11th Aug 2005 07:00
Spirent PLC11 August 2005 SPIRENT PLC INTERIM RESULTS FOR THE FIRST HALF OF 2005 London, UK - 11 August 2005: Spirent plc (LSE: SPT; NYSE: SPM), a leadingcommunications technology company, today announces its interim results for the first half of 2005. Summary £ million First half First half Change 2005(1) 2004(1) %--------------------------------------------------------------------- Revenue 230.4 239.3 (4)Operating profit(2) 14.1 21.5 (34)Adjusted profit before tax(3) 11.5 18.0 (36)Reported (loss)/profit beforetax (34.1) 16.7 -Adjusted earnings pershare(3),(4) (pence) 0.91 1.40 (35) • All ongoing businesses increased revenue and operating profit(2) in the first half of 2005 except the Service Assurance division which reported a loss as previously announced. - Performance Analysis operating profit(2) £11.4 million, up 50 per cent. - Network Products operating profit(2) £12.3 million, up 14 per cent. - Ongoing Systems business operating profit(2) £2.1 million, up 24 per cent. - Service Assurance operating loss(2) £9.0 million, in line with our April trading update. • We are taking a goodwill impairment charge of £37.0 million in relation to the Service Assurance division. Other material one-time charges of £7.1 million with a cash cost of £3.3 million have been taken in the period. • Net debt increased to £42.4 million (31 December 2004 £26.4 million) due to a reduction in operating cash flow, including the cash cost of restructuring, increased capital expenditure and a £5.1 million currency translation impact. Notes 1 First half 2005 refers to the period to 3 July 2005 and first half 2004 refers to the period to 4 July 2004. The results are prepared in accordance with the accounting policies set out in the document entitled 'Transition to International Financial Reporting Standards' issued on 15 July 2005. 2 Before material one-time charges and share-based payment. 3 Before material one-time charges, share-based payment and profit on disposal of operations. 4 Adjusted earnings per share is based on adjusted earnings as set out in note 6 to the Interim Report. Anders Gustafsson, Chief Executive, commented: "We expect the Performance Analysis division to make sequential progress in the second half of the year although conditions in the market remain variable. The Service Assurance division will continue to be loss making in the second half, albeit at a substantially reduced level as the benefits of the cost reductions are realised. The Network Products group's performance in the second half will reflect the normal seasonality of the business. As a result our expectations for the Group's outcome for the year as a whole remain unchanged. "The telecoms test and monitoring market remains the focus for the Group. In the last twelve months we have achieved much to improve the way we address our target markets and to increase our operational efficiency and we are now better positioned to develop the business in line with our strategic objectives." - ends -Enquiries Anders Gustafsson, Chief Executive Spirent plc +44 (0)1293 767676Eric Hutchinson, Finance Director Investor RelationsCatherine Nash Spirent plc +44 (0)1293 767676 MediaReg Hoare/Katie Hunt Smithfield +44 (0)207 360 4900 About Spirent Spirent is a leading communications technology company focused on deliveringinnovative systems and services to meet the needs of customers worldwide. Weare a global provider of performance analysis and service assurance solutionsthat enable the development and deployment of next-generation networkingtechnologies such as broadband services, Internet telephony, 3G wireless andweb applications and security testing. Our Network Products business is adeveloper and manufacturer of innovative solutions for fastening, identification, protection and connectivity in electrical and communicationsnetworks marketed under the global brand HellermannTyton. The Systems groupcomprises PG Drives Technology which develops power control systems forspecialist electrical vehicles in the mobility and industrial markets. Furtherinformation about Spirent plc can be found at www.spirent.com Spirent Ordinary shares are traded on the London Stock Exchange (ticker: SPT)and on the New York Stock Exchange (ticker: SPM; CUSIP number: 84856M209) in 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, 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 a weak US dollar; our ability to avoid a breach of our financialcovenants and to achieve certain financial requirements under our renegotiatedborrowing terms; changes in the business, financial condition or prospects ofone or more of our major customers; risks of doing business internationally; thefinancial burden of our pension fund deficit; risks relating to the acquisitionor sale of businesses and our subsequent ability to integrate businesses; ourreliance on proprietary technology; our exposure to liabilities for productdefects; our reliance on third party manufacturers and suppliers; and otherrisks described from time to time in Spirent plc's Securities and ExchangeCommission periodic reports and filings. The Company undertakes no obligation toupdate any forward-looking statements contained in this press release, whetheras a result of new information, future events or otherwise. INTERIM REPORT FOR THE FIRST HALF OF 2005 Operating profit/(loss) and return on sales are used by the Group as keymeasures of operating performance and are stated in the text before the effectof goodwill impairment, other material one-time charges and share-based paymentso that period on period comparisons are not distorted. In constant currencies or on a constant currency basis means calculated atconstant exchange rates. First half 2005 refers to the period to 3 July 2005 and first half 2004 refersto the period to 4 July 2004. The results are prepared in accordance with theaccounting policies set out in the document entitled 'Transition toInternational Financial Reporting Standards' issued on 15 July 2005. Overview All our ongoing businesses increased revenue and operating profit in the firsthalf of 2005 except the Service Assurance division which reported a loss aspreviously announced. The Performance Analysis division grew operating profit by 50 per cent, despitea slow down in spending by the US carriers as well as lower than expected USgovernment spending on telecoms in the first half. We have for some time been reporting that we were experiencing a slow down inour Service Assurance division's existing leased line and DSL business. However,we announced in April that the extent of the decline in the first quarter hadbeen significantly greater than anticipated. This was due to customers delayingthe release of capital spending budgets and a larger than expected shift incustomers' investment towards next-generation networks. In addition, mergeractivity among the US carriers delayed spending on monitoring equipment. Thesefactors have adversely affected the Service Assurance division's performance andwe reported an operating loss of £9.0 million in the first half. In response to the significant drop in activity levels, we undertook in June arestructuring of the division to realign resources and further reduce operatingcosts. This was in addition to the actions taken and announced in February.These restructurings allow support for existing leased line monitoring customersto be provided on a more efficient basis while we continue to invest in our newIP service assurance products. In total the restructuring actions have reducedheadcount in the division by around 260, representing some 40 per cent of theworkforce, and are expected to result in total annualised cost savings ofapproximately £12 million, of which approximately £5 million will benefit the second half of 2005. After the full benefit of the restructurings, the annualised revenue required in the Service Assurance division to achieve a breakeven result at the operating level will be approximately £52 million. As anticipated, we are taking a goodwill impairment charge in relation to theService Assurance division and this amounted to £37.0 million. The carryingvalue of the Service Assurance division at the end of the first half is £16.6million. Other material one-time charges of £7.1 million in the period comprise£4.0 million in respect of restructuring and inventory write-downs in theService Assurance division and £3.1 million in respect of the supply chaininitiatives and other restructuring within the Group. The cash cost of thesecharges is £3.3 million in the first half. Further restructuring charges ofapproximately £3 million will be taken in the second half to complete the supply chain initiatives. Both our Network Products group and the ongoing Systems business reportedimproved results over the same period last year with operating profit up 14 percent and 24 per cent, respectively. Net debt increased to £42.4 million in the first half of 2005 (31 December 2004£26.4 million) due to a reduction in operating cash flow, including the cashcost of restructuring, increased capital expenditure and a £5.1 million currencytranslation impact. Outlook We expect the Performance Analysis division to make sequential progress in thesecond half of the year although conditions in the market remain variable. TheService Assurance division will continue to be loss making in the second half,albeit at a substantially reduced level as the benefits of the cost reductionsare realised. The Network Products group's performance in the second half willreflect the normal seasonality of the business. As a result our expectations forthe Group's outcome for the year as a whole remain unchanged. The telecoms test and monitoring market remains the focus for the Group. In thelast twelve months we have achieved much to improve the way we address ourtarget markets and to increase our operational efficiency and we are now betterpositioned to develop the business in line with our strategic objectives. Operating review Communications £ million First half First half Change 2005 2004 %---------------------------------------------------------------- RevenuePerformance Analysis 87.6 83.1 5Service Assurance 20.2 42.0 (52)---------------------------------------------------------------- Communications group 107.8 125.1 (14) Operating profit/(loss)Performance Analysis 11.4 7.6 50Service Assurance (9.0) 3.5 ----------------------------------------------------------------- Communications group 2.4 11.1 (78) Return on sales (%)Performance Analysis 13.0 9.1Service Assurance - 8.3Communications group 2.2 8.9 The anticipated loss in the Service Assurance division affected the performanceof the Communications group as a whole in the first half of 2005. Revenue forthis group decreased by 14 per cent to £107.8 million and operating profitdeclined to £2.4 million. Return on sales fell from 8.9 per cent to 2.2 percent. Product development in the first half of 2005 was £28.4 million, or 26 per centof revenue (first half 2004 £30.1 million, 24 per cent of revenue). This wassplit as to £19.9 million in the Performance Analysis division (first half 2004£20.8 million) and £8.5 million in the Service Assurance division (first half2004 £9.3 million). This investment continues to be directed at next-generationtechnologies and in particular at the development of our new unified testplatform, our wideband CDMA wireless handset test systems and our IP serviceassurance solutions. In the second half of 2004 we embarked on a number of initiatives to improve theoperational efficiency of the Communications group and we have made progresswith the integration of cross-group functions such as IT, finance, humanresources and corporate marketing. We have also made progress with therationalisation of our supply chain across the Communications group and have nowmade arrangements for the majority of our manufacturing functions to beoutsourced. This approach will reduce the group's fixed costs and enable us tomove to a more variable cost based model. Performance Analysis The Performance Analysis division achieved a 5 per cent increase in revenue inthe first half of 2005 driven by continued customer spending on next-generationand 3G wireless technologies in the period. This growth was achieved despitevariable market conditions in the first half caused by lower than expectedspending by the US government and reduced spending by certain of the US serviceproviders. Operating profit in the first half of 2005 of £11.4 million was up 50per cent over the first half of 2004 due to the increased volumes and thebenefits of cost control. On a constant currency basis, revenue and operatingprofit were up 8 per cent and 55 per cent, respectively, in the first half.Return on sales improved to 13.0 per cent for the period compared with 9.1 percent in the first half of 2004. In the first half of 2005 we achieved increased sales in constant currenciesfrom our routing, IP telephony, triple play, broadband access and security, weband application testing solutions compared with the first half of 2004. Our newunified platform for Ethernet testing, Spirent TestCenter(TM), which deliversincreased scalability and improved automation, has been well received and wehave secured initial orders since its launch in May. We have successfullyaddressed customers' needs in relation to the delivery of complex IP telephonyservices and infrastructure quality of service testing for triple play (voice,video and data). We now have a leading position in this market due to ourability to provide end-to-end test capabilities across complex convergednetworks. Web security remains an issue for businesses worldwide and we haveenhanced our Avalanche(TM) offering through partnerships that enable us togenerate the latest malicious attacks and simulate financial trading traffic. Wesaw a good contribution from our professional services activities which offertailored support to customers for complex testing projects. In the period we saw particularly good growth in our wireless and positionlocation test activities, which accounted for 25 per cent of divisional revenuein the first half of 2005. This was partly driven by continuing strong sales ofour CDMA handset test solutions due to the commercial roll out of the 3Gtechnology 1xEV-DO and the increasing need to test sophisticated applicationsand services on CDMA handsets. Growth was also driven by increased sales in thewideband CDMA sector, where our unique position location testing capabilityenabled us to achieve significant market share gains. North America continues to represent the largest market for this division but wehave made progress in Europe and the Asia Pacific region in the period. Werecently opened a facility in Bangalore, India to serve customers with researchand development operations in the region and sales have grown significantlyalbeit from a low base. During the first half of the year we have made several advances in sharpeningour market focus and improving operational efficiencies. These advances and ourstrong portfolio of next-generation products will allow us to move forward withour strategy of developing our telecoms test activities. Service Assurance Revenue for the division in the first half of 2005 was down by 52 per centcompared with the same period last year due to the significant drop in activitylevels in our existing business. The division delivered an operating loss of£9.0 million for the period compared with an operating profit of £3.5 million inthe first half of 2004. Revenue in the first half of 2005 comprised orders from our leased line and DSLcustomers as well as ongoing contributions from annual service and supportcontracts. Our leased line monitoring activities contributed over 60 per cent ofthis division's revenue in the period. We also saw a small contribution from theinitial sales of our IP service assurance solutions. We continue to supply and support leased line and DSL monitoring systems formajor US service providers. However, as announced in April, we saw a substantialdrop off in this business in the first quarter. In response to this trend wehave undertaken a major restructuring of this division so as to enable us tosupport our existing leased line customers on a more efficient basis whilecontinuing to invest in our new IP service assurance products. The strategy for this division is to deliver service assurance solutions for IPbusiness services and residential triple play offerings. We are also focused ondelivering next-generation field test solutions to service providers worldwide.We believe that our solutions address the challenges and issues carriers willface as they deploy Ethernet, voice-over-IP and video services on a commercialscale. Customers worldwide continue to provide positive feedback and showinterest in our IP solutions and we are currently involved in a number of laband field trials for IP business services, residential triple play and fieldtest solutions. Our products are being developed to match the service assuranceand field test needs of these customers. While we have seen an uplift in quote and proposal activity for IP serviceassurance solutions in the second quarter of 2005, we remain cautious as to thetiming of full scale deployment of these advanced services by carriersworldwide. As a consequence we cannot be certain as to the timing of furtherrevenue from our new IP products. Network Products £ million First half First half Change 2005 2004 %---------------------------------------------------------------- Revenue 103.9 95.0 9Operating profit 12.3 10.8 14Return on sales (%) 11.8 11.4 Our Network Products group delivered a strong performance in the first half of2005 with revenue of £103.9 million up 9 per cent over the same period lastyear. Operating profit of £12.3 million was ahead by 14 per cent over the firsthalf of 2004 and return on sales improved slightly to 11.8 per cent from 11.4per cent. Despite a flattening in automotive production levels and car sales, our sales tothe European car manufacturers grew compared with the same period last year asour products have been specified on a number of new models that have now enteredproduction. We have made good progress in the US automotive market due to ourstrong position with European car manufacturers who are expanding their NorthAmerican operations, and our established position in the US bus and truckmarket. We have also increased sales of our Autotool automated applicationsystems into first tier suppliers to the US car market. We received a positivereaction to the launch of our pre-terminated structured cabling system,RapidNet, in the US and are encouraged by the initial sales we have achieved. Wecontinued to launch additions to all our product ranges during the first half. While European sales increased overall, sales in the UK were depressed by theweaker industrial economy and slippage in customers' programmes. Good growth insales was achieved in North America, South America and the Asia Pacific region. Major investment activities include the extension of our facility in Tornesch,Germany, which will be completed in the second half of this year, and theintegration of our operations in Argentina and Brazil in order to serve thelocal market on a more efficient basis. Overall we continue to increase customer penetration and gain market share inthe major market segments we serve. Systems £ million First half First half Change 2005 2004 %---------------------------------------------------------------- Revenue 18.7 15.5 21Operating profit 2.1 1.7 24Return on sales (%) 11.2 11.0 Figures in the above table relate to the ongoing business only. Divestedbusinesses contributed £3.7 million of revenue and £0.6 million of operatingprofit in the first half of 2004. Our Systems group is a leading supplier of power control systems for poweredmedical and small industrial vehicles. Revenue was up by 21 per cent andoperating profit was up 24 per cent in the period. Return on sales increasedmarginally to 11.2 per cent compared with 11.0 per cent in the first half of2004. The business continues to be impacted by the effect of the weak US dollar asnearly 80 per cent of the UK-based manufacturing is exported priced in USdollars. In order to mitigate this effect we have continued to move more of ourmanufacturing to China. The situation regarding US government healthcare funding of wheelchairs hasbroadly stabilised and this has had a positive effect on sales of our wheelchaircontrol systems in the first half of the year. We launched the VR2, asophisticated mainstream wheelchair controller with enhanced performancecharacteristics, in the first half and customer reaction to the product has beenpositive. We have made progress in addressing the small industrial vehiclemarket with our Trio+ and Access 120 systems and sales to this sector haveincreased by 60 per cent from a low base in the first half of 2004. Financial Review £ million First half First half Change 2005 2004 %---------------------------------------------------------------- Revenue 230.4 239.3 (4)Operating profit 14.1 21.5 (34)Return on sales (%) 6.1 9.0 The interim results for the first half of 2005 are prepared in accordance withthe accounting policies set out in the document entitled 'Transition toInternational Financial Reporting Standards' issued on 15 July 2005. The mostsignificant impacts of the transition to International Financial ReportingStandards (IFRS) from UK Generally Accepted Accounting Practice (UK GAAP) for Spirent are in relation to: i) the elimination of the charge for goodwill amortisation;ii) the change in the profit or loss on disposal of operations; andiii) an increase in the charge for share-based payment. Information on the impact of the transition to IFRS, including accountingpolicies and reconciliations of the Group's UK GAAP balance sheets to its IFRSbalance sheets at 1 January 2003 (the transition date balance sheet), 31 December 2003, 4 July 2004 and 31 December 2004, together with reconciliations of the Group's UK GAAP income statements to its IFRS income statements for the first half of 2004 and for the years to 31 December 2003 and 31 December 2004, can be found in the document entitled 'Transition to International Financial Reporting Standards' (see note 1 of Notes to the financial information). Group revenue for the first half of 2005 was 4 per cent below the same period in2004. Operating profit was £14.1 million for the first half of 2005, 34 per centlower than the first half of 2004. This was largely due to the performance ofthe Service Assurance division which reported an operating loss for the firsthalf of £9.0 million compared with an operating profit in the first half of 2004of £3.5 million. Our other ongoing businesses showed growth in revenue andoperating profit compared with the first half of 2004. Return on sales hasdropped to 6.1 per cent compared with 9.0 per cent in the first half of 2004. The translation effect of exchange rates, principally the US dollar, on tradinghas not been significant in the period. Revenue has been reduced by £1.4 millionand operating profit has not been materially affected by exchange. Revenue by market and source grew over the first half of 2004 in Europe and theAsia Pacific region but fell in North America due to the decline in revenue inthe Service Assurance division. Product development spending for the Group in the first half of 2005 was £31.8million, or 14 per cent of revenue (first half 2004 £33.7 million, 14 per cent of revenue) and continues to be principally in the Communications group. The business segments for the Group reported under IFRS are the same as thosethat were reported under UK GAAP. However, there are stricter definitionsincluded in IFRS regarding the allocation of corporate costs. Those shared costswhich cannot be allocated directly to individual segments are now reported asnon segmental costs. These non segmental costs (before material one-time chargesand share-based payment) amount to £2.7 million for the first half of 2005(first half 2004 £2.7 million) and include costs for our Board, listing costs inrelation to our dual listing and compliance costs including those in relation tothe Sarbanes-Oxley Act 2002. As a result of the substantial drop in activity levels in the Service Assurancedivision we are taking a goodwill impairment charge of £37.0 million. Thecarrying value of the Service Assurance division at the end of the first half of2005 is £16.6 million. Other material one-time charges of £7.1 million have beenincurred in the period. As previously stated, actions have been taken in theService Assurance division which resulted in restructuring charges of £2.7million and related inventory write-downs of £1.3 million in the first half of2005. Other charges totalling £3.1 million relate to supply chain initiativesand other restructuring activities in our businesses and at a corporate level. A charge for share-based payment is being reported in accordance with IFRS. Thischarge represents the expense for share options and other share-based incentivesusing an option pricing model. The charge for the first half of 2005 is £2.4 million (first half 2004 £1.3 million). We anticipate that this charge will bemarginally higher in the second half as we expect to make further awards in thesecond half of 2005. On transition to IFRS Spirent has applied IFRS 2 'Share-based Payment' only to awards made after 7 November 2002 and not fully vestedat 1 January 2005. The charge is therefore expected to increase over time asmore awards become subject to this treatment. The reported £0.9 million gain on disposal of operations relates to the sale ofcertain non trading Group companies. Net interest payable in the first half of 2005 was £3.3 million compared with£4.0 million in the same period of 2004. The interest charge is expected to beof a similar magnitude in the second half of the year. Reported loss before tax for the first half of 2005 is £34.1 million comparedwith a profit before tax of £16.7 million for the first half of 2004. The effective rate of tax for the first half of 2005 was 23.5 per cent comparedwith 21.2 per cent for the full year 2004. We expect the effective tax rate forthe full year to be approximately 24 per cent. Basic loss per share was 3.90 pence (first half 2004 earnings per share 1.26pence). We are presenting an adjusted earnings per share measure which adds backthe effect of goodwill impairment, other material one-time charges, share-basedpayment, profit or loss on disposal of operations and any related tax. TheCompany believes that this measure provides greater comparability of theunderlying performance of the Group from period to period. We are reporting anadjusted earnings per share of 0.91 pence for the first half of 2005 comparedwith 1.40 pence for the first half of 2004, a decline of 35 per cent. Net debt increased from £26.4 million at the end of 2004 to £42.4 million at theend of the first half of 2005 with £5.1 million of this increase being due tothe effects of currency translation. In addition operating cash inflow was lowerand capital expenditure increased as had been expected. Operating cash inflow was £4.2 million for the first half of 2005 compared withan inflow of £18.5 million in the first half of 2004, a result of the drop inoperating profit and increases in working capital which included the payment of£3.3 million of restructuring costs. Net capital expenditure was £15.8 millionin the first half of 2005 (first half 2004 £11.0 million). We expect capitalexpenditure for the full year to be in the region of £30 million (full year 2004£24.8 million). The depreciation charge was £10.9 million in the first half andis expected to be in the range £21 million to £23 million for the full year. The covenants in our principal borrowing agreements are based on UK GAAP as itexisted at 31 December 2002. In accordance with the terms of these agreementsearnings before interest, tax, amortisation and exceptional items to netinterest expense was 5.1 times (covenant ratio greater than or equal to 3.0 times) and net debt to earnings before interest, tax, depreciation, amortisationand exceptional items was 0.8 times (covenant ratio less than or equal to 3.0times) on a rolling 12 month basis. At the end of the first half of 2005 the retirement benefit obligations were£39.2 million (31 December 2004 £38.1 million). The Company made an additional annual cash contribution of £3.5 million to our UK defined benefit pension plan in the first half of 2005. An actuarial loss of £4.2 million has been charged in the consolidated statement of changes in equity. This principally arises due to a reduction in the corporate bond rates which are used for the measurement ofscheme liabilities in accordance with accounting standards. No dividend is being declared in respect of the first half of 2005. Consolidated income statement ------------------------------------------------------------------------------£ million Notes First half First half Year 2005 2004 2004------------------------------------------------------------------------------Revenue 2, 3 230.4 239.3 475.0Cost of sales (136.8) (139.6) (274.9)------------------------------------------------------------------------------Gross profit 93.6 99.7 200.1Operating expenses (126.0) (79.5) (164.0)------------------------------------------------------------------------------Operating (loss)/profit 2 (32.4) 20.2 36.1------------------------------------------------------------------------------Goodwill impairment 37.0 - -Other material one-time charges 4 7.1 - 2.9Share-based payment 2.4 1.3 5.2Operating profit before materialone-time charges and share-basedpayment 2 14.1 21.5 44.2------------------------------------------------------------------------------Loss from interest in joint venture - (0.2) (0.7)Share of profit of associates 0.7 0.7 1.8------------------------------------------------------------------------------Operating (loss)/profit of theGroup, joint venture and associates (31.7) 20.7 37.2Profit on the disposal of operations 0.9 - 4.0------------------------------------------------------------------------------(Loss)/profit before interest (30.8) 20.7 41.2Finance income 1.0 0.7 1.6Finance costs (4.3) (4.7) (9.1)Costs associated with the partprepayment of loan notes - - (0.5)------------------------------------------------------------------------------(Loss)/profit before tax (34.1) 16.7 33.2Tax 5 (2.7) (4.7) (6.7)------------------------------------------------------------------------------(Loss)/profit for the period (36.8) 12.0 26.5------------------------------------------------------------------------------Attributable toEquity shareholders (37.0) 11.8 26.2Minority shareholders' interests 0.2 0.2 0.3------------------------------------------------------------------------------(Loss)/profit for the period (36.8) 12.0 26.5------------------------------------------------------------------------------Basic (loss)/earnings per share(pence) 6 (3.90) 1.26 2.79Diluted (loss)/earnings per share(pence) 6 (3.90) 1.23 2.74------------------------------------------------------------------------------ Consolidated balance sheet £ million First half First half 31 December 2004 2005(1) 2004 (1)------------------------------------------------------------------------------ AssetsNon current assetsGoodwill 74.4 109.8 106.5Property, plant andequipment 94.0 85.5 86.3Interest in jointventure - 0.3 -Investments inassociates 14.6 13.0 14.3Deferred tax 11.4 10.3 11.1------------------------------------------------------------------------------ 194.4 218.9 218.2------------------------------------------------------------------------------ Current assetsInventories 57.8 53.8 54.0Trade and otherreceivables 99.1 94.7 89.9Cash and cashequivalents 40.1 30.5 51.7------------------------------------------------------------------------------ 197.0 179.0 195.6------------------------------------------------------------------------------Total assets 391.4 397.9 413.8------------------------------------------------------------------------------ LiabilitiesCurrent liabilitiesTrade and otherpayables (95.3) (87.4) (90.8)Current tax (29.2) (27.4) (26.2)Short termborrowings andoverdrafts (1.7) (1.6) (1.8)Provisions and otherliabilities (3.3) (2.3) (4.2)------------------------------------------------------------------------------ (129.5) (118.7) (123.0)------------------------------------------------------------------------------ Non current liabilitiesTrade and otherpayables (4.6) (4.3) (3.9)Long term borrowings (80.8) (82.4) (76.3)Retirement benefitobligations (39.2) (35.0) (38.1)Deferred tax (2.2) (2.4) (2.5)Provisions and otherliabilities (10.5) (11.8) (9.6)------------------------------------------------------------------------------ (137.3) (135.9) (130.4)------------------------------------------------------------------------------Total liabilities (266.8) (254.6) (253.4)------------------------------------------------------------------------------Net assets 124.6 143.3 160.4------------------------------------------------------------------------------ EquityCalled up sharecapital 32.1 31.8 31.9Share premiumaccount 3.9 701.9 1.3Capital reserve 10.4 14.4 10.9Capital redemptionreserve - 0.7 -Translation reserve 2.9 (0.5) 1.6Net unrealised gainsand losses (1.0) - -Retainedearnings/(loss) 74.7 (606.6) 113.4------------------------------------------------------------------------------ Shareholders' funds- equity 123.0 141.7 159.1Minority interests -equity 1.6 1.6 1.3------------------------------------------------------------------------------ Total equity andreserves 124.6 143.3 160.4------------------------------------------------------------------------------ 1 First half 2005 refers to the position at 3 July 2005 and first half 2004 refers to the position at 4 July 2004. Consolidated cash flow statement------------------------------------------------------------------------------£ million First half First half Year 2005 2004 2004------------------------------------------------------------------------------ Cash flows from operatingactivitiesOperating (loss)/profit (32.4) 20.2 36.1Goodwill impairment 37.0 - -Depreciation of property, plant andequipment 10.9 13.0 25.4(Profit)/loss on disposal ofproperty, plant and equipment (0.1) 0.4 0.4Write-down of property, plant andequipment - - 0.6Share-based payment 2.4 1.3 5.2Deferred income received 9.4 4.6 4.9Increase in debtors (5.7) (10.2) (9.1)Increase in inventories (2.1) (0.2) (1.0)(Decrease)/increase in creditors (9.1) 1.4 8.5Decrease in provisions (0.7) (3.4) (2.9)Retirement benefit obligations (3.5) (7.2) (7.8)Tax paid (1.9) (1.4) (3.1)------------------------------------------------------------------------------Net cash from operating activities 4.2 18.5 57.2------------------------------------------------------------------------------ Cash flows from investingactivitiesDividends received from associates - 0.1 0.1Interest received 0.9 0.8 1.6Disposal of operations 0.9 - 2.5Purchase of property, plant andequipment (16.1) (11.3) (25.3)Proceeds from sale of property,plant and equipment 0.3 0.3 0.5Acquisition of subsidiaries - (0.8) (1.1)Contribution to joint venture - - (0.2)------------------------------------------------------------------------------ Net cash used in investingactivities (14.0) (10.9) (21.9)------------------------------------------------------------------------------ Cash flows from financingactivitiesInterest paid (3.7) (4.5) (8.4)Interest element of finance leaserental payments (0.2) (0.2) (0.4)Costs associated with the partprepayment of loan notes - (1.8) (2.3)Proceeds from the issue of sharecapital 2.3 0.9 1.5Repayment of loans - (8.2) (10.2)Repayment of capital element offinance lease rentals (0.5) (0.4) (0.8)------------------------------------------------------------------------------ Net cash used in financingactivities (2.1) (14.2) (20.6)------------------------------------------------------------------------------ Net (decrease)/increase in cash andcash equivalents (11.9) (6.6) 14.7Cash and cash equivalents at thebeginning of the period 51.0 36.9 36.9Effect of exchange rate changes 0.2 (0.5) (0.6)------------------------------------------------------------------------------ Cash and cash equivalents at theend of the period 39.3 29.8 51.0------------------------------------------------------------------------------ Cash and cash equivalents comprise: Cash and cash equivalents 40.1 30.5 51.7Overdrafts (0.8) (0.7) (0.7)------------------------------------------------------------------------------ 39.3 29.8 51.0------------------------------------------------------------------------------ Consolidated statement of changes in equity ---------------------------------------------------------------------------------------------£ million Net Called up Share unrealised Shareholders' share premium Capital Translation gains/ Retained funds - capital account reserve reserve (losses) earnings equity --------------------------------------------------------------------------------------------- At 1 January 2005 As originallyrestated underIFRS 31.9 1.3 10.9 1.6 - 113.4 159.1Changes inaccountingpolicyrelating tofirst timeapplication ofIAS 39'FinancialInstruments:RecognitionandMeasurement'(note 1) - - - - (0.1) - (0.1)--------------------------------------------------------------------------------------------- At 1 January2005 asrestated 31.9 1.3 10.9 1.6 (0.1) 113.4 159.0--------------------------------------------------------------------------------------------- Changes in equityfor the firsthalf of 2005Exchangedifferences ontranslatingforeignoperations - - - 1.3 - - 1.3Share-basedpayment - - - - - 2.2 2.2Actuarial lossrecognised onretirementbenefitobligations - - - - - (4.2) (4.2)Tax onretirementbenefitobligations - - - - - 0.3 0.3Net unrealisedlosses on cashflow hedges - - - - (0.9) - (0.9)--------------------------------------------------------------------------------------------- Net profitsand lossesrecogniseddirectly inequity - - - 1.3 (0.9) (1.7) (1.3)Loss for theperiodattributableto equityshareholders - - - - - (37.0) (37.0)----------------------------------------------------------------------------------------------- Totalrecognisedprofits andlosses for theperiod - - - 1.3 (0.9) (38.7) (38.3)----------------------------------------------------------------------------------------------- New sharesissued 0.2 2.6 (0.5) - - - 2.3----------------------------------------------------------------------------------------------- At the end ofthe period 32.1 3.9 10.4 2.9 (1.0) 74.7 123.0----------------------------------------------------------------------------------------------- Notes to the financial information 1 Basis of preparation The consolidated interim financial statements have been prepared in accordancewith the principal accounting policies set out in the document entitled'Transition to International Financial Reporting Standards', which was issued bySpirent on 15 July 2005. These interim financial statements should be read inconjunction with this document. The document can be found on the Company'swebsite, www.spirent.com, or can be obtained by writing to the Company Secretaryat Spirent House, Crawley Business Quarter, Fleming Way, Crawley, West Sussex,RH10 9QL. This interim financial information has been prepared on the assumption that allIFRS statements, including International Accounting Standards (IASs), StandingInterpretations Committee (SIC) interpretations and International FinancialReporting Interpretations Committee (IFRICs) interpretations issued by theInternational Accounting Standards Board (IASB) as effective for 2005 reportingwill be endorsed by the European Commission. These are subject to ongoing reviewand possible amendment by the IASB and subsequent endorsement by the EuropeanCommission and therefore may change. Further standards and interpretations mayalso be issued that will become applicable for the Group's financial year ending31 December 2005. In 2005 the Group has adopted IFRS for the first time. Thedate of transition is 1 January 2003. IAS 34 'Interim Financial Reporting' hasnot been applied to this interim financial information. The financial information does not constitute statutory accounts as defined inSection 240 of the Companies Act 1985. Statutory accounts for the year ended 31December 2004, which were prepared under accounting policies generally acceptedin the UK, have been filed with the Registrar of Companies. The auditors reporton those accounts was unqualified and did not contain a statement made underSection 237(2) or Section 237(3) of the Companies Act 1985. The Interim Report for the period ended 3 July 2005 was approved by thedirectors on 11 August 2005. Changes in accounting policy The Group has taken the transitional exemption not to apply IAS 32 'FinancialInstruments: Disclosure and Presentation' and IAS 39 'Financial Instruments:Recognition and Measurement' to the period ended 4 July 2004 and the year ended31 December 2004. These standards have been implemented with effect from 1January 2005 and as a result a number of financial instruments have beenrecognised on the opening balance sheet at that date. The accounting policy in respect of these standards can be found in the documententitled 'Transition to International Financial Reporting Standards'. Thischange results in the following restatements at 1 January 2005: £ million Shareholders' Current assets Current equity - net - trade and liabilities - unrealised gains other trade and other Long term and (losses) receivables payables borrowings------------------------------------------------------------------------------ At 1 January2005 - asoriginallyrestated underIFRS - 89.9 90.8 76.3Implementationof IAS 39 (0.1) 0.5 1.0 (0.4)------------------------------------------------------------------------------ At 1 January2005 asrestated (0.1) 90.4 91.8 75.9------------------------------------------------------------------------------ 2 Segmental analysis £ million Performance Service Network Non Analysis Assurance Communications Products Systems segmental Group--------------------------------------------------------------------------------------------- First half2005Revenue 87.6 20.2 107.8 103.9 18.7 - 230.4--------------------------------------------------------------------------------------------- Operatingprofit/(loss)beforematerialone-timecharges andshare-basedpayment 11.4 (9.0) 2.4 12.3 2.1 (2.7) 14.1Goodwillimpairment - (37.0) (37.0) - - - (37.0)Othermaterialone-time (2.4) (4.0) (6.4) (0.4) - (0.3) (7.1)chargesShare-basedpayment (1.4) (0.6) (2.0) (0.2) (0.1) (0.1) (2.4)--------------------------------------------------------------------------------------------- Operatingprofit/(loss) 7.6 (50.6) (43.0) 11.7 2.0 (3.1) (32.4)--------------------------------------------------------------------------------------------- First half2004Revenue 83.1 42.0 125.1 95.0 19.2 - 239.3--------------------------------------------------------------------------------------------- Operatingprofit/(loss)beforeshare-basedpayment 7.6 3.5 11.1 10.8 2.3 (2.7) 21.5Share-basedpayment (0.9) (0.3) (1.2) (0.1) - - (1.3)--------------------------------------------------------------------------------------------- Operatingprofit/(loss) 6.7 3.2 9.9 10.7 2.3 (2.7) 20.2--------------------------------------------------------------------------------------------- Year 2004Revenue 176.8 74.7 251.5 187.8 35.7 - 475.0--------------------------------------------------------------------------------------------- Operatingprofit/(loss)beforematerialone-timecharges andshare-basedpayment 21.7 2.5 24.2 21.3 4.0 (5.3) 44.2Materialone-timecharges 1.3 (1.9) (0.6) - - (2.3) (2.9)Share-basedpayment (3.2) (1.4) (4.6) (0.4) (0.1) (0.1) (5.2)--------------------------------------------------------------------------------------------- Operatingprofit/(loss) 19.8 (0.8) 19.0 20.9 3.9 (7.7) 36.1--------------------------------------------------------------------------------------------- 3 Geographical analysis £ million First half First half Year 2005 2004 2004------------------------------------------------------------------------------- Revenue by marketEurope 84.8 82.6 167.4North America 100.1 116.0 223.4Asia Pacific, Rest of Americas,Africa 45.5 40.7 84.2-------------------------------------------------------------------------------Group 230.4 239.3 475.0------------------------------------------------------------------------------- Revenue by sourceEurope 98.7 91.6 184.9North America 106.4 124.6 243.4Asia Pacific, Rest of Americas,Africa 25.3 23.1 46.7-------------------------------------------------------------------------------Group 230.4 239.3 475.0------------------------------------------------------------------------------- Average exchange ratesUS Dollar 1.87 1.82 1.83Euro 1.46 1.48 1.47------------------------------------------------------------------------------- 4 Other material one-time charges £ million First half First half Year 2005 2004 2004------------------------------------------------------------------------------ Inventory write-downs 1.3 - -Restructuring costs (includingwrite-down of property, plant andequipment and lease provisions) 5.8 - 1.6Exit from joint venture - - 1.3------------------------------------------------------------------------------ 7.1 - 2.9------------------------------------------------------------------------------ There is no tax effect in respect of the material one-time charges. 5 Tax £ million First half First half Year 2005 2004 2004------------------------------------------------------------------------------ UK tax - - -Overseas tax 2.7 4.7 6.7------------------------------------------------------------------------------ 2.7 4.7 6.7------------------------------------------------------------------------------ 6 (Loss)/earnings per share £ million First half First half Year 2005 2004 2004------------------------------------------------------------------------------- (Loss)/earnings attributable to equityshareholders (37.0) 11.8 26.2------------------------------------------------------------------------------- Goodwill impairment 37.0 - -Other material one-time charges 7.1 - 2.9Share-based payment 2.4 1.3 5.2Profit on the disposal of operations (0.9) - (4.0)Costs associated with the partprepayment of loan notes - - 0.5Prior year tax credit - - (1.3)------------------------------------------------------------------------------- Adjusted earnings attributable to equityshareholders 8.6 13.1 29.5------------------------------------------------------------------------------- (Loss)/earnings per share (pence)Basic (3.90) 1.26 2.79Diluted (3.90) 1.23 2.74Adjusted 0.91 1.40 3.14------------------------------------------------------------------------------- Weighted average number of shares in issue(millions)Basic and adjusted 948.8 937.2 939.2Dilutive potential of employee shareoptions - 21.0 18.1-------------------------------------------------------------------------------Related Shares:
Spirent