CML Microcircuits Regulatory News (CML)

CML Microsystems Plc

PRELIMINARY RESULTS

CML Microsystems Plc ("CML"), which designs, manufactures and markets a broad range of semiconductor products, primarily for the global communication and data storage markets, announces Preliminary Results for the year ended 31 March 2012.

Financial Highlights:

·; Group revenues up 6% to £23.41m (2011: £22.12m)

·; Gross profit up 5% to £16.21m (2011: £15.37m)

·; Profit before tax up 70% to £3.95m (2011: £2.32m)

·; Basic EPS up 18% of 21.06p (2011: 17.87p)

·; Net cash inflow £2.92m (2011: £4.41m)

·; Cash reserves of £7.74m (2011: £6.25m)

·; Net cash of £5.24m (2011: £2.33m)

·; Final dividend of 4p per ordinary share (2011: 3.5p)

Operational Highlights:

·; Storage: 46% of group revenue

- 24% growth and now represents the largest segment for the first time

- CAGR of 29% over the last four years

- Production release of the Group's first SATA interface controller

·; Wireless: 36% of group revenue

- 12% decrease due to one-off order during the second half of 2011

- CAGR of 8% over the last four years

- acquisition of low bit rate vocoder technology

- new release of QAM modem for narrowband wireless data

·; Wireline telecom: 12% of group revenue

- 6% growth due to expansion of electronic payment terminals, home care and security systems

·; Equipment: 3% of revenue

- Launch of the its first M2M wireless product

Regarding Outlook, Chris Gurry, Managing Director of CML, said:

"Our clearly stated goal is for consistent growth and current economic uncertainties have the potential to negatively affect this objective. Nevertheless, given the largely industrial and somewhat diverse market areas addressed, we are relatively well placed to achieve further progress. The Board is pleased with the operational and financial progress that had been made over the course of the year and expects further advances for the year to 31 March 2013."

Enquiries:

Chairman's statement

Introduction

I am pleased to report that the results for the year to 31 March 2012 reflect a further full year of solid growth in both sales revenues and profitability amidst the backdrop of a challenging world economic environment.

Within the November 2011 half-year statement I commented on my belief that the Group's results for the full trading year were expected to meet expectations and I am satisfied to convey that those expectations have subsequently been exceeded.

Particularly pleasing growth from the storage product area was recorded across all major market territories and an underlying positive trend within the wireless product area was evident, as highlighted in the operating and financial review that follows.

Another year of improved trading profitability permitted your management to lower Group borrowings further and additional focus on maximising the use of cash balances resulted in a significant reduction in interest charges.

Results

Group revenues for the year just ended were £23.41m (2011: £22.12m) while gross profit was £16.21m (2011: £15.37m). Profit before tax of £3.95m (2011: £2.32m) was assisted by the £328k net gain from a property transaction and revaluation of commercial development land in the USA.

The Group generated close to £3m of cash and reported an earnings per share increase of almost 19% to 20.94p diluted (2011: 17.64p).

Dividend

Since re-instating the dividend during the prior financial year, the Group has continued to enhance its trading position. The Board has considered the improvements made along with the developing prospects for the business and are recommending payment of a final dividend of 4p per ordinary share (2011: 3.5p). This represents a 14% increase and is to be paid on 3 August 2012 to all shareholders whose names appear on the register at close of business on 22 June 2012.

Property

I have previously highlighted that the Group continues to devote appropriate resources to realising capital value from its non-operational property assets and the year under review demonstrates the effects of that. Efforts continue in this regard and have the potential to contribute meaningfully to cash reserves and enhance the Group's growth objectives.

Prospects

Your Company continues to operate in a challenging global environment but, subject to unforeseen circumstances, I have confidence that the full year ahead will see your Company deliver further growth.

The Group's worldwide employee base is fundamental to the success being achieved and I cannot conclude my report to you without expressing the Board's recognition of the vital role that they play and thank them for their ongoing contribution and commitment towards its success.

GW Gurry

Chairman 11 June 2012

Operating and financial review

Overview

The year to 31 March 2012 saw the Group deliver solid further progress in pursuit of our consistent growth strategy. A steady increase in revenue levels amidst the uncertainties that affected many business areas throughout the year led to a good rise in profit from operations that was further enhanced by the sale of a non-operational property asset.

Through the period under review, we continued to leverage our proprietary technology and system-level understanding to develop and market class-leading semiconductor products to solve real world problems for our customers. Research and development (R&D) expenditure rose as a result of actions taken to ensure the timely availability of products aimed at nearer term windows of opportunity whilst we also acquired intellectual property and made use of external services to complement and enhance our own engineering activities.

The majority of our major customers increased their expenditure with the Group and satisfactory progress was made with seeding a number of new prospects that are expected to drive revenues higher over the coming years.

Financial results

Total Group revenues for the year climbed by almost 6% to £23.41m (2011: £22.12m). This increase was driven by strong growth from the storage sector resulting in it representing the largest of the three principal semiconductor markets addressed. The sales from ICs shipped into the wireless market areas were lower year on year due to one customer undertaking unusually high levels of contract-related spending during the prior year. The weakening of the US Dollar against Sterling negatively impacted the reported sales levels by approximately £400k.

Gross profit for the year amounted to £16.21m (2011: £15.37m), an increase of 5% and the overall gross margin was stable against the comparable year at 69%.

Distribution and administration costs increased to £13.05m (2011: £12.73m) due mainly to a greater proportion of R&D expenditure being written off through the income statement along with a generally higher level of staff costs. The effects of this increase were partially mitigated by lower amortisation and depreciation charges.

At the operating level, and prior to other operating income, the Group posted a £3.16m profit (2011: £2.64m) representing growth of 20%.

The Group owns a number of non-operational commercial properties that provide rental income. Lower occupancy through the year led to a reduced income level being posted, however, the effects of this were outweighed by higher EU grants being received. The net effect to other operating income was an increase of £70k to £459k (2011: £389k).

As reported at the half-year stage, the Group sold its vacant and non-operational North American commercial property asset and received close to US$700k net of costs and taxes. Additionally, the Group owns commercial land in the US which had its value reduced by £70k. The combined effect of these two events resulted in a net profit of £328k being recorded within the consolidated income statement.

The improved cash reserves of the Group enabled us to reduce finance costs by a material amount. A contributing factor was the practice of periodically offsetting loans against cash reserves leading to net finance costs (excluding pension effects) reducing to £30k against a prior year net cost of £133k.

Profit before taxation amounted to £3.95m (2011: £2.32m) representing a 70% increase on the prior year. After adjusting out the exceptional property sale and revaluation elements, profit before tax increased by 33% and totalled £3.62m (2011: £2.72m).

Net cash inflow for the year was £2.92m (2011: £4.41m) following payment of a £550k dividend (2011: £Nil) in respect of the prior financial year. Cash reserves at 31 March 2012 were £7.74m (2011: £6.25m) and bank loans and overdrafts reduced by £1.4m to £2.50m (2011: 3.92m).

Inventory levels at the year end had increased to £1.78m (2011: £1.67m) in line with the higher revenues that were recorded. Capital expenditure remained at a relatively low level of £145k (2011: £253k).

Income tax expense amounted to £633k against a prior year credit of £360k. A movement in the Group's deferred tax asset accounted for £320k of this expense.

Total research and development expenses increased to £4.59m (2011: £3.36m) and represented close to 20% of revenues. Of this total, £1.07m was written off to the consolidated income statement (2011: £574k). This higher expenditure reflected the combined effects of key intellectual property purchases and services relating to new product development programmes in both the wireless and storage market sectors.

This year there were no material adverse effects on the income statement relating to the Group's defined benefit pension scheme that has been closed to new entrants and future accruals for some years. There was however a material effect on the Group's balance sheet accounted for under IAS 19. The financial and demographic actuarial assumptions used, which are in keeping with current practices, had the effect of increasing the scheme liability to £4.54m (2011: £2.61m). In addition, the mandatory triennial actuarial valuation was conducted and the Company subsequently agreed a multi-year deficit reduction programme with the scheme trustees that is expected to eliminate the deficit over a 15 year period.

MARKETS REVIEW

Wireless

During the period, wireless product shipments accounted for close to 36% of Group sales. It is noteworthy that throughout the final six months of the comparable year we shipped a large single contract order to a long standing Far Eastern customer that was not repeated in the year under review. The underlying trend within the wireless product arena is one of steady growth and the compound annual growth rate (CAGR) for this sector over the last four years, by revenue, has been 8%.

In the two-way radio sub-market, shipments were dominated by baseband processing ICs for the major producers of analogue portable (handheld) and mobile (in car) products. The end market transition from analogue to recent new digital radio standards remained at relatively low levels although customer design activity increased as the year progressed. Global shipments of ICs into the more mature TETRA digital radio standard were robust.

Narrowband wireless data ICs were sold into a variety of standardised and proprietary customer solutions. Within China, the marine AIS safety systems market contributed significantly driven by the government's subsidisation programme.

From an engineering perspective, the investment in new developments continued to be focused on those areas that are expected to drive growth for some years to come. Key low bit rate vocoder technology was acquired during the first six months of the year and new IC releases included a QAM modem for narrowband wireless data, full production release of a direct conversion RF receiver and continued expansion of the RF building block range of products.

Storage

Revenue growth from the shipment of flash memory controller ICs dominated the year under review. Sales into this market sector grew by 24% and resulted in it representing the single largest market for the Group for the first time. A CAGR of 29% over the last four years drove storage to account for 46% of Group revenues this year.

Most major existing customers increased their spend with us and there were pleasing contributions made from a selection of new customers who were previously evaluating or qualifying their flash memory based storage products containing our semiconductors.

We achieved double digit percentage revenue growth in each of the major geographical regions addressed, namely the Americas, Europe and the Far East. This overall growth came from a combination of increased shipments and higher average selling prices from our newer controller products that by necessity are becoming increasingly complex in order to maintain the level of reliability that our customers and their respective customers demand within the industrial markets served.

Engineering activities were primarily focused on production release of the Group's first SATA interface controller. During the final quarter of the year early samples were provided to our customer base and, following a number of lengthy customer qualification activities, meaningful production shipments are expected to commence in the second half of the financial year to 31 March 2013.

Engineering resource levels continued to be expanded and, aside from entry into the SATA market, key programmes operated that should maintain the Group's leading position in the numerous industrial markets for removable media cards, solid state drives and embedded storage applications.

Wireline telecom

The sales from semiconductors into the wireline telecom sector grew by approximately 6% and represented just under 12% of total Group revenues.

Customer design-in activity with the more recent, lower cost products was healthy through the year and unit shipments grew strongly. The products were typically used to send small amounts of data across traditional analogue telephone lines and are compatible with global international communication standards. Major customers through the year produced electronic payment terminals, medical home care systems and security alarm panels.

From an engineering perspective, we focused on ensuring that the telecom product range remained price and performance competitive for the sub-markets addressed.

Equipment

Radio Data Technology (RDT), which represents the Group's equipment segment, recorded stable annual revenues of £759k (2011: £769k) making a 3% contribution to Group sales.

RDT's traditional wireless SCADA market remained quite resilient through the year although the geographical mix changed with export sales accounting for a larger proportion.

In a similar way, revenues from the sale of wireless video transmission products for use predominantly within the UK CCTV market were weighted in favour of the newer digital systems for the first time.

During the year, RDT launched its first M2M wireless product that operates using national and international GSM/GPRS networks. The combined modem and router was developed in conjunction with a lead customer and is specifically targeted at the industrial customer base for connecting remote pieces of equipment to the internet or to each other.

SUMMARY AND OUTLOOK

Important financial targets this year were to grow revenues, maintain costs and drive profitable growth. The trading performance recorded is evidence of those achievements despite the global uncertainty that existed throughout the period. The rise in net cash levels came after higher levels of R&D investment, the reinstatement of an annual dividend and a meaningful reduction in Group loans.

The underlying customer design-in activity level for the wireless product range is confirmation that our RF strategy is gaining momentum. The adoption of the Group's FirmASIC technology is increasing as customers realise the tremendous benefits of using a standard product offering that can be customised in rapid time and at reduced cost when compared to competing technologies.

The drivers within our wireless markets remain the migration from analogue voice-centric technology to the newer digital standards; the global adoption of AIS products and the trend to higher data rates within the narrowband wireless data end markets. Coupled with this, we are focused on growing the number of customers using Group products for separate baseband and RF functions which in turn increases the total silicon value within each customer end product.

The flash memory controller market is growing as solid state storage technology gathers momentum. The year under review reflects the growth achieved in shipping controllers that have either a parallel (PATA) or SD/MMC interface. We have achieved a leading position in the industrial PATA controller market and through the year ahead we expect to secure additional revenue from the new SATA products. We believe the number of design-win opportunities within the industrial SATA market to be larger than the existing markets addressed whilst the average selling price of SATA controller products is expected to be higher.

For the year ahead we intend to drive increased sales revenues through the ongoing adoption of Group semiconductor products across a growing customer base. Our priority is to focus on multi-year sustainable end market opportunities. We expect to keep engineering development activities at similar levels and to maintain our strategy to deliver innovative products that provide compelling solutions to real world customer problems.

Our clearly stated goal is for consistent growth and current economic uncertainties have the potential to negatively affect this objective. Nevertheless, given the largely industrial and somewhat diverse market areas served, we are relatively well placed to achieve further progress.

The Board is pleased with the operational and financial achievements made over the course of the year and expects further advances for the year to 31 March 2013.

C.A. Gurry

Managing Director

Consolidated income statement

Consolidated statement of comprehensive income

for the year ended 31 March 2012

Consolidated statement of financial position

for the year ended 31 March 2012

Consolidated cash flow statement

for the year ended 31 March 2012

Consolidated statement of changes in equity

for the year ended 31 March 2012

Notes to the financial statements

1. Segmental analysis

Reported segments and their results in accordance with IFRS 8, are based on internal management reporting information that is regularly reviewed by the chief operating decision maker (C. A. Gurry). The measurement policies the Group uses for segmental reporting under IFRS 8 are the same as those used in its financial statements.

Information about revenue, profit/loss, assets and liabilities

Notes to the financial statements

1. Segmental analysis

Other segmental information

Inter-segmental transfers or transactions are entered into under commercial terms and conditions appropriate to the location of the entity whilst considering that the parties are related.

Geographical information

2. Dividend paid and proposed

It is proposed to pay a dividend of 4.0p per Ordinary Share of 5p in respect of the year end 31 March 2012 (2011: 3.5p per Ordinary Share of 5p).

3. Income tax

The Directors consider that tax will be payable at varying rates according to the country of incorporation of a subsidiary and have provided on that basis.

4. Profit per ordinary share

The calculation of basic and diluted earnings per share is based on the profit attributable to ordinary shareholders, divided by the weighted average number of shares in issue during the year.

5. Investment properties

Investment properties are revalued at each discrete period end by the directors and every third year by independent Chartered Surveyors on an open market basis. No depreciation is provided on freehold investment properties or on leasehold investment properties. In accordance with IAS 40, gains and losses arising on revaluation of investment properties are shown in the income statement. At the 31 March 2012 the investment properties were professionally valued by Everett Newlyn, Chartered Surveyors and Commercial Property Consultants on an open market basis.

6. Analysis of cash flow movement in net debt

The cash flow above is a combination of the actual cash flow and the exchange movement.

7. Principal risks and uncertainties

Key risks of a financial nature

The principal risks and uncertainties facing the Group are with foreign currencies and customer dependency. With the majority of the Group's earnings being linked to the US Dollar a decline in this currency will have a direct effect on revenue, although since the majority of the cost of sales are also linked to the US Dollar, this risk is reduced at the gross profit line. Additionally, though the Group has a very diverse customer base in certain market segments, key customers can represent a significant amount of revenue. Key customer relationships are closely monitored, however changes in buying patterns of a key customer could have an adverse effect on the Group's performance.

Key risks of a non-financial nature

The Group is a small player operating in a highly competitive global market, which is undergoing continual and geographical change. The Group's ability to respond to many competitive factors including, but not limited to pricing, technological innovations, product quality, customer service, manufacturing capabilities and employment of qualified personnel will be key in the achievement of its objectives, but its ultimate success will depend on the demand for its customers' products since the Group is a component supplier.

A substantial proportion of the Group's revenue and earnings are derived from outside the UK and so the Group's ability to achieve its financial objectives could be impacted by risks and uncertainties associated with local legal requirements, the enforceability of laws and contracts, changes in the tax laws, terrorist activities, natural disasters or health epidemics.

8. Directors' statement pursuant to the disclosure and transparency rules

The directors confirm that, to the best of their knowledge:

a. the condensed consolidated financial statements, prepared in accordance with IFRS as adopted by the EU give a true and fair view of the assets, liabilities, financial position and loss of the company and the undertakings included in the consolidation taken as a whole; and

b. the Chairman's statement and operating and financial review includes 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 a description of the principal risks and uncertainties that they face.

The directors are also responsible for the maintenance and integrity of the CML Microsystems Plc website. Legislation in the UK governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions.

9. Significant accounting policies

The accounting policies used in preparation of the annual results announcement are the same accounting policies set out in the year ended 31 March 2011 financial statements.

10. General

The results for the year have been prepared using the recognition and measurement principles of international financial reporting standards as adopted by the EU.

The audited financial information for the year ended 31 March 2011 is based on the statutory accounts for the financial year ended 31 March 2011 that have been filed with the Registrar of Companies. The auditor reported on those accounts: their report was (i) unqualified, (ii) did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying the reports and (iii) did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2012 are expected to be finalised and signed following approval by the board of directors on 22 June 2012 and delivered to the Registrar of Companies following the Company's annual general meeting on 1 August 2012.

The financial information contained in this announcement does not constitute statutory accounts for the year ended 31 March 2012 or 2011 as defined by Section 434 of the Companies Act 2006.

A copy of this announcement can be viewed on the company website http://www.cmlmicroplc.com.

11. Approval

The Directors approved this annual results announcement on 11 June 2012.