The directors present their annual report and audited consolidated financial statements for the year ended 31 December 2010.
Description of operations, principal activities and review of business
The principal operations and activities of the Group and its subsidiaries are the licensing, marketing, research and development of RISC-based microprocessors, fabric IP, video processors, physical IP and associated systems IP, software and tools. The nature of the global semiconductor industry is such that most of its business is conducted overseas and, to serve its customers better, the Group has sales offices around the world. These include six offices in the US and offices in Shanghai, Shenzhen and Beijing, PR China; Shin-Yokohama, Japan; Seoul, South Korea; Taipei, Taiwan; Kfar Saba, Israel; Paris, France; Munich, Germany and Bangalore, India. Design offices are based in Cambridge, Maidenhead, Sheffield and Blackburn, UK; Sophia Antipolis and Grenoble, France; Grasbrunn, Germany; Trondheim, Norway; Sentjernej, Slovenia; Lund, Sweden; Austin, Texas, Olympia, Washington and San Jose, California in the US and Bangalore, India. More information about the business, its operations and key performance indicators are set out in the overview and business review on pages 1 to 29, the financial review incorporating a section on principal risks and uncertainties on pages 30 to 37, the Chairman’s statement on corporate governance and corporate responsibility on pages 38 to 40 and the corporate responsibility report on pages 52 to 54. The Group’s statement on corporate governance can be found in the corporate governance report on pages 44 to 51 of these financial statements. The principal risks and uncertainties section of the financial review and the corporate governance report form part of this directors’ report and are incorporated into it by cross reference.
Normalised net cash generation £m
The Group’s stated objective is to establish a global standard for its RISC architecture, physical IP and other products in the embedded microprocessor and semiconductor markets. The directors believe that, in order to achieve this goal, it is important to expand the number and range of potential customers for its technology. The Group intends to enter into licence agreements with new customers and to increase the range of new technology supplied to existing customers. Relationships will continue to be established with third-party tools and software vendors to ensure that their products will operate with the Group’s products. As a result of its position in the semiconductor industry, the Group is presented with many opportunities to acquire complementary technology or resources and it intends to continue to make appropriate investments and acquisitions from time to time.
After dividend payments of £34.3 million in 2010, the highly cash generative nature of the business enabled the Group to increase its cash, cash equivalents, short- and long-term deposits and marketable securities balance to £290.1 million (net of accrued interest of £1.7 million) at the end of 2010 from £141.8 million at the start of the year. After reviewing the 2011 budget and longer-term plans, the directors are satisfied that, at the time of approving the financial statements, it is appropriate to adopt the going concern basis in preparing the financial statements of both the Group and the parent company.
The directors recommend payment of a final dividend in respect of the year to 31 December 2010 of 1.74 pence per share which, subject to approval at the AGM on 12 May 2011, will be paid on 18 May 2011 to shareholders on the register on 3 May 2011. This final dividend, combined with the interim dividend of 1.16 pence per share paid in October 2010 , makes a total of 2.90 pence per share for the year, an increase of 20% on the total dividend of 2.42 pence per share for 2009.
Share buyback programme
No share buybacks were undertaken in 2010 and no shares have been re-purchased to date in 2011. The rolling authority to buy back shares given by the shareholders at the AGM in May 2010 remains in place and a resolution to authorise the directors to make purchases in appropriate circumstances will be proposed at the 2011 AGM.
Research and development (R&D)
R&D is of major importance and, as part of its research activities, the Group collaborates closely with universities world-wide and plans to continue its successful engagement with Michigan University. Key areas of product development for 2011 include the development of further energy efficient, high-performance engines for both data and control applications such as ARM cores based on symmetric multiprocessor and superscalar technology. The Group is investing in future physical IP development including low-power, low-leakage technologies for both bulk CMOS (complementary metal oxide semiconductor) and SOI (silicon on insulator) processes to ensure leadership in this market. In addition, the Group will continue to develop and deliver tools, graphics and video processors and fabric IP to enable its customers to design and programme systems-on-chip (SoCs).
The Group incurred R&D expenses of £139.8 million in 2010, representing 34% of revenues, compared with £112.2 million in 2009. R&D expenses have been charged to the income statement since the requirements for capitalisation were not met. The requirements for capitalisation are considered in more detail in note 1 to the financial statements.
During the year the Group made donations for charitable purposes of £37,834 (2009: £34,292). The total amounts given for each such purpose were:
Relief of poverty
Promotion of education
ARM employees are encouraged to offer their time and expertise to help charities and other groups in need. The Group operates a gift matching system for individual employees’ fundraising efforts. The Group does not make any political donations. The Group invested £2.5 million in an interest-free charitable bond with Future Business, as described in more detail in the Corporate Responsibility Report.
Directors in the year
The following served as directors of the Company during the year ended 31 December 2010:
Doug Dunn OBE (Chairman)
Warren East (Chief Executive Officer)
Tim Score (Chief Financial Officer)
Tudor Brown (President)
Mike Muller (Chief Technology Officer)
Mike Inglis (General Manager, Processor Division)
Simon Segars (General Manager, Physical IP Division)
Lucio Lanza (independent non-executive director) (retired 14 May 2010)
Kathleen O’Donovan (independent non-executive director and financial expert)
Philip Rowley (independent non-executive director and financial expert)
John Scarisbrick (Non-executive director)
Jeremy Scudamore (Senior Independent non-executive director) (retired 31 January 2011)
Young Sohn (independent non-executive director)
Kathleen O’Donovan became Senior Independent non- executive director on 31 January 2011 following the retirement of Jeremy Scudamore.
Election and re-election of directors
Janice Roberts and Larry Hirst joined the board as independent non-executive directors on 25 January 2011 and Andy Green joined the board as an independent non- executive director on 25 February 2011. All will be standing for election at the 2011 AGM. In line with the provisions of the UK Corporate Governance Code 2010, all directors will stand for election or re-election annually.
(See pages 41 to 43 for the biographies of the directors at the date of this report).
The interests of the directors in the Company’s ordinary shares of 0.05 pence, all of which were beneficially held, are disclosed in the remuneration report.
As at 31 December 2010, ARM’s share capital comprised a single class of ordinary shares of 0.05 pence each and there were 1,344,055,696 ordinary shares in issue (2009: 1,344,055,696) of which 21,624,158 ordinary shares were held in treasury (2009: 60,321,361). The rights attached to treasury shares are restricted in accordance with the Companies Acts. The rights attached to ordinary shares are as follows:
- on a show of hands at a general meeting, every shareholder present in person (or, in the case of a corporation, present at the meeting by way of a representative) and entitled to vote shall have one vote and every proxy present who has been duly appointed by a shareholder entitled to vote on the resolution has one vote;
- on a poll, every shareholder present in person (or in the case of a corporation, present at the meeting by way of a representative) or by proxy and entitled to vote shall have one vote for every ordinary share held;
- shareholders are entitled to a dividend where declared or paid out of profits available for such purposes; and
- shareholders are entitled to participate in a return of capital on a winding-up.
The notice of the AGM specifies deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the AGM. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the AGM and published on ARM’s website after the meeting.
There are no restrictions on the transfer of ordinary shares in ARM other than:
- •restrictions that may from time to time be imposed by laws and regulations (for example, those relating to market abuse and insider dealing);
- •restrictions that may be imposed pursuant to the Listing Rules of the Financial Services Authority under which certain employees of ARM require the approval of the Company to deal in shares;
- •restrictions on the transfer of shares that may be imposed under article 61.2 of ARM’s articles of association or under Part 22 of the Companies Act 2006, in either case following a failure to supply information required to be disclosed following service of a request under section 793 of the Companies Act 2006; and
- • restrictions on transfer of shares held under certain of the Company’s employee share plans while they remain subject to the plan.
The directors are aware of the following substantial interests in the issued share capital of the Company as at 25 February 2011:
Janus Capital Management
Thornburg Investment Management
Legal and General Investment Management
Save for the above, the Company has not been notified, as at 25 February 2011, of any material interest of 3% or more or any non-material interest exceeding 10% of the issued share capital of the Company.
Appointment of directors
ARM shareholders may by ordinary resolution appoint any person to be a director. ARM must have not less than two and no more than 16 directors holding office at all times. ARM may by ordinary resolution from time to time vary the minimum and/or maximum number of directors.
In line with the UK Corporate Governance Code 2010, at the 2011 AGM and future AGMs all directors will present themselves for re-election (if eligible) unless the directors have agreed otherwise.
The directors may appoint a director to fill a casual vacancy or as an additional director to hold office until the next AGM, who shall then be eligible for election.
Articles of association
ARM’s articles of association may be amended only by a special resolution at a general meeting of shareholders.
The directors are responsible for the management of the business of ARM and may exercise all powers of ARM subject to applicable legislation and regulation and the articles of association.
At the 2010 AGM, the directors were given authority to buy back a maximum number of 126,012,000 ordinary shares at a minimum price of 0.05 pence each. The maximum price was an amount equal to 105% of the average of the closing mid market prices of ARM’s ordinary shares as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which such ordinary shares are contracted to be purchased. This authority will expire at the earlier of the conclusion of the 2011 AGM or 30 June 2011.
Accordingly, resolution 21 will be proposed as a special resolution at the 2011 AGM to give ARM authority to acquire up to 134,508,636 ordinary shares following expiry of the current authority. The directors will use this authority only after careful consideration, taking into account market conditions prevailing at the time, other investment opportunities, appropriate gearing levels and the overall position of ARM. In particular, this authority will be exercised only if the directors believe that it is in the best interests of shareholders generally and will increase earnings per share.
Resolution 19 to be proposed at the 2011 AGM will authorise the directors generally to allot up to £221,939 in nominal amount of ordinary shares and, in addition, will authorise the directors to allot up to a further £221,939 in nominal amount of ordinary shares in connection with a “rights issue” (as defined in resolution 19). Further, resolution 20 will authorise the directors to allot ordinary shares (or sell treasury shares) for cash (i) otherwise than in connection with a “pre-emptive offer” (as defined in resolution 20) up to an aggregate nominal amount of £33,627 or (ii) in connection with a pre-emptive offer up to an aggregate nominal amount of £33,627, or (iii) in connection with a rights issue up to a further nominal amount of £33,627, in each case as if section 561(1) of the Companies Act 2006 did not apply to such allotment (or sale). The period of authorisation will in each case expire at the earlier of the conclusion of the 2012 AGM or on 30 June 2012.
Qualifying indemnity provision
Article 139 of the Company’s articles of association provides for the indemnification of directors of the Company against liability incurred by them in certain situations, and is a “qualifying indemnity provision” within the meaning of Section 236 of the Companies Act 2006.
Change of control
All of ARM’s equity-based plans contain provisions relating to a change of control. Outstanding awards and options would normally vest and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time.
There are no significant agreements to which ARM is a party that take effect, alter or terminate upon a change of control.
The Group has a strong demand for highly qualified staff and disability is not seen to be an inhibitor to employment or career development. In the event of any staff becoming disabled while with the Group, their needs and abilities would be assessed and the Group would, where possible, seek to offer alternative employment to them if they were no longer able to continue in their current role.
As the Group is an IP enterprise, it is vital that all levels of staff are consulted and involved in its decision- making processes. To this end, internal conferences and communications meetings are held regularly which involve employees from all parts of the Group in discussions on future strategy and developments. Furthermore, employee share ownership is encouraged and all employees are able to participate in one of the Group’s schemes to encourage share ownership. The Group has an informal and delegated organisational structure. It does not presently operate any collective agreements with any trade unions.
Information about the Group’s employees and policies are contained in the remuneration report, the corporate responsibility (CR) report and the corporate governance report. Information about environmental matters, social and community policies and their effectiveness is contained in the CR Report.
Policy on payment of creditors
The Group’s policy is to pay suppliers before the end of the month following the month of receipt of the invoice, unless terms have been specifically agreed in advance. This policy and any specific terms agreed with suppliers are made known to the appropriate staff and to suppliers on request. Trade creditors of the Group at 31 December 2010 were equivalent to 16 days’ purchases for the Group (2009: nine days) and nil days for the Company (2009: nil).
The Group’s financial risk management and policies and exposure to risks in relation to financial instruments are detailed in note 1c.
There are a large number of contracts in place with the Group’s Partners which are described in more detail in the business review. There are no parties with whom the Group has contractual or other arrangements which are essential to the business of the Group.
Annual General Meeting (AGM)
The AGM will be held at 110 Fulbourn Road, Cambridge, CB1 9NJ, UK, on 12 May 2011 at 2.30pm. A presentation will be made at this meeting outlining recent developments in the business. All voting at the meeting will be conducted on a poll where every shareholder present in person or by proxy will have one vote for each share of which they are the owner. The Group will convey the results of the poll on the website after the AGM. Shareholders are invited to submit written questions in advance of the meeting. Questions should be sent to The Company Secretary, ARM Holdings plc,110 Fulbourn Road, Cambridge CB1 9NJ, UK.
A resolution to reappoint PricewaterhouseCoopers LLP as auditors to the Group will be proposed at the AGM. Details of other resolutions to be proposed at the meeting are set out in the Circular and Notice of AGM 2011 which will be made available to all shareholders together with a proxy card.
Statement of directors’ responsibilities
The directors are responsible for preparing the annual report, the directors’ remuneration report and the Group and the parent company financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the parent company financial statements and the directors’ remuneration report in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). 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 the Company and of the profit or loss of the Group for that period.
In preparing those 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 that the Group financial statements comply with IFRSs as adopted by the European Union, and with regard to the parent company financial statements, that applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- •prepare the Group and parent company financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business, in which case there should be supporting assumptions or qualifications as necessary.
The directors are also required by the Disclosure and Transparency Rules of the Financial Services Authority to include a report containing a fair view of the business and a description of the principal risks and uncertainties facing the Company and the Group. These are set out in the financial review on pages 30 to 37.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation and the parent company financial statements and the directors’ remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for ensuring the maintenance and integrity of the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ statement pursuant to the Disclosure and Transparency Rules
Each of the directors whose names and functions are described in the biographies on pages 41 to 43 confirm that to the best of each person’s knowledge and belief:
- •the financial statements, prepared in accordance with IFRS as adopted by the EU (UK GAAP for the Company), give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company; and
- •the directors’ report and the financial review on pages 30 to 37 include a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.
Disclosure of information to auditors
In the case of each of the persons who are directors at the time when the report is approved, the following applies:
- •So far as each director is aware, there is no relevant audit information of which the Group’s auditors are unaware.
- •Each director has taken all the steps that he or she ought to have taken in his or her duty as a director in order to make himself or herself aware of any relevant audit information and to establish that the Group’s auditors are aware of that information.
- Medical research£11,595
- Local charities2£9,025
- Relief of poverty£6,626
- Promotion of education£4,002
Percentage of issued ordinary share capital
- Janus Capital Management5.9%
- Thornburg Investment Management5.0%
- Legal and General Investment Management3.8%
By order of the board
ARM Holdings plc
Company Number: 2548782