REG - Filtronic PLC - 2022 Audited Final Results
02/08/2022 07:00
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RNS Number : 5287U Filtronic PLC 02 August 2022
2 August 2022
FILTRONIC PLC
AUDITED FULL YEAR RESULTS FOR THE YEAR ENDED 31 MAY 2022
Filtronic plc (AIM: FTC), the designer and manufacturer of products for the
aerospace, defence, telecoms infrastructure and critical communications
markets, announces its full year results for the 12 months ended 31 May 2022.
Financial Highlights
2022 2021
Revenue £17.1m £15.6m
Adjusted EBITDA* £2.8m £1.8m
Adjusted operating profit** £1.6m £0.6m
Exceptional items £0.4m £0.06m
Operating profit £2.0m £0.6m
Profit before taxation £1.9m £0.2m
Profit for the year £1.5m £0.1m
Basic and diluted earnings per share 0.68p 0.03p
Net cash balance as at 31 May £2.2m £0.8m
Net cash when excluding right of use property leases £3.1m £1.9m
Cash generated from operating activities £2.3m £2.5m
*Adjusted EBITDA is earnings before interest, taxation, depreciation,
amortisation and exceptional items.
** Adjusted operating profit is operating profit before exceptional items.
Operational Highlights
· Healthy cash position provides a platform for continued
investment in growth initiatives.
· Delivered on existing development contracts and secured initial
production orders.
· Built our channels to market, strengthened the order book,
improved customer engagement and developed the opportunity pipeline with a
number of growth opportunities.
· Sales of our "best-in-class" Tower Top Amplifier supplied to the
market leading Original Equipment Manufacturer ("OEM") in critical
communications surpassed £1m in the financial year.
· Series of recent contract wins, totalling £1.9m across a
diverse range of new customers, demonstrating the execution of our objective
to broaden our client base.
· Successfully managed the ongoing headwinds from global
semiconductor shortages, ensuring continuity of supply to our customers, and
generated new opportunities as a consequence.
· Margin improvement from a stronger sales mix leading to stronger
adjusted EBITDA.
· Strengthened our engineering and business development teams with
active recruitment campaign.
Commenting on the outlook, Jonathan Neale, Chairman, said: "The Group's
trading performance strengthens the balance sheet and provides a platform to
further develop the business with continued investment in R&D, new product
development and process capability. Execution of our technology roadmap will
be a key focus this year as we expand and augment our product offering whilst
also delivering bespoke developments to customers who trust us to solve their
technically challenging RF problems. Broadening our customer base remains one
of our key strategic objectives, and having strengthened our sales channels,
we look forward to further progress having recently won several contracts to a
range of new customers and markets that can deliver sustainable growth and
long-term shareholder value.
With the growing opportunity pipeline and order book, we anticipate further
revenue growth, particularly as 5G telecommunication infrastructure rollouts
gather pace, although the quality of earnings may be impacted due to price
sensitivities in this market. This would be a timing issue, rather than
normalised trading, given the development contracts we are working on in
aerospace & defence and space where the mix is much stronger. The
continued push by governments to utilise sovereign capability in the supply
chain of key programmes in these markets positions the Group well with
opportunities regularly presenting themselves for us to capitalise on. Given
the scale of some of these, we are open to exploring partnerships and other
revenue models as a means of securing potential growth".
Annual General Meeting
The Annual General Meeting will take place at 11am on 27 October 2022 at
Plexus building, Thomas Wright Way, Netpark, Sedgefield, County Durham, TS21
3FD.
Filtronic plc Tel. 01740 618800
Richard Gibbs (Chief Executive Officer)
Michael Tyerman (Chief Financial Officer)
finnCap Ltd Tel. 020 7220 0500
Jonny Franklin-Adams / Tim Harper (Corporate Finance)
Alice Lane / Sunila de Silva (ECM)
Walbrook PR Ltd Tel. 020 7933 8780
Paul Vann / Nick Rome or filtronic@walbrookpr.com (mailto:filtronic@walbrookpr.com)
Note: This announcement contains inside information which is disclosed in
accordance with the Market Abuse Regulation.
Forward-looking statements
The Chairman's statement and Chief Executive's review 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.
Chairman's statement
Dear fellow shareholder
I have written previously of the long-term potential of the business that
attracted me to join the Board of Filtronic plc ("Filtronic") and I am pleased
to report that good progress continues to be made on this overarching aim.
We have delivered revenue growth, and another successive year of adjusted
earnings before interest, taxation, depreciation and amortisation ("adjusted
EBITDA") growth. This has strengthened our cash position and balance sheet
providing us with the opportunity to further invest in the business for
continued growth and sustainable value.
The Markets
The Group's key addressable markets continue to benefit from long-term growth
drivers. The aerospace & defence and security markets have traditionally
long sales cycles but retain strong spending trends both domestically and
overseas particularly given current events. Our capability, products and
know-how are very relevant in this sector, and with greater emphasis on
security sourced from domestic or allied supply for government or original
equipment manufacturer ("OEM") contracts, it is an opportunity for growth and
diversification of our existing customer base.
In the telecommunications market 5G rollouts continue to gather pace as the
drive to build infrastructure capacity continues with an increasing number of
governments licencing their E-band spectrum to enable this. Whilst there is
always price pressure on established technologies as they mature, the
emergence of important new frequencies and technologies remain strong
opportunities for growth.
The space market is an area that is becoming increasingly important as global
investment has gathered pace over the last few years. Satellites in low earth
orbit ("LEO") are ideal for enabling high-speed, low-latency communication.
Approximately 60 to 70 percent of space-company investment is now directed at
LEO endeavours. Filtronic has products and know-how derived from our
high-altitude pseudo satellite ("HAPS") projects that offer strong potential
for us to play a significant role in these important communications sectors
for both ground and flight platforms.
In the USA, the critical communications sector has shown some recovery post
covid as domestic spending has been re-prioritised. However, this sector
remains under pressure on the demand side, due to semiconductor supply
impacting the availability of non-Filtronic system components.
At a macro-economic level, we face the same cost pressures of energy, cost of
living and continued component cost increases and lead times as other
businesses. The Company has worked well to adapt, innovate and mitigate these
challenges where possible, whilst continuing to invest and find growth.
Our core ability to design and produce high performance technology
demonstrators to a high-quality which are manufacturable at scale volume,
continues to be a critical competitive differentiator. The ability of our
clients to customise our products to their particular requirement, further
strengthens our proposition in our markets.
Financial Performance Summary
Group sales increased in the year by 10% to £17.1m (FY2021: £15.6m).
A strong sales mix improved the quality of earnings giving adjusted operating
profit of £1.6m (2021: £0.6m), operating profit of £2.0m (2021: £0.6m) and
adjusted EBITDA growth of 55% to £2.8m (2021: £1.8m).
The Group closed the year with £4.0m of cash at bank (2021: £2.9m) in
addition to the availability of undrawn working capital debt facilities in the
UK and USA.
The Group's net cash position, when including all debt except right of use
property leases, was £3.1m at the end of the financial year (2021: £1.9m).
Net cash including right of use property leases was £2.2m (2021: £0.8m).
Dividend
As with previous years, the Board continues to believe shareholders are better
served by cash being retained in the business to fund future business
development. Consequently, no dividend is proposed for the year (2021: £nil).
Board and Senior Management
FY2022 has seen a couple of changes to Filtronic's board composition. Reg Gott
retired as Chairman in October 2021, which caused the Board to undertake a
rigorous search process resulting in my appointment to the Board as Chairman
in November 2021.
Maura Moynihan, the Group's Company Secretary took the decision to retire in
May 2022 having served the business well for over 20 years. On behalf of the
Board, I would like to thank Maura for her significant and sustained
contributions. She leaves a legacy of a strong governance framework. Her
duties as Company Secretary have been adopted by the Group's Chief Financial
Officer, Michael Tyerman, who will fulfil both functions which we will keep
under review in accordance with the QCA governance code.
Outlook
We have successfully strengthened our sales and engineering organisations in
the year with the intention of addressing the growth opportunities that we
believe exist in these markets as well as diversifying our customer base.
The technology we offer and the markets we serve align closely with the
sovereign capability requirements of both the UK and US governments. Advances
in telecommunication high frequency technology and commercial satellite
constellations are growth markets in which we have relevant capability and
whilst there are evidently continuing factors producing turbulence, affecting
many markets, there are also opportunities in the radio frequency and
microwave domain. The Group remains well placed in the market to deliver
revenue growth supported by a healthy order book and balance sheet.
Jonathan Neale
Chairman
1 August 2022
Chief Executive's review
I am pleased to report that sustained growth in our vertical markets over the
last twelve months has resulted in a solid set of financial results for
FY2022. With year-on-year revenue growth of 10%, and a third year of adjusted
EBITDA growth, based on increased operational efficiencies and demand for
higher margin products, we see momentum in the business continue to build as
we make good progress with our long-term strategic objectives.
Customers in our core markets of aerospace, defence, 5G telecommunications
infrastructure and critical communications have strong underlying demand for
their products and services and remain committed to investing in new
technology and emerging markets. Radio frequency ("RF") design is a
notoriously complex engineering discipline, but with our global reputation,
combined with over 40 years of iterative IP development in the field, we
continue to see demand from multinational corporations wanting to engage our
services in the design and manufacture of next generation RF products.
Despite the lingering impact of the Covid pandemic, and constraints on the
supply chain caused by the global shortage of critical semiconductor
components, the first half of FY2022 continued the gradual recovery we
experienced at the close of the prior year. The second half of FY2022 was
stronger still, with customers in critical communication and
telecommunications infrastructure delivering on delayed project
implementations, and the benefit of new, higher margin, product introductions
in the defence and test instrument market. Once again, our trading results
reveal the underlying strength and profitability of the Filtronic business
despite unprecedented levels of business uncertainty. Our cash at bank at year
end of £4.0m (May 2021: £2.9m) affords us the ability to make the
investments we need to address new adjacent markets and provision for future
supply chain challenges, whilst maintaining a robust balance sheet.
In addition to our established markets, there is now a significant interest in
RF communication solutions for low earth orbit ("LEO") space, and
high-altitude pseudo satellites ("HAPS"), where our existing E-band technology
can be adapted for use in the converging terrestrial and non-terrestrial
telecommunication networks. Our growing family of E-band backhaul
telecommunications products, developed over 10 years have the benefit of being
compact, highly integrated, and extremely reliable. They are also manufactured
in commercial volumes, at a competitive price, which allows LEO space
equipment manufacturers to get solutions to market quickly, at cost not
usually associated with custom developed space products.
The healthy balance sheet has enabled us to continue to build on investments
made at our Sedgefield manufacturing site. The addition of state-of-the-art
equipment for rapid process and product development has significantly enhanced
our ability to bring new products to market. The ability to develop
engineering prototypes and create new manufacturing processes without the need
to disrupt the volume manufacturing lines has greatly improved delivery of
engineering programmes and eased the transition from prototype into
production.
Talented people remain at the heart of our ability to deliver leading edge
products and future business growth. We have made significant efforts this
year to find and recruit the specialist engineering and marketing skills
required to realise our growth ambition. To further penetrate the UK aerospace
and defence market we have strengthened our business development team with the
addition of seasoned industry experts who have a strong track-record of sales
delivery. In FY2023 we will open a new engineering design office in Manchester
having recruited a high-calibre team of RF engineers in the region
specifically to address the emerging space and telecommunication market.
The most significant management challenge of the last few years has been
Covid, and the associated restrictions placed on engaging directly with
customers which we previously communicated as our biggest challenge of the
pandemic. The strengthening of our marketing team has yielded great results
since the national lockdowns and brand awareness has been raised in the
markets we serve. However, the welcome return of tradeshows, conferences and a
willingness of customers to accept face to face meetings and site visits to
Filtronic facilities in a normalised business development environment is a
critical factor for our future growth prospects.
In 2020 we made the decision to consolidate manufacturing of critical
communication products in the USA, to better support our customers, and
respond to an increased preference for onshoring and "buy America" sentiment.
This move has been well received by customers and enabled us to respond
quickly as the critical communication market recovered and supply chain issues
in China started to impact our competitors. Our made in America TTA product
launched in FY2020, achieved the milestone of surpassing £1m of sales in
January 2022, and it continues to be the TTA product of choice for P25
programmes that will be implemented in the next 24 months.
The global semiconductor shortage has impacted our business, and undoubtably
restricted our ability to recognise revenue in FY2022. We believe these supply
shortages may continue to be a challenge in the FY2023 trading period and
beyond. Throughout the last twelve months we have invested in critical
inventory as the opportunity has become available, however reacting to
schedule changes and fluctuating material delivery dates has become a
significant additional workload for the business. As a manufacturer and design
authority, we have the flexibility to be proactive in the sourcing of
components, and in some cases, we can redesign and requalify products to make
use of alternative material at short notice. However, Filtronic RF products
generally form part of a larger communication solution, and increasingly it is
other elements of the equipment supply chain that cause customers to
reschedule product deliveries, adjust demand forecasts and in extreme cases,
postpone new product introductions until a later date.
Customers and Markets
The critical communications market has almost returned to pre-pandemic levels
of demand, with state and federal spending programs redirected back to the
upgrading and deployment of "first responder" networks. Our combiner products
are used in most P25 network base stations, and our filter and amplifier
products are extensively deployed across the Land Mobile Radio ("LMR")
network. LTE telecommunication networks carry more data traffic, but the
reliability of the LMR network when all other telecom networks become
saturated, makes it an important part of any private network solution.
Notwithstanding some short-term disruption to customer schedules from supply
chain issues we expect Filtronic products to remain a part of the P25 network
solution for some years to come.
The aerospace market remains a strong and steady revenue contributor, with
shipments supported by a strategic inventory holding, and consistent
availability of customer supplied materials. The multi-year manufacturing
supply agreements won in FY2020, will run into FY2024, and we are looking to
secure follow-on demand as future aerospace radar contracts are released. We
have expanded our footprint in the Active Electronically Scanned Array
("AESA") radar market by capturing several related filter design opportunities
in the past year. Initial volumes are low, but it has enabled us to strengthen
our position with the major aerospace primes, broadening our customer
register, which is a key strategic objective of ours.
We have made inroads into the UK defence market with the successful completion
and delivery of our first battlefield communications product to the UK
Ministry of Defence ("MOD"). The product is undergoing field trials and we
believe we are positioned favourably for any repeat orders that may
materialise as well as other future design programmes as part of the
framework.
5G telecommunication network deployment around the world is accelerating, and
critical to true 5G performance is the quality and reliability of high
frequency backhaul communications. Filtronic's 71-76GHz and 81-86GHz mmWave
transceivers are designed to deliver cost-effective, multi-gigabit
connectivity for mobile backhaul networks, in geographies where the E-band
frequency has been licenced. The demand for our products will continue as
users come to expect true 5G performance, and individual countries make the
E-band frequency available for use, with India expected to be a key market and
licence approval anticipated shortly.
HAPS and LEO space communications are an attractive application for our proven
E-band technology, and initial customer engagements are evolving into tangible
commercial opportunities. We have undertaken two important development
programmes with large west-coast USA technology companies that were early
pioneers in this field of converging telecommunication solutions.
Consequently, we now have a good understanding of how to apply our IP in both
stratospheric and LEO space platforms. We are further encouraged by the UK
government's interest in the commercial space market and the publication of
the National Space Strategy in September 2021.
There have been several notable achievements over the last year which set the
potential for sustainable growth and future revenues, to which end, I would
highlight the following:
• Two separate design contracts with UK aerospace and
defence primes for bespoke, low power bandpass filters and switch filter
banks, for use in next generation radar systems. Design and prototypes were
delivered within the year and initial production orders were placed for
delivery in FY2023.
• The successful delivery of a £1.3m defence contract for
the design, development, and production of a battlefield radio communication
product. This represents our first direct engagement with the UK MoD and the
timely delivery of the initial production units positions us favourably for
future production volumes.
• The Tower Top Amplifier ("TTA") product, launched in
FY2020, passed the milestone of £1.0m of sales in FY2022, with some important
design wins for future system upgrades and new state-wide installations in the
USA.
• Successful transition of a long running development
programme for over-the-air, mmWave test equipment, from prototype into full
production. We are working with the customer to explore future production run
rates based on market acceptance of the end product.
• Successful delivery of custom, high-performance E-band
transceivers for use in several separate private network applications
associated with high-frequency trading platforms. Extreme low latency data
communications being critical for the delivery of timely trading data.
• Continued delivery of the Morpheus E-band transceiver in
volume production with over 60,000 units shipped worldwide. This achievement
earned Filtronic the coveted Queen's Award for Export in November 2021.
• We closed the year with a significant opportunity
pipeline of new aerospace, defence and HAPS and LEO space opportunities, that
have the potential to materially drive the business forward in the medium
term.
Outlook
We are undoubtably in a period of economic and geopolitical uncertainty but
one in which our technology will be in demand, the RF design expertise we
offer is in short-supply and our core markets well positioned for growth. The
current disruption to semiconductor supply chains will impact our business in
the short term. However, we feel we have the resources and reserves necessary
to weather the short-term impacts and look forward to the new trading period.
Filtronic's core markets of mobile telecommunications, critical communications
and aerospace and defence, represent industry segments that have remained
robust over the last few years. They also align well with the needs of the
post-pandemic world, where public safety, mobile communications, sovereign
defence capability and development of LEO non-terrestrial telecommunication
networks, resonate with governments and other stakeholders alike.
Business plans for FY2023 will reflect the somewhat unpredictable nature of
the economy and the current geopolitical situation, but in general we remain
committed to the growth opportunities and technology roadmaps identified in
our strategic plan. We have a culture that is proactive and highly motivated
to create growth and diversification of our customer base. With this in mind,
we have a number of initiatives to develop our capability, and secure a range
of well-defined business opportunities including:
· Development of next generation MMIC designs that will enable us to
continue the evolution of our mobile telecom backhaul solutions, from E-band
into the adjacent licence bands of V-band, W-band and ultimately D-band;
· Develop our scalable Cerus power amplifier platform to maximise the
range of power options at selected frequency bands;
· Develop our E-band transceiver platform to include active diplexer
and SiP solutions;
· Continued investment in our marketing activities with an updated
website platform, enhanced web content, and strategic use of social media
platforms;
· Strengthening the sales organisation with the deployment of additional
direct sales and business development resource in the UK and Western Europe;
· Expand our indirect channels to market through the Manufacturing
Representative Network across the USA and in Europe through distribution and
reps;
· Further investment in capital equipment to continue the extension of
our engineering, design and test capability, production capability aligned to
new business opportunities and incorporation of alternative frequency bands
required for LEO space applications; and
· Align our business processes and equip our facilities to achieve the
accreditation necessary to undertake a higher level of UK Defence
programmes.
I am pleased with the progress we have made to date and remain excited by the
potential that exists at Filtronic. There is an increasing demand for our
high-performance products and unique RF design capabilities, and I believe we
have the resources and expertise necessary to navigate the business challenges
that will come our way in the next twelve months. The specific market segments
that we have identified for future growth continue to develop at pace, and as
we embark on a new financial year, I believe we are well placed to continue to
deliver on our long-term growth objectives.
Richard Gibbs
Chief Executive Officer
1 August 2022
Financial review
A year of continued progress delivering revenue growth and another year of
successive adjusted EBITDA growth, despite strong macro-economic headwinds and
industry-wide semiconductor shortages, providing a solid platform from which
we will invest in the future of the business.
Filtronic achieved another year of adjusted EBITDA growth delivering £2.8m
(2021: £1.8m) thanks to a strong sales mix and controlled overhead spend.
Consequently, the balance sheet was strengthened with a healthy cash position
following cash generation of £1.1m (2021: £0.9m) which will be used to
invest in opportunities that offer a high rate of return and provide the
building blocks for future growth.
Revenues
We are also pleased to report sales growth for the Group of 10%, taking
revenue to £17.1m (2021: £15.6m) with the uplifts coming from aerospace
& defence and critical communications. This was especially pleasing given
revenue would have been higher in the period if output had not been
constrained by material availability caused by the widely publicised global
semiconductor component shortage. By encouraging customers to place
longer-term orders we have secured the visibility we need to align resources
and safeguard inventory. Consequently, we have been able to build our order
book, which is stronger leaving the year than we entered, and gives optimism
that we can continue on a growth trajectory. The momentum is also building as
we look to deliver on one of our key strategic objectives, to broaden the
customer base, with several recent contract wins outside of our largest three
customers.
5G Xhaul sales decreased year-on-year by 12% as revenue was constrained by
component availability in H1. Having received the material towards the end of
H1, we enjoyed a 38% increase of sales to our lead customer in H2, as the
demand profile returned to customer-specified levels. Output continues to
flex, and we have the capacity in place to execute as 5G rollouts gather pace
and an increasing number of governments release E-band spectrum. Sales of
E-band derivatives to customers in adjacent markets saw growth with a main
contributor being 'over-the-air' equipment having successfully completed the
pilot phase of an engineering development to a leading US customer.
Sales of aerospace & defence products saw year-on-year growth of 27%,
driven by our multi-year contracts running at consistent levels of output
combined with revenue from new contract wins. The battlefield communications
project, announced in January 2020, was the largest of these contract wins and
saw over £1m of revenue recognised in the period. This market is critical to
our growth plans, and it was pleasing to see several new customers entering
the register with initial NRE development contracts. The sales cycle can be
long in aerospace and defence, but once initial prototype orders become
established, they are generally long-term and predictable, which helps to
underwrite the business, improving the risk appetite for more speculative
high-return projects in other areas.
The products supplied into the critical communications market achieved good
results in the period with 23% growth year-on-year. The market suffered during
the pandemic with funds diverted to sectors such as healthcare, but government
spend has now flowed back into public infrastructure projects, with Filtronic
benefitting from new state and county level rollouts. Demand recovered well in
the year and our lead customer is reporting year-on year revenue growth in
Land Mobile Radio ("LMR"), which is the segment of their business we supply
into, and a record order backlog primarily driven by LMR demand. The recently
launched TTAs performed beyond our expectation with the product successfully
designed into major infrastructure projects ahead of more established
suppliers in the market. Our procurement strategies, including early sourcing
of materials and elevated levels of inventory, minimised the impact of
component shortages but revenue to this market would have been higher if not
for shortages upstream in the system-level product. However, this also created
opportunities for us, and we were able to capitalise, winning additional
business thanks to our ability to maintain supply, when competitors hit
fulfilment challenges.
Operating costs and headcount
Operating costs remained broadly flat in the year at £9.4m (2021: £9.5m) as
overheads were controlled in the administrative areas of the business.
The Group's largest overhead is salary-related costs which increased by
£0.1m, although the mix of personnel changed in the year. Improvements in
manufacturing efficiency facilitated a lower cost base to run our
manufacturing operations, with the savings invested back into the business
with the recruitment of new employees in engineering to support work on the
technology roadmap.
Given this shift, there was a reduction in the total number of employees in
the Group during the year which is reflected in the average headcount for the
year decreasing to 124 (2021: 130). An analysis of the Group's average
continuing headcount is presented below:
Number 2022 2021
Manufacturing 78 86
Research and development 26 24
Sales and marketing 5 5
Administration 15 15
Total headcount 124 130
Further investment is planned for the year ahead with additional engineers
joining the business in Q1 FY2023 as we seek to capitalise on new
opportunities having strengthened our direct channels to market. This follows
a big push on recruitment of senior sales personnel and engineers which
incurred recruitment costs of £0.2m, which is larger than we have previously
incurred, as given the high number of vacancies to fill we engaged a
recruitment process outsourcer ("RPO") to fill the open vacancies.
Other costs were managed tightly throughout the year and consequential cost
savings from the pandemic such as business travel prevailed. In my report last
year, I advised that I was keen to see our sales and marketing team return to
trade exhibitions at the earliest opportunity, and it was pleasing to see the
restart of these events in the year. They have been successful forums for
generating new customer leads in the past, and money will always be made
available to support these events as they are key to new business acquisition.
In the USA, we secured a second round of financial support through the
Paycheck Protection Programme ("PPP") to retain staff during the pandemic. The
loan was forgiven for repayment by the US government and converted to a grant
totalling $186k (£131k).
A large portion of our product development in the year was customer funded
which maintained a healthy flow of cash during the development phase of the
engineering projects. Consequently, there was limited capitalisation of
development costs as the costs are expensed in line with revenue recognition.
Further commentary can be seen in the Research and Development section of this
review.
Adjusted EBITDA
The Group continues to focus on an alternative performance measure ("APM") to
track performance of the business. This APM is adjusted EBITDA as it measures
the quality of earnings without the impact of exceptional items and non-cash
expenses such as depreciation and amortisation. Adjusted EBITDA for the
operation was £2.8m (2021: £1.8m) representing a 58% increase whilst
adjusted operating profit was £1.6m (2021: £0.6m) representing a 174%
increase. This was facilitated by a stronger sales mix and controlled spend of
the overhead cost base whilst maintaining investment into R&D.
Gross profit increased considerably thanks to increased sales to the critical
communications and aerospace & defence market as certain components are
free issued by the customer which gives improved margins, whilst sales to the
telecommunications infrastructure market were lower where pricing is more
competitive.
Amortisation increased as the full year impact of the Morpheus and MMIC IP
engineering developments, capitalised as an intangible asset in a prior
period, were borne.
The exceptional items relate to legacy Telecoms Antenna Operation provisions
that were released unused in the period. Having previously recognised the cost
in the discontinued operation, the reversal has gone through exceptional
items.
The table below shows the reconciliation of operating profit delivered at
£2.0m (2021: £0.6m) and to adjusted EBITDA.
2022 2021
Reconciliation of operating profit to adjusted EBITDA £000 £000
Operating profit 1,975 642
Exceptional items (391) (64)
Adjusted operating profit 1,584 578
Impairment of development costs - 45
Depreciation 945 941
Amortisation 278 209
Adjusted EBITDA 2,807 1,773
Taxation
A tax charge of £0.4m (2021: £0.2m) was recognised for the year. This is the
result of a reduced deferred tax position reflecting usage in the year within
the profitable trading subsidiaries in the UK and US. This is a non-cash entry
so payments will not be made to this value.
It is highly likely that governments around the world will increase their
rates of corporation tax over the next few years to help pay for the cost of
economic support provided over the last couple of years. The UK has already
increased the rate of corporation tax with effect from 1 April 2023 for
companies with profits above £250,000 to 25% from 19%, and the US is
currently debating the merits of an increase. However, with substantial
deferred tax assets, including those not recognised on the balance sheet, this
is likely to have a minimal impact on cash in the Group in the short and
medium term.
Research and development costs ("R&D")
Total R&D costs in the year before capitalisation and amortisation of
development costs were £1.7m (2021: £1.7m). The Group utilised most of its
engineering resource on customer funded developments generating near-term
revenue with an increased chance of commercialisation.
However, the Group remains committed to investment in R&D for future
growth of the business and consequently measures R&D spend as a KPI. Given
the importance, our investment strategy is geared towards continual investment
in R&D with the plan to align annual spend at 12% or more of revenue. Key
areas of spend in the year included product development for markets spanning
'over-the-air' mmWave equipment, aerospace & defence, low earth orbit and
development of W-band capability. The healthy cash position and strengthened
balance sheet gives us a greater ability to invest in the development of our
own strategic technology roadmap and proprietary IP. This will allow us to
build long-term shareholder value in the years ahead.
Recruitment of RF engineers has been an industry-wide issue for some time, but
a change of approach has yielded positive results with the use of the RPO, as
disclosed in the operating costs and headcount subsection of this report. We
have also recruited a high-calibre team of engineers in the Manchester area,
where we are creating a low-cost footprint to base the team, who will drive
our technology roadmap in mmWave engineering for the space market.
The Group capitalises its development costs in line with IAS 38. A
reconciliation of R&D costs before capitalisation and amortisation can be
seen in the table below:
2022 2021
Reconciliation of R&D costs £000 £000
R&D costs in income statement 1,937 1,845
Capitalisation of development costs - 52
Impairment of development costs - (45)
Amortisation of development costs (259) (182)
R&D cash spend 1,678 1,670
Capital expenditure and right of use assets
Capital expenditure increased slightly in the year. The total amount of
capital purchased was £0.6m (2021: £0.4m) with the purchase of another
die-attach machine and solder reflow oven. The die-attach machine increases
overall capacity at our Sedgefield site, enabling quick-turnaround of new
product introductions and servicing of a growing opportunity pipeline without
disruption to the production line. It also increases the bandwidth of our
process engineers, which is a key skillset of the business, to undertake more
development work. The solder reflow oven improves the capability of the
operation and opens new opportunities particularly in the aerospace &
defence market. The assets were externally financed through asset finance
agreements were subsequently classified as right of use assets.
Warranty provision
In line with industry practice, the Group provides warranties to customers
over the quality and performance of the products it sells. The Group's policy
is to make a provision, calculated as a percentage of cost of goods sold,
after reviewing costs associated with faulty products returned. As at 31 May
2022, the warranty provision was £0.1m (2021: £0.3m). A provision relating
to the legacy Telecoms Antenna Operation was released unused in the year and
is recognised in exceptional items.
Funding and cash flow
The Group recorded an increase in cash and cash equivalents to £4.0m (2021:
£2.9m) at the year-end. Cash generated from operating activities in the year
was £2.3m (2021: £2.5m) as solid adjusted EBITDA performance drove strong
cash generation with offset by increased working capital requirements.
Industry-wide semiconductor shortages have been well documented and are
mentioned a number of times in the Group's Annual Report, with a key
mitigation action being the increase of our inventory holding. This has been
key to continuity of supply at a time when availability is scarce and lead
times are stretching. Consequently, the net inventory position grew by £0.4m
in the year. The increase in receivables and payables represents a strong
period of trading in Q4 FY2022, inflating the closing position, as working
capital was in line with payment terms.
Net cash of all lease obligations, when including all debt except property
leases at the end of the period, was £3.1m (2021: £1.9m), whilst overall net
cash including property leases was £2.2m (2021: £0.8m). At a time when many
sectors are struggling with liquidity, coupled with economic headwinds from
inflation, cost of living increases and geopolitical uncertainty, our business
is in the fortunate position to have a platform from which to grow with a cash
position that will be used to invest for the future.
We also have additional cash headroom available through a £3.0m invoice
discounting facility with Barclays Bank plc in the UK and a $4.0m invoice
factoring facility with Wells Fargo Bank in the USA. Both facilities were
undrawn at 31 May 2022 (2021: undrawn).
Going concern
In assessing going concern, the Board have considered:
· The principal risks faced by the Group which are discussed within the
'Risk management' section of the Annual Report;
· The financial position of the Group including forecasts and financial
plans;
· The healthy cash position at 31 May 2022 of £4.0m (2021: £2.9m) and
the additional headroom available through the undrawn invoice discounting
facilities and overdraft (2021: undrawn);
· Global semiconductor component shortages impacting supply chains and
the potential for customer orders to remain unfulfilled for prolonged periods;
and
· The economic headwinds the world is facing with the potential for
customers to reassess their priorities, with opportunities postponed or
curtailed.
Therefore, the Directors are satisfied that the Group has adequate financial
resources to continue in operational existence for a period of at least 12
months from the date of this report. Accordingly, the going concern basis has
been adopted in the preparation of the Annual Report for the year ended 31 May
2022.
Michael Tyerman
Chief Financial Officer
1 August 2022
The Board
The directors that served during the year ended 31 May 2022, and to the date
of this announcement, and their respective roles are set out below:
Jonathan Neale (Non-Executive Chairman) appointed 15 November 2021
Richard Gibbs (Chief Executive Officer)
Michael Tyerman (Chief Financial Officer)
Pete Magowan (Non-Executive Director)
John Behrendt (Non-Executive Director)
Reg Gott (Non-Executive Chairman) retired 28 October 2021
Consolidated Income Statement
for the year ended 31 May 2022
2022 2021
Continuing operations Note £000 £000
Revenue 2 17,052 15,556
====== ======
Adjusted Earnings before interest, taxation, depreciation, amortisation and 2,807 1,773
exceptional items
Amortisation of intangible assets (278) (209)
Impairment of development costs - (45)
Depreciation of property, plant and equipment and right of use assets (945) (941)
---------- ----------
Adjusted operating profit 1,584 578
Exceptional items 3 391 64
---------- ----------
Operating profit 1,975 642
Finance costs 4 (194) (431)
Finance income 111 -
---------- ----------
Profit before taxation 1,892 211
Taxation 6 (424) (151)
---------- ----------
Profit for the year 1,468 60
====== ======
---------- ----------
Basic and diluted earnings per share 5 0.68p 0.03p
====== ======
The profit for the year is attributable to the equity shareholders of the
parent company, Filtronic plc.
Consolidated Statement of Comprehensive Income
for the year ended 31 May 2022
2022 2021
£000 £000
Profit for the year 1,468 60
---------- ----------
Other comprehensive income/(expense)
Items that are or may be subsequently reclassified to profit and loss:
Currency translation movement arising on consolidation 179 (98)
---------- ----------
Total comprehensive income/(expense) for the year 1,647 (38)
====== ======
The total comprehensive income for the year is attributable to the equity
shareholders of the parent company Filtronic plc.
All income recognised in the year was generated from continuing operations.
Consolidated Balance Sheet
at 31 May 2022
2022 2021
Note £000 £000
Non-current assets
Goodwill and other intangible assets 1,495 1,716
Right of use assets 2,293 2,268
Property, plant and equipment 701 1,014
Deferred tax 868 1,218
---------- ----------
5,357 6,216
---------- ----------
Current assets
Inventories 2,598 2,190
Trade and other receivables 4,479 3,294
Cash and cash equivalents 4,006 2,906
---------- ----------
11,083 8,390
---------- ----------
---------- ----------
Total assets 16,440 14,606
---------- ----------
Current liabilities
Trade and other payables 2,993 2,380
Provisions 282 397
Deferred income 172 184
Financial liabilities - 63
Lease liabilities 540 542
---------- ----------
3,987 3,566
---------- ----------
Non-current liabilities
Deferred Income 130 128
Financial liabilities - 76
Lease liabilities 1,280 1,478
---------- ----------
1,410 1,682
---------- ----------
---------- ----------
Total liabilities 5,397 5,248
---------- ----------
---------- ----------
Net assets 11,043 9,358
---------- ----------
Equity
Share capital 7 10,796 10,795
Share Premium 8 11,060 11,039
Translation Reserve (471) (650)
Retained earnings (10,342) (11,826)
----------12,16 ----------12,161
Total equity 11,043 9,358
====== ======
The total equity is attributable to the equity shareholders of the parent
company Filtronic plc.
Company number 2891064
Richard Gibbs
Chief Executive Officer
Consolidated Statement of Changes in Equity
for the year ended 31 May 2022
Share capital Share premium Translation reserve Retained earnings Total equity
£000 £000 £000 £000 £000
Balance at 31 May 2020 10,794 11,000 (552) (11,888) 9,354
Profit for the year - - - 60 60
New shares issued 1 39 - - 40
Currency translation movement arising on consolidation - - (98) - (98)
Share-based payments - - - 2 2
---------- ---------- ---------- ---------- ----------
Balance at 31 May 2021 10,795 11,039 (650) (11,826) 9,358
Profit for the year - - - 1,468 1,468
New shares issued 1 21 - - 22
Currency translation movement arising on consolidation - - 179 - 179
Share-based payments - - - 16 16
---------- ---------- ---------- ----------- ----------
Balance at 31 May 2022 10,796 11,060 (471) (10,342) 11,043
====== ====== ====== ======= ======
Consolidated Cash Flow Statement
for the year ended 31 May 2022
2022 2021
£000 £000
Cash flows from operating activities
Profit for the year 1,468 60
Taxation 424 151
Finance income (111) -
Finance costs 194 431
---------- ----------
Operating profit 1,975 642
Share-based payments 16 2
Depreciation of property, plant and equipment and right of use assets 945 941
Amortisation of intangible assets 278 209
Impairment of intangible assets - 45
Movement in inventories (273) 626
Movement in trade and other receivables (1,100) 1,489
Movement in trade and other payables 550 (1,026)
Movement in provisions (115) (712)
Change in deferred income (10) (255)
Tax received 19 495
---------- ----------
Net cash generated from operating activities 2,285 2,456
---------- ----------
Cash flows from investing activities
Capitalisation of development costs - (52)
Acquisition of other intangible assets (57) (69)
Acquisition of plant and equipment (61) (177)
Acquisition of right of use assets (132) (106)
Proceeds on sale of assets - 12
---------- ----------
Net cash used in investing activities (250) (392)
---------- ----------
Cash flows from financing activities
Interest paid (194) (225)
Proceeds from bank loans - 131
Repayment of bank loans (131) (209)
Exercise of employee share options 22 40
Repayment of lease liabilities (653) (666)
Repayment of interest-bearing borrowings (8) (104)
---------- ----------
Net cash used in financing activities (964) (1,033)
---------- ----------
Movement in cash and cash equivalents 1,071 1,031
Currency exchange movement 29 (153)
Opening cash and cash equivalents 2,906 2,028
---------- ----------
Closing cash and cash equivalents 4,006 2,906
====== ======
Notes to the Preliminary Financial Information
for the year ended 31 May 2022
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 2022.
In accordance with corporate governance requirements the directors have
undertaken a review of forecasts and the Group's cash requirements to consider
whether it is appropriate that the Group continues to adopt the going concern
assumption.
At 31 May 2022, the Group had cash at bank of £4.0m and access to undrawn
invoice discounting facilities of £3.0m and $4.0m in the UK and USA
respectively (2021: undrawn).
The Board recognises the uncertain economic and political environment that the
world faces and has reviewed the business outlook to reflect this uncertainty.
Cash flow forecasts have been prepared to model various scenarios over a
three-year period based on the Group's financial and trading position,
principal risks and uncertainties and strategic plans. A downside scenario was
modelled where programme curtailment and/or delays may adversely affect
forward-looking demand to levels lower than those initially
modelled in the base case scenario. A further 'severe but plausible' scenario
was modelled which reflected output in the event semiconductor material
availability prevented supply to customers for a period of time.
The scenarios modelled above demonstrate the Group has adequate cash and
borrowing capacity for the next twelve months. Therefore, the directors
continue to adopt the going concern basis to prepare the accounts.
There are a number of new standards, including, amendments to standards and
interpretations that are effective for financial statements after this
reporting period, but the Group has not adopted them early. None of these are
expected to have a material impact on the results or financial position of the
Group.
Whilst the information included in this preliminary announcement has been
prepared on the basis of International Accounting Standards in conformity of
the requirements of the Companies Act 2006, this announcement does not itself
contain sufficient information to comply with IFRSs. The Company expects to
publish full financial statements within two months of this announcement.
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 May 2022 or 31 May 2021. The
financial information for 2021 is derived from the statutory accounts for 2021
which have been delivered to the registrar of companies. The auditor has
reported on the 2022 accounts; their report was:
(i) unqualified
(ii) did not include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
The statutory accounts for 2022 were 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.
2 Segmental analysis
IFRS 8 requires consideration of the identity 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 Chief Executive Officer who reviews internal monthly
management reports, budget and forecast information as part of this.
Accordingly, the Chief Executive Officer is deemed to be the CODM.
The CODM has identified one operating segment within the Group as defined
under IFRS 8. In turn, this is the only reportable segment of the Group as the
entities in the Group have similar products and services, production processes
and economic characteristics. Therefore, there is no allocation of operating
expenses, profit measures or assets and liabilities to specific commercial
markets.
Accordingly, the CODM assesses the performance of the operating segment on
financial information which is measured and presented in a manner consistent
with those in the financial statements by reference to Group results against
budget.
The Group profit measures are adjusted operating profit and adjusted EBITDA,
both disclosed on the face of the consolidated income statement. No
differences exist between the basis of preparation of the performance measures
used by management and the figures in the Group financial statements.
The Group has three customers representing individually over 10% of revenue
each and in aggregate 81% of revenue. This is split as follows:
• Customer A - 36% (2021: 35%)
• Customer B - 23% (2021: 33%)
• Customer C - 22% (2021: 19%)
Revenue by destination Total
2022 2021
£000 £000
United Kingdom 7,489 4,693
Europe 3,421 4,178
Americas 5,313 4,197
Rest of the World 829 2,488
---------- ----------
17,052 15,556
====== ======
Split of non-current assets by location 2022 2021
£000 £000
United Kingdom 5,109 5,293
Americas 248 923
--------- ---------
5,357 6,216
====== ======
Non-current assets relate to property, plant and equipment, right of use
assets, goodwill and other intangible assets and deferred tax.
3 Exceptional items
Exceptional items are costs that are separately disclosed due to their
material and non-recurring nature in order to reflect management's view of the
underlying business.
Operating costs are stated after crediting exceptional items as follows:
Year Year
Ended Ended
31 May 31 May
2022 2021
£000 £000
Antenna warranty (339) -
Historic claim (52) (64)
---------- ----------
(391) (64)
====== ======
The antenna warranty item also related to the Group's legacy Telecoms Antenna
Operation previously costed through discontinued operations. The warranty
period has now lapsed, and the provision was released unused.
A provision relating to an historic claim was released unused and credited to
the income statement as it related to the Telecoms Antenna Operation, sold in
January 2020.
4 Finance costs
Year Year
Ended Ended
31 May 31 May
2022 2021
£000 £000
Interest expense on loans for plant and equipment - 6
Interest expense for lease agreements 127 136
Minimum service costs and interest charges on invoice discounting facilities 67 82
Revaluation of foreign currency denominated intercompany balance - 207
---------- ----------
194 431
====== ======
5 Earnings per share
Total Group
2022 2021
£000 £000
Profit for the year 1,468 60
====== ======
'000 '000
Basic weighted average number of shares 214,726 213,397
Dilution effect of share options 868 897
---------- ----------
Diluted weighted average number of shares 215,594 214,294
---------- ----------
Basic and diluted earnings per share 0.68p 0.03p
====== ======
6 Taxation
The reconciliation of the effective tax rate is as follows:
2022 2021
£000 £000
Profit before taxation 1,892 211
====== ======
2022 2021
£000 £000
Profit before taxation multiplied by standard rate of corporation tax in the 359 40
UK - 19%
Disallowable items 155 213
Deferred tax asset not recognised 194 213
Enhanced R&D tax credit (270) (176)
Adjustment in respect of prior year - R&D tax credit (24) (371)
Foreign tax not at UK rate 15 (15)
Derecognition of deferred tax asset 104 247
Rate change of deferred tax (109) -
--------- ---------
Taxation 424 151
====== ======
The main rate of UK corporation tax for the financial year was 19% whilst the
US Federal Corporate tax rate is 21%. The deferred tax assets recognised in
the year have been calculated at the rates expected to be in existence in the
period of reversal.
On 3 March 2021, in the Budget, the UK government announced that the
corporation tax rate will increase to 25% for companies with profits above
£250,000 with effect from 1 April 2023, as well as announcing several other
changes to allowances and treatment of losses. These changes were enacted on
24 May 2021.
7 Share Capital
Ordinary shares of 0.1p each issued and fully paid
Number '000 £000
At 1 June 2020 213,698 10,794
Exercise of share options 717 1
-------------- ---------
At 31 May 2021 214,415 10,795
Exercise of share options 383 1
------------ -----------
At 31 May 2022 214,798 10,796
======== ======
All shares are allotted, called up and fully paid. 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.
8 Share Premium
£000
At 31 May 2020 11,000
Exercise of share options 39
-----------
At 31 May 2021 11,039
Exercise of share options 21
-----------
At 31 May 2022 11,060
=======
9 Dividends
The directors are not proposing to pay a dividend for the year ended 31 May
2022 (2021: £nil).
10 Analysis of net cash
Reconciliation of cash flow to movement in net cash 2022 2021
£000 £000
Movement in cash and cash equivalents 1,071 1,059
Movement in bank loans 131 78
Movement in lease liabilities - plant and machinery (28) 546
Movement in lease liabilities - property lease 228 (39)
Effect of exchange rate fluctuations 29 (181)
---------- ----------
Movement in net cash 1,431 1,463
Net opening cash/(debt) 755 (710)
---------- ----------
Net closing cash 2,186 753
====== ======
31 May Cash Flow Other movements 31 May 2022
2021
£000 £000 £000 £000
Cash and cash equivalents 2,906 1,071 29 4,006
Bank loans (131) 131 - -
Lease liabilities - plant and equipment (835) 417 (445) (863)
--------- --------- --------- ---------
Net cash when including all debt except property leases 1,940 1,619 (416) 3,143
Lease liabilities - property leases (1,185) 236 (8) (957)
--------- --------- --------- ---------
Net cash 755 1,855 (424) 2,186
====== ====== ====== ======
Cash at bank earns interest at floating rates based on daily bank deposit
rates. There are no restrictions on the availability of the cash and cash
equivalents at 31 May 2022 (2021: £nil).
IFRS 16 requires the recognition of property leases on the balance sheet which
is classified as a debt item.
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