Filtronic plc
Annual Report and Accounts 2018
Stock Code: FTC
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www.filtronic.com
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Welcome to
Filtronic
Filtronic plc is a designer and
manufacturer of advanced RF
communications products supplying
leading Original Equipment
Manufacturers and Mobile
Network Operators in the mobile
telecommunications infrastructure
and critical communications markets.
Our objective is to grow profitably in our chosen
market by being a key supplier to our customers
of technically advanced products. We focus on
markets where we have a deep understanding of
the sector and customer requirements and where
we can leverage our know-how and IP portfolio.
Our strategy to fulfil this objective is:
• To offer a growing range of technically
advanced antennas, mmWave transceivers
and filters which are designed to meet the
specific needs of our customers;
• To expand our customer base within existing
markets; and
• To widen the number of markets we serve
(both established and emerging markets).
In an increasingly connected world where data
is consumed in vast quantities, Mobile Network
Operators (MNOs) are adding capacity to provide
consumers with high-speed, high-capacity services
that enable them to enjoy premium quality data
services, such as streaming video, wherever they
are.
MNOs are adding capacity to existing 4G networks
by licensing more spectrum, densifying existing
cells, and by adopting new technologies that
will also be essential to the development of 5G
networks, such as Massive MIMO, that make more
efficient use of existing spectrum.
Filtronic provides key technologies that are at the
heart of densification and the development of
Filtronic plc Annual Report and Accounts 2018
Filtronic plc Annual Report 2016
Filtronic plc Annual Report 2015
Filtronic plc Annual Report 2015
Filtronic plc Annual Report 2015
higher capacity 4G and 5G networks. Our products
include multi-band, multi-port antennas, Massive
MIMO antennas and ultra-high capacity mmWave
transceivers that are used to wirelessly connect base
stations together.
Filtronic also provides a range of RF conditioning
products to public safety networks that are used
by first responders. These networks provide critical
communications and require high reliability equipment
to demanding specifications.
Technically advanced high-frequency RF
communications equipment will be essential to the
development of future 5G systems, and with network
access and mmWave know-how we are well placed
to play a key role as these networks are developed.
Filtronic is also working on long-range, high-capacity
wireless data links that will play a key role in the
development of High Altitude Pseudo-Satelilte
communications networks. These networks are being
developed to overcome the limitations of terrestrial
networks and bring the benefits of broadband
internet to an ever wider audience.
Contents
Glossary
Strategic report
Financial highlights
Operational highlights
Chairman’s statement
Chief Executive’s review
Market review
Objective and strategy
Financial review
Key performance indicators
Risk management
Corporate social responsibility report
Governance report
Board of Directors
Introductory letter from the Chairman
of the Board on the Governance report
Governance framework: Board and
committees, membership, remit and
activities
Audit Committee report
Directors’ remuneration report
Directors’ report
Financials
Independent auditor’s report to
the members of Filtronic plc
Consolidated income statement
Consolidated statement
of comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
Company statement of changes in equity
Consolidated cash flow statement
Company balance sheet
Company cash flow statement
Notes to the financial statements
Shareholder information
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What’s inside:
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www.filtronic.com Stock Code: FTC
Chairman’s statementWe continue to be encouraged by the breadth of opportunities being developed and remain optimistic for the long-term prospects for the Group.Chief Executive’s reviewWe were very pleased to see a strengthening of demand for higher margin products in the year, which led to improved profitability.Objective and strategy5G is the future of communications networks, and operators are beginning to develop plans for its deployment alongside partners, such as Filtronic, who are capable of delivering the required technology and quality.Market review5G represents a major opportunity with its mixture of sub-6GHz and mmWave frequencies as we have significant know-how over the proposed frequency ranges and the channels to market to capitalise on the opportunity. Glossary
3GPP:
The 3rd Generation Partnership Project
4G:
5G:
CAGR:
E-band:
EBITDA:
EMEA:
ExaByte
FDD:
GHz:
Gigabit:
HAPS:
IoT:
IP:
LAA:
4th Generation mobile networks
5th Generation mobile networks
Compound Average Growth Rate
71GHz to 86GHz
Earnings Before Interest, Taxation, Depreciation and Amortisation
Europe, the Middle East and Africa
One quintillion bytes
Frequency Division Duplex: a telecommunications duplex indexing method
Gigahertz: 10^9 Hertz
10^9 bits
High Altitude Pseudo-Sateliltes
Internet of Things
Intellectual Property
Licensed Assisted Access
LBITDA:
Loss Before Interest, Taxation, Depreciation and Amortisation
LEO:
LTE:
MHz:
MIMO:
mMIMO:
Low Earth Orbit
Long-Term Evolution
Megahertz: 10^6 Hertz
Multiple-Input, Multiple-Output
Massive Multiple-Input, Multiple-Output
mmWave:
Millimetre Wave
MNO:
Mobile Network Operator
Mobile PC:
Defined as laptop or desktop PC devices with built-in cellular modem or
external USB dongle
Mobile router:
A device with a cellular network connection to the internet and Wi-Fi or
ethernet connection to one or several clients (such as PCs or tablets)
ODU:
OEM:
P25:
RET:
RF:
Outdoor Unit
Original Equipment Manufacturer
Project 25: a suite of standards for digital mobile radio communications
designed for use by public safety organisations in North America
Remote Electrical Tilt
Radio Frequency: a rate of oscillation in the range of around 3kHz to 300GHz
Smartphone:
Mobile phones with data processing capabilities, e.g. iPhones, Android OS
phones, Windows phones but also Symbian and Blackberry OS
TDD:
TRM:
UWB:
Wi-Fi:
Time Division Duplex: duplex communication links where uplink is separated
from downlink by the allocation of different time slots in the same frequency
band.
Transmit Receive Module
Ultra Wide Band
Technology to enable wireless internet
Filtronic plc Annual Report and Accounts 2018
Filtronic plc Annual Report and Accounts 2018
Pictured: Filtronic antenna test range,
Täby, Sweden
www.filtronic.com Stock Code: FTC
Strategic reportwww.filtronic.com Stock Code: FTC
04
Strategic report
Financial highlights
Sales revenue
Earnings before interest, taxation, depreciation and amortisation
Operating profit
Profit before taxation
Basic earnings per share
Diluted earnings per share
Net cash balance at 31 May
Cash inflow from operating activities
•
•
•
Filtronic plc Annual Report and Accounts 2018
2018
2017
£24.0m
£35.4m
£2.5m
£1.8m
£1.2m
0.59p
0.59p
£3.6m
£1.8m
£2.5m
£1.7m
£2.2m
1.51p
1.49p
£2.6m
£3.9m
Operational highlights
• Secured a development contract with a major
OEM to design and supply Massive MIMO
antennas, a key product in network densification
using techniques that will form the basis of 5G
systems.
• Second major contract win secured in the year
for our Tier 1 European defence customer.
The contract, valued at £4.8m, is to be supplied
over three years. Production rates reached full
contractual requirements by the close of the year.
• Another year of strong demand for filter products,
with the main growth driven by our customer in
public safety, the largest OEM supplier in the public
safety communications market.
• Approved as a vendor by a major US mobile
network operator to supply 5G Evolution antennas
and recently qualified by a major MNO in EMEA for
another of our antenna products.
• Selected by a leading OEM to supply Orpheus
E-band transceivers into their new E-band backhaul
radio.
• Reorganisation of the business to capitalise on
opportunities in 5G as we leverage our
operational and engineering capabilities.
Pictured: radiating elements used in the Massive MIMO antenna
Filtronic plc Annual Report and Accounts 2018
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Chairman’s statement
Dear fellow shareholder,
Welcome to the Filtronic plc Annual Report for the year ended
31 May 2018.
The year under review saw steady progress as we further
developed our strategy of broadening our customer base and
the markets we serve. Although sales revenue reduced, a
good sales mix along with the initial fulfilment of the previously
announced defence contracts enabled gross margins to
improve, with the result that operating profitability was
marginally higher than in the comparative period.
The reduction in sales resulted from a combined impact
of lower than expected demand for our customer-specific
integrated ultra wide band antennas and delays in the
production ramp of our new defence contracts that did not
achieve full production capacity until the final quarter of the
year. In the second half of the year, we also saw a softening
of demand for legacy filter products as some of these
programme roll-outs naturally concluded.
We are, however, very pleased with the progress made
through the year in developing, refining and executing our
strategies to prepare the business for 5G deployment and
to increase our participation in markets other than mobile
telecommunications infrastructure. We were particularly
pleased to announce the award of a development contract
for Massive MIMO (“mMIMO”) antennas from Nokia. This is
strategically significant as mMIMO is a fundamental technique
that will be used in the development and deployment of 5G
systems. The mMIMO antenna is complex, but we have been
able to leverage our prior IP to accelerate the development
phase and we anticipate that, having recently received initial
orders, production will commence in the first half of FY2019.
Financial performance summary
Group sales for the year were £24.0m (2017: £35.4m)
and an operating profit of £1.8m was achieved (2017:
£1.7m). Earnings before interest, taxation, depreciation and
amortisation (“EBITDA”) was £2.5m (2017: £2.5m).
Filtronic Wireless business revenue was £18.4m (2017:
£30.5m) with an operating profit of £2.4m (2017: £3.5m) and
EBITDA of £2.7m (2017: £4.0m).
Filtronic Broadband business revenue was £5.6m (2017:
£4.9m) with an operating profit of £0.2m (2017: £0.9m
operating loss) and EBITDA of £0.5m (2017: £0.6m loss
before interest, taxation, depreciation and amortisation
(“LBITDA”)).
The Group had net cash of £3.6m at the end of the financial
year (2017: £2.6m). The cash generation for the year reflected
the continuing profitability of the Group. The Group maintains
an invoice discounting facility in the UK with Barclays Bank
plc of £3.0m that was undrawn at the year end (2017: £nil).
We have recently secured a further financing agreement with
Wells Fargo Bank for an invoice factoring facility in the USA
of $4.0m. This facility will support our sales growth in the US
market.
Dividend
No dividend is proposed for the year (2017: £nil). The
Board continues to review its dividend policy and remains
of the opinion that, whilst cash reserves remain healthy,
shareholder interests are better served by retaining cash to
fund our working capital and further investment plans than by
distributing cash at this time.
Outlook
The progress made over the past few years has demonstrated
the Group’s ability to grow both profits and profitability. Whilst
progress has been made in diversifying our customer base,
our sales remain highly concentrated and are still exposed
to fluctuations in demand due to the nature of our business
and the significant size of projects we supply. However,
the shorter product life cycles associated with the mobile
telecommunications infrastructure market are being offset
by the revenues that we are now starting to generate from
the critical communications market which has a longer-term
demand profile and more predictable revenue streams.
As the technologies deployed within our Filtronic Wireless and
Filtronic Broadband products progressively converge, we have
concluded that merging our two engineering and operations
organisations and trading as one business will better optimise
the use of our resources for the benefit of both customers
and shareholders. Consequently, this is the last year that we
will report Filtronic Wireless and Filtronic Broadband within the
Group as two separate business segments.
We continue to be encouraged by the breadth of opportunities
being developed and remain optimistic for the long-term
prospects for the Group.
The terms and impact of Brexit remain unclear, but the global
nature of our trade should provide a good degree of shelter
from any major changes that may arise when the UK leaves the
European Union.
I would like to thank our employees for all their continued hard
work over the past year and to also thank our shareholders and
other stakeholders for their continuing support as we work to
build the business.
Reg Gott
Chairman
15 August 2018
Pictured: radiating elements used in the Massive MIMO antenna
Strategic reportwww.filtronic.com Stock Code: FTC 06
Chief Executive’s review
FY2018 saw good underlying profitability despite reduced
sales revenue compared to FY2017. The decline in sales
revenue was a consequence of a faster than expected
reduction in demand for ultra wide band integrated antennas
as the programme roll-out that saw such good demand
in FY2017 concluded. Whilst a year-on-year drop in sales
revenue is disappointing, we were very pleased to see a
strengthening of demand for higher margin products in the
year, which led to improved profitability. With good order
visibility on established programme roll-outs from defence
contracts and our selection by a major Original Equipment
Manufacturer (“OEM”) to supply Filtronic-designed mMIMO
antennas, we are confident for the business over the mid to
long term.
Our strategy and markets
Our objective is to grow profitably as an organisation by being
a key supplier of advanced RF communications products
to the mobile telecommunications infrastructure and critical
communications markets. We focus on growth markets,
where we have a deep understanding of the sector and
customer requirements and where we can leverage our know-
how and significant IP portfolio.
Our strategy to fulfil this objective is:
• To offer a growing range of technically advanced
antennas, mmWave transceivers and filters which are
developed to meet the specific needs of our customers;
• To expand our customer base within existing markets; and
• To widen the number of markets we serve.
We have made significant progress in broadening both our
customer base and the markets we serve and FY2018 saw
Filtronic plc Annual Report and Accounts 2018
major contributions to sales and profits from outside our
traditional mobile telecommunications infrastructure market.
Revenues and profits from customers in the defence and
aerospace and public safety networks markets grew strongly
in the year, providing a good platform for the future.
Our core technology know-how is in antenna, RF conditioning
and transceiver products. We have gained a strong and
growing reputation in the markets we serve for innovation,
flexibility and the ability to deliver technically advanced
products to demanding specifications. The fast-moving nature
of the markets we serve means that we have to be flexible
and adapt rapidly to changes.
Within our traditional telecommunications market, the
evolution to 5G has begun to shape the nature of customer
demand. The recently announced orders for mMIMO
antennas is one example of how Filtronic is participating in this
technology evolution. As 5G develops to use mmWave bands,
our know-how in high-frequency transceivers, filtering and
antennas becomes increasingly relevant to our customers.
Over recent years, the technologies deployed across our
two businesses have been on progressively converging
pathways. We have therefore concluded that merging our two
business units into a single operating structure will enable us
to better address the opportunities that 5G is presenting to
us and allow the organisation to better utilise its engineering,
operations and sales resources. This change will also enable
us to simplify our messaging to new and existing customers
as we will simply go to market as Filtronic, eliminating some
confusion that existed whilst trading as two separate business
units.
The mobile telecoms infrastructure market has been the main
focus for Filtronic for a number of years. However, as we
execute our strategy to grow our customer base and target
adjacent market opportunities, we must ensure our sales
organisation reflects the different drivers and characteristics
of these target markets. We have therefore also realigned our
sales force into two sales teams to give specific market focus
Pictured: Antenna phasing network
Filtronic plc Annual Report and Accounts 2018
07
to our selling activities. One team will focus on our core
mobile telecommunications infrastructure market whilst
the other will focus on the critical communications market,
which includes defence and aerospace, public safety and
emerging applications such as High Altitude Pseudo-
Sateliltes (“HAPS”). We are convinced that having sector
specialists will enable us to meet our customers’ needs and
expectations more closely
As a consequence, from the start of the new financial
year, Filtronic Wireless and Filtronic Broadband business
segments have been combined, and this review will be the
last one that references the previous operating segments
and reports discrete financials for each.
Filtronic Wireless
FY2018 saw a reduction in revenues compared with
FY2017 due to the faster than expected reduction in
demand for our first generation of custom-integrated
antenna. However, based upon our achievements with
this product, we secured a major follow-up product
development contract for a mMIMO antenna. This antenna
is currently undergoing end customer trials with an
expected production ramp in FY2019. We are pleased to
note that initial orders have now been received and we are
in the process of setting up production lines to meet this
demand.
We have made considerable efforts to sell antennas direct
to Mobile Network Operators (“MNOs”) to further diversify
our customer base. Establishing ourselves in this sub-set
of the market has, however, taken longer than we had
originally expected. During FY2018, one of our antenna
products was approved by a major US MNO and we are
pleased to report that another MNO in EMEA recently
qualified another of our antenna products. We are working
diligently to convert these product approvals into sales and
will keep investors informed of progress.
In FY2017, we saw good demand for legacy filter products
and this demand continued through the first half of FY2018.
However, we started to see this demand tailing off in
the second half of FY2018 and we expect to see further
reductions as the programmes for these filter products
conclude during FY2019. We took a conscious decision
to exit the OEM base station filter market in FY2016 as
this market had become increasingly commoditised by
a number of Chinese suppliers bidding aggressively to
secure business. This trend has continued, and we have
no intention of re-entering this space. However, we do
continue to sell filters into the public safety market along
with our advanced antennas, which are system-level
products with integrated filters. In addition, we sell complex
filter combiners to MNOs where the application has not
been commoditised.
Pictured: Orpheus transceiver
FY2018 saw very healthy demand for filters and combiners
from the public safety market. This demand is project-driven
and during FY2018 we benefited from several major new
system deployments. Whilst demand is uneven, product life
cycles are long and underlying demand has steadily increased
in recent years.
Filtronic Broadband
During FY2018, we saw production ramps for the two main
defence contracts we had previously announced, which
require Filtronic to build high-specification Transmit Receive
Modules (“TRMs”) to our customers’ specifications. Our
know-how in the manufacture of transceivers, along with our
specialised production capability, was key to winning these
contracts. The component materials used are specified and,
for the most part, procured by the customer and then “free
issued” to us for manufacture, assembly and testing. The
scale-up of production proved to be challenging due to third-
party supply issues with some of these components, and
this significantly delayed achieving the anticipated revenues.
However, by working closely with our customer, we were
able to identify solutions to these component issues and by
the final quarter of FY2018, the two contracts were at full
contractual production rates. These two initial contracts run
for three and eight years, respectively. We note that more
orders have been placed for the defence application where
these TRMs are embedded and we are thus well positioned to
win more work in due course.
After a slow start to the year for sales of our backhaul
Orpheus transceiver products, we are pleased to report that
Orpheus sales picked up in the second half as a leading
OEM adopted this transceiver and embedded it in their new
E-band backhaul radio. We continue to seek opportunities
for these products in other applications and are working on
developing new design variants and configurations that meet
the specification requirements and price points demanded by
the telecoms market.
Pictured: Antenna phasing network
Strategic reportwww.filtronic.com Stock Code: FTC 08
Chief Executive’s review continued
In addition to our focus on our traditional core markets, we are
working to develop opportunities for our mmWave transceiver
products in emerging applications such as high-capacity
communications links to satellites, HAPS and track-side to
train links. During FY2018, we also secured and delivered
development contracts for fibre replacement and 5G-related
test equipment applications.
We are pleased with our progress in growing our customer
base and reducing our customer concentration but recognise
that we sell our products to a small number of large clients
and so addressing this concentration issue remains a long-
term project.
Future trends
The markets that we serve are dynamic, growing and continue
to present good opportunities for us.
MNOs continue to invest in networks to increase capacity.
Within 4G LTE networks, MNOs are increasing capacity by
densification of their networks. There are two specific trends in
densification:
a) MNOs acquiring additional spectrum and building out
networks to deploy additional bands. This is resulting in a
requirement for multi-band antennas that can service as
many as six different frequency bands.
b) The introduction of mMIMO increases spectral efficiency
within existing licensed bands. This technique is a cost-
effective way for MNOs to increase capacity and reduces
the significant investment in additional spectrum.
These dense networks, primarily at frequencies less than
6GHz, are being marketed as 4.5G, 4.9G and 5G Evolution
by MNOs and this is where we expect to see the majority
of hardware investment over the next few years. Filtronic is
well positioned to participate in the densification of 4G LTE
networks with our multi-port, ultra wide band antennas and
our mMIMO antenna offering.
We are also starting to see investment in the development of
mmWave 5G technologies. In the 26–28GHz band, concept
models have been produced with fully integrated front ends
where the mMIMO antennas are closely coupled to dedicated
chipsets incorporating multiple TRMs.
We are very well placed to participate in the development of
these 5G systems. Our combination of key relationships with
OEMs, high-frequency transceiver and TRM expertise, and
knowledge of advanced antenna and filtering technologies
provides us with solid commercial and technical platforms
upon which we can build our market position.
The critical communications market is driven by government
and quasi-governmental spending. Geopolitical instability is
leading to renewed expenditure on more advanced defence
and public security equipment and technology.
Investment in public safety networks continues to grow and
effective communications networks for emergency services
are seen as a high priority in an era of increasing focus on
national security. Whilst longer term there is a desire to use
commercially available broadband networks, such as 4G LTE,
that can accommodate public safety data requirements, most
budget holders value the quality, operational independence,
performance and stability of narrowband public safety
systems such as P25 and Tetra.
Looking ahead
The future of RF communication continues to be exciting and
Filtronic’s relevance to its customers and markets continues to
grow. We are supplying products and technologies to leading
businesses in mobile telecommunications infrastructure
and critical communications markets that will see major
deployments in the coming years. We continue to develop
relationships with existing and new customers that will yield
long-term growth for the business.
Rob Smith
Chief Executive Officer
15 August 2018
Pictured: 10-Port, LAA, Quasi-Omni Antenna
Filtronic plc Annual Report and Accounts 2018
09
Market review
Filtronic supplies advanced RF communications equipment
to the mobile telecommunications network infrastructure and
critical communications markets.
Our core market has historically been the mobile telecoms
OEM sector. Over the last ten years, this market has
experienced substantial consolidation of the addressable
customer base and the emergence of Chinese competitors
who have driven a price-down strategy. As a consequence,
our sales became concentrated on a decreasing number
of clients. Our strategic response has been to focus on
more advanced technologies and products, to expand our
customer base by building sales to MNOs, and to further
develop our established position in the growing critical
communications markets, whilst creating participation
opportunities in new, advanced, communications strategies
being explored by some of the world’s largest technology
companies where Filtronic’s advanced capabilities, agility and
reputation for innovation is valued.
Mobile telecommunications
The mobile telecommunications network infrastructure market
will continue to be of major significance to Filtronic and we
supply a range of products to this market. In recent years,
we have concentrated on system-level and sub-system-level
products where we are able to differentiate our capabilities.
Growth within this market has been driven by ever increasing
user demand for high-quality data networks, with streaming
of video through apps such as YouTube, Netflix and the BBC
iPlayer driving the need for capacity and high data rates. The
graphs in this section of the Annual Report demonstrate how
this translates into data usage with substantial growth forecast
over the next five years.
MNOs have sought to expand capacity in 4G LTE networks
and have added spectrum, creating the need for ultra wide
band equipment. In addition, mMIMO antennas use existing
spectrum more efficiently, enabling capacity gains within
previously licensed spectrum. This densification of the 4G
LTE network is a major drive for MNOs and we see this trend
continuing over the near to medium term.
The introduction of 5G future networks is beginning to take
shape. In July 2018, 3GPP officially released the network
architecture standards that will be used in 5G. These
standards are frequency agnostic and it is envisaged that
traditional sub-6GHz bands as well as higher frequency
mmWave bands will be deployed. The industry sees
bands around 3.5GHz as of particular interest because
this frequency offers potential capacity and data rate gains
within the established sub-6GHz range. The effective range
of radio frequency communications at 3.5GHz is relatively
short, meaning that many more cell sites will be required for
operations at this frequency.
To achieve the capacity and data rates envisaged for use in
5G networks, techniques such as 3D beamforming will need
to be deployed. mMIMO is a key enabler of this technology,
making it a strategically important product. The integration
of radio, software and antenna technologies will be key to
delivering these capabilities, and relationships with OEMs will
be essential in the development of antennas for 5G networks.
We are well placed to participate in the densification of 4G
LTE networks with our range of ultra wide band antennas and
mMIMO. 5G represents a major opportunity with its mixture of
sub-6GHz and mmWave frequencies as we have significant
know-how over the proposed frequency ranges and the
channels to market to capitalise on the opportunity.
Critical communications
Critical communications markets cover those sectors
where highly reliable RF equipment is mission critical. This
category includes defence and aerospace applications
(including advanced communications and radar), public safety
communications networks and emerging markets such as
HAPS and Low Earth Orbit (“LEO”) communications networks.
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Strategic reportwww.filtronic.com Stock Code: FTC 10
Market review continued
The defence and aerospace markets provide a diverse range
of opportunities and with NATO members starting to increase
spending in advanced systems, we are looking to build on our
recent contract wins in this sector.
Public safety networks continue to receive good levels of
investment as government and quasi-governmental agencies
continue to expand existing networks.
Security concerns are a major issue in defence and
aerospace and public safety markets and consequently many
governments have a policy of buying only from security-vetted
suppliers. These markets also have longer product life cycles
and provide more visibility of revenues, giving the business a
more predictable platform from which to grow.
HAPS and LEO networks are in the early stages of
development as a number of technology firms look to expand
internet coverage to include geographic locations that do
not have adequate traditional installed network broadband
service. We have participated in development projects in
this sector and our knowledge of high-capacity, long-range
transceivers is highly relevant to this market.
Market strategy
Our strategy is to focus on the markets that we have identified
where our IP and know-how differentiate us and where
we have established a good understanding of the market
requirements. We have separate sales teams that concentrate
on the markets we have identified to ensure that we align our
channels, strategies and focus to market specific needs and
opportunities.
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Filtronic plc Annual Report and Accounts 2018
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Objective and strategy
Filtronic is a leading designer and manufacturer of RF communications components and sub-systems.
Our objective is to profitably grow our business by
supplying class-leading RF communications components
and sub-systems for demanding applications across our
target markets. Our strategy to deliver this objective is:
• To offer a growing range of technically advanced
antennas, filters, mmWave transceivers and
associated products;
• To expand our customer base within our target markets;
and
• To widen the number of markets that we address.
Product strategy
Our high-performance product range has been developed
using advanced design capabilities and currently comprises
antenna, filter and mmWave transceiver products.
The product range and wider technology capability are
rich in IP and know-how with over 80 patents/applications
across the product portfolio.
Antenna products
Filtronic currently offers a range of standard ultra wide band
antennas covering both USA and the rest of the world
bands. In addition, we work closely with customers to tailor
products to meet their specific requirements.
Filter products
Filtronic’s filter products cover a range of product classes,
with solutions to support a variety of current and future
network needs.
mmWave transceiver products
Filtronic’s mmWave transceiver products are based around
our class-leading, high-capacity, E-band transceiver
technology which is used in mobile backhaul and wireless
link applications.
Organisational overview
Filtronic has merged its two operating business units,
Filtronic Broadband and Filtronic Wireless, into a single
operating unit which will be reported from the start of the
new financial year. This change has been made to:
• Better align ourselves to the opportunities presented
by 5G: as higher frequency networks are developed, the
technologies we offer converge;
• Simplify the branding by focusing on the Filtronic name;
• Improve operating efficiencies by merging the two
business units; and
• Leverage the talent pool across the business.
Filtronic operates from strategically located sites in the UK,
Sweden, the USA and China, so that we are close to our
customer and supply base.
Our business ethos is to be agile and responsive to
customer needs with a high degree of delegated authority
and empowerment.
Filtronic complies with internationally recognised standards
covering issues such as anti-bribery and corruption, child
labour, modern slavery and conflict minerals. Details of our
policies may be found on our website at:
www.filtronic.com/investors/corporate-governance/group-
policies/.
Leeds and Sedgefield, UK
Sales, Filter and mmWave
Design and Central Services.
Filtronic plc, Head Office.
Täby, Sweden
Sales and Antenna Research
and Development
Salisbury, MD, USA
Sales, Logistics,
Service and Repair
Suzhou, China
Ops and Sub-Contract
Manufacturing
Strategic reportwww.filtronic.com Stock Code: FTC
12
Objective and strategy continued
Filtronic people
At Filtronic we firmly believe that it is our people who make
the difference. We have an experienced, highly qualified and
motivated team who are determined to deliver outstanding
products and service to our customers.
Filtronic has a depth of engineering skills across its product
portfolio. The mmWave transceiver team, based in the UK,
has seen continuous development since 1997. The
antenna team has extensive industry expertise extending
back to 1994, whilst the filter team has expertise dating back
to 1992, including unique expertise, know-how and design
reputation in electronically reconfigurable filters.
With key staff positioned globally, Filtronic is able to
design and develop its product portfolio with an excellent
understanding of end customer and market needs.
Manufacturing and fulfilment
Design and development is performed and managed
in-house at our advanced design centres in Leeds, Täby
and Sedgefield.
Antenna and filter manufacturing is outsourced to our
manufacturing partner in Suzhou, China, whom we have
worked with for over ten years.
mmWave transceiver products are manufactured at our
highly automated facility in Sedgefield, UK.
Our logistics and service and repair centre based in Salisbury,
Maryland, USA, provides customer service and support to
markets in North America.
5G future networks
Next-generation technology: “Pre-5G” in the near term
5G is the future of communications networks, and
operators are beginning to develop plans for its deployment
alongside partners, such as Filtronic, who are capable of
delivering the required technology and quality.
• OEMs and operators are starting to plan for 5G
implementation.
• Other than some “genuine” 5G trials being undertaken,
most press releases labelled as 5G are essentially
enhanced 4G with some of the necessary 5G techniques
partially implemented, for example:
• Huawei “4.5G”;
• Nokia “4.5GPro and 4.9G”; and
• ZTE and Ericsson “Pre-5G”.
• Recently AT&T launched its “5G Evolution” plans leveraging
LAA frequencies.
• The cornerstone of 5G is mMIMO/3D beamforming, and
some systems have been, or are being, deployed which
utilise 8x8 mMIMO.
• Some systems using unpaired spectrum/TDD
mode only using a single frequency band were deployed
in 2016.
• 8x8 mMIMO solutions using FDD (paired spectrum) are
currently under development by the OEMs with some
trial systems deployed in late 2017. Extensive roll-out in
early adoption markets is expected in 2019.
• Initial focus is on high-frequency bands >1.7GHz where
physical size is acceptable.
• Standard panel antennas will continue to dominate at
<1GHz due to physical size and gain trade-offs.
Filtronic plc Annual Report and Accounts 2018
Pictured: Automatic wire bonder
Filtronic plc Annual Report and Accounts 2018
13
Next-generation technology: True 5G in the long-term
Based on our enviable combination of experience,
product portfolio and reputation, Filtronic is ready to take
advantage of the move to 5G as a trusted implementation
partner.
• Whilst there is still not a fully released 3GPP
specification, all OEMs have now released trial hardware
and are committed to true 5G trials.
• There has been some narrowing of the frequency band
likely to be used going forward and it is clear that true
5G will be at frequencies over 28GHz. This is where
most of the trials are being undertaken (Verizon, NTT
DOCOMO, KT, SK Telecom, AT&T).
• In the USA, in 2017, Verizon won a bidding war with
AT&T to acquire Straight Path for $3.1bn (39GHz for
95% of issued licenses and 28GHz in some major
cities).
• 3GPP have now named 5G as “5GNR” – (5G New
Radio) with a full specification to be released at Release
15.
• Pre-commercialisation trials have mostly been at 28GHz
based on broadband delivery systems only.
Pictured: mMIMO antenna
• All trial systems use 8x8 mMIMO technology.
• Large technology companies are investing heavily to
ensure they do not miss the boat.
• Large-scale adoption will coincide with a burgeoning
IoT market.
Case studies
Massive MIMO
Filtronic has collaborated with a major OEM to develop a
mMIMO antenna.
OEM mMIMO antenna
• The next-generation, dual-band FDD LTE antenna is
designed to integrate the OEM’s radios in a 16T16R
configuration and is based on Filtronic proprietary
designs, allowing rapid product development.
• Massive MIMO incorporates beamforming techniques
that yield increased spectral efficiency, which
significantly increases network capacity in both uplink
and downlink.
• The efficiency gains from Massive MIMO products
provide a compelling business case for MNOs and
are a major step in the development of dense 5G
networks.
What is Massive MIMO?
The acronym MIMO stands for Multiple-Input, Multiple-
Output. It is a term that is used to describe the ability of
a wireless network to transmit and receive more than one
data signal at the same time using the same data radio
channel.
Standard MIMO networks tend to use two or four
antennas that are physically separate but used in
combination to form part of the network. Massive MIMO,
is a MIMO system with an especially high number of
antenna elements. In this instance, it is desirable for
the antennas to be housed in a single unit and such a
dense array of elements is referred to as a Massive MIMO
antenna.
There is no set figure for what constitutes a Massive MIMO
array, but the description tends to be applied to systems
with tens or even hundreds of antenna elements. From
a performance perspective, the higher the number of
antenna elements, the better the network performance.
So, an 8x8 Massive MIMO antenna has 64 separate
antenna elements.
Because of practical considerations, for example,
space on masts, wind loads and weight, Massive MIMO
antennas are usually constrained to use higher frequencies
that have shorter wavelengths and therefore physically
smaller antennas.
Pictured: Automatic wire bonder
Strategic reportwww.filtronic.com Stock Code: FTC
14
Objective and strategy continued
What are the advantages of Massive MIMO?
By arranging elements in a grid pattern, it is possible
to use a technique known as 3D beamforming.
Beamforming enables a radio signal to be focused at a
single point rather than across the full sector covered by
an antenna. Therefore, the advantage of a Massive MIMO
network over a conventional one is that it can multiply the
capacity of a wireless connection without requiring more
spectrum. There are numerous factors involved but some
estimate that Massive MIMO could potentially yield as
much as a 50-fold capacity increase eventually. In a world
where spectrum licences cost in the hundreds of millions
of dollars, if not billions, this kind of increase in capacity
is highly attractive to MNOs and justifies the infrastructure
investment necessary to deliver Massive MIMO.
The spectral efficiency of Massive MIMO means that
spectrum is not wasted and that networks are more
efficiently deployed. This densification of the network
is critical as capacity in 4G networks is already being
reached.
In a fully deployed Massive MIMO network, utilising
3D beamforming connections to individual devices will
be more robust. This means that managing hand-offs
between cell sites improves and therefore the number of
dropped connections decreases significantly.
Massive MIMO and 5G
To handle the significant increase in data rates and
therefore higher network capacity required in 5G
networks, the use of Massive MIMO and 3D beam-
forming techniques are critical. The expectation is that 5G
will see data rates rise from 100 Megabits per second to
an anticipated >1 Gigabit per second.
Massive MIMO’s ability to serve multiple users and
multiple devices simultaneously within a condensed
area while maintaining fast data rates and consistent
performance is why this is viewed as being a key 5G
enabler.
Filtronic plc Annual Report and Accounts 2018
Pictured: Filtronic mMIMO antenna radiation diagram
Massive MIMO and Filtronic
Filtronic has collaborated to develop a Massive MIMO
antenna system based on our proprietary antenna
technology. Our antennas are based around patented
ultra wide band radiating elements, novel electro-optic
phase shifters and internal remote electronic tilting
technologies that offer a cost-effective, reliable design
architecture, ideally suited to Massive MIMO. The
use of ultra wide band elements and modular design
philosophy means that one antenna platform type can
be developed to service a wider customer base.
To achieve 3D beamforming with a Massive MIMO
antenna, it is necessary to integrate the radio and
antenna technology together. The need for a close
working relationship between the radio and antenna
manufacturer is therefore essential to the successful
development of a Massive MIMO antenna system.
Who is deploying Massive MIMO?
Over the past year, numerous MNOs have announced
that they are developing Massive MIMO networks in
partnership with the major OEMs. The MNOs who
have announced deployments include AT&T, T-Mobile,
Verizon, Deutsche Telecom and Vodafone.
Can current handsets use Massive MIMO?
As mMIMO is being deployed over 4G networks, the
latest generation of smartphones are designed to utilise
this technology. Devices that are mMIMO enabled
include Apple’s iPhone 8 and iPhone X, the HTC 10,
U11 and U12, the Huawei P9, P10 and P20, the LG G5
and G6, the Samsung Galaxy S7, S8 and S9, and the
Sony Xperia X and XZ.
It is worth noting that even older or less capable phones
that do not support mMIMO will be able to benefit from
the more stable, more sensitive network environment
that Massive MIMO will produce.
Pictured: Filtronic mMIMO antenna array radiating elements
Filtronic plc Annual Report and Accounts 2018
Financial review
The financial year saw steady progress
with another year of profitable trading, a
strengthening of the balance sheet and good
cash generation.
Revenue
Sales revenue for the Group decreased in the year by 32%
to £24.0m (2017: £35.4m).
Filtronic Wireless saw sales reduction of 40% to £18.4m
(2017: £30.5m) contributing 77% (2017: 86%) to Group
revenue. Despite revenue being down, our strategy of
refocusing the business into higher-margin products
and applications enabled us to substantially mitigate the
revenue decline.
Filtronic Broadband saw revenue growth of 14% with sales
increasing to £5.6m (2016: £4.9m) accounting for 23%
(2017: 14%) of Group revenue. In line with the strategy to
broaden the customer base and markets we serve, it was
particularly pleasing to see much of this growth coming
from new markets and product offerings which have much
longer product life cycles and therefore provide more
visibility over future revenues.
Operating costs
Operating costs reduced in the year as overheads,
excluding depreciation, amortisation and other non-cash
items, reduced to £8.8m (2017: £9.6m). We continue
to invest in our engineering and manufacturing teams to
support product development and delivery of contract
wins respectively and this is reflected in the average
headcount for the year which has increased to 126 (2017:
116). The reduction in overheads is accounted for by the
investment in intangible assets as we have capitalised
£0.4m (2017: £nil) of product development costs to match
against future revenues generated from the development.
EBITDA
During the year we took the decision to move from
adjusted operating profit to EBITDA as an alternative
performance measurement. EBITDA is a more widely
recognised metric by key stakeholders giving a good
indication of the cash generation from the business
operations before working capital and capital expenditure
requirements. EBITDA for the Group in the year was
£2.5m (2017: £2.5m). Filtronic Wireless EBITDA
reduced to £2.7m (2017: £4.0m) due to lower revenues
although improved product margins helped mitigate the
impact. Filtronic Broadband posted EBITDA of £0.5m
(2017: £0.6m LBITDA) which represents a significant
improvement on the prior year and validates the strategy
put in place to return the business unit to profitability.
15
Reconciliation of EBITDA
Operating profit
Depreciation
Amortisation
EBITDA
2018
£000
1,773
542
141
2017
£000
1,702
658
110
2,456
2,470
Exceptional cost/(income)
An exceptional cost of £0.5m (2017: £0.7m income) was
charged to the income statement due to the revaluation
of a US dollar denominated intercompany balance in the
Filtronic Wireless UK entity. This was a result of the US
dollar weakening against sterling during the year and the
intercompany loan to the US subsidiary being worth less in
sterling.
Taxation
A small tax credit of £5k (2017: £1.0m) has been
recognised for the year, as set out in note 13 to the
financial statements. The Group continues to benefit from
R&D tax credits in the UK as we continue to invest in
advanced product and process technology development.
An R&D tax credit of £0.2m, which relates to the previous
financial year, is included in the total credit and was realised
as cash in the period.
Following the recent reduction in the US federal corporate
tax rate, a write-down of £0.1m was made on the deferred
tax asset held in the USA relating to net operating losses
carried forward giving a one-off, non-cash impact to reflect
the new, lower rate of corporate taxation.
Capital expenditure
Capital expenditure of £0.6m (2017: £0.8m) included
£0.2m for the Filtronic Wireless business (2017: £0.3m)
and £0.4m for Filtronic Broadband (2017: £0.5m). Filtronic
Wireless invested in production tooling to enable cost
savings to improve product margins, whilst Filtronic
Broadband invested in new equipment to increase
production capacity and improve capability.
Pictured: Filtronic mMIMO antenna array radiating elements
Strategic reportwww.filtronic.com Stock Code: FTC 16
Financial review continued
Research and development costs
Total R&D costs in the year before capitalisation and
amortisation of development costs were £3.1m (2017:
£3.1m). The Group continues to invest in R&D for the future
growth of the business through new and enhanced products
to meet the expanding demands of customer programmes.
Key areas of expenditure in the year included the
development of a wider portfolio of antennas, the mMIMO
antenna we have developed in collaboration with Nokia, and
E-band products which we anticipate will deliver significant
future revenue opportunities.
The Group capitalises its development costs in line with
IAS 38 as set out in note 2 to the financial statements.
A reconciliation of R&D costs before capitalisation and
amortisation can be seen in the table below:
Reconciliation of R&D costs
R&D costs in income statement
Capitalisation of development costs
Amortisation of development costs
R&D costs before capitalisation
and amortisation
2018
£000
2,755
436
(95)
2017
£000
3,214
-
(95)
3,096
3,119
Inventory provision
Inventory is valued at the lower of cost and net realisable
value. It is the Group’s policy to regularly review the carrying
value of its inventories and to make a provision for excess
and obsolete inventory. As at 31 May 2018, the inventory
provision was £1.2m (2017: £1.6m).
Warranty provision
In line with industry practice, the Group provides warranties
to customers over the quality and performance of the
products it sells. The Group’s policy is to make a provision,
calculated as a percentage of sales revenue, after reviewing
costs associated with faulty products returned. As at 31
May 2018, the warranty provision was £0.4m (2017: £0.5m);
the decrease in the provision at the year end reflected the
fact that some of the provision was released unused during
FY2018.
Funding and cash flow
The Group continues to be cash generative and has
recorded an increase in cash and cash equivalents to £3.8m
(2017: £2.6m) at the year end.
Cash generation from operating activities in the year was
£1.8m (2017: £3.9m). The Group invested £1.1m (2017:
£1.0m) in capital expenditure and intangible assets. To
preserve cash liquidity, capital expenditure in the year
was financed through a bank loan and a hire purchase
agreement together totalling £0.5m. The full breakdown of
this movement can be seen on the consolidated cash flow
statement.
Net cash at the end of the period was £3.6m (2017:
£2.6m) being £3.8m cash and cash equivalents and £0.2m
of interest-bearing borrowings from the bank loan.
To provide additional cash headroom, Filtronic has a £3.0m
invoice discounting facility with Barclays Bank plc in the
UK. As at 31 May 2018, £nil was drawn down against this
facility (2017: £nil). Furthermore, after the year end, the
Group entered into an agreement with Wells Fargo Bank
for an additional $4.0m invoice factoring facility in our US
operation. This facility is designed to help finance our future
growth plans in this key market.
Michael Tyerman
Finance Director
15 August 2018
Pictured: 10-port, 8-port and 6-port, 65-degree, ultra wide band
base station sector antennas
Filtronic plc Annual Report and Accounts 2018
17
Key performance indicators
The Group’s management team uses various Key Performance Indicators (“KPIs”) to monitor the
financial and non-financial performance of the business. Below are the measures and metrics which
the Board believes best indicate the performance of the Group as a whole.
Revenue (£m)
£24.0m
4
.
5
3
0
.
4
2
EBITDA/(LBITDA) (£m)
£2.5m
5
.
2
5
.
2
EBITDA/(LBITDA) per
employee (£k)
£19.8k
8
.
9
1
6
.
1
2
2018
2017
2016
2015
2018
2017
2016
2015
)
7
.
7
4
(
)
7
.
4
4
(
Employees are a critical asset in our
business and we monitor the EBITDA/
(LBITDA) per employee to measure
productivity.
5
.
7
1
6
.
3
1
)
1
.
6
(
)
6
.
7
(
2018
2017
2016
2015
The total amount the Group earns
from the sale of products and
services.
The Board recognises EBITDA/
(LBITDA) as a key metric of the
underlying health of the business.
Research and
development costs (£m)
£3.1m
Cash generated from/(used in)
operating activities (£m)
£1.8m
5
.
6
9
.
3
8
.
1
3
.
4
1
3
.
1
3
.
2018
2017
2016
2015
The Board recognises that the Group
needs to invest in new products,
capabilities and technologies to
participate in a technology-driven
market and measures the investment
made in research and development.
2018
2017
2016
2015
)
7
3
.
(
)
0
.
5
(
The Board recognises that cash flow
from operating activities indicates
whether the Group is able to generate
sufficient positive cash flow to maintain
and grow its operations, or it may
require external funding for financing.
Strategic reportwww.filtronic.com Stock Code: FTC 18
Risk management
Effective risk management is key to our success, both in the industry that we operate in and within
our chosen business model. Filtronic supplies microwave, mmWave, base station filter products and
antennas for the wireless telecommunications market. The Group operates in a fast-changing sector
with a small number of sophisticated customers, demanding high-performance standards and
international competition, all of which pose risks to the business.
The directors recognise that risk is inherent in any business and seek to manage risk in a controlled manner. The key business
risks are set out as follows:
Risk
Nature
Mitigation
Change
in year
Market
We supply a range of niche products to a small
number of large OEM customers as well as a
number of MNOs.
The loss of any of these customers, material
reduction in orders from any such customer or
the timing of customer project roll-outs may have
a material adverse effect upon Filtronic’s financial
condition.
With the rapid evolution of product technology
and other corporate decisions, the size of our
addressable market may be affected. We may
also fail to forecast market movements correctly
thus missing opportunities or wrongly predicting
product longevity.
Manufacturing
For most of the products, production is
demand led and customers may vary their
requirements at short notice, which also
impacts inventory management. Customers
in these businesses expect consistently
high-quality products and decreasing prices,
hence we depend on control of our operating
environment, including management of security
of supply in our supply chain, and the provision
of correctly designed technological solutions
including the achievement of target cost-
reduction plans. Non-performance in these
areas would result in a diminished market
position.
The Group seeks to mitigate this risk by working
closely with customers, at all levels, to ensure
that we are designed into their products at an
early stage, enabling us to develop products that
meet their specifications and requirements.
We have strengthened the sales teams both
directly and indirectly and are actively seeking
to increase the number of contract wins across
a range of products with an encouraging
opportunity pipeline.
The sales teams have been reorganised to
serve our different markets: telecoms and critical
communications. By organising the sales team
by market and customer, it is anticipated that
our commercial teams will be able to forge
deeper relationships with customers and add
more focus to our strategy of diversifying the
customer base in the markets we serve.
The Group’s internal and outsourced
manufacturing processes are accredited under
ISO 9001.
We manufacture and assemble at our highly
automated facility at NETPark, Sedgefield,
based on our core competencies, and where
appropriate, we outsource non-core processes
to suppliers who can offer advantages over
internal supply.
Our antenna and filter products are
manufactured by an outsourced partner who
has a high degree of flexibility and a proven
track record of product ramp and mass volume
manufacturing, enabling us to flex volume with
limited impact on our cost base and balance
sheet.
All of our products are provided to customers
after detailed qualification testing. We work
closely with our customers to ensure that the
test processes employed are appropriate so
all products are supplied compliant to the
customer’s specification.
Filtronic plc Annual Report and Accounts 2018 Change
in year
19
Change
in year
Risk
Nature
Mitigation
Technology
Recruitment
and retention
Our product competitiveness is heavily
influenced by technology choices at
product concept stage and throughout
the execution of design to product
launch.
The market is time-sensitive and
opportunities may be lost if the
technology we develop is inappropriate
or fails to achieve customer specifications
or meet the timescales required to match
market demand.
For products in the production cycle,
technology insertion is often required as
a means of achieving price reductions,
which underpin sales.
Our ability to remain competitive in terms of
technology and product design is underpinned by
retaining key staff and effective design methodologies.
We work closely with our customers and suppliers to
gain a thorough knowledge of the technology being
developed in the marketplace. By staying close to the
market, we position ourselves to react quickly to any
technology changes that develop.
When undertaking new product introductions, we
follow a process which facilitates a thorough review
of the engineering development at various milestones
throughout the project. This methodology is designed
to ensure the product has no design defects, meets
the required specification and is on time to exploit the
market opportunity.
In order to protect our intellectual property, we
maintain and apply for patents when appropriate.
The Group is reliant on the key skills and
knowledge of its people in a range of areas
especially in the engineering function.
Failure to recruit, develop and retain an
appropriate number of suitably qualified
people in critical areas could affect our
ability to design new products and meet our
customers’ needs.
We have also benefited from a number of
non-UK employees filling key roles within
the business. Due to the highly technical
nature of our activities, these skills are not
always readily available within the UK and
any restrictions on employment of these
people could have an adverse effect on the
Group.
The Group has a competitive remuneration package
that is reflective of market conditions for key roles and
is under review as conditions change. The Group also
operates a long-term incentive plan for key employees
and SAYE schemes for all UK employees.
We continue to invest in our engineering teams to
ensure we have the right skills to execute our strategy.
We also provide regular communications to all
employees through communication meetings in each
of our business locations along with a bi-monthly
newsletter including a CEO blog giving updates about
business performance. By giving our employees an
understanding of our strategic direction, we believe it
enables them to make meaningful contributions to the
achievement of our goals.
Financial
management
The Group has specific exposure to credit
risk and exchange rate fluctuations. A
large proportion of the Group’s sales are
denominated in US dollars, so the Group
is subject to risks associated with currency
movements.
The Group has established a number of policies
to mitigate these risks, further details of which are
presented in note 36 to the financial statements.
Predominantly, currency risk on the US dollar is
managed through a natural hedge and forward
contracts.
The Board has established a continuous process for
identifying, evaluating, and managing the significant risks the
Group faces which has operated throughout the year and
up to the date of this report. Such a system is designed to
manage rather than eliminate the risk of failure to achieve
business objectives and can only provide reasonable and
not absolute assurance with respect to the preparation of
financial information and the safeguarding of assets and
against material misstatement or loss.
The Board regularly reviews the effectiveness of
the Group’s system of internal control. The Board’s
monitoring covers all controls, including financial,
operational and compliance controls, and risk
management systems. It is based principally on
reviewing reports from management to consider
whether significant risks are identified, evaluated,
managed and controlled and whether any significant
weaknesses are promptly remedied and indicate a
need for more extensive monitoring.
Strategic reportwww.filtronic.com Stock Code: FTC 20
Corporate social responsibility report
Acting with integrity and behaving responsibly are central to the execution of our strategy and
underpin our business model. This report covers how Filtronic interacts with its stakeholders, its
approach to key issues and its aims for the future.
Health and safety
The Board is committed to ensuring the health and safety
(“H&S”) of the Group’s employees and applies high standards
throughout the Group in the control and management of
its operations. The Board regularly reviews the Group’s
arrangements for the planning, organisation and control of
H&S matters. Global H&S meetings are held quarterly with
participants from each of the Group’s six sites.
Looking to the future
Filtronic continues to work towards future-proofing the
business to ensure we have the right skills for the future to
support business growth. We have appointed a number of
graduates across the Group this year and we are also in the
process of establishing an apprenticeship programme for
FY2019, which we believe will have a positive impact on both
the business and society.
Employees
The Group’s success depends on its employees and the
Board recognises that it is their commitment and contribution
that is vital to the execution of the Group’s strategy.
With an international workforce, it is important that we provide
an environment where we attract, motivate and reward high-
quality employees, throughout the Group.
Employee development
Employee development is an important element of employee
retention and motivation. The Group has an education
and training policy in place which is being implemented
through developing a Group-wide infrastructure to support
the identification of staff development needs through
meetings and staff appraisals. The aim is to provide quality
staff development which supports the Group’s strategic
objectives, whilst simultaneously aiding talent management
and succession planning. Various formal and informal training
has taken place over the year, including training sessions on
the Group’s policies and General Data Protection Regulations
(“GDPR”).
Employee communications
The Group believes in keeping employees fully informed on
matters which affect them through various communication
forums. The Group holds regular employee communications
sessions at which employees can review Group progress
and raise, share and discuss specific issues and concerns
that affect employees with senior management. The Group
publishes a quarterly newsletter which outlines developments
and plans across the business.
Equal opportunities
The Group is committed to a policy of equal opportunity by
which it ensures that all employment-related activities are based
on merit and suitability for the job alone. Further
information on our equal opportunities policy may be found on
our website: www.filtronic.com/investors/corporate-governance
/group-policies/.
Diversity and inclusion
Filtronic has diversity and equal opportunity policies to
support our aim of providing equal opportunities for all
without discrimination. These policies form part of the Group’s
core values (expected of employees, suppliers and other
stakeholders). Our policies and practices emphasise the
importance of treating people in a non-discriminatory manner
across the full employment life cycle, including hiring, reward,
development, promotions, mobility and departure. In the
event that an employee becomes disabled, the Group will
make reasonable appropriate adjustments, and so far as is
practicable, will continue to provide employment. Training is
provided to those making decisions on these factors so that
no individual is disadvantaged and to prevent discrimination
on the grounds of gender, religion, belief, race, creed, age,
disability, sexual orientation, ethnic origin, or marital status.
The Chief Executive Officer is the Board member responsible
for human resources.
Filtronic plc Annual Report and Accounts 2018
Filtronic plc Annual Report and Accounts 2018 Corporate social responsibility report
21
Human rights
Filtronic applies human rights considerations to the way it
does business, for example through our supplier and
anti-bribery and anti-corruption policies, our code of ethics,
which is an integral part of our management policies, our
practices in relation to health and safety, equal pay and
employees’ freedom to join trade unions. The Group has
adopted a specific policy on modern slavery reflecting
the obligations contained in the UK’s Modern Slavery Act
2015. Filtronic is committed to ensuring transparency in our
approach to tackling modern slavery throughout our supply
chain.
The environment
Care for the environment is an integral part of the Group’s
business activities. It is the Group’s policy to ensure that its
facilities are safe and the Group is committed to ensuring
that its impact on the environment is minimised. The Group
supports and trains its personnel to act responsibly in matters
relating to the environment. The Group takes account of
relevant legislation and regulations and analyses its practices,
processes and products to reduce their environmental impact,
and works with our customers and suppliers to achieve a high
standard of environmental stewardship.
to ensure they have systems in place that focus on quality,
environment, corporate social responsibility and health
and safety. The Group has adopted a specific policy on
conflict minerals and works with our suppliers to ensure
implementation including reporting on the use of conflict
minerals throughout our supply chain.
The implementation of these management systems, which
are designed to monitor and control processes such as
quality, the environment and health and safety, will provide
Filtronic with the confidence that each and every product
that is delivered to our customers is at an appropriate level
of quality, and has been designed and manufactured in
a way that considers our impact on the environment and
the ultimate health and safety of our employees and our
broader stakeholders who contribute to our success. We
are continuing with the roll-out of a customer relationship
management system in Filtronic that complements this
approach.
The FY2018 Strategic report, from pages
4 to 21, has been reviewed and approved
by the Board of Directors on 15 August
2018 and signed on its behalf by
We have three sites which are certified to ISO 9001 and ISO
14001 standard: Täby, Sweden; Leeds, West Yorkshire, UK;
and Sedgefield, County Durham, UK.
Rob Smith
Chief Executive Officer
15 August 2018
Charitable and community support
This year we have established a charity forum made up
of volunteer employees from across the Group, the aim of
which is to ensure we are more involved in supporting our
local communities through charitable work. The forum meets
quarterly. Over the course of the year, Filtronic employees
have participated in and sponsored various events including
the Yorkshire Three Peaks Challenge and the Great North
Run. To demonstrate our ongoing commitment to the
communities in which it operates, the Group has introduced
paid leave of one day per annum for staff who wish to
undertake voluntary or charitable work.
Supply chain
The adoption of an advanced product life cycle management
software system has allowed for Group-wide management
and control of our documentation to include product design,
suppliers and change management as well as a module to
address specific quality processes. Supply chain management
is working to develop partnerships with our main suppliers
Pictured: Filtronic staff taking part in the Yorkshire Three Peaks
Challenge.
Strategic reportwww.filtronic.com Stock Code: FTC
22
Governance report
Board of Directors
Photographs of directors by Al Frank Monk Photography
Executive Directors
Robert (Rob) Smith (aged 54) was appointed as Chief
Executive Officer with effect from 3 March 2015. Prior to this
date, he was Chief Financial Officer. He was previously Finance
Director at APC Technology Group plc, a distributor of specialist
electronic components and smart energy saving products and
services provider. Rob has also served as Finance Director at
Densitron Technologies plc, a manufacturer and distributor of
electronic displays. Rob’s earlier career was spent principally in
the electronic components industry working for GEC, Centronic
and International Rectifier. He is a Chartered Management
Accountant and a Fellow of the Chartered Institute of
Management Accountants.
Michael Tyerman (aged 39) was appointed as Finance Director
with effect from 1 April 2016. Prior to joining Filtronic, Michael
held various positions within Procter and Gamble, Huntsman
Polyurethanes and Komatsu. He joined Filtronic in 2007 as
Financial Controller of Filtronic Broadband and was promoted
to the position of Group Financial Controller in 2009. He was
Interim Head of Finance for the Filtronic Group from June 2015
and served in this position until his appointment to the Board.
Michael is a Chartered Management Accountant.
Non-Executive Directors
Reginald (Reg) Gott (aged 61) has been a Non-Executive
Director since 2006. He was appointed as Chairman of the
Board at the AGM held in 2015. He continues to act as the
Chairman of the Remuneration Committee. He was Chief
Executive of Resource Group Limited until early 2016. From
2002 to 2008, he was an Executive Director of FKI plc, an
international diversified engineering group, and from 2009
to 2012 he was Chief Executive of Nuaire Group. He has
an extensive background in the machinery, automation and
controls segments of the capital goods markets across Europe
and North America.
Michael Roller (aged 53) was appointed as a Non-Executive
Director on 1 June 2013 and also took over as Chairman of
the Audit Committee at the 2015 AGM. In March 2014 he
joined the Board of Bioquell plc as Group Finance Director. He
has previously been Finance Director of a number of quoted
companies, most recently Corin Group plc. He has also held a
number of other senior finance roles in a broad range of listed
and private companies. He qualified as an accountant with
KPMG.
Filtronic plc Annual Report and Accounts 2018 Governance report
23
Introductory letter from the Chairman of the
Board on the Governance report
New rules for AIM companies on corporate governance mean
that from 28 September 2018, each AIM company must
disclose on its website the recognised corporate governance
code that its board has decided to apply.
Having compared the provisions of the Quoted Companies
Alliance Code 2018 (“the QCA Code”) to the FCA UK Code
on Corporate Governance 2016 (“the UK Combined Code”),
the Filtronic Board decided that it will, commencing with the
financial year ending 31 May 2019, apply the QCA Code. The
Board considered that the updated QCA Code embodies the
key principles of the UK Combined Code but in a more flexible
and outcome-oriented manner more suited to the needs of
the Company. The Board does not envisage any material
change to the comprehensive governance policies and
procedures developed and implemented over the years, and
it intends to maintain, in the main, the same high standards of
governance.
By 28 September 2018, as required by the new AIM rules,
certain prescribed disclosures in relation to the QCA Code
will be added to the Company’s website. Next year’s Annual
Report will contain required disclosures against the ten
principles on the QCA Code. In this report, we describe how
we have continued to adhere to the principles of the UK
Combined Code where reasonably practical to do so.
I hope you will find this report helpful in understanding our
ongoing commitment to good governance.
Reg Gott
Chairman
15 August 2018
Governance framework: Board and
committees, membership, remit and activities
The Board
The Board is comprised of two Executive Directors (Rob
Smith, CEO and Michael Tyerman, FD) and two Non-
Executive Directors (Reg Gott, Chairman and Michael Roller).
The Board is supported and assisted by the Company
Secretary (Maura Moynihan), who attends, contributes to and
minutes each Board meeting.
All members of the Board have access to the advice and
services of the General Counsel and Company Secretary
and are able to take independent professional advice at the
Company’s expense in the discharge of their duties. The
Company has procedures to deal with directors’ conflicts
of interest and the Board is satisfied that these procedures
operate effectively.
Relations with shareholders
The Board places great value on maintaining open
relationships with shareholders and the primary point of contact
in the Company for this function is the CEO, supported by
the FD, both of whom undertake an extensive programme of
meetings with shareholders at least twice a year following the
release of results announcements. The Chairman is available to
speak with shareholders at their request. Presentations are also
made to analysts at those times to present the Group’s results.
This assists with the promotion of knowledge of the Group in
the investment marketplace and with shareholders and also
helps the directors to understand the needs and expectations
of shareholders. The Board believes that the Annual General
Change
Meeting provides an excellent opportunity to communicate
in year
directly with shareholders.
Board meetings
The Board meets regularly against a defined reporting timetable
and also at times in between the scheduled meetings when
required.
As far as is reasonably practical, the Board meetings are held
at the Company’s operational sites to enable local management
teams to present operational and strategic programme progress
to the Board. The Board believes this arrangement fosters
greater transparency and enhanced relationships between the
management and the Board. During the year, the Board held
meetings at its Sedgefield and Leeds sites as well as meeting at
its engineering design centre in Täby, Sweden.
Remit of the Board
Whilst day-to-day operational matters are managed by the Chief
Executive Officer, other matters, including those listed below, are
reserved for the Board:
• Strategy and oversight of the management of the Company;
• Approval of the Company and consolidated financial
statements;
• Approval of major corporate transactions and
commitments;
• Succession planning (appointment/removal of directors,
PDMRs and the Company Secretary);
• Approval of all terms of reference for the committees of the
Board;
• Review of the Group’s overall corporate governance
arrangements including systems of internal controls and risk
management; and
• Approval of the delegation of authority to the Chief
Executive Officer or where appropriate to the relevant Board
committee.
Committees
The Board continues to operate with three committees: the
Audit Committee, the Remuneration Committee and the
Nominations Committee. Detailed written terms of reference for
each committee are maintained and are available to view on the
Company website.
Governance reportwww.filtronic.com Stock Code: FTC
24
Governance report continued
Audit Committee
The primary function of the Audit Committee is to assist the
Board in fulfilling its financial and risk oversight responsibilities.
During the year, it met three times. The committee reviews
items such as the half and full-year results and then make
a recommendation to the Board. The Audit Committee is
chaired by Michael Roller and includes Reg Gott.
Nominations Committee
The Nominations Committee is chaired by Reg Gott and
includes Michael Roller. The Nominations Committee’s
duties are confined to the nomination of appointments,
reappointments and termination of employment or
engagement of directors and the Company Secretary.
Remuneration Committee
The Remuneration Committee is chaired by Reg Gott and
includes Michael Roller. The members of the Remuneration
Committee have no personal interest in the matters
considered other than as shareholders. No potential
conflicts of interest exist in relation to any member of the
committee and their duties. The Remuneration Committee’s
responsibilities include ensuring that the remuneration policy
of the Company and its implementation are appropriate. It
ensures that levels of remuneration are sufficient to attract,
retain and motivate directors of the quality required to run the
Company successfully whilst avoiding paying more than is
necessary for this purpose.
Directors’ attendance FY2018
The Board normally schedules at least 10 meetings during the
year. Last year the Board met 13 times. Attendance at Board
meetings and Committee meetings during the year ended
31 May 2018 was as follows:
Total meetings in year
Reg Gott
Michael Roller
Rob Smith
Michael Tyerman
Board
Audit
Remuneration
Nominations
13
13
13
13
13
3
3
3
N/A
N/A
6
6
6
N/A
N/A
1
1
1
N/A
N/A
Filtronic plc Annual Report and Accounts 2018 Governance report continued
Audit Committee report
25
During the year the Audit Committee comprised two
independent Non-Executive Directors:
to conclude that this would be more appropriate than the current
arrangements, would recommend this to the Board.
Michael Roller (Chairman) and Reg Gott.
The Audit Committee’s terms of reference include the
following roles and responsibilities:
• Monitoring and making recommendations to the Board
During the year ended 31 May 2018, the Audit Committee met
three times and discharged its responsibilities by:
• Reviewing and approving the external auditor’s terms of
engagement, remuneration and independence;
in relation to the Company’s published financial statements
and other formal announcements relating to the Company’s
financial performance;
• Reviewing the external auditor’s plan for the audit of the
Company’s financial statements, including the identification of
key risks;
• Advising the Board on whether the Committee believes
the Annual Report and Accounts, taken as a whole, are fair,
balanced and understandable and provide
the information necessary for shareholders to assess
the Company’s performance, business model and strategy;
• Monitoring and making recommendations to the Board
in relation to the Company’s internal financial controls and
financial risk management systems;
• Annually considering the need for an internal audit function;
• Making recommendations to the Board in relation to the
appointment, re-appointment and removal of the
external auditor and approving the remuneration and terms
of engagement of the external auditor;
• Reviewing and monitoring the external auditor’s
independence and objectivity and the effectiveness of the
audit process, taking into consideration the relevant UK
professional and regulatory requirements;
• Monitoring the extent to which the external auditor is
engaged to supply non-audit services; and
• Ensuring that the Company has arrangements in place
for the investigation and follow-up of any concerns raised
confidentially by staff in relation to the propriety of financial
reporting or other matters.
The Committee reviews its terms of reference and its
effectiveness annually and recommends to the Board
any changes required as a result of the review. The terms
of reference are available on request from the Company
Secretary and are available on the Company website, www.
filtronic.com. The Audit Committee meets at least three times
a year and has direct access to KPMG LLP (“KPMG”), the
Company’s external auditor. The Board considers that the
members of the Committee are independent and collectively
have the skills and experience required to discharge their
duties effectively, and that the Chairman of the Committee has
recent and relevant financial experience.
The Company outsources its internal audit activity to third
parties as it is not deemed appropriate given the size of the
Company to have its own internal audit function. However, the
Committee considers annually whether there is a need for an
in-house internal audit function to be established and, were it
• Reviewing the Company’s internal financial controls operated
in relation to the business and assessing the effectiveness
of those controls in minimising the impact of key risks;
Change
in year
• Reviewing the appropriateness of the Company’s accounting
policies;
• Reviewing the Company’s draft Annual Report and Accounts,
Interim Report and interim management statements prior
to Board approval;
• Reviewing the external auditor’s detailed report to the
Committee on the annual financial statements; and
• Reviewing the need for an internal audit function, and
determining what aspects of the Company’s operations
should be subject to outsourced internal audit scrutiny.
The following key areas of risk and judgement have been
identified and considered by the Audit Committee in relation to
the business activities and financial statements of the Group and
Parent Company:
• Group - Completeness of capitalised development costs;
• Group - Valuation of inventory; and
• Parent Company – Carrying value of the investment in the
subsidiary.
These issues were discussed with management and the auditor,
in particular at the pre-year end audit planning meeting and at the
conclusion of the audit of the financial statements.
Completeness of capitalised development costs: Product
development is critical to the Filtronic Group to maintain
competitiveness within the market and deliver new and enhanced
products to meet the demands of customer programmes.
Therefore, Filtronic must continue to invest in engineering
resources and ensure it is directing the resources on to
programmes that yield the best return. However, given the
technical complexity of the products we develop, it is not always
known at the outset of developments whether the technical
challenges can be overcome and whether the product is going to
be commercially viable.
The Committee considered a paper from senior management
detailing the timeline of significant developments in the period,
demonstrating when the relevant milestones were met against
the criteria for capitalising development costs in line with IAS 38.
Governance reportwww.filtronic.com Stock Code: FTC
26
Audit Committee report continued
The Committee concluded that the assumptions made by
management were reasonable, appropriate and consistent
with the accounting standard.
Valuation of inventory: Filtronic operates in an industry
where developments in product technology and the highly
customer-specific nature of some inventory may result in
inventory becoming slow-moving or obsolete. This in turn may
mean that inventory cannot be sold or sales prices for such
inventory is discounted to less than the relevant inventory’s
book value.
The Committee considered a paper from senior management
analysing this inventory by customer and looking at projected
future usage relative to current inventory on hand. It reviewed
the provision for excess and obsolete inventory and noted
that the level of provision and the methodology applied were
appropriate and consistent.
Carrying value of the investment in the subsidiary: The
Committee considered the judgements made in relation to
the valuation methodology adopted by management and
the model inputs used. These are set out in note 16 to the
financial statements.
The Committee agreed with the judgements made by
management and concluded that no impairment of the
carrying value of the investment in the subsidiary in the Parent
Company accounts was necessary.
The Company’s management and auditor confirmed to the
Audit Committee that they were not aware of any material
misstatements. Having reviewed the reports received from
management and the auditor, the Committee is satisfied that
the key areas of risk and judgement have been appropriately
addressed in the financial statements and that the significant
assumptions used in determining the value of assets and
liabilities have been properly appraised and are sufficiently
robust. The Committee considers that KPMG has carried out
its duties as the auditor in a diligent and professional manner.
As part of the review of auditor independence, KPMG has
confirmed that it is independent of the Company and has
complied with applicable auditing standards. KPMG has
held office as the auditor for 16 years; in accordance with
professional guidelines, the engagement partner is rotated
after at most five years and the current partner is in their final
year of the engagement.
In assessing the auditor’s effectiveness, the Committee:
• Challenged the work done by the auditor to test
management’s assumptions and estimates in the key risk
areas;
• Reviewed reports received from the auditor on these and
other matters;
• Received and considered feedback from management; and
• Held private meetings with the auditor that provided the
opportunity for open dialogue and feedback between
the Committee and the auditor without management being
present.
In addition, the Chairman of the Committee has discussions
by telephone and in person with the audit lead partner outside
the formal committee process throughout the year.
Having completed its review, the Audit Committee is satisfied
that KPMG remained effective and independent in carrying out
its responsibilities up to the date of signing this report. Having
served for 16 years as the auditor, the Audit Committee feels
it is appropriate to put the audit appointment out to tender
in order to maintain good corporate governance. KPMG will
be proposed for re-appointment as the auditor at the Annual
General Meeting although a tender process will take place
during the upcoming financial year.
After careful consideration of the advice of the Audit
Committee, the Board has concluded that the 2018 Annual
Report is fair, balanced and understandable and provides
the necessary information for the Company’s shareholders to
assess the Group’s risks, performance, business model and
strategy.
Filtronic plc Annual Report and Accounts 2018
27
Directors’ remuneration report
Annual statement on remuneration
On behalf of the Board, I am pleased to present the Filtronic
Directors’ remuneration report for the year ended 31 May
2018.
The Company, being listed on AIM, is not required to produce
a comprehensive Directors’ remuneration report or to submit
a remuneration policy to a binding vote. However, the Board
does wish to maintain transparency and demonstrate good
governance and so provides the following remuneration
report.
The remuneration report sets out payments and awards
made to the directors.
The Remuneration Committee comprises the Non-Executive
Directors, including the Chairman. It defines the Company’s
policy on remuneration, benefits and terms of employment for
Executive Directors and senior management. The Committee
also reviews and approves general increases in staff salaries
and bonus arrangements and takes these into account when
setting remuneration packages for Executive Directors and
senior management.
The Remuneration Committee has reviewed the remuneration
packages of the Executive Directors and senior management
to ensure these continue to attract, retain and motivate
talented people, while recognising wider shareholder interest.
The Committee reviews all incentive-based rewards before
they are awarded and has full discretion to adjust awards
downwards if deemed appropriate.
The Remuneration Committee terms of reference are available
to view at www.filtronic.com/investors/corporate-governance/
remuneration-committee.
The Remuneration Committee met six times during the year
including ad hoc meetings when needed.
Reg Gott
Chairman, Remuneration Committee
15 August 2018
Details of the service contracts currently in place for directors are as follows:
Name
Executive service agreement appointment date
Key current terms
Notice period
Rob Smith
CEO
Appointed to the Board on 16 June 2014
Appointed CEO on 3 March 2015
Base salary £161,534
12 months
Car allowance
Annual bonus
Health insurance
Pension
Michael Tyerman
Finance Director
Appointed to the Board on 1 April 2016
Base salary £92,455
6 months
Car allowance
Annual bonus
Health insurance
Pension
Name
Role
Non-Executive terms of appointment date
Fee
Notice period
Reg Gott
Chairman, Nominations
Committee Chairman and
Remuneration Committee
Chairman
Appointed to the Board on 13 July 2006
Appointed Chairman on 27 November 2015
£60,000
6 months
Michael Roller
Audit Committee Chairman
Appointed to the Board on 1 June 2013
£40,000
3 months
Certain sections constitute the audited part of the reports of the remuneration report.
Governance reportwww.filtronic.com Stock Code: FTC 28
Directors’ remuneration report continued
Total single figure of remuneration for directors—audited
The directors’ total remuneration in respect of the year under review is shown below and compared to the previous year. The
information in these tables has been audited by the Company’s independent auditor.
Salary or fee
Bonus
Benefits
Total remuneration excluding
pension contributions and
share-based payments
£000
FY2018
FY2017
FY2018
FY2017
FY2018
FY2017
FY2018
FY2017
Executive Directors
Rob Smith
Michael Tyerman
Non-Executive Directors
Reg Gott
Michael Roller
Total
157
90
60
40
347
154
82
60
35
331
-
-
-
-
-
141
40
-
-
181
11
8
-
-
19
11
8
-
-
19
168
98
60
40
366
306
130
60
35
531
Notes to the single figure table of remuneration for directors—audited
Taxable benefits
Taxable benefits in kind were unchanged in FY2018 and comprised car allowance and private health insurance.
In addition to these taxable benefits, the Executive Directors are provided with life assurance.
Incentive outcomes for FY2018
There was no bonus payment relating to FY2018.
Annual performance-related bonus plan
An annual performance-related bonus plan has been introduced for the year ending 31 May 2019 which will reward Executive
Directors and key management and staff cash bonuses for delivering stretching profit targets aligned to the 2019 business plan.
Total single figure of pension benefits for directors—audited
The Executive Directors’ total pension benefits in respect of the year under review are shown below and compared to the
previous year. The information in these tables has been audited by the Company’s independent auditor.
£000
Rob Smith
Michael Tyerman
Total
Contributions were made to the Company’s defined contribution scheme.
Pension contributions
FY2018
FY2017
13
7
20
12
7
19
Filtronic plc Annual Report and Accounts 2018
29
Directors’ and relevant senior management holdings of Filtronic shares—audited
Directors are not required but are expected to have holdings in the ordinary share capital of the Company. The information in the
following tables has been audited by the Company’s independent auditor.
The interests of the directors, who were serving as at 31 May 2018, in the Company’s ordinary shares, which excludes interests
under the share option schemes, are set out below:
Rob Smith
Michael Tyerman
Reg Gott
Michael Roller
2018
Shares
%
257,656
11,882
354,429
101,762
725,729
0.1%
0.0%
0.2%
0.0%
0.3%
2017
Shares
257,656
11,882
354,429
101,762
725,729
%
0.1%
0.0%
0.2%
0.0%
0.3%
All of the above shareholdings are held beneficially and include holdings of directors’ connected parties.
Management share option scheme—audited
The Executive Directors who served during the year ending 31 May 2018 held the following options over the ordinary shares of
the Company:
Rob Smith
Rob Smith
Michael Tyerman
Michael Tyerman
Plan
ESOP
SAYE
ESOP
SAYE
Exercise period
Option price
2018
2017
01/03/2019—28/02/2026
01/06/2019—30/11/2019
01/03/2019—28/02/2026
01/06/2019—30/11/2019
5.37p
5.20p
5.37p
5.20p
1,000,000
165,565
300,000
275,478
1,741,043
1,000,000
165,565
300,000
275,478
1,741,043
The ESOP scheme introduced in May 2016 was opened to Executive Directors and key management and staff across the
Group with the specific intent to retain staff by awarding share options for delivering a significant increase in the share price,
which if sustained for a defined minimum period will trigger vesting, but which can only be exercised by directors after three
years of the scheme opening. However, the Remuneration Committee is able to adjust the outcome at its discretion to ensure
it is fair and appropriate, taking into account the overall performance of the Group. Information relating to share options can be
found in note 30.
The closing middle market price on 31 May 2018 was 9p, and on 31 May 2017 it was 12p. The range of middle market
share prices during the year ended 31 May 2018 was 8p—16p.
There were no changes in directors’ interests between 31 May 2018 and 15 August 2018. The Company’s register of directors’
interests, which is open to inspection at the registered office, contains full details of directors’ shareholdings.
Governance reportwww.filtronic.com Stock Code: FTC
30
Directors’ report
The directors present their report together with the audited
consolidated financial statements for the year ended 31 May
2018.
or supervision of any Company in the Group. The indemnity
does not automatically terminate when the indemnified person
ceases to be a director.
Going concern
The Group’s business, and the factors likely to affect its future
development, performance and position are set out in the
Strategic report.
The revenue, trading results and cash flows are explained in
the financial review on page 15.
After a review of forecasts including projections of profitability
and cash flows for the year to 15 August 2019, the directors
believe that the Group has adequate resources to continue
to operate for the foreseeable future and that it is therefore
appropriate to continue to adopt the going concern basis
of accounting in the preparation of the consolidated and
Company financial statements.
Directors and their interests
The directors of the Company during the year, and up to the
date of this report, were as follows:
Rob Smith
Michael Tyerman
Reg Gott
Michael Roller
Directors’ conflicts of interest
There are no declarations to be made under Article 182 of the
Companies Act 2006.
Research and development expenditure
Research and development costs in the year were £3.1m
(2017: £3.1m), of which £0.4m was capitalised (2017: £nil).
Amortisation of development costs in the year was £0.1m
(2017: £0.1m).
Substantial shareholdings
Up to 31 May 2018 the Company had been notified, in
accordance with chapter 5 of the disclosure and transparency
rules, of the following voting rights as shareholders of the
Company. An analysis of shareholders as at 31 May 2018
(as disclosed by shareholders via TR1) is set out in the table
below. As at 31 May 2018, the Company had issued share
capital of 206,910,146 ordinary shares of 0.1p each.
Financial results and dividend
The results for the year are set out in the income statement on
page 35. The position at the end of the year is shown in the
balance sheet on page 37.
Details of directors’ interests in the share capital of the
Company are set out in the remuneration report on page 29.
The Directors are not recommending payment of a dividend
(2017: £nil).
Reg Gott, having served on the Board for more than nine
years, retires by rotation and, being eligible, offers
himself for re-election at the Annual General Meeting.
Directors’ indemnity
The Company has in place directors’ and officers’ liability
insurance on behalf of its directors and officers in accordance
with the provisions of the Companies Act. In addition, certain
directors benefit from an indemnity from the Company, to the
extent not prohibited by law, in respect of losses incurred as
a result of the discharge of their duties in the management
Top Investors
Rank
Investor
1
2
3
4
5
Legal & General Investment Mgt
Mrs Diana M Dixon
Canaccord Genuity Wealth Management
Mr David Newlands and Mrs Monique Newlands
River & Mercantile Asset Mgt
Share capital
The Company’s share capital consists of 0.1p ordinary shares.
The rights and obligations attached to each share are equal.
Each share carries the right to one vote at the Annual General
Meeting of the Company and carries no right to fixed income.
There are no limitations on holding or transfer of the shares.
The Board has no powers to issue or buy back the Company’s
shares, other than those approved by the shareholders at the
Annual General Meeting held in September 2017.
31-May-18
30,994,078
29,000,000
21,701,200
11,685,000
11,333,451
%
14.98
14.02
10.49
5.64
5.48
Filtronic plc Annual Report and Accounts 2018 Directors’ report
31
• State whether they have been prepared in accordance with
IFRSs as adopted by the EU;
• Assess the Group and Parent Company’s ability to continue
as a going concern, disclosing, as applicable, matters related
to going concern; and
• Use the going concern basis of accounting unless they either
intend to liquidate the Group or the Parent Company or
to cease operations, or have no realistic alternative but
to do so.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Parent Company and
enable them to ensure that its financial statements comply
with the Companies Act 2006. They are responsible for such
internal control, as they determine, as is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error and have general
responsibility for taking such steps as are reasonably open to
them, to safeguard the assets of the Group and to prevent and
detect fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic report and a Directors’
report that complies with that law and those regulations.
Disclosure of information to the auditor
The directors who held office at the date of approval of this
Directors’ report confirm that:
• So far as they are each aware, there is no relevant audit
information of which the Company’s auditor is unaware;
and
• Each director has taken all the steps that they ought to have
taken as a director to make themselves aware of any relevant
audit information and to establish that the Company’s
auditor is aware of that information.
Auditor
KPMG LLP has expressed a willingness to continue in office
as the auditor and a resolution to reappoint KPMG LLP will be
proposed at the forthcoming Annual General Meeting.
Maura Moynihan
Company Secretary
15 August 2018
Political and charitable contributions
No contributions were made for political purposes (2017:
£nil). The Group made charitable donations of £1,244 in the
year (2017: £nil).
Equal opportunities
The directors are committed to ensuring that there are equal
opportunities throughout the Group for all employees with
no discrimination on account of race, gender, age, sexual
orientation, disability, political views or religious beliefs.
Employee communication
Employee engagement with our strategy and values is vital
to the success of the Group. The directors place great
importance on keeping employees informed on matters
that affect them as employees as well as matters that affect
the performance of the Group. This is achieved through
formal and informal meetings as well as through Group
communication sessions.
Annual General Meeting
The Annual General Meeting of the Company will be held on
25 October 2018 at the offices of Pinsent Masons, 1 Park
Row, Leeds, LS1 5AB. Full details of the business to be
transacted at the meeting will be set out in the notice of the
Annual General Meeting.
Statement of directors’ responsibilities in
respect of the Annual Report, the Directors’
report and the financial statements
The Directors are responsible for preparing the Annual Report
and the Group and Parent Company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare Group and
Parent Company financial statements for each financial year.
As required by the AIM rules of the London Stock Exchange,
they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
as adopted by the EU (“IFRSs as adopted by the EU”) and
applicable law and have elected to prepare the Parent
Company financial statements on the same basis.
Under company law, the directors must not approve the
financial statements unless they are satisfied that they give
a true and fair view of the state of affairs of the Group and
Parent Company and of their profit or loss for that period. In
preparing each of the Group and Parent Company financial
statements, the directors are required to:
• Select suitable accounting policies and then apply them
consistently;
• Make judgements and estimates that are reasonable,
relevant and reliable;
Governance reportwww.filtronic.com Stock Code: FTC
32
Independent auditor’s report
to the members of Filtronic plc
1 Our opinion is unmodified
We have audited the financial statements of Filtronic plc (“the
Company”) for the year ended 31 May 2018 which comprise
the Consolidated Income Statement, the Consolidated
Statement of Comprehensive Income, the Consolidated
Balance Sheet, the Consolidated Statement of Changes in
Equity, the Company Statement of Changes in Equity, the
Consolidated Cash Flow Statement, the Company Balance
Sheet, the Company Cash Flow Statement and the related
notes, including the accounting policies in note 1.
In our opinion:
• the financial statements give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs
as at 31 May 2018 and of the Group’s profit for the year
then ended;
• the Group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards as adopted by the European Union
(“IFRSs as adopted by the EU”);
• the Parent Company financial statements have been
properly prepared in accordance with IFRSs as adopted
by the EU and as applied in accordance with the provisions
of the Companies Act 2006; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities are described below. We have fulfilled
our ethical responsibilities under, and are independent of the
Group in accordance with, UK ethical requirements including
the FRC Ethical Standard as applied to listed entities. We
believe that the audit evidence we have obtained is a sufficient
and appropriate basis for our opinion.
2 Key audit matters: Our assessment of risks of
material misstatement
Key audit matters are those matters that, in our professional
judgement, were of most significance in the audit of the
financial statements and include the most significant assessed
risks of material misstatement (whether or not due to fraud)
identified by us, including those which had the greatest effect
on: the overall audit strategy; the allocation of resources in
the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit
of the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on
these matters. In arriving at our audit opinion above, the key
audit matters, in decreasing order of audit significance, were
as follows:
Group: Completeness of Capitalised
Development Costs
(Capitalised £0.4m; 2017 £nil—expensed £2.7m; 2017
£3.1m)
Risk vs 2017 34
Refer to page 43 (accounting policies) and pages 55 to 56
(financial disclosures).
The Risk
Accounting application
The Group incurs development expenditure as it continues
to develop new applications and products for its portfolio.
Under the relevant accounting standard, development costs
should be capitalised if certain criteria are met and there is
an inherent judgement as to whether and when these criteria
are met for each development project. To date, minimal costs
have been capitalised under IAS 38 as the Group deem that
IAS 38 criteria have not been met for each project. There is,
therefore, a risk that costs which should be capitalised are
expensed.
Our Response
Our procedures included:
• Control Design and Observations: Evaluate the
Group’s processes and controls over the identification and
classification of development costs.
• Testing Application: Critically assessing the Group’s
accounting paper on the development spend in the
year, by considering the conclusions made by the Group
against the criteria in the relevant accounting standard. This
includes assessing against our own expectations based on
our knowledge of the entity and experience of the industry
in which it operates.
• Test of Details: Considering all development projects
on which expenditure was incurred during the year, against
the capitalisation criteria in the relevant accounting
standard and corroborating key assumptions with
reference to our understanding of the business and third-
party documentation.
Group: Carrying Value of Inventory
(£2.1m; 2017: £2.2m)
Risk vs 2017 34
Refer to page 45 (accounting policies) and page 57 (financial
disclosures).
The Risk
Subjective estimate
The risk relating to the valuation of inventories arises from the
judgement required to estimate net realisable value. Products
are high-tech and often specific to individual customers which
means that net realisable value is determined by the directors’
estimate of forecast customer demand and selling price.
Filtronic plc Annual Report and Accounts 2018
Independent auditor’s report
to the members of Filtronic plc
33
Our Response
Our procedures included:
• Test of Details: Sampling individual items of the inventory
on the balance sheet at the year end and comparing recent
selling prices of the sampled items to the carrying value net
of provisions.
• Test of Details: On a sample basis, compared the level of
inventory obsolescence provision against individual
inventory lines, when considered against the most recent
usage of those inventory items in ongoing projects or sales.
• Our Sector Experience: Assessing the reasonableness of
management’s assumption that stock not provided for can
be reused going forward against our knowledge of the
Group and the market in which it operates.
• Historical Comparisons: Assessing the accuracy of the
provision in previous years by comparison to the margin
achieved.
Parent Company: Carrying Value of Investment
in Subsidiary
(£10.6m; 2017: £10.6m)
Risk vs 2017 34
Refer to page 44 (accounting policies) and page 54 (financial
disclosures).
The Risk
Forecast-based valuation
The carrying amount of the Parent Company’s investment
in subsidiaries is a material balance, representing 60%
(2017: 45%) of the company’s total assets. The estimated
recoverable amount of these balances is subjective due to the
inherent uncertainty in the forecast cash flows used.
Our Response
Our procedures included:
• Benchmarking Assumptions: Challenging the growth rate
assumption in the assessment of the recoverable amount,
by comparing to third-party market data.
• Historical Comparisons: Assessing the reasonableness
of the budgets used in the assessment by considering the
historical accuracy of previous forecasts.
• Sensitivity Analysis: Performing sensitivity analyses over
the growth rate and discount rate assumptions adopted
and considering the outcomes with reference to external
benchmarks when available.
3 Our application of materiality and an
overview of the scope of our audit
The materiality for the Group financial statements as a whole
was set at £250,000 (2017: £270,000), determined with
reference to a benchmark of revenue, of which it represents
1.0% (2017: 4.9% of Group profit or loss before tax
normalised over a three-year period). We consider revenue
to be a more appropriate benchmark as it provides a more
stable measure year on year than Group profit before tax.
Materiality for the Parent Company financial statements as
a whole was set at £149,000 (2017: £100,000), determined
with a reference to a benchmark of net assets and chosen to
be lower than materiality for the Group financial statements
as a whole. It represents 0.9% (2017: 0.6%) of the stated
benchmark.
We agreed to report to the Audit Committee any corrected
and uncorrected identified misstatements exceeding £12,500
(2017: £13,500) in addition to other identified misstatements
that warranted reporting on qualitative grounds.
Of the Group’s 5 (2017: 5) reporting components, we
subjected 3 (2017: 3) to full scope audits for Group purposes.
The components within the scope of our work accounted
for 96.1% of Group Revenue, 89.8% of Group Profit Before
Tax and 71% of Group Total Assets. For the residual 2
components, we performed analysis at an aggregated Group
level to re-examine our assessment that there were no
significant risks of material misstatement within these.
The Group team performed all audit procedures on the
relevant components and approved the component
materialities, which ranged from £110,000 to £250,000 (2017:
£90,000 to £250,000), having regard to the mix of size and
risk profile of the Group across the components.
4 We have nothing to report on going concern
We are required to report to you if we have concluded that the
use of the going concern basis of accounting is inappropriate
or there is an undisclosed material uncertainty that may cast
significant doubt over the use of that basis for a period of at
least twelve months from the date of approval of the financial
statements. We have nothing to report in these respects.
5 We have nothing to report on the other
information in the Annual Report
The directors are responsible for the other information
presented in the Annual Report together with the financial
statements. Our opinion on the financial statements does
not cover the other information and, accordingly, we do not
express an audit opinion or, except as explicitly stated below,
any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in
doing so, consider whether, based on our financial statements
audit work, the information therein is materially misstated
or inconsistent with the financial statements or our audit
knowledge. Based solely on that work we have not identified
material misstatements in the other information.
Financialswww.filtronic.com Stock Code: FTC
34
Independent auditor’s report
to the members of Filtronic plc continued
A fuller description of our responsibilities is provided on the
FRC’s website at www.frc.org.uk/auditorsresponsibilities.
8 The purpose of our audit work and to whom
we owe our responsibilities
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as a
body, for our audit work, for this report, or for the opinions we
have formed.
Johnathan Pass (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
1 Sovereign Square
Sovereign Street
Leeds
LS1 4DA
Strategic report and Directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the
Strategic report and the Directors’ report;
• in our opinion, the information given in those reports for the
financial year is consistent with the financial statements; and
• in our opinion, those reports have been prepared in
accordance with the Companies Act 2006.
6 We have nothing to report on the other
matters on which we are required to report by
exception
Under the Companies Act 2006, we are required to report to
you if, in our opinion:
• adequate accounting records have not been kept by the
Parent Company, or returns adequate for our audit have not
been received from branches not visited by us; or
• the Parent Company financial statements are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by
law are not made; or
• we have not received all the information and explanations
we require for our audit.
We have nothing to report in these respects.
7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page
30, the directors are responsible for: the preparation of the
financial statements including being satisfied that they give a
true and fair view; such internal control as they determine is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to fraud
or error; assessing the Group and Parent Company’s ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern; and using the going concern basis
of accounting unless they either intend to liquidate the Group
or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue our opinion in an auditor’s report. Reasonable assurance
is a high level of assurance, but does not guarantee that an
audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the
basis of the financial statements.
Filtronic plc Annual Report and Accounts 2018
Independent auditor’s report
to the members of Filtronic plc continued
Consolidated income statement
for the year ended 31 May 2018
Revenue
Earnings before interest, taxation, depreciation and amortisation
Depreciation
Amortisation of other intangible assets
Amortisation of development costs
Operating profit
Finance costs
Exceptional finance items
Finance costs
Exceptional finance items
Finance income
Profit before taxation
Taxation
Profit for the period
Basic earnings per share
Diluted earnings per share
35
Group
Note
2018
£000
2017
£000
23,995
35,373
17
16
16
4
5
11
5
12
13
14
14
2,456
(542)
(46)
(95)
1,773
(61)
(486)
(547)
-
-
1,226
5
1,231
0.59p
0.59p
2,470
(658)
(15)
(95)
1,702
(287)
-
(287)
740
740
2,155
962
3,117
1.51p
1.49p
The profit for the period is attributable to the equity shareholders of the Parent Company, Filtronic plc.
The above results are all as a result of continuing operations.
Financialswww.filtronic.com Stock Code: FTC 36
Consolidated statement of
comprehensive income
for the year ended 31 May 2018
Profit for the period
Other comprehensive income
Items that are or may be subsequently reclassified to profit and loss:
Currency translation movement arising on consolidation
Total comprehensive income for the period
Note
Group
2018
£000
2017
£000
1,231
3,117
27
178
1,409
(541)
2,576
The total comprehensive income for the period is attributable to the equity shareholders of the Parent Company, Filtronic plc.
For the Company, there were no items of comprehensive income other than the loss for the year. Accordingly, no Company
statement of comprehensive income has been presented.
Filtronic plc Annual Report and Accounts 2018 Consolidated statement of
comprehensive income
for the year ended 31 May 2018
Consolidated balance sheet
at 31 May 2018
Non-current assets
Goodwill and other intangibles
Property, plant and equipment
Deferred tax
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Provisions
Deferred income
Financial liabilities
Non-current liabilities
Deferred income
Financial liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Translation reserve
Retained earnings
Total equity
The total equity is attributable to the equity shareholders of the Parent Company, Filtronic plc.
Company number 2891064.
Approved by the Board on 15 August 2018 and signed on its behalf by
Rob Smith
Chief Executive Officer
15 August 2018
37
Group
Note
2018
£000
2017
£000
16
17
18
19
20
21
22
23
24
23
24
25
26
27
29
3,904
1,411
965
6,280
2,138
6,388
3,794
12,320
18,600
3,590
1,354
1,015
5,959
2,249
8,643
2,598
13,490
19,449
5,076
8,061
485
360
206
545
105
-
6,127
8,711
-
312
312
6,439
12,161
10,788
10,640
(618)
(8,649)
12,161
11
-
11
8,722
10,727
10,788
10,640
(796)
(9,905)
10,727
Financialswww.filtronic.com Stock Code: FTC 38
Consolidated statement of
changes in equity
for the year ended 31 May 2018
Share
capital
£000
Share
premium
£000
Translation
reserve
£000
10,788
10,640
(255)
Balance at 1 June 2016
Profit for the year
Share-based payments
Currency translation movement arising on consolidation
Balance at 31 May 2017
Profit for the year
Share-based payments
Currency translation movement arising on consolidation
-
-
-
-
-
-
10,788
10,640
-
-
-
-
-
-
Balance at 31 May 2018
10,788
10,640
Company statement of
changes in equity
for the year ended 31 May 2018
Retained
earnings
£000
(13,044)
3,117
22
-
(9,905)
1,231
25
-
Total
equity
£000
8,129
3,117
22
(541)
10,727
1,231
25
178
(8,649)
12,161
-
-
(541)
(796)
-
-
178
(618)
Balance at 1 June 2016
Loss for the year
Share-based payments
Balance at 31 May 2017
Loss for the year
Share-based payments
Balance at 31 May 2018
Share
capital
£000
Share
premium
£000
10,788
10,640
-
-
-
-
10,788
10,640
-
-
-
-
Retained
earnings
£000
(2,929)
(631)
5
(3,555)
(695)
5
Total
equity
£000
18,499
(631)
5
17,873
(695)
5
10,788
10,640
(4,245)
17,183
Filtronic plc Annual Report and Accounts 2018 Consolidated statement of
changes in equity
for the year ended 31 May 2018
Consolidated cash flow statement
for the year ended 31 May 2018
Cash flows from operating activities
Profit for the period
Taxation
Finance income
Finance costs
Operating profit
Share-based payments
Profit on disposal of plant and equipment
Depreciation
Amortisation of intangibles
Movement in inventories
Movement in trade and other receivables
Movement in trade and other payables
Movement in provision
Change in deferred income
Tax received
Net cash from operating activities
Cash flows from investing activities
Interest paid
Capitalisation of development costs
Acquisition of intangible assets
Acquisition of plant and equipment
Proceeds on sale of assets
Net cash used in investing activities
Cash flows from financing activities
Proceeds from bank loans
Payment of bank loans
Proceeds from hire purchase agreements
Payment of interest-bearing borrowings
Net cash from/(used in) financing activities
Movement in cash and cash equivalents
Currency exchange movement
Opening cash and cash equivalents
Closing cash and cash equivalents
39
Group
2018
£000
2017
£000
1,231
(5)
-
547
1,773
25
(48)
542
141
111
2,259
(3,292)
(60)
244
56
1,751
(61)
(436)
(19)
(604)
49
3,117
(962)
(740)
287
1,702
22
(85)
658
110
(493)
(214)
559
384
(376)
1,599
3,866
(286)
-
-
(811)
86
(1,071)
(1,011)
300
(75)
301
-
526
1,206
(10)
2,598
3,794
-
-
-
(1,270)
(1,270)
1,585
23
990
2,598
Financialswww.filtronic.com Stock Code: FTC 40
Company balance sheet
at 31 May 2018
Non-current assets
Investments in subsidiaries
Intangible assets
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Total liabilities
Net assets
Equity
Share capital
Share premium
Retained earnings
Total equity
Company number 2891064.
Approved by the Board on 15 August 2018 and signed on its behalf by
Rob Smith
Chief Executive Officer
15 August 2018
Company
Note
2018
£000
2017
£000
15
16
20
21
25
26
29
10,564
122
10,686
11,528
342
11,870
22,556
5,373
5,373
17,183
10,788
10,640
(4,245)
17,183
10,564
143
10,707
12,472
124
12,596
23,303
5,430
5,430
17,873
10,788
10,640
(3,555)
17,873
Filtronic plc Annual Report and Accounts 2018 Company cash flow statement
for the year ended 31 May 2018
Cash flows from operating activities
Loss for the period
Finance costs
Operating loss
Amortisation of intangibles
Share-based payments
Movement in trade and other receivables
Movement in trade and other payables
Net cash from operating activities
Cash flows from investing activities
Acquisition of intangible assets
Net cash used in investing activities
Cash flows from financing activities
Interest paid
Net cash used in financing activities
Increase/(decrease) in cash and cash equivalents
Opening cash and cash equivalents
Closing cash and cash equivalents
41
2017
£000
(631)
34
(597)
26
5
567
36
37
(5)
(5)
(33)
(33)
(1)
125
124
Company
2018
£000
(695)
34
(661)
26
5
944
(58)
256
(5)
(5)
(33)
(33)
218
124
342
Financialswww.filtronic.com Stock Code: FTC 42
Notes to the financial statements
for the year ended 31 May 2018
1
Accounting policies
Reporting entity
Filtronic plc is a Company registered in England and Wales, domiciled in the United Kingdom, and listed on AIM on the
London Stock Exchange.
Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as
adopted by the European Union.
In accordance with the corporate governance requirements and the statement of directors’ responsibilities, and as
disclosed in the directors’ report, the directors have undertaken a review of forecasts and the Group’s cash requirements
for at least the next twelve months from the balance sheet signing date in order to consider whether it is appropriate that
the Group continues to adopt the going concern assumption.
The accounts have been prepared on a going concern basis.
The financial statements have been prepared under the historical cost convention except for forward foreign exchange
contracts that are accounted for on a fair value basis.
The accounting policies have been applied consistently throughout the Group.
Basis of consolidation and foreign currency translation
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, and are not consolidated from
the date that control ceases. Intragroup transactions and balances are eliminated on consolidation.
In publishing the Parent Company financial statements here together with the Group financial statements, the Company
has taken advantage of the exemptions in s408 of the Companies Act 2006 not to present its individual income statement
and related notes that form part of these approved financial statements. 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; and
• The income statements and cash flow statements are translated at the average rate of exchange each month in the
period, which approximates the rate of exchange ruling at the date of the transactions.
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.
The functional currency of each Group company is the currency of the primary economic environment in which the Group
company 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 Group company at the
exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are
translated into the functional currency 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.
Revenue
Revenue is recognised for goods and services during the periods when the risks and rewards of ownership have been
transferred to the customer, there is no continuing management involvement and the amount of revenue can be measured
reliably. Revenue excludes any related value added or sales tax.
The timing of the transfers of risks and rewards varies depending on the individual terms of the contract of sale. The
majority of sales in the Group are made at the point the product leaves the Filtronic production facility but there are sales
to a number of customers where the revenue is recognised once the product is delivered to the customer. In addition,
some customers require Filtronic to store items on their behalf in vendor-managed inventory at third-party locations;
in this instance, revenue is recognised when the goods have been moved out of the location by the customer and a
consumption advice has been provided.
Filtronic plc Annual Report and Accounts 2018 43
1 Accounting policies (continued)
Contracts undertaken to provide an engineering service, such as the design of a product, funded by the customer is
recognised as revenue when the outcome of the contract can be estimated reliably and the contract revenue is recognised in the
income statement in proportion to the stage of completion of the contract. The stage of completion is assessed against project
milestones. Otherwise, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable.
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 in volume production, 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.
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 fair value of the share options at the date of grant was 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 was
expensed in the income statement on a straight-line basis over the expected vesting period. At each reporting period, these
vesting expectations were revised as appropriate.
A credit was made to equity equal to the share-based payment charge in the period.
Exceptional items
Exceptional items are those significant items which are separately disclosed by virtue of their size or incidence to enable
a full understanding of the financial results.
Business combinations
All business combinations are accounted for by applying the acquisition method. Business combinations are accounted for
using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.
The Group measures goodwill at the acquisition date as:
• The fair value of the consideration transferred; plus
• The recognised amount of any non-controlling interests in the acquiree; plus
• The fair value of any existing equity interest in the acquiree; less
• The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a gain is recognised immediately in the consolidated income statement.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as
incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is
classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes
to the fair value of the contingent consideration are recognised in the consolidated income statement. Where contingent
consideration is linked to continued employment it is classified as an employment cost and recognised in the consolidated
income statement over the relevant period.
On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present
ownership interests and are entitled to a proportionate share of net assets of the acquiree in the event of liquidation, at its
proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date.
Financialswww.filtronic.com Stock Code: FTC
44
Notes to the financial statements continued
for the year ended 31 May 2018
1
Accounting policies (continued)
Investments in subsidiaries
Investments in subsidiaries are stated in the Company’s financial statements at cost less any accumulated impairment
losses.
Investments in subsidiaries are tested for impairment when there is an indication of impairment.
Goodwill
Goodwill that arises upon the acquisition of subsidiaries is included in intangible assets.
Goodwill is measured at cost less accumulated impairment losses.
Goodwill, which is allocated to cash-generating units, is tested for impairment annually and when there is an indication of
impairment. The goodwill carrying value is written down to its recoverable amount.
Other intangible assets
Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated
amortisation and accumulated impairment losses.
Amortisation is calculated over the cost of the asset, or another amount substituted for cost, less its residual value.
Amortisation is recognised in the income statement on a straight-line basis over the estimated useful lives of intangible
assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected
pattern of consumption of the future economic benefits embodied in the asset.
The estimated useful lives for the current and comparative periods are as follows:
• Licences
• Software licence
Life of the licence/patent
4 to 5 years
Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.
Impairment charges
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed
at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the
asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives or that are not
yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an
asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use,
the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. For the purposes of impairment
testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the
“cash-generating unit, or CGU”). Subject to an operating segment ceiling test, for the purposes of goodwill impairment
testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects
the lowest level at which goodwill is monitored for internal reporting purposes.
An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount.
Impairment losses are recognised in the income statement. Impairment losses recognised in respect of CGUs are
allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying
amounts of the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in
prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and less any accumulated impairment
losses.
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements continued
for the year ended 31 May 2018
45
1
Accounting policies (continued)
Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:
• Land
• Buildings
• Plant and equipment
Not depreciated
50 years
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 the 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 and other receivables
Trade and other 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.
Defined contribution pension schemes
Defined contribution pension schemes are operated for employees. Contributions are recognised as an expense in the
income statement as incurred.
Financial liabilities
Other current financial liabilities comprise borrowings, lease agreements and trade and other payables, and are
recognised initially at fair value and subsequently measured at amortised cost.
Current tax
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using rates enacted or
substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
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.
Grants
Capital-based grants are included within deferred income in the balance sheet and credited to the profit and loss account
over the estimated useful economic lives of the assets to which they relate.
Grants that compensate the Group for expenses incurred are recognised in profit or loss as other operating income on a
systematic basis in the same periods in which the expenses are recognised.
Warranty provision
A provision is recognised in the balance sheet when there is a present legal or constructive obligation as a result of a past
event, and it is probable that an outflow of economic benefits will be required to settle the obligation. A warranty provision
is recognised when products are sold. The provision is based on historical warranty data. The level of warranty provision
required is reviewed on a product-by-product basis and adjusted accordingly in light of actual experience.
Financialswww.filtronic.com Stock Code: FTC
46
Notes to the financial statements continued
for the year ended 31 May 2018
1
Accounting policies (continued)
Dilapidations and onerous leases
A provision for dilapidations and onerous leases is recognised in the balance sheet on a lease-by-lease basis and is based
on the Group’s best estimates of the required cost to settle the obligations.
Share capital
Ordinary shares issued are classified as share capital in equity.
Dividends
Interim dividends are recognised in equity in the period they are paid. Final dividends are recognised in equity in the period
they are approved by shareholders.
Forward currency contracts
Forward currency contracts are held at fair value. The gain or loss on re-measurement to fair value is recognised
immediately in the consolidated income statement.
Accounting developments
The following new standards and amendments to standards are mandatory for the first time for the financial year
beginning 1 June 2017:
• IFRS 9 “Financial Instruments” will supersede IAS 39 “Financial Instruments – Recognition and Measurement” and is
effective for annual periods beginning on or after 1 June 2018. IFRS 9 covers classification and measurement of
financial assets and financial liabilities, impairment of financial assets and hedge accounting.
• IFRS 15 “Revenue from Contracts with Customers” provides a single model for accounting for revenue arising
from contracts with customers, focusing on the identification and satisfaction of performance obligations, and is
effective for annual periods beginning on or after 1 June 2018. IFRS 15 will supersede IAS 18 “Revenue” and IAS 11
“Construction Contracts”.
• IFRS 16 “Leases” provides a new model for lessee accounting in which all leases, other than short-term and small-
ticket item leases, will be accounted for by the recognition on the balance sheet of a right-to-use asset and a lease
liability, and the subsequent amortisation of the right-to-use asset over the lease term. IFRS 16 will be effective for
annual periods beginning on or after 1 June 2019.
The directors have considered the impact of IFRS 9 and IFRS 15 and conclude that these new standards are not
expected to have a significant impact on the accounts when adopted. With regard to IFRS 9, the only area considered of
key relevance relates to provisions in respect of trade receivables. Given the Group’s approach to provisions for doubtful
or bad debts, the directors consider that no further analysis will be required. On the matter of IFRS 15, the Group has
undertaken a review of all current revenue streams and contracts and believes there will not be any material changes but
will conclude once the conversion process is complete.
The directors continue to assess the impact of IFRS 16 before it is implemented for periods beginning on or after 1 June
2019. The Group currently has property lease agreements in place for its main sites of business in the UK, the USA,
Sweden and China which are currently accounted for as operating leases. These property leases typically span periods of
between one and five years. The adoption of the standard will have a material impact on the balance sheet of the Group
when recognising the property asset and the present value of future lease payments. There are no other significant leases
in the Group other than these property leases. The Group will be able to give a quantification of the impact of IFRS 16 by
the end of FY2019.
Filtronic plc Annual Report and Accounts 2018
Notes to the financial statements continued
for the year ended 31 May 2018
47
2
Accounting estimates and judgements
The preparation of the financial statements requires the use of accounting estimates and judgements, that affect the
application of accounting policies and reported amounts of assets and liabilities, income and expenses. The accounting
estimates and judgements are continually evaluated. They are based on historical experience and other factors, including
expectations of the future, that are believed to be reasonable under the circumstances. Actual results may differ from the
expected results.
The accounting estimates and judgements that have a significant effect on the financial statements are considered below.
Goodwill and other intangibles—impairment
Goodwill and other intangibles are tested for impairment by reference to the expected cash generated by the business
unit. This is deemed to be the best approximation of value, but is subject to the same uncertainties as the cash flow
forecast being used.
Investments in subsidiaries
Investments in subsidiaries are tested for impairment by reference to the expected cash generated by the business unit.
This is deemed to be the best approximation of value, but is subject to the same uncertainties as the cash flow forecast
being used.
Inventory
Inventories are stated at the lower of cost and net realisable value. The assessment of the net realisable value of inventory
requires forecasts of the future demand and selling prices of inventory based on sales order book, market intelligence and
inventory ageing.
Debtors
In line with industry practice, Filtronic extends credit terms to its customers. Due to the concentration of debtors, the
effect of any one debtor defaulting would be material to the Group’s financial statements. Estimates and judgements are
made when valuing the debtor as to its recoverability based on historical data, ageing of debts and market intelligence of
our customers. A bad debt provision is created when it is unlikely the debt will be recovered.
Deferred tax asset
The recognition of the deferred tax assets relating to tax losses carried forward depends on forecasts of the future taxable
profits of the Company and its subsidiaries. These forecasts require the use of estimates and judgements about the future
performance of the Company and its subsidiaries using customer forecasts and market knowledge.
Warranty provision
Warranties are given to customers on products sold to them. A warranty provision is recognised when products are sold.
The provision is based on historical warranty data. Actual warranty costs in the future may differ from the estimates based
on historical performance. The level of warranty provision required is reviewed on a product-by-product basis and
adjusted accordingly in light of actual experience.
Capitalisation of development costs
In line with the requirements of IFRS, the Group’s policy is to capitalise development expenditure as intangible assets
when all the following criteria are met:
• The technical feasibility of completing the asset so that it will be available for use or sale;
• The intention to complete the asset and use or sell it;
• The ability to use or sell the asset;
• The asset will generate probable future economic benefits and demonstrate the existence of a market or the usefulness
of the asset, if it is to be used internally;
• The availability of adequate technical, financial and other resources to complete the development and to use or sell it; and
• The ability to measure reliably the expenditure attributable to the intangible asset.
This process is continually reviewed to ascertain whether any development costs meet the criteria for capitalisation.
This requires various judgements by management as to whether the various criteria have been met. The period over
which development costs are amortised is reviewed on a case-by-case basis in line with the expected product life.
Financialswww.filtronic.com Stock Code: FTC
48
Notes to the financial statements continued
for the year ended 31 May 2018
3
Segmental analysis
Operating segments
IFRS 8 requires consideration of the identity of the Chief Operating Decision Maker (“CODM”) within the Group. In line
with the Group’s internal reporting framework and management structure, the key strategic and operating decisions are
made by the CEO, who reviews internal monthly management reports, budget and forecast information as part of this.
Accordingly, the CEO is deemed to be the CODM.
Operating segments have then been identified based on the reporting information and management structures within the
Group. The Group has three customers representing individually over 10% each and in aggregate 76% of
revenue. This is split as follows:
• Customer A (Filtronic Wireless and Filtronic Broadband) — 35%
• Customer B (Filtronic Wireless) — 29%
• Customer C (Filtronic Wireless) — 12%
The Group has historically operated in two trading business segments in addition to central services:
• The design of radio frequency conditioning products for base stations used in wireless telecommunication networks
(Filtronic Wireless);
• The design and manufacture of transceiver modules and filters for backhaul microwave linking of base stations used in
wireless telecommunication networks (Filtronic Broadband); and
• A central services segment that provides support to the trading businesses.
In the table below reportable segment assets and liabilities include intersegment balances. These have been included
to reflect the assets and liabilities of the segment as monies are freely moved around the Group to provide funding for
working capital where required.
Filtronic
Broadband
Filtronic
Wireless
Central
services
Total
2018
£000
2017
£000
2018
£000
2017
£000
2018
£000
2017
£000
2018
£000
2017
£000
Revenue
5,593
4,917
18,402
30,456
-
-
23,995
35,373
Earnings/(loss) before interest, taxation,
543
(597)
2,722
3,956
(809)
(889)
2,456
2,470
depreciation and amortisation
Depreciation
Amortisation of other intangible(s) assets
Amortisation of development costs
Reportable segment operating profit/(loss)
Finance costs
Finance income
Profit/(loss) before taxation
Reportable segment assets
Capital expenditure
Reportable segment liabilities
(286)
(304)
(256)
(354)
-
-
(542)
(658)
(5)
(33)
219
(10)
-
-
(33)
(934)
-
-
(13)
(62)
-
(62)
(28)
(15)
-
-
(46)
(95)
(15)
(95)
2,391
3,540
(837)
(904)
1,773
1,702
(494)
-
(264)
740
(43)
(23)
(547)
-
-
-
(287)
740
209
(934)
1,897
4,016
(880)
(927)
1,226
2,155
5,550
3,082
9,300
12,817
14,267
15,012
29,117
30,911
359
467
245
344
-
-
604
811
12,182
10,078
6,863
12,141
462
516
19,507
22,735
Filtronic plc Annual Report and Accounts 2018
Notes to the financial statements continued
for the year ended 31 May 2018
3
Segmental analysis (continued)
Reconciliation of reportable segment assets and liabilities
Assets
Total assets for reportable segments
Intercompany
Group/unallocated
Consolidated total assets
Liabilities
Total liabilities for reportable segments
Intercompany
Consolidated total liabilities
49
2018
£000
2017
£000
29,117
30,911
(13,068)
(14,013)
2,551
2,551
18,600
19,449
19,507
22,735
(13,068)
(14,013)
6,439
8,722
Geographical information
In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of
customers. Segment assets are based on the geographical location of the assets.
Revenue by destination
United Kingdom
Europe
Americas
Rest of the world
Split of non-current assets by location
United Kingdom
Europe
Americas
Rest of the world
Non-current assets relate to property, plant and equipment, intangible assets and deferred tax.
2018
£000
2,529
4,898
13,780
2,788
2017
£000
218
18,696
14,602
1,857
23,995
35,373
2018
£000
4,797
76
1,256
151
6,280
2017
£000
4,459
107
1,255
138
5,959
Financialswww.filtronic.com Stock Code: FTC 50
Notes to the financial statements continued
for the year ended 31 May 2018
4
Operating profit
Revenue
Material cost of goods sold
Wages and salaries
Social security costs
Pension costs
Share-based payments
Staff costs
Amortisation of development costs
Amortisation of other intangible assets
Depreciation
Depreciation and amortisation
Other operating income
Other expenses
Total operating costs
Operating profit
5
Exceptional items
2018
£000
2017
£000
23,995
35,373
12,756
23,315
5,454
5,479
722
386
25
637
338
22
6,587
6,476
95
46
542
683
(229)
2,425
9,466
1,773
95
15
658
768
(24)
3,136
10,356
1,702
l
i
t
r
o
p
s
e
a
R
c
c
n
a
g
n
e
i
t
F
a
r
t
i
Finance costs/(income) is stated after charging/(crediting) exceptional items as follows:
Revaluation of US dollar denominated intercompany balance
S
2018
£000
486
486
2017
£000
(740)
(740)
An intercompany relationship exists between the Filtronic Wireless subsidiaries in the UK and the USA. The balance is
denominated in US dollars and is owed to the UK subsidiary. The US dollar has seen significant volatility during the year
which has led to a large cost on revaluation in the UK entity.
Filtronic plc Annual Report and Accounts 2018
Notes to the financial statements continued
for the year ended 31 May 2018
6
Operating items
Operating profit is stated after charging/(crediting):
Depreciation of property, plant and equipment
Research and development costs before capitalisation/amortisation of development costs
Development costs capitalised
Amortisation of development costs
Amortisation of other intangibles
Operating lease rentals
Foreign exchange (gain)/loss
7
Auditor’s remuneration
The Company’s auditor is KPMG LLP. The auditor’s remuneration was as follows:
Company auditor:
Audit of the Group and Company financial statements
Company auditor and their associates:
Audit of subsidiaries’ financial statements pursuant to legislation
Other services pursuant to such legislation
Other services
8
Employees
The average number of employees comprised:
Manufacturing
Research and development
Sales
Administration
51
2017
£000
658
3,119
-
95
15
383
123
2018
£000
542
3,096
(436)
95
46
339
(79)
2018
£000
2017
£000
20
44
2
2
68
12
44
2
2
60
2018
Number
2017
Number
60
46
6
14
126
56
44
5
11
116
Financialswww.filtronic.com Stock Code: FTC 52
Notes to the financial statements
for the year ended 31 May 2018
9
Compensation of directors
Details of the remuneration, pension entitlements and share options of the individual directors are set out in the
remuneration report on pages 27 to 29. The compensation of the directors was:
Salary or fees
Bonuses
Benefits
Total remuneration excluding pension contributions and share-based payments
Pension contributions
2018
£000
2017
£000
347
-
19
366
20
386
331
181
19
531
19
550
The schedule 5 disclosure requirements are included in the Directors’ remuneration report. The elements that are audited
are identified as such in that report.
10
Related party transactions
Identity of related parties
The Group has a related party relationship with its subsidiaries and with its directors.
Transactions with subsidiaries
The main transactions between the Company and its subsidiaries are management administration recharges to its
subsidiaries of £432,000 (2017: £432,000) and a royalty charge of 1% of Filtronic Wireless sales to the Filtronic Wireless
business of £184,000 (2017: £305,000). The royalty charge is eliminated on consolidation.
The Company also acts as a central service to distribute money around the Group to ensure subsidiaries are adequately
funded to meet obligations and to invest funds from subsidiaries where surplus cash exists. The total figures for these
transactions along with the management and royalty charge can be seen in notes 20 and 21 through the movement in the
Company’s intercompany receivables and payables.
Transactions with key management personnel
Key management personnel are considered to be the Executive Directors of the Company. The remuneration given to
these individuals is disclosed in the Directors’ remuneration report on pages 27 to 29.
11
Finance costs
Interest costs on loans for plant and equipment
Minimum service costs and interest charges on invoice discounting facilities
Termination fee of Faunus Group International (“FGI”) invoice discounting facility
Revaluation of US dollar denominated intercompany balance
12
Finance income
Revaluation of US dollar denominated intercompany balance
2018
£000
10
51
-
486
547
2018
£000
-
-
2017
£000
-
233
54
-
287
2017
£000
740
740
l
i
s
a
c
n
a
n
F
i
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements
for the year ended 31 May 2018
13
Taxation
Recognised in the income statement
Current tax credit
Overseas taxation in the period
Adjustment in respect of prior year — R&D tax credit
Total current tax credit
Deferred tax credit
Origination of temporary differences
Change of corporation tax rate
Total deferred tax charge/(credit)
Income tax credit
The reconciliation of the effective tax rate is as follows:
Profit before taxation
Profit before taxation multiplied by standard rate of corporation tax
in the UK
Disallowable items
Income not taxable
Deferred tax asset not recognised
Impact of tax rate change on deferred tax
Enhanced R&D tax credit
Adjustment in respect of prior year R&D tax credit
Foreign tax not at UK rate
Recognition of deferred tax asset previously unrecognised
Recognition of deferred tax asset from prior year
Taxation
53
2017
£000
62
(843)
(781)
(181)
-
(181)
(962)
2017
£000
2,155
2017
£000
427
98
(196)
335
83
(357)
(843)
262
-
(771)
(962)
2018
£000
188
(243)
(55)
(93)
143
50
(5)
2018
£000
1,226
2018
£000
319
157
(18)
237
143
(67)
19%
9%
(1%)
14%
9%
(4%)
(14%)
(243)
11%
(6%)
188
(93)
(37%)
(628)
0%
(5)
20%
5%
(9%)
16%
4%
(17%)
(39%)
12%
-
(36%)
(44%)
The main rate of UK corporation tax for the financial year was 19%. This will reduce to 17% from 1 April 2020. During the
year the US federal corporate tax rate was reduced to 21%. The deferred tax assets recognised in the year have been
calculated at the rates of their expected use.
14
Earnings per share
Profit for the period
Basic weighted average number of shares
Dilution effect of share options
Diluted weighted average number of shares
Basic earnings per share
Diluted earnings per share
Group
2018
£000
1,231
2017
£000
3,117
000
206,910
3,219
000
206,910
2,839
210,129
209,749
0.59p
0.59p
1.51p
1.49p
Financialswww.filtronic.com Stock Code: FTC 54
Notes to the financial statements continued
for the year ended 31 May 2018
15
Investments in subsidiaries
Cost
At 1 June 2016, 31 May 2017 and 31 May 2018
Impairment
At 1 June 2016, 31 May 2017 and 31 May 2018
Carrying amount at 1 June 2016, 31 May 2017 and 31 May 2018
Company
investments in
subsidiaries
£000
21,110
10,546
10,564
The Company’s subsidiaries are related parties.
The subsidiaries at 31 May 2018, which were owned by Filtronic plc, were as follows:
Name of subsidiary
Country of
incorporation
Description of
equity held
Proportion
held
Activity
Filtronic Broadband Limited1
UK
1p ordinary shares
100%
Filtronic Holdings UK Limited1
Isotek (Holdings) Limited1
UK
UK
£1 ordinary shares
1p ordinary shares
100%
100%
Design and manufacture
of microwave products for
telecommunication systems
Holding Company
Holding Company
Filtronic Comtek (UK) Limited1
UK
12.2787p ordinary
shares
100%
Dormant Company
Owned by Filtronic Holdings (UK) Limited:
Filtronic Wireless AB3
Sweden
SEK1 ordinary shares
100%
Owned by Isotek (Holdings) Limited:
Filtronic Wireless Limited1
UK
1p ordinary shares
100%
Filtronic Wireless Inc.2
USA
US$1 ordinary shares
100%
Isotek Limited1
UK
1p ordinary shares
100%
Design and manufacture
of antenna products for
telecommunication systems
Design and manufacture of
filters and related products for
telecommunication systems
Design and manufacture of
filters and related products for
telecommunication systems
Dormant Company
Owned by Filtronic Wireless Limited:
Isotek Hong Kong Holdings
Limited4
Hong Kong
HK$1 ordinary shares
100%
Holding Company
Owned by Isotek Hong Kong Holdings Limited:
Isotek Suzhou Limited5
China
US$350,000
paid in share capital
Filtronic Wireless Suzhou5
China
US$162,000
paid in share capital
100%
100%
Design and manufacture
of filters and related products
for telecommunication systems
Design and manufacture
of filters and related products
for telecommunication systems
1 Filtronic House, 3 Airport West, Lancaster Way, Yeadon, Leeds, West Yorkshire, LS19 7ZA, UK
2 700 Marvel Road, Salisbury, Maryland, 21801, USA
3 Antennvägen 6A, 18766, Täby, Sweden
4 RM 1501, C1 Grand Millennium Plaza (lower block), 181 Queen’s Road Central, Hong Kong
5 RM 802, Block 1, No. 135 Wangdun Road, SIP, Suzhou, China
i
l
s
a
c
n
a
n
F
i
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements continued
for the year ended 31 May 2018
16
Goodwill and other intangibles
55
Group
Cost
At 1 June 2016
Reclassification of software costs
At 31 May 2017
Additions
Disposals
Currency translation movement
At 31 May 2018
Amortisation
At 1 June 2016
Provided in the year
Reclassification of software costs
At 31 May 2017
Provided in the year
Disposals
Currency translation movement
At 31 May 2018
Goodwill
£000
Other intangibles
(core technology)
£000
Licence
agreement
£000
Software
costs
£000
Development
costs
£000
Total
£000
3,235
-
3,235
-
-
-
10,884
-
10,884
-
-
-
160
-
160
-
-
-
3,235
10,884
160
-
-
-
-
-
-
-
-
10,884
-
-
10,884
-
-
-
10,884
-
-
-
33
15
-
48
15
-
-
63
127
112
97
-
567
567
19
(30)
(13)
543
-
-
515
515
31
(30)
(13)
503
-
52
40
286
14,565
-
286
436
-
-
567
15,132
455
(30)
(13)
722
15,544
-
95
-
95
95
-
-
190
286
191
532
10,917
110
515
11,542
141
(30)
(13)
11,640
3,648
3,590
3,904
Carrying amount at 1 June 2016
Carrying amount at 31 May 2017
Carrying amount at 31 May 2018
3,235
3,235
3,235
Reconciliation of amortisation of other intangible assets
Amortisation of licence agreement
Amortisation of software costs
Amortisation of other intangible assets
Group
2018
£000
2017
£000
Company
2018
£000
2017
£000
15
31
46
15
-
15
15
13
28
15
11
26
The Company accounts include the licence agreements for £97,000 and £25,000 of software costs (2017: licence
agreements £112,000, software costs £31,000).
Goodwill and other intangibles relate to the acquisition of Isotek (Holdings) Limited. Goodwill is allocated to the Filtronic
Wireless CGU and this CGU represents the lowest level within the Group at which the goodwill is monitored for internal
management purposes, which is not higher than the Group’s operating segments as reported in note 3. The Group tests
goodwill annually for impairment or more frequently if there are indications that goodwill may be impaired.
The carrying value of intangible assets and goodwill has been assessed for impairment by reference to its value in use.
Value in use was determined by discounting the future cash flows generated from the continuing use of the unit. The
calculation of the value in use was based on the following key assumptions:
• Budgets incorporating post-tax cash flows have been prepared to 31 May 2019 based on past experience, actual
operating results, known future cash flows and estimates of future cash flows;
• Cash flows for a further three years have been extrapolated from the year to 31 May 2019. A revenue growth factor of
10% was applied to the projections together with cost inflation of 3%. A perpetuity factor has been applied based on
the year to 31 May 2023; and
Financialswww.filtronic.com Stock Code: FTC
56
Notes to the financial statements continued
for the year ended 31 May 2018
16
Goodwill and other intangibles (continued)
• The Group’s discount rate of 12% (2017:12%) was applied in determining the recoverable amount of the
unit, being the estimated weighted average cost of capital for the Filtronic Wireless CGU.
Based on this testing the directors do not consider any of the goodwill or intangible assets to be impaired, even allowing
for a reasonable degree of sensitivity to the underlying assumptions, including the discount rate.
The licence agreement relates to a Remote Electrical Tilt (‘‘RET’’) licence to enable the use of RETs in the antenna
products.
The accounting policy for intangible assets relating to capitalisation of development costs is set out in note 1.
17
Property, plant and equipment
Cost
At 1 June 2016
Additions
Disposals
Reclassification of software costs
Currency translation movement
At 31 May 2017
Additions
Disposals
Reclassification of software costs
Currency translation movement
At 31 May 2018
Depreciation and impairment
At 1 June 2016
Depreciation
Disposals
Reclassification of software costs
Currency translation movement
At 31 May 2017
Depreciation
Disposals
Currency translation movement
At 31 May 2018
Carrying amount at 1 June 2016
Carrying amount at 31 May 2017
Carrying amount at 31 May 2018
Group
plant and
equipment
£000
Company
plant and
equipment
£000
7,448
811
(556)
(567)
119
7,255
604
(457)
-
(31)
7,371
6,218
658
(556)
(515)
96
5,901
542
(456)
(27)
5,960
1,230
1,354
1,411
52
-
-
(52)
-
-
-
-
-
-
-
14
-
-
(14)
-
-
-
-
-
-
38
-
-
Filtronic plc Annual Report and Accounts 2018
Notes to the financial statements continued
for the year ended 31 May 2018
18
Deferred tax
Deferred tax assets
Opening balance
Tax losses recognised
Effect of change in UK corporation tax rate
Effect of change in overseas corporation tax rate
57
Group
2018
£000
1,015
93
(42)
(101)
965
2017
£000
834
264
(83)
-
1,015
Deferred tax assets within the Filtronic Wireless subsidiaries in the UK and the USA have been recognised as the
directors consider that future taxable profits will be available against which they can be used. Future taxable profits are
determined based on business plans for individual subsidiaries in the Group and the reversal of temporary differences.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable
that the related tax benefit will be realised; such deductions are reversed when the probability of future taxable profits
improves.
Group
Company
Deferred tax assets which have not been recognised:
Depreciation in advance of capital allowances
Tax losses carried forward
Share options deferment
2018
£000
2,161
2017
£000
2,110
11,121
12,944
95
80
2018
£000
457
9,322
95
2017
£000
455
9,274
80
13,377
15,134
9,874
9,809
The deferred tax assets have not been recognised where the directors consider that it is unlikely that future taxable profits
will be available against which they can be used. There is no expiry date for these unrecognised deferred tax assets which
are reassessed at each reporting date.
19
Inventories
Group
Company
Raw materials
Work in progress
Finished goods
Inventory provision
Inventories are stated net of provision
2018
£000
2,895
282
128
3,305
2017
£000
2,749
79
1,070
3,898
(1,167)
(1,649)
2,138
2,249
2018
£000
2017
£000
-
-
-
-
-
-
-
-
-
-
-
-
Raw materials, consumables and changes in finished goods and work in progress recognised in cost of sales in the year
amounted to £12,756,000 (2017: £22,668,000).
The amount charged to the income statement in the year in respect of write-downs of inventories is £nil (2017: £70,000).
The amount credited to the income statement in the year in respect of reversals of write-downs of inventories is £72,000
(2017: £nil).
20
Trade and other receivables
Trade receivables
Group receivables
Other receivables and prepayments
There are no provisions for bad debt.
Group
Company
2018
£000
5,736
-
652
6,388
2017
£000
8,079
2018
£000
-
2017
£000
-
-
11,479
12,426
564
8,643
49
46
11,528
12,472
Financialswww.filtronic.com Stock Code: FTC 58
Notes to the financial statements continued
for the year ended 31 May 2018
21
Trade and other payables
Trade payables
Group payables
Other payables and accruals
22
Provisions
Warranty provision
Opening balance
Used during the year
Released unused during the year
Charge for the year
Group
Company
2018
£000
3,712
-
1,364
5,076
2017
£000
6,382
-
1,679
8,061
2018
£000
52
4,914
407
5,373
2017
£000
24
4,914
492
5,430
Group
2018
£000
475
(18)
(79)
47
425
2017
£000
161
(11)
(36)
361
475
Company
2018
£000
2017
£000
-
-
-
-
-
-
-
-
-
-
The provision for warranty relates to the units sold during the last two financial years. The provision is based on estimates
made from historical warranty data.
Dilapidation provision
Opening balance
Released unused during the year
Charge for the year
Group
2018
£000
70
(10)
-
60
2017
£000
-
-
70
70
Company
2018
£000
2017
£000
-
-
-
-
-
-
-
-
The Group leases facilities at five sites in the UK, USA, China and Sweden with each lease requiring the site to be restored
to its original condition.
Total provision
Warranty provision
Dilapidation provision
2018
£000
425
60
485
2017
£000
475
70
545
2018
£000
2017
£000
-
-
-
-
-
-
23
Deferred income
Deferred income classified as current consists of a capital grant made by a customer that will be recognised as income in
the next year and customer contributions to tooling costs.
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements continued
for the year ended 31 May 2018
59
24
Financial liabilities
This note provides information about the contractual terms of the Group’s interest-bearing bank loans and borrowings
which are measured at carrying value.
Bank loans—current
Obligations under finance leases—current
Total current financial liabilities
Bank loans—non-current
Obligations under finance leases—non-current
Total non-current financial liabilities
Total financial liabilities
Terms and debt repayment schedule
Bank loan
Finance lease
Group
2018
£000
2017
£000
Company
2018
£000
2017
£000
100
106
206
117
195
312
518
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Nominal
interest
rate
Carrying
amount
2018
£000
Carrying
amount
2017
£000
Date of
maturity
7.6%
4.1%
31 August 2020
31 May 2021
217
301
-
-
Currency
GBP
GBP
Future minimum lease payments under finance leases, together with the carrying amount of lease obligations, are analysed
as follows:
Finance lease
Less than one year
Between one and five years
Debt reconciliation
Balance at 1 June 2016
Repayments of borrowings and interest
Balance at 31 May 2017
Proceeds from bank loans
Proceeds from finance leases
Interest paid
Repayment of borrowings
Balance at 31 May 2018
Group
2018
£000
106
195
301
2017
£000
-
-
-
Company
2018
£000
2017
£000
-
-
-
-
-
-
Bank loans
£000
Finance
lease
£000
Invoice
discounting
£000
-
-
-
300
-
(10)
(73)
217
-
-
-
-
301
-
-
301
1,270
(1,270)
-
-
-
-
-
-
Total
£000
1,270
(1,270)
-
300
301
(10)
(73)
518
Financialswww.filtronic.com Stock Code: FTC 60
Notes to the financial statements continued
for the year ended 31 May 2018
24
Financial liabilities (continued)
Banking facilities
At 31 May 2018, the Group had an undrawn invoice discount facility with Barclays Bank of £3.0m which enables it to
borrow up to 65% of the debtor book in the UK. In addition to the facility with Barclays Bank, the Group entered into
an agreement with Wells Fargo Bank after the year end for a facility of $4.0m enabling it to borrow up to 85% of the US
debtor book.
The bank loan, with a current carrying value of £217k, relates to an asset-based loan for plant and equipment at our facility
in Sedgefield.
25
Share capital
Group and Company
ordinary shares of 0.1p each
£000
Number
At 1 June 2016, 31 May 2017 and 31 May 2018
206,910,146
10,788
Holders of the ordinary shares are entitled to receive dividends when declared, and are entitled to one vote per share at
meetings of the Company.
26
Share premium
At 1 June 2016, 31 May 2017 and 31 May 2018
27
Translation reserve
At 1 June 2016
Currency translation movement arising on consolidation
At 1 June 2017
Currency translation movement arising on consolidation
At 31 May 2018
Group and
Company
10,640
Group
£000
(255)
(541)
(796)
(178)
(618)
The translation reserve comprises foreign currency differences arising from the translation of the financial statements of
foreign operations.
28
Dividends
The directors are not proposing to pay a dividend for the year ended 31 May 2018 (2017: £nil).
29
Retained earnings
At 1 June 2016
Profit/(loss) for the period
Share-based payments
At 31 May 2017
Profit/(loss) for the period
Share-based payments
At 31 May 2018
Group
£000
(13,044)
3,117
22
(9,905)
1,231
25
Company
£000
(2,929)
(631)
5
(3,555)
(695)
5
(8,649)
(4,245)
Filtronic plc Annual Report and Accounts 2018
Notes to the financial statements continued
for the year ended 31 May 2018
61
30
Share options
There are six sharesave plans that have been offered to employees at the date of this report. The first five schemes
offered to employees have now closed. Under these plans employees who join the plan save up to £500 per month for
three years. The members of the plans were granted a number of share options based on the amount they would save
over the three years. At the end of the three years, the members have a six-month period in which they can exercise
the share options. The exercise price for an option for the first five schemes was the middle market quotation of Filtronic
plc’s ordinary shares as derived from the Official List of London Stock Exchange on the dealing day immediately prior to
the plan offer date. The sixth scheme had an exercise price calculated by reference to the average of the middle market
closing price of the shares on AIM for the three dealing days prior to the invitation date.
Sharesave Plan—Scheme 5
Outstanding at the beginning of the period
Granted during the period
Cancelled during the period
Outstanding at the end of the period
Exercisable at the end of the period
Weighted average
exercise price 2018
Number of
options 2018
Weighted average
exercise price 2017
Number of
options 2017
31.0p
31.0p
31.0p
31.0p
31.0p
78,383
-
(78,383)
-
-
31.0p
31.0p
31.0p
31.0p
31.0p
84,189
-
(5,806)
78,383
-
The fifth sharesave scheme was offered to employees in June 2014 and has now closed.
Sharesave Plan—Scheme 6
Outstanding at the beginning of the period
Granted during the period
Cancelled during the period
Outstanding at the end of the period
Exercisable at the end of the period
Weighted average
exercise price 2018
Number of
options 2018
Weighted average
exercise price 2017
Number of
options 2017
5.2p
5.2p
5.2p
5.2p
5.2p
6,079,289
-
(113,390)
5,965,899
-
5.2p
5.2p
5.2p
5.2p
5.2p
-
6,244,854
(165,565)
6,079,289
-
A sixth sharesave scheme was offered to employees in June 2016.
The options outstanding at 31 May 2018 for Scheme 6 have a weighted average remaining contractual life of 1.5 years.
The share options granted during the year to May 2017 have an exercise price of 5.2p and have an exercise period from
1 June to 30 November 2019.
Financialswww.filtronic.com Stock Code: FTC 62
Notes to the financial statements continued
for the year ended 31 May 2018
30
Share options (continued)
Management incentive plans
The options granted in the year to directors, key management and staff have specific performance targets attached
to them. The target requires that the average mid-market closing price of a share over any period of 40 consecutive
business days between the date of grant and the third anniversary of the date of grant is greater than 20 pence per share.
Directors can only exercise their shares three years after grant after the target has been met. All other staff can exercise
their shares in three equal tranches after each year if the performance target has been met during the relevant financial
year. The exercise price for an option was the middle market quotation of Filtronic plc’s ordinary shares as derived from
the Official List of the London Stock Exchange or AIM depending on the timing of the award and the market Filtronic
traded on the dealing day immediately prior to the plan offer date. The Remuneration Committee is able to adjust the
outcome at its discretion to ensure it is fair and appropriate, taking into account the overall performance of the Group.
The following options under this scheme were outstanding at 31 May 2018:
Ordinary shares of 0.1p
Date granted
Earliest date
exercisable
Latest date
exercisable
Exercise price
5,256,250
500,000
750,000
200,000
200,000
6,906,250
01/03/2016
11/04/2016
30/09/2016
28/09/2017
28/03/2018
01/03/2017
11/04/2017
30/09/2017
28/09/2018
28/03/2019
28/02/2026
10/04/2026
29/09/2026
27/09/2027
27/03/2028
5.4p
8.5p
11.6p
13.0p
9.0p
The weighted average price of options of the outstanding options under this scheme at 31 May 2018 was 6.62p.
Outstanding at the beginning of the period
Granted during the period
Cancelled during the period
Outstanding at the end of the period
Exercisable at the end of the period
Number of share
options 2018
6,925,000
400,000
(418,750)
6,906,250
-
Number of share
options 2017
7,006,624
1,250,000
(1,331,624)
6,925,000
-
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements continued
for the year ended 31 May 2018
63
31
Share-based payments
Share options expense
Group
2018
£000
2017
£000
25
25
22
22
Company
2018
£000
2017
£000
5
5
5
5
The share options expense is the fair value of the share options at the date of grant spread over the expected vesting period
of the share options. The fair value of the share options at the date of grant was measured using the Black–Scholes model.
The inputs to the Black–Scholes model and the weighted average fair value of the share options granted during the year
were as follows:
Number of share options granted
Weighted average share price
Expected volatility
Expected life
Risk-free interest rate
Weighted average fair value
Group
Company
2018
2017
2018
2017
400,000
7,494,854
400,000
1,215,301
11.0p
50%
6.2p
50%
11.0p
50%
5.2p
50%
3.0 years
3.0 years
3.0 years
3.0 years
0.5%
1.0p
0.5%
1.0p
0.5%
1.0p
0.5%
1.0p
Expected volatility is the estimate of the volatility of the share price over the expected life of the share options.
32
Operating lease commitments
At the balance sheet date, there were commitments for lease payments under non-cancellable operating leases, which fall
due as follows:
Group
Company
Less than one year
Between one and five years
More than five years
2018
£000
2017
£000
2018
£000
2017
£000
264
668
-
932
264
538
40
842
-
-
-
-
-
-
-
-
The Group leases a number of facilities, offices and vehicles under non-cancellable operating leases. The lease terms are for
periods of one to ten years.
33
Pension costs
Defined contribution schemes
Group
Company
2018
£000
386
2017
£000
338
2018
£000
37
2017
£000
33
Financialswww.filtronic.com Stock Code: FTC 64
Notes to the financial statements continued
for the year ended 31 May 2018
34
Capital expenditure commitments
Capital expenditure contracted for at the balance sheet date
but not provided in the financial statements
35
Analysis of net cash/(debt)
Cash and cash equivalents
Bank loans
Reconciliation of cash flow to movement in net cash/(debt)
Movement in cash and cash equivalents
Cash flow from (increase)/decrease in debt financing
Effect of exchange rate fluctuations
Movement in net cash
Opening net cash/(debt)
Closing net cash
Group
2018
£000
2017
£000
Company
2018
£000
2017
£000
259
93
-
-
1 June
2017
£000
Cash
flow
£000
Other
changes
£000
31 May
2018
£000
2,598
1,206
-
2,598
(217)
989
(10)
-
(10)
2018
£000
1,206
(217)
(10)
979
2,598
3,577
3,794
(217)
3,577
2017
£000
1,585
1,270
23
2,878
(280)
2,598
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements continued
for the year ended 31 May 2018
65
36
Financial instruments
Fair value
The carrying amount of all the financial assets and liabilities approximates to their fair value as described below.
Cash and cash equivalents comprise bank balances and bank deposits with a maturity of three months or less.
Trade and other receivables are all receivable in less than one year. Trade receivables are generally receivable within 90 days.
Trade and other payables are all payable in less than one year. Trade payables are generally payable within 90 days.
Liquidity risk
The Group has net cash of £3,577,000 whilst the Company has net cash of £342,000. The Group has access to a £3.0m
sales invoicing facility with Barclays Bank and a $4.0m invoice factoring facility with Wells Fargo Bank.
Cash is held on bank deposit for varying periods from overnight to six months to ensure all liabilities can be met as they
fall due.
The sales invoicing facility with Barclays Bank allows the Company to borrow 65% of the UK entities’ debtors
denominated in US dollars and sterling up to a value of £3.0m.
The sales invoice factoring facility with Wells Fargo Bank allows the company to borrow 85% of the US entities’ debtors
denominated in US dollars up to a value of $4.0m.
The amount of cash available to the Group and the headroom available on debt facilities results in a low liquidity risk.
Credit risk
The exposure to credit risk is limited to the carrying amount of cash and cash equivalents and trade and other receivables
in the balance sheet as follows:
Cash and cash equivalents
Trade and other receivables
Group
Company
2018
£000
3,794
6,388
2017
£000
2,598
8,643
10,182
11,241
2018
£000
342
11,528
11,870
2017
£000
124
12,472
12,596
The cash and cash equivalents in the balance sheet were on deposit with large banks with high credit ratings as follows:
Barclays Bank plc
Bank of America Corporation
China CITIC Bank International Limited
Skandinaviska Enskilda Banken AB
Group
Company
2018
£000
2,760
447
87
500
2017
£000
1,800
719
58
21
2018
£000
342
-
-
-
2017
£000
124
-
-
-
3,794
2,598
342
124
Financialswww.filtronic.com Stock Code: FTC 66
Notes to the financial statements continued
for the year ended 31 May 2018
36
Financial instruments (continued)
The credit risk related to cash and cash equivalents is considered to be low due to the banks being large with high credit
ratings.
Credit risk is primarily related to trade receivables. The Group’s businesses are concentrated on long-term relationships
with a small number of larger and long-established original equipment manufacturers. Overdue receivables are regularly
monitored and appropriate action is taken to collect payment. The Group has historically incurred only low levels of
unrecoverable receivables. Therefore credit risk is considered to be low.
The Company has no trade receivables.
Trade receivables included the following amounts for the Group’s largest customers:
Customer one
Customer two
Customer three
Other customers
The age of trade receivables that have not been provided for was as follows:
Not past due
Past due less than three months
Past due more than three months
No trade receivables have been provided for in either FY2018 or FY2017.
Group
2017
£000
6,070
524
448
1,037
8,079
2018
£000
1,541
1,337
1,080
1,778
5,736
Group
2018
£000
2017
£000
5,726
7,651
2
8
405
23
5,736
8,079
Interest rate risk
Cash is generally held on short-term bank deposits which earns interest at variable money market deposit rates. At 31 May
2018, there was £nil held on short-term deposit. The remaining cash in the Group is held in very low interest rate accounts.
Sterling interest rates are very low and therefore interest rate risk is considered to be low.
The interest rate sensitivity of the expected annual interest income/(costs) assuming a balance on deposit or loan of
£1,000,000 is as follows:
1.5%
1.0%
0.5%
Expected
annual
interest
income
£000
Expected
annual
interest
costs
£000
15
10
5
(15)
(10)
(5)
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements continued
for the year ended 31 May 2018
67
36
Financial instruments (continued)
Foreign currency risk
The Group’s and Company’s reporting currency is sterling, which is also the Company’s functional currency. The functional
currencies of the subsidiaries are sterling, US dollar, Chinese yuan and Swedish krona.
The Group’s results and financial position are affected by fluctuations in foreign currency exchange rates.
The Group has generated a surplus of US dollars during the year due to an increasing number of projects being supplied in
US dollars. Whilst the Group’s major supplier invoices in US dollars, giving some degree of a natural hedge, it is not adequate
to offset the exposure on currency risk. Therefore, the Group has used forward foreign exchange contracts to reduce the
currency risk from surplus US dollars. The nature of the Group’s businesses means there is limited visibility of the currency
required in US dollars. Therefore, when forward contracts are used to reduce currency risk, they are usually only for short
periods of no more than six months. If the US dollar were to weaken significantly, this could materially reduce the Group’s
revenue and operating profit.
Cash is mainly held in sterling and the US dollar.
The Group’s exposure to foreign currency risk for cash and cash equivalents, trade receivables and trade payables was as
follows:
Group
2018
SEK
£000
EUR
£000
505
-
(35)
470
8
-
(222)
(214)
RMB
£000
87
568
USD
£000
1,823
3,833
(524)
(2,299)
131
3,357
2017
SEK
£000
EUR
£000
17
-
(45)
(28)
1
10
(60)
(49)
RMB
£000
49
796
(555)
290
USD
£000
1,945
7,237
(4,825)
4,357
Cash and cash equivalents
Trade receivables
Trade payables
Net exposure
The sensitivity of the Group operating profit to the US dollar to sterling exchange rate, assuming all other variables remain
constant, is as follows:
If the US dollar had been 1% stronger/weaker against sterling throughout the year ended 31 May 2018, then the Group
operating profit would have been £75,000 higher/lower.
Capital management
The Group’s and Company’s capital is the total equity which comprises ordinary share capital and retained earnings.
The Group currently has a sales invoice financing agreement in place for £3.0m in the UK and has recently entered into an
agreement for a sales invoice factoring agreement in the USA for $4.0m. At 31 May 2018, the Group had net cash of
£3,577,000 and the Company had a cash balance of £342,000. The Group and Company have sufficient cash to cover
working capital requirements and capital expenditure plans.
The Group’s objective when managing capital is to safeguard the Group’s ability to continue as a going concern in order to
provide future returns for shareholders.
Financialswww.filtronic.com Stock Code: FTC 68
Notes to the financial statements
for the year ended 31 May 2018
37
Forward-looking statements
Certain statements in this Annual Report are forward-looking. Where the annual report includes forward-looking statements,
these are made by the directors in good faith based on the information available to them at the time of their approval of this
report. Such statements are based on current expectations and are subject to a number of risks and uncertainties, including
both economic and business risk factors that could cause actual events or results to differ materially from any expected
future events or results referred to in these forward-looking statements. Unless otherwise required by applicable law,
regulation or accounting standard, the Group undertakes no obligation to update any forward-looking statements whether as
a result of new information, future events or otherwise.
Filtronic plc Annual Report and Accounts 2018 Notes to the financial statements
for the year ended 31 May 2018
Shareholder information
69
Financial public relations
Walbrook PR Limited
4 Lombard Street
London
EC3V 9HD
Tel: 020 7933 8780
Annual General Meeting
The Company’s Annual General Meeting will be
held at 11am on 25 October 2018 at the offices of
Pinsent Masons, 1 Park Row, Leeds, LS1 5AB
Registrars
Link Asset Services
Enquiries regarding shareholdings, change of
address or similar particulars should be directed
in the first instance to our Registrars, Link Asset
Services whose address is: The Registry, 34
Beckenham Road, Beckenham, Kent BR3 4TU, or
call 0871 664 0300 (UK calls cost 10p per minute
plus network extras). From overseas: +44 371 664
0300. Lines are open 9.00am to 5.30pm, Monday
to Friday, excluding public holidays. Alternatively,
you can email: shareholderenquiries@linkgroup.
co.uk.
Filtronic website
Shareholders are encouraged to visit our website
(www.filtronic.com) which has more information
about the Company.
Directors
(All at Filtronic House, 3 Airport West,
Lancaster Way, Yeadon, Leeds,
West Yorkshire, LS19 7ZA, UK)
Rob Smith — Chief Executive Officer
Michael Tyerman — Finance Director
Reg Gott — Non-Executive Chairman
Michael Roller — Non-Executive Director
Company Secretary
Maura Moynihan
Company number
2891064
Registered office
Filtronic plc
Filtronic House
3 Airport West
Lancaster Way
Yeadon, Leeds
West Yorkshire
LS19 7ZA
Tel: 0113 220 0000
Auditor
KPMG LLP
Chartered Accountants
1 Sovereign Square
Sovereign Street
Leeds
LS1 4DA
Bankers
Barclays Bank plc
10 Market Street
Bradford
BD1 1NR
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www.filtronic.com Stock Code: FTC