(WLF) Wolfson Microelectronics

7 February 2012

Wolfson Microelectronics plc

Fourth Quarter and Full Year Results to 1 January 2012

Sales flat as strong product adoption offset by weaker consumer demand

Wolfson Microelectronics plc ("Wolfson" or "the Company"), a leading supplier of mixed-signal semiconductors for consumer electronic products, announces fourth quarter and audited full year results for 2011.

Full year financial summary:

·    Revenue of $156.9m (2010: $157.3m)

·    Gross margin of 48.5% before exceptional charges (2010: 49.5%)

·    Underlying* operating loss of $7.5m (2010: $1.5m loss)

·    Net exceptional charges of $7.6m (2010: nil)

·    Operating loss of $24.2m after exceptional charges (2010: $11.3m loss)

·    Underlying* diluted loss per share of 4.9 cents (2010: 0.4 cents earnings)

·    Diluted loss per share of 15.4 cents (2010: 5.7 cents loss)

·    Cash and short-term deposits at 1 Jan 2012 of $53.4m (2 Jan 2011: $97.1m) and no debt

Fourth quarter summary:

·    Revenue of $36.9m (Q4 2010: $45.8m)

·    Gross margin of 49.9% (Q4 2010: 47.0%)

·    Underlying* operating loss of $2.9m (Q4 2010: $1.3m profit)

·    Exceptional charge of $2.4m on inventory write-off following supply chain realignment

·    Operating loss of $7.2m (Q4 2010: $1.0m loss)

·    Net cash inflow from operating activities of $7.7m (Q4 2010: $11.7m inflow)

·    Strong design-in performance with 110 new design-ins

Full year operational summary:

·    Strong revenue growth in mobile phones, PC/tablet computers and gaming, which increased by 33%, approximately 90% and 25% respectively

·    Mobile Audio Hubs grew by over 60% and Audio Hubs in total grew 19%

·    Micro-Electro-Mechanical Systems (MEMS) microphones are now shipping in volume and the first integrated microphone (complete microphone on a single piece of silicon) sampled

·    Launched 24 new products, including the world's first HD Audio System-on-Chip (SoC)

·    Record design-in performance with 382 new design-ins:

o  The majority are expected to contribute to revenue during 2012

o  The average value per design-in, based on the estimated two year revenue, has increased significantly

o  Wolfson's Audio Hub architecture is gaining wide acceptance in mobile multimedia products, especially in smartphones and tablet computers

o  The majority of design-ins are for Audio Hubs and for leading brand products

·    Cost-reduction and business improvement programme completed:

o  Annual cost-savings of $6.0m with full benefit expected from Q2 2012 onwards

o  Investment in R&D focused to exploit high-growth Audio Hub and MEMS microphone markets with category leading products

o  Innovative changes have delivered a competitive and scalable supply chain to meet fast volume ramp plans

Progress with existing customers in Q4 and FY 2011:

·    Penetration with existing customers has continued to increase

·    Wolfson audio solutions being further adopted by Samsung, LG, Sony, Amazon Lab 126 and RIM for a range of consumer electronics products which are expected to add incremental revenue in 2012

Progress with new customers/applications in Q4 and FY 2011:

·    Market penetration further increased with many adoptions of Wolfson audio solutions by new customers including  ZTE, ASUSTeK Computer Inc, Toshiba, Fujitsu, Acer, Lenovo and Best Buy, all of which started to contribute to revenue in 2011

·    Customer base further increased with design-ins into products of three incremental top tier mobile phone manufacturers, which are expected to contribute to revenue in 2012

Outlook:

·    Looking to the full year, the Company is comfortable with current market consensus

Near Term

·    In Q1 2012, given normal seasonality and prior to the positive impact of customer new product introductions in early 2012, the Company anticipates:

o  Revenues to be in the range of $26m to $32m dependent on new product ramps

o  Gross margin to be around 49% to 50%, dependent on product mix

Looking further ahead

·    Wolfson is increasingly benefitting from an accelerating technology transition in consumer electronics devices to "off-board" audio from central processor units to standalone audio devices where the Company's Audio Hub products have established a leadership position, especially in the fast growing smartphone and tablet applications

·    A further technology transition from Electret Condensing Microphones (ECM) to MEMS microphones is accelerating and creating a growing opportunity. Wolfson's MEMS microphones are extremely competitive and ideal for multi-microphone applications such as noise cancellation and advanced sound processing. Two major mobile phone design-ins were secured during 2011 and are expected to contribute incremental revenue in 2012

·    Mobile Audio Hubs sales grew strongly in 2011 and are expected to become an increasing proportion of Wolfson's business during 2012. The Company expects these application markets to continue to grow strongly in 2012

·    Favourable technology trends coupled with the right products, customers and markets are improving the fundamentals of the business. These factors, plus record design-ins with leading consumer electronics brands, position the Company well to achieve a step-up in revenues as 2012 progresses and a return to sustainable growth and underlying profitability

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

"Last year was characterised by strong first half growth, followed by a weak second half, resulting in flat year-on-year revenues for 2011. We delivered a record year for design-ins driven in part by establishing technology leadership over our competitors in the fast growing smartphone and tablet markets.

"Looking ahead, favourable technology trends coupled with the right products, customers and markets are improving the fundamentals of the business. These factors, plus record design-ins with leading brands, position the Company well to achieve a step-up in revenues as 2012 progresses, along with a return to both top line growth and underlying profitability."

Enquiries:

Mike Hickey, CEO, and Mark Cubitt, CFO, will be hosting a presentation to investors and analysts at 09.30 GMT at JP Morgan, 20 Moorgate, London, EC2R 6DA.  An audio webcast of the Wolfson Microelectronics plc Full Year Results presentation can be heard LIVE from 09.30 GMT via http://www.wolfsonmicro.com/investor 

Additionally, there is a dial in facility: UK Dial-in +44 (0) 208 817 9301; US Dial-in 1 866 629 2704. A replay of the conference call is available from 10.30 GMT on: +44 (0) 207 769 6425 or 00 353 1436 4267, Access Pin 6457 468#

*Underlying full year results exclude: charges for the amortisation of acquired intangible assets (2011: $5.5m; 2010: $5.3m) and share-based compensation charges, including associated payroll taxes (2011: $3.6m; 2010: $4.5m). Also, in 2011, net exceptional charges of $7.6m (2010: $nil) are excluded. The term "underlying" is not defined in IFRS and therefore may not be comparable with similarly titled measures reported by other companies. Underlying measures are not intended as a substitute for, or a superior measure to, IFRS measures.

Operational review

2011 was a challenging year for Wolfson, with revenue at $156.9m for the full year (2010: $157.3m) and $36.9m in the fourth quarter (Q4 2010: $45.8m). Revenue grew across key application markets on a full year basis, with strong growth in mobile phones, gaming and PC/tablet computers, which increased by 33%, 25% and approximately 90% respectively (and tablet computers alone grew by over 350%). These successes were offset by weaker markets in home audio, digital still cameras and portable navigation devices, which were down 58%, 39% and 73% respectively.

Gross margin for the full year, before exceptional charges, was 48.5% (2010: 49.5 %) and 49.9% for the fourth quarter of 2011 (Q4 2010: 47.0%).

During the year, the Company revised its supply chain strategy. The new strategy will provide Wolfson with a competitive supply chain that is scalable and capable of meeting Wolfson's fast volume growth plans and the increasing and demanding cost, quality and delivery requirements of customers. All suppliers will be leading Tier 1 suppliers and concentrated geographically to improve cycle time, quality, yield and cost.

Wolfson further enhanced its product portfolio with the launch of 24 new products in 2011. These devices, together with the 64 new products launched in 2009 and 2010, have significantly strengthened and refreshed the Company's product portfolio. This portfolio has generated 382 design-ins in 2011 and, notably, the average value of each design-in, based on the estimated two year revenue, has increased significantly year-on-year.

The vast majority of the design-ins are in the fastest growing consumer electronic product categories such as mobile phones, smartphones, tablet computers and gaming products; and Wolfson is building strong growth momentum in these categories from both a revenue and a design-in perspective. Encouragingly, Wolfson is also winning design-ins in its traditional markets, such as home audio and portable multimedia players.

Most of the 2011 design-ins are with leading brand global consumer electronics manufacturers and the majority are expected to start to ramp to volume production and revenue during 2012, with the precise timing dependent on end customer product launch dates.

Execution of Strategy

A few years ago Wolfson embarked on a strategy to become the category leader for HD Audio solutions in consumer electronics devices by leading in Audio Hubs, noise cancelling, sound processing and integrated MEMS microphones. This strategy was based on exploiting three major technology transitions happening in consumer electronics products:

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

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

·    The replacement in consumer electronic devices of traditional ECM by MEMS technology microphones, and the emergence of multi-microphone applications to support complex sound processing and noise cancelling features

These technology transitions have become increasingly widespread in 2011, and Wolfson is well placed to benefit:

·    Wolfson now leads in Audio Hubs, some of which are becoming HD Audio SoCs with on board advanced noise cancelling and sound processing

·    Wolfson's MEMS microphone technology has ramped to high volume production, and the first fully-integrated MEMS microphone has been designed, fabricated and is now being tested

Focussing on Operational Execution

These advances have involved considerable change: new intellectual property; new semiconductor process nodes (smaller geometries); new development tools; new systems; new software and software tools; new suppliers and improvements in the Company's supply chain; new customer engagements; and new support requirements. 2011 was a watershed year for the Company in terms of this transformation, with all of these foundations put in place and with many innovations in products, supply chain, software, customer support and sales.

Wolfson Dynamic Hearing

During the year, Wolfson acquired Dynamic Hearing PTY Ltd ("Dynamic Hearing"). Dynamic Hearing is a leading provider of high quality audio processing software for personal communication devices such as smartphones, Bluetooth headsets and hearing aids. The 22 Dynamic Hearing employees are now part of the Wolfson team. They will continue to serve Dynamic Hearing's existing customers as well as providing vital sound processing software, especially the transmit noise cancelling software to complement Wolfson's own receive noise cancelling solution. This enables Wolfson to provide complete HD Audio solutions for mobile applications. Dynamic Hearing's revenue contribution in Q4 2011 was $0.7m, of which $0.1m was to Wolfson. Costs were $0.7m, resulting in a breakeven result in Q4 2011.

Product Development

During the second half of 2011, a full review of the business was carried out. The outcome was an overhead cost reduction programme and a realignment of the investment in research and development (R&D). A review of the Company's product portfolio resulted in an increased investment in the growing Audio Hubs and MEMS product lines, and a reduction in investment in slower growing and less profitable Discrete and Power products. These product lines have all been significantly refreshed over the last few years and are already very competitive in their individual product categories.

These actions will cut annual overhead costs by $6.0m, the full benefit being expected from the second quarter 2012 onwards, and have left Wolfson positioned appropriately for the current difficult business environment whilst still able to invest in high growth areas.

Over the last year, Wolfson has launched 24 new products. The highlights of the Company's product development progress in 2011 are outlined below.

Audio Hubs

A new industry-leading product, the WM5100, is the world's first integrated HD Audio SoC. It combines in a single device an Audio Hub, transmit path noise reduction, receive path noise reduction with adaptive Ambient Noise Cancellation (ANC), Acoustic Echo Cancellation (AEC) and an audio DSP for sound enhancement.

The Company also launched the WM1811 Audio Hub with world leading analogue IP to provide next generation audio solutions across the mobile phone tiers, particularly ideal for feature phones and smartphones. 

The Wolfson WM8996 Audio Hub was introduced, which is aimed at the smartphone and tablet computer market, which requires high quality voice calls and extended music playback. This device incorporates the digital mixing required to route the various audio signals and provides a digital audio interface to digital microphones, such as Wolfson'sWM7210 / WM7220, and digital input speaker amplifiers, such as Wolfson's WM9082. The digital audio interface between the WM8996 and the WM9082 Class D speaker driver provides excellent noise immunity, eliminates traditional input filtering components and improves audio quality.

Two HD Audio Hub products, Wolfson's WM8861 and WM8862, were launched, and are aimed at improving the audio performance of Intel-based PCs, notebooks, laptops and tablet computer systems. They provide a complete audio subsystem with ultra-low power consumption and include high output power integrated speaker amplifiers.

Sound Processing

Over the last two years, Wolfson has built an engineering team to develop the software algorithms required to provide noise cancellation, noise reduction and sound enhancement products that run on its new family of HD Audio SoCs. 

The software and hardware development teams work in tandem to ensure the device and software algorithms are compatible and available concurrently to allow customers to evaluate the complete audio solution.

Working closely with the Wolfson software team during the past 18 months, Dynamic Hearing has developed and supplied a suite of audio enhancing transmit noise reduction and AEC algorithms to run on Wolfson's Audio Hub products. Wolfson's WM2200 device, launched in Q4 2010, was the first product combining Dynamic Hearing's multi-microphone transmit path /voice capture noise reduction and AEC technologies with Wolfson's unique receive ANC technology. This combination of audio processing technologies provides a complete platform-agnostic turnkey transmit and receive noise reduction solution. This solution will be further deployed across Wolfson's Audio Hub products for mobile phones and tablet computers.

Discrete & Power Products

Wolfson added to its family of MEMS microphones with the WM7130E bottom port analogue microphone for multi-microphone applications, such as noise cancellation headsets, conference phones and noise reduction solutions in mobile multimedia products. The Company also designed, built and sampled the world's first high performance, fully integrated (complete microphone on a single piece of silicon) MEMS microphone.

The imaging family of products has been refreshed with four new products. This new range of analogue front-end (AFE) digitiser integrated circuits can be easily integrated into the latest generation of imaging equipment in the home or office such as digital copiers, scanners (including portable bar code scanners) and multi-function printers (MFPs).

Other Products

During the year, Wolfson launched the WM229 ANC stereo headset reference design. This complements the WM182 reference design announced in 2010. Using these reference designs, Wolfson introduced the Digital Silence brand to market these headsets to the consumer. The Digital Silence portfolio of headsets is available from leading high street and online retailers.   Using the WM182 reference design, Wolfson launched the DS-321D, a state-of-the-art, in-ear, digital active ANC stereo headset with voice microphone.  Similarly, from the WM229 reference design, the DS-421D, will be available in March 2012. This latest product is a premium digital ANC headset with three user-selectable ANC modes specifically optimised for the user's environment, namely general, aeroplane and office. These two Digital Silence headsets complement the DS-101A headset, also launched in 2011.

Financial Review

The financial results of the Group for the 52 week period ended 1 January 2012 are summarised in the table below. 

*Underlying results exclude: charges for the amortisation of acquired intangible assets (2011: $5.5m; 2010: $5.3m) and share-based compensation charges, including associated payroll taxes, (2011: $3.6m; 2010: $4.5m).  Also, in 2011 exceptional charges totalling $7.6m (2010: $nil) are excluded (further details on the exceptional items are provided in Note 4 to the financial information). The term "underlying" is not defined in IFRS and therefore may not be comparable with similarly titled measures reported by other companies.  Underlying measures are not intended as a substitute for, or a superior measure to, IFRS measures.  Reconciliations of underlying measures to IFRS measures for operating expenses and operating loss in respect of each period are provided in the tables in notes 5 and 6 to the financial information.

Operating expenses: reconciliation from Underlying to IFRS

Operating loss: reconciliation from Underlying to IFRS 

Segmental Performance

Audio Hubs Products

The Company focuses on high performance Audio Hubs, including High Definition (HD) Audio System-on-Chip (SoC), noise reduction and sound enhancement software. Revenues at $105.4m in 2011 accounted for 67% of Group revenue (2010: 56%) and increased by 19% in the year from $88.6m in 2010.  Within this segment, Audio Hubs sold into mobile applications increased by 60% whilst Audio Hubs in non-mobile applications fell by 6%, reflecting the strong growth in smartphones and tablet computers, but weaker demand in most other application markets.

Gross margin for this reportable segment improved to 49.8% in 2011 from 49.0% in 2010, reflecting the higher proportion of newer products with more differentiated features in 2011 revenues.

Discrete and Power Products

This segment comprises simpler audio products (ADCs, DACs), power management integrated circuits, imaging parts and MEMS microphones. Revenues at $50.9m in 2011 accounted for 32% of Group revenue (2010: 44%) and declined by 26% in the year from $68.7m in 2011. Within this segment, MEMS microphones grew by 67%, albeit from a very small base, to revenue of $0.5m. The other components of this segment suffered from the weakness in the general consumer electronics market, particularly in the second half of 2011.  As part of the refocusing announced in July 2011, resources were reallocated from this segment, MEMS excluded, to Audio Hubs where there are greater growth opportunities.

Gross margin for this reportable segment fell to 45.6% in 2011 from 50.1% in 2010, reflecting the tough market environment for these less feature rich products.

Other Products

Other comprises the sale of complete headset products and royalties thereon.  This segment is fundamentally different from the other segments as it relates to sales of finished consumer products rather than the sale of integrated circuit components. Revenues in 2011 represented less than 1% of Group revenues, but grew from $0.1m in 2010 to $0.7m in 2011. Gross margin in 2011 was 72% against 100% in 2010 as the latter represented purely royalties.

Revenue

Group revenue was marginally down to $156.9m (2010: $157.3m), with the growth of 24% in the first half being reversed by weak consumer demand in the second half of the year. As explained in the Segmental Performance section, this is the net result of strong growth in Audio Hubs, up 19%, offset by weakness in Discrete and Power products. The largest customer represented 16% of revenue (2010: 20%).

Gross Profit

Group gross profit in 2011, before exceptional charges, was $76.1m, down 2% from the previous year (2010: $77.9m). Gross margin, before exceptional charges, fell to 48.5% from 49.5% in 2010, primarily impacted by weakness in Power and Discrete products and subcontractor yield issues early in 2011. 

Operating Expenses

Total underlying overheads, excluding amortisation of acquired intangibles, share-based compensation charges (and associated payroll taxes) and exceptional items amounted to $83.6m, compared to $79.4m in 2010, an increase of $4.2m. Of this increase, $1.5m relates to the adverse movement in the average £/$ exchange rate from $1.55/£1 to $1.60/£1, whilst a further $0.7m relates to the three month costs of Dynamic Hearing which was acquired on 30 September 2011. After stripping these increases out, the like for like increase is $2.0m, or 2.4%.  The projected underlying overheads in 2012 are expected to be between $81m and $85m, which include a full year of costs from the Dynamic Hearing acquisition. These will be slightly front end loaded with significant tape-out costs in the first quarter of 2012. The individual overhead categories are explained further in the following paragraphs.

Our continuous investment in research and development and best-in-class engineering tools is imperative to our growth strategy and our long term competitiveness. Expenditure on research and development, excluding charges such as amortisation and share-based compensation charges, increased by 11% to $47.3m or 30% of revenue (2010: $42.8m or 27% of revenue).  The increase primarily reflects the increased complexity of the products now being developed, through higher mask costs on lower technology node tape-outs, software and subcontract DSP costs on these newer products and with the addition of development costs incurred by Dynamic Hearing in the period since its acquisition. For 2012, research and development costs are expected to be between $45m and $49m, again front-end loaded on significant tape-out costs in the first quarter.

Distribution and selling expenses, excluding share-based compensation charges and exceptional charges, decreased by 5% to $23.4m or 15% of revenue (2010: $24.6m or 16% of revenue). The decrease reflects more efficient distribution, freight and packaging arrangements. For 2012, the expected cost is around $24m, with a slight weighting to the second half of the year on freight and packaging costs associated with increased forecast volume.

Administrative expenses, excluding share-based compensation charges and exceptional charges, increased by 7% to $12.9m or 8% of revenues (2010: $12.0m or 8% of revenue), reflecting the underlying £/$ exchange rate impact and the professional fees associated with the acquisition of Dynamic Hearing.  For 2012, the expected administrative expenses are around $12m, spread evenly through the year.

Exceptional Charges

At the interim results on 25 July 2011, the Company announced a cost reduction and refocusing programme to be actioned in the second half of 2011 at an exceptional cash cost of $3.5m, with annual savings of $6.0m.  The impact of the restructuring in 2011 was to reduce underlying operating expenses by $1.7m. The full savings of $1.5m per quarter are expected from Q2 2012 onwards.

A review of inventory, as part of  the restructuring and refocusing programme, itself prompted both by weak end user demand and customers deciding to make some products end-of-life much sooner than originally intimated to the Company highlighted $3.5m of older parts associated with Discrete and Power Products which were in excess of anticipated demand. The Company therefore decided to take an exceptional write down on these parts in Q3 2011.

In the course of the process to realign the Company's supply chain to better meet the Company's future product and anticipated demand requirements, involving the relocation of certain production support functions to the Far East and a streamlining of the subcontract manufacturing supply base, an inventory loss of $2.4m was identified.  This arose as a result of unacceptably low yields at a subcontractor from production of a high volume part; the extent of inventory scrapped by the subcontractor during the year had not been properly reported at the time.  Although reparation is being sought from the subcontractor concerned nothing has been anticipated for accounting purposes in the Company's 2011 financial statements.

The remaining exceptional item represents a $1.8m non-cash curtailment gain arising on closing the defined benefit pension scheme to future accrual in 2011.

Operating Loss

Underlying operating loss in 2011 was $7.5m, compared to a loss of $1.5m in 2010.

Share-based compensation charges, calculated in accordance with IFRS 2, and associated payroll taxes amounted to $3.6m in 2011, compared to $4.5m in 2010.  The decrease reflects new share-based awards in 2011 being offset by the lower share price and a credit of $0.7m recognised in respect of the lapsing of 2009 executive long-term incentive plan awards due to the non-market performance conditions not being met.  Based on the share price as at 30 December 2011 and planned share-based awards for 2012, the share-based compensation charge in 2012, including the associated payroll taxes, is estimated to be approximately $5m.

Total intangible asset amortisation charges recognised in 2011 on the 2007 acquisitions, and on the Dynamic Hearing acquisition, from 30 September 2011, amounted to $5.5m (2010: $5.3m). The charge for 2012 is expected to be $2.0m, weighted to the first half of the year.

The IFRS operating loss was $24.2m in 2011 (2010: $11.3m loss).

Financial income amounted to $1.6m, with finance expenses of $1.5m, resulting in net finance income in 2011 of $0.1m (2010: $0.1m). These sums include non-cash income and expenses associated with the defined benefit pension scheme and notional interest on the acquisition deferred consideration. The net interest income, in cash terms, was $0.2m (2010:$0.5m).

Taxation

The total effective tax rate was 25.6% (a credit) (2010: 41% credit) reflecting primarily the benefit from additional allowances on research and development expenditure offset by the partial non-deductibility of share-based compensation charges on awards above the share price as at 30 December 2011. The effective tax rate in 2012 is expected to be around 26%.

Cash Flow & Balance Sheet

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

Cash and short-term deposits amounted to $53.4m at 1 January 2012 (2 January 2011: $97.1m).

Net cash outflow from operating activities was $27.5m (2010: $6.9m inflow), driven by the underlying operating loss, $4.5m of payments on closure of the defined benefit pension scheme to future accrual and, most significantly, by the $18.9m impact of the reversal of the unusually large  trade payables position at the end of 2010.

On 30 September 2011, the Company acquired Dynamic Hearing for $4.3m. (Note 10 to the financial information provides full details of the acquisition.) The Company also paid $0.8m (2010: $1.0m) for deferred consideration as milestones were achieved on the 2007 acquisition of Sonaptic (ANC).

Cash outflow on capital expenditure amounted to $6.5m (2010: $6.4m) and relates primarily to software licenses and IT equipment.

The value of inventory held at 1 January 2012 was $22.9m or 103 days inventory (2 January 2011: $29.1m or 105 days inventory). It is anticipated that inventory levels will average around 70 - 100 days in 2012 to meet fluctuations in demand. Trade receivables amounted to $25.9m or 51days sales outstanding at 1 January 2012 (2 January 2011: $23.6m or 44 days sales outstanding). It is expected that the number of days sales outstanding will average around 45 in 2012. Trade payables at 1 January 2012 amounted to $16.5m or 53 days purchases (2 January 2011: $33.4m or 99 days purchases). It is anticipated that the number of days purchases will average around 50 in 2012.

Treasury and Foreign Exchange

Nearly all revenue and cost of goods sold are denominated in US dollars, so there is a natural and effective hedge down to the gross margin level. However, approximately two-thirds of operating costs are denominated in sterling, and this represents a structural currency exposure derived from the UK base of the Company. During 2011, there was currency hedging in place throughout the year, ranging from three to six months forward in time, with an average rate over the year of $1.60 to £1 (2010: $1.55 to £1). It is estimated that during 2011 and going into 2012, every one cent decrease in the US dollar/sterling exchange rate (i.e. weakening of Sterling) has the effect of decreasing the Company's overheads and increasing operating profit by $300,000 on an annualised basis. To give some short-term certainty, the majority of the Sterling dominated overheads for all of 2012 have been hedged at an average rate of $1.55 to £1.

Share repurchases

In 2011 one of the employee share trusts purchased 1,422,545 (2010: 585,663) ordinary shares in the Company for a total consideration of $5.4m (2010: $1.7m) to cover employee share-based awards. This employee share trust is likely to make further purchases of shares in the Company going forward to satisfy employee share-based awards and in order to minimise the dilution impact of those share-based awards.

Defined Benefit Pension Scheme

On the 30 April 2011 the Company closed the defined benefit pension scheme to future accrual and transferred the 28 active members into the Company defined contribution scheme. On breaking the link to final salary a $1.8m non-cash curtailment gain was recognised as an exceptional item. During the year the Company paid in $1.3m under the regular schedule of contributions and a further $3.2m as part of the agreement reached with the trustees to close the scheme to future accrual.

Q4 2011

The Company's financial performance for Q4 2011 is summarised below.

*Underlying Q4 results exclude: charges for the amortisation of acquired intangible assets (Q4 2011: $1.5m; Q4 2010: $1.3m) and share-based compensation charges, including associated payroll taxes (Q4 2011: $0.4m; Q4 2010: $1.0m). Also, in Q4 2011 an exceptional charge of $2.4m (Q4 2010: $nil) is excluded. Underlying results are reconciled to the results reported in accordance with IFRS in notes 5 and 6 to the financial information.

Revenue for Q4 2011 amounted to $36.9m, a fall of 19% from Q4 2010 revenue of $45.8m (Q3 2011: $40.4m).  This includes $0.6m revenues from the Dynamic Hearing acquisition on 30 September 2011. The revenue decline reflects the weak consumer demand in the second half of the year.

Gross profit was $18.4m, before an exceptional charge for an inventory write down of $2.4 million, compared with $21.5m in Q4 2010 (Q3 2011: $20.1m). Gross margin improved to 49.9%, before the exceptional charge, from 47.0% in Q4 2010 (Q3 2011: 49.7%) as a result of a change in product mix and lower manufacturing costs.

Total underlying operating expenses were $21.3m in Q4 2011, including $0.6m for the first time from the Dynamic Hearing acquisition, along with $0.6m subcontract costs on DSP design on the latest low geometry Audio Hub product. This compares to $20.8m in Q3 2011 (Q4 2010: $20.2m). Excluded from underlying expenses are: i) Share-based compensation calculated in accordance with IFRS 2 and associated payroll taxes, which amounted to $0.4m, down from $1.0m in Q3 2011 (Q4 2010: $1.0m) with the reduction relating to a credit from the lapsing of executive share awards where the performance conditions were not met, and: ii) Amortisation charges relating to the intangible assets arising from acquisitions, which amounted to $1.5m, up from $1.3m in both Q3 2011 and Q4 2010, the $0.2m increase relating to the Dynamic Hearing acquisition.

Underlying operating loss in Q4 2011, before exceptional charges of $2.4m, was $2.9m, compared with a $0.7m loss in Q3 2011 (Q4 2010: $1.3m profit), the decline primarily being the result of the fall in revenues.