31st Jul 2006 07:02
Filtronic PLC31 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 ofcustomised microwave electronic subsystems for the wireless telecommunicationsand defence industries, announces its Preliminary Results for the year ended 31May 2006. Worldwide sites are in the UK (Yorkshire, County Durham, Midlands andScotland), USA, Finland, Hungary and China. Filtronic is the world's leading independent supplier of transmit/receivemodules for base stations and a leading manufacturer of semiconductor switchesfor mobile handsets. The contribution to sales for continuing operations is:Wireless Infrastructure (78 %), Defence Electronics (14%); CompoundSemiconductors (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 EnquiriesFiltronic plc:Professor J David Rhodes, Group Chief Executive Tel: 01274 530622/ Mob: 07850 827 280Charles 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 InternationalFinancial 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 wassold in September 2005 for £56.7m, including the earn-out. The composition ofthe Board changed in January 2006 with the resignation of John Roulston as GroupChief Executive. The Board requested David Rhodes to move from Chairman to takeon this role so that he would bring his knowledge and experience of the businessand staff to put the group on a stable footing. I took on the role ofnon-executive Chairman on an interim basis whilst the Board seeks my long termsuccessor. On 5 May 2006 we announced that we had entered into exclusive negotiations withPowerwave Technologies, Inc. ("Powerwave") for the sale of the major activitieswithin our Wireless Infrastructure division, resulting in the formal agreementof this transaction which was announced on 12 June 2006. The consideration dueis $150m (approximately £81m) cash and 20.7m shares of Powerwave's common stock,and the shareholder circular for this transaction is in preparation, withcompletion of the sale due by 30 September 2006. For the other activities of the group, the highlight for the year has been theGaAs semiconductor fabrication facility at Newton Aycliffe reaching its targetof breakeven by the financial year end for the fourth quarter of the financialyear. The Defence Electronics activities opened their new manufacturingfacility in New Hampshire, USA in September 2005 which provides the base formedium term growth. Also, we are retaining the point to point radio backhaulactivity which is showing strong growth. The cash proceeds from the sale to Powerwave will be used to repay outstandingbank debt and to fund continuing investment in the Newton Aycliffe semiconductorfacility, along with other corporate working capital requirements. The netproceeds from the sale of the Powerwave shares are expected to be returned toshareholders as cash, once they are sold. This year also saw the retirement of Alan Needle from the role of ManagingDirector of the Wireless Infrastructure division in December 2005. He initiatedthe commercial application of the defence technology that created the currentWireless Infrastructure activity. As Managing Director, he took the business toflotation in 1994 and, under his leadership, Filtronic became the world'sleading independent supplier of transmit/receive modules for mobile basestations. We thank him for this considerable contribution. Reg Gott joined the Board as a non-executive director on 13 July 2006 and bringshis extensive background in the machinery, automation and controls segments ofthe capital goods market across Europe and North America to strengthen theBoard. I also expect that the Board will continue its active search for my long termreplacement, who will be responsible for organising the evolution of themanagement 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 ouremployees for their dedication to the growth of the business as the groupcontinues to evolve and John Roulston for his dedication and contribution. TheBoard is continuing its drive to have the intrinsic value of the group'soperations recognised in the company's valuation. Rhys WilliamsChairman31 July 2006 Group CEO's Operating Review Summary This year has been one of considerable change as I have sought to complete thefinancial restructuring initiated in September 2004 and to revitalise themarket'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 totalconsideration of £56.7m, including the earn-out consideration of £11.3m due inAugust 2006. The initial consideration of £45.4m was used to repay the £44.0mterm loan from Barclays and ABN AMRO, which had been rescheduled over a fiveyear term with revised financial covenants in July 2005. Defence Electronics opened its new manufacturing site in New Hampshire, USA inSeptember 2005, partly to support the supply of subsystems to ITT. The UKcontinued its activities across a range of programmes including the supply ofsubsystem assemblies for the Eurofighter Defensive Aids system to Elettronica ofItaly 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 itsfinancial performance was on target. In January 2006, the Board also asked me to move from being Chairman to take therole of Group Chief Executive on John Roulston's resignation. I undertook tocarry out the role for a twelve to eighteen month period with the specific aimsof providing leadership to the Wireless Infrastructure division following theretirement of its previous Managing Director, Alan Needle, in December 2005, andto support Iain Gibson in setting the direction for the next steps in the growthof the Compound Semiconductor and Defence Electronics activities within theIntegrated Products division. On appointment, I secured the management team of the Wireless Infrastructuredivision by ensuring the retention of Geoff Fletcher as Managing Director of thedivision. Subsequently, after a review of the group's strategic options, theBoard agreed that the majority of the activities in the Wireless Infrastructurebusiness, covering transmit receive modules, integrated power amplifiers andremote radio head products, would be acquired by Powerwave. We have subsequently continued to benefit from strengthening growth for theWireless Infrastructure division arising from operators outside North Americacommissioning systems from OEMs. The outlook for the businesses within the group is set out at the end of thisreport. The segmental analysis of the operating results for continuing operations is asfollows: Revenue Operating (loss) / profitYear ended 31 May 2006 2005 2006 2005 £m £m £m £m Wireless Infrastructure 172.7 177.7 5.5 17.5Defence Electronics 32.1 31.6 0.6 3.1Compound 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 topoint backhaul radio products that are primarily used to support mobile phonenetworks. During the year, the activities generated revenues of £172.7m (2005£177.7m). The core business maintained its market leading position supplyingall Western OEMs, and reflected a static market awaiting the placing of certainlarge contracts in India, China and the US that have started to be placed duringthe current year. The operating profit was £5.5m (2005 £17.5m), reflecting principally pricingpressure that was not able to be fully compensated by product redesign, and aslower than planned move of production on high volume product lines from Finlandto Hungary and from the US to China. We closed our Australian operations inAugust 2005 at a total cost of £1.1m, which is included in this result. Duringthe second half of the financial year, the business suffered unseasonally lowdemand during the third quarter and the activity for the fourth quarter includedthe negative impact of the announcement made on 5 May 2006 of discussions withPowerwave. Provision was also made in the second half of the financial year forthe finalisation of a commercial agreement in respect of a product liabilityissue with a customer. The power amplifier products were manufactured in production quantities for onecustomer, and we undertook product development for another customer on a productscheduled to start production in the second half of the financial year ending 31May 2007. The principal products for the point to point backhaul radio products are radiotransceivers assembled in the UK, which use integrated circuits produced byCompound Semiconductors, along with diplex filters which are manufactured in theUK and Hungary. Its customers are leading OEMs in the sector for whom severalnew products have entered production during the year. Further new designs arein qualification using our more complex multifunction integrated circuits. Compound Semiconductors In the past twelve months, the Compound Semiconductors facility at NewtonAycliffe has been undergoing a transition from its prior position as a modestproducer of Gallium Arsenide (GaAs) pHEMT wafers to being a volume producer ofthese products. They are used mainly in switches in mobile telephones, but alsohave applications in communication equipment and defence applications. Whilethe majority of recent growth stems from expansion in the mobile telephonesector, it has also been pleasing that the year has seen initial volumeproduction orders from Selex as they achieve success with E-Scan radar sales.While there was some disappointment in sales of merchant semiconductors, to alarge extent this has been caused by the priority of meeting steep customerdemand for switches. One benefit of the additional capacity to be created inthe future is to allow Compound Semiconductors to establish a stronger presencein the merchant semiconductors sector. The global mobile handset market is continuing its growth with approximately 815million handsets sold in 2005, and forecast to be over 1 billion handsets soldin 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 whichcontains this type of switch. This switch has the advantage that it consumesless power than alternative products for complex switches, and meets demandinglow-loss and linearity requirements. Competition is from older technologiesthat use 3 way pin diode or GaAs switches combined with band defining filters.Furthermore, handsets are becoming more complex with increasing switchingrequirements offering the possibility that the quantity of GaAs used per handsetwill increase further over the next two to three years. Revenue in the year grew 142% (2005 £8.6m to 2006 £20.8m) and the sequentialgrowth rate in revenue comparing half year on half year during the financialyear 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 wereincurred in the first half of the year. It was pleasing that Compound Semiconductors reached its targeted financialperformance of an operating break even run rate over the fourth quarter of thefinancial year to 31 May 2006. This was after absorbing the cost increasesassociated 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 inthe period arising from the renegotiation of arrangements on past governmentgrants. On the basis of this performance and the demand growth mentioned above,the Board has planned further expansion in the capacity of CompoundSemiconductors in the coming financial year. Defence Electronics For over 25 years Filtronic has supplied complex electromagnetic components andsubsystems, most notably for use in the field of electronic warfare, to defenceequipment prime contractors around the world. Although the Defence Electronicsactivities 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 NewtonAycliffe and a small research group in Australia. The past financial year hasseen one of FCL's larger contracts, for the supply of subsystems for theEurofighter project, draw to a close. Consequently, additional focus has beenapplied to securing new business for future years. Following a review of the future opportunities for the company in the US defencemarket, 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 asolid growth path for the company in the US defence market, the Sagemanufacturing operation and the Sigtek design centre were combined into a newbusiness, Filtronic Signal Solutions (FSS). A new manufacturing site was openedin Hudson, New Hampshire in September 2005, which consolidated the two previousmanufacturing operations in the US, supporting the contract with ITT, followingwhich the management team has been progressively strengthened. A major reviewof 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 November2005. Revenue in the year grew 2% (2005 £31.6m to 2006 £32.1m) and operating profitbefore 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 poweramplifier product for a new customer, based on LDMOS technology, that isscheduled to start production in October 2006. It has also undertakendevelopment work on remote radio heads for 3G and WiMAX applications in supportof the Wireless Infrastructure division. Business disposals This has been a year of major change in the structure of the group with the saleof the Handset Products division in September 2005, and agreement for the saleof the Wireless Infrastructure business (transmit/receive modules, poweramplifiers and remote radio heads activities of the Wireless Infrastructuredivision). The Handset Products division is treated as a discontinued operation. TheHandset Products division was a market leader in the provision of internalantennas for mobile handsets and was sold to Pulse in September 2005. For theperiod from 1 June 2005 to the date of its sale on 8 September 2005, itgenerated revenue of £13.6m and an operating profit of £0.2m. The totalconsideration, including the earn-out due in August 2006, was £56.7m, resultingin a profit on disposal of £14.1m. Finance The group rescheduled its bank facilities with Barclays and ABN AMRO in July2005 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 Productsdivision in September 2005 and the group's facilities became a revolving creditfacility of £18m available until August 2008 and an overdraft of £2m. In May2006, the group secured an additional facility of £15m from its bankers until 30November 2006 to fund the expansion of the Compound Semiconductors facility atNewton 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 capacityin 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 forDefence Electronics. Capital expenditure in the discontinued Handset Productsoperation was £1.0m (2005 £4.5m) in the period before disposal. This was forthe start-up of the manufacturing facility in Hungary and capacity expansion inChina. Employees At 31 May 2006, the group employed 3,353 people in its continuing operations, anincrease of 20% since May 2005, primarily in Wireless Infrastructure'smanufacturing operations in China and Hungary. Outlook Wireless Infrastructure The Wireless Infrastructure division has experienced continuing strengtheneddemand in its market, that has been reflected in the order book in June beingextended out from its usual period of around two weeks to twelve weeks and thishas been accompanied by increased visibility in the forecasts received fromcustomers for later in the financial year. As a result, production capacity has been increased with output for the largestvolume product being doubled since January and manufacturing operations inFinland 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 thanusual with a key customer. It is also well positioned to support Long Term Evolution GSM with its core OEMcustomers. This outlook for this division is focused on growth from itstraditional customer base. The planned financial performance for the Wireless Infrastructure division istherefore that revenue for the first half of the current financial year isexpected 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 thesecond half of the current financial year, supporting expected continued growthgoing forward. Compound Semiconductors For Compound Semiconductors, we are now providing some 20% of the overall mobilehandset market with 4-way and above mobile phone pHEMT switches, which is aroundan 80% share of the addressable market. Continued market adoption of our typeof switches is expected to reach 80% of overall mobile phone market over thecoming three years. As a result of a detailed assessment of future wafer requirements, we havephased our plans for capacity increase and we are currently undertaking thisexpansion in line with forecast demand for the current financial year. Therefore our financing plan for the growth of Compound Semiconductors requiresless than £15m of additional cash for this financial year, after which thebusiness is targeted to be self-financing. With the profile of capacity deployment, revenue growth of over 25% is thereforeexpected per sequential half year for the current financial year includinginitial growth in merchant semiconductors and non-switch volume products andgrowth in demand to support filter and backhaul radio products. Defence Electronics With its three major contracts substantially complete in the financial yearended 31 May 2006, the focus in Defence Electronics is to secure new businesswhich will mostly generate replacement revenues over the financial year andprovide a platform for future growth. In both the UK and US, opportunities havebeen identified and are being supported by appropriate product developmentactivities. Pension scheme We are expecting to implement changes to the group's final salary pension schemeat the end of the consultation period on 31 July 2006 to have benefits based oncareer average revalued earnings. As part of this change to the scheme, the company has agreed to provideadditional funding of £4.6m on implementation of the changes to the scheme tofund the actuarial deficit at the date of change. The existing contributionarrangements remain in place which require that any increases in contributionrates over current levels that are required to fund deficits would be made twothirds by employee members and one third by the company. Professor J David Rhodes CBE FRS FREngGroup Chief Executive Officer31 July 2006 Consolidated Income StatementFor 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 - 523Finance income 6 1,706 - 1,706Finance 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 shareBasic 9 (11.13)p 19.16p 8.03pDiluted 9 (11.13)p 19.15p 8.02p The (loss)/profit for the period is attributable to the equity shareholders ofthe parent company Filtronic plc. Consolidated Income Statementfor 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 - 2,356Finance income 6 1,988 - 1,988Finance costs 7 (6,005) - (6,005) ---------- ---------- ----------Profit before taxation 3,989 5,554 9,543Taxation (241) - (241) ---------- ---------- ----------Profit after taxation 3,748 5,554 9,302Gain on sale of discontinued operation 8 - - - ---------- ---------- ----------Profit for the period 3,748 5,554 9,302 ====== ====== ====== Earnings per shareBasic 9 5.01p 7.43p 12.44pDiluted 9 5.00p 7.41p 12.41p The profit for the period is attributable to the equity shareholders of theparent company Filtronic plc. Consolidated Statement of Recognised Income and Expensefor the year ended 31 May 2006 2006 2005 £000 £000 Profit for the period 6,011 9,302 ---------- ----------Actuarial loss on defined benefitpension scheme (2,849) (6,784)Transfer to income from translation reserverelated to business disposal (42) -Currency translation movement arising onconsolidation (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 theequity shareholders of the parent company Filtronic plc. Consolidated Balance Sheetat 31 May 2006 2006 2005 £000 £000Non-current assetsGoodwill 2,723 31,400Property, plant and equipment 69,248 79,793Deferred tax 2,249 2,309 ---------- ---------- 74,220 113,502 ---------- ----------Current assetsInventories 33,623 34,802Trade and other receivables 67,615 67,924Income tax receivable 550 -Cash and cash equivalents 5,293 6,563 ---------- ---------- 107,081 109,289 ---------- ---------- ---------- ----------Total assets 181,301 222,791 ---------- ----------Current liabilitiesBank overdraft - 5,958Bank revolving credit 18,000 -Bank loan - 11,000Trade and other payables 41,412 49,844Income tax payable 1,764 1,880 ---------- ---------- 61,176 68,682 ---------- ----------Non-current liabilitiesBank loan - 33,000Defined benefit pension 20,585 16,149Deferred income 4,475 10,730Deferred tax 688 661 ---------- ---------- 25,748 60,540 ---------- ---------- ---------- ----------Total liabilities 86,924 129,222 ---------- ---------- ---------- ----------Net assets 94,377 93,569 ====== ======EquityShare capital 7,484 7,484Share premium 139,172 139,172Translation reserve 698 1,302Other reserve 6,237 5,584Accumulated losses (59,214) (59,973) ---------- ----------Total equity 94,377 93,569 ====== ====== The total equity is attributable to the equity shareholders of the parentcompany Filtronic plc. Consolidated Cash Flow Statementfor the year ended 31 May 2006 2006 2005 £000 £000Cash flows from operating activities Profit for the period 6,011 9,302Gain on sale of discontinued operation (14,146) -Taxation 1,390 241Finance costs 4,934 6,005Finance income (1,706) (1,988)Gain on sale of property (523) (2,356) ---------- ----------Operating (loss)/profit (4,040) 11,204Defined benefit pension charge/(credit) 3,624 (422)Defined benefit pension contributions paid (2,561) (2,029)Share-based payment 240 291Depreciation 11,744 14,572Loss/(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 - 1,000Government grants repaid - (150)Movement in inventories (3,215) 2,107Movement 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 20,445Taxation paid (1,998) (1,846) ---------- ----------Net cash from operating activities 517 18,599 ---------- ---------- Consolidated Cash Flow Statementfor the year ended 31 May 2006 2006 2005 note £000 £000 Net cash from operating activities 517 18,599 ---------- ----------Cash flows from investing activitiesProceeds from sale of property 3,508 6,349Proceeds from sale of plant and equipment 348 1,555Interest received 172 85Acquisition 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 activitiesBank 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 1,418Currency exchange gain on sale of discontinued operation 1,007 -Currency exchange movement (175) 486Opening cash and cash equivalents 605 (1,299) ---------- ----------Closing cash and cash equivalents 10 5,293 605 ====== ====== Notes to the Preliminary Financial Informationfor the year ended 31 May 2006 1 Basis of preparation The financial information set out here does not constitute the company'sstatutory accounts for the years ended 31 May 2006 or 31 May 2005. Statutoryaccounts for 2005 have been delivered to the Registrar of Companies, and thosefor 2006 will be delivered following the company's annual general meeting. Theauditors have reported on those accounts; their reports were unqualified and didnot 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 ofa term loan of £15m, a revolving multicurrency facility of £18m and an overdraftof £2m. Unless previously repaid, the term loan is required to be repaid by 30November 2006 and the revolving facility is required to be repaid by 31 August2008. These existing facility arrangements also require that, in the event that theproposed disposal of the Wireless Infrastructure business to Powerwave (asreferred to below) does not complete, the group is required to agree revisedfinancial covenants in relation to its facilities by 30 September 2006. The group has signed an agreement with Powerwave for the disposal of itsWireless Infrastructure business for a consideration of $150m (approximately£81m) cash and 20.7m shares of Powerwave's common stock, due for completionbefore 30 September 2006. This has not been completed. On the assumption thiscompletion occurs by 30 September 2006, the cash consideration received would beutilised to repay existing bank facilities and provide additional capital forthe remaining group. The directors have prepared business plans and forecastsfor the remaining group on this basis and believe there to be sufficient workingcapital for the foreseeable future. In the event that a sale does not complete as envisaged, the group wouldcontinue with its existing business plans incorporating the WirelessInfrastructure business. The group currently benefits from sustained demand profiles for its volumeproduct divisions that are providing good visibility of key customers' forecastdemand well into the second half of the financial year ending 31 May 2007. Thephased rate of increase in Compound Semiconductors' production capacity, alongwith its current demand continuing to be greater than the growth in its output,as capacity utilisation is increased, limits the uncertainty of the financialsupport required for this activity. The group though operates in fast-changing, demand-led markets with a limitednumber of sophisticated customers who demand consistent high quality product.Thus the group remains exposed to changes in demand and issues arising from itscomplex operating environment including achievement of target cost reductionplans. As part of their assessment of the appropriateness of the preparation of thefinancial statements on the going concern basis, the directors have modelledvarious scenarios reflecting the dynamics referred to above. They are thereforeconfident that the group's current facility arrangements would be adequate andthat revised financial covenants would be agreed with the company's bankers. On the bases above, the directors believe that the group will have sufficientworking capital for the foreseeable future and therefore that it is appropriatefor 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 businesssegment results for the comparative period have been re-analysed to beconsistent with the current period. 2006 2005 £000 £000RevenueWireless Infrastructure 172,700 177,733Defence Electronics 32,079 31,590Compound Semiconductors 20,756 8,572Inter segment (4,572) (5,004) ---------- ----------Continuing operations 220,963 212,891Handset Products - discontinued operation 13,645 49,974 ---------- ---------- 234,608 262,865 ====== ======Operating (loss)/profitWireless Infrastructure 5,525 17,524Defence Electronics 564 3,070Compound Semiconductors (5,114) (11,701)Central Services (4,150) (5,694)Unallocated pension (charge)/credit (1,063) 2,451 ---------- ----------Continuing operations (4,238) 5,650Handset Products - discontinued operation 198 5,554 ---------- ----------Operating (loss)/profit (4,040) 11,204Gain on sale of property 523 2,356Finance income 1,706 1,988Finance costs (4,934) (6,005) ---------- ----------(Loss)/profit before taxation (6,745) 9,543Taxation (1,390) (241) ---------- ----------(Loss)/profit after taxation (8,135) 9,302 ====== ====== The operating (loss)/profit is stated after crediting the release of deferredincome 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 £000RevenueUnited Kingdom 116,266 106,447Finland 37,651 31,214Hungary 3,402 -United States of America 53,026 65,880China 61,153 57,147Australia 1,481 4,300Inter segment (52,016) (52,097) ---------- ----------Continuing operations 220,963 212,891 ---------- ----------Finland 4,405 23,220China 11,067 29,841Inter segment (1,827) (3,087) ---------- ----------Discontinued operation 13,645 49,974 ---------- ---------- 234,608 262,865 ====== ====== Operating (loss)/profitUnited Kingdom (15,659) (20,798)Finland 1,439 3,041Hungary (412) -United States of America 343 9,538China 11,305 16,198Australia (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) 11,204Gain on sale of property 523 2,356Finance income 1,706 1,988Finance costs (4,934) (6,005) ---------- ----------(Loss)/profit before taxation (6,745) 9,543Taxation (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 £000Closure costs of the WirelessInfrastructure facility in Australia 1,080 -Closure costs of the CompoundSemiconductors facility in California, USA 406 -Inventory write down in the US DefenceElectronics business 1,516 - ---------- ---------- 3,002 - ====== ====== The write down of the inventory in the US Defence Electronics business hasarisen as a result of its strategic repositioning, and after its move to a newfacility. 5 Government grants released During the year £2,717,000 (2005 £nil) of deferred government grants, related tothe Compound Semiconductors facility at Newton Aycliffe, County Durham, werereleased to income following the renegotiation of their arrangements. 6 Finance income 2006 2005 £000 £000 Interest income 172 85Expected return on pension scheme assets 1,534 1,381Currency 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 analysedas follows: 2006 2005 £000 £000Consideration and costsCash 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 soldGoodwill 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 000Weighted average number of shares 74,842 74,797Dilution effect of share options 93 84Dilution effect of contingently issuable shares - 45 ---------- ----------Diluted weighted average numberof 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 6,563Bank overdraft - (5,958) ---------- ----------Cash and cash equivalents in thecash 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 £000Final dividend year ended31 May 2004 1.80p - 1,344Interim dividend year ended31 May 2005 0.90p - 674Final dividend year ended31 May 2005 1.80p 1,347 -Interim dividend year ended31 May 2006 0.90p 674 - ---------- ---------- 2,021 2,018 ====== ====== The final dividend proposed for the year ended 31 May 2006 is 1.80p per sharepayable 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 capitalof 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 91,464Total recognised income and expensefor the period 2,589 3,832Share-based payments 240 291Dividends (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 ExchangeRelated Shares:
Filtronic