1st Mar 2007 07:05
Spirent Communications PLC01 March 2007 SPIRENT COMMUNICATIONS PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 London, UK - 1 March 2007 - Spirent Communications plc ("Spirent" or "theGroup") (LSE: SPT; NYSE: SPM), a leading communications technology company, todayannounces its preliminary results for its financial year ended 31 December 2006. Highlights • Much improved performance for the second half year. • Markets were highly competitive partly as a result of consolidation amongst our largest customers. • Restructuring actions taken during the year with total annualised cost savings of £16 million at a total cost of £9.1 million. • 24 per cent of orders for Communications group in the final quarter of 2006 came from new product platforms. Performance Analysis • Overall performance reflects continued product transition: - Spirent TestCenter(TM) sales grew to £20 million (2005: £4 million). - Existing older platforms, SmartBits and AX, orders declined by £27 million, 15 per cent of total Performance Analysis activity, to £48 million (2005: £75 million). - All other Broadband products and services grew. • Wireless continued to make good overall progress. Service Assurance • Signed our first major contract with TELUS, a leading provider of data, IP and wireless solutions in Canada, to provide triple play service assurance solutions. Financial • Four acquisitions made for a total initial consideration of £39.7 million. • Goodwill impairment of £46.8 million in relation to Service Assurance and SwissQual. • Net funds at the year end of £106.1 million with £41.9 million returned to shareholders to date at an average price of 46.1 pence per share. Board and management • New leadership at both Board level and in key operational positions: in-depth business review underway. Anders Gustafsson, Chief Executive, commented: "In 2006 Spirent delivered a much improved second half performance benefitingfrom growth in new product revenues and the restructuring actions undertaken. "With new Board leadership and having made key operational appointments we arenow undertaking an in-depth business review, the outcome of which will bereported before the AGM in May. "Our performance in 2007 is expected to benefit from the investment in new andupgraded products and the acquisitions made last year and further progressbeyond that will depend on the outcome of the business review. We are confidentthat our new products, led by Spirent TestCenter, will grow revenue and continueto gain market share although this will be offset by the decreasing revenue fromour older products. With market conditions continuing to be similar to lastyear, we consequently expect only a modest growth in Performance Analysisrevenues. In addition, should sterling continue its recent strength relative tothe US dollar, our performance for 2007, particularly in Systems, will be heldback." Results The adjusted profit and earnings per share measures have been restated toinclude share-based payment of £5.2 million (2005: £5.1 million) and intangibleamortisation of £1.6 million (2005: nil). £ million 2006 2005 Change %------------------------- ---------- ---------- ---------- ReportedContinuing operationsRevenue 271.6 259.3 5Loss before tax (50.1) (41.7)Basic loss per share (pence) (5.51) (3.97)GroupProfit/(loss) for the year 108.8 (24.5)Basic earnings/(loss) per share (pence) 11.75 (2.62)AdjustedContinuing operationsOperating profit1 8.3 6.4 30Profit/(loss) before tax2 14.3 (0.2)Adjusted earnings/(loss)3 per share (pence) 1.41 (0.22)------------------------- ---------- ---------- ---------- Notes 1 Before material one-time items and goodwill impairment. 2 Before material one-time items, goodwill impairment, profit on the disposal ofoperations and costs associated with the repayment of loan notes. 3 Adjusted earnings/(loss) per share is based on adjusted earnings as set out innote 6. - ends - EnquiriesAnders Gustafsson, ChiefExecutive Spirent Communications +44 (0)1293 767676 plcEric Hutchinson, Chief FinancialOfficer Reg Hoare/Libby Young Smithfield +44 (0)20 7360 4900 The Company will host a results presentation today at 09.15 for 09.30 UK time. A simultaneous webcast of the presentation will be available on the Spirent Communications plc website at www.spirent.com. Photography is available from UPPA (Universal Pictorial Press & Agency) - www.uppa.co.uk or tel: +44(0)20 7421 6000 About Spirent Communications plc Spirent Communications plc is a leading communications technology companyfocused on delivering innovative systems and services to meet the needs of customers worldwide. We are a global provider of performance analysis and serviceassurance solutions that enable the development and deployment ofnext-generation networking technologies such as broadband services, Internettelephony, 3G wireless and web applications and security testing. The Systemsgroup develops power control systems for specialist electrical vehicles in themobility and industrial markets. Further information about SpirentCommunications plc can be found at www.spirent.com. Spirent Communications plc Ordinary shares are traded on the London StockExchange (ticker: SPT) and on the New York Stock Exchange (ticker: SPM; CUSIPnumber: 84856M209) in the form of American Depositary Shares ("ADS"),represented by American Depositary Receipts, with one ADS representing fourOrdinary shares. Spirent and the Spirent logo are trademarks or registered trademarks of SpirentCommunications plc. All other trademarks or registered trademarks mentionedherein are held by their 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 manage a significant transition in productrevenues to new product solutions incorporating latest technology; the outcomeof the business review; our ability to successfully expand our customer base;continuing variable market conditions; pace of economic recovery; our ability toimprove efficiency, achieve the benefits of our cost reduction goals and adaptto economic changes and other changes in demand or market conditions; ourability to develop and commercialise new products and services, extend ourexisting capabilities in IP services and expand our product offeringinternationally; our ability to attract and retain qualified personnel; theeffects of competition on our business; fluctuations in exchange rates and heavyexposure to the US dollar; changes in the business, financial condition orprospects of one or more of our major customers; risks of doing businessinternationally; risks relating to the acquisition or sale of businesses and oursubsequent ability to integrate businesses; our reliance on proprietarytechnology; our exposure to liabilities for product defects; our reliance onthird party manufacturers and suppliers; and other risks described from time totime in Spirent Communications plc's Securities and Exchange Commission periodicreports and filings. The Company undertakes no obligation to update anyforward-looking statements contained in this press release, whether as a resultof new information, future events or otherwise. PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2006 CHAIRMAN'S STATEMENT At the end of 2006 a number of new directors were appointed to the Board and Iwas appointed Chairman. Since that time, the Board as a whole has embarked on anin-depth review of each of the company's operations. Since I was not at Spirent during most of 2006 my comments are necessarilylimited. However, it is already clear that the company has a strong base oftechnology and customer relationships, reflecting a very talented group ofemployees. I would like to express our thanks to them for their contributionsduring a year of transition and some market uncertainty. We also find ourselves with a strong balance sheet, largely due to the sale ofthe HellermanTyton business in February. Overall the company has a soundfoundation on which to build for which thanks are due to a number of Boardmembers who departed during the year. As you will read below, conditions in some of our markets are somewhatchallenging. However, in reality the outlook for Spirent's financial performancein 2007 and beyond will be more affected by the actions resulting from theBoard's review than by any foreseeable market developments. The major purpose ofthe Board's review is to decide where to focus our resources and how to be themost efficient and effective competitor in our chosen areas. We expect toannounce the results of the review prior to the Annual General Meeting on 9 May and look forward to communicating with shareholders again at thattime. We evaluate the performance of Spirent based on revenue and operating profit/(loss) before the effect of material one-time items and goodwill impairment sothat period on period comparisons are not distorted. Operating profit/(loss) andreturn on sales are referred to in the text before material one-time items andgoodwill impairment unless otherwise stated. GROUP OVERVIEW Introduction The year as a whole saw a series of challenges, primarily due to the continuingvariable market conditions resulting from the impact of customer consolidationand product transition which both depressed sales and margins and wasparticularly notable in the first half. As expected at the time of theannouncement of the interim results we delivered a much improved second halfwhich benefited from the growth in new product revenues and restructuringactions undertaken. For the full year the adjusted profit before tax was £14.3million compared with a loss before tax of £0.2 million in 2005. Our newly developed and recently launched products and solutions fornext-generation networks continue to grow sales and gain market share andrepresented almost 25 per cent of orders for Performance Analysis Broadband inthe final quarter of the year, demonstrating the success of our investment inproduct development and the benefit of newly acquired products. Four acquisitions were completed expanding our breadth of expertise andsolutions into new growth areas such as IP multimedia subsystems ("IMS"), IPtelephony and security test, whilst boosting our offering in other areas such aswireless. With new Board leadership and having made key operational appointments we arenow undertaking an in-depth business review, the outcome of which will bereported before the AGM in May. Market conditions The many high profile mergers of the last two years among our customers haveresulted in customers delaying their investment in next-generation networks andhave created highly competitive markets. Indeed, our sales to these latter customers as a group fell by 8 per cent in the year as a whole, principally inthe first half. As a result overall, many of our markets saw no growth, althoughwe remain positive for long term growth prospects. We expect our markets willremain competitive in the current year. Product transition A major feature of the year was significant product transition. The growth insales of all our new and enhanced products was encouraging, with SpirentTestCenter sales reaching £20 million (2005: £4 million), which was the Group'shighest revenue generating product in the final quarter of 2006. As expected,orders of our older platforms, SmartBits and AX, declined sharply by £27 millionbeing 36 per cent year-on-year. Revenues from all of our Performance AnalysisBroadband products, apart from SmartBits and AX grew in 2006. Spending on product development by the Communications businesses, totalled £55.0million (2005: £56.1 million) of which £5.0 million was incurred by our newlyacquired businesses. Product development was primarily focused on the newSpirent TestCenter platform, WCDMA performance test equipment for mobilehandsets and triple play IP service assurance monitoring solutions, as well asin our other faster growing product lines. Spirent TestCenter was developed to take testing to new levels by consolidatinga host of solutions on a single platform. To date, our new and upgraded productshave been well received by customers, who consistently report enhancedfunctionality, improved productivity and reliability. Spirent TestCenter'sperformance is very encouraging. It has already been purchased by over 200 customers worldwide, compared to just 90 when we reported our interim results inAugust 2006. These include most of the leading global companies in our industryand all of our largest customers. We were pleased with strong performances in our Asia Pacific operations,especially in Performance Analysis, and Europe, which was boosted by our recentacquisitions. Restructuring actions During the year we continued to manage the balance between the cost base andmaintaining the capability to generate long term growth. Accordingly, weundertook two major restructuring actions to realign resources and to reduceoperating expenses in our Performance Analysis and Service Assurance divisions,one announced in June and the other in October, as follows: • in June, a total annualised cost reduction of approximately £9.0 million per year at a one-time cost of £3.9 million; • in October, a total annualised cost reduction of approximately £7.0 million per year at a one-time cost of £5.2 million. These actions included completion of the outsourcing of all manufacturing exceptfinal assembly and test, continuing investment in our low cost offshoreengineering centre, further divisional management changes and restructuring ofsupport functions. Including these actions, we are targeting a long term improvement in operatingmargin in Performance Analysis Broadband, with an interim goal to deliver a runrate of 15 per cent by the end of 2007. The success of Spirent TestCenter as asingle platform should enable the Group to realise significant operatingefficiencies in product development, sales and marketing and other areas withinthe division. The significant restructuring action within Service Assurance is intended toallow the division to target a break-even position through 2007, whilst fundingthe investment in the future of next-generation triple play IP monitoringsolutions. The Board and staff Following the Extraordinary General Meeting on 22 December 2006, John Weston,Andrew Given, Fred D'Alessio, Marcus Beresford and Kurt Hellstrom ceased to bedirectors of the Company. We would like to thank them for their collectiveservice to Spirent over many years. At the EGM, Edward Bramson, Ian Brindle, Gerard Eastman and Alex Walker wereappointed directors of the Company. Subsequently, Edward Bramson was elected asChairman of the Board and appointed as Chairman of the Nomination Committee; IanBrindle was appointed Chairman of the Audit Committee, and as a member of theRemuneration Committee and Nomination Committee; Alex Walker was appointed asthe Senior Independent Non-executive Director and Chairman of the RemunerationCommittee, and as a member of the Audit Committee and Nomination Committee; andGerard Eastman was appointed as a member of the Audit, Remuneration andNomination Committees. Outlook Our performance in 2007 is expected to benefit from the investment in new andupgraded products and the acquisitions made last year and further progressbeyond that will depend on the outcome of the business review. We are confidentthat our new products, led by Spirent TestCenter, will grow revenue and continueto gain market share although this will be offset by the decreasing revenue fromour older products. With market conditions continuing to be similar to lastyear, we consequently expect only a modest growth in Performance Analysisrevenues. In addition, should sterling continue its recent strength relative tothe US dollar, our performance for 2007, particularly in Systems, will be heldback. Summary 2006 has been a busy and challenging year for Spirent with variability andunpredictability in our markets. We have worked hard to stay ahead of thecompetition and drive the development of our new products and services. Weachieved an improved performance in the second half over the first half year. We made good progress with our new products and saw growth in a number of keyproduct areas during 2006. We have secured the first major contract for afull-scale triple play service assurance solution. We intend to build on this in2007. In particular the development plans we have for Spirent TestCenter willdeliver increased functionality, scale, ease of use and automation for ourcustomers. The sale of the HellermannTyton Division enabled Spirent to achieve asignificantly strengthened balance sheet and to return capital to ourshareholders. Over the coming months the newly constituted Board will be workingto undertake an in-depth business review and will report the outcome before theAGM in May. GROUP FINANCIAL REVIEW The Group's financial performance is reported in accordance with InternationalFinancial Reporting Standards ("IFRS") under which the Group's discontinuedoperations, the HellermannTyton Division, are reported as a single line at thefoot of the income statement including the profit on sale. All comments below refer to continuing activities only unless otherwise stated. Please note that the adjusted profit and earnings per share measures have beenrestated to include share-based payment of £5.2 million (2005: £5.1 million) andintangible amortisation of £1.6 million (2005: nil). Results Continuing operations£ million Restated first Second 2006 Restated Change half half 2005 (%)---------------- -------- -------- -------- -------- --------Revenue 138.2 133.4 271.6 259.3 5Adjustedoperatingprofit1 2.8 5.5 8.3 6.4 30Return onsales1 (%) 2.0 4.1 3.1 2.5Adjustedprofit/(loss)before tax2 5.1 9.2 14.3 (0.2) -Adjustedearnings pershare3 (pence) 0.50 0.91 1.41 (0.22)Adjusted cashgenerationfrom operatingactivities4 (0.9) 13.5 12.6 6.4---------------- -------- -------- -------- -------- -------- Notes 1 Before material one-time items and goodwill impairment. 2 Before material one-time items, goodwill impairment, profit on the disposal ofoperations, costs associated with the repayment of loan notes and any relatedtax. 3 As 2 and before any related and prior year tax. 4 Before the cash cost of material one-time items and lump sum pensioncontribution. The year has been affected by the complexities of implementing major producttransitions combined with continued challenging market conditions in ourcommunications markets. These market conditions to a large extent were aconsequence of the consolidations of some of our major customers. Revenueincreased by 5 per cent over 2005, excluding the contribution from acquisitionsrevenue was flat year-on-year. There were some significant areas of growth,namely in our voice, security testing, positioning, client services and ofcourse in sales of our pioneering platform Spirent TestCenter. The growth ofthese products was offset by the rapid decline of our two traditional products,SmartBits and AX, which were down by 36 per cent, as well as the expected dropin revenue in our Service Assurance division during the second half of the yearas carriers continued to shift spending away from legacy networks. We focused onthe realignment of resources and the reduction in operating expenses across alldivisions and took restructuring actions in both Service Assurance andPerformance Analysis in June and also in October which improved theprofitability in Performance Analysis during the second half year and allowed usto maintain a near break-even position in Service Assurance. We are presenting an adjusted earnings measure eliminating the effect ofmaterial one-time items and goodwill impairment. Previously we had adjusted forintangible amortisation and share-based payment. Comparatives have been restatedto reflect this change. Adjusted operating profit improved by 30 per cent to £8.3 million compared with£6.4 million in 2005, excluding the effect of exchange, growth was 36 per cent.This result includes a significant reduction in the loss for the ServiceAssurance division to £1.1 million; (after share-based payment of £1.2 million,2005: £1.2 million) from a loss of £10.8 million reported in 2005. However, thiswas offset by the decline in profitability of the Performance Analysis divisiondown from £18.4 million in 2005 to £10.5 million in 2006 (after share-basedpayment of £3.6 million, 2005: £3.6 million and intangible amortisation of £1.6million, 2005: nil), although the performance improved in this division in thesecond half of 2006. The decline in profitability in the Performance Analysisbusiness was largely a result of additional spend on product development andsales and marketing costs associated with the launch of new product releases. Return on sales for the Group improved to 3.1 per cent from 2.5 per cent in2005. Revenue grew by market in the Asia Pacific region by 7 per cent and in Europe by27 per cent, a result of the SwissQual acquisition, but it was reduced in NorthAmerica year-on-year. Currency impact In 2006 the currency effects were minimal in relation to the income statement.The average sterling to US dollar exchange rate increased from 1.82 in 2005 to1.85 in 2006. Currency translation reduced revenue by £3.4 million and operatingprofit by £0.4 million compared with 2005. With the US dollar to sterling raterising to $1.96: £1 this is likely to have a more material impact in 2007. Inparticular our Systems group, which is exposed to transactional currency risk,had hedged its exposures and as a result did not experience the full effect ofthe weakening of the US dollar in 2006. Should the current exchange rate prevailin 2007, this would have a significant impact on its profitability. Cost of sales and operating expenses Product development spend is included in cost of sales in the income statement.2006 was a year of major product transition hence investment in productdevelopment remained high, with a total of £57.3 million, being 21 per cent ofrevenue, expensed during the year (2005: £58.4 million and 23 per cent ofrevenue). Of this amount £45.5 million (2005: £42.1 million) was incurred in thePerformance Analysis division, £9.5 million (2005: £14.0 million) in the ServiceAssurance division with the remaining £2.3 million (2005: £2.3 million) in theSystems group. The rate of spend increased in Performance Analysis in 2006compared with 2005 as we undertook additional investment for the development ofthe TestCenter platform. Our acquired businesses have added £5.0 million toproduct development spend in 2006. Product development decreased in ServiceAssurance year-on-year. Gross profit was higher at 44 per cent of revenue compared with 41 per cent in2005 as a result of the reduction in product development expense and thereorganisation of our supply chain activities to increase efficiency as well asthe move to increase outsourcing. Operating costs, excluding material one-time items and goodwill impairment are41 per cent of sales compared with 39 per cent in 2005. This is a result of theadditional sales and marketing effort in respect of new product launches, thesignificant costs of compliance with the Sarbanes-Oxley Act 2002, £2.6 million,incurred as a result of being a US listed company and intangible amortisation of£1.6 million (2005: nil). Material one-time items Material one-time items include restructuring costs of £9.1 million, the costsrelated to the EGM requisition in December 2006 of £2.0 million, a credit of£0.6 million in relation to the release of provisions on prior period disposalsand curtailment and settlement gains of £1.7 million in respect of changes toour defined benefit pension plan. Together these total a net £8.8 million costfor the year. The Group incurred a one-time finance charge of £8.8 million asthe loan notes were repaid early out of the proceeds from the sale of theHellermannTyton Division, and we incurred fees to break the associated interestrate swaps. Restructuring actions took place at the end of June 2006 and in October 2006affecting both our Communications divisions. These actions were in response toreductions in demand for legacy products in Service Assurance, and include theclosure of loss making locations and the initiatives identified to help achievethe divisional margin targets in Performance Analysis. The estimated annualisedcost savings from these actions are £16 million in total. In November 2006 the Company received a notice of requisition from certainshareholders requesting that the Company convene an Extraordinary GeneralMeeting to consider the removal of three of its non-executive directors and theappointment of four proposed new ones. The costs incurred in relation to thisamounted to £2.0 million. During 2006 active and deferred members of the Spirent Staff Pension Plan wereoffered the opportunity to leave the Plan and take an enhanced transfer value toanother pension arrangement. Many members accepted this offer resulting in abenefit to the funding of the Plan under IFRS of £1.7 million. Goodwill impairment We wrote down goodwill in our Service Assurance division by £9.5 million at theinterim stage and have taken a further impairment charge in the second half of£9.6 million. £19.1 million has been charged in total reflecting the delays intriple play roll out and continued declines in legacy business. Goodwill in theService Assurance division has now been fully impaired. In accordance with IFRS we have also assessed the goodwill carrying value of theSwissQual business that we acquired in January 2006 where activity levels havebeen lower than had been anticipated. This has resulted in a goodwill impairmentcharge of £27.7 million. Goodwill in SwissQual has been fully impaired. Whilstwe have written down the carrying value of SwissQual, we believe that there areexcellent prospects for the new products in the medium term. However, we havediscounted the projections to reflect the inherent risk in the growthprojections. Goodwill impairment charged in 2005 was £37.0 million and was in respect of theService Assurance division. Intangible amortisation This is the first year that the Group has acquired businesses under IFRS andconsequently this is the first time acquired intangible assets have beenrecognised and the associated amortisation has been charged. We have made fouracquisitions in 2006 resulting in £10.0 million of acquired intangible assetsbeing recognised on the balance sheet and we have estimated that the averageuseful life of these intangibles is 5 years. These intangible assets representcurrent technology and customer relationships in the main. Amortisation of £1.6million has been expensed in the income statement in 2006 and this is expectedbe slightly higher in 2007 to reflect the full year effect of the 2006acquisitions. Share-based payment The charge for share-based payment for 2006 is £5.2 million for our continuingbusinesses (2005: £5.1 million) based on a fair value model. Net finance income In February 2006 we repaid our senior loan notes out of the proceeds of the saleof the HellermannTyton Division. After funding the UK final salary pension planthis left us with a significant cash position some of which has been utilised topay for acquisitions and commence an on-market share repurchase. Net finance income was £6.0 million (excluding costs associated with therepayment of loan notes) compared with a net charge of £6.6 million in 2005. Ofnet income £2.0 million is in respect of the expected return on pension schemeassets less interest on the unwinding of the liabilities (2005: £1.1 millioncharge) a result of the change to the funding position of the UK final salarypension plan in February 2006. Surplus cash is held on deposit or in short datedcommercial paper and is earning current market rates of interest. Loss before tax for continuing operations Reported loss before tax for continuing operations was £50.1 million comparedwith a loss before tax in 2005 of £41.7 million. Adjusted profit/(loss) before tax is set out below: £ million 2006 2005---------------------- -------------- -------------- Reported loss before tax (50.1) (41.7)Material one-time items 8.8 8.4Goodwill impairment 46.8 37.0Profit on the disposal of operations - (3.9)Costs associated with the repayment of loan 8.8 -notes ---------------------- -------------- --------------Adjusted profit/(loss) before tax 14.3 (0.2)---------------------- -------------- -------------- Tax The tax charge for 2006 was £0.9 million, an effective rate of 6.3 per cent onthe adjusted profit before tax (2005: £4.0 million credit). We continue to incura low effective rate due to the carry forward of tax losses. Discontinued operations Discontinued operations relate to the HellermannTyton Division which was sold toDoughty Hanson & Co Limited on 15 February 2006. For the period up until salethe operating result was a profit after share-based payment of £3.0 million. The profit on the sale before tax was £166.1 million and tax of £9.2 million ispayable in relation to the sale. The final proceeds from the disposal on a cashfree/debt free basis were £296.7 million. The total expenses of the transactionamounted to £10.9 million, of which £6.7 million was incurred and charged in2005 and net assets (excluding debt and cash) sold were £128.2 million. Werealised a curtailment gain on the UK final salary pension fund of £0.5 million.Unrealised exchange gains of £1.3 million have been transferred from thetranslation reserve to the profit on sale. Earnings per share Basic earnings per share for the Group were 11.75 pence, this includes theprofit on sale of the HellermannTyton Division compared with a loss in 2005 of2.62 pence. Adjusted earnings per share, being before material one-time items,goodwill impairment, profit or loss on the disposal of operations and costsassociated with the repayment of loan notes, net of any related tax, was 1.41pence compared with a loss of 0.22 pence in 2005. Acquisitions We acquired four businesses during 2006 paying an initial consideration of £39.7million and deferred consideration of £3.7 million in the year. All acquisitionswere in the Performance Analysis division. Further deferred considerationpayments amounting to approximately £6.6 million are expected to be paid. On 23 January 2006 we acquired SwissQual Holding AG ("SwissQual") for an initialconsideration of CHF62.5 million (£27.8 million), paid in cash on completionwith up to a further CHF28.0 million (£12.4 million) payable depending on futurerevenue growth and on various technical and financial milestones being achieved.We have paid an additional £3.1 million of deferred consideration in 2006 andhave accrued for a further £4.5 million of deferred consideration. The totalestimated consideration is £35.4 million, £4.8 million less than the maximumpayable. SwissQual's solutions analyse, measure and improve the quality ofexperience for users of wireless applications and services. On 13 February 2006 we acquired QuadTex Systems, Inc ("QuadTex") for an initialconsideration of $7.5 million (£4.3 million), paid in cash on completion with upto a further $1.5 million (£0.9 million) payable depending on certain technicalmilestones and the retention of key employees. We paid £0.3 million of deferredconsideration in 2006. QuadTex is a provider of innovative and leading testtools for internet protocol multimedia subsystem ("IMS") and voice over IP("VoIP") testing. On 10 July 2006 we acquired Scientific Software Engineering, Inc. ("SSE"), theUS based developer of the Landslide product, a leading software based system fortesting the performance and functionality of 2.5 and 3G wireless networkinfrastructure for an initial consideration of $10.0 million (£5.5 million),paid in cash on completion with up to a further $6.0 million (£3.3 million)payable depending on the satisfaction of certain technical milestones and theretention of key employees in 2007. We paid £0.3 million of deferredconsideration in 2006. On 10 August 2006 we acquired the business of Imperfect Networks, Inc.("Imperfect Networks"), a US based developer of security testing solutions. Theacquisition enables Spirent to deliver enhanced security testing solutions toits customers across a number of markets. The initial consideration was $4.0million (£2.1 million), paid in cash on completion, with up to a further $4.0million (£2.2 million) payable depending on the satisfaction of certaintechnical milestones and revenues to be achieved in 2007. Financing and cash flow At 1 January 2006 cash and cash equivalents were £49.2 million and borrowings,which comprised mainly of £70.9 million of senior loan notes attracting a 9.1per cent rate of interest, were £84.8 million. The sale of the HellermannTytonDivision enabled the Group to realise a significant amount of cash repaying theloan notes, extinguishing all other debt, funding the £47.0 million deficit inthe UK final salary pension fund and commencing an on-market share buy backprogramme. We ended the year with cash and cash equivalents of £97.6 million, asignificant strengthening of the balance sheet from the prior year end. Inaddition £8.5 million of cash is held on deposit in a blocked trust account asrequired by the capital restructuring discussed below. Operating cash flow was representative of the tough market conditions and theadditional costs required to undertake such significant product transition. Netcash outflow from continuing operations before tax was £40.8 million (2005: £1.1million outflow). This outflow includes a £47.0 million contribution to fund theUK final salary pension plan and other one-time costs. Adjusted operating cash flow before tax is set out below: £ million 2006 2005----------------------------- ----------- ----------- Reported cash flows from continuing operations (40.8) (1.1)Add back:UK final salary pension plan lump sum contribution 47.0 3.5Material one-time items 6.4 4.0----------------------------- ----------- ----------- Adjusted cash generation from continuing operations 12.6 6.4----------------------------- ----------- ----------- During 2006 the Group absorbed £10.6 million of working capital much of whichwas in relation to receivables and a consequence of the higher activity levelsexperienced during the latter part of the year. Reported operating cash outflow for the continuing Group after tax was £42.4million (2005: £1.8 million outflow) and discontinued operations used £0.6million of operating cash in the period up to disposal (2005: £31.2 millioninflow). Tax payments in 2006 amounted to £2.3 million compared with £4.6million in 2005 (including discontinued operations). In the first quarter of2007 we will settle tax obligations on the sale of the HellermannTyton Divisionof approximately £6.7 million. Capital expenditure was £12.6 million compared with £14.8 million in 2005 forthe continuing Group. The depreciation charge was £11.8 million (2005: £11.4million). We spent £44.4 million on the acquisition of businesses in 2006 and received netcash of £278.2 million from the sale of the HellermannTyton Division. Deferredconsideration payments on acquisitions amounting to approximately £6.6 millionare expected to be paid. As previously mentioned the senior loan notes were repaid in February 2006 andthis left the Group debt free. On the early repayment of loan notes a make wholeamount was due of £7.2 million and we incurred break fees on the earlytermination of interest rate swaps of £2.3 million. Net finance income receivedin 2006 was £4.1 million compared with a net finance cost in 2005 of £6.5million. Pension fund The surplus in the UK defined benefit pension plans at 31 December 2006 was £2.4million (2005: net deficit £50.8 million), having been funded in February 2006by way of a special contribution of £47.0 million from the proceeds of thedisposal of the HellermannTyton Division. During 2006 the plans have benefitedfrom rising equity markets but have also benefited from an offer made to activeand deferred members giving them the opportunity to leave the UK final salarypension plan and take an enhanced transfer value to another pension arrangement.Many members accepted this offer resulting in a benefit to the funding of theplan under IFRS of £1.7 million and a reduction in the total liabilities of theplan of £21.8 million. The value of the surplus at 31 December 2006 has beencalculated using the latest mortality assumptions, and as such this hasadversely affected the position. The triennial actuarial valuations of the plans at 1 April 2006 are currentlybeing finalised. A defined benefit pension plan deficit is reported of £1.4 million at 31December 2006 in respect of the acquired scheme in SwissQual and the unfunded UKplan. Capital structure, on-market share repurchase programme and dividend During 2006, and following on from the cancellation of the share premium accountand capital redemption reserve (the "Cancellation") which took place in 2004,the Company was able to release non-distributable special reserves formed as aresult of the Cancellation by placing funds in a blocked trust account inaccordance with the undertakings made to the Court at the date of theCancellation. At 31 December 2006 cash held in the blocked trust account was£8.5 million. The Company currently has reserves of £194.1 million which arecapable of being distributed to shareholders through dividend or through sharebuy back. We commenced an on-market share repurchase programme in May 2006 which had beenannounced to shareholders together with the proposed disposal of HellermannTytonin December 2005. To date we have returned £41.9 million, being 90.3 millionshares, to shareholders at an average price of 46.1 pence per share. There is afurther £8 million to be returned of the originally announced £50 millionprogramme. Purchases are expected to be completed during 2007. It was alsoannounced in October that the Company proposed to seek authority for a furtherreturn of £50 million to shareholders. This will be considered further as partof the in-depth business review currently underway. Dividend policy is kept under review by the Board, however no dividend is beingdeclared in respect of 2006. Review of US listing and SEC registration As announced in October 2006 the Company has been carrying out a review toexplore a process by which it can de-list its shares and de-register in theUnited States. The US listing has become significantly more costly and onerousin recent years, not least due to the imposition of the Sarbanes-Oxleyregulations, which have cost the Company approximately £2.6 million during 2006. If the proposed SEC rule change announced in December 2006 is passed withoutsignificant amendment it is expected that the Company will be able to seek ade-registration as a result of its extremely low trading volumes in the US. A further update on progress towards de-listing and de-registration will be madeas and when appropriate. Business group development and performance Communications----------------- -------- -------- ------- -------- -------£ million Restated First Second 2006 Restated Change % half half 2005 2006 2006 ----------------- -------- -------- ------- -------- -------RevenuePerformanceAnalysis 94.5 97.7 192.2 178.8 7ServiceAssurance 24.9 18.7 43.6 42.8 2----------------- -------- -------- ------- --------Communicationsgroup 119.4 116.4 235.8 221.6 6----------------- -------- -------- ------- -------- Operating profit/(loss)PerformanceAnalysis 3.2 7.3 10.5 18.4 (43)ServiceAssurance 0.1 (1.2) (1.1) (10.8)----------------- -------- -------- ------- --------Communicationsgroup 3.3 6.1 9.4 7.6 24----------------- -------- -------- ------- -------- Return on sales (%)PerformanceAnalysis 3.4 7.5 5.5 10.3Service Assurance - - - ------------------ -------- -------- ------- --------Communicationsgroup 2.8 5.2 4.0 3.4----------------- -------- -------- ------- -------- Performance Analysis Results for Spirent's Performance Analysis division were marked by significantgrowth for a number of its products and solutions, including the pioneeringSpirent TestCenter platform, and an appreciably improved second half due toearly intervention efforts to increase profitability. However, the division'soverall performance was dampened by market variability, intense competition,delays in technology upgrades and a significant decline in revenue for twoestablished products. In 2006, Performance Analysis introduced many new releases and established asolid foundation for future profitable growth within the segments of 3Gwireless, IMS and VoIP. Several products had noteworthy results, including: • Spirent TestCenter, which was the Group's highest revenue generatingproduct in the fourth quarter; • Spirent Protocol Tester, which received two industry recognitionawards - one of the 10 "Best In Test" products for 2006 by Test & MeasurementWorld and Product of the Year by Internet Telephony; • Our security test solutions Avalanche and ThreatEx (the result of theacquisition of Imperfect Networks); • Abacus, a leading VoIP testing solution; • Launch of the new Diversity product (acquired as a result of theSwissQual acquisition), with subsequent key customer wins; and • The first test demonstration of a Galileo global positioning system. In 2006, revenue for this division of £192.2 million (2005: £178.8 million) wasup 7 per cent whilst operating profit decreased by 43 per cent to £10.5 million(2005: £18.4 million) principally weighed towards the first half. The declinewas largely due to additional spend on product development and sales andmarketing costs associated with the launch of new product releases. To mitigatethe weak first half restructuring actions were taken at the end of the secondquarter together with a greater focus on improving profitability. These actionsresulted in a significantly improved second half operating profit of £7.3million and a return on sales of 7.5 per cent versus a first half of £3.2million, and a return on sales of 3.4 per cent. Spirent's top 20 customers typically represent an estimated 36 per cent ofPerformance Analysis revenues. No one customer represented more than 10 per centof the total divisional revenues. On a geographic basis there was growth inEurope driven by Performance Analysis Positioning and SwissQual. Activity in theAsia Pacific region grew, building on strong growth particularly in China andIndia. Throughout 2006, market conditions continued to be variable and unpredictable inPerformance Analysis Broadband ("Broadband"). While we saw an increase inspending among some customers in the second half, when combined with customers'reduced spending in the first half, Broadband experienced a flat year overall.This was driven by a reduction in the total available market due toconsolidation activity among larger customers, lower spending from our largestcustomer, Cisco, and strong competition in the routing, switching, access, andL4-7 spaces, and in the VoIP and IMS markets. The tougher competitiveenvironment resulted in pressure on pricing, particularly at our largeraccounts. Despite unpredictable market conditions, Broadband gained position with leadingcustomers and strengthened its position in the growing security market with theacquisition of Imperfect Networks (ThreatEx). The majority of product development investment for Broadband went to launchingnew products and to positioning Spirent for the long term. Spirent TestCentercontinues to make significant gains in the marketplace, including: • More than half of Spirent TestCenter customers are repeat buyers; • A significant number of customer wins are at incumbent accounts of thecompetition; • Our top 20 Broadband customers are using Spirent TestCenter; and • More than 180 customers are now using the new platform. Spirent's Broadband customers are interested in driving significant competitiveadvantage through faster time to market for new services and products, deployingnew services to tap into new revenue streams and seeking highly integratedsolutions to reduce their footprint. They understand that complex testing cannotbe outsourced and that their resources for implementing complex testing arelimited. Development plans for Spirent TestCenter will deliver increasedfunctionality, scale, ease of use and automation so that our customers cancontinue to improve time to test, reduce the cost of testing and achieve afaster time to revenue for their new products and services. Spirent TestCenterarchitecture is significantly ahead of the competition and is designed tointegrate new technologies moving forward to protect customers' investments. Results for Performance Analysis Wireless ("Wireless") mirrored that ofBroadband - a combination of key market successes countered by market andproduct challenges. Spirent's overall CDMA business was down due to a lull inthe air interface evolution by network operators which led to the lack of a newtechnology catalyst for testing. In the WCDMA market, our gains in selling intoGSM and WCDMA-based A-GPS mobile device test applications were offset bydeclines in the RF test business. In the Mobile Device Test segment, where we hold a significant market share, wehad a strong year for Location Based Services test in both the CDMA and WCDMAmarkets. Spirent's Location Test Systems turned in a record-breaking year,driven by additional regulatory requirements for handsets and growth in thedeployment of commercial Location Based Services. More than60 per cent of Wireless R&D is focused on the WCDMA applications market, andSpirent continues to invest in its core network emulator platform to improvefeature capability. Wireless also saw some modest continued growth in thesimulator market for faders, driven by the evolution of Mobile Input-MobileOutput technology, a key element of WiMax deployment. At the end of the year,Spirent saw activity in testing for Mobile TV begin to ramp. This excitingindustry promises to be a key area of focus for Spirent as mobile networkoperators deploy multi-media services in 2007. Performance Analysis Positioning ("Positioning") saw its third year ofdouble-digit growth. Of note, Positioning launched the World's first commercialGalileo simulator and secured key contracts for official Galileo programbusiness. Galileo is expected to be a significant source of revenue in thefuture. Spirent entered into the Subscriber Experience Management ("SEM") market segmentas a result of its acquisition of SwissQual. Here, Spirent experienced asignificant impact from widespread industry consolidation, reducing demandmarkedly. In addition, there were substantial delays in purchasing decisionscompared to previous years. Competition is intense as well and drove increasedpressure on pricing; whilst several competitors merged to improve their marketposition. Despite these conditions, Spirent added an estimated 30 new SEMcustomers during the year. It launched a new product, Diversity, which was wellreceived by the market and gained traction with leading mobile networkoperators. Service Assurance In 2006, Spirent's Service Assurance division stabilised its performance amidsignificant market consolidation, secured important contracts for its tripleplay service assurance and field test solutions and delivered a break-evenresult before share-based payment of £1.2 million, marking a significantimprovement over its performance in 2005. Delays in customer decisions and spending on new solutions continued throughoutthe year and competition remains strong as service assurance players vie forfewer customers and retention of incumbent positions due to marketconsolidation. Carriers continue to shift spending away from legacy networks asthey deploy triple play offerings, however the current limited triple playsubscriber base is restricting the service assurance market. Overall revenues were slightly higher for Service Assurance compared to lastyear, due to the recognition of revenue from one-time projects for remote packetaccess testing in the first half of 2006. Operating loss was £1.1 millioncompared with a loss of £10.8 million in 2005. The improvement in profitabilityis due to increased revenue and margin, coupled with the benefit ofrestructuring actions that took place in the second quarter. These actionsallowed the division to target a break-even position before share-based paymentfor the year. The revenue profile has remained comparable with the prior year, with themajority of revenue coming from US service providers. Revenue from DSL equipment(20 per cent of total revenue) was higher in 2006 due to increased customerdemand. Leased line revenue for service assurance products (50 per cent oftotal) was down on 2005 as anticipated as customers continued to move spendingaway from legacy service assurance solutions. Service Assurance has begun to see the results of its investment innext-generation services. It secured a strategic contract with TELUS, a leadingprovider of data, IP and wireless solutions in Canada. The contract representsthe first award for a full-scale triple play service assurance solution. It alsodemonstrates that the triple play market is growing and that carriers understandservice assurance solutions are needed before scaling services. In addition, theService Assurance division's new handheld field test device, Tech-X, wasapproved and deployed at major North American customers. Service Assurance is focused on providing the right tools for service providersto scale triple play services and ensure consumers' Quality of Experience("QoE"). Its portfolio includes software and hardware based centralised test anddiagnostic solutions as well as handheld field test devices. The Tech-X is thefirst all-in-one field test solution that combines testing of copper, xDSL andtriple play services enabling field technicians to access the power of thecentral test and monitoring systems in the field. Spirent's triple play serviceassurance solutions allow service providers to get it right the first time,scale the service while managing operating costs, and dispatch to fix not tofind problems. From the lab to the live network, Spirent is the only companythat offers triple play solutions throughout the entire technology lifecycle. The Service Assurance division will continue to seek opportunities to realisethe potential of its existing baseline business while focusing its investmentson expanding its position in the triple play market. However, continuing delaysin the roll out of triple play service assurance solutions by our customers islikely to impact the timing of deployment of our new centralised test products.In the short term we expect that revenue from legacy products will declinefaster than the ramp up of revenues from our triple play solutions. Systems------------------------ ---------- ---------- ----------£ million 2006 Restated Change % 2005------------------------ ---------- ---------- ---------- Revenue 35.8 37.7 (5)Operating profit 4.7 4.3 9Return on sales (%) 13.1 11.4------------------------ ---------- ---------- ---------- The Systems group comprises PG Drives Technology, a leading supplier of controlsystems for electrically powered medical and industrial vehicles. Revenue wasdown 5 per cent and operating profit up 9 per cent, respectively. Return onsales increased to 13.1 per cent compared with 11.4 per cent in 2005. During 2006 we saw continued strong revenues from the VR2, a low cost,mainstream wheelchair control system that we launched in second half of 2005, aswell as growing market recognition for the R-net, our highly sophisticated rehabwheelchair system. These new products, together with our established ones,enabled us to increase customer penetration in both the mobility and industrialvehicles markets during the year. This was achieved in spite of continuingconstraints in US government healthcare funding for powered wheelchairs. We alsomoved more of our production to China to reduce the logistical costs ofsupporting our activities in the Asia Pacific region. At the end of 2006 welaunched two new systems, X25/30 and Sigmadrive, targeted at heavier industrialvehicles. These new products will spearhead our entry into new industrialmarkets. Non-segmental costs Non-segmental costs, being those which are not directly attributable to theoperating segments, were £5.8 million compared with £5.5 million in 2005. Thesecosts relate to the costs of our Board and costs in relation to our duallisting, including much of the costs of the Sarbanes-Oxley Act of 2002. Consolidated income statement 2006 2005Year to 31 December Notes £ million £ million------------------ ------ -------- -------- -------- -------- -------- ------- Before material Material Total Before Material Total one- one- material one-time time items time items one-time items and and items and goodwill goodwill and goodwill impairment impairment goodwill impairment impairment ------------------ ------ -------- -------- -------- -------- -------- ------- Continuing operationsRevenue 2,3 271.6 - 271.6 259.3 - 259.3Cost of sales (151.2) - (151.2) (151.7) (1.4) (153.1)------------------ ------ -------- -------- -------- -------- -------- ------- Grossprofit/(loss) 120.4 - 120.4 107.6 (1.4) 106.2Selling anddistribution (71.2) - (71.2) (70.9) - (70.9)Administration (40.9) (55.6) (96.5) (30.3) (44.0) (74.3)------------------ ------ -------- -------- -------- -------- -------- ------- Operatingprofit/(loss) 2 8.3 (55.6) (47.3) 6.4 (45.4) (39.0)Profit on thedisposal ofoperations - - - - 3.9 3.9------------------ ------ -------- -------- -------- -------- -------- ------- Profit/(loss)beforeinterest 8.3 (55.6) (47.3) 6.4 (41.5) (35.1)Finance income 7.6 - 7.6 1.5 - 1.5Finance costs (1.6) - (1.6) (8.1) - (8.1)Costsassociatedwith therepayment ofloan notes - (8.8) (8.8) - - ------------------- ------ -------- -------- -------- -------- -------- ------- Profit/(loss)before tax 14.3 (64.4) (50.1) (0.2) (41.5) (41.7)Tax (0.9) - (0.9) 4.0 - 4.0------------------ ------ -------- -------- -------- -------- -------- ------- Profit/(loss)for the yearfromcontinuingoperationsafter tax 13.4 (64.4) (51.0) 3.8 (41.5) (37.7)Discontinued operationsProfit for theyear fromdiscontinuedoperations 4 2.9 156.9 159.8 19.9 (6.7) 13.2------------------ ------ -------- -------- -------- -------- -------- ------- Profit/(loss)for the year 16.3 92.5 108.8 23.7 (48.2) (24.5)------------------ ------ -------- -------- -------- -------- -------- ------- Attributable to:Equity holdersof parent 16.3 92.5 108.8 23.3 (48.2) (24.9)Minorityshareholders'interests - - - - 0.4 - 0.4discontinued operations------------------ ------ -------- -------- -------- -------- -------- ------- Profit/(loss)for the year 16.3 92.5 108.8 23.7 (48.2) (24.5)------------------ ------ -------- -------- -------- -------- -------- ------- Earnings/(loss) per share(pence) 6Basicearnings/(loss) 11.75 (2.62)Basic lossfromcontinuingoperations (5.51) (3.97)Dilutedearnings/(loss) 11.70 (2.62)Diluted lossfromcontinuingoperations (5.51) (3.97)------------------ ------ -------- -------- -------- -------- -------- ------- Consolidated statement of recognised income and expense Year to 31 December ---------------£ million 2006 2005---------------------------------- --------- --------- Income and expense recognised directly in equityGains on cash flow hedges taken to equity - 1.9Exchange differences on retranslation of foreignoperations (10.3) 4.1Actuarial gains/(losses) on defined benefit pensionplans 1.6 (16.1)---------------------------------- --------- --------- (8.7) (10.1)Transfers to income statementExchange gain transferred to profit on sale (1.3) -Gains on cash flow hedges (1.9) (0.5)Transfers to balance sheetWrite-off of deferred tax asset on pension liability - (11.1)---------------------------------- --------- --------- Net (expense)/income recognised directly in equity (11.9) (21.7)Profit/(loss) for the year 108.8 (24.5)---------------------------------- --------- --------- Total recognised income and expense for the year 96.9 (46.2)---------------------------------- --------- --------- Attributable to:Equity holders of parent 96.9 (46.8)Minority shareholders' interests - discontinuedoperations - 0.6---------------------------------- --------- --------- 96.9 (46.2)---------------------------------- --------- --------- Consolidated balance sheet At 31 December ---------------£ million 2006 2005---------------------------------- --------- --------- AssetsNon-current assetsIntangible assets 63.3 71.5Property, plant and equipment 25.3 30.1Trade and other receivables 1.4 1.7Cash on deposit 8.5 -Defined benefit pension fund surplus 2.4 -Deferred tax 1.2 1.0---------------------------------- --------- --------- 102.1 104.3---------------------------------- --------- --------- Current assetsInventories 25.4 27.0Trade and other receivables 63.8 56.3Derivative financial instruments 0.1 2.6Cash and cash equivalents 97.6 49.2---------------------------------- --------- --------- 186.9 135.1---------------------------------- --------- --------- Assets held in disposal group held for sale - 164.1---------------------------------- --------- --------- Total assets 289.0 403.5---------------------------------- --------- --------- LiabilitiesCurrent liabilitiesTrade and other payables (61.8) (62.9)Current tax (30.5) (24.7)Derivative financial instruments - (0.7)Short term borrowings and overdrafts - (3.9)Provisions and other liabilities (5.9) (4.1)---------------------------------- --------- --------- (98.2) (96.3)---------------------------------- --------- --------- Non-current liabilitiesTrade and other payables (0.5) (0.7)Derivative financial instruments - (2.0)Long term borrowings - (71.2)Defined benefit pension fund deficit (1.4) (51.5)Deferred tax - (0.8)Provisions and other liabilities (6.1) (10.1)---------------------------------- --------- --------- (8.0) (136.3)---------------------------------- --------- --------- Liabilities included in disposal group held for sale - (48.7)---------------------------------- --------- --------- Total liabilities (106.2) (281.3)---------------------------------- --------- --------- Net assets 182.8 122.2---------------------------------- --------- --------- Capital and reservesShare capital 32.5 32.2Share premium account 10.6 4.4Capital reserve 5.5 10.2Translation reserve (6.1) 5.5Net unrealised gains and losses - 1.9Retained earnings 140.3 66.1---------------------------------- --------- --------- Equity holders of parent 182.8 120.3Minority interests - 1.9---------------------------------- --------- --------- Total equity 182.8 122.2---------------------------------- --------- --------- Consolidated cash flow statement Year to 31 December ----------------£ million Note 2006 2005------------------------------ ------ --------- --------- Cash flows from operating activitiesCash flow from operations 7 (40.7) 34.0Tax paid (2.3) (4.6)------------------------------ ------ --------- --------- Net cash (outflow)/inflow from operating activities (43.0) 29.4------------------------------ ------ --------- --------- Cash flows from investing activitiesDividends received from associates - 0.2Interest received 5.5 1.4Cash on deposit (8.5) -Disposal of operations 278.2 2.4Purchase of property, plant and equipment (14.1) (30.5)Purchase of intangible assets (0.8) -Proceeds from the sale of property, plant andequipment 0.4 0.6Acquisition of subsidiaries (44.4) ------------------------------- ------ --------- --------- Net cash from/(used in) investing activities 216.3 (25.9)------------------------------ ------ --------- --------- Cash flows from financing activitiesInterest paid (1.4) (7.4)Interest element of finance lease rental payments - (0.5)Costs associated with repayment of loan notes (9.5) -Proceeds from the issue of share capital and employeeshare ownership trust 2.4 2.7On-market share repurchase (41.9) -Repayments of borrowings (95.7) (0.2)New borrowings 23.0 -Repayments of capital element of finance leaserentals - (1.4)------------------------------ ------ --------- --------- Net cash used in financing activities (123.1) (6.8)------------------------------ ------ --------- --------- Net increase/(decrease) in cash and cash equivalents 50.2 (3.3)Cash and cash equivalents at the beginning of theyear 48.8 51.0Effect of foreign exchange rate changes (1.4) 1.1------------------------------ ------ --------- --------- Cash and cash equivalents at the end of the year 97.6 48.8------------------------------ ------ --------- --------- Cash and cash equivalents comprise:Cash and cash equivalents 97.6 49.2Overdrafts - (0.4)------------------------------ ------ --------- --------- 97.6 48.8------------------------------ ------ --------- --------- Notes 1 Financial information presented The financial information contained in this document does not constitutestatutory accounts as defined in Section 240 of the Companies Act 1985. As required by the European Union's IAS Regulation and the Companies Act 1985the Group has prepared its consolidated financial statements for the year to 31December 2006 in accordance with International Financial Reporting Standards("IFRS") as adopted by the European Union. The comparative financial informationis based on the statutory accounts to 31 December 2005. These accounts, uponwhich the auditors issued an unqualified opinion, have been delivered to theRegistrar of Companies. 2 Segmental analysis-------------- -------- -------- ------------- ------- --------- --------£ million Performance Service Communications Systems Non-segmental Continuing Analysis Assurance operations Total-------------- -------- -------- ------------- ------- --------- -------- 2006Revenue 192.2 43.6 235.8 35.8 - 271.6-------------- -------- -------- ------------- ------- --------- -------- Operatingprofit/(loss)beforematerialone-time itemsand goodwillimpairment 10.5 (1.1) 9.4 4.7 (5.8) 8.3Materialone-time items (3.8) (5.3) (9.1) - 0.3 (8.8)Goodwillimpairment (27.7) (19.1) (46.8) - - (46.8)-------------- -------- -------- ------------- ------- --------- -------- Operating(loss)/profit (21.0) (25.5) (46.5) 4.7 (5.5) (47.3)Finance income 7.6Finance costs (1.6)Costsassociatedwith therepayment ofloan notes (8.8)-------------- -------- -------- ------------- ------- --------- -------- Loss before tax (50.1)Tax (0.9)-------------- -------- -------- ------------- ------- --------- -------- Loss after taxfor the year (51.0)-------------- -------- -------- ------------- ------- --------- -------- Other informationProductdevelopment 45.5 9.5 55.0 2.3 - 57.3Share-basedpayment 3.6 1.2 4.8 0.1 0.3 5.2Intangibleamortisation 1.6 - 1.6 - - 1.6-------------- -------- -------- ------------- ------- --------- -------- 2 Segmental analysis continued -------------- ----------- --------- ------------- ------- ------------- ----------£ million Performance Service Communications Systems Non-segmental Continuing Analysis Assurance operations Total-------------- ----------- --------- ------------- ------- ------------- ---------- 2005Revenue 178.8 42.8 221.6 37.7 - 259.3-------------- ----------- --------- ------------- ------- ------------- ---------- Operatingprofit/(loss)beforematerialone-time itemsand goodwillimpairment 18.4 (10.8) 7.6 4.3 (5.5) 6.4Materialone-time items (2.5) (5.4) (7.9) - (0.5) (8.4)Goodwillimpairment - (37.0) (37.0) - - (37.0)-------------- ----------- --------- ------------- ------- ------------- ---------- Operating(loss)/profit 15.9 (53.2) (37.3) 4.3 (6.0) (39.0)Profit ondisposal ofoperations 3.9Finance income 1.5Finance costs (8.1)-------------- ----------- --------- ------------- ------- ------------- ---------- Loss before tax (41.7)Tax 4.0-------------- ----------- --------- ------------- ------- ------------- ---------- Loss after taxfor the year (37.7)-------------- ----------- --------- ------------- ------- ------------- ---------- Other informationProductdevelopment 42.1 14.0 56.1 2.3 - 58.4Share-basedpayment 3.6 1.2 4.8 0.1 0.2 5.1-------------- ----------- --------- ------------- ------- ------------- ---------- 3 Geographical analysis £ million 2006 2005---------------------------------- --------- --------- Revenue by marketContinuing operationsEurope 54.6 43.0North America 153.0 158.2Asia Pacific, Rest of Americas, Africa 64.0 58.1---------------------------------- --------- --------- 271.6 259.3---------------------------------- --------- --------- Revenue by sourceContinuing operationsEurope 76.5 61.2North America 175.9 180.9Asia Pacific, Rest of Americas, Africa 19.2 17.2---------------------------------- --------- --------- 271.6 259.3---------------------------------- --------- --------- 4 Discontinued operations £ million 2006 2005---------------------------------- --------- --------- Revenue 28.0 205.5---------------------------------- --------- --------- Operating profit 3.0 24.4Share of profit of associate 0.1 2.7Profit/(loss) on the disposal of operations 166.1 (6.7)Net finance costs (0.1) (1.1)---------------------------------- --------- --------- Profit/(loss) before tax 169.1 19.3Tax (0.1) (6.1)Tax on the disposal of operations (9.2) ----------------------------------- --------- --------- Profit for the year 159.8 13.2---------------------------------- --------- --------- 5 Material one-time items and goodwill impairment £ million 2006 2005----------------------------------- -------- --------- Goodwill impairment 46.8 37.0Restructuring costs 9.1 6.9EGM costs 2.0 -Curtailment and settlement gain on defined benefit pension (1.7) -planRelease of provision for prior year disposals (0.6)Inventory provisions - 1.4Exit from joint venture - 0.1----------------------------------- -------- --------- 55.6 45.4----------------------------------- -------- --------- 6 Earnings/(loss) per share £ million Continuing Discontinued Total operations operations operations---------------------------- -------- --------- --------- 2006Profit/(loss)for the yearattributableto equityholders ofparent (51.0) 159.8 108.8Materialone-time items 8.8 - 8.8Goodwillimpairment 46.8 - 46.8Profit on thedisposal ofoperations - (156.9) (156.9)Costsassociatedwith therepayment ofloan notes 8.8 - 8.8Prior year taxcredit (0.3) - (0.3)---------------------------- -------- --------- --------- Adjustedearningsattributableto equityholders ofparent 13.1 2.9 16.0---------------------------- -------- --------- --------- 2005(Loss)/profitfor the year (37.7) 13.2 (24.5)Less: minorityshareholders'interests - (0.4) (0.4)---------------------------- -------- --------- --------- (Loss)/profitfor the yearattributableto equityholders ofparent (37.7) 12.8 (24.9)Materialone-time items 8.4 0.4 8.8Goodwillimpairment 37.0 - 37.0(Profit)/losson thedisposal ofoperations (3.9) 6.7 2.8Prior year taxcredit (5.9) - (5.9)Prior year taxcredit onassociate - (1.5) (1.5)---------------------------- -------- --------- --------- Adjustedearnings/(loss) attributableto equityholders ofparent(restated) (2.1) 18.4 16.3---------------------------- -------- --------- --------- 2006 2005---------------------------- -------- --------- --------- Earnings/(loss) per share (pence)Basic 11.75 (2.62)Basic fromcontinuingoperations (5.51) (3.97) Diluted 11.70 (2.62)Diluted fromcontinuingoperations (5.51) (3.97) Adjusted(restated) 1.73 1.72Adjusted fromcontinuingoperations(restated) 1.41 (0.22)---------------------------- -------- --------- --------- Weighted average number of shares in issue (million)Basic andadjusted 925.9 950.4Dilutivepotential ofemployee shareoptions 3.8 10.2---------------------------- -------- --------- --------- Weightedaverage numberof shares inissue -diluted 929.7 960.6---------------------------- -------- --------- --------- 7 Reconciliation of profit/(loss) before tax to cash generated from operations £ million 2006 2005---------------------------------- --------- --------- Continuing operationsLoss before tax (50.1) (41.7)Adjustments for:Profit on the disposal of operations - (3.9)Finance income (7.6) (1.5)Finance costs 1.6 8.1Costs associated with the repayment of loan notes 8.8 -Goodwill impairment 46.8 37.0Intangible amortisation 1.6 -Depreciation of property, plant and equipment 11.8 11.4Loss on the disposal of property, plant and equipment 0.6 0.1Impairment of property, plant and equipment 0.8 -Share-based payment 5.2 5.1Settlement and curtailment of pension fund (1.7) -Changes in working capital:Deferred income (released)/received (1.3) 5.8(Increase)/decrease in receivables (6.1) 0.4Increase in inventories (0.4) (0.4)Decrease in payables (2.8) (16.8)Decrease in provisions (1.0) (0.9)Defined benefit pension fund (47.0) (3.8)---------------------------------- --------- --------- Cash flows from continuing operations (40.8) (1.1)---------------------------------- --------- --------- Discontinued operationsProfit before tax 169.1 19.3Adjustments for:Share of profit of associates (0.1) (2.7)Profit/(loss) on the sale of discontinued operations (166.1) 6.7Finance income - (0.1)Finance costs 0.1 1.2Depreciation of property, plant and equipment 1.6 11.2Profit on the disposal of property, plant and equipment (0.1) (0.1)Share-based payment 0.4 0.5Changes in working capital:Increase in receivables (2.9) (1.7)Decrease/(increase) in inventories 0.5 (3.0)(Decrease)/increase in payables (2.4) 3.8---------------------------------- --------- --------- Cash flows from discontinued operations 0.1 35.1---------------------------------- --------- --------- Cash flows from operating activities (40.7) 34.0---------------------------------- --------- --------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Spirent