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31 January 2007


Filtronic confirms cut in compound semi capex due to lower-than-expected demand

In its full interim results for first-half fiscal 2006/7 (to end-November), Filtronic plc of Shipley, UK, which manufactures microwave subsystems and components for wireless telecoms and defence, has reported revenue for continuing operations up 24% year-on-year, from £28.9m to £35.8m.

Operating loss was cut from £8.6m to £5.9m (or from £6.6m to £4.2m before non-recurring items). Excluding a profit of £82.6m from October’s sale of the Wireless Infrastructure business to Powerwave Technologies Inc, pre-tax loss was cut from £11.1m a year earlier to £6.8m.

Of the 17.7m Powerwave shares gained (worth £57.6m), Filtronic has since disposed of 7.4m shares (raising £24.2m). Cash reserves have gone from a net debt of £12m a year previously to a surplus of £64m. Filtronic will return £10m to shareholders by end-March. Payments are limited by the shortage of distributable reserves, but there could be a second instalment after October’s expiry of principal warranty obligations to Powerwave.

During first-half fiscal 2006/7, total capital expenditure rose from £6.8m to £9.4m, including £6.5m for Filtronic Compound Semiconductors Ltd in Newton Aycliffe, County Durham, UK. This division’s revenues rose 23% from £8.5m to £15.1m (from 29% to 42% of total revenues). This was mainly due to sales of switches for cellular handsets to the USA, with some broadening of the customer base. Operating loss (before non-recurring items) was cut from £4.7m to £1.4m.

However, the compound semiconductor business break-even run rate achieved in the preceeding six months (to end-May) has not been sustained, mainly reflecting the impact of product price reduction and exchange rate effects. Production capacity is now being aligned with the lower demand expected from the firm’s concentrated customer base. Hence, the expansion plan has been curtailed ‘within the limitations of contractual commitments and logical steps in installing equipment’, resulting in a provision for project cancellation costs of £7m. As first stated in a trading update first-half fiscal 2006/7 in mid-December, this will reduce the capital expenditure program by £5m to ‘not exceeding £10m’ (including contract cancellation charges). The original figure was £45m to triple capacity when the investment was first announced, before being reduced last June to £15m after half-year losses of £6.7m. The aim is to restructure the business to at least a consistent breakeven and cash-neutral position, which will not be achieved in the second half of this financial year, the firm says.

Filtronic’s Point to Point division (transceiver modules and filters for backhaul microwave radios linking mobile base-stations) grew sales 78% from £5.7m to £10.5m, giving operating profits of £1m, due to product and customer diversification over the last two years. The operation is "well positioned to exploit a growing market." However, it will go through period of consolidation in the fiscal second half, the firm warns.

Filtronic’s Defense Electronics revenue fell from £15.3m to £11.6m, reflecting the effective completion of deliveries under three large contracts, and yielding an operating loss £1.1m (compared with a profit of £0.8m a year previously). UK Defense business saw underlying growth of 19% for its ongoing products and should achieve double-digit operating margins going forward. However, the US Defense made an operating loss of £1.2m on a ‘sub-critical level of activity’, so Filtronic plans to exit the business by May’s financial year-end.

Central R&D (mainly focused on the wireless infrastructure group) has been discontinued (saving £1m a year), with surplus property earmarked for disposal, including the main headquarters in Shipley.

“Following the completion of the Wireless Infrastructure disposal, progress has been made in reducing the losses in the continuing group and in taking actions to achieve the goal of a profitable and cash-positive performance,” said chairman John Poulter.

However, for its fiscal second-half 2006/7 (to end-May), Filtronic’s group revenue is now forecast to be flat compared to the first half, with neither Compound Semiconductors nor Point to Point expecting to show revenue growth. Losses in Compound Semiconductors and the US Defence businesses, together with central costs, will exceed the operating profits from the UK Defence and Point to Point businesses. “The second-half outlook is still for the group to be loss-making,” Poulter concludes.

See related item:

Filtronic shaves around £5m off expansion plan