10th Jan 2005 07:00
Pace Micro Technology PLC10 January 2005 10th January 2004 Pace Micro Technology plc Interim Report for the 27 weeks ended 4 December 2004 SALIENT POINTS • Shipments increased to 2.1 million set-top boxes (2003: 1.0 million)• Turnover increased 36% to £150.5m (2003: £110.4m);• Profit before tax of £3.1m (2003: £0.8m);• Diluted earnings per share of 3.6p (2003: 0.6p) (adjusted earnings per share 1.4p: 2003:0.6p);• Net cash position £11.4m (29 May 2004: £20.4m);• Business performance significantly improved. Pace Micro Technology's Chairman Sir Michael Bett commented: "Pace's results for the first half are significantly ahead of last year withinwhat has been a highly competitive market. A wider geographical spread has beenachieved with non-UK customers representing 61% of our total revenues,complementing our existing strong UK market position. Markets remain competitiveand the Group continues to address these by rigorous management controls,adapting new technologies and adjusting product mix. "We are confident that the Group's underlying performance and recovery trendwill continue, although, as indicated in our market update issued on 16 December2004, this recovery may take longer than was initially anticipated." Chairman's Statement Pace's results for the twenty seven weeks ending 4 December 2004 show furtherrecovery in Group performance and the Board is pleased to report that revenues,volumes and profit were all significantly ahead of last year. Group strategycontinues to be focussed on growing market share while addressing thecompetitive challenges of the current market place. We aim to improve netmargins by sustaining a rigorous approach to the management of all businesscosts and by seeking additional, more consistent, revenue streams. Results Profit before tax improved to £3.1m (26 weeks to 29 November 2003: £0.8m) onturnover of £150.5m (2003: £110.4m). Basic and diluted earnings per share were3.6p (2003: 0.6p). After eliminating the impact of a one off taxation credittaken in the period, the basic and diluted earnings per share were 1.4p (2003:0.6p). An interim dividend is not declared (2003:nil), although it is the Board'sintention to review its dividend policy at the time of the Group's results forthe full year. Trading review During the period the volume of Pace shipments doubled to 2.1 million set-topboxes, a new record for the Group (2003: 1.0m), as it took advantage ofincreased demand for set-top box products from payTV operators. This growth,which has resulted in a 36% increase in turnover, has been driven, in part, byan ongoing decline in average selling prices (ASPs). As a result of the lowerpricing and a greater proportion of lower-cost, lower-margin set-top boxes beingshipped, gross margin declined to 16.8% (2003: 19.1%). We have continued to establish a wider geographic spread for the Group'sbusiness with sales to non-UK customers making up 61% of our total revenues(2003: 47%). In the period Pace has shipped products to over 25 customers, withpayTV operators in Continental Europe and Asia Pacific playing an importantrole. Sky Italia was a particularly important customer in the period, for whichwe began shipments of our second-generation product. In Germany and Scandinavia more set-top boxes were shipped to some of our mostrecent new customers, Premiere and KDG in Germany and Viasat in Scandinavia. Atthe same time we announced an important new contract with Premiere for PVR,which we expect to deliver during 2005. In the UK, a more mature market fordigital TV, BSkyB remains an important customer as its Sky+ service continues toexpand. We also shipped product to our cable customers Ntl and Telewest. In Australia, we built on our successful relationship with Foxtel, providing itsstandard digital set-top box and we are working with them on its first PVRplatform, due in 2005. Outside of Australia, the Asia Pacific market remainsrelatively small and highly competitive, but we are actively addressing themarket place. In the US we have increased our penetration with the cable operators. We arecurrently shipping our high definition set-top box, with our high definition PVRnow in the final stages of development. In profit terms, our business is stillnot at breakeven but we aim to improve this position in the second half. We are increasing our use of outsource partners. Pace now has over 75 softwareengineers at Tata Elxsi in Bangalore, India and we are developing newrelationships with Far Eastern hardware engineering houses. Net operating expenses increased by 9.5% to £22.4m (2003: £20.4m), but as apercentage of revenue fell to 14.9% (2003: 18.5%). Engineering costs increasedto £11.8m (2003: £10.8m). Non-engineering overheads increased to £10.6m (2003:£9.6m) to support the growth in worldwide activity. Net assets improved to £57.8m (29 May 2004 as restated: £49.5m). Net currentassets rose to £57.4m (29 May 2004: £54.1m). Within net current assets, debtorsincreased to £71.8m (29 May 2004: £64.7m), creditors increased to £43.7m (29 May2004: £41.4m) and stocks increased to £17.6m (29 May 2004: £10.0m). The debtorsbalances included insured balances of £36.2m (29 May 2004: £38.5m). Net cashbalances at the year-end were £11.4m (29 May 2004: £20.4m), mainly due to higherlevels of finished stocks for delivery over the next few months. Included within the tax charge is a credit of £4.9m relating to the agreementwith the Inland Revenue in the UK of a disputed balance in respect of a prioryear, the cash effect of which was received in the year ended 31 May 2003. As previously announced, the Company is a party to a reference to the FinancialServices and Markets Tribunal. The Company is unfortunately prohibited underthe Financial Services and Markets Act 2000 from providing any furtherinformation regarding this reference until the matter is resolved. Future technologies The demand for more sophisticated set-top box products is growing and Pace iswell positioned to lead in this field, providing innovation with, for example,our new advanced codec high definition PVR products and our mobile PVR product,PVR2GO, designed for payTV customers, as well as products for multiroom viewing. The demand for PVR and high definition set-top boxes is growing and Pace isexploiting this positive trend on two fronts. Firstly by developingrelationships with existing customers and working with them as they grow theirservice offerings to include more profitable PVR and high definition products.Secondly by applying our technological expertise in new markets through ourknowledge of home networking and our ability to create platforms with thecapability to deliver interactive services over broadband networks. Theseprovide opportunities in the potential market for the Intelligent Home, where wecan apply Pace's engineering and product delivery skills to develop additionalbusiness streams and applications that can gain us access to a wider customerbase. In addition we are active in broadband video, the delivery of digital televisionover telephone lines, and have worked on some of the world's most successfullive deployments. With more large-scale telecommunications companies nowlooking at broadband video we have increased our activity in this arena. Board changes Two Board members retired during the period. David Hood, one of Pace's foundersand a non-executive director for the last six years, retired at the AnnualGeneral Meeting on 8 September 2004. Marvin Jones, a non-executive director forthe past four and a half years, retired from the Board at the end of December2004. The Board would like to extend their thanks to both David and Marvin for theimportant contribution they have made to the development of Pace's business.The Nominations Committee of the Board is presently interviewing candidates asadditional non-executive directors. Outlook The expected timescale of Pace's recovery has extended since the update at ourlast Annual General Meeting and, as indicated in our market update issued on 16December 2004, revenues in the second half are expected to be lower than in thefirst half. However, we do expect higher margins in the second half. Pace is a major player in the UK market, where the penetration of digital payTVis continuing to grow, albeit at a slowing rate as the market matures. In thelonger term, Continental Europe and Asia Pacific represent big opportunities forgrowth, as more payTV operators go digital and others progress to higherspecification PVR and high definition TV platforms. However, short-term revenuesare likely to reduce as shipments to both Italy and Germany slow down followingcustomers' high volume launch phases. Our expectations for the US market contain certain engineering design revenues,including a material amount relating to a re-negotiation of existing commitmentswith Comcast. Subject to a positive outcome, we expect our revenues and marketshare in the US to increase in the second half. We are pursuing a number of new business opportunities throughout the world, butit is too early to predict how and when these opportunities will be translatedinto business wins. The Board remains confident that Pace is well positioned inthis highly competitive market. Sir Michael BettChairman10 January 2005 CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE 27 WEEKS ENDED 4 DECEMBER 2004 Note 27 weeks ended 26 weeks ended 52 weeks ended 4 Dec 2004 29 Nov 2003 29 May 2004 (unaudited) (unaudited) (audited) £000 £000 £000 Turnover 2 150,547 110,412 239,949 Cost of sales (125,227) (89,314) (194,425) _____________ _____________ _____________Gross profit 25,320 21,098 45,524 Net operating expenses:Before exceptional item (22,368) (20,433) (40,350)Exceptional item 3 - - (1,500) _____________ _____________ _____________Operating profit 2,952 665 3,674 Net interest receivable 119 109 206 _____________ _____________ _____________Profit on ordinary activities before taxation 3,071 774 3,880 Tax credit on profit on ordinary activities 4 4,896 486 4,186 _____________ _____________ _____________Retained profit for the financial period 7,967 1,260 8,066 _____________ _____________ _____________ Basic earnings per ordinary share 5 3.6p 0.6p 3.7p Diluted earnings per ordinary share 5 3.6p 0.6p 3.6p Adjusted basic earnings per ordinary share 5 1.4p 0.6p 3.7p Adjusted diluted earnings per ordinary share 5 1.4p 0.6p 3.6p The results from the current period derive from continuing operations. CONSOLIDATED BALANCE SHEETAT 4 DECEMBER 2004 4 Dec 2004 29 Nov 2003 29 May 2004 Note (unaudited) (unaudited) (audited) As restated As restated (note 8) (note 8) £000 £000 £000 Fixed assetsIntangible 9,155 9,661 9,436Tangible 6,618 8,747 7,010Investments 200 - - ____________ ____________ ____________ 15,973 18,408 16,446 ____________ ____________ ____________Current assetsStocks 17,611 14,325 10,006Debtors 6 71,826 56,153 64,724- due within one year 67,868 50,997 60,912- due after more than one year 3,958 5,156 3,812Cash at bank and in hand 11,688 14,154 20,705 ____________ ____________ ____________ 101,125 84,632 95,435 Creditors: amounts falling due within one year (43,720) (34,109) (41,378) ____________ ____________ ____________Net current assets 57,405 50,523 54,057 ____________ ____________ ____________Total assets less current liabilities 73,378 68,931 70,503 Creditors: amounts falling due after more thanone year (242) (257) (246) Provisions for liabilities and charges 7 (15,362) (26,029) (20,748) ____________ ____________ ____________Net assets 57,774 42,645 49,509 ____________ ____________ ____________ Capital and reservesCalled up equity share capital 11,347 11,316 11,339Share premium account 35,671 35,434 35,647Profit and loss account 10,756 (4,105) 2,523 ____________ ____________ ____________Total shareholders' funds 57,774 42,645 49,509 ____________ ____________ ____________ CONSOLIDATED CASH FLOW STATEMENTFOR THE 27 WEEKS ENDED 4 DECEMBER 2004 27 weeks ended 26 weeks ended 52 weeks ended 4 Dec 2004 29 Nov 2003 29 May 2004 (unaudited) (unaudited) (audited) Note £000 £000 £000 Net cash (outflow)/inflow from operatingactivities 9 (7,015) 6,470 14,165 Returns on investments and servicing of finance 52 101 136Taxation (69) 758 391Capital expenditure and financial investment (1,817) (1,477) (2,665)Acquisitions and disposals (200) (5,093) (4,936) ____________ ____________ ____________Cash (outflow)/inflow before financing (9,049) 759 7,091Financing 32 (15) 204 ____________ ____________ ____________(Decrease)/increase in cash in the period (9,017) 744 7,295 ____________ ____________ ____________ Reconciliation of net cash flow to movement in net funds(Decrease)/increase in cash in the period (9,017) 744 7,295Cash flow from decrease in debt 5 26 34 ____________ ____________ ____________Movement in net funds in the period (9,012) 770 7,329Net funds at start of period 20,406 13,077 13,077 ____________ ____________ ____________Net funds at end of period 11,394 13,847 20,406 ____________ ____________ ____________ ANALYSIS OF CHANGES IN NET FUNDS At 29 May 2004 Cashflow At 4 Dec 2004 £000 £000 £000 Cash at bank and in hand 20,705 (9,017) 11,688Debt due within one year (53) 1 (52)Debt due after one year (246) 4 (242) ____________ ____________ ____________ 20,406 (9,012) 11,394 ____________ ____________ ____________ NOTES 1 Basis of preparation The interim financial information for the 27-week period ended 4 December 2004 has not been audited, nor has the interim financial information for the 26-week period ended 29 November 2003. They comply with relevant accounting standards and have been prepared on a consistent basis using the accounting policies set out in the 2004 Annual Report and Accounts (as referred to in note 8, an adjustment has been made to comply with UITF Abstract No 38 "Accounting For ESOP Trusts" which has been adopted in the current period). The figures for the 52-week period ended 29 May 2004 do not constitute the Group's statutory accounts for that period but have been extracted from the statutory accounts, which have been filed with the Registrar of Companies and then restated to reflect the adoption of the provisions of UITF Abstract No 38 "Accounting For ESOP Trusts". The auditors have reported on those accounts and that report was unqualified and did not contain a statement under Section 237(2) or (3) of the Companies Act 1985. The accounts for the full year will be for the 53-week period ending 4 June 2005. Financial Position and Market Conditions The performance of the Group has continued to improve in this period. Unit volumes and turnover have increased and the geographical diversity continues to widen. However, pressure on selling prices continues and the net profit margin remains low. The risks in the digital broadcasting industry involve the application of new and evolving technologies and the nature of Pace's activities, which are characterised by large individual sales orders to a limited range of customers, are unchanged. Some customers are incurring losses as they implement their business plans and others continue to review the timing and nature of their plans. These factors, particularly in the context of the level of net profitability, increase the sensitivity of the judgements required to prepare the financial statements. However, a consistent approach has been applied using all available information. The Group ended the year with net cash balances of £11.4m and has uncommitted banking facilities in an amount of £20m, which are available until 30 September 2005. The Board has built the above circumstances into their working capital forecasts and has modelled various business scenarios. Based on these, the Board has concluded it is appropriate to confirm the going concern basis of preparation for the financial information. 2 Turnover 27 weeks ended 26 weeks ended 52 weeks ended 4 Dec 2004 29 Nov 2003 29 May 2004 (unaudited) (unaudited) (audited) £000 £000 £000 The geographical analysis of turnover by destination is as follows: United Kingdom 58,043 58,191 138,275 Continental Europe 71,118 41,915 56,812 Asia Pacific 11,760 1,241 19,986 North America 9,245 6,925 22,252 Rest of the World 381 2,140 2,624 ____________ ____________ ____________ 150,547 110,412 239,949 ____________ ____________ ____________ 3 Exceptional items 27 weeks ended 26 weeks ended 52 weeks ended 4 Dec 2004 29 Nov 2003 29 May 2004 (unaudited) (unaudited) (audited) £000 £000 £000 Cost regarding reference to Financial Services and Markets Tribunal - - 1,500 ____________ ____________ ____________ - - 1,500 ____________ ____________ ____________ The Company is party to a reference to the Financial Services and Markets Tribunal and the exceptional charge made in the year ended 29 May 2004 reflects the estimated costs, including legal fees associated with this matter. Discussions continue with insurers in respect of potential recoveries of legal costs. 4 Tax credit on profit on ordinary activities 27 weeks ended 26 weeks ended 52 weeks ended 4 Dec 2004 29 Nov 2003 29 May 2004 (unaudited) (unaudited) (audited) £000 £000 £000 The tax credit is based on the estimated effective rate of taxation on trading for the period and represents: United Kingdom corporation tax at 30% - 909 8,214 Overseas tax (110) (39) 44 Adjustment in respect of a prior year (see below) 4,860 - - Deferred tax (see note 6) 146 (384) (4,072) ____________ ____________ ____________ 4,896 486 4,186 ____________ ____________ ____________ Following the agreement of an outstanding Corporation Tax matter with the Inland Revenue in the UK, a one-off tax credit has been taken in respect of a prior year. 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 219,057,810 (2003: 218,251,847). Adjusted earnings per share calculations reflect the profit after taxation excluding the impact of the one-off tax credit referred to in note 4. 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 224,548,028 (2003: 223,912,904). 6 Debtors Debtors include a deferred tax asset of £3,958,000 (2003: £7,500,000), all of which is due after more than one year (2003: £5,156,000). 7 Provisions for liabilities and charges Royalties under Corporation negotiation Onerous Tax (see below) contracts Warranties (note 4) Total £000 £000 £000 £000 £000 At 29 May 2004 7,864 1,828 5,696 5,360 20,748 Charge/(credit) for the period 597 - 3,081 (5,360) (1,682) Utilised (66) (378) (3,260) - (3,704) ____________ ____________ ____________ ____________ ____________ At 4 December 2004 8,395 1,450 5,517 - 15,362 ____________ ____________ ____________ ____________ ____________ The owners of patents covering technology allegedly used by the Group have indicated claims for royalties relating to the Group's use (including past usage) of that technology. Whilst negotiations over these liabilities continue, they are not concluded. The directors have made provision for the potential royalties payable based on the latest information available. Having taken legal advice, the Board considers that there are defences available that should mitigate the amounts being sought. The Group will vigorously negotiate or defend all claims but, in the absence of agreement, the amounts provided may prove to be different from the amounts at which the potential liabilities are finally settled. 8 Prior year adjustment At 4 December 2004 the Pace Micro Technology Employee Benefits Trust and QUEST held shares in the Company which cost £21,434,000 (2003: £21,530,000). These shares are held to satisfy options granted to employees. In line with the requirements of UITF Abstract No 38 "Accounting For ESOP Trusts", such amounts have been reclassified to show the Company's purchases of own shares as deductions from the Profit and Loss Account reserve in arriving at Shareholders' Funds. The previous treatment was to classify such amounts, net of impairment provisions, as assets in Fixed Asset Investments. The comparative figures in the financial information have been restated to reflect this change with a resulting impact on the balance sheets as follows. 29 Nov 2003 29 May 2004 £000 £000 Decrease in Investments and Net Assets (2,515) (2,436) ____________ ____________ Net decrease in Profit and Loss Account and Shareholders' Funds (2,515) (2,436) ____________ ____________ There is no impact on the Profit and Loss Account for the year ended 29 May 2004 or the 26-week period to 29 November 2003 resulting from the above restatement. 9 Net cash (outflow)/inflow from operating activities 27 weeks ended 26 weeks ended 52 weeks ended 4 Dec 2004 29 Nov 2003 29 May 2004 (unaudited) (unaudited) (audited) £000 £000 £000 Operating profit 2,952 665 3,674 Goodwill amortisation 281 282 564 Depreciation 2,198 2,681 5,317 Loss on sale of tangible fixed assets - 178 317 (Increase)/decrease in stocks (7,605) 1,642 5,961 (Increase)/decrease in debtors (6,890) 796 (11,540) Increase/(decrease) in creditors 2,075 528 10,728 Decrease in provisions for liabilities and charges (26) (302) (856) ____________ ____________ ____________ Net cash (outflow)/ inflow from operating activities (7,015) 6,470 14,165 ____________ ____________ ____________ Copies of this Interim Report will be sent shortly to shareholders and areavailable on application to the Registered Office: Pace Micro Technology plc,Victoria Road, Saltaire, Shipley, West Yorkshire, BD18 3LF. There will be an analysts' presentation on 10 January 2005 at 9.30am at CitigateDewe Rogerson's office at 26 Finsbury Square, London, EC2. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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