NEWPORT, United Kingdom, March 28, 2003 (PRIMEZONE) -- Surface Technology Systems plc (Other OTC:SUTYF) (LSE:SRTS) ("STS"), a world leader in the manufacture of wafer etch and deposition machines used in the production of semiconductor-related devices, announces its financial results for the year ended 31 December 2002.
"The business continues to head in the right direction for a return to profitability and growth..the progress being made is rapid, wide-ranging and will be enduring," said Nigel Randall, Chairman, STS.
Highlights
- 33.8 million Pounds of sales despite a deep and prolonged industry recession
- Losses reduced in the second half of the year through rapid cost reduction measures
- Borrowings 3 million Pounds below market expectations at year end
- Company-wide restructuring implemented for further efficiency savings and greater customer focus
- Largest-ever Micro Electro-Mechanical Systems ("MEMS") equipment order just received (see separate announcement today).
Introduction
2002 was a very challenging year for the Group. Following one and a half years of rapid growth, a severe downturn in our markets was signalled towards the end of 2001. That downturn accelerated and then persisted throughout 2002.
Summary
Sales revenue at 33.8 million Pounds was 40% lower than 2001. This decline is attributable to both volume of machines sold and sales price per machine. Whilst it is disappointing to report this result, the reduction in sales volume is mostly due to the extremely rapid decline in sales of machines for Photonics (opto-electronics) applications, a global industry downturn which has been well-publicised. It is, therefore, pleasing to report that the volume of machine sales for Micro Electro-Mechanical Systems ("MEMS"), which is the Group's core business sector, Compound Semiconductor applications and the emerging niche sector of 'chip-scale packaging' have all held steady despite the deep and prolonged cut-backs in customers' capital expenditure patterns. The average sales price per machine sold has, however, fallen across all market sectors.
Losses before exceptional items amounted to 4.3 million Pounds in 2002 compared with a profit of 5.3 million Pounds in 2001, a stark measure of the sales volume and price pressure faced by the Group. In addition, as a result of the industry downturn in the first half of the year, a reassessment of the value of component and work-in-progress inventory on hand was completed. As reported at the half year, an exceptional provision of 5.4 million Pounds was taken, predominately, against that inventory. Accordingly, the total pre-tax loss for the year, including the exceptional costs incurred in the first half of the year, amounts to 9.9 million Pounds. No dividend is proposed for 2002.
Outlook
Trading conditions in 2003 are expected to remain very difficult. Nevertheless, as stated in the Trading Update announcement on 6 February 2003, interest in STS' products is strong, as evidenced by the new order announced today, and with the substantial cost reduction measures already taken it is anticipated that 2003 will show an improvement on 2002. The Board continues to believe that the prolonged downturn in the Group's market sectors has only delayed the demand for STS machines. The need remains for new technology enabling products within the aerospace, defence, automotive, information technology, healthcare, leisure, public utilities and telecommunications markets, driven by both the competitive pressures to improve product offerings and profitability. Today, STS is one of the leading equipment suppliers in the MEMS, Photonics and Wireless Communications industries, with a significant number of machines installed around the world and is well placed to benefit from an economic upturn in any of the geographic and technology markets served.
Chairman's Statement
The Chairman's statement to be published in the forthcoming Annual Report is as follows:
Introduction
2002 was a very challenging year for the Group, as the financial results accompanying this statement for the year ended 31 December 2002 show. Following one and a half years of rapid growth, a severe downturn in our markets was signalled towards the end of 2001. That downturn accelerated and then persisted throughout 2002, which caused losses to arise and exceptional costs to be incurred in the first half of the year. The management team acted decisively to address these challenges and, as a result of stronger internal control of the business in the second half of 2002, I am pleased to report that both losses and borrowings were lower than earlier expectations.
Results
Sales revenue at 33.8 million Pounds was 40% lower than 2001. This decline is attributable to both volume of machines sold and sales price per machine. Whilst it is disappointing to report this result, the reduction in sales volume is mostly due to the extremely rapid decline in sales of machines for Photonics (opto-electronics) applications, a global industry downturn which has been well-publicised. It is, therefore, pleasing to report that the volume of machine sales for Micro Electro-Mechanical Systems ("MEMS"), which is the Group's core business sector, Compound Semiconductor applications and the emerging niche sector of 'chip-scale packaging' have all held despite deep and prolonged cut-backs in customers' capital expenditure patterns. The average sales price per machine sold has, however, fallen across all market sectors.
Losses before exceptional items amounted to 4.3 million Pounds in 2002 compared with a profit of 5.3 million Pounds in 2001, a stark measure of the sales volume and price pressure faced by the Group. In addition, as a result of the industry downturn in the first half of the year, a reassessment of the value of component and work-in-progress inventory on hand was completed. As reported at the half year, an exceptional provision of 5.4 million Pounds was taken, predominately, against that inventory. Accordingly, the total pre-tax loss for the year, including the exceptional costs incurred in the first half of the year, amounts to 9.9 million Pounds. No dividend is proposed for 2002.
The net cash outflow before financing was 4.1 million Pounds for 2002 compared with an outflow of 2.4 million Pounds in 2001, resulting in bank borrowing increasing to 17.9 million Pounds. This level of borrowing, together with the impact of the losses, resulted in the Group's debt to equity gearing increasing to 207% at the year-end, compared with 86% at the end of 2001.
Review of the year General trading conditions and, in particular, margin pressure have required the Group to take tough action to reduce operating costs. Where this action has included a reduction in the number of employees, it has clearly been regrettable, but necessary, both for the short-term recovery and the long-term strength of the business. The total number of employees is now 197, reduced from 297 at the start of 2002. In taking this action, the aim throughout has been to strike a balance between reducing operating costs and improving operating efficiency, whilst, at the same time, protecting the longer-term investments in research and new product development. Whilst operating costs remain under review, I believe the Group has made major progress towards this balance and with the internal restructuring of operations announced in the Trading Update on 6 February 2003, the Group is now better organised for a return to profitability.
The shortfall in gross margin and the need for inventory provisions were identified in the first half of the year, as reported in the Group's interim accounts. The management team has focussed attention on control of the margin and inventory management in the second half of the year. It is pleasing to report that the underlying gross margin has improved by some 10 percentage points in the second half against a background of continuing sales price pressure. In addition, close cash control resulted in borrowings at 31 December 2002 being approximately 3 million Pounds lower than earlier market expectations.
Investment in new products and research and development has continued. The new High Rate Machine, introduced in late 2001, has been successful and further product developments will be introduced during 2003. Competition in our markets has increased and a major element of STS's strategy is to continue the innovative advances in its products to provide the essential product differentiation and to win new business. Two-thirds of machines sold in 2002 were to new customers.
In March 2002, Andrew Chambers was appointed to the Board as Technology Director, having previously been responsible for the Engineering and Process functions in the Group and is successfully leading the Group's continuing business-critical research and product development programmes. In May 2002, Paul Webb, who is now Finance Director, was appointed and is making a significant contribution to the improvement in the internal financial disciplines required in these challenging times. Subsequent to the year-end, Andy McQuarrie, who is based in the USA and who has delivered significant growth from the North American market in recent years, has taken on the essential role of Business Development Director to spearhead the Group's efforts in generating new revenue streams. A search is underway for a Sales and Marketing Director to join the Board to complete the Executive Team. Under Ian Smith's leadership as Chief Executive, the entire Executive team has responded to the challenges presented in 2002 with speed, resolve and commitment. The business continues to be steered in the right direction for a return to profitability and growth. On behalf of the Board, I want to thank all of the STS team for their continuing enthusiasm and dedication during this period of unprecedented challenge.
I stated in my Chairman's Statement one year ago that STS operates in a world of constant and rapid change and the ability of the business to react quickly, re-organise and adapt to new environments is a key element of its long-term strength. One year on, the abilities of the business in these areas have been severely challenged, but I am pleased to report that the progress being made is rapid, robust, wide-ranging and will be enduring.
Outlook
Trading conditions in 2003 are expected to remain very difficult. Nevertheless, as stated in the Trading Update announcement on 6 February 2003, interest in STS' products is strong and with the substantial cost reduction measures already taken it is anticipated that 2003 will show an improvement on 2002. The Board continues to believe that the prolonged downturn in the Group's market sectors has only delayed the demand for STS machines. The need remains for new technology enabling products within the aerospace, defence, automotive, information technology, healthcare, leisure, public utilities and telecommunications markets, driven by both the competitive pressures to improve product offerings and profitability. Today, STS is one of the leading equipment suppliers in the MEMS, Photonics and Wireless Communications industries, with machines installed around the world and is well placed to benefit from economic upturn in any of the geographic and technology markets served.
Nigel Randall, Chairman
Operating and Financial Review
Extracts from the Operating and Financial Review to be published in the forthcoming Annual Reports are as follows:
Sales and Markets
The number of machines sold reduced by 19% in 2002 compared with the previous year. This reduction in volume was compounded by a 27% fall in the average selling price per machine sold. This fall is due partly to competitive activity and partly to a change in the mix of machine configuration. In connection with configuration, in 2002 the number of machines sold for mass production applications, as opposed to lower margin Research and Development ("R&D") applications, was 25% less than in 2001. In particular, this change reflects the fall in the number of customers needing equipment for Photonics, or opto-electronics, device manufacture.
- MEMS
The Micro Electro-Mechanical Systems ("MEMS"), industry continues to show signs of significant growth with more customers designing and manufacturing devices in both research and mass production volumes for a wide range of end-user applications. These applications span industry sectors such as Automotive, Information Technology, Telecommunications, Medical and Bio-medical, Environmental, Aeronautics, Space, Military, Domestic and Leisure.
The characteristics of "MEMS" devices, being highly specialised integrated circuits and micro-machines, mean that each device is high value, in contrast to products in the 'mainstream' semiconductor industry. The fundamentals of the "MEMS" industry, being highly fragmented due to the wide range of applications, mean that capital equipment supplied is complex and is configured to each individual customer's process requirements, again in contrast to products in the mainstream semiconductor industry. Therefore, each individual "MEMS" application is a 'niche' market in itself and there are relatively few opportunities for selling large quantities of identical machines. The market penetration of STS' Advanced Silicon Etch equipment, the world-class process engineering expertise at STS and the strategy of working with "R&D" customers during their transition into mass production, all place the Group in a prime position to win such repeat business as the "MEMS" industry grows and matures.
In 2002, the number of machines sold for "MEMS" applications was identical to 2001. Due to the decline of the Photonics sector, however, machines for "MEMS" applications accounted for 53% of total sales, compared with 43% in the previous year.
The joint marketing agreement with Xactix, Inc., who provide machines for MEMS etching using the gas, Xenon Difluoride, which was announced in July 2002, has progressed well. A product range incorporating STS and Xactix process capabilities has been defined and discussions continue in order to integrate more closely the technology and infrastructure of both companies.
- Photonics
The demand for telecoms operators to upgrade or build next generation networks, using optical components for high-speed communication, driven primarily by increased use of the internet and data transmission, is expected to provide strong growth in the Photonics sector in the future. The trend towards 'all-optical' networks has led to the development of key devices such as optical, or 'planar' waveguides, the commercial manufacture of which was made possible using the Group's etching and deposition products. As a result of enabling this technology, the Group secured a significant market share in the supply of equipment for the manufacture of these devices when this industry grew rapidly in 2000 and 2001.
The rapid expansion in industry capacity and over-supply of Photonics components led, however, to a major correction in the third quarter of 2001. Consequently, equipment sales to the Photonics industry in 2002 were significantly reduced, being 56% lower than 2001 and 63% lower than the year 2000. As a proportion of total sales, machines for Photonics applications accounted for 16% in 2002, compared with 29% in 2001.
The Group continues to supply equipment to those customers who are likely to benefit when this industry recovers and, therefore, this market position gives cause for optimism for a return to higher sales levels in the future.
- Wireless Communications
The Group sells equipment incorporating etch and deposition processes used in the production of Compound Semiconductor integrated circuits for LEDs and power amplifiers and transmit/receive components in mobile phone handsets. Compound Semiconductor devices play a crucial role in mobile communications in that they operate at low power consumption and with high functionality, which are key requisites for next generation handsets. Sales of machines for Compound Semiconductor applications accounted for 19% of total machine sales in 2002 compared with 18% in 2001.
- Advanced Chip-scale Packaging
Sales revenue in 2002 and the previous year has included machines sold for etch applications in 'chip-scale packaging'. This essentially enables device manufacturers to package each chip on a wafer scale before dicing the wafer, as opposed to packaging each chip after the wafer has been diced into individual components. The process has the potential to increase the overall application and exploitation of microelectronic systems via further miniaturisation. Revenues from this etch application are relatively low at present, accounting for 4% of total sales in 2002, compared with 3% in 2001, but are anticipated to be higher in the near future.
- Geographical and customer spread
The Group generated revenues in 18 countries in 2002 (14 in 2001), maintaining its global reach. Exports from the UK amounted to 93% of total machine sales. The analysis of global machine sales is as follows:
% of total
2002 2001
UK and Europe 23 28
USA 35 45
Japan 17 10
Rest of World 25 17
The Group sold a similar number of machines to new customers in 2002 as it did in 2001, but that total accounted for 66% of total machine sales in 2002 compared with 49% in 2001. This shows that there has been a lower level of repeat business in 2002, a further reflection of the reduction in sales of machines for volume production applications.
In 2002, 37% of machines sold were to universities and research institutions, with 63% sold to industrial companies, but overall 82% of all machines sold were for "R&D" applications. This gives an indication of the amount of "R&D" activity in industrial companies, the purpose of which is to develop devices for volume production in due course. The search for new MEMS applications and the education of industry to the potential of the technology continues.
STS' strong position in growing technology markets, its geographic reach, the customer spread and its product range, applicable to both "R&D" and production environments, all mean that the Group's revenue risks continue to be well spread and will help it to emerge successfully from currently depressed market conditions.
Research and Development
During 2002, 4.3 million Pounds was incurred in respect of "R&D" activity, the same level of expenditure as in 2001. All such expenditure is written off as it is incurred. Two of the Group's principal core competencies are the innovative development of process solutions for customers' device fabrication requirements and the development of new equipment. Even in the market conditions experienced throughout 2002, it is considered vital to maintain the level of competence in these two areas of development in order for the Group to benefit from any market upturn in the future. Specific new product development projects continued throughout 2002 and will be completed in the current year.
Financial Performance
The gross margin for 2002, which is stated after "R&D" costs, was 4.5% compared with 33.8% for 2001. During the first half of 2002, an exceptional charge of 5.2 million Pounds, relating principally to non-recurring, non-cash inventory provisions, was incurred. The gross margin for 2002, prior to making the exceptional charge was 19.8%.
The operating loss of 8.9 million Pounds resulted in a much lower cash outflow from operating activities of 2.5 million Pounds for the year as a result of the non-cash exceptional profit and loss charges and the reduction in working capital. Capital expenditure was 1.4 million Pounds for 2002 compared with 6.7 million Pounds the previous year, which included the factory extension project. Taxation refunded in 2002 amounted to 1.2 million Pounds compared to 1.9 million Pounds paid in the previous year. The net cash outflow before financing was 4.1 million for Pounds 2002 compared to 2.4 million Pounds for 2001. Current trading and outlook Trading conditions are expected to be very difficult in the first half of 2003, since forward order visibility is low at present, with firm orders representing approximately three months revenue. Some improvement is anticipated in the second half of the year. The focus for 2003 is to manage at this level of activity and, at the same time, shape and structure the business for a return to profitability.
Whilst the short term outlook is challenging, interest in STS' products remains strong, as evidenced by a lengthening list of enquiries and there are further signs that more customers, particularly in MEMS, are beginning to move from the research and development stage of device manufacture through to volume production. This confirms the Board's belief that the strategy adopted by the Group in serving "R&D" customers and working with them during their transition into production will prove to be effective when markets return to growth.
Longer term, the Group also needs to consider opportunities to benefit from the anticipated growth of the markets in which it operates. The strategic aim of the business is to consolidate its position in the R&D and production markets it currently serves, in particular, in the MEMS industry. To this end, the executive team continues to consider a range of options by which this may be achieved.
Summary
The technology markets in which the Group operates continue to have potential for significant long-term growth. The challenge is to ensure the business is strengthened in order to manage short-term fluctuations in demand patterns, to react to changes in the competitive landscape and to continue to provide innovative solutions to customers when their end-user markets develop. This challenge continues to be tackled robustly by a talented and dedicated team committed to return the business to profitable growth.
Ian Smith, Chief Executive
Statutory Accounts
The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2002 or 2001. The financial information for the year ended 31 December 2001 is derived from the statutory accounts for the year ended 31 December 2001, which have been delivered to the Registrar of Companies and on which the auditors reported. Their report was unqualified and did not contain a statement under section 237 (2) or (3) of the Companies Act 1985. The statutory accounts for the financial year 31 December 2002 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting.
The Directors approved this announcement on 27th March 2003. Further copies of this announcement are available from the Company's registered office at Imperial Park, Newport, NP10 8UJ.
Background on STS
STS' equipment is one of the enablers of change as new 21st century products are adopted. Its machines enable customers to manufacture micro-technology devices to carry out tasks previously considered not practical, such as miniature gyroscopes for stability control and accelerometers for air-bag triggers in cars, or tiny switches for optical fibre data transmission in the Internet, or power amplifiers microchips for mobile phones. Many of these devices are already part of our daily lives and will increasingly be so.
A full copy of this release, including the financial tables, can be found at the following:
http://reports.huginonline.com/897148/115295.pdf
Ian Smith - Chief Executive, STS plc, 01633 652400
Barrie Newton - Rowan Dartington & Co., Ltd, 0117 9330011
Ken Rees - Winningtons, 0117 3179477
STS Web site: www.stsystems.co.uk