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
====== ======
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