Final Results
Spirent PLC
25 February 2004
828 - 25 February 2004
Spirent plc
Preliminary results for the year to 31 december 2003
Spirent plc (LSE: SPT; NYSE: SPM), a leading communications technology company,
today announced its preliminary results for the year to 31 December 2003.
Summary of 2003 Results
£ million First half (1) Second half 2003 2002 (1)
2003 2003
---------------------- --------- --------- --------- ---------
Turnover 229.2 237.0 466.2 558.9
Operating profit (2) 15.4 20.6 36.0 50.4
Profit before taxation(3) 13.1 16.9 30.0 46.0
Earnings per share(4)(pence) 1.02 1.29 2.31 3.36
• Due to a modest increase in activity levels, turnover and operating
profit(2) in the second half of 2003 were up over the first half by 3 per
cent and 34 per cent, respectively.
• Free cash flow(5), before the cash cost of exceptional items, improved
to £62.8 million compared with £44.1 million in 2002 due to a strong focus
on cash management.
• Cash generation and proceeds from divestments resulted in significantly
reduced net debt of £57.5 million at the year end compared with £161.8
million at the end of 2002.
• We maintained our commitment to product development, investing £66.0
million or 14 per cent of turnover this year (2002 £77.7 million and 14 per
cent).
• In the Communications group, second half turnover and operating profit
were up 5 per cent and 71 per cent, respectively, over the first half of
2003 reflecting modestly improved levels of activity.
• The Network Products and Systems groups both delivered increases in
turnover and operating profit over 2002.
• Reported profit before taxation was £0.3 million for 2003 compared with
a loss of £1,023.41 million in 2002.
Notes
1 Results for 2002 and the first half of 2003 have been restated to reflect the
effect of adopting Financial Reporting Standard 17 'Retirement Benefits' and
Urgent Issues Task Force Abstract 38 'Accounting for ESOP Trusts'. Had the prior
year's accounting policy applied in 2003, operating profit would have been £2.1
million lower and profit before taxation £0.6 million lower.
2 Before goodwill amortisation and operating exceptional items of £9.7
million (2002 £56.1 million) and £7.5 million (2002 £964.9 million),
respectively.
3 Before goodwill amortisation and operating exceptional items as above,
non-operating exceptional items of £3.6 million profit (2002 £48.4 million loss)
and an exceptional interest expense of £16.1 million (2002 nil).
4 Earnings per share is based on headline earnings as set out in note 3 to
the Preliminary Report.
5 Cash flow before acquisitions, disposals, equity dividends and financing.
Commenting on the results, Nicholas Brookes, Chief Executive, said:
'The improved performance in the second half of 2003 reflects a modest increase
in trading activity in the latter part of the year as well as our actions to
reduce costs. We have strengthened substantially our financial position during
the year due to our emphasis on cash management and the proceeds from disposals.
We have invested in the expansion of our Communications group's product
portfolio. This has enabled us to respond to our customers' needs, as their
spending increasingly turns from legacy networks to next-generation
technologies. Our Network Products and Systems businesses performed well despite
the generally weak market conditions worldwide.
'We have seen a satisfactory start to 2004, which may indicate the beginning of
a recovery in telecoms capital spending, although we remain cautious in relation
to its extent. We have positioned our Performance Analysis activities to benefit
from increases in customer investment in next-generation equipment. In the
Service Assurance division, performance will pick up as and when next-generation
networks and services become more widely deployed. Our Network Products group is
expected to benefit from any strengthening in its markets.'
- ends -
Enquiries
Nicholas Brookes, Chief Executive Spirent plc +44 (0)1293 767676
Eric Hutchinson, Finance Director
Investor Relations
Catherine Nash Spirent plc +44 (0)1293 767676
Media
Jon Coles/Rupert Young Brunswick +44 (0)20 7404 5959
About Spirent
Spirent is a leading communications technology company focused on delivering
innovative systems and services to meet the needs of customers worldwide. We are
a global provider of performance analysis and service assurance solutions that
enable the development and deployment of next-generation networking technologies
such as broadband services, Internet telephony, 3G wireless and web applications
and security testing. Our Network Products business is a developer and
manufacturer of innovative solutions for fastening, identification, protection
and connectivity in electrical and communications networks marketed under the
global brand HellermannTyton. The Systems group comprises PG Drives Technology,
which develops power control systems for specialist electrical vehicles in the
mobility and industrial markets, and an aerospace business that provides
ground-based logistics support software systems for the aviation market. Further
information about Spirent plc can be found at www.spirent.com
Spirent Ordinary shares are traded on the London Stock Exchange (ticker: SPT)
and on the New York Stock Exchange (ticker: SPM; CUSIP number: 84856M209) in the
form of American Depositary Shares (ADS), represented by American Depositary
Receipts, with one ADS representing four Ordinary shares.
Spirent and the Spirent logo are trademarks or registered trademarks of Spirent
plc. All other trademarks or registered trademarks are held by their respective
companies. All rights reserved.
This press release may contain forward-looking statements (as that term is
defined in the United States Private Securities Litigation Reform Act of 1995)
based on current expectations or beliefs, as well as assumptions about future
events. You can sometimes, but not always, identify these statements by the use
of a date in the future or such words as 'will,' 'anticipate,' 'estimate,'
'expect,' 'project,' 'intend,' 'plan,' 'should,' 'may,' 'assume' and other
similar words. By their nature, forward-looking statements are inherently
predictive and speculative and involve risk and uncertainty because they relate
to events and depend on circumstances that will occur in the future. You should
not place undue reliance on these 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, but are not limited to: the effects of
competition on our business; the extent of recovery in telecoms capital
spending; our ability to develop and commercialise new products and services and
realise product synergies; risks relating to the acquisition or sale of
businesses and our subsequent ability to integrate businesses; our ability to
meet and achieve the benefits of our cost reduction goals and otherwise
successfully adopt cost structures to respond to changes in business conditions;
risks that our cost cutting initiatives will impair our ability to develop
products and remain competitive; our ability to improve efficiency and adapt to
economic changes and other changes in demand; changes in the business, financial
condition or prospects of one or more of our major customers; our reliance on
third party manufacturers and suppliers; risks of not retaining or increasing
market share; our exposure to liabilities for product defects; our reliance on
proprietary technology; our ability to attract and retain qualified personnel;
risks of doing business internationally; changes in exchange rate or market
conditions in the markets in which we participate or in general economic or
political conditions; and other risks described from time to time in Spirent
plc's Securities and Exchange Commission periodic reports and filings. The
Company undertakes no obligation to update any forward-looking statements
contained in this press release, whether as a result of new information, future
events or otherwise.
PRELIMINARY REPORT FOR THE YEAR TO 31 DECEMBER 2003
Operating profit, return on sales and headline earnings per share are used by
the Group as key measures of operating performance and are stated before the
effect of goodwill amortisation and exceptional items so that period on period
comparisons are not distorted. Free cash flow, cash flow before acquisitions,
disposals, equity dividends and financing, is also a key measure.
Results for 2002 and the first half of 2003 have been restated to reflect the
effect of adopting Financial Reporting Standard (FRS) 17 'Retirement Benefits'
and Urgent Issues Task Force (UITF) Abstract 38 'Accounting for ESOP Trusts'.
CHIEF EXECUTIVE'S OPERATING REVIEW
Overview
Our results for the year were affected by the challenging conditions in the
global telecoms market and the generally weak market conditions worldwide with
turnover of £466.2 million and operating profit of £36.0 million down 17 per
cent and 29 per cent, respectively, compared with 2002. However our performance
in the second half of 2003 saw a sequential increase in both turnover and
operating profit over the first half reflecting a modest increase in activity
levels. Due to a strong focus on cash management we generated £62.8 million of
free cash before the cash cost of exceptional items. Net debt has been
significantly reduced to £57.5 million at the year end compared with £161.8
million at the end of 2002 through cash generated by the businesses and the
proceeds from the sale of the WAGO joint venture. We have maintained our
commitment to product development, investing £66.0 million or 14 per cent of
turnover in 2003 (2002 £77.7 million and 14 per cent).
Review of Operations
Communications
£ million First half Second half 2003 2002 Annual
2003 2003 change
%
------------------- -------- -------- -------- -------- --------
Turnover
Performance Analysis 71.3 77.4 148.7 184.0 (19)
Service Assurance 46.2 45.5 91.7 131.4 (30)
------------------- -------- -------- -------- --------
117.5 122.9 240.4 315.4 (24)
Operating profit
Performance Analysis 0.5 3.9 4.4 10.0 (56)
Service Assurance 4.6 4.8 9.4 20.8 (55)
------------------- -------- -------- -------- --------
5.1 8.7 13.8 30.8 (55)
Return on sales (per cent)
Performance Analysis 0.7 5.0 3.0 5.4
Service Assurance 10.0 10.5 10.3 15.8
Communications group 4.3 7.1 5.7 9.8
The results for the Communications group for 2002 and the first half of 2003
have been restated to reflect the transfer of our field test activities from the
Performance Analysis to the Service Assurance division.
As anticipated, the telecoms market remained challenging throughout 2003.
Spirent Communications' turnover was down 24 per cent compared with 2002, but
turnover for the second half of 2003 was up 5 per cent sequentially compared
with the first half due to modestly improved levels of activity. Compared with
2002, operating profit for 2003 was down 55 per cent, however operating profit
in the second half of 2003 improved by 71 per cent sequentially over the first
half. Return on sales for the group for 2003 reduced to 5.7 per cent from 9.8
per cent in 2002.
2003 saw further reductions in capital spending of some 20 per cent by our
network equipment manufacturer (NEM) and network service provider (NSP)
customers. Against this background we have been able to maintain our market
position by providing customers with the products and services they need to
support the development of next-generation equipment and packet-based services
and by enabling them to deploy and assure these technologies more economically
and efficiently. Quarterly order intake in the Performance Analysis division has
increased sequentially since the first half reflecting the modest improvement in
activity levels and the normal seasonality of the business. Due to the lower
levels of spending and change in ordering patterns by the US incumbent local
exchange carriers (ILECs) the Service Assurance division's order book declined
from $59.2 million (£36.8 million) at the end of 2002 to $44.4 million (£25.0
million) at the end of 2003.
We have remained committed to our investment in product development throughout
the industry downturn and this year was no exception with £57.8 million or 24
per cent of Spirent Communications' turnover (2002 £66.2 million and 21 per
cent) being invested to maintain our position in important next-generation
technologies. Key areas where we have been investing include: broadband access
technologies, such as gigabit and 10-gigabit Ethernet and digital subscriber
line (DSL); voice-over-IP (VoIP); Internet Protocol version 6 (IPv6); Internet
infrastructure and web security testing; and third generation (3G) wireless
technologies. Our continued investment in product development resulted in the
launch during the year of a number of new products which were the first of their
kind or capability. We received a number of awards and industry recognition of
our achievements with our AvalancheTM and ReflectorTM 2200 products and a
10-gigabit Ethernet test module being among InfoWorld magazine's readers'
preferred products for 2003. Our field test products were also winners in the
'Customer Delight' category in the BT Investing in Excellence Awards 2003.
Our 'Advanced Test Program' continues to help maintain our position at the
leading edge of technology focusing on test trials run by university and
independent industry test labs and the technical media. These activities support
the strength of our 'Tested with Spirent' designation which customers use to
demonstrate that their products have been part of one of the industry's most
respected independent test programmes. Customers are increasingly demanding more
consulting, training and support services due to constraints on their resources
and we have responded to this need by offering a comprehensive suite of services
under the ServiceEdgeTM name.
We have continued to broaden our presence internationally. 2003 saw the European
launch of our web applications and security testing products as well as wireless
test systems for customers who are using wideband CDMA (W-CDMA) technology for
the advancement of 3G services and networks. We continued to make progress in
Asia where we are associated with some of the leading telecoms technology
institutes and companies.
Our strategy continues to be to advance next-generation technologies and
services; to deliver integrated, easy-to-use, end-to-end customer solutions; to
increase our presence internationally; and to extend our products into web
service and applications testing for the enterprise sector. By remaining at the
forefront of key emerging communications technologies and by leveraging the
benefits of combining our test and monitoring capabilities we believe we are
well placed to serve the future needs of our customers.
Performance Analysis
Our Performance Analysis division develops solutions for testing the
performance, functionality and conformance to industry standards of network
equipment and networks themselves. This is achieved by simulating voice and data
traffic and large-scale networks and by creating real-world conditions in the
laboratories of NEMs, NSPs, enterprises and government departments. By
subjecting equipment and networks to impairments and stresses customers can
ensure that the equipment or services they are about to launch or deploy will
actually withstand real-world conditions thus reducing the commercial risks
inherent in developing or adopting new products.
Due to the drop in spending by NEMs and NSPs globally during 2003, turnover in
this division fell 19 per cent compared with 2002 to £148.7 million. Operating
profit for 2003 was down 56 per cent compared with 2002 at £4.4 million. However
our performance in the second half of 2003 showed an improvement with turnover
up 9 per cent and operating profit up by £3.4 million due to a modest increase
in activity levels in the latter part of the year. Return on sales for the
second half recovered to 5.0 per cent, but was 3.0 per cent for the year
compared with 5.4 per cent in 2002.
Our customer base for this division remains broadly spread and includes some of
the largest NEMs and NSPs worldwide. We have benefited from the presence we
established in China in 2002 and our increased sales and marketing efforts
throughout Asia. In Europe, a continuing focus on the development and roll-out
of DSL networks and services by customers helped sales of our broadband access
test equipment and we saw encouraging interest in our web applications and
security testing products.
While turnover for the year reduced overall we saw improvements in sales from
our web applications and security testing activities and an increase in sales to
the government sector. Growth in data traffic continues to drive the need for
increased broadband access and our broadband access solutions continue to
represent the largest part of this division's sales. We have been able to
capitalise on the trend towards VoIP and have launched several new products that
are aimed at this growth area. Interest in IPv6, which provides broader address
space for the next phase of the Internet, was also good this year as the
technology moves closer to deployment.
In the wireless space, we are benefiting from our acquisition in 2002 of W-CDMA
expertise and have built on our established reputation in CDMA-2000 where we
remain a market leader in the US. During the year we launched a W-CDMA network
emulator for testing the interoperability of mobile handsets and networks and a
version of our successful CDMA position location test system which we plan to
extend to support W-CDMA. In the CDMA sector, the ability to test applications
and services has become more of a focus and we launched several products in 2003
aimed at testing the performance of mobile data services and enhanced voice
services, such as 'push-to-talk'.
Service Assurance
Our Service Assurance division provides hardware and software systems that
enable NSPs to test and assure remotely the broadband leased line, DSL,
wireless, optical and managed IP services they provide to residential and
enterprise customers. Our products include operations support systems (OSS)
software, remote test probes, network access systems and consulting and
technical services. We also supply portable systems for fault identification and
testing of copper telephone lines in the field. Our systems help service
providers cut their operational costs by automating and centralising their
network testing and service assurance processes, reducing the need for expensive
physical intervention and mitigating against poor customer service with faster
response times to problems.
We are a leading provider of monitoring systems to the US ILECs' continuing
broadband service roll-out programmes. However during the year our core
customers continued to reduce their overall capital spending and as a result
sales were adversely affected with turnover for the division declining 30 per
cent to £91.7 million compared with £131.4 million in 2002. While we continue to
be a leading supplier of monitoring systems for DSL services, systems for
digital leased line services aimed at the enterprise market remain the largest
part of our Service Assurance business, accounting for approximately half the
sales in 2003. Operating profit of £9.4 million for 2003 was down 55 per cent
for the year but was better than anticipated in the second half at £4.8 million.
Return on sales for 2003 fell to 10.3 per cent from 15.8 per cent in 2002. In
order to capitalise on potential synergies we have transferred our field test
business into the Service Assurance division. At the end of the year actions
were taken to extend our existing capabilities in the IP services sector which
we believe represents an important growth opportunity.
During the year we expanded our product range with test probes and OSS for
next-generation DSL variants which allow higher speed broadband access for the
residential and enterprise markets. We also announced a development effort and
strategic partnership with Alcatel under which Spirent's test technology will be
incorporated into Alcatel's broadly deployed ASAM (Advanced Services Access
Manager) products in North America. A number of our existing customers have
announced the introduction of next-generation IP services and we have won
initial orders in this market for gigabit Ethernet, managed local area network
and IP virtual private network services. We intend to expand our capabilities
and product functionality in this area in the future. We have also extended our
product line through the launch of FieldOpTM, an operations management solution
that integrates service assurance and workforce management capabilities onto a
single platform for use in the field.
In order to assist customers with the integration, acceptance and operation of
hardware and software sourced from various suppliers, we continue to partner
with providers of other network devices and OSS to validate the interoperability
of our products.
We believe there is opportunity to expand this division's product offering
internationally and we have made encouraging progress in Asia where we are
currently in trials with some of the largest NSPs in the region and have already
won initial orders. We continue with our marketing efforts in Europe.
Network Products
£ million First half Second half 2003 2002 Annual
2003 2003 increase
%
------------------- -------- -------- -------- -------- --------
Turnover 85.9 88.5 174.4 164.7 6
Operating profit 8.1 8.6 16.7 15.0 11
Return on sales (per
cent) 9.4 9.7 9.6 9.1
Our Network Products business provides customers with innovative solutions for
fastening, identification, protection and connectivity in electrical and
communications networks under the global brand, HellermannTyton. Our ability to
work closely with customers to develop value added products allows us to
maintain our competitive position, gain new customers and enables us to benefit
from any future recovery in our markets.
The business delivered a sound performance in 2003 with turnover up 6 per cent
at £174.4 million and operating profit up 11 per cent at £16.7 million compared
with 2002. Turnover in the second half of 2003 was up 3 per cent on a sequential
basis which is a positive indicator given that the second half of the year is
usually weaker than the first. Return on sales at 9.6 per cent in 2003 was up
over the previous year.
The main improvement in turnover over 2002 came from our European automotive
sales where we have increased market penetration. Sales in Japan by our
associate company were strong and our South American businesses saw a recovery
in turnover and continue to be profitable.
The automotive sector remains our most important with sales to this market
accounting for 34 per cent of turnover in 2003 compared with 30 per cent in
2002. Despite global vehicle production declining modestly year on year, the
trend to replace metal parts with plastic and the increasing complexity of
electronic systems within cars has resulted in more of our products being
specified on new vehicle platforms than on their predecessors.
Our range of automated systems, including Autotools, continues to generate
pull-through sales of the high volume consumables required, such as cable ties
and identification labels and markers. We now have a broad installed base of
these systems at cable and wire harness manufacturers worldwide.
Sales of our local area network connectivity products were lower in the UK
compared with 2002 reflecting the continued decline in the market but we were
able to continue to increase sales in the US. The market for our broadband
products remained depressed due to continuing cuts in spending by telecoms
service providers worldwide.
Our focus on customer support and service is an important aspect of our success
and we were delighted to be recognised as a Gold Supplier for Royal Mail who we
supply via an advanced e-procurement system.
Systems
£ million First half Second half 2003 2002 Annual
2003 2003 increase
%
------------------- -------- -------- -------- -------- --------
Turnover 21.0 25.6 46.6 43.0 8
Operating profit 2.5 3.3 5.8 4.4 32
Return on sales (per
cent) 11.9 12.9 12.4 10.2
Figures in the above table relate to ongoing businesses only
On an ongoing business basis the Systems group saw an 8 per cent increase in
turnover to £46.6 million and a 32 per cent increase in operating profit to £5.8
million compared with 2002. The improvement was mainly in PG Drives Technology,
our power controls business. During 2003 we completed the divestment of our
Aviation Information Solutions (AIS) businesses from within the Systems group's
aerospace activities for net proceeds of £3.2 million in cash.
PG Drives Technology is a leading supplier of power control systems for powered
wheelchairs and mobility scooters and while we continue to experience pricing
pressure in the market we have been successful in mitigating this through
lower-cost designs, materials cost reductions and increased volumes. The
continuing success of our established VSI systems for powered wheelchairs and
our S-Drive systems for mobility scooters enabled us to increase customer
penetration and win new business in the mobility vehicles market during the
year.
During 2003 we also made further progress in the small industrial vehicles
market, with the I-Drive and TRIO+ products launched this year being well
received by customers, and we intend to make further investments to grow this
part of the business.
In our aerospace business, sales of GOLDTM, a leading contractor logistics
support software system to the military market, were up compared with last year
largely due to increased sales to leading defence manufacturers supporting the
US Air Force. The continued weak conditions in the civil aviation market
affected sales of AuRATM, our ground-based maintenance, repair and overhaul
software system.
Dividend
As advised last year we will not pay a dividend in respect of the year to 31
December 2003. Future dividend policy will be kept under review by the Board and
will depend on the trading outlook and the availability of cash and
distributable reserves. Our borrowing terms prohibit us from paying a dividend
until certain financial requirements are satisfied.
The Board
In October 2003 we announced the appointment of Andrew Given as a Non-executive
Director. Andrew was previously Deputy Chief Executive of Logica plc and
currently serves as the Senior Independent Non-executive Director on the boards
of VT Group plc and Spectris plc. We also announced the appointment of Fred
D'Alessio to the Board as a Non-executive Director in January 2004. Fred has
substantial experience in telecoms having spent over 30 years in the industry.
Their experience of international technology companies will be of great benefit
to the Group and we look forward to working with them.
Paul Cheng retired from the Board with effect from the end of 2003 and we would
like to take this opportunity to thank him for his valuable contribution during
his tenure as a Non-executive Director.
It was announced today that I have informed the Board of my intention to retire
as Chief Executive of Spirent with effect from the end of June 2004. A formal
process to find a successor is under way. Since joining the Company in 1995 I
have worked to develop Spirent from a broadly based electronics group into a
focused high technology company. Spirent now has three global operating groups
with leading positions in their served markets. The Company has a strong
management team, a highly experienced Board and is in good shape to move forward
so I believe now is the right time to hand over to a successor to enable Spirent
to continue along its strategic path.
Our People
In yet another challenging year our employees have made great efforts to
generate sales and control costs. It is proof of our employees' determination
and commitment that we have been able to maintain our leading positions in the
markets we serve. I would like to thank all our people for their contribution to
these results and it is because of their continued efforts that we can look to
the future with optimism.
Corporate Social Responsibility
A strong sense of corporate social responsibility (CSR) has always been part of
the Spirent culture. We understand that our reputation and future success in
part rest on our attitudes and responsibility to the people around us and the
world in which we live and we take these responsibilities seriously. Best
practice in relation to CSR is continually evolving but current trends look for
annual improvements in CSR systems, monitoring and reporting and we have made
progress during the year in a number of areas including the publication of our
Ethics and Environmental Policies on the Spirent website.
Outlook
We have seen a satisfactory start to 2004, which may indicate the beginning of a
recovery in telecoms capital spending, although we remain cautious in relation
to its extent. We have positioned our Performance Analysis activities to benefit
from increases in customer investment in next-generation equipment. In the
Service Assurance division, performance will pick up as and when next-generation
networks and services become more widely deployed. Our Network Products group is
expected to benefit from any strengthening in its markets.
FINANCIAL REVIEW
Results
£ million First half Second half 2003 2002
2003 2003
------------------------- -------- -------- -------- --------
Turnover
Ongoing businesses 224.4 237.0 461.4 523.1
Divestments 4.8 - 4.8 35.8
------------------------- -------- -------- -------- --------
Group 229.2 237.0 466.2 558.9
------------------------- -------- -------- -------- --------
Operating profit
Ongoing businesses 15.7 20.6 36.3 50.2
Divestments (0.3) - (0.3) 0.2
------------------------- -------- -------- -------- --------
Group 15.4 20.6 36.0 50.4
------------------------- -------- -------- -------- --------
Return on sales (per cent)
Group 6.7 8.7 7.7 9.0
------------------------- -------- -------- -------- --------
Turnover for 2003 of £466.2 million was 17 per cent lower than 2002. Turnover
from ongoing businesses of £237.0 million for the second half of 2003 improved
by 6 per cent over the first half reflecting modestly improved levels of
activity in the latter part of the year.
Operating profit before goodwill amortisation and exceptional items was £36.0
million for the year, down 29 per cent on 2002. Operating profit for ongoing
businesses for the second half of 2003 improved by 31 per cent over the first
half reflecting the modest increase in activity and the effect of cost savings.
Return on sales for the year was lower at 7.7 per cent, 1.3 percentage points
below 2002. Return on sales in the second half of 2003 showed an improvement
over the first half of 2.0 percentage points.
In 2003 North America accounted for 56 per cent of turnover and 36 per cent of
operating profit by source compared with 66 per cent and 60 per cent,
respectively, in 2002. Europe accounted for 36 per cent of turnover and 60 per
cent of operating profit by source compared with 28 per cent and 38 per cent,
respectively, in 2002.
By market, turnover reduced in North America by £93.1 million but was maintained
in Europe and Asia where, as a result, combined turnover increased from 43 per
cent in 2002 to 51 per cent of the total for 2003.
The weakness of the US dollar in the second half of the year has been offset to
some extent by the strength of the euro throughout 2003. The effect of currency
translation for 2003 compared with 2002 was to reduce turnover by £16.6 million
and operating profit by £0.2 million. In relation to profit before taxation,
goodwill amortisation and exceptional items, currency translation resulted in an
increase of £0.7 million as our interest costs are largely denominated in US
dollars and a higher proportion of profits this year were denominated in euros.
We have used the following average exchange rates for the year, $1.64: £1 (2002
$1.51: £1) and euro 1.45: £1 (2002 euro 1.59: £1).
Product development spend for the Group for 2003 was £66.0 million, representing
14 per cent of turnover compared with £77.7 million in 2002, also 14 per cent of
turnover.
Earnings before interest, taxation, depreciation, amortisation and exceptional
items (EBITDA before exceptional items) was £65.3 million (2002 £84.0 million).
Net interest payable, excluding the exceptional interest expense, reduced from
£12.3 million in 2002 to £9.3 million due to the reduction in net debt. A
finance expense of £1.5 million has been charged as a result of the
implementation of FRS 17 (see Changes in Accounting Policies below).
The Group's effective tax rate for 2003 was 7.7 per cent compared with 18.3 per
cent in 2002 being significantly reduced by a prior year adjustment of £6.0
million recognising the utilisation of losses and the release of provisions.
Excluding this the effective tax rate was 27.7 per cent.
Headline earnings per share was 2.31 pence compared with 3.36 pence in 2002.
Reported profit before taxation was £0.3 million after charging exceptional
items of £20.0 million compared with a loss of £1,023.4 million in 2002 after
charging exceptional items of £1,013.3 million. Reported loss per share for 2003
was 0.05 pence (2002 loss 113.90 pence).
At 31 December 2003 net debt reduced significantly to £57.5 million from £161.8
million at the end of 2002 due to cash generation and the proceeds of
divestments of non-core businesses. The weak US dollar benefited the net debt
position on translation by £6.1 million.
At 31 December 2003 Spirent was well within its existing borrowing covenants.
Net interest cover was 3.7 times (covenant ratio: greater than or equal to 2.5
times) and net debt to EBITDA was 0.96 times (covenant ratio: less than or equal
to 2.25 times).
Changes in Accounting Policies
We have implemented Financial Reporting Standard (FRS) 17 'Retirement Benefits'
at 31 December 2003 to bring us in line with latest UK GAAP and to move towards
the adoption of International Financial Reporting Standards in 2005. Prior year
amounts have been restated to reflect the change in accounting policy. Under FRS
17 profit before taxation for 2003 is £0.6 million higher than it would have
been under Statement of Standard Accounting Practice (SSAP) 24. Under FRS 17
£1.5 million of the pension charge for 2003 has been classified as other finance
expense. Actuarial changes are recorded in the statement of total recognised
gains and losses. A pension fund liability net of deferred taxes at 31 December
2003 of £35.2 million (2002 £46.2 million) is reflected in the Group and Company
balance sheets.
The Group has also implemented Urgent Issues Task Force (UITF) Abstract 38
'Accounting for ESOP Trusts' which requires that the cost of own shares,
previously reported as a fixed asset investment, be shown as a deduction from
shareholders' funds. A prior year adjustment has been made to reflect this
change.
Exceptional Items
Operating Exceptional Items
In 2002 we took a large exceptional charge for goodwill impairment of £923.3
million which was principally in relation to the Communications group. After
carrying out the appropriate valuation exercises, no further impairment charges
are required in 2003.
Operating exceptional items of £7.5 million have been charged in the period and
are detailed below (excluding exceptional interest and taxation):
£ million 2003 2002
--------------------------------- --------- ---------
Finance renegotiation costs 2.3 -
Restructuring costs 3.8 8.6
Lease provisions (0.8) 20.2
Tangible fixed asset write-downs 2.2 3.6
Stock provisions - 4.4
Acquisition retention bonuses - 4.8
--------------------------------- --------- ---------
7.5 41.6
--------------------------------- --------- ---------
Operating exceptional items include £2.3 million in respect of the renegotiation
of our borrowing terms (see Financing below) and £3.8 million for the cost
reduction actions within the Communications group taken mainly in the first half
year. We were able to sublet two of our vacant locations and an amount of £1.8
million has been released in respect of these. Further properties were vacated
in 2003 that gave rise to a charge of £1.0 million, resulting in a net release
of £0.8 million for lease provisions in the year. In addition, a charge of £2.2
million has been taken for tangible fixed asset write-downs connected with the
vacated space.
The cash cost of operating exceptional items was £10.9 million in 2003 (2002
£7.7 million).
Non-operating Exceptional Items
Divestments
The divestment of our interests in the WAGO joint venture and of AIS from within
the Systems group resulted in a net profit of £3.6 million after charging £2.6
million of goodwill previously written off to reserves and now reinstated in
accordance with FRS 10.
Interest
An exceptional interest cost of £16.1 million has been charged in 2003. This
charge comprises the make-whole amount and related bank fees of £14.3 million
charged and previously reported in the first half of the year, together with a
further make-whole amount of £1.8 million accrued in respect of the further
prepayment of loan notes in February 2004 negotiated at the end of 2003 (see
Financing below).
The cash cost of the exceptional interest expense was £13.7 million in 2003.
Taxation
The exceptional tax credit of £1.7 million is in respect of the tax effect of
the exceptional items in 2003. In 2002 we reported a net exceptional tax charge
of £18.5 million which was principally due to the re-evaluation of the recovery
of deferred tax assets under FRS 19. We continue not to recognise deferred tax
assets as there is currently insufficient evidence to support recognition under
accounting standards, other than in relation to the pension fund deficit in
2003.
Financing
As previously reported, in order to provide the Group with an increase in the
level of headroom available in relation to certain of the financial covenants,
amendments to the terms of the loan notes and syndicated bank facility were
agreed in March 2003. These amendments were conditional on the divestment of our
interests in the WAGO joint venture and the application of the net proceeds to
partially pre-pay the loan notes. On completion of the divestment of WAGO in
April 2003, £47.0 million of the loan notes were pre-paid and an associated
make-whole amount of £12.5 million was paid. Following this prepayment $144.2
million of loan notes remained outstanding.
At 31 December 2003 Spirent was nil drawn on its committed bank facility of £60
million and we held £37.6 million of cash. Given the Group's cash generation in
2003 we considered that our £60 million bank facility was in excess of our
business requirements. Consequently at the end of 2003 we entered into
negotiations with a small group of lending banks and agreed a £30 million,
364-day working capital facility with a six month term-out option which became
effective on 18 February 2004 to replace the £60 million facility. We have
applied some of our excess cash, including the net proceeds from the disposal of
AIS, to make a further prepayment of the loan notes to reduce the cost of
borrowing going forward. A further partial prepayment of $14.4 million (£8.1
million) of loan notes was made on 18 February 2004 and an associated make-whole
amount of $3.3 million (£1.8 million) has been incurred. This amount and the
costs associated with this transaction have been accrued in the 2003 financial
year.
Cash Flow
£ million First half Second half 2003 2002
2003 2003
---------------------------- ------- -------- ------- -------
Free cash flow
Operating cash flow 28.6 39.6 68.2 76.9
Add back cash cost of operating
exceptional items 8.2 2.7 10.9 7.7
Interest and other (19.0) (4.1) (23.1) (10.5)
Add back cash cost of exceptional
interest expense 13.7 - 13.7 -
Taxation (2.3) 11.2 8.9 (4.2)
Capital expenditure (6.3) (9.5) (15.8) (25.8)
---------------------------- ------- -------- ------- -------
Free cash flow before the cash cost
of exceptional items 22.9 39.9 62.8 44.1
---------------------------- ------- -------- ------- -------
Spirent continued to generate cash in all its operating groups during 2003.
Operating cash flow of £68.2 million was 11 per cent down on the previous year
of £76.9 million. Cash flow before acquisitions, disposals, equity dividends and
financing, or free cash flow, before the cash cost of exceptional items, was
higher at £62.8 million compared with £44.1 million for 2002. The second half of
the year was particularly strong in cash generation terms with £39.9 million of
free cash flow before exceptional items being generated.
Net interest payments of £9.5 million, excluding the exceptional interest
expense, were lower by £1.3 million compared to the previous year due to lower
levels of debt.
We received tax refunds net of tax charges of £8.9 million in 2003 compared with
a net tax payment of £4.2 million in 2002. Most of these refunds fell into the
second half of the year and were due to the carry back of prior year tax losses
in the United States.
We have substantially reduced our capital expenditure over the last two
financial years and in 2003 spent a net £15.8 million compared with £25.8
million in 2002. This rate of capital spending is well below the depreciation
charge of £29.3 million. We are planning to increase the rate of capital
spending in 2004 to some £30.0 million largely in respect of renewing and
increasing capacity in the Network Products group.
Disposals and Acquisitions
As previously reported, we realised £58.8 million in net proceeds from the sale
of WAGO in April 2003 and £3.2 million from the sale of AIS in June 2003.
We did not make any acquisitions in 2003. In August 2002 we completed the
acquisition of Caw Networks, Inc. (Caw) for an initial cash consideration of $49
million with a provision for deferred consideration of up to $60 million
dependent on certain technical and financial milestones being met. Caw has
achieved a certain level of the earn-out targets. The Company has elected to
satisfy the deferred consideration due through the issue of new Spirent shares
and has provided for a liability of £2.7 million in respect of this.
Pension Fund
The valuation of the defined benefit UK pension plans at 1 April 2003 showed a
funding deficit of £50.7 million. In order to comply with the minimum funding
requirements Spirent will make annual pension contributions of £3.5 million
commencing on 1 July 2004 and has increased the rate of employer pension
contribution from 13.4 per cent to 16.0 per cent of pay with effect from 1
January 2004.
As previously discussed we have implemented in full FRS 17 'Retirement
Benefits'. The funding position at 31 December 2003 under FRS 17 has improved as
a result of the performance of equity markets since the valuation date and the
deficit has reduced to £43.4 million.
Spirent has a contractual liability, as disclosed in our annual reports, to pay
Nicholas Brookes an unfunded unapproved retirement benefit (UURB) as agreed when
he joined the Company in 1995. At 31 December 2003 the provision in respect of
this UURB stood at £4.5 million. Conditionally upon him remaining in employment
until 30 June 2004, Nicholas Brookes and the Company have agreed that he will
commute all of his pension entitlement under the UURB in exchange for a lump sum
payment of £3.7 million in cash, payable to him on 1 July 2004.
Summary
As stated last year, it was our intention during 2003 to focus on the organic
development of the business and cash generation in order to reduce our net debt,
which we have been successful in achieving. These will continue to be our key
operational and financial objectives for 2004.
Consolidated Profit and Loss Account
£ million Notes Year to 31 December
-------- --------- ------- -------
2003 2003 2003 2002
restated
Before Exceptional Total Total
exceptional items
items
Turnover: Group and share
of joint
venture 488.6 - 488.6 634.5
Less: share of joint
venture's (22.4) - (22.4) (75.6)
turnover
-------- --------- ------- -------
Turnover 1, 2 466.2 - 466.2 558.9
-------- --------- ------- -------
Operating profit/(loss) 1, 2 26.3 (7.5) 18.8 (970.6)
--------------------- ----- -------- --------- ------- -------
Operating exceptional
items
Goodwill impairment - - - 923.3
Other - 7.5 7.5 41.6
Goodwill amortisation 9.7 - 9.7 56.1
Operating profit before
goodwill
amortisation and
exceptional items 1, 2 36.0 - 36.0 50.4
--------------------- ----- -------- --------- ------- -------
Income from interests in:
Joint ventures 2.7 - 2.7 7.4
Associates less goodwill
amortisation 2.1 - 2.1 0.8
----- -------- --------- ------- -------
Operating profit/(loss)
of the
Group, joint ventures and
associates 31.1 (7.5) 23.6 (962.4)
Non-operating exceptional
items
Profit/(loss) on disposal
and closure of
operations - 3.6 3.6 (48.4)
----- -------- --------- ------- -------
Profit/(loss) before 31.1 (3.9) 27.2 (1,010.8)
interest
Net interest payable (9.3) (16.1) (25.4) (12.3)
Other finance expense (1.5) - (1.5) (0.3)
-------- --------- ------- -------
Profit/(loss) before 20.3 (20.0) 0.3 (1,023.4)
taxation
Taxation (2.3) 1.7 (0.6) (26.9)
-------- --------- ------- -------
Loss after taxation 18.0 (18.3) (0.3) (1,050.3)
-------- ---------
Minority shareholders' (0.2) (0.4)
interest
------- -------
Loss attributable to (0.5) (1,050.7)
shareholders
Dividends - (12.5)
------- -------
Loss for the year (0.5) (1,063.2)
------- -------
Basic and diluted loss 3 (0.05)p (113.90)p
per share
Headline earnings per 3 2.31p 3.36p
share
Net dividend per share
Interim and total - 1.35p
------- -------
Consolidated Statement of Total Recognised Gains and Losses
£ million Year to 31 December
-------------------
2003 2002
restated
Loss attributable to shareholders (0.5) (1,050.7)
Gain on lapsed options 1.2 5.2
Exchange adjustment on subsidiaries, joint ventures and
associates 6.1 (23.0)
Taxation on exchange adjustment (0.2) 0.1
Reinstatement/(reversal) of deferred tax assets on the
pension scheme 12.6 (5.4)
Actuarial gain/(loss) recognised in pension scheme net
of tax 0.2 (23.6)
-------- --------
Total recognised gains and losses 19.4 (1,097.4)
Prior year adjustment - UITF 38 (32.2) -
- FRS 17 (41.9) -
-------- --------
Total recognised gains and losses since last Report and
Accounts (54.7) (1,097.4)
-------- --------
Consolidated Balance Sheet
£ million At 31 December
--------------------------
2003 2002
restated
Fixed assets
Intangible assets 101.6 113.6
Tangible assets 90.2 110.0
Investments
Investment in joint venture
Share of gross assets 0.3 72.9
Share of gross liabilities - (22.8)
-------- -------
0.3 50.1
Investment in associates 14.6 13.3
-------- -------
14.9 63.4
-------- ---------
Total fixed assets 206.7 287.0
Current assets
Stocks 55.0 61.5
Debtors 86.9 97.3
Investments - 0.1
Cash at bank and in hand 37.6 83.5
-------- -------
179.5 242.4
-------- -------
Current liabilities
Creditors due within one year (111.3) (107.5)
Loans and overdrafts (1.8) (1.8)
-------- -------
(113.1) (109.3)
-------- -------
Net current assets 66.4 133.1
-------- ---------
Assets less current liabilities 273.1 420.1
Long term liabilities
Creditors due after more than one year (95.6) (248.3)
Provision for liabilities and charges
Deferred taxation (2.3) (2.4)
Other provisions (17.9) (26.0)
-------- -------
(20.2) (28.4)
-------- ---------
Assets less liabilities (excluding pension
liability) 157.3 143.4
Pension liability (35.2) (46.2)
-------- ---------
Assets less liabilities (including pension
liability) 122.1 97.2
-------- ---------
Shareholders' funds - equity 119.9 95.1
Minority shareholders' interest - equity 2.2 2.1
-------- ---------
Total equity 122.1 97.2
-------- ---------
Consolidated Cash Flow Statement
£ million Notes Year to 31 December
------------------
2003 2002
Net cash inflow from operating activities 4 68.2 76.9
Dividends received from joint venture - 0.2
Dividends received from associates 0.1 0.1
Returns on investments and servicing of finance (23.2) (10.8)
Taxation 8.9 (4.2)
Capital expenditure and financial investment (15.8) (25.8)
-------- --------
Cash inflow before acquisitions, disposals,
equity dividends and financing 38.2 36.4
Acquisitions and disposals 60.4 6.4
Equity dividends paid - (40.2)
Management of liquid resources 0.1 0.2
Financing (143.6) 53.8
-------- --------
Net cash (outflow)/inflow (44.9) 56.6
-------- --------
Reconciliation of Net Cash Flow to Movement in Net Debt
£ million Year to 31 December
-----------------
2003 2002
Net cash (outflow)/inflow (44.9) 56.6
Cash outflow/(inflow) arising from the change in debt and
lease financing 144.3 (51.4)
Cash inflow arising from the change in liquid resources (0.1) (0.2)
-------- ---------
Movement arising from cash flows 99.3 5.0
Debt issue costs (0.8) -
Loans and finance leases acquired with subsidiary - (0.2)
New finance leases (0.3) (0.2)
Exchange adjustment 6.1 12.7
-------- ---------
Movement in net debt 104.3 17.3
Net debt at 1 January (161.8) (179.1)
-------- ---------
Net debt at 31 December (57.5) (161.8)
-------- ---------
Notes
1. Segmental Analysis
£ million Year to 31 December
---------------------
2003 % 2002 %
restated
Turnover
Performance Analysis 148.7 32 184.0 33
Service Assurance 91.7 20 131.4 23
-------- ------ -------- ------
Communications 240.4 52 315.4 56
Network Products 174.4 37 164.7 30
Systems 51.4 11 78.8 14
-------- ------ -------- ------
466.2 100 558.9 100
-------- ------ -------- ------
Operating profit/(loss)
Operating profit before goodwill amortisation
and
exceptional items
Performance Analysis 4.4 12 10.0 20
Service Assurance 9.4 26 20.8 41
-------- ------ -------- ------
Communications 13.8 38 30.8 61
Network Products 16.7 47 15.0 30
Systems 5.5 15 4.6 9
-------- ------ -------- ------
36.0 100 50.4 100
-------- ------ -------- ------
Operating exceptional items - goodwill
impairment
Performance Analysis - (330.7)
Service Assurance - (530.4)
-------- --------
Communications - (861.1)
Network Products - (21.7)
Systems - (40.5)
-------- --------
- (923.3)
-------- --------
Operating exceptional items - other
Performance Analysis (5.1) (28.3)
Service Assurance (0.1) (8.6)
-------- --------
Communications (5.2) (36.9)
Network Products - (3.3)
Systems - (1.4)
Non-segmental (2.3) -
-------- --------
(7.5) (41.6)
-------- --------
Goodwill amortisation
Performance Analysis (3.9) (20.8)
Service Assurance (5.5) (33.5)
-------- --------
Communications (9.4) (54.3)
Network Products (0.3) (1.5)
Systems - (0.3)
-------- --------
(9.7) (56.1)
-------- --------
Operating profit/(loss) 18.8 (970.6)
-------- --------
2. Geographical Analysis
£ million Year to 31 December
---------------------
2003 % 2002 %
restated
Turnover by market
Europe 149.6 32 149.4 27
North America 229.3 49 322.4 57
Asia Pacific, Rest of Americas, Africa 87.3 19 87.1 16
-------- ------ -------- ------
466.2 100 558.9 100
-------- ------ -------- ------
Turnover by source
Europe 168.2 36 157.7 28
North America 262.1 56 368.9 66
Asia Pacific, Rest of Americas, Africa 35.9 8 32.3 6
-------- ------ -------- ------
466.2 100 558.9 100
-------- ------ -------- ------
Operating profit/(loss) by source
Operating profit before goodwill amortisation
and exceptional items
Europe 21.7 60 19.3 38
North America 13.0 36 30.2 60
Asia Pacific, Rest of Americas, Africa 1.3 4 0.9 2
-------- ------ -------- ------
36.0 100 50.4 100
-------- ------ -------- ------
Operating exceptional items - goodwill
impairment
Europe - (19.5)
North America - (901.8)
Asia Pacific, Rest of Americas, Africa - (2.0)
-------- --------
- (923.3)
-------- --------
Operating exceptional items - other
Europe (2.3) (3.6)
North America (5.2) (37.3)
Asia Pacific, Rest of Americas, Africa - (0.7)
-------- --------
(7.5) (41.6)
-------- --------
Goodwill amortisation
Europe (1.5) (1.6)
North America (8.2) (54.4)
Asia Pacific, Rest of Americas, Africa - (0.1)
-------- --------
(9.7) (56.1)
-------- --------
Operating profit/(loss) 18.8 (970.6)
-------- --------
3. (Loss)/Earnings per Share
£ million Year to 31 December
---------------
2003 2002
restated
Basic loss attributable to shareholders (0.5) (1,050.7)
-------- --------
Operating exceptional items
Goodwill impairment - 923.3
Other 7.5 41.6
Goodwill amortisation 9.7 56.1
(Profit)/loss on disposal of operations (3.6) 48.4
Exceptional interest charge 16.1 -
Prior year tax credit (6.0) (6.2)
Reversal of deferred tax assets - 19.0
Attributable taxation on exceptional items (1.7) (3.5)
Attributable taxation on the disposal of operations - 3.0
-------- --------
Headline earnings attributable to shareholders 21.5 31.0
-------- --------
Weighted average number of Ordinary shares in issue -
basic, headline and diluted (million) 929.3 922.5
-------- --------
4. Reconciliation of Operating Profit to Net Cash Inflow from Operating
Activities
£ million Year to 31 December
---------------
2003 2002
restated
Operating profit/(loss) 18.8 (970.6)
Depreciation 29.3 33.6
(Profit)/loss on disposal of tangible fixed assets (0.1) 4.1
Goodwill impairment - 923.3
Goodwill amortisation 9.7 56.1
Stock compensation expense 0.6 0.5
Deferred income received/(released) 0.2 (4.8)
Decrease in debtors 3.8 2.9
Decrease in stocks 3.1 15.2
Increase/(decrease) in creditors 5.7 (1.7)
Non-cash movement in pension fund liability 0.8 (0.1)
(Decrease)/increase in provisions (3.7) 18.4
-------- ---------
Net cash inflow from operating activities 68.2 76.9
-------- ---------
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 to 31 December 2002 as restated to reflect the implementation of
Financial Reporting Standard (FRS) 17 'Retirement Benefits' and Urgent Issues
Task Force (UITF) Abstract 38 'Accounting for ESOP Trusts'. Those accounts, upon
which the auditors issued an unqualified opinion modified to include a reference
to going concern, have been delivered to the Registrar of Companies.
The statutory accounts for the year to 31 December 2003, which include an
unqualified audit report, will be circulated to shareholders on 26 March 2004.
The Annual General Meeting will be held on 11 May 2004.
This information is provided by RNS
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