Final Results
Spirent PLC
20 February 2002
796 - 20 February 2002
RESILIENT PERFORMANCE WITH STRONG CASH GENERATION
Spirent plc, the international network technology company, today announces its
audited preliminary results for the year ended 31 December 2001.
Highlights
£ million
2001 2000 Change %
Turnover 802 697 15
Operating profit(1) 113 138 (18)
Profit before taxation(2) 101 125 (19)
Headline earnings per share (pence)(2) 7.76 12.61 (38)
Final dividend per share (pence) 3.00 3.00 -
* Resilient performance in a year of unprecedented deterioration in telecoms
market conditions. Communications group turnover £431 million, operating
profit £83 million.
* Operating cash generation of £141 million, an increase of 12 per cent over
2000.
* Cash generation achieved despite funding an increase of £36 million to £96
million in new product development.
* Hekimian (reported as the Service Assurance Solutions Division) performed
strongly with growth in turnover and operating profit of 53 and 54 per cent
respectively.
* In accordance with accounting standards, goodwill impaired on Hekimian by
£477 million.
* The Performance Analysis Solutions Division (formerly Telecom Test)
reported stability in order intake levels through the second half year.
* Annual cost savings from reorganisation increased by £5 million to £35
million.
* Net borrowings reduced from £326 million to £179 million.
* Dividend maintained at 4.35 pence per share for full year.
(1) Before goodwill amortisation of £86.6 million (2000 £25.7 million) and
exceptional items of £759.5 million (2000 £2.2 million) (including
goodwill impairment of £724.6 million)
(2) Before goodwill amortisation and exceptional items as above and
non-operating exceptional profit of £14.5 million, being the net profit
on the disposal and closure of operations (2000 loss £14.9 million)
Note: Operating profit as referred to in the text is stated before goodwill
amortisation and exceptional items
Commenting on the results, Nicholas Brookes, Chief Executive, said:
'Spirent has delivered resilient operating performance and strong cash
generation in a year marked by an unprecedented downturn in the telecoms
industry. We have taken action to protect profits and improve cash flow, to
reduce borrowings and to increase our investment in product development for
technological leadership.
'The levels of activity in the first half of 2002 are likely to remain in line
with the second half of 2001 and we have positioned the Company to be
profitable and cash generative at these levels. Spirent Communications' systems
are positioned in technologies that are critical to the deployment of next-
generation converged voice, data and video networks and Spirent will be able to
generate full value from a market recovery.'
- ends -
Enquiries:
Nicholas Brookes, Chief Executive Spirent plc On 20/02/02
Eric Hutchinson, Finance Director +44(0)20 7404 5959
Thereafter
+44 (0)1293 767676
Jon Coles/Rupert Young Brunswick (London) +44 (0)20 7404 5959
Nina Pawlak Brunswick (New York) +1 212 333 3810
Background note:
Spirent plc is an international network technology company providing state-of-
the-art solutions with a focus on high growth activities. Our Communications
group unites leading edge performance analysis technology with network
operations expertise, enabling customers to accelerate the development,
deployment and assurance of next generation network equipment and services
worldwide. Further information about Spirent plc can be found at
www.spirent.com
Spirent plc is listed on the London Stock Exchange (ticker: SPT) and on the New
York Stock Exchange (ticker: SPM; CUSIP number: 84856M209) with one American
Depositary Receipt representing four ordinary shares.
Spirent and the Spirent logo are trademarks of Spirent plc. All rights
reserved.
This press release may contain forward-looking statements that are based on
current expectations or beliefs, as well as assumptions about future events.
You can identify these statements by their use of words such
as 'will', 'anticipate', 'estimate', 'expect', 'project', 'intend', 'plan',
'should', 'may', 'assume' and other similar words. You should not place undue
reliance on our forward-looking statements, which are not a guarantee of future
performance and are subject to factors that could cause our actual results to
differ materially from those expressed or implied by these statements. Such
factors include: aggressive competition; our ability to develop and
commercialise new products and services; risks relating to the acquisition or
sale of businesses; our reliance on third party manufacturers and suppliers;
our exposure to liabilities for product defects; our reliance on proprietary
technology; our ability to grow in e-commerce; our ability to attract and
retain qualified personnel; risks of doing business internationally; risks of
downturns in the industries in which we participate; and other risks described
from time to time in Spirent plc's Securities and Exchange Commission periodic
reports and filings. We undertake no obligation to update our forward-looking
statements, whether as a result of new information, future events or otherwise.
CHAIRMAN'S & CHIEF EXECUTIVE'S REVIEW
Overview and Strategic Progress
Spirent has delivered resilient operating performance and strong cash
generation in a year marked by an unprecedented downturn in the telecoms
industry, the general slowdown of the world economy, and the economic
uncertainties created by the terrorist attacks in the United States.
Critical to the company's ability to weather the storm and to set us apart from
others have been the strenuous efforts and initiative shown by our employees to
win business and to continue to develop innovative products to meet new
customer needs. Part of the response to the slowdown had to be the reduction of
resources employed, resulting in tough decisions to restructure operations and
job losses. The actions we have taken are now expected to generate annualised
savings of £34.6 million compared to our previous estimate of £30 million. In
taking these cost reduction measures, we have been mindful of the need to
protect our ability to develop new products within the Communications group as
a key driver for future growth.
Cash generation from operating activities delivered £141.2 million, a 12 per
cent increase over that for 2000. This was achieved despite funding a £35.6
million increase in new product development to £95.9 million.
We have built on our strategy of uniting the best in performance analysis
technology with in-depth network operations expertise. Accordingly, we have
organised Spirent Communications into two operating divisions named the
Performance Analysis Solutions Division (formerly known as the Telecom Test
division), focused on test and performance analysis, and the Service Assurance
Solutions Division (formerly the Network Monitoring division), focused on
service assurance for improved network operations.
Adding our leading edge performance analysis test solutions to our service
assurance systems enables Spirent to integrate products and systems at the
forefront of technology which will allow our customers to accelerate their
deployment in the networks. For customers, this advantage translates into more
rapid development of their new devices, more rapid acceptance of those devices
in the field and lower costs for the widespread deployment of their new
networking services.
The Performance Analysis Solutions Division reported order intake levels stable
through the second half year and this has continued into January 2002. The
Service Assurance Solutions Division order backlog closed at $106 million, an
increase of $23 million since 30 June 2001.
Our commitment to developing new products and technologies has been carried
forward by the strategic partnership with Caw Networks we announced in October.
The integration of our products with theirs is creating a new and unique
solution for the industry to test the performance of applications across the
network.
Note: Operating profit as referred to in the text is stated before goodwill
amortisation and exceptional items
Hekimian has achieved considerable growth in 2001, the acquisition of the
business being a key part of the strategic development of Spirent, and we
continue to be confident that the business has excellent long-term prospects.
Hekimian has firmly established Spirent as a leader in the service assurance
market space, which we believe will offer strong growth in the future. However,
in accordance with accounting standards, we are required to re-assess the
carrying value of Hekimian. This has been prompted by the continued fall in
comparable company valuations in the light of the industry downturn. We have
adopted a prudent approach in determining the carrying value of the investment.
This has resulted in an impairment charge of £477.0 million and a new carrying
value of £630.0 million. This charge is a non-cash adjustment which has no
bearing on the ability of the company to generate profit and cash in the
future.
As reported in our half-year results, we wrote down the carrying value of
goodwill on our investments in Zarak and Net-HOPPER, by £247.6 million.
We have reviewed the carrying values of goodwill of all other businesses and
concluded that no impairment is required.
We have made provisions against excess stocks and debtors amounting to £19.4
million.
The sale in November 2001 of our Sensing Solutions group for $220 million
(approximately £152 million) is indicative of the significant headway made in
2001 towards our stated goal of focus on high technology communications
activities.
Financial Performance
Despite a marked decline in the market environment, financial performance was
resilient with turnover rising 15 per cent to £801.8 million (2000 £696.7
million) reflecting a full year's contribution from our 2000 acquisitions.
Operating profit fell 18 per cent to £112.9 million (2000 £137.9 million) as a
result of the slowdown in the telecommunications industry and a considerably
increased investment in product development. Organically, turnover and
operating profit declined 3 per cent and 37 per cent respectively.
In 2001, Spirent plc derived 80 per cent of its continuing operating profit
from its Communications group (2000 78 per cent, 1999 54 per cent).
Profit before taxation, amortisation and exceptional items decreased 19 per
cent to £100.9 million (2000 £124.6 million). After charging goodwill
amortisation of £86.6 million and exceptional items of £745.0 million, reported
loss before taxation was £730.7 million (2000 profit £81.8 million).
Operating exceptional items include goodwill impairment of £724.6 million,
provisions against debtors and stocks of £19.4 million, reorganisation costs of
£11.3 million and acquisition retention bonuses of £4.2 million.
Headline earnings per share fell 38 per cent to 7.76 pence per share (2000
12.61 pence). Return on sales decreased by 5.7 percentage points to 14.1 per
cent (2000 19.8 per cent).
Product development is an important driver of growth and an area in which we
have expanded our efforts. In 2001, we invested £95.9 million (2000 £60.3
million), representing 12.0 per cent of sales (2000 8.7 per cent). Within the
Communications group, product development spend more than doubled to £73.0
million (2000 £34.7 million), equivalent to 17.0 per cent of sales (2000 12.0
per cent), leading to a number of successful new product launches.
Cash generation delivered £141.2 million from operating activities, up by £15.5
million compared to 2000. Dividends distributed to shareholders amounted to
£39.8 million, up from £27.7 million last year. We have reduced net borrowings
from £326.4 million to £179.1 million.
Operating Highlights
Communications Group
Within the Communications group, significant contracts from the incumbent local
exchange carriers in the United States and other major service providers
propelled the Service Assurance Solutions Division (formerly known as Network
Monitoring) to record performance. Contracts won in 2001 included the first
large-scale deployment of our CenterOp suite of products. These systems are the
platform for Spirent Communications' next generation of service assurance
solutions that encompass a variety of network services.
Spirent Communications became the first service assurance provider to certify
in hardware, software and services for the industry's stringent new TL-9000
quality standards for telecommunications systems.
The Communications group's Performance Analysis Solutions Division (formerly
Telecom Test) was more directly affected by the telecoms downturn. This
division's leading customers were among those hardest hit. Even in this
difficult economic environment, the division was able to increase its market
share of total available customer capital spend thanks to the advanced nature
of its solutions. We continue to win industry plaudits. We participated in the
showcase public demonstrations of terabit routing and 10-gigabit Ethernet
testing. We were first-to-market to deploy test products for 10-gigabit
Ethernet, cdma2000 and location-based wireless applications.
Network Products Group
In the face of the general slowdown in North America and Europe, and a second
half downturn in South America, the Network Products group experienced a
decline in both sales and margins. Despite the slowdown in the global
automotive market, the group increased both its share of the value of
components on vehicles, and the number of major global automotive customers to
whom it is a 'preferred supplier'.
2001 saw record annual sales of Autotools, which are automatic tools for the
application of our fixing products. With each Autotool generating repeat sales
of consumable products, the Autotool business represents an important source of
ongoing revenue for the group.
Notable among the Network Products group's telecoms related activities were the
introduction into the US market of award-winning 'Category 6' high bandwidth
structured cabling and Category 6 RJ45 modular jacks, together with further
contracts with a major UK telecoms provider to create fully networked homes and
offices.
In light of the above, the Network Products group is also well placed to
capitalise on an upturn in the market.
Systems Group
The Systems group was able to report an increase in operating profit, generated
in part through the completion of the initial development of AuRATM and the
consolidation programme within the aerospace information and software systems
businesses.
Integration and Identity
The Spirent name, brand and identity, introduced in 2000, are now established
in the minds of investors, institutions and customers. The task of integrating
a number of geographically, culturally and technologically disparate companies
under the Spirent brand is proceeding well. Our aim is to unite the best in
performance analysis technology with in-depth network operations expertise to
accelerate the development, deployment and assurance of next-generation network
technologies.
Board and Senior Management
My Chung joined the Board as an Executive Director in May 2001, bringing to the
Spirent plc Board a wealth of expertise and experience gained in the
telecommunications industry.
Olivier Huon joined Spirent in July 2001 as Director of Business Development.
Jim Schleckser was promoted to President of Hekimian in April 2001.
Paul Eardley has taken on the role of Company Secretary in addition to his
duties as General Legal Counsel.
People
At the conclusion of a difficult year, we would like to thank all our employees
for their hard work and service and to congratulate them on their enthusiasm,
effort and initiative. These attributes are an immense asset to the Company and
continue to be hugely important as we realise our goal of 'One Company, One
Team, One Vision'.
We would also like to acknowledge the contribution made and service provided by
those capable and experienced people who left employment with the Company
during the restructuring process.
As part of the sale of our Sensing Solutions business, some 2,000 Spirent staff
transferred from the Spirent payroll to that of the new owners. We thank them
for their work on Spirent's behalf and wish them well under the stewardship of
the General Electric Company.
NYSE Listing
An important development was our listing on the New York Stock Exchange in July
2001, in the form of American Depositary Receipts under the SPM ticker with one
ADR representing four ordinary shares. With some 70 per cent of Group revenues
coming from our US operations, we are committed to delivering an increased
profile and understanding of the Company to the US financial community.
Dividend
The Board recommends maintaining a final dividend of 3.00 pence per share (2000
3.00 pence). This will give a total dividend for the year of 4.35 pence per
share (2000 4.35 pence). The final dividend will be paid to shareholders
registered at close of business on 10 May 2002.
Outlook
Spirent has delivered resilient operating performance and strong cash
generation in a year marked by an unprecedented downturn in the telecoms
industry. We have taken action to protect profits and improve cash flow, to
reduce borrowings and to increase our investment in product development for
technological leadership.
The levels of activity in the first half of 2002 are likely to remain in line
with the second half of 2001 and we have positioned the Company to be
profitable and cash generative at these levels. Spirent Communications' systems
are positioned in technologies that are critical to the deployment of next-
generation converged voice, data and video networks and Spirent will be able to
generate full value from a market recovery.
OPERATING REVIEW
Communications
£ million Organic
2001 2000 Change % Change %
______________________________________________________________________________
Turnover 430.6 289.2 49 (4)
Operating profit 83.4 98.6 (15) (40)
Return on sales (per cent) 19.4 34.1
The mission of Spirent Communications is to accelerate the development,
deployment and assurance of next-generation network technology around the
world. As today's independent circuit-switched voice, data and signalling
networks migrate toward converged packet-switched networks for voice, data,
signalling and video traffic, this will have a great positive global impact,
and the communications industry offers strong long-term growth prospects.
Spirent Communications provides the test, performance analysis systems and
network management expertise our customers need to move new technologies out of
the laboratory and into widespread deployment as quickly and profitably as
possible. Our customers include the world's largest and most progressive
manufacturers of network equipment and terminals, global service providers and
large enterprise network operators. Our strategy is to unite the best in
performance analysis technology with in-depth network operations expertise to
accelerate the development, deployment and assurance of next-generation network
technologies. In keeping with this strategy, we have organised Spirent
Communications into two operating divisions: the Performance Analysis Solutions
Division (formerly known as the Telecom Test division), focused on test and
performance analysis, and the Service Assurance Solutions Division (formerly
the Network Monitoring division), focused on service assurance for improved
network operations.
Bringing together the two divisions of Spirent Communications gives us a unique
competitive advantage by positioning Spirent at the forefront of new technology
development and extending the potential return on our research and development
investment through the entire life cycle of network technology deployment. For
customers, this advantage translates into more rapid development of their new
devices, more rapid acceptance of those devices in the field and lower costs
for widespread deployment of their new networking services.
We took significant steps throughout the year to leverage expertise in the
Performance Analysis Solutions and Service Assurance Solutions divisions to
develop joint solutions to address customer needs more rapidly. We achieved one
of the first fruits of this integration with the development and delivery for
trial of optical test units in the service assurance arena in less than six
months, building upon expertise from the performance analysis team. Another
example was progress on a unified user interface for Spirent Communications'
performance analysis systems. Our ability to translate cutting-edge laboratory
test capability into high-volume network test and service assurance systems is
a strategic strength of Spirent Communications that we believe gives us an
important competitive advantage.
Note: Operating profit as referred to in the text is stated before goodwill
amortisation and exceptional items
The increased investment in product development has led to significant
innovation. The Communications group established industry leadership in 10-
gigabit Ethernet by winning its third successive 'Best of Show' award at the
May Networld+Interop trade fair for its 10-gigabit Ethernet Test System.
Spirent delivered the first working 10-gigabit Ethernet products in the market
for five separate LAN & WAN interface types to leading equipment manufacturers
including Cisco, Intel, Extreme, Nortel and Foundry Networks. Other highlights
in the Performance Analysis Solutions Division included showcase public
demonstrations of terabit routing and 10-gigabit Ethernet testing, first-to-
market deployment of cdma2000 and location-based wireless testing and shipments
of the first fibre channel performance testing for storage area networks.
Our partnership and investment in Caw Networks gives Spirent Communications the
ability to offer application-layer testing of websites and firewalls. Our
Advanced Test Program initiative positions us in university and independent
research laboratories as well as in the Internet2 project and helps ensure that
Spirent remains at the forefront of new networking technology.
Spirent Communications group made progress on integrating sales, marketing,
administrative and manufacturing operations throughout the year. These
integrated operations not only resulted in annualised cost savings of more than
£25 million, but also improved our ability to provide integrated solutions to
customers. As part of our efforts we formed a sales team focused on early
adopters of new network technologies and have been working to create integrated
solutions, using both performance analysis advanced probe technology and
service assurance software.
A key strategic goal of the group is to become a truly global provider of
telecoms test, management and performance analysis systems. In 2001, 35 per
cent of the Performance Analysis Solutions Division's turnover came from
outside North America (2000 26 per cent). We now have more than 80 Spirent
Communications sales and marketing staff in Europe, the Middle East and Asia,
and we seek to increase the percentage of non-North American sales over the
coming years.
Performance Analysis Solutions Division
£ million Change Organic
2001 2000 % Change
%
_________________________________________________________________________
Turnover 245.5 283.7 (13) (23)
Operating profit 38.7 97.1 (60) (65)
Return on sales (per cent) 15.8 34.2
Turnover was impacted significantly by decreased demand by the major network
equipment manufacturers in North America and Europe. Sales to customers in Asia
grew strongly. Manufacturing margins were maintained, but reduced volumes
combined with increased product development spend resulted in a fall in the
operating margin achieved.
The Performance Analysis Solutions Division was built through acquisition and
continued development of the Adtech, DLS, Edgcumbe, GSS, SmartBits, TAS and
Zarak product lines. This division develops and delivers testing solutions for
a broad range of communications technologies, including Ethernet, wireless,
optical, Packet-over-SONET, digital subscriber line (DSL), global positioning
systems (GPS), traditional voice and voice-over-IP, giving customers the
ability to source their complete requirements for performance analysis
solutions from Spirent. Our broad range of products enables equipment
manufacturer and service provider development laboratories to thoroughly
emulate large-scale networks, introduce impairments and stress-test equipment
to ensure maximum performance and conformance to industry standards.
Spirent Communications' systems test a full range of wireless and wireline
networks and equipment, including core terabit routers and ATM switches, metro
optical access systems, next-generation wireless and broadband access devices,
high-speed Ethernet enterprise and storage area networks, and GPS-based
wireless terminals. Our test systems can be used individually, or integrated
into solutions that fully emulate the network conditions new products will
encounter. In short, Spirent Communications' systems are positioned in
technologies that are critical to the deployment of next-generation converged
voice, data, and video networks.
The Performance Analysis Solutions Division was directly affected by the
downturn in the overall communications industry. This division's top customers
were among those hardest hit by the telecoms downturn. Even in this difficult
economic environment, the Performance Analysis Solutions Division was able to
increase its share of total capital spend captured due to the advanced nature
of its solutions. Cost-cutting measures and continued focus on leading-edge
product development in 2001 ensures that this division is appropriately sized
for its current level of business and is well positioned to respond rapidly to
upturns in market spending.
Service Assurance Solutions Division
£ million Proforma Growth Organic
2001 2000 % Growth
%
___________________________________________________________________________
Turnover 185.1 121.3 53 46
Operating profit 44.7 29.1 54 49
Return on sales (per cent) 24.1 24.0
Turnover grew strongly as the incumbent local exchange carriers in the United
States increased demand for our test probes and software systems for service
assurance applications. New customers added in the year further increased
sales. Manufacturing margins and operating expenses were maintained in
proportion to sales.
The Service Assurance Solutions Division was formed at the end of 2000 with the
acquisitions of Hekimian and Net-HOPPER. This division provides network test
and operations support systems used by many of the world's largest and most
progressive service providers to assure the quality of high bandwidth voice and
data services. These systems enable the efficient delivery and maintenance of
high-value network services, including private line voice and data, digital
subscriber line, wireless, optical and converged packet networks. Service
assurance products include operations support system software, remote test
probe hardware, network test access systems and the expertise to implement and
maintain the systems over extended periods of time.
Spirent Communications is at the forefront of two important industry trends in
remote testing: firstly, to automate an increasing number of everyday tests in
order to reduce the costs of operating large-scale networks; and secondly, to
integrate a broader range of network status and service quality measurements
with network testing to provide comprehensive service assurance management
solutions. We believe these trends will serve to deepen our relationships with
customers and increase the overall size of our market opportunity.
Though 2001 was a uniquely tough year in the communications industry, Spirent
Communications weathered the year's challenges and emerged in a position of
strength, ready for market recovery. This validates our strategy to develop
revenues from the service assurance market as well as from the performance
analysis market. During the course of the year, this strategy improved our
ability to enable customers to accelerate the development, deployment and
assurance of next-generation network technologies.
The Service Assurance Solutions Division won significant contracts from
Verizon, SBC, Qwest and other major service providers which propelled this
division to record performance. Contracts during 2001 for DSL and private line
service assurance systems included the first large-scale deployments of
CenterOp Sentry TM, Perform TM, Flow TM and Gateway TM. These systems are the
platform for Spirent Communications' next generation of service assurance
solutions that encompass a variety of network services based on data, optical
and wireless technologies.
A major strategic initiative of the Service Assurance Solutions Division is to
expand globally from its largely North American customer base. The division
established a European sales and support infrastructure in 2001 and embarked
upon the long-term selling cycle required for large-scale operations support
systems. Other achievements within this division included integration of the
Net-HOPPER remote test access product line into the Hekimian business unit.
Spirent Communications also became the first service assurance provider to
certify in hardware, software and services for the industry's stringent new TL-
9000 quality standards for telecommunications systems.
Network Products
£ million Organic
2001 2000 Change % Change %
____________________________________________________________________________
Turnover 170.4 181.4 (6) (6)
Operating profit 15.3 25.3 (40) (40)
Return on sales (per cent) 9.0 13.9
In the face of the general slowdown in North America and Europe, and a second
half downturn in South America, the Network Products group experienced a
decline in both sales and margins. Key customer sectors, including both
telecoms and truck building, were particularly affected by difficult market
conditions but early restructuring actions enabled the business to remain
fundamentally strong and well positioned to take advantage of an upturn.
During 2001 we completed a major restructuring of the global business,
consolidating and extending customer-facing activities whilst reducing
administrative and production resources to bring costs in line with changes in
demand. The results of this restructuring will become fully effective in the
first half of 2002.
Despite the difficult market environment, the Network Products group continued
to invest in its telecoms-related business to support future growth. Investment
in new products to meet local needs has been followed by their successful
introduction into new markets through existing HellermannTyton channels. The
launch of our recently developed Local Area Network connectivity products into
the United States got off to a good start as reported in our Interim Results,
our 'Gigaband Category 6' range being named a winner in Communications News
magazine's 'Editors Choice 2001' awards. We look forward to further developing
our 'Network Sciences' brand in North America and around the world through
2002. The connectivity systems complement our more established communications
offerings, such as raceway products, where we have won several major contracts
supporting network installations.
The second half of the year has also seen our first half optimism for small
office/home office (SoHo) solutions translated into further contracts with a
major UK telecoms provider to create fully networked homes and offices. We are
working to expand this concept to the United States and Europe.
Automotive sales continue to contribute significantly to the success of the
group. Despite the slowdown in the global automotive market, including the
continuing difficulties in the US truck market, the group has increased its
share of the value of components on vehicles. This has been achieved through
close working relationships with customers and innovative product development
as new vehicle platforms are introduced. During 2001, our focus on design and
customer service has resulted in the group increasing the number of major
global automotive customers with which it enjoys 'preferred supplier' status.
The group is therefore well placed to capitalise on any improvement in the
automotive market.
Our globalisation activities have continued in 2001 enabling our customers to
benefit further from our global capabilities and product range. The success of
this programme has been reflected in a number of major supply agreements which
have been signed during the year with international customer groups.
Taken together, our capital investment programme coupled with cost reduction
measures whilst maintaining our emphasis on innovation have allowed us to
weather the recent downturn. The Network Products group is well positioned for
growth as existing markets recover and we start to exploit new opportunities in
home and business networking.
Systems
£ million Organic
2001 2000 Change % Growth %
______________________________________________________________________________
Turnover 124.0 135.4 (8) 4
Operating profit 6.1 2.7 126 201
Return on sales (per cent) 4.9 2.0
The Systems group was able to report an increase in operating profit, generated
in part through the completion of the initial development of AuRATM and the
consolidation programme within the aerospace information and software systems
businesses.
Within the aerospace business, we signed AuRA deals with American Eagle,
Continental Express and Boeing with a combined order value of $20 million. This
builds on existing AuRA business with US carriers Sun Country, Frontier and USA
3000. AuRA is Spirent's Maintenance, Repair and Overhaul (MRO) system which is
designed to help air operators control the cost and timing of aircraft
maintenance whilst improving efficiency.
Our Aviation Information Solutions (AIS) business made good headway, with
further validation of our concept and product demonstrated by the expansion of
our existing relationship with FedEx to supply 90 of their Airbus fleet with
airborne file servers and software applications at an order value of some $10
million. Our AIS technology helps flight crew manage information and on-board
software applications, improve logging of faults and reduce time spent on
maintenance.
Discontinued Operations
In November, we completed the sale of the equity and assets of our Sensing
Solutions group to the General Electric Company for a cash consideration of
$220 million (approximately £152 million).
The net proceeds of the sale were used to reduce net debt. The sale represented
a further step in Spirent's increasing focus on communications related
activities. Under the terms of the deal, all of the approximately 2,000
employees in the Sensing Solutions group transferred with the business.
Combined Sensing Solutions revenues for the period up to divestment were £76.8
million with an operating profit for the combined Sensing Solutions businesses
of £8.1 million.
Interconnection Joint Venture
Our share of turnover increased by 3 per cent to £78.3 million (2000 £76.0
million) and our share of the operating profit decreased by 28 per cent to £9.6
million (2000 £13.3 million).
The business experienced a marked deterioration in market conditions during the
second half of the year as a result of the global recession. Local management
have undertaken actions to reduce costs. Against this background, the business
continues to expand its market through delivery of a high level of product
innovation.
FINANCIAL REVIEW
Headline PBTA
£ million 2001 2000
_____________________________________________________________________________
(Loss)/profit before taxation (730.7) 81.8
Goodwill amortisation 86.6 25.7
Operating exceptional items:
Other 34.9 2.2
Goodwill impairment 724.6 -
(Profit)/loss on disposal and closure of operations (14.5) 18.1
(Profit) on disposal of tangible fixed assets - (3.2)
_____________________________________________________________________________
Headline profit before taxation 100.9 124.6
_____________________________________________________________________________
Spirent, in common with other companies in the global telecommunications
sector, has experienced the difficulties resulting from a period of marked
decline in demand since the second quarter of 2001. We have taken decisive
action to reduce costs, to protect profits and to improve cash flow. We have
made provisions against stocks and debtors and, in accordance with accounting
standards and the fall in comparable company valuations, impaired goodwill on
the acquisitions of Hekimian Laboratories, Zarak Systems and Net-HOPPER.
Despite the market conditions the Service Assurance Solutions Division has
grown operating profit organically by some 49 per cent over the previous year.
Cash generated from our operations has risen by 12 per cent.
Operating cash flow has remained positive for all our businesses. The
divestment of Sensing Solutions in early November generated net cash of £147.1
million. This has been used to reduce net borrowings to £179.1 million at 31
December 2001. This represents a ratio of 16 per cent (2000 18 per cent)
against shareholders funds, and 1.2 times reported earnings (2000 2.0 times)
before interest, taxation, depreciation, amortisation and exceptional items.
Net borrowings at the end of January 2002 were £172.0 million.
Interest cover as adjusted for goodwill amortisation and exceptional items for
2001 has been maintained at 5.4 times (2000 5.3 times).
Note: Operating profit as referred to in the text is stated before goodwill
amortisation and exceptional items
Financial Results
Second Half First Half
£ million 2001 2001
_________________________________________________________________________
Turnover 342.9 458.9
Operating profit 33.5 79.4
Return on sales (per cent) 9.8 17.3
Headline earnings per share (pence) 2.22 5.54
Headline earnings per share has been calculated to exclude all exceptional
items and attributable taxation, as this is the practice commonly used by
analysts: previously only acquisition retention bonuses had been excluded.
Headline earnings per share for the first six months has been restated to
reflect this.
Turnover increased by 15 per cent from £696.7 million to £801.8 million,
reflecting the full year's contribution from the acquisitions made in 2000.
Turnover reduced by 25 per cent in the second half over the first half of 2001,
the first quarter of 2001 having produced a strong result prior to the telecoms
slowdown taking effect. Organically turnover declined by 3 per cent. On one
hand, the Performance Analysis Solutions Division's turnover declined
organically by 23 per cent, on the other there was significant organic growth
of 46 per cent in the Service Assurance Solutions Division, where major
contracts were won.
North America now accounts for some 71 per cent of our turnover by source (2000
67 per cent). Turnover by market destination is 63 per cent to North America
(2000 56 per cent).
Return on sales before exceptional items of 14.1 per cent decreased by 5.7
percentage points over 2000, with the second half returning 9.8 per cent. The
majority of this reduction can be attributed to the Performance Analysis
Solutions Division where the return was reduced to 5.5 per cent in the second
half year compared to 23.4 per cent in the first half. The Service Assurance
Solutions Division saw a reduction in return from 26.0 per cent to 21.2 per
cent first half to second half.
Earnings before interest, taxation, depreciation, amortisation and exceptional
items (EBITDA before exceptional items) declined by 8 per cent from £163.0
million to £150.1 million.
Goodwill amortisation increased from £25.7 million in 2000 to £86.6 million, a
result of the acquisitions, including Hekimian, in the later part of last year.
The effect of exchange rate translation was positive, increasing turnover by
£23.4 million and profit before taxation by £1.9 million.
A basic loss per share of 83.43 pence is reported (2000 earnings 7.40 pence),
after charging goodwill amortisation of £86.6 million and net exceptional items
of £745.0 million, which includes goodwill impairment of £724.6 million.
Headline earnings per share declined 38 per cent from 12.61 pence to 7.76 pence.
Goodwill Impairment
As reported in our interim announcement, the carrying value of goodwill for
Zarak Systems and Net-HOPPER has been written down by £247.6 million, a
consequence of the rapid deterioration in market conditions and the resultant
impact on future cash flows from these businesses.
In the light of the downturn in valuations in the telecommunications market and
in accordance with accounting standards, we are required to reassess the
carrying value of Hekimian. We have written down the investment in Hekimian
resulting in an impairment charge of £477.0 million.
The total charge reported for goodwill impairment for the year is £724.6
million.
Other Exceptional Items
In response to the slowdown in the technology industry we have undertaken a
reorganisation of our activities at a cost of £11.3 million which has been
charged in 2001. We saw benefit in the second half year from these actions and
expect to generate savings totalling £34.6 million on an annual basis. Both
costs and anticipated cost savings have increased from our earlier estimates as
further actions have been undertaken, by £2.3 million and £4.6 million
respectively.
The deterioration has also led us to make provisions totalling £19.4 million
against inventories in excess of 12 months usage and doubtful debts. The
increase in provisions in the second half year of £4.5 million is principally
attributable to amounts due from a distributor who is operating under financial
constraints. Any amounts recovered will be reported as exceptional gains in
future reporting periods.
Other exceptional items relate to acquisition retention bonuses, arising out of
acquisitions made in 2000, of £4.2 million.
Acquisitions and Divestments
There has been little in the way of acquisition activity in 2001. In October we
acquired a 16 per cent interest in Caw Networks Inc for a consideration of £6.4
million. Caw is reported as an associated company.
Spirent has continued to dispose of its non-core activities. In November,
Spirent sold its Sensing Solutions group to the General Electric Company for a
total consideration of $220 million. The net cash proceeds after expenses
generated from the sale, of £147.1 million, have been used to reduce net
borrowings. The tax liability associated with this transaction, estimated at
£13.2 million, is payable in 2002.
Other minor divestments and closures have taken place during the year.
The net profit on divestment was £14.5 million after charging £65.1 million of
goodwill previously written off to reserves.
Interest
Net interest payable has reduced from £29.3 million in 2000 to £22.8 million,
as we have benefited from the reduction of interest rates primarily on the US
dollar. Benefit has been obtained from the reduction in borrowings following
receipt of the proceeds from the sale of Sensing Solutions in November.
Taxation
The Group's effective tax rate was 29.4 per cent (2000: 30.3 per cent), after
adjusting for the effects of goodwill amortisation, impairment, exceptional
items and divestments.
It is anticipated that this rate is sustainable for 2002.
We have implemented the requirements of Financial Reporting Standard (FRS)
19 'Deferred Tax', which requires substantially full provision to be made.
The reported charge of £32.6 million (2000 £30.6 million) includes a tax
charge of £13.2 million in respect of the profit on divestments.
Cash Flow
Cash Generation
£ million 2001 2000
_________________________________________________________________________
Net cash flow from operating activities 141.2 125.7
Less cash outflows on:
- Interest net of dividends received and (22.1) (21.2)
minority dividends paid
- Tax paid (21.0) (22.2)
- Capital expenditure and financial investment (57.7) (59.5)
_________________________________________________________________________
Free cash inflow before dividends 40.4 22.8
_________________________________________________________________________
Operating cash flow of £141.2 million was 12 per cent higher than 2000.
Comparing the first half to the second half of 2001, July to December generated
£87.3 million, an increase of some 62 per cent over the first half year.
Cash Generation Second Half First Half
£ million 2001 2001
______________________________________________________________________________
Net cash flow from operating activities 87.3 53.9
Less cash outflows on:
- Interest net of dividends received (8.4) (13.7)
- Tax paid (7.8) (13.2)
- Capital expenditure and financial investment (27.5) (30.2)
______________________________________________________________________________
Free cash inflow/(outflow) before dividends 43.6 (3.2)
______________________________________________________________________________
Much of this improvement has been achieved through reduction in working capital
where we have taken initiatives to increase stock turns and reduce debtor days
outstanding. Working capital improved by £43.0 million in the second half year
excluding the effect of exceptional provisions for stocks and debtors. For the
full year working capital, again excluding the exceptional provisions, has
improved by £21.9 million.
Operating cash generation has been impacted by the release of deferred income
of £17.8 million, where monies had been received in advance in 2000 relating to
major contracts primarily for Hekimian.
Net capital expenditure and financial investment at £57.7 million (2000 £59.5
million) was high, due to our investment in new facilities and software
systems. We expect capital expenditure for 2002 will be in the range £30
million to £35 million. 2000 included £22.0 million advanced to the Employee
Share Ownership Trust for the acquisition of shares for employee share schemes.
Acquisitions net of divestments raised £149.6 million. Divestments raised
£148.8 million. As previously discussed this includes the net proceeds from the
sale of Sensing Solutions, as well as from other minor divestments.
Acquisitions resulted in a net positive cash flow of £0.8 million. This
includes a receipt of £22.3 million from Axel Johnson Inc under the terms of
the Hekimian acquisition agreement less $20 million of deferred consideration
paid in July for Netcom Systems acquired in 1999, and £6.4 million for our
investment in Caw Networks Inc.
The dividend payments for 2001 were £12.1 million higher than in 2000 due to
the increased number of shares in issue following the acquisitions made using
equity in 2000.
Dividend
A final dividend of 3.00 pence per share has been recommended which maintains
the distribution for the year at 4.35 pence. The dividend is 1.8 times covered
(2000 2.4 times) by headline earnings.
Consolidated Profit & Loss Account
Continuing Operations Discontinued
Operations
Before
exceptional Exceptional
items items Total Total
2001 2001 2001 2001 2000
£ million £ million £ million £ million £ million
Turnover: Group and
share of joint venture 803.3 - 76.8 880.1 772.7
Less: share of joint
venture's turnover (78.3) - - (78.3) (76.0)
_______ _______ _______ _______ _______
Turnover 725.0 - 76.8 801.8 696.7
_______ _______ _______ _______ _______
Operating (loss)/profit 19.4 (759.5) 6.9 (733.2) 110.0
______________________________________________________________________________
Exceptional items - 34.9 - 34.9 2.2
Goodwill impairment - 724.6 - 724.6 -
Goodwill amortisation 85.4 - 1.2 86.6 25.7
Operating profit before
goodwill amortisation
and exceptional items 104.8 - 8.1 112.9 137.9
______________________________________________________________________________
Income from interests in:
Joint venture 9.6 - - 9.6 13.3
Associates less goodwill
amortisation 1.2 - - 1.2 2.7
Non operating
exceptional items - (2.8) 17.3 14.5 (14.9)
_______ _______ _______ _______ _______
(Loss)/profit before
interest 30.2 (762.3) 24.2 (707.9) 111.1
_______ _______ _______
Net interest payable (22.8) (29.3)
_______ _______
Loss)/profit before
taxation (730.7) 81.8
Taxation 32.6 30.6
_______ _______
(Loss)/profit after
taxation (763.3) 51.2
Minority interest 0.2 0.5
_______ _______
(Loss)/profit
attributable to
shareholders (763.5) 50.7
Dividends 40.0 36.1
_______ _______
(Loss)/profit retained (803.5) 14.6
_______ _______
Basic (loss)/earnings
per share (83.43)p 7.40p
Headline earnings per
share 7.76p 12.61p
Diluted (loss)/earnings
per share (83.43)p 7.18p
_______ _______
Net dividend per share:
Interim 1.35p 1.35p
Proposed final 3.00p 3.00p
_______ _______
Total dividend 4.35p 4.35p
_______ _______
Consolidated Statement of Total Recognised Gains and Losses
2001 2000
£ million £ million
(Loss)/profit attributable to shareholders (763.5) 50.7
Gain on lapsed options 3.3 -
Exchange adjustment on subsidiaries, joint (0.2) 8.8
venture and associates
UK current taxation on exchange adjustment (2.6) (1.7)
__________ __________
Total recognised gains and losses (763.0) 57.8
__________ __________
Consolidated Balance Sheet
2001 2001 2000 2000
£ million £ million £ million £ million
Fixed assets
Intangible assets 987.7 1,816.8
Tangible assets 137.6 136.2
Investments
Investment in joint venture
Share of gross assets 69.0 64.5
Share of gross liabilities (24.7) (23.8)
__________ ___________
44.3 40.7
Investment in associates 18.3 12.9
Other investments 34.1 33.4
__________ ___________
96.7 87.0
__________ __________
1,222.0 2,040.0
Current assets
Stocks 93.1 136.2
Debtors 143.4 206.8
Investments 0.3 3.9
Cash at bank and in hand 27.6 28.6
__________ ___________
264.4 375.5
__________ ___________
Current liabilities
Creditors due within
one year 166.8 199.6
Loans and overdrafts 11.2 19.8
__________ ___________
178.0 219.4
__________ ___________
Net current assets 86.4 156.1
__________ __________
Assets less current
liabilities 1,308.4 2,196.1
Long term liabilities:
Creditors due after
more than one year (210.1) (355.6)
Provision for
liabilities and charges (1.5) (2.1)
__________ __________
Assets less liabilities 1,096.8 1,838.4
__________ __________
Shareholders' funds - equity 1,094.4 1,834.7
Minority shareholders'
interest - equity 2.4 3.7
__________ __________
Total equity 1,096.8 1,838.4
__________ __________
Consolidated Cash Flow Statement
2001 2000
£ million £ million
Net cash inflow from operating activities 141.2 125.7
Dividends received from: - joint venture 1.6 1.1
- associates 0.2 0.4
Returns on investments and servicing of finance (23.9) (22.7)
Taxation (21.0) (22.2)
Capital expenditure and financial investment (57.7) (59.5)
Acquisitions and disposals 149.6 (536.6)
Equity dividends paid (39.8) (27.7)
Management of liquid resources 3.6 50.6
Financing (152.8) 480.2
__________ __________
Net cash inflow/(outflow) 1.0 (10.7)
__________ __________
Reconciliation of Net Cash Flow to Movement in Net Borrowings
Net cash inflow/(outflow) 1.0 (10.7)
Cash outflow arising from the change in debt and
lease financing 157.7 47.9
Cash inflow arising from the change in liquid
resources (3.6) (50.6)
__________ __________
Movement arising from cash flows 155.1 (13.4)
Loans and finance leases acquired with subsidiaries - (2.3)
Loan to acquire subsidiary - (13.9)
New finance leases (0.8) (2.5)
Exchange adjustment (7.0) (19.7)
__________ __________
Movement in net borrowings 147.3 (51.8)
Net borrowings at 1 January (326.4) (274.6)
__________ __________
Net borrowings at 31 December (179.1) (326.4)
__________ __________
Analysis of Results
2001 2000
£ million % £ million %
Segmental Analysis
Turnover
Performance Analysis Solutions Division 245.5 34 283.7 47
Service Assurance Solutions Division 185.1 25 5.5 1
_________ ______ _________ ______
Communications 430.6 59 289.2 48
Network Products 170.4 24 181.4 30
Systems 124.0 17 135.4 22
_________ ______ _________ ______
725.0 100 606.0 100
Discontinued operations:
Sensing Solutions 76.8 90.7
_________ _________
801.8 696.7
_________ _________
Operating (loss)/profit
Performance Analysis Solutions Division 38.7 37 97.1 77
Service Assurance Solutions Division 44.7 43 1.5 1
_________ ______ _________ ______
Communications 83.4 80 98.6 78
Network Products 15.3 14 25.3 20
Systems 6.1 6 2.7 2
_________ ______ _________ ______
104.8 100 126.6 100
_________ _________
Discontinued operations:
Sensing Solutions 8.1 11.3
_________ _________
112.9 137.9
Exceptional items (34.9) (2.2)
Goodwill impairment (724.6) -
Goodwill amortisation (86.6) (25.7)
_________ _________
(733.2) 110.0
Geographical Analysis
Turnover by source
Europe 183.7 25 169.0 28
North America 514.6 71 407.3 67
Asia Pacific, Rest of Americas, Africa 26.7 4 29.7 5
_________ ______ _________ ______
725.0 100 606.0 100
______ ______
Discontinued operations:
Europe 20.6 20.3
North America 48.3 61.4
Asia Pacific, Rest of Americas, Africa 7.9 9.0
_________ _________
801.8 696.7
_________ _________
Operating (loss)/profit
Europe 21.6 21 18.2 14
North America 81.6 78 105.7 84
Asia Pacific, Rest of Americas, Africa 1.6 1 2.7 2
_________ ______ _________ ______
104.8 100 126.6 100
______ ______
Discontinued operations:
Europe 2.3 1.7
North America 6.3 9.9
Asia Pacific, Rest of Americas, Africa (0.5) (0.3)
_________ _________
112.9 137.9
Exceptional items (34.9) (2.2)
Goodwill impairment (724.6) -
Goodwill amortisation (86.6) (25.7)
_________ _________
(733.2) 110.0
_________ _________
The above financial information does not constitute statutory accounts as
defined in section 240 of the Companies Act 1985. The comparative financial
information is based on the statutory accounts for the financial year ended 31
December 2000. Those accounts, upon which the auditors issued an unqualified
opinion, have been delivered to the Registrar of Companies. The statutory
accounts for the year ended 31 December 2001, which include an unqualified
audit report, will be circulated to shareholders on 20 March 2002.
The Annual General Meeting will be held on 2 May 2002 and subject to the
approval of the shareholders the final dividend will be paid on 5 June 2002 (17
June 2002 for ADR holders) to shareholders registered at the close of business
on 10 May 2002.
This information is provided by RNS
The company news service from the London Stock Exchange
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