Interim Financial Results

Sales for the six months ended 30 November 2004 were £130.1m (*2003 £123.6m) and operating profit was £2.6m (*2003 £5.2m). Exceptional profit on disposals of property was £2.4m (2003 nil).

Financing costs totaled £1.7m (2003 £2.5m) comprising net interest payable £2.0m (2003 £2.8m) and a net currency exchange gain of £0.3m (2003 £0.8m).

The profit before taxation was £3.3m (*2003 £2.7m). After taxation charges of £1.6m (*2003 £1.5m), the profit was £1.7m (*2003 £1.2m). Basic earnings per share is 2.21p (*2003 1.60p). Diluted earnings per share is 2.21p (*2003 1.59p).

Dividend

The Board is maintaining an interim dividend of 0.90p (2003 0.90p) per share payable on 1 April 2005 to shareholders on the register at 25 February 2005.

Operations

The segmental analysis of the operating results is as follows:

* The results for the six months ended 30 November 2003 have been restated using the revised accounting policy described in note 6 to the interim financial information. The average rate of exchange for the period is now used to translate the results of overseas subsidiaries.

Wireless Infrastructure

This business segment has two main areas of activity for mobile base stations, these being filter based transmit/receive modules and integrated power amplifiers.

The filter based transmit/receive modules represent the established part of the activity. The overall market expansion is estimated to be 15% in the calendar year 2004, which we outperformed with 18% sales growth compared with the prior period in 2003. We consider that our total available market for these modules increased by more than 20% with the inclusion of Ericsson.

We further consider that we have improved our market leading position, where we hold 28% of the expanded available market, through commencing shipments to two new Original Equipment Manufacturers (“OEMs”), so that we now supply all major OEMs in production quantities. Margins remain stable at 13% compared to the prior period in 2003 as we continue the transition to low cost manufacturing. More than 50% of our module products are now manufactured in China, using locally sourced material.

The integrated power amplifiers are a new product area, which has been the principal development priority. We are focusing on products for the 3G sector, where the WCDMA market for power amplifiers is considered to be showing 20% CAGR. Development and initial production costs in the six months to 30 November 2004 were £3.0m (2003 £2.0m) and shipments of the product started on a small scale at the end of this reporting period.

Handset Products

This business segment has maintained its market position supplying about 18% of the global market in antennas for mobile handsets. We have kept our focus on the growing ‘internal antenna’ market and on supplying major handset OEMs, broadening our customer base with Samsung and others including Chinese manufacturers and Original Design Manufacturers. Our internal antennas continue to require high levels of mechanical integration.

During the six months ended 30 November 2004, the operating margin has improved, compared with the preceding six months, to 16% before goodwill amortisation, and 12% after goodwill amortisation. The margins were 27% and 24% respectively for the corresponding period of 2003, reflecting the very high level of demand with a customer for a product family in this period and the lower level of integration within antennas.

Integrated Products

We group within this business segment activities supporting the semiconductors and defence sectors and point to point microwave links. Overall, this division is showing revenue growth of 29% compared to the six month period of 2003, after excluding the turnover of the electronic warfare business of Filtronic Solid State that was sold in December 2003. Similarly, operating losses reduced by £2.8m to £5.7m for the six month period ended 30 November 2004.

Within semiconductors, progress has been made to broaden the product mix and use of the capacity of the semiconductor foundry at Newton Aycliffe. Our switches have been selected by RFMD for several products under a strategic supplier agreement. Our catalogue products are selling strongly and are used in space applications. We are experiencing increasing demand for more complex, higher value MMICs (Monolithic Microwave Integrated Circuits), and our foundry products have been accepted for critical applications by cellular OEMs.

The outstanding deferred licence fee from BAE SYSTEMS is now being recognised as revenue equally over the minimum period for which the Filtronic group is liable to make reimbursement. This period is to 1 May 2008. This results in an increase in such revenue in the six months to 30 November 2004 of £0.8m to £1.2m.

We are benefiting from strong growth in the US, based on highly integrated sub-systems for pulse frequency measurement, including a recent contract for upgrade to military aircraft.

Point to point microwave links are now being supplied to two OEMs for use in mobile networks.

Central R&D

The main focus for this activity has been to support the developments for the integrated power amplifiers, including digital pre-distortion techniques.

Finance

Interest costs have reduced by 29% compared to the prior period in 2003.

The group’s lending banks have confirmed their support, including continuing to waive the current breach of covenants, whilst reserving their rights. The group’s overdraft facility has been renewed at £9m until 31 January 2006. The additional finance charges arising from the breach of covenants will be approximately £0.5m in the year to 31 May 2005.

Capital expenditure

Capital expenditure in the six months to 30 November 2004 was £7.3m (2003 £5.0m). Its main focus was for generic automated production lines for Handset Products to support customer projects (£2.4m) and expansion of Wireless Infrastructure’s manufacturing resources in China (£1.4m), with limited investment in Wireless Infrastructure’s power amplifiers product (£0.8m) for initial production requirements.

Cash flow and closing net debt

Net cash flow from operations for the six months to 30 November 2004 was £10.9m (including a decrease in working capital of £1.6m), along with £7.4m proceeds principally from the sale of properties at Merrimack, USA and Brisbane, Australia on a sale and leaseback basis, resulted in an increase of cash of £4.9m after meeting capital expenditure of £7.3m, financing tax, dividends, interest and loan repayments of £7.0m. This compares with a decrease in cash of £9.5m for the six months to 30 November 2003, which included loan repayments of £8.4m, and reflects our focus on improving the cash performance in the current period.

As a result of the improved increase in cash, closing net debt was £44.0m, a reduction of £10.6m compared to 30 November 2003, which reduced our debt equity ratio from 51% to 43%.

Outlook

In Wireless Infrastructure, continued volume growth is expected in line with the strengthening market in 2.5 and 3G, with particular value coming from our focus on GSM, EDGE, CDMA and WCDMA products. The power amplifier production is expected to increase by the end of this financial year, and a second power amplifier product is also planned for production during the following financial year.

In Integrated Products, continued growth is expected from electronic warfare in the US and point to point microwave links in line with recent performance. Improved product mix should lead to revenue growth in compound semiconductors. This profile gives the potential overall growth equivalent to the past half year.

In Handset Products, revenue is expected to remain seasonal with growth in demand from our key customer’s new models not expected to start until next financial year. Management focus will remain on achieving efficiency although operating margins may be under pressure during this period of reduced demand.

The Board is continuing with the activities for the disposal of the Handset Products division, that was envisaged to be by way of either an IPO or a sale. To facilitate this, we have effected the legal separation of the associated businesses. In the light of current market conditions the Board is not pursuing an IPO at this stage.

Company directors

Professor J David Rhodes CBE FRS FREng
Chairman
31 January 2005