Interim Results
Spirent Communications PLC
10 August 2006
SPIRENT COMMUNICATIONS PLC
INTERIM RESULTS FOR THE FIRST HALF OF 2006
LONDON, UK, 10 August 2006 - Spirent Communications plc ("Spirent" or "the
Group")
(LSE: SPT; NYSE: SPM), a leading communications technology company, today
announces its interim results for the first half of 2006.
£ million First half First half
2006(1) 2005(1)
--------------------------------------------------------------------------------
Adjusted
Continuing operations
Revenue 138.2 126.5
Operating profit(2) 3.8 1.8
Profit before tax(3) 6.1 (1.1)
Adjusted earnings/(loss) per share(4) 0.61 (0.13)
Reported
Continuing operations
Revenue 138.2 126.5
Loss before tax (17.1) (46.1)
Basic loss per share (1.82) (4.87)
Group
Profit/(loss)for the period 141.3 (36.8)
--------------------------------------------------------------------------------
Notes
(1) First half 2006 refers to the period to 2 July 2006 and first half 2005
refers to the period to 3 July 2005.
(2) Before material one-time items, goodwill impairment, intangible
amortisation and share-based payment.
(3) Before material one-time items, goodwill impairment, intangible
amortisation, share-based payment, profit on disposal of operations and
costs associated with repayment of notes.
(4) Adjusted earnings per share is based on adjusted earnings as set out in
note 6.
• First half characterised by variable market conditions and significant
product transition:
- as announced on 14 June 2006 profitability was also impacted by short
term delays to product launches and higher product development and
sales and marketing spend in a very competitive market place.
- strong performance by new and existing products such as Spirent
TestCenterTM, Landslide and GPS positioning but a decline in some
older product lines.
- good growth in Asia.
• Reported results include:
- £157.1 million profit after tax on disposal of the HellermannTyton
Division.
- cost of £3.9 million for restructuring actions as announced on 29 June
2006 to realign resources and reduce operating expenses.
- goodwill impairment of £9.5 million in the Service Assurance division.
• Net cash at half year of £146.3 million.
• Sarbanes Oxley costs of £1 million in first half; £3 million expected
for the full year.
• Share buy back commenced and on track.
• Three strategic acquisitions completed in the year to date for an
initial consideration £37.5 million and the acquisition of Imperfect
Networks, announced separately today for £2.2 million, in line with our
strategy.
Anders Gustafsson, Chief Executive, commented:
"The first half was characterised by managing our newly focused communications
company through a period of significant product transition and variable market
conditions. These factors are expected to continue in the second half. Our
strategy of investing for the longer term in our existing and new products will
benefit our customers and positions us well to grow organically by gaining
market share for next-generation products and solutions in triple play, wireless
and fixed/mobile convergence. We are also growing through selective, strategic
acquisitions.
"The introduction of new products and enhancements to our existing products,
together with the contribution from our acquisitions, is expected to lead to a
modest increase in revenue for 2006 compared with 2005. This, combined with the
benefits of the restructuring actions we have taken, is expected to result in an
improved performance for the year as a whole."
- ends -
Enquiries
Anders Gustafsson, Chief
Executive Spirent Communications plc +44 (0)1293 767676
Eric Hutchinson, Chief Financial
Officer
Reg Hoare/Katie Hunt/Libby
Young Smithfield +44 (0)20 7360 4900
About Spirent Communications plc
Spirent Communications plc 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. The Systems
group develops power control systems for specialist electrical vehicles in the
mobility and industrial markets. Further information about Spirent
Communications plc can be found at www.spirent.com.
Spirent Communications plc 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
Communications 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 manage a significant transition in product
revenues to new product solutions incorporating latest technology; our ability
to successfully expand our customer base; continuing variable market conditions;
pace of economic recovery; our ability to improve efficiency, achieve the
benefits of our cost reduction goals 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 the US dollar; changes in the business,
financial condition or prospects of one or more of our major customers; risks of
doing business internationally; 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 Communications 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. .
INTERIM REPORT FOR THE FIRST HALF OF 2006
We evaluate the performance of Spirent based on revenue and operating profit/
(loss) before the effect of material one-time items, goodwill impairment,
intangible amortisation and share-based payment so that period on period
comparisons are not distorted. Operating profit /(loss) and return on sales are
referred to in the text before material one-time items, goodwill impairment,
intangible amortisation and share-based payment unless otherwise stated.
First half 2006 refers to the period to 2 July 2006 and first half 2005 refers
to the period to 3 July 2005.
Overview
Introduction
The first half of 2006 has been characterised by the transformation of Spirent
into a focused communications company and by a number of management challenges,
primarily variable market conditions and significant product transition. We
continue to make strong progress in developing and launching new products and
solutions for next-generation networks that enable our customers to reduce the
time and cost of testing and achieve faster time to revenue for new products and
services. We expect the benefits of these investments to come through
incrementally in the second half and going into 2007.
The year so far has included both the completion of the major disposal of the
HellermannTyton Division and the acquisition of four strategically important,
but smaller businesses. The disposal significantly improved our financial
position, and as expected enabled the Group to repay debt, strengthen the
pension fund and begin a share repurchase programme.
Results
The variable market conditions seen in 2005 continued through the first half of
this year impacting our results. Market conditions continue to reflect customers
delaying their investment in next-generation networks, a highly competitive
market and the continued consolidation of customer businesses, of which there
were further high profile mergers announced in the period. As a result, we
estimate that many of our markets are seeing little or no growth in the short
term, although we continue to remain positive on the prospects for long term
growth. Furthermore, we believe that the factors affecting Spirent have also
impacted our competitors, leading to our markets being fiercely competitive.
The other major impact on our first half performance was significant product
transition, which we expect to be an important feature of the year as a whole.
The financial effect was seen in terms of lower sales of our existing products
and higher investment in new products. The total spending on product development
by the Communications businesses totalled £30.0 million (first half 2005:
£28.4 million). We invested in Spirent TestCenter, W-CDMA performance test
equipment for mobile handsets, and triple play IP service assurance monitoring
solutions, as well as in our existing fast growing product lines.
Lastly, short term delays to product launches and our decision to continue to
incur a higher level of investment in sales and marketing throughout the first
half to create a stronger long term market position, have also impacted these
results.
New products
Product transition principally involves investing in the capability of products
and solutions through new launches and upgrades, whilst at the same time
managing the sales decline of some of our existing product lines. This
investment is designed to position Spirent strongly for market share gains under
any market conditions.
To date, new product launches have been well received by our customers who
reported enhanced functionality, improved productivity and reliability. We are
most encouraged by the initial sales performance of Spirent TestCenter, which
has already been purchased by over 90 customers worldwide, including most of the
leading global companies in our industry.
Other successes in the first half have included growing sales of the Landslide
product, the future of which will be underpinned by the subsequent acquisition
of SSE in July, the growth in the security test product, AvalancheTM, and a
strong performance in our Asia Pacific operations, especially in Performance
Analysis Broadband.
Restructuring actions
During the first half we indicated that we would continue to carefully manage
the balance between the cost base and maintaining the capability to generate
long term growth. Accordingly, at the end of the period we implemented
restructuring actions in our Performance Analysis and Service Assurance
divisions to realign resources and to reduce operating expenses. The major part
of these actions have taken place in the Service Assurance division, which
should enable it to maintain a near break-even result for the second half of
2006. Pro forma break-even sales for Service Assurance are estimated to be £36
million per year.
The total annualised cost reduction will be approximately £9.0 million per year.
The cost of these actions is a one-time charge in the period of £3.9 million, of
which £1.9 million has been paid in cash in the first half.
Acquisitions
Four acquisitions have been completed this year in line with our strategy to
continue to expand our breadth of expertise and solutions into new growth areas
such as IP multimedia subsystems ("IMS"), IP telephony and security test, whilst
boosting our offering in other areas such as wireless. The acquisitions were:
• SwissQual Holding AG ("SwissQual"), a provider of innovative test and
measurement solutions for wireless telecoms markets, for an initial
consideration of £27.8 million.
• QuadTex Systems, Inc ("QuadTex"), a provider of innovative and leading
test tools for IMS and VoIP testing, for an initial consideration of £4.3
million.
• Scientific Software Engineering, Inc ("SSE"), a provider of systems
for testing the performance and functionality of 2.5 and 3G wireless network
infrastructure already incorporated in our existing fast growing Landslide
product, for an initial consideration of £5.4 million.
• The assets of Imperfect Networks, Inc, a provider of security web
application test solutions, for an initial consideration of £2.2 million.
Strategic initiatives
Our strategy in our Communications businesses is to focus on creating
shareholder value through delivering innovative solutions for our customers.
Within this broad strategy our specific initiatives are underway to:
• Restructure our Global Sales Team to focus on major customers serving
core and growth segments, such as wireless, triple play and IMS;
• Continue to deliver high value solutions, services and products to all
customers, utilising partnerships to gain leverage of our technological
capabilities;
• Improve our time to market, through a significantly improved product
realisation management process;
• Increase our professional staff capabilities, simplify processes and
improve support infrastructure to our customers;
• Continue to unlock synergies within the company by exploiting our
technical leadership across new and different business segments; and
• Empower our employees to create a true performance culture and strive
for excellence.
Outlook
The first half was characterised by managing our newly focused communications
company through a period of significant product transition and variable market
conditions. These factors are expected to continue in the second half. Our
strategy of investing for the longer term in our existing and new products will
benefit our customers and positions us well to grow organically by gaining
market share for next-generation products and solutions in triple play, wireless
and fixed/mobile convergence. We are also growing through selective, strategic
acquisitions.
The introduction of new products and enhancements to our existing products,
together with the contribution from our acquisitions, is expected to lead to a
modest increase in revenue for 2006 compared with 2005. This, combined with the
benefits of the restructuring actions we have taken, is expected to result in an
improved performance for the year as a whole.
Operating review
Communications
£ million First half 2006 First half 2005 Change %
--------------------------------------------------------------------------------
Revenue
Performance Analysis 94.5 87.6 8
Service Assurance 24.9 20.2 23
---------------------------------------------------------------
Communications group 119.4 107.8 11
---------------------------------------------------------------
Operating profit/(loss)
Performance Analysis 3.3 11.4 (71)
Service Assurance 0.7 (9.0) >100
---------------------------------------------------------------
Communications group 4.0 2.4 67
---------------------------------------------------------------
Return on sales (%)
Performance Analysis 3.5 13.0
Service Assurance 2.8 -
Communications group 3.4 2.2
---------------------------------------------------------------
Revenue for the Communications group was up 11 per cent against the prior year
comparative period and operating profit improved to £4.0 million.
The results for Performance Analysis were impacted by the variable market
conditions experienced during the first half and by the major transition from
existing products. This has resulted in a decline in sales of our SmartBits and
AX products, as we build our market position with the new test platform, Spirent
TestCenter. We experienced a delay in the deployment of location based
technologies and wireless hand-set conformance test products. In addition there
have been delays to order intake for subscriber experience management test
devices, which will result in lumpy demand patterns.
Service Assurance saw a period of stability and the recognition of revenues in
relation to one-time projects for major customers, which resulted in higher
revenues and a small profit for the period.
We invested heavily in product development, all of which was expensed, resulting
in a charge of £30.0 million, 25 per cent of sales. Performance Analysis
invested £24.1 million (first half 2005: £19.9 million) and Service Assurance
£5.9 million (first half 2005: £8.5 million). A significant part of this
investment was in the development of Spirent TestCenter, W-CDMA performance test
equipment for hand-set, triple play IP service assurance monitoring solutions
and in our fast growing product lines, including IP telephony, security test and
wireless handset test products.
We undertook a significant cost reduction programme at the end of June 2006,
incurring a one-time cost of £3.9 million. This will result in annualised
savings of approximately £9.0 million, primarily in the Service Assurance
division.
Performance Analysis
The market for test equipment during the first half of 2006 was variable and
unpredictable. By geographic region we saw growth in Asia and Europe, but North
America continued to prove challenging. Wireless and positioning revenues formed
29 per cent of the total revenues for Performance Analysis in the first half
year. Revenues from our top 20 customers typically represent around 40 per cent
of Performance Analysis revenues. Major customers include Cisco, Alcatel,
Motorola, Huawei, and NTT.
Uncertainty due to customer consolidation through mergers and acquisitions,
shifts in technology and shifts in demand geographically has led to variable
demand for our test products. In addition we are undergoing a major product
transition as we develop new functionality and architecture for the new
platform, Spirent TestCenter. Spirent TestCenter was developed to change the
game in testing by delivering a host of solutions on a single platform. With
Spirent TestCenter, our customers can reduce the cost and time of testing,
achieving a faster time to revenue for their new products and services. Specific
benefits of Spirent TestCenter include:
• Significantly ramps the scale of testing;
• Tests much larger devices;
• Adds diagnostic testing through expert software; and
• Achieves faster time to test and automated testing.
A major release of Spirent TestCenter was made on 13 June 2006. We expect the
release to drive sales during the second half of 2006.
Underlying trends show that there is, and will continue to be, demand driven by
the deployment of next-generation networks, the requirement for tools to drive
productivity improvements in our customers development labs, and expansion in
Asia.
As we enter the second half of 2006 our objective continues to be to expand
within our core markets, to serve security test, access technologies, website
testing, carrier Ethernet and metro area networks, switching, IP telephony and
triple play (voice, video and data services). We see opportunities for expansion
and for revenue growth from new products launched in the first half of 2006,
including Spirent TestCenter, Abacus for IP telephony and Avalanche for security
and web testing. We intend to establish leading positions in wireless
infrastructure test, IMS and expand into serving manufacturing test. Overall,
Spirent TestCenter will form a significant part of revenues for 2006. We expect
it to contribute a fifth of our annual broadband test revenues in 2006 and
become proportionally more significant during 2007.
Our wireless and positioning test products saw a levelling off, after the high
growth in 2005. There was a lull in the CDMA market for us as EV-DO deployments
are bedded in and in W-CDMA markets as A-GPS solutions were deferred and HSDPA
deployments took priority. The wireless market remains attractive with high
speed data, 3G roll out, IP/mobile TV and location based services offering
growth opportunities. However, the W-CDMA service test market is highly
competitive. As a result we have identified critical areas in which to leverage
our capabilities and we expect that our strength in CDMA device testing and
positioning test will allow us to gain market share. Revenues from our GPS
positioning products saw a successful first half performance in North America
and Asia. We are also seeing traction in the European Galileo market. The
acquisition of SwissQual enables the establishment of a leading position in
subscriber experience management test for wireless networks.
Service Assurance
The markets for legacy service assurance solutions continue to decline as
anticipated. Next-generation monitoring solutions are still being evaluated by
the major service providers and final purchasing decisions have yet to be made.
Whilst the risk profile is increasing, due to the consolidation of service
providers, the potential rewards remain high, and with our considerable IP
expertise, long standing relationships with major carriers and demonstrable
capability in IPTV testing, we believe we are well positioned to achieve
success.
The bulk of the activity in Service Assurance in the first half relates to
leased line, DSL and packet based monitoring solutions, as well as professional
services and maintenance revenues. We saw our highest level of new packet based
solutions revenues, related to a one-time contract with a major US service
provider.
Revenues were higher than the first half of 2005, up by 23 per cent, this was
due to the recognition of £4.5 million in relation to the one-time project for
remote packet access testing. Although this was a one-time contract, it is
nevertheless clear evidence of our capability to develop and launch new products
into an evolving service assurance market. Profitability was achieved with £0.7
million of operating profit, compared with a loss of £9.0 million in the prior
year, with the improvement reflecting increased revenue and margin coupled with
the benefit of the restructuring actions taken in 2005.
The underlying legacy revenues for leased line services continue to be in long
term decline, as more focus shifts to next-generation networks. DSL monitoring
benefited from an increase in activity as major carriers continued to grow DSL
services and have worked off inventories of equipment from the previous year.
As a result of the expected decline in legacy revenues and in anticipation of
further delays in new product purchasing decisions, we took action at the end of
June to reduce the resource levels. After these actions, the break-even revenue
for 2007 for the Service Assurance division is estimated to be £36 million a
year. We continue to invest the majority of our resources in the development of
our next-generation triple play IP monitoring and field test solutions.
We are setting priorities to maximise the potential of our existing baseline
business, focusing on winning triple play monitoring in major service providers
and by increasing the scale of our field test handheld devices. This will result
in maintaining a near break-even position short term while we continue to invest
in the future and returning our Service Assurance division to growth.
Systems
£ million First half 2006 First half 2005 Change %
------------------------- ---------- ---------- ----------
Revenue 18.8 18.7 1
Operating profit 2.6 2.1 24
Return on sales (%) 13.8 11.2
------------------------- ---------- ---------- ----------
The Systems group comprises PG Drives Technology, a leading supplier of control
systems for electrically powered medical and small industrial vehicles. Revenue
was held back mainly due to constraints in US government healthcare funding for
powered wheelchairs, however operating profit was up 24 per cent benefiting from
product cost improvements and a reduction in logistical costs as we placed more
of our production in China to support our activities in the Asia Pacific region.
During the first half of 2006 we saw continued strong revenues from the two
wheelchair control systems which were launched in second half of 2005: the VR2,
low cost, mainstream wheelchair control system, and the R-net, our highly
sophisticated wheelchair system. These new products, together with our
established ones, enabled us to increase customer penetration in both the
mobility and industrial vehicles markets during the period. Later this year we
are planning further new product launches that will enable us to strengthen our
position in both our markets.
Financial Review
£ million First half 2006 First half 2005
--------------------------------------------------------------------------------
Continuing operations
Revenue 138.2 126.5
--------------------------------------------------------------------------------
Reported operating loss (10.6) (44.1)
Add back material one-time items:
Restructuring costs 3.9 5.4
Inventory absorption adjustment (2.3) -
Inventory provisions - 1.3
Goodwill impairment 9.5 37.0
Intangible amortisation 0.9 -
Share-based payment 2.4 2.2
--------------------------------------------------------------------------------
Adjusted operating profit 3.8 1.8
--------------------------------------------------------------------------------
Return on sales (%) 2.7 1.4
--------------------------------------------------------------------------------
The Network Products group has been treated as a discontinued operation and is
excluded from the above table. All amounts referred to below are in respect of
continuing operations unless otherwise stated.
Results
Group revenue for the first half of 2006 was 9 per cent above the same period in
2005. Adjusted operating profit was £3.8 million for the first half of 2006,
compared with £1.8 million for the first half of 2005. The first half of 2005
was impacted by an operating loss of £9.0 million in the Service Assurance
division and in the first half of 2006, this division reported an operating
profit of £0.7 million. The Performance Analysis division has reported flat
revenue for the first half of 2006 excluding the effect of exchange and growth
from acquisitions, and a decline in profitability due in part to high levels of
investment in product development and selling and marketing in a year of
significant product transition. Return on sales has improved to 2.7 per cent
compared with 1.4 per cent in the first half of 2005.
The translation effect of exchange rates, principally the US dollar, has
increased revenue by £4.4 million, although operating profit was not materially
affected by exchange. Excluding the effect of exchange rates and the growth
contributed by the two acquisitions completed during the first half of 2006,
SwissQual and QuadTex, growth in revenue was 2 per cent.
Revenue by market and by source grew over the first half of 2005 in all
geographic regions, particularly in Asia.
Income statement
Gross profit increased to £59.9 million, 43 per cent of revenue (first half
2005: £50.5 million, 40 per cent of revenue). Gross profit is reported after
expensing product development to cost of sales. The increase in gross profit,
which is after higher product development spend, is a result of the growth in
revenue; the reorganisation of our supply chain activities to increase
efficiency and moving to more outsourcing; and the increased absorption of
manufacturing overhead as we changed the application of our accounting policy in
Performance Analysis. The effect in the period of this last factor is to absorb
£2.3 million more overhead into inventory when compared to the first half of
2005. This benefited operating profit for the Performance Analysis division and
has been treated as a material one-time item in these results. This effect is
not expected to recur in future periods.
The investment in product development by the continuing Group in the first half
of 2006 was £31.2 million, or 23 per cent of revenue (first half 2005: £29.5
million, 23 per cent of revenue).
Non-segmental costs (before share-based payment) amounted to £2.8 million for
the first half of 2006, compared with £2.7 million (before share-based payments
and material one-time items) for the first half of 2005.
This year we are bearing the considerable cost of implementing the Sarbanes
Oxley Act of 2002. We estimate that the costs of this will amount to
approximately £3 million in 2006 of which approximately a third was incurred in
the first half.
As a result of the decline in revenues from some of our existing products and
the delay to our expectations in securing orders for our new IP products and
services in the Service Assurance division, and as anticipated in the trading
update of 14 June, we are taking a goodwill impairment charge of £9.5 million
(first half 2005: £37.0 million). The carrying value of the Service Assurance
division at the end of the first half of 2006 was £14.1 million including
goodwill of £10.3 million.
Restructuring costs resulting from the cost reduction actions announced in June
of £3.9 million, which is lower than the £5 million originally anticipated, were
charged in the first half of 2006.
We made two acquisitions during the first half of 2006 and in accordance with
accounting standards have performed valuations to determine the fair value of
identifiable intangible assets acquired. These intangible assets are being
amortised over their estimated useful lives in the range of five to ten years
and this has resulted in an amortisation charge to the income statement of
£0.9 million for the first half of 2006. Future acquisitions will result in the
establishment of further intangible assets and a consequential increase in the
level of amortisation being expensed.
The charge for share-based payment for the first half of 2006 was £2.4 million
(first half 2005: £2.2 million).
Net interest income in the first half of 2006 was £2.3 million compared with a
charge of £2.9 million in the same period of 2005, having repaid our senior loan
notes and funded the pension scheme from the proceeds of the sale of the
HellermannTyton Division in February 2006. An additional interest charge of £8.8
million was reported related to the early redemption of our loan notes.
Reported loss before tax
Reported loss before tax for the first half of 2006 was £17.1 million compared
with a loss before tax of £46.1 million for the first half of 2005. Adjusted
profit before tax, is set out below.
£ million First half 2006 First half 2005
--------------------------------------------------------------------------------
Reported loss before tax from continuing
operations (17.1) (46.1)
Material one-time items:
Restructuring costs 3.9 5.4
Inventory absorption adjustment (2.3) -
Inventory provisions - 1.3
Goodwill impairment 9.5 37.0
Intangible amortisation 0.9 -
Share-based payment 2.4 2.2
Profit on the disposal of operations - (0.9)
Costs associated with the repayment of
loan notes 8.8 -
--------------------------------------------------------------------------------
Adjusted profit/(loss) before tax 6.1 (1.1)
--------------------------------------------------------------------------------
Tax
The effective rate of tax for the first half of 2006 was 4.9 per cent. The
effective tax charge will trend towards normal tax rates in future as profits
recover.
Earnings per share
Basic earnings per share was 14.80 pence, including the profit on the sale of
the HellermannTyton Division (first half 2005: loss per share 3.90 pence).
Adjusted earnings per share from continuing operations, adding back the effect
of goodwill impairment, material one-time charges, intangible amortisation,
share-based payment, profit or loss on disposal of operations and costs
associated with the repayment of loan notes and any related tax, was 0.61 pence
(first half 2005: loss 0.13 pence). We believe that this measure provides
greater comparability of the underlying performance of the Group from period to
period.
Discontinued operations
A profit from discontinued operations of £158.7 million has been reported, being
that from the disposal of the HellermannTyton Division of £157.1 million and the
operating result for the period of £1.6 million up to disposal, both net of tax.
The disposal was completed on 15 February 2006.
The profit on the sale of operations was £165.3 million before tax of £8.2
million, and comprises net proceeds of £283.7 million less net assets disposed
of £120.2 million, cumulative exchange gains of £1.3 million and a pension fund
curtailment gain of £0.5 million.
The net proceeds from the disposal of the HellermannTyton Division are set out
below compared with the pro forma proceeds included in the circular distributed
to shareholders shown for comparison. Note that £6.7 million of the transaction
costs were expensed and reported in the 2005 result, of which £5.2 million were
paid in 2006. The tax liability of £8.2 million will be paid in the second half
of 2006.
Net proceeds
£ million First half 2006 Second half 2005 Total Pro forma
--------------------------------------------------------------------------------
Cash free/debt free
equivalent value 297.6 - 297.6 288.9
Debt assumed (9.4) - (9.4) (11.2)
--------------------------------------------------------------------------------
Cash consideration 288.2 - 288.2 277.7
Transaction costs (4.5) (6.7) (11.2) (9.8)
Tax (8.2) - (8.2) (9.0)
--------------------------------------------------------------------------------
275.5 (6.7) 268.8 258.9
--------------------------------------------------------------------------------
Total proceeds from the disposal on a cash free/debt free equivalent value were
£8.7 million greater, principally due to higher working capital than anticipated
at the end of 2005, although expenses amounted to £1.4 million more.
Proceeds from the sale were applied as follows:
• Repayment of senior loan notes of $124.8 million (£70.5 million);
• Payment of an amount payable on the early redemption of the loan notes
("make-whole amount") of $12.9 million (£7.4 million);
• Break fees of £2.3 million in respect of interest rate swaps connected
with the senior loan notes;
• Special contribution of £47.0 million to the UK final salary pension
scheme; and
• Commencement of the on-market share repurchase programme.
The balance of the proceeds were placed on deposit.
Acquisitions
During the first half of 2006 we completed two acquisitions SwissQual and
QuadTex. We also announced two further acquisitions; SSE in July and Imperfect
Networks announced today. All these acquisitions are within our Performance
Analysis division.
The acquisition of SwissQual was completed on 23 January 2006 for an initial
consideration of Swiss francs 62.5 million (£27.8 million) which was paid in
cash. There is further consideration payable of up to Swiss francs 28.0 million
(£12.4 million) depending on revenue growth and various technical and financial
milestones.
QuadTex was acquired on 13 February 2006 for an initial consideration of $7.5
million (£4.3 million), paid in cash. There is further consideration of up to
$1.5 million (£0.9 million) payable depending on certain technical milestones
and the retention of key employees.
SSE was completed on 10 July 2006 and the initial consideration settled by way
of a cash payment of $10.0 million (£5.4 million). There is a further amount
payable of up to $6.0 million (£3.3 million) depending on the satisfaction of
certain technical milestones and the retention of key employees.
The assets of Imperfect Networks, a provider of security web application test
solutions, have been acquired for an initial consideration of $4.0 million (£2.2
million) payable in cash on completion with up to a further $4.0 million (£2.2
million), payable depending on the satisfaction of certain technical milestones
and revenues to be achieved in 2007.
Financing and cash flow
At the end of the first half of 2006 the Group was debt free with cash and cash
equivalents of £146.3 million (31 December 2005: net debt £35.6 million). Cash
and investments are principally held in sterling and earn normal market rates of
interest. Cash of £10.5 million is held in escrow in respect of long term
leasehold obligations as a result of the balance sheet reconstruction in 2004,
in order to enable the share repurchase programme to be executed. The senior
loan notes, which stood at £70.9 million at 31 December 2005, were our principal
borrowings; these were repaid in February 2006 out of the proceeds of the sale
of the HellermannTyton Division.
Total Group operating cash flow was an outflow of £52.6 million for the first
half of 2006 compared with an inflow of £4.2 million in the first half of 2005.
This outflow includes £47.0 million paid out in February 2006 to fund the UK
final salary pension scheme, and £1.9 million, of the total £3.9 million charged
in respect of restructuring costs in June. Increases in working capital were
experienced partly due to inventory build in preparation for the launch of the
latest release of Spirent TestCenter.
Net interest payments were £10.6 million, this includes the make-whole amount of
£7.4 million and interest rate swap break fees of £2.3 million.
The disposal of the HellermannTyton Division contributed £278.5 million to the
cash inflow from investing activities and the acquisitions of SwissQual and
QuadTex resulted in a cash outflow of £32.6 million.
The cash outflow in respect of the on-market share repurchase programme during
the period amounted to £7.2 million.
Net capital expenditure was £8.2 million in the first half of 2006 (first half
2005: £15.8 million, of which £8.0 million related to the Network Products
group). We expect capital expenditure for the full year to be in the region of
£13 million. The depreciation charge was £6.7 million in the first half for the
continuing operations and is expected to be approximately £13 million for the
full year.
Pension fund
At the end of the first half of 2006 the UK final salary pension scheme was £4.3
million in surplus (31 December 2005: deficit £50.8 million) having been funded
in February 2006 by way of a special contribution of £47.0 million from the
proceeds of the disposal of the HellermannTyton Division. Other pension
obligations amounted to £0.9 million (31 December 2005: £0.7 million).
On-market share repurchase programme
We commenced an on-market share repurchase programme in May 2006 following
completion of certain actions, one of which was obtaining shareholder approval
for Spirent to make on-market share repurchases of up to 14.99 per cent of the
issued share capital.
In the first half year we repurchased 20.1 million shares at an average price of
40.6 pence. During July we have bought a further 16.0 million shares, which
brings the average price per share to date to 38.3 pence.
Dividend
No dividend is being declared in respect of the first half of 2006.
Consolidated income statement
--------------------------------------------------------------------------------
£ million Notes First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Continuing operations
Revenue 2, 3 138.2 126.5 259.3
Cost of sales (78.3) (76.0) (153.1)
--------------------------------------------------------------------------------
Gross profit 59.9 50.5 106.2
Operating expenses (70.5) (94.6) (145.2)
--------------------------------------------------------------------------------
Operating loss 2 (10.6) (44.1) (39.0)
Profit on the disposal of operations - 0.9 3.9
--------------------------------------------------------------------------------
Loss before interest (10.6) (43.2) (35.1)
Finance income 3.6 1.0 1.5
Finance costs (1.3) (3.9) (8.1)
Costs associated with the repayment
of loan notes (8.8) - -
--------------------------------------------------------------------------------
Loss before tax (17.1) (46.1) (41.7)
Tax - overseas (0.3) (0.1) 4.0
--------------------------------------------------------------------------------
Loss for the period from continuing
operations after tax (17.4) (46.2) (37.7)
Discontinued operations 5
Profit from discontinued operations 158.7 9.4 13.2
--------------------------------------------------------------------------------
Profit/(loss) for the period 141.3 (36.8) (24.5)
--------------------------------------------------------------------------------
Attributable to:
Equity holders of parent 141.3 (37.0) (24.9)
Minority shareholders' interests -
discontinued operations - 0.2 0.4
--------------------------------------------------------------------------------
Profit/(loss) for the period 141.3 (36.8) (24.5)
--------------------------------------------------------------------------------
Earnings/(loss) per share (pence) 6
Basic earnings/(loss) 14.80 (3.90) (2.62)
Basic loss from continuing operations (1.82) (4.87) (3.97)
Diluted earnings/(loss) 14.71 (3.90) (2.62)
Diluted loss from continuing
operations (1.82) (4.87) (3.97)
--------------------------------------------------------------------------------
Consolidated statement of recognised income and expense
--------------------------------------------------------------------------------
£ million First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Exchange differences on retranslation of
foreign operations (3.9) 1.4 4.1
Exchange gain taken to profit on sale (1.3) - -
Actuarial gains/(losses) on defined benefit
pension plans 6.8 (4.2) (16.1)
(Losses)/gains on cash flow hedges (1.9) (0.9) 1.4
Deferred tax asset on pension liability - - (11.1)
Tax on actuarial losses - 0.3 -
--------------------------------------------------------------------------------
Net expense recognised directly in equity (0.3) (3.4) (21.7)
Profit/(loss) for the period 141.3 (36.8) (24.5)
--------------------------------------------------------------------------------
Total recognised income and expense for the
period 141.0 (40.2) (46.2)
--------------------------------------------------------------------------------
Attributable to:
Equity holders of parent 141.0 (40.5) (46.8)
Minority shareholders' interests -
discontinued operations - 0.3 0.6
--------------------------------------------------------------------------------
141.0 (40.2) (46.2)
--------------------------------------------------------------------------------
Consolidated statement of changes in equity
--------------------------------------------------------------------------------
£ million First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Total recognised income and expense 141.0 (40.2) (46.2)
New shares issued 1.0 2.3 2.7
Share-based payment 2.7 2.2 5.4
On-market share repurchase (8.2) - -
Employee share ownership trust 0.4 - -
Minority interests sold (1.9) - -
--------------------------------------------------------------------------------
Total movement 135.0 (35.7) (38.1)
At 1 January 122.2 160.3 160.3
--------------------------------------------------------------------------------
At the end of the period 257.2 124.6 122.2
--------------------------------------------------------------------------------
Consolidated balance sheet
--------------------------------------------------------------------------------
£ million First half First half 31 December
2006(1) 2005(1) 2005
--------------------------------------------------------------------------------
Assets
Non current assets
Intangible assets 96.3 74.4 71.5
Property, plant and equipment 27.7 94.0 30.1
Investment in associates - 14.6 -
Trade and other receivables 1.6 - 1.7
Defined benefit pension plan
surplus 4.3 - -
Deferred tax 1.1 11.4 1.0
--------------------------------------------------------------------------------
131.0 194.4 104.3
--------------------------------------------------------------------------------
Current assets
Inventories 32.3 57.8 27.0
Trade and other receivables 59.5 99.1 56.3
Financial assets 0.4 - 2.6
Cash and cash equivalents 146.3 40.1 49.2
--------------------------------------------------------------------------------
238.5 197.0 135.1
--------------------------------------------------------------------------------
Assets held in disposal group
held for sale - - 164.1
--------------------------------------------------------------------------------
Total assets 369.5 391.4 403.5
--------------------------------------------------------------------------------
Liabilities
Current liabilities
Trade and other payables (67.6) (94.3) (62.9)
Current tax (31.1) (29.2) (24.7)
Financial liabilities - (2.7) (4.6)
Provisions and other liabilities (3.3) (3.3) (4.1)
--------------------------------------------------------------------------------
(102.0) (129.5) (96.3)
--------------------------------------------------------------------------------
Non-current liabilities
Trade and other payables (1.0) (4.6) (0.7)
Financial liabilities - (80.8) (73.2)
Defined benefit pension plan
deficit (0.9) (39.2) (51.5)
Deferred tax - (2.2) (0.8)
Provisions and other liabilities (8.4) (10.5) (10.1)
--------------------------------------------------------------------------------
(10.3) (137.3) (136.3)
--------------------------------------------------------------------------------
Liabilities included in disposal
group held for sale - - (48.7)
--------------------------------------------------------------------------------
Total liabilities (112.3) (266.8) (281.3)
--------------------------------------------------------------------------------
Net assets 257.2 124.6 122.2
--------------------------------------------------------------------------------
Capital and reserves
Share capital 32.3 32.1 32.2
Share premium account 8.7 3.9 4.4
Capital reserve 6.8 10.4 10.2
Retained earnings, translation
reserve and net unrealised gains
and losses 209.4 76.6 73.5
--------------------------------------------------------------------------------
Equity holders of parent 257.2 123.0 120.3
Minority interests - 1.6 1.9
--------------------------------------------------------------------------------
Total equity 257.2 124.6 122.2
--------------------------------------------------------------------------------
1 First half 2006 refers to the position at 2 July 2006 and first half 2005
refers to the position at 3 July 2005.
Consolidated cash flow statement
--------------------------------------------------------------------------------
£ million Notes First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Cash flows from operating activities
Cash (used in)/generated from
operations 7 (49.9) 6.1 34.0
Tax paid (2.7) (1.9) (4.6)
--------------------------------------------------------------------------------
Net cash (used in)/from operating
activities (52.6) 4.2 29.4
--------------------------------------------------------------------------------
Cash flows from investing activities
Dividends received from associates - - 0.2
Interest received 2.1 0.9 1.4
Disposal of operations 278.5 0.9 2.4
Purchase of property, plant and
equipment (8.4) (16.1) (30.5)
Proceeds from sale of property, plant
and equipment 0.2 0.3 0.6
Acquisition of subsidiaries (32.6) - -
--------------------------------------------------------------------------------
Net cash from/(used in) investing
activities 239.8 (14.0) (25.9)
--------------------------------------------------------------------------------
Cash flows from financing activities
Interest paid (0.9) (3.7) (7.4)
Interest element of finance lease
rental payments - (0.2) (0.5)
Costs associated with the repayment
of loan notes and swap break fees (9.7) - -
Proceeds from the issue of share
capital 1.4 2.3 2.7
On-market share repurchase (7.2) - -
Repayment of borrowings (95.6) - (0.2)
New borrowings 23.0 - -
Repayment of capital element of
finance lease rentals - (0.5) (1.4)
--------------------------------------------------------------------------------
Net cash used in financing activities (89.0) (2.1) (6.8)
--------------------------------------------------------------------------------
Net increase/(decrease) in cash and
cash equivalents 98.2 (11.9) (3.3)
Cash and cash equivalents at the
beginning of the period 48.8 51.0 51.0
Effect of exchange rate changes (0.7) 0.2 1.1
--------------------------------------------------------------------------------
Cash and cash equivalents at the end
of the period 146.3 39.3 48.8
--------------------------------------------------------------------------------
Cash and cash equivalents comprise:
Cash and cash equivalents 146.3 40.1 49.2
Overdrafts - (0.8) (0.4)
--------------------------------------------------------------------------------
146.3 39.3 48.8
--------------------------------------------------------------------------------
Notes to the financial information
1 Basis of preparation
The interim financial information has been prepared on the basis of the
accounting policies set out in the Group's statutory accounts for the year to 31
December 2005, which have been filed with the Registrar of Companies. The
interim financial information is unaudited but has been reviewed by the
auditors. The interim financial information does not constitute statutory
accounts as defined in Section 240 of the Companies Act 1985. The comparative
financial information for the year to 31 December 2005 is based on the statutory
accounts for that period. The auditors report on those accounts was unqualified
and did not contain a statement made under Section 237(2) or Section 237(3) of
the Companies Act 1985.
The Interim Report for the period ended 2 July 2006 was approved by the
directors on 10 August 2006.
2 Segmental analysis
--------------------------------------------------------------------------------
£ million Performance Service Commun- Systems Non- Continuing
Analysis Assurance ications segmental operations
Total
--------------------------------------------------------------------------------
First half 2006
Revenue 94.5 24.9 119.4 18.8 - 138.2
--------------------------------------------------------------------------------
Operating
profit/(loss)
before
material
one-time
items,
goodwill
impairment,
intangible
amortisation
and
share-based
payment 3.3 0.7 4.0 2.6 (2.8) 3.8
Material
one-time items
(note 4) 0.8 (2.4) (1.6) - - (1.6)
Goodwill
impairment - (9.5) (9.5) - - (9.5)
Intangible
amortisation (0.9) - (0.9) - - (0.9)
Share-based
payment (1.5) (0.6) (2.1) (0.1) (0.2) (2.4)
--------------------------------------------------------------------------------
Operating
(loss)/profit 1.7 (11.8) (10.1) 2.5 (3.0) (10.6)
--------------------------------------------------------------------------------
First half 2005
Revenue 87.6 20.2 107.8 18.7 - 126.5
--------------------------------------------------------------------------------
Operating
profit/(loss)
before
material
one-time
items,
goodwill
impairment and
share-based
payment 11.4 (9.0) 2.4 2.1 (2.7) 1.8
Material
one-time items
(note 4) (2.4) (4.0) (6.4) - (0.3) (6.7)
Goodwill
impairment - (37.0) (37.0) - - (37.0)
Share-based
payment (1.4) (0.6) (2.0) (0.1) (0.1) (2.2)
--------------------------------------------------------------------------------
Operating
(loss)/profit 7.6 (50.6) (43.0) 2.0 (3.1) (44.1)
--------------------------------------------------------------------------------
Year 2005
Revenue 178.8 42.8 221.6 37.7 - 259.3
--------------------------------------------------------------------------------
Operating
profit/(loss)
before
material
one-time
items,
goodwill
impairment and
share-based
payment 22.0 (9.6) 12.4 4.4 (5.3) 11.5
Material
one-time items
(note 4) (2.5) (5.4) (7.9) - (0.5) (8.4)
Goodwill
impairment - (37.0) (37.0) - - (37.0)
Share-based
payment (3.6) (1.2) (4.8) (0.1) (0.2) (5.1)
--------------------------------------------------------------------------------
Operating
(loss)/profit 15.9 (53.2) (37.3) 4.3 (6.0) (39.0)
--------------------------------------------------------------------------------
Revenue and operating profit for discontinued operations is disclosed in note 5.
3 Geographical analysis
--------------------------------------------------------------------------------
£ million First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Revenue by market
Continuing operations
Europe 24.0 20.7 43.0
North America 80.3 75.1 158.2
Asia Pacific, Rest of Americas, Africa 33.9 30.7 58.1
--------------------------------------------------------------------------------
138.2 126.5 259.3
--------------------------------------------------------------------------------
Revenue by source
Continuing operations
Europe 35.8 30.5 61.2
North America 92.3 87.2 180.9
Asia Pacific, Rest of Americas, Africa 10.1 8.8 17.2
--------------------------------------------------------------------------------
138.2 126.5 259.3
--------------------------------------------------------------------------------
Average exchange rates
US dollar 1.79 1.87 1.82
Euro 1.46 1.46 1.46
--------------------------------------------------------------------------------
4 Material one-time items
--------------------------------------------------------------------------------
£ million First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Continuing operations
Restructuring costs (including write-down of
property, plant and equipment and lease
provisions) 3.9 5.4 6.9
Inventory absorption adjustment (2.3) - -
Inventory provision - 1.3 1.4
Exit from joint venture - - 0.1
--------------------------------------------------------------------------------
1.6 6.7 8.4
--------------------------------------------------------------------------------
There is no tax effect in respect of the material one-time items.
5 Discontinued operations
--------------------------------------------------------------------------------
First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Revenue 28.0 103.9 205.5
--------------------------------------------------------------------------------
Operating profit 2.3 11.7 24.4
Share of profit of associates 0.2 0.7 2.7
Profit on disposal of operations 165.3 - (6.7)
Net finance costs (0.1) (0.4) (1.1)
--------------------------------------------------------------------------------
Profit before tax 167.7 12.0 19.3
Tax (0.8) (2.6) (6.1)
Tax on the disposal of operations (8.2) - -
--------------------------------------------------------------------------------
Profit for the period 158.7 9.4 13.2
--------------------------------------------------------------------------------
Discontinued operations relate to the HellermannTyton Division.
6 Earnings/(loss) per share
--------------------------------------------------------------------------------
£ million Continuing Discontinued Total
operations operations operations
--------------------------------------------------------------------------------
First half 2006
(Loss)/profit
for the year
attributable
to equity
holders of
parent (17.4) 158.7 141.3
Material
one-time items 1.6 - 1.6
Goodwill
impairment 9.5 - 9.5
Share-based
payment 2.4 0.3 2.7
Intangible
amortisation 0.9 - 0.9
Costs
associated
with the
repayment of
loan notes 8.8 - 8.8
Profit on the
disposal of
operations - (165.3) (165.3)
Tax on the
disposal of
operations - 8.2 8.2
--------------------------------------------------------------------------------
Adjusted
earnings
attributable
to equity
holders of
parent 5.8 1.9 7.7
--------------------------------------------------------------------------------
First half 2005
(Loss)/profit
for the period (46.2) 9.4 (36.8)
Less: minority
shareholders'
interests - (0.2) (0.2)
--------------------------------------------------------------------------------
(Loss)/profit
for the year
attributable
to equity
holders of
parent (46.2) 9.2 (37.0)
Material
one-time items 6.7 0.4 7.1
Goodwill
impairment 37.0 - 37.0
Share-based
payment 2.2 0.2 2.4
Profit on the
disposal of
operations (0.9) - (0.9)
--------------------------------------------------------------------------------
Adjusted
(loss)/earning
s attributable
to equity
holders of
parent (1.2) 9.8 8.6
--------------------------------------------------------------------------------
Year 2005
(Loss)/profit
for the period (37.7) 13.2 (24.5)
Less: minority
shareholders'
interests - (0.4) (0.4)
--------------------------------------------------------------------------------
(Loss)/profit
for the year
attributable
to equity
holders of
parent (37.7) 12.8 (24.9)
Material
one-time items 8.4 0.4 8.8
Goodwill
impairment 37.0 - 37.0
Share-based
payment 5.1 0.5 5.6
Profit/(loss)
on the
disposal of
operations (3.9) 6.7 2.8
Prior year tax
credit (5.9) - (5.9)
Prior year tax
credit on
associate - (1.5) (1.5)
--------------------------------------------------------------------------------
Adjusted
earnings
attributable
to equity
holders of
parent 3.0 18.9 21.9
--------------------------------------------------------------------------------
6 Earnings/(loss) per share continued
--------------------------------------------------------------------------------
First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Earnings/(loss) per share (pence)
Basic 14.80 (3.90) (2.62)
Basic from continuing operations (1.82) (4.87) (3.97)
Diluted 14.71 (3.90) (2.62)
Diluted from continuing operations (1.82) (4.87) (3.97)
Adjusted 0.81 0.91 2.30
Adjusted from continuing operations 0.61 (0.13) 0.32
--------------------------------------------------------------------------------
Weighted average number of shares in issue
(million)
Basic and adjusted 954.5 948.8 950.4
Dilutive potential of employee share options 6.1 11.6 10.2
--------------------------------------------------------------------------------
Weighted average number of shares in issue -
diluted 960.6 960.4 960.6
--------------------------------------------------------------------------------
7 Cash generated from operations
--------------------------------------------------------------------------------
£ million First half First half Year
2006 2005 2005
--------------------------------------------------------------------------------
Continuing operations
Operating loss (10.6) (44.1) (39.0)
Goodwill impairment 9.5 37.0 37.0
Amortisation of intangibles 0.9 - -
Depreciation of property, plant and equipment 6.7 5.5 11.4
(Profit)/loss on disposal of property, plant
and equipment (0.1) - 0.1
Share-based payment 2.4 2.2 5.1
Deferred income received 0.4 9.4 5.8
Decrease in receivables 0.8 - 0.4
Increase in inventories (6.6) - (0.4)
Decrease in payables (4.1) (11.7) (16.8)
Decrease in provisions (2.1) (0.7) (0.9)
Retirement benefit obligations (47.0) (3.5) (3.8)
--------------------------------------------------------------------------------
Net cash used in continuing operations (49.8) (5.9) (1.1)
--------------------------------------------------------------------------------
Discontinued operations
Operating profit 2.3 11.7 24.4
Depreciation of property, plant and equipment 1.6 5.4 11.2
Profit on disposal of property, plant and
equipment (0.1) (0.1) (0.1)
Share-based payment 0.3 0.2 0.5
Increase in receivables (3.8) (5.7) (1.7)
Decrease/(increase) in inventories 0.5 (2.1) (3.0)
(Decrease)/increase in payables (0.9) 2.6 3.8
--------------------------------------------------------------------------------
Cash (used in)/from discontinued operations (0.1) 12.0 35.1
--------------------------------------------------------------------------------
Cash flows from operating activities (49.9) 6.1 34.0
--------------------------------------------------------------------------------
This information is provided by RNS
The company news service from the London Stock Exchange