Flomerics Group PLC - Final Results

Flomerics Group PLC, supplier of virtual prototyping software to the electronics industries, announces its results for the year ended 31 December 2005.

Key Points

• Turnover up 12% at £11.4 million (2004 : £10.2 million)
  

• Profit before tax and amortisation of goodwill increased by 49% to £1.1 million (2004: £753,000).
  

• Basic Earnings per Share up 62% at 6.28p (2004 : 3.88p)
  

• Strong increased cash position of £4.1 million (2004 : £3.3 million)
  

• Dividend increased by 18% to 1.3p per share (2004 : 1.1p)
  

• Successful acquisition in April 2005 of Microelectronics Research and Development Ltd (MicReD) which has contributed £162,000 to profit before tax.
  

• The turnover from the electromagnetic product lines (FLO/EMC and Micro-Stripes) increased by 13% and accounts for 15% of total revenues.

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

“The Company has a clear strategy for both organic and non-organic growth and a management team committed to delivering it. With a more sales led approach, world leading technologies, a team of experts across various different fields and a good financial base, the Directors believe the prospects for the Company are excellent.”

Enquiries:

CHAIRMAN’S STATEMENT

Results

Flomerics has delivered an excellent set of results for the year ended 31 December 2005. Turnover has increased by 12% to £11.4 million (2004: £10.2 million) and profit before tax and amortisation of goodwill has been increased by 49% to £1.1 million (2004: £753,000). Earnings per share has increased by 62% to 6.3p. The Group’s cash balances have increased to £4.1 million (2004: £3.3 million). The Board is recommending an 18% increase in the dividend to 1.3 p per share.

Organic Development

Flomerics has maintained its position as the global market leader in thermal analysis for electronics with its flagship product, FLOTHERM. The Company has recently been tackling thermal issues earlier in the design cycle, in particular with its FLO/PCB product released in 2004, and this has strengthened the market position of FLOTHERM itself. Revenue from the thermal product lines increased by 6% relative to 2004. Revenues from the other long-established business line in building services, with the product FLOVENT, grew by 3%.  The Company maintains a very significant commitment to R&D on these and associated products, which are expected to continue providing a strong foundation for the development of business in complementary areas for many years to come.

For some years we have been investing in products for electromagnetic analysis of electronics, initially with our acquisition of Micro-Stripes and then with the development of FLO/EMC. It has been very encouraging to see revenue from the electromagnetic product lines increase by 13% as they are increasingly recognised as providing valuable tools, e.g. for addressing large-scale electromagnetic interference problems in the defence sector. We continue to invest in expanding our resources for sales and support of these products around the world.

 Turnover in each of our regions of operation (US, Europe and Asia Pacific) excluding MicReD has grown at the same rate and I am particularly pleased that there has been an increase in contribution from each of the Company’s major lines of business. I am also pleased to see increasing opportunities for us to sell a suite of tools to the same customer, as was done with the significant order of over €300,000 from Galileo Avionica in 2005.

Acquisitions

During the year we were pleased to announce the acquisition of a Hungarian company, Microelectronics Research and Development Limited (MicReD). Their principal product is the “T3Ster” measuring device, which is used for thermal characterisation of electronic chip packages. It has other applications, for example in measuring the efficiency of Thermal Interface Materials, which have barely been exploited yet. Since the acquisition, MicReD have produced another tool, the “Teraled”, for measuring the thermal behaviour of LEDs. The first Teraled sale was made just before the end of 2005. Both of these products are world-leading technologies, which have a great market potential. The Company also has some promising software products that could complement the rest of our portfolio. In the period since the acquisition MicReD made a profit before tax of £162,000.

This is the first acquisition that the Company has made since we embarked on our growth strategy in 2004. Flomerics has a very good world-wide infrastructure of offices that is able to support more business through the sale of complementary technologies. Acquisitions are a key part of the Company’s strategy and we believe that they are vital component of increasing shareholder value.

Personnel

Last year I reported that I expected Gary Carter to take over as CEO from David Tatchell by mid-2006. It is some measure of how comfortable David felt working with Gary that we were able to appoint Gary as CEO in September 2005. I am personally very grateful to David for the magnanimous way that he has enabled this to happen. It has been a pleasure to see him contributing in a very significant way to the Company’s future in his current position as Chief Technology Officer.

The management team has been further strengthened in the year by the appointment of Andy Farrington as the President of our US subsidiary, Flomerics Inc.

I would like to thank Gary, his management team and all Flomerics employees for the dedication and hard work that has delivered these results.

Outlook

The Company is now far less dependent on it flagship product, FLOTHERM, which accounted for 70% of revenue in 2005 (2004: 75%). It is becoming a more rounded provider of solutions to engineers which, following the acquisition of MicReD, are not  limited to software.  Consequently the Company is less exposed to the fortunes of one particular sector and has several opportunities for growth.

The Company has a clear strategy for both organic and non-organic growth and a management team committed to delivering it. With a more sales led approach, world leading technologies, a team of experts across various different fields and a good financial base, the Directors believe the prospects for the Company are excellent.

David Mann
Chairman
3 March 2006

CHIEF EXECUTIVE’S REVIEW

I have just completed my first year with Flomerics having joined as Chief Operating Officer in January 2005 and moved into the post of Chief Executive Officer in September.  In this time I have been encouraged by many of the things I have seen but none more so than by the on-going commitment to demonstrate leadership in the industries we serve and to manage the change that is required to maintain that position.

With the revenue and profit having returned to growth in 2004, the challenge for 2005 was to build on this and demonstrate that Flomerics continues to be the major force in the thermal simulation markets that we have dominated for so long. At the same time we planned to accelerate our growth in the complementary electromagnetic simulation market as we seek to diversify our product range.  I am pleased to be able to report that we have succeeded in both of these objectives.

2005 Achievements

As indicated above I am delighted to be able to report on the continued improving trends in the growth of both the thermal (revenue up 6%) and electromagnetic (revenue up 13%) lines of business. A significant area of growth in 2005 was in the requirement for simulation of electromagnetic interference (EMI), a trend that looks like continuing for some time. I would also like to mention the contribution from FLOVENT which performed particularly well in Europe and remains at 9% of total revenues.

In any company, the financial health of your biggest clients is a good barometer of how the market is performing. I am pleased to report that our largest customers reported good results in 2005 and that we experienced strong growth in revenue from our two biggest, Intel and Siemens.

We were delighted in April 2005 to be able to complete the acquisition of the Hungarian based MicReD.  Formed in 1997 as a spin-off from Budapest University of Technology and Economics (BUTE), MicReD’s main product is the “T3Ster” (pronounced “Trister”), which provides fast, repeatable and accurate thermal characterisation of electronic chip packages. Organisations already using the T3Ster include IBM, Infineon, Intel, Philips and ST Microelectronics – all of which are also users of our FLOTHERM thermal analysis software. We have an exciting opportunity to build on MicReD’s success in Europe and Asia-Pacific by starting to exploit the opportunities for sales of the T3Ster in North America. This acquisition therefore has strong synergy with Flomerics’ core business, and represents a significant step for Flomerics towards providing a complete thermal-design solution for its customers. 

Partnerships

As we increase our focus on the design and simulation process rather than just on point solutions, we have seen the need to develop relationships with other companies in our industry.  Most recently, in partnership with Cadence and a joint customer, CISCO, we were able to develop and launch a new product, ‘FLO/PCB for Allegro’ which provides a link to Cadence® Allegro® PCB Editor software. Designers can simply call up a menu item on the Cadence software and, with a few mouse clicks, generate a thermal model of their design. This enables them to quickly analyse the design from a thermal standpoint and identify problems at a stage in the design process when they can be quickly and inexpensively corrected.

Another partnership announced in 2005 is with SimLab GmbH where together we have created a software interface linking board-level and system-level electromagnetic compatibility (EMC) analysis for the first time.

Similarly, with Applied Wave Research Inc. (AWR®), we have announced a partnership that will enable Microwave/RF engineers analyzing circuit layouts using AWR’s Microwave Office® software to study the electromagnetic performance of key components in 3D using the MicroStripes software from Flomerics.

Of course, the most important partnerships of all are with our customers.  When done well, this benefits both Flomerics and the customer.  Galileo Avionica is a great example of this.  Earlier in 2005, they selected FLOTHERM and FLO/PCB as their standard thermal modelling software across their design centres and business units. After extensive evaluation of several options, they concluded that these thermal simulation software tools will enable them to save time in modelling while integrating the design process to a higher degree than with other tools. This order for over €300,000 was a great example of our Integrated Analysis Environment where we are providing multiple tools to solve customer problems across a range of customer applications.

Industry Leadership

It has long been the case at Flomerics that individual contributions from our employees have been critical to the success and reputation of the company.  They are the most important factor in meeting the needs our customers and shareholders. I would like to thank all Flomerics staff for an excellent performance throughout 2005.

Since the origins of the company, Flomerics has believed strongly in being actively involved in research.  Whilst this helps us keep our products current and in line with the changing demands of the industry, it also illustrates our commitment to the development of future technologies on which our own success depends.  This provides a level of visibility to our customers that reinforces our position as the market leader. We continued many joint research projects with collaborators in 2005 including world-leading universities and some of our largest customers.  I would like to highlight two recent examples of this.

In addition to great technology, MicReD brings to Flomerics world-leading experts in the field of microelectronics. In December, we were proud to announce that Professor Marta Rencz (MicReD CEO and head of department of electron devices at the Technical University of Budapest) was elected to the Board of Management of an EU funded project, ‘Design for Micro and Nano Manufacture’ as manager of the Modelling and Simulation work package. This project has been set up to ensure that problems affecting the manufacture and reliability of products based on micro nano technologies can be addressed before prototype and pre-production.

SEMI-THERM is the premier forum for the exchange of information between industrial and academic communities on topics related to semiconductor thermal measurement, modelling and management. In 2005, we were delighted that the General Chair of SEMI-THERM was held by John Parry, head of research at Flomerics.

People

In addition to the change to my position, 2005 saw a number of other changes in terms of new people coming into Flomerics.  As already mentioned, we were delighted to welcome our new colleagues from MicReD.    We were also pleased to introduce a new Regional Director for our North American operations.  Andy Farrington joined Flomerics in the summer bringing with him strong sales management experience.

With my move into the Chief Executive role, the former CEO, David Tatchell has moved into the role of Chief Technology Office.  Whilst I continue to draw upon the many years of experience that David has in this industry, we have both welcomed this change and the new opportunities it presents for David to focus on a key area of managing the company.

Industries, Products and Users

The range of industries in which Flomerics’ products are used continues to be diverse. The use of electronics in a fast growing range of applications continues.  For example, in 2003, 25% of the manufacturing cost of an average car was related to electronics.  By 2010 this will rise to 40%¹.  What we take for granted as the latest electronic wizardry in our car represents a significant design challenge for the thermal and EMC engineering community. Flomerics continues to stay very close to these trends, adapting our products and sales and marketing strategies in order to best meet our customers needs whilst maximising our opportunity to drive revenues.

A great example of this is the recently announced development from MicReD of the ‘Teraled’, a device designed for the thermal characterisation of power LED’s which are increasingly being used to replace conventional lighting units in automotive applications.

As the distribution by industry of our typical user shifts then so do the profiles of the users themselves.  Traditional barriers between thermal engineers, EMC engineers and designers for example are changing.  The skills and needs of the users are also changing and so we continue to develop and evolve products to meet those needs.  There is no better example of this than ‘FLO/PCB for Allegro’ where we have targeted a product at a very specific user community.  The simulation of EMC is another great example where we have seen a market need in advance and developed a product to allow our customers to design around these problems.

The Future

We enter 2006 in a strong position.  We have both new and also established market leading products. Whilst continuing to focus on the requirements of our customers we will continue to look for new opportunities for investment, from research and development, to sales, engineering and marketing. Key areas of investment in 2006 include a MicReD sales and engineering team in the US and the expansion of our already successful European FLOVENT sales team. We are committed to hiring good people and to grow and adapt our global coverage to meet the needs of an ever changing world.

¹Source: Centre for Automotive Research, Ann Arbor, MI

Gary Carter
Chief Executive
3 March 2006

OPERATING AND FINANCIAL REVIEW

Group Financial Performance

Turnover for the year was up by 11.6 % at £11.4 million. The turnover figure includes the contribution of MicReD, which was acquired part way through the year. On a like-for-like basis turnover was up by 7.3% (6.7% at constant exchange rates).

Profit before tax and amortisation of goodwill was up by 49% at £1.1 million. This includes a contribution from MicReD of £162,000. Excluding the contribution from MicReD, the increase is 28%. The profit margin (before goodwill amortisation) has  improved from 7.4% to 9.8%.

Profit before tax after amortisation of goodwill is up by 44% at £966,000. The goodwill figure of £158,000 includes an amount of £76,000 attributable to the acquisition of MicRed, which is a pro-rated charge as the company was acquired at the end of April 2005.

The Group headline tax rate is only 3.8% this year. This is low partly because of the Research and Development tax credit, which is available in the UK, but has been impacted this year particularly by an expected one-off repayment in the United States of tax that has been over paid in previous years. The effect of this is £80,000.

The result is an increase in the basic earnings per share of 62%. Without the one-off tax benefit from the United States the increase would have been 52%.

Revenues

Each of the operating regions excluding MicReD enjoyed revenue growth at the same level.  The revenue split for 2005 including the contribution from MicReD is:

USA: 40%

Europe: 39%

Asia Pacific: 21%

The split of revenue by business line demonstrates our continued progress in diversifying our product base. The primary part of the business, which is analysis for cooling of electronics and comprises the products FLOTHERM and FLO/PCB (released in 2004), saw an increase in revenues of about 6%. This part of the business now accounts for 72% of total revenue (2004: 76%).

The electromagnetic product lines (FLO/EMC and Micro-Stripes) enjoyed an increase in revenues of 13% and account for 15% of total revenues.

Revenue from FLOVENT increased by 3% and accounts for 9% of total revenue.

The improvement in the market and the traction of the newer products is illustrated by the sales generated in 2005 with two of our largest customers – Intel and Siemens. Intel increased the number of FLOTHERM licences by 33% and also invested in FLO/EMC and FLO/PCB. Total revenue from this account was up by 38% compared to the previous year. Total revenue from Siemens was up by 18% and also includes an investment in FLO/EMC.

Most of the Group’s revenue is from software licences, which in the year accounted for 73% of total revenue, with the remaining 27% from maintenance (13%), services (10%), and hardware (4%).

Most licence revenue is from annual licences. However, the Group also sells perpetual licences and multi-year (generally 3 year) licences. Multi-year and perpetual licences accounted for 36% of total licence revenues, slightly lower than 2004, when the comparable figure was 38%.

The Group has a high level of recurring revenues in the form of annual maintenance on perpetual licences and annual (or multi-year) renewals. In 2005 this represented 53% of total revenue. In 2004 this was 56%. The decrease is explained by the contribution from MicReD, which is not recurring revenue.

Costs

Cost of sales, which includes royalties paid to third party licensors was £291,000 or 2.5% of revenues. This includes the cost of sales for MicReD (manufacturing costs of hardware), which was £129,000. Without this cost of sales was thus £162,000, down a little from last year - £201,000.

Research and development costs were down marginally (2.5%) in absolute terms at £2.2 million. This includes a small amount from MicReD. As a percentage of total revenue research and development costs were 19.4 % compared to 22.2% in 2004. We had indicated in the past our intention to bring research and development down as a percentage of revenue and this has been achieved partly through the off-shore development operation that we have in India.

Staff related costs, the Group’s biggest expense increased by 5.0% compared to 2004 but as a percent of revenue came down from 57.9% to 54.5%. This is despite an increase in average staff numbers of 16% from 117 to 136.

Cashflow and Financing

Cash generated from operating activities was £1.9 million, compared to £1.1 million in 2004.

Major non-operating cashflows included capital expenditure of £380,000 and net cash spent on the acquisition of MicRed of £405,000, dividends of £161,000 and tax paid of £126,000. The net increase in cash was £767,000 to £4.1 million.

The Group has borrowings of £443,000, being the mortgage on a freehold property that is being repaid over ten years. With our cash balance of £4.1 million, net funds are thus £3.6 million.

Trade debtors at the end of 2005 were £3.4 million. Debtor days at 31 December were 76 (2004:72.)

Acquisition

On April 28 Group acquired the Hungarian Company Microelectronics Research and Development (“MicReD”). Details of the acquisition are given in note 8. The cost of the acquisition in the year was £695,000. This is comprised of:

For the purposes of the goodwill calculation it has been assumed that the total consideration will be £1.2 million, however the maximum consideration under the terms of the agreement is £1.4 million.

For the period since the acquisition MicReD contributed £434,000 of sales and a profit before tax of £162,000 – a margin of 37%.

Dividend

The Board is recommending a dividend of 1.3p per share (2004: 1.1p). Subject to approval from shareholders, the dividend will be paid on 5 May 2006 to shareholders on the register at the close of business on 7 April 2006. The cash effect of this is £193,000.

Accounting Standards

As reported last year the Group will be adopting International Financial Reporting Standards (IFRS) with effect from 1 January 2007. When the 2007 results are reported the 2006 results will be restated under IFRS. The first statements to be published under IFRS will be the interim accounts for the six months to 30 June 2007.

We have been working with our auditors to assess the impact of IFRS on our accounts. We have not quantified the impact but we expect the biggest area to be effected will be Research and Development expenditure where it is likely that some capitalisation of costs will be required. In addition IFRS requires that goodwill is not amortised but is subject to impairment.

From 1 January 2006, in accordance with FRS 20 the Group will account for the cost of share options granted in the profit and loss account and we will need to restate the 2005 accounts for this charge.

Chris Ogle
Finance Director
3 March 2006

FLOMERICS GROUP PLC

CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2005

* As restated (see Note 6)

FLOMERICS GROUP PLC

CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2005

* As restated (see Note 6)

FLOMERICS GROUP PLC

SUMMARY CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2005

* As restated (see Note 6)

Notes:

1.       The Group recognised unrealised gains on translation of foreign currency net investments of £124,000 (2004: loss £105,000) 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 2005 and 2004 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 2004 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 2005 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, Oriel Securities Limited. (125 Wood Street, London, EC2V 7AN) 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 2005 has been calculated based on the profit on ordinary activities after taxation and the weighted average number of shares in issue of 14,782,635 (2004: 14,646,580 ).

5.       In accordance with FRS14 issued in October 1998 the fully diluted earnings per share were 6.01 pence per share (2004: 3.85p). The diluted number of shares was 15,439,000 (2004: 14,791,000)

6.       In order to conform with the requirements of FRS 21 ‘Events after the Balance Sheet Date’, dividends have been restated and are recorded in the profit and loss in the period that they have been declared. The effect of this change in accounting policy on the comparative is that net assets have increased by £161,000 as at 31 December 2004, and reported dividends have decreased by £15,000 in the year ended 31 December 2004.

7.      The AGM will be held at 10.30 am on 25 April 2006 at the registered office of the company (81 Bridge Road, Hampton Court, Surrey, KT8 9HH).

8.      On 28 April 2005, the Group acquired the entire share capital of Microelectronics Research and Development Limited (“MicReD”) for a maximum total consideration (before expenses) of approximately €2.1 million (approximately £1.4 million). The maximum consideration is only payable on an over-target performance. For an “on target” performance the total consideration will be approximately £1.2 million.  This figure has been assumed in the provisional calculation of the goodwill shown below: