24th Feb 2005 07:01
Spirent PLC24 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 leadingcommunications technology company, today announced its final results for theyear to 31 December 2004. Highlights Change %£ million 2004 2003 Reported Constant currency--------------------------------------------------------------------------------Turnover 475.0 466.2 2 9Operating profit(1) 42.8 36.0 19 28Profit before taxation andamortisation(2) 37.4 30.0 25Profit before taxation 24.0 0.3 > 100Earnings 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 havecontinued throughout 2004 and we are delighted to announce results showing asubstantial improvement in our Performance Analysis division. During 2005 weexpect this division to benefit from further customer spending on technologiescritical to the migration to packet-based networks. In our Service Assurancedivision we have taken actions to cut costs and reinvigorate the business, butwe do not anticipate seeing a recovery in its performance until the latter partof the year. Our Network Products group had another strong year in 2004 and isexpected to continue to make further progress in 2005. "As expected, we have had a satisfactory start to 2005 and looking ahead Ianticipate further progress as we pursue our strategy of growing ourcommunications business." - ends - Enquiries Anders Gustafsson, Chief Executive Spirent plc +44 (0)1293 767676Eric Hutchinson, Finance Director Investor RelationsCatherine Nash Spirent plc +44 (0)1293 767676 MediaTom Buchanan/Rupert Young Brunswick +44 (0)20 7404 5959 About Spirent Spirent is a leading communications technology company focused on deliveringinnovative systems and services to meet the needs of customers worldwide. We area global provider of performance analysis and service assurance solutions thatenable the development and deployment of next-generation networking technologiessuch as broadband services, Internet telephony, 3G wireless and web applicationsand security testing. Our Network Products business is a developer andmanufacturer of innovative solutions for fastening, identification, protectionand connectivity in electrical and communications networks marketed under theglobal brand HellermannTyton. The Systems group comprises PG Drives Technologywhich develops power control systems for specialist electrical vehicles in themobility and industrial markets. Further information about Spirent plc can befound 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 theform of American Depositary Shares (ADS), represented by American DepositaryReceipts, with one ADS representing four Ordinary shares. Spirent and the Spirent logo are trademarks or registered trademarks of Spirentplc. All other trademarks or registered trademarks mentioned herein are held bytheir respective companies. All rights reserved. This press release may contain forward-looking statements (as that term isdefined in the United States Private Securities Litigation Reform Act of 1995)based on current expectations or beliefs, as well as assumptions about futureevents. You can sometimes, but not always, identify these statements by the useof a date in the future or such words as "will", "anticipate", "estimate","expect", "project", "intend", "plan", "should", "may", "assume" and othersimilar words. By their nature, forward-looking statements are inherentlypredictive and speculative and involve risk and uncertainty because they relateto events and depend on circumstances that will occur in the future. You shouldnot place undue reliance on these forward-looking statements, which are not aguarantee of future performance and are subject to factors that could cause ouractual results to differ materially from those expressed or implied by thesestatements. Such factors include, but are not limited to: the extent to whichcustomers continue to invest in next-generation technology and deploy advancedIP-based services; our ability to successfully expand our customer base; ourability to continue to benefit from generally improving market conditions; theprevailing market conditions and pace of economic recovery; our ability toimprove efficiency and adapt to economic changes and other changes in demand ormarket conditions; our ability to develop and commercialise new products andservices, extend our existing capabilities in IP services and expand our productoffering internationally; our ability to attract and retain qualified personnel;the effects of competition on our business; fluctuations in exchange rates andheavy exposure to a weak US dollar; changes in the business, financial conditionor prospects of one or more of our major customers; risks of doing businessinternationally; the financial burden of our pension fund deficit; risksrelating to the acquisition or sale of businesses and our subsequent ability tointegrate businesses; our reliance on proprietary technology; our exposure toliabilities for product defects; our reliance on third party manufacturers andsuppliers; and other risks described from time to time in Spirent plc'sSecurities and Exchange Commission periodic reports and filings. The Companyundertakes no obligation to update any forward-looking statements contained inthis press release, whether as a result of new information, future events orotherwise. REPORT FOR THE YEAR TO 31 DECEMBER 2004 Operating profit, return on sales and headline earnings per share are used bythe Group as key measures of operating performance and are stated before theeffect of goodwill amortisation and exceptional items so that period on periodcomparisons 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 goodwillamortisation and operating exceptional items. In constant currencies or on aconstant currency basis means calculated at constant exchange rates. Headlineearnings per share as referred to in the text is based on headline earnings asset out in note 3 to this report. OPERATING AND FINANCIAL REVIEW Overview Our performance in 2004 showed a marked improvement as a result of ourinvestment in and focus on growth markets. In the Communications group, ourPerformance Analysis division achieved a substantial improvement in its results,with turnover up 31 per cent in constant currencies and operating profit upmaterially from £4.4 million to £19.7 million due to increased customer spendingon next-generation technologies. Actions have been taken to reinvigorate theService Assurance division, but we are not anticipating a recovery in itsperformance until the latter part of 2005. Results for the division wereaffected by market pressures, with turnover down 10 per cent in constantcurrencies and operating profit at break-even. The Network Products groupdelivered another strong performance, with turnover up 11 per cent and operatingprofit up 27 per cent in constant currencies. The movement in the US dollarexchange 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 forefrontof telecoms technology. Strong cash generation reduced net debt to £26.4 millionat the end of 2004 compared with £57.5 million at the end of 2003. Operating review Communications Change % Constant£ million 2004 2003 Reported currency--------------------------------------------------------------------------------TurnoverPerformance Analysis 176.8 148.7 19 31Service Assurance 74.7 91.7 (19) (10) --------- ---------Communications group 251.5 240.4 5 15 Operating profitPerformance Analysis 19.7 4.4 > 100 >100Service Assurance 0.2 9.4 (98) (95) --------- ---------Communications group 19.9 13.8 44 63 Return on sales (%)Performance Analysis 11.1 3.0Service Assurance 0.3 10.3Communications group 7.9 5.7 Our Communications group, Spirent Communications, is a leading provider of testand monitoring solutions and systems for next-generation telecoms equipment andservices worldwide. In 2004 we achieved an improvement in the overall results ofour 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 itsmarket and we are working to enhance our products to address customers' evolvingneeds. Turnover for the group was up by 15 per cent on a constant currency basiscompared with 2003. As a result of increased volumes, operating profit increasedto £19.9 million representing a 63 per cent increase in constant currencies overthe prior year. Return on sales improved to 7.9 per cent compared with 5.7 percent in 2003. In order to be able to meet our customers' needs and to secure our position atthe forefront of telecoms technology we have maintained our investment inproduct development, spending a total of £60.4 million, or 24 per cent of theCommunications group's turnover, in the period (2003 £57.8 million and 24 percent). Total product development spending for the year was split as to £43.2million in the Performance Analysis division and £17.2 million in the ServiceAssurance division (2003 £39.4 million and £18.4 million, respectively). Thisinvestment continues to be directed at next-generation technologies and atmaintaining the competitiveness of our products in terms of price andfunctionality. During the second half of 2004 we embarked on a number of initiatives to improvethe operational efficiency of the Communications group. These initiativesinclude 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 oursmaller operations being integrated into our broadband and wireless activities.These actions will enable the group to make better use of shared resources anddrive synergies across our various telecoms activities. A substantial headcountreduction and certain other actions have also been undertaken in the ServiceAssurance 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 advancenext-generation technologies and services, to increase our presenceinternationally and to extend our products into the enterprise sector. Webelieve we have made progress in delivering this strategy during 2004 and, whilechallenges still remain for us in relation to the Service Assurance division, weare confident we now have the corporate structure and management with which todrive the group along its future development path. Performance Analysis Our Performance Analysis division develops solutions for testing theperformance, functionality and conformance of telecoms equipment. This isachieved by simulating voice, video and data traffic and large-scale networksand by creating real-world conditions in the laboratories of network equipmentmanufacturers, telecoms service providers, enterprises and governmentdepartments. By subjecting equipment and networks to impairments and stressescustomers are able to ensure that the equipment or services they are about tolaunch or deploy will withstand real-world conditions thereby reducing thecommercial risks inherent in developing or adopting new products. While overall telecoms capital spending was up modestly in 2004 our PerformanceAnalysis division benefited directly from increased spending on next-generationand 3G wireless technologies by our customers during the year. This trend, whichbegan to emerge towards the end of 2003, has largely been driven by themigration from legacy, circuit-switched networks to Internet Protocol (IP) orpacket-based networks by telecoms service providers around the world. As aresult turnover in the Performance Analysis division grew by 31 per cent inconstant currencies in 2004. Operating profit of £19.7 million was up materiallyover 2003 reflecting the operational gearing inherent in this business asvolumes increase. Return on sales recovered to 11.1 per cent for the periodcompared with 3.0 per cent in 2003. Our portfolio of leading-edge products, services and solutions is well alignedwith our customers' needs and in 2004 we grew sales in constant currencies inall of our product groups and across all customer sectors. In particular, we sawgood demand for our core broadband access, metro Ethernet, gigabit Ethernet andIPv6 test systems, driven by the move towards higher speeds of datatransmission, increased scalability and the proliferation of high bandwidthapplications such as voice, video and data, generally referred to as 'tripleplay'. The momentum in the voice-over-IP (VoIP) services sector was behind theincreased sales of our market-leading IP telephony test solutions during theyear. Continuing concerns in relation to the delivery of mission criticalprocesses over enterprise networks and websites resulted in strengthened demandfor our web testing products both from network equipment manufacturers andenterprise customers. Our wireless handset test activities, which represent approximately 23 per centof this division's turnover, grew substantially in 2004 due largely to increaseddemand for our industry-leading CDMA-2000 handset test systems. Demand has beendriven by the deployment of high speed 3G data services and the increased numberof new mobile devices in the market. There was good growth in sales of oursystems for testing advanced CDMA wireless services such as 'push-to-talk' andthose utilising mobile IP, reflecting an increased focus on testing theapplications that run on mobile devices. We are now a market leader in testsolutions for mobile devices employing 1xEV-DO technology, an advanced 3G CDMAtechnology that was first used in Asia and is now undergoing deployment in theUS and Europe. During the year we also made initial sales of our wideband CDMAhandset testing solutions into strategic customers, including systemsincorporating our leading location-based testing capability using Assisted GPS. On a geographic basis we have seen increased turnover worldwide in constantcurrencies with sales particularly strong in the US where a large number of ourmajor customers are located. Strong relationships with important local customershave led to record sales in China in 2004. In addition, the move by some of themajor global network equipment manufacturers to establish quality assurance andresearch and development facilities in India and China has contributed to salesin the Asia Pacific region. We also delivered growth in our European sales over2003 due to the continued roll out of advanced digital subscriber line (DSL)services in the region and good demand for our VoIP, web applications andwireless handset testing systems. The results for our Performance Analysis division demonstrate that our strategyof providing solutions that enable customers to develop and deploynext-generation equipment and services more efficiently and economically hasdelivered growth. During 2005 we expect to continue to benefit from furthercustomer spending on technologies critical to the migration to packet-basednetworks. Service Assurance Our Service Assurance division provides systems that enable telecoms serviceproviders to test and assure broadband leased line, DSL and IP services. Ourproducts include operations support systems software, remote test probes,network access systems and consulting and technical services. We also supplyportable systems for fault identification and testing of copper telephone linesin the field. Our systems help service providers reduce their operational costsby automating and centralising their network testing and service assuranceprocesses, reducing the need for expensive physical intervention andfacilitating faster responses to customers' problems. The performance of our Service Assurance division in 2004 was affected by marketpressures with turnover for the division down 10 per cent in constant currenciescompared with 2003. Operating profit for 2004 was down substantially at £0.2million 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 formajor US service providers during the year. However, sales of our leased linesystems declined faster than anticipated in the period as customers increasinglyfocused their capital spending on advanced IP services. Service providerscontinue to seek to reduce the cost of deploying DSL services and we haveresponded to this trend by re-engineering certain elements of our offering toincrease the cost effectiveness of our DSL monitoring solutions. Our hardwareprobes remained the largest contributor to sales in 2004 with maintenance andsupport contracts representing just over a quarter of this division's sales inthe year. We have had success in the IP space with initial orders forSmartSight(TM), our recently launched IP monitoring and diagnostic system, andwe have been encouraged by the levels of customer interest in this range ofsolutions. We expect to launch further enhancements to the SmartSight productrange in 2005. Our field test business saw significant growth over 2003 drivenby the shipment of a major order of portable fault testers to a leading Europeanservice provider. The future growth of our Service Assurance division will come from the deliveryof cost effective DSL monitoring solutions, success in the IP services sectorand the broadening of our customer base geographically. Consequently, over thelast six months we have taken several steps to realign our resources and reduceoperating costs including changing the senior management, reducing employeenumbers by approximately 15 per cent and redirecting marketing and productdevelopment efforts. We have increased our marketing efforts outside the US and,in particular, have adopted a direct sales strategy in China which involvesexiting our joint venture, Spirent DM, and creating a direct sales force basedin Beijing. We are currently actively working with a number of non-US customersto help them define their future strategy for DSL and IP service assurance. The global telecoms sector is currently undergoing a migration from legacynetworks towards IP-based networks and services. These new networks and serviceswill require sophisticated monitoring and diagnostic systems to enable networkoperators to deliver the high quality, reliable telecoms services theircustomers have come to expect. We believe the actions we have taken in ourService Assurance division will enable us to take advantage of this trend but weare not anticipating a recovery in its performance until the latter part of2005. Network Products Change % Constant£ million 2004 2003 Reported currency--------------------------------------------------------------------------------Turnover 187.8 174.4 8 11Operating profit 20.4 16.7 22 27Return on sales (%) 10.9 9.6 Our Network Products group produces innovative products and solutions for thefastening, identification, protection and connectivity of wires and cables inelectrical and communications networks in a broad range of applications. Thegroup operates under the global brand HellermannTyton in 30 countries worldwideand has manufacturing facilities in all the major geographic regions. Our Network Products group delivered another strong performance in 2004 withturnover of £187.8 million up 11 per cent in constant currencies over the sameperiod last year. Operating profit of £20.4 million was ahead by 27 per cent inconstant currencies over 2003. Return on sales improved to 10.9 per cent from9.6 per cent due to increased operational efficiencies. As anticipated, resultsfor the second half of 2004 were marginally below the first half due to thenormal seasonality of this business. Capital expenditure was up over 2003 asplanned due to the expansion of capacity at our major manufacturing sites and weplan to further increase capacity in 2005. In Europe our sales benefited from increased automotive production and ourability to increase the number of products per platform on new models. Sales inthe US were up due to the general economic recovery as well as our increasedpenetration of the automotive and telecoms markets and successful new productintroductions. Sales in Japan through our associate company showed good growthand we made progress in China due to the increasing OEM and automotiveproduction levels in the region. We were successful in growing sales to the automotive sector, which representsthe largest proportion of this group's turnover, with increased cabling in carsdriving demand for our cable management and fastening products. In addition,with the increasing trend among volume car manufacturers to move production toemerging economies, our ability to supply customers directly in these regionshas helped increase sales. Sales to the heavy vehicles market were good in allregions but particularly in the US where heavy truck manufacturers increasedtheir manufacturing volumes in the year. We increased sales in our next largestmarket, the electrical wholesalers and catalogue houses, although their endmarkets continue to be difficult. We saw growth in sales of our connectivitysystems but the communications market remains very price competitive and we tookactions during the year to reduce the cost base. The RapidNet pre-terminatedstructured cabling system launched last year has received increasing acceptanceand we have secured several important installations in the enterprise and publicsector markets. We also secured further deployments for Autotools, our market-leading automated bundling systems, at major automotive and white goods harnessmakers worldwide during the year. Our strong customer focus, technical leadership and world class operationalexcellence have enabled us to capitalise on our market-leading positions inEurope, South America and the Asia Pacific region during 2004 and we expect tocontinue 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. Divestedbusinesses contributed £4.4 million of turnover and £0.6 million of operatingprofit in 2004 and £13.5 million of turnover and a £0.6 million operating lossin 2003. After the sale of our last remaining aerospace business in August 2004, theSystems group now comprises PG Drives Technology, a leading supplier of powercontrol systems for powered medical and small industrial vehicles. The continuedweakness of the US dollar has adversely affected the trading performance of PGDrives Technology with the transaction effect reducing operating profit byapproximately £3 million. Turnover and operating profit were down 14 per centand 69 per cent, respectively, in constant currencies compared with 2003. Returnon sales reduced to 6.1 per cent compared with 16.1 per cent in 2003. We havehad some success in reducing our exposure to the US dollar:sterling exchangerate by increasing the number of components purchased in US dollars. We havealso moved some of our production to China to reduce the logistical costs ofsupporting our activities in the Asia Pacific region. Continuing constraints in US government healthcare funding for poweredwheelchairs dampened demand for our wheelchair systems during the year. Due tothe competitiveness of our established VSI, S-Drive and TRIO+ products we were,however, successful in increasing customer penetration in both the mobility andour new industrial vehicles markets during the year. In 2005 we are planning tolaunch several new products that will enable us to strengthen our position inboth our addressed markets. While results for this group are currently being affected by the weak US dollarand reduced US government healthcare funding, longer term prospects for our mainmobility vehicle market remain positive, as we anticipate that increasingaffluence and the desire for mobility will increase the demand for poweredmedical vehicles. Financial review Results Change % Constant £ million 2004 2003 Reported currency --------------------------------------------------------------------------------Turnover 475.0 466.2 2 9Operating profit 42.8 36.0 19 28Return on sales (%) 9.0 7.7 Reported turnover for 2004 of £475.0 million was up 2 per cent and operatingprofit of £42.8 million was up 19 per cent compared with 2003. In constantcurrencies turnover was up by 9 per cent and operating profit was up by 28 percent compared with 2003. Return on sales for the Group improved to 9.0 per centfrom 7.7 per cent in 2003. Reported results have been affected by the weakness of the US dollar relative tosterling with an average US dollar:sterling exchange rate of $1.83: £1 in 2004compared with $1.64: £1 in 2003. In 2004 currency translation reduced turnoverby £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 regionsduring 2004. Turnover by market grew in constant currencies in all regionsexcept the Asia Pacific region, where growth from the Network Products group andPerformance Analysis division was offset by lower demand for our Systems group'sproducts. Operating profit by source in North America grew by 64 per cent inconstant currencies compared with 2003. Operating profit also grew in the AsiaPacific region but reduced by 4 per cent in constant currencies in Europe due tothe effect of the weak US dollar on trading. Product development spending for the Group in 2004 was £67.3 million, or 14 percent of turnover (2003 £66.0 million and 14 per cent), the large majority ofwhich was invested in the Communications group. A £0.7 million loss from interests in joint ventures in 2004 relates to ourshare of the losses in our joint venture company in China, Spirent DM. Incomefrom interests in joint ventures reported in 2003 included our share of profitsfrom 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 thecontinued reduction in net debt during 2003 and 2004. Profit before taxation, amortisation and exceptional items was £37.4 millioncompared with £30.0 million in 2003. Reported profit before taxation was £24.0million compared with £0.3 million for 2003. The effective rate of taxation for 2004 was 24.1 per cent compared with 27.7 percent for 2003 as a result of the utilisation of tax losses. We anticipate thatthe 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 939.2million (2003 929.3 million). After charging goodwill amortisation andexceptional items, basic earnings per share for 2004 was 1.70 pence (2003 loss0.05 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 debtby £5.4 million due principally to the weak US dollar. Our borrowing covenant ratios at the year end were net interest cover of 5.8times (covenant ratio: greater than or equal to 2.5 times) and net debt toEBITDA of 0.5 times (covenant ratio: less than or equal to 2.25 times). Havingmet the financial covenant requirements under the terms of our borrowings, wewill revert to semi-annual covenant tests, with covenants of net interest coverof 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 thecancellation of the share premium account and capital redemption reserve inorder to eliminate the deficit in the Company's distributable reserves. Exceptional items Operating exceptional items of £2.9 million have been charged in 2004 whichrelated to restructuring costs within our businesses and the exit from our jointventure 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 millionof goodwill previously written off to reserves and now reinstated in accordancewith Financial Reporting Standard 10. Provisions on vacant property and accruedexpenses 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 interestexpense in 2004. In 2003 we reported an exceptional interest expense of £16.1million in relation to the make-whole amount on the partial prepayment of oursenior notes and related bank fees. Financing During 2004 we prepaid a total of $19.4 million (£10.6 million) of our seniornotes. Following this $124.8 million (£65.0 million) of notes remainedoutstanding at 31 December 2004. Our £30 million bank facility remained nildrawn at the end of 2004 at which point we had cash at bank and in hand of £51.7million. A new £30 million bank facility was put in place in February 2005 andthis 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 flowfor 2004 was down by 12 per cent at £60.3 million compared with £68.2 million in2003 due largely to the pension payments referred to below. Cash flow before disposals, acquisitions and financing, or free cash flow, for2004 was £23.0 million compared with £38.2 million in 2003. Net capitalexpenditure increased to £24.8 million as planned compared with net £15.8million in 2003. We expect capital investment to increase to approximately £35million in 2005 due to investments in IT within our Communications group and theexpansion of capacity within the Network Products group. Net cash payments of tax of £3.1 million were made in 2004 compared with a netinflow of £8.9 million in 2003 when we had the benefit of a carry back of taxlosses, principally in the US. In 2004 we made our first additional annual cash contribution of £3.5 million toour defined benefit UK pension plans and we will make a similar contribution tothe schemes in the first half of 2005. We also settled the liability of £3.7million due to Nicholas Brookes, the former Chief Executive of the Company, onhis retirement in respect of his unfunded unapproved retirement benefit (UURB). Excluding the make-whole amounts, net interest payments of £7.2 million in 2004were 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 ofsenior 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 inAugust 2004. During the year we acquired the minority shareholdings in two ofour 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 December2003 £35.2 million), net of deferred taxation of £11.1 million (2003 £13.0million). The assets in the schemes have increased during the year as a resultof the performance of the equity markets and the Company's contribution of £3.5million to the defined benefit UK pension plans. The Company will make a furthercontribution of £3.5 million to the defined benefit UK pension plans in thefirst 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. Forthe Spirent Group the main areas on which we expect IFRS to make an impact willbe the reporting and treatment of goodwill and intangible assets, share-basedpayments, financial instruments and profit or loss on disposal of operations.The adoption of IFRS will not affect our position under existing borrowingcovenants as they are calculated under UK GAAP as it existed at31 December 2002 nor will IFRS change the cash flow, risk profile or economicsof the business going forward. Further details on the effect of the adoption ofIFRS are provided later in this report. Dividend In November we completed the process required to eliminate the deficit in theCompany's distributable reserves. Although we are now in a position to rebuilddistributable reserves through retained profits, out of which dividends may bepaid, 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 theretirement of Nicholas Brookes on 30 June 2004. After joining the Group, AndersGustafsson took over direct responsibility for Spirent Communications. InSeptember 2004 My Chung, Executive Director of Spirent and President of SpirentCommunications, resigned from the Board and we would like to thank him for hiscontribution to Spirent and wish him well for the future. In November WilliamBurns was appointed President of the Service Assurance division of SpirentCommunications. In December we were delighted to announce the appointment of Kurt Hellstrom as anon-executive director. He was formerly President and Chief Executive Officer ofEricsson and has exceptional experience of the telecoms industry, particularlyin wireless communications and the Asia Pacific market. Richard Moley willretire from the Board with effect from the date of the 2005 Annual GeneralMeeting and we would like to thank him for his valuable contribution during histenure as a non-executive director. Outlook During 2005 we expect our Performance Analysis division to benefit from furthercustomer spending on technologies critical to the migration to packet-basednetworks. In our Service Assurance division we have taken actions to cut costsand reinvigorate the business, but we do not anticipate seeing a recovery in itsperformance until the latter part of 2005. Our Network Products group isexpected to continue to make further progress in 2005. As expected, we have had a satisfactory start to 2005 and looking ahead weanticipate further progress as we pursue our strategy of growing ourcommunications 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 jointventure 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 7.5Goodwill amortisation 9.1 - 9.1 9.7Operating profit before goodwillamortisation 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, jointventures 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 27.2Net 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 0.3Taxation (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 toshareholders 16.0 (0.5) ------- ------- Basic earnings/(loss) per share 3 1.70p (0.05)pHeadline earnings per share 3 2.99p 2.31pDiluted 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 1.2Exchange adjustment on subsidiaries, joint ventures and associates (0.7) 6.1Overseas taxation on exchange adjustment - (0.2)Reinstatement of deferred tax assets on pensionliability - 12.6Actuarial gain recognised in the pension schemes net oftax 2.1 0.2 ------- --------Total recognised gains and losses 18.6 19.4 ------- -------- Consolidated balance sheet £ million At 31 December --------------------------- 2004 2003Fixed assetsIntangible assets 88.8 101.6Tangible assets 86.3 90.2Investments Investment in joint venture - 0.3Investment in associates 15.8 14.6 -------- ------- 15.8 14.9 -------- --------Total fixed assets 190.9 206.7 Current assetsStocks 54.0 55.0Debtors 89.9 86.9Cash at bank and in hand 51.7 37.6 -------- ------- 195.6 179.5 -------- ------- Current liabilitiesCreditors 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 liabilitiesCreditors due after more than one year (80.2) (95.6)Provision for liabilities andcharges Deferred taxation (1.9) (2.3)Other provisions (13.8) (17.9) -------- ------- (15.7) (20.2) -------- --------Assets less liabilities(excluding pension liability) 172.0 157.3Pension 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) 8.9Capital 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 60.4Management of liquid resources - 0.1Financing (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 leasefinancing 11.0 144.3Cash 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 % TurnoverPerformance Analysis 176.8 37 148.7 32Service Assurance 74.7 16 91.7 20 -------- ------ -------- ------Communications 251.5 53 240.4 52Network Products 187.8 40 174.4 37Systems 35.7 7 51.4 11 -------- ------ -------- ------ 475.0 100 466.2 100 -------- ------ -------- ------ Operating profit Operating profit before goodwillamortisation and exceptional items Performance Analysis 19.7 46 4.4 12Service Assurance 0.2 - 9.4 26 -------- ------ -------- ------Communications 19.9 46 13.8 38Network Products 20.4 48 16.7 47Systems 2.5 6 5.5 15 -------- ------ -------- ------ 42.8 100 36.0 100 -------- ------ -------- ------ Operating exceptional itemsPerformance 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 amortisationPerformance 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 marketEurope 167.4 35 149.6 32North America 223.4 47 229.3 49Asia Pacific, Rest of Americas, Africa 84.2 18 87.3 19 -------- ------ -------- ------ 475.0 100 466.2 100 -------- ------ -------- ------Turnover by sourceEurope 184.9 39 168.2 36North America 243.4 51 262.1 56Asia Pacific, Rest of Americas, Africa 46.7 10 35.9 8 -------- ------ -------- ------ 475.0 100 466.2 100 -------- ------ -------- ------ Operating profit by source Operating profit before goodwillamortisation and exceptional items Europe 20.6 48 21.7 60North America 20.1 47 13.0 36Asia Pacific, Rest of Americas, Africa 2.1 5 1.3 4 -------- ------ -------- ------ 42.8 100 36.0 100 -------- ------ -------- ------ Operating exceptional itemsEurope (2.1) (2.3)North America (0.8) (5.2) -------- -------- (2.9) (7.5) -------- --------Goodwill amortisationEurope (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 7.5Goodwill amortisation 9.1 9.7Loss/(profit) on disposal of operations 0.9 (3.6)Exceptional interest charge 0.5 16.1Prior 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 operatingactivities £ million Year to 31 December ---------------- 2004 2003 Operating profit 30.8 18.8Depreciation 25.4 29.3Loss/(profit) on disposal of tangible fixed assets 0.4 (0.1)Related Shares:
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