(E2V) e2v Technologies

e2v technologies plc

Results for the year ended 31 March 2013

e2v technologies plc, the provider of specialist technology for high performance systems and equipment, announces its results for the year ended 31 March 2013:

Results

·     Full year trading in line with expectations.

·     Significant reduction in net borrowings to £9.8m from £30.0m.

·     Full year dividend maintained with final dividend of 2.8 pence per share.

·     Record year end order book at £195m, up 36% from the prior year.

·     Order book for delivery over the next 12 months of £130m, up 10% from prior year.

(1)       Excludes the Group's non-core businesses disposed in May 2012 and October 2012.

(2)       Adjusted operating profit is before operating specific items.  Adjusted profit before tax is before all specific items.

(3)       Net borrowings excludes debt issue costs.

(4)       Adjusted earnings is profit before all specific items less tax where applicable.

Commenting on the results, Keith Attwood, Chief Executive Officer said:

"The full year trading performance reflected the ongoing restructuring and increased flexibility in our cost base which we have utilised to mitigate the challenging trading environment experienced during the year.  We have significantly reduced net borrowings and we have built the order book to record levels.

Looking forward, whilst we expect a slow start, we continue to anticipate modest revenue growth for the coming year, reflecting the strength of our order book.  We remain cautious about the broader economic environment, and the potential impact on orders received and delivered in the year."

Further enquiries:

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S STATEMENT

Overview

We are pleased to report performance for the year which was in line with expectations in a challenging trading environment with delayed order placement and slower progress than planned on space programmes.  Action taken to control costs and implement ongoing restructuring, combined with utilising the flexibility that we established in the Group, have helped to maintain operating margins in line with expectations.  Strong cash generation during the year included the benefit of completing the strategic realignment of the Group with the sale of the non-core businesses and has significantly reduced net borrowings to £9.8m.

Financial performance

Revenue excluding the Group's non-core businesses sold during the year was £196.8m (2012: £219.8m), reflecting deferral of US and UK defence orders, lower demand in commercial and industrial markets, and less progress than anticipated on space programmes.

Adjusted⁽²⁾ operating profit of £32.2m (2012: £41.0m) represents a margin of 16.4%, in line with expectations.  The actions taken by management have reduced the cost base by £8.8m in the year, demonstrating the resilience of the Group.

Adjusted⁽⁴⁾ earnings per share at 11.07p (2012: 13.37p) reflect reduced financing costs through lower borrowings and the full year benefit of our facility that was arranged in July 2011 along with a reduction in our tax rate to 23.3%.  Earnings per share were 12.53p (2012: 11.12p), reflecting the profit on disposal of non-core businesses and the sale of the surplus property in Grenoble.

We end the year with a record order book at £195m (2012: £143m), an increase of 36%.  The order book for delivery over the coming 12 months was £130m (2012: £118m), an increase of 10%. 

Strategy

We have continued to deliver on our strategy during the year, through our focus on our chosen application segments and expansion in the US and Asia.  We have reviewed and re-affirmed the strategy with the Board during the year.  The geographic spread and the range of markets we serve, along with our broad portfolio of products, provide the Group with some additional resilience given a number of our markets continue to be constrained by economic pressures.  We have made progress on a number of key strategic initiatives during the year, including building our presence in the US and Asia.

In RF power solutions we have received the initial order under a multi-year development agreement with Rio Tinto for the design and supply of large-scale Prowave® microwave generators.  Going forward, our priority is to execute our existing customer programmes and engaging on opportunities to move up the value chain in radiotherapy and electronic countermeasures, with continued active management of the commercial and industrial product portfolio. 

In High performance imaging solutions we are pleased to have booked multi-year orders with the China Academy of Space Technology (CAST), European Space Agency (ESA) and a US programme.  We have introduced our new Complementary Metal Oxide Semiconductor (CMOS) based line scan camera for machine vision applications which is gaining traction in the market.  In October we were awarded a further £3.8m of funding from the Regional Growth Fund in the UK to support our strategic plan for growth within our space imaging business.  Going forward our focus is the delivery of our current order book for space and a full year of activity from the new products introduced this year.

In Hi-rel semiconductors we were pleased to announce the memorandum of understanding with Micron Technology to support end of life product lines, in addition to our strategic partnerships with Freescale, Everspin, and Maxim.  Our focus is therefore on developing our strategic partnerships and our Semiconductor Lifecycle Management (SLiM™) offering which is even more relevant in the current environment when platform life extension and lifetime cost are driving funding decisions although there remains uncertainty in the US defence sector.

Dividend

The Board has recommended an unchanged final dividend of 2.8p per share, making a total dividend for the year of 4.1p.  This represents an increased pay-out ratio, with dividend cover moving to 2.7 times (2012: 3.3 times) reflecting the Board's confidence in the resilience of the Group, the low level of borrowings and the Group's cash generation potential.

Board

We thank Chris Geoghegan for his contribution as Chairman, leading the Group through the major restructuring of both the balance sheet and the business over the last three years.

Our people

This year we have welcomed 96 new joiners to our core staff of over 1,500 at the end of the year and congratulate 70 members of our existing team who have taken on new or expanded roles.  Our graduate and apprentice schemes have been active with 21 young people joining us under these development programmes.  This year has been a time of continuing change, including the start of the reorganisation of our Chelmsford site.  The Board wishes to thank the staff for their commitment to our strategy and their dedicated contribution in what has been a challenging year.

Outlook

Looking forward, whilst we expect a slow start, we continue to anticipate modest revenue growth for the coming year, reflecting the strength of our order book.  We remain cautious about the broader economic environment, and the potential impact on orders received and delivered in the year.

Neil Johnson                                                                                                                                        Keith Attwood

Chairman                                                                                                                                              Chief Executive Officer

BUSINESS REVIEW

Summary

Revenue (excluding the disposal businesses) of £196.8m is down 10% compared with the last financial year, reflecting the challenging trading environment, with order deferral in US and UK defence markets, lower demand in commercial and industrial markets and for science imaging applications.  In addition the improvement in our space imaging business from our recovery programme was slower than planned and completion of our US defence development programme was delayed.

Adjusted⁽²⁾ operating profit of £32.2m, reflected the lower level of revenue offset by actions taken by management to contain costs and generate cash so sustaining the operating profit margin at 16.4%.  The flexibility that was built into the cost base has been utilised and further restructuring was launched in the UK, at an estimated cost of £1.2m.

Cash generation during the year was strong delivering a £20.2m reduction in net borrowings.  The stronger operating performance in the second half, as well as the benefit from our inventory reduction programme contributed £23.5m.  Net borrowings also benefited from the cash generated by the disposal of the non-core businesses as well as the sale of the surplus property in France, resulting in closing net borrowings of £9.8m which was better than our expectations.

Our order book at 31 March 2013 was at record levels with the closing order book of £195m (2012: £143m) representing an increase of £52m; similarly our order book for delivery over the coming 12 months increased by £12m to £130m (2012: £118m).  This now includes the full 12 month of radiotherapy order cover offsetting the change in mix as the prior year included £6m relating to the non-core businesses that were disposed during the year.  The strength of our order book positions us well for growth, although those businesses that typically have lower level of order cover can be more vulnerable to the broader economic environment.

Strategy and business model

Objective

Our objective is to be a leading global provider of innovative, specialist technology solutions for high performance long life systems.

Markets

We focus on specialist international sectors in medical, space, aerospace, defence and commercial and industrial markets.  We seek to generate growth through providing higher value solutions and new product development, platform life extension and upgrade, and new applications which provide transformational economics.  We are also expanding our global presence with our new facilities in the US and Asia supporting our teams of in-country sales and engineering specialists.

In the medical and science markets that we address, the key drivers are: ongoing demand for spares reflecting growth in the installed base, and Original Equipment Manufacturers (OEMs) that are expanding their activities in Asia with increasing local competition.  Overall we estimate sustained growth in medical, but a continued slowdown in government funding for scientific research.

The aerospace and space markets continue to benefit from demand for earth observation associated with climate change monitoring, as well as increasing demand from international markets for space science and in aerospace we are seeing steady growth in commercial aircraft production.  Overall we estimate sustained growth in space from international countries and continued civil aviation demand.

In the defence markets that we address, we are seeing a shift to platform life extension and upgrade programmes in response to growing budget pressures with increasing uncertainty over programme funding.  Electronic warfare and communications is receiving funding in an overall decreasing envelope.  There is also a growing focus on semiconductor counterfeit and obsolescence management.

In commercial and industrial markets, capital investment remains subdued, although there are opportunities in Asia and the BRIC markets for new product lines.  The aftermarket sectors that we address have remained steady, giving overall an estimated cyclical market which responds to the timing of capital investment.

Overall our addressable markets of c.£3.5bn we anticipate to grow in the range of 1-3% over the next three years.

Strategy

Our business is built on two core technologies of firstly Radio Frequency (RF) and microwave products, sub-systems and solutions and secondly semiconductor based products and solutions.  Through these, we deliver technology for high performance systems at a component, sub-system and service level.  We have capability of working in regulated environments, managing security and export control and delivering to demanding specifications and high quality standards with traceability.

We are repositioning the Group in the value chain, moving from a component to a sub-system scope of supply, with long term service. Increasingly our customers are seeking to engage the Group on a development and advisory basis utilising the Group's highly skilled engineering teams.

We focus our investment on eight key application areas, reduced from 20 areas of focus three years ago.  Within the 8 key applications are the two sectors creating new markets for us with high growth potential, of SLiM™ and industrial processing systems.  We are also expanding our presence in the US and Asia.

Our strategy provides the opportunity for growth through our expanded markets, increased focus on our customer relationships moving from the supply of components to integrated sub-systems and services, so delivering a greater level of customer intimacy.

Operating model

The Group is organised into three product divisions supported by our focus in the US and Asia along with Group functions.  The divisions deliver solutions targeted at specialist global application segments.  We are often a leader in these specific applications.  

The three main product divisions have responsibility for product design and development, sales and customer service and work closely with the strengthened regional teams in the US and Asia.

RF power solutions (RFP) - providing high performance electron devices, sub-systems and solutions in three main application segments: radiotherapy, electronic countermeasures and industrial processing systems.

High performance imaging solutions (HPI) - providing advanced Charged Coupled Device (CCD) and Complementary Metal Oxide Semiconductor (CMOS) imaging sensors, cameras and solutions in three main application segments: machine vision, space imaging and scientific imaging.

Hi-rel semiconductor solutions (HRS) - providing high reliability semiconductors and services in two main application segments: aerospace and defence semiconductors which includes hi-rel assembly, packaging and test services, extended availability of obsolete and end-of-life integrated circuits and high speed data converters, along with semiconductor lifecycle management under the Group's SLiM™ brand.

US - capabilities include our new facility in Milpitas, California with plastic and ceramic hi-rel semiconductor design, assembly, test and qualification, with expansion in progress to provide RF and microwave development and camera assembly and test, as well as service for thermal imaging products.  Sales and business development and support are provided nationwide.

Asia - capabilities include our network of sales offices in Hong Kong, Korea and Japan that provide sales support and application engineering across the region as well as our international purchasing office based in Taiwan.  In our qualified manufacturing facility in Beijing China we have commenced production of thermal imaging cameras and have capacity to support other product lines including radiotherapy and industrial cameras and sensors.

Group functions provide overall direction and resourcing and drive best practice and:

·     Global operations with responsibility for all manufacturing and supply chain activity across the four main manufacturing sites based in Chelmsford (UK), Grenoble (France), Milpitas (California, US) and Beijing (China) .

·     Support services including group marketing and technology, finance, commercial, IT and human resources.

Outcomes and Key Performance Indicators (KPIs)

Our strategy and business model seeks to provide the opportunity for sustainable profitable growth over the long term.  We monitor sales growth and operating profit margin for the Group and its product divisions. Sales growth is targeted initially at 4-8% and to return to 10% per annum after three years and the adjusted⁽²⁾ operating profit margin target is to be greater than 17%.  The level of the order book is a leading indicator of the business performance.  Due to the nature of some of the Group's long term contracts the full order book can be more variable, hence the 12 month order book is our chosen measure.

We have two KPIs that measure the progress made in repositioning the Group in its value chain.  The percentage of sales from sub-systems and solutions is a measure of how the much of the Group's revenue comes from more complex products and services.  Geographic reach, the percentage of sales outside Western Europe, measures the effectiveness of our geographic expansion outside of the Group's traditional European customer base.

As a technology company we have a portfolio of products and technologies which evolves over time with new products being added and other products being withdrawn.  New business proportion is a measure of the refresh within the portfolio and we consider that growth is normally achieved at a new business proportion of greater than around 12%.

Geographic focus

In the US we relocated into our new larger facility in Milpitas, which provides secure wafer storage, hi-reliability assembly and test facilities and capacity for the expansion of our US RFP and HPI businesses.  The US leadership team has been strengthened with a number of key appointments including a new president.  The US team is developing relationships with key customers and established several strategic agreements, as well as providing support to existing programmes such as the ALE-55 and our development programme for the F15.

In China we completed the fit out of our facility, which has achieved ISO9002 certification and commenced production of thermal imaging cameras in February.  We have expanded our sales and technical teams in Korea and China supporting the new product introductions particularly those targeted at industrial applications and the International space business.  We have established new distribution and channel partners in Japan, Korea, China and South East Asia.

RF power solutions

Financials

Revenue decreased by 5% to £81.9m (2012: £86.1m).  Radiotherapy sales were steady, with anticipated stronger performance in the final quarter.  Electronic countermeasures delivered good growth from its continuing programmes including the US ALE-55 programme for the F18 Super Hornet.  In industrial processing systems we signed a two year development agreement with Rio Tinto and are completing the first phase of the work.  As anticipated the activity in the remaining portfolio of products is lower than the prior year reflecting reduced demand in these mature commercial and industrial markets.

The division's adjusted⁽²⁾ operating profit was £16.9m (2012: £12.5m), an increase of 35%.  The benefits from ongoing cost control and development programmes moving into revenue has delivered improved operating margins.

The order book at 31 March 2013 was £108m (2012: £60m).  The increase reflects the renewal of the multi-year radiotherapy contracts with Accuray and Elekta.  The orders due for delivery in 12 months as at 31 March 2013 were £62m (2012: £50m), up 24% in line with the total order book.

Application segments

Radiotherapy

We deliver RF power systems for the generation of high energy X-rays for the treatment of cancer, high performance, high reliability products and provide the continuity for long term spares that our radiotherapy customers require.  We are established as the market leader for the supply of magnetrons, thyratrons, modulators and services.  Our principal customers are the radiotherapy system OEMs including Accuray, Elekta and Varian.  Key drivers for the market include the increasing incidence of cancer worldwide, for which radiotherapy is the most cost effective treatment; increasing demand in Asia for radiotherapy services; new equipment demand which is dependent on healthcare spending; the demand for spares which is driven by the growing installed base and the spares replacement cycle which can be between five to ten years after a new system is commissioned.

The division's radiotherapy revenue was steady, in part, reflecting some overstocking by one of our major customers in the prior year.  For the coming years we continue to anticipate that spares revenue will grow in line with the past expansion of the installed base over the last five to ten years.  Growth is anticipated to be driven by continued new build demand, which accounts for approximately one third of the growth, along with the growing installed base that underpins the other two thirds of the anticipated growth. We continue to engage with our customer base regarding moving up the value chain and developing new RF generating sub-systems.

Electronic countermeasures

We provide leading technology for platform life extension programmes and upgrades to enhance capability and provide electronic countermeasure protection of high value air, land and naval assets.  We manufacture key components, such as magnetrons, coupled-cavity and helix Travelling Wave Tubes (TWTs), and, at a sub-system level, Microwave Power Modules (MPMs) and transmitters, as well as delivering design and development services.  Our products are primarily of European origin, so are not restricted under the US's International Traffic in Arms Regulation (ITAR) which is a key advantage in our international markets.  In the US, our operations are authorised for defence programmes and we have expanded our US operational footprint, in support of our programmes.  Key customers are the system level OEMs, including BAE Systems, Selex Galileo, Raytheon, Saab, EADS and Thales.  For some novel applications we also contract directly with the end users or governmental laboratories through their technology groups.

Revenue growth in electronic countermeasures was driven by our existing programmes including the ALE-55 programme for the F18 Super Hornet.  We have completed the development contract for our F15 programme and are supporting initial flight trials.  Western defence budgets are anticipated to reduce with short term uncertainty in the US, with a shift to platform life extensions and upgrade programmes. Growth is anticipated to come in Europe from contracts to supply MPMs and novel systems and in the US from the current contracts and future upgrade programmes.  Our MPM and ultra wideband TWT provides opportunities in Europe and the US, because of the product's size, weight and performance.

Industrial processing systems

We provide Microwave and RF generators for the processing of bulk materials, delivering transformational economics in energy consumption and material yield into a range of established sectors.  The current focus is in applications for mining, where we are providing RF generators and development support.

During the year we signed a development agreement with Rio Tinto covering the design and supply of large-scale ProWave® microwave and RF generators for use in projects to improve the efficiency of mineral recovery.  This followed on from the signing of a memorandum of understanding in February 2012.  We are completing the initial phase of our development work with Rio Tinto.  The completion of the vermiculite field trials during the year identified a number of technical challenges, with the result that no revenue is now planned from this application.  The technology developed as part of the vermiculite programme supports our activities with Rio Tinto.

We have continued to invest in our R&D programmes and infrastructure, which is in part funded by the Regional Growth Fund, in conjunction with the University of Nottingham and that supports this key opportunity for growth.

Other applications

The remaining portfolio of businesses in the division are principally focused on applications in commercial and industrial markets including, radar for commercial shipping and industrial applications such as, industrial heating, induction and dielectric welding, lasers and cargo screening along with satellite communication amplifiers.

As anticipated, revenue for the remaining businesses was lower than the prior year reflecting softer demand in industrial end user markets.  The cost flexibility built into the business and the ongoing restructuring has been instrumental in materially improving operating margins.

High performance imaging solutions

Financials

Reported revenue decreased by 3% to £64.5m (2012: £66.2m).  Demand for machine vision cameras into process control applications in Asia was stronger in the second half through the take up of our new CMOS based line scan camera.  Scientific imaging was lower than the prior year reflecting softer end user demand.  In space our recovery programme has delivered growth in the second half.  The remaining businesses, including thermal imaging and dental products, have delivered good underlying growth.

The division's adjusted⁽²⁾ operating profit before taxation was £7.3m (2012: £10.3m), a decrease of £3.0m.  This was due to the lower volumes, which included the end of the high margin last time buy activity and some lower margin space programmes reflecting the technical challenges.  The space imaging recovery programme has required increased resources to supplement our existing capability.

The order book at 31 March 2013 was £63m (2012: £56m).  The growth in the order book reflects good order intake in the space sector and underlying growth the other application segments as one-off orders are being replaced by ongoing business.  The orders due for delivery in 12 months as at 31 March 2013 were £49m (2012: £44m), up 11% in line with the total order book.

Application segments

Machine vision

Our camera platforms provide sensitive, high speed performance for demanding inspection processes where quality and reliability are key customer requirements for applications such as semiconductor and electronics manufacturing inspection, food and beverage processing, ophthalmology and document imaging.  Our products include line scan cameras for high end machine vision and optical coherence tomography ophthalmological applications based on CCD sensor technology.  Each end user market has specialised inspection equipment suppliers that are e2v's customers, including for OCT/ophthalmology Carl Zeiss, Meditec, Canon and Optopol, and for semiconductor and electronics Orbotech and Basler.  Additionally, there are a large number of integrators which we access via distributors and our agents.

Revenue in machine vision was flat, reflecting softer demand in the first half, with a stronger second half reflecting the take up of our new CMOS based line scan camera (the Eliixa+), which provides high speed sensitivity and high resolution for high end inspection applications and is performing strongly.  Further growth is anticipated to come from the general increase in factory automation and the drive to increase productivity and quality, as well as the investment in new flat panel display manufacturing equipment for the next generation OLED displays.  In addition our increased sales resources in Asia provide a platform to support these important high growth markets.

Space imaging

We are the world leading supplier for space qualified, visible range, high performance imaging sensors and sub-systems for space and ground based science applications.

We have a long established heritage of providing reliable, high performance, high quality space qualified imaging sensors and arrays for space science and astronomy applications and high speed, high resolution sensors for earth observation satellites.  Countries wish to maintain independent observation capabilities and the increasing investment in monitoring climate change are driving a growing demand for new observation satellite programmes.  We have a strong position in Europe for these CCD sensors and our product remains attractive for this application due to the long proven performance in flight.  We are also developing a CMOS based technology platform which in part is funded by our £3.8m award from the UK Regional Growth Fund.  We have been successful in recent years in winning programmes in the US and other international space markets including China.  The main end users are worldwide space agencies including NASA, ESA, CNES and CAST as well as the prime satellite manufacturers including Astrium, Thales, Lockheed Martin, and Ball Aerospace.

The space imaging recovery programme has delivered growth in the second half reflecting the delivery of milestones on a number of programmes.  This business by nature will remain technically challenging.  Order intake in space has remained strong with the £8.4m order for ESA's Euclid space science mission, as well as securing other orders for Sentinel and a US programme.  Current growth in space imaging is underpinned by major programmes in the order book. 

Scientific imaging

We provide high sensitivity, low noise sensors enabling high end scientific instruments.  Our scientific imaging sensors are used in spectroscopy, microscopy, crystallography, fluoroscopy and broad scientific imaging applications.  The market for high end scientific cameras is currently highly concentrated with three manufacturers Andor, Hamamatsu and Roper, all of whom we support.  We have a significant market share, proprietary technology and have strong relationships with these major customers.

Revenue in scientific imaging was lower than the prior year with softer end user demand reflecting the current macroeconomic environment which is restricting government science spending. 

Other applications

We support a range of other specialist applications for our technology including CMOS dental intra-oral sensors, CMOS area array sensors for use in automatic data collection systems including 2D barcode reading, andthermal imaging products.  We have expanded our CMOS platform with a 46% increase in CMOS based products sold.

Underlying growth has come from the continuing portfolio including the dental sensors and the new product introductions in thermal imaging.  Growth, particularly in Asia, is anticipated from new customers for our CMOS dental sensors, as increasing wealth makes dental care affordable and the move from film based to digital technology is driven by ease of use and lower running costs.  Thermal imaging is now a vital technology to support firefighting, law enforcement and security and our new hand held products provide market leading performance for their size and weight.  The demand for 2D bar code reading is replacing laser technology and facilitating new applications.

Hi-rel semiconductor solutions

Financials

Reported revenue decreased by 25% to £50.4m (2012: £67.5m).  The reduction in revenue reflects the anticipated reduction following the completion of the first phase of our SLiM™ contract for the 68k microprocessor in the prior year.  In aerospace and defence semiconductors lower revenue reflects defence market uncertainty particularly in the US.

The division's adjusted⁽²⁾ operating profit was £11.3m (2012: £21.1m), a decrease of 46%.  This was due to the anticipated lower volumes and margins principally due to the 68K SLiM™ contract in addition to the softer demand in defence.  In response to the reduced demand we have drawn on the flexibility that was established in our Grenoble business, along with careful cost control in the US as we moved into our new facility in July.  These actions sustained the margin for the business at 22%, in line with our expectations.

The order book at 31 March 2013 was £24m (2012: £20m).  The increase primarily reflects increased orders for the smart sensor business reflecting final orders from customers.  The orders for delivery within 12 months as at 31 March 2013 £19m (2012: £18m).

Application segments

Aerospace and defence semiconductors

We provide high reliability semiconductors and packaging and test services that meet the demanding specifications of our aerospace and defence customers and have an established reputation for providing through life support for critical programmes.  We have strategic partnerships with Freescale, Everspin, Maxim and Micron to provide a range of high reliability versions of their standard products.  We continue to explore additional strategic partnerships.  We provide market leading packaging and screening options, and redesigned End-of-Life (EOL) military specification integrated circuits.  We provide our customers with continuity of supply of over 4000 QML-certified components made obsolete by the original device manufacturer.  The routes to market for semiconductor components are generally through distributors and we have strong relationships with two of the major worldwide component distributors, Arrow and Avnet.  We were pleased to announce in October 2012 the signing of a memorandum of understanding with Micron Technology to be the aftermarket provider of certain memory products for aerospace, industrial and defence customers.

Revenue from aerospace and defence semiconductors was lower due to the deferral of anticipated orders on defence programmes as funds have not been flowing down the supply chain, reflecting the uncertainty in the market particularly in the US.  In our European test and assembly business, that mainly serves the space market, we have also seen reduced level of activity reflecting lower US demand.  We currently have market leading positions and have continued to bring new products to market which should underpin future growth. We received the first order from Shandong Space in China for the e2v digital to analogue data converter following its approval by CAST.  We also shipped the first Defence Logistics Agency (DLA) approved products from our Lattice product life extension programme and released a number of new product lines, including four new data converters and hi-rel versions of the Freescale QorIQ microprocessor family for the aerospace and defence market.  The potential for further growth is anticipated to be achieved through design wins for new products and the through life support provided into by the SLiM™ programmes.

Semiconductor lifecycle management

SLiM™ is long term, proactive assurance of continuity of supply of critical components in aerospace and defence systems, supporting platform life extension and avoiding the need for expensive redesign and requalification.  This provides a proactive approach for managing critical components in aerospace and defence systems, where the original components became obsolete during the lifetime of the system, and offers the potential for improved integrity, counterfeit avoidance, lower cost and reduced risk over the lifetime of the assets.  The defence primes have long term support and maintenance commitments to ensure that the high value military assets they supply continue to perform throughout their lifecycle.  Semiconductor obsolescence management is a particularly significant and costly issue that needs to be managed within these lifetime support programmes.  Our capabilities in design of semiconductors, supply chain management and packaging and test services, can extend the availability of otherwise obsolete semiconductors, providing our customers with the security of supply of the components they require.  The customers for SLiM™ are the large defence primes, including Raytheon Space and Airborne Systems and European OEMs on the Eurofighter Typhoon programme.

The estimated future revenue from our portfolio of SLiM™ programmes outside our order book has increased to £24m reflecting the increased interest in the SLIM™ approach to obsolescence management.  We have added a further two new significant OEM defence programmes in the year and we continue to support strategic programme initiatives with leading contractors covering their at risk components.  Defence budget pressures are driving platform life extension and this combined with increasing concerns regarding obsolescence and counterfeit parts means that SLiM™ is well positioned to take advantage of these opportunities.  We to continue to market our SLiM™ initiative targeted at the large defence primes building on the traction we have from our existing portfolio and the success of the programme to manage the EOL for the 68K series microprocessors.  Further growth is anticipated from existing OEM contracts, additional contract wins and the new products from our semiconductor partnerships which broaden our offering. 

Other applications

The other applications are in the smart sensor market for sensor signal conditioning Application Specific Integrated Circuits (ASICs) and Application Specific Standard Products (ASSPs) for applications in industrial automation, industrial detectors, automotive safety and security, engine management and climate control applications.  The revenue from these legacy product lines is lower reflecting the anticipated decline.  These are not considered to be strategic products and we are continuing to manage our exit from these non-core product lines.

Financial Review

Revenue and adjusted⁽²⁾ operating profit by division were as follows:

Review of trading performance and KPIs

The Group's revenue excluding disposal businesses was 10% lower than the last financial year, reflecting challenging markets, delayed order progress and limited progress on space programmes.  By geographical spread, revenue was lower in all regions.  In North America revenue was down by 5% and in Asia Pacific revenue was down 3%, the largest fall was in Europe where revenue was down by 25%.  Geographic reach, the proportion of sales outside Western Europe increased to 57% (2012: 51%) reflecting the larger decline in Western Europe than the rest of the world.  New business in the year, from new products or customers in the last three years, made up approximately 18% of revenue and business mix, which reflects the percentage of sales from sub-systems and solutions, was 29%. 

Gross profit was £78.1m (2012: £90.0m) a decrease of 13% and represented 39% of revenue (2012: 38%).  Gross profit includes specific items contributing £0.9m (2012: £0.7m) reflecting revenue and cost of sales associated with disposed businesses and last time build inventory provision.  The gross profit margin being maintained demonstrates the resilience of the business, and the action taken by management to draw on the operational flexibility established in the business and ongoing cost control.  Further reorganisation on our Chelmsford site will increase flexibility and add further resilience as we manage the portfolio of RF businesses supported by this facility.

Net expenditure on R&D has decreased to £10.7m (2012: £15.7m).  The expenditure has been focused on investment in the key programmes supporting the growth opportunities.  Grant funding has increased of which the Regional Growth Fund in the UK contributed £3.3m (2012: £3.0m).  We also received funding in France from the Programme D'Investissement D'Avenir (PIA) of £0.4m.  The main programmes include the continued MPM development, the next generation of the high power RF generator for use in industrial processing systems, the high performance sensors for life science applications, and the completion of the new thermal imaging camera product range, and establishing the platform for next generation semiconductor products.

Selling and distribution costs decreased by 10% to £15.9m (2012: £17.6m) reflecting the lower activity levels and ongoing cost control, partially offset by continued expansion in the sales teams in the growth geographies of the US and Asia.

Administrative costs decreased to £15.9m (2012: £21.5m).  Administrative costs include a number of the items excluded from adjusted⁽²⁾ operating profit of £2.9m (2012: £4.4m) detailed below.  The remaining administrative costs of £18.8m (2012: £17.1m) increased by 10% (£1.7m) reflecting increased share based payments, expansion in Asia and the US.

Adjusted⁽²⁾ operating profit

Adjusted⁽²⁾ operating profit is considered to reflect more accurately the underlying performance of the business and is calculated as follows:

Adjusted⁽²⁾ operating profit decreased to £32.2m (2012: £41.0m) and represented 16.4% of revenue (2012: 18.7%), broadly in line with the 17% target set for the Group.  Return on capital employed (adjusted⁽²⁾ operating profit divided by net operating assets along with intangibles at 31 March 2009 and acquired thereafter) decreased to 22% (2012: 26%) reflecting the lower level of profitability of the Group.

On 16 May 2012 the Group announced the disposal of its non-core businesses.  The trading results of the Group's non-core businesses have been treated as specific items for the period, with the prior year restated accordingly.

Amortisation of acquired intangible assets of £2.6m has reduced from the prior year (2012: £3.8m) and reflects a number of intangible assets recognised on the acquisition of Grenoble and e2v aerospace & defense Inc. which are now fully amortised.

The Group's restructuring programmes in Lincoln and Grenoble are now substantially completed within our previously published overall programme cost of £24m.  The business improvement programme expenses reported for the year were a net cost of £0.8m (2012: net credit £1.0m).  These include costs of £1.2m for termination and site consolidation with further planned reduction of the Chelmsford site footprint, of which further costs of c.£5m will be incurred over the next two to three years.  This provides modest improvement in efficiency and options for the use of the vacated land and buildings.

The surplus property at our Grenoble site was sold during the year resulting in a gain of £4.5m, the gain in the prior year related to the sale of the remaining property at the old Lincoln site.

The Group's overall foreign currency hedging policy is to put in place forward contracts to sell surplus currencies based on its trading forecasts, with the level of coverage decreasing over the next 12 months.  The mark to market adjustment on this cover amounted to a loss of £0.4m (2012: £0.4m). 

Finance charges

Net finance costs before specific items were £1.4m (2012: £2.5m), a reduction of 44% compared with the prior year reflecting the reduction in the level of debt and a full year benefit of the reduced margin payable and lower debt issue costs amortisation on the bank facility entered into in July 2011.

Taxation

The tax charge for the year was £7.5m (2012: £8.5m).  The effective tax rate on reported profit for the year ended 31 March 2013 amounted to 22%.  This reflects the lower effective rate on the disposal of the businesses.  The tax charge in the current year has benefited from tax credits for R&D in the UK and France of £2.1m (2012: £2.4m).  The effective tax rate on adjusted⁽²⁾ profit before tax was 23%.  Going forward we consider that the effective rate on adjusted profit will be c.26% based on the planned distribution of profits across our locations and  likely benefit of R&D tax credits.

The Group generated profits in the UK, France and the US which were subject to tax at 24%, c.34% and c.40% (including state taxes) respectively.

Profit for the year

The profit for the year is £26.7m (2012: £23.5m).  The increase in profitability reflects the lower level of specific items and the profits on the disposal of the property and non-core businesses, as well as lower interest and tax costs.  We have maintained our dividend with an interim dividend of 1.3p per share, paid December 2012, and a proposed final dividend of 2.8p per share.

Currency

Our UK and French manufacturing operations sell through the Group's global sales and distribution network, and are therefore subject to transactional and translational risks particularly in relation to the US dollar which accounts for 44% (2012: 38%) of the Group's sales.  Where US dollars are forecast to exceed US dollar costs, the surplus US dollars are sold under foreign exchange contracts to cover costs incurred in the UK and France in accordance with the Group's hedging policy. 

Cash flow and net borrowings

At 31 March 2013, net borrowings amounted to £9.8m, a reduction of £20.2m over the year (2012: £30.0m).  Full year cash generation includes the sale of land for £5.9m and the proceeds from the sale of the non-core businesses of £12.0m.  The net cash inflow generated from operations was £28.9m, a decrease of £8.5m compared with the prior year.  Working capital utilised £12.7m of cash, reflecting a reduction in payables of which non trade payables amounted to £4.1m and provisions utilised £3.1m of which £2.0m related to business improvement programmes, offset by a reduction in trade receivables, while inventory was effectively held flat.

Borrowing facilities

The committed multi-currency revolving facilities are equivalent to c.£80m and were made available for 4 years from 27 July 2011.  Based on the Group's performance and net borrowings as at 31 March 2013, the margin payable is 140bps and non-utilisation fees at 40% of margin.

The facility is subject to the following key covenants as at 31 March 2013:

Central functions

The costs of the central functions are allocated to the divisions.  The central costs, excluding exchange differences, of £3.5m (2012: £3.9m) are the costs relating specifically to the management of e2v technologies plc and are not allocated. 

Key performance indicators (KPIs)

Our KPIs to monitor financial performance have been covered in detail in this Business Review.  The table below provides a summary of our KPIs.  Non-financial KPIs will be discussed in detail in the Corporate Responsibility Review in the Annual Report and Financial Statements and include customer satisfaction, number of reportable accidents in the year, percentage reduction in our carbon footprint and Business in the Community (BITC) Environmental Index.

2011 has not been restated for the disposal of the non-core businesses.

Consolidated income statement

Year ended 31 March 2013

Consolidated statement of comprehensive income

Year ended 31 March 2013

Consolidated statement of financial position

As at 31 March 2013

Consolidated statement of cash flows

Year ended 31 March 2013

Consolidated statement of changes in equity

Year ended 31 March 2013

Notes to the audited results

Year Ended 31 March 2013

1.     Accounting policies  

Basis of presentation

The audited results for the year ended 31 March 2013 have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and applied in accordance with the provisions of The Companies Act 2006.  The preliminary announcement was approved by the Board of Directors on 17 May 2013.

The financial information set out in the audited results does not constitute the Group's statutory financial statements for the year ended 31 March 2013 within the meaning of section 435 of the Companies Act 2006 and has been extracted from the full consolidated financial statements for the year ended 31 March 2013.

Statutory consolidated financial statements for the year ended 31 March 2012, which received an unqualified audit report, have been delivered to the Registrar of Companies.  The reports of the auditor on the consolidated financial statements 31 March 2013 and 31 March 2012 were unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.  The consolidated financial statements for the year ended 31 March 2013 will be delivered to the Registrar of Companies and made available to all shareholders in due course.

The accounting policies applied in preparing these audited results are unchanged from those set out in the Group's 2012 Annual Report and Financial Statements, except as detailed below.

The Group's non-core businesses, comprising the businesses of e2v scientific instruments Ltd, MiCS Microchemical Systems SA and e2v microsensors SA, and the industrial gas sensors business of e2v technologies (UK) Ltd, were sold by the Group in May and October 2012.  Following these disposals, to ensure the accurate reporting of the underlying performance of the Group, management has determined that it is appropriate to include the revenue and profits associated with the disposed businesses for the current and preceding financial period as specific operating items.  Whilst total reported revenue, operating profit and profit after tax remain unchanged, revenue, operating profit and profit after tax before specific items are affected and the comparative information has been restated for these disposals.  For the year ended 31 March 2012 revenue, operating profit and profit after tax before specific items have decreased by £14,800,000, £842,000 and £735,000, respectively.  Segmental information included in note 4, has been restated to take account of this.

The following standards and interpretations have been adopted in these financial statements and have not had a material effect on the Group's financial statements in the period of initial application.

·        IFRS 1, 'Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters'

·        IFRS 7, 'Disclosures - Transfers of Financial Assets'

·        IAS 12, 'Deferred Tax: Recovery of Underlying Assets' 

The financial information is presented in Sterling.  All values are rounded to the nearest thousand (£000) unless otherwise indicated.

In order to provide a more relevant presentation of the Group's underlying performance, profit for each financial year has been analysed between:

a)    Trading results before specific items; and

b)    The effect of specific items.  Specific items are material items of income and expense which, in the opinion of the Directors, because of the nature or infrequency of the events giving rise to them, merit separate presentation to allow a better understanding of the elements of the Group's underlying performance for the financial year and are presented on the face of the income statement to facilitate comparisons with prior periods and assessments of trends in financial performance.

Specific operating items may include: business improvement programme expenses; last time build inventory provisions; gains and losses on sale of property; acquisition costs; impairments and fair value gains and losses on foreign exchange contracts; all operating items attributable to terminated or disposed operations and operations held for sale where there is a contractual agreement to sell; and amortisation of acquired intangible assets, including impairment.

Specific finance items may include: fair value gains and losses arising on interest rate swaps; realised exchange differences on the re-denomination of borrowings; and write-off of debt issue costs.

Specific tax items include the tax effect on: specific operating items; and specific finance items.

Further analysis of specific operating and finance items are provided in notes 3 and 4, respectively.

2.     Segment information

The Group is organised into three operating divisions, which are organised and managed separately based on the key products that they provide.  Each is treated as an operating segment and a reportable segment in accordance with IFRS 8, 'Operating Segments'.

The operating and reportable segments are:

·      RF power solutions which provides high performance electron devices, sub-systems and solutions in three main application segments: radiotherapy; electronic countermeasures and industrial processing systems.

·      High performance imaging solutions which provides advanced Charged Coupled Devices (CCD) and Complimentary Metal Oxide Semiconductor (CMOS) imaging sensors, cameras and solutions in three main application segments: machine vision, space imaging and scientific imaging.

·      Hi-rel semiconductor solutions which provides high reliability semiconductors and services in two main application segments: aerospace and defence semiconductors, which includes hi-rel assembly, packaging and test services, extended availability of obsolete and end-of-life integrated circuits and high speed data converters, and semiconductor lifecycle management under the Group's SLiMTM brand. 

All other, reported below, includes the results of the Group's businesses which have been disposed of during the current financial period.  The results of these operations, as detailed in note 3, are treated as specific items and the segment results for the year ended 31 March 2012 have been restated accordingly.  Specific revenue in the periods covered by this financial information is comprised entirely of revenue from the disposed non-core businesses.

Centre-corporate includes those unallocated costs directly associated with the management of the Group's public quotation and other related costs arising for the corporate management of the Group along with treasury related activities.

Segment revenue and results

The following is an analysis of the Group's revenue and results by reportable segment:

Geographical information

The Group's revenue from external customers and information about its non-current assets by geographical location are detailed below:

The Group is organised such that Centre-corporate is responsible for the management of operations (including production, supply chain and IT), sales administration (including credit control) and marketing.  Assets associated with these activities are designated against Centre-corporate in the above analysis (this includes all software owned by the Group).  Centre-corporate recharges the segments for the provision of these services.  Centre-corporate is also responsible for the Group's treasury function.

3.     Specific operating items

In response to the changing market conditions, principally for the RF power solutions businesses, during the year ended 31 March 2013 the Group has commenced a restructuring at its Chelmsford site and has incurred business improvement programme expenses to date of £1,216,000, principally related to termination and site consolidation costs.  In addressing remaining matters related to the Grenoble restructuring, receivable provisions of £428,000 were released in the period.  During the year ended 31 March 2012, business improvement programme expenses related to the Grenoble and Lincoln restructuring programmes netted to a credit of £1,008,000 which comprised: profit on sale of fixed assets of £673,000; release of receivable and termination provisions totalling £1,144,000; offset by costs incurred of £809,000, which principally relate to bonus payments to staff.

On 30 November 2012, the Group completed the sale of its surplus land at the Grenoble facility for gross proceeds of £5,887,000.  A gain of £4,499,000 was recognised, which is net of the following items: £683,000 for legally mandated profit share "participation" and associated employment taxes that arise due to the increase in the taxable profit of e2v Semiconductors SAS and £403,000 costs relating to site remediation.  The surplus land had been classified as a disposal group held for sale at 31 March 2012.  The remaining property at the old Lincoln site was sold during the year ended 31 March 2012 and resulted in a gain on sale of £208,000.

In May 2012 and October 2012, the Group disposed of its non-core business.  Note 8 provides details related to this disposal.  As at 31 March 2012, these businesses were recognised as a disposal group held for sale and the carrying value of the disposal group was written down to its fair value less costs to sell, resulting in an impairment charge of £1,650,000 being recorded.  The trading results of the Group's non-core businesses of £393,000 (2012: £842,000) have been treated as specific items for the periods being reported. 

The Group, in part, hedges its exposure to foreign currency risks through the use of forward exchange contracts.  The changes in the fair value of the instruments are recorded as specific items in the income statement.  Fluctuations in the exchange rates have resulted in a net fair value loss of £449,000 (2012: £355,000).

As part of the de-commissioning work in Grenoble during the second half of the year ended 31 March 2012, certain of the equipment was sold or re-deployed, resulting in the reversal of the previously recorded impairment charge of £433,000.  Furthermore, a last time stock build programme was also completed during the year ended 31 March 2012 with additional inventory build during the period of £2,510,000 which has been provided against in recognition of the excess level of inventory held.

4.     Finance costs and revenue