Final Results

RNS Number : 5316L

Filtronic PLC

02 August 2011

 



FILTRONIC PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MAY 2011

Filtronic plc announces its Preliminary results for the year ended 31 May 2011.

Revenue from continuing operations was £15.5m (2010 £15.6m), with an operating loss before amortisation and exceptional items of £5.3m (2010 loss £0.3m). The operating loss after exceptional items was £7.1m (2010 loss £1.1m).

Highlights

Strategic

·     Acquisition of Isotek gives entry to differentiated, high growth base station sector

·     Cost cutting actions taken following mid-year reduction in Broadband's largest customer's demand

Financial

·     Revenue from continuing operations £15.5m (2010 £15.6m)

·     Operating loss before amortisation and exceptional items £5.3m (2010 loss £0.3m)

Outlook

With cost reductions implemented and demand for Isotek products growing from both OEMs and operators, the company is positioned with competitive products to respond to growing market demand, particularly in the USA, in calendar 2012.

Enquiries:

Filtronic plc	Tel. [phone]
Howard Ford, Chairman
Hemant Mardia, CEO
Mike Brennan, CFO
Panmure Gordon (UK) Limited	Tel. [phone]
Dominic Morley
Walbrook PR Ltd	Tel. [phone]
Paul McManus	Mob. [phone]
	[e-mail]

Chairman's Statement

The year ended 31 May 2011 produced revenue of £15.5m and an operating loss before exceptional items and the amortisation of intangibles of £5.3m, compared with the prior year revenue of £15.6m and a £0.3m operating loss before exceptional items from continuing operations. Cash at the end of the year of £4.1m was down from last year's £16.2m following the November 2010 acquisition of the Isotek group. A full breakdown of the year is shown in the financial statements, notes and narrative which follow.

An annual dividend for 2009/10 of 1.00p (£0.7m) was paid to shareholders on 5 November 2010. In light of the higher operational losses, the Board has decided to recommend no annual dividend in respect of the financial year just ended.

In furtherance of our strategy to create a differentiated, high growth and higher margin wireless telecoms business, Isotek (Holdings) Limited was acquired on 15 November 2010 for £4.2m cash plus £6.8m in Filtronic shares (18.55 million shares). The deal has delivered entry into the rapidly developing 3G/4G base station market sector by acquiring innovative intellectual property and a position on significant 3G/4G network upgrade programmes.

The Group operations now include two separately reported trading business segments; Broadband which has been transitioned from the traditional Point to Point backhaul (PTP) business segment and the acquired Isotek wireless Basestation business. 

Broadband Business

Broadband saw a 22% decline in its revenues to £12.1m (2010 £15.6m), slightly better than projected in the latest communication to shareholders in April 2011. The segment loss before exceptional items was £2.5m (2010 £0.7m profit)

The second half performance was significantly impacted by a sharper than expected decline in sales of traditional products. The acquisition of a key customer (NERA) in January 2011 by Ceragon Networks resulted in a large reduction in its purchases of our short-haul radio products. There were, however, positive developments in Broadband's strategy to broaden its addressable market with a new customer and product base, though the growth in sales revenue from these new activities did not fully compensate for the rapid reduction in Ceragon (NERA) sales. Cost reduction actions taken following the NERA acquisition at the start of 2011 with an annualised impact of £1.4m were delivering benefits by the financial year end.

Basestation Business

In the 28 week period since its acquisition in mid-November 2010, Isotek achieved sales revenues of £3.4m and incurred a loss of £2.0m. The revenue was short of the revised projection made to shareholders in April 2011 of revenue for the period of around £4m, though this still represented a significant step increase in revenue from the previous 24 week period of £1.2m. With the business still reliant on a very small number of early stage programmes, a couple of deferrals by end-customers in the US on significant LTE / 4G programmes have had a considerable short-term impact on results.

Whilst the trading performance is disappointing, the group has continued to invest in engineering resource at Isotek to support these major programmes and to improve product margins on certain products for the forthcoming LTE / 4G network rollouts, as well as expanding sales activity to address additional manifold opportunities for 3G and 4G mobile network upgrades. 

Outlook

Action has been taken to reduce costs in the Broadband business where an appropriate headcount reduction has been implemented. Meanwhile the integration of the Isotek and Broadband businesses is being accelerated across the group, and specialist Broadband resources are being redeployed to maximise mobile base station product opportunities. In parallel, the company is expanding its business development activity on new opportunities for its innovative filtering products as operational capacity is scaled up.

The group has significantly increased its addressable market to circa $600m estimated for 2012, with channels into Broadband, aerospace manufacturing and the larger basestation market. The addressable basestation market for Isotek filtering products comprises both major network equipment OEMs and a wide range of operators.

Explosive growth in mobile data is leading to a growing market for both new OEM 4G basestation filters and operator network upgrade products to rapidly overlay new capacity onto existing infrastructure.

This growth is particularly evidenced in the US market by a series of network upgrade programs launched by leading operators.

The group is exploiting these opportunities with unique IP offering cost effective customised solutions with market leading spectrum efficiency and rapid time to market, enabling operators to maximise valuable assets.

The outlook is expanded upon in further detail in the Operating review.

Finally, I should like to thank all staff in the business for their contribution over the past year.

Howard Ford

Chairman

2 August 2011

Chief Executive Officer's Operating Review

Summary

Following the acquisition of Isotek in November 2010 the business comprised two trading segments during the second half of the financial year; Broadband and the new Basestation business. The group continues to execute its strategy to expand its addressable market through new product developments and customers. Actions have been taken to stabilise the Broadband business and Basestation sales growth is backed by significant opportunities in the rapidly developing 3G/4G base station market.

Operations

The Broadband business designs and manufactures customised microwave electronic sub assembly components that are integrated by OEM's into radios. These radios provide the backhaul links for telecom networks, particularly the mobile base station market. Filtronic is a leading merchant supplier of transceivers and diplex filters to this market.

The Basestation business develops and markets innovative filters and combiners, which enable operators to use their existing 2G infrastructure to also deliver 3G and 4G services simultaneously. Our products can bring significant cost savings as well as improving the use of available spectrum.

Broadband first half revenue (£7.1m) was up on the second half of the prior year (£6.0m) but following the January 2011 Ceragon acquisition of Nera there was a significant weakening of demand in the second half (revenue £5.0m). Whilst actions have been taken to reduce costs the benefits will not be derived until the next financial year, and an operating loss of £2.5m for the Broadband segment was reported for the year.

Basestation sales grew from £1.2m in the pre - acquisition 24 weeks to £3.4m in the post acquisition 28 weeks. However margins were tight prior to the delivery of production cost improvements possible on volume products, and a loss of £2.0m was reported for the period.

The group continues to invest in future product development, investing £3.5m in R&D during the year. This included continuing work supported by a research grant awarded by Yorkshire Forward with support from the European Regional Development Fund to assist in the development of a new product to target the emerging market for 4G mobile broadband services. This and other major programs are scheduled for completion by the end of 2011, leading to reduced costs in the second half of the coming financial year.

Operational cash outflows of £4.4m (primarily in the second half), were added to by acquisition related cash outflows of £5.8m, capex of £0.9m and dividends of £0.7m to explain the cash outflow of £12.1m in the year.

Overall revenue for the year of £15.5m, was similar to last years £15.6m, with an operating loss before exceptional items and intangible amortisation of £5.3m compared with a £0.3m loss in 2010.

Exceptional costs of £0.6m (2010 £0.8m) included acquisition related costs of £0.5m and redundancy costs incurred in the Broadband costs reduction program.

Broadband Business

There are more encouraging signs for the Broadband business at the start of FY2012. Though first half on first half comparisons will continue to be impacted by the Ceragon reductions and mature product phase-outs, there is now better forward visibility in both these areas, and activity has stabilised. The second half will start to benefit progressively from sales to the new customers of higher margin products as detailed below. The overall expectation is for FY2012 Broadband sales of just above £10m with broadly balanced halves.

As outlined in the statement to shareholders in April 2011, the growth in new programmes to a broader customer base will have an increasingly positive impact through FY2012. The business has secured initial production orders on Selex Galileo electronic radar programmes; production of the Multi-Chip Package semiconductor solutions for an OEM backhaul customer is ramping successfully; and initial customer orders for gigabit radio modules are being executed. Meanwhile, the business has established a constructive working relationship with Ceragon that gives greater clarity about recovering levels of long-haul product demand over coming months. Actions to reduce costs earlier in 2011, combined with ongoing fixed cost reductions should result in an annualised benefit of some £2m by the second half of FY2012.

Basestation Business

There are indications that volume shipments should resume later this calendar year for the projects delayed in the final quarter, as these programmes are required to enable the relevant US carriers to address well documented capacity constraints.

There are encouraging signs deriving from the expansion of business development activity, particularly in the USA, where our US subsidiary Isotek Inc is now participating in a number of OEM programmes involving network operators AT&T, Verizon and most recently Sprint, who are engaged in adding LTE / 4G overlay to meet the ever increasing demand for mobile data capacity. Although these programmes are as yet in early stage regional roll-out, OEM funding of our production for a number of these programmes underpins our volume production expectations for the next 6-12 months. Additionally, the sales initiative to address the US operator market has also begun to bear fruit, with demonstrations of filter or combiner products being planned with a total of five operators to address immediate capacity constraints

As expected, the development of the LTE market in Europe remains behind that of the USA due to regulatory licence timing. However, volume shipments of filter products to a major operator commenced in May, and will form the backbone of Isotek's European revenues in the first half of FY2012.

The challenge for Isotek during FY 2012 is to convert the sharply increased level of customer enquiries for product sampling into a number of volume programmes. The business continues to budget for a significant step up in Isotek revenues to circa £15m for the year based on the increased customer activity together with current program insertions, though as previously stressed the revenues will be weighted towards the second half.

Employees

At 31 May 2011, the group employed 159 people (2010 139) including 51 in the basestation business.

Hemant Mardia

Chief Executive Officer

2 August 2011

Financial Review

Results

The year ended 31 May 2011 generated revenue of £15.5m (2010 £15.6m), resulting in an operating loss before intangible amortisation, and exceptional items of £5.3m (2010 £0.3m loss from continuing operations). The group loss for the period from continuing operations was £6.7m (2010 £1.0m loss), reflecting a £1.2m amortisation of acquisition related intangibles as well as exceptional costs relating significantly to the acquisition. Revenue and operating results by segment (see note 4) are the main key performance indicators used by the group. The operating results are discussed in the Chief Executive's Operating Review, along with a review of the business.

Exceptional Costs

In addition to £0.5m of costs related to the Isotek acquisition and subsequent integration, redundancy costs of £0.1m were also incurred in order to reduce the Broadband cost base.

Net finance income

The group ended the year with net cash of £4.1m (2010 £16.2m) and generated net finance income of £0.1m (2010 £0.1m), reflecting low interest rates on reduced cash deposits post the acquisition.

Taxation

No current tax is due on continuing operations, reflecting available losses. The £0.3m credit reported is a deferred tax liability release related to the intangible amortisation. It will not result in any tax refund.

Capital expenditure

Capital expenditure of £0.9m (2010 £0.6m) included £0.3m for the Isotek business.

Research and development costs

Research and development costs of £3.5m (2010 £2.3m), which represented 22.7% (2010 14.8%) of revenue were expensed. Offsetting these costs, Yorkshire Forward grant income of £0.3 (2010 £0.5m), was reported under other operating income. No research and development costs were capitalised in the balance sheet.

Working capital

At 31 May 2011 net working capital was £2.1m (2010 £2.5m). Net working capital comprised inventories of £1.7m (2010 £2.0m), receivables of £5.9m (2010 £3.4m) and payables of £5.5m (2010 £2.9m).

Cash flow

Cash outflow from operating activities was £4.4m (2010 £1.9m inflow), cash outflow from investing activities (including the acquisition) was £7.0m (2010 £1.2m outflow) and net cash outflow from financing activities was £0.7m (2010 £0.7m outflow). The closing cash balance as at 31 May 2011 was £4.1m (2010 £16.2m).

Dividend

An annual dividend of 1.00p per share in respect of 2009/10 was paid on 5 November 2010.

The Board does not recommend an annual dividend in respect of 2010/11.

Michael Brennan

Chief Financial Officer

2 August 2011

Directors' Assessment of Risk

Introduction

Filtronic supplies microwave and basestation filter products for the wireless telecommunications market. The business is in a fast-changing sector with a small number of sophisticated customers, demanding performance standards and international competition, all of which pose risks to the business.

Market

We supply a niche range of products to a small number of large OEM customers for both the Broadband and Basestation filter businesses as well as an as yet small number of network operators in the Basestation business. The loss of any of these customers, including Ceragon Networks, or any material reduction in orders from any such customers may have a material adverse effect upon Filtronic's financial condition. With the rapid evolution of product technology and other corporate decisions the size of our addressable market may be affected. We may also fail to forecast market movements correctly so missing opportunities or wrongly predicting product longevity.

Manufacturing

In most of the products, production is demand led and customers may vary their requirements from the business at short notice, which also impacts inventory management. Customers in these businesses expect consistent high quality product and reducing prices, hence we depend on control of our operating environment, including management of security of supply in our supply chain, and the provision of correctly designed technological solutions including the achievement of target cost reduction plans. Non performance in these areas risks a diminished market position.

All our products are provided to customers after detailed qualification testing. However, this may not test all aspects of the product's design and manufacturing process or may not ensure that the product is viewed as fit for purpose in its intended use. Identification of these types of problem after release of product to customers creates the risk of being required to rectify such product defects. Historically such work has not had a substantial impact on the financial performance of the business, although a major defect, leading to a field recall, could do so in future.

The Broadband business operates a leased manufacturing location, located within the facility of our major semiconductor supplier. The Basestation business relies for the manufacture of its products on a large Chinese turnkey manufacturer that provides favourable supply and financing terms. The loss of this supplier or a material change to supply terms could have a material adverse effect on the Group.

Technology

Our product competitiveness is strongly influenced by technology choices at product concept stage and throughout execution of design to product launch. For products in the production cycle, technology insertion is often required as a means of achieving price reductions, which underpin sales. The market is time sensitive and opportunities may be lost if the technology we develop is not appropriate or ready for exploitation to match market demand, so having an adverse effect on business performance.

Our ability to remain competitive in terms of technology and product design is also underpinned by retaining key staff, the loss of whom could seriously impact the rate of introduction of new products and technologies.

Financial management

A large proportion of sales is denominated in US dollars with the cost base substantially in sterling, which may therefore create margin risks that may not be recoverable through price changes. This risk is mitigated to some extent by purchasing some input materials in US dollars.

We have sold four divisions of the group in the past seven years. We have provided warranties in support of these transactions, covering areas including product liability for an initial period and usually environment risks on freehold property and tax risks for longer specified periods. We have received claims on the sale of the Wireless Infrastructure and Defence Electronics business, some of which have been settled or rejected, and may receive claims in future related to these current and future commitments.

Goodwill and Going Concern

With the acquisition of the basestation business, goodwill and intangibles have arisen. If the base station business does not develop as anticipated then this may have an adverse impact upon business performance which may result in a write down of the goodwill and/or the intangibles.

The directors have considered going concern matters and whilst they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future, it remains possible that sufficient events with material adverse impacts on the business could occur such as to change this expectation.

The Board

The directors that served during the year ended 31 May 2011 and their respective roles are set out below:

Hemant Mardia (Chief Executive Officer)

Howard Ford (Chairman)

Michael Brennan (Chief Financial Officer)

Graham Meek (Non-executive Director)

Reginald Gott (Non-executive Director)

Alan Needle (Executive Director)

Responsibility Statement of the Directors

The directors whose names appear above confirm that to the best of their knowledge:

·     The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole: and

·     The Chairman's Statement and Business Review which form part of the Report of the Directors, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with the description of the principal risks and uncertainties that they face.

Consolidated Income Statement

for the year ended 31 May 2011

		2011	2010
Continuing operations	note	£000	£000
Revenue	5	15,523	15,575
		======	======
Operating loss before amortisation and exceptional items		(5,260)	(292)
Amortisation of intangibles	8	(1,209)	-
Exceptional items	6	(611)	(842)
		----------	----------
Operating loss		(7,080)	(1,134)
Finance income		79	113
		----------	----------
Loss before taxation		(7,001)	(1,021)
Taxation	9	326	-
		----------	----------
Loss for the period from continuing operations		(6,675)	(1,021)
Loss for the period from discontinued operations	3	(265)	-
		----------	----------
Loss for the period		(6,940)	(1,021)
		======	======
Basic and diluted loss per share
Continuing operations	7	(7.19)p	(1.37)p
Discontinued operations	7	(0.29)p	-
		----------	----------
Basic and diluted loss per share	7	(7.48)p	(1.37)p
		======	======

The loss for the period is attributable to the equity shareholders of the parent company Filtronic plc.

Consolidated Statement of Comprehensive Income

for the year ended 31 May 2011

	2011	2010
	£000	£000
Loss for the period	(6,940)	(1,021)
	----------	----------
Currency translation movement arising on consolidation	(32)	-
	----------	----------
	(32)	-
	----------	----------
	----------	----------
Total comprehensive income for the period	(6,972)	(1,021)
	======	======

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

Consolidated Balance Sheet

at 31 May 2011

		2011	2010
	note	£000	£000
Non-current assets
Goodwill and other intangibles	8	13,330	-
Property, plant and equipment		2,485	1,998
		----------	----------
		15,815	1,998
		----------	---------
Current assets
Inventories		1,677	1,998
Trade and other receivables		5,763	3,361
Tax receivable		114	-
Cash and cash equivalents		4,120	16,245
		----------	----------
		11,674	21,604
		----------	----------
		----------	----------
Total assets		27,489	23,602
		----------	----------
Current liabilities
Trade and other payables		5,485	2,886
Provision		437	706
Deferred Tax	9	653	-
Deferred income		17	17
		----------	----------
		6,592	3,609
		----------	----------
Non-current liabilities
Deferred Tax	9	1,959	-
Deferred income		108	108
		----------	----------
		2,067	108
		----------	----------
		----------	----------
Total liabilities		8,659	3,717
		----------	----------
		----------	----------
Net assets		18,830	19,885
		======	======
Equity
Share capital	10	9,287	7,432
Share Premium	11	4,683	-
Translation Reserve		(32)	-
Retained earnings		4,892	12,453
		----------	----------
Total equity		18,830	19,885
		======	======

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

 Company Number 2891064

Consolidated Statement of Changes in Equity

for the year ended 31 May 2011

		2011	2010
		£000	£000
Opening total equity		19,885	21,576
Total comprehensive income for the period		(6,972)	(1,021)
Shares issued net of issue costs		6,538	-
Share-based payments		122	73
Dividends		(743)	(743)
		----------	----------
Closing total equity		18,830	19,885
		======	======

Consolidated Cash Flow Statement

for the year ended 31 May 2011

		2011	2010
	note	£000	£000
Cash flows from operating activities
Loss for the period		(6,940)	(1,021)
Loss on sale of discontinued operations		265	-
Taxation		(326)	-
Finance income		(79)	(113)
		----------	----------
Operating loss		(7,080)	(1,134)
Share-based payments		122	73
Loss on disposal of plant and equipment		-	35
Depreciation		523	601
Amortisation of intangibles		1,209	-
Movement in inventories		476	2,533
Movement in trade and other receivables		(724)	1,418
Settlement of option premia debt acquired with Isotek		1,194	-
Movement in trade and other payables		178	(1,117)
Movement in provision		(269)	(608)
Movement in deferred income		-	125
		----------	----------
Net cash from operating activities		(4,371)	1,926
		----------	----------

Consolidated Cash Flow Statement

for the year ended 31 May 2011

		2011	2010
	note	£000	£000
Net cash (used in) / from operating activities		(4,371)	1,926
		----------	----------
Cash flows from investing activities
Interest received		79	113
Acquisition of plant and equipment		(925)	(639)
Proceeds on sale of assets		19	-
Acquisition of subsidiary, net of cash acquired		(4,162)	-
Share issue costs		(325)	-
Acquired loan repaid		(1,400)	-
Sale of investment in subsidiary	3	(265)	(635)
		----------	----------
Net cash used in investing activities		(6,979)	(1,161)
		----------	----------
Cash flows from financing activities
Dividends paid		(743)	(743)
		----------	----------
Net cash used in financing activities		(743)	(743)
		----------	----------
Movement in cash and cash equivalents		(12,093)	22
Currency exchange movement		(32)	5
Opening cash and cash equivalents		16,245	16,218
		----------	----------
Closing cash and cash equivalents		4,120	16,245
		======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

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 2011. The following new standards have become effective from 1 June 2010 and hence have been reflected in the financial statements:

·     IFRS 3 (revised) Business combinations and consequential amendments to IAS 27 Consolidated and separate financial statements are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. During the period, the Group has made one acquisition as set out in note 13, and the requirements of these standards have been applied in accounting for this transaction. The Group's accounting policy under the new standards is set out within significant accounting policies.

·     Amendments to IAS 39 "Financial Instruments: Recognition and Measurement: Eligible Hedged Items" (mandatory for the year commencing on or after 1 July 2009). The amendments to IAS 39 clarify how to apply existing principles in determining eligible hedged risks and portions. These changes have had no material impact on the Consolidated Financial Statements.

·     Amendments to IAS 39 "Reclassification of Financial Assets: Effective Date and Transition" (mandatory for the year commencing on or after 1 July 2009). These changes have had no material impact on the Consolidated Financial Statements.

·     Improvements to IFRSs (issued 16 April 2009) (adoption dates vary but certain improvements are mandatory for the year commencing on or after 1 July 2009). On 16 April 2009 the IASB published the Improvements to IFRSs 2009. The Improvements to IFRSs 2009 is the result of the IASB's second annual improvements project (AIP). This project has involved the IASB accumulating throughout the year what it believes are non-urgent but necessary improvements to IFRSs and then processing these amendments collectively. The Improvements to IFRSs 2009 contains 15 amendments to 12 standards. These changes have had no material effect on the Consolidated Financial Statements.

EU Law (IAS Regulation EC1606/2002) requires that the consolidated financial statements of the group for the year ended 31 May 2011 be prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted for use in the EU ('adopted IFRSs'). Whilst the information included in this preliminary announcement has been computed in accordance with adopted IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The company expects to publish full financial statements in August 2011.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 May 2011 or 2010 but is derived from those financial statements. Statutory financial statements for 2010 have been delivered to the registrar of companies, and those for 2011 will be delivered in due course. The auditors have reported on those financial accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors 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.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

2    Accounting Estimates and Judgements

The presentation of the financial statements requires the use of accounting estimates and judgements, that affect the application of accounting policies and reported amount of assets and liabilities, income and expenses. The accounting estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of the future, that are believed to be reasonable under the circumstances. Actual results may differ from the expected results.

The accounting estimates and judgements that have a significant effect on the financial statements are considered below.

Acquisition accounting

As part of the accounting for business combinations it is necessary to perform a purchase price allocation exercise to identify appropriate categories of intangible assets that have been purchased. Such exercise involves judgement with regards to those types of assets identified, the value of those assets and the useful economic lives applied with regards to amortisation rates. The amounts recognised are calculated by reference to management forecasts and assumed discount rates.

Goodwill and other intangibles impairment

Goodwill and other intangibles are tested for impairment by reference to the expected cash generated by the business unit. This is deemed to be the best approximation of value, but is subject to the same uncertainties as the cash flow forecast being used.

Inventory

Inventories are stated at the lower of cost and net realisable value. The assessment of net realisable value of inventory requires forecasts of the future demand and selling prices of the inventory.

Deferred tax asset

The recognition of the deferred tax assets relating to tax losses carried forward depends on the forecasts of the future taxable profits of the company and its subsidiaries. These forecasts require the use of estimates and judgements about the future performance of the company and its subsidiaries.

Warranty provision

Warranties are given to customers on products sold to them. A warranty provision is recognised when products are sold. The provision is based on historical warranty data. Actual warranty costs in the future may differ from the estimates based on historical performance. The level of warranty provision required is reviewed on a product by product basis and adjusted accordingly in light of actual experience.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

2    Accounting Estimates and Judgements (continued)

Capitalisation of development costs

Development costs incurred on projects requiring product qualification tests to satisfy customer specifications are generally expensed as incurred, reflecting the technical risks associated with resultant product qualification test.

Other certain research and development costs are likely to meet the definition of enhancement type costs, as they do not substantially improve the product, and therefore do not meet the definition of development costs to be capitalised.

The process is to be continually reviewed to ascertain whether any development costs meet the criteria for capitalisation. This requires various judgements by management as to whether the various criteria have been met.

3    Loss for period from discontinued operations

      The loss of £265,000 relates to a warranty issue arising post sale of the Defence UK business to Teledyne. This payment has now been settled and no further exposure is expected.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

4    Segmental analysis

IFRS 8 requires consideration 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 CEO, who reviews internal monthly management reports, budget and forecast information as part of this. Accordingly the CEO is deemed to be the CODM.

Operating segments have then been identified based on the interim reporting information and management structures within the group. The group has two customers representing individually over 10% each in aggregate over 75% of the revenue.

In the period the group acquired the entire share capital of Isotek (Holdings) Limited. Prior to this the group operated within one trading business segment involving the design and manufacture of transceiver modules and filters for backhaul microwave linking of base stations used in the wireless telecommunication networks (Broadband). Subsequent to the acquisition the enlarged group is also involved in the design of radio frequency conditioning product for base stations used in wireless telecommunications networks (Basestation). Accordingly the group (continuing operations) now operates within two trading business segments. The group also contains a central services segment that provides support to the trading businesses.

The Defence Electronics business was sold on 15 August 2008 (please refer to note 3).

	Broadband		Basestation		Central Services		Defence Electronics (Discontinued)		Total
	2011 £000	2010 £000	2011 £000	2010 £000	2011 £000	2010 £000	2011 £000	2010 £000	2011 £000	2010 £000
External revenue	12,136	15,575	3,387	-	-	-	-	-	15,523	15,575
Finance income	-	-	-	-	79	113	-	-	79	113
Depreciation and amortisation	487	601	36	-	-	-	-	-	523	601
Reportable segment loss before exceptional items	(2,463)	667	(1,955)	-	(842)	(959)	(265)	-	(5,525)	(292)
Reportable segment loss before income tax	(2,584)	444	(1,976)	-	(1,232)	(1,461)	(265)	-	(6,057)	(1,017)
Reportable segment assets	7,409	7,806	6,007	-	18,777	15,796	-	-	32,193	23,602
Capital expenditure	663	639	263	-	-	-	-	-	926	639
Reportable segment liabilities	6,693	4,538	8,838	-	383	1,729	-	-	15,914	6,267

Notes to the Preliminary Financial Information for the year ended 31 May 2011

4    Segmental analysis (continued)

	2011	2010
	£000	£000
Depreciation and amortisation
Reportable segment totals	523	601
Adjustments/amortisation of intangibles	1,209	-
	----------	----------
Consolidated depreciation and amortisation	1,732	601
	======	======

	2011	2010
	£000	£000
Loss before taxation
Total loss for reportable segments	(6,057)	(1,017)
Elimination of discontinued operations	265	-
Group/unallocated	(1,209)	-
	----------	----------
	(7,001)	(1,017)
	======	======

	2011	2010
	£000	£000
Assets
Total assets for reportable segments	32,193	23,602
Inter company	(7,255)	(2,551)
Group/unallocated	2,551	2,551
	----------	----------
	27,489	23,602
	======	======

	2011	2010
	£000	£000
Liabilities
Total liabilities for reportable segments	15,914	6,267
Inter company	(7,255)	(2,551)
	----------	----------
	8,659	3,716
	======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

5    Revenue by Destination

	2011	2010
	£000	£000
United Kingdom	838	35
Europe	11,256	14,451
USA	620	7
Rest of the World	2,809	1,082
	----------	----------
	15,523	15,575
	======	======

6    Exceptional items

Operating loss is stated after charging exceptional items as follows:

		2011	2010
		£000	£000
Directors' resignation costs		-	146
Pension scheme closure costs		-	116
Acquisition related costs		694	320
Vendor contribution toward acquisition costs		(300)	-
Integration costs relating to acquisition		75	-
Redundancy costs		142	260
		----------	----------
		611	842
		======	======

Professional fees were incurred in the acquisition of Isotek (Holdings) Ltd. This includes legal and professional, non-audit and corporate finance fees. The prior year fees include the cost of an opportunity that Filtronic decided not to proceed with.

Under the terms of the Isotek acquisition, the vendor agreed to pay a contribution of £300,000 towards acquisition costs.

As part of the integration of Isotek into the Filtronic group costs have been incurred in harmonising systems and processes with the aim of achieving synergies.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

7    Loss per share

		2011	2010
		£000	£000
Loss for the period
Continuing operations		(6,675)	(1,021)
Discontinued operations		(265)	-
		----------	----------
Loss for the period		(6,940)	(1,021)
		======	======
		000	000
Basic and diluted weighted average number of shares		92,873	74,323
		======	======
Basic and diluted loss per share
Continuing operations		(7.19)p	(1.37)p
Discontinued operations		(0.29)p	-
		----------	----------
Basic and diluted loss per share		(7.48)p	(1.37)p
		======	======

There was no difference in the weighted average number of shares used for the calculation of basic and diluted loss per share as the effect of all potentially dilutive shares outstanding was anti dilutive.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

8    Goodwill and other intangibles

	Goodwill	Other intangibles (core technology)	Total
	£000	£000	£000
Cost
At 1 June 2010	-	-	-
Additions	3,655	10,884	14,539
	---------	---------	---------
At 31 May 2011	3,655	10,884	14,539
	======	======	======
Amortisation
At 1 June 2010	-	-	-
Provided in year	-	(1,209)	(1,209)
	---------	---------	---------
At 31 May 2011	-	(1,209)	(1,209)
	======	======	======
Carrying amount at 1 June 2010	-	-	-
	---------	---------	---------
Carrying amount at 31 May 2011	3,655	9,675	13,330
	======	======	======

Goodwill and other intangibles have arisen in the period relating to the acquisition referred to in note 13.

Goodwill is allocated to the Basestation cash generating unity (CGU) and this CGU represents the lowest level within the group at which the goodwill is monitored for internal management purposes, which is not higher than the group's operating segments as reported in note 4. The group tests goodwill annually for impairment or more frequently if there are indications that goodwill may be impaired.

The carrying value of intangible assets and goodwill has been assessed for impairment by reference to its value in use. Value in use was determined by discounting the future cash flows generated from the continuing use of the unit. The calculation of the value in use was based on the following key assumptions:

·     Cash flows were projected to 31 May 2013 based on past experience and actual operating results;

·     Cash flows for a further 8-year period were extrapolated. A growth factor was not applied to the projections as the value in use exceeded the carrying amounts before any such assumption was applied:

Notes to the Preliminary Financial Information

For the year ended 31 May 2011

8    Goodwill and other intangibles (continued)

·     A pre-tax discount rate of 20% was applied in determining the recoverable amount of the unit, being the estimated weighted average cost of capital.

Based on this testing the directors do not consider any of the goodwill or intangible assets to be impaired even allowing for a reasonable degree of sensitivity to the underlying assumptions, including the discount rate.               

9    Deferred tax

	2011	2010
	£000	£000
Deferred tax liability	2,612	-
	======	======

The deferred tax liability relates to the intangible assets arising upon acquisition. The original liability was £2,938,000 with £326,000 released to the income statement during the year.

Deferred tax classified as current consists of the element that will be recognised as income in the next year. Deferred tax classified as non-current will be released to the income statement over the remaining life.

10    Share Capital

	Group
	Ordinary shares of 10p each issued and fully paid
	Number	£000
At 1 June 2009	74,323,093	7,432
	--------------	---------
At 1 June 2010	74,323,093	7,432
Shares issued in year	18,550,000	1,855
	--------------	---------
At 31 May 2011	92,873,093	9,287
	========	======

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.

Notes to the Preliminary Financial Information

For the year ended 31 May 2011

10    Share Capital (continued)

The group issued 18.55m shares of nominal value 10p in part consideration for the entire share capital of Isotek (Holdings) Limited.

In compliance with the Companies Act 2006 the company has adopted articles of association that has dispensed with the requirement for authorised share capital.

11  Share Premium

				Group  £000
At 1 June 2010				-
Premium on share issue				5,008
Share issue costs				(325)
				-------
At 31 May 2011				4,683
				====

The shares issued as part of the consideration of Isotek (Holdings) Ltd were issued at a premium of 27p reflecting the market value of the shares at the date of acquisition net of costs of £325,000.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

12  Dividends

The dividends recognised in equity and paid during the year were as follows:

		2011	2010
	Per share	£000	£000
Annual dividend year ended 31 May 2009	1.00p	-	743
Annual dividend year ended 31 May 2010	1.00p	743	-
		--------	--------
		743	743
		=====	=====

The directors are not proposing to pay a dividend for the year ended 31 May 2011.

13  Acquisition in year

On 16 November 2010 Filtronic acquired the share capital of Isotek (Holdings) Ltd ("Isotek"). Isotek employs approximately 51 staff predominantly in the United Kingdom and the United States, and develops and markets leading edge telecoms products for a range of wireless infrastructure telecoms applications.

Consideration is made up of :	£000
Share consideration (18,550,000) at completion date market value	6,864
Cash consideration	4,230
	-------
Total consideration for Isotek	11,094
Estimated working capital adjustment to consideration	(530)
	-------
Estimated final consideration for Isotek	10,564
	====

As at 31 May 2011 the fair value of the acquired leases, liabilities and goodwill has been determined on a provisional basis pending finalisation of the working capital adjustment.

The offer to Isotek shareholders included an adjustment to consideration based on the working capital and net cash on the date of acquisition. The estimate above is based upon the working capital data included in the Isotek companies opening balance sheets used to prepare these accounts but cannot be final until the working capital adjustment is agreed.

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

13  Acquisition in year (continued)

There were no significant fair value adjustments arising on the acquisition other then the recognition of intangible assets and deferred tax noted below.

The goodwill arising on the acquisition relates to the skills and talents of the acquired business workforce and the benefits of future market expansion. These benefits are not recognised separately from goodwill as the future economic benefits arising cannot be reliably measured.

Intangibles relating to the core technology and know-how are being amortised over a period of 4.5 years.

Since the acquisition Isotek has carried revenues of £3.4m, and has made losses from operations of £2.0m excluding exceptional items and amortisation.

	Book value pre-acquisition	Fair value adjustments	Fair value of net assets
	£000	£000	£000
Intangibles on acquisition	-	10,884	10,884
Deferred tax liability	-	(2,939)	(2,939)
Tangible fixed assets	105	-	105
Current assets	2,573	(20)	2,553
Current liabilities	(3,585)	(109)	(3,694)
	---------	---------	---------
	(907)	7,816	6,909
Goodwill arising on acquisition			3,655
			---------
Total consideration (as above)			10,564
Non-cash consideration (shares issued and provisional working capital adjustment)			(6,334)
Cash acquired			(68)
			---------
Net cash outflow			4,162
			======

The following summary presents the group as if Isotek was acquired on 1 June 2010. The amounts include the results of the acquired business but do not include any exceptional items or amortisation of separately identified intangibles, which are being amortised over 4.5 years. In addition the amounts do not include any possible synergies from the acquisition. The results of the acquired companies for the period before acquisition have not been adjusted to reflect Filtronic accounting policies nor to reflect fair value adjustments made on acquisition. The information is provided for illustrative purposes only and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of the future results of the combined entities.

	Pro Forma
	Group
	£000
Revenue	16,646
Loss before tax, amortisation and exceptional items	(6,755)
	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2011

14  Forward looking statements

The Chairman's Statement and Chief executive officer's operating 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.

 

END

 

 

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