29th Jan 2008 09:00
Pace Micro Technology PLC29 January 2008 Pace Micro Technology plc results for the half year ended 1 December 2007 29 January 2008 Saltaire, UK, 29 January 2008, Pace Micro Technology, the leading independentdeveloper of digital TV technologies for the global payTV industry, announcesits financial results for the half year ending 1 December 2007. FOLLOWING THE CHANGE OF THE COMPANY'S YEAR END TO 31 DECEMBER, AUDITED RESULTSFOR THE SEVEN MONTH PERIOD ENDED 31 DECEMBER 2007 WERE RELEASED EARLIER TODAY. Operating Highlights • Exceptional performance during the period, in line with increased expectations • Solid underlying business trends, platform for growth now embedded • Good balance of business across the group and broadened product range • Volume shipments of 1.8m set-top boxes (2006: 1.8m) Financial Highlights • Revenue up 5% to £190.0m (2006: £180.2m) • Gross margin improvement to 20.7% (2006: 15.3%) • Profit before tax of £10.6m (2006: £0.5m) • Earnings per share of 4.6 p (2006: 0.1p) • Net borrowings of £4.2m (Cash in hand 2 June 2007: £11.9m) Contacts Fiona Laffan/Tim Williamson/Raphael Mazet Neil Gaydon/Stuart Hall/Helen KettleboroughBrunswick Pace Micro Technology+44 20 7404 5959 Today only - +44 20 7404 5959 Thereafter - +44 1274 538005 INTERIM MANAGEMENT REPORT Results Overview Pace is the leading company in digital TV technology and creates products formany of the world's most successful digital payTV operators. The Company hasdelivered exceptional performance during the period, meeting its increasedexpectations, due to ongoing action to improve business efficiencies andexceptional performance in North America. At the same time, the organisationalchanges which are now complete have structured Pace's business around thetechnologies and needs of its customers, and provided Pace with a solid andsustainable platform for growth. Product margins, execution and quality all continued to improve throughout theperiod and Pace has increased profit before tax to £10.6m (2006: £0.5m) onrevenues of £190.0m (2006: £180.2m). Pace's revenues remain well balanced between its markets in North America (52%of total) and European and Australasian markets (48%). Pace has continued to winnew customers in both market groups while also growing market share fromexisting customers. North America, the world's largest market for digital television technology, hasperformed strongly with shipments of 0.6m set-top boxes in the half year period(2006: 0.6m). Strengthening its US market position by investing early in nextgeneration products, Pace has been quick to market with its new OCAP-readyCableCARDTM range to meet new US regulatory requirements for separable securityin cable set-top boxes. Orders of CableCARD products have begun to increase,while demand for satellite products remained strong. Pace continued to developand deepen its customer relationships in North America in the period and nowsupplies over 40 operators, including the two largest payTV organisations,DirecTV and Comcast. Pace performed strongly in the EMEA and APAC markets, achieving a level ofshipments into the EMEA region of 1.0m set-top boxes (2006: 1.0m), and shipmentsinto the APAC region of 0.2m (2006: 0.3m). Demand for HD PVR has grown andDigiturk has recently launched a HD PVR service using Pace set-top boxes, whichis also the first implementation of Pace's new Irdeto conditional access /OpenTV middleware platform. As expected this platform is enabling Pace to winfurther new customers in these regions and in September Pace announced abusiness win with Multichoice in South Africa. Multichoice is typical of thecustomers Pace aims to work with: the leading payTV operator in a region withrights to the best content, strong engineering and a customer base receptive tothe latest developments in digital TV technology. Multichoice and Digiturk have extended Pace's customer-base of leading payTVoperators that also includes BSkyB, Sky Italia, and UPC in EMEA. In Australiaand New Zealand Pace has continued to ship products to Foxtel, Optus and Sky NewZealand. Financial Review In the half year period Pace shipped 1.8m set-top boxes (2006: 1.8m) with revenues of £190.0m (2006: £180.2m). Average selling prices rose from £98 to £103,reflecting the ongoing trend in demand for higher specification products such asHD PVR, a demand Pace has been able to meet due to its ongoing early investmentin new technology. Gross margin of 20.7% shows a significant improvement fromthe previous period (2006: 15.3%) through thorough and close management of thebusiness. Overheads, excluding the impact of IAS38, were £30.2m (2006: £26.1m, excludingrestructuring costs). R&D spend before capitalisation of development expenditurein line with IAS38 was £18.3m (2006: £13.5m), as Pace continued to invest inhigher specification products such as HD PVR and new technologies. The IAS38adjustment was a net credit of £1.8m (2006: net credit £1.3m) principally as aresult of the investment in Multi-Dweller and retail products that are scheduledto be launched during 2008. Profit before tax was £10.6m (2006: £0.5m). The interest charge was £0.4m (2006:£1.3m) the reduced level of charges reflecting higher levels of cash held duringthe period. A tax credit of £0.2m (2006: charge £0.3m) reflects overseas taxcharges of £0.4m and a deferred tax credit of £0.5m (relating to the recognitionof trading losses). Retained profit for the period was £10.8m (2006: £0.2m). TheBoard does not recommend the payment of a dividend, but is keeping the positionunder review. The net working capital position at 1 December 2007 was £43.9m (2 June 2007:£30.5m). This change was due to an inventory increase of £27.1m (to facilitateDecember 07 shipments), debtor increase of £14.0m and creditor increase of£15.7m. Due to the increase in the level of working capital at the period end, the Groupfinished the period with a net borrowings position of £4.2m (2 June 2007: netcash £11.9m). Outlook The Board is pleased with progress and the benefits the organisation isdelivering in the form of a solid, sustainable platform for growth that has beenembedded across the group. Neil GaydonChief Executive Officer29 January 2008 Responsibility statement of the directors in respect of the half-yearlyfinancial report We confirm that to the best of our knowledge: • the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU; • the interim management report includes a fair review of the information required by: (a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indicationof important events that have occurred during the first six months of thefinancial year and their impact on the condensed set of financial statements;and a description of the principal risks and uncertainties for the remainingmonth of the seven month financial period; and (b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related partytransactions that have taken place in the first six months of the currentfinancial year and that have materially affected the financial position orperformance of the entity during that period; and any changes in the relatedparty transactions described in the last annual report that could do so. By order of the Board Anthony J DixonCompany Secretary29 January 2008 The Directors who all served throughout the period are: • Mike McTighe - Chairman • Neil Gaydon - Chief Executive Officer • Stuart Hall - Chief Financial Officer • David McKinney - Chief Operating Officer • Patricia Chapman-Pincher - Non-executive director • Robert Fleming - Non-executive director • Marten Fraser - Non-executive director CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTFOR THE 26 WEEKS ENDED 1 DECEMBER 2007 Note 26 weeks 26 weeks 52 weeks ended ended ended 1 Dec 2007 2 Dec 2006 2 June 2007 £000 £000 £000 Revenue 2 190,043 180,217 386,513Cost of sales (150,680) (152,719) (324,865) _____________ _____________ _____________Gross profit 39,363 27,498 61,648Administrative expenses:Research and Developmentexpenditure (16,426) (12,225) (28,949)Other administrative expenses:Before exceptional items (11,902) (12,546) (24,379)Exceptional items 3 - (884) (1,208) _____________ _____________ _____________Total Administrativeexpenses (28,328) (25,655) (54,536) _____________ _____________ _____________Operating profit 11,035 1,843 7,112 Finance income 49 53 138Finance expenses (444) (1,384) (2,325) _____________ _____________ _____________Profit before tax 10,640 512 4,925 Tax credit/(charge) 4 160 (288) 1,841 _____________ _____________ _____________Profit after tax 10,800 224 6,766 _____________ _____________ _____________Attributable to: Equity holders of the Company 10,800 224 6,766 Basic earnings per ordinaryshare 5 4.7p 0.1p 3.0pDiluted earnings perordinary share 5 4.6p 0.1p 3.0p All figures presented on pages 5 to 11, for the 26 weeks ended 1 December 2007and 2 December 2006, are unaudited. The figures in respect of the 52 weeks ended2 June 2007 are audited. CONDENSED CONSOLIDATED INTERIM BALANCE SHEETAT 1 DECEMBER 2007 Note 1 Dec 2007 2 Dec 2006 2 June 2007 £000 £000 £000ASSETS Non Current AssetsProperty, plant and equipment 8,693 6,877 6,508Intangible assets - goodwill 9,436 9,436 9,436Intangible assets -development expenditure 15,514 12,570 13,670Available for sale financialassets 349 349 349Deferred tax assets 6,094 2,887 4,968 ____________ ____________ ____________Total Non Current Assets 40,086 32,119 34,931 ____________ ____________ ____________Current AssetsInventories 52,411 27,512 25,268Trade and other receivables 66,532 83,192 52,563Cash and cash equivalents - - 12,049 ____________ ____________ ____________Total Current Assets 118,943 110,704 89,880 ____________ ____________ ____________Total Assets 159,029 142,823 124,811 ____________ ____________ ____________ EQUITY Issued capital 11,680 11,627 11,659Share premium 36,885 36,521 36,751 Translation reserve 311 (885) 227Retained earnings 14,789 (5,072) 2,300 _______ _______ _______Total Equity 63,665 42,191 50,937 _______ _______ _______ LIABILITIES Non Current Liabilities Interest bearing loans andborrowings 102 151 99 Provisions 6 10,804 8,972 9,646 _______ _______ _______Total Non Current Liabilities 10,906 9,123 9,745 _______ _______ _______Current Liabilities Trade and other payables 75,078 72,491 59,368 Current tax liabilities 461 256 282Interest bearing loans andborrowings 4,050 13,930 60Provisions 6 4,869 4,832 4,419 ____________ ____________ ____________Total Current Liabilities 84,458 91,509 64,129 ____________ ____________ ____________Total Liabilities 95,364 100,632 73,874 ____________ ____________ ____________Total Equity and Liabilities 159,029 142,823 124,811 ____________ ____________ ____________ CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Share capital Share premium Translation Retained Total equity reserve earnings £000 £000 £000 £000 £000 ------- ------- -------- ------- -------Balance at 3June 2006 11,576 36,246 240 (5,595) 42,467 ------- ------- -------- ------- ------- Profit for theperiod - - - 224 224Currencytranslationadjustments - - (1,125) - (1,125) ------- ------- -------- ------- -------Total incomeand expensefor the period (1,125) 224 (901)Employee shareincentivecharges - - - 299 299Issue of shares 51 275 - - 326 ------- ------- -------- ------- -------Balance at 2December 2006 11,627 36,521 (885) (5,072) 42,191 ------- ------- -------- ------- ------- Profit for theperiod - - - 6,542 6,542Currencytranslationadjustments - - 1,112 - 1,112 ------- ------- -------- ------- -------Total incomeand expensefor the period - - 1,112 6,542 7,654Employee shareincentivecharges - - - 385 385Movement inemployee sharetrusts - - - 445 445Issue of shares 32 230 - - 262 ------- ------- -------- ------- -------Balance at 2June 2007 11,659 36,751 227 2,300 50,937 ------- ------- -------- ------- ------- Profit for theperiod - - - 10,800 10,800Currencytranslationadjustments - - 84 - 84 ------- ------- -------- ------- -------Total incomeand expensefor the period - - 84 10,800 10,884Deferred Taxadjustment - - - 606 606Employee shareincentivecharges - - - 424 424Movement inemployee sharetrusts - - - 659 659Issue of shares 21 134 - - 155 ------- ------- -------- ------- -------Balance at 1December 2007 11,680 36,885 311 14,789 63,665 ------- ------- -------- ------- ------- CONDENSED CONSOLIDATED INTERIM CASH FLOW STATEMENTFOR THE 26 WEEKS ENDED 1 DECEMBER 2007 26 weeks ended 26 weeks ended 52 weeks ended 1 Dec 2007 2 Dec 2006 2 June 2007 £000 £000 £000 Cash flows fromoperating activities Profit before tax 10,640 512 4,925Adjustments for:Share based paymentscharge 424 299 684Depreciation ofproperty, plant andequipment 2,130 2,073 4,277Amortisation ofdevelopment expenditure 8,622 5,525 14,172Loss on sale ofproperty, plant andequipment 94 - 90Net financial charges 395 1,331 2,187Movement in trade andother receivables (13,971) (42,764) (9,966)Movement in trade andother payables 15,295 27,722 13,794Movement in inventories (27,143) 7,169 9,524Movement in provisions 1,608 (1,029) (826) _____________ _____________ _____________Cash generated (usedin)/ from operations (1,906) 838 38,861Interest paid (319) (1,215) (2,361)Tax paid (181) (51) (124) _____________ _____________ _____________Net cash used inoperating activities (2,406) (428) 36,376 _____________ _____________ _____________Cash flows frominvesting activities Purchase of property, plant andequipment (4,153) (1,280) (3,256)Development expenditure (10,466) (6,809) (16,556)Interest received 49 - 138 ____________ ____________ ____________Net cash used ininvesting activities (14,570) (8,089) (19,674) ____________ ____________ ____________ Cash flows fromfinancing activities Proceeds from issue of share capital 155 326 588Proceeds from exerciseof employee shareoptions 659 - 445 Repayment of loans - (23) (55) ____________ ____________ ____________Net cash generated fromfinancing activities 814 303 978 ____________ ____________ ____________Net change in cash andcash equivalents (16,162) (8,214) 17,680Cash and cashequivalents at start ofperiod 12,049 (5,880) (5,880)Effect of exchange ratefluctuations on cashheld 63 221 249 ____________ ____________ ____________Cash and cashequivalents at end ofperiod (4,050) (13,873) 12,049 ____________ ____________ ____________ NOTES 1. BASIS OF PREPARATION BASIS OF PREPARATION This unaudited interim financial information is for the 26 week period ending 1December 2007 and is prepared in accordance with IAS 34 Interim FinancialReporting as adopted by the EU and under the historical cost convention asmodified by the revaluation of derivative instruments. The accounting policies applied by the Group in these condensed consolidatedfinancial statements are the same as those applied by the Group in itsconsolidated financial statements for the year ended 2 June 2007. Interim Financial Information The interim financial information for the 26 week periods ended 1 December 2007and 2 December 2006 have not been audited but has been reviewed by theauditors. Their review report for the 26 week period ended 1 December 2007 isset out on page 12. Figures for the 52 week period ended 2 June 2007 areextracted from the Company's statutory financial statements for that financialyear. Those financial statements have been reported on by the company'sauditors and delivered to the registrar of companies. The report of theauditors was (i) unqualified, (ii) did not include a reference to any matters towhich the auditors drew attention by way of emphasis without qualifying theirreport, and (iii) did not contain a statement under section 237(2) or (3) of theCompanies Act 1985. SIGNIFICANT JUDGEMENTS, KEY ASSUMPTIONS AND ESTIMATION UNCERTAINTY The preparation of interim statements in conformity with Adopted IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. Key sources of estimation uncertainty and critical accounting judgements are asfollows: Warranties Pace provides product warranties for its set-top boxes. It is difficult to makeaccurate predictions of potential failure rates or the possibility of anepidemic failure, as a warranty estimate must be calculated at the outset of aproduct before field deployment data is available. These estimates improveduring the lifetime of the product in the field. A provision for warranties is recognised when the underlying products orservices are sold. The provision is based on historical warranty data and aweighting of all possible outcomes against their associated probabilities. Thelevel of warranty provision required is reviewed on a product by product basisand provisions adjusted accordingly in the light of actual performance. Royalties Pace's products incorporate third party technology, usually under licence.Inadvertent actions may expose Pace to the risk of infringing third partyintellectual property rights. Potential claims can still be submitted many yearsafter a product has been deployed. Any such claims are always vigorouslydefended. A provision for royalties is recognised where the owners of patents coveringtechnology allegedly used by the Group have indicated claims for royaltiesrelating to the Group's use (including past usage) of that technology. Havingtaken legal advice, the Board considers that there are defences available thatshould mitigate the amounts being sought. The Group will vigorously negotiate ordefend all claims but, in the absence of agreement, the amounts provided mayprove to be different from the amounts at which the potential liabilities arefinally settled. The provision is based on the latest information available. EU Import duty classification Pace, along with other set top box manufacturers and broadcasters, continues tomonitor the potential re-interpretation by European Union customs authorities ofcustoms regulations that could result in the extension of import duties tointeractive set-top boxes manufactured outside, but imported into, the EU. Nofinal decision has been made so it remains impossible to quantify any potentialimpact. However, Pace has analysed its options against the range of possibleoutcomes and has plans in place to manage these outcomes. Writ Issued against Company A writ has been issued against the Company by a former customer relating to thesupply of set top boxes in 2000/01. The amount claimed is circa $7.2m. TheDirectors believe that they have good defences to the claim and therefore, inthe absence of any liability, no provision has been made. In addition on 15 July2007 Pace filed a counterclaim for circa $10m against this former customer and arelated third party. Going concern The Group has in place borrowing facilities to January 2010, based upon 85% ofrelevant trade debtors, as adjusted, up to a maximum of £35m. These facilitiesare subject to financial performance covenants. The Board has prepared a working capital forecast based upon assumptions as totrading and has concluded that the Group has adequate working capital, will meetthe financial performance covenants and that therefore it is appropriate to usethe going concern basis of preparation for this financial information. Change of year end The Pace Board resolved on 23 July 2007 that it has decided to change itsAccounting Reference Date from 31 May to 31 December. This follows Pace'sstatement released on 23 March 2007 when it was announced that the change inGroup Accounting Reference Date would be made in order to more closely align theGroup's business reporting cycle with those of its principal customers andsuppliers. Accordingly the next audited financial statements will be prepared for the 7month period to 31 December 2007. 2 Revenue 26 weeks ended 26 weeks ended 52 weeks ended 1 Dec 2007 2 Dec 2006 2 June 2007 £000 £000 £000 The geographical analysis of revenue by destination is as follows: United Kingdom 41,752 29,913 69,487 Continental Europe 33,981 31,747 62,693 Far East and Australasia 14,765 19,818 30,888 North America 99,545 98,739 223,239 Rest of the World - - 206 ____________ ____________ ____________ 190,043 180,217 386,513 ____________ ____________ ____________ The Directors have undertaken a review of the Group's continuing operations and its associated business risks and consider that the continuing operations should be reported as a single business segment. The Directors consider that the continuing operations represent one product offering with similar risks and rewards and should be reported as a single business segment in line with the Group's internal reporting framework. 3 Exceptional items 26 weeks ended 26 weeks ended 52 weeks ended 1 Dec 2007 2 Dec 2006 2 June 2007 £000 £000 £000 Restructuring and reorganisation costs - 884 1,208 ____________ ____________ ____________ The restructuring and reorganisation charges in the previous periods related to a restructuring programme within the Group. 4 Tax credit/(charge) 26 weeks ended 26 weeks ended 52 weeks ended 1 Dec 2007 2 Dec 2006 2 June 2007 £000 £000 £000 The tax credit/(charge) is based on the estimated effective rate of taxation on trading for the period and represents: Current tax: Overseas tax charge (360) (288) (240) ____________ ____________ ____________ Total current tax charge (360) (288) (240) ____________ ____________ ____________ Deferred tax: Origination and reversal of timing differences (257) - 2,081 Adjustment in respect of previous periods 1,169 - - Effect of change in tax rate (392) - - ____________ ____________ ____________ Total deferred tax credit 520 - 2,081 ____________ ____________ ____________ Tax credit/(charge) 160 (288) 1,841 ____________ ____________ ____________ The tax credit for the period reflects the overseas tax charge of £0.4m anddeferred tax credit, principally due to the recognition of prior year losses anda change in the UK corporation tax rate from 30% to 28%. 5 Earnings per ordinary share Basic earnings per ordinary share have been calculated by reference to the profit after taxation, and the average number of qualifying ordinary shares of 5p in issue of 228,286,371 (2006: 224,533,942). Diluted earnings per ordinary share vary from basic earnings per ordinary share due to the effect of the notional exercise of outstanding share options. The diluted earnings are the same as basic earnings. The diluted number of qualifying ordinary shares was 233,894,974 (2006: 225,959,720). 6 Provisions Royalties Warranties Total under £000 £000 negotiation £000 At 2 June 2007 7,473 6,592 14,065 Charge for the period 1,730 2,504 4,234 Utilised (790) (1,836) (2,626) ___________ ____________ ____________ At 1 December 2007 8,413 7,260 15,673 ___________ ____________ ____________ Due within one year - 4,869 4,869 Due after more than one year 8,413 2,391 10,804 INDEPENDENT REVIEW REPORT TO PACE MICRO TECHNOLOGY PLC Introduction We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 1December 2007 which comprises the condensed consolidated interim incomestatement, the condensed consolidated interim balance sheet, the condensedconsolidated interim statement of changes in shareholders' equity, the condensedconsolidated interim cash flow statement and the related explanatory notes. Wehave read the other information contained in the half-yearly financial reportand considered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the Disclosureand Transparency Rules ("the DTR") of the UK's Financial Services Authority("the UK FSA"). Our review has been undertaken so that we might state to thecompany those matters we are required to state to it in this report and for noother purpose. To the fullest extent permitted by law, we do not accept orassume responsibility to anyone other than the company for our review work, forthis report, or for the conclusions we have reached. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the DTR of the UK FSA. As disclosed in note 1, the annual financial statements of the group areprepared in accordance with IFRSs as adopted by the EU. The condensed set offinancial statements included in this half-yearly financial report has beenprepared in accordance with IAS 34 Interim Financial Reporting as adopted by theEU. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity issued by the AuditingPractices Board for use in the UK. A review of interim financial informationconsists of making enquiries, primarily of persons responsible for financial andaccounting matters, and applying analytical and other review procedures. Areview is substantially less in scope than an audit conducted in accordance withInternational Standards on Auditing (UK and Ireland) and consequently does notenable us to obtain assurance that we would become aware of all significantmatters that might be identified in an audit. Accordingly, we do not express anaudit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly financialreport for the six months ended 1 December 2007 is not prepared, in all materialrespects, in accordance with IAS 34 as adopted by the EU and the DTR of the UKFSA. KPMG Audit PlcChartered AccountantsLeeds29 January 2008 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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