Statement re. IFRS

Filtronic PLC 24 January 2006 24 January 2006 Filtronic plc International Financial Reporting Standards In prior years Filtronic plc prepared its consolidated financial statements according to UK Generally Accepted Accounting Practice (UK GAAP). From 1 June 2005 Filtronic plc is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Consequently Filtronic plc's first results to be reported in accordance with IFRS will be the interim results for the six months ended 30 November 2005, which will be announced on Monday 30 January 2006. The comparative financial information for the six months ended 30 November 2004 and the year ended 31 May 2005 have been restated in accordance with IFRS as reported below. Consolidated Income Statement 6 months ended 30 November 2004 Continuing Discontinued operations operation Total note Â£000 Â£000 Â£000 Revenue 103,168 26,973 130,141 ======== ======== ======== Operating (loss)/profit (1,329) 4,311 2,982 Gain on disposal of property 2,372 - 2,372 Finance income 3 431 - 431 Finance costs 4 (2,281) - (2,281) -------- -------- -------- (Loss)/profit before taxation (807) 4,311 3,504 Taxation (1,668) - (1,668) -------- -------- -------- (Loss)/profit after taxation (2,475) 4,311 1,836 -------- -------- -------- (Loss)/profit for the period (2,475) 4,311 1,836 ======== ======== ======== (Loss)/earnings per share Basic 5 (3.31)p 5.77p 2.46p Diluted 5 (3.31)p 5.76p 2.45p The (loss)/profit for the period is attributable to the equity shareholders of the parent. Consolidated Income Statement Year ended 31 May 2005 Continuing Discontinued operations operation Total note Â£000 Â£000 Â£000 Revenue 212,891 49,974 262,865 ======== ======== ======== Operating profit 5,650 5,554 11,204 Gain on disposal of property 2,356 - 2,356 Finance income 3 607 - 607 Finance costs 4 (4,624) - (4,624) -------- -------- -------- Profit before taxation 3,989 5,554 9,543 Taxation (241) - (241) -------- -------- -------- Profit after taxation 3,748 5,554 9,302 -------- -------- -------- Profit for the period 3,748 5,554 9,302 ======== ======== ======== Earnings per share Basic 5 5.01p 7.43p 12.44p Diluted 5 5.00p 7.41p 12.41p The profit for the period is attributable to the equity shareholders of the parent. Consolidated Balance Sheet 30 November 31 May 2004 2005 Â£000 Â£000 Non-current assets Goodwill 32,024 31,400 Property, plant and equipment 81,601 79,793 Deferred tax - 2,309 ------- ------- 113,625 113,502 ------- ------- Current assets Inventories 30,862 34,802 Trade and other receivables 58,731 67,924 Income tax receivable 686 - Cash and cash equivalents 6,322 6,563 ------- ------- 96,601 109,289 ------- ------- ------- ------- Total assets 210,226 222,791 ------- ------- Current liabilities Bank overdraft 2,369 5,958 Bank loan 8,000 11,000 Trade and other payables 40,224 49,844 Income tax payable 1,954 1,880 ------- ------- 52,547 68,682 ------- ------- Non-current liabilities Bank loan 40,000 33,000 Defined benefit pension 15,804 16,149 Deferred income 12,295 10,730 Deferred tax 608 661 ------- ------- 68,707 60,540 ------- ------- ------- ------- Total liabilities 121,254 129,222 ------- ------- Net assets 88,972 93,569 ======= ======= Equity Share capital 7,484 7,484 Share premium 139,172 139,172 Translation reserve 554 1,302 Other reserve 1,937 5,584 Accumulated losses (60,175) (59,973) ------- ------- Total equity 88,972 93,569 ======= ======= Consolidated Statement of Recognised Income and Expense 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Profit for the period 1,836 9,302 Actuarial loss on defined benefit pension scheme (3,584) (6,784) Currency translation movement arising on consolidation 471 1,314 -------- -------- Total recognised income and expense for the period (1,277) 3,832 ======== ======== Consolidated Cash Flow Statement 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Cash flows from operating activities Profit for the period 1,836 9,302 Taxation 1,668 241 Finance costs 2,281 4,624 Finance income (431) (607) Gain on disposal of property (2,372) (2,356) -------- -------- Operating profit 2,982 11,204 Defined benefit pension charge/(credit) 1,476 (422) Defined benefit pension contributions paid (855) (2,029) Share-based payment 129 291 Depreciation 7,235 14,572 Gain on disposal of plant and equipment (136) (235) Licence fee released (1,167) (2,335) Government grants released (296) (693) Government grants received 1,000 1,000 Government grants repaid (150) (150) Movement in inventories 5,466 2,107 Movement in trade and other receivables (4,915) (13,249) Movement in trade and other payables 1,034 10,384 -------- -------- Cash flow from operations 11,803 20,445 Taxation paid (1,662) (1,846) -------- -------- Net cash from operating activities 10,141 18,599 -------- -------- Consolidated Cash Flow Statement 6 months Year ended ended 30 November 31 May 2004 2005 note Â£000 Â£000 Net cash from operating activities 10,141 18,599 -------- -------- Cash flows from investing activities Proceeds from sale of property 6,358 6,349 Proceeds from sale of plant and equipment 1,004 1,555 Interest received 45 85 Acquisition of property, plant and equipment (7,255) (12,963) -------- -------- Net cash from investing activities 152 (4,974) -------- -------- Cash flows from financing activities Bank loan repaid (2,000) (6,000) Interest paid (2,063) (4,189) Dividends paid (1,344) (2,018) -------- -------- Net cash from financing activities (5,407) (12,207) -------- -------- Increase in cash and cash equivalents 4,886 1,418 Currency exchange movement 366 486 Opening cash and cash equivalents (1,299) (1,299) -------- -------- Closing cash and cash equivalents 7 3,953 605 ======== ======== Notes to the Interim Financial Information 1. Business segment analysis 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Revenue Wireless Infrastructure 86,631 177,733 Electronic Defence 15,216 31,590 Compound Semiconductors 3,610 8,572 Inter segment (2,289) (5,004) -------- -------- Continuing operations 103,168 212,891 Handset Products - discontinued operation 26,973 49,974 -------- -------- 130,141 262,865 ======== ======== Operating profit/(loss) Wireless Infrastructure 7,062 17,524 Electronic Defence 1,197 3,070 Compound Semiconductors (6,289) (11,701) Central Services (2,678) (5,694) Unallocated pension (charge)/credit (621) 2,451 -------- -------- Continuing operations (1,329) 5,650 Handset Products - discontinued operation 4,311 5,554 -------- -------- Operating profit 2,982 11,204 Gain on disposal of property 2,372 2,356 Finance income 431 607 Finance costs (2,281) (4,624) -------- -------- Profit before taxation 3,504 9,543 Taxation (1,668) (241) -------- -------- Profit after taxation 1,836 9,302 ======== ======== The business segments were redefined with effect from 1 June 2005. The business segment results for the comparative periods have been re-analysed to be consistent with the current period. 2. Geographical origin segment analysis 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Revenue United Kingdom 54,614 106,447 Finland 16,223 31,214 United States of America 27,030 65,880 China 23,647 57,147 Australia 2,405 4,300 Inter segment (20,751) (52,097) -------- -------- Continuing operations 103,168 212,891 -------- -------- Finland 13,374 23,220 China 14,990 29,841 Inter segment (1,391) (3,087) -------- -------- Discontinued operation 26,973 49,974 -------- -------- 130,141 262,865 ======== ======== Operating (loss)/profit United Kingdom (10,077) (20,798) Finland 2,227 3,041 United States of America 1,080 9,538 China 6,750 16,198 Australia (1,309) (2,329) -------- -------- Continuing operations (1,329) 5,650 -------- -------- Finland (137) (2,923) China 4,448 8,477 -------- -------- Discontinued operation 4,311 5,554 -------- -------- Operating profit 2,982 11,204 Gain on disposal of property 2,372 2,356 Finance income 431 607 Finance costs (2,281) (4,624) -------- -------- Profit before taxation 3,504 9,543 Taxation (1,668) (241) -------- -------- Profit after taxation 1,836 9,302 ======== ======== 3. Finance income 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Interest income 45 85 Currency exchange gains 386 522 -------- -------- 431 607 ======== ======== 4. Finance costs 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Interest expense (2,063) (4,189) Net pension finance cost (218) (435) -------- -------- (2,281) (4,624) ======== ======== 5. (Loss)/earnings per share 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 (Loss)/profit for the period - continuing operations (2,475) 3,748 - discontinued operation 4,311 5,554 -------- -------- Profit for the period 1,836 9,302 ======== ======== 000 000 Weighted average number of shares 74,753 74,797 Dilution effect of share options 33 84 Dilution effect of contingently issuable shares 89 45 -------- -------- Diluted weighted average number of shares 74,875 74,926 ======== ======== Basic (loss)/earnings per share - continuing operations (3.31)p 5.01p - discontinued operation 5.77p 7.43p -------- -------- Basic earnings per share 2.46p 12.44p ======== ======== Diluted (loss)/earnings per share - continuing operations (3.31)p 5.00p - discontinued operation 5.76p 7.41p -------- -------- Diluted earnings per share 2.45p 12.41p ======== ======== 6. Dividends The dividends recognised in equity and paid during the period were as follows: 6 months Year ended ended 30 November 31 May 2004 2005 Per share Â£000 Â£000 Final dividend year ended 31 May 2004 1.80p 1,344 1,344 Interim dividend year ended 31 May 2005 0.90p - 674 -------- -------- 1,344 2,018 ======== ======== 7. Cash and cash equivalents and net debt 30 November 31 May 2004 2005 Â£000 Â£000 Cash and cash equivalents 6,322 6,563 Bank overdraft (2,369) (5,958) -------- -------- Cash and cash equivalents in the cash flow statement 3,953 605 -------- -------- Bank loan - current (8,000) (11,000) - non-current (40,000) (33,000) -------- -------- Debt (48,000) (44,000) -------- -------- -------- -------- Net debt (44,047) (43,395) ======== ======== 8. Reconciliation of movements in equity 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Opening equity 91,464 91,464 Total recognised income and expense for the period (1,277) 3,832 Share-based payments 129 291 Dividends (1,344) (2,018) -------- -------- Closing equity 88,972 93,569 ======== ======== 9 Basis of preparation These comparative interim financial statements have been prepared on the basis of International Financial Reporting Standards (IFRS) as adopted for use in the European Union that are effective at 31 May 2006, which is the group's first annual reporting date under IFRS. IFRS are subject to ongoing amendment by the International Accounting Standards Board and subsequent endorsement by the European Union, and therefore are subject to change. The consolidated financial statements for the year ended 31 May 2006 will be the group's first full IFRS financial statements. The date of transition to IFRS is 1 June 2004. The financial information for the comparative periods has been restated on the basis of IFRS. Reconciliations from UK GAAP to IFRS of the profit for the period and total equity for the comparative periods are set out in note 10. Explanations of the differences between the UK GAAP and the IFRS financial statements are provided in note 11. The group has elected to take certain IFRS first-time adoption options and these are described in note 12. The accounting policies adopted when reporting under UK GAAP have been revised where necessary to comply with IFRS. The accounting policies adopted by the group under IFRS are laid out in note 13. The accounting policies have been applied consistently to all the periods presented in these comparative interim financial statements. 10 Reconciliations from UK GAAP to IFRS The reconciliations from UK GAAP to IFRS of the profit for the period and total equity for the comparative periods are as follows: Profit for the period 6 months Year ended ended 30 November 31 May 2004 2005 Â£000 Â£000 Profit for the period per UK GAAP 1,652 5,312 Goodwill amortisation 1,109 2,222 Share-based payments (86) (248) Defined benefit pension operating (charge)/credit (621) 2,451 Defined benefit pension net finance cost (218) (435) -------- -------- Profit for the period per IFRS 1,836 9,302 ======== ======== Total equity 1 June 30 November 31 May 2004 2004 2005 Â£000 Â£000 Â£000 Total equity per UK GAAP 101,113 102,590 105,778 Proposed dividends 1,344 674 1,347 SSAP 24 pension accrual 388 388 388 Defined benefit pension liability (11,381) (15,804) (16,149) Goodwill amortisation - 1,109 2,222 Goodwill currency translation movement - 15 (17) -------- -------- -------- Total equity per IFRS 91,464 88,972 93,569 ======== ======== ======== 11 Differences between the UK GAAP and the IFRS financial statements Explanations of the differences between the UK GAAP and the IFRS financial statements are as follows: Presentation of financial statements The formats of the income statement, balance sheet and particularly the cash flow statement are different under IFRS as compared to those used for UK GAAP. Segment reporting The reportable business segments were redefined to comply with the requirements of IAS 14 Segment Reporting. Each reportable business segment is subject to risks and returns that are different from the other business segments. Goodwill Goodwill is not amortised under IFRS. Instead goodwill is subject to annual impairment testing, which indicated there was no impairment. Share-based payment Under IFRS, the fair value of share options at the date of grant is expensed in the income statement over the vesting periods of the options. Defined benefit pension IAS 19 Employee Benefits requires the separate recognition of the operating and financing costs of the defined benefit pension scheme in the income statement. Service costs are spread systematically over the working lives of the employees. Financing costs are recognised in the periods in which they arise. There was a past service credit in the year ended 31 May 2005 as a result of a reduction in the benefits payable under the scheme. The defined benefit pension liability is the present value of the defined benefit obligation less the fair value of the pension scheme assets. Actuarial gains and losses are recognised immediately in the statement of recognised income and expense. Previously under UK GAAP the defined benefit pension scheme was accounted for in accordance with SSAP 24. The SSAP 24 charge to the income statement for the comparative periods presented was the same as the employers pension contributions for the period. The defined benefit pension costs and pension liability under IAS 19 are the same as disclosed under FRS 17 in the UK GAAP financial statements for the year ended 31 May 2005. Dividends Under IFRS, interim dividends are recognised in the period they are declared, and final dividends are recognised in the period they are approved by shareholders. Dividends are recognised directly in equity, and not in the income statement. Translation reserve Under IFRS, currency translation movements arising from the consolidation of overseas subsidiaries are accumulated in the translation reserve, which is a separate component of equity. Revaluation reserve The UK GAAP revaluation reserve of Â£106,000 has been reclassified to accumulated losses under IFRS. The amount was the balance on the revaluation reserve at the transition date in respect of assets that are measured on the basis of deemed cost under IFRS. 12 IFRS First-time adoption options The group has elected to take certain IFRS first-time adoption options as follows: Business combinations All prior business combination accounting has been frozen at the transition date. This includes goodwill on the balance sheet and goodwill deducted from equity. Share-based payments Only share options granted since 7 November 2002 have been fair valued and expensed in the income statement over the vesting periods. Employee benefits All cumulative actuarial gains and losses in respect of the defined benefit pension scheme have been recognised at the transition date. Foreign exchange The translation reserve arising from the consolidation of foreign subsidiaries was set to zero at the transition date. 13 Accounting policies Basis of accounting The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements have been prepared under the historical cost convention, except for the defined benefit pension liability which is measured at fair value. The accounting policies have been applied consistently throughout the group. Basis of consolidation The financial statements consolidate the income statements, balance sheets and cash flow statements of the company and all of its subsidiaries. Subsidiaries are all entities over which the group has the power to govern the financial and operating policies. Subsidiaries are consolidated from the date on which control is transferred to the group. Subsidiaries are not consolidated from the date that control ceases. Intra group transactions and balances are eliminated on consolidation. Segment reporting The business segments are the primary segments and the geographical origin segments are the secondary segments. Each reportable segment is subject to risks and returns that are different from the other segments. Foreign currency translation The functional currency of each subsidiary is the currency of the primary economic environment in which the subsidiary operates. The financial statements are presented in sterling which is the functional and presentational currency of the company. Transactions denominated in foreign currencies are translated into the functional currency of each subsidiary at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rate of exchange ruling at the balance sheet date. Foreign exchange gains and losses arising on the settlement of such transactions and translation of monetary assets and liabilities are recognised in the income statement. On consolidation, the financial statements of subsidiaries with a functional currency other than sterling are translated into sterling as follows: - The assets and liabilities in their balance sheets plus any goodwill are translated at the rate of exchange ruling at the balance sheet date. - The income statements and cash flow statements are translated at the average rate of exchange for the period. Currency translation movements arising on the translation of the net investments in foreign subsidiaries are recognised in the translation reserve, which is a separate component of equity. Revenue Revenue is recognised for goods and services provided to customers during the period. Revenue excludes any related value added or sales tax. Research and development All research costs are expensed as incurred. Development costs chargeable to the customer are recognised as an expense in the same period as the associated customer revenue. Development costs incurred on projects requiring product qualification tests to satisfy customer specifications are generally expensed as incurred, reflecting the technical risks associated with meeting the resultant product qualification test. Development costs incurred on projects are capitalised where firstly the technical feasibility can be tested against relevant milestones, secondly the probable revenue stream foreseen over the life of the resulting product can support the development and thirdly sufficient resources are available to complete the development. These capitalised costs are amortised on a straight line basis over the expected life of the associated product. Once a new product is qualified, further development costs are expensed as they arise because they are incurred in response to continual customer demand to enhance the product functionality and to reduce product selling prices. Government grants Government grants related to operating expenditure are recognised in the income statement in the same period as the expenditure. Government grants related to capital expenditure are credited to deferred income in the balance sheet on receipt. The deferred government grant income is recognised in the income statement over the expected life of the related assets. Operating leases Operating lease rentals are charged to the income statement on a straight line basis over the lease term. Share-based payments The group operates share option schemes, under which share options are granted to certain employees. The granting of the share options is a share-based payment. The fair value of the share options at the date of grant is calculated using an option pricing model, taking into account the terms and conditions applicable to the option grant. The fair value of the number of share options expected to vest is expensed in the income statement on a straight line basis over the expected vesting period. Each reporting period these vesting expectations are revised as appropriate. A credit is made to equity, equal to the share-based payment expense in the period. Goodwill Goodwill represents the excess of the cost of acquisitions over the fair value of the net identifiable assets of the subsidiary acquired at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units. Goodwill is tested for impairment annually and when there is an indication of impairment. If impaired, the goodwill carrying value is written down to its recoverable amount. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and less any accumulated impairment losses. Depreciation is provided on a straight line basis over the estimated useful lives of the assets as follows: Freehold land Not depreciated Freehold buildings 50 years Plant and equipment 3 to 10 years Property, plant and equipment are tested for impairment when there is an indication of impairment. If impaired, the carrying values of the assets are written down to their recoverable amounts. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises weighted average cost of materials and components together with attributable direct labour and overheads. Net realisable value is the estimated selling price less estimated costs of completion and sale. Trade receivables Trade receivables are stated net of any provision for doubtful debts. Cash and cash equivalents Cash and cash equivalents comprise cash balances and bank deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the group's cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement. Net debt Net debt is cash and cash equivalents less bank overdrafts, bank revolving credits and bank loans. Dividends Interim dividends are recognised in equity in the period they are declared. Final dividends are recognised in equity in the period they are approved by shareholders. Share capital Ordinary shares issued are classified as share capital in equity. Pension schemes Defined contribution pension schemes are operated for overseas employees. Contributions are recognised as an expense in the income statement as incurred. A defined benefit pension scheme is operated for United Kingdom employees. The defined benefit pension liability is the present value of the defined benefit obligation less the fair value of the pension scheme assets. The defined benefit obligation is calculated by independent actuaries using the projected unit measure. The discount rate used to calculate the present value of the defined benefit obligation is the yield on AA credit rated corporate bonds that have maturity dates approximating the terms of the benefit obligations. Service costs are spread systematically over the working lives of the employees, and are recognised within operating costs in the income statement. Financing costs are recognised in the periods in which they arise within finance costs in the income statement. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised immediately in the statement of recognised income and expense. Deferred taxation Deferred tax is provided using the balance sheet liability method. Provision is made for temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts for taxation purposes. Temporary differences are not provided for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit. No provision is made for differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. This information is provided by RNS The company news service from the London Stock Exchange

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