Final Results
Spirent PLC
24 February 2005
SPIRENT PLC
FINAL RESULTS FOR THE YEAR TO 31 DECEMBER 2004
London, UK - 24 February 2005: Spirent plc (LSE: SPT; NYSE: SPM), a leading
communications technology company, today announced its final results for the
year to 31 December 2004.
Highlights
Change %
£ million 2004 2003 Reported Constant
currency
--------------------------------------------------------------------------------
Turnover 475.0 466.2 2 9
Operating profit(1) 42.8 36.0 19 28
Profit before taxation and
amortisation(2) 37.4 30.0 25
Profit before taxation 24.0 0.3 > 100
Earnings per share(3) (pence) 2.99 2.31 29
• Our performance in 2004 showed a marked improvement as a result of our
investment in and focus on growth markets.
• In the Communications group, our Performance Analysis division achieved
a substantial improvement in its results, with turnover up 31 per cent in
constant currencies and operating profit(1)up materially from £4.4 million
to £19.7 million due to increased customer spending on next-generation
technologies.
• Actions have been taken to reinvigorate the Service Assurance division,
but we are not anticipating a recovery in its performance until the latter
part of 2005. Results for the division were affected by market pressures,
with turnover down 10 per cent in constant currencies and operating
profit(1)at break-even.
• The Network Products group delivered another strong performance, with
turnover up 11 per cent and operating profit(1)up 27 per cent in constant
currencies.
• The movement in the US dollar exchange rate reduced reported turnover by
£32.8 million, operating profit(1)by £3.2 million and profit before
taxation and amortisation(2)by £2.5 million.
• Product development spending in the Communications group was £60.4
million, 24 per cent of turnover, to secure our position at the forefront
of telecoms technology.
• Strong cash generation reduced net debt to £26.4 million at the end of
2004 compared with £57.5 million at the end of 2003.
Notes
(1)Before goodwill amortisation and operating exceptional items.
(2)Before exceptional items.
(3)Earnings per share is based on headline earnings as set out in note 3 to this
report.
(4)In constant currencies or on a constant currency basis means calculated at
constant exchange rates.
Commenting on the results, Anders Gustafsson, Chief Executive, said:
'The positive trends in customer spending seen towards the end of 2003 have
continued throughout 2004 and we are delighted to announce results showing a
substantial improvement in our Performance Analysis division. During 2005 we
expect this division to benefit from further customer spending on technologies
critical to the migration to packet-based networks. In our Service Assurance
division we have taken actions to cut costs and reinvigorate the business, but
we do not anticipate seeing a recovery in its performance until the latter part
of the year. Our Network Products group had another strong year in 2004 and is
expected to continue to make further progress in 2005.
'As expected, we have had a satisfactory start to 2005 and looking ahead I
anticipate further progress as we pursue our strategy of growing our
communications business.'
- ends -
Enquiries
Anders Gustafsson, Chief Executive Spirent plc +44 (0)1293 767676
Eric Hutchinson, Finance Director
Investor Relations
Catherine Nash Spirent plc +44 (0)1293 767676
Media
Tom Buchanan/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. 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 mentioned herein 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 extent to which
customers continue to invest in next-generation technology and deploy advanced
IP-based services; our ability to successfully expand our customer base; our
ability to continue to benefit from generally improving market conditions; the
prevailing market conditions and pace of economic recovery; our ability to
improve efficiency and adapt to economic changes and other changes in demand or
market conditions; our ability to develop and commercialise new products and
services, extend our existing capabilities in IP services and expand our product
offering internationally; our ability to attract and retain qualified personnel;
the effects of competition on our business; fluctuations in exchange rates and
heavy exposure to a weak US dollar; changes in the business, financial condition
or prospects of one or more of our major customers; risks of doing business
internationally; the financial burden of our pension fund deficit; risks
relating to the acquisition or sale of businesses and our subsequent ability to
integrate businesses; our reliance on proprietary technology; our exposure to
liabilities for product defects; our reliance on third party manufacturers and
suppliers; 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.
REPORT FOR THE YEAR TO 31 DECEMBER 2004
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 disposals,
acquisitions, equity dividends and financing) is also a key measure.
Operating profit and return on sales in the text are stated before goodwill
amortisation and operating exceptional items. In constant currencies or on a
constant currency basis means calculated at constant exchange rates. Headline
earnings per share as referred to in the text is based on headline earnings as
set out in note 3 to this report.
OPERATING AND FINANCIAL REVIEW
Overview
Our performance in 2004 showed a marked improvement as a result of our
investment in and focus on growth markets. In the Communications group, our
Performance Analysis division achieved a substantial improvement in its results,
with turnover up 31 per cent in constant currencies and operating profit up
materially from £4.4 million to £19.7 million due to increased customer spending
on next-generation technologies. Actions have been taken to reinvigorate the
Service Assurance division, but we are not anticipating a recovery in its
performance until the latter part of 2005. Results for the division were
affected by market pressures, with turnover down 10 per cent in constant
currencies and operating profit at break-even. The Network Products group
delivered another strong performance, with turnover up 11 per cent and operating
profit up 27 per cent in constant currencies. The movement in the US dollar
exchange rate reduced reported turnover by £32.8 million, operating profit by
£3.2 million and profit before taxation, amortisation and exceptional items by
£2.5 million. Product development spending in the Communications group was
£60.4 million, 24 per cent of turnover, to secure our position at the forefront
of telecoms technology. Strong cash generation reduced net debt to £26.4 million
at the end of 2004 compared with £57.5 million at the end of 2003.
Operating review
Communications
Change %
Constant
£ million 2004 2003 Reported currency
--------------------------------------------------------------------------------
Turnover
Performance Analysis 176.8 148.7 19 31
Service Assurance 74.7 91.7 (19) (10)
--------- ---------
Communications group 251.5 240.4 5 15
Operating profit
Performance Analysis 19.7 4.4 > 100 >100
Service Assurance 0.2 9.4 (98) (95)
--------- ---------
Communications group 19.9 13.8 44 63
Return on sales (%)
Performance Analysis 11.1 3.0
Service Assurance 0.3 10.3
Communications group 7.9 5.7
Our Communications group, Spirent Communications, is a leading provider of test
and monitoring solutions and systems for next-generation telecoms equipment and
services worldwide. In 2004 we achieved an improvement in the overall results of
our Communications group due to a recovery in the Performance Analysis division,
which has benefited from increased spending on next-generation technologies.
Results for the Service Assurance division were weak due to pressures in its
market and we are working to enhance our products to address customers' evolving
needs. Turnover for the group was up by 15 per cent on a constant currency basis
compared with 2003. As a result of increased volumes, operating profit increased
to £19.9 million representing a 63 per cent increase in constant currencies over
the prior year. Return on sales improved to 7.9 per cent compared with 5.7 per
cent in 2003.
In order to be able to meet our customers' needs and to secure our position at
the forefront of telecoms technology we have maintained our investment in
product development, spending a total of £60.4 million, or 24 per cent of the
Communications group's turnover, in the period (2003 £57.8 million and 24 per
cent). Total product development spending for the year was split as to £43.2
million in the Performance Analysis division and £17.2 million in the Service
Assurance division (2003 £39.4 million and £18.4 million, respectively). This
investment continues to be directed at next-generation technologies and at
maintaining the competitiveness of our products in terms of price and
functionality.
During the second half of 2004 we embarked on a number of initiatives to improve
the operational efficiency of the Communications group. These initiatives
include the further integration of important functions such as IT, finance,
human resources and group marketing and a rationalisation of the supply chain.
In addition, management reporting lines have been simplified with certain of our
smaller operations being integrated into our broadband and wireless activities.
These actions will enable the group to make better use of shared resources and
drive synergies across our various telecoms activities. A substantial headcount
reduction and certain other actions have also been undertaken in the Service
Assurance division. In total these actions, some of which were taken in 2005,
are expected to deliver annualised cost savings of approximately £4 million.
Our strategy for Spirent Communications continues to be to advance
next-generation technologies and services, to increase our presence
internationally and to extend our products into the enterprise sector. We
believe we have made progress in delivering this strategy during 2004 and, while
challenges still remain for us in relation to the Service Assurance division, we
are confident we now have the corporate structure and management with which to
drive the group along its future development path.
Performance Analysis
Our Performance Analysis division develops solutions for testing the
performance, functionality and conformance of telecoms equipment. This is
achieved by simulating voice, video and data traffic and large-scale networks
and by creating real-world conditions in the laboratories of network equipment
manufacturers, telecoms service providers, enterprises and government
departments. By subjecting equipment and networks to impairments and stresses
customers are able to ensure that the equipment or services they are about to
launch or deploy will withstand real-world conditions thereby reducing the
commercial risks inherent in developing or adopting new products.
While overall telecoms capital spending was up modestly in 2004 our Performance
Analysis division benefited directly from increased spending on next-generation
and 3G wireless technologies by our customers during the year. This trend, which
began to emerge towards the end of 2003, has largely been driven by the
migration from legacy, circuit-switched networks to Internet Protocol (IP) or
packet-based networks by telecoms service providers around the world. As a
result turnover in the Performance Analysis division grew by 31 per cent in
constant currencies in 2004. Operating profit of £19.7 million was up materially
over 2003 reflecting the operational gearing inherent in this business as
volumes increase. Return on sales recovered to 11.1 per cent for the period
compared with 3.0 per cent in 2003.
Our portfolio of leading-edge products, services and solutions is well aligned
with our customers' needs and in 2004 we grew sales in constant currencies in
all of our product groups and across all customer sectors. In particular, we saw
good demand for our core broadband access, metro Ethernet, gigabit Ethernet and
IPv6 test systems, driven by the move towards higher speeds of data
transmission, increased scalability and the proliferation of high bandwidth
applications such as voice, video and data, generally referred to as 'triple
play'. The momentum in the voice-over-IP (VoIP) services sector was behind the
increased sales of our market-leading IP telephony test solutions during the
year. Continuing concerns in relation to the delivery of mission critical
processes over enterprise networks and websites resulted in strengthened demand
for our web testing products both from network equipment manufacturers and
enterprise customers.
Our wireless handset test activities, which represent approximately 23 per cent
of this division's turnover, grew substantially in 2004 due largely to increased
demand for our industry-leading CDMA-2000 handset test systems. Demand has been
driven by the deployment of high speed 3G data services and the increased number
of new mobile devices in the market. There was good growth in sales of our
systems for testing advanced CDMA wireless services such as 'push-to-talk' and
those utilising mobile IP, reflecting an increased focus on testing the
applications that run on mobile devices. We are now a market leader in test
solutions for mobile devices employing 1xEV-DO technology, an advanced 3G CDMA
technology that was first used in Asia and is now undergoing deployment in the
US and Europe. During the year we also made initial sales of our wideband CDMA
handset testing solutions into strategic customers, including systems
incorporating our leading location-based testing capability using Assisted GPS.
On a geographic basis we have seen increased turnover worldwide in constant
currencies with sales particularly strong in the US where a large number of our
major customers are located. Strong relationships with important local customers
have led to record sales in China in 2004. In addition, the move by some of the
major global network equipment manufacturers to establish quality assurance and
research and development facilities in India and China has contributed to sales
in the Asia Pacific region. We also delivered growth in our European sales over
2003 due to the continued roll out of advanced digital subscriber line (DSL)
services in the region and good demand for our VoIP, web applications and
wireless handset testing systems.
The results for our Performance Analysis division demonstrate that our strategy
of providing solutions that enable customers to develop and deploy
next-generation equipment and services more efficiently and economically has
delivered growth. During 2005 we expect to continue to benefit from further
customer spending on technologies critical to the migration to packet-based
networks.
Service Assurance
Our Service Assurance division provides systems that enable telecoms service
providers to test and assure broadband leased line, DSL and IP services. Our
products include operations support systems 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 reduce their operational costs
by automating and centralising their network testing and service assurance
processes, reducing the need for expensive physical intervention and
facilitating faster responses to customers' problems.
The performance of our Service Assurance division in 2004 was affected by market
pressures with turnover for the division down 10 per cent in constant currencies
compared with 2003. Operating profit for 2004 was down substantially at £0.2
million compared with £9.4 million in 2003, after incurring an operating loss of
£2.0 million in the second half of the year.
We continued to supply and support DSL and leased line monitoring systems for
major US service providers during the year. However, sales of our leased line
systems declined faster than anticipated in the period as customers increasingly
focused their capital spending on advanced IP services. Service providers
continue to seek to reduce the cost of deploying DSL services and we have
responded to this trend by re-engineering certain elements of our offering to
increase the cost effectiveness of our DSL monitoring solutions. Our hardware
probes remained the largest contributor to sales in 2004 with maintenance and
support contracts representing just over a quarter of this division's sales in
the year. We have had success in the IP space with initial orders for
SmartSight(TM), our recently launched IP monitoring and diagnostic system, and
we have been encouraged by the levels of customer interest in this range of
solutions. We expect to launch further enhancements to the SmartSight product
range in 2005. Our field test business saw significant growth over 2003 driven
by the shipment of a major order of portable fault testers to a leading European
service provider.
The future growth of our Service Assurance division will come from the delivery
of cost effective DSL monitoring solutions, success in the IP services sector
and the broadening of our customer base geographically. Consequently, over the
last six months we have taken several steps to realign our resources and reduce
operating costs including changing the senior management, reducing employee
numbers by approximately 15 per cent and redirecting marketing and product
development efforts. We have increased our marketing efforts outside the US and,
in particular, have adopted a direct sales strategy in China which involves
exiting our joint venture, Spirent DM, and creating a direct sales force based
in Beijing. We are currently actively working with a number of non-US customers
to help them define their future strategy for DSL and IP service assurance.
The global telecoms sector is currently undergoing a migration from legacy
networks towards IP-based networks and services. These new networks and services
will require sophisticated monitoring and diagnostic systems to enable network
operators to deliver the high quality, reliable telecoms services their
customers have come to expect. We believe the actions we have taken in our
Service Assurance division will enable us to take advantage of this trend but we
are not anticipating a recovery in its performance until the latter part of
2005.
Network Products
Change %
Constant
£ million 2004 2003 Reported currency
--------------------------------------------------------------------------------
Turnover 187.8 174.4 8 11
Operating profit 20.4 16.7 22 27
Return on sales (%) 10.9 9.6
Our Network Products group produces innovative products and solutions for the
fastening, identification, protection and connectivity of wires and cables in
electrical and communications networks in a broad range of applications. The
group operates under the global brand HellermannTyton in 30 countries worldwide
and has manufacturing facilities in all the major geographic regions.
Our Network Products group delivered another strong performance in 2004 with
turnover of £187.8 million up 11 per cent in constant currencies over the same
period last year. Operating profit of £20.4 million was ahead by 27 per cent in
constant currencies over 2003. Return on sales improved to 10.9 per cent from
9.6 per cent due to increased operational efficiencies. As anticipated, results
for the second half of 2004 were marginally below the first half due to the
normal seasonality of this business. Capital expenditure was up over 2003 as
planned due to the expansion of capacity at our major manufacturing sites and we
plan to further increase capacity in 2005.
In Europe our sales benefited from increased automotive production and our
ability to increase the number of products per platform on new models. Sales in
the US were up due to the general economic recovery as well as our increased
penetration of the automotive and telecoms markets and successful new product
introductions. Sales in Japan through our associate company showed good growth
and we made progress in China due to the increasing OEM and automotive
production levels in the region.
We were successful in growing sales to the automotive sector, which represents
the largest proportion of this group's turnover, with increased cabling in cars
driving demand for our cable management and fastening products. In addition,
with the increasing trend among volume car manufacturers to move production to
emerging economies, our ability to supply customers directly in these regions
has helped increase sales. Sales to the heavy vehicles market were good in all
regions but particularly in the US where heavy truck manufacturers increased
their manufacturing volumes in the year. We increased sales in our next largest
market, the electrical wholesalers and catalogue houses, although their end
markets continue to be difficult. We saw growth in sales of our connectivity
systems but the communications market remains very price competitive and we took
actions during the year to reduce the cost base. The RapidNet pre-terminated
structured cabling system launched last year has received increasing acceptance
and we have secured several important installations in the enterprise and public
sector markets. We also secured further deployments for Autotools, our market-
leading automated bundling systems, at major automotive and white goods harness
makers worldwide during the year.
Our strong customer focus, technical leadership and world class operational
excellence have enabled us to capitalise on our market-leading positions in
Europe, South America and the Asia Pacific region during 2004 and we expect to
continue to make further progress in 2005.
Systems
Change %
Constant
£ million 2004 2003 Reported currency
--------------------------------------------------------------------------------
Turnover 31.3 37.9 (17) (14)
Operating profit 1.9 6.1 (69) (69)
Return on sales (%) 6.1 16.1
Figures in the above table relate to PG Drives Technology only. Divested
businesses contributed £4.4 million of turnover and £0.6 million of operating
profit in 2004 and £13.5 million of turnover and a £0.6 million operating loss
in 2003.
After the sale of our last remaining aerospace business in August 2004, the
Systems group now comprises PG Drives Technology, a leading supplier of power
control systems for powered medical and small industrial vehicles. The continued
weakness of the US dollar has adversely affected the trading performance of PG
Drives Technology with the transaction effect reducing operating profit by
approximately £3 million. Turnover and operating profit were down 14 per cent
and 69 per cent, respectively, in constant currencies compared with 2003. Return
on sales reduced to 6.1 per cent compared with 16.1 per cent in 2003. We have
had some success in reducing our exposure to the US dollar:sterling exchange
rate by increasing the number of components purchased in US dollars. We have
also moved some of our production to China to reduce the logistical costs of
supporting our activities in the Asia Pacific region.
Continuing constraints in US government healthcare funding for powered
wheelchairs dampened demand for our wheelchair systems during the year. Due to
the competitiveness of our established VSI, S-Drive and TRIO+ products we were,
however, successful in increasing customer penetration in both the mobility and
our new industrial vehicles markets during the year. In 2005 we are planning to
launch several new products that will enable us to strengthen our position in
both our addressed markets.
While results for this group are currently being affected by the weak US dollar
and reduced US government healthcare funding, longer term prospects for our main
mobility vehicle market remain positive, as we anticipate that increasing
affluence and the desire for mobility will increase the demand for powered
medical vehicles.
Financial review
Results
Change %
Constant
£ million 2004 2003 Reported currency
--------------------------------------------------------------------------------
Turnover 475.0 466.2 2 9
Operating profit 42.8 36.0 19 28
Return on sales (%) 9.0 7.7
Reported turnover for 2004 of £475.0 million was up 2 per cent and operating
profit of £42.8 million was up 19 per cent compared with 2003. In constant
currencies turnover was up by 9 per cent and operating profit was up by 28 per
cent compared with 2003. Return on sales for the Group improved to 9.0 per cent
from 7.7 per cent in 2003.
Reported results have been affected by the weakness of the US dollar relative to
sterling with an average US dollar:sterling exchange rate of $1.83: £1 in 2004
compared with $1.64: £1 in 2003. In 2004 currency translation reduced turnover
by £32.8 million, operating profit by £3.2 million and profit before taxation,
amortisation and exceptional items by £2.5 million.
Turnover by source grew in constant currency terms in all geographic regions
during 2004. Turnover by market grew in constant currencies in all regions
except the Asia Pacific region, where growth from the Network Products group and
Performance Analysis division was offset by lower demand for our Systems group's
products. Operating profit by source in North America grew by 64 per cent in
constant currencies compared with 2003. Operating profit also grew in the Asia
Pacific region but reduced by 4 per cent in constant currencies in Europe due to
the effect of the weak US dollar on trading.
Product development spending for the Group in 2004 was £67.3 million, or 14 per
cent of turnover (2003 £66.0 million and 14 per cent), the large majority of
which was invested in the Communications group.
A £0.7 million loss from interests in joint ventures in 2004 relates to our
share of the losses in our joint venture company in China, Spirent DM. Income
from interests in joint ventures reported in 2003 included our share of profits
from WAGO which was divested in April 2003.
Net interest payable, excluding the exceptional interest expense, reduced to
£6.8 million in 2004 compared with £9.3 million in 2003 due principally to the
continued reduction in net debt during 2003 and 2004.
Profit before taxation, amortisation and exceptional items was £37.4 million
compared with £30.0 million in 2003. Reported profit before taxation was £24.0
million compared with £0.3 million for 2003.
The effective rate of taxation for 2004 was 24.1 per cent compared with 27.7 per
cent for 2003 as a result of the utilisation of tax losses. We anticipate that
the effective tax rate for 2005 will be approximately 25 per cent.
Headline earnings per share of 2.99 pence increased by 29 per cent over 2003.
The weighted average number of shares outstanding at the period end was 939.2
million (2003 929.3 million). After charging goodwill amortisation and
exceptional items, basic earnings per share for 2004 was 1.70 pence (2003 loss
0.05 pence).
Net debt has reduced significantly to £26.4 million at 31 December 2004 from
£57.5 million at the end of 2003. The effect of translation has reduced net debt
by £5.4 million due principally to the weak US dollar.
Our borrowing covenant ratios at the year end were net interest cover of 5.8
times (covenant ratio: greater than or equal to 2.5 times) and net debt to
EBITDA of 0.5 times (covenant ratio: less than or equal to 2.25 times). Having
met the financial covenant requirements under the terms of our borrowings, we
will revert to semi-annual covenant tests, with covenants of net interest cover
of not less than 3.0 times and net debt to EBITDA of not more than 3.0 times,
and certain other restrictions within our borrowing terms will be relaxed.
We were granted an order of the High Court in November 2004 confirming the
cancellation of the share premium account and capital redemption reserve in
order to eliminate the deficit in the Company's distributable reserves.
Exceptional items
Operating exceptional items of £2.9 million have been charged in 2004 which
related to restructuring costs within our businesses and the exit from our joint
venture company, Spirent DM.
Total non-operating exceptional items in 2004 were a net loss of £0.9 million.
In August 2004 the remaining aerospace maintenance, repair and overhaul (MRO)
business was divested for a net loss of £2.5 million after charging £4.9 million
of goodwill previously written off to reserves and now reinstated in accordance
with Financial Reporting Standard 10. Provisions on vacant property and accrued
expenses related to prior year disposals of £1.6 million have been released.
A make-whole amount of £0.5 million has been charged as an exceptional interest
expense in 2004. In 2003 we reported an exceptional interest expense of £16.1
million in relation to the make-whole amount on the partial prepayment of our
senior notes and related bank fees.
Financing
During 2004 we prepaid a total of $19.4 million (£10.6 million) of our senior
notes. Following this $124.8 million (£65.0 million) of notes remained
outstanding at 31 December 2004. Our £30 million bank facility remained nil
drawn at the end of 2004 at which point we had cash at bank and in hand of £51.7
million. A new £30 million bank facility was put in place in February 2005 and
this facility has a 364-day term and a 12 month term-out option.
Cash flow
In 2004 we were cash generative in all our operating groups. Operating cash flow
for 2004 was down by 12 per cent at £60.3 million compared with £68.2 million in
2003 due largely to the pension payments referred to below.
Cash flow before disposals, acquisitions and financing, or free cash flow, for
2004 was £23.0 million compared with £38.2 million in 2003. Net capital
expenditure increased to £24.8 million as planned compared with net £15.8
million in 2003. We expect capital investment to increase to approximately £35
million in 2005 due to investments in IT within our Communications group and the
expansion of capacity within the Network Products group.
Net cash payments of tax of £3.1 million were made in 2004 compared with a net
inflow of £8.9 million in 2003 when we had the benefit of a carry back of tax
losses, principally in the US.
In 2004 we made our first additional annual cash contribution of £3.5 million to
our defined benefit UK pension plans and we will make a similar contribution to
the schemes in the first half of 2005. We also settled the liability of £3.7
million due to Nicholas Brookes, the former Chief Executive of the Company, on
his retirement in respect of his unfunded unapproved retirement benefit (UURB).
Excluding the make-whole amounts, net interest payments of £7.2 million in 2004
were below the £9.5 million paid in 2003. In 2004 we paid make-whole amounts of
£2.3 million, including £1.8 million accrued in 2003, on the prepayment of
senior notes compared with £13.7 million paid in 2003.
Disposals and acquisitions
We divested our MRO aerospace business for net cash proceeds of £2.5 million in
August 2004. During the year we acquired the minority shareholdings in two of
our Network Products subsidiaries for a cash consideration of £1.1 million.
Pension fund
At the end of 2004 the pension liability reduced to £27.0 million (31 December
2003 £35.2 million), net of deferred taxation of £11.1 million (2003 £13.0
million). The assets in the schemes have increased during the year as a result
of the performance of the equity markets and the Company's contribution of £3.5
million to the defined benefit UK pension plans. The Company will make a further
contribution of £3.5 million to the defined benefit UK pension plans in the
first half of 2005. The UURB liability of £3.7 million was settled in 2004.
Adoption of International Financial Reporting Standards
Spirent is required to comply with International Financial Reporting Standards
(IFRS) as adopted by the European Union with effect from 1 January 2005. For
the Spirent Group the main areas on which we expect IFRS to make an impact will
be the reporting and treatment of goodwill and intangible assets, share-based
payments, financial instruments and profit or loss on disposal of operations.
The adoption of IFRS will not affect our position under existing borrowing
covenants as they are calculated under UK GAAP as it existed at
31 December 2002 nor will IFRS change the cash flow, risk profile or economics
of the business going forward. Further details on the effect of the adoption of
IFRS are provided later in this report.
Dividend
In November we completed the process required to eliminate the deficit in the
Company's distributable reserves. Although we are now in a position to rebuild
distributable reserves through retained profits, out of which dividends may be
paid, no decision to resume dividend payments has been taken by the Board.
The Board and senior management
In August 2004 Anders Gustafsson was appointed Chief Executive after the
retirement of Nicholas Brookes on 30 June 2004. After joining the Group, Anders
Gustafsson took over direct responsibility for Spirent Communications. In
September 2004 My Chung, Executive Director of Spirent and President of Spirent
Communications, resigned from the Board and we would like to thank him for his
contribution to Spirent and wish him well for the future. In November William
Burns was appointed President of the Service Assurance division of Spirent
Communications.
In December we were delighted to announce the appointment of Kurt Hellstrom as a
non-executive director. He was formerly President and Chief Executive Officer of
Ericsson and has exceptional experience of the telecoms industry, particularly
in wireless communications and the Asia Pacific market. Richard Moley will
retire from the Board with effect from the date of the 2005 Annual General
Meeting and we would like to thank him for his valuable contribution during his
tenure as a non-executive director.
Outlook
During 2005 we expect our Performance Analysis division to benefit from further
customer spending on technologies critical to the migration to packet-based
networks. In our Service Assurance division we have taken actions to cut costs
and reinvigorate the business, but we do not anticipate seeing a recovery in its
performance until the latter part of 2005. Our Network Products group is
expected to continue to make further progress in 2005.
As expected, we have had a satisfactory start to 2005 and looking ahead we
anticipate further progress as we pursue our strategy of growing our
communications business.
Consolidated profit and loss account
£ million Notes Year to 31 December
2004 2004 2004 2003
Before Exceptional Total Total
exceptional items
items
Turnover - Group and share of joint
venture 475.0 - 475.0 488.6
Less share of joint venture's turnover - - - (22.4)
-------- --------- ------- -------
Turnover 1, 2 475.0 - 475.0 466.2
-------- --------- ------- -------
Operating profit 1, 2 33.7 (2.9) 30.8 18.8
----------------------------------------------------------------------------------------------------
Operating exceptional items - 2.9 2.9 7.5
Goodwill amortisation 9.1 - 9.1 9.7
Operating profit before goodwill
amortisation and exceptional items 1, 2 42.8 - 42.8 36.0
----------------------------------------------------------------------------------------------------
Income from interests in
Joint ventures (0.7) - (0.7) 2.7
Associates 2.8 - 2.8 2.1
-------- --------- ------- -------
Operating profit of the Group, joint
ventures and associates 35.8 (2.9) 32.9 23.6
Non-operating exceptional items
(Loss)/profit on disposal of operations - (0.9) (0.9) 3.6
-------- --------- ------- -------
Profit before interest 35.8 (3.8) 32.0 27.2
Net interest payable (6.8) - (6.8) (9.3)
Exceptional interest payable - (0.5) (0.5) (16.1)
Other finance expense (0.7) - (0.7) (1.5)
-------- --------- ------- -------
Profit before taxation 28.3 (4.3) 24.0 0.3
Taxation (7.7) - (7.7) (0.6)
-------- --------- ------- -------
Profit/(loss)after taxation 20.6 (4.3) 16.3 (0.3)
-------- --------- ------- -------
Minority shareholders'interest (0.3) (0.2)
------- -------
Profit/(loss)attributable to
shareholders 16.0 (0.5)
------- -------
Basic earnings/(loss) per share 3 1.70p (0.05)p
Headline earnings per share 3 2.99p 2.31p
Diluted earnings/(loss)per share 3 1.67p (0.05)p
------- -------
Consolidated statement of total recognised gains and losses
£ million Year to 31 December
-----------------
2004 2003
Profit/(loss) attributable to shareholders 16.0 (0.5)
Gain on lapsed options 1.2 1.2
Exchange adjustment on subsidiaries, joint ventures and
associates (0.7) 6.1
Overseas taxation on exchange adjustment - (0.2)
Reinstatement of deferred tax assets on pension
liability - 12.6
Actuarial gain recognised in the pension schemes net of
tax 2.1 0.2
------- --------
Total recognised gains and losses 18.6 19.4
------- --------
Consolidated balance sheet
£ million At 31 December
---------------------------
2004 2003
Fixed assets
Intangible assets 88.8 101.6
Tangible assets 86.3 90.2
Investments
Investment in joint venture - 0.3
Investment in associates 15.8 14.6
-------- -------
15.8 14.9
-------- --------
Total fixed assets 190.9 206.7
Current assets
Stocks 54.0 55.0
Debtors 89.9 86.9
Cash at bank and in hand 51.7 37.6
-------- -------
195.6 179.5
-------- -------
Current liabilities
Creditors due within one year (116.8) (111.3)
Loans and overdrafts (1.8) (1.8)
-------- -------
(118.6) (113.1)
-------- -------
Net current assets 77.0 66.4
-------- --------
Assets less current liabilities 267.9 273.1
Long term liabilities
Creditors due after more than
one year (80.2) (95.6)
Provision for liabilities and
charges
Deferred taxation (1.9) (2.3)
Other provisions (13.8) (17.9)
-------- -------
(15.7) (20.2)
-------- --------
Assets less liabilities
(excluding pension
liability) 172.0 157.3
Pension liability (27.0) (35.2)
-------- --------
Assets less liabilities
(including pension
liability) 145.0 122.1
-------- --------
Shareholders' funds - equity 143.7 119.9
Minority interests - equity 1.3 2.2
-------- --------
Total equity 145.0 122.1
-------- --------
Consolidated cash flow statement
£ million Note Year to 31 December
---------------
2004 2003
Net cash inflow from operating activities 4 60.3 68.2
Dividends received from associates 0.1 0.1
Returns on investments and servicing of finance (9.5) (23.2)
Taxation (3.1) 8.9
Capital expenditure and financial investment (24.8) (15.8)
-------- --------
Cash inflow before acquisitions, disposals,
equity dividends and financing 23.0 38.2
Acquisitions and disposals 1.2 60.4
Management of liquid resources - 0.1
Financing (9.5) (143.6)
-------- --------
Net cash inflow/(outflow) 14.7 (44.9)
-------- --------
Reconciliation of net cash flow to movement in net debt
£ million Year to 31 December
---------------
2004 2003
Net cash inflow/(outflow) 14.7 (44.9)
Cash outflow arising from the change in debt and lease
financing 11.0 144.3
Cash inflow arising from the change in liquid resources - (0.1)
-------- --------
Movement arising from cash flows 25.7 99.3
Debt issue costs 0.3 (0.8)
New finance leases (0.3) (0.3)
Exchange adjustment 5.4 6.1
-------- --------
Movement in net debt 31.1 104.3
Net debt at 1 January (57.5) (161.8)
-------- --------
Net debt at 31 December (26.4) (57.5)
-------- --------
Notes
1. Segmental analysis
£ million Year to 31 December
-----------------------
2004 % 2003 %
Turnover
Performance Analysis 176.8 37 148.7 32
Service Assurance 74.7 16 91.7 20
-------- ------ -------- ------
Communications 251.5 53 240.4 52
Network Products 187.8 40 174.4 37
Systems 35.7 7 51.4 11
-------- ------ -------- ------
475.0 100 466.2 100
-------- ------ -------- ------
Operating profit
Operating profit before goodwill
amortisation and exceptional items
Performance Analysis 19.7 46 4.4 12
Service Assurance 0.2 - 9.4 26
-------- ------ -------- ------
Communications 19.9 46 13.8 38
Network Products 20.4 48 16.7 47
Systems 2.5 6 5.5 15
-------- ------ -------- ------
42.8 100 36.0 100
-------- ------ -------- ------
Operating exceptional items
Performance Analysis 1.3 (5.1)
Service Assurance (1.9) (0.1)
-------- --------
Communications (0.6) (5.2)
Non-segmental (2.3) (2.3)
-------- --------
(2.9) (7.5)
-------- --------
Goodwill amortisation
Performance Analysis (3.7) (3.9)
Service Assurance (5.1) (5.5)
-------- --------
Communications (8.8) (9.4)
Network Products (0.3) (0.3)
-------- --------
(9.1) (9.7)
-------- --------
Operating profit 30.8 18.8
-------- --------
2. Geographical analysis
£ million Year to 31 December
-----------------------
2004 % 2003 %
Turnover by market
Europe 167.4 35 149.6 32
North America 223.4 47 229.3 49
Asia Pacific, Rest of Americas, Africa 84.2 18 87.3 19
-------- ------ -------- ------
475.0 100 466.2 100
-------- ------ -------- ------
Turnover by source
Europe 184.9 39 168.2 36
North America 243.4 51 262.1 56
Asia Pacific, Rest of Americas, Africa 46.7 10 35.9 8
-------- ------ -------- ------
475.0 100 466.2 100
-------- ------ -------- ------
Operating profit by source
Operating profit before goodwill
amortisation and exceptional items
Europe 20.6 48 21.7 60
North America 20.1 47 13.0 36
Asia Pacific, Rest of Americas, Africa 2.1 5 1.3 4
-------- ------ -------- ------
42.8 100 36.0 100
-------- ------ -------- ------
Operating exceptional items
Europe (2.1) (2.3)
North America (0.8) (5.2)
-------- --------
(2.9) (7.5)
-------- --------
Goodwill amortisation
Europe (1.5) (1.5)
North America (7.6) (8.2)
-------- --------
(9.1) (9.7)
-------- --------
Operating profit 30.8 18.8
-------- --------
3. Earnings per share
£ million Year to 31 December
----------------
2004 2003
Basic profit/(loss) attributable to shareholders 16.0 (0.5)
-------- --- ---------
Operating exceptional items 2.9 7.5
Goodwill amortisation 9.1 9.7
Loss/(profit) on disposal of operations 0.9 (3.6)
Exceptional interest charge 0.5 16.1
Prior year tax credit (1.3) (6.0)
Attributable taxation on exceptional items - (1.7)
-------- ---------
Headline earnings attributable to shareholders 28.1 21.5
-------- ---------
Weighted average number of Ordinary shares in issue -
basic and headline (million) 939.2 929.3
-------- ---------
Weighted average number of Ordinary shares - diluted
(million) 957.3 929.3
-------- ---------
4. Reconciliation of operating profit to net cash inflow from operating
activities
£ million Year to 31 December
----------------
2004 2003
Operating profit 30.8 18.8
Depreciation 25.4 29.3
Loss/(profit) on disposal of tangible fixed assets 0.4 (0.1)
Tangible fixed asset write-downs 0.6 2.2
Goodwill amortisation 9.1 9.7
Stock compensation expense 0.6 0.6
Deferred income received 4.9 0.2
(Increase)/decrease in debtors (9.1) 3.8
(Increase)/decrease in stocks (1.0) 3.1
Increase in creditors 9.3 5.7
Decrease in provisions (2.9) (5.9)
Pension fund liability (7.8) 0.8
-------- ---------
Net cash inflow from operating activities 60.3 68.2
-------- ---------
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 2003. Those accounts, upon which the auditors
issued an unqualified opinion, have been delivered to the Registrar of
Companies.
Adoption of International Financial Reporting Standards
Spirent is required to comply with International Financial Reporting Standards
(IFRS) as adopted by the European Union (EU) with effect from 1 January 2005.
For the Spirent Group the main areas on which we expect IFRS to make an impact
will be the reporting and treatment of goodwill and intangible assets, share-
based payments, financial instruments and profit or loss on disposal of
operations. The adoption of IFRS will not affect our position under existing
borrowing covenants as they are calculated under UK GAAP as it existed at 31
December 2002 nor will IFRS change the cash flow, risk profile or economics of
the business going forward.
Spirent is expecting to report two years of comparative data in accordance with
the requirements for US listed companies and as a consequence the IFRS
transition date for Spirent will be 1 January 2003, being the start of the
earliest period of the comparative information required.
We discuss below the areas that will be affected by the adoption of IFRS
compared with UK GAAP, based on IFRS expected to be in force at 31 December
2005. These are subject to ongoing review and endorsement by the EU and
interpretive guidance by the International Accounting Standards Board (IASB)
and are therefore still subject to change. All information provided below is
for illustrative purposes only and is subject to further management review and
external audit.
IFRS 3 'Business Combinations' prohibits amortisation of goodwill and requires
that it be carried at cost with impairment reviews undertaken annually or when
indicators of impairment exist. The Spirent Group did not make any major
acquisitions in either the 2003 or 2004 accounting periods and we will apply
IFRS 3 prospectively from the transition date. Goodwill amortisation charged
under UK GAAP for 2003 and 2004 was £9.7 million and £9.1 million, respectively,
and these charges will be reversed in the restatements under IFRS.
In accordance with IFRS 2 'Share-based Payment' a charge will be recognised for
the fair value of employee stock options granted. The fair value will be
calculated using a binomial model and will include all options granted since 7
November 2002 which are not vested at 1 January 2005 as allowed by the standard.
The charge, which does not affect cash flow, will consequently build up over
time. It is expected to be minimal for 2003 and in the region of £5 million for
2004.
IAS 19 'Employee Benefits' permits a number of different approaches for the
accounting treatment of defined benefit pension plans. Spirent expects to adopt
the approach which is similar to the UK standard Financial Reporting Standard
(FRS) 17 'Retirement Benefits'. Spirent adopted FRS 17 for UK GAAP reporting in
2003.
Spirent will apply IAS 32 and 39 'Financial Instruments' prospectively, that is
with effect from 1 January 2005, and hence no adjustments for financial
instruments will be required in the profit and loss restatements for 2003 and
2004. The principles of IAS 39 require that financial instruments be measured at
fair value. Spirent uses derivative financial instruments to hedge its exposure
to fluctuations in interest and foreign exchange rates. In general the number
and fair value adjustments of these transactions is relatively small and we
would therefore not anticipate a significant effect on our results in respect of
IAS 39 unless our activity in such instruments increases.
Goodwill written off to reserves and arising prior to 1 January 1998, which is
reinstated under UK GAAP, is not reinstated in the calculation of the profit or
loss on disposal of subsidiaries under IFRS. Furthermore, IAS 21 'The Effects of
Changes in Foreign Exchange Rates' requires the cumulative exchange differences
on foreign operations to be included in the calculation of profit or loss on
disposal. These combined requirements will increase the profit reported on our
disposals in 2003 by £5.0 million to £8.6 million and restate the loss reported
in 2004 by £4.9 million to a profit of £4.0 million.
There will be other less significant differences between IFRS and UK GAAP and
some changes to the presentation of our financial results required as a result
of the restatements under IFRS.
We expect the net effect of the above adjustments will be to increase the
reported level of earnings in respect of the 2003 and 2004 financial years under
IFRS compared with UK GAAP. This is principally because the reversal of the
goodwill amortisation charge and the adjustment in respect of the profit or loss
on disposals (both excluded for headline earnings calculations, in any event),
will exceed the share-based compensation charge arising under IFRS 2, the latter
being a non-cash item.
Restated figures for the 2004 interim and 2004 final results will be made
available before the publication of the 2005 interim results.
This information is provided by RNS
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