Final Results

Filtronic PLC 31 July 2006 FILTRONIC PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MAY 2006 Growth of continuing operations; Handset Products division sale earn-out of £11m; Foundry met break even objective; Net debt reduced; Dividend maintained Filtronic plc ('Filtronic'), a leading global designer and manufacturer of customised microwave electronic subsystems for the wireless telecommunications and defence industries, announces its Preliminary Results for the year ended 31 May 2006. Worldwide sites are in the UK (Yorkshire, County Durham, Midlands and Scotland), USA, Finland, Hungary and China. Filtronic is the world's leading independent supplier of transmit/receive modules for base stations and a leading manufacturer of semiconductor switches for mobile handsets. The contribution to sales for continuing operations is: Wireless Infrastructure (78 %), Defence Electronics (14%); Compound Semiconductors (8%). Financial Highlights • Revenue from continuing operations of £221.0 m (2005 £212.9m) • Operating loss from continuing operations of £4.2m (2005 profit £5.6m) • Gain on sale of property of £0.5m (2005 gain £2.4m) • Net finance cost of £3.2m (2005 £4.0m) • Pre-tax loss of £6.7m (2005 profit: £9.5m) • Gain on sale of discontinued operation £14.1m (2005 £nil) • Final dividend maintained at 1.80p (2005 1.80p), payable 31 October 2006 • Total dividend 2.70p (2005 2.70p) • Net debt of £12.7m (2005 £43.4m), with bank borrowing facilities of £35.0m Operational Highlights • Wireless Infrastructure: - Maintaining market leading position supplying all Western OEMs - Second half year performance suffered unseasonally low demand in Q3 (December 2005, January and February 2006) and Q4 suffered negative impact of Powerwave Technologies, Inc. negotiation announcement - Market changed fundamentally in recent months with key customer pursuing volume growth strategy. • Compound Semiconductors: - Met objective of run rate break even over Q4 FY06 - Market leader for 4-way and above pHEMT mobile phone switches supplying some 20% of overall handset market with around 80% share of addressable market • Defence Electronics - three large contracts substantially completed in the year • Handset Products division sold in September 2005 for £45.4m plus earn-out of £11.3m, due in August 2006 • Capital expenditure of £14.4m (2005 £13.0m) Summary of outlook for the Group • Continuing upswing in activity for Wireless Infrastructure division with revenue expected to increase by more than 25% compared with the preceding half year for the first half of the current financial year and customer demand supporting growth for second half • The financing plan for Compound Semiconductors requires less than £15m of additional cash for this financial year, after which the business is targeted to be self-financing • Agreed change of final salary pension scheme to career average revalued earnings basis • Board is continuing with the preparation of the shareholder circular for the Wireless Infrastructure transaction with completion of the sale due by 30 September 2006 Enquiries Filtronic plc: Professor J David Rhodes, Group Chief Executive Tel: 01274 530622/ Mob: 07850 827 280 Charles Hindson, Group Finance Director Tel: 01274 530622/ Mob: 07800 706 319 Parkgreen Communications Ltd: Paul McManus Tel: 020 7493 3713 / Mob: 07980 541 893 Chairman's Statement These are the first full year results prepared on the basis of International Financial Reporting Standards adopted by the EU. Filtronic has again achieved growth for the continuing activities of the group, with revenue for the year ended 31 May 2006 increased by 3.8% to £221.0m (2005 £212.9m). The operating result for continuing operations was a loss of £4.2m (2005 £5.6m profit). The profit for the period was £6.0m (2005 £9.3m). The Board therefore proposes to maintain a final dividend of 1.80p (2005 1.80p) payable on 31 October 2006 to shareholders on the register on 29 September 2006. This has been an eventful year for the group. The Handset Products division was sold in September 2005 for £56.7m, including the earn-out. The composition of the Board changed in January 2006 with the resignation of John Roulston as Group Chief Executive. The Board requested David Rhodes to move from Chairman to take on this role so that he would bring his knowledge and experience of the business and staff to put the group on a stable footing. I took on the role of non-executive Chairman on an interim basis whilst the Board seeks my long term successor. On 5 May 2006 we announced that we had entered into exclusive negotiations with Powerwave Technologies, Inc. ('Powerwave') for the sale of the major activities within our Wireless Infrastructure division, resulting in the formal agreement of this transaction which was announced on 12 June 2006. The consideration due is $150m (approximately £81m) cash and 20.7m shares of Powerwave's common stock, and the shareholder circular for this transaction is in preparation, with completion of the sale due by 30 September 2006. For the other activities of the group, the highlight for the year has been the GaAs semiconductor fabrication facility at Newton Aycliffe reaching its target of breakeven by the financial year end for the fourth quarter of the financial year. The Defence Electronics activities opened their new manufacturing facility in New Hampshire, USA in September 2005 which provides the base for medium term growth. Also, we are retaining the point to point radio backhaul activity which is showing strong growth. The cash proceeds from the sale to Powerwave will be used to repay outstanding bank debt and to fund continuing investment in the Newton Aycliffe semiconductor facility, along with other corporate working capital requirements. The net proceeds from the sale of the Powerwave shares are expected to be returned to shareholders as cash, once they are sold. This year also saw the retirement of Alan Needle from the role of Managing Director of the Wireless Infrastructure division in December 2005. He initiated the commercial application of the defence technology that created the current Wireless Infrastructure activity. As Managing Director, he took the business to flotation in 1994 and, under his leadership, Filtronic became the world's leading independent supplier of transmit/receive modules for mobile base stations. We thank him for this considerable contribution. Reg Gott joined the Board as a non-executive director on 13 July 2006 and brings his extensive background in the machinery, automation and controls segments of the capital goods market across Europe and North America to strengthen the Board. I also expect that the Board will continue its active search for my long term replacement, who will be responsible for organising the evolution of the management team and completion of the refresh of the members of the Board. In supporting us through this eventful year, I would like to thank all of our employees for their dedication to the growth of the business as the group continues to evolve and John Roulston for his dedication and contribution. The Board is continuing its drive to have the intrinsic value of the group's operations recognised in the company's valuation. Rhys Williams Chairman 31 July 2006 Group CEO's Operating Review Summary This year has been one of considerable change as I have sought to complete the financial restructuring initiated in September 2004 and to revitalise the market's appreciation of the value inherent in the group. The Handset Products division was sold in September 2005 to Pulse Electronics (Singapore) PTE Ltd, a subsidiary of Technitrol Inc. ('Pulse') for a total consideration of £56.7m, including the earn-out consideration of £11.3m due in August 2006. The initial consideration of £45.4m was used to repay the £44.0m term loan from Barclays and ABN AMRO, which had been rescheduled over a five year term with revised financial covenants in July 2005. Defence Electronics opened its new manufacturing site in New Hampshire, USA in September 2005, partly to support the supply of subsystems to ITT. The UK continued its activities across a range of programmes including the supply of subsystem assemblies for the Eurofighter Defensive Aids system to Elettronica of Italy and EADS of Germany. Compound Semiconductors continued to experience growing demand for its products, so we decided in the first half of the year to increase capacity as its financial performance was on target. In January 2006, the Board also asked me to move from being Chairman to take the role of Group Chief Executive on John Roulston's resignation. I undertook to carry out the role for a twelve to eighteen month period with the specific aims of providing leadership to the Wireless Infrastructure division following the retirement of its previous Managing Director, Alan Needle, in December 2005, and to support Iain Gibson in setting the direction for the next steps in the growth of the Compound Semiconductor and Defence Electronics activities within the Integrated Products division. On appointment, I secured the management team of the Wireless Infrastructure division by ensuring the retention of Geoff Fletcher as Managing Director of the division. Subsequently, after a review of the group's strategic options, the Board agreed that the majority of the activities in the Wireless Infrastructure business, covering transmit receive modules, integrated power amplifiers and remote radio head products, would be acquired by Powerwave. We have subsequently continued to benefit from strengthening growth for the Wireless Infrastructure division arising from operators outside North America commissioning systems from OEMs. The outlook for the businesses within the group is set out at the end of this report. The segmental analysis of the operating results for continuing operations is as follows: Revenue Operating (loss) / profit Year ended 31 May 2006 2005 2006 2005 £m £m £m £m Wireless Infrastructure 172.7 177.7 5.5 17.5 Defence Electronics 32.1 31.6 0.6 3.1 Compound Semiconductors 20.8 8.6 (5.1) (11.7) Central Services - - (4.1) (5.7) Inter segment (4.6) (5.0) - - Unallocated pension (charge)/ credit - - (1.1) 2.4 ---------- ---------- ---------- ---------- 221.0 212.9 (4.2) 5.6 ========== ========== ========== ========== Wireless Infrastructure Wireless Infrastructure designs and manufactures the transmit/receive modules, power amplifiers and remote radio heads for mobile base stations, and point to point backhaul radio products that are primarily used to support mobile phone networks. During the year, the activities generated revenues of £172.7m (2005 £177.7m). The core business maintained its market leading position supplying all Western OEMs, and reflected a static market awaiting the placing of certain large contracts in India, China and the US that have started to be placed during the current year. The operating profit was £5.5m (2005 £17.5m), reflecting principally pricing pressure that was not able to be fully compensated by product redesign, and a slower than planned move of production on high volume product lines from Finland to Hungary and from the US to China. We closed our Australian operations in August 2005 at a total cost of £1.1m, which is included in this result. During the second half of the financial year, the business suffered unseasonally low demand during the third quarter and the activity for the fourth quarter included the negative impact of the announcement made on 5 May 2006 of discussions with Powerwave. Provision was also made in the second half of the financial year for the finalisation of a commercial agreement in respect of a product liability issue with a customer. The power amplifier products were manufactured in production quantities for one customer, and we undertook product development for another customer on a product scheduled to start production in the second half of the financial year ending 31 May 2007. The principal products for the point to point backhaul radio products are radio transceivers assembled in the UK, which use integrated circuits produced by Compound Semiconductors, along with diplex filters which are manufactured in the UK and Hungary. Its customers are leading OEMs in the sector for whom several new products have entered production during the year. Further new designs are in qualification using our more complex multifunction integrated circuits. Compound Semiconductors In the past twelve months, the Compound Semiconductors facility at Newton Aycliffe has been undergoing a transition from its prior position as a modest producer of Gallium Arsenide (GaAs) pHEMT wafers to being a volume producer of these products. They are used mainly in switches in mobile telephones, but also have applications in communication equipment and defence applications. While the majority of recent growth stems from expansion in the mobile telephone sector, it has also been pleasing that the year has seen initial volume production orders from Selex as they achieve success with E-Scan radar sales. While there was some disappointment in sales of merchant semiconductors, to a large extent this has been caused by the priority of meeting steep customer demand for switches. One benefit of the additional capacity to be created in the future is to allow Compound Semiconductors to establish a stronger presence in the merchant semiconductors sector. The global mobile handset market is continuing its growth with approximately 815 million handsets sold in 2005, and forecast to be over 1 billion handsets sold in 2008. Use of GaAs switches is now specified for most new handset designs, and 80% of handsets manufactured in 2008 are expected to be of a design which contains this type of switch. This switch has the advantage that it consumes less power than alternative products for complex switches, and meets demanding low-loss and linearity requirements. Competition is from older technologies that use 3 way pin diode or GaAs switches combined with band defining filters. Furthermore, handsets are becoming more complex with increasing switching requirements offering the possibility that the quantity of GaAs used per handset will increase further over the next two to three years. Revenue in the year grew 142% (2005 £8.6m to 2006 £20.8m) and the sequential growth rate in revenue comparing half year on half year during the financial year was 45%. Operating losses reduced from £11.7m in 2005 to £5.1m in 2006, including closure costs of our USA West Coast sales office of £0.4m which were incurred in the first half of the year. It was pleasing that Compound Semiconductors reached its targeted financial performance of an operating break even run rate over the fourth quarter of the financial year to 31 May 2006. This was after absorbing the cost increases associated with commissioning a further capacity in the second half of the year. This was before the recognition of the release of £2.7m of deferred income in the period arising from the renegotiation of arrangements on past government grants. On the basis of this performance and the demand growth mentioned above, the Board has planned further expansion in the capacity of Compound Semiconductors in the coming financial year. Defence Electronics For over 25 years Filtronic has supplied complex electromagnetic components and subsystems, most notably for use in the field of electronic warfare, to defence equipment prime contractors around the world. Although the Defence Electronics activities are divided between the UK and the US, the two parts of the company, which are managed as separate entities, operate in similar market sectors, reflecting the original technology base of the UK company. The UK business (FCL) currently has manufacturing sites in Shipley and at Newton Aycliffe and a small research group in Australia. The past financial year has seen one of FCL's larger contracts, for the supply of subsystems for the Eurofighter project, draw to a close. Consequently, additional focus has been applied to securing new business for future years. Following a review of the future opportunities for the company in the US defence market, the past year has seen a significant consolidation of the US business. In order to achieve better leverage of the company's competencies and to lay a solid growth path for the company in the US defence market, the Sage manufacturing operation and the Sigtek design centre were combined into a new business, Filtronic Signal Solutions (FSS). A new manufacturing site was opened in Hudson, New Hampshire in September 2005, which consolidated the two previous manufacturing operations in the US, supporting the contract with ITT, following which the management team has been progressively strengthened. A major review of the business following these changes resulted in an inventory write down of £1.5m, which was made in the interim results for the six months to 30 November 2005. Revenue in the year grew 2% (2005 £31.6m to 2006 £32.1m) and operating profit before the inventory write down of £1.5m in 2006 was £2.1m (2005 £3.1m). Central Research and Development Central Research and Development has supported the development of a new power amplifier product for a new customer, based on LDMOS technology, that is scheduled to start production in October 2006. It has also undertaken development work on remote radio heads for 3G and WiMAX applications in support of the Wireless Infrastructure division. Business disposals This has been a year of major change in the structure of the group with the sale of the Handset Products division in September 2005, and agreement for the sale of the Wireless Infrastructure business (transmit/receive modules, power amplifiers and remote radio heads activities of the Wireless Infrastructure division). The Handset Products division is treated as a discontinued operation. The Handset Products division was a market leader in the provision of internal antennas for mobile handsets and was sold to Pulse in September 2005. For the period from 1 June 2005 to the date of its sale on 8 September 2005, it generated revenue of £13.6m and an operating profit of £0.2m. The total consideration, including the earn-out due in August 2006, was £56.7m, resulting in a profit on disposal of £14.1m. Finance The group rescheduled its bank facilities with Barclays and ABN AMRO in July 2005 to be a term loan of £44m repayable over five years and an overdraft of £9m. The term loan was repaid on completion of the sale of the Handset Products division in September 2005 and the group's facilities became a revolving credit facility of £18m available until August 2008 and an overdraft of £2m. In May 2006, the group secured an additional facility of £15m from its bankers until 30 November 2006 to fund the expansion of the Compound Semiconductors facility at Newton Aycliffe. Capital expenditure The group's capital expenditure for the continuing operations was £13.4m (2005 £8.5m). The capital expenditure was incurred principally to increase capacity in Compound Semiconductors in the light of continued growth in customer demand, and the completion of the move to the new manufacturing facility in the US for Defence Electronics. Capital expenditure in the discontinued Handset Products operation was £1.0m (2005 £4.5m) in the period before disposal. This was for the start-up of the manufacturing facility in Hungary and capacity expansion in China. Employees At 31 May 2006, the group employed 3,353 people in its continuing operations, an increase of 20% since May 2005, primarily in Wireless Infrastructure's manufacturing operations in China and Hungary. Outlook Wireless Infrastructure The Wireless Infrastructure division has experienced continuing strengthened demand in its market, that has been reflected in the order book in June being extended out from its usual period of around two weeks to twelve weeks and this has been accompanied by increased visibility in the forecasts received from customers for later in the financial year. As a result, production capacity has been increased with output for the largest volume product being doubled since January and manufacturing operations in Finland have been restarted to meet demand for a specific product. In addition, demand for point to point backhaul radios has doubled year on year. With this increase in demand, pricing has been agreed for a longer period than usual with a key customer. It is also well positioned to support Long Term Evolution GSM with its core OEM customers. This outlook for this division is focused on growth from its traditional customer base. The planned financial performance for the Wireless Infrastructure division is therefore that revenue for the first half of the current financial year is expected to increase by more than 25% compared with the preceding half year and, with the strength of the current market, customer demand extends well into the second half of the current financial year, supporting expected continued growth going forward. Compound Semiconductors For Compound Semiconductors, we are now providing some 20% of the overall mobile handset market with 4-way and above mobile phone pHEMT switches, which is around an 80% share of the addressable market. Continued market adoption of our type of switches is expected to reach 80% of overall mobile phone market over the coming three years. As a result of a detailed assessment of future wafer requirements, we have phased our plans for capacity increase and we are currently undertaking this expansion in line with forecast demand for the current financial year. Therefore our financing plan for the growth of Compound Semiconductors requires less than £15m of additional cash for this financial year, after which the business is targeted to be self-financing. With the profile of capacity deployment, revenue growth of over 25% is therefore expected per sequential half year for the current financial year including initial growth in merchant semiconductors and non-switch volume products and growth in demand to support filter and backhaul radio products. Defence Electronics With its three major contracts substantially complete in the financial year ended 31 May 2006, the focus in Defence Electronics is to secure new business which will mostly generate replacement revenues over the financial year and provide a platform for future growth. In both the UK and US, opportunities have been identified and are being supported by appropriate product development activities. Pension scheme We are expecting to implement changes to the group's final salary pension scheme at the end of the consultation period on 31 July 2006 to have benefits based on career average revalued earnings. As part of this change to the scheme, the company has agreed to provide additional funding of £4.6m on implementation of the changes to the scheme to fund the actuarial deficit at the date of change. The existing contribution arrangements remain in place which require that any increases in contribution rates over current levels that are required to fund deficits would be made two thirds by employee members and one third by the company. Professor J David Rhodes CBE FRS FREng Group Chief Executive Officer 31 July 2006 Consolidated Income Statement For the year ended 31 May 2006 Continuing Discontinued operations operation Group 2006 2006 2006 note £000 £000 £000 Revenue 220,963 13,645 234,608 ====== ====== ====== Operating (loss)/profit 4,5 (4,238) 198 (4,040) Gain on sale of property 523 - 523 Finance income 6 1,706 - 1,706 Finance costs 7 (4,934) - (4,934) ---------- ---------- ---------- (Loss)/profit before taxation (6,943) 198 (6,745) Taxation (1,390) - (1,390) ---------- ---------- ---------- (Loss)/profit after taxation (8,333) 198 (8,135) Gain on sale of discontinued operation 8 - 14,146 14,146 ---------- ---------- ---------- (Loss)/profit for the period (8,333) 14,344 6,011 ====== ====== ====== (Loss)/earnings per share Basic 9 (11.13)p 19.16p 8.03p Diluted 9 (11.13)p 19.15p 8.02p The (loss)/profit for the period is attributable to the equity shareholders of the parent company Filtronic plc. Consolidated Income Statement for the year ended 31 May 2005 Continuing Discontinued operations operation Group 2005 2005 2005 note £000 £000 £000 Revenue 212,891 49,974 262,865 ====== ====== ====== Operating profit 4,5 5,650 5,554 11,204 Gain on sale of property 2,356 - 2,356 Finance income 6 1,988 - 1,988 Finance costs 7 (6,005) - (6,005) ---------- ---------- ---------- Profit before taxation 3,989 5,554 9,543 Taxation (241) - (241) ---------- ---------- ---------- Profit after taxation 3,748 5,554 9,302 Gain on sale of discontinued operation 8 - - - ---------- ---------- ---------- Profit for the period 3,748 5,554 9,302 ====== ====== ====== Earnings per share Basic 9 5.01p 7.43p 12.44p Diluted 9 5.00p 7.41p 12.41p The profit for the period is attributable to the equity shareholders of the parent company Filtronic plc. Consolidated Statement of Recognised Income and Expense for the year ended 31 May 2006 2006 2005 £000 £000 Profit for the period 6,011 9,302 ---------- ---------- Actuarial loss on defined benefit pension scheme (2,849) (6,784) Transfer to income from translation reserve related to business disposal (42) - Currency translation movement arising on consolidation (531) 1,314 ---------- ---------- (3,422) (5,470) ---------- ---------- ---------- ---------- Total recognised income and expense for the period 2,589 3,832 ====== ====== The total recognised income and expense for the period is attributable to the equity shareholders of the parent company Filtronic plc. Consolidated Balance Sheet at 31 May 2006 2006 2005 £000 £000 Non-current assets Goodwill 2,723 31,400 Property, plant and equipment 69,248 79,793 Deferred tax 2,249 2,309 ---------- ---------- 74,220 113,502 ---------- ---------- Current assets Inventories 33,623 34,802 Trade and other receivables 67,615 67,924 Income tax receivable 550 - Cash and cash equivalents 5,293 6,563 ---------- ---------- 107,081 109,289 ---------- ---------- ---------- ---------- Total assets 181,301 222,791 ---------- ---------- Current liabilities Bank overdraft - 5,958 Bank revolving credit 18,000 - Bank loan - 11,000 Trade and other payables 41,412 49,844 Income tax payable 1,764 1,880 ---------- ---------- 61,176 68,682 ---------- ---------- Non-current liabilities Bank loan - 33,000 Defined benefit pension 20,585 16,149 Deferred income 4,475 10,730 Deferred tax 688 661 ---------- ---------- 25,748 60,540 ---------- ---------- ---------- ---------- Total liabilities 86,924 129,222 ---------- ---------- ---------- ---------- Net assets 94,377 93,569 ====== ====== Equity Share capital 7,484 7,484 Share premium 139,172 139,172 Translation reserve 698 1,302 Other reserve 6,237 5,584 Accumulated losses (59,214) (59,973) ---------- ---------- Total equity 94,377 93,569 ====== ====== The total equity is attributable to the equity shareholders of the parent company Filtronic plc. Consolidated Cash Flow Statement for the year ended 31 May 2006 2006 2005 £000 £000 Cash flows from operating activities Profit for the period 6,011 9,302 Gain on sale of discontinued operation (14,146) - Taxation 1,390 241 Finance costs 4,934 6,005 Finance income (1,706) (1,988) Gain on sale of property (523) (2,356) ---------- ---------- Operating (loss)/profit (4,040) 11,204 Defined benefit pension charge/(credit) 3,624 (422) Defined benefit pension contributions paid (2,561) (2,029) Share-based payment 240 291 Depreciation 11,744 14,572 Loss/(gain) on disposal of plant and equipment 402 (235) Licence fee released (2,335) (2,335) Government grants released to income (3,920) (693) Government grants received - 1,000 Government grants repaid - (150) Movement in inventories (3,215) 2,107 Movement in trade and other receivables 1,490 (13,249) Movement in trade and other payables 1,086 10,384 ---------- ---------- Cash flow from operations 2,515 20,445 Taxation paid (1,998) (1,846) ---------- ---------- Net cash from operating activities 517 18,599 ---------- ---------- Consolidated Cash Flow Statement for the year ended 31 May 2006 2006 2005 note £000 £000 Net cash from operating activities 517 18,599 ---------- ---------- Cash flows from investing activities Proceeds from sale of property 3,508 6,349 Proceeds from sale of plant and equipment 348 1,555 Interest received 172 85 Acquisition of property, plant and equipment (14,422) (12,963) Sale of discontinued operation 44,138 - ---------- ---------- Net cash from investing activities 33,744 (4,974) ---------- ---------- Cash flows from financing activities Bank revolving credit drawn 18,000 - Bank loan repaid (44,000) (6,000) Bank loan renewal fee paid (543) - Interest paid (1,841) (4,189) Dividends paid (2,021) (2,018) ---------- ---------- Net cash from financing activities (30,405) (12,207) ---------- ---------- Increase in cash and cash equivalents 3,856 1,418 Currency exchange gain on sale of discontinued operation 1,007 - Currency exchange movement (175) 486 Opening cash and cash equivalents 605 (1,299) ---------- ---------- Closing cash and cash equivalents 10 5,293 605 ====== ====== Notes to the Preliminary Financial Information for the year ended 31 May 2006 1 Basis of preparation The financial information set out here does not constitute the company's statutory accounts for the years ended 31 May 2006 or 31 May 2005. Statutory accounts for 2005 have been delivered to the Registrar of Companies, and those for 2006 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985. Financial position and market conditions The group currently has agreed facilities of £35m with its bankers consisting of a term loan of £15m, a revolving multicurrency facility of £18m and an overdraft of £2m. Unless previously repaid, the term loan is required to be repaid by 30 November 2006 and the revolving facility is required to be repaid by 31 August 2008. These existing facility arrangements also require that, in the event that the proposed disposal of the Wireless Infrastructure business to Powerwave (as referred to below) does not complete, the group is required to agree revised financial covenants in relation to its facilities by 30 September 2006. The group has signed an agreement with Powerwave for the disposal of its Wireless Infrastructure business for a consideration of $150m (approximately £81m) cash and 20.7m shares of Powerwave's common stock, due for completion before 30 September 2006. This has not been completed. On the assumption this completion occurs by 30 September 2006, the cash consideration received would be utilised to repay existing bank facilities and provide additional capital for the remaining group. The directors have prepared business plans and forecasts for the remaining group on this basis and believe there to be sufficient working capital for the foreseeable future. In the event that a sale does not complete as envisaged, the group would continue with its existing business plans incorporating the Wireless Infrastructure business. The group currently benefits from sustained demand profiles for its volume product divisions that are providing good visibility of key customers' forecast demand well into the second half of the financial year ending 31 May 2007. The phased rate of increase in Compound Semiconductors' production capacity, along with its current demand continuing to be greater than the growth in its output, as capacity utilisation is increased, limits the uncertainty of the financial support required for this activity. The group though operates in fast-changing, demand-led markets with a limited number of sophisticated customers who demand consistent high quality product. Thus the group remains exposed to changes in demand and issues arising from its complex operating environment including achievement of target cost reduction plans. As part of their assessment of the appropriateness of the preparation of the financial statements on the going concern basis, the directors have modelled various scenarios reflecting the dynamics referred to above. They are therefore confident that the group's current facility arrangements would be adequate and that revised financial covenants would be agreed with the company's bankers. On the bases above, the directors believe that the group will have sufficient working capital for the foreseeable future and therefore that it is appropriate for the financial statements to be prepared on the going concern basis. 2 Business segment analysis The business segments were redefined with effect from 1 June 2005. The business segment results for the comparative period have been re-analysed to be consistent with the current period. 2006 2005 £000 £000 Revenue Wireless Infrastructure 172,700 177,733 Defence Electronics 32,079 31,590 Compound Semiconductors 20,756 8,572 Inter segment (4,572) (5,004) ---------- ---------- Continuing operations 220,963 212,891 Handset Products - discontinued operation 13,645 49,974 ---------- ---------- 234,608 262,865 ====== ====== Operating (loss)/profit Wireless Infrastructure 5,525 17,524 Defence Electronics 564 3,070 Compound Semiconductors (5,114) (11,701) Central Services (4,150) (5,694) Unallocated pension (charge)/credit (1,063) 2,451 ---------- ---------- Continuing operations (4,238) 5,650 Handset Products - discontinued operation 198 5,554 ---------- ---------- Operating (loss)/profit (4,040) 11,204 Gain on sale of property 523 2,356 Finance income 1,706 1,988 Finance costs (4,934) (6,005) ---------- ---------- (Loss)/profit before taxation (6,745) 9,543 Taxation (1,390) (241) ---------- ---------- (Loss)/profit after taxation (8,135) 9,302 ====== ====== The operating (loss)/profit is stated after crediting the release of deferred income as follows: 2006 2005 £000 £000 Wireless Infrastructure - government grants 416 62 Defence Electronics - government grants 64 2 Compound Semiconductors - licence fee 2,335 2,335 - government grants 3,440 629 ---------- ---------- 6,255 3,028 ====== ====== 3 Geographical origin segment analysis 2006 2005 £000 £000 Revenue United Kingdom 116,266 106,447 Finland 37,651 31,214 Hungary 3,402 - United States of America 53,026 65,880 China 61,153 57,147 Australia 1,481 4,300 Inter segment (52,016) (52,097) ---------- ---------- Continuing operations 220,963 212,891 ---------- ---------- Finland 4,405 23,220 China 11,067 29,841 Inter segment (1,827) (3,087) ---------- ---------- Discontinued operation 13,645 49,974 ---------- ---------- 234,608 262,865 ====== ====== Operating (loss)/profit United Kingdom (15,659) (20,798) Finland 1,439 3,041 Hungary (412) - United States of America 343 9,538 China 11,305 16,198 Australia (1,254) (2,329) ---------- ---------- Continuing operations (4,238) 5,650 ---------- ---------- Finland (3,190) (2,923) China 3,388 8,477 ---------- ---------- Discontinued operation 198 5,554 ---------- ---------- Operating (loss)/profit (4,040) 11,204 Gain on sale of property 523 2,356 Finance income 1,706 1,988 Finance costs (4,934) (6,005) ---------- ---------- (Loss)/profit before taxation (6,745) 9,543 Taxation (1,390) (241) ---------- ---------- (Loss)/profit after taxation (8,135) 9,302 ====== ====== 4 Reorganisation costs Operating (loss)/profit is stated after charging reorganisation costs: 2006 2005 £000 £000 Closure costs of the Wireless Infrastructure facility in Australia 1,080 - Closure costs of the Compound Semiconductors facility in California, USA 406 - Inventory write down in the US Defence Electronics business 1,516 - ---------- ---------- 3,002 - ====== ====== The write down of the inventory in the US Defence Electronics business has arisen as a result of its strategic repositioning, and after its move to a new facility. 5 Government grants released During the year £2,717,000 (2005 £nil) of deferred government grants, related to the Compound Semiconductors facility at Newton Aycliffe, County Durham, were released to income following the renegotiation of their arrangements. 6 Finance income 2006 2005 £000 £000 Interest income 172 85 Expected return on pension scheme assets 1,534 1,381 Currency exchange gains - 522 ---------- ---------- 1,706 1,988 ====== ====== 7 Finance costs 2006 2005 £000 £000 Interest expense (1,841) (4,189) Bank borrowing facilities fees (543) - Interest on pension scheme liabilities (2,058) (1,816) Currency exchange losses (492) - ---------- ---------- (4,934) (6,005) ====== ====== 8 Gain on sale of discontinued operation On 8 September 2005 the Handset Products business was sold. The sale is analysed as follows: 2006 2005 £000 £000 Consideration and costs Cash consideration 47,113 - Currency exchange gain on consideration 1,007 - Additional cash consideration receivable in August 2006 11,433 - Sale costs (2,881) - Currency translation adjustment 42 - ---------- ---------- 56,714 - ====== ====== Assets and liabilities sold Goodwill 28,466 - Property, plant and equipment 9,425 - Inventories 4,064 - Trade and other receivables 10,110 - Cash and cash equivalents 208 - Trade and other payables (9,667) - Income tax payable (38) - ---------- ---------- Net assets sold 42,568 - Gain on sale of discontinued operation 14,146 - ---------- ---------- 56,714 - ====== ====== The Handset Products business had the following cash flows: 2006 2005 £000 £000 Cash flows from operating activities (1,567) 10,358 ====== ====== Cash flows from investing activities (973) (4,471) ====== ====== 9 (Loss)/earnings per share 2006 2005 £000 £000 (Loss)/profit for the period - continuing operations (8,333) 3,748 - discontinued operation 14,344 5,554 ---------- ---------- Profit for the period 6,011 9,302 ====== ====== 000 000 Weighted average number of shares 74,842 74,797 Dilution effect of share options 93 84 Dilution effect of contingently issuable shares - 45 ---------- ---------- Diluted weighted average number of shares 74,935 74,926 ====== ====== Basic (loss)/earnings per share - continuing operations (11.13)p 5.01p - discontinued operation 19.16p 7.43p ---------- ---------- Basic earnings per share 8.03p 12.44p ====== ====== Diluted (loss)/earnings per share - continuing operations (11.13)p 5.00p - discontinued operation 19.15p 7.41p ---------- ---------- Diluted earnings per share 8.02p 12.41p ====== ====== 10 Cash and cash equivalents and net debt 2006 2005 £000 £000 Cash and cash equivalents 5,293 6,563 Bank overdraft - (5,958) ---------- ---------- Cash and cash equivalents in the cash flow statement 5,293 605 ---------- ---------- Bank revolving credit (18,000) - Bank loan - current - (11,000) - non-current - (33,000) ---------- ---------- Debt (18,000) (44,000) ---------- ---------- ---------- ---------- Net debt (12,707) (43,395) ====== ====== 11 Dividends The dividends recognised in equity and paid during the year were as follows: 2006 2005 Per share £000 £000 Final dividend year ended 31 May 2004 1.80p - 1,344 Interim dividend year ended 31 May 2005 0.90p - 674 Final dividend year ended 31 May 2005 1.80p 1,347 - Interim dividend year ended 31 May 2006 0.90p 674 - ---------- ---------- 2,021 2,018 ====== ====== The final dividend proposed for the year ended 31 May 2006 is 1.80p per share payable on 31 October 2006 to shareholders on the register on 29 September 2006. The final dividend will amount to £1,348,000 based on the issued share capital of 74,870,956 10p ordinary shares as at 21 July 2006. 12 Reconciliation of movements in total equity 2006 2005 £000 £000 Opening total equity 93,569 91,464 Total recognised income and expense for the period 2,589 3,832 Share-based payments 240 291 Dividends (2,021) (2,018) ---------- ---------- Closing total equity 94,377 93,569 ====== ====== This information is provided by RNS The company news service from the London Stock Exchange

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