Flomerics Group PLC - Preliminary results for Flomerics - Encouraging Progress

IMMEDIATE RELEASE
4 March 2005   

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 ended 31 December 2004.

Key Points

• Turnover flat at £10.2m, but at constant rates of exchange up 7%

• Profit Before Tax up 47% to £671,000 (2003 : £455,000)

• Basic Earnings per Share up 41% at 3.88p (2003 : 2.75p)

• Dividend increased by 10% to 1.1p per share (2003: 1p)

• Strong cash position with a balance of £3.3m (2003 : £2.5m)

• Revenues from FLO/EMC up 46% (at constant rates)

• Growth in Asia Pacific revenues of 28% (at constant rates)

• FLO/PCB launched and well received

Commenting on the results and prospects, David Mann, the Chairman, said:

“Flomerics has demonstrated that it is ready to advance again. With the strengthened management team, an impressive array of market-leading products and a global presence, the directors believe that Company is well placed to seize opportunities for growth in revenue and for these to lead to a steady improvement in profit margin.”

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Chairman’s Statement

Results

I am very pleased to report a positive set of results for the Company with good progress in all areas. Turnover for the year was flat compared to 2003 at £10.2 million, but at constant rates of exchange, turnover was up by 7% compared to a 10% contraction in 2003. Profit before tax has increased by 47% to £671,000, resulting in a significant improvement in the pre-tax profit margin from 4% to over 6% and an increase in earnings per share of 41%. The total of the Group’s cash balances has strengthened to £3.3 million. The board is recommending a dividend of 1.1 p per share, an increase of 10%.

The comparisons made with the prior year below and in the Chief Executive’s Review are all at constant rates of exchange. On this basis revenue from each of the Company’s products was greater than in 2003.

It is particularly encouraging that revenue from the flagship product, FLOTHERM, grew by 2% compared to an 8% contraction in the previous year. The Company is benefiting from the recovery that is taking place in the electronics sector and FLOTHERM has retained a strong competitive position.

It is also encouraging that there was significant growth of 46% in revenue from FLO/EMC. Whilst this is still a small part of the business (7% of total revenues), the product has a key position in the strategy for broadening the range of the Company’s offerings.

FLO/PCB was released during the year and is another important part of the Company’s toolset. The product has been well received and we expect good growth in 2005.

In the regions, Asia Pacific performed particularly well with growth of 28%, and revenues from Europe increased by 9%. Revenues from the US were 1% down on 2003, reflecting the fact that some customers have moved their design work from the US to Asia Pacific.

Personnel

All members of the Flomerics team have my sincere thanks for the hard work and dedication that has enabled the Company to post these results. I particularly appreciate the leadership from David Tatchell and the management team, which has enabled the Company to come through a challenging period with confidence and a strong sense of direction.

Earlier this year Gary Carter was appointed to the board as Chief Operating Officer. Gary has an impressive track record in the field of analysis software. The intention is that David Tatchell, one of the founders of the Company, will hand over the role of CEO to Gary by mid-2006.

Outlook

After some difficult years during which the Company was able to maintain profitability, Flomerics has demonstrated that it is ready to advance again. With the strengthened management team, an impressive array of market-leading products and a global presence, the directors believe that the Company is well placed to seize opportunities for growth in revenue and for these to lead to a steady improvement in profit margin.

David Mann
Chairman

4 March 2005

CHIEF EXECUTIVE’S REVIEW

A RECAP – FLOMERICS’ STRATEGY FOR GROWTH

Over the years, Flomerics has been successful in establishing a strong, market-leading position as the supplier of analysis software for the thermal design/cooling of electronic equipment – to the extent that manufacturers of virtually all types of electronics equipment are now utilising our FLOTHERM software as a key component of their product design process.

Our strategy has been to leverage this unique market position by broadening our product range, to address complementary problems in the “physical design of electronics”, and thereby to open up new growth opportunities alongside the maturing FLOTHERM market. Most significantly, FLO/EMC addresses the need to improve the electromagnetics shielding of electronics equipment, by analysing the emissions from the equipment. And FLO/PCB is targeted at electronics designers, who increasingly need access to a first-level thermal-analysis tool to improve circuit board layout, and to communicate effectively with the mainstream thermal design team using FLOTHERM.

These products – the established FLOTHERM product, plus the newer complementary products FLO/EMC and FLO/PCB – do, we believe, provide significant growth opportunities, all in the physical design of electronics. Beyond this, we see additional opportunities in other markets from the Micro-Stripes and FLOVENT products. Micro-Stripes provides high-frequency electromagnetics analysis for antenna and microwave equipment design – and FLOVENT analyses heating and ventilation for the building services industry. These products benefit from strong synergies – in technology and software – with (respectively) FLO/EMC and FLOTHERM. They therefore enable us to address these additional markets in a cost effective manner.

To recap - Flomerics’ current business strategy can therefore be summarised as:

• Ensuring that FLOTHERM returns to growth as the electronics industries recover;
• Leveraging the FLOTHERM market position by introducing new products (FLO/EMC and FLO/PCB) alongside it, addressing the broader needs of “physical design of electronics”;
• And exploiting cost-effective opportunities in additional markets from products (Micro-Stripes and FLOVENT) with strong synergy with the core products.

PROGRESS IN 2004

As highlighted elsewhere, it is pleasing to be able to report, after a difficult period, a number of positive trends in Flomerics’ business in 2004, which advance this strategy.

Firstly, as the recovery in the electronics industries has taken root, we have seen a return to some level of growth in FLOTHERM. On a like for like basis (that is, without currency variations) FLOTHERM has grown by 2% over 2004, following two years of contraction.

Secondly, good progress has been made with broadening our range of products in the physical design of electronics. FLO/EMC is beginning to become established in the market, as is demonstrated by the strong growth in 2004 (46%). Alongside this, the new FLO/PCB product, released in March 2004, is making headway, and is becoming established in a number of major accounts.

And thirdly, both Micro-Stripes and FLOVENT have benefited from a re-focussing of resources during 2004. Micro-Stripes has been particularly successful, showing strong growth (20%). This was mainly achieved in Japan and Europe – for 2005 we have also added dedicated resources in the US, and anticipate good growth from this market. And FLOVENT showed 5% growth over 2003, reversing the trends of prior years.

LOOKING FORWARD

We are now building on these successes in a number of ways.

In order to maintain the growth momentum we need to add and refocus resources, carefully targeted on market and products needs. This means additional sales and support resources in key emerging territories (during 2004 we added a new Sales Office in India, and expanded the operation in China) – and adding electromagnetics technical expertise within our existing infrastructure, to support and drive the growth in FLO/EMC and Micro-Stripes.

In addition, during 2004 we have established an Offshore Development Centre in India (in Bangalore, co-located with the India Sales Office). This is already making a significant contribution to our product development program. By taking responsibility for product quality assurance and testing, and certain specific aspects of development, it is enabling us to accelerate product development in a cost effective manner.

And – perhaps most importantly – we are re-positioning Flomerics and its products in a fairly crucial way. In order to address the increasing complexities of current and future electronics equipment, our customers are increasingly needing to move beyond “point solutions” addressing particular design issues in isolation, to “integrated solutions” which operate efficiently together, and promote effective communication and team work.

We have always seen FLOTHERM, FLO/EMC and FLO/PCB as a suite of integrated products, together addressing the primary design needs in the physical design of electronics. The integration is reflected particularly in the common user interfaces, and the sharing of data and design models between the products. A number of customers are already taking advantage of this integration – and we are beginning to market the product suite as (rather than individual products) an “Integrated Analysis Environment” for the physical design of electronics.

This repositioning of Flomerics and its products represents an important evolution in our business approach. It provides the opportunity for us to market and sell our multi-product suite effectively, to build higher-level relationships with our customers, and to build greater barriers to competition. We are therefore devoting significant efforts to re-orienting the business (sales, marketing, engineering, and product) to this new business model. And we are seeing the first successes in (for example) Philips and Ericsson in Europe, and Cisco, Intel and Tellabs in the US.

APPOINTMENT OF NEW CHIEF OPERATING OFFICER

Earlier this year we announced the appointment of Gary Carter as Chief Operating Officer. Gary joins us from ANSYS, Inc., a major US-based Computer Aided Engineering (CAE) Company, where he was Managing Director and Vice President of European Sales.

Gary brings experience of building and managing a CAE software business several times the size of Flomerics, and of leading a major, successful, international sales operation. In particular, his prior experiences in building corporate level relationships with major customers will be invaluable in implementing our “Integrated Analysis Environment” strategy.

I am therefore delighted that Gary has joined Flomerics, and I am confident that he will play a major part in enabling Flomerics to realise its exciting growth opportunities.

David Tatchell
Chief Executive

4 March 2005

OPERATING AND FINANCIAL REVIEW

Overview

Turnover for the year was maintained at its 2003 level at £10.2 million. Profit before tax has increased by 47% to £671,000 and cash balances have strengthened to £3.3 million.

Turnover

Approximately 50% of the Group’s revenues are received in dollars and this has had a significant negative impact on the turnover figure in 2004. The effect on turnover of reporting this at the average rate of exchange for the year of 1.83 compared to 1.64 last year is over £600,000. At constant rates of exchange turnover has increased by 7%, compared to contraction of 10% in 2003 .

The comparisons made below by region and by product are all at constant rates of exchange.

The area showing most growth was Asia Pacific with over 28%. This region now accounts for over 20% of total revenues – compared to 17% in 2003. China performed particularly well, with growth in excess of 100% and is now proving to be a very successful operation. The improved economy in Japan and more focus on Micro-Stripes enabled this territory to increase revenues by 34%.

Europe also showed good growth (9%), particularly in Germany and France, although some of this can be attributed to multi-year licences.

Revenues from the US have stabilised (99% of 2003) following contraction in the previous two years. The US is our biggest region but now accounts for 42% of turnover compared to 48% in 2003. We have seen some evidence of our customers moving their design work, along with the manufacturing, to Asia Pacific and this is reflected in our sales.

Revenues increased from all of the Group’s products compared to 2003. 2004 was the first full year for the merged product of FLO/EMC and it performed well with growth of 46%. FLOTHERM, which still accounts for 75% of total revenue, showed a small amount of growth (2%) but this follows two years of contraction. Revenues for Micro-Stripes and FLOVENT increased over 2003 by 20% and 5% respectively.

Most of the Group’s revenues, 73%, are derived from licences but maintenance revenue is becoming increasingly important and in 2004 accounted for 15% of total revenues (2003:13%), an increase of 20%. The balance comes from training, consultancy and the Group’s magazine – “Electronics Cooling.” Recurring revenues (i.e. licence renewals and maintenance revenue) accounted for 56% of total revenues (2003: 58%). Revenue from new licences increased by 13% compared to 2003 and represented 33% of total revenues. This is encouraging and is strong evidence of a recovery following a period of contracting revenues from new licences. There was a significant increase in revenues coming from perpetual licences and in 2004 they accounted for 18% of total revenues, compared to 13% in 2003. This is largely due to the increase in business coming from Asia Pacific where perpetual licences are more the norm.

Operating Expenses

Total operating costs were down 2%. Cost of sales were down by 22% to £201,000 due to lower royalties being paid to third party licensors. Research and development costs are down 4% compared to 2003 and at £2,271,000 represent 22% of turnover compared to 23% in 2003. Other costs were flat compared to last year.

Staff related costs are the Group’s biggest expense, and represent 58% of turnover. In 2004 total staff costs increased by 1%. The average number of employees was down slightly at 117 compared to 120 in 2003. Staff numbers have come down in the US in line with the reduced turnover but have increased in China, where we now have 5 employees and in India where we have 11.

Other Income, Tax and Earnings per Share

Other operating income represents rent received and is up 63% at £75,000 due to a full year’s rent being received on the Group’s freehold property in Hampton court. Interest received has also increased by 54% to £71,000 due to higher cash balances.

The net result is an increase in profit before tax of 47% to £671k. This represents an improvement in the pre-tax margin from 4.5% to 6.6%.

The Group’s tax rate remains low because of the benefit of the Research and Development tax credits. In 2004 the tax rate was 15%, slightly higher than last year (11%), which benefited from a repayment of withholding tax.

Basic earnings per share are thus 41% up on last year at 3.88 pence (2003: 2.75pence).

Dividend

The Board is recommending a dividend of 1.1p per share (2003: 1.0p per share). Subject to approval from shareholders, the dividend will be paid on 6 May 2005 to shareholders on the register at the close of business on 8 April 2005. The cash effect of this is £161,000.

Financing and Cash Flows

Cash generated from operating activities was £1.1 million (2003: £0.8 million). After capital expenditure of £302,000 (2003: £196,000), tax refunded of £227,000 (2003: £76,000 paid) and a dividend paid to shareholders of £146,000 (2003: £146,000) the cash inflow to the Group was £851,000 (2003: £331,000.) The cash balance has thus increased from £2.5 million to £3.3 million and net funds are now £2.8 million (2003: £1.9 million). The Group has borrowings of £509,000, being the mortgage on a freehold property that is being repaid over ten years.

In order to maximise the interest received, the Group compares interest rates from different banks and deposits are placed for varying terms. £71,000 of bank interest was received in the year (2003: £46,000).

Because of the international nature of the business there is significant exposure to exchange rate fluctuations. The UK company receives royalty payments from the US subsidiary and forward exchange contracts are taken out to partly hedge the exposure. In addition forward exchange contracts are entered into to partly hedge the exposure to the Yen from payments that it receives from Japan.

Trade debtors at the and of 2004 were £3.4 million (2003:£3.0 million). Debtor days, calculated on a count-back basis, have improved from 80 to 72 days.

Accounting Standards

On October 7 2004, the Stock Exchange announced that it intended to mandate that AIM companies should adopt International Accounting Standards (IAS) from 1 January 2007. It was previously the intention that this would be mandatory from 1 January 2006, whilst voluntary adoption could take place from 1 January 2005. The Board now intends to adopt IAS with effect from the new date of 1 January 2007.

We have been working with our auditors to understand the implications of the new standards. Whilst it has been possible to reach some high level conclusions about the areas likely to be affected, more time is needed to assess the impact accurately.

With effect from 1 January 2006, in accordance with FRS20, the Group will need to show the “cost” of share options granted in the profit and loss account. There is still some debate in the accountancy world about how best to value the options granted and again the Board is working with its advisors to assess the effect.

Chris Ogle
Finance Director

4 March 2005

FLOMERICS GROUP PLC

CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2004

* As restated (see Note 6)

FLOMERICS GROUP PLC

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2004

FLOMERICS GROUP PLC

SUMMARY CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2004

* As restated (see Note 6)

Notes:

1. The Group recognised unrealised losses on translation of foreign currency net investments of £105,000 (2003: £75,000) in the year, which were taken to reserves and are not included in the profits above.
2. The financial information shown for the years ended 31 December 2004 and 2003 set out above does not constitute statutory accounts but is derived from those accounts. The results have been prepared using accounting policies consistent with those used in the preparation of the statutory accounts. The financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The financial information for the year ended 31 December 2003 has been extracted from the statutory accounts for that year which have been filed with the Registrar of Companies and which contain an unqualified audit report. The financial information for the year ended 31 December 2004 has been extracted from the draft statutory accounts for that year upon which the auditors have yet to report. Copies of this announcement are available at the registered offices of the Company (81 Bridge Road, Hampton Court, Surrey, KT8 9HH) and at the offices of the company’s nominated advisors, Teather & Greenwood Ltd. (Beaufort House, 15 St Boltolph Street, London EC3A 7QR) for a period of 14 days from the date hereof.
3. The Group’s turnover and profit before tax for each geographic area of operation is:

The loss in Europe is after central costs including research and development.

The net assets attributable to each geographic area are:

4. The earnings per share figure for 2004 has been calculated based on the profit on ordinary activities after taxation and the weighted average number of shares in issue of 14,646,580 (2003: 14,646,580 ).
5. In accordance with FRS14 issued in October 1998 the fully diluted earnings per share were 3.85 pence per share ( 2003: 2.74p). The diluted number of shares was 14,791,000 (2003: 14,724,000)
6. Previously, rental income was classified within other interest receivable and similar income. This year the directors believe that it is more accurate to reflect rental income as other operating income. The effect of this is to increase operating profit by £75,000 (2003: £46,000). There is no overall impact upon retained profits.
7. The AGM will be held at 10.30 am on 27 April 2005 at the registered office of the company (81 Bridge Road, Hampton Court, Surrey, KT8 9HH).