9th Aug 2007 07:00
Spirent Communications PLC09 August 2007 SPIRENT COMMUNICATIONS PLC INTERIM RESULTS FOR THE FIRST HALF 2007 London, UK - 9 August 2007: Spirent Communications plc ("Spirent" or "the Group") (LSE: SPT), a leading communications technology company, today announcesits interim results for the first half of 2007. Highlights • Restructuring actions in the first half of 2007 on course to achieve £21.5 million of full year cost savings in 2008. Exceptional expenses lower than anticipated at £12.6 million of which £3.5 million are cash. • Adjusted earnings per share from continuing operations increased from 0.65 pence in the first half of 2006 to 0.85 pence per share in the first half of 2007 after absorbing negative foreign exchange impact equivalent to 0.22 pence per share. • Net cash inflow of £10.3 million in the first half, increasing cash to £106.9 million with no debt. • Results of Strategic Review to be communicated to shareholders in October 2007 will address portfolio and product development priorities, further cost reduction opportunities and optimisation of balance sheet structure. Performance Analysis • Operating profit increased by 20 per cent at constant currency on slight sales decline compared with the same period in the prior year. • Legacy Broadband sales continued declining trend evidenced in 2006 offset by strong growth in Wireless and Positioning products and the new release of Spirent TestCenterTM. • Actions stemming from Operating Review in April expected to contribute to significant profit improvements in the second half of 2007. • In Broadband, revenue was up 9 per cent sequentially from the first quarter to the second quarter in the period, and up 14 per cent over the prior half year at the top 6 customers which account for a third of Broadband revenue. Service Assurance • Service Assurance operating profit exceeded expectations as downsizing actions taken in 2006 more than offset an anticipated revenue decline. Systems • Operating profit declined by 32 per cent in sterling terms, in line with expectations, entirely due to movement in exchange rates. Edward Bramson, Chairman, commented: "The major focus of Spirent's attention in the first half of 2007 was onimplementing the actions stemming from the Board's Operating Review in April.These have proceeded well and we are on course to meet the cost objectives thatwere announced. "The effects of the Operating Review on first half profits were minimal and sothe first half is not a good indicator of future financial prospects. Ouroutlook for the second half is for flat to slight sequential growth in revenuein US dollars based on typical seasonal patterns. The cost reductions and theoperating changes that have now been made should produce a significantimprovement in second half profits." Results summary £ million First half First half Change (%) Underlying change at 2007 2006 constant currency (%) ReportedContinuing operationsRevenue 114.2 134.2 (15) (8) Loss before tax (4.5) (15.7)Basic loss per share (pence) (0.60) (1.68) Adjusted1Continuing operationsOperating profit2 5.0 4.2 19 64Profit before tax3 8.1 6.5 25 54Adjusted earnings4 per share (pence) 0.85 0.65 31 64 Notes 1 The adjusted profit and earnings per share have been restated to include share-based payment and intangible amortisation. 2 Before exceptional items and goodwill impairment. 3 Before exceptional items, goodwill impairment and costs associated with the repayment of loan notes. 4 Adjusted earnings per share is based on adjusted earnings as set out in note 6. - ends - Enquiries Edward Bramson, Executive Chairman Spirent Communications plc +44 (0)1293 767676Eric Hutchinson, Chief Financial Officer Andrew Dowler/Harriet Keen Financial Dynamics +44 (0)20 7831 3113 The Company will host a results presentation today at 09.15am for 09.30am UK time. A simultaneous webcast of the presentation will be available on the Spirent Communications plc website at www.spirent.com About Spirent Communications plc Spirent Communications plc is a leading communications technology companyfocused on delivering innovative systems and services to meet the needs ofcustomers worldwide. We are a global provider of performance analysis andservice assurance 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). The Company operates a Level 1 American DepositaryReceipt ("ADR") programme with each ADR representing four Spirent Communicationsplc Ordinary shares. The ADRs trade in the US over-the-counter ("OTC") marketunder the symbol SPMYY and the CUSIP number is 84856M209. 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. Cautionary statement This document may contain forward-looking statements which are made in goodfaith and are based on current expectations or beliefs, as well as assumptionsabout future events. You can sometimes, but not always, identify thesestatements by the use of a date in the future or such words as "will","anticipate", "estimate", "expect", "project", "intend", "plan", "should","may", "assume" and other similar words. By their nature, forward-lookingstatements are inherently predictive and speculative and involve risk anduncertainty because they relate to events and depend on circumstances that willoccur in the future. You should not place undue reliance on theseforward-looking statements, which are not a guarantee of future performance andare subject to factors that could cause our actual results to differ materiallyfrom those expressed or implied by these statements. The Company undertakes noobligation to update any forward-looking statements contained in this document,whether as a result of new information, future events or otherwise. INTERIM RESULTS FOR THE FIRST HALF OF 2007 Executive Chairman's statement The major focus of Spirent's attention in the first half of 2007 was onimplementing the actions stemming from the Board's Operating Review in April2007. These have proceeded well and we are on course to meet the costobjectives that were announced. As indicated in April, we expected local currency (US$) sales in the PerformanceAnalysis business, Spirent's largest, to be essentially flat, reflecting marketconditions and the continuing decline in sales of older legacy broadbandproducts. Sales were in fact down slightly as strong growth in the Wireless andSpirent TestCenter products, which grew at constant currencies by 21 per centand 127 per cent respectively, did not quite make up for the reduction in legacysales. If current trends continue, these products should provide overall salesgrowth for Performance Analysis at some point in 2008. The smaller businesses,Service Assurance and Systems both produced results in line with or slightlybetter than expected. Most of our sales, 90 per cent, are billed in US dollars but the negative effectof the increase in the sterling exchange rate was mitigated by the fact thatapproximately 85 per cent of our expenses were also incurred in dollars. As aresult, while exchange rates reduced earnings in the first half by approximately0.22 pence per share we were nevertheless able to increase adjusted earnings to0.85 pence per share from 0.65 pence in the prior year. The effects of the operating review on first half profits were minimal and sothe first half is not a good indicator of future financial prospects. Ouroutlook for the second half is for flat to slight sequential growth in revenuein US dollars based on typical seasonal patterns. The cost reductions and theoperating changes that have now been made should produce a significantimprovement in second half profits. We are actively involved in preparing a Strategic Review for the Board, an earlyoutcome of which was the divestiture of the SwissQual business completed inJuly. The balance of the review will address the Company's business portfolioand product development priorities, as well as further cost containmentopportunities and the structure of the balance sheet. We look forward tocommunicating the results of this review to shareholders in October. As announced in June, Duncan Lewis has joined the Board bringing considerabletelecoms experience with a number of major companies. I am now pleased towelcome Tom Maxwell, who has a long career in investment management, to theBoard as an additional independent non-executive director with effect from 1October 2007. Board composition, in terms of independent non-executivedirectors, is now compliant with the requirements of the Combined Code and, from1 October the composition of the Board Committees will also be compliant. Group financial performance Results overview Continuing operations £ million First half First half Change (%) Underlying change at 2007 2006 1 constant currency (%) Revenue 114.2 134.2 (15) (8)Adjusted operating profit2 5.0 4.2 19 64Return on sales2 (%) 4.4 3.1 Adjusted earnings per share3 (pence) 0.85 0.65 31 64Adjusted cash flows from operating 19.4 (2.7)activities4 The Group is reporting an underlying change in revenue and adjusted operatingprofit given the significant effect the weakness of the US dollar has had on theoperating results this period compared with the same period in the previousyear. Underlying change is the change at constant currencies and eliminates theeffect of fluctuating exchange rates on the translation of operating results andon the transactions during the period. Notes 1 The adjusted profit and earnings per share have been restated to include share-based payment and intangible amortisation. 2 Before exceptional items and goodwill impairment. 3 Before exceptional items, goodwill impairment, costs associated with the repayment of loan notes and any related tax. 4 Before the cash cost of exceptional items and lump sum pension contributions. Revenue Reported revenue in sterling was down 15 per cent compared with the first halfof 2006. At constant currencies revenue was down 8 per cent. The reduction inrevenue can be attributed to a one-time contract in Service Assurance recognisedin the first half of 2006 for £4.5 million, the effects of translation andtransaction exchange of £8.3 million and £1.2 million respectively and thesubdued market conditions experienced by our Performance Analysis division,which did not offset completely the expected legacy revenue decline. North America contributed 54 per cent of total revenue by market and this wasdown from 60 per cent in the first half 2006 being the region most affected bycurrency translation and market conditions. By contrast revenue in Europe grewmarginally and now represents 19 per cent of total revenue compared with 15 percent in the first half of 2006. Revenue in the Asia Pacific region was down inabsolute terms period on period and represents 27 per cent of total revenuecompared with 25 per cent in the first half of 2006. Operating profit Operating profit before exceptional items was £5.0 million compared with £4.2million for the first half of 2006. This was after giving effect to exchangerate impact of £1.9 million in 2007 principally due to a weak US dollar and thecomparison is further distorted by an inventory absorption credit in 2006 whichdid not recur in 2007. The cost reductions announced in April and the reductionin regulatory costs have resulted in approximately £1.6 million of profitimprovement. The balance of the cost reduction benefits are expected to be seenin the second half 2007 and full year 2008. Underlying profitability compared to the same period of 2006 is as follows: £ million First half First half 2007 2006 Adjusted operating profit reported 5.0 4.2Exchange effect of translation 0.5 -Exchange effect on transactions 1.4 - Underlying profit 6.9 4.2 Currency impact The average sterling to US dollar exchange rate increased from 1.79 for thefirst half of 2006 to 1.97 for the first half of 2007. 90 per cent of ourrevenues are invoiced in US dollars so translation into sterling reducedreported revenue. Translation exchange impact reduced revenue by £8.3 millioncompared with the first half of 2006. The translation effect of exchange rateson operating profit was relatively smaller at £0.5 million. The Groupexperienced transaction losses compared with the prior year and the reduction inrevenue due to the weakening of the US dollar period on period for the Groupamounted to £1.2 million and the effect on operating profit was a reduction of£1.4 million. Based on current exchange rates currency is expected to continueto be a feature in the second half of 2007. Cost of sales and operating expenses Product development has been reclassified out of cost of sales to improve thetransparency and is shown separately on the face of the income statement. Inaddition the costs of our customer service operations have been reclassified outof selling and distribution costs and into cost of sales which is considered afairer representation of these costs. Comparative amounts have been restated toreflect these changes. Gross margin excluding exceptional items was lower at 59.9 per cent comparedwith 60.5 per cent for the first half of 2006, principally due to anon-recurring inventory absorption credit in 2006. As the development of Spirent TestCenter, a major new broadband product in ourPerformance Analysis division is ongoing, product development spending continuesto form a substantial portion of our total costs. A total of £22.8 million,being 20 per cent of revenue, was expensed during the first half of 2007 (firsthalf 2006: £29.7 million and 22 per cent of revenue). Of this amount £18.8million (first half 2006: £22.6 million) was incurred in the PerformanceAnalysis division, £2.8 million (first half 2006: £5.9 million) in the ServiceAssurance division with the remaining £1.2 million (first half 2006: £1.2million) in the Systems group. The Board continues to place emphasis onoptimising returns from future product development investments. Other operating costs, excluding exceptional items and goodwill impairment, wereessentially unchanged at about 35 per cent of sales but were down in absoluteterms at £40.6 million compared with £47.3 million in 2006. Approximately £1.6million of savings have been realised from the actions resulting from the Apriloperating review and reduction in regulatory expenses. The charge for share-based payment was £1.0 million for the first half of 2007compared with £2.4 million for the first half of 2006. This charge is lowerthan normal having been reduced by the high rate of cancellation and lapse ofawards resulting from the restructuring actions that have taken place during theperiod, which reduced the charge by approximately £0.8 million. Exceptional items Following completion of the operating review and as reported to shareholders inApril a number of changes were implemented. These changes focused onPerformance Analysis, shared services and corporate overheads. In PerformanceAnalysis actions resulting from the review focused on three main areas: productportfolio, operational efficiency and reduction in the number of facilities. Asa result of these cost reduction actions, Spirent has recorded an exceptionalcharge in the first half of 2007 of £12.6 million. This charge includesredundancy and other restructuring costs of £3.5 million, provisions for onerouslease costs of £3.7 million and a write-down of assets which are now redundantof £5.4 million. The annualised cost savings from these actions are expected tobe in the region of £21.5 million (US$43 million). The cost savings derive fromfour main areas: reduced manufacturing costs £7.3 million, product development£4.5 million, sales and marketing spending £2.2 million and generaladministrative overhead reduction of £7.5 million. Some £1.6 million of savingshave already benefited the second quarter but there will be a future benefitrealised through the second half of 2007 with the total amount being fullyrealised in the year ended 31 December 2008. We will continue to explore anyfurther opportunities for cost savings in our businesses throughout the rest ofthe year. Net finance income Cash and cash equivalents were £106.9 million at the end of the first half of2007, cash is held in short term bank deposits and short dated commercial paper.Finance income was £3.2 million compared with income of £3.6 million in thefirst half of 2006, as the cash surplus had been reduced throughout 2006 by theon-market share repurchase programme. In 2006 interest payable of £1.3 millionwas incurred in relation to loan notes which were redeemed in February 2006 andthere was a charge of £8.8 million reported related to the early redemption ofthe loan notes. Loss before tax for continuing operations Reported loss before tax for continuing operations was £4.5 million comparedwith a loss before tax in the first half of 2006 of £15.7 million. Adjusted profit before tax for continuing operations, to exclude exceptionalitems and goodwill impairment, was £8.1 million compared with £6.5 million forthe first half of 2006. Tax The tax charge for the first half of 2007 was £0.7 million, an effective rate of8.6 per cent on the adjusted profit before tax (first half 2006: £0.3 million).We continue to incur a low effective rate due to tax losses carried forward. Discontinued operations Discontinued operations in 2007 relate to the loss making SwissQual businessthat was acquired in January 2006. The disposal of this business was completedon 5 July 2007 for cash proceeds of US$3.0 million (£1.5 million). At the endof the first half year an impairment charge of £4.5 million has been reported asthe assets of this business have been written down to fair value less costs ofsale as required by accounting standards. In the period SwissQual reportedrevenue of £3.4 million and an operating loss of £3.4 million. Discontinued operations in 2006 also include the HellermannTyton Division soldin February last year. Earnings per share Basic loss per share for the Group was 1.55 pence, compared with earnings of14.80 pence for the first half of 2006, earnings in 2006 include the profit onsale of the HellermannTyton Division of £165.3 million. Adjusted earnings pershare for continuing operations, being before exceptional items, goodwillimpairment and costs associated with the repayment of loan notes net of anyrelated tax, was 0.85 pence compared with 0.65 pence in the first half of 2006. Financing and cash flow Cash and cash equivalents were £106.9 million at the end of the first half of2007 up from £97.6 million at 31 December 2006 with £10.3 million of cash beinggenerated in the first half year, the Group continues to be debt free. The cashflows for the first half of 2006 reflect the sale of the HellermannTytonDivision and the repayment of debt. Net cash inflow from continuing operating activities before tax was £16.4million (first half 2006: £51.6 million outflow). The outflow in 2006 includeda £47.0 million contribution to fund the UK final salary pension scheme. Adjusted operating cash flow before tax from continuing operations is set outbelow: £ million First half First half 2007 2006 Reported cash flows from continuing operating activities 16.4 (51.6)Add back:UK final salary pension fund contribution - 47.0Cash cost of exceptional items 3.0 1.9 Adjusted cash flows from continuing operating activities 19.4 (2.7) The cash outflow in respect of exceptional items comprised £1.4 million inrespect of 2006 actions and £1.6 million in respect of those taken in 2007, witha further £1.9 million expected to be paid in the second half year. Reported operating cash inflow for the Group after tax was £14.9 million (firsthalf 2006: £52.6 million outflow) discontinued operations used £1.0 million ofoperating cash in the period (first half 2006: £1.7 million generated). Taxpayments in the first half of 2007 amounted to £0.5 million compared with £2.7million in first half of 2006 (including discontinued operations). In the firstquarter of 2007 we settled tax obligations on the sale of the HellermannTytonDivision of £6.7 million. We received tax refunds amounting to £6.8 millionduring the period. Capital expenditure was down, £2.4 million compared with £8.4 million in thefirst half of 2006, well below the depreciation charge for the period of £5.8million for the continuing Group (first half 2006: £6.6 million). We spent £4.0 million on deferred consideration in relation to our 2006acquisitions and there will be further payments of up to £1.0 million due in thesecond half year. Net finance income received in the first half of 2007 was £2.2 million comparedwith net finance income received in the first half of 2006 of £1.2 million. We returned £4.2 million of cash to shareholders during the period as part ofthe share buy back programme. Pension fund The accounting valuation at the end of the first half of 2007 for the UK definedbenefit plans was based on the triennial actuarial valuations of the plans at 1April 2006 which were completed during the period. The surplus in the plansrose from £2.4 million at 31 December 2006 to £13.0 million at the end of thefirst half of 2007 with improvement in funding being due to rising equitymarkets and to changes to the values of financial assumptions, namely the rateof return on corporate bonds, underlying the calculation of the liabilitiesduring the interim period. The accounting rules however, limit the surplus thatmay be recognised by the Company and as such none of this surplus has beenrecognised on the balance sheet at the end of the first half of 2007. The Grouphas also reported a £0.7 million liability in respect of the UK unfunded plan atthe end of the first half of 2007. Capital structure, on-market share repurchase programme and dividend We returned a further £4.2 million of cash to shareholders representing 6.7million shares continuing the on-market share repurchase programme commenced inMay 2006. To date 97.0 million shares have been repurchased with £45.8 millionof cash now returned of the original £50 million programme. As part of the on-going strategic review we are evaluating the optimal balancesheet structure. Dividend policy is also kept under review by the Board, however no dividend isbeing paid in respect of the first half of 2007. Review of US listing and SEC registration The recent adoption of new rules by the US Securities and Exchange Commission ("SEC") gave Spirent the opportunity to terminate its reporting obligationsunder the US Securities Exchange Act of 1934 ("the Exchange Act"). Spirentbelieves that the administrative burden and increasing costs associated withmaintaining the listing on the New York Stock Exchange and the reportingrequirements necessary for its registration with the SEC under the Exchange Actoutweighed the benefits to Spirent and its shareholders. The average daily trading volume of shares represented by Spirent's AmericanDepositary Receipts ("ADRs") was very small, accounting for 0.5 per cent of thetotal number of Spirent Ordinary shares traded in the relevant 12 month period.In light of this level of trading activity and the recent adoption of new rulesby the SEC, Spirent has changed its ADR facility with The Bank of New York to aLevel 1 Programme. This means that the Company's ADRs are now traded in the USover-the-counter market. The Company's Ordinary shares will continue to tradeon the London Stock Exchange. On 5 June 2007 Spirent filed an application to terminate the US registration ofits ADRs and Ordinary shares. The Company's Exchange Act reporting obligationshave now ceased and termination of registration will occur ninety days afterfiling, subject to the SEC having no objections. Outlook The major focus of Spirent's attention in the first half of 2007 was onimplementing the actions stemming from the Board's Operating Review in April.These have proceeded well and we are on course to meet the cost objectives thatwere announced. The effects of the Operating Review on first half profits were minimal and sothe first half is not a good indicator of future financial prospects. Ouroutlook for the second half is for flat to slight sequential growth in revenuein US dollars based on typical seasonal patterns. The cost reductions and theoperating changes that have now been made should produce a significantimprovement in second half profits. Business group development and performance Communications £ million First half 2007 First half 2006 Change (%) Underlying change at constant currency (%) Revenue Performance Analysis 80.6 90.5 (11) (3) Service Assurance 16.5 24.9 (34) (28) Communications group 97.1 115.4 (16) (9) Operating profit before exceptional items and goodwill impairment Performance Analysis 4.5 4.6 (2) 20 Service Assurance 0.9 0.1 >100 >100 Communications group 5.4 4.7 15 38 Return on sales (%) Performance Analysis 5.6 5.1 Service Assurance 5.5 0.4 Communications group 5.6 4.1 Performance Analysis The market conditions for test equipment for Performance Analysis in the firsthalf of 2007 were subdued. Underlying revenues in US dollar terms forPerformance Analysis were below the same period last year by 3 per cent. Despite the decrease in total sales for the division, the underlying rate ofprofitability was improved. The prior year benefited from an increase ininventory value through overhead absorption of £2.3 million and exchangeimpacted the results by £1.0 million. After taking into account these itemsprofits improved on lower sales, largely as a result of cost improvementsactioned during the first half year. By geographic region Asia sales increased, but other regions, notably NorthAmerica, were down. Wireless and Positioning revenues were 31 per cent of thecontinuing Performance Analysis business. Similar trends continued from last year in that top customers were workingthrough merger integrations, reducing activity levels in the market, althoughthe impact of this is declining in importance. A number of other majorcustomers showed meaningful growth in activity. Customer consolidation is driving a move to larger, more strategic relationshipswhich favour vendors that have broader technology assets in meeting testingrequirements across multiple platforms (wireless and wireline assets, integratedtechnologies on single platforms). Addressing customer requirements driven bytechnology and service convergence offers an opportunity for Spirent given itsasset base across wireless, wireline and service assurance solutions. With regard to the Performance Analysis Broadband activities a further majorrelease of Spirent TestCenter was made at the end of May 2007 using our InspireArchitectureTM delivering increased productivity for customers. This resultedin the highest recorded monthly order intake for Spirent TestCenter in June2007. Overall the decline in existing product revenues outweighed the growth innew product revenues for Broadband in the period. It is worth noting that thetop 6 customers, which make up a third of the global revenue in the Broadbandbusiness, delivered a 14 per cent revenue increase in the first half of 2007compared with the first half of 2006. In addition, overall Broadband revenueincreased by 9 per cent from the first quarter of 2007 to the second quarter of2007. The market conditions for the Performance Analysis Wireless division were inline with expectations. Revenue grew strongly by 21 per cent at constantcurrency in the first half year compared to the same period last year. Notablylocation based service test requirements grew markedly. CDMA activity trackedplan and fader product sales continued to be robust on the back of sustainedinvestment by customers in WiMaX. This is in areas where we have seencompetitors enter the market. New development areas include video test capability, upgrades to location basedsystems and the ability to deliver more automated solutions for mobile devicetesting. Regionally growth was strong in Asia with additional equipmentmanufacturers entering the mobile handset market. We have continued to build on the strength of our product capabilities in theGPS emulation market, where all market segments have been buoyant. Newcustomers provided a significant portion of revenue and in addition revenueswere recorded for the sale of Galileo simulators. Service Assurance The market for traditional service assurance solutions continues to be in longterm decline as service providers transition capital spending to next-generationservices. In addition, the consolidation of network service providers hasreduced the number of target customers for service assurance solutions. Theresult of this market trend is that customers continue to drive for lower costsresulting in pressure on maintenance contracts. Despite this, our control overcosts within our own operations has resulted in improved profit performance forthe division. Operating profit was significantly improved sequentially and over the sameperiod last year. However, revenues were down from first half 2006 due to £4.5million of revenue from a one-time project for remote packet access testing thatoccurred in the prior year. Next-generation service offerings are beginning to be deployed and serviceproviders are evaluating our next-generation service assurance solutions. Oneof the first service providers to select a next-generation service assurancesolution is Telus, a Canadian carrier, which signed a contract to deploy ourtriple play solution late last year. During the first half 2007 Telus commencedsuccessful deployment of our next-generation hardware and software triple playservice assurance solution. Systems £ million First half 2007 First half 2006 Change (%) Underlying change at constant currency (%) Revenue 17.1 18.8 (9) (3)Operating profit/(loss) 1.7 2.5 (32) -Return on sales (%) 9.9 13.3 The Systems group comprises PG Drives Technology, a leading supplier of controlsystems for electrically powered medical and small industrial vehicles. Revenuewas down due to changes in US government healthcare funding for poweredwheelchairs, which created a shift from premium systems to lower-cost solutions.The US dollar exchange rate also had a marked affect on revenue and profit.We continued to relocate more production into the Far East to support ouractivities in the Asia Pacific Region and to gain product and logistical costbenefits. During the first half of 2007 we began penetrating new industrial marketsegments (forklift trucks and golf carts) with our new Sigma and X30/25products. Later this year we are planning more new product launches that willenable us to further strengthen our position in the medical mobility market. Non-segmental costs Non-segmental costs excluding exceptional costs, being those which are notdirectly attributable to the operating segments, were lower at £2.1 millioncompared with £3.0 million in the first half of 2006. Corporate overheads werereduced as a result of the operating review and a number of activities wereintegrated into the business units. The termination of the Company's reportingobligations under the US Exchange Act has reduced corporate compliance costs. Board As announced in June, Duncan Lewis joined the Board as an independentnon-executive director bringing extensive telecoms experience to the Company. The Company is now pleased to announce that Tom Maxwell will be appointed as anadditional independent non-executive director with effect from 1 October 2007and will become a member of the Audit and Nomination Committees. A Member ofthe Chartered Institute of Bankers in Scotland and a Member of the Society ofInvestment Professionals, Tom has considerable financial and investmentexperience. He has previously worked for, among others, Martin CurrieInvestment Management Limited and Ivory & Sime Investment Management plc. As a result of Mr Maxwell's appointment, Gerard Eastman will cease to be amember of the Audit and Remuneration Committees on 1 October 2007, enablingtheir composition to become compliant with the Combined Code. Mr Eastman willremain as a non-executive director on the Board and a member of the NominationCommittee. Board composition, in terms of independent non-executive directors, is nowcompliant with the requirements of the Combined Code and, from 1 October thecomposition of the Board Committees will also be compliant. Consolidated income statement Notes First half First half£ million 2007 2006 (restated)1 Before Exceptional Total Before Exceptional Total exceptional items2 exceptional items2 and items items and goodwill goodwill impairment impairmentContinuing operationsRevenue 2, 3 114.2 - 114.2 134.2 - 134.2Cost of sales (45.8) (2.4) (48.2) (53.0) - (53.0) Gross profit 68.4 (2.4) 66.0 81.2 - 81.2Product development (22.8) - (22.8) (29.7) - (29.7)Selling and distribution (25.6) - (25.6) (30.9) - (30.9)Administration (15.0) (10.2) (25.2) (16.4) (13.4) (29.8) Operating profit/(loss) 2 5.0 (12.6) (7.6) 4.2 (13.4) (9.2)Finance income 3.2 - 3.2 3.6 - 3.6Finance costs (0.1) - (0.1) (1.3) - (1.3)Costs associated with the - - - - (8.8) (8.8) repayment of loan notes Profit/(loss) before tax 8.1 (12.6) (4.5) 6.5 (22.2) (15.7)Tax - overseas (0.7) - (0.7) (0.3) - (0.3) Profit/(loss) for the period from 7.4 (12.6) (5.2) 6.2 (22.2) (16.0)continuing operations after taxDiscontinued operations 4Profit/(loss) for the period from (3.8) (4.5) (8.3) 0.2 157.1 157.3discontinued operations Profit/(loss) for the period 3.6 (17.1) (13.5) 6.4 134.9 141.3attributable to equity holders ofparent Earnings/(loss) per share (pence) 6Basic and diluted earnings/(loss) (1.55) 14.80Basic and diluted loss from (0.60) (1.68)continuing operations Note 1 The first half of 2006 has been restated to reflect the presentation of SwissQual as a discontinued operation, the reclassification of product development costs out of cost of sales and the reclassification of the costs of customer service operations to cost of sales from selling and distribution expense. 2 Exceptional items are equivalent to material one-time items which were presented in previous financial information. Consolidated statement of recognised income and expense £ million First half First half 2007 2006 Income and expense recognised directly in equityExchange differences on retranslation of foreign (1.0) (3.9)operationsActuarial gains/(losses) on defined benefit pension plans (2.6) 6.8 (3.6) 2.9Transfers to income statementExchange gain transferred to profit on sale - (1.3)Gains on cash flow hedges - (1.9) Net expense recognised directly in equity (3.6) (0.3)Profit/(loss) for the period (13.5) 141.3 Total recognised income and expense for the period (17.1) 141.0attributable to the equity holders of parent Consolidated statement of changes in equity £ million First half First half 2007 2006 Total recognised income and expense (17.1) 141.0New shares issued 2.5 1.0Share-based payment 1.0 2.7On-market share repurchase (4.2) (8.2)Employee share ownership trust 0.8 0.4Minority interests sold - (1.9) Total movement (17.0) 135.0At 1 January 182.8 122.2 At the end of the period 165.8 257.2 Consolidated balance sheet 1 July 2 July 31 December£ million 2007 2006 2006 AssetsNon-current assetsIntangible assets 57.7 96.3 63.3Property, plant and equipment 17.8 27.7 25.3Trade and other receivables 1.4 1.6 1.4Cash on deposit 7.7 - 8.5Defined benefit pension plan surplus - 4.3 2.4Deferred tax 1.0 1.1 1.2 85.6 131.0 102.1 Current assetsInventories 18.8 32.3 25.4Trade and other receivables 52.8 59.5 63.8Derivative financial instruments 0.3 0.4 0.1Cash and cash equivalents 106.9 146.3 97.6 178.8 238.5 186.9 Assets held in disposal group held for sale 5.6 - - Total assets 270.0 369.5 289.0 LiabilitiesCurrent liabilitiesTrade and other payables (52.5) (67.6) (61.8)Current tax (30.7) (31.1) (30.5)Provisions and other liabilities (6.8) (3.3) (5.9) (90.0) (102.0) (98.2) Non-current liabilitiesTrade and other payables (0.8) (1.0) (0.5)Defined benefit pension plan deficit (0.7) (0.9) (1.4)Provisions and other liabilities (8.2) (8.4) (6.1) (9.7) (10.3) (8.0) Liabilities included in disposal group held for sale (4.5) - - Total liabilities (104.2) (112.3) (106.2) Net assets 165.8 257.2 182.8 Capital and reservesShare capital 32.0 32.3 32.5Share premium account 13.7 8.7 10.6Capital redemption reserve 0.7 - -Capital reserve 4.7 6.8 5.5Translation reserve (7.1) 0.3 (6.1)Retained earnings 121.8 209.1 140.3 Total equity 165.8 257.2 182.8 Consolidated cash flow statement First half First half£ million Notes 2007 2006 Cash flows from operating activitiesCash flows from operations 7 15.4 (49.9)Tax paid (0.5) (2.7) Net cash inflow /(outflow) from operating activities 14.9 (52.6) Cash flows from investing activitiesInterest received 2.2 2.1Transfer from long term deposit 0.7 -Disposal of operations - 278.5Purchase of property, plant and equipment (2.4) (8.4)Purchase of intangible assets (0.3) -Proceeds from sale of property, plant and equipment 0.1 0.2Acquisition of subsidiaries (4.0) (32.6) Net cash (used in)/from investing activities (3.7) 239.8 Cash flows from financing activitiesInterest paid - (0.9)Costs associated with the repayment of loan notes and - (9.7)swap break feesProceeds from the issue of share capital and employee 3.3 1.4share ownership trustOn-market share repurchase (4.2) (7.2)Repayment of borrowings - (95.6)New borrowings - 23.0 Net cash used in financing activities (0.9) (89.0) Net increase in cash and cash equivalents 10.3 98.2Cash and cash equivalents at the beginning of the period 97.6 48.8Transfer of cash and cash equivalents to assets of (0.5) -disposal group held for saleEffect of exchange rate changes (0.5) (0.7) Cash and cash equivalents at the end of the period 106.9 146.3 Notes to the financial information 1 Basis of preparation The consolidated interim financial information has been prepared on the basis ofthe accounting policies set out in the Group's statutory accounts for the yearto 31 December 2006, which have been filed with the Registrar of Companies. Theconsolidated interim financial information is unaudited but has been reviewed bythe auditors. The consolidated interim financial information does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985. The comparative financial information for the year to 31 December 2006 isbased on the statutory accounts for that period apart from as stated below. Theauditors' report on those accounts was unqualified and did not contain astatement made under Section 237(2) or Section 237(3) of the Companies Act 1985. The Group has reclassified product development costs out of cost of sales and isdisclosing these costs separately in the income statement. The change has beenmade to improve the transparency of the Group's results. The costs of customer service operations have been reclassified from selling anddistribution expense to cost of sales. This reflects the increasing proportionof revenues derived from the provision of added value services, and the Boardhas concluded that this classification is a fairer representation of thecommercial operations and the gross profit achieved by the Group. Comparatives have been restated accordingly. The Interim Report for the period ended 1 July 2007 was approved by thedirectors on 9 August 2007. 2 Segmental analysis £ million Continuing Performance Service Non- operations Analysis Assurance Communications Systems segmental Total First half 2007Revenue 80.6 16.5 97.1 17.1 - 114.2 Operating profit/(loss) before 4.5 0.9 5.4 1.7 (2.1) 5.0exceptional itemsExceptional items (note 5) (7.6) (2.7) (10.3) - (2.3) (12.6) Operating profit/(loss) (3.1) (1.8) (4.9) 1.7 (4.4) (7.6) Other informationProduct development 18.8 2.8 21.6 1.2 - 22.8Share-based payment 0.7 0.2 0.9 - 0.1 1.0Intangible amortisation 0.4 - 0.4 - - 0.4 First half 2006Revenue 90.5 24.9 115.4 18.8 - 134.2 Operating profit/(loss) before 4.6 0.1 4.7 2.5 (3.0) 4.2exceptional items and goodwillimpairmentExceptional items (note 5) (1.5) (2.4) (3.9) - - (3.9)Goodwill impairment - (9.5) (9.5) - - (9.5) Operating profit/(loss) 3.1 (11.8) (8.7) 2.5 (3.0) (9.2) Other informationProduct development 22.6 5.9 28.5 1.2 - 29.7Share-based payment 1.5 0.6 2.1 0.1 0.2 2.4Intangible amortisation 0.1 - 0.1 - - 0.1 2 Segmental analysis continued £ million Continuing Performance Service Non- operations Analysis Assurance Communications Systems segmental Total Year 2006Revenue 179.5 43.6 223.1 35.8 - 258.9 Operating profit/(loss) before 10.6 (1.1) 9.5 4.7 (5.8) 8.4exceptional items and goodwillimpairmentExceptional items (3.8) (5.3) (9.1) - 0.3 (8.8)Goodwill impairment - (19.1) (19.1) - - (19.1) Operating profit/(loss) 6.8 (25.5) (18.7) 4.7 (5.5) (19.5) Other informationProduct development 42.0 9.5 51.5 2.3 - 53.8Share-based payment 3.6 1.2 4.8 0.1 0.3 5.2Intangible amortisation 0.5 - 0.5 - - 0.5 Revenue and operating profit for discontinued operations is disclosed in note 4. 3 Geographical analysis First half First half£ million 2007 2006Revenue by marketContinuing operationsEurope 21.9 20.7North America 61.1 79.8Asia Pacific, Rest of Americas, Africa 31.2 33.7 114.2 134.2Revenue by sourceContinuing operationsEurope 32.0 31.8North America 72.6 92.3Asia Pacific, Rest of Americas, Africa 9.6 10.1 114.2 134.2Average exchange ratesUS dollar 1.97 1.79Euro 1.48 1.46 4 Discontinued operations First half First half£ million 2007 2006 (restated)1 Revenue 3.4 32.0 Operating profit/(loss) (3.4) 0.9Share of profit of associates - 0.2Profit on disposal of operations - 165.3Loss recognised on the measurement to fair value less (4.5) -costs to sellNet finance costs - (0.1) Profit/(loss) before tax (7.9) 166.3Tax (0.4) (0.8)Tax on the disposal of operations - (8.2) Profit/(loss) for the period (8.3) 157.3 Note 1 Restated to reflect the presentation of SwissQual as a discontinued operation. Discontinued operations relate to the HellermannTyton Division which was sold on15 February 2006 and SwissQual which has been classified as a discontinuedoperation at 1 July 2007. The sale of SwissQual was completed on 5 July 2007.SwissQual was included within the Performance Analysis division. 5 Exceptional items First half First half£ million 2007 2006 (restated)1 Restructuring costs 3.5 3.9Lease provisions 3.7 -Write-down of redundant assets 5.4 - 12.6 3.9 Note 1 Restated to exclude the effect of the inventory absorption adjustment. Exceptional items are discussed in more detail in the interim report under Groupfinancial performance. 6 Earnings/(loss) per share First half First half Year 2007 2006 2006 Earnings/(loss) per share (pence)Basic and diluted (1.55) 14.80 11.75Basic and diluted from continuing operations (0.60) (1.68) (2.45) Adjusted 0.41 0.67 1.73Adjusted from continuing operations 0.85 0.65 1.48 Weighted average number of shares in issue (million)Basic and adjusted 873.7 954.5 925.9Dilutive potential of employee share options 10.5 6.1 3.8 Diluted 884.2 960.6 929.7 £ million Continuing Discontinued Total operations operations operations First half 2007Profit/(loss) for the year attributable to equity holders (5.2) (8.3) (13.5)of parentExceptional items 12.6 - 12.6Loss recognised on the measurement to fair value less - 4.5 4.5costs to sell Adjusted earnings attributable to equity holders of 7.4 (3.8) 3.6parent First half 2006 (restated)1, 2Profit/(loss) for the year attributable to equity holders (16.0) 157.3 141.3of parentExceptional items 3.9 - 3.9Goodwill impairment 9.5 - 9.5Costs associated with the repayment of loan notes 8.8 - 8.8Profit on the disposal of operations - (157.1) (157.1) Adjusted earnings attributable to equity holders of 6.2 0.2 6.4parent Year 2006 (restated)1Profit/(loss) for the year attributable to equity holders (22.7) 131.5 108.8of parentExceptional items 8.8 - 8.8Goodwill impairment 19.1 27.7 46.8Costs associated with the repayment of loan notes 8.8 - 8.8Profit on the disposal of operations - (156.9) (156.9)Prior year tax credit (0.3) - (0.3) Adjusted earnings attributable to equity holders of 13.7 2.3 16.0parent Note 1 The first half of 2006 and the year 2006 have been restated to present SwissQual as a discontinued operation. 2 Adjusted earnings for the first half of 2006 has been restated to include share-based payment and intangible amortisation. 7 Reconciliation of profit/(loss) before tax to cash generated from operations First half First half£ million 2007 2006 (restated)1 Continuing operationsOperating loss (7.6) (9.2)Goodwill impairment - 9.5Amortisation of intangible assets 0.4 0.1Depreciation of property, plant and equipment 5.8 6.6(Profit)/loss on disposal and impairment of property, 3.0 (0.1)plant and equipmentShare-based payment 1.0 2.4Deferred income received 4.1 0.4Decrease/(increase) in receivables 4.6 (2.9)Decrease/(increase) in inventories 5.0 (6.1)Decrease in payables (2.5) (3.2)Increase/(decrease) in provisions 2.6 (2.1)Retirement benefit obligations - (47.0) Cash flows from continuing operating activities 16.4 (51.6) Discontinued operationsOperating profit/(loss) (3.4) 0.9Amortisation of intangible assets 0.6 0.8Depreciation of property, plant and equipment 0.2 1.7Profit on disposal of property, plant and equipment - (0.1)Share-based payment - 0.3Decrease/(increase) in receivables 3.0 (0.1)Increase in inventories (0.2) -Decrease in payables (1.2) (1.8) Cash flows from discontinued operating activities (1.0) 1.7 Cash flows from operating activities 15.4 (49.9) Note 1 The first half of 2006 has been restated to present SwissQual as a discontinued operation. 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