Annual Report 2011 - ADVA Optical Networking

ADVA Optical Networking Annual Report 2011
Capitalizing on Next-Generation Networks
Capitalizing on Next-Generation Networks
www.advaoptical.com
Annual Report 2011
Welcome
Profile
Mission
ADVA Optical Networking is a global provider of intelligent telecommunications infrastructure solutions.
ADVA Optical Networking enables next-generation networks. The Company’s mission is to be the
trusted partner for innovative Optical+Ethernet
transport solutions that ADVANCE next-generation
networks for data, storage, voice and video services.
With software-automated Optical+Ethernet transmission technology, the Company builds the foundation for high-speed, next-generation networks.
The Company’s FSP product family adds scalability
and intelligence to customers’ networks while removing complexity and cost.
With a flexible and fast-moving organization, ADVA
Optical Networking forges close partnerships with
its customers to meet growing demand for data,
storage, voice and video services.
Thanks to reliable performance for more than
15 years, the Company has become a trusted
partner for more than 250 carriers and 10,000
enterprises across the globe.
2
ADVAntages
Welcome
Focus on Growth Markets
Speed for Customers
• ADVA Optical Networking focuses on growth markets in the
telecom space that have one thing in common: a strong
and sustainable demand for Optical+Ethernet transport.
• ADVA Optical Networking has a strong track record of being first to market with new functionality that adds value
for customers.
• These markets are driven by the shift from legacy purpose-built networks to next-generation multi-purpose networks, where Optical+Ethernet technology provides the
underlying foundation.
• A responsive team serves customers around the globe, with
65% of ADVA Optical Networking’s 2011 revenues generated in EMEA, 30% in the Americas and 5% in Asia-Pacific.
• Average growth across these markets is expected to be
13% per year between 2010 and 2014 to a total of EUR 6.8
billion in 2014. Including the adjacent long-haul WDM and
Ethernet switching markets that ADVA Optical Networking
will be able to address increasingly over time, the Company’s total addressable market is projected to expand to
EUR 9.4 billion in 2014.1
Optical+Ethernet Innovation
• ADVA Optical Networking’s industry-leading engineering
force is exclusively focused on Optical+Ethernet innovation, outperforming the engineering departments of other
vendors in this space.
• Focus on innovation drives market success and has made
ADVA Optical Networking the #1 player worldwide for fiber Ethernet access solutions for five years in a row with
a market share of more than 20% 2 and …
• … a strong competitor in Europe, Middle East and Africa
(EMEA) in the metro optical market with a market share
of more than 10%.3
Management
Board
Supervisory
Board
Corporate
Governance
• ADVA Optical Networking’s Optical+Ethernet solutions
have been deployed by more than 250 carriers and 10,000
enterprises.
Stock
Trusted Partner
• ADVA Optical Networking’s unique combination of innovation and speed has seen the Company build close partnerships with customers, resulting in repeat purchases and
strong cross-selling opportunities for its Optical+Ethernet
solutions.
Investor
Relations
Business
Overview
• As a trusted partner for more than 15 years, ADVA Optical Networking provides high-quality solutions with lowest
cost of ownership and best user experience.
Management
Report
• The Company’s experienced management team has many
years of senior management background in blue-chip telecommunications equipment companies, making it a dependable partner when it comes to building long-term business relationships.
1
Financial
Statements
Industry analyst estimates for metro WDM equipment (“Optical”) and
Ethernet access devices (“Ethernet”) relevant for ADVA Optical Networking.
Sources: Infonetics Research Optical Network Hardware, Quarterly Market
Share, Size, and Forecasts 2Q11, August 2011, and Infonetics Research
Carrier Ethernet Equipment Biannual Market Share, Size and Forecasts 2nd
Edition, November 2011.
2
Based on 2010 total revenues for Ethernet access devices. Source: Infonetics Research Carrier Ethernet Equipment Biannual Market Share, Size
and Forecasts 2nd Edition, November 2011.
3
Based on 2010 total revenues for metro optical transport equipment.
Source: Infonetics Research Optical Network Hardware, Quarterly Market
Share, Size, and Forecasts 2Q11, August 2011.
Additional
Information
3
Contents
Welcome2
Business Overview
Profile
2
Mission41
Mission2
Technology41
ADVAntages3
Market and Growth Drivers
2011 Financial Highlights
6
Products45
2011 Business Highlights
7
Sales Regions and Customers
48
Sales and Marketing
50
41
Management Board
14
Operations52
Members and Their Backgrounds
15
Product Engineering
54
Letter to Shareholders
18
Quality Management
56
Supervisory Board
22
Group Management Report
58
Members23
Forward-Looking Statements
59
Report to Shareholders
General Economic and Market Conditions
59
Business Development and Operational Performance
61
Net Assets and Financial Position
66
Share Capital and Shareholder Structure
71
Restriction of Voting Rights and Share Transfers
72
Corporate Governance Report
4
40
24
28
The ADVA Optical Networking Stock
32
Investor Relations Review and Financial Calendar
36
Appointment and Dismissal of Management Board Members 72
Changes to Articles of Association
72
Issuance and Buy-Back of Shares
73
Takeover Bid-Driven Change of Control Provisions
73
Employees and Social Responsibility
74
Declaration on Corporate Governance
76
Remuneration of Management and Supervisory Boards
77
Environmental Responsibility
78
Risk Report
79
Events After the Balance Sheet Date
86
Outlook87
IFRS Consolidated Financial Statements
90
Consolidated Statement of Financial Position
91
Consolidated Income Statement
92
Consolidated Statement of Comprehensive Income
93
Consolidated Cash Flow Statement 94
Consolidated Statement of Changes in Stockholders’ Equity 95
Notes to the Consolidated Financial Statements
96
ADVAntages at work:
Innovation
Driving new ideas in an industry that is
continually evolving. Turn to pages 22, 28
and 32 to read more about ADVA Optical
Networking’s innovative network solutions.
Speed for Customers
Ensuring your data is where you need it,
when you need it. Read more about ADVA
Optical Networking’s commitment to its
customers’ needs on pages 36 and 40.
Affirmative Declaration of the Management Board
163
Independent Auditor’s Opinion
164
Additional Information
166
Trusted Partner
Quarterly Overview 2009 – 2011
167
Multi-Year Overview 2001 – 2011
168
Fostering relationships that help building
the network of the future. Turn to pages 58,
90 and 166 to discover how ADVA Optical
Networking is working with its customers
and partners to enable sustainable growth.
Glossary169
Corporate Information
176
5
› 2011 Financial Highlights
› 2011 Business Highlights
2011 Financial Highlights
(in millions of EUR)
• 2007
•
2008
•
2009
Revenues
251.5
251.5
217.7
217.7
232.8
232.8
• 2010
291.7
291.7
• 2011
310.9
310.9
Pro forma operating income (IFRS) *
11.9 **
11.9 **
1.8
1.8
1.5 **
1.5 **
-0.7
-0.7
6.1
6.1
13.3
13.3
Cash and cash equivalents (as of December 31)
41.6
41.6
46.6
46.6
50.9
50.9
54.1
54.1
17.3
17.3
59.1
59.1
* Pro forma operating income is calculated prior to non-cash charges related to the stock compensation programs and amortization and impairment of
goodwill and acquisition-related intangible assets.
** Numbers exclude one-off non-cash charges (2007) and restructuring charges (2008).
6
2011 Business Highlights
Welcome
• Solid revenue growth and sustainable profitability
• Ongoing innovation leadership, further international expansion and ramped-up technology and distribution partnerships
Management
Board
• Expansion of addressable market into WDM longhaul and mobile backhauling opportunities
Supervisory
Board
During 2011, ADVA Optical Networking made the following
key announcements:
Corporate
Governance
Customer Achievements
Stock
• February 16: Deployment of ADVA Optical Networking’s
latest FSP 3000 optical transport solution at PCCW, Hong
Kong’s premier telecommunications service provider, in
order to provide a total of 100Gbit/s connectivity for the
APRICOT-APAN (Asia Pacific Regional Internet Conference
on Operational Technologies – Asia Pacific Advanced Network) event, a prestigious regional Internet summit for
the ICT industry that took place in Hong Kong from February 15 to 25, 2011. PCCW was appointed the “Host Fiber Broadband Service Provider” for the conference because of its fiber connectivity leadership, expertise and
experience. The PCCW solution also included a 40Gbit/s
connection to demonstrate a super-HD video to the conference participants.
• April 19: ADVA Optical Networking’s FSP 3000 solution
has been selected by CFN Services in the U.S. to provide
industry leading low-latency solutions from Washington,
D.C., to the New York / New Jersey trading venues. The
availability of this route provides trading firms a competitive advantage when utilizing data sourced from Washington, D.C. Leveraging ADVA Optical Networking’s technology, the CFN optical-fiber network will provide the New
York / New Jersey financial community the fastest available access to the Washington, D.C., information sources.
• May 16: LightNet selected ADVA Optical Networking and its
partner, Telecom Italia after an evaluation of about 20 vendors and a public tender for their launch of a powerful, flexible and reliable telecommunications infrastructure that delivers its users unprecedented collaboration, medical and
scientific capabilities. LightNet is an association of educational and research institutions in Italy’s Trieste territory.
ADVA Optical Networking’s carrier-class, 40Gbit/s DWDM
FSP 3000 platform provides them high-speed connectivity and dynamic bandwidth allocation within and among
their diverse roster of 10 member institutions, as well as to
Italy’s and neighboring countries’ national research and
education networks and the commercial Internet.
Investor
Relations
Business
Overview
Management
Report
• May 16: Lonestar Education and Research Network (LEARN)
has deployed ADVA Optical Networking’s DWDM FSP 3000
platform to extend its metro solutions in Dallas, San Antonio and Houston, Texas, USA, and has named the FSP 3000
as its platform-of-choice for future network expansion.
LEARN is a consortium of K-12, colleges, universities, research, healthcare and public-service institutions in the
state of Texas. ADVA Optical Networking’s solution serves
the campus appetite for commodity Internet access, transmission and delivery of very large research data files and
provides the most advanced enterprise services.
Financial
Statements
Additional
Information
7
›› 2011 Business Highlights
• May 25: Indosat has deployed ADVA Optical Networking’s
FSP 3000 platform to support data center interconnectivity solutions for the Indonesian service provider’s banking
customers. This platform provides high-capacity DWDM
core network connectivity for Indosat’s interbank services.
The project strengthens the ongoing partnership between
Indosat and ADVA Optical Networking and will increase the
value for their customers.
• June 1: Romtelecom has selected ADVA Optical Networking’s FSP 3000 agile core transport solution to enable multiple critical networks in Romania, including several countywide rings, a nationwide network throughout the country
and an international link connecting Romania and Germany. After an active tendering process, Romtelecom selected the FSP 3000 platform to enable all three infrastructures. The carrier chose this platform because of the
FSP 3000’s unique scalability and ability to support the service provider’s diverse application needs, including Romtelecom’s upcoming introduction of 100Gbit/s services.
• July 18: U.S.-based Northwest Open Access Network
(NoaNet) has selected ADVA Optical Networking’s FSP 3000
platform to enable the extension of high-speed broadband
service to nearly every underserved area of Washington
State. The solution affords NoaNet the long-term, cost-effective scalability to accommodate more users and continue a transition from 10Gbit/s to 40Gbit/s and, eventually, 100Gbit/s services. Finally, it will help NoaNet deliver
reliable, high-speed Internet access to schools, libraries,
emergency responders, hospitals, government agencies,
businesses and individuals in virtually every inhabited location of Washington.
• July 27: artelis, an alternative communications provider
in Luxembourg and Saarland, Germany, has deployed
ADVA Optical Networking’s FSP 3000 platform in a new
backbone infrastructure that effectively unites two separate networks onto one flexible core. Integrated by Nokia
8
Siemens Networks, this new network enables artelis to
rapidly respond to its customers’ needs and provision new
services and bandwidth on demand. Including ROADMs and
Raman amplification technology, the FSP 3000 solution ensures artelis is able to deliver these services while at the
same time reducing operational expenses.
• August 16: Global Net Access (GNAX), a leading provider
of data center services, colocation, cloud computing and
managed hosting in the U.S., has deployed ADVA Optical Networking’s FSP 3000 platform to upgrade the connection from its AtlantaNAP data center to a Telx interconnection facility. This connection upgrade will provide
GNAX’s customers with even higher bandwidth access, up
to 160Gbit/s, to hundreds of domestic and international
carriers, in addition to low-latency connections to financial
exchanges and media application providers. The protection and redundancy capabilities of the FSP 3000 platform
ensure that GNAX will be able to offer its customers strict
service level agreements for mission-critical applications.
• September 20: TorreyPoint announced that U.S.-based
KINBER, the Keystone Initiative for Network Based Education and Research, selected the company to build a stimulus-funded Pennsylvania-wide network using integrated
technology from ADVA Optical Networking and Juniper
Networks. This fiber optic network represents the foundation of PennREN, the Pennsylvania Research and Education Network, a high-speed fiber broadband network providing 100Mbit/s to 10Gbit/s Ethernet connectivity across
the state of Pennsylvania. ADVA Optical Networking’s key
role is to add scalability and intelligence to networks, while
removing the complexity and cost. This was a strong factor in KINBER’s decision process, along with ADVA Optical Networking’s demonstrated success and strong references in the research & education community.
• October 10: Openreach, the infrastructure division of British Telecom, will use ADVA Optical Networking’s FSP 3000
as the foundation for its new Optical Spectrum Access product (OSA) within its Optical Spectrum Services portfolio.
Designed to provide enterprises with the high-bandwidth,
high-speed and high-availability network connections they
need to respond to today’s demanding business opportunities, OSA seeks to further strengthen the United Kingdom’s position as a global business center. The FSP 3000
platform ensures customers will be able to scale to meet
these challenges, deliver a best in class solution and position themselves well within an increasingly competitive
global playing field.
• November 15: The industry’s first commercial installation
of a high-end parallel sysplex over InfiniBand service in
Luxembourg in a joint project of ADVA Optical Networking and P & TLuxembourg. Deployed in a major financial institution’s network, the solution provides a fully-secured
mainframe business continuity service. By leveraging the
strengths of ADVA Optical Networking’s FSP 3000 platform, the customer has successfully migrated his parallel sysplex environment connecting two mainframes from
a 2Gbit/s FICON-based solution to a higher bandwidth,
more sophisticated 5Gbit/s InfiniBand optical connectivity running over a protected, route-diverse physical fiber
infrastructure.
• October 24: ICN, The Iowa Communications Network (ICN),
is incorporating its advanced optical transmission equipment in a network upgrade provided by ADVA Optical Networking. ICN’s authorized users, which consist of K-12
schools, higher education, healthcare, state and federal government, National Guard armories and libraries
throughout Iowa, will have improved access from this
equipment upgrade. This network will address high bandwidth demands from the many community anchor institutions of Iowa. With the speed and reliability of fiber
optics, Iowans will see educational enhancements, improved technology opportunities, and increased economic
development.
• December 6: Syringa Networks, an Idaho-based regional
provider of high-speed fiber optic services in the U.S., has
selected ADVA Optical Networking’s FSP 3000 platform to
provide connectivity throughout its Idaho footprint. Spanning more than 2,500 miles of fiber, Syringa Networks provides high-speed broadband access to southern Idaho and
northern Utah businesses. By using the FSP 3000 platform
as the cornerstone of its infrastructure, Syringa Networks
is able to scale to meet any network demand, whether from
private enterprise customers or the public sector.
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
• November 8: BCNET, a Canadian not-for-profit organization that runs one of the world’s most advanced regional research and education networks, announced the deployment
of ADVA Optical Networking’s FSP 3000 platform in its highcapacity infrastructure. Connecting over 140 research and
higher-education institutions, schools and colleges throughout British Columbia, the diverse path, ring-configuration allows the shared IT services organization to offer leading-edge
network services to accelerate research, collaboration and
learning. Installed by Charter, one of Canada’s fastest-growing integrators, the new network is built on ROADMs providing BCNET with previously unattainable levels of flexibility.
Management
Report
Financial
Statements
Additional
Information
9
›› 2011 Business Highlights
New Products and Solutions – Innovation
• February  10: Successful trial of an ADVA Optical Networking
direct-detection 100Gbit/s solution in the metro network
of a tier-one European carrier. The solution ran error-free
under real-life conditions with unfavorable fiber characteristics. The trial demonstrated the potential of non-coherent technologies for low-latency applications in metro and
enterprise networks. The demonstration was part of ADVA
Optical Networking’s engagement in the 100GET metro
project, partially funded by the German Ministry of Research and Education (Bundesministerium für Bildung und
Forschung).
• February 28: Addition of a coherent express layer to ADVA
Optical Networking’s flagship FSP 3000 platform. The new
technology has been optimized for 100Gbit/s transmission
speed and enables service providers to use optical network
resources flexibly and on-demand. Close interworking with
the IP / MPLS layer allows a massive increase in network
scalability and efficiency. The feature set represents a new
generation of agile optical core networks and includes an
optical layer that is fully optimized for 100Gbit/s coherent transmission technology, the latest ROADM technology and end-to-end service and bandwidth management.
10
• March  21: Release of ADVA Optical Networking’s enhanced
network operations center (NOC) services as part of the
new ADVAcare suite, which presents a combination of operations services, technical support and hardware and software maintenance. NOC services are designed to help
protect customers’ networks and reduce operational expenditure, while freeing internal resources to focus on
core business activities. They deliver cost-effective business protection and are provided remotely, with all network-event, quality-of-service and surveillance data securely transported out-of-band between a customer and
ADVA Optical Networking. Service-level agreements can
be customized for a specific customer’s needs.
• April 
12: Availability of ADVA Optical Networking’s
FSP 150EG-X edge gateway, which delivers cost-effective capacity, scalability and resiliency for Carrier Ethernet access and backhaul networks. The product combines scalability with operational simplicity and enables
service providers to migrate toward a universal, Ethernet-centric network architecture below the provider edge.
The FSP 150EG-X is a high-capacity, non-blocking edge
gateway that provides a central aggregation solution and
enables service providers to scale their Carrier Ethernet
backhaul offering to address larger applications, while providing a manageable, cost-effective platform that is optimized to deliver intelligent services.
Welcome
• September 8: Launch of ADVA Optical Networking’s 100G
metro solution designed specifically to address the continued fierce bandwidth growth in the metro environment.
The new solution is a response to the demands of service providers and enterprises for efficient 100Gbit/s data
transport across distances of up to 500km. Fully integrated
into the FSP 3000 platform, the 100G metro solution increases the capacity of DWDM networks while lowering
cost and reducing space and power consumption. The foundation of the 100G metro solution is in its non-coherent
4x28G technology that enables key efficiencies in cost,
space, power and spectral.
• November 3: Launch of ADVA Optical Networking’s
FSP 150CC-XG210, an ultra-compact Ethernet service demarcation and aggregation device. The new product enables the delivery of differentiated Ethernet services up to
10Gbit/s with strict service level assurance for carrier and
enterprise applications. The FSP 150CC-XG210 has been
built from the ground up on Etherjack™ and Syncjack™
technology. It is the first product to deliver these two feature suites at 10Gbit/s line speeds and consequently provides unrivalled service monitoring and assurance.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
11
›› 2011 Business Highlights
Interoperability and Alliance Partnerships
• February  8: ADVA Optical Networking’s membership in the
Dark Fiber Community (DFC), an online resource for the
network operators that build efficient broadband networks
and the vendors that support them. Operated by Allied
Fiber, the DFC is designed as a networking and educational
platform. With currently around 60 members, the DFC was
created in response to the rising demands for Allied Fiber’s
dark-fiber products and services and represents a knowledge portal for the industry, providing data and industry
information that is freely accessible to all.
• March 28: ADVA Optical Networking’s participation in the
Brocade Developer Program, which will enable enterprise
customers to efficiently roll-out next-generation data center technologies between their sites. The cooperation will
allow customers to adapt new technologies like 16Gbit/s
Fibre Channel and Data Center Bridging much more quickly
and with the certainty that all corresponding products deployed will interoperate successfully. Therefore customers can continue to deploy new solutions with confidence.
ADVA Optical Networking’s lowest-latency, flexible optical
networking solutions, combined with Brocade’s expertise
in data center networking, present the ideal combination
to enable the roll-out of traditional disaster recovery and
business continuity solutions, as well as next-generation
cloud computing architectures.
12
• May 11: HEAnet, Juniper Networks and ADVA Optical Networking have successfully demonstrated the automated
setup of optical circuits between Juniper Networks routers via an ADVA Optical Networking DWDM optical network, using a common signaling protocol. As another step
to delivering the most cost-effective and flexible network
solution, this setup allows building an optical circuit without any user intervention beyond the original user commands on the initiating router. As a result, the solution
enables improved network utilization, efficiency, performance and scalability to lower the service providers’ operational expenses.
• November 10: Successful qualification of ADVA Optical
Networking’s FSP 3000 platform for the IBM zEnterprise™
Bladecenter® Extension. This IBM solution includes zBX
and is the new infrastructure for extending System z qualities of service and management capabilities across a set
of integrated, fit-for-purpose POWER7 and IBM System x®
compute elements. The extension is highly relevant for enterprise applications such as business continuity, disaster recovery and cloud computing infrastructure. In these
environments low-latency, high-capacity and secure data
transmission links between systems are critical. Together
with advanced features like high bandwidth physical layer
encryption it represents real investment protection for customers who already have ADVA Optical Networking solutions not only in IBM mainframe environments but also in
applications like real time stock trading or data replication.
Company Events
• May 16: Appointment of a new member to ADVA Optical Networking’s Supervisory Board. With the retirement
of Bernard Bourigeaud from the Supervisory Board on
May 15, his position was filled by Johanna Hey, who was
elected by the Company’s Annual Shareholders’ Meeting
in Meiningen, Germany, on May 16. Johanna Hey brings
extensive international corporate tax law experience to
ADVA Optical Networking.
Welcome
• October 18: Krish Prabhu steps down from his office as
Vice Chairman and as member of ADVA Optical Networking’s Supervisory Board, due to his appointment as President and CEO of AT & T Labs, Inc. earlier in 2011.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
13
Management Board
14
From left to right:
Brian Protiva, Christian Unterberger, Jaswir Singh and Christoph Glingener
Members and
Their Backgrounds
ADVA Optical Networking is led by a dynamic, international,
experienced and highly-motivated team. Leading, directing and managing the Company’s growth are four executive officers:
Welcome
Brian Protiva
Chief Executive Officer (CEO)
Management
Board
Bachelor of Science in Electrical Engineering, Stanford University, USA
Supervisory
Board
Brian Protiva
Chief Executive Officer
Christoph Glingener
Chief Technology Officer
Corporate
Governance
Christian Unterberger
Chief Sales & Marketing Officer
Stock
Jaswir Singh
Chief Financial Officer & Chief Operating Officer
Investor
Relations
Brian Protiva co-founded ADVA Optical Networking in 1994
and, as one of two managing directors, he focused on creating ADVA Optical Networking’s marketing, sales and growth
strategy. In 2001, Brian was appointed CEO and set in motion the strategies that fuel the Company’s success today.
Under his leadership, ADVA Optical Networking advanced to
become the global market leader in Ethernet access devices
and one of the top players in metro Wavelength Division
Multiplexing (WDM) worldwide. To date, ADVA Optical Networking’s innovative Optical+Ethernet solutions have been
deployed at more than 10,000 enterprises and more than 250
carriers around the world. Revenues reached EUR 311 million in 2011, while employment climbed to 1,304 employees
at year-end 2011. Prior to ADVA Optical Networking, Brian
was managing director at AMS Technologies (now the EGORA
Group), which he joined in 1987 and where he focused on
co-managing its subsidiaries.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
15
› Members and Their Backgrounds
16
Christoph Glingener
Chief Technology Officer (CTO)
Christian Unterberger
Chief Sales & Marketing Officer (CSMO)
Ph.D. in Electrical Engineering, University of Dortmund, Germany
Diploma in Electrical Engineering (Diplom-Ingenieur), Carinthia University
of Applied Sciences, Austria
Christoph Glingener joined ADVA Optical Networking in April
2006, assuming responsibility for all global research and development activities at sites in Europe, the United States and
China. In 2007, Christoph was appointed CTO. Since that time,
he also leads ADVA Optical Networking’s product management and advanced technology teams. Christoph has focused
on streamlining ADVA Optical Networking’s innovative product portfolio, defining the product strategy and building the
Company’s standing as a global leader in optical networking.
Christoph’s activities at ADVA Optical Networking build on a
long and successful industry career with experience gained
in both academic and corporate roles. These include leading positions at Marconi Communications (now Ericsson) and
Siemens Communications (now Nokia Siemens Networks).
Christian Unterberger joined ADVA Optical Networking in
October 2007 to drive corporate sales revenue through a
comprehensive and proactive global program, by using his
extensive sales experience in the telecommunications industry. Since July 2009, Christian is also charged with determining product positioning and market launch strategies,
as well as promoting the Company’s global brand identity.
Prior to joining ADVA Optical Networking, Christian headed
the Service Core and Applications business at Nokia Siemens
Networks, where his primary responsibilities included managing the unit’s global activities. Before that, he was with
Siemens Communications (now Nokia Siemens Networks)
for 20 years, where he progressed through the ranks, holding sales and management positions of increasing responsibility, including positions overseeing Europe, Middle East,
Africa and Asia-Pacific. He concluded his career at Siemens
Communications as president of the company’s global Fixed
Networks business.
Jaswir Singh
Chief Financial Officer (CFO) & Chief Operating Officer (COO)
Welcome
Master of Advanced Business Practice, University of South Australia, Australia
Master of Accountancy, with Distinction, Charles Sturt University, Australia
Management
Board
Bachelor of Commerce, University of Canterbury, New Zealand
Member of CPA Australia
bility for the region. Jaswir has a long and successful background with global telecommunications and high-tech companies, including the North American subsidiary of Nokia;
AirDefense (now part of Motorola); and Equant (a division of
the France Telecom Group now known as Orange Business
Services). Jaswir has more than 20 years experience in senior general management, CFO and operations roles, including managing USD multi-billion enterprises globally.
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Jaswir Singh joined ADVA Optical Networking in November
2007 to enable the Company’s next growth stage. Since
joining the Company, he has worked to solidify ADVA Optical Networking’s financial position, including strengthening
the balance sheet, improving internal controls and processes
to ensure accuracy of financial statements, implementing
strategies to manage working capital, improve cash generation, cash flow and net liquidity, and minimizing foreign currency exposure. In early 2009, Jaswir also assumed the COO
function, whereby he manages the Company’s global manufacturing, supply chain and logistics activities. Additionally,
in July 2009, he took over responsibility for the Company’s
global business systems and information technology activities, and also assumed the role of president of the Company’s
North American subsidiary, maintaining full legal responsi-
Business
Overview
Management
Report
Financial
Statements
Additional
Information
17
›› Letter to Shareholders
Letter to Shareholders
Dear shareholders and friends,
2011: Revenue
growth to a record
high coupled with increased profitability,
driven by focus on
innovation, operational excellence
and target markets
with long-term
growth potential
2011 was a very challenging year for the global economy. A year marked by economic turmoil caused by debt-laden European countries and natural disasters with
Japan being devastated by earthquakes and a tsunami and Thailand coming to
a halt due to severe flooding. Nevertheless, ADVA Optical Networking continued
to introduce highly innovative networking solutions and to grow revenues. With
strategic investments in development activities, we launched new products and
software that make it more efficient for our customers to operate their networks
and to run their businesses.
Despite the poor macro-economic environment, we achieved our goal to grow
profitably. ADVA Optical Networking’s revenues rose to a record high of EUR 310.9
million in 2011, up 6.6% compared to 2010. Profitability growth was even stronger,
with our pro forma operating income increasing by 30% from EUR 13.3 million to
EUR 17.3 million, developing positively to 5.6% of revenues in 2011 after 4.6% in
the prior year. This sound operational result also fueled our financial strength. At
year-end 2011, net liquidity was at an all-time high of EUR 31.2 million, up from
EUR 24.7 million at the end of 2010.
18
Welcome
The drivers behind our strong results for 2011 remain
unchanged: our relentless focus on innovation, operational
excellence and our target markets which continue to show
long-term growth potential.
Focus on innovation. ADVA Optical Networking continues to develop the most advanced network technology
that provides carriers and enterprises with compelling
opportunities to shape and enhance their networks and
businesses. We drive cost and complexity out of the
network by using our software framework to provide our
customers with an intelligent, simple and scalable network
environment. Major 2011 innovation examples include
the addition of an express layer with coherent detection
technology to our FSP 3000 platform optimized for long
distance 100Gbit/s transmission speed, allowing a massive increase in carrier customers’ network scalability and
efficiency; the launch of a non-coherent, direct detection
100Gbit/s metro solution for our FSP 3000 platform specifically designed for short-reach applications with distances
of up to 500km, lowering cost and reducing space and
power consumption for carrier customers when compared
to coherent solutions; and the new FSP 150EG-X edge
gateway, which delivers cost-effective capacity, scalability
and resiliency for Carrier Ethernet access and backhaul
networks, allowing service providers to migrate towards a
universal, Ethernet-centric network architecture.
Focus on operational excellence. ADVA Optical Networking has managed to control operational costs despite
major incremental investments in its development activities. During 2011, we improved our operational capabilities significantly. Among the key achievements for the
year are the global consolidation of purchasing volumes
to select alternative suppliers in low-cost regions; the
global bundling of transport needs which led to a reduction
of freight costs; the reduction of routing times on work
orders by 10% at our main production site in Meiningen;
the doubling of the number of orders packed per day, due
to increased automation; the re-use of packaging material; the improvement of our sales forecast accuracy and
related cut of supplier lead times and inventory; the optimization of our electronic manufacturing services (EMS)
partner strategy which provides scale and competitive
purchasing while utilizing low-cost labor resulting in a significant decrease in cost of assembly; and the introduction
of a global trade compliance management system which
led to globally standardized supply chain processes for all
operations sites, further reducing customer lead times.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
19
›› Letter to Shareholders
Focus on growth markets. ADVA Optical Networking’s
Optical+Ethernet transport solutions have been deployed
in a growth market environment for more than 15 years.
In 2011, a major driver for this growth was the strong
trend towards mobile communication. Devices such as
smartphones have become the “wallet” without which we
do not leave our homes. We want to simply use our device
whenever and wherever we are, whether it is to look up
directions, to share pictures and files while away, or to
simply view a YouTube video gone viral. Our devices today
address routine tasks allowing us to handle business and
payment transactions and connecting us to information
that we can store in our pocket at all times. With webbased file hosting services, we can store and share files
and folders anywhere. The related growth in mobile traffic
needs to be backhauled from the mobile base stations to
the carriers’ central offices, requiring cost-efficient access
technology such as ADVA Optical Networking’s FSP 150
Ethernet access devices (EADs). While EADs in the past
have mainly been used for customer-to-carrier connections, today they are increasingly deployed in mobile
backhauling solutions. Another key driver in the demand
for our technology is the strong trend towards cloud computing solutions, with owned hardware being replaced by
shared-service platforms and many applications being run
in the cloud instead of on local hardware. This trend has
led to a massive increase in transport capacity demand,
20
fueling growth for our FSP 3000 platform, by carriers and
enterprises alike.
It is only the combination of our three focus areas outlined above that has made ADVA Optical Networking grow
with increasing profitability year-after-year since 2008.
Significant innovation and our commitment to operational
excellence made it possible to turn the major opportunities
in our addressable market into sustainable revenue and
profitability growth.
Looking out to 2012 and beyond, all indications suggest
that the market growth trends seen in 2011 will continue
or even accelerate. With the latest enhancements of our
two hardware platforms FSP 3000 and FSP 150, further
development of our FSP management software suite, and
the ramp-up of our service offerings, we are also beginning to address opportunities in the WDM long-haul and
Ethernet switching markets. These strategic decisions will
enable us to address a market totaling USD 9.4 billion in
2014, nearly 40% bigger in size than the market we would
be able to address in 2014 without this expansion.1 Band Industry analyst estimates for metro WDM equipment (“Optical”) and
Ethernet access devices (“Ethernet”) relevant for ADVA Optical Networking. Sources: Infonetics Research Optical Network Hardware, Quarterly
Market Share, Size, and Forecasts 2Q11, August 2011, and Infonetics
Research Carrier Ethernet Equipment Biannual Market Share, Size and
Forecasts 2nd Edition, November 2011.
1
2012: Increasing
profitability due to
ongoing market and
revenue growth coupled with increasing
gross margins and
an ongoing focus on
innovation and operational excellence
Welcome
width demand and technology substitution will continue
to drive explosive growth in our market and thus we are
confident that we can continue to grow profitably even in
a very challenging macro-economic environment. “The
global telecommunications industry continues to expand
as spending by consumers and businesses for wireless
services fuels industry revenue growth. Despite global
economic uncertainty, the telecommunications industry
is showing revenue growth, which is being driven by consumer Internet usage and business mobility solutions.
These are enabling new applications”. 2 Beyond revenue
growth, our focus on innovation and strategic technology
partnerships will result in an expanding share of highmargin, software-heavy applications as well as expanded
service offerings, fueling profitability.
These opportunities will support our strategic focus to
remain the trusted partner for innovative Optical+Ethernet
transport solutions for existing and new customers. The
combination of cost-effective innovation, short development and delivery times, a broad and growing customer
base and well-balanced distribution model differentiates
ADVA Optical Networking from its peers and will further
fuel our sustainable business model for the benefit of our
customers, shareholders and employees. I specifically
thank our dedicated employees for their consistent and
valuable contributions. Their combined talents have made
ADVA Optical Networking a strong and profitable company
with bright prospects for the future. Thank you!
ADVA Optical Networking will continue to ADVANCE by
capitalizing on next-generation networks.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
February 23, 2012
Investor
Relations
Brian Protiva
Chief Executive Officer
Business
Overview
Management
Report
2
Source: Insight Research: “Worldwide Telecommunications Industry
Revenue to Reach $2.7 Trillion by 2012”, January 4, 2012.
Financial
Statements
Additional
Information
21
Supervisory Board
Innovation
The Optical Reboot Has Begun
22
Hunger for bandwidth has never been greater – demand for operational simplicity never
louder. Moving to a network built on 100G technology with unconstrained ROADM flexibility represents the biggest upgrade to our global network infrastructure in the past
decade. When complete, it will offer a flexible network that can easily accommodate
today’s bandwidth demand and usher in a new wave of data-intensive applications.
The new FSP 3000 Agile Core Express is the foundation of tomorrow’s networks.
Members
Welcome
ADVA Optical Networking’s Supervisory Board consists of a diverse and international group of five seasoned experts in their
respective fields:
• Anthony Maher, since 2002
Chairman
Management
Board
Chairman of the Compensation Committee
Chairman of the Nomination Committee
Chairman of the Strategic Initiatives Committee
Member of the Audit Committee
Supervisory
Board
Merchant
• Thomas Smach, since 2005
Vice Chairman
Corporate
Governance
Member of the Audit Committee
Member of the Nomination Committee
Member of the Strategic Initiatives Committee
Stock
Partner, Riverwood Capital Management, Menlo Park (California), USA
• Johanna Hey, since 2011
Member of the Compensation Committee
Investor
Relations
Professor for tax law, University of Cologne, Cologne, Germany
• Eric Protiva, since 1999
Business
Overview
Member of the Nomination Committee
Managing Director, EGORA Holding GmbH, Martinsried / Munich, Germany
Management
Report
• Albert Rädler, since 1999
Chairman of the Audit Committee
Member of the Compensation Committee
Financial
Statements
Tax adviser, Linklaters LLP, Munich, Germany
Additional
Information
23
›› Report to Shareholders
Report to Shareholders
In 2011, the Supervisory Board once again performed its
duties under the law and the Company’s articles. It carefully and continuously monitored the Management Board
and supported it in all strategic matters. The Supervisory
Board has been directly involved in the early stages of all
important strategic decisions of the Company. During six ordinary meetings, in which the members of the Management
Board regularly participated, the Management Board consistently, promptly and extensively informed the Supervisory
Board about the business situation of the Company and the
Group, in particular about strategic orientation, market development, prospects for growth and the development of
net assets, financial position and profitability, including budgeting, investments, personnel, compliance and risk management. The Supervisory Board extensively discussed all
important business issues on the basis of the Management
Board’s reports. Any deviations of the actual business development from the Company’s plans and objectives were
explained by the Management Board in detail and reviewed
by the Supervisory Board. The Supervisory Board was involved in all important decisions at an early stage and gave
its approvals, after thorough examination and consultation,
where required by law or the Company’s articles and in the
best interest of the Company and Group. In addition to the
six meetings, but only on an exceptional basis, the Supervisory Board passed resolutions on urgent matters between
these meetings. Moreover, especially the Chairman and the
Vice Chairmen maintained regular contact with individual
members of the Management Board outside of the scheduled
meetings and were kept up-to-date with respect to current
business developments, important transactions and forthcoming decisions.
24
Main Management Board Activities Covered
and Examined by the Supervisory Board
In 2011, as in the prior year, the Supervisory Board focused
mainly on the business development and strategic direction
of the Company, particularly its revenue, earnings and headcount development, as well as ADVA Optical Networking’s financial situation. In this context, the consequences of the
still volatile macro-economic environment and in particular
of the European debt crisis for the Company were discussed.
The Supervisory Board closely monitored and supported the
activities of the Management Board, including discussions
on mergers and acquisitions. It discussed the organization
of the Company and the Group with the Management Board
and assured itself of the efficiency of this organization. The
Management Board submitted to the Supervisory Board all
transactions and decisions requiring approval according to
the Company’s articles. The Supervisory Board approved all
such transactions and decisions.
Welcome
Committees
In order to perform its tasks efficiently, the Supervisory
Board maintained four committees during 2011: members of
the Audit Committee were Albert Rädler (Chairman), Anthony
Maher and Thomas Smach; members of the Compensation
Committee were Anthony Maher (Chairman), Albert Rädler,
Krish Prabhu (until October 18) and Johanna Hey (from December 15); members of the Strategic Initiatives Committee
were Anthony Maher (Chairman) and Thomas Smach; and
members of the Nomination Committee were Anthony Maher
(Chairman), Thomas Smach and Eric Protiva (from May 16).
The Committees’ tasks have been to discuss and prepare
specific topics and resolutions for the Board’s plenary meetings. The Committees have not been granted decision-making authority. The Audit Committee held six meetings during the course of the year and, in addition to reviewing the
consolidated annual and three quarterly financial statements
as well as the Company’s annual financial statements, discussed the financial position and performance of the Group,
the appointment of the external auditor, the audit scope for
2011, the development of tax positions and risks, internal
audit activities, as well as the effectiveness of the internal
controls related to financial reporting and of the risk management system. The Compensation Committee met three
times during the past year. Its discussions focused mainly
on the extension of the employment agreements of the Chief
Officers and their remuneration. The Nomination Committee
did not meet in 2011, nor did the Strategic Initiatives Committee. However, the members of the Strategic Initiatives
Committee regularly consulted with the Management Board
on the overall situation of the telecommunications industry,
the Company’s acquisition strategy and strategic direction
with regards to the Company’s most important partners.
Reports on the work of the Supervisory Board committees
were regularly presented and discussed during the subsequent Supervisory Board plenary meeting.
Corporate Governance Code
The Supervisory Board welcomes the German Corporate Governance Code and supports its objectives. The Supervisory
Board has approved compliance with and the implementation of most recommendations and proposals of the Corporate Governance Code within the ADVA Optical Networking
organization. In its meeting on December 15, 2011, the Supervisory Board and the Management Board discussed the
implementation of the Code, and jointly approved an updated
declaration of compliance in accordance with section 161 of
the German Stock Corporation Law (Aktiengesetz, AktG).
This declaration is published on the Company’s website and
is accessible for all shareholders.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
25
›› Report to Shareholders
Annual Financial Statements and Management Reports
ADVA Optical Networking’s consolidated annual financial
statements as of December 31, 2011, and ADVA AG Optical Networking’s annual financial statements as of December 31, 2011, as well as the Group management report and
the management report of ADVA AG Optical Networking
for the fiscal year 2011 were audited by the Company’s appointed auditor for 2011, Price Waterhouse Coopers Aktiengesellschaft Wirtschaftsprüfungs­gesellschaft, Munich, who
issued unqualified audit opinions. Pursuant to section 315a
of the German Commercial Code (Handelsgesetzbuch, HGB),
the consolidated annual financial statements have been prepared according to International Financial Reporting Standards (IFRS). All management letter points from the auditor were taken up, discussed with the Management Board,
and their consideration was ensured.
All auditing materials and reports were submitted to the
Supervisory Board members prior to the meeting of the Supervisory Board dealing with the Company’s and Group’s 2011
financial statements. On February 14 and 20, 2012, these
materials were discussed and examined in detail jointly by
the Audit Committee and the auditor and in consideration of
the auditor’s report. The Audit Committee reported its findings to the entire Supervisory Board in its meeting on February 21, 2012. Furthermore, the auditor, who was present
in all three meetings, reported on the material results of the
audit, explained net assets, the financial position and the results of operations of the Company and the Group, and was
available to answer additional questions from the members
of the Supervisory Board.
26
In view and consideration of these audit reports and on the
basis of the additional information provided by the auditor,
the Supervisory Board discussed and examined the financial
statements and management reports in detail in its meeting
on February 21, 2012. It unanimously approved ADVA AG Optical Networking’s annual financial statements and management report, as well as ADVA Optical Networking’s consolidated annual financial statements and Group management
report. The annual financial statements of ADVA AG Optical Networking for the fiscal year 2011 are thereby adopted.
Welcome
Changes within the
Management and Supervisory Boards
There have been no changes within the Management Board
in 2011.
Management
Board
As of May 15, 2011, Bernard Bourigeaud retired from the
Supervisory Board. On May 16, 2011, the Annual General
Meeting elected Johanna Hey as a new member of the Supervisory Board and reappointed all other members of the
Supervisory Board for four years. Further, as of October 18,
2011, Krish Prabhu stepped down from his office as Vice
Chairman and as a member of the Supervisory Board. The
Supervisory Board thanks Bernard Bourigeaud and Krish
Prabhu for their valued contribution.
In its March 21, 2011 meeting, the Supervisory Board extended the appointment of Christoph Glingener and Christian Unterberger as members of the Management Board until December 31, 2012, and in its July 19, 2011 meeting it
extended the respective appointment of Brian Protiva and
Jaswir Singh until the same date. Corresponding individual
provisions were agreed to in writing.
The Supervisory Board would like to express its appreciation of the personal dedication, performance and the ongoing commitment of the Management Board and all employees of the Company and the Group during 2011.
Supervisory
Board
Corporate
Governance
Stock
February 21, 2012
Investor
Relations
On behalf of the Supervisory Board:
Business
Overview
Anthony Maher
Chairman of the Supervisory Board
Management
Report
Financial
Statements
Additional
Information
27
Corporate Governance Report
Innovation
Trusted Partner: Building the Future Together
Untold Possibilities
We believe the networks that we are building today will radically alter the way future
In an online world there are no boundaries, there are no limits. Our networks are built
generations work, play and communicate. Only through collaboration can we build this
to ensure you can access online content where, when and how our customers want.
network. Our strategic partnership with Juniper Networks sees a united vision for a
To us, it’s all about simplicity. A simplicity based on the evolution of packet backhaul
next-generation packet transport infrastructure that can scale to meet any bandwidth
to a common infrastructure for mobile backhaul, business services and wholesale
demand while at the same time removing cost and complexity from the network.
demands. Convergence has finally arrived. Introducing the new FSP 150EG-X edge
gateway.
28
Corporate Governance Philosophy
Good corporate governance is highly valued at ADVA Optical Networking. The recommendations of the German Corporate Governance Code in its latest version have been largely
implemented within the ADVA Optical Networking Group.
Minor deviations from these recommendations are explained
in detail in the declaration of compliance and typically result from practical considerations based on circumstances
within the Company. The most recent declaration of compliance as well as earlier declarations are available on ADVA
Optical Networking’s website for review by shareholders and
other interested parties.
Welcome
ADVA Optical Networking believes it is important to inform
all relevant and interested parties of developments within
the Group in a fair and comprehensive manner and to comply
with the highest transparency and publication standards so
that the Company can establish a solid foundation of trust.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
29
›› Declaration of Compliance
Declaration of Compliance
On December 15, 2011, the Management Board and the
Supervisory Board of ADVA Optical Networking issued the
following declaration of compliance for the German Corporate Governance Code (“Code”) pursuant to section 161 of
the German Stock Corporation Law (Aktiengesetz, AktG), including explanations of the deviations:
“For the period from December 16, 2010 (publication date of
the previous declaration of compliance) this declaration relates to the latest version of the Code as amended on May 26,
2010 and published on July 2, 2010 in the Electronic Federal
Gazette (“Elektronischer Bundesanzeiger”). Except for the
deviations listed below, ADVA AG Optical Networking (“ADVA
Optical Networking”) has complied, and will continue to comply, with all recommendations of the Code:
Sending of documents for the invitation and
convening of the Annual Shareholders’ Meeting
ADVA Optical Networking shall send notification of the convening of the Annual Shareholders’ Meeting together with
supporting documents to all domestic and foreign financial
services providers, shareholders and shareholders’ associations by electronic means, provided that respective approval
requirements are fulfilled (see section 2.3.2 of the Code).
As the Company has issued bearer shares, ADVA Optical
Networking is not able to communicate with its shareholders directly, but only via depository banks. In order to comply with all legal requirements, in cases where the Company
is not able to clarify the above-mentioned approval requirements, for notifications in accordance with section 125 AktG
the Company continues to distribute via physical mail. In addition, the Company publishes the invitation and convening
documents on its website.
30
Deductible for D & O Insurance
ADVA Optical Networking has taken out a D & O (directors’
and officers’ liability insurance) policy which historically has
not contained a deductible for the members of the Management Board and the Supervisory Board. This policy contains
a deductible for members of the Management Board, but not
for members of the Supervisory Board (see section 3.8 paragraph 3 of the Code). ADVA Optical Networking does not believe that such a deductible enhances the motivation and the
sense of responsibility of the members of the Supervisory
Board in carrying out their duties.
Management Board compensation and
annual financial statements
The stock options issued to members of the Management
Board as part of their compensation are only related to the
share price, not to demanding, relevant comparison parameters (see section 4.2.3 paragraph 3 of the Code). In ADVA
Optical Networking’s opinion, basing share-based variable
compensation on such comparison parameters may result
in reduced transparency.
Welcome
Supervisory Board
ADVA Optical Networking does not require that the Chairman of the Supervisory Board shall chair the Committee
that handles contracts with the members of the Management Board (see section 5.2 paragraph 2 of the Code),
although this is currently the case. ADVA Optical Networking
prefers to maintain flexibility regarding the appointment of
the Chairman of the Committee that handles contracts with
the members of the Management Board.
In addition, ADVA Optical Networking’s Supervisory Board
handles any issues of compliance directly and has not delegated this task to the Audit Committee (see section 5.3.2
of the Code). It is ADVA Optical Networking’s view that
due to the importance of compliance matters, all members
of the Supervisory Board should be involved in handling
respective issues.
Moreover, ADVA Optical Networking specifies an age limit
for the members of the Management Board, but not for the
members of the Supervisory Board (see section 5.4.1 of
the Code). In ADVA Optical Networking’s opinion, suitability
to serve as a member of the Supervisory Board should not
depend on the candidate’s age.
Management
Board
Supervisory
Board
The resolution on the remuneration of the Supervisory Board
(see section 5.4.6. of the Code) in general does not treat
chairmanship and membership in Committees. In ADVA
Optical Networking’s view, only chairmanship in the Audit
Committee drives significantly higher workload and should
therefore be remunerated separately.”
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
31
The ADVA Optical Networking Stock
Innovation
More with Less
32
The demand for bandwidth is unlimited – the supply of real estate, rack space and
power is not. Crowded data centers in metro areas are facing relentless pressure to
answer this fierce bandwidth growth with existing equipment. Disruptive technology is
needed if you’re to do more with less. Our customers need better spectral efficiency
at lower costs, with smaller footprints and significantly reduced power consumption.
It’s time for the 100G metro.
Disappointing
share price development in 2011
High free float
The price of ADVA Optical Networking’s share decreased in
2011 from EUR 5.86 on December 31, 2010, to EUR 3.62 on
December 31, 2011. This represents a decline of EUR 2.24,
or 38.2%. In an overall depressed market the share underperformed the broad Nasdaq Composite Index (-2%) and the
TecDAX (-21%), the average for major technology stocks in
the Frankfurt Stock Exchange’s Prime Standard segment.
The Company’s share price also underperformed a portfolio
of telecommunications equipment stocks 1 (-28%).
Stock Information 2
Welcome
Trade name
ISIN DE0005103006 /
WKN 510300
Symbol
ADV
Exchange
Prime Standard Segment,
TecDAX
Management
Board
Supervisory
Board
Frankfurt Stock Exchange
As of December 31, 2011, the Company’s nominal share capital totaled EUR 47,524,875, an increase of EUR 355,739 since
December 31, 2010. The higher share capital is attributable
to the issuance of 244,339 ordinary shares related to capital increases from conditional capital following the exercise
of employee stock options and to the issuance of 111,400
ordinary shares related to capital increases from authorized
capital following the exercise of employee option bonds, both
throughout 2011. As for the shareholder structure of ADVA
Optical Networking, at the end of 2011 free float equaled
81.8%, including 1.6% of outstanding ADVA Optical Networking stock held directly by members of the Management and
Supervisory Boards, while the Company’s sole major shareholder EGORA Group held the remaining 18.2%. Compared
to the end of 2010, free float increased by 0.2% points. During the year the Company did not utilize the share buyback
authorized at the Annual Shareholders’ Meeting in June 2010.
Sector
Technology
Industry
Communications Technology
Number of shares
outstanding
at year-end 2011
47,524,875
2011 high / low price
EUR 3.08 / EUR 7.76
2011 year-end price
EUR 3.62
2011 year-end
market capitalization
EUR 172.0 million
2010 year-end price
EUR 5.86
2011 share price
performance
-38.2%
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
1
Companies included in this portfolio are: Adtran, Brocade, Ciena, Infinera
and Tellabs.
2
Additional
Information
Price information is based on Xetra closing prices.
33
› Shareholder Structure
› Price Development 2011
Shareholder Structure
2010 year end
2011 year end
18.4%
81.6%
18.2%
81.8%
Shares outstanding
Significant
negative returns
for global equity
markets
34
47,169,136
47,524,875
• Free float
• EGORA Group
Global equity markets posted significant negative returns
in 2011. On a local currency basis the MSCI World Index
declined by 9% in 2011 compared to an increase of 10%
in the prior year. The year saw most of the European and
Asian indices recording double-digit losses as a result of
the EUR zone crisis and global economic growth uncertainties. While the S & P500 index in the U.S. managed to
end 2011 at levels from a year earlier, the Euro Stoxx 50
decreased by 17% in 2011. Europe’s sovereign debt crisis impacted all major continental European equity markets in 2011, from Greece and Italy to France and Germany, which all posted negative 2011 MSCI index returns of
-62%, -23%, -17% and -17%, respectively. The United Kingdom’s equity markets declined too, with the FTSE 100 Index
down 6% for the year. Japan, in a year rocked by natural disasters with an already struggling YEN, saw its stock market decline significantly as well, with the Nikkei 225 down by
18%. Emerging markets were also substantially impacted by
the 2011 slowdown. The MSCI Emerging Markets Index was
down 16% on a local currency basis. Indonesia and South
Africa were the only emerging markets with positive returns for equities (MSCI Indonesia Index: +5%, MSCI South
Africa Index: +1%), while the Egypt and Indian markets
performed the worst (MSCI Egypt Index: -47%, MSCI India
Index: -26%).
In general, technology stocks even tended to underperform
the overall market. The Nasdaq Composite and the German
TecDAX indices closed the year down 2% and 21%, respectively, reflecting the significant overall performance differences of the U.S. and the European stock markets.
Technology stocks
even underperformed the
overall market
In 2011, ADVA Optical Networking’s share price performance at -38.2% was disappointing and in sharp contrast
to the strong positive performance in the years before (2010:
+132%; 2009: +128%).
ADVA Optical
Networking’s share
price performance
was disappointing in 2011
From its 2010 year-end level of EUR 5.86, the Company’s
share price initially continued to increase, and, as economic
momentum seemed to firm up, reached its highest level of
EUR 7.76 on February 15, 2011.
Following the release of ADVA Optical Networking’s Q4 2010
results on February 24 in line with guidance, share price levels dropped to levels of around EUR 6.00, due to lower profitability guidance for Q1 2011 than originally anticipated by
the market and some general market softness driven by the
consequences of the natural disasters in Japan.
The release of ADVA Optical Networking’s Q1 and Q2 2011
results on April 20 and July 21, respectively, resulted in further negative share price adjustments. Although the Company reported its quarterly results in line or slightly above
guidance in both instances, market expectations on actual
results (in the case of the Q1 release) or guidance for the
next quarter (in the case of Q2 release) were not met. Furthermore, the cut of the U.S.’s S & P credit rating from AAA
to AA+ on August 5, growing concerns related to the spread
of the EUR debt crisis and increasing downside risks to the
global economy sent stocks down across industries with further negative implications for the Company’s share price. Until September, ADVA Optical Networking’s stock decreased
to levels of below EUR 3.50 and dropped to its low for the
year of EUR 3.08 on September 22, representing a 60% decline from the year’s high in mid-February.
The release of ADVA Optical Networking’s results for Q3 2011
on October 20 made the Company’s share price increase
again to levels of EUR 4.50 in mid-November. ADVA Optical
Networking ended 2011 with a share price of EUR 3.62 and
a market valuation of EUR 172.0 million, with the decrease
between mid-November and year-end related to further increasing fears over the future of the EUR zone.
While average daily trading volumes on Xetra by tendency
continued to improve nicely to 458 thousand shares in
H1 2011 (+78% compared to H2 2010 at 258 thousand),
they came back to 276 thousand in H2 2011, related to lower
general trading activity in light of the increasing macro-economic challenges.
ADVA Optical
Networking’s
valuation is low
when compared
to industry peer
group companies
Price Development 2011 in Comparison
(in %, indexed)
Welcome
140
140
120
120
100
100
80
80
60
60
40
Jan. Feb. Mar. Apr. May
Jun. Jul.
• ADVA Optical Networking
• TecDAX
Aug. Sep. Oct. Nov. Dec.
Management
Board
Supervisory
Board
Corporate
Governance
40
• Peer group
• Nasdaq Composite
*
Stock
* Peer group data are calculated with the arithmetic average of Adtran,
Brocade, Ciena, Infinera and Tellabs stock prices.
Investor
Relations
Compared to other listed telecommunication equipment peer
group companies at year-end 2011, ADVA Optical Networking held an aggregate valuation at the lower end of the spectrum. Currently, as of February 14, 2012, ADVA Optical Networking has reached a market capitalization of EUR 195.3
million at a share price of EUR 4.11, above year-end 2011
levels. The valuation gap vis-à-vis the Company’s peer group
shows a significant discount on the basis of the enterprise
value / sales and enterprise value / operating profit ratios for
2012. ADVA Optical Networking believes that continued successful operating performance and growth will be reflected
in more appropriate valuation levels going forward.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
35
Investor Relations Review and Financial Calendar
Speed for Customers
Fractions of a Second Make all the Difference
As technology advances, faster networks drive revenues. In this environment, low latency
optical transport is the ultimate competitive edge for our customers. CFN Services is a
provider of high-performance network and application solutions to sophisticated global
financial market companies and network operators. When building its new route from
New York City to Washington D.C. they knew there was only one technology The FSP 3000.
36
Key determining factors for ADVA Optical Networking’s
investor relations focus in 2011 were:
Welcome
• Ongoing market growth, solid revenue growth and increasing profitability
Management
Board
• Financial strength and operational flexibility
• Expansion of the addressable market into WDM long-haul
and mobile backhauling opportunities
Investor relations
activities increased
significantly
In a volatile macro-economic environment driven by excess
government debt in many countries, financial community interest in learning about ADVA Optical Networking has further
increased in 2011, due to the overall growth prospects of the
Company’s market, solid revenue growth and rising profitability. ADVA Optical Networking significantly increased its
investor relations activities in 2011. The Company completed
a total of 21 roadshows (2010: 26) in London, Frankfurt am
Main, New York, Baltimore, Boston, Edinburgh, Geneva, Helsinki, Los Angeles, Milan, Munich, Paris, Philadelphia, Princeton, San Francisco, Stockholm, Vienna and Zurich, held more
than 220 one-on-one meetings (2010: more than 170), and
participated in a total of 13 investor conferences (2010: six).
Of these, seven were cross-sector conferences and six were
technology-focused events; all of these conferences targeted
institutional investors. These events were hosted by Berenberg Bank, Cheuvreux, Close Brothers Seydler Bank, Commerzbank, Credit Suisse, Deutsche Bank, Handelsbanken,
Jefferies, JPMorgan, LBBW and UniCredit.
Supervisory
Board
ADVA Optical Networking hosted its annual Analyst and Investor Day in September 2011 in Martinsried / Munich with
all four members of the Management Board present. In addition, with a total of 33 press releases, four ad hoc releases,
quarterly reports and regular conference calls, the financial
community was kept informed about any significant developments within ADVA Optical Networking. Further, throughout the year, the Company continued to provide comprehensive and up-to-date information relevant to the financial
community on the investor relations pages of its website at
www.advaoptical.com, including full transcripts of archived
conference calls.
Annual Analyst
and Investor
Day held
Corporate
Governance
Stock
Investor
Relations
At the end of 2011, eight financial analysts (end of 2010:
six) provided research coverage of ADVA Optical Networking’s stock.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
37
›› Financial Analyst Coverage
›› Financial Calendar
›› Investor Relations Contact
Financial Analyst Coverage
(as of December 31, 2011)
38
Institution
Financial Analyst Name
Location
Arete Research Services
Alban Cousin
London, United Kingdom
Berenberg Bank
Zhancheng Li
London, United Kingdom
Close Brothers Seydler Research
Veysel Taze
Frankfurt am Main, Germany
Deutsche Bank
Benjamin Kohnke
Frankfurt am Main, Germany
DZ Bank
Oliver Finger
Frankfurt am Main, Germany
Hauck & Aufhaeuser
Tim Wunderlich
Hamburg, Germany
Silvia Quandt Bank
Jacques Abramowicz
Frankfurt am Main, Germany
WestLB
Thomas Langer
Dusseldorf, Germany
Sustained increase
of trading liquidity
Despite the volatile macro-economic environment, the overall growth prospects of the Company’s market, solid revenue
growth and rising profitability, combined with the expansion
of ADVA Optical Networking’s investor relations activities
and a continuously high free float of between 81% and 82%
throughout the year, have led to a sustained increase of trading liquidity in the Company’s shares in 2011 compared to
the prior year. The average daily Xetra trading volume grew
to 366 thousand shares during 2011, up 22% from 299 thousand shares during the prior year.
Successful
Annual Shareholders’ Meeting
The Annual Shareholders’ Meeting took place on May 16,
2011, in Meiningen, Germany. Except for the creation of additional authorized capital with a possible exclusion of subscription rights, all items on the agenda were approved by
a majority, including the creation of additional conditional
capital. Further items implemented at the Shareholders’
Meeting that day were the election of Johanna Hey as a new
member of the Supervisory Board, the variable remuneration of the Supervisory Board for 2010 as well as the appointment of Price Waterhouse Coopers Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft as the auditors for the 2011
financial results.
Capital market communication in Germany is based on a
broad range of frequently amended legal provisions, as for
example enacted in the German Stock Corporation Law
(Aktiengesetz, AktG) or the German Securities Trading Law
(Wertpapier-Handelsgesetz, WpHG). As a Prime Standard
company on the Frankfurt Stock Exchange, ADVA Optical
Networking has continuously met the highest standards for
open and transparent communication since its initial public offering in 1999. Therefore, the Company welcomes all
regulations that provide enhanced standards of transparency
and publication for shareholders. Compliance and implementation of these regulations, as with the German Corporate
Governance Code, is continuously supervised by ADVA Optical Networking’s legal department.
Meeting the
highest standards
of open and
transparent capital
market communication is a key
priority for ADVA
Optical Networking
Financial Calendar
Publication of
Three-Month Report 2012
Annual Shareholders’
Meeting
Publication of
Six-Month Report 2012
Publication of
Nine-Month Report 2012
Investor Relations Contact
April 24, 2012
Martinsried / Munich,
Germany
May 24, 2012
Meiningen,
Germany
July 19, 2012
Martinsried / Munich,
Germany
October 23, 2012
Martinsried / Munich,
Germany
Welcome
Wolfgang Guessgen
Management
Board
Vice President
Investor Relations & Treasury
t +49 89 89 06 65 940
[email protected]
Supervisory
Board
Karin Tovar
Corporate
Governance
Manager
Investor Relations
t +1 201 940 7212
[email protected]
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
39
Business Overview
› Mission
41
› Technology
41
› Market and Growth Drivers
41
› Products
45
› Sales Regions and Customers
48
› Sales and Marketing
50
› Operations
52
› Product Engineering
54
› Quality Management
56
Speed for Customers
Simplicity Is Key
40
As service providers continue to respond to difficult economic conditions and an
increasingly competitive marketplace, they need to ensure their networks can
deliver the bandwidth and performance they need. To do this, simplicity is key.
Romtelecom shares our vision and used our FSP 3000 to build a unified network
with international reach. One platform, one solution, endless possibilities –
The FSP 3000.
Mission
Trusted supplier
of next-generation
data transport
solutions
ADVA Optical Networking enables next-generation networks.
The Company’s mission is to be the trusted partner for innovative Optical+Ethernet transport solutions that ADVANCE
next-generation networks for data, storage, voice and video
services.
Technology
ADVA Optical Networking develops, manufactures and
sells transport solutions for next-generation telecommunication networks. The Company’s products are based on
fiber-optic technology combined with Ethernet functionality
(Optical+Ethernet) and intelligent software.
Multiplication of
fiber capacity with
Wavelength Division Multiplexing
technology (WDM)
Optical
Fiber is the optimum physical medium to transmit large
amounts of data over long distances. The bandwidth-overdistance capabilities of fiber by far exceed those of any other
medium such as copper or wireless technologies. Therefore,
fiber-optic transport is the unchallenged foundation for all
high-speed networks. ADVA Optical Networking’s optical
transmission solutions are based on Wavelength Division
Multiplexing (WDM) technology. With WDM, multiple data
streams are transmitted simultaneously over one single optical fiber by assigning each stream to a different wavelength.
Every wavelength (up to 160 in total) can carry a different
application such as voice, video, data or storage traffic. Combining (i.e., multiplexing) these wavelengths at one end of
the fiber, transmitting them over distance and then separating (i.e., de-multiplexing) them at the far end multiplies the
capacity of fiber and makes transmission more efficient.
WDM supports all data protocols and transmission speeds,
and it is a natural foundation for all high-capacity networks.
Ethernet
Ethernet is the dominant data-link protocol for today’s networks supporting a multitude of communication applications.
ADVA Optical Networking provides Ethernet-optimized transmission solutions for fiber- or copper-based lines used to
provide access for enterprises into a carrier’s network. Also,
Ethernet is one of the key protocols used to carry applications in high-speed optical networks for access traffic backhaul and the interconnection of routers (see “Optical” above).
Automated Optical+Ethernet
The combination of fiber-optic transmission technology and
Ethernet-optimized data processing (Optical+Ethernet) is
an ideal solution to deliver high-speed connectivity for data,
storage, voice and video applications. Network operation is
automated by an intelligent management software suite,
which enhances the end-user experience and simplifies network operations.
Welcome
Ethernet is the
dominant data-link
protocol for advanced networks
Management
Board
Supervisory
Board
Optical+Ethernet
and intelligent
software =
foundation for
high-speed
networks
Corporate
Governance
Stock
ADVA Optical Networking creates Optical+Ethernet solutions
from inception through to manufacture and into service. The
following paragraphs describe important market dynamics
that drive growth for the Company’s business.
Investor
Relations
Market and Growth Drivers
ADVA Optical Networking’s market encompasses data networking solutions based on optical WDM technology and
Ethernet-optimized transport and aggregation technology.
Within this market, the Company covers three areas with
distinct and largely independent growth drivers: carrier infrastructure, Carrier Ethernet access and dedicated enterprise networks.
With innovative products, ADVA Optical Networking enables
carriers and enterprises to deliver intelligent services, simplify their networks and scale their infrastructure for future
Business
Overview
Growth is driven
by three market
areas largely
independent from
one another
Management
Report
Financial
Statements
Innovative
products add
value to and
remove cost from
customer networks
Additional
Information
41
›› Market and Growth Drivers
growth. The Company’s market-leading approach to combining Optical+Ethernet technologies with intelligent software
into one integrated family of products provides a compelling
value proposition to network operators looking for greater
service assurance, automated operation and expanded flexibility for a variety of services and topologies. Moreover,
customers benefit from ADVA Optical Networking’s powerful software and service-provisioning features that manage
and control the entire network with lower costs and higher
quality of service.
Social media
applications drive
bandwidth demand
Carrier Infrastructure
The largest driver for growth in the carrier infrastructure
area of the market is the demand by private and business
users for social media applications.
Across the globe, this bandwidth demand is creating a surge
in network traffic. Residential users demand faster access
to the ever-increasing wealth of information on the Internet.
In addition they want broadband connectivity to exchange
digital images, watch videos or participate in online games
and other bandwidth-intensive peer-to-peer applications.
Video services (including video-on-demand, Internet television and video file sharing) are the most popular applications in the residential market. This demand for high-quality video is forcing carriers to rapidly scale their networks
to provision for intelligent triple play services (data, voice
and video) and future growth. Business users have started
to embrace cloud computing offerings, requiring reliable,
high-speed connectivity to their application hosting servers
across a high-performance carrier infrastructure.
A network upgrade for triple play services is not without
challenges. Carriers have started to deliver bandwidth in the
range of several Mbit/s per household, aiming for 1Gbit/s in
the near future. This is more than a factor of 10,000 higher
than the bandwidth required for a traditional phone service
and multiplies with the number of subscribers. Hence, at a
network node that serves 100 households, which all subscribe
42
to the new service, the carrier needs to handle 1,000,000
times the bandwidth.
There are several ways for service providers to deliver broadband connectivity to their customers. Traditional telecommunications companies often rely on Digital Subscriber Line
(DSL) technology to increase the capacity of their phone
lines, i.e., twisted pairs of copper wires, which are typically
available to every household. Coax cables are a good alternative, typically owned by cable TV companies that are expanding their offerings to become Multiple Service Operators
(MSOs). New initiatives for Fiber-To-The-Home (FTTH) or Fiber-To-The-Building (FTTB) are rolling out, providing the ultimate bandwidth pipe. And last but not least there are wireless technologies available, most well-known in the form of
the Universal Mobile Telecommunications System (UMTS) –
often referred to as third generation (3G) mobile technologies – and the emerging fourth generation (4G) mostly in the
form of Long Term Evolution (LTE) standards, which all provide higher bandwidth per end user than legacy technology.
Carriers use a
wide range
of access
technologies
For carriers, the challenge is to provide good connectivity to
as many customers as possible at the lowest possible cost.
That means making good use of existing infrastructure, especially in the last mile, and intelligent investment in new
technology to support growth and emerging applications. The
trend toward flat-rate based pricing models, the rising cost
of labor and other resources as well as the dramatic increase
of end-user bandwidth require new and more powerful network concepts. The underlying network infrastructure needs
to scale by many orders of magnitude and be simpler to operate, pushing fiber optic transmission technology closer to
the end customer and making it the only viable choice for
the backhaul and core of the network.
ADVA Optical Networking helps carriers to simplify their
networks and build a scalable network infrastructure that is
future-proof. With the Company’s Optical+Ethernet product
solutions carriers can combine various traffic streams from
ADVA Optical Networking provides a
unified access and
backhaul solution
for residential and
business services
different access technologies onto a single transport platform. Backhaul for copper, coax, fiber and wireless access
technologies on a single platform eliminates the costly operation of parallel systems. In addition, ADVA Optical Networking offers one of the most scalable platforms in the market,
allowing seamless transport from the customer premise to
the core of the network. Thus, carriers can bypass some of
the small access nodes, eliminating the expense of operating these locations.
More bandwidth to
more customers
from fewer
network sites
using less energy
Enterprises and
mobile operators
seek connectivity
based on Ethernet
Mobile operators
benefit from dataoptimized highspeed backhauling
The ability to deliver more bandwidth to more customers
from fewer sites that are located farther back in the network
enables operators to streamline their networks while simultaneously improving the end-user experience. Energy-hungry devices, which are needed for data processing, can be
concentrated in fewer network locations, leading to a network architecture that is more energy-efficient and easier
to operate.
Carrier Ethernet Access
The key driver for growth in the Carrier Ethernet access
area of ADVA Optical Networking’s market is the migration
from legacy technologies such as Synchronous Optical Network / Synchronous Digital Hierarchy (SONET/SDH), A synchronous Transfer Mode (ATM) and Frame Relay to intelligent
and unified Ethernet-based transport and services, fueled
by increased bandwidth demand from mobile data users and
enterprises connected via fixed-line technology.
The success of high-speed mobile devices and services for
private and business use has created a big opportunity for
mobile operators – but also a challenge for their networks.
To launch and support these new data services operators
had to upgrade their mobile base stations to 3G and are now
migrating to 4G technology. While both 3G and 4G technologies allow the delivery of more bandwidth over an air interface to the mobile device, operators also need to solve
the backhaul challenge from the base station to the network. Traditional backhaul was done via SONET/SDH leased
lines or radio links. Higher-speed backhaul needs to be dataoptimized, and Carrier Ethernet is the best choice for both –
fixed line and radio links – to increase the data throughput
without increasing the cost for backhaul at the same scale.
Welcome
The drive for bandwidth is also reflected in the enterprise
market where corporations seek high-speed connectivity between their geographically dispersed locations in order to
exchange and store data more efficiently. Enterprises typically have two options when it comes to interconnecting their
sites: they can build and operate a private network or rely
on a managed service provider to give them the connectivity they need. Unlike residential customers, enterprises not
only demand high bandwidth, but also have stringent requirements regarding quality of service, network performance
and availability. Service providers can charge a premium
for these attributes but need to back their service offerings
with service level agreements.
Enterprises want
bandwidth, quality
and performance
Most enterprise networks today are based on Ethernet technology, which has established itself as the dominant data protocol for Local Area Networks (LAN). Ethernet was originally
developed as a fair-access, open and ubiquitous connectivity
protocol to interconnect computers within a single organization. The priorities here were low cost, ease of connecting/
disconnecting from the network, fair allocation of best-effort bandwidth among all users and automatic discovery of
resources on the network. The simplicity of the protocol,
its close relation to the Internet Protocol (IP) and its adaptability to new IP-based technologies has driven Ethernet’s
popularity in the enterprise market to the point where it is
almost universally deployed. This popularity has driven volumes and reduced the cost of the basic technology blocks
to very low levels.
Ethernet: from
corporate Local
Area Networks to
carrier networks
The use of Ethernet in carrier networks requires modifications to some of these concepts since carriers are in the
business of serving a wide range of customers from a common infrastructure platform. Carrier private services need
ADVA Optical
Networking is the
market leader for
Carrier Ethernet
access devices
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
43
›› Market and Growth Drivers
›› Products
to offer high security from intrusion or leakage of traffic between customers, isolation of faults on a customer’s service from affecting others, access controls to ensure customers receive the service they paid for, quality of service
guarantees and service level agreements. ADVA Optical
Networking has built a market-leading position in Carrier
Ethernet access devices, enabling carriers to deliver intelligent
Ethernet services over any physical media, including fiber
and copper. ADVA Optical Networking’s unique Etherjack™
demarcation software provides unparalleled service assurance and Operations, Administration, Maintenance & Provisioning (OAM & P) capabilities that enable carriers to guarantee highest quality of service to their end users.
The strong popularity of Ethernet among enterprise users,
the increasing demand from mobile operators for Ethernetbased connectivity to their base stations and the rapidly
growing acceptance of Carrier Ethernet, combined with the
typically lower cost of maintaining an Ethernet-based access
network compared to running an access network based on
legacy protocols such as Frame Relay and ATM have paved
the way for Carrier Ethernet to replace these incumbent technologies in the foreseeable future.
Losing data is
a threat to all
companies
Geographically
dispersed storage networks
provide maximum
protection
44
Enterprise Networks
The key driver for growth in the enterprise network area of
the market is the increasing need by enterprises to have a
more reliable and efficient IT infrastructure that protects
them against data loss. Loss of mission-critical data is, for
many companies, a highly threatening scenario that could
destroy or severely impact their business. In addition, more
and more business transactions depend on the availability of
electronic platforms. Application downtime results in revenue
losses, idle staff and damaged reputation for an enterprise.
While Ethernet services can solve the problem of high-bandwidth connectivity for corporate LANs between sites, enterprise CIOs are also increasingly concerned about the cost,
security and availability of their business data. As a result,
many large companies or research and education institutions
are building their own private networks to provide greater
control. In addition, financial institutions, insurance firms
and other Fortune 1000 companies are generating missioncritical data at a rapid pace. Losing any data, not just mission-critical, puts an organization’s future at risk, and application downtime is costly. These concerns are reinforced by
regulatory demands such as Basel II/III and Sarbanes-Oxley legislation, ensuring that corporate attention will continue
to be focused on data storage management. While Storage
Area Networks (SANs) improve local corporate resource utilization and enable efficient management of rapidly-growing
amounts of data at one particular site, a higher number of
enterprises are seeking more comprehensive approaches to
their data center management. Consolidation of storage resources to a number of different locations is the next step
in storage management: enterprises achieve previously unknown levels of data availability and improve their cost and
productivity positions, thanks to a geographically dispersed
SAN setup. Optical WDM is the pre-eminent connectivity
solution for enterprises wanting to implement high-performance distributed storage solutions that meet their needs
for business continuity and data availability.
As more and more business transactions depend on the availability of electronic platforms, an increasing number of industries (e.g., the health care and educational sectors) have
found it economical to deploy private enterprise networks.
The emergence of mega data centers and new concepts for
utility computing, cloud computing and server virtualization
require more and improved high-speed transport networks.
All these trends are enlarging the size of ADVA Optical Networking’s target market.
Private enterprise
networks and
cloud computing
concepts require
high-speed transport networks
Products
Optical+Ethernet
= intelligence,
simplicity,
scalability
WDM provides
maximum
scalability
ADVA Optical
Networking’s innovative products
reduce complexity and costs
and increase the
scalability of transmission networks
Portfolio expansion
with differentiated 100Gbit/s
solutions
ADVA Optical Networking’s portfolio strategy is built on a
foundation of innovative Optical+Ethernet solutions that combine the strengths of the two core technologies with intelligent software into one unified family of products called the
Fiber Service Platform (FSP). The Company uses this strategy to be the trusted partner in the Optical+Ethernet market space, delivering next-generation transport solutions with
intelligence, simplicity and scale, ultimately increasing the
customers’ service revenue potential and decreasing their
total cost of ownership.
The optical expertise of ADVA Optical Networking is built on a
core of WDM technology and is represented in the FSP 3000
platform. This technology enables the simultaneous transmission of independent applications across a common fiber
infrastructure. By using separate wavelengths for different
data streams, WDM multiplies the capacity of fiber cables.
Network operators can leverage their existing fiber infrastructure for new applications and do more with fewer fibers
to accommodate bandwidth growth. The FSP 3000 platform
can aggregate, extend, add, drop or switch traffic based on
the application requirements.
In 2010, ADVA Optical Networking announced an agreement
with Juniper Networks to evaluate the potential for jointly
marketing and selling next-generation IP-based transport
solutions to service providers to help reduce network complexity and costs. Driven by this initiative, first joint customer wins have been reported during 2011. The newly won
customers include service providers, governmental institutions and research & education organizations.
ADVA Optical Networking expanded its WDM portfolio in
2011 with the addition of a coherent express layer to its
FSP 3000 platform. The new technology has been optimized
for 100Gbit/s transmission speed and enables service pro-
viders to use optical network resources flexibly and on-demand. Close interworking with the IP layer enables a massive
increase in network scalability and efficiency. The feature set
represents a new generation of agile optical core networks.
Welcome
Management
Board
Furthermore, ADVA Optical Networking successfully conducted trials of its innovative 100Gbit/s transmission technology in 2011. Unlike other suppliers, ADVA Optical Networking is taking a two-pronged development approach to
the topic of 100Gbit/s transport: one approach is optimized
for high-performance agile core networks, while a second
is optimized for metro networks. This focus on shorter distances enables the reduction of development activities and
risk, and hastens time to market with a solution that is optimized for the Company’s main application space.
ADVA Optical Networking’s Ethernet access solutions have
been a significant part of its product portfolio since 2000,
driven by the increasing demand for Ethernet services with
carrier customers. Carrier Ethernet is in the process of replacing legacy technologies, such as Frame Relay, ATM and
SONET/SDH. ADVA Optical Networking has built a marketleading position in Ethernet access devices, enabling its
customers to deliver intelligent Ethernet services over any
physical media, including fiber and copper. The Company’s
unique Etherjack™ demarcation software provides unparalleled service assurance and OAM & P capabilities that enable
carriers to guarantee highest quality of service to their end
users. The portfolio was expanded with the addition of synchronous Ethernet capability to the FSP 150 family of products and the introduction of Syncjack™ functionality. Delivery of synchronization information is an important capability
for mobile operators when moving from traditional Time
Division Multiplexing (TDM)-based backhaul solutions to dataoptimized Carrier Ethernet backhaul.
Supervisory
Board
Corporate
Governance
Ethernet provides
the intelligence for
innovative services
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
In 2011, ADVA Optical Networking expanded its Carrier Ethernet access solution by adding the FSP 150EG-X edge gateway, which delivers cost-effective capacity, scalability and re-
Additional
Information
45
›› Products
siliency for Carrier Ethernet access and backhaul networks.
The product combines scalability with operational simplicity and enables service providers to migrate toward a universal, Ethernet-centric network architecture below the provider edge.
Service management software
simplifies network
operation
Support services:
plan – build – care
Throughout 2011 ADVA Optical Networking also continued
to develop its FSP Service Manager, an enhanced component
of the FSP management software suite that simplifies the operation of end-to-end Optical+Ethernet networks. While the
Company continues to add flexibility to its hardware platforms, ADVA Optical Networking also ensures that the additional functionality and associated degrees of freedom do
not have a negative impact on the operator’s user experience. The FSP Service Manager allows carriers to provision,
turn up and maintain more services with less operational effort than ever before. They can take full advantage of new
features without being burdened by lengthy and complicated
operational processes.
In addition to hardware and software products, ADVA Optical Networking offers a wide range of support services that
help the Company’s customers to plan, build and care for
their networks.
The major advantages of ADVA Optical Networking’s product
portfolio are best summarized in three main bullets:
• Intelligence
The Company’s Ethernet demarcation, extension and aggregation solutions enable the ubiquitous delivery of intelligent services over any media. The market-leading
Etherjack™ software allows the definition of differentiated
services and provides full end-to-end service assurance.
Syncjack™ provides timing excellence and synchroniza-
46
tion. Optojack™ allows intelligent optical link monitoring in
passive optical network environments. The FSP management software suite provides user-friendly network automation across increasingly complex networks.
• Simplicity
The combination of two core technologies (Optical+Ethernet)
creates a universal transport platform for carrier and enterprise networks leading to simplified network architecture with fewer purpose-built systems. The Company’s
powerful software, including Etherjack™, Syncjack™, RAYcontrol™ and the FSP Service Manager, eliminates the need
for time-consuming manual operation, enabling simplified end-to-end provisioning of any service, anywhere,
anytime.
• Scalability
A flexible array of Reconfigurable Optical Add / Drop Multiplexing (ROADM), Dense WDM (DWDM), Coarse WDM
(CWDM), WDM-Passive Optical Network (PON), optical amplification, service aggregation, synchronization and network management capabilities enables network operators
to converge their transport requirements onto a single
platform that scales from the customer premise to the
core of the network. The scalable architecture minimizes
the total cost of ownership, taking into consideration both
the initial capital investment and the ongoing operating expenses such as the cost for energy consumption.
With its Fiber Service Platform (FSP), ADVA Optical Networking offers a portfolio of Optical+Ethernet networking
products designed to help carriers and enterprise customers build a next-generation infrastructure that reaches from
the customer premise across metropolitan and regional areas to long distance networks. The products are optimized
The Fiber Service
Platform (FSP) –
ADVA Optical Networking’s solution
for next-generation networks
for ease-of-use with simple and smooth installation and setup, areas especially critical in carrier access and enterprise
networks. The FSP service concept includes support in the
planning, set-up and operation of a network throughout its
entire lifecycle.
Ethernet Access
An overview of the FSP product portfolio and its fields of
application demonstrates the broad range of solutions that
ADVA Optical Networking delivers to carrier and enterprise
customers:
Metro
Welcome
Management
Board
Core
Supervisory
Board
Corporate
Governance
Optical Access
Stock
Investor
Relations
Business
Overview
Enterprise
Management
Report
Financial
Statements
Additional
Information
47
›› Sales Regions and Customers
The product portfolio focuses on three major product areas:
The FSP 3000 for scalable optical transport, the FSP 150 for
intelligent Ethernet access and the FSP management software
suite for intelligent network automation. While both hardware
platforms offer their own Optical+Ethernet service functionality, these platforms can be combined together for a fully
integrated end-to-end solution. The FSP management software suite provides seamless end-to-end network operation.
Sales Regions and Customers
Diverse global
customer base
ADVA Optical Networking sells its products to a broad customer base worldwide, either through distribution partners
or its own direct sales force. In 2011 the Company continued to increase its global end-customer base with significant wins with both carriers and enterprise customers
across all regions. The evolution of the product portfolio further strengthened valuable relationships with British Telecom and other large carriers. The strength of ADVA Optical
Networking’s own sales team combined with the strength
of select partnerships with Original Equipment Manufacturers (OEMs) and Value Added Resellers (VARs) allowed the
Company to grow in 2011, despite of a challenging macroeconomic environment. Overall, in 2011 ADVA Optical Networking recorded record revenues of EUR 310.9 million, up
6.6% from EUR 291.7 million in 2010.1 Since ADVA Optical
Networking’s inception in 1994, its solutions have been deployed at more than 250 carriers and 10,000 enterprises.
While enterprise end customers comprised more than twothirds of total revenues several years ago, this ratio has reversed during recent years. The trend toward outsourcing
data services such as Ethernet business services to carriers,
as well as growing infrastructure deployments by communications service providers have driven the development in
ADVA Optical Networking’s business and the entire industry.
The split of total 2011 revenues of EUR 310.9 million is as follows:
• WDM product lines FSP 3000R7, FSP 3000RE and FSP 2000:
EUR 184.1 million,
• Ethernet access product lines FSP 500 and FSP 150: EUR 85.9 million,
and
• other: EUR 40.9 million.
1
48
EMEA
The region comprises Europe, Middle East and Africa.
Employees at year-end 2011: 829 (year-end 2010: 772)
Revenues in 2011: EUR 201.8 million (2010: EUR 183.9 million)
Customers in this region include British Telecom, Cable &
Wireless, COLT, Deutsche Telekom, Eircom, Media Broadcast, RomTelecom, Telecom Italia, Telefónica, Telia Sonera,
Telkom South Africa and enterprise customers from the financial and other verticals. ADVA Optical Networking experienced growing revenues in the EMEA region in 2011, driven
by higher carrier infrastructure business. EMEA continued to
be the Company’s largest sales region in 2011 and will continue to play a prominent role in the future.
Even in this currently uncertain environment, an average
market growth per year of 13% 2 is expected for this region
through 2014. ADVA Optical Networking anticipates that the
WDM market will continue to represent a major driver, as capacity is expanded to meet the rising business and residential
demand for bandwidth in the access, the metro and the core
network. The market for Ethernet access solutions for enterprises also offers significant opportunity, with higher growth
rates than the WDM market. In addition, the Company sees
strong growth impulses through mobile backhaul projects.
The upgrade of mobile networks to 3G and 4G technology
requires more fiber-based Ethernet access solutions in this
space. Given the growth potential for WDM and Ethernet access, ADVA Optical Networking expects further positive development of its business in the EMEA region and strengthening of its market position.
Average annual industry analyst estimates 2010 to 2014 for metro WDM
equipment (“Optical”) and Ethernet access devices (“Ethernet”) relevant
for ADVA Optical Networking. Sources: Infonetics Research Optical Network Hardware, Quarterly Market Share, Size, and Forecasts 2Q11, August
2011, and Infonetics Research Carrier Ethernet Equipment Biannual Market
Share, Size and Forecasts 2nd Edition, November 2011.
2
EMEA is the
largest sales
region and
shows continued
growth potential
Solid revenues in
the Americas in
2011 with positive
outlook for 2012
Americas
The Americas region comprises North America and
South America.
Employees at year-end 2011: 323 (year-end 2010: 308)
Revenues in 2011: EUR 94.5 million (2010: EUR 90.6 million)
Asia-Pacific
The Asia-Pacific region comprises Australia and New Zealand,
Greater China, India, Japan and South East Asia.
Employees at year-end 2011: 152 (year-end 2010: 123)
Revenues in 2011: EUR 14.6 million (2010: EUR 17.2 million)
ADVA Optical Networking saw solid revenue flows in the
Americas in 2011. After very strong growth in 2010 partially driven by non-recurrent enterprise projects, revenues
stabilized at solid levels in 2011. The Company continues
to maintain a broad customer base in this region and was
successful in acquiring new business and accounts in the
Ethernet access space. Also, the carrier infrastructure business was very healthy. Well-established customers from this
region include Cox Communications, Global Crossing, Level(3)
Communications, Telmex, Time Warner Cable, tw telecom and
enterprise customers from the financial and other verticals.
Due to the still relatively narrow customer base in the AsiaPacific region, the development of respective revenues is still
highly volatile. In 2011, ADVA Optical Networking saw decreasing revenues in this region, due to lower carrier infrastructure business and the effect of the earthquake in Japan at the beginning of the year. Customers in this region
include KDDI, NextGen Networks, NTT, PCCW, SingTel, TATA
Communications, Telstra and enterprise customers from the
financial and other verticals.
The Company expects further market growth in the Americas, amounting to an average of 13% 2 per year through 2014.
Sales efforts are focused on servicing both carriers and corporate customers. Key corporate verticals are research and
education organizations, major Internet service providers,
healthcare and financial institutions and federal and municipal
governmental agencies. Growth in this region will be driven
through demand for metro and regional carrier infrastructure deployments, enterprise applications, Ethernet access
solutions for enterprises and mobile backhaul opportunities,
for which ADVA Optical Networking is well-positioned. The
Company expanded its sales efforts in the Americas in 2011
and will continue to invest in this region in 2012.
Welcome
Volatile revenue
development in
Asia-Pacific with
continued growth
expectations
for the upcoming years
Management
Board
Supervisory
Board
Corporate
Governance
The region’s average annual market growth of 13% 2 through
2014 will be primarily driven by increasing managed service opportunities, infrastructure deployments and Ethernet access business. The market conditions present excellent growth opportunities for ADVA Optical Networking and
will be addressed through direct sales business and the further development of sales channel partnerships.
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
49
›› Sales and Marketing
Sales and Marketing
Three-pronged
sales distribution strategy
Sales
ADVA Optical Networking employs a direct-touch and proven
three-pronged sales distribution strategy to maximize customer reach around the world:
• Direct sales,
• Sales through system integrators
(known as Value Added Reseller partners or VARs), and
• Strategic partnerships with
Original Equipment Manufacturers (OEMs).
Direct sales
is particularly
important in the
Ethernet access
market and will be
further expanded
50
Direct Sales
The Company continues to expand its direct-touch initiative
as well as its direct sales force to win new customers. Establishing direct contact with enterprises and carriers enables ADVA Optical Networking to work more closely and to
better understand customers’ specific requirements, which
in turn helps to develop the right products and solutions. A
broad-based direct sales approach is particularly required
to address the evolutionary nature of the Ethernet access
market. The Company increased its sales headcount during
the year in all regions by hiring additional employees. The
expanded sales organization has helped to strengthen the
sales process and to more intensively support strategic OEM
and VAR partners.
VAR Partners
VAR partners market ADVA Optical Networking’s products
primarily under the brand name “ADVA Optical Networking”
or with co-branded products under the name “Powered by
ADVA Optical Networking”. The Company works particularly
closely with its distribution partners to provide planning and
network consulting services for large enterprise and carrier
customers and is intensely focused on developing optimized
customer solutions. Partners typically provide the required
technical support following network installation. ADVA Optical Networking guarantees high-quality support by working proactively to provide in-depth personnel training for its
distribution partners. VAR partners include Dacoso, HewlettPackard, Hitachi Data Systems, IBM, NEC, Sagem Télécommunications and Walker & Associates.
OEM Partners
OEM partners market, sell and support ADVA Optical Networking’s products with extensive software and features integration into their own comprehensive product portfolios.
Main OEM partners are Nokia Siemens Networks (NSN), Fujitsu Network Communications (FNC) and Alcatel-Lucent
(ALU). These channel partners generally have long and deeprooted relationships with incumbent carriers and governmental agencies. They also sell ADVA Optical Networking’s solutions with full integration into their network management
platforms. Some incumbent carrier customers and select
governmental agencies clearly value the OEM relationship
to provide seamless new-product integration.
VAR partners
mostly provide
access to carrier
and large enterprise customers
OEM partners
largely drive sales
into incumbent
carriers
Positioning of
the “ADVA Optical
Networking” brand
Focus on
innovation
leadership
Marketing
Direct-touch efforts are proactively supported by the marketing team to build the ADVA Optical Networking brand and to
expand visibility of the FSP product portfolio. Specific marketing activities include regular participation in tradeshows
and conferences, tactical online advertising, news coverage and bylined articles in trade publications. ADVA Optical Networking conducts customer and partner workshops,
supports co-marketing efforts with its partners and delivers
an electronic customer newsletter. The Company also maintains a dynamic and active online presence, including a blog
and social media outreach. In 2011, ADVA Optical Networking exhibited at the CeBIT tradeshow in Hanover, Germany,
at the Broadband World Forum Europe in Paris, France, and
at Comptel events in the USA. In addition to these major
events, ADVA Optical Networking also participated in numerous smaller shows and organized customer events with
targeted focus. To drive thought leadership, the Company
continued strong relationships with industry trade press
and analysts, delivered presentations at conferences and
launched special event campaigns.
External communication was focused on Optical+Ethernet innovation, one of the key messages in the current “ADVANCE”
marketing campaign. The “ADVANCE” campaign was launched
in 2006, reinforcing the Company’s success as a market and
technology leader. The campaign also underscores ADVA Optical Networking’s drive to help customers accelerate their
transition to next-generation networks.
ADVA Optical Networking’s external marketing activities are
targeted toward carriers that offer high-speed communication services and the enterprise customers that buy them.
The Company continues to lead the industry with advanced
Ethernet access and optical functionality, including softwarebased automation and an increasingly popular service offering. The marketing messages underscore its innovative, industry-leading position in all areas. Messaging supporting
ADVA Optical Networking’s advanced infrastructure for the
access, metro and core network continues to be shared with
the Company’s partners. Together, ADVA Optical Networking and its partners convey a strong value proposition to the
marketplace about the intelligence, simplicity and scalability of the joint product portfolios.
The product
portfolio value
proposition:
intelligence,
simplicity,
scalability
Furthermore, ADVA Optical Networking continues to actively
support marketing alliances with other global communications hardware and software vendors like Brocade, IBM,
Infovista, JDS Uniphase and Juniper Networks. The numerous interoperability tests conducted with partners carry
significant weight, as they demonstrate the compatibility of
the various systems and assure customers that ADVA Optical Networking’s products seamlessly integrate and operate
with the systems of its partners and the customers’ existing IT infrastructures. ADVA Optical Networking’s partners
serve as multipliers for joint marketing programs. This drives
new customer opportunities and strengthens the Company’s sales efforts.
Marketing alliances
with additional
network equipment providers
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Stock
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Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
51
›› Operations
Operations
Four core
functions:
strategic sourcing,
supply chain
management,
manufacturing
engineering,
manufacturing
Focus on highest
quality levels,
short delivery
times and low cost
Strategic sourcing:
worldwide
collaboration with
a consolidated
supplier base,
minimizing
total supply chain
sourcing costs
52
ADVA Optical Networking’s operations activities consist of four
core functions: strategic sourcing, supply chain management,
manufacturing engineering and production. The integration
of these functions with the global sales, R & D and quality
management departments is the foundation for the Company’s proven ability to provide innovative Optical+Ethernet
networking solutions at highest quality levels and product
performance while maintaining short delivery and response
times and the benefit of the lowest total cost of ownership
for the customer. In order to ensure its competitive positioning in the long run, ADVA Optical Networking leverages
the capacities of tier 1 contract manufacturers for standard
board production steps and building Ethernet access devices.
The strategic sourcing team manages sourcing of direct and
indirect materials as well as contract manufacturing. The
team is committed to source worldwide from a consolidated
supplier base and to minimize total supply chain sourcing
costs. Strategic sourcing is deeply engaged in R & D projects
(upstream sourcing) and, by means of a bi-annual negotiation
process, also provides continued cost reductions for all materials used in volume production. Particular focus is paid to
capitalizing on the fierce competition in the innovative market for optical components, on using low-cost suppliers for
mechanical components through a dedicated team residing
in China, and on leveraging the scale of the Company’s tier 1
contract manufacturers to obtain competitive prices for standardized electronic components. Key suppliers are covered
by a state-of-the-art supplier management process consisting of periodic audits and assessments, commodity strategies, supplier classification models, performance scorecards
and quarterly business reviews.
The supply chain management (SCM) team is responsible
for customer order fulfillment, including material and capacity planning, supply of components and shipment of finished goods. Furthermore, the SCM team drives global inventory and supplier management. Integrated SCM ensures
the high-quality and cost-efficient manufacturing of buildto-order, even customer-specific WDM solutions with short
delivery times, as well as the production of off-the-shelf and
medium- and higher-volume Ethernet access solutions. Key
priorities are the seamless execution of the sales & operations planning process and the implementation of advanced
logistic models with the Company’s suppliers. These processes lead to lower in-house inventory and working capital needs and at the same time to higher flexibility and customer service quality.
Supply chain
management:
high-quality and
cost-efficient
customer order
fulfillment
ADVA Optical Networking’s manufacturing engineering team
drives the new product introduction process and provides
technical support for in-house production as well as contract
manufacturing operations. The team works closely with the
Company’s research and development engineers, applies a
commonly approved industrialization process and collaborates with all development sites and manufacturing lines during the entire product lifecycle.
Manufacturing
engineering:
operations
support and
interface between
development and
manufacturing
ADVA Optical Networking has developed a unique and balanced manufac­turing strategy combining the best from both
outsourcing and in-house production. The Company’s target
is to maximize technology adoption, maintain high flexibility
and minimize costs. The center of ADVA Optical Networking’s
internal manufacturing organization is a purpose-built 9,000
square meter facility in Meiningen, Germany. The transparent, glass-walled and award-winning building reflects the
transparent order fulfillment process. This production set-up
provides a convincing answer to the ever-increasing demand
for customized and flexible manufacturing with many shortterm change requests, particularly those in WDM projects.
Compared to fully contracted manufacturing, this approach
ensures a major advantage in this key phase of the customer
Manufacturing:
combination of inhouse production
and outsourcing
order fulfillment process with significantly increased flexibility and drastically shortened lead times for the benefit of
the Company’s customers.
Outsourcing of non-core manufacturing activities to the Company’s tier 1 contract manufacturing suppliers ensures an
efficient and flexible utilization of ADVA Optical Networking’s
own production resources as well as virtually unlimited access to manufacturing capacity. The main outsourcing partners leverage cost advantages for ADVA Optical Networking in low-cost regions such as Eastern Europe and China.
The Company performs sophisticated and capital-intensive
functional testing in-house, especially when it comes to customized complex system assembly, as the related processes
are strategically relevant. ADVA Optical Networking has obtained TL 9000 certification for all its manufacturing facilities.
In 2011, ADVA Optical Networking achieved significant reductions of in-house manufacturing, packaging and freight
costs, driven by a global lean management and process improvement initiative launched in the prior year. In 2012, this
initiative will be extended to encompass the entire supply
chain, thereby decreasing the end-to-end supply network
cost from suppliers to customers. The aim of this initiative
is to capitalize on the Company’s continued growth for accelerated cost reductions by increasing operational effectiveness. The key enabling element is ADVA Optical Networking’s
Company-wide enterprise resource planning system that ensures efficient information flow and reinforces deployment of
uniform and scalable processes across all operations sites.
Significant cost
reductions in
2011, driven by
lean initiative,
capitalizing on
ADVA Optical
Networking’s
continued growth
With a strong customer focus, a flexible global organization
and an efficient cost structure, ADVA Optical Networking has
all prerequisites in place to support further successful development of its business.
Flexible
organization
and efficient
cost structure
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Stock
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Relations
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Overview
Management
Report
Financial
Statements
Additional
Information
53
›› Product Engineering
Product Engineering
Unique organizational set-up,
focus on standardization,
differentiated intellectual property
rights portfolio
ADVA Optical Networking’s product engineering is an agile
organization focused on developing differentiated and automated product solutions that add value through intelligence,
simplicity and scalability. In an ongoing close dialogue with
strategic customers, ADVA Optical Networking identifies opportunities and addresses customer needs accordingly. A
unique organizational set-up covering the complete product
lifecycle from early demonstrators and prototypes over first
realizations and targeted product developments to volume
production, coupled with fast decision making ensures industry leading time-to-market. Together with a commitment
to standardization and the creation of a differentiated intellectual property rights portfolio, this approach is the foundation for ADVA Optical Networking’s market position as a
trusted technology partner. In 2011, ADVA Optical Networking has further scaled the product engineering team by 14%
compared to the end of the prior year to a total of 570 employees, while increasing the team’s overall efficiency. The
team’s growth was driven by the expansion into new market
segments like core connectivity and mobile backhaul as well
as partnership needs and customer proximity.
The product engineering team is structured as follows: product line management (defining product features and product
strategy), advanced technology (identifying future trends,
realizing prototypes and defining the Company’s future technology strategy), product lifecycle management (covering
all aspects relevant for the individual products throughout
their lives), engineering (developing and testing the products) and new product introduction (introducing the products
into manufacturing and ensuring manufacturability and volume ramp). Furthermore, these units break down by product area (WDM, Ethernet access and management software
suite). The key engineering locations are Shenzhen in China,
Berlin and Meiningen in Germany, Oslo in Norway, Gdynia /
Gdansk in Poland and Richardson (Texas), Washington D.C.
54
and Norcross (Georgia) in the U.S. In 2011, new activities
were initiated in Greece and Israel. All product engineering activities are based on globally aligned processes, tools
and common product platforms. Both processes and tools
were further enhanced in 2011, towards maximum agility
and product quality.
New activities in
Greece and Israel,
increased focus
on agility and
market-leading
product quality
In 2011, ADVA Optical Networking further enhanced its product offerings around its two market-leading hardware platforms (FSP 150 and FSP 3000) and its unique management
platform (FSP management software suite). Besides functional improvements to extend technology leadership, the
Company further reduced the amount of stock-keeping units,
in order to minimize operational complexity, and focused on
improving product quality and on achieving cost leadership
for its solutions.
Simplification and
functional enhancement of key
product platforms
FSP 150,
FSP 3000 and
FSP management
software suite
The FSP 3000 scalable optical transport solution covers a
wide range of applications. It is used in private enterprise
networks by a broad range of verticals (e.g., financial, health
care, research & education, utility and media) for applications
such as data center connectivity. Carriers use the FSP 3000
to scale their access, backhaul, metro and core transport
networks. In 2011, this platform was enhanced by the agile
core solution including the world’s first fully flexible optical
switch (Colorless, Directionless, Flexgrid, Contentionless or
CDFC-ROADM). ADVA Optical Networking released further
differentiating solutions during the year, targeting specific
enterprise verticals.
The FSP 150 intelligent Ethernet access solution is targeted
at wholesale, business service and mobile backhaul applications. In 2011, new products (e.g., the FSP 150EG-X) and
enhanced platform versions were launched, substantiating
ADVA Optical Networking’s market leadership. The Company extended the platform’s Ethernet OAM & P functionality (Etherjack™) and enhanced the Company’s unique synchronization suite (Syncjack™) for Ethernet-based mobile
backhaul networks.
For 2012, ADVA Optical Networking targets the launch of
several key features across all product areas as well as the
evolution towards a software-defined product set, and intends to extend its technology, cost and quality leadership.
Focus in 2012:
Welcome
Launch of key
features across
all product areas
Evolution towards
a software-defined
product set
Management
Board
Expansion of technology, cost and
quality leadership
Supervisory
Board
The FSP management software suite covers network and
service management solutions, as well as control plane solutions (RAYcontrol™), enabling market-leading automation
and management functionality. In 2011, this platform was
further enhanced, and ADVA Optical Networking proved its
leadership in highly automated optical solutions through the
enhancement of its industry-leading control plane.
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
55
›› Quality Management
Quality Management
Main goal:
customer
satisfaction
Integration of
quality management in all
activities, from
R & D to post-sales
Strong Net
Promoter Score,
with significant
improvement over
the last two years
Quality management is inherent to all ADVA Optical Networking business processes. The main goal of quality management is to understand and to meet customer requirements.
This is the basis for all research & development, operations
and sales & marketing activities, in order to assure sustainable high quality levels and maximum customer satisfaction.
The focus on quality management is crucial to maintain the
Company’s trusted partner reputation with customers, and
it enables ADVA Optical Networking to become the quality
leader in its marketplace.
An annual customer satisfaction survey of ADVA Optical Networking’s processes, products and services results in comprehensive feedback, which the Company uses as an important basis for continuous improvements. In addition to
revenues and pro forma operating income, customer satisfaction, as measured by this feedback, represents an additional component in determining the variable compensation
for members of the Management Board and the Company’s
second level of management. The quality management department reports directly to the chief executive officer. It
acts as an overarching Group-wide advisory function, helping to uncover and eliminate weaknesses in all areas and
processes within the Company. This results in increasing
customer satisfaction ratings and greater efficiency. For
2011, ADVA Optical Networking’s Net Promoter Score 3 was
at +27%, up 7% points from +20% in 2010 and 12% points
from +15% in 2009.
The Net Promoter Score is obtained by asking customers a single question
on a 0 to 10 rating scale: “How likely is it that you would recommend our
company to a friend or colleague?” Based on their responses, customers
are categorized into one of three groups: promoters (9-10 rating), passives
(7-8 rating), and detractors (0-6 rating). The percentage of detractors is
then subtracted from the percentage of promoters to obtain a Net Promoter
Score.
3
56
Successful quality management starts in product engineering. It is therefore also an integral part to all ADVA Optical
Networking development projects, starting with the product identification phase. The Company systematically analyzes failure rates over all phases of the development and
product origination process, and from there derives corresponding optimization measures. This ensures high quality
standards and product reliability.
With regard to operations activities, supplier quality is an
important quality management component at ADVA Optical
Networking. Periodic evaluation by means of system and process audits and systematic inspection of incoming goods assures compliance with minimum quality requirements and
fosters continued optimization. This is also supported by the
ever increasing involvement of the Company’s suppliers in
the development process.
ADVA Optical Networking applies the staging concept to
prepare its products for customer-specific installation. This
concept is another important contributor to quality assurance. In order to provide maximum reliability, test configurations, settings and critical values are determined specific
to each application.
Finally, ADVA Optical Networking optimizes its global processes, products and services by continuously improving its
data analysis methods and tools across all functional areas.
This ongoing optimization is essential to manage the complexity of the Company’s wide-spread global activities, providing the basis for further growth. With the aim to identify
and optimize cross-functional processes, ADVA Optical Networking has built an “efficiency engine” team as a systematic continuous improvement approach based on Lean Six
Sigma methodologies.
Sustainable
resolutions
create trust
ADVA Optical Networking’s focus on quality management
shows in its successful 2011 repeat certifications in accordance with the renowned telecommunications quality and
general environmental management practices TL 9000 and
ISO 14001.
Successful
TL 9000 and
ISO 14001
repeat certifications in 2011
Welcome
Management
Board
Supervisory
Board
In case of unexpected complaints after service deployment,
ADVA Optical Networking strives to help its customers in quick
and non-bureaucratic ways. The Company assesses the risk
resulting from failures by means of standardized methods.
It then analyzes the failures and their root causes and takes
the appropriate corrective and preventive actions, with the
goal to achieve sustainable resolutions for its customers.
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
57
Group
Management Report
Trusted Partner
Operational Excellence
The enterprise landscape has never been so fierce. In this environment,
an enterprise customer’s network is its competitive edge. It enables the
customer to respond quicker, move faster and compete across a global
market. To ensure a customer’s team and network are performing at
maximum capacity, the enterprise needs to work with partners that
deliver. Openreach understands these demands. Its new enterprise
service – Optical Spectrum Access – is using the FSP 3000.
58
› Forward-Looking Statements
59
› General Economic and Market Conditions
59
› Business Development and
Operational Performance
61
› Net Assets and Financial Position
66
› Share Capital and Shareholder Structure
71
› Restriction of Voting Rights and
Share Transfers
72
› Appointment and Dismissal of
Management Board Members
72
› Changes to Articles of Association
72
› Issuance and Buy-Back of Shares
73
› Takeover Bid-Driven Change of
Control Provisions
73
› Employees and Social Responsibility
74
› Declaration on Corporate Governance
76
› Remuneration of Management and
Supervisory Boards
77
› Environmental Responsibility
78
› Risk Report
79
› Events After the Balance Sheet Date
86
› Outlook
87
Forward-Looking Statements
This Group management report of ADVA AG Optical Networking contains forward-looking statements using words
such as “believes”, “anticipates” and “expects” to describe
expected revenues and earnings, anticipated demand for
optical networking solutions, internal estimates and liquidity. These forward-looking statements involve a number of
unknown risks, uncertainties and other factors that could
cause actual results to differ materially. Unknown risks, uncertainties and other factors are discussed in the “risk report” section further below.
In the following, ADVA AG Optical Networking as a company
is labeled “the Company” or “ADVA AG Optical Networking”,
“ADVA Optical Networking” or “the Group” always refers to
the ADVA Optical Networking Group.
General Economic and Market Conditions
Global economic
growth slowed
down to 3.1%
in 2011
The Global Economy in 2011 1
Overall, global economic growth slowed down in 2011 and
has become more fragile. Global real gross domestic product rose by 3.1% in 2011 after an increase of 3.9% in the
prior year. The reduced growth is mainly due to the unresolved EUR crisis, the reappearance of severe debt market
stress as well as persistently high unemployment and stagnant wages in many high-income nations. The real gross
domestic product of the developing countries rose by 6.3%
(2010: 7.4%), largely due to strong but slowing growth rates
in China (+9.4%, compared to 10.3% in 2010) and India
(+8.1%, compared to 8.6% in 2010). The combined economies of high-income nations grew their real gross domestic
product by a moderate 1.8% in 2011 (2010: 2.5%). Within
this group, the U.S. rose by 2.3% (2010: 2.9%). With significant variations among member countries, the EUR coun1
Source: United Nations Conference for Trade and Development, December
2011. The 2011 numbers are preliminary.
tries rose by an overall 1.8% (2010: 1.7%). Japan declined
by 0.4% (2010: increased by 4.0%), largely driven by the
impact of major supply-chain and energy disruptions due to
the massive earthquake and tsunami which hit the country in
March. The pace of global recovery in 2011 was weaker than
that seen after previous recessions. It slowed dramatically
in H2 2011, as inventory re-building cycles and fiscal stimulus programs have gradually disappeared since mid-2010.
Global Economic Prospects 2
Global real gross domestic product is projected to grow by
2.5% in 2012, less than in 2011. Growth will largely depend
on improved coordination of fiscal stimuli and monetary policies, with a strong focus on employment. At an estimated
1.4%, growth in high-income countries should be below the
global growth rate again for 2012, driven by ongoing sluggish private consumer demand due to high unemployment in
many places. At an estimated real gross domestic product increase of 5.4%, once more it should be the developing countries that drive global economic growth in 2012, though under high capacity utilization and increasing inflationary risks.
With real gross domestic product growth rates of 8.4% and
6.5%, respectively, China and India once more are forecasted
to show the strongest pick-up within the group of major developing countries in 2012.
There are good prospects for global growth in 2013 to remain
at least at 2012 levels, assuming international solidarity and
cooperation with expansionary monetary and fiscal policies
in key countries remain in place. Equally important to 2013
growth are global reflationary measures, declining inflation
and continued strong growth in developing countries.
Market Environment for ADVA Optical Networking
Although moderate, economic growth supported the favorable market environment for communications equipment
suppliers in 2011. Demand for carrier infrastructure and
enterprise networks showed sound growth, while demand
2
Welcome
Management
Board
Supervisory
Board
Slower growth
expected for 2012,
with global economy expanding by
2.5%, provided
that international
solidarity and cooperation remain
intact with strong
focus on employment generation
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Average growth
of 13% per
year expected
through 2014 in
Optical+Ethernet
solutions covered
at current
Management
Report
Financial
Statements
Penetration into
the adjacent
long-haul WDM
and Ethernet
switching markets
Additional
Information
Source: World Bank, Global Economic Prospects, January 2012.
59
›› General Economic and
Market Conditions
›› Business Development and
Operational Performance
for Carrier Ethernet access devices increased at even higher
rates. Industry analysts believe that the communications
equipment market relevant to ADVA Optical Networking will
grow at sound rates in 2012 and beyond as well.
ADVA Optical Networking is particularly active in the segment for networking solutions based on fiber-optic transmission technology and Ethernet-optimized data processing
(Optical+Ethernet). The Group’s addressable market is split
into three areas: enterprise networks, carrier infrastructure
and Carrier Ethernet access. The market volume of ADVA
Optical Networking’s relevant market segment amounted to
USD 4,136 million 3 (EUR 3,115 million 4) in the year 2010.5
Of this total volume, “Optical” accounted for USD 3,611
million 3 (EUR 2,719 million 4), while “Ethernet” contributed
USD 525 million 3 (EUR 395 million 4).
The growth of the overall market is primarily driven by steadily
increasing demand for wireless and wireline bandwidth from
residential end customers and corporations, with carriers investing in new optical networking infrastructure solutions.
As in 2010, carrier customers’ decisions to roll out triple play
services (data, voice and video) to residential end customers
on a large scale were a major driver for many next-generation network infrastructure projects. Data storage, the convergence of enterprise networks and the expansion of local
area networks to multiple locations are in particularly high
demand by enterprises. Furthermore, over the last couple
of years, the Ethernet protocol has evolved into the standard carrier network protocol, replacing incumbent protocols
Industry analyst estimates for metro WDM equipment (“Optical”) and
Ethernet access devices (“Ethernet”) relevant for ADVA Optical Networking.
Sources: Infonetics Research Optical Network Hardware, Quarterly Market
Share, Size, and Forecasts 2Q11, August 2011, and Infonetics Research
Carrier Ethernet Equipment Biannual Market Share, Size and Forecasts 2nd
Edition, November 2011. The split of the metro WDM equipment into carrier
infrastructure and enterprise solutions is based on ADVA Optical Networking internal estimates.
3
Calculated at the average exchange rate of USD 1.32789 per EUR in 2010.
4
At the time this report was finalized (February 20, 2012), no respective 2011
data were available yet; ADVA Optical Networking believes that its relevant
market grew by a high single-digit percentage in 2011.
5
60
such as SONET/SDH, ATM and Frame Relay. Based on these
trends, between 2010 and 2014 the overall market for ADVA
Optical Networking’s Optical+Ethernet solutions is projected
to grow by an annual average of 13% to a total of USD 6,775
million in 2014.3 Including the adjacent long-haul WDM and
Ethernet switching markets, which over time ADVA Optical
Networking will be able to address increasingly with its advanced Optical+Ethernet transport solutions portfolio, the
Group’s addressable market is projected to grow to a total
of USD 9,415 million in 2014.
Market Environment for Enterprise Networks
The market for enterprise networks comprises approximately
17% 3 of the Optical+Ethernet market. Based on a volume
of USD 722 3 (EUR 544 million 4) in 2010, this market is expected to grow at an average rate of 14% 3 per year until
2014. Increasing enterprise demand for high-bandwidth services such as cloud computing and low-latency transmission
could be counterbalanced in part by a continued outsourcing trend, as enterprises might utilize the services of carriers instead of expanding or installing their own networks.
Market Environment for Carrier Infrastructure
The market for carrier infrastructure currently represents
ADVA Optical Networking’s most sizable opportunity. This
area comprises 70% 3 of the Optical+Ethernet market. Based
on a volume of USD 2,889 million 3 (EUR 2,175 million 4) in
2010, carrier infrastructure solutions will grow by an average 12% 3 per year through 2014. ADVA Optical Networking
expects that the significant growth in this area will be based
primarily on expanding bandwidth demand from the carriers’
residential and business customers. Expanding data traffic
will continue to strain existing networks, thereby requiring
carriers to further build out their infrastructure.
17% of total
market
Average growth
of 14% per
year expected
through 2014
70% of total
market
Average growth
of 12% per
year expected
through 2014
13% of total
market
Average growth
of 18% per
year expected
through 2014
Market Environment for Carrier Ethernet Access
ADVA Optical Networking traditionally holds a strong market position in this area, which makes up 13% 3 of the
Optical+Ethernet market. Based on a volume of USD 525
million 3 (EUR 395 million 4) in 2010, at an average annual
accretion rate of 18% 3 until 2014 this market is projected
to show the strongest growth. This growth will be driven by
the substitution of legacy services with intelligent and unified Ethernet-based services, fueled by increased bandwidth
demand from enterprises and from backhauling broadband
mobile traffic. For ADVA Optical Networking, this market is
an excellent opportunity to generate further revenue and
profit growth through advancements in Ethernet technology.
Addressable market
and growth rates 3
Enterprise networks
Carrier infrastructure
Carrier Ethernet access
Total addressable
Optical+Ethernet
market
2010
USD
million
Share
of total
CAGR *
20102014
722
17%
14%
2,889
70%
12%
525
13%
18%
4,136
100%
13%
* CAGR = Compound annual growth rate.
Continuously
strong market
position
In its overall addressable market, ADVA Optical Networking
continued to hold a strong position. For fiber Ethernet access
devices, with a market share of more than 20%, the Group
continues to be the global market leader for the fifth year in
a row.6 For metro optical transport solutions (enterprise networks and carrier infrastructure), with a market share of more
than 10%, ADVA Optical Networking remains a strong competitor in EMEA (Europe, Middle East and Africa).7
6
7
Business Development and
Operational Performance
Welcome
Revenues
In 2011, ADVA Optical Networking generated revenues of
EUR 310.9 million, a sequential increase of 6.6% on revenues
of EUR 291.7 million in 2010. The year-on-year increase reflects the success of ADVA Optical Networking’s direct and
direct-touch sales strategy coupled with a sound customer
base, and is due to increased Ethernet access and carrier
infrastructure business. ADVA Optical Networking has successfully opened up new markets and taken advantage of
underlying business opportunities.
Revenue expansion in 2011 due
to increased
Ethernet access
and carrier infrastructure business
The most important sales region in 2011 remained Europe,
Middle East and Africa (EMEA), followed by the Americas and
Asia-Pacific. EMEA revenues grew by 9.8% from EUR 183.9
million in 2010 to EUR 201.8 million in 2011, comprising 64.9%
of total revenues in 2011, up from 63.0% in 2010. This increase relates mainly to higher carrier infrastructure business. In the Americas, revenues rose 4.2% from EUR 90.6
million in 2010 to EUR 94.5 million in 2011, due to stronger
Ethernet access business. The corresponding share of total
annual revenues slightly declined from 31.1% to 30.4%. In
the Asia-Pacific region, revenues decreased by 14.8% from
EUR 17.2 million in 2010 to EUR 14.6 million in 2011, mainly
due to lower carrier infrastructure business and the earthquake in Japan at the beginning of 2011. The Asia-Pacific region comprised 4.7% of total revenues in 2011, compared
to 5.9% in 2010. The Asia-Pacific region still continues to
show new opportunities and significant business potential.
ADVA Optical Networking will maintain focus on capitalizing
on these opportunities. The Group will also selectively invest in opening up other emerging markets and growing its
market share in the Americas.
EMEA remains
most important
sales region,
followed by the
Americas and
Asia-Pacific
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Market presence
in Asia-Pacific and
in the Americas
will be further
expanded
Financial
Statements
Based on 2010 total revenues for Ethernet access devices. Source:
Infonetics Research Carrier Ethernet Equipment Biannual Market Share,
Size and Forecasts 2nd Edition, November 2011.
Additional
Information
Based on 2010 total revenues for metro optical transport equipment.
Source: Infonetics Research Optical Network Hardware, Quarterly Market
Share, Size, and Forecasts 2Q11, August 2011.
61
›› Business Development and
Operational Performance
Revenues by Region
(in millions of EUR and relative to total revenues)
Results of Operations
Total
2007
2008
2009
2010
2011
14.1
12.7
17.2
14.6
• EMEA
63.2%
32.9%
3.9%
158.8
82.9
9.8
64.0%
29.6%
6.4%
139.3
64.364.3
166.6
53.5
90.6
94.5
• Americas
183.9
201.8
251.5
217.7
(in millions of EUR,
except earnings per
share)
Portion
of reve2011
nues
Portion
of reve2010
nues
Revenues
310.9
100.0%
291.7
100.0%
Cost of goods sold
-180.2
58.0%
-172.6
59.2%
Gross profit
130.7
42.0%
119.1
40.8%
232.8
Selling and
marketing expenses
-44.2
14.2%
-43.7
15.0%
63.0%
31.1%
5.9%
291.7
-24.1
7.8%
-23.6
8.1%
64.9%
30.4%
4.7%
General and
administrative
expenses
310.9
Research and
development
expenses
-50.9
16.4%
-46.3
15.9%
1.7
0.6%
3.8
1.3%
Operating income
13.2
4.2%
9.3
3.2%
Interest income and
expenses, net
-1.5
0.5%
-1.4
0.5%
Other financial gains
and losses, net
2.3
0.7%
3.1
1.1%
Income before tax
14.0
4.5%
11.0
3.8%
2.9
0.9%
-4.0
1.4%
16.9
5.4%
7.0
2.4%
71.6%
23.0%
5.4%
• Asia-Pacific
Since ADVA Optical Networking is only active in a single operating segment, the development, production and marketing of optical networking solutions, a further breakdown of
revenues is not relevant.
Other operating
income and
expenses, net
Income tax benefit
(expense), net
Net income
Earnings per share
in EUR
62
basic
0.36
0.15
diluted
0.35
0.15
Higher gross profit
is mainly a result
of higher revenues
Gross profit grew from EUR 119.1 million in 2010 to EUR 130.7
million in 2011, comprising 40.8% and 42.0% of revenues,
respectively. The increase in gross profit is mainly due to
higher revenues. The development of the Group’s gross margin was impacted by variations in regional revenue distribution and in product and customer mix. While production
costs declined, this cost reduction was partly offset by selling price erosion.
Gross Profit
(in millions of EUR and relative to total revenues)
89.6
87.3
97.5
119.1
130.7
35.6%
40.1%
41.9%
40.8%
42.0%
2007
2008
2009
2010
2011
Selling and marketing expenses at EUR 44.2 million in 2011
were up from EUR 43.7 million in 2010, and comprised 14.2%
of revenues in 2011, slightly down from 15.0% in 2010. The
absolute increase is largely driven by investment in post-sales
customer service as well as investment in ADVA Optical Networking’s intensified direct-touch activities with those customers served via indirect distribution channels. Establishing
direct contact enables the Group to work more closely with its
end customers and better understand their specific requirements, which in turn helps in developing suitable products.
Selling and marketing expenses
grew due to
direct-touch sales
activities and extended post-sales
customer service
Welcome
Management
Board
Supervisory
Board
Selling and Marketing Expenses
(in millions of EUR and relative to total revenues)
37.3
43.7
Corporate
Governance
44.2
34.8
34.8
3.9%
16.0%
16.0%
15.0%
14.2%
2007
2008
2009
2010
2011
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
63
›› Business Development and
Operational Performance
General and
administrative
expenses slightly
above 2010 levels
General and administrative expenses at EUR 24.1 million in
2011 were slightly above the EUR 23.6 million recorded in
2010. The share of total revenues decreased from 8.1% in
2010 to 7.8% in 2011.
General and Administrative Expenses
(in millions of EUR and relative to total revenues)
33.4
26.6
23.5
23.6
24.1
13.3%
12.2%
10.1%
8.1%
7.8%
2007
2008
2009
2010
2011
ADVA Optical Networking’s research and development activities are driven by the distinct emphasis on differentiating its
highly innovative Optical+Ethernet solutions and working with
customers and partners to identify and meet their current
and future needs. The resulting key technologies and products radically simplify complicated network structures and
supplement existing solutions. During 2011, R & D activities
focused on the development of the enhanced FSP 3000 platform as well as advanced FSP 150 Ethernet access solutions.
At EUR 50.9 million in 2011, R & D expenses were up from
the EUR 46.3 million seen the year before, while comprising
16.4% of revenues in 2011 after 15.9% in the prior year. The
increase is due to investment in advanced Optical+Ethernet
technology and the commitment to develop new optical features with a strategic partner. R & D expenses included income from capitalization of development expenses, net of
amortization for capitalized development projects, of EUR 9.5
million, significantly above EUR 3.9 million seen in 2010. This
increase is mainly due to joint development activities with a
strategic partner in 2011.
Research and Development Expenses
(in millions of EUR and relative to total revenues)
42.5
16.9%
41.4
19.0%
41.3
17.7%
50.2
17.2%
60.4
19.4%
-9.5
-3.9
-2.3
-9.0
-5.2
40.2
16.0%
32.4
14.9%
36.1
15.5%
46.3
15.9%
50.9
16.4%
2007
2008
2009
2010
2011
• Net R & D expenses • Net capitalization effect
Net other operating income and expenses amounted to positive EUR 1.7 million in 2011, down from positive EUR 3.8 million in the prior year. This item is mainly impacted by subsidies received for specific R & D activities and provision releases from earlier periods.
64
Further increase
in R & D expenses
Income from capitalization of development expenses,
net, increased
significantly
Total operating expenses increased by EUR 7.7 million, from
EUR 109.8 million in 2010 to EUR 117.5 million in 2011, about
stable at 37.8% of revenues in 2011 after 37.6% in the prior
year.
Significant
increase of
operating income
due to revenue
growth and higher
gross margin
Overall, ADVA Optical Networking reported a significantly
increased operating income of EUR 13.2 million in 2011
after an operating income of EUR 9.3 million in the prior year.
The improved operating result is largely due to growth in revenues and gross margin.
2.3
-7.4%
-3.2%
3.2%
13.2
4.2%
1.0%
-7.1
-18.7
2007
Net income is
mainly driven by
operating income
and tax benefit
2008
2009
2010
2011
Given the positive development of operating income, ADVA
Optical Networking reported significantly increased net income of EUR 16.9 million for 2011, after EUR 7.0 million in
2010. Beyond operating income, the positive net result in
2011 was driven by net interest expenses of EUR 1.5 million
(prior year: EUR 1.4 million) and net other financial gains of
EUR 2.3 million (prior year: EUR 3.1 million) relating to the
translation of foreign currency assets and liabilities and to
gains and losses on hedging instruments.
Welcome
7.0
16.9
1.3
Management
Board
-8.9
Supervisory
Board
-29.5
2007
Operating Income (Loss)
(in millions of EUR and relative to total revenues)
9.3
Net Income (Loss)
(in millions of EUR)
2008
2009
2010
2011
• Operating income (loss)
• Other pre-tax income (expenses)
• Income tax benefit (expense)
Corporate
Governance
Basic and diluted earnings per share were EUR 0.36 and
EUR 0.35, respectively, in 2011 after EUR 0.15 each in the
prior year. Basic average shares outstanding increased by 0.7
million to 47.3 million in 2011, due to capital increases from
the exercise of stock options and option bonds. In addition,
diluted weighted average shares outstanding increased by
0.4 million to 48.7 million in 2011, due to stock options that
became exercisable during 2011.
Stock
Investor
Relations
Summary: Business Development and
Operational Performance
Overall, the business development and operational performance in 2011 improved significantly compared to 2010. This
was mainly a result of the positive revenue and gross margin development.
Business
Overview
Management
Report
Financial
Statements
The Group reported an income tax benefit of EUR 2.9 million in 2011 after an income tax expense of EUR 4.0 million
in 2010. The 2011 tax benefit is mainly due to initial recognition of deferred tax assets on tax loss carry-forwards in
ADVA Optical Networking’s entity in the U.S., partly offset
by current tax charges.
Additional
Information
65
›› Net Assets and Financial Position
Net Assets and Financial Position
Total assets
increased significantly, with
disproportionally
strong growth of
non-current assets
Balance Sheet Structure
ADVA Optical Networking’s total assets increased by EUR 25.8
million or 11.0%, up from EUR 234.1 million at year-end 2010
to EUR 259.9 million at the end of 2011.
2011
2010
160.5
149.6
99.4
84.5
259.9
234.1
Current liabilities
85.4
72.3
Non-current liabilities
38.5
46.4
Stockholders’ equity
136.0
115.4
259.9
234.1
(on December 31, in millions of EUR)
Current assets
Non-current assets
Total assets
Total equity and liabilities
Current assets rose by EUR 10.9 million or 7.3% from
EUR 149.6 million on December 31, 2010 to EUR 160.5 million on December 31, 2011, and comprised 61.8% of the balance sheet total after 63.9% at the end of the prior year.
The increase in current assets was driven by higher trade
accounts receivable as well as a rise in cash and cash equivalents. Trade accounts receivable rose by EUR 7.0 million to
EUR 54.9 million at year-end 2011, driven by increased revenues, with days sales outstanding at 58 in 2011 after 52 in
2010. Due to the global nature of ADVA Optical Networking’s
sales activities, a significant part of the Group’s accounts receivables result in GBP and USD cash inflows. In addition,
cash and cash equivalents increased from EUR 54.1 million
at year-end 2010 to EUR 59.1 million at the end of December 2011, largely resulting from improved profitability. At
the same time inventories at EUR 36.5 million at the end of
2011 were EUR 3.1 million lower than at the end of December 2010, with slightly reduced inventory turns at 5.0x in
2011 after 5.3x in 2010.
66
Non-current assets increased by EUR 14.9 million from
EUR 84.5 million at year-end 2010 to EUR 99.4 million on
December 31, 2011. Within non-current assets, capitalized
development projects grew by EUR 9.7 million to EUR 39.2
million at year-end 2011. The increase was largely driven by
joint development activities with a strategic partner. In addition, deferred tax assets rose by EUR 6.5 million to EUR 11.2
million at year-end 2011, mainly related to initial recognition
of tax loss carry-forwards in ADVA Optical Networking’s entity in the U.S. Property, plant and equipment was slightly
up by EUR 1.0 million to EUR 21.6 million at the end of 2011.
These effects were compensated in part by a decrease in
purchased technology by EUR 2.4 million to EUR 2.7 million,
due to regular amortization charges.
Major additional assets belonging to ADVA Optical Networking are the broad and global customer base of more than
250 carriers and more than 10,000 enterprises, the ADVA
Optical Networking brand, the vendor and partner relationships and a highly motivated and skilled global team. These
assets are not included in the balance sheet.
Additional
off-balance
sheet assets
With respect to equity and liabilities, current liabilities increased by EUR 13.1 million from EUR 72.3 million at yearend 2010 to EUR 85.4 million at the end of 2011, primarily
due to increases in current financial liabilities and deferred
revenues. Current financial liabilities increased by EUR 8.9
million to EUR 10.3 million, driven by the reclassification of
a bonded loan maturing in March 2012. Current deferred
revenues increased by EUR 5.5 million to EUR 12.9 million
at the end of 2011 due to higher service and product revenue deferral. Trade accounts payable slightly increased from
EUR 33.1 million at the end of 2010 to EUR 33.2 million at
year-end 2011, with days payable outstanding stable at 65
days. In addition, current provisions decreased by EUR 1.2
million to EUR 5.6 million at the end of 2011, mainly comprising provisions for outstanding invoices of uncertain amount
and timing, warranty provisions and provisions for potential
obligations from existing contracts.
Total liabilities increased; shift from
non-current to
current liabilities
Non-current liabilities decreased by EUR 7.9 million from
EUR 46.4 million at year-end 2010 to EUR 38.5 million at the
end of 2011, largely related to a decrease in non-current financial liabilities and partly offset by an increase in deferred
tax liabilities. The decrease in non-current financial liabilities
is due to the reclassification of the above-mentioned bonded
loan to current financial liabilities.
Higher stockholders’ equity due to
net income and
capital increases
related to exercise
of stock options
and option bonds
Stockholders’ equity increased by EUR 20.6 million from
EUR 115.4 million at year-end 2010 to EUR 136.0 million at
the end of 2011, mainly due to net income of EUR 16.9 million reported for 2011. In addition, capital increases totaling EUR 0.4 million from the exercise of stock options and
option bonds were reported in 2011. The equity ratio was
at 52.3% at the end of 2011, after 49.3% at year-end 2010.
The non-current assets ratio amounted to 136.8% on December 31, 2011, with stockholders’ equity fully covering the
non-current assets and a portion of the current assets. This
healthy balance sheet structure reflects the Group’s careful financing strategy.
Balance sheet
ratios
Equity ratio
Non-current
asset ratio
Liability structure
(on December 31,
in %)
Stockholders’ equity
Total assets
Stockholders’ equity
Non-current assets
Current liabilities
Total liabilities
2011
2010
52.3
49.3
136.8
136.6
Capital Expenditures
Capital expenditures for additions to property, plant and
equipment and finance leases in 2011 amounted to EUR 7.5
million, down from EUR 8.2 million in 2010. The decrease is
largely due to lower investments in leasehold improvements.
Capital expenditures for intangible assets of EUR 26.0 million in 2011 were up from EUR 16.1 million in the prior year.
This total consists of capitalized development projects of
EUR 23.8 million in 2011 after EUR 15.3 million in 2010,
driven by development activities for ADVA Optical Networking’s enhanced FSP 3000 platform as well as advanced
Ethernet solutions. The increased investments in other intangible assets of EUR 2.2 million in 2011 after EUR 0.8 million
in 2010 were mainly due to investments in software licenses.
Welcome
Capital expenditures for
property, plant
and equipment
are mainly related
to investments
in production &
test equipment
Management
Board
Supervisory
Board
Capital expenditures for intangible
assets are mainly
related to capitalized development projects
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
68.9
60.9
Financial
Statements
Additional
Information
67
›› Net Assets and Financial Position
Cash Flow
2011
Portion
of cash
2010
Portion
of cash
Operating cash flow
39.7
67.2%
21.1
39.0%
Investing cash flow
-32.8
55.6%
-24.0
44.3%
Financing cash flow
-3.0
5.0%
3.3
6.1%
Net effect of foreign
currency translation
on cash and cash
equivalents
1.1
1.9%
2.8
5.2%
(in millions of EUR)
Net change in cash
and cash equivalents
Cash and cash
equivalents at the
beginning of the period
Cash and cash
equivalents at the
end of the period
Increased operating cash flow
due to higher
income before tax
68
5.0
8.5%
3.2
5.9%
54.1
91.5%
50.9
94.1%
59.1
100.0%
54.1
100.0%
Cash flow from operating activities at EUR 39.7 million in
2011 was up EUR 18.6 million from EUR 21.1 million in 2010.
This development was largely due to the improved income
before tax as well as higher non-cash relevant depreciation
and amortization of tangible and intangible assets. Net cash
required for working capital decreased significantly compared
to 2010 mainly due to lower inventories.
Cash flow from investing activities was EUR -32.8 million in
2011 after EUR -24.0 million in the prior year. The increased
use of funds for investing activities is largely due to higher
cash outflows for capitalized development projects and property and, plant and equipment.
Increased use of
funds for investing activities
Finally, cash flow from financing activities at negative EUR 3.0
million in 2011 was significantly below the 2010 level at positive EUR 3.3 million. The 2011 cash flow from financing activities largely resulted from repayment of existing debt and
interest payments partly offset by capital increases from
exercise of stock options and option bonds.
Negative financing
cash flow related
to repayment of
existing debt and
interest payments
Overall, including the net effect of foreign currency translation on cash and cash equivalents of EUR 1.1 million (2010:
EUR 2.8 million), cash and cash equivalents rose by EUR 5.0
million in 2011, from EUR 54.1 million at year-end 2010
to EUR 59.1 million at year-end 2011, after an increase of
EUR 3.2 million in the prior year.
Strong
equity base
Financing
ADVA Optical Networking’s financial management objective is
to provide sufficient funds to ensure ongoing operations and
to support the Group’s projected growth. Beyond the strong
equity base appropriate for the growing business, ADVA Optical Networking finances its business by means of liabilities
with maturities typically exceeding the life of the assets being financed. For any liability taken, ADVA Optical Networking is focused on minimizing related interest cost, as long
as access to funds is not at risk. Excess funds are used either to redeem debt or are invested in short-term interestbearing term deposits or money market funds.
Financial liabilities
2011
2010
Other current financial liabilities
10.3
1.4
Other non-current financial liabilities
17.6
27.9
Total financial liabilities
27.9
29.3
The following table gives an overview on interest terms and
the maturity structure of each financial liability at year-end
2011:
Maturity
(in millions
of EUR)
IKB Deutsche
Industriebank
loans *
Dec.
31,
2011
Total financial liabilities decreased from EUR 29.3 million at
year-end 2010 to EUR 27.9 million at the end of 2011. While
the current portion rose from EUR 1.4 million to EUR 10.3 million, the non-current portion decreased from EUR 27.9 million
on December 31, 2010, to EUR 17.6 million at the end of December 2011, mainly due to the reclassification of a bonded
loan maturing in March 2012. All financial liabilities were exclusively denominated in EUR at the end of both periods.
Interest
≤ 12
terms months
13
to 36
> 36
months months
1.4
Fixed rate,
subsidized
0.3
0.6
0.5
2.5
Fixed rate,
subsidized
-
1.3
1.2
IKB Deutsche
Industriebank
bonded loan *
14.0
Floating
rate based
on 3M
EURIBOR
-
14.0
-
Deutsche
Bank bonded
loan
10.0
Fixed rate
10.0
(on December 31, in millions of EUR)
Shift from noncurrent to current
financial liabilities
during the year
Welcome
Total
financial
liabilities
Management
Board
Supervisory
Board
Corporate
Governance
Stock
-
Investor
Relations
27.9
10.3
15.9
1.7
Business
Overview
* Key covenants refer to the Group’s year-end debt / equity ratio and to the
quarter-end net liquidity.
Management
Report
Financial
Statements
Additional
Information
69
›› Net Assets and Financial Position
›› Share Capital and
Shareholder Structure
On December 31, 2011, the Group had available EUR 8.0
million (on December 31, 2010: EUR 4.0 million) of undrawn
committed borrowing facilities in respect of which all conditions had been met.
Very strong
net liquidity
Financing ratios
(on December 31)
Further details about the Group’s financial liabilities can be
found in note (13) to the consolidated financial statements.
Cash ratio
Cash and cash
equivalents Finance lease obligations declined from EUR 0.1 million at
the end of 2010 to rounded nil at the end of 2011.
Quick ratio
Due to the increase in cash and cash equivalents and decrease in financial liabilities at the same time, ADVA Optical Networking’s net liquidity rose by EUR 6.5 million from
EUR 24.7 million at year-end 2010 to EUR 31.2 million at yearend 2011. Cash and cash equivalents of EUR 59.1 million on
December 31, 2011, and of EUR 54.1 million on December 31,
2010, were invested mainly in EUR, USD and in GBP. At yearend 2011, access to EUR 0.4 million of cash and cash equivalents was restricted, after EUR 0.1 million at year-end 2010.
Net liquidity
2011
2010
(on December 31, in millions of EUR)
Cash and cash equivalents
2011
2010
0.69
0.75
1.33
1.41
1.88
2.07
Current liabilities
Monetary
current assets *
Current liabilities
Current assets
Current ratio
Current liabilities
* Monetary current assets are defined as the sum of cash and cash equivalents, short-term investments and securities and trade accounts receivable.
Return on capital employed in 2011 was at 8.3%, considerably up from 6.4%, in 2010. This favorable development
is largely due to the greatly improved operating result reported in 2011.
Return on capital employed (ROCE)
2011
2010
13.2
9.3
236.9
215.5
77.2
71.1
8.3%
6.4%
(base data in millions of EUR)
59.1
54.1
Operating income
Average total assets *
- finance lease obligations
current
-0.0
-0.1
Average current liabilities *
non-current
-0.0
-0.0
ROCE
- financial liabilities
70
ADVA Optical Networking’s liquidity ratios remain strong and
reflect the healthy balance sheet structure of the Group.
current
-10.3
-1.4
non-current
-17.6
-27.9
Net liquidity
31.2
24.7
Operating income
Ø total assets –
Ø current liabilities
* Arithmetic average of five quarterly period-end values (Dec. 31 of the prior
year and Mar. 31, Jun. 30, Sep. 30 and Dec. 31 of the year).
Positive development of return on
capital employed
due to higher
operating income
Transactions with Related Parties
Transactions with related individuals and legal entities are
discussed in notes (33) and (34) to the consolidated financial statements.
No dividend
payments
Dividend Payments
In 2011 there were no dividend payments for 2010 (prior
year: nil for 2009). ADVA Optical Networking does not plan
to pay out a dividend for 2011.
Summary: Net Assets and Financial Position
The net assets and financial position of ADVA Optical Networking continues to be strong in 2011, with cash and cash
equivalents as well as net liquidity at significantly higher
levels than at year-end 2010.
Share Capital and Shareholder Structure
Welcome
On December 31, 2011, ADVA AG Optical Networking had issued 47,524,875 no par value bearer shares (December 31,
2010: 47,169,136). No other class of shares had been issued
during the reporting period.
At year-end 2011, EGORA Holding GmbH held a total of
8,656,749 shares or 18.2% of all ADVA Optical Networking
shares outstanding (at year-end 2010: 8,656,749 shares or
18.4% of all shares outstanding). 6,330,902 of these shares or
13.3% of all shares outstanding (at year-end 2010: 6,330,902
shares or 13.5% of all shares outstanding) were held by
EGORA Ventures GmbH, a 100% subsidiary of EGORA Holding GmbH, and the remaining 2,325,847 shares or 4.9% of all
shares outstanding (at year-end 2010: 2,325,847 shares or
4.9% of all shares outstanding) were held directly by EGORA
Holding GmbH. Both EGORA companies have their registered
offices in Fraunhoferstrasse 22, 82152 Martinsried / Munich,
Germany. No other shareholder has filed with the Company
to have held more than 10% of the Company’s shares outstanding as of December 31, 2011.
Management
Board
Year-end free float
at 82% about unchanged compared
to the end of
the prior year
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
71
›› Restriction of Voting Rights and
Share Transfers
›› Appointment and Dismissal of
Management Board Members
›› Changes to Articles of Association
›› Issuance and Buy-Back of Shares
›› Takeover Bid-Driven Change
of Control Provisions
Restriction of Voting Rights and Share Transfers
Changes to Articles of Association
At year-end 2011, ADVA AG Optical Networking had no knowledge of any restrictions related to voting rights or share
transfers.
Changes to ADVA Optical Networking’s articles of association follow sec­tion 179 of the German Stock Corporation Law
(Aktiengesetz, AktG) in conjunction with section 133 AktG,
as well as the provisions in section 4 paragraph 6 and section 13 paragraph 3 of the Company’s current articles of association, dated January 2, 2012. Accordingly, in principle
any changes to the articles of association need to be resolved
by the Shareholders’ Meeting. However, the Shareholders’
Meeting has authorized the Supervisory Board to change the
version of the articles of association in accordance with capital increases from authorized capital and conditional capital.
These procedures were applied over the entire year 2011.
Appointment and Dismissal of
Management Board Members
The appointment and dismissal of members of the Management Board of ADVA AG Optical Networking follows the direction of the German Stock Corporation Law (Aktiengesetz,
AktG), as well as the provisions in section 6 of the Company’s current articles of association, dated January 2, 2012.
According to these articles, in principle the Supervisory
Board appoints the members of the Management Board and
does so for a maximum period of five years. However, it is
the Company’s practice to appoint the members of the Management Board for two years only. Repeated appointment is
possible. The Management Board of ADVA AG Optical Networking regularly consists of two individuals. However, the
Supervisory Board may appoint a higher number of individuals. If the Management Board consists of more than one
individual, the Supervisory Board may appoint one member
of the Management Board Chief Executive Officer or Speaker
of the Management Board, and another member his or her
deputy. The Supervisory Board may recall an already-effective appointment for important reasons. In 2011, there
were no appointments or dismissals of Management Board
members. At the end of 2011, ADVA Optical Networking’s
Management Board consisted of Brian Protiva (Chief Executive Officer), Christoph Glingener (Chief Technology Officer),
Jaswir Singh (Chief Financial Officer & Chief Operating Officer)
and Christian Unterberger (Chief Sales & Marketing Officer).
72
Issuance and Buy-Back of Shares
At year-end 2011:
Authorized capital
at 46.9% of share
capital
Conditional capital
at 9.5% of share
capital
Authorization to
buy back shares
of up to 9.7% of
share capital
The rights of the Management Board to issue new shares are
regulated in section 4 paragraphs 4 to 5k of the current articles
of association of ADVA AG Optical Networking, last amended
on January 2, 2012. Accordingly, the Management Board may
issue up to 22,312,779 shares from a total of two tranches of
authorized capital, amounting to a total of EUR 22,312,779
against cash or contribution in-kind with possible exclusion of
subscription rights. On December 31, 2011, the authorized capital amounted to EUR 22,312,779, i.e., that day the Management
Board may have issued up to 22,312,779 shares or 46.9% of
total shares outstanding. In addition, on December 31, 2011, a
total of two tranches of conditional capital amounting to a total
of EUR 4,716,000 or 9.9% of the share capital were recorded
in the commercial register. The conditional capital has been
used for granting stock option and similar rights to members
of the Management Board, to employees of the Company and
to management and employees of affiliated companies. The
conditional capital increase is put into effect only if and when
the holders of the option rights exercise these rights. 219,989
new shares were registered in the trade register on January 20,
2012. These shares were already created in 2011 as a result of
the exercise of stock options. Thus, the number of shares that
can be issued by the Management Board from the two tranches
of conditional capital was reduced to 4,496,011 or 9.5% of total shares outstanding.
At year-end 2011, the Management Board was authorized to
buy back, until May 31, 2015, up to 4,600,000 own shares of
the Company. This equals 9.7% of the share capital issued
on December 31, 2011. This right was granted to the Management Board by a resolution of the Shareholders’ Meeting on June 9, 2010. Shares bought back may be used exclusively as compensation for the acquisition of companies,
parts of companies or investments in companies, for issuing employee stock to employees of the Company or affiliated companies, for serving share subscription rights from
the Company’s stock option and option bond plans, and for
redeeming the shares.
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Takeover Bid-Driven
Change of Control Provisions
At year-end 2011, two bonded loans with redemption values
of EUR 10 million (due in March 2012) and EUR 14 million (due
in September 2013), respectively, are part of ADVA Optical
Networking’s financial liabilities. In the event of a potential
takeover bid-driven change in control of ADVA Optical Networking, the creditors have the right to terminate the bonds
with immediate effect.
Stock
Investor
Relations
On December 31, 2011, for the event of a takeover bid-driven
change in control there have been no recourse agreements
in place with any of the members of the Management Board
or with any of the Group’s employees.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
73
›› Employees and Social Responsibility
Employees and Social Responsibility
Employees per country
On December 31, 2011, ADVA Optical Networking had 1,304
employees, of whom 17 were apprentices. The breakdown
of permanent employees by department is listed in the table below:
Employees per
department
2011
2010
Change
(on December 31)
Research and development
570
498
+72
Purchasing and production
204
203
+1
20
19
+1
Sales, marketing
and service
352
333
+19
Management and
administration
141
134
+7
17
16
+1
1,304
1,203
+101
Quality management
Apprentices
Total employees
Total headcount
increased
Hiring mostly
in R & D and
sales, marketing
and service
74
2011
2010
Change
Germany
(including apprentices)
507
489
+18
USA
319
305
+14
Poland
163
128
+35
China
120
96
+24
United Kingdom
89
86
+3
Norway
26
23
+3
France
14
15
-1
Singapore
13
11
+2
Italy
9
9
+0
India
8
7
+1
36
34
+2
1,304
1,203
+101
(on December 31)
On average, ADVA Optical Networking employed 1,258 employees during 2011, up from 1,145 during 2010. Furthermore, there were 23 and 13 temporary employees working
for ADVA Optical Networking at year end 2011 and 2010, respectively. During 2011, employee increases occurred mostly
in the R & D and sales, marketing & service areas. The rise in
total employees was especially driven by higher relevance
of innovation and increased relationships with customers.
Other countries
Total employees
Personnel expenses increased from EUR 90.8 million in 2010
to EUR 97.9 million, representing 31.5% of revenues in 2011
compared to 31.1% in 2010.
ADVA Optical Networking successfully attracts and retains
highly qualified staff due to its competitive compensation
programs and the rewarding work environment offered. The
employee compensation packages comprise fixed and variable elements, and also include stock options, option bonds
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or stock appreciation rights. These compensation packages enable employees to participate appropriately in the
success of the Group and support employee retention, while
at the same time rewarding individual efforts, teamwork, innovation and productivity. Furthermore, employees who perform exceptionally well or who make suggestions for significant improvements are recognized through the Group’s Spot
Award program. In addition, the Group is committed to of-
Compensation
comprises fixed
and variable
elements
fering all employees comprehensive on-the-job training, as
well as specific continuing education opportunities in order
to advance their personal and professional development.
Comprehensive
education
programs through
the ADVA Optical
Networking
University
The Group offers three types of continuing education programs through the ADVA Optical Networking University,
based on employee development needs. These needs are
identified, documented and reviewed semi-annually within
an electronic performance appraisal and competency management system:
1. Through ADVA Optical Networking’s general development
program, employees are offered courses on various topics
that are regularly requested, including language classes,
standard office software know-how and the improvement
of communication, presentation, conflict management
and project management skills.
2. On the basis of employees’ individual development plans,
which are agreed annually and regularly reviewed with
their respective line managers, ADVA Optical Networking
offers specific training courses tailored to meet individual
employee needs. These courses also include technical
training, which is mostly conducted internally by the
Group’s own technical experts.
3. ADVA Optical Networking has launched a global in-house
management training program. This customized initiative
is targeted at all leaders with people-management
responsibilities. The Group offers a set of different
courses according to experience and knowledge levels,
which helps managers to understand how to maximize
both individual and team performance.
ADVA Optical Networking is convinced that these three
components form a solid foundation from which the Group
can utilize the skills of its employees and foster their continuing development.
Welcome
Management
Board
Within ADVA Optical Networking, all relevant local regulations
for health and safety in the workplace are complied with and
regularly monitored by an independent engineering office for
safety in the workplace. ADVA Optical Networking provides
a global work environment that is clean, bright and friendly.
There is no workers’ council, and ADVA Optical Networking
is not affiliated with a particular trade union and is thus not
tied to any collective agreements.
Supervisory
Board
Corporate
Governance
ADVA Optical Networking is an equal opportunity employer
and has an on-going commitment to the creation of a workplace free of discrimination and harassment. The Group recruits, hires, trains and promotes individuals in all job levels
without regard to race, religion, ancestry, sexual orientation,
national origin, age, sex and physical or mental disability.
ADVA Optical Networking is committed to a fair and equitable
workplace where everyone is a respected and valued member of the team. The Group’s core values (teamwork, execution, accountability and motivation) and leadership principles
(integrity / honesty, decisiveness and respect) guide employees and managers in all business activities.
Equal opportunities for all
employees
At its main production and development facility in Meiningen,
ADVA Optical Networking currently provides 17 apprenticeship positions, which lead to professions as electronic technicians for devices and systems and as office clerks. The Company is among the most recognized apprenticeship providers
for industrial electronics professions in Southern Thuringia.
In addition, ADVA Optical Networking offers an active university student trainee program in Germany that provides onthe-job work experience to students pursuing their degrees.
Recognized
apprenticeship positions
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
75
›› Employees and Social Responsibility
›› Declaration on Corporate Governance
›› Renumeration of Management
and Supervisory Boards
International,
highly qualified
and motivated
employees
The Group relies on a team of highly qualified and motivated
employees of 34 different nationalities, with extensive experience in telecommunications and in various other industries. The interdisciplinary and intercultural exchange among
employees on all levels advances the open and transparent
culture of the Group and the creativity of its employees in
the best possible way. In 2011, the Group conducted an employee survey with the support of an independent human
resources consultancy, with improved overall feedback compared to the survey taken in the prior year. Based on the results of the 2011 survey, the Management Board derived an
action plan to further improve employee satisfaction. The
Group expects to conduct a similar employee survey in 2012.
Supplier evaluation driven by
compliance with
ethical standards,
based on the EICC
code of conduct
Further, ADVA Optical Networking requires its suppliers to
comply with international standards based on the universal
declaration of human rights of the United Nations and the
conventions of the International Labor Organization. As part
of its supplier approval process, the Group requests from
each supplier a statement of its compliance with each relevant standard. Supplier audits are conducted in cases where
compliance with these standards is questionable, and the
Group also offers to support key suppliers in the management of their labor, health and safety matters. In 2011, ADVA
Optical Networking released an enhanced supplier code of
conduct which is in line with the respective code set forth by
the Electronics Industry Citizenship Coalition (EICC). Based
on this code, the Group expanded its supplier audit activities accordingly and obtains a more complete picture of its
suppliers than before, further strengthening the partnerships between ADVA Optical Networking and its suppliers.
Social responsibility of the Group
and its employees
76
Beyond its focus on employees and suppliers, ADVA Optical
Networking is eager to help address the needs of the overall environment as well as to involve itself in the communities in which it conducts business. The Group has adopted a
telecommuting policy that allows employees to save gas and
support the environment. In addition, a recycling program is
in place in the U.S. offices, motivating employees to increase
their environmental consciousness. At its site in Meiningen,
the Group actively supports a local non-profit organization
focusing on the needs of physically and mentally disabled individuals by integrating these individuals into the site’s operations activities like the assembly of small parts for products and document archiving. Further, in 2011, in the U.S.,
ADVA Optical Networking and local employees raised donations for a range of aid organizations, including Susan G. Komen (cure of breast cancer), YMCA (youth support), Scottish Rite Hospitals (children’s healthcare), Red Cross (blood
drive), SPCA (animal shelter), Hope on Wheels (changing
lives through job placement, training and support), Canine
Assistants (service dogs), New Beginnings Center (fostering
an environment for safety and respect for families affected
by domestic violence), Cure for ALS (Lou Gehrig’s disease
awareness & research) and sponsored a child from Ukraine
to come to the U.S. Furthermore, in ADVA Optical Networking’s York office, local employees took part in a range of charity events from Charity Egg Collection (children’s hospice),
Comic Relief (abolishing poverty) and Movember (fighting
men’s health issues).
Declaration on Corporate Governance
According to section 289a of the German Commercial Code
(Handelsgesetzbuch, HGB), ADVA AG Optical Networking is
obliged to publish a declaration on corporate governance.
In order to facilitate public access to all respective data, the
Company decided to publish the declaration on its website
www.advaoptical.com (About Us / Investor Relations / Corporate Governance / Declaration on Corporate Governance).
Remuneration of
Management and Supervisory Boards
The Management
Board receives
fixed compensation, a short
and long-term
variable bonus
and stock options
The compensation of ADVA Optical Networking’s Management Board members consists of fixed and variable components. In addition to a fixed salary, the members of the Management Board receive variable compensation in the form of
bonus payments which are assessed based in part on shortterm aspects and in part on long-term criteria focusing on
the sustainable development of the Company. As additional
long-term variable compensation, the Management Board
members receive stock options within the scope of ADVA
Optical Networking’s stock option program.
For 2011, the fixed salary remained stable compared to 2010.
The short-term variable compensation for 2010 is based on
the Group’s IFRS pro forma operating income 8 (40%), the
Group’s revenues (20%), the Group’s free cash flow (20%)
as well as individual goals agreed with each member of the
Management Board at the beginning of 2011 (20%). The
short-term variable compensation is determined annually as
compensation for the current year at the discretion of the
Supervisory Board. Furthermore, a long-term variable compensation focusing on the sustainable development of the
Company was defined in 2011 and will be paid to the members of the Management Board after three years, provided
that minimum Group IFRS pro forma operating income margins, increasing year-by-year, are met for each of the three
years. All members of the Management Board additionally receive a company car or a car allowance, as well as – in Germany – reimbursement of half of their social security contributions. Moreover, ADVA Optical Networking bears the costs
of pecuniary damage liability insurance for the Management
Board members, taking into account the statutory deductible amount. These benefits are partially tax-deductible by
the members of the Management Board as non-cash bene8
fits. In addition, ADVA Optical Networking grants stock options to members of the Management Board. These option
rights authorize the members of the Management Board to
purchase a set number of shares in the Company once a fixed
vesting period has elapsed.
Welcome
Management
Board
Total Management Board compensation payable for 2011
and 2010 was EUR 1,790 thousand and EUR 1,784 thousand,
respectively. On December 31, 2010, current assets included
EUR 43 thousand in receivables against Brian Protiva for advanced tax expenses on exercised stock options. In 2011 and
2010, no further loans or prepayments were granted to the
members of the Management Board.
The compensation of ADVA Optical Networking’s Supervisory Board members also consists of fixed and variable
components. The 2007 Annual Shareholders’ Meeting resolved on June 13, 2007, that starting in the financial year
2007, in addition to the reimbursement of out-of-pocket expenses, each member of the Supervisory Board should receive a fixed compensation, payable after the end of the financial year, as well as an annual variable payment related
to the Group’s performance; the amount of this variable payment is to be proposed by the Management and the Supervisory Boards and determined annually by the Shareholders’ Meeting deciding on the approval of the activities of the
Supervisory Board for the relevant financial year. For 2010,
the Annual Shareholders’ Meeting approved the payout of a
total of EUR 55 thousand in variable compensation for the
Supervisory Board. For the financial year 2011, the Annual
Shareholders’ Meeting will be presented with a resolution to
pay a total of EUR 53 thousand. Furthermore, ADVA Optical
Networking bears the cost of pecuniary damage liability insurance for all members of the Supervisory Board. During
2011, no loans or advance payments were granted to members of the Supervisory Board.
Supervisory
Board
Corporate
Governance
The Supervisory
Board receives
fixed compensation and
a short-term
variable bonus
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
Pro forma operating income is calculated prior to non-cash charges related
to the stock compensation programs and amortization and impairment of
goodwill and acquisition-related intangible assets.
77
›› Renumeration of Management
and Supervisory Boards
›› Environmental Responsibility
›› Risk Report
Provided that the 2012 Annual Shareholders’ Meeting approves the 2011 activities of the Supervisory Board, the total compensation payable to the members of the Supervisory Board for 2011 will be EUR 397 thousand, after EUR 415
thousand for 2010.
Detailed information on the compensation structure of the
individual members of the Management and Supervisory
Boards can be found in note (34) to the consolidated financial statements.
Environmental Responsibility
Careful utilization of natural
resources
Being environmentally conscious is a high priority at ADVA
Optical Networking.
Products consume
little energy
When compared to the products of its competitors, the
Group’s platforms generally consume less energy, a fact
customers have supported with statements confirming the
positive overall energy balance of ADVA Optical Networking’s
platforms deployed in their networks.
Easy recyclability
at the end of the
product life cycle
78
The modular platform design allows easy upgrading and ensures that the products can be recycled easily at the end of
the product life cycle. As a manufacturer of optical and electronic products, ADVA Optical Networking complies with the
European Union’s requirements, including the regulations on
waste electrical and electronic equipment (WEEE), on the restriction of hazardous substances (RoHS) and on the registration, evaluation, authorization and restriction of chemicals (REACH). In order to meet the requirements of its global
customer base in the best possible way, the Group also complies with the respective provisions in many other regions of
the world. Furthermore, ADVA Optical Networking contributes to industry-wide discussions focused on impacting future adjustments in relevant international legislation. Being
involved in these discussions allows the Company to react
early in an appropriate way.
In addition, ADVA Optical Networking continually improves
the eco-friendliness of its products, even when there are no
related legally binding requirements to do so. As an example, the Group initiates modifications of the components supplied by its vendors on an ongoing basis; in many instances,
these modifications are driven by vendor process- and product-focused environmental sustainability audits conducted
by ADVA Optical Networking. The quality and sustainability of the cooperation is dependent on the vendors and the
amount of environmentally-conscious policies they support,
among other criteria.
Vendor assessment based on
policies regarding
environmental matters
The Company also contributes to the respectful utilization
of natural resources by using returnable packaging material
for the flow of goods between component vendors and the
Group’s facilities. ADVA Optical Networking aims to reuse the
outer packaging from vendors for its own shipments. In order to do so, the Group in part customizes vendor packaging material to fit specific sales requirements.
Use of returnable and reusable
packaging material
ADVA Optical Networking’s facilities in Germany, Poland,
the U.S., the United Kingdom and China take advantage
of state-of-the-art energy-saving building technology concepts. The Group has implemented a global environmental
management system and achieved repeated ISO 14001 environmental management standard certification for all relevant facilities worldwide (Meiningen, Berlin and Martinsried /
Munich in Germany, Richardson (Texas) and Norcross (Georgia) in the U.S., York in the United Kingdom and Shenzhen
in China) in 2011.
Successful
ISO 14001 repeat
certification of all
major facilities
in 2011
Risk Report
ADVA Optical Networking’s future development is subject to
various general and Group-specific risks, which in certain
cases can also endanger the Group’s continued existence.
The Management Board has implemented a risk management
and an internal control system that enables the Management
Board to detect risks in due time, to take corrective actions
and to benefit from opportunities. An essential aspect of the
Group’s strategy is its ability to anticipate developments in
the marketplace and future customer needs. Special emphasis is given to product development and the technical
performance of the Group’s products. Due to ever-changing
market trends and limited planning certainty, risks to ADVA
Optical Networking’s future cannot be completely excluded.
Diversified
business
Effective decision
support and
reporting system
Risk Management System
Since ADVA Optical Networking was founded in 1994, its business has become more diversified. The Group’s market is split
into three global areas (enterprise networks, carrier infrastructure, Carrier Ethernet access), all with drivers largely
independent of each other. ADVA Optical Networking markets its products and solutions in part via a variety of distribution partners and has become less dependent on these
partners over the years. Beyond focusing on reducing revenue volatility, the Group has established a comprehensive
risk management system. The Management Board of ADVA
AG Optical Networking recognizes that however good a risk
management system may be, it cannot in all cases prevent
the occurrence of events that may cause material damage
to the Group.
ADVA Optical Networking is organized according to functional areas across all international locations. This is also reflected in the Management Board’s split of responsibilities,
in particular as related to risk management. The Management Board continuously analyzes the potential risks and
implements the necessary measures to guard against them
to the greatest extent possible. In recent years, ADVA Opti-
cal Networking has significantly improved its results-driven
decision support and reporting system. The Group has established an appropriate risk management system across all
departments with the purpose of quickly uncovering potential risks and taking corrective actions in a timely manner.
These measures allow the Management Board to evaluate
the present and future situation of the Group at all times. A
combination of monthly and ad-hoc reports present a thorough picture of current and future business developments.
Welcome
Management
Board
Supervisory
Board
ADVA Optical Networking’s strategic goals are the basis for
this risk management system. These goals are profitable
growth, Optical+Ethernet innovation, operational excellence
and employee development. The strategic goals are reviewed
by both the Management Board and the Supervisory Board
on a yearly basis and amended where appropriate. They
also constitute the basis for the Group’s three-year business plan, which is reviewed and updated annually. Each of
these goals is defined in detail and then broken down into
specific departmental and individual targets. The strategic
goals are traced to each individual employee, so that each
employee can focus and be evaluated on his / her individual
performance and contribution to ADVA Optical Networking’s
overall performance.
Strategic goals
are the basis of
the risk management system
ADVA Optical Networking measures the accomplishment of
its strategic goals against revenues and pro forma operating income 9. The Management Board sets target values for
both metrics for the year to come and measures actual values against the target values on a monthly basis. In case of
deviations from plan, corrective action can be taken quickly.
This information is summarized and communicated to the
Management Board in a monthly report.
Revenues
and pro forma
operating income
operationalize
strategic goals
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
9
Additional
Information
Pro forma operating income is calculated prior to non-cash charges related
to the stock option programs and amortization and impairment of goodwill
and acquisition-related intangible assets.
79
›› Risk Report
Monthly budget
reviews, tight
controls and
processes
Sound compliance
processes are in
place to ensure
observance of all
applicable laws
and regulations
Moreover, budgets are reviewed on a monthly basis and adjusted if necessary. The Group’s accounting, decision support and treasury departments provide monthly, globally
consolidated reports on available cash funds and the development of margins and current assets (e.g., inventories and
receivables). These reports also include budgeted and actual
revenues and expenditures. Structure and content of these
reports must be adapted continuously to meet information
requirements. ADVA Optical Networking has regularly updated credit limits in place for all customers. Material expenditures and investments must be approved in advance
through an electronic purchase order system. In conjunction
with continuously updated revenue and cash forecasts, a detailed monthly preview of anticipated Group developments
within the next three to twelve months can be generated. In
addition, ADVA Optical Networking’s Management Board regularly analyzes the financial position and profitability of the
Group, discusses all significant business transactions with
the Supervisory Board and obtains its approval if necessary.
In order to ensure observance of all applicable laws and
regulations, ADVA Optical Networking has a code of conduct
and a range of Group-wide policies in place which are mandatory for all employees. Enforcement of respective compliance is coordinated by ADVA Optical Networking’s Chief
Compliance Officer who reports to the Chief Executive Officer
and the Supervisory Board. In addition, Albert Rädler, member of the Company’s Supervisory Board, serves as ombudsman. Any employee is free to contact him directly and anonymously and report suspected incidents of non-compliance.
The analytical tools and processes described above secure
a constant and transparent reporting system across all divisions. In regular monthly reports and quarterly webinars, the
Management Board informs the extended worldwide management team about the current business development, business outlook, Group and departmental goals.
80
In addition, ADVA Optical Networking systematically describes all major risks which may cause material harm to the
Group or may even threaten its existence, as well as the internal controls, processes and tools that are used to mitigate these risks. The list of major risks is subject to change,
driven by input from within the organization and at least biannual reviews by the Management Board. For each major
risk identified, the Group assigns a dedicated risk owner who
is responsible to report risk-related information periodically
and to inform the Management Board immediately should
the risk materialize.
All major risks are
described, as well
as the internal
controls, processes
and tools that are
used to mitigate
these risks
Opportunity Identification
The identification of opportunities results from applying the
same analytical tools and processes as described in the “risk
management system” section above. Current opportunities
are discussed in the “outlook” section further below.
General Risks
Economic and Market Risks
ADVA Optical Networking’s business activities are subject to
the general economic conditions in its primary sales regions
and, in particular, to conditions in the communications and
networking industries. The Group is most affected by the
investment decisions made by carriers and enterprises in
Europe, the Americas and the Asia-Pacific region. If a longterm period of decline should unexpectedly occur in these
regions, it could have a noticeably detrimental effect on the
Group’s business, operating results and financial situation. In
the past few years, ADVA Optical Networking has witnessed
an increasing volatility in market trends, which makes planning and forecasting more difficult and could thus result in
negative consequences for the financial position of the Group.
Competitive Risks
Additional risks arise as a result of increased competition
from existing and new competitors. In particular, companies
from the Asia-Pacific region have been increasing their market presence and utilizing their cost advantages in develop-
Dependency on
the communication
and networking industry
Strong competition
ment and production. The market for Optical+Ethernet solutions is highly competitive and subject to rapid technological
change. Competition in this market is characterized by various factors, such as price, functionality, service, scalability
and the ability of systems to meet customers’ immediate and
future network requirements. Risks to the Group’s business
particularly include the increased pricing competition faced
by carrier customers, or the proliferation of competitive alternatives and multi-solution systems, which could lead to
a decline in profit margins. Since most of the Group’s competitors operate in a broader market and have considerably
more resources available due to their greater size, ADVA
Optical Networking must continue to leverage its competitive advantage in terms of functionality and efficiency of its
solutions, as well as in terms of total cost for the customer.
Significant
financial risks
Financial Risks
Financial risks, in essence, arise from potential
• inability to secure financing,
• inventory depreciation,
• impairment of intangible assets, especially of goodwill and
capitalized R & D expenses,
• fluctuations in international currencies,
• losses due to bad debt, and
• changes in interest rate levels.
ADVA Optical Networking may not be able to secure followup financing for maturing financial liabilities, and, in full or in
part, bank credit lines may be cancelled, due to changes in
the overall economic outlook, interbank lending willingness
and the assessment of ADVA Optical Networking’s creditworthiness. For the latter reason, financial liabilities may be
called in before scheduled maturity. In the event of a change
in control or when defined financial ratios reach threshold
limit values, part of the financial liabilities may fall due with
immediate effect. In 2011, no financial liabilities were called
in before maturity, and liquidity was sufficient at all times to
meet payment obligations. Also, ADVA Optical Networking
may not be able to sell accounts receivable from key customers, due to a reduction in the creditworthiness of these
customers, the loss of business with these customers and
declining financial strength of ADVA Optical Networking. In
2011, the Group’s ability to sell these accounts receivable
has not been impacted.
Welcome
Management
Board
Supervisory
Board
Inventory depreciation may be triggered by technological
obsolescence, as well as short-term changes in customer
demand and manufacturing processes. In 2011, inventory
depreciation amounted to EUR 5.6 million after EUR 1.2 million in 2010.
Corporate
Governance
ADVA Optical Networking carries significant intangible assets
that may need to be impaired. Goodwill may be subject to
valuation adjustments in case forecasts for related net cash
flows need to be adjusted, and capitalized development expenses may need to be impaired due to a modified assessment of related market demand. In 2011, no such impairments were recognized (2010: no such impairments either).
Stock
Investor
Relations
Due to a major portion of the Group’s revenues and costs being generated in foreign currencies and a significant portion
of its goodwill being carried in foreign currencies, ADVA Optical Networking is particularly subject to fluctuations in the
EUR / USD and EUR / GBP exchange rates. In 2011, on a net
basis, the Group saw significant GBP inflows and USD outflows, based on strong GBP operating cash flow generation
and largely USD-denominated material purchasing, which
was less than compensated by USD cash income. To combat fluctuations, the USD and GBP net cash flows in part are
hedged against EUR using forward exchange agreements.
The importance of currency hedging, especially by means
of derivative instruments and natural hedges through local
purchasing and manufacturing will increase for ADVA Optical
Networking in the future. Further expansion in non-EUR re-
Business
Overview
Management
Report
Financial
Statements
Additional
Information
81
›› Risk Report
gions of the world is likely to raise the Group’s currency exposure as well. Going forward, a weakening of the USD and
the GBP can have a significant financial impact on the ability
to price ADVA Optical Networking’s products competitively.
Since many of the Group’s major competitors are U.S. companies, they benefit from a weakening USD. This could result in a negative impact on the Group’s level of competitiveness and business development and could endanger growth
in markets outside of Europe.
In 2011, depreciation on trade accounts receivable due to
bad debts amounted to about nil (about nil in 2010).
ADVA Optical Networking’s cash and cash equivalents with
banks as well as interest-bearing liabilities with banks and
other parties imply interest income and expense cash flows
that can be impacted adversely by changes in interest rates.
ADVA Optical Networking in part uses derivative financial instruments to hedge this risk. At the end of 2011, there were
no interest rate hedging contracts in place (end of 2010: no
such contracts in place either).
82
Long sales cycles
Time Risks
Conducting business with carriers entails long sales cycles,
which are governed by the legal, economic and business requirements for carriers, and can result in delays in the recognition of revenues. Since the Group’s distribution partners
generate a major portion of revenues, future revenue trends
are uncertain. Through an ongoing expansion of ADVA Optical Networking’s direct sales efforts and the subsequent
improvements in customer relations, the Group expects to
continue to reduce this risk in the future.
Difficult protection
of intellectual
property, product
and warranty
liability
Legal Risks
Legal risks pertain primarily to protecting intellectual property and other trade secrets, as well as potential claims under product and warranty liabilities. ADVA Optical Networking
currently relies on a combination of copyright and trademark
laws, contractual rights, patents and trade secrecy laws to
protect its intellectual property. Unauthorized parties may attempt to copy or otherwise obtain and use the Group’s products or technology. Monitoring unauthorized use of products
and technology is difficult, and the Group cannot be certain
that steps taken will prevent unauthorized use of products
and technology. If competitors are able to use the Group’s
products and technology, ADVA Optical Networking’s ability
to compete effectively could be harmed. Counter measures
may prove insufficient in the future and result in conflicts
regarding the usage of property rights and technologies. In
particular, the continued expansion of the Group’s presence
in China carries the risk that less stringent regulations for
intellectual property rights could lead to an infringement on
ADVA Optical Networking’s patents and other intellectual
property. Such infringement of intellectual property rights
could take the form of the production of illegal copies of the
Group’s products and solutions, and could cause considerable damage to the Group. Third parties may also assert that
ADVA Optical Networking has violated their own intellectual
property rights and copyright laws, and may claim license
fees, indemnities or discontinuation of production and marketing of the relevant products. Related disputes could result in considerable cost to ADVA Optical Networking in its
efforts to protect intellectual property while also diverting
considerable management resources. This could result in a
negative impact on the Group’s business activities. Risks
from product and warranty liability result from possible damages occurring to the users of ADVA Optical Networking’s
products due to malfunctions or other defects. Although the
Group usually negotiates for contractual limitations on liability and maintains liability insurance, the possibility remains
that such liabilities may result in a negative impact on the
Group’s business activities.
Group-Specific Risks
Product Risks
Risks specific to ADVA Optical Networking primarily arise in
case the Group is not able to continually adapt business activities to the ever-changing market conditions. These types
Inability to meet
customer demands
of risks originate to some extent from changes in customer
demands and the Group’s ability to meet these requirements
reliably and in a timely manner. Should the Group be unable
to adapt to new market conditions, customer requirements
or industry standards, the Group’s development would be
negatively impacted. The same is true if the products cannot be seamlessly integrated into existing customer network infrastructures. This could lead to delays in installation, return of products or cancellation of orders, and would
not only result in additional costs for warranty and repair
services, but would also harm ADVA Optical Networking’s
overall reputation.
Dependence on Large Customers, Suppliers and Contract
Manufacturers
A limited number of distribution partners and direct or indirect carrier customers currently account for a significant
portion of the Group’s revenues. If orders from these major
customers are postponed or cancelled, revenues and profitability would be adversely affected because the Group’s cost
structure is largely aligned with ADVA Optical Networking’s
future expectations and can only be adjusted on such short
notice to a limited extent. The Group also depends on a limited number of suppliers to provide numerous components
for the manufacturing of products and systems. Although the
Group follows a general policy of requiring components to be
available through at least two suppliers, some risks of delivery bottlenecks and associated production shortages exist.
Overall, there are only a limited number of sources for obtaining the required optical and electronic components ADVA
Optical Networking requires for its products; in some cases
they can only be purchased from a single supplier. At times
that source is also a competitor. In addition, ADVA Optical
Networking relies on a significant amount of contract manufacturing services from a limited number of providers of
such services. A consolidation among the Group’s component suppliers, or negative developments in the businesses
of the Group’s component suppliers and contract manufacturers affecting their ability to supply the Group, could ad-
versely impact the availability of components and products on
which ADVA Optical Networking depends and in turn strongly
impair the Group’s business.
Strategic Risks / Acquisitions
ADVA Optical Networking considers acquisitions and strategic investments to be an important part of its strategy to
expand technological competence and increase presence in
key markets. This enables the Group to expand its customer
base and allows for easier access to new clients. Such investments could involve increased capital requirements and
result in a material burden on the financial position of the
Group, with the realization of anticipated benefits remaining uncertain. Furthermore, the acquisition process and the
subsequent integration of new companies into the Group require a commitment from management, which may considerably impinge on management’s other important responsibilities in the operating business. There are also direct risks
related to the integration of new companies, such as the potential loss of key employees of these companies, as well as
cultural acclimatization issues or challenges with the pooling of IT systems.
Welcome
Increased capital
requirements,
commitment of
management
resources, loss of
key employees
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
83
›› Risk Report
Overall risk has
decreased, no
current risks are
endangering the
Group’s survival
Risk Assessment
Based on careful inspection of the Group’s risk profile at the
time of the preparation of the Group management report,
the Management Board has not identified any risks that pose
a danger to ADVA Optical Networking’s survival, and to the
Management Board there are no risks evident that may endanger the future existence of the Group. ADVA Optical Networking’s overall risk has decreased since the preparation
of the Group management report of the prior year. While
the global macro environment is more uncertain and hence
the economic and market risks have increased, ADVA Optical Networking’s growing liquidity and profitability as well
as its ability to double its credit lines from EUR 4.0 million to
EUR 8.0 million and to raise EUR 11.5 million for a five-year
bonded loan in January 2012 indicate that its financial risk at
the time of the preparation of this report has decreased, in
spite of an assessment of counterparty risk by lenders that
is still conservative. In addition, the significant ramp of the
Group’s development activities has further strengthened its
market positioning and product quality, reducing ADVA Optical Networking’s competitive and product risks.
Internal Controls Related to Financial Reporting
The Management Board of ADVA Optical Networking is responsible for establishing and maintaining an adequate system of internal controls. It has implemented an internal control system that enables the Management Board to ensure
completeness, accuracy and reliability of financial reporting
at Group level. When designing its internal control system,
ADVA Optical Networking used the COSO 10 framework as a
key reference and source of guidance. The internal control
over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting. No
system of internal control over financial reporting, including one determined to be effective, may prevent or detect
all misstatements.
Internal controls
related to financial
reporting designed
around COSO
framework
Control Environment
The control environment is the foundation of the internal
control system in every organization. ADVA Optical Networking fosters an environment of openness and integrity with
a clear commitment to excellence, competence and the development of its employees. The Group’s leadership principles of integrity / honesty, decisiveness and respect are based
on this philosophy, and the culture is reflected in the overall
tone set by the Management Board. ADVA Optical Networking has a clear organizational structure with well-defined authorities and responsibilities. The bodies charged with the
governance and control of the Group (Management Board,
Supervisory Board) actively participate in the running and
steering of the business. Financial steering is handled by the
Chief Financial Officer & Chief Operating Officer, under the
Audit Committee’s control.
Control environment backed by
the Management
Board’s leadership principles
10
84
Five major accounting organizations formed a group known as COSO (Committee of Sponsoring Organizations of the Treadway Commission), to provide guidance on evaluating internal control. They issued this guidance as
the COSO Internal Control Framework.
Risk Assessment
As part of the internal controls related to financial reporting, the risk assessment follows the process described in the
“risk management system” section.
Information
technology
controls suited
to complexity of
business units
Global accounting
policies, reporting
guidelines and
closing calendar
Control Activities
The larger and more complex business units use an integrated enterprise resource planning solution, which also
serves as general ledger system. Information technology
controls have been implemented to restrict user access, ensure proper authorization of changes to the system and efficient handling of user help desk requests. Specific processes
are defined and applied for the following reporting cycles in
those business units: cash reporting, revenue recognition,
R & D capitalization, inventory reporting, fixed assets, payroll and provisions.
At the Group level, those balance sheet and income statement positions requiring a significant degree of judgment and
estimation when being valued are subject to rigorous review
and management involvement. This is the case for impairment testing reviews (annual or when a triggering event occurs), capitalization of development projects (when the industrialization stage is reached) and tax reporting and review
(quarterly). ADVA Optical Networking also carries out intercompany reconciliations and analytical reviews based on a
four-eyes principle between the local accounting and the consolidation functions. All business units follow a set of global
accounting policies and reporting guidelines.
The financial statements preparation process is monitored
via a calendar that is communicated to all involved parties
on a monthly basis. Checklists are completed both in the individual business units and at the consolidation level to ensure completeness of all closing steps. Monthly reviews by
Group management have been installed to detect omissions.
Information and Communication Tools
The internal control system at ADVA Optical Networking is
supported by tools to store and exchange information, enabling the Management Board to make informed business
decisions about financial reports and disclosures. The following components ensure proper information and communication for financial reporting
Effective information and
communication
with the Management Board
Welcome
Management
Board
• Accounting systems that are matched to the degree of complexity of a business unit. All local accounts are mapped
to the Group chart of accounts, which is used Group-wide.
The Group consolidation is supported by a database tool.
Supervisory
Board
• Global accounting policies for the more complex financial
statement positions of the Group and a Group accounting
manual for all other financial guidance. Accounting policies
are updated regularly and are implemented only after a
thorough internal review and training process.
Corporate
Governance
Stock
Internal Monitoring
As part of the ongoing monitoring, the Chief Financial Officer
& Chief Operating Officer is informed of all material misstatements and control breakdowns on a quarterly basis in the executive summary to the financial statements. The reporting
of deficiencies follows the principles of open and transparent communication, and follow-up is ensured through regular calls where corrective actions are presented.
Transparent
reporting and
follow-up of
control
deficiencies
Internal Financial Audit
In order to monitor significant activities, to identify and
minimize risks and to support decision-making, ADVA Optical Networking implemented internal audit procedures to
review financial processes. Based on a risk assessment for
key financial processes, in 2011 the Group agreed on an audit program and performed appropriate audit procedures
throughout 2011. The Chief Financial Officer & Chief Operating Officer presents the internal audit reports to the Audit Committee. Actions to adjust processes or enhance internal controls are initiated based on the recommendations
included in the internal audit reports.
Internal review of
financial processes
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
85
›› Events After the
Balance Sheet Date
›› Outlook
Events After the Balance Sheet Date
Planned conversion into an SE
legal entity
86
The Management Board and the Supervisory Board of ADVA
AG Optical Networking will propose to the upcoming Annual General Meeting on May 24, 2012 the conversion of the
Company into an SE (Societas Europaea, a public limited-liability company under European law) named ADVA Optical
Networking SE. The Management Board considers an SE to
be a modern legal form for a global corporation with headquarters in Europe.
As replacement of a bonded loan due in March 2012
ADVA AG Optical Networking entered into a new bonded
loan agreement amounting to EUR 11.5 million. The loan
was paid out on January 31, 2012 and is due for repayment
in January 2017.
New five-year
EUR 11.5 million
bonded loan
Outlook
Optical+Ethernet
metro networking market is
expected to grow
by 13% per year
through 2014
Based on the macro-economic environment described above,
ADVA Optical Networking expects its total market to grow by
an average 13% per year between 2010 and 2014.3 Carrier
Ethernet access solutions are expected to show the strongest growth within this segment.
Growth driven by
increasing bandwidth demand and
replacement of
incumbent protocols with Ethernet
The growth of the overall market is primarily driven by steadily
increasing demand for bandwidth from residential end customers and corporations, with carriers investing in new optical networking infrastructure solutions. As in 2010, carrier
customer decisions to roll out triple play services (data, voice
and video) to residential end customers on a large scale were
a major driver for many next-generation network infrastructure projects. Data storage, the convergence of enterprise
networks and the expansion of local area networks to multiple locations are in particularly high demand by enterprises.
Furthermore, over the last couple of years, the Ethernet protocol has evolved into the standard carrier network protocol, replacing incumbent protocols such as SONET/SDH, ATM
and Frame Relay.
Based on the trends mentioned above, as in the prior year,
ADVA Optical Networking will concentrate on the following
four strategic elements:
Strategic goals
Welcome
• Grow global revenues profitably through continued strong
direct sales & marketing efforts with a solid focus on key
accounts, optimized distribution partnerships and nonhardware business.
Management
Board
Supervisory
Board
• Expand the Group’s proven Optical+Ethernet innovation
leadership by meeting key customers’ demand for advanced networking solutions quickly and comprehensively.
Corporate
Governance
• Maintain operational excellence by further focusing on
industry-leading processes and best-in-class execution,
which will result in quality leadership, improved efficiency
and increased overall customer satisfaction.
Stock
• Recruit, retain, motivate, educate and nurture the Group’s
team to achieve high levels of performance, personal
growth and job satisfaction, while keeping attrition rates
low.
Investor
Relations
Additional details on the projected market environment until 2014 as well as the resulting opportunities are discussed
in the “general economic and market conditions” section
further above.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
87
›› Outlook
2011
expectations have
been fully met
Looking back at 2011, ADVA Optical Networking was able to
make major progress in all four elements:
2011 revenues were up 6.6% compared to 2010, likely somewhat below market growth,5 but still satisfactory as ADVA
Optical Networking had seen extraordinary strong 2010 revenues, up 25.3% compared to the prior year and well above
market growth, due to major non-recurring low latency deployments for the financial industry in H2 2010. The Group
was able to further increase its overall customer base in 2011
and to expand the trusted partnerships with existing customers. The moderate revenue growth in 2011 went along
with a significant improvement in ADVA Optical Networking’s
profitability. The Group’s operating profit at EUR 13.2 million in 2011 is up from EUR 9.3 million in 2010, and its net
income of EUR 16.9 million in 2011 more than doubled from
EUR 7.0 million in 2010. This positive development is largely
due to increased revenues and gross margins as well as to
extraordinary tax income in 2011 related to the initial recognition of deferred taxes in ADVA Optical Networking’s U.S.
entity. The Group’s profitable growth also drove an increase
of ADVA Optical Networking’s net liquidity, from EUR 24.7 million at year-end 2010 to EUR 31.2 million at the end of 2011.
Also, ADVA Optical Networking expanded its Optical+Ethernet
innovation leadership in 2011 by successfully introducing a
number of state-of-the-art networking solutions that meet
the demands of the Group’s customers. Examples include
the release of industry-leading high speed transport technology. ADVA Optical Networking’s new 100Gbit/s agile core
express solution with coherent detection technology allows
a massive increase in network scalability and efficiency,
and enables service providers to use optical networking resources flexibly and on-demand. The Group’s new non-coherent, direct detection 100Gbit/s metro solution meets the
demand of service providers and enterprises for efficient
high-speed transport across distances of up to 500km. Further, ADVA Optical Networking introduced new versions of
its FSP 150 Ethernet access platform during 2011. The new
88
FSP 150EG-X edge gateway delivers cost-effective capacity, scalability and resiliency for Carrier Ethernet access and
backhaul networks, and the new FSP 150CC-XG210 is an ultra-compact Ethernet service demarcation and aggregation
device that enables unrivalled service monitoring and assurance at 10Gbit/s line speed.
As for maintaining operational excellence, ADVA Optical Networking showed strong progress as well with efficiency improvements in many areas. For example, the optimization of
the Group’s distribution processes started in 2010 resulted
in significant inventory reductions, shorter cycle times and
lower material flow complexity in 2011. ADVA Optical Networking’s research & development approach follows bestin-class processes benefiting from a globally integrated IT
landscape, integrated tools and product-line specific centers
of competence. With this approach, the Group managed to
further reduce the amount of stock-keeping units, reducing
operational complexity.
On the employee side, ADVA Optical Networking hired significant additional talent in 2011, mostly for its research & development and sales organizations, reflecting its innovation
focus and its stronger emphasis on distribution. Based on
competitive compensation programs, a rewarding work environment with comprehensive education opportunities and
strong financial results, the Group maintained the high motivation of its employees in 2011.
Further
improvement
of ADVA Optical
Networking’s profitability expected
Excellent environment for further
market growth
Unique combination of factors
differentiates
ADVA Optical
Networking
from its peers
ADVA Optical Networking expects to further improve the
profitability of the Group, based on the strategic focus described above, a unique combination of factors differentiating ADVA Optical Networking from its peers and the dynamic growth expected in the telecommunications industry,
an industry that is centrally critical for most applications
and industries:
• Video-sharing websites such as YouTube, social networking platforms such as Facebook, online gaming and mobile gadgets using bandwidth-hungry applications have
all been growing at very strong rates over the last years,
independent from the macro-economic environment. Today these services are straining and constricting existing
networks, requiring massive investments in WDM infrastructure. In addition, the increase in mobile devices as
the primary platform for the future delivery of broadband
services is creating a significant need for high-capacity
backhaul networks that can scale with the projected high
growth in broadband demand and service delivery. These
trends are highly beneficial to ADVA Optical Networking,
as the Group builds the foundation for high-speed, nextgeneration networks. ADVA Optical Networking’s product
portfolio adds scalability and intelligence to its customers’
networks while removing complexity and cost.
• These exciting opportunities in ADVA Optical Networking’s
industry will support its strategic focus to be the trusted
partner for innovative Optical+Ethernet transport solutions. The combination of cost-effective innovation, short
development and delivery times, a broad and growing customer base and well-balanced distribution model differentiates ADVA Optical Networking from its peers and will further fuel its sustainable business model.
Based on these factors, the Management Board of ADVA
Optical Networking expects 2012 and 2013 revenues to grow
year-on-year. Under this assumption, the Management Board
of ADVA Optical Networking also expects 2012 and 2013 operating income and net liquidity to increase. The Group will
continue to invest appropriately in product engineering and
revenue-generating activities in both years, while investing
selectively in the general and administrative function. Actual results may differ materially from expectations, provided
that risks materialize or the underlying assumptions prove
unrealistic. ADVA Optical Networking’s major risks are discussed in the “risk report” section further above.
In 2012 and
2013, revenues,
operating income
and net liquidity
are expected to
grow year-on-year
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Meiningen, February 20, 2012
Stock
Brian Protiva
Investor
Relations
Christoph Glingener
Business
Overview
Jaswir Singh
Management
Report
Christian Unterberger
Financial
Statements
Additional
Information
89
IFRS Consolidated
Financial Statements
› Consolidated Statement of
Financial Position
91
› Consolidated Income Statement
92
› Consolidated Statement of
Comprehensive Income
93
› Consolidated Cash Flow Statement
94
› Consolidated Statement of
Changes in Stockholders’ Equity
95
› Notes to the Consolidated
Financial Statements
96
› Affirmative Declaration of
the Management Board
163
› Independent Auditor’s Opinion
164
Trusted Partner
A New Era of Connectivity
90
Research and Education networks stand at the forefront of innovation.
They’re continually developing new applications that drive our civilization forward. But to do this they need connectivity. KINBER is a key part
of this community. When it had to develop a network to advance the
education, health care and work force development across the state of
Pennsylvania in the U.S., there was only once choice. We worked with
TorreyPoint and Juniper Networks to create a highly automated network – built on the FSP 3000.
Consolidated Statement of Financial Position
(in thousands of EUR)
Assets
Note
Dec. 31,
2011
Welcome
Dec. 31,
2010
(12)
21
63
(13)
10,312
1,424
47,926
Trade accounts payable
(14)
33,224
33,140
39,588
Provisions
(15)
5,572
6,749
Tax liabilities
(22)
3,822
3,960
Deferred revenues
(16)
12,877
7,412
Other current liabilities
(14)
19,563
19,553
85,391
72,301
(12)
20
42
Financial liabilities
(13)
17,594
27,906
Provisions
(15)
775
943
Deferred tax liabilities
(22)
12,902
10,632
Deferred revenues
(16)
4,084
3,217
Other non-current liabilities
(14)
3,144
3,667
38,519
46,407
123,910
118,708
59,110
54,085
Trade accounts receivable
(8)
54,874
Inventories
(9)
36,536
Tax assets
(22)
354
227
Other current assets
(10)
9,636
7,796
160,510
149,622
Total current assets
Non-current assets
(11)
49
81
Property, plant and
equipment
(11)
21,599
20,597
Goodwill
(11)
19,842
19,653
Capitalized development
projects
(11)
39,231
29,571
Purchased technology
(11)
2,684
5,069
Other intangible assets
(11)
2,857
2,398
(6)
1
100
(22)
11,237
4,704
Total assets
Management
Board
Total current liabilities
Supervisory
Board
Corporate
Governance
Non-current liabilities
Finance leases
Total non-current assets
Dec. 31,
2010
Finance lease obligations
(7)
Other non-current assets
Dec. 31,
2011
Financial liabilities
Cash and cash equivalents
Deferred tax assets
Note
Current liabilities
Current assets
Investments accounted for
by the equity method
Equity and liabilities
(10)
Finance lease obligations
Stock
Total non-current liabilities
Total liabilities
Stockholders’ equity
Share capital
47,525
47,169
303,679
-229,021
-236,028
Net income
16,939
7,007
Accumulated other
comprehensive loss
-4,836
-6,413
Accumulated deficit
Business
Overview
(17)
305,379
Capital reserve
Investor
Relations
1,886
2,327
99,386
84,500
Total stockholders’ equity
135,986
115,414
259,896
234,122
Total equity and liabilities
259,896
234,122
Management
Report
Financial
Statements
Additional
Information
91
›› Consolidated Income Statement
›› Consolidated Statement of
Comprehensive Income
Consolidated Income Statement
Note
2011
2010
(18)
310,945
291,725
Cost of goods sold
-180,251
-172,653
Gross profit
130,694
119,072
-44,186
-43,681
-24,116
-23,601
-50,936
-46,252
(in thousands of EUR, except earnings per share and number of shares)
Revenues
Selling and marketing expenses
General and administrative expenses
Research and development expenses *
Other operating income
(19)
2,125
3,892
Other operating expenses
(19)
-374
-131
13,207
9,299
Operating income
Interest income
(20)
86
92
Interest expenses
(20)
-1,617
-1,531
Other financial gains and losses, net
(21)
2,328
3,130
14,004
10,990
2,935
-3,983
16,939
7,007
basic
0.36
0.15
diluted
0.35
0.15
basic
47,298,983
46,596,579
diluted
48,718,224
48,267,085
Income before tax
Income tax benefit (expense), net
(22)
Net income
Earnings per share in EUR
(24)
Weighted average number of shares for calculation of earnings per share
* Line item “Research and development expenses” includes income from capitalization of development expenses, net of amortization for capitalized development projects.
Further details are presented in note (11).
92
Consolidated Statement of Comprehensive Income
(in thousands of EUR)
Welcome
Note
Net income
Exchange differences on translation of foreign operations
Total comprehensive income
(17)
2011
2010
16,939
7,007
1,577
1,723
18,516
8,730
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
93
›› Consolidated Cash Flow Statement
›› Consolidated Statement of
Changes in Stockholders’ Equity
Consolidated Cash Flow Statement
(in thousands of EUR)
Cash flow from operating activities
Note
2011
14,004
10,990
Adjustments to reconcile income
before tax to net cash provided by
operating activities
Non-cash adjustments
Amortization of non-current assets
(11)
24,361
20,687
Loss from disposal of
property, plant and equipment and
intangible assets
(11)
89
19
Stock compensation expenses
Foreign currency exchange differences
1,583
1,848
-84
-2,440
Changes in assets and liabilities
Increase in trade accounts receivable
Decrease (increase) in inventories
Increase in other assets
Increase in trade accounts payable
Increase (decrease) in provisions
Increase in other liabilities
Income tax paid
Net cash provided by
operating activities
94
Proceeds from disposal of property,
plant and equipment and intangible
assets
2010
21
223
Proceeds from government grants
(11)
466
-
Investments in property, plant and
equipment
(11)
-7,500
-8,218
Investments in intangible assets
(11)
-26,014
-16,076
(6)
99
-
85
92
-32,843
-23,979
Payments received for loans to
investments accounted for by the equity
method
Interest received
Net cash used in investing activities
(31)
2011
Cash flow from investing activities
(23)
Income before tax
Note
2010
-6,948
-9,313
3,052
-14,188
-1,710
-5,825
84
6,131
-1,460
3,173
7,900
10,631
-1,135
-613
39,736
21,100
Cash flow from financing activities
Proceeds from capital increase and
exercise of stock options
(17)
401
3,762
Proceeds from issuance and exercise of
option bonds
(31)
36
162
Cash repayment of option bonds
(31)
-211
-38
-62
-292
Payments for finance leases
Increase in financial liabilities
(13)
-
14,000
Cash repayment of financial liabilities
(13)
-1,424
-12,725
-1,719
-1,585
-2,979
3,284
1,111
2,798
5,025
3,203
54,085
50,882
59,110
54,085
Interest paid
Net cash provided by (used in)
financing activities
Net effect of foreign currency
translation on cash and cash
equivalents
Net change in
cash and cash equivalents
Cash and cash equivalents
on January 1
Cash and cash equivalents
on December 31
Consolidated Statement of Changes in Stockholders’ Equity
Welcome
Par value
Capital
reserve
Net income
and accumulated
deficit
Accumulated
other
comprehensive
loss
Total
46,149
299,285
-236,028
-8,136
101,270
Share capital
(in thousands of EUR,
except number of shares)
Number
of shares
Balance on January 1, 2010
46,149,337
Capital increase, including exercise
of stock options and option bonds
1,019,799
1,020
Stock options and option bonds
outstanding
2,742
3,762
1,652
1,652
Net income
7,007
Exchange differences on
translation of foreign operations
Total comprehensive income
Balance on December 31, 2010
Capital increase, including exercise
of stock options and option bonds
1,723
1,723
7,007
1,723
8,730
-229,021
-6,413
115,414
47,169
303,679
355,739
356
232
588
1,468
1,468
Net income
16,939
Exchange differences on
translation of foreign operations
Total comprehensive income
Balance on December 31, 2011
47,524,875
47,525
305,379
Supervisory
Board
Corporate
Governance
7,007
47,169,136
Stock options and option bonds
outstanding
Management
Board
Stock
Investor
Relations
Business
Overview
16,939
1,577
1,577
16,939
1,577
18,516
-212,082
-4,836
135,986
Management
Report
Financial
Statements
Details on changes in stockholders’ equity are presented in note (17).
Additional
Information
95
›› Notes to the Consolidated
Financial Statements
Notes to the Consolidated Financial Statements
(1)
Information About the Company and the Group
The consolidated financial statements of ADVA AG Optical Networking (hereinafter referred to as “the Company”) for the year ended
December 31, 2011, were authorized for issue in accordance with
a resolution of the Management Board on February 20, 2012. Since
1999, the Company has operated under the name ADVA AG Optical Networking. The Company’s registered offices are at its main
manufacturing site in Maerzenquelle 1-3, 98617 Meiningen, Germany. The Company’s headquarters are in Fraunhoferstrasse 9a,
82152 Martinsried / Munich, Germany.
The ADVA Optical Networking Group (hereinafter referred to as
“ADVA Optical Networking” or “the Group”) develops, manufactures
and sells optical and Ethernet-based networking solutions to telecommunications carriers and enterprises to deliver data, storage,
voice and video services.
Telecommunications service providers, private companies, universities and government agencies worldwide use the Group’s systems. ADVA Optical Networking sells its product portfolio both directly and through an international network of distribution partners.
(2)
Basic Principles for the Preparation of the
Consolidated Annual Financial Statements
The Group’s consolidated annual financial statements for the financial years ended December 31, 2011, and December 31, 2010, are
prepared in accordance with the International Financial Reporting
Standards (IFRS) published by the International Accounting Standards Board (IASB), as applicable in the European Union (EU). The
consolidated financial statements have been prepared under the
historical cost convention, as modified by the valuation of certain
derivative financial instruments and share-based compensation
transactions at fair value through profit and loss.
96
The consolidated annual financial statements are presented in EUR.
Unless otherwise stated, all amounts quoted are in thousands of
EUR. The balance sheet is broken down into current and non-current assets and liabilities. The classification of income and expenses
in the income statement is based on their function within the entity. When items on the balance sheet and in the income statement
are summarized in the interest of clarity, it is explained in the notes
to the consolidated financial statements. The additional disclosure
requirements in order to comply with section 315a paragraph 1 of
the German Commercial Code (Handelsgesetzbuch, HGB) have all
been met.
The annual financial statements of the individual subsidiaries of
the holding company ADVA AG Optical Networking, as subsumed in
the consolidated annual financial statements, are all prepared using the same accounting and valuation policies and the same balance sheet date.
(3)
Effects of New Standards and Interpretations
The accounting policies followed are consistent with those of the
prior financial year, except for the adoption of new and amended
IFRSs and interpretations (IFRICs) during the year.
Standards, amendments and interpretations
applicable for the first time in 2011
The Group has adopted the following new or revised IFRSs and
IFRICs in 2011. The application has not had a material impact on
the amounts reported for the current and prior years but may affect the accounting for future transactions or arrangements.
First-time
adoption *
IAS 24
Related Party
Disclosures
(revised)
IAS 32
Financial
Instruments:
Presentation:
Classification of
Rights Issues
(amendment)
IFRS 1
First-time adoption
of IFRSs:
Limited Exemption
from Comparative
IFRS 7 Disclosures
for First-time
Adopters
Jan. 1, 2011
Feb. 1, 2010
Impact on
the financial
position and
performance
none
Improvements to IFRSs issued in 2010: The amendment clarifies
that an entity may present an analysis of each component of other
comprehensive income either in the statement of changes of equity or in the notes to the financial statements.
First-time
adoption *
none
none
IFRIC 14
Prepayments of a
Minimum Funding
Requirement
(amendment)
Jan. 1, 2011
none
IFRIC 19
Extinguishing
Financial Liabilities
with Equity
Instruments
(revised)
Jul. 1, 2010
none
Improvements
to IFRSs (2010)
Amends seven
pronouncements
(plus consequential
amendments to
various others)
Management
Board
New accounting pronouncements adopted by the EU
requiring application in future periods
IFRS 7
Jul. 1, 2010
Welcome
Financial Instruments
Disclosures:
Transfer of Financial
Assets (Amendments)
Expected
impact on
the financial
position and
performance
Supervisory
Board
Corporate
Governance
Jul. 1, 2011
Disclosure
Stock
* To be applied in the first reporting period of a financial year beginning on or after this
date.
Investor
Relations
The amendments to IFRS 7 increase the disclosure requirements for
transactions involving transfers of financial assets. These amendments are intended to provide greater transparency around risk
exposures when a financial asset is transferred but the transferor
retains some level of continuing exposure in the asset. The amendments also require disclosures where transfers of financial assets
are not evenly distributed throughout the period.
Business
Overview
Management
Report
Financial
Statements
Jan. 1, 2011
none
Additional
Information
* To be applied in the first reporting period of a financial year beginning on or after this
date.
97
›› Notes to the Consolidated
Financial Statements
New accounting requirements not yet adopted by the EU
The IASB and the IFRIC have issued further Standards and Interpretations in 2011 and previous years. The application is not yet mandatory for the financial year 2011 and in addition is subject to the adoption by the EU.
Expected impact on the
financial position and
performance
Jul. 1, 2012
under review
Jan. 1, 2012
under review
Jul. 1, 2013
none
IAS 1
Presentation of Financial Statements – Presentation of Items of
Other Comprehensive Income (amendments)
IAS 12
Deferred Tax: Recovery of Underlying Assets (amendment)
IAS 19
Employee Benefits (amendments)
IAS 27
Separate Financial Statements (revised)
Jan. 1, 2013
none
IAS 28
Investments in Associates and Joint Ventures (amendment)
Jan. 1, 2013
none
IAS 32
Financial Instruments – Presentation: Offsetting Financial Assets and
Financial Liabilities (amendment)
Jan. 1, 2014
none
IFRS 1
First-time Adoption of International Financial Reporting Standards:
Severe Hyperinflation and Removal of Fixed Dates for First Time
Adopters (amendments)
Jul. 1, 2011
none
IFRS 7
Financial Instruments – Disclosures: Offsetting Financial Assets and
Financial Liabilities (amendment)
Jan. 1, 2013
none
IFRS 9
Financial Instruments (and subsequent amendments; amendments to
IFRS 9 and IFRS 7 issued December 16, 2011)
Jan. 1, 2015
under review
IFRS 10
Consolidated Financial Statements
Jan. 1, 2013
none
IFRS 11
Joint Arrangements
Jan. 1, 2013
none
IFRS 12
Disclosure of Interests in Other Entities
Jan. 1, 2013
none
IFRS 13
Fair Value Measurement
Jan. 1, 2013
none
IFRIC 20
Stripping Costs in the Production Phase of a Surface Mine
Jan. 1, 2013
none
* To be applied in the first reporting period of a financial year beginning on or after this date.
98
First-time
adoption *
The amendments to IAS 1 retain the option to present profit or loss
and other comprehensive income either in a single statement or
in two separate but consecutive statements. However, the amendments to IAS 1 require additional disclosures to be made in the
other comprehensive income section such that items of other comprehensive income are grouped into two categories: a) items that
will not be reclassified subsequently to profit or loss; and b) items
that will be reclassified subsequently to profit or loss when specific
conditions are met. Income tax on items of other comprehensive
income is required to be allocated on the same basis. The presentation of other comprehensive income items will be modified accordingly when the amendments are applied in future accounting
periods. The Group does not plan to adopt the standard early and
the effect on the financial reporting has not yet been determined.
(4)
IFRS 9 Financial instruments addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of IAS 39 that relate to the classification
and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those
measured at fair value and those measured at amortized cost. The
determination is made at initial recognition. The classification depends on the entity´s business model for managing its financial instruments and the contractual cash flow characteristics of the instruments. For financial liabilities, the standard retains most of
the IAS 39 requirements. The main change is that, in cases where
the fair value option is taken for financial liabilities, the part of fair
value change due to an entity´s own credit risk is recorded in other
comprehensive income rather than the income statement, unless
this creates an accounting mismatch. The Group does not plan to
adopt the standard early and the impact on the financial reporting
has not yet been determined.
Business combinations
Business combinations from January 1, 2010 are accounted for using the acquisition method. The cost of an acquisition is measured
as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer
measures the non-controlling interest in the acquiree either at fair
value or at the proportionate share of the acquiree’s identifiable net
assets. Acquisition costs incurred are expensed.
Besides the described standards the adoption of new or revised standards and interpretations – from today’s perspective – will not have
a material impact on the financial position and performance of the
Company. The Group does not plan to early adopt these standards.
Significant Accounting Policies
Welcome
Principles of consolidation
All companies in which ADVA AG Optical Networking has direct or
indirect control through subsidiaries are fully consolidated on the
date of change of control to ADVA AG Optical Networking. Companies are deconsolidated on the date when ADVA AG Optical Networking’s control ceases.
Management
Board
Supervisory
Board
Intercompany revenues, expenses, income, receivables and payables within the Group are netted.
Intercompany profits that arise from deliveries and services provided within the Group are eliminated.
Corporate
Governance
Stock
Investor
Relations
When a Group company acquires a business, it assesses the financial assets and liabilities acquired for appropriate classification and
designation in accordance with the contractual terms, economic circumstances and relevant conditions on the acquisition date. This
includes the separation of embedded derivatives in host contracts
by the acquiree.
Business
Overview
Management
Report
If the business combination is achieved in stages, the acquisition
date fair value of the acquirer’s previously held equity interest in
the acquiree is re-measured to fair value on the acquisition date
through profit and loss.
Financial
Statements
Additional
Information
99
›› Notes to the Consolidated
Financial Statements
Any contingent consideration to be transferred by the acquirer will
be recognized at fair value on the acquisition date. Subsequent
changes to the fair value of the contingent consideration that is
deemed an asset or liability will be recognized in accordance with
IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classified as equity,
it shall not be re-measured until it is finally settled within equity.
Goodwill is initially measured at cost being the excess of the consideration transferred over the Group’s net identifiable assets acquired and liabilities assumed. If this consideration is lower than the
fair value of the net assets of the company acquired, the difference
is recognized in profit or loss after reassessment.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing,
goodwill acquired in a business combination is, from the acquisition
date, allocated to each of the Group’s cash generating units that are
expected to benefit from the combination, irrespective of whether
other assets or liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a cash generating unit and where part
of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying
amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is
measured based on the relative values of the operation disposed of
and the portion of the cash generating unit retained.
100
In comparison to the above-mentioned requirements, the following
differences applied to business combinations until January 1, 2010:
Business combinations were accounted for based on the purchase
method, whereby the cost of the stake acquired was netted against
the Group’s share in the Group companies’ equity at the time of acquisition. The cost of the acquisition was measured as the aggregate outlay of cash and cash equivalents, as well as the fair values of the assets given, equity instruments issued and liabilities
incurred or assumed on the date of exchange, plus any costs directly attributable to the acquisition. The non-controlling interest
(formerly known as minority interest) was measured at the proportionate share of the acquiree’s identifiable net assets.
Business combinations achieved in stages were accounted for as
separate steps. Any additional acquired share of interest did not
affect previously recognized goodwill.
When a Group company acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted
in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract.
Contingent consideration was recognized if, and only if, the Group
had a present obligation, the economic outflow was more likely than
not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration affected goodwill.
Investments in associates and in joint ventures
The equity method according to IAS 28 (Investments in Associates) is used to account for investments in entities in which ADVA
AG Optical Networking holds 20% to 50% of the voting rights, either directly or indirectly, and over whose operating and financial
policy decisions ADVA AG Optical Networking exercises significant
influence (associated companies). The investment is initially recognized at cost, and the carrying amount is increased or decreased to
recognize the investor´s share of the profit or loss generated. The
Group share of the profit or loss of investments accounted for by
the equity method is recognized in the consolidated income statement, whereas the share of changes in the equity of investments
accounted for by the equity method that has not been recognized
in profit or loss is shown in the reserves of the consolidated equity.
In case the Group share of losses exceeds the carrying amount
of the investment accounted for by the equity method, no further
losses are recognized at Group level. Goodwill relating to an investment accounted for by the equity method is included in the carrying amount of the investment. Upon loss of significant influence
over an associate, the Group measures and recognizes any retaining investment at its fair value. Upon loss of significant influence,
any difference between the carrying amount of the associate and
the fair value of the retaining investment and proceeds from disposal is recognized in profit or loss.
The equity method is equally used for entities in which ADVA Optical Networking exercises joint control (joint ventures). These are
jointly controlled entities, whereby the venturers have a contractual arrangement that establishes joint control over the economic
activities of the entity.
Foreign currency translation
The functional currency of each Group company is the currency of
the main economic environment in which the company operates.
The reporting currency of ADVA Optical Networking’s consolidated
financial statements is the functional currency of the parent company, ADVA AG Optical Networking (EUR).
Welcome
Management
Board
Transactions in foreign currencies are initially recorded by the Group
entities at their respective functional currency rates prevailing on
the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling on the reporting date. Nonmonetary items that are measured in terms of historical cost in a
foreign currency are translated using the exchange rates as on the
dates of the initial transactions. Non-monetary items measured at
fair value in a foreign currency are translated using the exchange
rates on the date when the fair value is determined.
Supervisory
Board
Corporate
Governance
Stock
The assets and liabilities of foreign operations are translated into
EUR at the rate of exchange prevailing at the reporting date, and
their income statements are translated at the average rate for the
reporting period. The exchange differences arising from the translation are recognized in accumulated other comprehensive income.
On disposal of a foreign operation, the component of accumulated
other comprehensive income relating to that particular foreign operation is recognized in the income statement.
Investor
Relations
Business
Overview
Any goodwill arising on the acquisition of a foreign operation and
any fair value adjustments to the carrying amount of assets and liabilities arising on acquisition are treated as assets and liabilities of
the foreign operation and translated at the closing rate.
Management
Report
Financial
Statements
Additional
Information
101
›› Notes to the Consolidated
Financial Statements
The relevant currency translation rates are listed below:
Closing rate
on Dec. 31, 2011
Average rate
for the period
Jan. 1 to Dec. 31, 2011
Closing rate
on Dec. 31, 2010
Average rate
for the period
Jan. 1 to Dec. 31,2010
USD / EUR
0.77220
0.71880
0.75460
0.75488
GBP / EUR
1.19330
1.15220
1.16750
1.16605
NOK / EUR
0.12870
0.12820
0.12800
0.12495
JPY / EUR
0.01000
0.00900
0.00926
0.00861
CNY / EUR
0.12130
0.11110
0.11450
0.11166
SGD / EUR
0.59430
0.57160
0.58470
0.55418
SEK / EUR
0.11200
0.11070
0.11120
0.10490
PLN / EUR
0.22540
0.24300
0.25230
0.25103
HKD / EUR 0.09940
0.09230
0.09689
0.09730
BRL / EUR 0.41360
0.42970
0.45300
0.43072
INR / EUR
0.01420
0.01520
0.01665
0.01651
SAR / EUR *
0.20590
0.20210
-
-
* The 2011 average rate is calculated for the period Nov. 30 to Dec. 31, 2011.
102
Segment reporting
The internal organizational and management structure and the
structure of internal financial reporting activities are the key factors in determining what information is reported. For making decisions about resource allocation and performance assessment, management does not monitor the operating results separately on the
level of business units. The Group operates in one business segment only, namely the development, marketing and sale of optical
networking products.
Cash and cash equivalents
Cash and cash equivalents as reported in the consolidated cash flow
statement include short-term liquidity, i.e., cash and cash equivalents and short-term investments and securities with an initial time
to maturity not exceeding three months. On December 31, 2011
cash and cash equivalents do not include short-term investments.
Financial assets
Financial assets within the scope of IAS 39 are either classified as
financial assets at fair value, affecting the income statement, loans
and receivables, investments held to maturity, financial assets available for sale or as derivatives designated as hedging instruments in
an effective hedge, as appropriate. The Group determines the classification of its financial assets at initial recognition.
All regular purchases and sales of financial assets are recognized
on the trade date, i.e., the date ADVA Optical Networking committed to purchase the asset. Investments are initially recognized at
fair value plus transaction costs for all financial assets not carried
at fair value through profit or loss. Financial assets carried at fair
value through profit or loss are initially recognized at fair value, and
transaction costs are expensed in the income statement.
The Group’s financial assets include cash and short-term deposits,
trade and other receivables, quoted financial instruments and derivative financial instruments.
Subsequent measurement
The subsequent measurement of financial assets depends on their
classification as follows:
Welcome
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial
assets held for trading and financial assets designated upon initial
recognition at fair value through profit or loss. Financial assets are
classified as held for trading if they are acquired for the purpose
of selling or repurchasing in the near-term. This category includes
derivative financial instruments entered into by the Group that are
not designated as hedging instruments in hedge relationships as
defined by IAS 39. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets at fair
value through profit or loss are carried in the statement of financial
position at fair value with changes in fair value recognized in other
financial gains and losses, net, in the income statement.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
ADVA Optical Networking evaluates for its financial assets at fair
value through profit or loss (held for trading) whether the intent
to sell them in the near-term is still appropriate or not. When the
Group is unable to trade these financial assets due to inactive markets and management’s intent to sell them in the foreseeable future
significantly changes, in rare circumstances the Group may elect to
reclassify these financial assets. The reclassification to loans and
receivables, available-for-sale or held to maturity depends on the
nature of the asset. This reclassification does not affect the evaluation of financial assets designated at fair value through profit or
loss using the fair value option at designation.
Investor
Relations
Business
Overview
Management
Report
The Group has not designated any financial assets upon initial recognition as at fair value through profit or loss. To date, no financial assets are designated to the category at fair value through
profit or loss.
Financial
Statements
Additional
Information
103
›› Notes to the Consolidated
Financial Statements
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market.
After initial measurement, loans and receivables are subsequently
carried at amortized cost using the effective interest rate method
less allowances for impairment. Amortized cost is calculated considering any discount or premium at the time of the purchase. The
amortized cost includes any fees that are an integral part of the effective interest rate and of the transaction costs. Gains and losses
are recognized in the income statement at the time the loans and
receivables are written off or impaired.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments
and fixed maturities are classified as held-to-maturity when the
Group has the positive intention and ability to hold them to maturity. After initial measurement, held-to-maturity investments are
measured at amortized cost using the effective interest method,
less impairment. Amortized cost is calculated by taking into account
any discount or premium on acquisition and fees or costs that are
an integral part of the effective interest rate. The effective interest
rate amortization and losses arising from impairment are recognized
in the income statement in other financial gains and losses, net.
Available-for-sale investments
The Group did not have any available-for-sale investments during
the years ended December 31, 2011 and 2010.
104
Derecognition
ADVA Optical Networking derecognizes a financial asset (or, where
applicable, a part of a financial asset or part of a group of similar
financial assets) when:
• The rights to receive cash flows from the asset have expired.
• The Group has transferred its rights to receive cash flows from
the asset or has assumed an obligation to pay the received cash
flows in full without material delay to a third party under a “passthrough” arrangement; and either (a) the Group has transferred
substantially all the risks and rewards of the asset, or (b) the
Group has neither transferred nor retained substantially all the
risks and rewards of the asset, but has transferred control of
the asset.
When the Group has transferred its rights to receive cash flows
from an asset or has entered into a “pass-through” arrangement,
and has neither transferred nor retained substantially all the risks
and rewards of the asset nor transferred control of the asset, the
asset is recognized to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations
that the Group has retained. Continuing involvement that takes the
form of a guarantee over the transferred asset is measured at the
lower of the original carrying amount of the asset and the maximum
amount of consideration that the Group could be required to repay.
Impairment of financial assets
On each balance sheet date, ADVA Optical Networking assesses
whether a financial asset is impaired. If there is objective evidence
that an impairment loss on loans and receivables has been incurred,
the amount of the loss is determined as the difference between the
carrying amount of the financial asset and the present value of expected future cash flows. Impairment losses are recognized in the
income statement.
If the amount of the impairment loss decreases in subsequent periods, and provided that the decrease can be related to an event
that had occurred after the impairment was recognized, the previously recognized impairment loss is reversed. The loss can only be
reversed to the extent that the carrying value of the asset does not
exceed its amortized cost on the date of impairment. Any subsequent reversal of an impairment loss affects the income statement.
For trade receivables, a provision for impairment is made, provided
that there is objective evidence that ADVA Optical Networking will
not be able to collect the full amount due under the original terms
of the invoice. The carrying amount of the receivable is reduced
through use of an allowance account. Impaired trade receivables
are derecognized when they are assessed as uncollectible.
Inventories
Inventories are valued at the lower of cost or net realizable value.
The cost of purchase is determined at average prices. Production
costs include direct unit costs, an appropriate portion of necessary
manufacturing overheads and production-related depreciation that
can be directly assigned to the production process. Administrative
and social insurance charges that can be assigned to production
are also taken into account. Financing charges are not classified as
part of the at-cost base. The net realizable value is the estimated
selling price that could be realized on the closing date in the context of ordinary business activity, less estimated costs of completion and costs necessary to make the sale.
Inventory depreciation covers risks relating to slow-moving items
or technical obsolescence. Where the reasons for previous writedowns no longer apply, those write-downs are reversed.
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Property, plant and equipment
Property, plant and equipment are stated at historic cost less accumulated depreciation and accumulated impairment losses, if any.
The present value of the expected cost for the decommissioning of
the asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met.
Management
Board
Supervisory
Board
Depreciation on property, plant and equipment is calculated on a
straight-line basis over the estimated useful economic lives of the
assets as follows:
• Buildings
• Technical equipment and machinery
• Factory and office equipment
Corporate
Governance
20 to 25 years
3 to 4 years
3 to 10 years
Stock
Leasehold improvements and other subsidies received under new or
renewed operating lease contracts are accounted for according to
SIC 15 (Operating leases – incentives). The benefit is recognized as
a reduction of the rental expense over the contractual lease term.
Leasehold improvements are capitalized as tangible assets and depreciated over the term of the lease on a straight-line basis.
Investor
Relations
Business
Overview
An item of property, plant and equipment is derecognized upon
disposal or when no future economic benefits are expected from
its use or disposal. Any gain or loss arising on derecognition of the
asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized.
Management
Report
The assets’ residual values, useful economic lives and methods of
depreciation are reviewed at each financial year-end, and adjusted
prospectively, if appropriate.
Financial
Statements
Additional
Information
105
›› Notes to the Consolidated
Financial Statements
Borrowing costs directly attributable to the acquisition, construction
or production of an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale are capitalized as
part of the cost of the respective assets. If borrowing costs cannot
be directly attributed to the acquisition, construction or production
of an asset, an assessment is made on whether general borrowing
costs should be recognized that would have been avoided if the asset was not acquired, constructed or produced. All other borrowing costs are expensed in the period they occur. Borrowing costs
consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value on the date of acquisition. Following
initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses.
Internally generated intangible assets, excluding capitalized development costs, are not capitalized, and expenditure is reflected
in profit or loss in the year in which the expenditure is incurred.
The useful economic lives of intangible assets are assessed to be
either finite or indefinite.
Intangible assets with finite lives are generally amortized on a
straight-line basis over the expected useful economic lives of the
assets as follows:
• Capitalized development projects
• Purchased technology
• Software and other intangible assets
106
3 to 5 years
6 to 9 years
3 to 6 years
Intangible assets with finite useful economic lives are assessed for
impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization
method for an intangible asset with a finite useful life are reviewed
at least at each financial year-end. The amortization expense on intangible assets with finite lives is recognized in profit or loss in the
expense category consistent with the function of the intangible asset. Amortization of purchased intangible assets and amortization
of capitalized development projects is recognized in profit or loss
in the positions stated in note (11).
Intangible assets with an indefinite useful life are not amortized. The
useful life of an intangible asset with an indefinite life is reviewed
annually to determine whether the indefinite life assessment continues to be applicable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. There
are no intangible assets with indefinite lives other than goodwill.
Gains or losses arising from derecognition of an intangible asset are
measured as the difference between the fair value less costs to sell
and the carrying amount of the asset, and they are recognized in
the income statement when the asset is derecognized.
Impairment test for intangible assets
Intangible assets with indefinite useful economic lives are tested for
impairment annually and whenever there is an indication for potential
impairment, either individually or at the cash generating unit level.
Goodwill
An unlimited useful life is assumed for goodwill acquired in the context of business combinations. Impairment reviews are performed
at the cash generating unit level on the balance sheet date or when
there is an indication that the goodwill may be impaired in accordance with IAS 36. Impairment losses on goodwill recognized in
prior periods are not reversed. See note (11).
Purchased technology
Purchased technology has a limited useful life. It is stated at cost
and amortized on a straight-line basis over estimated useful economic lives of six to nine years. It is tested for impairment if an indication exists that the recoverable amount of the asset may have
decreased.
Capitalized development projects
Development expenses for new products are capitalized as development projects if
• they can be unambiguously assigned to those products,
• the products under development are technically
feasible and can be marketed,
• there is reasonable certainty that the development
activity will result in future cash inflows, and
• ADVA Optical Networking intends and is able to
complete and use the development project.
Capitalized development projects include all costs that can be directly assigned to the development process. Financing charges are
capitalized if the development project represents a qualifying asset in the sense of IAS 23.
After initial recognition of development projects as an asset, measurement is at historical cost, less accumulated amortization and
impairment. The straight-line method of amortization is used from
the start of production through the estimated selling periods for
the products developed (generally between three and five years).
Finished as well as unfinished development projects are tested for
impairment on the balance sheet date. Impairment losses are recognized if appropriate.
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Management
Board
Supervisory
Board
Research costs are expensed as incurred according to IAS 38.
Government grants
Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions
will be complied with. When the grant relates to an expense item,
it is recognized as income over the period necessary to match the
grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is recognized as a
reduction of purchase costs and released as a reduction of amortization expense over the expected useful life of the related asset.
Corporate
Governance
Stock
Investor
Relations
Leasing
Leasing contracts are classified as finance leases if substantially all
risks and rewards, and with it the economic ownership, are transferred to the lessee. All other leasing transactions are classified as
operating leases.
Business
Overview
Property, plant and equipment acquired by ADVA Optical Networking through finance lease contracts is stated at the fair value of the
leased property or, if lower, the present value of the future minimum lease payments when the contract commences. Finance lease
contracts are then amortized using the straight-line method over
the shorter of the leasing period or the estimated useful life of the
assets. The correspondent liability is shown as finance lease obligation. The lease payment to the lessor is apportioned between finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term to
produce a constant periodic rate of interest on the remaining liability.
Management
Report
Financial
Statements
Additional
Information
107
›› Notes to the Consolidated
Financial Statements
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term.
Financial liabilities
Initial recognition and measurement
Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an
effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value and in the case of loans
and borrowings, plus directly attributable transaction costs.
ADVA Optical Networking’s financial liabilities include trade and
other payables, bank overdrafts, loans and borrowings and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification as follows:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon
initial recognition as at fair value through profit or loss. Financial
liabilities are classified as held for trading if they are acquired for
the purpose of selling in the near-term. This category includes derivative financial instruments entered into by the Group that are
not designated as hedging instruments in hedge relationships as
defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective
hedging instruments. Gains or losses on liabilities held for trading
are recognized in the income statement. ADVA Optical Networking
has not designated any financial liabilities upon initial recognition
as at fair value through profit or loss.
108
Loans and borrowings
After initial recognition, interest-bearing loans and borrowings are
subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the income
statement when the liabilities are derecognized as well as through
the effective interest rate method (EIR) amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of
the EIR. The EIR amortization is included in interest expenses in
the income statement.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated
as a derecognition of the original liability and the recognition of a
new liability. The difference in the respective carrying amounts is
recognized in the income statement.
Provisions
Provisions are recognized when the Group has a present obligation
(legal or constructive) as a result of a past event, when it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be
made of the amount of the obligation. Where the Group expects
some or all of a provision to be reimbursed, for example under an
insurance contract, the reimbursement is recognized as a separate
asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in profit or loss, net of
any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that
reflects, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provision over time is recognized in other financial gains and losses, net.
Derivative financial instruments and hedging activities
The Group entered into forward rate agreements to hedge foreign
currency exposure of expected future cash flows. These derivatives
are initially recognized at fair value on the date a derivative contract
is entered into and are subsequently re-measured at their fair value.
The Group did not apply hedge accounting rules according to IAS 39
during the years ended December 31, 2011 and 2010.
Revenue recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, net of discounts, rebates and other sales taxes
or duty. The following specific recognition criteria must also be met
before revenue is recognized:
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Management
Board
Sale of goods
Revenue from the sale of goods is recognized when the significant
risks and rewards of ownership of the goods have passed to the
buyer, usually on delivery of the goods.
Supervisory
Board
Product returns that are estimated according to contractual obligations and past revenues statistics are recognized as a reduction
of revenues.
Corporate
Governance
Rendering of services
Revenues arising from the sale of services primarily derive from
training, maintenance and installation services and are recognized
when those services have been rendered. Installation services are
recognized as revenue if the final installation has been approved
by the customer. Generally, maintenance services are reported as
deferred revenue and recognized as revenue straight-line over the
contract period. Training is recognized as revenue immediately after supply of the service.
Stock
Investor
Relations
Business
Overview
In arrangements with a customer that include delivery of goods as
well as rendering of services, the shipment of the goods is separated from the rendering of the services if the goods have a standalone value for the customer and the fair value of the service can
be reliably determined. Both components of the transaction are
measured at their respective fair value.
Management
Report
Financial
Statements
Additional
Information
109
›› Notes to the Consolidated
Financial Statements
Cost of goods sold
The cost of goods sold comprises the costs incurred in the production and rendering of services. This item subsumes both the direct
cost of materials and production directly assignable to a product and
indirect (overhead) costs, including the depreciation of production
equipment and write-downs on inventories. The cost of goods sold
also includes appropriation to the warranty provision. Income from
the reversal of write-downs on inventories reduces the cost of goods
sold, which also includes amortization of purchased technologies.
Interest income and expenses
For all financial instruments measured at amortized cost and interest-bearing financial assets classified as available-for-sale, interest
income or expenses are recorded using the effective interest rate,
which is the rate that exactly discounts the estimated future cash
payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability.
Taxes
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or
paid to the taxation authorities. The tax rates and tax laws used to
compute the amount are those that are enacted or substantively enacted by the respective balance sheet date.
Deferred income tax
Deferred tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
• where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that
is not a business combination and, at the time of the transaction,
affects neither the accounting profit nor taxable profit or loss; and
• in respect to taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the near future.
Deferred tax assets are recognized for all deductible temporary
differences, carry forward of unused tax credits and unused tax
losses, to the extent that it is probable that taxable profit will be
available against which the deductible temporary differences, and
the carry-forward of unused tax credits and unused tax losses can
be utilized, except:
• where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at
the time of the transaction, affects neither the accounting profit
nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only
to the extent that it is probable that the temporary differences
will reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed on each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all
or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed on each balance sheet date and
are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be utilized.
110
Deferred tax assets and liabilities are measured at the tax rates
that are expected to apply to the year when the asset is realized or
the liability is settled, based on tax rates (and tax laws) that have
been enacted or substantively enacted on the balance sheet date.
Future changes in tax rates are recognized on the balance sheet
date if their impact is materially certain as part of the tax legislation process.
Deferred tax relating to items recognized directly in equity is recognized in equity and not in the income statement.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against
current income tax liabilities and the deferred taxes relate to the
same taxable entity and the same taxation authority.
Share-based compensation transactions
Employees (including senior executives) of ADVA Optical Networking receive remuneration in the form of share-based compensation
transactions, whereby employees render services as consideration
for equity instruments (equity-settled transactions) or they are
granted stock appreciation rights, which are settled in cash (cashsettled transactions). Stock options, option bonds and stock appreciation rights are reported and valued in accordance with IFRS 2.
Share-based compensation transactions between different entities
of ADVA Optical Networking are considered as either equity-settled
or cash-settled share-based compensation transactions in the individual financial statements of ADVA AG Optical Networking. The
Group entities employing the beneficiaries measure the received
services as an equity-settled share-based compensation transaction. No repayment arrangements have been set up between the
entities of ADVA Group.
Equity-settled transactions
The cost of equity-settled transactions with employees is measured
by reference to the fair value on the grant date. The fair value is determined by an external expert using an appropriate pricing model.
See note (31) for further details.
The cost of equity-settled transactions is recognized, together with
the corresponding increase in equity, over the period in which the
relevant employees become fully entitled to the award (vesting date).
No expense is recognized for awards that do not ultimately vest,
except for awards where vesting is conditional upon market condition, which are treated as vesting irrespective of whether or not
market condition is satisfied, provided that all other performance
conditions are satisfied.
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Management
Board
Supervisory
Board
Where the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if the terms
had not been modified, if the original terms of the award are met.
An additional expense is recognized for any modification that increases the total fair value of the share-based compensation transaction, or is otherwise beneficial to the employee as measured on
the date of modification.
Corporate
Governance
Where an equity-settled award is cancelled, it is treated as if it
vested on the date of cancellation, and any expense not yet recognized for the award is recognized immediately. This includes any
award where non-vesting conditions within the control of either the
entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards
are treated as if they were a modification of the original award, as
described in the previous paragraph. All cancellations of equity-settled transaction awards are treated equally.
Stock
Investor
Relations
Business
Overview
The dilutive effect of outstanding options is reflected in the computation of earnings per share. See note (24).
Management
Report
Cash-Settled Transactions
The cost of cash-settled transactions is measured initially at fair
value on the grant date. The fair value is expensed over the vesting period with recognition of a corresponding provision. The provision is re-measured on each balance sheet date up to and including the settlement date, with changes in the fair value recognized
in profit or loss.
Financial
Statements
Additional
Information
111
›› Notes to the Consolidated
Financial Statements
Earnings per share
The Group calculates basic and diluted earnings per share in accordance with IAS 33. Basic earnings per share are calculated based
on the weighted average number of no-par value shares outstanding during the reporting period. Diluted earnings per share are calculated based on the weighted average number of no-par value
shares outstanding during the reporting period, but also including the number of no-par value shares that could come into existence if all stock options and option bonds were exercised on balance sheet date.
(5) Significant Accounting Judgments, Estimates and
Assumptions
The preparation of the Group’s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities on the reporting
date. However, uncertainty about these assumptions and estimates
could result in outcomes that could require a material adjustment
to the carrying amount of the asset or liability affected in the future. Assumptions used to make estimates are regularly reviewed.
Changes in estimate only affecting one accounting period are only
taken into account in that accounting period. In the case of changes
in estimates that affect the current and future accounting periods,
these are taken into account appropriately in the current and subsequent accounting periods.
Discussed below are the key judgments and assumptions concerning the future and other key sources of estimation and uncertainty
on the balance sheet date that have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial year.
112
Impairment of non-financial assets
The Group assesses whether there are any indicators of impairment for all non-financial assets on each reporting date. Goodwill
and other indefinite life intangibles are tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators
that the carrying amounts may not be recoverable. When valuein-use calculations are undertaken, management must estimate
the expected future cash flows from the asset or cash generating
unit and choose a suitable discount rate in order to calculate the
present value of those cash flows. See note (11) for the carrying
amounts involved.
Share-based compensation transactions
The Group measures the cost of equity-settled and cash-settled
transactions with employees by reference to the fair value of the
equity instruments on the date at which they are granted or on the
balance sheet date. Estimating fair value requires determining the
most appropriate valuation model for a grant of equity instruments,
which is dependent on the terms and conditions of the grant. This
also requires determining the expected life of the option, volatility
and dividend yield, as well as further assumptions. See note (31)
for the carrying amounts involved.
Taxes
Uncertainties exist with respect to the interpretation of complex tax
regulations and the amount and timing of future taxable income.
Given the wide range of international business relationships and
the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expenses already
recorded. The Group establishes provisions, based on reasonable
estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of
such provisions is based on various factors, such as experience of
previous tax audits and differing interpretations of tax regulations
by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective Group company’s domicile.
Deferred tax assets are recognized for all unused tax losses to the
extent that it is probable that taxable profit will be available against
those losses that can be utilized. Significant management judgment is required to determine the amount of deferred tax assets
that can be recognized, based upon the likely timing and level of
future taxable profits together with future tax planning strategies.
See note (22) for the carrying amounts involved.
Development expenses
Development expenses are capitalized in accordance with the accounting policy described in note (4). Initial capitalization of costs
is based on management’s judgment that technological and economic feasibility is confirmed, usually when a product development
project has reached a defined milestone according to an established
project management model. In determining the amounts to be capitalized, management makes assumptions regarding the expected
future cash generation of the assets, discount rates to be applied
and the expected period of benefits. See note (11) for the carrying amounts involved.
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Management
Board
Supervisory
Board
Provisions
Significant estimates are involved in the determination of provisions
related to warranty costs and legal proceedings. The estimate of
warranty claims is based on historic data and is extrapolated into
the future. Legal proceedings often involve complex legal issues
and are subject to substantial uncertainties. Accordingly, management exercises considerable judgment in determining whether
there is a present obligation as a result of a past event at the end
of the reporting period, whether it is more likely than not that such
a proceeding will result in an outflow of resources and whether the
amount of the obligation can be reliably estimated. Provisions are
detailed in note (15).
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
113
›› Notes to the Consolidated
Financial Statements
(6)
Scope of Consolidation and Shareholdings
The consolidated financial statements for the year ended on December 31, 2011, include the financial statements of ADVA AG Optical Networking plus all of the 13 (11 on December 31, 2010) wholly-owned subsidiaries listed below (hereafter collectively referred to as “the
Group companies”):
Share in equity
(in thousands)
114
Equity
Net income
(loss)
owned
directly
owned
in-directly
35,004
11,659
100%
-
ADVA Optical Networking
North America, Inc., Norcross / Atlanta
(Georgia), USA
USD
*
ADVA Optical Networking
Ltd., York, United Kingdom
GBP
**
5,406
1,060
100%
-
ADVA Optical Networking
AS, Oslo, Norway
NOK
**
17,110
971
100%
-
ADVA Optical Networking
AB, Kista / Stockholm, Sweden
SEK
**
4,498
199
100%
-
ADVA Optical Networking
Serviços Ltda., São Paulo, Brazil
BRL
*
266
141
99%
1%
ADVA Optical Networking
(Shenzhen) Ltd., Shenzhen, China
CNY
**
17,991
2,259
100%
-
ADVA Optical Networking
Singapore Pte. Ltd., Singapore
SGD
**
685
414
100%
-
ADVA Optical Networking
Hong Kong Ltd., Hong Kong, China
HKD
**
228
148
-
100%
74,610
4,205
100%
-
2,394
556
100%
-
ADVA Optical Networking
Corp., Tokyo, Japan
JPY
ADVA Optical Networking
sp. z o.o., Gdynia / Gdansk, Poland
PLN
**
ADVA Optical Networking
(India) Private Ltd., Bangalore, India
INR
***
100
-145
1%
99%
ADVA Optical Networking
LLC., Riyadh, Kingdom of Saudi Arabia
SAR
*
500
-
95%
5%
ADVA Optical Networking
Trading (Shenzhen) Ltd., Shenzhen, China
CNY
*
1,956
-
-
100%
*
* Prepared in accordance with the International Financial Reporting Standards (IFRS) for the period ended Dec. 31, 2011.
** Prepared in accordance with local commercial law for the period ended Dec. 31, 2010.
***Prepared in accordance with local commercial law for the financial year ended Mar. 31, 2011.
ADVA Optical Networking North America, Inc. (ADVA Optical Networking North America) is a R & D, production, sales and administration site with locations in Norcross (Georgia), Paramus (New Jersey) and Richardson (Texas), USA.
ADVA Optical Networking Ltd. (ADVA Optical Networking York) is
a logistics, sales and administration site in York, United Kingdom.
ADVA Optical Networking AS (ADVA Optical Networking Oslo) is an
R & D site in Oslo, Norway.
ADVA Optical Networking AB, Kista / Stockholm, Sweden, (ADVA Optical Networking Stockholm) is responsible for sales in Scandinavia.
ADVA Optical Networking Serviços Ltda., São Paulo, Brazil, (ADVA
Optical Networking São Paulo) is a sales office for the Latin America region.
ADVA Optical Networking (Shenzhen) Ltd. (ADVA Optical Networking Shenzhen) is a Chinese R & D and administration site in Shenzhen, China, with a branch in Shanghai, China.
ADVA Optical Networking Singapore Pte. Ltd. (ADVA Optical Networking Singapore) is a sales office for the Asia-Pacific region,
excluding Japan and South Korea. ADVA Optical Networking Singapore has a total of three subsidiaries: in Bangalore, India, ADVA
Optical Networking (India) Private Ltd., in Hong Kong, China, ADVA
Optical Networking Hong Kong Ltd. and in Shenzhen, China, ADVA
Optical Networking Trading (Shenzhen) Ltd.
ADVA Optical Networking Corp. (ADVA Optical Networking Tokyo)
is a sales office for Japan and South Korea.
ADVA Optical Networking sp. z o.o. (ADVA Optical Networking
Gdansk) is an R & D site in Poland.
ADVA Optical Networking (India) Private Ltd., Bangalore, India,
(ADVA Optical Networking Bangalore) is a sales office for the Indian sub-continent.
ADVA Optical Networking LLC., Riyadh, Kingdom of Saudi Arabia
(ADVA Optical Networking Riyadh) is responsible for the sales activities in the Middle East.
Welcome
ADVA Optical Networking Trading (Shenzhen) Ltd. (ADVA Optical
Networking Trading) is a logistics site in Shenzhen, China.
Management
Board
Investments accounted for by the equity method
ADVA Optical Networking North America has a 44.5% share in OptXCon Inc., Raleigh (North Carolina), USA. The Company concluded
operations in 2002. The investment is accounted for by the equity
method and is fully depreciated. There are no local financial statements available.
Supervisory
Board
Corporate
Governance
ADVA AG Optical Networking holds a 45% share in a jointly controlled company called “Island House Trading 32 (Pty) Ltd., trading
as Khanyisa Optical Networking (Pty) Ltd.”, Pretoria, South Africa.
The investment has a book value of EUR 1 thousand (prior year:
EUR 1 thousand). The start-up loan of ZAR 875 thousand (EUR 99
thousand) granted by ADVA AG Optical Networking has been fully
repaid in 2011. Hereinafter, the company is referred to as Khanyisa
Optical Networking.
Stock
Investor
Relations
Changes in scope of consolidation
On December 3, 2011, a group company under the name ADVA
Optical Networking LLC. was founded in Riyadh, Kingdom of Saudi
Arabia. The company was registered in the Commercial Register on
January 25, 2012. The registered share capital amounts to SAR 500
thousand (EUR 100 thousand). ADVA AG Optical Networking holds
a 95% share of the investment, representing SAR 475 thousand.
ADVA Optical Networking York holds a 5% share of the investment,
representing SAR 25 thousand.
Business
Overview
Management
Report
On December 13, 2011 a group company ADVA Optical Networking
Trading (Shenzhen) Ltd. was founded in Shenzhen, China. The registered share capital amounts to USD 308 thousand (EUR 237 thousand). The shares are held by ADVA Optical Networking Singapore.
Financial
Statements
Additional
Information
115
›› Notes to the Consolidated
Financial Statements
(7) Cash and Cash Equivalents
(8)
Cash and cash equivalents on December 31 include the following
amounts to which ADVA Optical Networking has only limited access:
Trade accounts receivable are non-interest-bearing and are due
within 30 to 120 days in general. For specific projects other payment terms may be agreed.
(in thousands of EUR)
Amounts pledged as security
2011
2010
361
96
Cash at banks earns interest at floating rates based on daily bank
deposit rates.
Cash equivalents are invested for varying periods of between one
day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term
deposit rates.
On December 31, 2011, the Group had available EUR 8,000 thousand
(on December 31, 2010: EUR 4,000 thousand) of undrawn committed
borrowing facilities in respect of which all conditions had been met.
Trade Accounts Receivable
Gross trade accounts receivable and depreciation of trade accounts
receivable have developed as follows:
2011
2010
55,248
48,099
On January 1
173
189
Increase
354
124
Usage
-71
-
Release
-83
-145
1
5
374
173
54,874
47,926
(in thousands of EUR)
Gross trade accounts receivable
Depreciation
Exchange rate differences
On December 31
Net trade accounts receivable
On December 31, 2011 and 2010, there was no material credit risk.
See note (27) for further disclosures.
116
Depreciation of trade accounts receivable is based on an assessment of balances past their due date. Trade accounts receivable
past due can be analyzed as follows:
2011
gross
value
2011
depreciation
2010
gross
value
2010
depreciation
5,177
-
6,078
-
3 to 6 months
442
-
946
-
6 to 12 months
525
304
71
44
79
70
129
129
6,223
374
7,224
173
(in thousands of
EUR,
on December 31)
Less than 3
months
More than 1 year
A Group company entered into a supplier finance agreement,
whereby it can finance receivables from a specific customer for
a period of up to 120 days. Credit risks and settlement risks are
transferred to the financing institution. The Group pays an annual fee amounting to LIBOR plus 0.35% on the volume of receivables transferred. In 2011, the Group incurred interest expenses
of EUR 109 thousand pertaining to this arrangement (prior year:
EUR 78 thousand).
Welcome
Management
Board
Supervisory
Board
Another Group company entered into a supplier finance agreement.
The agreement entitles the Group company to finance receivables
from a specific customer with a maturity of minimum 45 days. ADVA
Optical Networking pays annual interest amounting to EURIBOR
plus 3% on the volume of the receivables transferred. In addition,
a service charge of EUR 500 per transaction applies. In 2011, ADVA
Optical Networking incurred interest expenses of EUR 326 thousand (prior year: EUR 137 thousand) pertaining to this agreement.
Corporate
Governance
Stock
Investor
Relations
On December 31, 2011, EUR 5,619 thousand of trade receivables
are past due but not impaired (prior year: EUR 7,024 thousand).
Trade accounts receivable that are not overdue are not impaired.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
117
›› Notes to the Consolidated
Financial Statements
(9)Inventories
The table below summarizes the composition of inventories on
December 31:
2011
2010
Raw materials and supplies
9,010
12,407
Work in progress
2,392
4,688
25,134
22,493
36,536
39,588
(in thousands of EUR)
Finished goods
118
In 2011, write-downs amounting to EUR 5,624 thousand (prior year:
EUR 1,236 thousand) were recognized as expense within costs of
goods sold. This amount includes reversals of earlier write-downs
in the amount of EUR 362 thousand (prior year: EUR 516 thousand)
due to higher selling and input prices.
In 2011 and 2010, material costs of EUR 145,504 thousand and
EUR 142,579 thousand, respectively, have been recognized.
(10) Other Current and Non-Current Assets
Welcome
On December 31, other current assets can be analyzed as follows:
2011
2010
Prepaid expenses
2,415
2,054
Receivables due from tax authorities
2,096
870
Positive fair values of derivative financial
instruments
1,772
1,136
(in thousands of EUR)
Government grant allowances for
research projects
Other
2,723
2,555
630
1,181
9,636
7,796
Other current assets are non-interest-bearing and are generally
due within 0 to 60 days. Further disclosures on derivative financial
instruments are given in note (21).
Management
Board
Other non-current assets include mainly lease deposits of EUR 661
thousand (prior year: EUR 556 thousand) and non-current claims
from government grant allowances for research projects of EUR
1,225 thousand (prior year: EUR 1,686 thousand).
Supervisory
Board
During 2011 and 2010, government grants for ten and eight research
projects have been recognized, respectively. These public grants
relate to programs promoted by the EU and national governments.
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
119
›› Notes to the Consolidated
Financial Statements
(11) Fixed Assets
The following changes in fixed assets were recorded in 2011 and 2010:
Historical cost
(in thousands of EUR)
Accumulated depreciation
Net book values
Jan. 1,
2011
Addi­
tions
Dispo­
sals/
retire­
ments
3,078
-
-325
-
-3
2,750
2,997
29
-325
-
-
2,701
49
81
Land and buildings
11,367
129
-10
157
64
11,707
3,138
676
-6
-
24
3,832
7,875
8,229
Technical equipment
and machinery
45,531
5,487
-268
217
386
51,353
35,715
4,557
-231
-
478
40,519
10,834
9,816
8,885
1,031
-181
1
84
9,820
6,789
878
-164
-
86
7,589
2,231
2,096
456
613
-46
-375
11
659
-
-
-
-
-
-
659
456
66,239
7,260
-505
-
545
73,539
45,642
6,111
-401
-
588
51,940
21,599
20,597
72,986
-
-
-
839
73,825
53,333
-
-
-
650
53,983
19,842
19,653
Capitalized
development projects
57,907
23,767
-
-
224
81,898
28,336
14,131
-
-
200
42,667
39,231
29,571
Purchased technology
29,896
-
-
-
462
30,358
24,827
2,319
-
-
528
27,674
2,684
5,069
In-process
development projects
2,188
-
-
-
51
2,239
2,188
-
-
-
51
2,239
-
-
Finance leases
Reclas­
sifica­tions
Currency
trans­lation
adjust­ments
Dec. 31,
2011
Jan. 1,
2011
Depre­
ciation of
the period
Deprecia­
tion on
dispo­sals/
retire­ments
Reclas­
sifica­tions
Currency
trans­lation
adjust­ments
Dec. 31,
2011
Dec. 31,
2011
Dec. 31,
2010
Property, plant
and equipment
Factory and office
equipment
Assets under
construction
Intangible assets
Goodwill
Other intangible assets
50,915
2,247
-25
-
81
53,218
48,517
1,771
-18
-
91
50,361
2,857
2,398
213,892
26,014
-25
-
1,657
241,538
157,201
18,221
-18
-
1,520
176,924
64,614
56,691
961
-
-
-
22
983
960
-
-
-
22
982
1
1
99
-
-99
-
-
-
-
-
-
-
-
-
-
99
Financial investments
Investments accounted
for by the equity method
Loans to investments
accounted for by the
equity method
120
1,060
-
-99
-
22
983
960
-
-
-
22
982
1
100
284,269
33,274
-954
-
2,221
318,810
206,800
24,361
-744
-
2,130
232,547
86,263
77,469
Welcome
Historical cost
(in thousands of EUR)
Finance leases
Accumulated depreciation
Net book values
Management
Board
Depreciation of
the period
Depreciation on
disposals/
retirements
Reclassifications
Currency
translation
adjustments
Dec. 31,
2010
Dec. 31,
2010
Dec. 31,
2009
Jan. 1,
2010
Additions
Disposals/
retirements
3,099
49
-71
-
1
3,078
2,958
109
-71
-
1
2,997
81
141
9,553
1,908
-178
14
70
11,367
2,710
580
-178
-
26
3,138
8,229
6,843
40,157
5,289
-1,286
-150
1,521
45,531
31,354
4,423
-1,101
-153
1,192
35,715
9,816
8,803
7,437
1.068
-240
338
282
8,885
5,857
805
-225
153
199
6,789
2,096
1,580
Reclassifications
Currency
translation
adjustments
Dec. 31,
2010
Jan. 1,
2010
Supervisory
Board
Property, plant
and equipment
Land and buildings
Technical equipment
and machinery
Factory and office
equipment
Assets under
construction
142
543
-21
-210
2
456
-
-
-
-
-
-
456
142
57,289
8,808
-1,725
-8
1,875
66,239
39,921
5,808
-1,504
-
1.417
45,642
20,597
17,368
Corporate
Governance
Stock
Investor
Relations
Intangible assets
Goodwill
70,797
-
-
-
2,189
72,986
51,694
-
-
-
1,639
53,333
19,653
19,103
Capitalized
development projects
44,722
15,291
-2,893
-
787
57,907
19,273
11,373
-2,893
-
583
28,336
29,571
25,449
Purchased technology
29,194
-
-
-
702
29,896
22,244
1,961
-
-
622
24,827
5,069
6,950
In-process
development projects
2,111
-
-
-
77
2,188
2,111
-
-
-
77
2,188
-
-
50,351
785
-560
8
331
50,915
47,310
1,436
-539
-
310
48,517
2,398
3,041
197,175
16,076
-3,453
8
4,086
213,892
142,632
14,770
-3,432
-
3,231
157,201
56,691
54,543
888
1
-
-
72
961
888
-
-
-
72
960
1
-
Other intangible assets
Business
Overview
Management
Report
Financial
Statements
Financial investments
Investments accounted
for by the equity method
Loans to investments
accounted for by the
equity method
Additional
Information
83
-
-
-
16
99
-
-
-
-
-
-
99
83
971
1
-
-
88
1,060
888
-
-
-
72
960
100
83
258,534
24,934
-5,249
-
6,050
284,269
186,399
20,687
-5,007
-
4,721
206,800
77,469
72,135
121
›› Notes to the Consolidated
Financial Statements
Finance leases
The Group has financial obligations arising from a variety of finance
lease agreements for factory and office equipment. In 2011, the
Group has not capitalized any government grants for finance leases
(prior year: EUR 26 thousand) as a reduction from historical costs.
Further information on leases as well as the costs and minimum
future lease payments arising from these leases are listed under
note (12).
Property, plant and equipment
The classification and changes in property, plant and equipment are
shown in the analysis of changes in fixed assets.
In 2011 and 2010, there were neither impairments nor write-backs
of property, plant and equipment impaired in prior years.
In 2011, the Group received government grants of EUR 466 thousand (prior year: nil). Based on grant allowances EUR 240 thousand (prior year: EUR 509 thousand) have been deducted from historical costs in 2011.
Goodwill
In general, goodwill is allocated to the Group companies on whose
acquisition it arose. For Covaro Networks Inc. goodwill is allocated
to the Group company who owns the respective technology. The
table below shows the composition of goodwill on December 31:
(in Tausend EUR)
FirstFibre Ltd.
(ADVA Optical Networking York)
Cellware GmbH
(ADVA AG Optical Networking)
Covaro Networks Inc.
(ADVA Optical Networking York)
Movaz Networks Inc.
(ADVA Optical Networking
North America)
Gryfsoft sp. z o.o.
(ADVA Optical Networking Gdansk)
Effect of foreign currency translation
2011
2010
6,841
6,841
481
481
10,150
10,150
4,448
4,448
130
130
-2,208
-2,397
19,842
19,653
Impairment of goodwill
In 2011 and 2010 no impairment of goodwill was recognized.
Key assumptions used in impairment testing
For impairment testing purposes, goodwill is allocated to the acquired Group companies, respectively. Those Group companies represent the cash generating units.
122
On December 31, 2011 and 2010, the value in use of the goodwill was
calculated based on future cash flows (discounted cash flow method).
The calculation is most sensitive to the following assumptions:
•
•
•
•
Gross margins
Discount rates
Raw material prices
Market share expected
Cash flows include the projected cash flows for the three subsequent years as per the approved budget and three-year planning for
gross margins, market share and raw material prices. For further
periods, a perpetual income is estimated based on nil growth with
inflation offset. The discount rate used for the calculation is a pretax rate, considers the specific risk of each group company and is
calculated according to the Capital Asset Pricing Model (CAPM). The
cost of equity is composed of a risk-free interest rate and a specific
risk mark-up calculated as the difference of the average market rate
of return and the risk-free interest rate multiplied with the specific
risk related to the Company (beta coefficient). The beta coefficient
is calculated on a peer group basis. The calculation uses pre-tax
discount rates depending on the different cash generating units.
•
•
•
•
Pre-tax discount rate
Risk-free interest rate
Risk mark-up
Beta coefficient
(weighted average of the peer group)
Sensitivity analysis
The implications of adverse changes on the key assumptions for
the recoverable amount are discussed below. Each key assumption is considered in turn, even though there are dependencies between the assumptions:
Welcome
Management
Board
• Gross margin – a reduction of more than 9.8% of the expected
long-term average gross margin over the planning period would
result in an impairment loss in the unit ADVA Optical Networking York.
Supervisory
Board
• Discount rate – an increased pre-tax discount rate of more than
20.9% would result in an impairment loss in the unit ADVA AG
Optical Networking.
Corporate
Governance
• Growth rate – a growth reduction of more than 63.6% would result
in an impairment loss in the unit ADVA Optical Networking York.
Stock
Investor
Relations
9.1% to 13.8%
1.9% on average
5.0% to 7.4%
1.32
Business
Overview
Management
Report
Financial
Statements
Additional
Information
123
›› Notes to the Consolidated
Financial Statements
Capitalized development projects, purchased
technology and other intangible assets
The table below summarizes carrying amounts of capitalized development projects, purchased technology and other intangible assets on December 31:
(in thousands of EUR)
2011
2010
Capitalized development projects
39,231
29,571
Purchased technology
2,684
5,069
Other intangible assets
2,857
2,398
44,772
37,038
Capitalized development projects include the development of
Ethernet access products amounting to EUR 5,337 thousand (prior
year: EUR 3,039 thousand) and of WDM solutions amounting to
EUR 33,894 thousand (prior year: EUR 26,532 thousand). The remaining amortization period is between one month and five years.
Purchased technology includes the capitalized technologies from
the acquisitions of Covaro amounting to EUR 1,732 thousand (prior
year: EUR 2,279 thousand) and Movaz amounting to EUR 952 thousand (prior year: EUR 2,790 thousand). The net book value of
Covaro technology will be fully depreciated in four years (prior year:
five years) and the net book value of Movaz technology will be fully
depreciated in six months (prior year: one year and six months).
124
Amortization of intangible assets
Amortization of intangible assets with a finite useful life comprises:
(in thousands of EUR)
2011
2010
Capitalized development projects
14,131
11,373
Purchased technology
2,319
1,961
Other intangible assets
1,771
1,436
18,221
14,770
Amortization of capitalized development projects is included in research and development expenses in the income statement. Amortization of purchased technology is included in line item “Cost of
goods sold”.
The amortization of purchased technology is related to Covaro and
Movaz and amounts to EUR 547 thousand and EUR 1,772 thousand,
respectively (prior year: EUR 547 thousand and EUR 1,414 thousand, respectively).
Impairment of intangible assets
In 2011 and 2010, no impairment of intangible assets with finite
useful economic lives was recognized.
The methodology for calculating impairment is the same as the one
used for goodwill impairment testing. The key assumptions and key
sensitivities are also the same.
Income from capitalization of development expenses,
net of amortization for capitalized development projects
(13) Financial Liabilities
2011
2010
Capitalization of development expenses
23,648
15,291
Amortization of capitalized development
projects
-14,131
-11,373
9,517
3,918
(in thousands of EUR)
(12) Finance Lease Obligations
The Group has financial obligations arising from a variety of finance
lease agreements for factory and office equipment. These obligations will expire at varying times over the next two years.
Minimum lease
payments
(in Tausend
EUR)
Up to one year
Present value of
minimum lease
payments
Dec. 31,
2011
Dec. 31,
2010
Dec. 31,
2011
Dec. 31,
2010
24
69
21
63
Welcome
The table below details financial liabilities and their maturity:
Maturity
(in thousands
of EUR)
IKB Deutsche
Industriebank
loans *
IKB Deutsche
Industriebank
bonded loan *
Deutsche
Bank
bonded loan
Total
financial
liabilities
Dec. 31,
2011
Management
Board
Interest
≤ 12 13 – 36
> 36
terms months months months
Supervisory
Board
1,406 **
Fixed rate,
subsidized
2,500
Fixed rate,
subsidized
-
1,250
1,250
14,000
Floating rate
based on
3M EURIBOR
-
14,000
-
312
625
469
Corporate
Governance
Stock
Investor
Relations
10,000
Fixed rate
10,000
-
-
Business
Overview
One to
five years
21
47
20
42
More than
five years
-
-
-
-
* Key covenants refer to the Group’s year-end debt / equity ratio and to the quarter-end
net liquidity.
45
116
41
105
** At the end of 2011, the IKB Deutsche Industriebank loan is secured by a registered land charge without certificate amounting to EUR 5,581 thousand (end of 2010:
EUR 5,581 thousand) on the production and development site in Meiningen.
27,906
10,312
15,875
1,719
Management
Report
Financial
Statements
Additional
Information
125
›› Notes to the Consolidated
Financial Statements
Maturity
(in thousands Dec. 31,
2010
of EUR)
Interest
≤ 12 13 – 36
> 36
terms months months months
IKB Deutsche
Industriebank
loans *
1,719 **
Fixed rate,
subsidized
313
625
781
2,500
Fixed rate,
subsidized
-
417
2,083
1,111
Floating rate
based on
3M EURIBOR
1,111
-
-
IKB Deutsche
Industriebank
bonded loan *
14,000
Floating rate
based on
3M EURIBOR
-
14,000
-
Deutsche Bank
bonded loans
10,000
Fixed rate
-
10,000
-
1,424
25,042
2,864
Total
financial
liabilities
29,330
* Key covenants refer to the Group’s year-end debt / equity ratio and to the quarter-end
net liquidity.
**At the end of 2011, the IKB Deutsche Industriebank loan is secured by a registered land charge without certificate amounting to EUR 5,581 thousand (end of 2010:
EUR 5,581 thousand) on the production and development site in Meiningen.
126
The interest rate charged for interest-bearing financial liabilities
during 2011 ranged between 1.92% and 4.72% p.a. on average.
The fair value of the financial liabilities is stated in note (26).
Capital management
The goal of ADVA Optical Networking’s capital management is to
provide sufficient funds to ensure ongoing operations and to support the Group’s projected growth at any time. The Group defines
capital as the total of stockholders’ equity and financial liabilities. On
December 31, 2011, stockholders’ equity was at EUR 135,986 thousand or at 52.3% of the balance sheet total (prior year: EUR 115,414
thousand or 49.3% of the balance sheet total). Financial liabilities
were at EUR 27,906 thousand on December 31, 2011 (prior year:
EUR 29,330 thousand), with maturities typically exceeding the life
of the assets being financed. The loan contracts require the compliance with specific key financial covenants. Financial covenants
relate to the debt / equity-ratio and net liquidity. If financial covenants are not met, early redemption of financial liabilities may be
requested. In 2011, ADVA Optical Networking complied with all financial covenants. In managing its capital, ADVA Optical Networking is focused on minimizing interest expenses, as long as access to
funds is not at risk. Excess funds are used either to redeem debt,
or they are invested in short-term interest-bearing term deposits
or money market funds.
In 2011, the Group implemented cash pooling for USD bank accounts. The respective cash balances are transferred to a pooling
account on a daily basis. Interest is calculated based on the consolidated balances.
(14) Trade Accounts Payable and Other Current and
Non-Current Liabilities
The trade accounts payable are non-interest-bearing and generally
due within 30 to 90 days.
On December 31, 2011, other non-current liabilities primarily include deferred rental expense of EUR 1,676 thousand (prior year:
EUR 1,848 thousand) and obligations to complete subsidized research projects of EUR 1,066 thousand (prior year: EUR 1,819 thousand). Non-current liabilities are not discounted.
Welcome
Management
Board
Other current liabilities on December 31 can be analyzed as follows:
2011
2010
Supervisory
Board
10,428
10,290
Corporate
Governance
1,570
1,564
602
986
Liabilities due to withheld wage income tax and
social security contributions
1,504
1,313
Liabilities due to tax authorities
1,621
2,550
Obligations from subsidized research projects
2,321
2,180
Other
1,517
670
19,563
19,553
(in thousands of EUR)
Liabilities due to employees
for variable compensation and payroll
for vacation
related to option bonds issued
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
127
›› Notes to the Consolidated
Financial Statements
(15)Provisions
The table below lists changes in the composition of the Group’s provisions in the reporting period:
Reclassification
Accrued
interest
Currency
translation
difference
Dec. 31,
2011
182
-
-
1
811
-
1,129
-
-
18
1,428
-4,600
-103
2,417
108
-
22
3,333
6,749
-4,951
-103
3,728
108
-
41
5,572
Personnel
provisions
246
-13
-
115
-
-
-
348
Other long-term
provisions
697
-163
-
-
-108
-
1
427
943
-176
-
115
-108
-
1
775
7,692
-5,127
-103
3,843
-
-
42
6,347
Jan. 1,
2011
Usage
Release
Appropriation
Warranty
provision
722
-94
-
Personnel
provisions
538
-257
5,489
(in thousands of
EUR)
Short-term
provisions
Other short-term
provisions
Long-term
provisions
128
The estimated expenses related to warranty claims reflects both
past experience and current developments and are based on a percentage of sales revenues. Any differences between actual amounts
and anticipated amounts are treated as changes in accounting estimates and affect earnings in the period in which the change occurs.
Short- and long-term personnel provisions mainly include employees’ accident insurance and liabilities from share-based compensation transactions.
Other short-term provisions primarily include provisions for outstanding invoices of uncertain amount and timing and provisions
for potential obligations from existing contracts.
On December 31, 2011, other long-term provisions include provisions
for onerous contracts of EUR 427 thousand (prior year: EUR 584
thousand). It is expected that this provision will be used between
January 1, 2013, and September 30, 2014.
(17) Stockholders’ Equity
Welcome
Capital transactions
On January 21, 2011, 24,350 option bonds exercised in 2010 at a
par value of EUR 24 thousand were registered in the commercial
register. The capital reserve increased by the premium payment of
EUR 15 thousand. In addition, 111,400 option bonds at a par value
of EUR 111 thousand have been exercised and were registered in
the commercial register in 2011. The capital reserve increased by
the premium payment of EUR 36 thousand.
Management
Board
Supervisory
Board
In connection with the exercise of stock options, 219,989 shares
were issued to the Management Board, to employees of the Company and its Group companies out of conditional capital in 2011.
The par value of EUR 220 thousand was appropriated to the share
capital, whereas the premium of EUR 181 thousand was recognized
in capital reserve.
Corporate
Governance
Stock
Other information on the share option programs is given in note (31).
(16) Deferred Revenues
Deferred revenues include deferred service revenues, where the
contracted payments are recognized as revenues over the duration
of the respective contracts. Some of the service revenues have a
contractual maintenance period of up to 110 months and therefore
incorporate a long-term element.
Deferred revenues also include revenues from product sales that
have not been recognized because one or more of the recognition
criteria has not been met.
Common stock and share capital
ADVA AG Optical Networking had 47,524,875 no par value bearer
shares (hereinafter “common shares”) in issue on December 31,
2011 (prior year: 47,169,136).
Investor
Relations
The common shares entitle the holder to vote at the Annual Shareholders’ Meeting and to receive dividends in case of a distribution.
No restrictions are attached to the common shares.
Business
Overview
Authorized capital
According to the Company’s articles of association, the Management Board is authorized, subject to the consent of the Supervisory Board, to increase subscribed capital until June 10, 2014, only
once or in successive tranches by a maximum of EUR 20,948 thousand by issuing new common shares in return for cash or non-cash
contributions (authorized capital I). Subject to the consent of the
Supervisory Board, the Management Board is further authorized to
decide whether to exclude stockholders’ subscription rights. Stockholders’ subscription rights can be excluded up to the amount of
Management
Report
Financial
Statements
Additional
Information
129
›› Notes to the Consolidated
Financial Statements
EUR 4,048 thousand to enable new shares to be issued for cash at
an issue price that is not significantly lower than the stock market
price. Moreover, stockholders’ subscription rights can be excluded
up to the amount of EUR 16,900 thousand to enable new shares to
be issued for the purpose of acquiring companies or equity interests in companies in return for non-cash contributions.
Since the Annual Shareholders’ Meeting on June 11, 2008, the authorized capital III for the exercise of outstanding option bonds
stands unchanged at EUR 1,500 thousand. Subject to the approval
of the Supervisory Board, the Management Board is authorized to
increase subscribed capital only once or in successive tranches by
a maximum of EUR 1,500 thousand by issuing new common shares
in return for cash contributions. This authorized capital may be
used only in conjunction with the exercise of convertible subscription right bonds. Stockholders’ subscription rights are excluded.
The authorized capital is valid for five years starting from the date
of the registration of the resolution.
Due to the capital transactions stated above the authorized capital III amounted to EUR 1,364 thousand on December 31, 2011.
Conditional capital
The Annual Shareholders’ Meeting on May 16, 2011 resolved to decrease the existing conditional capital (conditional capital 2003 / 2008)
by EUR 346 thousand to EUR 3,796 thousand. In addition, a new
conditional capital (conditional capital 2011 / I) of EUR 920 thousand
has been created. The resolutions were registered in the commercial register on May 24, 2011.
Considering the above described capital transactions, the total
conditional capital on December 31, 2011, amounts to EUR 4,496
thousand.
The changes in share capital, authorized and conditional capital are
summarized below:
CondiAutho­ Autho­
tional Condirized
rized capital
tional
(in thousands of
Share capital capital 2003 / capital
capital
I
III
2008 2011/I
EUR)
Jan. 1, 2011
47,169
20,948
1,500
4,142
-
Changes due
to Annual
Shareholders’
Meeting
resolutions
-
-
-
-346
920
Stock options
exercised
220
-
-
-220
-
Option bonds
exercised
136
-
-136
-
-
47,525
20,948
1,364
3,576
920
Dec. 31, 2011
Capital reserve
The capital reserve includes premium payments from the issuance
of shares, as well as additional contributions to the Company’s equity associated with the exercise of stock options and option bonds.
Additionally, the capital reserve contains the correspondent accumulated compensation expenses from stock option programs amounting to EUR 14,402 thousand (prior year: EUR 12,934 thousand).
Accumulated other comprehensive loss
Accumulated other comprehensive loss is used to record exchange
differences arising from the translation of the financial statements
of foreign operations.
Changes in stockholders’ equity are summarized in the consolidated
statement of changes in stockholders’ equity.
130
Voting Rights
According to section 21 paragraph 1 of the German Securities Trading Law (Wertpapier-Handelsgesetz, WpHG) the Company published
the following information in 2011:
Date of
change
in
investment
May 18, 2011
(19) Other Operating Income and Expenses
(in thousands of EUR)
Welcome
2011
2010
103
1,502
1,237
1,068
785
1,322
2,125
3,892
-35
-16
-339
-115
-374
-131
1,751
3,761
Other operating income
Name of
investment
owner
Capital Research
and Management
Company /
SMALLCAP World
Fund, Inc.
Threshold
limit
Share of
voting
rights
Release of provisions
Government grants received
Other
Management
Board
Supervisory
Board
Other operating expenses
above 3%
3.10%
Impairments on trade accounts receivable
Other
(18) Revenues
In 2011 and 2010, revenues included EUR 32,150 thousand and
EUR 26,221 thousand for services, respectively. The remaining revenues relate mainly to product sales.
Other operating income and expenses, net
Corporate
Governance
Stock
Investor
Relations
A segmentation of revenues by geographic region is provided in the
section on segment reporting under note (25).
Business
Overview
Management
Report
Financial
Statements
Additional
Information
131
›› Notes to the Consolidated
Financial Statements
(20) Interest Income and Expenses
Interest income primarily includes interest from daily bank deposits and from other short-term deposits with maturities between one
day and three months.
Interest expenses are primarily incurred on financial liabilities and on
the sale of receivables. Refer to notes (13) and (8) for further details.
(21) Other Financial Gains and Losses, net,
and Derivative Financial Instruments
Other financial gains and losses, net, comprise the following:
(in thousands of EUR)
2010
Between June 14, 2010 and March 4, 2011, the Group entered into
six forward rate agreements that matured in 2011. A net result of
EUR 101 thousand was realized on these transactions.
Fair value disclosures
On December 31, the Group held the following financial instruments
measured at fair value:
Fair value
11,099
9,154
(in thousands
of EUR)
thereof: gains from
forward rate agreements
3,042
4,225
Forward rate
agreements
Foreign currency exchange losses
-8,771
-6,022
thereof: losses from
forward rate agreements
-1,169
-454
Income from investments accounted for
by the equity method
-
1
Losses from short-term investments
-
-3
2,328
3,130
Foreign currency exchange gains
132
2011
Forward rate agreements
The Group entered into forward rate agreements to hedge foreign
currency exposure of expected future cash flows on April 7, 2011,
May 3, 2011, July 29, 2011, and August 29, 2011. These agreements
mature on March 30, 2012 and on June 29, 2012. In 2011, unrealized profits amount to EUR 1,772 thousand.
Nominal value
2011
2010
2011
2010
1,772
1,136
16,741
31,767
The nominal value is the accounting value from which payments are
derived (underlying transaction). Since the nominal value itself is
not at risk, it is the potential for changes in foreign exchange rates,
interest rates and prices that is hedged.
The fair value reflects the credit risk of the instrument. Since the
Group only uses standard, marketable instruments for its hedges,
the fair value is determined using market prices and is not netted
against any contrary trend in the value of underlying transactions.
The fair value of these transactions is presented within other current assets in the statement of financial position.
(22) Income Taxes
Income taxes in Germany consist of corporate income tax, the solidarity surcharge and trade taxes. The tax calculation in foreign
countries is based on the applicable local tax rates. They vary between 16.5% and 44.8% (prior year: between 16.5% and 42.0%).
The table below shows the components of the Group’s total income
tax expenses:
(in thousands of EUR)
2011
2010
Current taxes
Current income tax charge
Adjustments in respect of current
income tax for prior years
-1,102
-1,307
245
85
-857
-1,222
Deferred taxes
Temporary differences and
loss carry-forwards
Changes in tax rates
Income tax benefit (expense), net
A reconciliation of income taxes based on the accounting profit and
the expected domestic income tax rate for the parent company of
27.73% (prior year: 27.73%) to effective income tax expense is
presented below.
2011
2010
Accounting profit before tax
14,004
10,990
Expected statutory tax expense
-3,883
-3,047
Tax rate adjustments
-65
-17
Tax for prior periods
245
85
Foreign tax rate differential
219
-226
Non-tax-deductible stock option expenses
-231
-195
Differences from foreign branch offices
-172
-230
Other non-tax-deductible expenses
-253
-332
7,127
-651
40
821
-92
-191
2,935
-3,983
-21.0%
36.2%
(in thousands of EUR)
Adjustments to recognition of
deferred tax assets
3,857
-2,744
-65
-17
3,792
-2,761
2,935
-3,983
Utilization of loss carry-forwards not
recognized before
Other differences
Income tax benefit (expense)
Effective tax rate
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
The effect of adjustments to recognition of deferred tax assets is
mainly a result of the first time recognition of deferred tax assets
and liabilities for prior periods at ADVA Optical Networking North
America (EUR 7,064 thousand).
Management
Report
Financial
Statements
Additional
Information
133
›› Notes to the Consolidated
Financial Statements
The deferred tax assets and deferred tax liabilities on December 31 relate to the following:
2011
2010
Deferred tax
assets
Deferred tax
liabilities
Deferred tax
assets
Deferred tax
liabilities
8
-167
-
-1,231
3,257
-64
-
-50
Prepaid expenses
22
-10
-
-
Other current assets
80
-491
153
-
3,367
-732
153
-1,281
349
-763
452
-
-10,733
-
-8,200
163
-377
226
-
73
-2
204
-
690
-
-
-529
1,275
-11,875
882
-8,729
33
-20
-
-29
1,302
-
253
-
770
-39
-
-94
78
-236
-
-490
2,183
-295
253
-613
(in thousands of EUR)
Current assets
Trade accounts receivable
Inventories
Total current assets
Non-current assets
Property, plant and equipment
Capitalized development projects
Purchased technology
Other intangible assets
Other non-current assets
Total non-current assets
Current liabilities
Trade accounts payable
Provisions
Deferred revenues
Other current liabilities
Total current liabilities
134
Welcome
2011
2010
Deferred tax
assets
Deferred tax
liabilities
Deferred tax
assets
Deferred tax
liabilities
28
-
-
-9
Other non-current liabilities
1,364
-
611
-
Total non-current liabilities
1,392
-
611
-9
(in thousands of EUR)
Management
Board
Non-current liabilities
Financial liabilities
Supervisory
Board
Corporate
Governance
Loss carry-forwards
German tax loss carry-forward
1,028
-
1,544
-
thereof: current
831
-
671
-
thereof: non-current
197
-
873
-
1,992
-
1,261
-
1,236
-
423
-
756
-
838
-
3,020
-
2,805
-
11,237
-12,902
4,704
-10,632
thereof: current
7,617
-1,027
1,500
-1,894
thereof: non-current
3,620
-11,875
3,204
-8,738
Foreign tax loss carry-forward
thereof: current
thereof: non-current
Total loss carry-forwards
Deferred tax assets (liabilities)
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
135
›› Notes to the Consolidated
Financial Statements
Temporary differences are differences between the carrying amount
of an asset or liability in the balance sheet according to IFRS and
its tax base.
Deferred tax assets have been recognized for German and foreign tax loss carry-forwards since the Group determined a positive
tax forecast due to projected positive market developments in the
Optical+Ethernet transport solution market and the leading market
position of ADVA Optical Networking in the regional markets which
are relevant for the assessment of loss carry-forwards.
The German and foreign tax loss carry-forwards on December 31
can be analyzed as follows:
2011
2010
ADVA AG Optical Networking,
Meiningen, Germany
126,769
127,712
ADVA Optical Networking AS,
Oslo, Norway
3,365
3,533
114,959
121,220
5,100
4,670
250,193
257,135
(in thousands of EUR)
ADVA Optical Networking North America, Inc.,
Norcross / Atlanta (Georgia), USA
ADVA Optical Networking Ltd.,
York, United Kingdom
Deferred tax assets have not been recognized in respect to tax
losses in ADVA AG Optical Networking in the amount of EUR 123,061
thousand (prior year: EUR 122,145 thousand) due to open appeals
related to the finalized tax audit for 2001-2004, since the positive
outcome of the decision is probable, but not virtually certain.
136
In prior years, deferred tax liabilities in ADVA Optical Networking
North America of EUR 1,627 thousand had been offset against the
deferred tax assets. Deferred tax assets exceeding deferred tax liabilities in ADVA Optical Networking North America had not been
recognized. Deferred tax assets have now been recognized for the
first time in ADVA Optical Networking North America also as far as
they exceed deferred tax liabilities. The effect of the first time recognition of deferred tax assets and liabilities at ADVA Optical Networking North America includes deferred taxes for prior periods
which have now been recognized (EUR 7,064 thousand). For the
first time, the Company has not reported tax losses over an aggregated three-year-period anymore, and there is reasonable assurance that taxable profits will be recognized in the near future that
can be offset against loss carry-forwards.
Pursuant to the U.S. Tax Act, federal tax-losses carried forward in
the U.S. expire after twenty years. Further, the utilization of a portion of loss carry-forwards is subject to annual limitations. Also,
certain loss carry-forwards may be subject to alternative minimum
taxation. Consequently, deferred tax assets have not been recognized in respect to loss carry-forwards in ADVA Optical Networking
North America in the amount of EUR 112,851.
Additionally, deferred tax assets for loss carry-forwards for state
and local purposes expire in between five and twenty years. Further, the utilization of tax loss carry-forwards for state and local purposes is subject to annual limitations. Consequently, deferred tax
assets in the amount of EUR 2,967 thousand (prior year: EUR 3,225
thousand) have not been recognized in ADVA Optical Networking
North America in respect to tax losses for state and local purposes.
Deferred tax assets in ADVA Optical Networking Inc. and MPS Inc.
have been transferred to ADVA Optical Networking North America
in the course of the mergers in 2008.
Deferred tax assets on loss carry-forwards in ADVA Optical Networking Oslo have not been recognized. The company has a history
of losses, and the recognition of taxable profits that could be offset
against loss carry-forwards is not certain in the near future. In addition, these loss carry-forwards may not be used to offset against
future taxable profits elsewhere in the Group.
Whether or not deferred tax assets are realized depends on the
generation of future taxable income during periods in which these
temporary differences are deductible. The Group has considered
the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment.
On December 31, 2011 and 2010, no deferred tax liabilities on retained earnings of group companies have been recognized. ADVA
Optical Networking committed that there will be no distribution of
currently undistributed earnings from the Company’s subsidiaries in
the near future. The amount of temporary differences for which no
deferred tax liabilities have been recognized amounts to EUR 201
thousand (prior year: EUR 123 thousand).
(23) Notes to the Consolidated Cash Flow Statement
Welcome
The consolidated cash flow statement has been prepared in accordance with IAS 7.
Management
Board
Cash and cash equivalents disclosed in the cash flow statement coincide with the position “cash and cash equivalents” presented in
the statement of financial position.
Supervisory
Board
Cash flows from investing and financing activities are determined
based on payments, whereas the cash flow from operating activities
is derived indirectly from the consolidated income before tax. When
cash flow from operating activities is calculated, the changes in assets and liabilities are adjusted for the effects of currency translation.
As a result, it is not possible to reconcile the figures to the differences in the published consolidated statement of financial position.
Corporate
Governance
Cash and cash equivalents to which the Group only has restricted
access are explained in note (7).
Stock
(24) Earnings per Share
Tax assets of EUR 354 thousand (prior year: EUR 227 thousand)
include primarily corporate tax refunds for prior years of EUR 323
thousand (prior year: EUR 173 thousand), as well as withholding
tax refunds of EUR 31 thousand (prior year: EUR 54 thousand).
Tax liabilities primarily include corporate income tax liabilities.
Investor
Relations
In accordance with IAS 33, basic earnings per share are calculated
by dividing consolidated net income by the weighted average number of shares outstanding.
Business
Overview
In the period under review, there were no material effects that diluted earnings per share. Diluted earnings per share are calculated
by adjusting the average number of shares outstanding by the number of potential shares arising from granted and exercisable stock
options on the balance sheet date.
Management
Report
Regarding net income, no effects of dilution need to be considered
in 2011 and 2010.
Financial
Statements
Additional
Information
137
›› Notes to the Consolidated
Financial Statements
The following table reflects the number of shares used in the computation of basic and diluted earnings per share:
Weighted average number
of shares (basic)
Effect of dilution from
stock options
Weighted average number
of shares (diluted)
2011
2010
47,298,983
46,596,579
1,419,241
1,670,506
48,718,224
48,267,085
There have been no other material transactions involving ordinary
shares or potential shares between the balance sheet date and the
date of authorization for issue of these financial statements.
138
(25) Segment Reporting
In accordance with IFRS 8 operating segments are identified based
on the way information is reported internally to the chief operating
decision maker and regularly reviewed to make decisions about resources to be allocated to the segment and assess its performance.
Within the ADVA Optical Networking Group, management decisions
are based on pro forma operating results. Pro forma financial information excludes non-cash charges related to share-based compensation plans and amortization and impairment of goodwill and
acquisition-related intangible assets. Income from capitalization of
development expenses, net of amortization for capitalized development projects, is shown separately from research and development expenses.
Segment information on December 31, 2011 is analyzed as follows:
Pro forma
financial
(in thousands of EUR) information
Welcome
Intangible assets
from acquisitions
Goodwill
Compensation
expenses
Disclosure
of R & D
expenses
Consolidated
financial
information
Revenues
310,945
-
-
-
-
310,945
Cost of goods sold
-177,429
-2,319
-
-503
-
-180,251
Gross profit
133,516
-2,319
-
-503
-
130,694
Management
Board
Supervisory
Board
Gross margin
42.9%
Selling and marketing
expenses
-43,411
General and
administrative
expenses
-24,007
-
-
-109
-
-24,116
Research and
development expenses
-60,083
-
-
-370
9,517
-50,936
Income from
capitalization of
development expenses,
net of amortization
for capitalized
development projects
9,517
-
-
-
-9,517
-
Investor
Relations
Other operating income
2,125
-
-
-
-
2,125
Business
Overview
-374
-
-
-
-
-374
17,283
-2,493
-
-1,583
-
13,207
237,173
2,881
19,842
-
-
259,896
Other operating
expenses
Operating income
Segment assets
42.0%
-174
-
-601
-
-44,186
Corporate
Governance
Stock
Management
Report
Financial
Statements
Additional
Information
139
›› Notes to the Consolidated
Financial Statements
Segment information on December 31, 2010 is analyzed as follows:
Pro forma
financial
information
Intangible assets
from acquisitions
291,725
Cost of goods sold
Gross profit
(in thousands of EUR)
Revenues
Disclosure
of R & D
expenses
Consolidated
financial
information
-
-
-
-
291,725
-170,501
-1,961
-
-191
-
-172,653
121,224
-1,961
-
-191
-
119,072
Gross margin
41.6%
Selling and marketing
expenses
-42,947
-180
-
-554
-
-43,681
General and administrative
expenses
-23,277
-
-
-324
-
-23,601
Research and development
expenses
-49,391
-
-
-779
3,918
-46,252
Income from capitalization of
development expenses, net
of amortization for capitalized
development projects
3,918
-
-
-
-3,918
-
Other operating income
3,892
-
-
-
-
3,892
-131
-
-
-
-
-131
13,288
-2,141
-1,848
-
9,299
209,024
5,445
-
-
234,122
Other operating expenses
Operating income
Segment assets
140
Goodwill
Compensation
expenses
40.8%
19,653
Additional information by geographical regions:
(in thousands of EUR)
2011
2010
Revenues
Germany
81,792
50,086
120,058
133,804
Americas
94,469
90,661
Asia-Pacific
14,626
17,174
310,945
291,725
Rest of Europe,
Middle East and Africa
Revenue information is based on the shipment location of the
customers.
Welcome
In 2011, the share of revenues allocated to major customers was
EUR 115,767 thousand (prior year: EUR 113,271 thousand). In both
reporting periods, revenues with two major customers exceeded
10% of total revenues.
Management
Board
Non-current assets and deferred tax assets are attributed based on
the location of the respective Group company. Non-current assets
for the purpose of segment reporting consist of property, plant and
equipment, intangible assets and finance lease equipment.
Supervisory
Board
Corporate
Governance
(in thousands of EUR)
Dec. 31,
2011
Dec. 31,
2010
Stock
Non-current assets
Germany
60,068
Rest of Europe,
Middle East and Africa
12,583
10,098
Americas
11,418
12,458
2,193
1,795
86,262
77,369
Asia-Pacific
53,018
Investor
Relations
Business
Overview
Deferred tax assets
1,376
2,689
Rest of Europe,
Middle East and Africa
Germany
1,597
1,819
Americas
8,080
-
184
196
11,237
4,704
Asia-Pacific
Management
Report
Financial
Statements
Additional
Information
141
›› Notes to the Consolidated
Financial Statements
(26) Additional Disclosures on Financial Instruments
The following tables analyze carrying amounts, amortized costs and fair values according to valuation categories. Only assets and liabilities
which fall into the categories defined by IFRS 7 are shown, so that the total amounts disclosed do not correspond to the balance sheet totals of each year.
Amounts recognized according to IAS 39
Valuation
category in
accordance
with IAS 39*
Carrying
amount
Amortized
cost
Fair value
recognized in
profit and loss
Fair value
Cash and cash equivalents
LaR
59,110
59,110
-
59,110
Trade accounts receivable
LaR
54,874
54,874
-
54,874
FVTPL
1,772
1,772
1,772
(in thousands of EUR,
on Dec. 31, 2011)
Assets
Other current assets
(derivatives without a hedging relationship)
Total active financial instruments
115,756
113,984
1,772
115,756
Liabilities
Financial liabilities
(current and non-current)
FLAC
27,906
27,906
-
28,022
Trade accounts payable
FLAC
33,224
33,224
-
33,224
Other liabilities
(current and non-current)
FLAC
13,502
13,502
-
13,502
74,632
74,632
-
74,748
113,984
113,984
-
113,984
1,772
-
1,772
1,772
74,632
74,632
-
74,748
Total passive financial instruments
Of which aggre­gated by cate­gory in
accor­dance with IAS 39:
Loans and receivables (LaR *)
Financial assets at fair value through profit or
loss (FVTPL *)
Financial liabilities at amortized cost (FLAC *)
* Abbreviations used for the IAS 39 categories: LaR: Loans and receivables, FVTPL: Financial assets at fair value through profit or loss, FLAC: Financial liabilities at amortized cost.
142
Amounts recognized according to IAS 39
Welcome
Valuation
category in
accordance
with IAS 39*
Carrying
amount
Amortized
cost
Fair value
recognized in
profit and loss
Fair value
Cash and cash equivalents
LaR
54,085
54,085
-
54,085
Trade accounts receivable
LaR
47,926
47,926
-
47,926
FVTPL
1,136
-
1,136
1,136
103,147
102,011
1,136
103,147
(in thousands of EUR,
on Dec. 31, 2010)
Management
Board
Assets
Other current assets
(derivatives without a hedging relationship)
Total active financial instruments
Supervisory
Board
Corporate
Governance
Stock
Liabilities
Financial liabilities
(current and non-current)
FLAC
29,330
29,330
-
29,224
Trade accounts payable
FLAC
33,140
33,140
-
33,140
Other liabilities
(current and non-current)
FLAC
13,168
13,168
-
13,168
75,638
75,638
-
75,532
Business
Overview
102,011
102,011
-
102,011
Management
Report
1,136
-
1,136
1,136
75,638
75,638
-
75,532
Total passive financial instruments
Investor
Relations
Of which aggregated by category in
accordance with IAS 39:
Loans and receivables (LaR *)
Financial assets at fair value through profit or
loss (FVTPL *)
Financial liabilities at amortized cost (FLAC *)
Financial
Statements
Additional
Information
143
›› Notes to the Consolidated
Financial Statements
The fair value of financial liabilities has been calculated based on future cash flows by using arm’s length interest rates. On December 31,
2011 and 2010, respectively, no financial instruments were measured at cost or at fair value through other comprehensive income.
The Group uses the following hierarchy for determining the fair
value of financial instruments:
Level 1: Quoted prices in active markets for identical assets or
liabilities.
Level 2: Techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly. Forward rate agreements are measured using quoted forward exchange rates and yield curves derived from quoted interest
rates according to the maturities of the contract.
Level 3: Techniques which use inputs that are not based on observable market data.
The Group has not used the option to designate financial assets
as “at fair value through profit or loss” on recognition of those assets. The Group has neither used the option to designate financial
liabilities as “at fair value through profit or loss” on recognition of
those liabilities.
Gains and losses as well as interest income and expenses from
financial instruments are analyzed in the table below:
(in thousands of EUR)
Note
2011
2010
(21)
1,873
3,159
(8, 19)
-306
5
(12)
-
-123
(13)
-1,141
-1,439
Gains and losses
Financial assets at fair value
through profit or loss
Loans and receivables
Financial liabilities measured at
amortized cost
Interest income and expenses
Fair values of assets and liabilities at fair value through profit or
loss are mainly calculated using level 2 valuation techniques. On
December 31, no valuations were made according to levels 1 or 3.
In 2011 and 2010, no transfers between hierarchy levels occurred.
144
Financial liabilities measured
at amortized cost
(27) Financial Risk Management
The goal of ADVA Optical Networking’s financial risk management
is to provide sufficient funds to ensure ongoing operations and to
support the Group’s projected growth. Financial instruments primarily include bank loans, overdrafts, bonded loans and trade payables, as well as trade receivables and cash. Derivative financial
instruments are used exclusively for hedging purposes, not for trading or speculation.
Financial risks in essence arise from the potential loss of bad debt,
failure to discharge payment obligations, fluctuations in international currencies and changes in interest rate levels.
Foreign currency risk
Because a major portion of the Group’s revenues and costs are
generated in foreign currencies, the Group is particularly subject
to fluctuations of the EUR against the USD and GBP. Net assets
of ADVA Optical Networking include foreign currency positions of
EUR 56,163 thousand (prior year: EUR 36,478 thousand) denominated in USD, and EUR 22,395 thousand (prior year: EUR 2,109
thousand) denominated in GBP.
To hedge operating risks and risks associated with the funding of
planned investments, ADVA Optical Networking makes use of derivative instruments as far as cash flow and fair value risks are concerned. Foreign currency risks that have no impact on the Group’s
cash flows or income statement (i.e., risks resulting from the translation of assets and liabilities of Group companies into the Group
reporting currency on consolidation) are not hedged. Derivative instruments are used essentially to hedge the following risks:
Exchange risks arising from sales and payment obligations in
foreign currencies
The Group uses standard instruments such as foreign exchange rate
forward transactions. The use of these instruments is governed by
the uniform guidelines applied within the framework of the Group’s
risk management system.
Changes in the fair value of financial instruments used to hedge
cash flows are recorded in the income statement within the position other financial gains and losses, net.
Welcome
Foreign currency risk sensitivity: Had the EUR been valued 10%
higher (lower) compared to the USD on December 31, 2011, net income would have been EUR 2,564 thousand lower (higher). Had the
EUR been valued 10% higher (lower) compared to the USD on December 31, 2010, prior year net income would have been EUR 440
thousand lower (higher).
Management
Board
Supervisory
Board
Had the EUR been valued 10% higher (lower) compared to the GBP
on December 31, 2011, net income would have been EUR 379 thousand lower (higher). Had the EUR been valued 10% higher (lower
compared to the GBP on December 31, 2010, prior year net income
would have been EUR 2,334 thousand lower (higher).
Corporate
Governance
Exchange risks arising from the translation of assets and
liabilities in foreign currencies
The Group uses average rate options, which allow a realization of
gains from the translation of non-EUR denominated assets and liabilities; losses need not be realized. The use of these instruments
is governed by the uniform guidelines applied within the framework
of the Group’s risk management system. Currently, no average rate
options are used to hedge foreign exchange risks.
Stock
Investor
Relations
Business
Overview
Changes in the fair value of financial instruments used to hedge fair
values of non EUR assets and liabilities are recorded in the income
statement within the position other financial gains and losses, net.
Management
Report
Foreign currency risk sensitivity: Had the EUR been valued 10%
higher (lower) compared to the USD on December 31, 2011, net income would have been EUR 1,744 thousand higher (lower). Had the
EUR been valued 10% higher (lower) compared to the USD on December 31, 2010, prior year net income would have been EUR 2,106
thousand higher (lower).
Financial
Statements
Additional
Information
145
›› Notes to the Consolidated
Financial Statements
Had the EUR been valued 10% higher (lower) compared to the GBP
on December 31, 2011, net income would have been EUR 2,579 thousand lower (higher). Had the EUR been valued 10% higher (lower)
compared to the GBP on December 31, 2010, prior year net income
would have been EUR 2,702 thousand lower (higher).
Interest rate risk
ADVA Optical Networking is exposed to interest risks because group
entities invest funds at fixed and floating interest rates. At the balance sheet date financial liabilities arise only in the parent company.
The interest rate risk is mitigated by the fact that most existing financial liabilities have fixed interest rates. The loan amounting to
EUR 14,000 thousand carries variable interest. Based on the currently low interest rates on the EUR money market and the uncertain macro-economic environment for the EUR zone, the Group’s risk
resulting from changes in interest rates at current is not material.
146
Credit risk
ADVA Optical Networking is exposed to credit risk in its operations. Credit risk is controlled and managed through centrally defined credit limits, which are based on the recommendations of an
external rating agency. Credit risks are accounted for as depreciation or impairment of individual assets. The Group does not use any
credit derivatives to hedge credit risk. The maximum risk of loss is
the carrying value of trade accounts receivable of EUR 54,874 thousand (prior year: EUR 47,926 thousand) as per note (8).
Liquidity risk
The Group is exposed to liquidity risk, which is the risk that the
Group will not be able to meet its obligations as they fall due. The
Group manages this risk by forecasting its cash and working capital requirements.
The table below analyzes the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining time at
the balance sheet date to the contractual maturity date:
Welcome
Future cash flows
(in thousands of EUR,
on December 31,
2011)
≤ 12 months
13 – 36 months
Management
Board
> 36 months
Note
Carrying
value
Redemption
Interest
Redemption
Interest
Redemption
Interest
Financial liabilities
(13)
27,906
10,312
895
15,875
565
1,719
33
Finance leases
(12)
41
21
3
20
1
-
-
Trade accounts payable
and other current and
non-current liabilities
(14)
55,931
52,787
-
2,192
-
952
-
83,878
63,120
898
18,087
566
2,671
33
Supervisory
Board
Corporate
Governance
Stock
Future cash flows
(in thousands of EUR,
on December 31,
2010)
≤ 12 months
13 – 36 months
> 36 months
Note
Carrying
value
Redemption
Interest
Redemption
Interest
Redemption
Interest
Financial liabilities
(13)
29,330
1,424
1,089
25,042
1,301
2,864
91
Finance leases
(12)
105
63
6
42
5
-
-
Trade accounts payable
and other current and
non-current liabilities
(14)
56,360
52,693
-
2,537
-
1,129
-
85,795
54,180
1,095
27,621
1,306
3,993
91
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
147
›› Notes to the Consolidated
Financial Statements
(28) Other Financial Obligations and Financial Commitments
Lease commitments
The Group has non-cancellable operating leases, primarily for buildings and cars. There are no sub-lease agreements.
The future minimum lease payments due on operating leases are
listed in the table below:
(in thousands of EUR)
Up to one year
One to five years
More than five years
Dec. 31,
2011
Dec. 31,
2010
4,362
3,873
10,636
12,373
3,565
2,838
18,563
19,084
Lease payments for buildings including parking spaces amount to
EUR 3,112 thousand and EUR 2,975 thousand in 2011 and 2010,
respectively. Lease payments for cars consist of monthly installments plus servicing charges and road tax, and totaled EUR 1,114
thousand and EUR 1,066 thousand in 2011 and 2010, respectively.
Other obligations
On December 31, 2011, the Group had purchase commitments totaling EUR 13,884 thousand (on December 31, 2010: EUR 12,136 thousand) in respect to suppliers. On the same date, the Group had no
future obligations to pay license fees (at the end of the prior year:
EUR 1,677 thousand) for patent infringements.
148
Guarantees
Group entities have issued guarantees in favor of customers. On
December 31, 2011, performance bonds with a maximum guaranteed amount of EUR 416 thousand were issued. Further the parent company granted an irrevocable guarantee of up to GBP 1,500
thousand for liabilities of ADVA Optical Networking Ltd., York and a
rental guarantee for ADVA Optical Networking AS (Norway) up to a
maximum amount equal to six months rental plus utility payments.
(29) Contingent Liabilities
In the normal course of business, claims may be asserted or lawsuits filed against the Company and its subsidiaries from time to
time. On December 31, 2011, ADVA Optical Networking does not expect that potential titles or litigations in detail or in total will have a
material impact on its financial position or operating performance.
Deferred tax assets have not been recognized in respect to tax
losses in ADVA AG Optical Networking due to open appeals related
to the finalized tax audit for 2001-2004, since the positive outcome
of the decision is probable, but not virtually certain. See note (22).
(30) Auditor’s Fees
In 2011 and 2010, the following fees charged by the legal auditor
were agreed and stated as expenses:
(in thousands of EUR)
Year-end audit
Other consulting services
2011
2010
331
250
48
16
379
266
(31) Stock Option Programs
To date, the Company has issued stock options (Plan IX and Plan XIV),
option bonds for employees (Plan X) and stock appreciation rights for
employees (Plan XI, Plan XIII and Plan XV). On December 31, 2011, two
stock-based compensation programs for the Management Board and
employees of the Company and its subsidiaries were still in existence.
Additionally, so-called D6 shares were issued during the course of the
acquisition of ADVA Optical Networking North America. The D6 stock
program expired in November 2010.
On October 1, 2008, stock options from Plan IX and stock appreciation
rights from Plan XI were offered to be exchanged for new rights. All
rights of those plans issued before January 1, 2008, were allowed for
exchange on the due date, whereby three old rights were exchanged for
two new rights of the respective option program. The calculation of the
strike price and vesting period of the new options and stock appreciation rights is based on the latest contracts. The new options and stock
appreciation rights are listed as Plan IXa and Plan XIa in this report.
In December 2010, the Supervisory Board approved a profit limitation for all options granted to members of the Management Board out
of Plan IX. The options issued with those changed conditions are referred to as Plan IXb.
Due to legal requirements, ADVA Optical Networking’s Management
Board decided to revoke the agreements of option bonds from Plan X,
issued on January 1, 2010 and April 1, 2010, to employees of ADVA
AG Optical Networking and employees of affiliated companies, and
the affected employees signed a corresponding waiver to the option
bond agreement. The cancellation of the relevant issuances resulted in
the recognition of expenses amounting to EUR 128 thousand in 2011.
Without the cancellation those expenses would have been recognized
over the remaining vesting period.
In February 2011, the Management Board set up a new stock appreciation rights program. These stock appreciation rights can be exercised until December 31, 2015. 50% of the option rights may not be
exercised until 2012 and the remaining 50% until 2013. The agreements include a profit limit of EUR 20.00 per option. The new program
is referred to as Plan XIII. Respective option rights were granted on
March 1, 2011. There will be no further issuance of stock appreciation rights from Plan XIII.
Welcome
Management
Board
In August 2011, the Management Board set up two new programs
for the issuance of option rights and stock appreciation rights. Both
contracts stipulate a four-year vesting period and a total contractual
life of seven years for the respective rights issue. The rights may only
be exercised if the volume weighted average of the Company share
closing prices on the ten stock exchange trading days before the first
day of each exercise period in which the option is exercised is at least
120% of the purchase price. In addition, the calculation of the maximum bonus for stock appreciation rights is based on the share price at
the date of exercise, with the share price being capped at EUR 20.00.
Consecutively, the new program for issuance of option rights is referred to as Plan XIV and the program for issuance of stock appreciation rights is referred to as Plan XV.
Supervisory
Board
Corporate
Governance
Stock
All option rights are non-transferable. They may only be exercised as
long as the entitled person is employed on a permanent contract by
the Company or by a company in which ADVA AG Optical Networking
has direct or indirect interest. Option rights issued to apprentices may
only be exercised if the apprentices are hired by the Company or by
an affiliated company on a permanent contract. All option rights expire upon termination of the employment contract. In the event that
the person entitled dies, becomes unable to work or retires, special
provisions come into force.
Investor
Relations
Business
Overview
Management
Report
The group of people to whom option rights can be issued is defined
separately for each stock option program. 23% of option rights authorized pursuant to Plan XIV can be issued to members of the Management Board, 4% to the management of affiliated companies, 28%
to Company employees, and 45% to employees of affiliated companies. The Management Board specifies the exact group of people entitled to exercise rights and the scope of each offer.
Financial
Statements
Additional
Information
149
›› Notes to the Consolidated
Financial Statements
Subject to the conditions under which option rights are issued, each
option right entitles the individual to purchase one common share in
the Company. The stock appreciation rights entitle the recipient to
receive a bonus in the amount of the difference between the defined
strike price and the stock market price on the date of exercise (cash
settlement). The Company may opt to replace the granted stock appreciation rights with other participation rights as long as such other
participation right economically equals the replaced stock appreciation right. The conditions of issue specify the term, the exercise price
(strike price), any qualifying periods and the defined exercise periods.
Apart from those rights referred to as Plan XIII all option rights can
be exercised over a total period of seven years. One-third of the option rights granted pursuant to Plan IX and XI may not be exercised
until two years after the grant date, another one-third three years after the grant date and the final one-third four years after the grant
date. 50% of the option rights granted pursuant to Plan X may not
be exercised until two years after the grant date and the remaining
50% three years after the grant date. The new option plans XIV und
XV comprise a uniform vesting period of four years for all options and
stock appreciation rights issued. The strike price equals the average
stock price of the last ten trading days prior to the grant date. The
minimum strike price is defined as the final auction price on the day
when the option rights are issued. To exercise the options, certain exercise hurdles per tranche are to be considered. Exercise hurdles comprise a surplus on the strike price of 10%, 20% and 30% for the first,
second and third tranche of Plan IX, and of 10% and 20% for the first
and second tranche of Plan X. The exercise hurdle on Plan XIV comprises a surplus on the strike price of 20%.
Exercise periods are regularly linked to key business events in the
Company’s calendar and each have a defined term. Certain other
business events can lead to blocking periods, during which option
rights cannot be exercised. Insofar as regular exercise periods overlap with such blocking periods, the exercise deadline shall be extended by the corresponding number of exercise days immediately
after the end of such a blocking period. Option rights may be exercised only on days on which commercial banks are open in Frankfurt am Main, Germany.
150
The fair value of stock options, option bonds and stock appreciation rights is estimated by simulation (Monte Carlo method) using
a program that was especially adjusted to the underlying plans and
based on the assumed strategy for the exercise (earliest possible
date). The following computation parameters were assumed for option rights issued in 2011 and stock appreciation rights re-valued
on December 31, 2011:
Plan
XI
Plan
XIa
Weighted average
share price
(in EUR)
3.63
3.63
Average strike price
(in EUR)
5.39
Expected volatility
(in % per year)
Term
(in years)
Risk-free interest rate
(in % per year)
Plan
XIII
Plan
XIV
Plan
XV
3.63
3.78
3.63
1.75
3.22
3.84
3.57
74.75%
74.75%
74.75%
74.46%
74.75%
7.0
7.0
4.9
7.0
7.0
1.30%
1.30%
1.30%
2.00%
1.30%
The volatility is specified as fluctuation of the share price compared
to the average share price of the period. In each case, expected
volatility is calculated on the basis of historic share prices (historic
volatility). The risk-free interest rate is based on information on
risk-free investments with corresponding terms.
For the calculation of the fair value of options and option bonds,
ADVA Optical Networking assumed that no dividends have been
paid to stockholders.
Changes in the number of option rights outstanding are detailed in
the tables below.
Stock Option Program 2003 (Plan IXa)
Stock Option Program 2003 (Plan IX)
Weighted average
Number
strike price
of options
(in EUR)
Options outstanding
on Jan. 1, 2010
Welcome
All options from this plan have been issued in the course of the
stock option exchange offer on October 1, 2008.
Number
of options
Weighted average
strike price
(in EUR)
1,112,721
1.75
-
-
2,207,917
3.70
Options outstanding
on Jan. 1, 2010
490,200
3.47
Granted options
Exercised options
-350,450
3.21
Exercised options
-117,878
1.75
Forfeited options
-244,234
4.88
Forfeited options
-37,844
1.75
-67,629
3.73
Expired options
-
-
2,035,804
3.58
956,999
1.75
-
-
-
-
Exercised options
-108,827
1.90
Exercised options
-111,162
1.75
Forfeited options
-129,536
3.21
Forfeited options
-24,157
1.75
-34,600
6.62
Expired options
-
-
1,762,841
3.66
Options outstanding
on Dec. 31, 2011
862,031
4.55
Of which exercisable
Granted options
Expired options
Options outstanding
on Dec. 31, 2010
Granted options
Expired options
Options outstanding
on Dec. 31, 2011
Of which exercisable
Options outstanding
on Dec. 31, 2010
Granted options
821,680
1.75
473,448
1.75
The weighted average remaining contractual life for option rights
outstanding on December 31, 2011, was 3.91 years. The strike price
for those options is between EUR 1.00 and EUR 11.37.
The weighted average remaining contractual life for option rights
outstanding on December 31, 2011, was 3.85 years. The strike price
for those options is EUR 1.75.
Stock options exercised in 2011 had an average share price of
EUR 4.46 on the exercise date.
Stock options exercised in 2011 had an average share price of
EUR 4.32 on the exercise date.
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
151
›› Notes to the Consolidated
Financial Statements
Stock Option Program 2003 for the Management Board
(Plan IXb)
Stock Option Program for Employees of
ADVA Optical Networking North America (D6 Shares)
Number
of options
Weighted average
strike price
(in EUR)
-
-
245,000
3.31
Exercised options
-
-
Forfeited options
-
-
Expired options
-
-
Options outstanding
on Jan. 1, 2010
Granted options
Options outstanding
on Dec. 31, 2010
Options outstanding
on Jan. 1, 2010
Number
of options
Weighted
average strike
price (in EUR)
6,000
6.69
-
-
-6,000
6.69
245,000
3.31
Of which exercisable
-
-
Exercised options
Granted options
-
-
Forfeited options
-
-
Exercised options
-
Expired options
-
-
Forfeited options
-
-
Expired options
-
-
Options outstanding
on Dec. 31, 2010
-
-
245,000
3.31
-
-
Options outstanding
on Dec. 31, 2011
Of which exercisable
The weighted average remaining contractual life for option rights
outstanding on December 31, 2011, was 5.33 years. The strike price
for those options is between EUR 2.55 and EUR 5.04.
152
As part of the acquisition of Movaz, a total of 247,529 options on
D6 shares were granted to select employees of ADVA Optical Networking North America on three issuance dates in 2007. The capital increase was registered in the course of the first-time consolidation of Movaz in 2006. Exercises of the options in 2010 did not
result in an additional capital increase.
Granted options
Option Bonds for Employees 2005 (Plan X)
Stock Appreciation Rights (Plan XI)
Number
of option
bonds
Weighted
average strike
price (in EUR)
838,950
4.08
Granted option bonds
147,900
2.58
Exercised option bonds
-24,350
1.60
Forfeited option bonds
-39,200
5.05
-
-
Option bonds outstanding
on Jan. 1, 2010
Expired option bonds
Option bonds outstanding
on Dec. 31, 2010
Granted option bonds
923,300
3.87
Stock appreciation rights
outstanding
on Jan. 1, 2010
Granted stock appreciation rights
Exercised stock appreciation rights
Forfeited stock appreciation rights
Expired stock appreciation rights
Stock appreciation rights
outstanding
on Dec. 31, 2010
-
-
Exercised option bonds
-111,400
1.32
Granted stock appreciation rights
Forfeited option bonds
-64,850
4.55
Exercised stock appreciation rights
Expired option bonds
-146,300
2.58
Forfeited stock appreciation rights
Option bonds outstanding
on Dec. 31, 2011
600,750
4.58
483,750
5.43
Of which exercisable
The weighted average remaining contractual life for option bonds
outstanding on December 31, 2011, was 2.76 years. The strike price
for those options is between EUR 1.00 and EUR 9.79.
Option bonds exercised in 2011 had an average share price of
EUR 4.19 on the exercise date.
Expired stock appreciation rights
Stock appreciation rights
outstanding
on Dec. 31, 2011
Of which exercisable
Welcome
Number
of stock
appreciation
rights
Weighted
average strike
price
(in EUR)
58,000
5.61
61,000
3.30
-
-
-10,300
5.52
-
-
108,700
4.32
15,000
6.13
-
-
-7,400
5.10
-
-
116,300
4.50
36,394
6.26
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
The average fair value of stock appreciation rights granted in 2011
valued on December 31, 2011, is EUR 0.70.
Management
Report
The weighted average remaining contractual life for stock appreciation rights outstanding on December 31, 2011, was 4.30 years. The
strike price for those stock appreciation rights is between EUR 1.00
and EUR 9.79.
Financial
Statements
Additional
Information
153
›› Notes to the Consolidated
Financial Statements
Stock Appreciation Rights (Plan XIa)
All rights from this plan have been issued in the course of the stock
option exchange offer on October 1, 2008.
Number
of stock
appreciation
rights
Weighted
average
strike price
(in EUR)
80,544
1.75
-
-
Exercised stock appreciation rights
-9,237
1.75
Forfeited stock appreciation rights
-2,334
1.75
-
-
68,973
1.75
-
-
Exercised stock appreciation rights
-5,462
1.75
Forfeited stock appreciation rights
-3,112
1.75
-
-
60,399
1.75
35,401
1.75
Stock appreciation rights
outstanding
on Jan. 1, 2010
Granted stock appreciation rights
Expired stock appreciation rights
Stock appreciation rights
outstanding
on Dec. 31, 2010
Granted stock appreciation rights
Expired stock appreciation rights
Stock appreciation rights
outstanding
on Dec. 31, 2011
Of which exercisable
The weighted average remaining contractual life for stock appreciation rights outstanding on December 31, 2011, was 3.85 years.
The strike price for those stock appreciation rights is EUR 1.75.
Stock appreciation rights exercised in 2011 had an average share
price of EUR 4.19 on the exercise date.
154
Stock Appreciation Rights (Plan XIII)
Stock appreciation rights
outstanding
on Dec. 31, 2010
Granted stock appreciation rights
Exercised stock appreciation rights
Forfeited stock appreciation rights
Expired stock appreciation rights
Stock appreciation rights
outstanding
on Dec. 31, 2011
Of which exercisable
Number
of stock
appreciation
rights
Weighted
average
strike price
(in EUR)
-
-
146,300
2.58
-
-
-11,100
2.55
-
-
135,200
2.59
-
-
The average fair value of stock appreciation rights granted in 2011
valued on December 31, 2011, is EUR 1.49.
The weighted average remaining contractual life for stock appreciation rights outstanding on December 31, 2011, was 4.08 years. The
strike price for those stock appreciation rights is between EUR 2.55
and EUR 3.88.
Stock Option Program 2011 (Plan XIV)
Number
of options
Options outstanding
on Dec. 31, 2010
Granted options
Exercised options
Forfeited options
Expired options
Options outstanding
on Dec. 31, 2011
Of which exercisable
Stock Appreciation Rights (Plan XV)
Weighted
average strike
price
(in EUR)
-
-
628,200
3.59
-
-
-2,500
3.57
-
-
625,700
3.59
-
-
The average fair value of option rights granted in 2011 valued on
December 31, 2011, is EUR 2.37.
The weighted average remaining contractual life for option rights
outstanding on December 31, 2011, was 6.74 years. The strike price
for those options is between EUR 3.57 and EUR 4.10.
Welcome
Number of
Weighted
stock average strike
appreciation
price
rights
(in EUR)
Stock appreciation rights
outstanding
on Dec. 31, 2010
-
-
153,300
3.57
Exercised stock appreciation rights
-
-
Forfeited stock appreciation rights
-
-
Expired stock appreciation rights
-
-
153,300
3.57
-
-
Granted stock appreciation rights
Stock appreciation rights
outstanding
on Dec. 31, 2011
Of which exercisable
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
The average fair value of stock appreciation rights granted in 2011
valued on December 31, 2011, is EUR 1.57.
The weighted average remaining contractual life for stock appreciation rights outstanding on December 31, 2011, was 6.73 years.
The strike price for those stock appreciation rights is EUR 3.57.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
155
›› Notes to the Consolidated
Financial Statements
Compensation expenses arising from share-based compensation
programs included in operating income were as follows:
2011
2010
Plan IX
387
602
Plan IXa
598
745
Plan IXb
232
107
Plan X
159
189
-5
53
Plan XIa
-33
111
Plan XIII
130
-
Plan XIV
92
-
Plan XV
23
-
(in thousands of EUR)
Plan XI
D6 shares for employees of
ADVA Optical Networking North
America
-
8
Effect of foreign currency
translation
-
33
1,583
1,848
The liability arising from stock appreciation rights is included in noncurrent provisions and amounts to EUR 348 thousand and EUR 246
thousand on December 31, 2011 and 2010, respectively. The intrinsic value of those liabilities amounts to EUR 77 thousand on December 31, 2011 (prior year: EUR 82 thousand).
156
(32)Employees
In 2011 and 2010, respectively, the ADVA Optical Networking Group
had an average of 1,244 and 1,131 permanent employees and an
average of 14 apprentices each year on its payroll. The employee
breakdown by department is listed below:
2011
2010
Research and development
541
458
Purchasing and production
204
204
20
18
Sales, marketing and service
342
318
Management and administration
137
133
14
14
1,258
1,145
Quality management
Apprentices
A further 23 and 13 people were employed on a temporary basis
effective December 31, 2011 and 2010, respectively.
Personnel expenses for 2011 and 2010 totaled EUR 97,909 thousand and EUR 90,818 thousand, respectively:
2011
2010
Wages and salaries
82,484
76,435
Social security costs
13,049
11,727
793
808
1,583
1,848
97,909
90,818
(in thousands of EUR)
Expenses for defined contribution plans
Share-based compensation expenses
Retirement Benefit Schemes
The Group operates various defined contribution retirement benefit
schemes in several Group companies. The assets of the schemes are
held separately from those of the Group in funds under the control
of trustees. The only obligation of ADVA Optical Networking with
respect to the retirement benefit scheme is to make the specified
contributions. Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. Payments
made to state-managed retirement benefit schemes are dealt with
as payments to defined contribution schemes where the Group’s
obligations under the schemes are equivalent to those arising in a
defined contribution retirement benefit scheme.
(33) Related Party Transactions
Welcome
EGORA Holding GmbH, Martinsried / Munich, and its subsidiaries
(the EGORA Group), Khanyisa Optical Networking, OptXCon Inc.
and all members of the Company’s governing bodies and their
relatives qualify as related parties to ADVA Optical Networking on
December 31, 2011, in the sense of IAS 24.
Management
Board
On December 31, 2011, the EGORA Group held an 18.2% equity
stake in ADVA Optical Networking. Albert Rädler, member of ADVA
Optical Networking’s Supervisory Board is a tax consultant at Linklaters LLP, and chairman of the Supervisory Board of AMS Technologies AG, Martinsried / Munich, Germany. AMS Technologies AG is
a member of the EGORA Group. Until July 29, 2011, TeraGate AG,
Munich, Germany, was a member of the EGORA Group and qualified as a related party. With the sale of the investment on July 29,
2011, TeraGate AG ceases to be a related party.
Supervisory
Board
Corporate
Governance
Stock
In 2011 and 2010, ADVA Optical Networking sold products to the
EGORA Group. During the same period, ADVA Optical Networking
acquired components from the EGORA Group.
Investor
Relations
ADVA Optical Networking has entered into several agreements with
the EGORA Group under which ADVA Optical Networking is entitled
to make use of certain facilities and services of the EGORA Group.
Additionally, ADVA Optical Networking makes use of legal and consulting services from Linklaters LLP.
Business
Overview
All transactions with the above related parties are conducted on
an arm’s-length basis.
Management
Report
Financial
Statements
Additional
Information
157
›› Notes to the Consolidated
Financial Statements
A summary of transactions with related parties is provided in the
table below:
(in thousands of EUR)
2011
2010
702
1,646
702
1,646
19
15
19
15
Sales to related parties
EGORA Group
The table below lists ADVA Optical Networking’s trade receivables,
trade payables and provisions in respect to related parties:
(in thousands of EUR)
EGORA Group
1
1
Linklaters LLP
4
80
5
81
-
328
-
328
Trade payables
EGORA Group
Services provided by related parties
EGORA Group
2010
Trade receivables
Purchases from related parties
EGORA Group
2011
5
8
5
8
Provisions
Linklaters LLP
-
5
-
5
See note (34) for detailed information about compensation of the
Manage­ment Board and the Supervisory Board.
158
(34) Governing Boards and Compensation
Welcome
Management Board
Resident in
External mandates
Brian Protiva
Chief Executive Officer
Berg,
Germany
Member of the Board of Directors of Alvarion Ltd., Tel Aviv, Israel
(until October 2011)
Christoph Glingener
Chief Technology Officer
Jade,
Germany
-
Jaswir Singh
Chief Financial Officer &
Chief Operating Officer
Alpharetta (Georgia),
USA
-
Christian Unterberger
Chief Sales & Marketing Officer
Taufkirchen,
Germany
Management
Board
Supervisory
Board
Corporate
Governance
-
Stock
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
159
›› Notes to the Consolidated
Financial Statements
Supervisory Board
160
Resident in
Occupation
External mandates
Anthony Maher,
Chairman
Munich,
Germany
Businessman
Chairman of the Board of Directors of BroadLight, Inc., Ramat-Gan, Israel
Chairman of the Board of Directors of Alvarion Ltd., Tel Aviv, Israel (until October 2011)
Member of the Board of Directors of Verivue, Inc., Westford (Massachussetts), USA
Thomas Smach,
Vice Chairman
Manlius
(New York),
USA
Partner,
Riverwood Capital
Management,
Menlo Park (California),
USA
Member of
Member of
USA (since
Member of
Johanna Hey
(since May 16,
2011)
Cologne,
Germany
Professor for Tax Law,
University of Cologne,
Cologne, Germany
Member of the Central Advisory Board of Commerzbank AG, Frankfurt am Main,
Germany
Eric Protiva
Atherton
(California),
USA
Managing Director of
EGORA Holding GmbH,
Martinsried / Munich,
Germany
Member of the Supervisory Board of AMS Technologies AG, Martinsried / Munich,
Germany
Member of the Board of Directors of Elforlight Ltd., Daventry, United Kingdom
Albert Rädler
Vaterstetten,
Germany
Tax adviser,
Linklaters LLP,
Munich, Germany
Chairman of the Supervisory Board of AMS Technologies AG, Martinsried / Munich,
Germany
Member of the Supervisory Board of TeraGate AG, Munich, Germany (until July 2011)
Krish Prabhu,
Vice Chairmen
(until October 18,
2011)
Plano
(Texas),
USA
President and CEO,
AT & T Labs,
Dallas (Texas), USA
Member of Board of Directors of Altera Corporation, San Jose (California), USA
Bernard
Bourigeaud
(until May 15,
2011)
Waterloo,
Belgien
President,
BJB Consulting Sprl,
Waterloo, Belgium
Member of Board of Directors of CGI Group Inc., Montreal, Canada
Member of International Advisory Board, HEC (International Business School),
Jouy En Josas, France
Member of Board of Directors of Amadeus IT Holding S.A., Madrid, Spain
President of Board of Centre d’Étude et de Prospective Stratégique, Paris, France
Member of the Advisory Board of Jeffries Investment Banking & Capital Markets,
London, United Kingdom (since April 2011)
Member of the Governing Board of IPC (International Paralympics Committee),
Bonn, Germany (since August 2011)
Chairman of Oberthur Technologies Holding, Paris, France (since December 2011)
Vice Chairman of Oberthur Technologies SA, Paris, France (since December 2011)
the Board of Directors of Crocs, Inc., Niwot (Colorado), USA
the Board of Directors of Pinnacle Holding Co., LLC, Syracuse (New York),
September 2011)
the Board of Sintec Media Ltd., Jerusalem, Israel (since January 2011)
Compensation of the Management Board
On December 31, the members of the Management Board held the
following shares and had been granted the following stock options:
The total Management Board compensation was EUR 1,790 thousand in 2011 and EUR 1,784 thousand in 2010. This amount is analyzed across the individual Board members as follows:
(in thousands of EUR)
Fixed
Variable
Total
2011
Total
2010
Brian Protiva
Chief Executive Officer
260
250
510
499
Christoph Glingener
Chief Technology Officer
257
168
425
419
Jaswir Singh
Chief Financial Officer &
Chief Operating Officer
318
110
428
445
Christian Unterberger
Chief Sales & Marketing
Officer
259
168
427
421
The estimated variable compensation relates to the performance
based bonus for 2011, which is included in other personnel provisions on December 31, 2011.
The Group paid pecuniary damage liability insurance premiums on
behalf of members of the Management Board totaling EUR 12 thousand and EUR 9 thousand in 2011 and 2010 (in equal amounts for
each Management Board member), respectively. These insurance
premiums are part of the Management Board’s fixed compensation.
Additionally, the fixed compensation includes contributions to unemployment insurance, pension schemes and company car allowances.
Shares
Stock options
2011
2010
2011
2010
294,030
294,030
225,000
225,000
Christoph Glingener
Chief Technology Officer
-
-
275,000
275,000
Jaswir Singh
Chief Financial Officer &
Chief Operating Officer
-
-
250,000
250,000
Christian Unterberger
Chief Sales & Marketing
Officer
-
-
218,335
258,334
Brian Protiva
Chief Executive Officer
Welcome
Management
Board
Supervisory
Board
Corporate
Governance
Stock
The options to members of the Management Board were granted
out of Plan IX and Plan IXb. These option rights authorize the Management Board to purchase the said number of common shares in
the Company once the qualifying period has elapsed. Plan IXb includes a profit limit of EUR 20.00 per option, whereas Plan IX has
no profit limitations.
Investor
Relations
Business
Overview
The strike price for these option rights is
• EUR 7.24 for 130,000 options granted on October 1, 2006,
• EUR 6.06 for 130,000 options granted on October 1, 2007,
• EUR 2.57 for 286,668 options granted on July 1, 2008,
• EUR 2.26 for 176,667 options granted on October 1, 2009,
• EUR 2.55 for 170,000 options granted on January 1, 2010,
• EUR 5.04 for 75,000 options granted on October 1, 2010,
respectively.
Management
Report
Financial
Statements
On December 31, 2010, current assets include a prepayment of
tax expenses for exercised stock options in the amount of EUR 43
thousand made on behalf of Brian Protiva. In 2011 and 2010, no
further loans or prepayments were granted to the members of the
Management Board.
Additional
Information
161
›› Notes to the Consolidated
Financial Statements
›› Affirmative Declaration of
the Management Board
Compensation of the Supervisory Board
The fixed compensation to be paid to the Supervisory Board for
2011 and 2010 totaled EUR 344 thousand and EUR 360 thousand,
respectively. This amount can be analyzed by the individual Board
members as follows:
Fixed
2011
Fixed
2010
Variable
2010
Total
2010
Anthony Maher,
Chairman
80
80
15
95
Thomas Smach,
Vice Chairman
80
80
10
90
Johanna Hey
(since May 16, 2011)
25
-
-
-
Eric Protiva
40
40
5
45
Albert Rädler
40
40
10
50
Krish Prabhu,
Vice Chairman
(until October 18, 2011)
64
80
10
90
(in thousands of EUR)
Bernard Bourigeaud
(until May 15, 2011)
15
40
5
45
For the fiscal year 2010, the Annual Shareholders’ meeting approved variable compensation of EUR 55 thousand for the Supervisory Board. This variable compensation was paid out in 2011 and
is included in variable compensation 2010 in the table above. For
the fiscal year 2011, the Annual Shareholders’ Meeting will be presented with a resolution to pay EUR 53 thousand in variable compensation to the Supervisory Board.
162
The Group paid pecuniary damage liability insurance premiums on
behalf of members of the Supervisory Board totaling EUR 19 thousand and EUR 14 thousand in 2011 and 2010 (in equal amounts for
each Supervisory Board member), respectively.
On December 31, members of the Supervisory Board held the following shares:
Shares
2011
2010
Anthony Maher,
Chairman
8,000
3,000
Thomas Smach,
Vice Chairman
-
-
Johanna Hey
(since May 16, 2011)
-
-
Eric Protiva
320,000
320,000
Albert Rädler
156,297
156,297
Krish Prabhu,
Vice Chairman
(until October 18, 2011)
-
-
Bernard Bourigeaud
(until May 15, 2011)
-
-
(35) Events After the Balance Sheet Date
Affirmative Declaration of the Management Board
The Management Board and the Supervisory Board of ADVA AG Optical Networking will propose to the upcoming Annual General Meeting on May 24, 2012 the conversion of the Company into an SE (Societas Europaea, a public limited-liability company under European
law) named ADVA Optical Networking SE. The Management Board
considers an SE to be a modern legal form for a global corporation
with headquarters in Europe.
We, the members of the Management Board of ADVA AG Optical
Networking, to the best of our knowledge affirm that, in accordance
with the applicable reporting principles, the management report
and the consolidated financial statements of the ADVA Optical Networking Group represent a true and fair view of the net assets, financial position and performance of the Group, together with a description of the principal opportunities and risks associated with the
expected development of the Group..
As replacement of a bonded loan due in March 2012 ADVA AG
Optical Networking entered into a new bonded loan agreement
amounting to EUR 11,500 thousand. The loan was paid out on January 31, 2012 and is due for repayment in January 2017.
Welcome
Management
Board
Supervisory
Board
Meiningen, February 20, 2012
Corporate
Governance
Declaration of compliance with the
German Corporate Governance Code
Stock
Pursuant to Section 161 of the German Stock Corporation Law
(AktG), the Management Board and the Supervisory Board have issued a declaration of compliance with the German Corporate Governance Code. This declaration is published on the Group’s website
(www.advaoptical.com).
Brian Protiva
Christoph Glingener
Investor
Relations
Meiningen, February 20, 2012
Jaswir Singh
Business
Overview
Christian Unterberger
Management
Report
Brian Protiva
Christoph Glingener
Financial
Statements
Jaswir Singh
Additional
Information
Christian Unterberger
163
›› Independent Auditor’s Opinion
Independent Auditor’s Opinion
The following independent auditor’s opinion is a mere convenience
translation from the German language and hence does not bear
the auditor’s seal and signatures. The German language version of
the independent auditor’s opinion only refers to the German language version of the consolidated 2011 IFRS financial statements
and Group management report of ADVA AG Optical Networking.
Auditor’s Report
We have audited the consolidated financial statements prepared by
the ADVA AG Optical Networking, Meiningen, comprising the statement of financial position, the income statement, the statement of
comprehensive income, statement of changes in equity, cash flow
statement and the notes to the consolidated financial statements,
together with the group management report for the business year
from January 1 to December 31, 2011. The preparation of the consolidated financial statements and the group management report
in accordance with the IFRSs, as adopted by the EU, and the additional requirements of German commercial law pursuant to § (Article) 315a Abs. (paragraph) 1 HGB (“Handelsgesetzbuch”: German
Commercial Code) is the responsibility of the parent Company’s
Board of Managing Directors. Our responsibility is to express an
opinion on the consolidated financial statements and on the group
management report based on our audit.
164
We conducted our audit of the consolidated financial statements in
accordance with § 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschafts­prüfer (Institute of Public Auditors in Germany)
(IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation
of the net assets, financial position and results of operations in the
consolidated financial statements in accordance with the applicable financial reporting framework and in the group manage­ment
report are detected with reasonable assurance. Knowledge of the
business activities and the economic and legal environment of the
Group and expectations as to possible misstatements are taken
into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the
evidence supporting the disclosures in the consolidated financial
statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit
includes assessing the annual financial statements of those entities
included in consolidation, the determination of the entities to be
included in consolidation, the accounting and consolidation principles used and signi­ficant estimates made by the Company’s Board
of Managing Directors, as well as evaluating the overall presentation of the consolidated financial statements and the group management report. We believe that our audit provides a reasonable
basis for our opinion.
Our audit has not led to any reservations.
Welcome
In our opinion based on the findings of our audit the consolidated
financial statements comply with the IFRSs as adopted by the EU,
and the additional requirements of German commercial law pursuant to § 315a Abs. 1 and give a true and fair view of the net assets,
financial position and results of operations of the Group in accordance with these requirements. The group management report is
consistent with the consolidated financial statements and as a whole
provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
Management
Board
Supervisory
Board
Munich, February 21, 2012
Corporate
Governance
PricewaterhouseCoopers
Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft
Stock
Alexander Winter
Wirtschaftsprüfer
(German Public Auditor)
ppa. Sven Jacob
Wirtschaftsprüfer
(German Public Auditor)
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
165
Additional Information
Trusted Partner
Partners that Add Value
166
High-performance networks require high-performance partnerships.
We work closely with partners across the globe to ensure our products
deliver the results you need. IBM is one such partner. Together we’ve
worked on some of the world’s most advanced enterprise networks.
IBM’s latest zEnterprise Bladecenter® Extension is vital for enterprise
applications such as business continuity, disaster recovery and cloud
computing infrastructure. In these environments low-latency, highcapacity and secure data transmission are critical. There is one product
that meets these requirements out of the box – the FSP 3000.
Quarterly Overview 2009 - 2011
(IFRS, in thousands of EUR,
except stated otherwise)
Welcome
--------------------- 2009 --------------------Q1
Q2
Q3
Q4
-------------------- 2010 -------------------Q1
Q2
Q3
Q4
--------------------- 2011 --------------------Q1
Q2
Q3
Q4
INCOME STATEMENT
Pro forma financial
numbers exclude
non-cash charges related to the stock compensation programs
and amortization and
impairment of goodwill
and acquisition-related
intangible assets
Revenues
56,941
58,155
58,112
59,600
63,162
68,611
80,549
79,403
70,351
77,837
79,325
83,432
Pro forma cost of goods sold
-32,378
-34,108
-33,815
-32,550
-35,974
-40,513
-48,358
-45,656
-41,368
-44,399
-44,830
-46,832
Pro forma gross profit
24,563
24,047
24,297
27,050
27,188
28,098
32,191
33,747
28,983
33,438
34,495
36,600
Pro forma selling and marketing expenses
-9,159
-9,392
-8,784
-9,390
-9,473
-10,885
-10,285
-12,304
-10,033
-11,099
-10,983
-11,296
Pro forma general and administrative expenses
-5,902
-5,825
-5,524
-6,029
-5,532
-5,921
-5,892
-5,932
-6,086
-6,183
-6,273
-5,465
Pro forma research and development expenses
-10,860
-10,004
-9,401
-10,449
-11,860
-12,235
-12,731
-12,565
-14,359
-14,094
-14,782
-16,848
1,177
1,790
1,256
991
1,429
863
945
681
1,688
1,160
2,539
4,130
Other operating income and expenses, net
101
491
127
931
949
1,969
176
667
714
277
469
291
Pro forma operating income (loss)
-80
1,107
1,971
3,104
2,701
1,889
4,404
4,294
907
3,499
5,465
7,412
Amortization of intangible assets from
acquisitions
-632
-617
-603
-591
-411
-435
-657
-638
-632
-607
-614
-640
Stock compensation expenses
-296
-282
-372
-428
-380
-443
-474
-551
-582
-479
-424
-98
6,674
Income from capitalization of development
expenses, net of amortization for capitalized
development projects
Operating income (loss)
-1,008
208
996
2,085
1,910
1,011
3,273
3,105
-307
2,413
4,427
-293
-296
-325
-301
-327
-327
-338
-447
-342
-409
-402
-378
518
98
-915
842
1,134
717
451
828
-1,609
-988
2,988
1,937
-783
10
-244
2,626
2,717
1,401
3,386
3,486
-2,258
1,016
7,013
8,233
235
449
244
-1,217
-347
-816
-957
-1,863
-56
-179
2,719
451
-548
459
0
1,409
2,370
585
2,429
1,623
-2,314
837
9,732
8,684
basic
-0.01
0.01
0.00
0.03
0.05
0.01
0.05
0.03
-0.05
0.02
0.21
0.18
diluted
-0.01
0.01
0.00
0.03
0.05
0.01
0.05
0.03
-0.05
0.02
0.20
0.18
Cash and cash equivalents
47,823
50,445
48,046
50,882
48,684
51,286
66,207
54,085
44,712
55,375
55,991
59,110
Inventories
Interest income and expenses, net
Other financial gains and losses, net
Income (loss) before tax
Income tax benefit (expense), net
Net income (loss)
Management
Board
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
Business
Overview
Earnings per share in EUR
Management
Report
BALANCE SHEET (as of period end)
27,483
24,781
24,729
25,400
30,021
35,072
33,683
39,588
36,085
32,135
34,900
36,536
Goodwill
19,306
19,447
18,968
19,103
19,407
20,283
19,519
19,653
19,273
19,097
19,458
19,842
Capitalized R & D expenses
21,243
23,463
24,381
25,449
26,914
28,146
28,874
29,571
31,182
32,261
34,911
39,231
Other intangible assets
13,027
11,611
11,187
9,991
9,356
9,293
7,970
7,467
7,644
6,718
6,216
5,541
Total intangible assets
53,576
54,521
54,536
54,543
55,677
57,722
56,363
56,691
58,099
58,076
60,585
64,614
Other assets
71,459
65,997
63,761
66,172
69,444
73,699
68,349
83,758
73,949
81,099
99,276
99,636
Total assets
200,341
195,744
191,072
196,997
203,826
217,779
224,602
234,122
212,845
226,685
250,752
259,896
Total stockholders’ equity
100,611
100,584
99,086
101,270
105,143
110,693
112,487
115,414
111,809
112,125
124,424
135,986
Financial
Statements
Additional
Information
CASH FLOW STATEMENT
Cash flow from operating activities
Gross capital expenditures for property,
plant and equipment
EMPLOYEES (as of period end)
5,743
10,313
6,195
6,854
3,805
8,973
2,049
6,273
-1,078
18,144
9,718
12,952
-1,366
-1,608
-1,210
-1,623
-2,198
-2,367
-1,420
-2,823
-928
-1,897
-1,543
-2,892
1,043
1,041
1,068
1,100
1,124
1,128
1,173
1,203
1,224
1,257
1,275
1,304
167
›› Multi-Year Overview 2001 - 2011
›› Glossary
Multi-Year Overview 2001 - 2011
(in thousands of EUR,
except stated otherwise)
Change
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
U.S. GAAP
U.S. GAAP
U.S. GAAP
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
IFRS
2011
vs. 2010
INCOME STATEMENT
Revenues
90,017
88,059
90,440
102,136
131,292
192,709
251,486
217,672
232,808
291,725
310,945
Pro forma cost of goods sold
-56,144
-48,829
-45,517
-51,387
-67,555
-109,630
-151,050
-125,802
-132,851
-170,501
-177,429
+4%
Pro forma gross profit
33,873
39,230
44,923
50,749
63,737
83,079
100,436
91,870
99,957
121,224
133,516
+10%
Pro forma general, administrative,
selling and marketing expenses
-25,296
-23,396
-23,460
-26,542
-34,325
-46,721
-59,685
-60,385
-60,005
-66,224
-67,418
+2%
Pro forma financial
Pro forma research and development
-14,211
-11,594
-12,026
-12,088
-15,238
-28,054
-41,372
-40,682
-40,714
-49,391
-60,083
+22%
numbers exclude
Income from capitalization of development
expenses, net of amortization for
capitalized development projects
0
0
0
736
4,831
4,633
2,315
9,004
5,214
3,918
9,517
+143%
Restructuring expenses
0
0
0
0
0
0
0
-2,251
0
0
0
-
Other operating income and expenses, net
0
0
0
0
89
185
86
1,736
1,650
3,761
1,751
-53%
-5,634
4,240
9,437
12,855
19,094
13,122
1,780
-708
6,102
13,288
17,283
+30%
Amortization of intangible assets from
acquisitions excluding goodwill
-21,492
-5,212
-4,636
-3,084
-714
-6,681
-10,727
-4,574
-2,443
-2,141
-2,493
+16%
Impairment of goodwill
-35,035
0
0
0
0
0
-6,581
0
0
0
0
-
25,562
199
-1,071
-1,284
-1,198
-5,526
-3,186
-1,761
-1,378
-1,848
-1,583
-14%
-36,599
-773
3,730
8,487
17,182
915
-18,714
-7,043
2,281
9,299
13,207
+42%
-1,159
-1,047
-769
-192
-26
-490
-853
-1,005
-1,215
-1,439
-1,531
+6%
-764
-423
-484
-531
248
-1,443
-1,734
-1,103
543
3,130
2,328
-26%
-38,522
-2,243
2,477
7,764
17,404
-1,018
-21,301
-9,151
1,609
10,990
14,004
+27%
3,454
3,315
2,354
-537
-5,530
-9,325
-8,154
275
-289
-3,983
2,935
-174%
-81,286
-144
46
0
0
0
0
0
0
0
0
-
0
-2,231
0
0
0
0
0
0
0
0
0
-
-116,354
-1,303
4,877
7,227
11,874
-10,343
-29,455
-8,876
1,320
7,007
16,939
+142%
basic
-3.57
-0.04
0.15
0.22
0.35
-0.26
-0.64
-0.19
0.03
0.15
0.36
+140%
diluted
-3.57
-0.04
0.15
0.21
0.34
-0.26
-0.64
-0.19
0.03
0.15
0.35
+133%
+9%
non-cash charges
related to the stock
compensation
programs and
amortization and
impairment of goodwill
and acquisition-related
intangible assets
Pro forma
operating income (loss)
Stock compensation expenses
Operating income (loss)
Interest income and expenses, net
Other financial gains and losses, net
Income (loss) before tax
Income tax benefit (expense), net
Loss from discontinued
operations, after tax
Cumulative effect of changes
in accounting principles
Net income (loss)
+7%
Earnings per share in EUR
BALANCE SHEET (as of December 31)
Cash and cash equivalents
7,417
14,586
18,819
24,054
27,657
32,181
41,576
46,560
50,882
54,085
59,110
Inventories
15,758
9,951
8,561
12,964
14,373
42,034
31,029
26,961
25,400
39,588
36,536
-8%
Goodwill
10,592
9,738
8,955
11,046
11,704
24,247
20,006
18,854
19,103
19,653
19,842
+1%
+33%
Capitalized R & D expenses
0
0
0
736
5,567
10,198
12,238
19,829
25,449
29,571
39,231
16,713
7,902
2,434
2,930
3,132
28,107
18,178
12,926
9,991
7,467
5,541
-26%
Total intangible assets
27,305
17,640
11,389
14,712
20,403
62,552
50,422
51,609
54,543
56,691
64,614
+14%
Other assets
Other intangible assets
40,453
40,089
38,646
47,474
62,634
95,918
80,769
70,670
66,172
83,758
99,636
+19%
Total assets
90,933
82,266
77,415
99,204
125,067
232,685
203,796
195,800
196,997
234,122
259,896
+11%
Total stockholders’ equity
47,469
45,099
49,920
63,543
79,681
138,322
109,026
97,998
101,270
115,414
135,986
+18%
Cash flow from operating activities
-4,853
15,801
14,523
6,590
13,526
-7,899
25,150
23,343
29,105
21,100
39,736
+88%
Gross capital expenditures
for property, plant and equipment
-5,185
-1,988
-2,528
-3,007
-5,008
-10,245
-8,378
-4,464
-5,807
-8,808
-7,260
-18%
396
401
428
496
561
853
1,040
1,042
1,100
1,203
1,304
+8%
CASH FLOW STATEMENT
168
EMPLOYEES (as of December 31)
Glossary
Agile Core
Agile core is a marketing term used by ADVA Optical Networking to promote the enhanced level of flexibility and automation in the FSP 3000 platform for applications in the
network core.
ATM (Asynchronous Transfer Mode)
ATM is a network protocol that encodes data traffic into
small fixed-sized cells instead of variable-sized packets, as
in packet-switched networks like Ethernet.
Blog
A blog (a blend of the term web log) is a type of website or
part of a website. It is usually maintained by an individual
with regular entries of commentary, descriptions of events
or other material such as graphics or video. A blog encourages interaction and feedback from the blog visitors. Entries are commonly displayed in reverse-chronological order.
Welcome
Carriers
Carriers, in general, are companies that build and maintain
communications networks for commercial use. Beyond incumbent telephony companies, these also include new alternative carriers, which were established during the deregulation of the telecommunications market, and special service
providers, which offer outsourced services (e.g., software
applications or data storage) for enterprise customers.
Management
Board
Supervisory
Board
CDFC-ROADM
CDFC stands for Colorless Directionless Flexgrid Contentionless, and describes the latest generation of ROADM technology, which provides unprecedented flexibility and efficiency for routing wavelengths through an optical network.
See also ROADM.
Corporate
Governance
Stock
Cloud Computing
Cloud computing describes a concept where IT-applications
no longer run on the user’s infrastructure (for example, a
server) but are outsourced to a service provider whose IT
infrastructure is not visible or known in detail – as if it was
hidden in a cloud. A typical example is the use of software
as a service, where the software is not stored on the user’s
machine, but on servers of the software service provider.
Investor
Relations
Business
Overview
Control Plane
Within a network, the control plane is software that manages
the establishment, maintenance and termination of connections and services.
Management
Report
Financial
Statements
Additional
Information
169
›› Glossary
CWDM (Coarse Wavelength Division Multiplexing)
CWDM is a standardized WDM technology that uses up to
20 different wavelengths for data transmission over a single fiber. In contrast to DWDM, CWDM uses only a ‘coarse’
wavelength grid, so the underlying optical component technology is simpler. This makes CWDM systems very cost-effective, but also limits them in terms of total capacity. See
also DWDM and WDM.
DWDM (Dense Wavelength Division Multiplexing)
DWDM is a standardized WDM technology that uses up to
160 different wavelengths for data transmission over a single fiber. DWDM uses a ‘dense’ wavelength grid that requires
high-precision optical components, maximizing the bandwidth per fiber. See also CWDM and WDM.
DSL (Digital Subscriber Line)
DSL is a technology that provides fast digital data transmission over the copper wires of a local telephone network. The
advantage of DSL is that broadband services like fast Internet access and Internet television signals can be delivered
over the same twisted pair of copper wires that was originally deployed for phone service only.
170
Edge Gateway
An Edge Gateway is a network node equipped for interfacing with another network that uses different protocols. The
edge gateway may perform functions such as protocol translation, rate conversion or fault isolation as necessary to provide system interoperability.
Etherjack™
This innovative ADVA Optical Networking technology allows
carriers to deploy differentiated Ethernet services by providing the industry’s first intelligent Ethernet demarcation point,
which includes service definition toward the end-user and
end-to-end quality-of-service assurance across any network.
Ethernet
Ethernet is a packet-based data transmission protocol
with a data rate of 10Mbit/s. Fast Ethernet provides a data
rate of 100Mbit/s, Gigabit Ethernet 1Gbit/s and 10 Gigabit
Ethernet 10Gbit/s.
Fibre Channel
Fibre Channel, or FC, has been designed for the continuous,
serial high-speed transmission of big data volumes. It is primarily used for SANs in enterprise storage. Today’s transmission speeds include 1, 2, 4, 8, 10 and 16Gbit/s. See also
SAN (Storage Area Network).
FICON
FICON (Fibre Connection) is an IBM-proprietary protocol that
has been standardized as a mapping protocol for Fibre Channel. It is predominantly used in the context of IBM servers
and mainframes.
Frame Relay
Frame Relay is an efficient data transmission technique.
Network providers commonly sell Frame Relay services as
a lower-cost alternative to leased lines. With Frame Relay,
service providers can sell more total bandwidth than they
have available in their networks because not all users use
100% of their bandwidth all the time.
Gbit/s (Gigabit per second)
Bits are binary symbols of zero or one and are the standard unit by which data is stored and processed by computers. “Giga” stands for one billion (1,000,000,000). Bit/s is
the basic unit of a data rate, which describes how many bits
per second are being transmitted. One Gbit/s is therefore a
data rate that transmits one billion bits of data per second.
Welcome
Management
Board
GMPLS (Generalized Multiprotocol Label Switching)
GMPLS extends MPLS to provide the control plane (signaling
and routing) for devices that switch data. This common control
plane simplifies network operation and management by automating end-to-end provisioning of connections, managing
network resources and providing the quality of service level
that is expected in advanced applications. See also MPLS.
Supervisory
Board
Corporate
Governance
Stock
Investor
Relations
FSP (Fiber Service Platform)
The Fiber Service Platform is ADVA Optical Networking’s comprehensive portfolio of Optical+Ethernet networking products optimized for carrier and enterprise networks in metropolitan and regional areas.
Business
Overview
FTTx (Fiber-To-The-x)
FTTx is an umbrella term for fiber-based access networks,
where x defines the end point of the fiber network. One example is FTTC (Fiber-To-The-Curb) where the fiber network
is terminated in a street cabinet (at the curb) and the remaining distance to the end user is bridged by some other
– in most cases existing – media, such as copper. Many network operators see FTTH (Fiber-To-The-Home) as the ultimate solution. In a FTTH scenario the fiber is deployed all
the way to individual homes.
Management
Report
Financial
Statements
Additional
Information
171
›› Glossary
InfiniBand
InfiniBand is a specification describing a serial high-speed
data transmission technology. InfiniBand is used in high-performance computing and enterprise data centers. Its features include high throughput, low latency, quality of service
and failover, and it is designed to be scalable.
MPLS (Multiprotocol Label Switching)
MPLS enables packet-switched transmission of data packets
in a connection-less network along a pre-configured path.
This data-carrying mechanism is mostly used by carriers
with large transport networks and Internet Protocol-based
voice and data services.
IP (Internet Protocol)
IP is a packet-based method by which data is sent from one
computer to another on the Internet.
MSO (Multiple Service Operator)
The term MSO emerged in the 1990s when cable television
companies, mainly in the U.S., started to offer telecom services in addition to their traditional television and video offerings. Technically, most telecom service providers today
could be called multiservice operators, but the term MSO
still implies the historical roots in the cable television space.
ISO 14001
ISO 14001 is a standard developed and published by the
International Organization for Standardization. This standard
defines, establishes and maintains an environmental management system for the manufacturing and service industries.
LAN (Local Area Network)
A LAN is a computer network covering a small physical area,
like an office or small group of buildings. There are several
technologies available for setting up a LAN. Today, Ethernet is the most commonly used technology in LAN environments. See also Ethernet.
Lean Six Sigma
Lean Six Sigma combines the Lean and Six Sigma managerial concepts and focuses on the elimination of seven defined
kinds of waste (classified as production defects, overproduction, unnecessary transportation, waiting times, unnecessary inventory, unnecessary motion and wrong or unnecessary processes) and on the provision of goods and service
at a rate of no more than 3.4 defects per million opportunities.
LTE (Long Term Evolution)
LTE is the project name of a new high-performance air interface for cellular mobile communication systems. It is the
last step toward the 4th generation (4G) of radio technologies designed to increase the capacity and speed of mobile
telephone networks.
172
OAM & P (Operations, Administration,
Maintenance & Provisioning) Capabilities
Capabilities that control and manage data transport in carrier networks. Enhanced OAM & P capabilities facilitate specific service level agreements between carriers and their customers detailing data signal quality and speed.
OEM (Original Equipment Manufacturer)
OEM partners purchase products from other companies to
fill gaps in their portfolio and offer an end-to-end solution.
They typically re-label and market the products under their
own brand name.
Optojack™
Optojack™ is an innovative concept developed by ADVA
Optical Networking, which allows the cost-effective monitoring of fiber-based access links.
Parallel Sysplex
In computing, a parallel sysplex is a cluster of IBM mainframes acting together as a single system. Used for disaster recovery, parallel sysplex combines data sharing and
parallel computing to allow a cluster of up to 32 systems to
share a workload for high performance and high availability.
PON (Passive Optical Network)
PON is a concept for fiber-based access networks. Using unpowered optical splitters, a point-to-multipoint topology is
set up, enabling the efficient connection of multiple customer
end points to one network node.
Protocol
A protocol defines the “language” elements that networks
use to communicate with each other.
Provider Edge
The provider edge is located at the edge of the provider network and presents the provider’s view of the customer site.
Provider edge devices are aware of the services that connect through them and maintain service state.
Raman Amplification
Raman amplification is based on the Stimulated Raman
Scattering (SRS) phenomenon and allows all-optical signal
amplification in the transmission fiber.
Welcome
Management
Board
RAYcontrol™
This innovative ADVA Optical Networking GMPLS-based control plane technology greatly simplifies the management of
optically switched networks and offers unparalleled flexibility in service delivery, protection and restoration capabilities. See also Control Plane and GMPLS.
Supervisory
Board
REACH (Registration, Evaluation, Authorization and
Restriction of Chemicals)
A regulation issued by the European Union addressing the
production and use of chemical substances and the potential impact of these substances on human health and the
environment.
Corporate
Governance
Stock
ROADM (Reconfigurable Optical Add / Drop Multiplexing)
ROADM is an innovative functionality in optical networks that
enables cost-effective switching of wavelengths.
Investor
Relations
RoHS (Restriction of Hazardous Substances)
A directive issued by the European Union regarding the restriction of specific hazardous substances used for production and processing of electronic devices and components.
Business
Overview
Management
Report
Financial
Statements
Additional
Information
173
›› Glossary
SAN (Storage Area Network)
A SAN establishes direct connections between storage devices and network servers, enabling such devices to be shared
as peer resources and increasing the capacity and performance of storage hardware.
Server Virtualization
Server virtualization is the masking of server resources, including the number and identity of individual physical servers, processors and operating systems, from server users. The server administrator uses a software application to
divide one physical server into multiple isolated virtual environments, which are made accessible to individual users.
These virtual environments function equivalently to a separate physical computer and are sometimes called virtual
private servers, but they are also known as guests or
instances.
SONET (Synchronous Optical Network) /
SDH (Synchronous Digital Hierarchy)
SONET and SDH are methods for communicating digital information. These methods were developed in the mid-1980s
to replace the Plesiochronous Digital Hierarchy system for
transporting large amounts of telephone and data traffic and
to allow for interoperability between equipment from different vendors. While SONET is a U.S. standard, SDH is dominant in Europe and also widely used in the rest of the world.
Syncjack™
This innovative ADVA Optical Networking technology allows
carriers to deliver, monitor and assure accurate timing and
synchronization information required for applications such
as mobile backhaul.
174
TDM (Time Division Multiplexing)
Time division multiplexing (TDM) is a type of digital multiplexing in which two or more bit streams or signals are
transferred apparently simultaneously as sub-channels in
one communication channel, but are physically taking turns
on the channel. The time domain is divided into several recurrent timeslots of fixed length, one for each sub-channel.
TL 9000
TL 9000 is a quality management system standard defined
specifically for the telecommunications industry. It standardizes the quality system requirements for the design, development, delivery, installation and maintenance of telecommunication products and services, and it also defines the
performance metrics required to measure the situation at
the time of the implementation of the standard as well as
progress made.
Triple Play Services
Triple play services refer to bundled offerings of data, voice
and video services to end customers. These services are
offered in a bundle of three, and may include Internet and
e-mail access, Internet telephony, Internet television and
video-on-demand.
Utility Computing
Utility computing describes a concept where an IT service
provider offers his customers services such as computing
power or storage capacity that are metered and charged
based on actual usage. In this concept, computing power
and storage capacity are organized and billed like a utility, similar to other utilities such as water, gas or electricity.
UMTS (Universal Mobile Telecommunications System)
UMTS is one of the third-generation cell phone technologies
that support high-bandwidth applications on mobile devices.
VAR (Value Added Reseller)
VAR partners combine products from a number of different
vendors together with their own services to offer customers a complete and comprehensive solution.
WDM (Wavelength Division Multiplexing)
WDM expands the capacity of networks by allowing a greater
number of signals to be transmitted over a single fiber. WDM
enables numerous channels of data to be multiplexed into
unique color bands, and then to be combined and transmitted over a single fiber and de-multiplexed at the other end.
Welcome
Management
Board
WDM-PON (Wavelength Division MultiplexingPassive Optical Network)
WDM-PON is an innovative concept for access and backhaul
networks. It uses multiple wavelengths (WDM) over a physical point-to-multipoint fiber infrastructure that contains no
active components (PON). The use of different wavelengths
allows for traffic separation within the same physical fiber.
The result is a network that provides logical point-to-point
connections over a physical point-to-multipoint network topology. A WDM-PON allows operators to deliver high bandwidth to multiple endpoints over long distances.
Supervisory
Board
Corporate
Governance
Stock
WEEE (Waste Electrical and Electronic Equipment)
A directive issued by the European Union regarding the return
and recycling of waste electrical and electronic equipment.
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
175
›› Corporate Information
Corporate Information
Corporate Headquarters
ADVA AG Optical Networking
Campus Martinsried
Fraunhoferstrasse 9 a
82152 Martinsried / Munich
Germany
t +49 89 89 06 65 0
[email protected]
Registered Head Office
Maerzenquelle 1 – 3
98617 Meiningen-Dreissigacker
Germany
t +49 3693 450 0
Americas Office
ADVA Optical Networking North America, Inc.
5755 Peachtree Industrial Boulevard
Norcross, Georgia 30092
USA
t +1 678 728 8600
Asia-Pacific Office
ADVA Optical Networking (Shenzhen) Ltd.
18/F, Maoye Times Square
Haide 2nd Road
Nanshan District
Shenzhen 518054
China
t +86 755 8621 7400
176
ADVA Optical Networking on the Web
More information about ADVA Optical Networking, including
solutions, technologies and products, can be found on the
Company’s website at www.advaoptical.com.
PDF files of this annual report, as well as quarterly reports,
presentations and general investor information, are also
located on the Company’s website and can be downloaded
in both English and German. Quarterly conference calls are
conducted on the day of earnings announcements. Related
PDF, audio and transcript files are available for download
in the investor relations section of the Company’s website,
www.advaoptical.com.
Welcome
Investor Communication
To receive an investor packet, request other information, ask
specific questions, or be placed on the distribution list, please
contact ADVA Optical Networking’s investor relations team:
Auditor
• Price Waterhouse Coopers Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft, Munich, Germany
Wolfgang Guessgen
Vice President Investor Relations & Treasury
82152 Martinsried / Munich
Germany
t +49 89 89 06 65 940
Legal Counsels
• Hogan Lovells, Munich, Germany
Management
Board
Supervisory
Board
Tax Advisers
• Deloitte, Munich, Germany
Corporate
Governance
Karin Tovar
Manager Investor Relations
140 E. Ridgewood Avenue, Suite 415
Paramus, New Jersey 07652
USA
t +1 201 940 7212
Stock
[email protected]
Investor
Relations
Business
Overview
Management
Report
Financial
Statements
Additional
Information
177
ADVA Optical Networking Geschäftsbericht 2011
Nutzen durch fortschrittliche Netze
Nutzen durch fortschrittliche Netze
www.advaoptical.com
Geschäftsbericht 2011