Flomerics Group PLC
16 March 2000
PART I
FLOMERICS GROUP PLC
RECORD PRELIMINARY RESULTS FOR YEAR ENDED 31 DECEMBER 1999
Earnings per share increase from 10.1p to 20.0p on turnover
up 26%
Flomerics Group PLC, supplier of analysis software to the
telecommunications, semiconductor, and computer industries,
and other sectors of the electronics industries, announces
its results for the year to 31 December 1999.
Highlights:
* Turnover up 26% to £8.7 million (1998 : £6.9 million)
* Profit before tax up 110% to £807,000 (1998 : £384,000)
* Operating Profit margin increased to 9.5% from 5.6%
* EPS before amortisation of goodwill up 98 % to 20.0p
(1998 : 10.1p)
* Proposed dividend increased to 4.0p per share
(1998 : 3.3 p)
* Key acquisition announced in July 1999 of Kimberley
Communications Consultants Limited (KCC)
Commenting on the opportunities facing the company, the
Chief Executive, David Tatchell, commented:
"Flomerics is increasingly focussing on its primary market
sectors of telecommunications, computers and semiconductors.
These both support and are driven by the ongoing
communications revolution, associated with the explosive
growth of the Internet, the digital revolution in media, and
the breakthrough of wireless technology in replacing and
extending traditional communications systems."
Commenting on the results, the Chairman, David Mann, said:
"The results for 1999 reflect a continuation of the
company's impressive year-on-year growth record and this,
combined with significant improvements in margins, has led
to a doubling of pre-tax profits for the year.
The acquisition of Kimberley Communications Consultants
Limited during 1999 has added key electromagnetics analysis
technology to the company's portfolio, and positions it as a
broader-based provider of design solutions to the
electronics industries.
Consequently, the directors continue to view the company's
future with confidence, and are exploring ways of addressing
most effectively the enlarged opportunities now facing the
company."
FOR FURTHER INFORMATION PLEASE CONTACT:
David Mann Chairman 020 8941 8810
David Tatchell Chief Executive 020 8941 8810
Chris Ogle Finance Director 020 8941 8810
Richard Thompson Teather & Greenwood 020 7426 9073
Jodie Downes Teather & Greenwood 020 7426 9011
Rupert Dearden Teather & Greenwood 020 7426 9036
Tom Gadsby Buchanan
Communications 020 7466 5113
CHAIRMAN'S STATEMENT
Results - Continuing quality growth
Flomerics' performance for the year ended 31 December 1999
reflects a continuation of the company's impressive growth
record and this, combined with significant improvements in
margins, has led to a doubling of pre-tax profits.
Including the effect of the acquisition of Kimberley
Communication Consultants Limited (KCC) in July, turnover
increased by 26.1% to £8.7 million (1998 : £6.9 million).
Profit before tax increased by 110% to £807,000 (1998 :
£384,000).
Earnings per share before amortisation of goodwill increased
98% to 20.0p (1998 : 10.1p).
The Directors propose to pay an increased dividend of 4.0p
per share (1998 : 3.3p) in respect of the year. Dividend
cover is 5.1 times. Subject to approval by the shareholders,
the dividend will be paid on 9 May 2000 to shareholders on
the register at close of business on 14 April 2000.
Acquisition of Kimberley Communications Consultants Limited
On 27 July 1999 the Board announced the acquisition of
Kimberley Communications Consultants Limited (KCC), a
private Nottingham-based company. KCC's business is the
development and marketing of analysis software for high-
frequency elecromagnetic processes, primarily in microwave
and antenna applications.
The acquisition of KCC opens up substantial cross-selling
opportunities for the enlarged group.
First there is a major new market opportunity in
electromagnetic compatibility (EMC) for electronics
equipment, which complements and strengthens Flomerics' core
thermal-simulation business.
Secondly, for KCC's existing business in microwave and
antenna applications, Flomerics offers KCC the international
support infrastructure and sales channels in the US and
continental Europe which it currently lacks. Leveraging this
infrastructure on behalf of KCC's existing products will
enable KCC to address more effectively the global market for
high-frequency electronic analysis software - currently
estimated at £20m annually, and growing at 25% per annum.
Achieving a major repositioning of Flomerics' business
Flomerics has established a position as a world-leading
player in the rapidly expanding field of "virtual
prototyping" - the provision of software enabling engineers
to test virtual models of their equipment on a computer
before building physical prototypes.
Specifically, the company has, over the last decade,
achieved a position as the global market-leader in the
supply of thermal-design software to the telecommunications,
semiconductor and computer industries, and other sectors of
the electronics industries, and to the building services
industries. The customer base includes the world's most-
respected engineering companies, including Intel, Hewlett
Packard, Lucent and Siemens.
As a result of the acquisition of KCC, it is has added
leading-edge electromagnetics analysis technology to its
portfolio. It is consequently now repositioned as a broader-
based supplier of engineering analysis software, able to
provide additional products addressing the critical
electromagnetics problems faced by the same customer base.
The strategic thinking underlying this move, and the
resulting longer-term opportunities, are covered more fully
in the Chief Executive's report.
The business
The company's principal current products are FLOTHERM,
FLOVENT and (as a result of the KCC acquisition)
Microstripes.
FLOTHERM is used by electronics manufacturers to analyse and
improve the thermal design of electronics equipment of all
kinds. FLOVENT is used by building services engineers to
analyse the ventilation, thermal environment and air quality
in buildings. Microstripes is used to analyze high-frequency
electromagnetics processes, primarily in microwave and
antenna applications.
Continuing growth in FLOTHERM
The FLOTHERM business accounts for 86% of turnover, and
achieved growth in turnover of 21% on top of 15.4% growth in
1998. Good growth has been achieved in all territories. The
US, accounting for 56% of FLOTHERM turnover (1998 : 53%),
remains the largest market, Europe represents 32% (1998 :
36%), and the Far East 12% (1998 : 11%).
A new business was launched during 1999, targeting the
provision of thermal design services to electronics
companies. This complements the mainstream FLOTHERM
business, by offering full design services to companies
wishing to outsource their thermal designs. This new
business initiative, based initially in the US, was launched
successfully during the first half of 1999. This has been an
important new source of revenue for the Group and in its
first year contributed £223,000 of revenue. In the first
half of 2000 this initiative will be extended to Europe
(from the Hampton Court office).
During 1999 the company achieved a significant strengthening
of the FLOTHERM product line, with a major new release in
October. This has contributed to the continuing expansion
achieved during the year within Flomerics' blue chip
customer base throughout the world, and to the adoption of
the FLOTHERM technology by a number of new customers.
And in FLOVENT
FLOVENT turnover grew by 24% on top of 71% growth in 1998
and accounts for 10% of company turnover (1998 : 10%).
Particularly good growth was achieved in the US (up by 47%).
In October 1999 a major upgrade, FLOVENT Version 2, was
released, and has been extremely well received by the
market. This, coupled with the investment made during 1999
in establishing dedicated FLOVENT resources in the UK and
US, positions the company to address the substantial
opportunities that it believes this emerging market offers.
Web-enabled products
The new Web product, FLOPACK, launched during 1998, enables
users to create complex models of electronics packages via
the Web, and download them to FLOTHERM. It is sold as a
subscription service, and has already been adopted by a
significant proportion of the FLOTHERM users. Based on this
successful experience, Flomerics is developing a suite of
Web applications, the first of which is planned for release
during 2000.
Plus the contribution from Electromagnetics products
During the five months August to December 1999, KCC's
business, based on the Microstripes product, contributed
£267,000 to revenue, and achieved a contribution to
operating profit of £21,000.
In November 1999 a major new version of Microstripes,
Version 5, was released in beta test form. This new release
provides a completely new user interface designed for
Windows NT operation, and includes many enhancements in
analysis functionality targeted at the specific applications
of antennas and microwave devices. The reaction from the
user base has been extremely encouraging. Full release is
planned for Q2 2000.
Exploring the EMC market
To address the EMC market identified above, the company has
embarked on the creation of a major new product, FLO/EMC.
This will involve appropriate specialization of the existing
Microstripes product and, ultimately, embedding the
Microstripes analysis functionality within the FLOTHERM
product structure. This work is already well advanced, with
a first product release scheduled for the second half of
2000.
In parallel, as a first stage in marketing the new product
concept, the company is marketing a product-plus-services
package to selected major FLOTHERM customers. This is aimed
at achieving three things: an in-depth assessment of the EMC
market; getting some major customers on board early; and
working with these customers as partners, achieving input
into the detailed product definition for FLO/EMC.
The response to this initiative has been extremely
encouraging, and sales have already been achieved to a
number of major US and European corporations.
Extending and strengthening global infrastructure
Flomerics is committed to continue building the
infrastructure needed to enable it effectively to market and
support its products worldwide.
To this end, during 1999, as well as strengthening the
existing US offices in Massachusetts, Northern California,
and Texas, the company opened a new office in San Diego,
Southern California to provide local sales and support in
this important region.
In order to address the important, emerging market in China,
Flomerics has, during the early part of 2000, secured direct
representation in Shanghai.
In addition, in order to exploit the market opportunities
for KCC's electromagnetics products, electromagnetics
specialists are being recruited to join the existing
Flomerics offices, particularly in the US.
Management and staff
During the year, the senior management team has been
strengthened by two appointments to the Board of Flomerics
Group plc (Tom Rowbotham as Deputy Chairman and Chris Ogle
as Finance Director) and two to the Board of Flomerics
Limited (Barbara Evans as Development Director and David
Johns, the Managing Director of KCC). We welcome these four
people, who have brought considerable new experience and
additional resources to the overall direction of the Group.
Achievements and Prospects
I congratulate all the management and staff on meeting
market expectations for the 1999 results, which were
established over two years ago, when it became clear that
the company needed a period of increased investment to
produce and launch new versions of its key products,
FLOTHERM and FLOVENT. That programme has now been
completed successfully and Flomerics is much better equipped
to introduce additional functions and complementary products
in its traditional markets. The acquisition of KCC has
simultaneously opened up opportunities across a much wider
field.
Thus the company has entered an exciting new phase of
business development. The directors see good prospects for
continuing growth by focusing on a range of these
opportunities that can be addressed directly with a
sustainable level of expenditure on research and
development. Additional opportunities may be pursued in
other ways, for example by working in co-operation with
industrial partners.
David Mann
Chairman
16 March 2000
CHIEF EXECUTIVE'S REVIEW
Flomerics' established market position - and resulting
opportunities
Competitive pressures are increasingly forcing industry to
enhance productivity by accelerating product development -
shortening product design cycles and reducing "time to
market" - and simultaneously to improve product
functionality and reliability, and often to reduce product
size.
Engineers are consequently seeking ways of avoiding
traditional "build and test" design methodologies, and
replacing them with computer analysis - creating and
analyzing virtual models of their equipment on computers,
and thereby ensuring that their design is "right first
time". The use of such "virtual prototyping" is
revolutionizing product development process in many
industries, enabling design cycles to be reduced
considerably, with improved product quality.
The competitive pressures driving these trends are nowhere
more intense than in the fields of communication equipment,
semiconductors, and computers, and the other sectors of the
electronics industry - which are simultaneously enjoying
explosive growth and suffering from cut-throat competition.
It is in these sectors that Flomerics' software is already
well established as a key component in one critical aspect
of equipment design - thermal design.
Thermal design is only one part (albeit an increasingly
important one) of the "physical design" of electronics
equipment - namely, the packaging of the electronics into
the physical equipment which is supplied to the customer. We
see substantial opportunities in this wider physical-design
market. Consequently, as explained below, we are seeking to
expand Flomerics from its established base as the primary
supplier of thermal solutions to the electronics industries,
to become a major supplier of broader-based software used in
other critical aspects of physical design of electronics.
A major repositioning
The provision of design analysis software of this kind
relies on complex mathematical methods, implemented in
computer software, which can correctly and efficiently solve
the underlying equations governing the physical process in
question. Thus our current products, which simulate heat
transfer and air flow (in electronics equipment and
buildings) have at their heart "computational fluid
dynamics" technology - which solves the basic governing
equations of heat transfer and fluid dynamics. To provide
effective design tools, this must then be packaged in
appropriate user-friendly software, and backed up by
international marketing and support infrastructure.
Flomerics business strategy has been to identify market
niches where such engineering analysis software yields
demonstrable productivity benefits, and, by providing best
in class software, backed up by high-quality support
services, to establish a dominant position in this market
niche. This has been achieved in the FLOTHERM market, and to
establish a leading position in the embryonic FLOVENT
market. Alongside these world- leading market positions,
and a blue chip customer base comprising virtually all
the industry majors, Flomerics has created the
infrastructure and processes required to develop complex
engineering analysis software, and to market it and
support it globally.
The company's strategy is now, using this market position
and infrastructure as the foundations, to seek ways of
broadening the business, by providing a wider range of
engineering design technologies to its established customer
base. The key to this is acquiring additional analysis
capabilities, which we can cross-sell to our established
customer base. The acquisition on 27th July 1999 of
Kimberley Communications Consultants Limited (KCC)
represents a major step in this direction.
The significance of the KCC acquisition
Although KCC is small (£643,000 annualized turnover, and
with just ten employees) we see the company as a key
component of Flomerics' future strategy, and expect that it
will contribute significantly to Flomerics' growth over the
next 10 years.
KCC's existing business is the provision of software that
analyses high frequency electromagnetic processes, primarily
used in the design of microwave devices and to optimise the
shapes of antennas. KCC's product, Microstripes, is used by
major corporations such as Nortel, Nokia, and British
Aerospace.
Flomerics gives KCC an international sales and marketing
infrastructure, which will enable it to exploit this market
far more effectively than it has been able to so far.
More significantly there is a huge opportunity for this
software to complement Flomerics' current thermal software
in providing another key solution to the electronics
industries. In essence, FLOTHERM provides a solution to the
problem of heat in electronics equipment. KCC's product can
provide a solution to the equally important problem of
electromagnetic radiation and interference - or,
"electromagnetic compatibility" (EMC).
EMC is one of the most serious problems facing the
electronics industries. Increasing competitive pressures are
forcing designers more and more into increased density of
electronics and higher frequency ranges. These higher
frequencies have not only led to increased heat dissipation,
but also to increased electromagnetic emissions. These
emissions cause interference, which can affect the
performance of the device itself, or other devices nearby.
The designer needs to limit these emissions - and also to
ensure that his equipment is not vulnerable to imposed
radiation.
To cite a familiar example - the reason that mobile phones
cannot be switched on in an aircraft is because the
emissions could affect the plane's navigation systems.
Electromagnetic emissions can also be a health risk - as is
well known there is concern that emissions from mobile
phones may cause brain tumours. For these reasons, and many
more, regulators in the industrialized nations are
tightening the legislative rules governing the permitted
levels of electromagnetic emissions from equipment of all
types, and are imposing rigorous performance tests before
equipment is licensed for release and shipment.
The new Flomerics EMC product (FLO/EMC) and FLOTHERM are
highly complementary because there is a trade-off between
the emissions problem and the heat problem. In essence, a
designer of a computer with a radiation problem puts in
shields to stop radiation getting out. But by doing this he
also stops the heat from getting out - so the equipment
overheats. If a software solution can enable the engineer to
see both of these problems at once, he will be able to
optimize the trade-off between these two conflicting design
considerations in the minimum possible time.
With these two products Flomerics will be in the position of
offering two complementary, best-in-class predictive
analysis tools to the electronics design community, thereby
exploiting and reinforcing our current, strong market
position.
KCC's trading results since the acquisition have been
satisfactory and as expected. We have spent time
positioning the company so that the EMC opportunities can
be exploited. The response from our major customers has been
universally positive. They are as excited as we are about
our new EMC solution, and a number of sales have already
been achieved. This confirms our belief that a substantial
proportion of the FLOTHERM user base has immediate need for
the FLO/EMC product.
Opportunities
Flomerics is increasingly focusing on its primary market
sectors of telecommunications, computers, and
semiconductors. These both support and are driven by the
ongoing communications revolution, associated with the
explosive growth of the Internet, the digital revolution in
media, and the breakthrough of wireless technology in
replacing and extending traditional communications systems.
Flomerics is well positioned as a global provider of key
enabling technology to these markets. We therefore see great
potential for growth in these sectors.
David Tatchell
Chief Executive
16 March 2000
FINANCE DIRECTOR'S REVIEW
Profit and Loss Account
Turnover, including the results from Kimberley
Communications Consultants Limited (KCC) increased by 26% to
£8.713m from £6.910m. Operating profit for the Group is up
112% at £826,000 . The operating profit margin has increased
to 9.5% from 5.6%.
The end result is an increase in profit before tax of 110%
from £384,000 to £807,000.
Earnings per share before amortisation of goodwill is up 98%
at 20.0 pence compared to 10.1 pence. The fully diluted
earnings per share and post goodwill figure is 18.6 pence.
Balance Sheet
Goodwill of £786,000 arising from the purchase of KCC has
been included in fixed assets. The Chief Executive's Review
explains in some detail the strategic value of this
acquisition and the fact that we expect it to benefit the
Group for at least ten years. For this reason the goodwill
will be amortised over ten years but will be reviewed
annually.
Trade debtors have increased from £2.895m to £3.522 m.
Debtors at the end of the year are traditionally high
because of the disproportionate amount of business that is
done in the last quarter. Debtor days at the year end,
however, have been reduced from 98.8 days in 1998 to 90.8
days.
Cashflow
Cash flow from operating activities was £752,000 compared to
£839,000 in 1998. After capital expenditure including
finance lease repayments( £514,000), taxation (£121,000),
acquisition costs (£164,000) and dividend payment (£85,000)
cash balances for the year fell by £150,000. The group's
net debt at the year end has increased from £74,000 to
£281,000.
Working Capital and Financial Instruments
The Group manages its short term working capital
requirements through the use of its overdraft facility and
the management of debtors and creditors. Significant
investments in hardware are financed by finance leases,
normally over three years. There is an exposure to interest
rate fluctuations as the bank overdraft interest rate is
charged at 2.75% over the Bank's base rate. The finance
leases on the other hand are taken out at fixed interest
rates. The overdraft facility was used more extensively in
1999 than in 1998 and as a consequence interest paid on bank
borrowings was greater than in 1998.
The Group's US Company, Flomerics Inc, trades in dollars.
The Group also has branch offices in France, Germany and
Italy and uses distributors in Japan, Taiwan and Korea, all
of which trade in their domestic currencies. The Group's UK
operation also exports to various other territories and
invoices in a variety of currencies. These various overseas
activities mean that there is a foreign currency risk. This
exposure is monitored but it has not been the company's
policy to hedge against this risk.
Capital Expenditure
Capital expenditure for the group in the year was £452,000,
compared to £509,000 in 1998. The majority of this
(£340,000) was for computer hardware. £172,000 of this
expenditure has been financed by hire purchase.
Research and Development
Research and Development costs for the period were £1.559m ,
compared to £1.225m in 1998. This represents 17.9% of
turnover, a slight increase from last year's 17.7%.
Taxation
The tax rate for the year is 38.8% compared to 32.9% in
1998. This is partly due to the amortisation of goodwill but
more significantly because of the high amount of disallowed
depreciation and the lesser amount of capital allowances
when compared to last year.
Issue of Shares
In order to finance the acquisition of KCC 188,466 shares
were issued to the previous shareholders. The effect on the
share premium account of this transaction was an increase of
£475,000 to £524,000.
Retained Profit
Retained profit for the year is £384,000. After other
movements in reserves, shareholders' funds at the end of the
year have increased from £1.576m to £2.388m.
Chris Ogle
Finance Director
16 March 2000
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