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Results
International Financial Reporting Standards
Research and development costs
Gain on sale of property
Interest expense
Taxation
Disposal of Handset Products division
Capital expenditure
Compound Semiconductors operation at Newton Aycliffe
Deferred income
Working capital
Cash flow and net debt
Financing
Defined benefit pension scheme
Wireless Infrastructure disposal costs
Results
Continuing operations generated revenue of £221.0m (2005 £212.9m), resulting in an operating loss of £4.2m
(2005 5.6m profit). The group loss before tax was £6.7m (2005 £9.5m profit), and the loss after tax was £8.1m (2005 £9.3m profit). The operating results are discussed in the Group CEO’s Operating Review, along with a review of the business and outlook.
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International Financial Reporting Standards
The financial statements have been prepared for the first time on the basis of International Financial Reporting Standards as adopted by the European Union (IFRS). The comparative figures for the year ended 31 May 2005 have been restated accordingly.
The main changes resulting from the implementation of IFRS were the recognition of defined pension scheme liability
in the balance sheet, no amortisation of goodwill arising on acquisitions, share-based payment expense for share
options, and a revised accounting policy for research and development that permits capitalisation of expenditure in
certain circumstances.
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Research and development costs
Research and development costs of £27.6m (2005 £31.1m) were expensed, which was 11.8% (2005 11.8%) of sales.
No research and development costs were capitalised in the balance sheet.
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Gain on sale of property
During the year the group sold a property located on the East coast of the USA for £1.4m and surplus land at Newton Aycliffe, County Durham for £2.1m. Together these two sales resulted in a gain on sale of property of £0.5m (2005 £2.4m).
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Interest expense
Interest expense was reduced to £1.8m (2005 £4.2m) as a result of repaying the £44.0m bank loan during the year with
the proceeds from the sale of the Handset Products division.
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Taxation
The net taxation charge of £1.4m (2005 £0.2m) arises primarily from the group’s operations in China and Finland, where taxable profits cannot be relieved by losses available in other jurisdictions. The deferred tax credit arising in 2005 of £2.2m was due to the initial recognition of a proportion of the tax losses carried forward by the group’s operations in the United States of America as a deferred tax asset in the balance sheet.
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Disposal of Handset Products division
On 8 September 2005 the Handset Products division was sold for a net consideration of £45.4m plus an earn-out
consideration of £11.3m, due to be paid in August 2006. The gain on the sale of the division was £14.1m. The Handset
Products division has been treated as a discontinued operation in the financial results for both the years ended 31 May 2006 and 31 May 2005.
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Capital expenditure
Capital expenditure of £14.4m (2005 £13.0m) comprised continuing operations £13.4m (2005 £8.5m) and discontinued operations £1.0m (2005 £4.5m).
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Compound Semiconductors operation at Newton Aycliffe
The Compound Semiconductor operation at Newton Aycliffe achieved its target of being at run rate breakeven over the
last quarter of the year ended 31 May 2006. In light of this improved operating performance and increasing customer
demand, an impairment review of the operation has not been undertaken.
The Board has approved further financing of up to £15.0m for Newton Aycliffe, over the coming financial year, to meet
current demand forecasts. The business is targeted to be self-financing thereafter.
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Deferred income
Deferred income comprised government grants and the licence fee paid by BAE SYSTEMS Avionics Limited (now SELEX SAS) in connection with the Supply and Development Agreement dated 30 November 2001.
The arrangements for the regional selective assistance grants in respect of Newton Aycliffe were renegotiated during the year. As a result of the renegotiation £2.7m has been released to income, bringing the total deferred grant income recognised in the year to £3.9m (2005 £0.7m). No further grants are now due to be received, and there is no deferred grant income at 31 May 2006 for recognition in later years.
The deferred licence fee income recognised as revenue amounted to £2.3m (2005 £2.3m). The recognition of this
deferred licence fee income continues until 1 May 2008.
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Working capital
At 31 May 2006 net working capital was £48.5m (2005 £52.9m). The reduction was primarily due to the disposal of the Handset Products division during the year. Net working capital comprised inventories £33.6m (2005 £34.8m), receivables £56.3m (2005 £67.9m) and less payables £41.4m (2005 £49.8m).
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Cash flow and net debt
Cash inflow from operating activities was £0.5m (2005 £18.6m), cash inflow from investing activities was £33.7m (2005 £5.0m outflow) and net cash outflow from financing activities was £30.4m (2005 £12.2m). During the year the £44.0m term loan was repaid, and £18.0m revolving credit facilities were drawn, to end the year with net debt of £12.7m (2005 £43.4m), reducing gearing from 46% to 13%.
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Financing
We amended our bank debt facilities with Barclays and ABN AMRO three times during the year. In July 2005, the term
loan of £44.0m was agreed over a five year period along with an overdraft of £9.0m. The term loan was repaid on
completion of the sale of the Handset Products division in September 2005 and replaced by facilities totalling £20.0m.
These are a revolving credit facility of £18.0m available until 31 August 2008 and an overdraft of £2.0m. On 31 May 2006,
a further facility of £15.0m available to 30 November 2006 was arranged for the financing of the expansion of Compound Semiconductors. Arrangement fees totalling £0.5m have been charged in the year. The arrangement fee of £0.5m for the most recent facility arises in the financial year ending 31 May 2007.
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Defined benefit pension scheme
The group operates a defined benefit pension scheme for United Kingdom employees. After a consultation period with
the members of the scheme, which ends on 31 July 2006, it is expected that the benefits under the scheme will change
from the current final salary basis to being based on career average revalued earnings.
As part of the change to the scheme, the company has agreed to pay £4.6m into the scheme to fund the actuarial deficit at the date of change.
The defined benefit pension liability in the group and company balance sheets was £20.6m (2005 £16.1m). If the change to the basis of the scheme benefits had been in place at 31 May 2006, the defined benefit pension liability would have been reduced by approximately £5.0m. This reduction is before the benefit of the company’s additional £4.6m
contribution to the scheme referred to above.
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Wireless Infrastructure disposal costs
In the event that the disposal of the majority of the Wireless Infrastructure division to Powerwave is not completed, costs
for professional fees, related to the preparation for its sale, of approximately £2.6m will be expensed in the financial year ending 31 May 2007, along with a potential break fee due to Powerwave of up to £2.4m ($4.6m).
Charles Hindson BA FCCA MCT
Group Finance Director
31 July 2006
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