6 February 2013

Wolfson Microelectronics plc

Fourth Quarter and Full Year Results to 30 December 2012

Strong revenue momentum with fourth quarter sales up 52% year-on-year

Wolfson Microelectronics plc ("Wolfson" or "the Company"), a world leader in Audio Solutions for consumer electronic products, announces fourth quarter and audited full year results for 2012.

Fourth quarter 2012 summary:

·    Revenue up 52% to $56.1m (Q4 2011: $36.9m)

·    Gross margin of 43.9% (Q4 2011: 49.9%, before exceptional charges)

·    Underlying* operating profit of $1.5m (Q4 2011: $2.9m loss)

·    Operating profit of $0.5m** (Q4 2011: $7.2m loss)

 

Full year financial summary:

·    Revenue up 15% to $179.7m (2011: $156.9m)

·    Gross margin of 46.9% (2011: 48.5%, before exceptional charges)

·    Underlying* operating loss of $2.9m (2011: $7.5m loss)

·    Operating loss of $9.3m** (2011: $24.2m loss)

·    Underlying* diluted loss per share of 1.0 cents (2011: 4.9 cents loss)

·    Diluted loss per share of 5.2 cents (2011: 15.4 cents loss)

·    Cash and short-term deposits at 30 December 2012 of $48.0m (1 Jan 2012: $53.4m), no debt

 

Full year 2012 operational summary:

·    Built strong revenue momentum as 2012 progressed with year-on-year sales growing 52% in Q4 and 15% for the full year supporting a return to profitability in the second half of 2012

 

·    Sales to mobile phones and tablet computer applications grew 60% year-on-year 

 

·    Strong performance from Audio Hubs and Micro-Electro-Mechanical Systems (MEMS) microphone product lines with Audio Hubs growing 27% overall, Mobile Audio Hubs growing by around 60% and MEMS microphones growing to 6% of Q4 2012 revenues

 

·    Launched 21 new products, including the world's first quad core HD Audio System-on-a-Chip (SoC) and the world's first high performance integrated MEMS microphone

·    Record estimated revenue value for new design-ins set in 2012 with Q4 2012 the best ever quarter for design-in value. The majority of the value of design-ins is for Audio Hubs with around 10% for MEMS microphones

 

 

 

 

 

 

Outlook:

 

In Q1 2013, given normal seasonality, the Company anticipates:

 

•   Continuing revenue momentum with year-on-year revenue growth in the range of 40% - 60% ($42m to $48m) dependent on timing of customers' new product ramps

•   Gross margin to be around 41% driven by near-term product mix

 

Looking further ahead:

 

•   Gross margins are expected to improve strongly towards traditional levels as 2013 progresses primarily due to mix shifting to more value-added products and MEMS production reaching economic scale

•   Strong end-markets in smartphones and tablet computers, the shift to higher added value products and design-in value at record levels in 2012, means the Company is well positioned for further strong growth in revenues and profitability during  2013

 

 

Commenting on the results, Mike Hickey, CEO of Wolfson Microelectronics, said:

 

"By penetrating the most dynamic and fast-growing segments of the consumer electronics market, we have established strong revenue momentum, growing more than 50% year-on-year in the fourth quarter and, as anticipated, returned to profit in the second half of the year.

"We are increasing our market presence in smartphones and tablet computers, and are now shipping to most of the world's brand-leading mobile phone and tablet computer manufacturers. This, combined with our class-leading portfolio of audio products delivering another record year for new design-ins, positions the Company well for further strong growth in 2013."

 

*Underlying full year results exclude: charges for the amortisation of acquired intangible assets (2012: $1.7m; 2011: $5.5m) and share-based compensation charges, including associated payroll taxes (2012: $3.3m; 2011: $3.6m). Also, in 2012, an exceptional charge of $1.4m is excluded (2011: net exceptional charges of $7.6m are excluded). The term "underlying" is not defined in IFRS and therefore may not be comparable with similarly titled measures reported by other companies. Underlying measures are not intended as a substitute for, or a superior measure to, IFRS measures.

** After exceptional charge for 2012 of $1.4m (2011: after net exceptional charges $7.6m) of which $1.4m was in Q4 2012 (Q4 2011: $2.4m charge).

 

Enquiries:

 

Wolfson Microelectronics
Mike Hickey, CEO Mark Cubitt, CFO	020 7618 9100 On the day 0131 272 7000 Thereafter
Luther Pendragon
Harry Chathli, Claire Norbury	020 7618 9100

 

Mike Hickey, CEO, and Mark Cubitt, CFO, will be hosting a presentation to investors and analysts at 0900 GMT at JP Morgan, Holborn Bars, 138-142 Holborn, London EC1N 2NQ. An audio webcast of the Wolfson Microelectronics plc Full Year Results presentation can be heard LIVE from 0900 GMT via: www.wolfsonmicro.com/investor

 

Additionally, there is a dial-in facility: UK freephone 0800 634 5205; US freephone +1 866 629 2704; International +44 (0)208 817 9301. A replay of the conference call is available from 1130 GMT on +44 (0)207 769 6425 or US +1 630 652 3111, Access Pin 9819393#

Operational Review

 

2012 was a challenging year for the semiconductor and consumer electronics industries, with a contraction of around 3% in the overall semiconductor market and zero growth in the consumer electronics market. In pleasing contrast, 2012 has been a year of positive evolution and growth for Wolfson, with revenue up 15% at $179.7m for the full year (2011: $156.9m) and up 52% to $56.1m in the fourth quarter (Q4 2011: $36.9m). Full year revenue into the mobile phone and tablet computer application markets grew approximately 60% and these applications now represent around 65% of total revenue. Other consumer device applications were impacted by weak consumer spending and were down 23% overall, with good growth in digital still cameras and portable media players more than offset by weaker markets in home audio and gaming.

 

Revenue from Audio Hubs grew 27% year-on-year to 75% of full year 2012 revenues. Within this segment, Mobile Audio Hub products grew around 60% and accounted for over half of 2012 full year revenues. Revenues from the MEMS microphone product line has also grown significantly during 2012 from a very small base, accounting for 6% of revenue in Q4 2012 and 3% of full year 2012 revenue.

 

Gross margin for the full year was 46.9% (2011: 48.5%, before exceptional charges), and 43.9% for the fourth quarter of 2012 (Q4 2011: 49.9%, before exceptional charges). This decline is a result of product mix, a delay in qualification of a lower cost manufacturing source for a high volume product and non-recurring costs associated with the steep production ramp in the MEMS microphone product line. These factors are expected to reverse as 2013 progresses, with gross margin recovering strongly in the second half towards traditional levels as product mix swings to more value-added products, a lower cost manufacturing source for a high volume product is qualified and MEMS microphone production achieves economic scale.

 

Wolfson further enhanced its product portfolio with the launch of 21 new products in 2012 and the strength of the Company's product and technology portfolio delivered another record design-in year. The overall number of design-ins for 2012 was down year-on-year to 237 (2011: 382) due to a general consolidation in customers' product portfolios as they reacted to the adverse end-market conditions by reducing the number of new models being introduced. However, the estimated value of these design-ins, measured in terms of projected eight quarter revenue, grew significantly year-on-year to exceed the record level of 2011, with Q4 2012 being the Company's best ever quarter for design-in value.

 

This design-in value growth has been driven by the projected higher volume from fewer new customer products being introduced and the Company, through adding higher value features to its Audio Hubs, is increasing average selling prices. Also, as a result of Wolfson's new advanced HD Audio solutions, the Company is gaining more "value share of board" in each end product. Wolfson's 'end-to-end' HD Audio solutions comprise Audio Hubs, multiple MEMS microphones, software and other products from its portfolio so, when selected, the Company increases the number of its parts being designed into each new end customer product.

 

The majority of the estimated revenue value for design-ins won in 2012 was for Audio Hub products (85%) and for MEMS microphone (10%) products. This positions the Company well for further growth in revenues in both of these product lines in 2013, and for MEMS microphone revenues to become an increasing percentage of its overall business. The majority of the design-ins are into products in the fastest growing consumer electronic product applications such as mobile phones, smartphones and tablet computers, and Wolfson has built strong growth momentum in these applications, both from a revenue and design-in perspective. Encouragingly, Wolfson is also achieving design-ins in its traditional markets, such as home audio, digital still cameras and portable media players.

Most of the 2012 design-ins are with leading brand global consumer electronics manufacturers, and the majority are expected to start to ramp to volume production and revenue during 2013, with precise timing dependent on end customer product launch dates.

 

Product Adoption by Existing and New Customers in 2012

Adoption of Wolfson's audio products by existing and new customers continued to grow during the year, increasing its market penetration. Excellent progress was made particularly in mobile phones, smartphones and tablet computers, where adoption of Wolfson's low power Audio Hubs has further enhanced the Company's leadership position in these products.

 

Design-ins with the previously announced five new top tier mobile phone manufacturers progressed well during the year, with four achieving volume manufacturing and one expected in early 2013.

 

Market penetration with existing customers continues to progress, with notable new Wolfson product adoptions for mobile phones and tablet computers at customers including Samsung, LG, Microsoft, BlackBerry, Motorola, Fujitsu and Sony.

 

Encouragingly, additional progress was made with new Wolfson product adoptions with both new customers and existing customers in new applications. These included:

 

o A large consumer electronics company's range of tablet computers

o Two major Chinese computer and telecommunications enterprises selecting Wolfson audio solutions for their ranges of mobile phones

o A Japanese multinational corporation selecting Wolfson's Audio Hubs for a selection of its new mobile phone platforms

o A brand-leading consumer electronics company for its smart connector accessory

 

While almost half (47%) of 2012 design-ins were for mobile phones and tablet computers, Wolfson continued to win design-ins in other application markets. Some notable design-ins during the year included:

 

o A large consumer electronics manufacturer selecting Wolfson's Audio DSP and Audio Hub for its latest media player

o Sony selecting Wolfson's Audio Hub for its PS Vita portable gaming console

o A number of brand-leading digital still camera manufacturers selecting Wolfson low power Audio Hubs for their latest models

o Wolfson Dynamic Hearing software selected for multiple headset and hearing aid products

o Nokia selecting Wolfson Dynamic Hearing software for its Reaction Bluetooth^® headset

o A world-leading technology company selecting Wolfson's Audio Hub and MEMS microphones for its latest top-of-the-range set-top-box model

o Samsung selecting Wolfson's audio solution for its new remote controllers for its smart television range

o iriver selecting Wolfson's DAC and audio transceiver for its Astell&Kern AK100 digital music player

 

Executing on Strategy

The Company's goal is to lead in HD Audio for consumer electronics products by:

·    Leveraging its best-in-class intellectual property (IP) position and brand heritage in highest performance audio

·    Growing its leadership in Audio Hubs and making them the de facto platform for HD Audio in consumer electronics products

·    Building on its technology leadership in noise cancellation and sound enhancement software to 'own' sound processing

·    Exploiting  its technology and performance advantages in MEMS microphones to deliver the best voice and audio capture

·    Enabling best-in-class low power, high performance HD Audio solutions with its drivers, converters, Audio Hubs and MEMS microphones

When it was introduced in 2009, the intention behind the strategy was to exploit three emerging technology transitions in smart electronic devices:

·    The dis-integration of the audio function from central processors in consumer electronics products to standalone devices like Wolfson's Audio Hubs

·    The emergence of noise cancelling and sound processing as key features in smart mobile devices

·    The replacement of traditional electret condenser microphones (ECM) with MEMS microphones and the emergence of multi-microphone applications to support complex sound processing and noise cancelling features

These technology transitions are now fully acknowledged in the industry, with the Company's HD Audio technology featuring in an increasing array of products from most of the world's brand-leading mobile phone and tablet computer manufacturers.

 

The Company's Audio Hubs continue to be selected by OEMs for many industry-leading consumer electronics applications, and accounted for 75% of revenues and 85% of design-ins in 2012. This success has been fuelled by the significant growth in smartphones and tablet computers, as they are among the first product applications to dis-integrate the audio function from the application processors to standalone devices. However, the Company expects this audio dis-integration trend to extend to other mobile phone product tiers and consumer electronics applications over the next few years as smart devices proliferate, and this is driving a fast growing market for standalone audio devices like Wolfson Audio Hubs. The market for dis-integrated audio is expected to grow to more than $2bn in the next three years at a compound annual growth rate (CAGR) of around 60% (Source: Gartner, iSuppli and Wolfson).

 

The MEMS microphone market is expected to grow to more than $1.5bn in the next three years with a CAGR of around 60% (Source: Gartner, iSuppli and Wolfson). This growth is due to restrictions in the size and shape of portable products such as mobile phones and tablet computers driving the technology transition from ECM to more compact MEMS microphones and the increase of applications where multiple microphones are used for noise cancellation or advanced audio processing.

 

Wolfson's MEMS microphone product line has grown significantly during 2012. From a very small base at the start of the year, MEMS microphones accounted for 6% of revenue in Q4 2012. The Company is now shipping in volume to three major mobile device manufacturers and multiple other customers in a wide range of customer products. Design-ins and a strong MEMS microphone portfolio are expected to support increasing traction with customers during 2013 and beyond, and the Company expects MEMS microphones to become an increasing percentage of overall revenues.

 

The Company has also invested in its supply chain, executing the supply chain re-engineering initiative announced in 2011 to plan, including the introduction of two new process nodes and a new MEMS production process. A significant operational milestone was achieved in 2012 with the shipment of the two billionth Wolfson part. Quality was further enhanced with a Six Sigma quality programme being implemented across the Company and Wolfson's software capabilities were strengthened with the successful integration of Dynamic Hearing.

 

Product Development

Over the last year, Wolfson has launched 21 new products. The highlights of the Company's product development progress in 2012 are outlined below.

 

Audio Hubs

The Company introduced several new industry-leading products in the Audio Hub family, including the WM5102 and the WM5110, both of which are designed primarily for the smartphone and tablet computer market. The WM5102 is a high performance Audio Hub with voice Digital Signal Processor (DSP), featuring integrated transmit path (Tx) and receive path (Rx) noise reduction, and echo cancellation, which helps mobile phone manufacturers deliver clearer, more natural sounding audio, even in noisy environments.

 

The WM5110 is the world's first quad core HD Audio System-on-a-Chip (SoC), and is capable of delivering exceptional hi-fi audio quality with an extremely fast processor, at very low power consumption. It has the added benefit of on-board hardware and software, which reduces background noise by up to 90%, delivering high quality voice conversations, audio recording and playback, resulting in what Wolfson believes to be the most powerful and efficient HD Audio Processor on the market.

 

MEMS Microphones

The Company introduced the world's first high performance, fully integrated (complete microphone on a single piece of silicon) MEMS microphone.

 

In addition, Wolfson launched the WM7121 and the WM7132, adding to its MEMS microphone portfolio. These are the first high performance top and bottom port silicon MEMS microphones from Wolfson to feature matching frequency responses, matching phase responses and matching sensitivity. This makes them much easier for designers to integrate into products with multiple microphones. These devices are designed to deliver HD Audio quality and highly authentic audio recordings to a wide range of consumer electronics applications including mobile phones, Bluetooth^® headsets, navigation devices, gaming consoles and both digital still and digital video cameras.

 

The MEMS microphone portfolio was further enhanced during the year by a number of top and bottom port devices in various packaging configurations. The Company's strong MEMS microphone portfolio is expected to gain increasing traction with new and existing customers during 2013 and beyond.

Financial Review

The financial results of the Company for the 52 week period ended 30 December 2012 are summarised in the table below. 

 

				52 week period ended 30 December 2012		52 week period ended 1 January 2012
				$m	% revs	$m	% revs
Revenue				179.7		156.9
Gross profit (IFRS)				84.2	46.9 %	70.2	44.7%
Exceptional charge				-	-	5.9	3.8%
Gross profit (Underlying)				84.2	46.9%	76.1	48.5%
Overheads
	Research & Development			(51.1)	29%	(47.3)	30%
	Distribution & Selling			(23.3)	13%	(23.4)	15%
	Administration			(12.7)	7%	(12.9)	8%
Underlying* operating  loss				(2.9)	-2%	(7.5)	-5%
	Share-based compensation			(3.3)	2%	(3.6)	2%
	Amortisation charges			(1.7)	1%	(5.5)	4%
	Exceptional items:
	- recognised in cost of sales			-	-	(5.9)	4%
	- recognised in overheads			-	-	(3.5)	2%
	- pension (past service cost)/      curtailment gain			(1.4)	1%	1.8	-1%
Operating loss				(9.3)	-5%	(24.2)	-15%
Net financing (expense) / income				(0.1)		0.1
Loss before tax				(9.4)	-5%	(24.1)	-15%
Income tax credit				3.3		6.2
Loss after tax				(6.1)	-3%	(17.9)	-11%
Diluted loss per share (cents)				(5.2)		(15.4)
Underlying diluted loss per share (cents)				(1.0)		(4.9)
Average £/$ exchange rate				1.55		1.60

 

*Underlying results exclude: charges for the amortisation of acquired intangible assets (2012: $1.7m; 2011: $5.5m) and share-based compensation charges, including associated payroll taxes (2012: $3.3m; 2011: $3.6m).  Also, in 2012, an exceptional charge of $1.4m is excluded (2011: exceptional items totalling $7.6m are excluded). The term "underlying" is not defined in IFRS and therefore may not be comparable with similarly titled measures reported by other companies.  Underlying measures are not intended as a substitute for, or a superior measure to, IFRS measures.  Reconciliations of underlying measures to IFRS measures for operating expenses and operating loss in respect of each period are provided in the tables below.

 

Operating expenses: reconciliation from Underlying to IFRS

 

	Underlying	Share-based compensation (including associated payroll taxes)	Amortisation  of acquired intangible assets	Exceptional items	IFRS
	$m	$m	$m	$m	$m
52 weeks ended 30 December 2012
Distribution and selling costs	(23.3)	(0.6)	-	-	(23.9)
Research & Development expenses	(51.1)	(2.1)	(1.7)	-	(54.9)
Administrative expenses	(12.7)	(0.6)	-	-	(13.3)
Past service cost on defined benefit plan	-	-	-	(1.4)	(1.4)
	_______	______	_______	_______	_______
	(87.1)	(3.3)	(1.7)	(1.4)	(93.5)
52 weeks ended 1 January 2012
Distribution and selling costs	(23.4)	(1.0)	-	(1.9)	(26.3)
Research & development expenses	(47.3)	(2.0)	(5.5)	(1.5)	(56.3)
Administrative expenses	(12.9)	(0.6)	-	(0.1)	(13.6)
Curtailment gain on defined benefit plan	-	-	-	1.8	1.8
	_______	_______	_______	_______	_______
	(83.6)	(3.6)	(5.5)	(1.7)	(94.4)

 

 

Operating loss: reconciliation from Underlying to IFRS 

 

		52 weeks ended	52 weeks ended
		30 December 2012	1 January 2012
		$m	$m
Underlying operating loss		(2.9)	(7.5)
Share-based compensation and related payroll taxes Amortisation of acquired intangible assets		(3.3) (1.7)	(3.6) (5.5)
Exceptional items		(1.4)	(7.6)
		_______	_______
Operating loss (IFRS)		(9.3)	(24.2)
		_______	_______

Segmental Performance

Audio Hubs Products

The Company focuses on high performance Audio Hubs, including High Definition (HD) Audio System-on-Chip (SoC), noise reduction and sound enhancement software. Revenues at $134.1m in 2012 accounted for 75% of Company revenue (2011: 67%) and increased by 27% in the year from $105.4m in 2011. Within this segment, Audio Hubs sold into mobile applications increased by almost 60% whilst Audio Hubs in non-mobile applications fell by 12%, reflecting the strong growth in smartphones and tablet computers, but weaker demand in most other application markets.

 

Gross margin for this reportable segment fell to 46.6% in 2012 from 49.8% in 2011, reflecting the product mix in 2012.

 

Discrete and Power Products

This segment comprises simpler audio products (ADCs, DACs), power management integrated circuits, imaging parts and MEMS microphones. Revenues at $45.5m in 2012 accounted for 25% of Company revenue (2011: 32%) and declined by 11% in the year from $50.9m in 2011. Within this segment, MEMS microphones grew tenfold, albeit from a very small base, to revenue of $5.2m. In Q4 2012, MEMS microphones accounted for 6% of total Company revenues compared to less than 1% in Q1 2012. The other components of this segment suffered from lack of differentiation and the weakness in the general consumer electronics market and, excluding MEMS microphones, fell in the year by 20%.

 

Gross margin for this reportable segment increased to 47.5% in 2012 from 45.6% in 2011, helping to partly offset the fall in revenues.

 

Other Products

Other Products comprises the sale of complete headset products and royalties thereon. This segment is fundamentally different from the other segments as it relates to sales of finished consumer products rather than the sale of integrated circuit components. Revenues in both 2012 and 2011 represented less than 1% of Company revenues.

 

Revenue

Company revenue increased by 15% to $179.7m (2011: $156.9m), with a decline of 11% in the first half of 2012, followed by strong growth of 41% in the second half of the year, compared to the same periods in 2011. As explained in the Segmental Performance section, this is the net result of strong growth in Audio Hubs and MEMS microphones, offset to some extent by weakness in Discrete and Power products. The largest customer in 2012 represented 32% of revenue (2011: 16%).

 

Gross Profit

Company gross profit in 2012 was $84.2m, up 11% from the previous year (2011: $76.1m, before exceptional charges). Gross margin fell to 46.9% from 48.5% (before exceptional charges) in 2011, primarily impacted by product mix, delays in qualification of a lower cost manufacturing source for a high volume product, plus costs associated with the steep production ramp of the MEMS microphone product line. These effects are expected to reverse as 2013 progresses, with gross margin recovering strongly in the second half towards traditional levels as mix swings towards more value-added products, the lower cost manufacturing source is qualified and MEMS microphone production reaches economic scale.

Operating Expenses

Total underlying overheads, excluding amortisation of acquired intangibles, share-based compensation charges (and associated payroll taxes) and exceptional charge amounted to $87.1m in 2012, compared to $83.6m (before exceptional charges) in 2011, an increase of $3.5m. Of this increase, $2.1m relates to the full year costs of Dynamic Hearing acquired on 30 September 2011. The projected underlying overheads in 2013 are based on a broadly flat headcount and are expected to be between $90m and $94m, with the variability primarily in the research and development spend. The increase relates to: 2013 Sterling-denominated overheads being hedged at an exchange rate of $1.6: £1 compared to $1.55: £1 in 2012, accounting for $1.7m of the increase, and assumed inflation of 3% prevailing in 2013. The individual overhead categories are explained further in the following paragraphs.

 

The Company's continuous investment in research and development and best-in-class engineering tools is imperative to Wolfson's growth strategy and long-term competitiveness. Expenditure on research and development, excluding charges such as amortisation and share-based compensation charges, increased by 8% to $51.1m or 29% of revenue (2011: $47.3m or 30% of revenue). The increase in this category of costs of $3.8m in 2012 primarily reflects the greater complexity of the products now being designed by the Company, resulting in higher mask costs on lower technology node tape-outs, software and subcontract DSP costs relating to these newer products and the full year impact of research and development costs incurred by Dynamic Hearing. For 2013, research and development costs are expected to be between $51m and $55m, spread evenly through the year.

 

Distribution and selling expenses, excluding share-based compensation charges, were broadly flat at $23.3m or 13% of revenue (2011: $23.4m or 15% of revenue). This results from higher freight and packaging costs, associated with the increased revenues, offset by supply chain efficiencies. For 2013, the expected cost is around $25m, with a slight weighting to the second half of the year on freight and packaging costs associated with increased forecast volume.

 

Administrative expenses, excluding share-based compensation charges, were marginally lower in 2012, at $12.7m or 7% of revenue (2011: $12.9m or 8% of revenue). For 2013, administrative expenses are expected to be around $14m, spread evenly through the year.

 

Operating Loss

Underlying operating loss was $2.9m (before exceptional charge), compared to a loss of $7.5m in 2011 before exceptional charges.

 

Share-based compensation charges, calculated in accordance with IFRS 2, and associated payroll taxes amounted to $3.3m in 2012, compared to $3.6m in 2011. The decrease reflects new share-based awards in 2012 being offset by a credit of $2.2m recognised in respect of the lapsing of 2010 executive long-term incentive plan awards due to the non-market performance conditions not being achieved. Based on the share price as at 28 December 2012 and planned share-based awards for 2013, the share-based compensation charge in 2013, including the associated payroll taxes, is estimated to be approximately $6m, slightly second-half weighted.

 

Total intangible asset amortisation charges recognised in 2012 in respect of the 2007 acquisitions, and on the Dynamic Hearing acquisition, amounted to $1.7m (2011: $5.5m). The charge for 2013, relating primarily to the Dynamic Hearing acquisition, is expected to be $1.4m, spread evenly through the year.

 

There was an exceptional charge in 2012 of $1.4m for the estimated cost of the enhanced transfer value offer in respect of the Company's defined benefit pension scheme.

Exceptional charges in 2011 totalled a net of $7.6m for restructuring and an inventory write-down net of a curtailment gain of $1.8m on the defined benefit pension scheme. The IFRS operating loss was $9.3m in 2012 (2011: $24.2m loss).

 

Financial income amounted to $1.4m, with finance expenses of $1.5m, resulting in net finance expense in 2012 of $0.1m (2011: $0.1m income). These sums include non-cash income and expenses associated with the defined benefit pension scheme and notional interest on the acquisition deferred consideration. The net interest income, in cash terms, was $0.2m (2011: $0.2m).

 

Taxation

The total effective tax rate was 35% credit (2011: 25.6% credit), primarily reflecting the benefit from additional allowances on research and development expenditure, offset by certain expenses which are not deductible for tax purposes. The effective tax rate in 2013 will benefit from the introduction of the UK Patent Box regime from 1 April 2013.

 

Cash Flow & Balance Sheet

Summarised Consolidated Cash Flow
52 weeks ended 30 December 2012	2012	2011
	$m	$m
Loss before tax	(9.4)	(24.1)
Depreciation & amortisation	9.5	13.7
Net finance expense / (income)	0.1	(0.1)
Earnings / (loss) before interest, tax, depreciation and amortisation	0.2	(10.5)
Share-based compensation charge	2.6	4.1
Change in working capital:
-     (increase) / decrease in inventories/receivables	(10.1)	4.2
-     increase / (decrease) in payables/provisions	10.6	(18.9)
Pension curtailment gain	-	(1.8)
Payments to Defined Benefit Pension scheme	-	(4.5)
Foreign exchange	(0.3)	0.2
Income taxes (paid) / received	-	(0.3)
Net cash flow from operating activities	3.0	(27.5)
Capital expenditure	(6.1)	(6.5)
Free cash flow	(3.1)	(34.0)
Purchase of shares by employee share trust	-	(5.4)
Proceeds of new issue shares	0.6	0.7
Deferred consideration  / acquisition of subsidiary	(3.2)	(5.1)
Interest received	0.2	0.2
Foreign exchange (losses) / gains	0.1	(0.1)
Net cash outflow	(5.4)	(43.7)
Opening cash balances*	53.4	97.1
Closing cash balances*	48.0	53.4

*includes cash and cash equivalents and short-term deposit balances

Cash and short-term deposits amounted to $48.0m at 30 December 2012 (1 January 2012: $53.4m).

Net cash inflow from operating activities was $3.0m (2011: $27.5m outflow), driven by the improved trading performance and total working capital remaining broadly flat.

 

The Company paid $3.2m (2011: $0.8m) for deferred consideration as milestones were achieved on the 2007 acquisition of Sonaptic (ANC) and further payments are expected in 2013 as milestones are met.

 

Cash outflow on capital expenditure amounted to $6.1m (2011: $6.5m) and relates primarily to software licenses and IT equipment.

 

The value of inventory held at 30 December 2012 was $24.7m or 65 days inventory (1 January 2012: $22.9m or 103 days inventory). It is anticipated that inventory levels will be in the range of 70 to 100 days in 2013 in order to meet fluctuations in demand. Trade receivables amounted to $33.9m or 49 days sales outstanding at 30 December 2012 (1 January 2012: $25.9m or 51 days sales outstanding). It is expected that the number of days sales outstanding will average around 50 in 2013. Trade payables at 30 December 2012 amounted to $24.3m or 52 days purchases (1 January 2012: $16.5m or 53 days purchases). It is anticipated that the number of days purchases will average around 50 in 2013.

 

Treasury and Foreign Exchange

Nearly all revenue and cost of goods sold are denominated in US dollars, so there is a natural and effective hedge down to the gross margin level. However, approximately two-thirds of operating costs are denominated in Sterling, and this represents a structural currency exposure derived from the UK base of the Company. During 2012, there was currency hedging in place throughout the year, ranging from three to twelve months forward in time, with an average rate over the year of $1.545 to £1 (2011: $1.60 to £1). It is estimated that during 2012 and going into 2013, every one cent decrease in the US dollar/Sterling exchange rate (i.e. weakening of Sterling) has the effect of decreasing the Company's overheads and increasing operating profit by $300,000 on an annualised basis. To give some short-term certainty, the majority of the Sterling-dominated overheads for all of 2013 have been hedged at an average rate of $1.60 to £1, resulting in an increased overheads cost of $1.7m in 2013 over 2012 purely due to exchange rates.

 

Share Repurchases

Only a very small quantity of shares (1,981 shares in the Company) were purchased in 2012 by one of the employee share trusts in relation to employee share-based awards (2011: 1,422,545 ordinary shares in the Company were purchased by employee trust at a cost of $5.4m). This employee share trust is likely to make further purchases of shares in the Company going forward to satisfy employee share-based awards and in order to minimise the dilution impact of those share-based awards, however this is unlikely to be before 2014.

 

Defined Benefit Pension Scheme

During the year no payments were made into the closed defined benefit pension scheme (2011: $4.5m contributions were paid by the Company into the Scheme). As at 30 December 2012 the Company was in the middle of an Enhanced Transfer Value (ETV) offer to the 83 deferred members of the scheme and that offer closes in mid February 2013. An exceptional charge of $1.4m has been estimated and recognised in the 2012 financial statements of the Group and Company based on the estimated take up of the ETV offer; this will be adjusted to the final figure in the 2013 financial statements. A cash payment by the Company into the Scheme of around $1.6m is scheduled for the first quarter of 2013 in respect of this ETV exercise.

 

 

Q4 2012

 

The Company's financial performance for Q4 2012 is summarised below.

 

				Q4 2012		Q3 2012		Q4 2011
				$m	% revs	$m	% revs	$m	% revs
Revenue				56.1		53.0		36.9
Gross profit (IFRS)				24.6	43.9%	25.2	47.5%	16.0	43.4%
Exceptional charge				-	-	-	-	2.4	6.5%
Gross profit (Underlying)				24.6	43.9%	25.2	47.5%	18.4	49.9%
Overheads
	Research & Development			(13.7)	24%	(12.5)	24%	(12.8)	35%
	Distribution & Selling			(6.1)	11%	(6.1)	11%	(5.3)	14%
	Administration			(3.3)	6%	(3.2)	6%	(3.2)	9%
Underlying* operating  profit / (loss)				1.5	3%	3.4	7%	(2.9)	-8%
	Share-based compensation			0.8	-1%	(1.5)	3%	(0.4)	1%
	Amortisation charges			(0.4)	1%	(0.3)	1%	(1.5)	4%
	Exceptional items :
	-recognised in cost of sales			-	-	-	-	(2.4)	6%
	-pension past service cost			(1.4)	2%	-	-	-	-
Operating profit / (loss)				0.5	1%	1.6	3%	(7.2)	-19%
Net financing (expense) / income				(0.4)		-		0.3
Profit / (loss) before tax				0.1	-	1.6	-3%	(6.9)	-19%
Income tax credit / (expense)				1.0		(0.4)		1.6
Profit / (loss) after tax				1.1	2%	1.2	2%	(5.3)	-14%
Average £/$ exchange rate				1.55		1.55		1.60

 

*Underlying Q4 results exclude: charges for the amortisation of acquired intangible assets (Q4 2012: $0.4m; Q4 2011: $1.5m) and share-based compensation charges, including associated payroll taxes (Q4 2012: $0.8m credit; Q4 2011: $0.4m charge). Also, in Q4 2012 an exceptional charge of $1.4m is excluded (Q4 2011 an exceptional charge of $2.4m is excluded). Underlying results are reconciled to the results reported in accordance with IFRS in notes 5 and 6 to the financial information.

 

Revenue for Q4 2012 amounted to $56.1m, an increase of 52% from Q4 2011 revenue of $36.9m (Q3 2012: $53.0m). The revenue increase reflects the strong growth in the Company's sales of both Audio Hubs and MEMS microphones into the smartphone and tablet computer markets. The largest customer represented 36% of Q4 2012 revenues, compared to 33% in Q3 2012 and 19% in Q4 2011.

 

Gross profit was $24.6m, compared with $18.4m in Q4 2011 (Q3 2012: $25.2m). In Q4 2012, gross margin fell to 43.9% from 49.9% in Q4 2011 (Q3 2012: 47.5%) as a result of a change in product mix, compounded by a delay in qualification on a lower cost  manufacturing source for a high volume product, and costs associated with the steep production ramp of the MEMS microphone product line. This lower gross margin is expected to continue in Q1 2013 before recovering as the Company moves through 2013, with gross margin recovering strongly in the second half towards traditional levels as mix shifts to more value-added products, the lower cost manufacturing source is qualified and MEMS microphone production reaches economic scale.

  

Total underlying operating expenses were $23.1m in Q4 2012 compared to $21.8m in Q3 2012 (Q4 2011: $21.3m), the increase being related to research and development costs for both Audio Hub and MEMS microphone products. Excluded from underlying expenses are: i) Share-based compensation, calculated in accordance with IFRS 2, and associated payroll taxes, which amounted to a $0.8m credit in Q4 2012, being a $2.3m reduction from the $1.5m charge in Q3 2012 (Q4 2011: $0.4m charge), reflecting  a credit for executive share awards which shall lapse as the performance conditions have not been met, and: ii) Amortisation charges relating to the intangible assets arising from acquisitions in prior years, which amounted to $0.4m in Q4 2012, compared to $0.3m in Q3 2012 and $1.5m in Q4 2011; and (iii) the exceptional charge of $1.4m for the estimate of the accounting cost of the enhanced transfer value offer in respect of the defined benefit pension scheme.

 

Underlying operating profit in Q4 2012 was $1.5m, compared with a $3.4m profit in Q3 2012 (Q4 2011: $2.9m loss). This decline in the operating result, compared to Q3 2012, primarily results from the increase in research and development costs and lower gross margin due to product mix.