Final Results
Flomerics Group PLC
27 February 2003
IMMEDIATE RELEASE 27 February 2003
'Preliminary results for Flomerics'
Flomerics Group PLC, supplier of analysis software to the telecommunications,
semiconductor and computer industries, and other sectors of the electronics
industries, announces its results for the year ended 31 December 2002.
Key Points
• Turnover down 9% to £11.7m (2001 : £12.9m). (7% decrease at constant
exchange rates)
• Profit Before Tax increased over 100% to £635,000. (2001: £308,000) by
continued tight control of costs.
• Earnings per share before amortisation of goodwill increased 65% to
3.8p (2001 : 2.3p)
• Strong cash position with a balance of £2.2m. (2001 : £1.1m)
• Continued encouraging progress with FLO/EMC (growth of 43% over 2001)
and FLOVENT (growth of 9% over 2001) with sales of FLOTHERM most
affected by the difficult market conditions (revenue down 13% on 2001).
• Good prospects for the converged product of FLOTHERM and FLO/EMC when
it is released in the first half of 2003.
• Dividend maintained at 1p per share
Commenting on the results and prospects, David Tatchell, the Chief Executive,
said:
"While we see another tough year in front of us, we are confident that our core
thermal business offers continuing growth opportunities. We are providing
solutions for increasingly critical design needs. Therefore, as design activity
in the industry recovers, we would expect to see intensifying demand for
Flomerics' products, which our position of market leader puts us in an ideal
position to exploit."
For further information please contact:
Flomerics:
David Mann, Chairman 020 8941 8810
David Tatchell, Chief Executive
Chris Ogle, Finance Director
Buchanan Communications:
Tim Thompson / Nicola Cronk 020 7466 5000
CHAIRMAN'S STATEMENT
Flomerics has achieved a profit before tax of £635,000 in the year ended 31
December 2002 (i.e. to double the £308,000 of the previous year). The difficult
trading conditions encountered in the second half of 2001 persisted throughout
2002 and resulted in a decrease in turnover of 9% to £11.7 million (2001: £12.9
million); at constant rates of exchange the reduction was 7%. Although this
reduction is naturally disappointing, the Directors consider that the Company
has benefited from the importance of its products to customers in the
electronics sectors around the world, many of whom have been under very
considerable pressure to cut costs. Flomerics has worked extremely hard to
support these customers through this challenging period, while at the same time
maintaining a tight control of costs to improve profit margins and increase net
cash balances.
In some respects the results for the year as a whole are similar to the interim
results for the first half, which also showed a reduction in turnover combined
with an increase in profit. At the interim stage the Directors considered that
there were reasonable prospects for the year as a whole showing some growth,
particularly bearing in mind the weak second half of 2001. However, by October
it had become clear that the second half was proving even more challenging and
in the event turnover in that period was less than in the first half.
Earnings per share for the year before amortisation of goodwill were 3.8p (2001:
2.3p) and at 31 December 2002 cash balances were £2.2 million (2001:£1.1
million). The Directors propose to pay a dividend of 1p per share in respect of
the year 2002, which would maintain the same level of dividend as in 2001 and
2000. Subject to approval by shareholders, the dividend will be paid on 9 May
2003 to shareholders on the register at the close of business on 11 April 2003.
THE PRODUCTS
The Group's strategy continues to be that of addressing a larger market with a
broader range of products. Its strong position in the provision of software and
associated services to the electronics industry has been established with its
flagship product, FLOTHERM. Significant investments have been made not only in
developing new versions of this product but also in key new offerings,
especially with FLO/EMC.
Sales of FLOTHERM and associated services have been those most affected by the
downturn in the electronics, computing and telecommunications sectors. Growth in
sales from the other products has been encouraging, although held back by the
global economic situation.
FLOTHERM continues to be the Group's predominant revenue generator but to a
lesser extent, accounting for 76% of turnover in 2002 (2001: 81%). Revenue from
this product contracted by 13% compared to flat revenue in 2001 and 32% growth
in 2000. Renewals were at a lower level than expected due to many customers
reducing their own costs and indeed some going out of business. The Group did
not lose any of its major corporate accounts, but in some instances the level of
renewal was lower.
FLOVENT accounted for 10% of the Group's turnover (2001:9%) with growth of 9%
over the previous year (2001: 12%). The product has benefited from the data
centre initiative, which has enabled closer synergies with FLOTHERM.
FLO/EMC accounted for 6% of the Group turnover (2001:4%) with growth of 43% over
the previous year (2001:274%). The product has been well received in various
quarters and the synergies that were expected are being realised with the
product being sold to a good number of existing FLOTHERM customers. The product
should receive a significant boost when the converged product of FLOTHERM and
FLO/EMC is released in the first half of 2003. In 2003 it will also be more
actively sold in some of the Group's smaller regional offices.
Microstripes accounted for 8% of Group turnover (2001: 6%) with growth of 7%
over the previous year.
INTERNATIONAL DEVELOPMENT
From a geographical perspective revenues have been most affected by the downturn
in the US. Total revenues from the US fell by 13% (at constant rates) compared
to 2001. Japan has also been affected and sales of FLOTHERM were down by 20%.
Europe on the other hand has been relatively resilient; despite the economic
situation, the offices in France, Germany and Sweden all experienced growth in
turnover in excess of 10%. Over the last two years new offices have been set up
in China and Singapore. These have proved to be successful, with turnover more
than doubled in China and growth of over 50% in Singapore.
EMPLOYEES AND MANAGEMENT
In the fourth quarter of 2001 the number of employees was reduced from 157 to
138. During 2002 there has been a tight control on recruitment and staff numbers
have been further reduced to 127, largely by normal leavers. The team has coped
well with the additional pressures caused by this reduction in resources as well
as the direct effects of the market downturn.
I am pleased to announce the appointment of Paul Ramshaw to the board of
Flomerics Limited as the Regional Director responsible for Asia Pacific. Paul
has been with the Company since 1994 and has successfully established regional
offices in China, Singapore and Sweden. His appointment reflects the Group's
increased focus on Asia Pacific, which should play an increasing part in its
fortunes over the next few years.
BID APPROACH
On 23 October 2002, in response to a sharp movement in the share price, the
Board of Flomerics Group plc was obliged to advise shareholders that it had
received a preliminary approach for the acquisition of the Company. Subsequent
to that announcement the Board received further expressions of interest. The
discussions with the interested parties were protracted and the Board concluded
that it was unlikely to receive an offer that it would recommend to
shareholders. The talks were therefore discontinued and the market was informed
to this effect on 30 January 2003.
PROSPECTS
Along with many other companies in our sector, Flomerics continues to find
trading conditions difficult and the Directors consider that this situation
could last for some time. We do not expect any appreciable recovery in 2003 and
any growth in revenues in the short term will be difficult to achieve. The
Company has managed its cost base carefully and will ensure that costs do not
increase until conditions improve.
The Company has an excellent suite of products, which address important and
proven needs in the design of electronic equipment. With the release of key new
versions of products in 2003, the board believes that the Company's relative
position in the market will strengthen and that it is well placed to benefit
when economic conditions in the electronics sector start to improve.
I have always been impressed by the strong sense of loyalty and commitment that
exists within Flomerics. I believe those qualities have been essential in
enabling the staff and management to produce a very creditable performance in
difficult circumstances. On behalf of the shareholders, I thank all the members
of the team for their efforts and determination in this challenging period.
David Mann
Chairman
26 February 2003
CHIEF EXECUTIVE'S REVIEW
THE END OF THE TUNNEL?
During 2002 Flomerics has continued to be affected by the prolonged economic
slowdown. In particular, the FLOTHERM business (now 76% of our total) has
clearly suffered from the continuing difficulties in the electronics industries
- leading to the 13% contraction in FLOTHERM business we experienced during
2002.
Looking forward, a number of questions arise:- What, while this is going on, is
happening to Flomerics' customer base and market position? Is a recovery in
industry design activity in sight? And, most importantly, are there reasons for
confidence that the demand for FLOTHERM will bounce back as the industry
recovers?
Focusing first on our customer base and market position - we have, during 2002,
been successful in retaining all of our major corporate accounts, and in
increasing our presence in a number of them, most notably Dell, Sun, Siemens,
and Thales. Moreover, we are confident that we are retaining our worldwide
position as "number 1" in electronics thermal software. Our success rate against
competitors remains good - and this has enabled us to retain a market share that
is significantly more than all competitors combined. Maintaining this leading
market position is doubly important to us - it puts us in a strong position to
benefit as the industry recovers - and it provides the ideal base from which to
build complementary businesses, such as FLO/EMC.
Are we beginning to see any signs of the market recovery? While industry
indicators would indicate that the worst is past(1), all the signs are that the
recovery, when it comes, will be slow and patchy. Certainly, our market remains
weak, and we are not yet seeing any clear signs of immediate recovery in our
business. On the other hand - looking beyond the very short term - we remain
confident that, as the recovery progresses, and as the electronics industries do
return to steady growth, we will benefit from a strengthening demand for our
products.
CONTINUING OPPORTUNITIES IN ELECTRONIC THERMAL
Why the confidence? Consider first our current experience. The industry sectors
which make up our primary markets are telecoms/networking and computing - both
of which have suffered major contraction during the slowdown. Many of the
smaller companies have disappeared, and even the leading industry players - who
are major FLOTHERM customers - have shrunk, some by 50% or more.
Against this backdrop, the limited contraction (of 13%) in FLOTHERM business
appears in a rather more positive light. This result does confirm what we have
argued from the beginning of the slowdown - that thermal design (and the
FLOTHERM thermal analysis which supports it) is an increasingly critical and
necessary part of the design process for any new electronics equipment - so
that, even in troubled times, companies need to maintain this investment in
order to survive and to remain competitive.
(1)An important indicator is US technology spending, which has recovered from over
10% year-on-year contraction in mid 2001 to just under 5% growth at the end of
2002. Quarterly year-on-year growth figures for US Technology Investments, from
U.S Department of Commerce, as quoted in Nov 2002 "Technology Spending Outlook"
by W R Hambrecht & Co (www.wrhambrecht.com).
The factor underlying this is the inexorable trend in all classes of electronics
equipment of escalating functionality and power densities. In other words,
slowdown or no slowdown, "Moore's Law" continues to apply. This means that
thermal (and EMC) design problems appear certain to continue to intensify for
the foreseeable future.
Hence our confidence that, as the industry recovers, we would expect to see
intensifying demand for Flomerics' products, which our position of market
leadership puts us in an ideal position to exploit.
EVEN IN THE SLOWDOWN - STRONG GROWTH IN EMC
The foregoing focuses on our core thermal market. However, as we have made clear
previously, we see the future of Flomerics as being based on using our leading
position in electronics thermal as a foundation for new, complementary analysis
products addressing parallel needs in the "physical design of electronics".
As a first step, we have identified electromagnetics compatibility (EMC) as a
critical electronics design need, which we are addressing via our FLO/EMC
product. FLO/EMC is primarily aimed at existing FLOTHERM customers, for whom it
provides a means of analysing the emissions of electromagnetic radiation from
their equipment. The levels of such emissions are limited by legislation - and,
as functional densities and clock speeds in present-day equipment escalate,
reducing or containing such emissions is becoming an increasingly challenging
design issue.
To reinforce this, our current experience would demonstrate the increasing
recognition in industry of the importance of EMC issues - and of the unique
solution that Flomerics is providing. In 2002, despite the industry slowdown,
FLO/EMC showed continuing strong growth (of 43%), and increasing market
penetration. It is now becoming established at over 40 organisations worldwide,
including a number of major FLOTHERM accounts such as Intel, Dell, Lockheed
Martin, and Siemens. This experience re-affirms our confidence that, with a
long-term market potential comparable to our current core FLOTHERM business, FLO
/EMC provides real growth opportunities even in the present depressed market
conditions.
Up to now the FLO/EMC product has been based on the earlier electromagnetics
software from Kimberly Communications Consultants Limited (KCC), which Flomerics
acquired in 1999. In parallel, development has been underway on a new version,
which will offer the same EMC analysis capabilities within the FLOTHERM product
architecture. This "merged product" offers a number of major benefits:- it
provides the user with the improved user interface available in Flomerics' core
products; it enables users to share data models between FLO/EMC and FLOTHERM
(facilitating investigation of the often-necessary trade-offs between thermal
and EMC design changes); and it ensures that future investments in the FLOTHERM
code series also benefit FLO/EMC.
The first merged-product FLO/EMC release is scheduled during the first half of
2003. We are confident that this important release will enable us to maintain
the momentum of FLO/EMC growth during 2003 and beyond, and to exploit the major
medium - and long-term - opportunities we see for FLO/EMC.
PLUS - EMERGING MARKETS IN ASIA PACIFIC
In building and managing our international infrastructure, we are increasingly
focussing on the Asia Pacific territories.
We see these territories (particularly China) as "emerging markets" for our
electronics-industry products. The performance during 2002 - in which the Asia
Pacific territories showed significant growth, against the trend of the rest of
the world - would confirm this.
In recognition of the increasing importance of these markets, we have created a
new Asia Pacific Division, under a new Director, Paul Ramshaw. In his previous
capacity as Sales Manager at Flomerics, Paul has been responsible (among other
things) for the establishment and management of many of our Asia Pacific
operations. Now that he can focus entirely on Asia Pacific, we are confident
that he will be able to maximise our opportunities in these increasingly
important territories.
TO SUM UP
In summary - while we see another tough year in front of us - we are confident
that our core thermal business offers good continuing growth opportunities. In
addition, we see major opportunities from the FLO/EMC product, which is becoming
increasingly well established alongside our thermal products.
We are confident that our worldwide market-leading position will enable us to
exploit these opportunities as the industry recovers.
David Tatchell
Chief Executive
26 February 2003
OPERATING AND FINANCIAL REVIEW
THE BUSINESS MODEL
Turnover for the Group is derived from the sale of analysis software and
associated services. The software is used by engineers in the design process to
produce a "virtual prototype", which enables them to predict the behaviour of a
proposed design prior to the build and test phase.
There are four principal products:
The flagship product is FLOTHERM, which predicts temperatures and airflows and
is used by engineers in the electronics industries to improve the thermal design
of their equipment.
FLO/EMC is also sold to engineers in the electronics industries and enables
better predictions of the electromagnetic radiation and interference problems -
or "electromagnetic compatibility" (EMC).
FLOVENT utilises the same software structure as FLOTHERM, but is applied to
larger spaces - such as buildings. Applications include heating, cooling,
ventilation and air quality.
Microstripes was the product acquired from KCC. It is a 3D electromagnetic
simulator used in the design of microwave devices and antennae.
A principal aim of the Group is to lead the market for analysis software in the
physical design of electronics. A global market lead has been established with
FLOTHERM and the strategy is to consolidate this position and establish the same
position with FLO/EMC. In the meantime synergies will be maximised with
FLOVENT, for example by focusing the product on data centres, which use
equipment that has been designed with FLOTHERM. Synergies are also being
exploited with Microstripes by focusing on the embedded antenna market.
We also believe that there are important opportunities for our products to be
sold to other parts of the supply chain. Selling to data centres is an example
of this at one end of the chain: at the other end there is an opportunity to
sell to the suppliers of the components.
The Group derives the majority (approx. 90%) of its turnover from the sale of
licences and support. The rest comes from training and consultancy. Customers
pay by the "seat" for the software and some of the larger customers may have up
to 80 seats. There is no over dependency on any one customer. Most licences are
sold as annual licences, so that there is a considerable benefit from repeat
business as the licences renew. Occasionally two or three year or perpetual
licences will also be sold depending on the customer's requirements.
RESEARCH AND DEVELOPMENT
During 2002 considerable effort has been directed towards the new converged
product of FLOTHERM and FLO/EMC version 4.1. The first release of this product
is expected in the first half of 2003. This is a major release and is key to the
strategy of providing multiple solutions to designers in the electronics sector.
It will allow designers working on different aspects of the design - i.e. the
thermal and EMC, to share data models and thereby obtain an optimum solution.
Total Research and Development costs, in line with other costs, came down in
2002 by about £300,000 but at £2.5 million still represents more than 21% of
revenue. This figure includes a share of all of the central costs but at over
20% is higher than we would normally expect in the medium term.
Looking further forward the next release of the converged product is planned for
2004 and work is also in hand on new products that will help to deliver the
strategy of exploiting the supply chain in our chosen markets.
AREAS OF OPERATION
The Group's head office and research and development function is located in
Hampton Court in the UK. In the US, which accounts for a significant proportion
of the Group's revenue, there are four sales and support offices. In addition
there are four offices in Europe and three offices in the Asia Pacific region.
PERFORMANCE IN 2002
A summary of the Group's trading performance is given in the Chairman's
statement.
In the last quarter of 2001, in anticipation of slowing revenues, the cost base
was reduced with a headcount reduction of roughly 12%. Throughout 2002 costs
have been carefully controlled and the headcount has fallen by a further 8%.
Compared with 2001 total costs were down by 12%. The result is an increase in
profit before tax of over 100% to £635,000 and an improvement in the margin from
2.4% to 5.4%. This is below where we would like it to be but with a continued
lead in the thermal analysis market and other products coming on stream, we are
well placed to deliver attractive margins when trading conditions improve.
FINANCING AND THE BALANCE SHEET
The balance sheet remains strong. The cash balance at the end of 2002 was over
£2 million compared to £1 million at the end of 2001 and net funds have improved
to £1.5 million from £235,000. Borrowings of £673,000 comprise a mortgage on a
freehold property for £630,000 (2001:£683,000) and finance leases of £43,000
(2001:£130,000).
The Group had an overdraft facility of £800,000, which expired in August 2002.
In view of the strong cash position this facility has not been renewed.
Because of the international nature of the business, there is exposure to
exchange rate fluctuations and in particular the US dollar, accounting for more
than 50% of the total turnover. Forward exchange contracts are taken out against
significant cash receipts of foreign currencies expected in the UK.
Cash generated from operating activities was over £2million (2001:£1.7 million).
After capital expenditure of £362,000 (2001: £1.7 million, including a freehold
property for £1.1 million), tax paid of £234,000 (2001: £260,000) and a dividend
paid to shareholders of £146,000 (2001:£146,000) cash inflow was £1.3 million
(2001: outflow £440,000.)
Trade debtors for the business are always high at the end of the year because of
the greater proportion of business transacted in the last quarter. Trade debtors
at the end of 2002 were £3.3 million, representing 29% of the turnover compared
to £3.8 million, or 30% of turnover at the end of 2001.
The freehold property referred to above was acquired in 2001, when it was
expected that the UK operation would require additional space. In 2002 the
property was refurbished and we are currently looking to let the premises
short-term but the market for commercial property in the South East of England
is very slow.
The Group is carrying £540,000 of goodwill on the balance sheet relating to the
acquisition of Kimberley Communications Consultants Limited in 1999. This is
being amortised over ten years.
There are few trade creditors and out of a total creditors figure of £3.5
million, £2.0 million represents deferred revenue. These are amounts that have
been invoiced to our customers but not recognised in the profit and loss
account, being attributable to the support element of the sale.
Chris Ogle
Finance Director
26 February 2003
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2002
2002 2002 2001 2001
(Unaudited) (Unaudited) (Audited) (Audited)
£'000 £'000 £'000 £'000
Turnover 11,711 12,875
Cost of sales (355) (518)
_________ _________
Gross profit 11,356 12,357
Administrative expenses
Goodwill amortisation (82) (82)
Other (including research and
development) (10,570) (11,968)
________ ________
(10,652) (12,050)
________
Operating profit 704 307
Other interest receivable and similar
income 26 123
Interest payable and similar charges (95) (122)
________ _________
Profit on ordinary activities before
taxation (Note 3) 635 308
Tax on profit on ordinary activities (160) (55)
_________ _________
Profit for the financial year 475 253
Dividends (146) (146)
_________ _________
Retained profit for the financial year 329 107
_________ _________
Earnings per share (Note 4) 3.25p 1.73p
Diluted earnings per share (Note 5) 3.23p 1.72p
Earnings per share before amortisation of
goodwill 3.81p 2.29p
CONSOLIDATED BALANCE SHEET
AT 31 DECEMBER 2002
2002 2002 2001 2001
(Unaudited) (Unaudited) (Audited) (Audited)
£'000 £'000 £'000 £'000
Fixed assets
Intangible assets 540 622
Tangible assets 1,908 2,146
_______ ________
2,448 2,768
Current assets
Debtors 4,216 5,109
Cash at bank and in hand 2,159 1,048
_______ _______
6,375 6,157
Creditors: amounts falling due
within one year (3,546) (3,754)
_______ _______
Net current assets 2,829 2,403
_______ _______
Total assets less current 5,277 5,171
liabilities
Creditors: amounts falling due
after more than one year (574) (668)
Provisions for liabilities and - (33)
charges
_______ _______
Net assets (Note 3) 4,703 4,470
_______ _______
Capital and reserves
Called up share capital 146 146
Share premium account 1,602 1,602
Merger reserve 759 759
Profit and loss account 2,196 1,963
________ ________
Equity shareholders' funds 4,703 4,470
________ ________
SUMMARY CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2002
2002 2001
(Unaudited) (Audited)
£'000 £'000
Operating Activities
Operating profit 704 307
Depreciation and amortisation charges 635 706
(Profit)Loss on disposal of fixed assets (17) 13
Profit on disposal of investment - (25)
Exchange differences (80) (36)
Decrease in debtors 893 517
(Decrease) /increase in creditors (121) 187
Net cash inflow from operating activities 2,014 1,669
Net cash (outflow) / inflow from returns on
investment and servicing of finance (69) 1
Tax paid (234) (260)
Net cash outflow from capital expenditure (314) (1,704)
Equity dividend paid (146) (146)
________ ________
Net cash inflow /(outflow) before financing 1,251 (440)
Net cash (outflow) / inflow from financing (140) 490
________ ________
Increase in cash in the year 1,111 50
________ ________
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET
FUNDS
Increase in cash in period 1,111 50
Cash outflow from decrease in debt and lease
financing 140 196
New mortgage - (700)
Movement in net funds in the year 1,251 (454)
Net funds at 1 January 235 689
Net funds at 31 December 1,486 235
Notes:
1. The Group recognised unrealised losses on translation of foreign
currency net investments of £96,000 (2001: £28,000) in the year which were taken
to reserves and are not included in the profits above.
2. The financial information shown for the years ended 31 December 2002
and 2001 set out above does not constitute statutory accounts but is derived
from those accounts. The results have been prepared using accounting policies
consistent with those used in the preparation of the statutory accounts. The
financial information contained in this announcement does not constitute
statutory accounts within the meaning of Section 240 of the Companies Act
1985. The financial information for the year ended 31 December 2001 has
been extracted from the statutory accounts for that year which have been filed
with the Registrar of Companies and which contain an unqualified audit report.
The financial information for the year ended 31 December 2002 has been extracted
from the draft statutory accounts for that year upon which the auditors have yet
to report. Copies of this announcement are available at the registered offices
of the Company (81 Bridge Road, Hampton Court, Surrey, KT8 9HH) and at the
offices of the Company's nominated advisors, Teather & Greenwood Ltd. (Beaufort
House, 15 St Boltolph Street, London EC3A 7QR) for a period of 14 days from the
date hereof.
3. The Group's turnover and profit before tax for each geographic area of
operation is:
Turnover Profit Before Taxation
2002 2001 2002 2001
£'000 £'000 £'000 £'000
United States of America 5,908 7,120 9 106
Europe and Asia Pacific 5,803 5,755 626 202
_______ _______ _______ _______
11,711 12,875 635 308
_______ _______ _______ _______
The net assets attributable to each geographic area are:
2002 2001
£'000 £'000
United States of America 479 514
Europe and Asia Pacific 4,224 3,956
_______ _______
4,703 4,470
_______ _______
4. The earnings per share figure for 2002 has been calculated based on
the profit on ordinary activities after taxation and the weighted average number
of shares in issue of 14,647,000 (2001: 14,647,000 ).
5. In accordance with FRS14 issued in October 1998 the fully diluted
earnings per share were 3.23 pence per share (2001: 1.72p). The diluted number
of shares was 14,709,000 (2001: 14,737,000)
6. The AGM will be held at 10.30 am on 23 April 2003 at the registered
office of the Company (81 Bridge Road, Hampton Court, Surrey, KT8 9HH).
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