healthy economic and financial position.



Kongsberg, 19 March 2019



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