Last checked at 28 Sep 2015 07:00
FILTRONIC PLC
("Filtronic", the "Company" or the "Group")
UNAUDITED PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MAY 2015
Filtronic plc, the designer and manufacturer of microwave electronics products for the wireless telecoms infrastructure market, announces its Preliminary results for the year ended 31 May 2015.
Financial Highlights
2015 | 2014 | |
Sales Revenue | £17.5m | £32.9m |
Operating loss before amortisation and exceptional items | (£8.1m) | £(0.4m) |
Loss before taxation | (£11.0m) | £(3.7m) |
Basic and diluted loss per share | (10.68p) | (2.90p) |
Net cash balance as at 31 May | £0.8m | £2.5m |
Cash (out) / in flow from operating activities | (£3.7m) | £1.6m |
Operational Highlights
· Successfully completed prototype development of Ultra-Wide Band Integrated Antenna for major OEM. Post year end received production tooling orders;
· Orpheus, our latest generation E-band transceiver launched and has achieved class leading performance of >4Gbps at 256 QAM. Production orders received for FY16;
· Broadband has been selected by a new customer to supply SiGe E-band modules for delivery in Q4 2015; and
· Business structure simplified to give clearer responsibilities and accountability. Annualised overhead cost savings of £2 million achieved.
Commenting on the outlook, Howard Ford, Chairman, said:
"The general market outlook remains positive with demand for infrastructure products being driven by increasing consumption of data-heavy apps on mobile devices.
"The key product development for Wireless has been a range of Integrated, Ultra-Wide Band Antennas which have been developed in association with a major OEM and are being trialled by a number of operators. Production tooling has been committed for these products and we expect production orders to commence when the tooling has been completed."
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About Filtronic plc:
The Wireless business develops and markets innovative customised filters, combiners, and microwave subsystems which enable operators to use their existing network infrastructure to overlay 3G and 4G (LTE) services, as well as providing OEM customers with next generation filter solutions for 4G (LTE) base station units.
The Broadband business designs and manufactures customised microwave electronic sub assembly components that are integrated by OEM's into radios for telecom network backhaul links and by a leading radar manufacturer into its aerospace products.
Chairman's letter
The year ended 31 May 2015 was a challenging and difficult year for Filtronic. We continued to work hard to bring a number of new and exciting product developments to completion, but demand from our original equipment manufacturer ("OEM") customers fell short of our expectations. We also encountered delays in product developments, due to some significant technical challenges associated with the complex nature of a number of the programmes undertaken and this exacerbated the shortfall in revenue.
In early March 2015, we fully recognised the scale of these issues and implemented management changes and appropriate cost reductions. Clear accountability was reinforced throughout the organisation and we have now overcome the technical issues related to key development programmes.
Sales revenue reduced to £17.5m in the year (2014: £32.9m) and an operating loss before exceptional items and amortisation of goodwill of £8.1m (2014: loss of £0.4m) was incurred.
Net cash and bank balances as at 31 May 2015 were £0.8m (2014: £2.5m) reflecting the proceeds from the share placing made in December 2014 of £2.0m net of expenses, greater efficiency in managing our working capital and the benefits achieved in reducing costs from March 2015 onwards.
Wireless business
Sales in the year from our Wireless business were £10.3m (2014: £23.2m). In part the reduction reflected the conclusion of the large contract for TV interference mitigation filters in 2014 but also reflected delays in sales from new product introductions. Wireless made an operating loss before exceptional items and amortisation of £5.7m (2014: £2.6m profit).
A simplification of the Wireless business was implemented in March and costs were cut by reducing headcount in the UK and closing our offices in California. In our Leeds facility we reduced research and development activity that was not customer-funded and consolidated our new product introduction activities. The costs of these changes were mitigated by selling excess assets in the U.S.
Broadband business
Sales in our Broadband business fell to £7.2m (2014: £9.7m) but due to tighter cost control, improved product mix and better production yields a reduced operating loss before amortisation and exceptional items was incurred of £1.6m (2014: £2.3m loss).
Placing and transfer to the AIM Market
On 27 August we announced our intention to move to the AIM market and announced the placing of 90,000,000 new shares in the Company, contingent on shareholder approval. This will provide an additional £4.5 million of funding (before expenses) that will enable the business to execute on its commercialisation plans.
Changes to the board
Alan Needle resigned as CEO on 3 March 2015. Rob Smith, who was appointed as CFO on 16 June 2014, assumed the role of CEO on Alan's departure. Both Graham Meek and I have indicated our intention not to stand for re-election at this year's AGM.
Outlook
The general market outlook remains positive with demand for infrastructure products being driven by increasing consumption of data-heavy apps on mobile devices.
The key product development for Wireless has been a range of Integrated, Ultra-Wide Band Antennas which have been developed in association with a major OEM and are being trialled by a number of operators. Production tooling has been committed for these products and we expect production orders to commence when the tooling has been completed.
Broadband's latest generation E-band transceiver, Orpheus, has been well received and the production ramp will commence in the final quarter of calendar year 2015. We have also won orders for adjacent market applications and our opportunity pipeline has been growing steadily.
Whilst the underlying market growth potential is substantial, it remains a very competitive market and we have made significant adjustments to our business model to ensure we meet these competitive challenges
I would like to thank the board of directors, employees, shareholders, advisors and our bankers who have given their support to the Company and worked tirelessly to put the business on the road to recovery and I look forward to the management team delivering the success that we have all worked for.
Howard Ford
Chairman
Chief executive's statement
Summary
As outlined in the Chairman's letter, FY2015 was a disappointing and unsatisfactory year for Filtronic with a number of commercial and technical setbacks combining to result in a significant consolidated operating loss before amortisation and exceptional items of £8.1 million (FY2014: £0.4million).
Once the scale of the issues became apparent it was imperative that actions be taken to turn around the Group's performance and stem both the operating losses and the consumption of cash. A number of initiatives commenced in early March and have continued since. These have included:
· reducing our overhead cost base;
· simplifying our organisational structure;
· improving our sales and marketing activities;
· resolving key technical issues; and
· strengthening our balance sheet.
A good start has been made on all the turnaround actions. The proposed placing and move to AIM announced on 27 August 2015 and new U.S. sales invoice financing facility announced on 14 September 2015 mean that we can concentrate on taking the actions that are required to improve our operational performance. As we move forward, we will continue to refine our strategy, look for further efficiency in how we develop and deliver products as well as being more effective in our customer engagement. Filtronic has a tremendous legacy of engineering excellence and has superb manufacturing knowhow and resources. Whilst retaining our technical leadership we are taking actions to invest in our selling and marketing capabilities and channels to market to ensure that we achieve better results.
Mobile Telecommunications Infrastructure Market
The mobile telecommunications infrastructure market continues to evolve. The take up and deployment of 4G / LTE has spurred dramatic increases in data traffic with video apps such as YouTube, NetFlix and Periscope setting the pace and requiring operators to ensure sufficient, contiguous capacity is available to users. Operator pricing plans have evolved so that call and text traffic is typically unmetered and data consumption is increasingly becoming the priced element of operators' offering to consumers.
The increased data traffic and the need for seamless 4G / LTE coverage is requiring operators to make sustained investments into infrastructure capacity. This investment presents opportunities to Filtronic for both our Wireless and Broadband Businesses and we continue to develop our capabilities and offerings for this market.
Filtronic Wireless
Filtronic Wireless has followed a strategy of gaining design wins from major mobile telecommunications infrastructure industry OEMs and engaged in a number of customer specific development programmes during the year. These have required a significant investment in engineering during the period. Due to longer than anticipated development lead times and lower customer demand associated with these projects, the business achieved reduced revenue of £10.3 million (FY2014: £23.2 million). A number of these programmes are now due to enter production during FY2016.
One notable trend in the wireless infrastructure has been the increasing integration of the various sub-systems in the RF to save weight, reduce signal losses, lower overall capital cost and decrease operating expenditure. In order to address this market trend, in 2013 Filtronic acquired an antenna capability in Sweden. This has enabled us to develop a range of ultra-wide band antennas that integrate our existing filter, combiner, software and electronics technologies with our newly developed radiating elements and phase shifters. Key elements of these developments are subject to patent applications. These advanced and novel antennas enable our OEM customers to offer operators integrated radios and RF management in a single solution. This development has been a major focus for the Wireless business and we are currently moving this product range into a production ready status.
It is our firm belief that the industry will adopt integrated antennas over the coming years as the compelling operational benefits become increasingly apparent to operators.
Filtronic Broadband
Filtronic Broadband has concentrated on developing and supplying carrier grade, E-band transceiver modules, for the mobile telecommunications backhaul market. The E-band spectrum offers the market increased capacity and is being licenced for use in a number of important markets. The take up of E-band has been slower than industry analysts had originally predicted and together with commercial challenges affecting our customers who have been supplying the Russian market, we saw a reduction in sales in FY2015 to £7.2 million (FY2014: £9.7 million). However, due to improved margins, better production yields and cost controls we were able to reduce the operating loss before intangibles and exceptional items to £1.6 million (FY2014: £2.3 million).
A concentrated effort has been made to improve the specification of our E-band modules and to reduce the cost of the product. In our latest generation offering, Orpheus, we have met these objectives. Orpheus has demonstrated class leading performance, delivering >4 Gbps at 256 QAM and giving our customers a measurable advantage over their competition. Orpheus is now ramping to volume production and our lead customer is forecasting improved demand as E-band becomes more widely adopted throughout the industry. In addition to our own E-band product, we have won orders to supply E-band products based on an alternate technology and this allows us to bring our knowhow of high frequency module manufacture and test to a wider customer base.
During the year we have increased our engagement with the wider market for high frequency transceivers and along with Selex we have now won a contract to supply modules for a satellite communications project and have an exciting pipeline of opportunities that we are working hard to convert.
Adjacent Market Opportunities
Whilst Filtronic has concentrated on the mobile telecommunications infrastructure market over the recent past it has become increasingly apparent that we need to develop complementary markets. Filtronic Broadband has successfully worked with Selex over a number of years and Filtronic has historically been a major player in providing filtering technology to the defence and aerospace markets.
As we move forward we will engage more actively with these markets that generally present better margins and higher added value, though not offering the same potential unit volumes as the telecommunications market.
Moving Forward
Filtronic is embarking on a programme of change to improve our commercial and financial performance. While it will be a tough few years of transition, this process is necessary to enable Filtronic to become the successful, profitable and growing company that it aspires to be.
We have invested heavily in product development over the recent past and our focus now is to ensure that we commercialise these developments. We are building sales channels and will invest in our sales and marketing assets to ensure that we capitalise on our technology leadership.
The mobile telecommunications infrastructure market continues to show strong growth and our E-band transceivers and ultra-wide band integrated antennas will be our leading products in these markets in the next few years. We are starting to gain traction in adjacent markets and specifically see good opportunities in aerospace and defence markets where there is continuing strong demand for high specification filters and transceiver products.
Longer term, cloud RAN and 5G deployment will generate further requirements for increasingly complex and technically advanced infrastructure equipment and further increases in data traffic. Filtronic's product road map envisages further development of antennas and E-band products so that we position ourselves to be an increasingly key supplier in our chosen market space.
Rob Smith
Chief Executive Officer
Financial review
Financial results
Sales revenue in the year ended 31 May 2015 was £17.5m (2014: £32.9m) and operating loss before interest, intangible amortisation and exceptional items was £8.1m (2014: £0.4m loss). The Group net loss before taxation for the year was £11.0m (2014: £3.7m loss). Amortisation of intangible assets arising from the acquisition of Isotek (Holdings) Limited charged in the year was £2.4m (2014: £2.4m). Exceptional costs, primarily relating to the costs associated with reducing the overhead cost base, of £0.5m (2014: £0.8m) were recognised in the year.
Key performance indicators (KPIs)
The directors set budgets for the year which are reviewed against the management accounts on a monthly basis. In addition to these results the directors review a number of KPIs to assess the performance of the Group and assist in decision making. Historically, revenue and operating results by segment (note 4) have been the main KPIs used by the Group. In line with industry practice, a more comprehensive set of financial KPIs has been introduced to monitor business performance.
Taxation
A tax credit of £0.5m (2014: £0.9m) has been recognised for the year, see note 12, to the financial statements.
Funding and cash flow
The Group ended the year with net cash of £0.8m (2014: £2.5m), the decrease in net cash resulted from the operating losses in the year which were offset by an unwinding of working capital and the raising of £2m through a share placing. Cash (out)/in flow from operating activities was (£3.7m) (2014: £1.6m).
On 3 December 2014 the Company successfully completed a share placing of £2m net of issue costs.
Filtronic has an invoice discounting facility with Barclays Bank plc of £2.0m. As at 31 May 2015 £0.3m was drawn down against this facility (2014: £nil).
The Company announced on 14 September 2015 that it had entered into an agreement in the US for a sales invoice finance facility with FGI Finance of $3.5m.
At the end of August 2015, it was announced that the Company is proposing to move to the AIM market where it will raise £4.5m through a share placing of 90,000,000 new shares, subject to shareholder approval. The shares will be issued at a discounted price of 5.0p per share with funds used to strengthen the balance sheet and commercialise the suite of products it has invested heavily in over the recent past. AIM is a more appropriate market for a company of Filtronic's size which should help attract new investors, providing a platform to promote the Company and trading in its shares. It also offers greater flexibility with regard to potential future corporate transactions enabling the Company to agree and execute certain transactions quicker and more cost effectively than on the Official List. There will also be an opportunity for existing shareholders to participate in the fund raising at the discounted price of 5.0p per share with the Company intending to launch an open offer of up to 20,000,000 new shares to raise up to a further £1m, once it has completed its move to AIM. In order to execute this, the Company will need to complete a capital reorganisation by reducing the nominal value attached to existing shares in a way that does not affect their economic value and adopt new articles of association.
Inventory Provision
Inventory is valued at the lower of cost or net realisable value. It is the Group's policy to regularly review the carrying value of its inventories and to make a provision for excess and obsolete inventory. As at 31 May 2015 the inventory provision was £1.6m (2014: £1.6m).
Warranty provision
In line with industry practice the Group provides warranties to customers over the quality and performance of products it sells. The Group's policy is to make a provision, calculated as a percentage of sales revenue, after reviewing costs associated with faulty products returned.
Capital expenditure
Capital expenditure of £0.2m (2014: £1.1m) included £0.2m for the Wireless business and £nil in Broadband.
Research and development costs
Research and development costs in the year were £6.5m (2014: £6.4m). In line with the requirements of IFRS, the Group's policy is to capitalise development expenditure as intangible assets when all the qualifying criteria set out in note 2 to the financial statements have been met. After considering the criteria no research and development costs were capitalised in the balance sheet in the year (2014: £nil).
Working capital
At 31 May 2015 net working capital was £4.0m (2014: £8.0m). Net working capital comprised inventories of £1.6m (2014: £3.9m), receivables of £7.9m (2014: £9.9m) and payables of £6.6m (2014: £7.4m).
Rob Smith
Chief Financial Officer
The Board
The directors that served during the year ended 31 May 2015 and their respective roles are set out below:
Rob Smith (Chief Executive Officer and Chief Financial Officer) (Appointed 16 June 2014)
Howard Ford (Chairman)
Graham Meek (Non-executive Director)
Reginald Gott (Non-executive Director)
Michael Roller (Non-executive Director)
Alan Needle (Resigned 3 March 2015)
Responsibility Statement of the Directors
This statement is given pursuant to rule 4 of the Disclosure and Transparency Rules. The directors whose names appear above confirm that to the best of their knowledge:
· The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole: and
· The chairman's letter, Chief executive officers statement and financial review which form part of the strategic report, include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with the description of the principal risks and uncertainties that they face.
Consolidated Income Statement
for the year ended 31 May 2015
2015 | 2014 | ||
note | £000 | £000 | |
Revenue | 17,524 | 39,900 | |
====== | ====== | ||
Operating loss before amortisation and exceptional items | (8,136) | (442) | |
Amortisation of intangibles | (2,418) | (2,419) | |
Exceptional items | 6 | (491) | (825) |
---------- | ---------- | ||
Operating loss | (11,045) | (3,686) | |
Finance income | - | 13 | |
---------- | ---------- | ||
Loss before taxation | (11,045) | (3,673) | |
Taxation | 537 | 858 | |
---------- | ---------- | ||
Loss for the period | (10,508) | (2,815) | |
====== | ====== | ||
---------- | ---------- | ||
Basic and Diluted loss per share | 7 | (10.68p) | (2.90p) |
====== | ====== | ||
The loss for the period is attributable to the equity shareholders of the parent company Filtronic plc.
The above results are all as a result of continuing operations.
Consolidated Statement of Comprehensive Income
for the year ended 31 May 2015
2015 | 2014 | |
£000 | £000 | |
Loss for the period | (10,508) | (2,815) |
---------- | ---------- | |
Currency translation movement arising on consolidation | 236 | (474) |
---------- | ---------- | |
Total comprehensive income for the period | (10,272) | (3,289) |
====== | ====== |
The total comprehensive income for the period is attributable to the equity shareholders of the parent company Filtronic plc.
Consolidated Balance Sheet
at 31 May 2015
2015 | 2014 | ||
note | £000 | £000 | |
Non-current assets | |||
Goodwill and other intangibles | 9 | 3,377 | 5,653 |
Property, plant and equipment | 1,796 | 2,865 | |
Deferred tax | 10 | - | 485 |
---------- | ---------- | ||
5,173 | 9,003 | ||
---------- | ---------- | ||
Current assets | |||
Inventories | 1,646 | 3,933 | |
Trade and other receivables | 7,906 | 9,941 | |
Cash and cash equivalents | 1,087 | 2,531 | |
---------- | ---------- | ||
10,639 | 16,405 | ||
---------- | ---------- | ||
---------- | ---------- | ||
Total assets | 15,812 | 25,408 | |
---------- | ---------- | ||
Current liabilities | |||
Trade and other payables | 6,577 | 7,447 | |
Provision | 11 | 111 | 333 |
Deferred income | 21 | 169 | |
Interest bearing borrowings | 15 | 320 | - |
---------- | ---------- | ||
7,029 | 7,949 | ||
---------- | ---------- | ||
Non-current liabilities | |||
Deferred Tax | 10 | - | 485 |
Deferred income | 54 | 75 | |
---------- | ---------- | ||
54 | 560 | ||
---------- | ---------- | ||
---------- | ---------- | ||
Total liabilities | 7,083 | 8,509 | |
---------- | ---------- | ||
---------- | ---------- | ||
Net assets | 8,729 | 16,899 | |
---------- | ---------- | ||
Equity | |||
Share capital | 12 | 10,688 | 9,716 |
Share Premium | 13 | 6,199 | 5,145 |
Translation Reserve | (200) | (436) | |
Retained earnings | (7,958) | 2,474 | |
---------- | ---------- | ||
Total equity | 8,729 | 16,899 | |
====== | ====== | ||
The total equity is attributable to the equity shareholders of the parent company Filtronic plc.
Company number 2891064
Rob Smith
Chief Executive Officer
Consolidated Statement of Changes in Equity
for the year ended 31 May 2015
2015 | 2014
| ||
£000 | £000 | ||
Opening total equity | 16,899 | 20,198 | |
Total comprehensive income for the period | (10,272) | (3,289) | |
New shares issued (net of issue costs) | 2,026 | 50 | |
Share-based payments | 76 | (60) | |
---------- | ---------- | ||
Closing total equity | 8,729 | 16,899 | |
====== | ====== | ||
Consolidated Cash Flow Statement
for the year ended 31 May 2015
2015 | 2014 | ||
£000 | £000 | ||
Cash flows from operating activities | |||
Loss for the period | (10,508) | (2,815) | |
Taxation | 537 | (858) | |
Finance income | - | (13) | |
---------- | ---------- | ||
Operating loss | (11,045) | (3,686) | |
Share-based payments | 76 | (60) | |
Loss on disposal of plant and equipment | 50 | 27 | |
Depreciation | 1,045 | 1,083 | |
Amortisation of intangibles | 2,436 | 2,419 | |
Movement in inventories | 2,375 | 1,315 | |
Movement in trade and other receivables | 2,930 | 6,950 | |
Movement in trade and other payables | (1,094) | (6,048) | |
Movement in provision | (222) | (272) | |
Change in deferred income including government grants | (169) | (81) | |
Tax paid | (62) | (32) | |
---------- | ---------- | ||
Net cash (used in)/from operating activities | (3,680) | 1,615 | |
---------- | ---------- | ||
Consolidated Cash Flow Statement
for the year ended 31 May 2015
2015 | 2014 | ||
£000 | £000 | ||
Net cash (used in)/from operating activities | (3,680) | 1,615 | |
---------- | ---------- | ||
Cash flows from investing activities | |||
Interest received | - | 13 | |
Acquisition of Intangible Assets | (160) | - | |
Acquisition of plant and equipment | (201) | (1,058) | |
Proceeds on sale of assets | 219 | 32 | |
---------- | ---------- | ||
Net cash used in investing activities | (142) | (1,013) | |
---------- | ---------- | ||
Cash flows from financing activities | |||
Proceeds from exercise of share options | - | 50 | |
Proceeds from new shares issued (Net of issue costs) | 2,026 | - | |
Movement in interest bearing borrowings | 320 | (496) | |
---------- | ---------- | ||
Net cash from/(used in) financing activities | 2,346 | (446) | |
---------- | ---------- | ||
Movement in cash and cash equivalents | (1,476) | 156 | |
Currency exchange movement | 32 | - | |
Opening cash and cash equivalents | 2,531 | 2,375 | |
---------- | ---------- | ||
Closing cash and cash equivalents | 1,087 | 2,531 | |
====== | ====== | ||
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
1 Basis of Preparation
These preliminary results have been prepared on the basis of the accounting policies which are to be set out in Filtronic plc's annual report and financial statements for the year ended 31 May 2015.
(a) A number of new standards, amendments to standards and interpretations are effective for the year ended 31 May 2015. These are either not relevant or have no material impact on the Group.
(b) There are also a number of new standards, amendments to standards and interpretations that are effective for financial statements after this reporting period, but the Group has not adopted them early except for the adoption of some disclosures which have been applied. None of these is expected to have a material impact on the results or financial position of the Group.
EU Law (IAS Regulation EC1606/2002) requires that the consolidated financial statements of the Group for the year ended 31 May 2015 be prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted for use in the EU ('adopted IFRSs'). Whilst the information included in this preliminary announcement has been computed in accordance with adopted IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements in September 2015.
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 May 2015 or 31 May 2014. The financial information for 2014 is derived from the statutory accounts for 2014 which have been delivered to the registrar of companies.
The statutory accounts for 2015 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the registrar of companies in due course.
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
2 Accounting Estimates and Judgements
The preparation of the financial statements requires the use of accounting estimates and judgements, that affect the application of accounting policies and reported amount of assets and liabilities, income and expenses. The accounting estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of the future, that are believed to be reasonable under the circumstances. Actual results may differ from the expected results.
The accounting estimates and judgements that have a significant effect on the financial statements are considered below.
Goodwill and other intangibles impairment
Goodwill and other intangibles are tested for impairment by reference to the expected cash generated by the business unit. This is deemed to be the best approximation of value, but is subject to the same uncertainties as the cash flow forecast being used.
Inventory
Inventories are stated at the lower of cost and net realisable value. The assessment of net realisable value of inventory requires forecasts of the future demand and selling prices of the inventory.
Debtors
In line with industry practice Filtronic extends credit terms to its customers. Due to the concentration of debtors the effect of any one debtor defaulting would be material on the Group's financial statements.
Deferred tax asset
The recognition of the deferred tax assets relating to tax losses carried forward depends on the forecasts of the future taxable profits of the Company and its subsidiaries. These forecasts require the use of estimates and judgements about the future performance of the Company and its subsidiaries.
Warranty provision
Warranties are given to customers on products sold to them. A warranty provision is recognised when products are sold. The provision is based on historical warranty data. Actual warranty costs in the future may differ from the estimates based on historical performance. The level of warranty provision required is reviewed on a product by product basis and adjusted accordingly in light of actual experience.
Capitalisation of development costs
Development costs incurred on projects requiring product qualification tests to satisfy customer specifications are generally expensed as incurred, reflecting the technical risks associated with resultant product qualification test.
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
Other certain research and development costs are likely to meet the definition of enhancement type costs, as they do not substantially improve the product, and therefore do not meet the definition of development costs to be capitalised.
The process is to be continually reviewed to ascertain whether any development costs meet the criteria for capitalisation. This requires various judgements by management as to whether the various criteria have been met.
3 Risks and Uncertainties
Effective risk management is key to our success against the characteristics both of the industry that we operate in and within our chosen business model. Filtronic supplies microwave, base station filter products and antennas for the wireless telecommunications market. The Group operates in a fast-changing sector with a small number of sophisticated customers, demanding performance standards and international competition, all of which pose risks to the business.
The directors recognise that risk is inherent in any business and seek to manage risk in a controlled manner. The key business risks are set out as follows: -
Risk | Nature | Mitigation | Change in year |
Market | We supply a range of niche products to a small number of large OEM customers for both the Broadband and Wireless businesses as well as a number of network operators in the Wireless business. The loss of any of these customers, or any material reduction in orders from any such customers, may have a material adverse effect upon Filtronic's financial condition. With the rapid evolution of product technology and other corporate decisions the size of our addressable market may be affected. We may also fail to forecast market movements correctly so missing opportunities or wrongly predicting product longevity. | The Group seeks to mitigate this risk by working closely with OEMs, on an engineer to engineer basis, to ensure that we are designed in to their products at an early stage. The Group is actively seeking to increase the number of design wins across a range of OEM products. This strategy is designed to diversify market risk. The relationship that the Group maintains with OEMs is key to ensuring that we are involved in the early stages of product design. | ↑ |
Manufacturing | In most of the products, production is demand led and customers may vary their requirements from the business at short notice, which also impacts inventory management. Customers in these businesses expect consistently high quality product and reducing prices, hence we depend on control of our operating environment, including management of security of supply in our supply chain, and the provision of correctly designed technological solutions including the achievement of target cost reduction plans. Non-performance in these areas risks a diminished market position. | The Group's internal and out sourced manufacturing processes are certified to ISO9001. Our Broadband division has relocated to a new facility. This move provided us with the opportunity to take greater control over our in house processes and where appropriate we have outsourced non-core processes to suppliers who can offer better quality and consistency of manufacturing. All our products are provided to customers after detailed qualification testing. We work closely with our customers to ensure that the test process employed ensures that the all products are supplied compliant to the customer's specification.
| ↓ |
Technology | Our product competitiveness is strongly influenced by technology choices at product concept stage and throughout execution of design to product launch. For products in the production cycle, technology insertion is often required as a means of achieving price reductions, which underpin sales. The market is time sensitive and opportunities may be lost if the technology we develop is not appropriate or ready for exploitation to match market demand, so having an adverse effect on business performance. | Our ability to remain competitive in terms of technology and product design is underpinned by retaining key staff. We work closely with our customers and suppliers to gain a thorough knowledge of the technology being developed in the market place. By staying close to the market we position ourselves to react quickly to any technology changes that develop. | ↓ |
Financial management | The Group has a specific exposure to credit risk, interest rate and exchange rate fluctuations. | The Group has established a number of policies to mitigate these risks. | ↑ |
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
3 Risks and Uncertainties (Continued)
The board has applied principle C.2 of the UK Corporate Governance Code by establishing a continuous process for identifying, evaluating, and managing the significant risks the Group faces which has operated throughout the year and up to the date of this report. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance with respect to the preparation of financial information and the safeguarding of assets and against material misstatement or loss.
In compliance with provision C.2.1 of the UK Corporate Governance Code, the board regularly reviews the effectiveness of the Group's system of internal control. The board's monitoring covers all controls, including financial, operational and compliance controls and risk management systems. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate a need for more extensive monitoring. The board has also performed a specific assessment for the purpose of this annual report. This assessment considers all significant aspects of internal control arising during the period covered by the report. The audit committee assists the board in discharging its review responsibilities.
During the course of its review of the risk management and internal control systems, the board has not identified or been advised of any failings or weaknesses which it has determined to be significant. Therefore a confirmation in respect of necessary actions has not been considered appropriate.
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
4 Segmental analysis
IFRS 8 requires consideration of the chief operating decision maker ('CODM') within the Group. In line with the Group's internal reporting framework and management structure, the key strategic and operating decisions are made by the CEO, who reviews internal monthly management reports, budget and forecast information as part of this. Accordingly the CEO is deemed to be the CODM.
Operating segments have then been identified based on the interim reporting information and management structures within the Group. The Group has four customers representing individually over 10% each in aggregate over 66% of the revenue.
The Group operates in two trading business segments:
· The design and manufacture of transceiver modules and filters for backhaul microwave linking of base stations used in wireless telecommunications networks (Broadband).
· The design of radio frequency conditioning product for base stations used in wireless telecommunications networks (Wireless)
The Group also contains a central services segment that provides support to the trading businesses.
In the table below reportable segment assets and liabilities include inter segment balances. These have been included to reflect the assets and liabilities of the segment as monies are freely moved around the Group to provide funding for working capital where required.
| |||||||||||||||
Broadband | Wireless | Central Services | Total | ||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | ||||||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||||||||
External revenue | 7,241 | 9,736 | 10,283 | 23,164 | - | - | 17,524 | 32900 | |||||||
Finance income | - | - | - | - | - | 13 | - | 13 | |||||||
Depreciation | 482 | 606 | 557 | 478 | 6 | - | 1,045 | 1,083 | |||||||
Reportable segment loss before exceptional items | (1,648) | (2,285) | (5,697) | 2,619 | (791) | (776) | (8,136) | (442) | |||||||
Reportable segment loss before income tax | (1,904) | (2,749) | (5,877) | 2,563 | (846) | (1,068) | (8,627) | (1,254) | |||||||
Reportable segment assets | 4,883 | 10,861 | 7,251 | 9,005 | 11,959 | 13,032 | 24,093 | 32,898 | |||||||
Capital expenditure | 5 | 326 | 151 | 732 | 45 | - | 201 | 1,058 | |||||||
Reportable segment liabilities | 9,877 | 14,422 | 7,381 | 3,340 | 657 | 788 | 17,915 | 18,549 | |||||||
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
4 Segmental analysis (Continued)
| 2015 | 2014 |
£000 | £000 | |
Depreciation and amortisation | ||
Reportable segment totals | 1,045 | 1,084 |
Adjustments/amortisation of intangibles | 2,436 | 2,419 |
---------- | ---------- | |
Consolidated depreciation and amortisation | 3,481 | 3,503 |
====== | ====== |
| 2015 | 2014 | |
£000 | £000 | ||
Loss before taxation | |||
Total profit for reportable segments | (8,627) | (1,267) | |
Group/unallocated | (2,418) | (2,419) | |
---------- | ---------- | ||
| Consolidated loss before taxation | (11,045) | (3,686) |
====== | ====== | ||
| 2015 | 2014 | |
£000 | £000 | ||
Assets | |||
Total assets for reportable segments | 24,093 | 32,898 | |
Inter company | (10,832) | (10,041) | |
Group/unallocated | 2551 | 2,551 | |
---------- | ---------- | ||
| Consolidated total assets | 15,812 | 25,408 |
====== | ====== | ||
| 2015 | 2014 | |
£000 | £000 | ||
Liabilities | |||
Total liabilities for reportable segments | 17,915 | 18,550 | |
Inter company | (10,832) | (10,041) | |
---------- | ---------- | ||
| Consolidated total liabilities | 7,083 | 8,509 |
====== | ====== | ||
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
5 Revenue by Destination
| 2015 | 2014 |
£000 | £000 | |
United Kingdom | 1,772 | 10,429 |
Europe | 4,412 | 4,351 |
Americas | 7,727 | 15,081 |
Rest of the World | 3,613 | 3,039 |
--------- | ---------- | |
17,524 | 32,900 | |
====== | ====== |
6 Exceptional items
Operating loss is stated after charging exceptional items as follows:
| 2015 | 2014 |
£000 | £000 | |
Director Resignation | 131 | - |
Redundancy costs | 244 | - |
Closure of Wireless California operation | 67 | |
Filtronic Broadband relocation | 98 | 463 |
Swedish entity set up costs | - | 52 |
Dilapidation of premises of discontinued operations | (75) | 310 |
Electrical damage | 26 | - |
--------- | ---------- | |
491 | 825 | |
====== | ====== |
Alan Needle, the previous Chief Executive Officer, left the company in the year. The costs relating to his departure were £131,000 including employers national insurance contributions and other costs.
The Company undertook a redundancy programme in the final quarter of the financial year in both the Broadband and Wireless business as part of cost saving measures to remove a further £2m of overhead costs. The cost of implementing these redundancies was £244,000.
Additionally, the Company closed the operations in California, which formed part of the Filtronic Wireless Inc, as part of the same cost saving programme. A payment of $215,000 was made by a third party for the assets in California but not enough to cover the full cost of closure.
The Broadband business relocated to the North East Technology Park, Sedgefield, in the previous financial year to reduce operating costs. The final set of costs related to this move have now been recognised.
A charge was made in the previous financial year for dilapidations relating to the termination of two leases related to the disposal of the Group's former UK defence Company. The costs were £75,000 lower than originally estimated.
An electrical fault at the Broadband facility damaged equipment in one of the engineering labs. The estimated cost of repair is £26,000. A claim for compensation is currently in progress.
Notes to the Preliminary Financial Information
for the year ended 31 May 2014
7 Loss per share
2015 | 2014 | ||
£000 | £000 | ||
---------- | ---------- | ||
Loss for the period | (11,045) | (2,815) | |
====== | ====== | ||
000 | 000 | ||
Basic weighted average number of shares | 103,417 | 97,078 | |
---------- | ---------- | ||
Basic and diluted loss per share | (10.68p) | (2.90p) | |
====== | ====== | ||
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
8 Taxation
The reconciliation of the effective tax rate is as follows:
2015 | 2014 | |||
£000 | £000 | |||
Loss before taxation | (11,045) | (3,673) | ||
====== | ====== | |||
2015 | 2014 | |||
£000 | £000 | |||
Loss before taxation multiplied by standard rate of corporation tax in the UK | (21%) | (2,300) | (23%) | (833) |
Disallowable item | 2% | 245 | 4% | 164 |
Income not taxable | 1% | 167 | (6%) | (205) |
Deferred tax not recognised | 16% | 1,722 | 11% | 405 |
Impact of rate change on deferred tax | 1% | 19 | (1%) | (32) |
Adjustment in respect of prior years - R&D tax credit | (6%) | (673) | (2%) | (65) |
R&D tax credit | - | - | (8%) | (276) |
FX rate change of deferred tax | - | - | 1% | 25 |
Foreign tax not at UK rate | (2%) | (203) | (1%) | (41) |
Derecognition of deferred tax asset | 4% | 485 | - | |
--------- | --------- | --------- | --------- | |
Taxation | (5%) | (537) | (23%) | (858) |
====== | ====== | ====== | ====== |
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
9 Goodwill and other intangibles
Goodwill
| Other intangibles (core technology) | Licence Agreement | Total | |
£000 | £000 | £000 | £000 | |
Cost | ||||
At 1 June 2013 and 31 May 2014 | 3,235 | 10,884 | - | 14,119 |
Additions | - | - | 160 | 160 |
====== | ====== | ====== | ====== | |
At 31 May 2015 | 3,235 | 10,884 | 160 | 14,279 |
====== | ====== | ====== | ====== | |
Amortisation | ||||
At 1 June 2013 | - | 6,047 | - | 6,047 |
Provided in year | - | 2,419 | - | 2,419 |
--------- | --------- | --------- | ||
At 31 May 2014 | - | 8,466 | - | 8,466 |
Provided in year | - | 2,418 | 18 | 2,436 |
====== | ====== | ====== | ====== | |
At 31 May 2015 | - | 10,884 | 18 | 10,902 |
====== | ====== | ====== | ====== | |
Carrying amount at 1 June 2013 | 3,235 | 4,837 | - | 8,072 |
--------- | --------- | --------- | --------- | |
Carrying amount at 31 May 2014 | 3,235 | 2,418 | - | 5,653 |
--------- | --------- | --------- | --------- | |
Carrying amount at 31 May 2015 | 3,235 | - | 142 | 3,377 |
====== | ====== | ====== | ====== |
Goodwill and other intangibles relate to the acquisition of Isotek (Holdings) Limited.
Goodwill is allocated to the Wireless cash generating unity (CGU) and this CGU represents the lowest level within the Group at which the goodwill is monitored for internal management purposes, which is not higher than the Group's operating segments as reported in note 4. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill may be impaired.
The carrying value of intangible assets and goodwill has been assessed for impairment by reference to its value in use. Value in use was determined by discounting the future cash flows generated from the continuing use of the unit. The calculation of the value in use was based on the following key assumptions:
· Budgets incorporating cash flows have been prepared to 31 May 2017 based on past experience, actual operating results, known future cash flows and estimates of future cash flows;
Notes to the Preliminary Financial Information
For the year ended 31 May 2015
9 Goodwill and other intangibles (continued)
· Cash flows for a further 3 years have been extrapolated from the year to 31 May 2017. A revenue growth factor of 5 % was applied to the projections together with cost inflation of 3%. A perpetuity factor has been applied based on the year to 31 May 2020;
· A post tax discount rate of 12% (2014: 12%) was applied in determining the recoverable amount of the unit, being the estimated weighted average cost of capital for the Wireless CGU.
Based on this testing the directors do not consider any of the goodwill or intangible assets to be impaired, even allowing for a reasonable degree of sensitivity to the underlying assumptions, including the discount rate.
The Licence agreement relates to a Remote Electrical Downtilt ("RET") license procured during the year to enable the use of RETs in the antenna products.
10 Deferred tax
2015 | 2014 | |
£000 | £000 | |
Deferred tax liability | - | 485 |
====== | ====== | |
The deferred tax liability related to the intangible assets arising upon acquisition of the Wireless business. The liability at acquisition was £2,938,000 and at 31 May 2015 was £nil. This has now been fully released to the income statement.
Deferred tax assets have been classified as non-current due to a change in accounting policy.
| ||
2015 | 2014 | |
£000 | £000 | |
Deferred tax assets | - | 485 |
====== | ====== |
The deferred tax assets brought forward from the Wireless business have been derecognised as the Directors consider that the underlying temporary differences will not reverse in the next year.
Notes to the Preliminary Financial Information
For the year ended 31 May 2015
11 Provision
Warranty provision | 2015 | 2014 |
£000 | £000 | |
Opening balance | 108 | 605 |
Used during the year | (12) | (41) |
Released unused during the year | (35) | (487) |
Charge for the year | 40 | 31 |
--------- | --------- | |
Closing balance | 101 | 108 |
====== | ====== | |
Dilapidation provision | 2015 | 2014 |
£000 | £000 | |
Opening balance | 225 | - |
Used during the year | (140) | (85) |
Released unused during the year | (75) | - |
Charge for the year | - | 310 |
--------- | --------- | |
Closing balance | 10 | 225 |
====== | ====== |
12 Share Capital
Group | ||
Ordinary shares of 10p each issued and fully paid | ||
Number | £000 | |
At 1 June 2013 | 96,997.993 | 9700 |
Shares issued in year | 162,993 | 16 |
-------------- | --------- | |
At 31st May 2014 | 97,160.966 | 9,716 |
Shares issued in year | 9,716,000 | 972 |
-------------- | --------- | |
At 31 May 2015 | 106,876,986 | 10,688 |
======== | ====== | |
Holders of the ordinary shares are entitled to receive dividends when declared, and are entitled to one vote per share at meetings of the Company.
The Group issued 9,716,000 shares though a share placing on 3 December 2014 at a nominal value of 10p per share.
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
13 Share Premium
Group £000 | ||
At 1 June 2013 | 5,111 | |
Premium on share issue | 34 | |
------- | ||
At 31 May 2014 | 5,145 | |
Premium on share issue | 1,054 | |
------- | ||
At 31 May 2015 | 6,199 | |
==== |
The shares issued as part of the share placing were issued at a premium of 12p per share reflecting the market value of the shares at the date of acquisition net of issue costs of £112,000.
14 Dividends
The directors are not proposing to pay a dividend for the year ended 31 May 2015 (2014: nil).
15 Analysis of net funds
1 June 2014 | Cash Flow | Other Changes | 31 May 2015 | |
£000 | £000 | £000 | £000 | |
Cash and cash equivalents | 2,531 | 1,444 | 32 | 1,087 |
Interest bearing borrowings | - | (320) | - | (320) |
--------- | --------- | --------- | --------- | |
2,531 | (1,796) | 32 | 767 | |
====== | ====== | ====== | ====== | |
Reconciliation of cash flow to movement in net funds | ||||
2015 | 2014 | |||
£000 | £000 | |||
Movement in cash and cash equivalents | (1,476) | 570 | ||
Cash flow from increase in debt financing | (320) | 496 | ||
Effect of exchange rate fluctuations | 32 | (414) | ||
--------- | --------- | |||
Movement in net funds | (1,764) | 652 | ||
Net funds at 1 June 2014 | 2,531 | 1,879 | ||
--------- | --------- | |||
Net funds at 31 May 2015 | 767 | 2,531 | ||
====== | ====== | |||
Notes to the Preliminary Financial Information
for the year ended 31 May 2015
16 Subsequent events
On 27 August 2015 the Group announced its intention to raise £4.5m through the placing of 90,000,000 new ordinary shares. In conjunction with the Placing, it is proposed to cancel trading of the Company's existing shares from the Main Market on the London Stock Exchange and apply to admit existing and new shares to the AIM Market of the London Stock Exchange. It is also proposed to reorganise the Company's share capital and to amend the articles of association.
To complete these proposals the Company will require Shareholder approval at a general meeting to be held mid-October. There will also be an opportunity for all existing shareholders to purchase new ordinary shares through an open offer of up to 20,000,000 shares at a discounted price of 5p per share which could raise up to another £1m.
On 14 September 2015 it was announced that Filtronic Wireless Inc, a wholly owned subsidiary of Filtronic plc, had entered into a sales invoice finance facility with Faunus Group International Inc (FGI Finance). Under the terms of the facility the Group may draw down up to 80% of the debtors and a maximum of $3.5m.
17 Forward looking statements
The chairman's letter and chief executive officer's statement include statements that are forward looking in nature. These are made by the directors in good faith based on the information available to them at the time of their approval of this report. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including both economic and business risk factors that could cause actual events or results to differ materially from any expected future events referred to in these forward-looking statements. Unless otherwise required by applicable law, regulation or accounting standard, the Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.