2022 Audited Final Results

RNS Number : 5287U

Filtronic PLC

02 August 2022

 

                                                                                                                                                                                                     

                                                                                                                                                                          2 August 2022

FILTRONIC PLC

AUDITED FULL YEAR RESULTS FOR THE YEAR ENDED 31 MAY 2022

Filtronic plc (AIM: FTC), the designer and manufacturer of products for the aerospace, defence, telecoms infrastructure and critical communications markets, announces its full year results for the 12 months ended 31 May 2022.

Financial Highlights

	2022	2021
Revenue	£17.1m	£15.6m
Adjusted EBITDA*	£2.8m	£1.8m
Adjusted operating profit**	£1.6m	£0.6m
Exceptional items	£0.4m	£0.06m
Operating profit	£2.0m	£0.6m
Profit before taxation	£1.9m	£0.2m
Profit for the year	£1.5m	£0.1m
Basic and diluted earnings per share	0.68p	0.03p
Net cash balance as at 31 May	£2.2m	£0.8m
Net cash when excluding right of use property leases	£3.1m	£1.9m
Cash generated from operating activities	£2.3m	£2.5m

*Adjusted EBITDA is earnings before interest, taxation, depreciation, amortisation and exceptional items.

** Adjusted operating profit is operating profit before exceptional items.

Operational Highlights

·       Healthy cash position provides a platform for continued investment in growth initiatives.

·       Delivered on existing development contracts and secured initial production orders.

·       Built our channels to market, strengthened the order book, improved customer engagement and developed the opportunity pipeline with a number of growth opportunities.

·       Sales of our "best-in-class" Tower Top Amplifier supplied to the market leading Original Equipment Manufacturer ("OEM") in critical communications surpassed £1m in the financial year.

·       Series of recent contract wins, totalling £1.9m across a diverse range of new customers, demonstrating the execution of our objective to broaden our client base.

·       Successfully managed the ongoing headwinds from global semiconductor shortages, ensuring continuity of supply to our customers, and generated new opportunities as a consequence.

·       Margin improvement from a stronger sales mix leading to stronger adjusted EBITDA.

·       Strengthened our engineering and business development teams with active recruitment campaign.

Commenting on the outlook , Jonathan Neale, Chairman, said: " The Group's trading performance strengthens the balance sheet and provides a platform to further develop the business with continued investment in R&D, new product development and process capability. Execution of our technology roadmap will be a key focus this year as we expand and augment our product offering whilst also delivering bespoke developments to customers who trust us to solve their technically challenging RF problems. Broadening our customer base remains one of our key strategic objectives, and having strengthened our sales channels, we look forward to further progress having recently won several contracts to a range of new customers and markets that can deliver sustainable growth and long-term shareholder value.

With the growing opportunity pipeline and order book, we anticipate further revenue growth, particularly as 5G telecommunication infrastructure rollouts gather pace, although the quality of earnings may be impacted due to price sensitivities in this market. This would be a timing issue, rather than normalised trading, given the development contracts we are working on in aerospace & defence and space where the mix is much stronger. The continued push by governments to utilise sovereign capability in the supply chain of key programmes in these markets positions the Group well with opportunities regularly presenting themselves for us to capitalise on. Given the scale of some of these, we are open to exploring partnerships and other revenue models as a means of securing potential growth".

Annual General Meeting

The Annual General Meeting will take place at 11am on 27 October 2022 at Plexus building, Thomas Wright Way, Netpark, Sedgefield, County Durham, TS21 3FD.

Filtronic plc Tel. [phone] Richard Gibbs (Chief Executive Officer) Michael Tyerman (Chief Financial Officer) finnCap Ltd Tel. [phone] Jonny Franklin-Adams / Tim Harper (Corporate Finance) Alice Lane / Sunila de Silva (ECM) Walbrook PR Ltd Tel. [phone] Paul Vann / Nick Rome or [e-mail]

Note: This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulation.

Forward-looking statements

The Chairman's statement and Chief Executive's review include statements that are forward looking in nature. These are made by the Directors in good faith based on the information available to them at the time of their approval of this report. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including both economic and business risk factors that could cause actual events or results to differ materially from any expected future events referred to in these forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, the Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Chairman's statement

Dear fellow shareholder

I have written previously of the long-term potential of the business that attracted me to join the Board of Filtronic plc ("Filtronic") and I am pleased to report that good progress continues to be made on this overarching aim.

We have delivered revenue growth, and another successive year of adjusted earnings before interest, taxation, depreciation and amortisation ("adjusted EBITDA") growth. This has strengthened our cash position and balance sheet providing us with the opportunity to further invest in the business for continued growth and sustainable value.

The Markets

The Group's key addressable markets continue to benefit from long-term growth drivers. The aerospace & defence and security markets have traditionally long sales cycles but retain strong spending trends both domestically and overseas particularly given current events. Our capability, products and know-how are very relevant in this sector, and with greater emphasis on security sourced from domestic or allied supply for government or original equipment manufacturer ("OEM") contracts, it is an opportunity for growth and diversification of our existing customer base.

In the telecommunications market 5G rollouts continue to gather pace as the drive to build infrastructure capacity continues with an increasing number of governments licencing their E-band spectrum to enable this. Whilst there is always price pressure on established technologies as they mature, the emergence of important new frequencies and technologies remain strong opportunities for growth.

The space market is an area that is becoming increasingly important as global investment has gathered pace over the last few years. Satellites in low earth orbit ("LEO") are ideal for enabling high-speed, low-latency communication. Approximately 60 to 70 percent of space-company investment is now directed at LEO endeavours. Filtronic has products and know-how derived from our high-altitude pseudo satellite ("HAPS") projects that offer strong potential for us to play a significant role in these important communications sectors for both ground and flight platforms.

In the USA, the critical communications sector has shown some recovery post covid as domestic spending has been re-prioritised. However, this sector remains under pressure on the demand side, due to semiconductor supply impacting the availability of non-Filtronic system components.

At a macro-economic level, we face the same cost pressures of energy, cost of living and continued component cost increases and lead times as other businesses. The Company has worked well to adapt, innovate and mitigate these challenges where possible, whilst continuing to invest and find growth.

Our core ability to design and produce high performance technology demonstrators to a high-quality which are manufacturable at scale volume, continues to be a critical competitive differentiator. The ability of our clients to customise our products to their particular requirement, further strengthens our proposition in our markets.

Financial Performance Summary

Group sales increased in the year by 10% to £17.1m (FY2021: £15.6m).  

A strong sales mix improved the quality of earnings giving adjusted operating profit of £1.6m (2021: £0.6m), operating profit of £2.0m (2021: £0.6m) and adjusted EBITDA growth of 55% to £2.8m (2021: £1.8m).

The Group closed the year with £4.0m of cash at bank (2021: £2.9m) in addition to the availability of undrawn working capital debt facilities in the UK and USA.

The Group's net cash position, when including all debt except right of use property leases, was £3.1m at the end of the financial year (2021: £1.9m). Net cash including right of use property leases was £2.2m (2021: £0.8m).

Dividend

As with previous years, the Board continues to believe shareholders are better served by cash being retained in the business to fund future business development. Consequently, no dividend is proposed for the year (2021: £nil).

Board and Senior Management

FY2022 has seen a couple of changes to Filtronic's board composition. Reg Gott retired as Chairman in October 2021, which caused the Board to undertake a rigorous search process resulting in my appointment to the Board as Chairman in November 2021.

Maura Moynihan, the Group's Company Secretary took the decision to retire in May 2022 having served the business well for over 20 years. On behalf of the Board, I would like to thank Maura for her significant and sustained contributions. She leaves a legacy of a strong governance framework. Her duties as Company Secretary have been adopted by the Group's Chief Financial Officer, Michael Tyerman, who will fulfil both functions which we will keep under review in accordance with the QCA governance code.

Outlook

We have successfully strengthened our sales and engineering organisations in the year with the intention of addressing the growth opportunities that we believe exist in these markets as well as diversifying our customer base.

The technology we offer and the markets we serve align closely with the sovereign capability requirements of both the UK and US governments. Advances in telecommunication high frequency technology and commercial satellite constellations are growth markets in which we have relevant capability and whilst there are evidently continuing factors producing turbulence, affecting many markets, there are also opportunities in the radio frequency and microwave domain. The Group remains well placed in the market to deliver revenue growth supported by a healthy order book and balance sheet.

Jonathan Neale

Chairman

1 August 2022

Chief Executive's review

I am pleased to report that sustained growth in our vertical markets over the last twelve months has resulted in a solid set of financial results for FY2022. With year-on-year revenue growth of 10%, and a third year of adjusted EBITDA growth, based on increased operational efficiencies and demand for higher margin products, we see momentum in the business continue to build as we make good progress with our long-term strategic objectives. 

Customers in our core markets of aerospace, defence, 5G telecommunications infrastructure and critical communications have strong underlying demand for their products and services and remain committed to investing in new technology and emerging markets. Radio frequency ("RF") design is a notoriously complex engineering discipline, but with our global reputation, combined with over 40 years of iterative IP development in the field, we continue to see demand from multinational corporations wanting to engage our services in the design and manufacture of next generation RF products.

Despite the lingering impact of the Covid pandemic, and constraints on the supply chain caused by the global shortage of critical semiconductor components, the first half of FY2022 continued the gradual recovery we experienced at the close of the prior year. The second half of FY2022 was stronger still, with customers in critical communication and telecommunications infrastructure delivering on delayed project implementations, and the benefit of new, higher margin, product introductions in the defence and test instrument market. Once again, our trading results reveal the underlying strength and profitability of the Filtronic business despite unprecedented levels of business uncertainty. Our cash at bank at year end of £4.0m (May 2021: £2.9m) affords us the ability to make the investments we need to address new adjacent markets and provision for future supply chain challenges, whilst maintaining a robust balance sheet.

In addition to our established markets, there is now a significant interest in RF communication solutions for low earth orbit ("LEO") space, and high-altitude pseudo satellites ("HAPS"), where our existing E-band technology can be adapted for use in the converging terrestrial and non-terrestrial telecommunication networks. Our growing family of E-band backhaul telecommunications products, developed over 10 years have the benefit of being compact, highly integrated, and extremely reliable. They are also manufactured in commercial volumes, at a competitive price, which allows LEO space equipment manufacturers to get solutions to market quickly, at cost not usually associated with custom developed space products.      

The healthy balance sheet has enabled us to continue to build on investments made at our Sedgefield manufacturing site. The addition of state-of-the-art equipment for rapid process and product development has significantly enhanced our ability to bring new products to market. The ability to develop engineering prototypes and create new manufacturing processes without the need to disrupt the volume manufacturing lines has greatly improved delivery of engineering programmes and eased the transition from prototype into production.

Talented people remain at the heart of our ability to deliver leading edge products and future business growth. We have made significant efforts this year to find and recruit the specialist engineering and marketing skills required to realise our growth ambition. To further penetrate the UK aerospace and defence market we have strengthened our business development team with the addition of seasoned industry experts who have a strong track-record of sales delivery. In FY2023 we will open a new engineering design office in Manchester having recruited a high-calibre team of RF engineers in the region specifically to address the emerging space and telecommunication market.

The most significant management challenge of the last few years has been Covid, and the associated restrictions placed on engaging directly with customers which we previously communicated as our biggest challenge of the pandemic.  The strengthening of our marketing team has yielded great results since the national lockdowns and brand awareness has been raised in the markets we serve. However, the welcome return of tradeshows, conferences and a willingness of customers to accept face to face meetings and site visits to Filtronic facilities in a normalised business development environment is a critical factor for our future growth prospects.

In 2020 we made the decision to consolidate manufacturing of critical communication products in the USA, to better support our customers, and respond to an increased preference for onshoring and "buy America" sentiment. This move has been well received by customers and enabled us to respond quickly as the critical communication market recovered and supply chain issues in China started to impact our competitors. Our made in America TTA product launched in FY2020, achieved the milestone of surpassing £1m of sales in January 2022, and it continues to be the TTA product of choice for P25 programmes that will be implemented in the next 24 months.

The global semiconductor shortage has impacted our business, and undoubtably restricted our ability to recognise revenue in FY2022. We believe these supply shortages may continue to be a challenge in the FY2023 trading period and beyond. Throughout the last twelve months we have invested in critical inventory as the opportunity has become available, however reacting to schedule changes and fluctuating material delivery dates has become a significant additional workload for the business. As a manufacturer and design authority, we have the flexibility to be proactive in the sourcing of components, and in some cases, we can redesign and requalify products to make use of alternative material at short notice. However, Filtronic RF products generally form part of a larger communication solution, and increasingly it is other elements of the equipment supply chain that cause customers to reschedule product deliveries, adjust demand forecasts and in extreme cases, postpone new product introductions until a later date.  

Customers and Markets

The critical communications market has almost returned to pre-pandemic levels of demand, with state and federal spending programs redirected back to the upgrading and deployment of "first responder" networks. Our combiner products are used in most P25 network base stations, and our filter and amplifier products are extensively deployed across the Land Mobile Radio ("LMR") network. LTE telecommunication networks carry more data traffic, but the reliability of the LMR network when all other telecom networks become saturated, makes it an important part of any private network solution. Notwithstanding some short-term disruption to customer schedules from supply chain issues we expect Filtronic products to remain a part of the P25 network solution for some years to come.  

The aerospace market remains a strong and steady revenue contributor, with shipments supported by a strategic inventory holding, and consistent availability of customer supplied materials. The multi-year manufacturing supply agreements won in FY2020, will run into FY2024, and we are looking to secure follow-on demand as future aerospace radar contracts are released. We have expanded our footprint in the Active Electronically Scanned Array ("AESA") radar market by capturing several related filter design opportunities in the past year. Initial volumes are low, but it has enabled us to strengthen our position with the major aerospace primes, broadening our customer register, which is a key strategic objective of ours.

We have made inroads into the UK defence market with the successful completion and delivery of our first battlefield communications product to the UK Ministry of Defence ("MOD"). The product is undergoing field trials and we believe we are positioned favourably for any repeat orders that may materialise as well as other future design programmes as part of the framework.

5G telecommunication network deployment around the world is accelerating, and critical to true 5G performance is the quality and reliability of high frequency backhaul communications. Filtronic's 71-76GHz and 81-86GHz mmWave transceivers are designed to deliver cost-effective, multi-gigabit connectivity for mobile backhaul networks, in geographies where the E-band frequency has been licenced. The demand for our products will continue as users come to expect true 5G performance, and individual countries make the E-band frequency available for use, with India expected to be a key market and licence approval anticipated shortly.

HAPS and LEO space communications are an attractive application for our proven E-band technology, and initial customer engagements are evolving into tangible commercial opportunities. We have undertaken two important development programmes with large west-coast USA technology companies that were early pioneers in this field of converging telecommunication solutions. Consequently, we now have a good understanding of how to apply our IP in both stratospheric and LEO space platforms. We are further encouraged by the UK government's interest in the commercial space market and the publication of the National Space Strategy in September 2021.

There have been several notable achievements over the last year which set the potential for sustainable growth and future revenues, to which end, I would highlight the following:

•            Two separate design contracts with UK aerospace and defence primes for bespoke, low power bandpass filters and switch filter banks, for use in next generation radar systems. Design and prototypes were delivered within the year and initial production orders were placed for delivery in FY2023.

•             The successful delivery of a £1.3m defence contract for the design, development, and production of a battlefield radio communication product. This represents our first direct engagement with the UK MoD and the timely delivery of the initial production units positions us favourably for future production volumes.

•             The Tower Top Amplifier ("TTA") product, launched in FY2020, passed the milestone of £1.0m of sales in FY2022, with some important design wins for future system upgrades and new state-wide installations in the USA.

•             Successful transition of a long running development programme for over-the-air, mmWave test equipment, from prototype into full production. We are working with the customer to explore future production run rates based on market acceptance of the end product.

•             Successful delivery of custom, high-performance E-band transceivers for use in several separate private network applications associated with high-frequency trading platforms. Extreme low latency data communications being critical for the delivery of timely trading data.

•             Continued delivery of the Morpheus E-band transceiver in volume production with over 60,000 units shipped worldwide. This achievement earned Filtronic the coveted Queen's Award for Export in November 2021. 

•             We closed the year with a significant opportunity pipeline of new aerospace, defence and HAPS and LEO space opportunities, that have the potential to materially drive the business forward in the medium term.

Outlook

We are undoubtably in a period of economic and geopolitical uncertainty but one in which our technology will be in demand, the RF design expertise we offer is in short-supply and our core markets well positioned for growth. The current disruption to semiconductor supply chains will impact our business in the short term. However, we feel we have the resources and reserves necessary to weather the short-term impacts and look forward to the new trading period.

Filtronic's core markets of mobile telecommunications, critical communications and aerospace and defence, represent industry segments that have remained robust over the last few years. They also align well with the needs of the post-pandemic world, where public safety, mobile communications, sovereign defence capability and development of LEO non-terrestrial telecommunication networks, resonate with governments and other stakeholders alike.

Business plans for FY2023 will reflect the somewhat unpredictable nature of the economy and the current geopolitical situation, but in general we remain committed to the growth opportunities and technology roadmaps identified in our strategic plan. We have a culture that is proactive and highly motivated to create growth and diversification of our customer base. With this in mind, we have a number of initiatives to develop our capability, and secure a range of well-defined business opportunities including:

·   Development of next generation MMIC designs that will enable us to continue the evolution of our mobile telecom backhaul solutions, from E-band into the adjacent licence bands of V-band, W-band and ultimately D-band;

·   Develop our scalable Cerus power amplifier platform to maximise the range of power options at selected frequency bands;

·     Develop our E-band transceiver platform to include active diplexer and SiP solutions;

·   Continued investment in our marketing activities with an updated website platform, enhanced web content, and strategic use of social media platforms;

·   Strengthening the sales organisation with the deployment of additional direct sales and business development resource in the UK and Western Europe;

·   Expand our indirect channels to market through the Manufacturing Representative Network across the USA and in Europe through distribution and reps;

·   Further investment in capital equipment to continue the extension of our engineering, design and test capability, production capability aligned to new business opportunities and incorporation of alternative frequency bands required for LEO space applications; and

·   Align our business processes and equip our facilities to achieve the accreditation necessary to undertake a higher level of UK Defence programmes. 

I am pleased with the progress we have made to date and remain excited by the potential that exists at Filtronic. There is an increasing demand for our high-performance products and unique RF design capabilities, and I believe we have the resources and expertise necessary to navigate the business challenges that will come our way in the next twelve months. The specific market segments that we have identified for future growth continue to develop at pace, and as we embark on a new financial year, I believe we are well placed to continue to deliver on our long-term growth objectives.

Richard Gibbs

Chief Executive Officer

1 August 2022

Financial review

A year of continued progress delivering revenue growth and another year of successive adjusted EBITDA growth, despite strong macro-economic headwinds and industry-wide semiconductor shortages, providing a solid platform from which we will invest in the future of the business.

Filtronic achieved another year of adjusted EBITDA growth delivering £2.8m (2021: £1.8m) thanks to a strong sales mix and controlled overhead spend. Consequently, the balance sheet was strengthened with a healthy cash position following cash generation of £1.1m (2021: £0.9m) which will be used to invest in opportunities that offer a high rate of return and provide the building blocks for future growth.

Revenues

We are also pleased to report sales growth for the Group of 10%, taking revenue to £17.1m (2021: £15.6m) with the uplifts coming from aerospace & defence and critical communications. This was especially pleasing given revenue would have been higher in the period if output had not been constrained by material availability caused by the widely publicised global semiconductor component shortage. By encouraging customers to place longer-term orders we have secured the visibility we need to align resources and safeguard inventory. Consequently, we have been able to build our order book, which is stronger leaving the year than we entered, and gives optimism that we can continue on a growth trajectory. The momentum is also building as we look to deliver on one of our key strategic objectives, to broaden the customer base, with several recent contract wins outside of our largest three customers.

5G Xhaul sales decreased year-on-year by 12% as revenue was constrained by component availability in H1. Having received the material towards the end of H1, we enjoyed a 38% increase of sales to our lead customer in H2, as the demand profile returned to customer-specified levels. Output continues to flex, and we have the capacity in place to execute as 5G rollouts gather pace and an increasing number of governments release E-band spectrum. Sales of E-band derivatives to customers in adjacent markets saw growth with a main contributor being 'over-the-air' equipment having successfully completed the pilot phase of an engineering development to a leading US customer.

Sales of aerospace & defence products saw year-on-year growth of 27%, driven by our multi-year contracts running at consistent levels of output combined with revenue from new contract wins. The battlefield communications project, announced in January 2020, was the largest of these contract wins and saw over £1m of revenue recognised in the period. This market is critical to our growth plans, and it was pleasing to see several new customers entering the register with initial NRE development contracts. The sales cycle can be long in aerospace and defence, but once initial prototype orders become established, they are generally long-term and predictable, which helps to underwrite the business, improving the risk appetite for more speculative high-return projects in other areas.

The products supplied into the critical communications market achieved good results in the period with 23% growth year-on-year. The market suffered during the pandemic with funds diverted to sectors such as healthcare, but government spend has now flowed back into public infrastructure projects, with Filtronic benefitting from new state and county level rollouts. Demand recovered well in the year and our lead customer is reporting year-on year revenue growth in Land Mobile Radio ("LMR"), which is the segment of their business we supply into, and a record order backlog primarily driven by LMR demand. The recently launched TTAs performed beyond our expectation with the product successfully designed into major infrastructure projects ahead of more established suppliers in the market. Our procurement strategies, including early sourcing of materials and elevated levels of inventory, minimised the impact of component shortages but revenue to this market would have been higher if not for shortages upstream in the system-level product. However, this also created opportunities for us, and we were able to capitalise, winning additional business thanks to our ability to maintain supply, when competitors hit fulfilment challenges.

Operating costs and headcount

Operating costs remained broadly flat in the year at £9.4m (2021: £9.5m) as overheads were controlled in the administrative areas of the business.

The Group's largest overhead is salary-related costs which increased by £0.1m, although the mix of personnel changed in the year. Improvements in manufacturing efficiency facilitated a lower cost base to run our manufacturing operations, with the savings invested back into the business with the recruitment of new employees in engineering to support work on the technology roadmap.

Given this shift, there was a reduction in the total number of employees in the Group during the year which is reflected in the average headcount for the year decreasing to 124 (2021: 130). An analysis of the Group's average continuing headcount is presented below:

Number	2022	2021
Manufacturing	78	86
Research and development	26	24
Sales and marketing	5	5
Administration	15	15
Total headcount	124	130

Further investment is planned for the year ahead with additional engineers joining the business in Q1 FY2023 as we seek to capitalise on new opportunities having strengthened our direct channels to market. This follows a big push on recruitment of senior sales personnel and engineers which incurred recruitment costs of £0.2m, which is larger than we have previously incurred, as given the high number of vacancies to fill we engaged a recruitment process outsourcer ("RPO") to fill the open vacancies.

Other costs were managed tightly throughout the year and consequential cost savings from the pandemic such as business travel prevailed. In my report last year, I advised that I was keen to see our sales and marketing team return to trade exhibitions at the earliest opportunity, and it was pleasing to see the restart of these events in the year. They have been successful forums for generating new customer leads in the past, and money will always be made available to support these events as they are key to new business acquisition.

In the USA, we secured a second round of financial support through the Paycheck Protection Programme ("PPP") to retain staff during the pandemic. The loan was forgiven for repayment by the US government and converted to a grant totalling $186k (£131k).

A large portion of our product development in the year was customer funded which maintained a healthy flow of cash during the development phase of the engineering projects. Consequently, there was limited capitalisation of development costs as the costs are expensed in line with revenue recognition. Further commentary can be seen in the Research and Development section of this review.

Adjusted EBITDA

The Group continues to focus on an alternative performance measure ("APM") to track performance of the business. This APM is adjusted EBITDA as it measures the quality of earnings without the impact of exceptional items and non-cash expenses such as depreciation and amortisation. Adjusted EBITDA for the operation was £2.8m (2021: £1.8m) representing a 58% increase whilst adjusted operating profit was £1.6m (2021: £0.6m) representing a 174% increase. This was facilitated by a stronger sales mix and controlled spend of the overhead cost base whilst maintaining investment into R&D.

Gross profit increased considerably thanks to increased sales to the critical communications and aerospace & defence market as certain components are free issued by the customer which gives improved margins, whilst sales to the telecommunications infrastructure market were lower where pricing is more competitive.

Amortisation increased as the full year impact of the Morpheus and MMIC IP engineering developments, capitalised as an intangible asset in a prior period, were borne.

The exceptional items relate to legacy Telecoms Antenna Operation provisions that were released unused in the period. Having previously recognised the cost in the discontinued operation, the reversal has gone through exceptional items.

The table below shows the reconciliation of operating profit delivered at £2.0m (2021: £0.6m) and to adjusted EBITDA.

	2022	2021
Reconciliation of operating profit to adjusted EBITDA	£000	£000
Operating profit	1,975	642
Exceptional items	(391)	(64)
Adjusted operating profit	1,584	578
Impairment of development costs	-	45
Depreciation	945	941
Amortisation	278	209
Adjusted EBITDA	2,807	1,773

Taxation

A tax charge of £0.4m (2021: £0.2m) was recognised for the year. This is the result of a reduced deferred tax position reflecting usage in the year within the profitable trading subsidiaries in the UK and US. This is a non-cash entry so payments will not be made to this value.

It is highly likely that governments around the world will increase their rates of corporation tax over the next few years to help pay for the cost of economic support provided over the last couple of years. The UK has already increased the rate of corporation tax with effect from 1 April 2023 for companies with profits above £250,000 to 25% from 19%, and the US is currently debating the merits of an increase. However, with substantial deferred tax assets, including those not recognised on the balance sheet, this is likely to have a minimal impact on cash in the Group in the short and medium term.

Research and development costs ("R&D")

Total R&D costs in the year before capitalisation and amortisation of development costs were £1.7m (2021: £1.7m). The Group utilised most of its engineering resource on customer funded developments generating near-term revenue with an increased chance of commercialisation.

However, the Group remains committed to investment in R&D for future growth of the business and consequently measures R&D spend as a KPI. Given the importance, o ur investment strategy is geared towards continual investment in R&D with the plan to align annual spend at 12% or more of revenue. Key areas of spend in the year included product development for markets spanning 'over-the-air' mmWave equipment, aerospace & defence, low earth orbit and development of W-band capability. The healthy cash position and strengthened balance sheet gives us a greater ability to invest in the development of our own strategic technology roadmap and proprietary IP. This will allow us to build long-term shareholder value in the years ahead.

Recruitment of RF engineers has been an industry-wide issue for some time, but a change of approach has yielded positive results with the use of the RPO, as disclosed in the operating costs and headcount subsection of this report. We have also recruited a high-calibre team of engineers in the Manchester area, where we are creating a low-cost footprint to base the team, who will drive our technology roadmap in mmWave engineering for the space market.

The Group capitalises its development costs in line with IAS 38. A reconciliation of R&D costs before capitalisation and amortisation can be seen in the table below:

	2022	2021
Reconciliation of R&D costs	£000	£000
R&D costs in income statement	1,937	1,845
Capitalisation of development costs	-	52
Impairment of development costs	-	(45)
Amortisation of development costs	(259)	(182)
R&D cash spend	1,678	1,670

Capital expenditure and right of use assets

Capital expenditure increased slightly in the year. The total amount of capital purchased was £0.6m (2021: £0.4m) with the purchase of another die-attach machine and solder reflow oven. The die-attach machine increases overall capacity at our Sedgefield site, enabling quick-turnaround of new product introductions and servicing of a growing opportunity pipeline without disruption to the production line. It also increases the bandwidth of our process engineers, which is a key skillset of the business, to undertake more development work. The solder reflow oven improves the capability of the operation and opens new opportunities particularly in the aerospace & defence market. The assets were externally financed through asset finance agreements were subsequently classified as right of use assets.

Warranty provision

In line with industry practice, the Group provides warranties to customers over the quality and performance of the products it sells. The Group's policy is to make a provision, calculated as a percentage of cost of goods sold, after reviewing costs associated with faulty products returned. As at 31 May 2022, the warranty provision was £0.1m (2021: £0.3m). A provision relating to the legacy Telecoms Antenna Operation was released unused in the year and is recognised in exceptional items.

Funding and cash flow

The Group recorded an increase in cash and cash equivalents to £4.0m (2021: £2.9m) at the year-end. Cash generated from operating activities in the year was £2.3m (2021: £2.5m) as solid adjusted EBITDA performance drove strong cash generation with offset by increased working capital requirements. Industry-wide semiconductor shortages have been well documented and are mentioned a number of times in the Group's Annual Report, with a key mitigation action being the increase of our inventory holding. This has been key to continuity of supply at a time when availability is scarce and lead times are stretching. Consequently, the net inventory position grew by £0.4m in the year. The increase in receivables and payables represents a strong period of trading in Q4 FY2022, inflating the closing position, as working capital was in line with payment terms.

Net cash of all lease obligations, when including all debt except property leases at the end of the period, was £3.1m (2021: £1.9m), whilst overall net cash including property leases was £2.2m (2021: £0.8m). At a time when many sectors are struggling with liquidity, coupled with economic headwinds from inflation, cost of living increases and geopolitical uncertainty, our business is in the fortunate position to have a platform from which to grow with a cash position that will be used to invest for the future.

We also have additional cash headroom available through a £3.0m invoice discounting facility with Barclays Bank plc in the UK and a $4.0m invoice factoring facility with Wells Fargo Bank in the USA. Both facilities were undrawn at 31 May 2022 (2021: undrawn).

Going concern

In assessing going concern, the Board have considered:

·   The principal risks faced by the Group which are discussed within the 'Risk management' section of the Annual Report;

·   The financial position of the Group including forecasts and financial plans;

·   The healthy cash position at 31 May 2022 of £4.0m (2021: £2.9m) and the additional headroom available through the undrawn invoice discounting facilities and overdraft (2021: undrawn);

·   Global semiconductor component shortages impacting supply chains and the potential for customer orders to remain unfulfilled for prolonged periods; and

·   The economic headwinds the world is facing with the potential for customers to reassess their priorities, with opportunities postponed or curtailed.

Therefore, the Directors are satisfied that the Group has adequate financial resources to continue in operational existence for a period of at least 12 months from the date of this report. Accordingly, the going concern basis has been adopted in the preparation of the Annual Report for the year ended 31 May 2022.

Michael Tyerman

Chief Financial Officer

1 August 2022

The Board

The directors that served during the year ended 31 May 2022, and to the date of this announcement, and their respective roles are set out below:

Jonathan Neale (Non-Executive Chairman) appointed 15 November 2021

Richard Gibbs (Chief Executive Officer)

Michael Tyerman (Chief Financial Officer)

Pete Magowan (Non-Executive Director)

John Behrendt (Non-Executive Director)

Reg Gott (Non-Executive Chairman) retired 28 October 2021

Consolidated Income Statement

for the year ended 31 May 2022

			2022		2021
Continuing operations	Note		£000		£000
Revenue		2	17,052		15,556
			======		======
Adjusted Earnings before interest, taxation, depreciation, amortisation and exceptional items			2,807		1,773
Amortisation of intangible assets			(278)		(209)
Impairment of development costs			-		(45)
Depreciation of property, plant and equipment and right of use assets			(945)		(941)
			----------		----------
Adjusted operating profit			1,584		578
Exceptional items		3	391		64
			----------		----------
Operating profit			1,975		642
Finance costs		4	(194)		(431)
Finance income			111		-
			----------		----------
Profit before taxation			1,892		211
Taxation		6	(424)		(151)
			----------		----------
Profit for the year			1,468		60
			======		======
			----------		----------
Basic and diluted earnings per share		5	0.68p		0.03p
			======		======

The profit for the year is attributable to the equity shareholders of the parent company, Filtronic plc.

Consolidated Statement of Comprehensive Income

for the year ended 31 May 2022

		2022	2021
		£000	£000
Profit for the year		1,468	60
		----------	----------
Other comprehensive income/(expense) Items that are or may be subsequently reclassified to profit and loss:
Currency translation movement arising on consolidation		179	(98)
		----------	----------
Total comprehensive income/(expense) for the year		1,647	(38)
		======	======

The total comprehensive income for the year is attributable to the equity shareholders of the parent company Filtronic plc.

All income recognised in the year was generated from continuing operations.

Consolidated Balance Sheet

at 31 May 2022

		2022	2021
	Note	£000	£000
Non-current assets
Goodwill and other intangible assets		1,495	1,716
Right of use assets		2,293	2,268
Property, plant and equipment		701	1,014
Deferred tax		868	1,218
		----------	----------
		5,357	6,216
		----------	----------
Current assets
Inventories		2,598	2,190
Trade and other receivables		4,479	3,294
Cash and cash equivalents		4,006	2,906
		----------	----------
		11,083	8,390
		----------	----------
		----------	----------
Total assets		16,440	14,606
		----------	----------
Current liabilities
Trade and other payables		2,993	2,380
Provisions		282	397
Deferred income		172	184
Financial liabilities		-	63
Lease liabilities		540	542
		----------	----------
		3,987	3,566
		----------	----------
Non-current liabilities
Deferred Income		130	128
Financial liabilities		-	76
Lease liabilities		1,280	1,478
		----------	----------
		1,410	1,682
		----------	----------
		----------	----------
Total liabilities		5,397	5,248
		----------	----------
		----------	----------
Net assets		11,043	9,358
		----------	----------
Equity
Share capital	7	10,796	10,795
Share Premium	8	11,060	11,039
Translation Reserve		(471)	(650)
Retained earnings		(10,342)	(11,826)
		----------12,16	----------12,161
Total equity		11,043	9,358
		======	======

The total equity is attributable to the equity shareholders of the parent company Filtronic plc.

Company number 2891064

Richard Gibbs

Chief Executive Officer

Consolidated Statement of Changes in Equity

for the year ended 31 May 2022

	Share capital	Share premium	Translation reserve	Retained earnings	Total equity
	£000	£000	£000	£000	£000
Balance at 31 May 2020	10,794	11,000	(552)	(11,888)	9,354
Profit for the year	-	-	-	60	60
New shares issued	1	39	-	-	40
Currency translation movement arising on consolidation	-	-	(98)	-	(98)
Share-based payments	-	-	-	2	2
	----------	----------	----------	----------	----------
Balance at 31 May 2021	10,795	11,039	(650)	(11,826)	9,358
Profit for the year	-	-	-	1,468	1,468
New shares issued	1	21	-	-	22
Currency translation movement arising on consolidation	-	-	179	-	179
Share-based payments	-	-	-	16	16
	----------	----------	----------	-----------	----------
Balance at 31 May 2022	10,796	11,060	(471)	(10,342)	11,043
	======	======	======	=======	======

Consolidated Cash Flow Statement

for the year ended 31 May 2022

		2022	2021
		£000	£000
Cash flows from operating activities
Profit for the year		1,468	60
Taxation		424	151
Finance income		(111)	-
Finance costs		194	431
		----------	----------
Operating profit		1,975	642
Share-based payments		16	2
Depreciation of property, plant and equipment and right of use assets		945	941
Amortisation of intangible assets		278	209
Impairment of intangible assets		-	45
Movement in inventories		(273)	626
Movement in trade and other receivables		(1,100)	1,489
Movement in trade and other payables		550	(1,026)
Movement in provisions		(115)	(712)
Change in deferred income		(10)	(255)
Tax received		19	495
		----------	----------
Net cash generated from operating activities		2,285	2,456
		----------	----------
Cash flows from investing activities
Capitalisation of development costs		-	(52)
Acquisition of other intangible assets		(57)	(69)
Acquisition of plant and equipment		(61)	(177)
Acquisition of right of use assets		(132)	(106)
Proceeds on sale of assets		-	12
		----------	----------
Net cash used in investing activities		(250)	(392)
		----------	----------
Cash flows from financing activities
Interest paid		(194)	(225)
Proceeds from bank loans		-	131
Repayment of bank loans		(131)	(209)
Exercise of employee share options		22	40
Repayment of lease liabilities		(653)	(666)
Repayment of interest-bearing borrowings		(8)	(104)
		----------	----------
Net cash used in financing activities		(964)	(1,033)
		----------	----------
Movement in cash and cash equivalents		1,071	1,031
Currency exchange movement		29	(153)
Opening cash and cash equivalents		2,906	2,028
		----------	----------
Closing cash and cash equivalents		4,006	2,906
		======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2022

1       Basis of Preparation

These preliminary results have been prepared on the basis of the accounting policies which are to be set out in Filtronic plc's Annual Report and financial statements for the year ended 31 May 2022.

In accordance with corporate governance requirements the directors have undertaken a review of forecasts and the Group's cash requirements to consider whether it is appropriate that the Group continues to adopt the going concern assumption.

At 31 May 2022, the Group had cash at bank of £4.0m and access to undrawn invoice discounting facilities of £3.0m and $4.0m in the UK and USA respectively (2021: undrawn).

The Board recognises the uncertain economic and political environment that the world faces and has reviewed the business outlook to reflect this uncertainty. Cash flow forecasts have been prepared to model various scenarios over a three-year period based on the Group's financial and trading position, principal risks and uncertainties and strategic plans. A downside scenario was modelled where programme curtailment and/or delays may adversely affect forward-looking demand to levels lower than those initially

modelled in the base case scenario. A further 'severe but plausible' scenario was modelled which reflected output in the event semiconductor material availability prevented supply to customers for a period of time.

The scenarios modelled above demonstrate the Group has adequate cash and borrowing capacity for the next twelve months. Therefore, the directors continue to adopt the going concern basis to prepare the accounts.

There are a number of new standards, including, amendments to standards and interpretations that are effective for financial statements after this reporting period, but the Group has not adopted them early. None of these are expected to have a material impact on the results or financial position of the Group.

Whilst the information included in this preliminary announcement has been prepared on the basis of International Accounting Standards in conformity of the requirements of the Companies Act 2006, this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements within two months of this announcement.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 May 2022 or 31 May 2021. The financial information for 2021 is derived from the statutory accounts for 2021 which have been delivered to the registrar of companies. The auditor has reported on the 2022 accounts; their report was:

(i) unqualified

(ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and

(iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The statutory accounts for 2022 were finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies in due course.

2       Segmental analysis

IFRS 8 requires consideration of the identity of the chief operating decision maker ('CODM') within the Group. In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the Chief Executive Officer who reviews internal monthly management reports, budget and forecast information as part of this. Accordingly, the Chief Executive Officer is deemed to be the CODM.

The CODM has identified one operating segment within the Group as defined under IFRS 8. In turn, this is the only reportable segment of the Group as the entities in the Group have similar products and services, production processes and economic characteristics. Therefore, there is no allocation of operating expenses, profit measures or assets and liabilities to specific commercial markets.

Accordingly, the CODM assesses the performance of the operating segment on financial information which is measured and presented in a manner consistent with those in the financial statements by reference to Group results against budget.

The Group profit measures are adjusted operating profit and adjusted EBITDA, both disclosed on the face of the consolidated income statement. No differences exist between the basis of preparation of the performance measures used by management and the figures in the Group financial statements.

The Group has three customers representing individually over 10% of revenue each and in aggregate 81% of revenue. This is split as follows:

• Customer A - 36% (2021: 35%)

• Customer B - 23% (2021: 33%)

• Customer C - 22% (2021: 19%)

Revenue by destination	Total
	2022	2021
	£000	£000
United Kingdom	7,489	4,693
Europe	3,421	4,178
Americas	5,313	4,197
Rest of the World	829	2,488
	----------	----------
	17,052	15,556
	======	======

Split of non-current assets by location				2022	2021
				£000	£000
United Kingdom			5,109		5,293
Americas			248		923
				---------	---------
				5,357	6,216
				======	======

Non-current assets relate to property, plant and equipment, right of use assets, goodwill and other intangible assets and deferred tax.

3       Exceptional items

Exceptional items are costs that are separately disclosed due to their material and non-recurring nature in order to reflect management's view of the underlying business.

Operating costs are stated after crediting exceptional items as follows:

		Year	Year
		Ended	Ended
		31 May	31 May
		2022	2021
		£000	£000
Antenna warranty		(339)	-
Historic claim		(52)	(64)
		----------	----------
		(391)	(64)
		======	======

The antenna warranty item also related to the Group's legacy Telecoms Antenna Operation previously costed through discontinued operations. The warranty period has now lapsed, and the provision was released unused.

A provision relating to an historic claim was released unused and credited to the income statement as it related to the Telecoms Antenna Operation, sold in January 2020.

4       Finance costs

		Year	Year
		Ended	Ended
		31 May	31 May
		2022	2021
		£000	£000
Interest expense on loans for plant and equipment		-	6
Interest expense for lease agreements		127	136
Minimum service costs and interest charges on invoice discounting facilities		67	82
Revaluation of foreign currency denominated intercompany balance		-	207
		----------	----------
		194	431
		======	======

5       Earnings per share

	Total Group
	2022	2021
	£000	£000
Profit for the year	1,468	60
	======	======
	'000	'000
Basic weighted average number of shares	214,726	213,397
Dilution effect of share options	868	897
	----------	----------
Diluted weighted average number of shares	215,594	214,294
	----------	----------
Basic and diluted earnings per share	0.68p	0.03p
	======	======

6       Taxation

The reconciliation of the effective tax rate is as follows:

		2022		2021
		£000		£000
Profit before taxation		1,892		211
		======		======
		2022		2021
		£000		£000
Profit before taxation multiplied by standard rate of corporation tax in the UK - 19%		359		40
Disallowable items		155		213
Deferred tax asset not recognised		194		213
Enhanced R&D tax credit		(270)		(176)
Adjustment in respect of prior year - R&D tax credit		(24)		(371)
Foreign tax not at UK rate		15		(15)
Derecognition of deferred tax asset		104		247
Rate change of deferred tax		(109)		-
		---------		---------
Taxation		424		151
		======		======

The main rate of UK corporation tax for the financial year was 19% whilst the US Federal Corporate tax rate is 21%. The deferred tax assets recognised in the year have been calculated at the rates expected to be in existence in the period of reversal.

On 3 March 2021, in the Budget, the UK government announced that the corporation tax rate will increase to 25% for companies with profits above £250,000 with effect from 1 April 2023, as well as announcing several other changes to allowances and treatment of losses. These changes were enacted on 24 May 2021.

7       Share Capital                                                                          

		Ordinary shares of 0.1p each issued and fully paid
	Number '000		£000
At 1 June 2020	213,698		10,794
Exercise of share options	717		1
	--------------		---------
At 31 May 2021	214,415		10,795
Exercise of share options	383		1
	------------		-----------
At 31 May 2022	214,798		10,796
	========		======

All shares are allotted, called up and fully paid. Holders of the ordinary shares are entitled to receive dividends when declared and are entitled to one vote per share at meetings of the Company.

8       Share Premium

			000
At 31 May 2020			11,000
Exercise of share options			39
			-----------
At 31 May 2021			11,039
Exercise of share options			21
			-----------
At 31 May 2022			11,060
			=======

9       Dividends

The directors are not proposing to pay a dividend for the year ended 31 May 2022 (2021: £nil).

10     Analysis of net cash

Reconciliation of cash flow to movement in net cash							2022		2021
							£000		£000
Movement in cash and cash equivalents							1,071		1,059
Movement in bank loans							131		78
Movement in lease liabilities - plant and machinery							(28)		546
Movement in lease liabilities - property lease							228		(39)
Effect of exchange rate fluctuations							29		(181)
							----------		----------
Movement in net cash							1,431		1,463
Net opening cash/(debt)							755		(710)
							----------		----------
Net closing cash							2,186		753
							======		======

	31 May 2021	Cash Flow	Other movements	31 May 2022
	£000	£000	£000	£000
Cash and cash equivalents	2,906	1,071	29	4,006
Bank loans	(131)	131	-	-
Lease liabilities - plant and equipment	(835)	417	(445)	(863)
	---------	---------	---------	---------
Net cash when including all debt except property leases	1,940	1,619	(416)	3,143
Lease liabilities - property leases	(1,185)	236	(8)	(957)
	---------	---------	---------	---------
Net cash	755	1,855	(424)	2,186
	======	======	======	======

Cash at bank earns interest at floating rates based on daily bank deposit rates. There are no restrictions on the availability of the cash and cash equivalents at 31 May 2022 (2021: £nil).

IFRS 16 requires the recognition of property leases on the balance sheet which is classified as a debt item.

 

END

 

 

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