Final Results

RNS Number : 4132N

Filtronic PLC

28 July 2014

 



                                                                                                                                                                               28 July 2014

FILTRONIC PLC

UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MAY 2014

Filtronic plc, the designer and manufacturer of microwave electronics products for the wireless telecoms infrastructure market, announces its Preliminary results for the year ended 31 May 2014.

The Wireless business develops and markets innovative customised filters, combiners, and microwave subsystems which enable operators to use their existing network infrastructure to overlay 3G and 4G (LTE) services, as well as providing OEM customers with next generation filter solutions for 4G (LTE) base station units.

The Broadband businessdesigns and manufactures customised microwave electronic sub assembly components that are integrated by OEM's into radios for telecom network backhaul links and by a leading radar manufacturer into its aerospace products.

Financial Highlights 

	2014	2013
Sales Revenue	£32.9m	£40.0m
Operating (loss) / profit (before amortisation and exceptional items)	£(0.4m)	£3.1m
(Loss) / profit before taxation	£(3.7m)	£0.2m
Basic (loss) / earnings per share	(2.90p)	0.29p
Diluted (loss) / earnings per share	(2.87p)	0.29p
Net cash balance as at 31 May	£2.5m	£1.9m
Cash in / (out) flow from operating activities	£2.0m	£(0.3m)

Operational Highlights

·     Acquired antenna capability which has subsequently achieved 4 design wins for antennas that are expected to generate revenue in FY2015. 

·     Successfully increased the number of OEM customers in both Broadband and Wireless.

·     Broadband completed move to a new facility at North East Technology Park, Sedgefield, County Durham reducing Broadband's fixed cost base.

·     Introduced a new Filtronic designed high power MMIC Amplifier for use on E-band platform.

·     Successfully completed customer trial of an E-band transceiver to achieve 1 gigabit per second in 250MHz RF channel with output power of 16dBm.

Commenting on the outlook, Howard Ford, Chairman, said:

"Investment in the 4G equipment infrastructure market continues to grow and offer significant opportunities for both Wireless and Broadband. The number, scale and quality of new opportunities continues to be strong and whilst the timing and volume of contracts from design wins remains uncertain, we expect Wireless to return to growth and with the upturn we have seen in Broadband the board is confident about the prospects for the business."

Filtronic plc Tel. [phone] Howard Ford (Chairman) / Alan Needle / Rob Smith Panmure Gordon (UK) Limited Tel. [phone] Dominic Morley Tom Salvesen Walbrook PR Ltd Tel. [phone] Paul McManus Mob. [phone] or [e-mail] Helen Westaway Mob. [phone] or [e-mail]

Chairman's letter

The year ended 31 May 2014 (FY2014) was an important developmental year for Filtronic. The group saw the introduction of several new products and was involved in a number of custom projects which have led to design wins with both original equipment manufacturers (OEMs) and network operators. Disappointingly, sales revenue reduced to £32.9m (2013: £40.0m) with an operating loss before exceptional items and the amortisation of intangibles of £0.4m (2013: profit £3.1m). The reduction in sales revenue and profit resulted from the conclusion of a significant project to deliver 4G (LTE) interference mitigation filters, which completed in the first half of FY2014, and a longer lead time for expected contracts from new design wins with OEMs.

Sales revenue in the Wireless business was £23.2m (2013: £31.8m) and £9.7m (2013: £8.1m) for the Broadband business. Operating profit before exceptional items and intangible amortisation was split between Wireless £2.6m profit (2013: £6.4m profit), Broadband £2.3m loss (2013: £2.4m loss) and central costs of £0.8m (2013: £0.9m). Net cash at the end 31 May 2014 was £2.5m compared with £1.9m, the increase in net cash resulted from the unwinding of working capital associated with projects at the previous year end and the improving shipments and lower inventory holding in Broadband.

Wireless business

During FY2014 the Wireless business worked with a number of OEMs and operators to develop customised products, including various innovative filters, switchable filters, combiners and antennas to support the rollout of LTE. A number of these projects have led to design wins that are anticipated to enter production in 2015/16.

In September 2013, the business acquired certain antenna assets and with the recruitment of an engineering team, predominantly located in Stockholm, the group has developed a capability to design and manufacture the next generation of ultra wideband (UWB) antennas that cover existing and yet to be released frequency spectrum. We are pleased to report that design wins at four customers have been achieved for antennas and these are anticipated to be revenue generating in the second half of FY2015.

The increased market complexity resulting from 4G LTE and the need for a heterogeneous network has resulted in a far more complex technology landscape. It is expected that OEMs will take an ever increasing role in the development of integrated equipment which may in the longer term reduce the number of operator specific projects available to Filtronic and further underscores the rationale of Filtronic working more closely with OEMs.

Broadband business

Sales revenues from E-band and V-band backhaul transceiver modules have increased through the year and are replacing lower margin, legacy product. Sales in the year included a last time buy of materials of £2.5m at cost by a long term customer to service their potential requirements until 2017, which suppressed the profit (as a percentage of sales) for Broadband.   The current E-band transceiver modules are predominantly for "carrier grade" mobile backhaul required by larger global operators to connect base stations into the mobile communications network. The V-band product is primarily used in enterprise solutions and "small cell" opportunities. The business also won contracts for the supply of microwave devices used in phased array radars in the military aerospace market.

Broadband successfully relocated its operations to a new location at North East Technology Park (NETPark) in County Durham. The relocation has enabled the business to reduce its fixed costs and focus its manufacturing capabilities to its core competencies. The increased sales revenue and lower overheads resulted in a reduced operating loss for the year and at the conclusion of the period the business attained profitability on a monthly run rate basis.

Dividend

The Board does not recommend a dividend for 2014 (2013: nil).

Board of directors

Mike Brennan left the Board in April 2014 and Rob Smith was appointed as chief financial officer and director subsequent to the year end.

Outlook

Investment in the 4G equipment infrastructure market continues to grow and offer significant opportunities for both Wireless and Broadband. The number, scale and quality of new opportunities continues to be strong and whilst the timing and volume of contracts from design wins remains uncertain, we expect Wireless to return to growth and with the upturn we have seen in Broadband the board is confident about the prospects for the business.

Finally, I should like to thank all staff in the business for their contribution over the past year and our shareholders for their patience as we continue to position the business to take advantage of the significant market growth forecast over the next several years.

Howard Ford

Chairman

Chief executive's statement

Summary of year performance

Over the previous few years Filtronic has supplied custom Wireless product to a number of operator projects. These projects included combiners, tuneable filters and LTE mitigation filters that resulted in a rapid growth in sales in FY2013.

The sales revenue from these projects has been tremendously beneficial for the group and has allowed us the time and resources to develop and expand our product offering and now, with the addition of tower mounted amplifiers and ultra wideband (UWB) antennas, we are able to target the OEMs with a more complete product range to establish a more stable underlying base level of business.

In Broadband it has enabled the company to transition away from low margin legacy products and concentrate its efforts on the supply of transceiver modules to the E-band and V-band markets.

However, as these projects came to their natural conclusion and follow on projects were delayed, sales revenue and operating profit receded in the second half of FY2014. In Wireless, it was our expectation that the take up of potential new projects would coincide with the conclusion of some of the operator projects. Unfortunately, this has not been the case and consequently the sales revenue in Wireless was lower than the previous year.

Wireless performance

In the year, Wireless achieved sales revenue of £22.9m (2013: £31.8m) and a profit of £3.9m (2013: £6.4m).

With customer expectations demanding a seamless user experience in a heterogeneous network, where all network layers need to be integrated together to an unprecedented degree, it is our belief that integrated systems of this complexity can only be satisfied by the major OEMs. It is this market dynamic that has increased our desire to access more OEM programmes.

 In line with this desire we have now achieved a significant number of design wins at key OEMs and expect these to enter production through FY2015. Our decision to prioritise OEM activity is key to providing the business with a more stable and sustainable growth pattern. Whilst we expect to be involved in several operator projects we see these as being incremental to the base OEM programmes in the longer term.

As stated in the chairman's letter, we have established an antenna business near Stockholm in Sweden. The antenna assets acquired included both compact and spherical near field antenna measurement ranges and the latest electrical and mechanical modelling tools which will enable Wireless to design and manufacture a range of UWB antennas for the mobile infrastructure market. The addition of antennas to the Filtronic product portfolio enables Wireless to combine a number of its existing technologies into a system level offering that is relevant to the future system requirements of our customers. We are pleased to report that design wins at four customers have been achieved for antennas and these are anticipated to be revenue generating in the second half of FY2015.

Broadband performance

In the year, Broadband achieved sales revenue of £9.7m (2013: £8.1m) and a £2.3m loss (2013: £2.4m loss). Sales in the year included £2.3m of materials supplied to a customer to cover future production needs.

As the business developed, Broadband has been focussed on its capability to design, manufacture and supply E-band and V-band transceiver modules. The E-band modules are required for "carrier grade" backhaul applications to connect high capacity base stations into the network. As network density increases with ever higher capacities, backhaul becomes more critical to avoid creating problems. The V-band transceiver modules are primarily for enterprise and small cell applications.

Our new products are at the leading edge of what is currently technically achievable and during FY2014 we have been improving our production processes and product designs to improve yield and capacity. By the end of the year, yields and output had considerably improved and the business achieved a profitable monthly run rate. The demand for E-band and V-band products is growing and we are embedded in a number of OEM programmes which are at the early stage of market development. In the year we delivered the 10,000^th millimetre wave module and successfully completed a customer trial which achieved 1 gigabit per second in a 250MHz RF channel with an output power of 16dBm.

In addition to E-band and V-band, Filtronic Broadband continue to supply to a major defence contractor with transmit and receive modules for aerospace, military grade phased array radar programmes. This is a long term relationship that has required Broadband to develop an expertise in high reliability manufacturing and testing techniques, which has the added benefit that relates to the manufacture and test of E-band and V-band modules.

During the year Broadband completed the move to a new facility at NETPark, Sedgefield, UK. The relocation has enabled the business to rationalise a number of its processes and enabled us to concentrate on our core competences. This rationalisation has been a major contributor to the improved production yields achieved through the year and has also resulted in a significant reduction in our fixed cost.

Prospects for Broadband have been enhanced by the development of E-band and V-band capabilities and the reduced cost base. The markets for the business's products are growing rapidly and we look forward to Broadband being a major player in its field.

Future developments

The next few years will see a continuance of increased demand for data with operators looking to differentiate themselves by offering seamless coverage and improvements in quality of service. This is likely to see the development of heterogeneous networks, networks that are composed of multiple radio access technologies, architectures, transmission solutions, and base stations of varying transmission power to create a seamless user experience. This development will drive both of our businesses, with every new frequency release providing opportunities for Wireless and the increasing requirement for "carrier grade" mobile backhaul providing additional opportunities for Broadband. 

As part of our research and development activates we are working to develop solutions which support the market trend towards smaller, more compact products encompassing the use of alternative materials including ceramic.

With Cloud RAN and later 5G, which is forecasted to commence roll out in 2020, we expect to see another dramatic increase in data volumes and speed of connection.

Filtronic is ideally placed to participate in this market and continues to develop its technology roadmap to support these opportunities.

Alan Needle

Chief Executive Officer

Financial review

Financial results

Sales revenue in the year ended 31 May 2014 was £32.9m (2013: £40.0m) and operating loss before interest, intangible amortisation and exceptional items was £0.4m (2013: £3.1mprofit). The group net loss before taxation for the year was£3.7m (2013: £0.2m profit). Amortisation of intangible assets arising from the acquisition of Isotek (Holdings) Limited charged in the year was £2.4m (2013: £2.4m).Exceptional costs, primarily relating to the relocation of the Broadband business of £0.8m (2013: £0.4m) were recognisedin the year.

During the year, Broadband recognised sales revenue of £2.5m in respect of a last time buy to secure materials for a customer programme for legacy product. The customer ordered the material from Filtronic against their forecast requirement for finished product. No margin was made on the sale of the last time buy material and consequently the operating profit percentage to sales for Broadband and the group were reduced.

Key performance indicators (KPIs)

The directors set budgets for the year which are reviewed against the management accounts on a monthly basis. In addition to these results the directors review a number of KPIs to assess the performance of the group and assist in decision making. Historically, revenue and operating results by segment (note 4) have been the main KPIs used by the group.

In line with industry practice a more comprehensive set of financial KPIs has been introduced to monitor business performance.

Taxation

A tax credit of £0.9m (2013: £0.05m) has been recognised for the year.

Funding and cash flow

The group ended the year with net cash of £2.5m (2013: £1.9m), the increase in net cash resulted from the unwinding of working capital associated with projects completed in the year and a reduction in inventory in Broadband. Cash in / (out) flow from operating activities was £2.0m (2013: £(0.3m)).

Filtronic has an invoice discounting facility with Barclays Bank plc of £2.0m. As at 31 May 2014 no funds were drawn down against this facility (2013: £0.5m).

Inventory Provision

Inventory is valued at the lower of cost or net realisable value. It is the group's policy to regularly review the carrying value of its inventories and to make a provision for excess and obsolete inventory. As at 31 May 2014 the inventory provision was £1.6m (2013: £1.5m).

Warranty provision

In line with industry practice the group provides warranties to customers over the quality and performance of products it sells. The group's policy is to make a provision, calculated as a percentage of sales revenue, after reviewing costs associated with faulty products returned.

In Broadband sufficient data has existed to establish to enable a reliable calculation of Warranty provision.

In the case of our Wireless division, no historic data was available to the group when it acquired the business and consequently up to 31 May 2013 the group has provided a cautious estimate of the provision likely to be required. By the year ended 31 May 2014 sufficient warranty returns data had been accumulated to enable the business to calculate a more reliable value required to cover the cost of any warranty returns for product supplied and still under warranty. This recalculation of warranty, together with normal warranty related adjustments resulted in a reduction of overall provision of £0.5m which was credited to the income statement in the year.

Capital expenditure

Capital expenditure of £1.1m (2013: £1.5m) included £0.8m for the Wireless business and £0.3m in Broadband.

Research and development costs

Research and development costs in the year were £6.4m (2013: £5.4m). In line with the requirements of IFRS, the group's policy is to capitalise development expenditure as intangible assets when all the qualifying criteria have been met. After considering the criteria no research and development costs were capitalised in the balance sheet in the year (2013: £nil).

Working capital

At 31 May 2014 net working capital was £6.4m (2013: £4.0m). Net working capital comprised inventories of £3.9m (2013: £5.4m), receivables of £9.9m (2013: £17.2m) and payables of £7.4m (2013: £13.6m).

Rob Smith

Chief Financial Officer

The Board

The directors that served during the year ended 31 May 2014 and their respective roles are set out below:

Alan Needle (Chief Executive Officer)

Howard Ford (Chairman)

Graham Meek (Non-executive Director)

Reginald Gott (Non-executive Director)

Michael Roller (Non-executive Director)

Michael Brennan (Resigned 15 April 2014)

Robert (Rob) Smith was appointed as Chief Financial Officer on 16 June 2014

Responsibility Statement of the Directors

This statement is given pursuant to rule 4 of the Disclosure and Transparency Rules. The currently serving 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 letter, Chief executive officers statement and financial review which form part of the strategic report, include 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 2014

		2014	2013
	note	£000	£000
Revenue		32,900	39,976
		======	======
Operating (loss)/profit before amortisation and exceptional items		(442)	3,051
Amortisation of intangibles		(2,419)	(2,419)
Exceptional items	6	(825)	(392)
		----------	----------
Operating (loss)/profit		(3,686)	240
Finance income/(costs) - net		13	(2)
		----------	----------
(Loss)/profit before taxation		(3,673)	238
Taxation		858	46
		----------	----------
(Loss)/Profit for the period		(2,815)	284
		======	======
		----------	----------
Basic (loss)/earnings per share	7	(2.90p)	0.29p
		======	======
		----------	----------
Diluted (loss)/earnings per share	7	(2.87p)	0.29p
		======	======

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

The above results are all as a result of continuing operations.

Consolidated Statement of Comprehensive Income

for the year ended 31 May 2014

	2014	2013
	£000	£000
Profit for the period	(2,815)	284
	----------	----------
Currency translation movement arising on consolidation	(474)	54
	----------	----------
	(474)	54
	----------	----------
	----------	----------
Total comprehensive income for the period	(3,289)	338
	======	======

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 2014

		2014	2013
	note	£000	£000
Non-current assets
Goodwill and other intangibles	9	5,653	8,072
Property, plant and equipment		2,865	3,005
Deferred tax	10	485	302
		----------	----------
		9,003	11,379
		----------	----------
Current assets
Inventories		3,933	5,356
Trade and other receivables		9,941	17,237
Cash and cash equivalents		2,531	2,375
		----------	----------
		16,405	24,968
		----------	----------
		----------	----------
Total assets		25,408	36,347
		----------	----------
Current liabilities
Trade and other payables		7,447	13,611
Provision	11	333	605
Deferred income		169	229
Interest bearing borrowings	15	-	496
		----------	----------
		7,949	14,941
		----------	----------
Non-current liabilities
Deferred Tax	10	485	1,112
Deferred income		75	96
		----------	----------
		560	1,208
		----------	----------
		----------	----------
Total liabilities		8,509	16,149
		----------	----------
		----------	----------
Net assets		16,899	20,198
		----------	----------
Equity
Share capital	12	9,716	9,700
Share Premium	13	5,145	5,111
Translation Reserve		(436)	38
Retained earnings		2,474	5,349
		----------	----------
Total equity		16,899	20,198
		======	======

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

Company number 2891064

Alan Needle

Chief Executive Officer

Consolidated Statement of Changes in Equity

for the year ended 31 May 2014

		2014	2013
		£000	£000
Opening total equity		20,198	19,841
Total comprehensive income for the period		(3,289)	338
New shares issued (net of issue costs)		50	47
Share-based payments		(60)	163
Exercise of share awards		-	(191)
		----------	----------
Closing total equity		16,899	20,198
		======	======

Consolidated Cash Flow Statement

for the year ended 31 May 2014

		2014	2013
		£000	£000
Cash flows from operating activities
(Loss)/profit for the period		(2,815)	284
Taxation		(858)	(46)
Finance (income)/costs - net		(13)	2
		----------	----------
Operating (loss)/profit		(3,686)	240
Share-based payments		(60)	163
Loss/(profit) on disposal of plant and equipment		26	(24)
Depreciation		1,084	875
Amortisation of intangibles		2,419	2,419
Movement in inventories		1,423	(2,158)
Movement in trade and other receivables		7,372	(6,960)
Movement in trade and other payables		(6,164)	5,189
Movement in provision		(272)	40
Change in deferred income including government grants		(81)	(58)
Tax paid		(32)	-
		----------	----------
Net cash from/(used in) operating activities		2,029	(274)
		----------	----------

Consolidated Cash Flow Statement

for the year ended 31 May 2014

		2014	2013
			£000
Net cash used in operating activities		2,029	(274)
		----------	----------
Cash flows from investing activities
Interest received		13	8
Acquisition of plant and equipment		(1,058)	(1,532)
Proceeds on sale of assets		32	55
		----------	----------
Net cash used in investing activities		(1,013)	(1,469)
		----------	----------
Cash flows from financing activities
Proceeds from exercise of share options		50	47
Exercise of share awards		-	(191)
Interest paid		-	(10)
Movement in interest bearing borrowings		(496)	496
		----------	----------
Net cash from financing activities		(446)	342
		----------	----------
Movement in cash and cash equivalents		570	(1,401)
Currency exchange movement		(414)	31
Opening cash and cash equivalents		2,375	3,745
		----------	----------
Closing cash and cash equivalents		2,531	2,375
		======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

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 2014.

(a)  A number of new standards, amendments to standards and interpretations are effective for the year ended 31 May 2014. These are either not relevant or have no material impact on the group.

(b)  There are also a number of new standards, amendments to standards and interpretations that are effective for financial statements after this reporting period, but the group has not adopted them early except for the adoption of some disclosures which have been applied. None of these is expected to have a material impact on the results or financial position of the group.

EU Law (IAS Regulation EC1606/2002) requires that the consolidated financial statements of the group for the year ended 31 May 2014 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 IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The company expects to publish full financial statements in August 2014.

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 May 2014 or 13 May 2013. The financial information for 2013 is derived from the statutory accounts for 2013 which have been delivered to the registrar of companies. The auditor has reported on the 2014 accounts; their report was

(i) unqualified

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

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

The statutory accounts for 2014 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies in due course.

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

2    Accounting Estimates and Judgements

The preparation 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.

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.

Debtors

In line with industry practice Filtronic extends credit terms to its customers. Due to the concentration of debtors the effect of any one debtor defaulting would be material on the group's financial statements.

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.

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.

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

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    Risks and Uncertainties

Effective risk management is key to our success against the characteristics both of the industry that we operate in and within our chosen business model. Filtronic supplies microwave, base station filter products and antennas for the wireless telecommunications market. The group operates 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.

The directors recognise that risk is inherent in any business and seek to manage risk in a controlled manner. The key business risks are set out as follows: -

Risk	Nature	Mitigation	Change in year
Market	We supply a range of niche products to a small number of large OEM customers for both the Broadband and Wireless businesses as well as a number of network operators in the Wireless business. The loss of any of these customers, 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.	The group seeks to mitigate this risk by working closely with OEMs, on an engineer to engineer basis, to ensure that we are designed in to their products at an early stage. The group is actively seeking to increase the number of design wins across a range of OEM products. This strategy is designed to diversify market risk. The relationship that the group maintains with OEMs is key to ensuring that we are involved in the early stages of product design.	↑
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 consistently 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.	The group's internal and out sourced manufacturing processes are certified to ISO9001. Our Broadband division has relocated to a new facility. This move provided us with the opportunity to take greater control over our in house processes and where appropriate we have outsourced non-core processes to suppliers who can offer better quality and consistency of manufacturing. All our products are provided to customers after detailed qualification testing. We work closely with our customers to ensure that the test process employed ensures that the all products are supplied compliant to the customer's specification.	↓
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 underpinned by retaining key staff. We work closely with our customers and suppliers to gain a thorough knowledge of the technology being developed in the market place. By staying close to the market we position ourselves to react quickly to any technology changes that develop.	↓
Financial management	The group has a specific exposure to credit risk, interest rate and exchange rate fluctuations.	The group has established a number of policies to mitigate these risks.	↑
Legacy disposals	We have sold four divisions of the group in the past ten years and have provided warranties in support of these transactions. These warranties typically cover matters such as product liability, environmental impact risks on freehold property and tax risks. We may receive claims in future related to these current and future commitments.	Following a review, the group has made financial provisions for potential liabilities and periodically reviews its potential liability in respect of these disposals.	↓

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

3    Risks and Uncertainties (Continued)

The board has applied principle C.2 of the UK Corporate Governance Code by establishing a continuous process for identifying, evaluating, and managing the significant risks the group faces which has operated throughout the year and up to the date of this report. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance with respect to the preparation of financial information and the safeguarding of assets and against material misstatement or loss.

In compliance with provision C.2.1 of the UK Corporate Governance Code, the board regularly reviews the effectiveness of the group's system of internal control. The board's monitoring covers all controls, including financial, operational and compliance controls and risk management systems. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The board has also performed a specific assessment for the purpose of this annual report. This assessment considers all significant aspects of internal control arising during the period covered by the report. The audit committee assists the board in discharging its review responsibilities.

During the course of its review of the risk management and internal control systems, the board has not identified or been advised of any failings or weaknesses which it has determined to be significant. Therefore a confirmation in respect of necessary actions has not been considered appropriate.

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

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 four customers representing individually over 10% each in aggregate over 74% of the revenue.

The group operates in two trading business segments:

·     The design and manufacture of transceiver modules and filters for backhaul microwave linking of base stations used in wireless telecommunications networks (Broadband).

·     The design of radio frequency conditioning product for base stations used in wireless telecommunications networks (Wireless)

The Group also contains a central services segment that provides support to the trading businesses.

In the table below reportable segment assets and liabilities include inter segment balances. These have been included to reflect the assets and liabilities of the segment as monies are freely moved around the group to provide funding for working capital where required.

				Broadband				Wireless			Central Services			Total
				2014 £000		2013 £000		2014 £000		2013 £000	2014 £000		2013 £000	2014 £000	2013 £000
External revenue				9,736		8,127		23,164		31,849	-		-	32,900	39,976
Finance income				-		-		-		-	13		8	13	8
Finance costs				-		-		-		-	-		(10)	-	(10)
Depreciation				606		621		478		254	-		-	1,084	875
Reportable segment profit/(loss) before exceptional items				(2,285)		(2,449)		2,619		6,378	(776)		(878)	(442)	3,051
Reportable segment profit/(loss) before income tax				(2,749)		(2,720)		2,563		6,378	(1,081)		(1,001)	(1,267)	2,657
Reportable segment assets				10,861		7,293		9,005		20,499	13,032		16,734	32,898	44,526
Capital expenditure				326		595		732		937	-		-	1,058	1,532
Reportable segment liabilities				14,422		8,298		3,340		16,824	788		1,757	18,549	26,879

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

4    Segmental analysis (Continued)

	2014	2013
	£000	£000
Depreciation and amortisation
Reportable segment totals	1,084	875
Adjustments/amortisation of intangibles	2,419	2,419
	----------	----------
Consolidated depreciation and amortisation	3,503	3,294
	======	======

		2014	2013
		£000	£000
(Loss)/profit before taxation
Total profit for reportable segments		(1,267)	2,657
Group/unallocated		(2,419)	(2,419)
		----------	----------
	Consolidated (loss)/profit before taxation	(3,686)	238
		======	======
		2014	2013
		£000	£000
Assets
Total assets for reportable segments		32,898	44,256
Inter company		(10,041)	(10,730)
Group/unallocated		2,551	2,551
		----------	----------
	Consolidated total assets	25,408	36,347
		======	======

		2014	2013
		£000	£000
Liabilities
Total liabilities for reportable segments		18,550	26,879
Inter company		(10,041)	(10,730)
		----------	----------
	Consolidated total liabilities	8,509	16,149
		======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

5    Revenue by Destination

	2014	2013
	£000	£000
United Kingdom	10,429	14,083
Europe	4,351	7,880
Americas	15,081	6,001
Rest of the World	3,039	12,012
	----------	----------
	32,900	39,976
	======	======

6    Exceptional items

Operating (loss)/profit is stated after charging exceptional items as follows:

	2014	2013
	£000	£000
Management Reorganisation	-	212
Redundancy costs	-	180
Dilapidation of premises of discontinued operations	310	-
Filtronic Broadband relocation	463	-
Swedish entity set up costs	52	-
	----------	----------
	825	392
	======	======

There is a provision for dilapidations of premises (£310,000) which relates to liability for dilapidations following the termination of two leases the liability for which was assumed by the company following the disposal of the group's former UK defence business.During the year Filtronic Broadband Limited relocated to North East Technology Park in Sedgefield significantly lowering the fixed cost base of the entity.

Costs of £52,000 were incurred in setting up a Swedish entity for the group to enter the antenna market.

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

7    (Loss)/earnings per share

		2014	2013
		£000	£000
		----------	----------
(Loss)/profit for the period		(2,815)	284
		======	======
		000	000
Basic weighted average number of shares		97,078	96,951
Dilution effect of share options		754	592
Dilution effect of share awards		183	70
		---------	---------
Diluted weighted average number of shares		98,015	97,613
		======	======
		----------	----------
Basic (loss)/earnings per share		(2.90p)	0.29p
		======	======
		----------	----------
Diluted (loss)/earnings per share		(2.87p)	0.29p
		======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

8    Taxation

The reconciliation of the effective tax rate is as follows:

		2014		2013
		£000		£000
(Loss)/profit before taxation		(3,673)		238
		======		======
		2014		2013
		£000		£000
(Loss)/profit before taxation multiplied by standard rate of corporation tax in the UK	(23%)	(833)	24%	57
Disallowable item	4%	164	12%	28
Tax relief for share options exercised	-	-	(25%)	(59)
Income not taxable	(6%)	(205)	(1%)	(3)
Deferred tax not recognised	11%	405	102%	243
Trading losses utilised	-	-	(104%)	(248)
Impact of rate change on deferred tax	(1%)	(32)	(17%)	(41)
Adjustment in respect of prior years - R&D tax credit	(2%)	(65)	-	-
R&D tax credit	(8%)	(276)	-	-
FX rate change of deferred tax	1%	25	-	-
Foreign tax not at UK rate	(1%)	(41)	15%	36
Deferred tax liability write off	-	-	(8%)	(19)
Recognition of capital allowances	-	-	-
	---------	---------	---------	---------
Taxation	(23%)	(858)	(19%)	(46)
	======	======	======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

9    Goodwill and other intangibles

	(Restated) Goodwill	Other intangibles (core technology)	Total
	£000	£000	£000
Cost
At 1 June 2012, 31 May 2013 and 31 May 2014	3,235	10,884	14,119
	---------	---------	---------
Amortisation
At 1 June 2012	-	3,628	3,628
Provided in year	-	2,419	2,419
	---------	---------	---------
At 31 May 2013	-	6,047	6,047
Provided in year	-	2,419	2,419
	======	======	======
At 31 May 2014	-	8,466	8,466
	======	======	======
Carrying amount at 1 June 2012	3,235	7,256	10,491
	---------	---------	---------
Carrying amount at 31 May 2013	3,235	4,837	8,072
	---------	---------	---------
Carrying amount at 31 May 2014	3,235	2,418	5,653
	======	======	======

      Goodwill and other intangibles relate to the acquisition of Isotek (Holdings) Limited.

At 31 May 2011 the fair value of the acquired assets, liabilities, intangibles and goodwill were determined on a provisional basis pending finalisation of acquisition related adjustments. Following this finalisation the intangibles and goodwill for the prior period at 31 May 2011, were restated.

Goodwill is allocated to the Wireless 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:

·     Budgets incorporating cash flows have been prepared to 31 May 2015 based on past experience and actual operating results;

Notes to the Preliminary Financial Information

For the year ended 31 May 2014

9    Goodwill and other intangibles (continued)

·     Cash flows for a further 6-year period have been extrapolated from second half FY15. A growth factor was not applied to the projections as the value in use exceeded the carrying amounts before any such assumption was applied:

·     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 for the Wireless CGU.

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.               

10  Deferred tax

	2014	2013
	£000	£000
Deferred tax liability	485	1,112
	======	======

The deferred tax liability largely relates to the intangible assets arising upon acquisition of the Wireless business. The liability was £2,938,000 at the date of acquisition and at 31 May 2014 was £485,000. £627,000 has been released to the income statement during the year (2013: £1,112,000).

Deferred tax assets have been classified as non-current due to a change in accounting policy.

	2014	2013
	£000	£000
Deferred tax assets	485	302
	======	======

The deferred tax assets relate to the recognition of the tax losses and capital allowances in the Wireless business.                                                                                                                                

Notes to the Preliminary Financial Information

For the year ended 31 May 2014

11    Provision

Warranty provision	2014	2013
	£000	£000
Opening balance	605	565
Used during the year	(41)	(126)
Released unused during the year	(487)	(94)
Charge for the year	31	260
	---------	---------
Closing balance	108	605
	======	======
Dilapidation provision	2014	2013
	£000	£000
Opening balance	-	-
Charge for the year	225	-
	---------	---------
Closing balance	225	-
	======	======

12    Share Capital

	Group
	Ordinary shares of 10p each issued and fully paid
	Number	£000
At 1 June 2012	96,814,993	9,681
Shares issued in year	183,000	19
	--------------	---------
At 1 June 2013	96,997,993	9,700
Shares issued in year	162,993	16
	--------------	---------
At 31 May 2014	97,160,966	9,716
	========	======

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.

The group issued 162,993 shares due to employees exercising share options from SAYE Schemes and the management incentive plan.

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

13  Share Premium

		Group  £000
At 1 June 2012		5,083
Premium on share issue		28
		-------
At 1 June 2013		5,111
Premium on share issue		33
		-------
At 31 May 2014		5,144
		====

The shares issued to employees in the year were issued at an average premium of 20p.

14  Dividends

The directors are not proposing to pay a dividend for the year ended 31 May 2014 (2013: nil).

15  Analysis of net funds

	1 June 2013	Cash Flow	Other Changes	31 May 2014
	£000	£000	£000	£000
Cash and cash equivalents	2,375	570	(414)	2,531
Interest bearing borrowings	(496)	496	-	-
	---------	---------	---------	---------
	1,879	1,066	(414)	2,531
	======	======	======	======
Reconciliation of cash flow to movement in net funds
			2014	2013
			£000	£000
Movement in cash and cash equivalents			570	(1,401)
Cash flow from increase in debt financing			496	(496)
Effect of exchange rate fluctuations			(414)	31
			---------	---------
Movement in net funds			652	(1,866)
Net funds at 1 June			1,879	3,745
			---------	---------
Net funds at 31 May			2,531	1,879
			======	======

Notes to the Preliminary Financial Information

for the year ended 31 May 2014

16  Forward looking statements

The chairman's letter and chief executive officer's statement 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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