RNS Number : 8568Y
Wolfson Microelectronics PLC
07 March 2012
7 March 2012
Wolfson Microelectronics plc
Annual Financial Report 2011 and Notice of Annual General Meeting
Following the release on 7 February 2012 of the Company's preliminary audited full year results announcement for the 52 week period ended 1 January 2012 (the "Preliminary Announcement"), the Company announces that it has published its Annual Report and Accounts 2011. Copies of the following documents have been posted to shareholders:
-- Annual Report and Accounts 2011;
-- the Notice of Annual General Meeting for 2012 and Form of Proxy; and
-- a letter to shareholders regarding electronic communications.
Copies of the Annual Report and Accounts 2011 and the Notice of Annual General Meeting ("AGM") for 2012 are available to access and download from the Company's website at: www.wolfsonmicro.com
Copies of: the Annual Report and Accounts 2011; the Notice of Annual General Meeting for 2012 and Form of Proxy for the 2012 AGM; and the letter to shareholders regarding electronic communications have all been submitted to the National Storage Mechanism and will shortly be available for inspection at www.Hemscott.com/nsm.do
The AGM will be held on 26 April 2012 at 10.00 a.m. at Westfield House, 26 Westfield Road, Edinburgh, EH11 2QB.
The Preliminary Announcement included a set of condensed consolidated financial statements and a fair review of the development and performance of the business and the position of the Company and the Group.
In accordance with Disclosure and Transparency Rule 6.3.5 (2) (b) additional information is set out in the appendices to this announcement. Appendix 1 includes a directors' responsibility statement, Appendix 2 contains information regarding the Company's principal risks and uncertainties and Appendix 3 contains the disclosures regarding related party transactions, all as extracted from the Annual Report and Accounts 2011. This announcement should be read in conjunction with, and is not a substitute for, reading the full Annual Report and Accounts 2011.
Jill Goldsmith 0131 272 7000
The following information is extracted from the Annual Report and Accounts 2011 and page and note references included in this information are to pages and notes in the Annual Report and Accounts 2011.
Appendix 1 : Statement of Directors' Responsibilities (page 60)
The Annual Report and Accounts 2011 contains the following statements regarding directors' responsibilities for the Annual Report and the financial statements.
Statement of directors' responsibilities in respect of the Annual Report and the financial statements
The directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare group and parent company financial statements for each financial year. Under that law they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent company financial statements, the directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
To the best of our knowledge:
* the financial statements, prepared in accordance with
the applicable set of accounting standards, give a
true and fair view of the assets, liabilities,
financial position and loss of the Company and the
undertakings included in the consolidation taken as a
* the management report, comprising the Chairman's
Statement, the Business Review and the Operating and
Financial Review together, include a fair review of
the development and performance of the business and
the position of the Company and the undertakings
included in the consolidation taken as a whole,
together with a description of the principal risks
and uncertainties that they face.
JM Hickey M Cubitt
Chief Executive Officer Chief Financial Officer
6 February 2012
Appendix 2 : Principal Risks and Uncertainties (pages 21 to 23)
Risks and Uncertainties
The constant review of risk and the risk profile of the business against the corresponding business opportunities are considered, within Wolfson, to be a fundamental responsibility of management. However, in addition and as a safeguard, the Company has put in place formal processes for the identification and, where possible, the management and/or mitigation of significant risks. In 2011, Wolfson conducted its formal risk management review processes in a manner similar to that adopted in 2010. Flowing from the annual strategic review, an updated risk register was generated by the senior management team, designed to align the strategy propositions with the corresponding risks; this reflected both a bottom up and top down analysis of opportunities and related risks. This updated risk register was reviewed at Audit Committee and at full Board level, and formally adopted.
The risk register is reviewed quarterly by the senior management team and pertinent issues arising are reported back to the Board and/or Audit Committee to ensure the directors are aware of any change in profile and other relevant matters. Details on the identification and management of risks are also included on pages 38 and 39 in the Corporate Governance Statement.
For 2012 the main priority for the business is the continued focus on the transformation programme, successful completion of which could/should completely change the scale of opportunity available to Wolfson. It is accepted that this strategy of itself has increased the overall risk and opportunity profile of the business for the reasons outlined in the Strategic Update section of the Business Review (on pages 5 to 11). The main factors which might damage achievement of the Company's ambition or its ability to optimise its opportunities may be summarised thus:
-- Failure to execute successfully any of the 3 core strands of the transformation strategy being:
a. The key development programmes of HD Audio Hubs and integrated MEMS microphones
b. Achieving the status of approved strategic partner and winning the high profile design slots with sufficient major customers (those producing smartphones and tablets in particular)
c. Managing the skills transition and being able to attract sufficient top calibre software engineers.
-- Major litigation, particularly claims of patent infringement, managing to derail any of the core developments or affecting customer confidence in Wolfson as a supplier.
-- Being outgunned by competitors either on development of leading technologies or in the strategic engagement with major customers.
-- Product quality issues leading to loss of reputation with customers and/or product recalls.
-- Supply chain capacity becoming a limiting factor; this could arise from natural disaster (e.g. Japan tsunami) or simply demand outstripping supply and Wolfson's subcontracted manufacturing capacity being squeezed resulting in higher prices (lower gross margin) or supply shortages.
The Full Complement of Risks
The complete list of possible risks can be categorised into 3 parts:
i. specific to Wolfson's strategy and positioning within its industry;
ii. generic to the industry in which the Company operates; and
iii. general risks with the potential for affecting virtually all companies in some way (e.g. bird flu pandemic).
The principal risks articulated above concentrate mainly on category i. What follows is the output from the Company's risk register concentrating more on categories ii. and, to a lesser extent, category iii.
New Product Specification and Introductions
Specifying and then designing the correct products is fundamental to the success of the Company. These are particularly important management considerations for 2012 and 2013. Customers tend to have set design windows that must be met for a product to be selected, and missing these windows through being late or not meeting the required specification can result in being excluded from an entire end consumer product cycle. The average design cycle for the Company's products can take 18 months or longer to complete and achieve volume production; therefore missing a cycle can take more than two years to recover. This long design cycle, coupled with limited customer visibility as to the commercial success of its own products before taking account of uncertainties over customers' future requirements and plans, makes forecasting product demand and the timing of that demand difficult. There are also inherent risks in lengthy design cycles including risk of future design loss to a competitor, risk of cancellation and limited uptake for new products.
Executing New Products on Schedule
The challenge to execute product development projects on time is more important than ever. Wolfson's Audio Hub products have significantly higher complexity (with combined analogue plus digital integrated circuits and related software) and this has therefore increased the Company's need to continuously improve its design process, tools and project management in order to complete critical new product developments on time.
Wolfson's business is technology-intensive and, by nature, fast-moving. Rapid progress in microelectronics continues unabated. By definition, Wolfson is thereby exposed as a matter of course to the threat of obsolescence, whether in the tools by which it designs products, the processes on which it builds products, the systems by which it tests products, or the end-devices into which it sells products. Wolfson invests heavily in research and development to keep pace, but this expenditure must be well-aimed and well-executed to benefit the Company fully and differentiate its solutions for customers. Failure in any of these respects could degrade significantly the Company's business, as well as technical, performance and prospects.
Increased Dependence on the Audio Hub Strategy
Wolfson sees the continued momentum behind Audio Hubs to be critical to its success going forward (as explained in the Strategic Update on pages 5 to 11). Continuation of the trend to dis-integrate audio and related functions from the main applications processor will be key to Wolfson's success.
Winning the Right Design-ins at Customers
The Company's sales success is dependent on first winning design-ins within customers' own products. The sales team must identify opportunities for design-ins early, convince the customer that the Wolfson product is better than the competition and support the customer as technical issues are resolved during the run up to the customer's mass production. The time from design-in to volume production of the customer's product, and therefore of sales revenue for Wolfson, can vary from a few months to over a year. Thereafter there is an inevitable reliance on the commercial success of those (customer) products into which Wolfson has been designed.
Dependence on the Growth of the Consumer Electronics Market
The Company's future success relies on the growth of the digital consumer electronics market and the successful adoption by customers of its integrated circuits in their products. The future size of the digital audio, portable devices, digital imaging markets, and other potential markets, is uncertain and depends on a number of factors, all of which are beyond the Company's control. The failure of these markets to develop as generally expected would, in all likelihood, have a material adverse effect on the business, financial condition and results of the Company's operations.
In addition, the Company's future success is also dependent on the success of its customers in their related markets. Reduced uptake by consumers of products from the Company's end customers could also have a material adverse effect on the Company's business, financial condition and operating results.
The Company supplies products to a range of companies. The Company seeks continually to expand its customer base and customer mix. However, one or a small number of customers may become responsible for a significant proportion of the Company's sales. Rapid variation of such customers' demand could then significantly affect the Company's revenues. The largest customer in 2011 accounted for 16% of revenue (2010: 20%), with the top 10 customers accounting for 65% of revenue in 2011 (2010: 59%) and the top 20 customers accounting for 81% of revenue in 2011 (2010: 75%).
Moreover, the reliance on a relatively small number of large global customers means that the Company's reputation for meeting development obligations, producing quality products and achieving delivery timescales are crucial. Significant failings in any of these areas could cause serious and long lasting damage to Wolfson's reputation and relationships.
The markets in which the Company operates are very competitive and are characterised by rapid technological change and evolving standards. Many of the Company's competitors are larger in size, have greater financial, marketing and/or technical resources, a longer trading history and larger installed customer bases. As a result, they may devote greater resources to the development, promotion and sale of their products than the Company can. These factors may prevent the Company from competing successfully against current or future competitors.
Fabless Business Model
The Company does not have its own manufacturing facilities. As a result, the Company's business model is less capital intensive. The Company uses GLOBALFOUNDRIES (formerly named Chartered Semiconductor), MagnaChip Semiconductor, CSMC, TSMC and X-FAB for the manufacture of most of its silicon wafers and Unisem, Carsem, ASE, OSE and KYEC for major test and assembly services. The Company is reliant on these independent suppliers to provide the required capacity to manufacture, assemble and test its products and to provide high quality products on time. The Company maintains an internal manufacturing support group which directs product supply, helps ensure a high level of quality and reliability and works with the wafer foundries and production assemblers to resolve issues. To mitigate the risk of loss of supply from a manufacturer ceasing business, or a temporary disruption affecting supplies, a number of contingency plans have been put in place, including carrying additional buffer inventories and second-sourcing higher volume parts. Regular senior management meetings are also held with suppliers to ensure the Company is kept up-to-date with current trading and liquidity issues within the supply chain. To mitigate this risk additional capacity has been added through the qualification of new suppliers.
Infringement of Third Party Intellectual Property Rights
The semiconductor industry is characterised by cross-licensing and frequent litigation regarding patent and other intellectual property rights. Given the degree to which success in the Audio Hubs and MEMS microphone markets could displace incumbent vendors, the potential for disruptive litigation is increased. Wolfson believes its innovative intellectual property, much of which is subject to patent applications, is well protected but the risk of attack still remains. The Company has provided certain indemnification protections to some of its customers in respect of any alleged infringement of third party intellectual property rights by its products. Claims against the Company could adversely affect its ability to market and sell its products and seriously harm its operating results. In addition, the defence of such claims could result in significant costs and divert the attention of the Company's executives and technical personnel from their day-to-day work.
The Company relies on the ability to hire and retain appropriately qualified staff who provide the expertise and experience critical to its business and the implementation of its strategy. There is intense competition for qualified personnel in the semiconductor industry and, from time to time, the Company experiences difficulty in locating candidates in the relevant country with appropriate qualifications and experience. The Company enters into employment contracts with its personnel but there is no assurance that it will be able to continue to hire and retain appropriately qualified personnel. The loss of the service of, or failure to recruit in a timely manner, key technical and management personnel (or teams) would adversely impact the Company's product development programmes and could have a material adverse effect on its performance and future growth.
Catastrophic Failure of End-user Device in the Field
The Company supplies components primarily into consumer electronic products. Many of the major consumer brands require indemnities should a customer product recall be required as a result of significant field failures caused by one of the Company's components. The Company looks to avoid such indemnities and, where given, to limit the scope and quantum of the indemnity; however, this is often not possible and indeed some indemnities are unlimited in quantum. To reduce this risk there are rigorous procedures and controls on the design, manufacture, testing and quality processes of the Company, so as to avoid any components being supplied that could result in such field failures. The Company also has significant, but not unlimited, product liability insurance in place to cover such an event.
The typical cycle time to manufacture a part from start to finish can range from twelve weeks to sixteen weeks depending on industry lead times. Customers typically place orders between three and eight weeks before required ship date, therefore inventory is built based on customer forecasts plus agreed buffer levels. To manage the potential risk of holding excess inventory, it is often held at wafer level, which accounts for half of the product manufacturing cycle time, with wafers often being capable of use in multiple products, thereby increasing flexibility and reducing risk of obsolescence. Very few parts are customised for specific customers, but when this is the case, such parts are built to order where possible. Detailed sales forecasts are reviewed monthly and manufacturing of inventories are managed against these forecasts, with large volume parts reviewed more regularly. When a part is identified as nearing end of life or a newer revision of the part is launched, or customers' forecasts decline, increased focus is given to manage the required reduction in inventory levels.
The markets in which the Company operates are very volatile and can quickly turn both favourably and unfavourably, based on end consumer confidence, success of a given customer's product and the general economic climate. With the underlying operational gearing in the business (refer to the Business Description section within the Business Review on page 15), a downturn in revenues quickly impacts the profitability and cash generation of the Company. It is therefore usual practice within the fabless industry that companies carry no debt (due to potential covenant issues) and a healthy cash surplus position to provide cover against sharp downturns, thereby giving assurance to both customers and suppliers.
The Company expects to review further potential (technology based) acquisition targets as part of its strategy. The internal investment case for such acquisitions may not materialise as planned. In addition, the integration of acquired companies involves additional risk including diversion of management time, potential failure to realise the synergy benefits anticipated from the acquisition, the cultural risk associated with integrating different companies in various countries, and risks associated with unexpected liabilities or events arising post acquisition.
Foreign currency exposure
Refer to Treasury and Foreign Exchange section on page 20.
This Annual Report contains certain forward-looking statements that are Wolfson's expectations and beliefs about our future business. These statements are made by the Directors in good faith, based on information available to them at the time of the approval of the report. Undue reliance should not be placed on such statements, which are based on Wolfson's current plans, estimates, projections and assumptions. By their nature, forward-looking statements involve known and unknown risk and uncertainty because they relate to events and depend on circumstances which may occur in the future and which in some cases are beyond Wolfson's control. Actual results may differ from those expressed in such statements, depending on a variety of factors. These factors include, but are not limited to: consumer and market acceptance of the Company's products and the products that use the Company's products; decreases in the demand for the Company's products; excess inventory levels at the Company's customers; decline in average selling prices of the Company's products; cancellation of existing orders or the failure to secure new orders; the Company's failure to introduce new products and to implement new technologies on a timely basis; the Company's failure to anticipate changing customer product requirements; fluctuations in manufacturing and assembly and test yields; the Company's failure to deliver products to its customers on a timely basis; disruption in the supply of wafers or assembly or testing services; the timing of significant orders; increased expenses associated with new product introductions, masks, or process changes; the commencement of, or developments with respect to, any future litigation; the cyclicality of the semiconductor industry; and overall economic conditions.
Appendix 3 : Related Party Transactions
('Related parties': Note 26 to the financial statements on page 109)
Identity of related parties
The Company has a related party relationship with its subsidiaries (see notes 13 and 27), with the employee share trusts (see notes 19 and 20) and with its directors.
Transactions with key management personnel
Key management personnel compensation
In addition to their salaries, the Group and Company also provide non-cash benefits to executive directors and contribute to a defined contribution pension plan on their behalf. The executive directors also participate in the Group's share option schemes and other long term incentive plans (see note 20). Details of the directors' remuneration are contained in the Directors' Remuneration Report on pages 44 to 59.
Key management personnel compensation, in respect of the executive and non-executive directors of the Company, comprised:
52 weeks 52 weeks
ended 1 January ended 2 January
benefits (page 50) 2,044 1,567
Post employment benefits
(page 53) 52 42
(fair value) 420 507
Key management personnel and director transactions
Directors of the Company and their immediate relatives control 3.41% of the voting ordinary shares of the Company. Information regarding the directors' shareholdings and share options is contained in the Directors' Remuneration Report on pages 54 and 55.
G Collinson was appointed as a non-executive director of the Company on 1 September 2008. From April 2005 to July 2007, G Collinson served as a non-executive director of Sonaptic Limited and he was also a shareholder of Sonaptic Limited. G Collinson held 6,667 'A' ordinary shares in Sonaptic Limited. Wolfson Microelectronics plc acquired the entire issued share capital of Sonaptic Limited on 23 July 2007. G Collinson received initial consideration of $279,208 (net of professional fees and charges) at the time of acquisition, from Wolfson Microelectronics plc and, following the release of the amount of initial consideration held in escrow on 29 January 2009, a further $22,240 (net of professional fees and charges). The terms of the acquisition were such that contingent consideration was payable to the shareholders of Sonaptic Limited. Therefore, as part of the consideration for his shares held in Sonaptic Limited as at the date of acquisition, G Collinson is entitled to receive, subject to the achievement of specific business milestones, a proportion of the contingent consideration from Wolfson Microelectronics plc in accordance with the terms of the share purchase agreement entered into on 23 July 2007 between the Company and the selling shareholders of Sonaptic Limited. In the 52 week period ended 1 January 2012, $7,026 of contingent consideration was paid to G Collinson by the Company. No amounts of contingent consideration were paid to G Collinson by the Company in the 52 week period ended 2 January 2011. G Collinson did not and will not participate in any discussion nor final decisions by the Board regarding the achievement of milestones and payment of contingent consideration.
Other related party transactions
During the 52 week period ended 1 January 2012, subsidiaries earned commission income from the Company of $12.2 million (2010: $12.2 million) and the Company provided management services to the subsidiaries totalling $2.7 million (2010: $2.9 million). The Company provided a loan of $3.02 million to Wolfson Microelectronics Australia Holding Pty Ltd during the 52 week period ended 1 January 2012 and none of that loan was repaid during the period. As explained in note 10, Wolfson Dynamic Hearing Pty Ltd joined the Group following its acquisition on 30 September 2011. In the period from 1 October 2011 to 1 January 2012, the Company continued to license technology from Dynamic Hearing and incurred costs, primarily relating to that licenceof $0.4 million during the period from 1 October 2011. As at 1 January 2012 the Company owed the subsidiaries $5,706,000 (2010: $4,066,000) and $3,471,000 was owed by the subsidiaries (2010: $3,611,000 owed by the subsidiaries). No dividends were received from the subsidiaries in 2011 or in 2010.
There are two employee share trusts: The Wolfson Microelectronics No.1 Employees' Share Trust ('the No.1 Trust') and The Wolfson Microelectronics No. 2 Employees' Share Trust. These trusts received loans from the Company totalling $5,389,000 in the 52 week period ended 1 January 2012 (52 week period ended 2 January 2011: $1,692,000), the trusts repaid $nil of these loans (2010: $nil) and as at 1 January 2012, $38,846,000 of these loans were outstanding (as at 2 January 2011: $33,457,000). During the 52 week period ended 1 January 2012 the No.1 Trust purchased 1,422,545 (2010: 585,663) of the Company's ordinary shares, for a total consideration of $5,390,000 (2010:$1,730,000), for the purposes of fulfilling awards under The Wolfson Microelectronics 2006 Performance Share Plan, The Wolfson Microelectronics 2009 Staff Share Award Plan and to satisfy certain share option awards (note 20). There were 4,359,070 of the Company's ordinary shares held by the Company's employee share trusts as at 1 January 2012 (as at 2 January 2011: 4,945,149 ordinary shares).
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