10th Aug 2006 07:01
Spirent Communications PLC10 August 2006 SPIRENT COMMUNICATIONS PLC INTERIM RESULTS FOR THE FIRST HALF OF 2006 LONDON, UK, 10 August 2006 - Spirent Communications plc ("Spirent" or "theGroup") (LSE: SPT; NYSE: SPM), a leading communications technology company, todayannounces its interim results for the first half of 2006. £ million First half First half 2006(1) 2005(1)-------------------------------------------------------------------------------- AdjustedContinuing operationsRevenue 138.2 126.5Operating profit(2) 3.8 1.8Profit before tax(3) 6.1 (1.1)Adjusted earnings/(loss) per share(4) 0.61 (0.13)ReportedContinuing operationsRevenue 138.2 126.5Loss before tax (17.1) (46.1)Basic loss per share (1.82) (4.87)GroupProfit/(loss)for the period 141.3 (36.8)-------------------------------------------------------------------------------- Notes (1) First half 2006 refers to the period to 2 July 2006 and first half 2005 refers to the period to 3 July 2005. (2) Before material one-time items, goodwill impairment, intangible amortisation and share-based payment. (3) Before material one-time items, goodwill impairment, intangible amortisation, share-based payment, profit on disposal of operations and costs associated with repayment of notes. (4) Adjusted earnings per share is based on adjusted earnings as set out in note 6. • First half characterised by variable market conditions and significant product transition: - as announced on 14 June 2006 profitability was also impacted by short term delays to product launches and higher product development and sales and marketing spend in a very competitive market place. - strong performance by new and existing products such as Spirent TestCenterTM, Landslide and GPS positioning but a decline in some older product lines. - good growth in Asia. • Reported results include: - £157.1 million profit after tax on disposal of the HellermannTyton Division. - cost of £3.9 million for restructuring actions as announced on 29 June 2006 to realign resources and reduce operating expenses. - goodwill impairment of £9.5 million in the Service Assurance division. • Net cash at half year of £146.3 million. • Sarbanes Oxley costs of £1 million in first half; £3 million expected for the full year. • Share buy back commenced and on track. • Three strategic acquisitions completed in the year to date for an initial consideration £37.5 million and the acquisition of Imperfect Networks, announced separately today for £2.2 million, in line with our strategy. Anders Gustafsson, Chief Executive, commented: "The first half was characterised by managing our newly focused communicationscompany through a period of significant product transition and variable marketconditions. These factors are expected to continue in the second half. Ourstrategy of investing for the longer term in our existing and new products willbenefit our customers and positions us well to grow organically by gainingmarket share for next-generation products and solutions in triple play, wirelessand fixed/mobile convergence. We are also growing through selective, strategicacquisitions. "The introduction of new products and enhancements to our existing products,together with the contribution from our acquisitions, is expected to lead to amodest increase in revenue for 2006 compared with 2005. This, combined with thebenefits of the restructuring actions we have taken, is expected to result in animproved performance for the year as a whole." - ends - EnquiriesAnders Gustafsson, ChiefExecutive Spirent Communications plc +44 (0)1293 767676Eric Hutchinson, Chief FinancialOfficer Reg Hoare/Katie Hunt/LibbyYoung Smithfield +44 (0)20 7360 4900 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) and on the New York Stock Exchange (ticker: SPM; CUSIPnumber: 84856M209) in the form of American Depositary Shares ("ADS"),represented by American Depositary Receipts, with one ADS representing fourOrdinary shares. Spirent and the Spirent logo are trademarks or registered trademarks of SpirentCommunications plc. All other trademarks or registered trademarks mentionedherein are held by their respective companies. All rights reserved. This press release may contain forward-looking statements (as that term isdefined in the United States Private Securities Litigation Reform Act of 1995)based on current expectations or beliefs, as well as assumptions about futureevents. You can sometimes, but not always, identify these statements by the useof a date in the future or such words as "will", "anticipate", "estimate","expect", "project", "intend", "plan", "should", "may", "assume" and othersimilar words. By their nature, forward-looking statements are inherentlypredictive and speculative and involve risk and uncertainty because they relateto events and depend on circumstances that will occur in the future. You shouldnot place undue reliance on these forward-looking statements, which are not aguarantee of future performance and are subject to factors that could cause ouractual results to differ materially from those expressed or implied by thesestatements. Such factors include, but are not limited to: the extent to whichcustomers continue to invest in next-generation technology and deploy advancedIP-based services; our ability to manage a significant transition in productrevenues to new product solutions incorporating latest technology; our abilityto successfully expand our customer base; continuing variable market conditions;pace of economic recovery; our ability to improve efficiency, achieve thebenefits of our cost reduction goals and adapt to economic changes and otherchanges in demand or market conditions; our ability to develop and commercialisenew products and services, extend our existing capabilities in IP services andexpand our product offering internationally; our ability to attract and retainqualified personnel; the effects of competition on our business; fluctuations inexchange rates and heavy exposure to the US dollar; changes in the business,financial condition or prospects of one or more of our major customers; risks ofdoing business internationally; risks relating to the acquisition or sale ofbusinesses and our subsequent ability to integrate businesses; our reliance onproprietary technology; our exposure to liabilities for product defects; ourreliance on third party manufacturers and suppliers; and other risks describedfrom time to time in Spirent Communications 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 2006 We evaluate the performance of Spirent based on revenue and operating profit/(loss) before the effect of material one-time items, goodwill impairment,intangible amortisation and share-based payment so that period on periodcomparisons are not distorted. Operating profit /(loss) and return on sales arereferred to in the text before material one-time items, goodwill impairment,intangible amortisation and share-based payment unless otherwise stated. First half 2006 refers to the period to 2 July 2006 and first half 2005 refersto the period to 3 July 2005. Overview Introduction The first half of 2006 has been characterised by the transformation of Spirentinto a focused communications company and by a number of management challenges,primarily variable market conditions and significant product transition. Wecontinue to make strong progress in developing and launching new products andsolutions for next-generation networks that enable our customers to reduce thetime and cost of testing and achieve faster time to revenue for new products andservices. We expect the benefits of these investments to come throughincrementally in the second half and going into 2007. The year so far has included both the completion of the major disposal of theHellermannTyton Division and the acquisition of four strategically important,but smaller businesses. The disposal significantly improved our financialposition, and as expected enabled the Group to repay debt, strengthen thepension fund and begin a share repurchase programme. Results The variable market conditions seen in 2005 continued through the first half ofthis year impacting our results. Market conditions continue to reflect customersdelaying their investment in next-generation networks, a highly competitivemarket and the continued consolidation of customer businesses, of which therewere further high profile mergers announced in the period. As a result, weestimate that many of our markets are seeing little or no growth in the shortterm, although we continue to remain positive on the prospects for long termgrowth. Furthermore, we believe that the factors affecting Spirent have alsoimpacted our competitors, leading to our markets being fiercely competitive. The other major impact on our first half performance was significant producttransition, which we expect to be an important feature of the year as a whole.The financial effect was seen in terms of lower sales of our existing productsand higher investment in new products. The total spending on product developmentby the Communications businesses totalled £30.0 million (first half 2005:£28.4 million). We invested in Spirent TestCenter, W-CDMA performance testequipment for mobile handsets, and triple play IP service assurance monitoringsolutions, as well as in our existing fast growing product lines. Lastly, short term delays to product launches and our decision to continue toincur a higher level of investment in sales and marketing throughout the firsthalf to create a stronger long term market position, have also impacted theseresults. New products Product transition principally involves investing in the capability of productsand solutions through new launches and upgrades, whilst at the same timemanaging the sales decline of some of our existing product lines. Thisinvestment is designed to position Spirent strongly for market share gains underany market conditions. To date, new product launches have been well received by our customers whoreported enhanced functionality, improved productivity and reliability. We aremost encouraged by the initial sales performance of Spirent TestCenter, whichhas already been purchased by over 90 customers worldwide, including most of theleading global companies in our industry. Other successes in the first half have included growing sales of the Landslideproduct, the future of which will be underpinned by the subsequent acquisitionof SSE in July, the growth in the security test product, AvalancheTM, and astrong performance in our Asia Pacific operations, especially in PerformanceAnalysis Broadband. Restructuring actions During the first half we indicated that we would continue to carefully managethe balance between the cost base and maintaining the capability to generatelong term growth. Accordingly, at the end of the period we implementedrestructuring actions in our Performance Analysis and Service Assurancedivisions to realign resources and to reduce operating expenses. The major partof these actions have taken place in the Service Assurance division, whichshould enable it to maintain a near break-even result for the second half of2006. Pro forma break-even sales for Service Assurance are estimated to be £36million per year. The total annualised cost reduction will be approximately £9.0 million per year.The cost of these actions is a one-time charge in the period of £3.9 million, ofwhich £1.9 million has been paid in cash in the first half. Acquisitions Four acquisitions have been completed this year in line with our strategy tocontinue to expand our breadth of expertise and solutions into new growth areassuch as IP multimedia subsystems ("IMS"), IP telephony and security test, whilstboosting our offering in other areas such as wireless. The acquisitions were: • SwissQual Holding AG ("SwissQual"), a provider of innovative test and measurement solutions for wireless telecoms markets, for an initial consideration of £27.8 million. • QuadTex Systems, Inc ("QuadTex"), a provider of innovative and leading test tools for IMS and VoIP testing, for an initial consideration of £4.3 million. • Scientific Software Engineering, Inc ("SSE"), a provider of systems for testing the performance and functionality of 2.5 and 3G wireless network infrastructure already incorporated in our existing fast growing Landslide product, for an initial consideration of £5.4 million. • The assets of Imperfect Networks, Inc, a provider of security web application test solutions, for an initial consideration of £2.2 million. Strategic initiatives Our strategy in our Communications businesses is to focus on creatingshareholder value through delivering innovative solutions for our customers.Within this broad strategy our specific initiatives are underway to: • Restructure our Global Sales Team to focus on major customers serving core and growth segments, such as wireless, triple play and IMS; • Continue to deliver high value solutions, services and products to all customers, utilising partnerships to gain leverage of our technological capabilities; • Improve our time to market, through a significantly improved product realisation management process; • Increase our professional staff capabilities, simplify processes and improve support infrastructure to our customers; • Continue to unlock synergies within the company by exploiting our technical leadership across new and different business segments; and • Empower our employees to create a true performance culture and strive for excellence. Outlook The first half was characterised by managing our newly focused communicationscompany through a period of significant product transition and variable marketconditions. These factors are expected to continue in the second half. Ourstrategy of investing for the longer term in our existing and new products willbenefit our customers and positions us well to grow organically by gainingmarket share for next-generation products and solutions in triple play, wirelessand fixed/mobile convergence. We are also growing through selective, strategicacquisitions. The introduction of new products and enhancements to our existing products,together with the contribution from our acquisitions, is expected to lead to amodest increase in revenue for 2006 compared with 2005. This, combined with thebenefits of the restructuring actions we have taken, is expected to result in animproved performance for the year as a whole. Operating review Communications £ million First half 2006 First half 2005 Change %-------------------------------------------------------------------------------- RevenuePerformance Analysis 94.5 87.6 8Service Assurance 24.9 20.2 23--------------------------------------------------------------- Communications group 119.4 107.8 11--------------------------------------------------------------- Operating profit/(loss)Performance Analysis 3.3 11.4 (71)Service Assurance 0.7 (9.0) >100--------------------------------------------------------------- Communications group 4.0 2.4 67--------------------------------------------------------------- Return on sales (%)Performance Analysis 3.5 13.0Service Assurance 2.8 -Communications group 3.4 2.2--------------------------------------------------------------- Revenue for the Communications group was up 11 per cent against the prior yearcomparative period and operating profit improved to £4.0 million. The results for Performance Analysis were impacted by the variable marketconditions experienced during the first half and by the major transition fromexisting products. This has resulted in a decline in sales of our SmartBits andAX products, as we build our market position with the new test platform, SpirentTestCenter. We experienced a delay in the deployment of location basedtechnologies and wireless hand-set conformance test products. In addition therehave been delays to order intake for subscriber experience management testdevices, which will result in lumpy demand patterns. Service Assurance saw a period of stability and the recognition of revenues inrelation to one-time projects for major customers, which resulted in higherrevenues and a small profit for the period. We invested heavily in product development, all of which was expensed, resultingin a charge of £30.0 million, 25 per cent of sales. Performance Analysisinvested £24.1 million (first half 2005: £19.9 million) and Service Assurance£5.9 million (first half 2005: £8.5 million). A significant part of thisinvestment was in the development of Spirent TestCenter, W-CDMA performance testequipment for hand-set, triple play IP service assurance monitoring solutionsand in our fast growing product lines, including IP telephony, security test andwireless handset test products. We undertook a significant cost reduction programme at the end of June 2006,incurring a one-time cost of £3.9 million. This will result in annualisedsavings of approximately £9.0 million, primarily in the Service Assurancedivision. Performance Analysis The market for test equipment during the first half of 2006 was variable andunpredictable. By geographic region we saw growth in Asia and Europe, but NorthAmerica continued to prove challenging. Wireless and positioning revenues formed29 per cent of the total revenues for Performance Analysis in the first halfyear. Revenues from our top 20 customers typically represent around 40 per centof Performance Analysis revenues. Major customers include Cisco, Alcatel,Motorola, Huawei, and NTT. Uncertainty due to customer consolidation through mergers and acquisitions,shifts in technology and shifts in demand geographically has led to variabledemand for our test products. In addition we are undergoing a major producttransition as we develop new functionality and architecture for the newplatform, Spirent TestCenter. Spirent TestCenter was developed to change thegame in testing by delivering a host of solutions on a single platform. WithSpirent TestCenter, our customers can reduce the cost and time of testing,achieving a faster time to revenue for their new products and services. Specificbenefits of Spirent TestCenter include: • Significantly ramps the scale of testing; • Tests much larger devices; • Adds diagnostic testing through expert software; and • Achieves faster time to test and automated testing. A major release of Spirent TestCenter was made on 13 June 2006. We expect therelease to drive sales during the second half of 2006. Underlying trends show that there is, and will continue to be, demand driven bythe deployment of next-generation networks, the requirement for tools to driveproductivity improvements in our customers development labs, and expansion inAsia. As we enter the second half of 2006 our objective continues to be to expandwithin our core markets, to serve security test, access technologies, websitetesting, carrier Ethernet and metro area networks, switching, IP telephony andtriple play (voice, video and data services). We see opportunities for expansionand for revenue growth from new products launched in the first half of 2006,including Spirent TestCenter, Abacus for IP telephony and Avalanche for securityand web testing. We intend to establish leading positions in wirelessinfrastructure test, IMS and expand into serving manufacturing test. Overall,Spirent TestCenter will form a significant part of revenues for 2006. We expectit to contribute a fifth of our annual broadband test revenues in 2006 andbecome proportionally more significant during 2007. Our wireless and positioning test products saw a levelling off, after the highgrowth in 2005. There was a lull in the CDMA market for us as EV-DO deploymentsare bedded in and in W-CDMA markets as A-GPS solutions were deferred and HSDPAdeployments took priority. The wireless market remains attractive with highspeed data, 3G roll out, IP/mobile TV and location based services offeringgrowth opportunities. However, the W-CDMA service test market is highlycompetitive. As a result we have identified critical areas in which to leverageour capabilities and we expect that our strength in CDMA device testing andpositioning test will allow us to gain market share. Revenues from our GPSpositioning products saw a successful first half performance in North Americaand Asia. We are also seeing traction in the European Galileo market. Theacquisition of SwissQual enables the establishment of a leading position insubscriber experience management test for wireless networks. Service Assurance The markets for legacy service assurance solutions continue to decline asanticipated. Next-generation monitoring solutions are still being evaluated bythe major service providers and final purchasing decisions have yet to be made.Whilst the risk profile is increasing, due to the consolidation of serviceproviders, the potential rewards remain high, and with our considerable IPexpertise, long standing relationships with major carriers and demonstrablecapability in IPTV testing, we believe we are well positioned to achievesuccess. The bulk of the activity in Service Assurance in the first half relates toleased line, DSL and packet based monitoring solutions, as well as professionalservices and maintenance revenues. We saw our highest level of new packet basedsolutions revenues, related to a one-time contract with a major US serviceprovider. Revenues were higher than the first half of 2005, up by 23 per cent, this wasdue to the recognition of £4.5 million in relation to the one-time project forremote packet access testing. Although this was a one-time contract, it isnevertheless clear evidence of our capability to develop and launch new productsinto an evolving service assurance market. Profitability was achieved with £0.7million of operating profit, compared with a loss of £9.0 million in the prioryear, with the improvement reflecting increased revenue and margin coupled withthe benefit of the restructuring actions taken in 2005. The underlying legacy revenues for leased line services continue to be in longterm decline, as more focus shifts to next-generation networks. DSL monitoringbenefited from an increase in activity as major carriers continued to grow DSLservices and have worked off inventories of equipment from the previous year. As a result of the expected decline in legacy revenues and in anticipation offurther delays in new product purchasing decisions, we took action at the end ofJune to reduce the resource levels. After these actions, the break-even revenuefor 2007 for the Service Assurance division is estimated to be £36 million ayear. We continue to invest the majority of our resources in the development ofour next-generation triple play IP monitoring and field test solutions. We are setting priorities to maximise the potential of our existing baselinebusiness, focusing on winning triple play monitoring in major service providersand by increasing the scale of our field test handheld devices. This will resultin maintaining a near break-even position short term while we continue to investin the future and returning our Service Assurance division to growth. Systems £ million First half 2006 First half 2005 Change %------------------------- ---------- ---------- ----------Revenue 18.8 18.7 1Operating profit 2.6 2.1 24Return on sales (%) 13.8 11.2------------------------- ---------- ---------- ---------- The Systems group comprises PG Drives Technology, a leading supplier of controlsystems for electrically powered medical and small industrial vehicles. Revenuewas held back mainly due to constraints in US government healthcare funding forpowered wheelchairs, however operating profit was up 24 per cent benefiting fromproduct cost improvements and a reduction in logistical costs as we placed moreof our production in China to support our activities in the Asia Pacific region. During the first half of 2006 we saw continued strong revenues from the twowheelchair control systems which were launched in second half of 2005: the VR2,low cost, mainstream wheelchair control system, and the R-net, our highlysophisticated wheelchair system. These new products, together with ourestablished ones, enabled us to increase customer penetration in both themobility and industrial vehicles markets during the period. Later this year weare planning further new product launches that will enable us to strengthen ourposition in both our markets. Financial Review £ million First half 2006 First half 2005--------------------------------------------------------------------------------Continuing operationsRevenue 138.2 126.5-------------------------------------------------------------------------------- Reported operating loss (10.6) (44.1)Add back material one-time items:Restructuring costs 3.9 5.4Inventory absorption adjustment (2.3) -Inventory provisions - 1.3Goodwill impairment 9.5 37.0Intangible amortisation 0.9 -Share-based payment 2.4 2.2-------------------------------------------------------------------------------- Adjusted operating profit 3.8 1.8-------------------------------------------------------------------------------- Return on sales (%) 2.7 1.4-------------------------------------------------------------------------------- The Network Products group has been treated as a discontinued operation and isexcluded from the above table. All amounts referred to below are in respect ofcontinuing operations unless otherwise stated. Results Group revenue for the first half of 2006 was 9 per cent above the same period in2005. Adjusted operating profit was £3.8 million for the first half of 2006,compared with £1.8 million for the first half of 2005. The first half of 2005was impacted by an operating loss of £9.0 million in the Service Assurancedivision and in the first half of 2006, this division reported an operatingprofit of £0.7 million. The Performance Analysis division has reported flatrevenue for the first half of 2006 excluding the effect of exchange and growthfrom acquisitions, and a decline in profitability due in part to high levels ofinvestment in product development and selling and marketing in a year ofsignificant product transition. Return on sales has improved to 2.7 per centcompared with 1.4 per cent in the first half of 2005. The translation effect of exchange rates, principally the US dollar, hasincreased revenue by £4.4 million, although operating profit was not materiallyaffected by exchange. Excluding the effect of exchange rates and the growthcontributed by the two acquisitions completed during the first half of 2006,SwissQual and QuadTex, growth in revenue was 2 per cent. Revenue by market and by source grew over the first half of 2005 in allgeographic regions, particularly in Asia. Income statement Gross profit increased to £59.9 million, 43 per cent of revenue (first half2005: £50.5 million, 40 per cent of revenue). Gross profit is reported afterexpensing product development to cost of sales. The increase in gross profit,which is after higher product development spend, is a result of the growth inrevenue; the reorganisation of our supply chain activities to increaseefficiency and moving to more outsourcing; and the increased absorption ofmanufacturing overhead as we changed the application of our accounting policy inPerformance Analysis. The effect in the period of this last factor is to absorb£2.3 million more overhead into inventory when compared to the first half of2005. This benefited operating profit for the Performance Analysis division andhas been treated as a material one-time item in these results. This effect isnot expected to recur in future periods. The investment in product development by the continuing Group in the first halfof 2006 was £31.2 million, or 23 per cent of revenue (first half 2005: £29.5million, 23 per cent of revenue). Non-segmental costs (before share-based payment) amounted to £2.8 million forthe first half of 2006, compared with £2.7 million (before share-based paymentsand material one-time items) for the first half of 2005. This year we are bearing the considerable cost of implementing the SarbanesOxley Act of 2002. We estimate that the costs of this will amount toapproximately £3 million in 2006 of which approximately a third was incurred inthe first half. As a result of the decline in revenues from some of our existing products andthe delay to our expectations in securing orders for our new IP products andservices in the Service Assurance division, and as anticipated in the tradingupdate of 14 June, we are taking a goodwill impairment charge of £9.5 million(first half 2005: £37.0 million). The carrying value of the Service Assurancedivision at the end of the first half of 2006 was £14.1 million includinggoodwill of £10.3 million. Restructuring costs resulting from the cost reduction actions announced in Juneof £3.9 million, which is lower than the £5 million originally anticipated, werecharged in the first half of 2006. We made two acquisitions during the first half of 2006 and in accordance withaccounting standards have performed valuations to determine the fair value ofidentifiable intangible assets acquired. These intangible assets are beingamortised over their estimated useful lives in the range of five to ten yearsand this has resulted in an amortisation charge to the income statement of£0.9 million for the first half of 2006. Future acquisitions will result in theestablishment of further intangible assets and a consequential increase in thelevel of amortisation being expensed. The charge for share-based payment for the first half of 2006 was £2.4 million(first half 2005: £2.2 million). Net interest income in the first half of 2006 was £2.3 million compared with acharge of £2.9 million in the same period of 2005, having repaid our senior loannotes and funded the pension scheme from the proceeds of the sale of theHellermannTyton Division in February 2006. An additional interest charge of £8.8million was reported related to the early redemption of our loan notes. Reported loss before tax Reported loss before tax for the first half of 2006 was £17.1 million comparedwith a loss before tax of £46.1 million for the first half of 2005. Adjustedprofit before tax, is set out below. £ million First half 2006 First half 2005-------------------------------------------------------------------------------- Reported loss before tax from continuingoperations (17.1) (46.1)Material one-time items:Restructuring costs 3.9 5.4Inventory absorption adjustment (2.3) -Inventory provisions - 1.3Goodwill impairment 9.5 37.0Intangible amortisation 0.9 -Share-based payment 2.4 2.2Profit on the disposal of operations - (0.9)Costs associated with the repayment ofloan notes 8.8 --------------------------------------------------------------------------------- Adjusted profit/(loss) before tax 6.1 (1.1)-------------------------------------------------------------------------------- Tax The effective rate of tax for the first half of 2006 was 4.9 per cent. Theeffective tax charge will trend towards normal tax rates in future as profitsrecover. Earnings per share Basic earnings per share was 14.80 pence, including the profit on the sale ofthe HellermannTyton Division (first half 2005: loss per share 3.90 pence).Adjusted earnings per share from continuing operations, adding back the effectof goodwill impairment, material one-time charges, intangible amortisation,share-based payment, profit or loss on disposal of operations and costsassociated with the repayment of loan notes and any related tax, was 0.61 pence(first half 2005: loss 0.13 pence). We believe that this measure providesgreater comparability of the underlying performance of the Group from period toperiod. Discontinued operations A profit from discontinued operations of £158.7 million has been reported, beingthat from the disposal of the HellermannTyton Division of £157.1 million and theoperating result for the period of £1.6 million up to disposal, both net of tax.The disposal was completed on 15 February 2006. The profit on the sale of operations was £165.3 million before tax of £8.2million, and comprises net proceeds of £283.7 million less net assets disposedof £120.2 million, cumulative exchange gains of £1.3 million and a pension fundcurtailment gain of £0.5 million. The net proceeds from the disposal of the HellermannTyton Division are set outbelow compared with the pro forma proceeds included in the circular distributedto shareholders shown for comparison. Note that £6.7 million of the transactioncosts were expensed and reported in the 2005 result, of which £5.2 million werepaid in 2006. The tax liability of £8.2 million will be paid in the second halfof 2006. Net proceeds £ million First half 2006 Second half 2005 Total Pro forma-------------------------------------------------------------------------------- Cash free/debt freeequivalent value 297.6 - 297.6 288.9Debt assumed (9.4) - (9.4) (11.2)-------------------------------------------------------------------------------- Cash consideration 288.2 - 288.2 277.7Transaction costs (4.5) (6.7) (11.2) (9.8)Tax (8.2) - (8.2) (9.0)-------------------------------------------------------------------------------- 275.5 (6.7) 268.8 258.9-------------------------------------------------------------------------------- Total proceeds from the disposal on a cash free/debt free equivalent value were£8.7 million greater, principally due to higher working capital than anticipatedat the end of 2005, although expenses amounted to £1.4 million more. Proceeds from the sale were applied as follows: • Repayment of senior loan notes of $124.8 million (£70.5 million); • Payment of an amount payable on the early redemption of the loan notes ("make-whole amount") of $12.9 million (£7.4 million); • Break fees of £2.3 million in respect of interest rate swaps connected with the senior loan notes; • Special contribution of £47.0 million to the UK final salary pension scheme; and • Commencement of the on-market share repurchase programme. The balance of the proceeds were placed on deposit. Acquisitions During the first half of 2006 we completed two acquisitions SwissQual andQuadTex. We also announced two further acquisitions; SSE in July and ImperfectNetworks announced today. All these acquisitions are within our PerformanceAnalysis division. The acquisition of SwissQual was completed on 23 January 2006 for an initialconsideration of Swiss francs 62.5 million (£27.8 million) which was paid incash. There is further consideration payable of up to Swiss francs 28.0 million(£12.4 million) depending on revenue growth and various technical and financialmilestones. QuadTex was acquired on 13 February 2006 for an initial consideration of $7.5million (£4.3 million), paid in cash. There is further consideration of up to$1.5 million (£0.9 million) payable depending on certain technical milestonesand the retention of key employees. SSE was completed on 10 July 2006 and the initial consideration settled by wayof a cash payment of $10.0 million (£5.4 million). There is a further amountpayable of up to $6.0 million (£3.3 million) depending on the satisfaction ofcertain technical milestones and the retention of key employees. The assets of Imperfect Networks, a provider of security web application testsolutions, have been acquired for an initial consideration of $4.0 million (£2.2million) payable in cash on completion with up to a further $4.0 million (£2.2million), payable depending on the satisfaction of certain technical milestonesand revenues to be achieved in 2007. Financing and cash flow At the end of the first half of 2006 the Group was debt free with cash and cashequivalents of £146.3 million (31 December 2005: net debt £35.6 million). Cashand investments are principally held in sterling and earn normal market rates ofinterest. Cash of £10.5 million is held in escrow in respect of long termleasehold obligations as a result of the balance sheet reconstruction in 2004,in order to enable the share repurchase programme to be executed. The seniorloan notes, which stood at £70.9 million at 31 December 2005, were our principalborrowings; these were repaid in February 2006 out of the proceeds of the saleof the HellermannTyton Division. Total Group operating cash flow was an outflow of £52.6 million for the firsthalf of 2006 compared with an inflow of £4.2 million in the first half of 2005.This outflow includes £47.0 million paid out in February 2006 to fund the UKfinal salary pension scheme, and £1.9 million, of the total £3.9 million chargedin respect of restructuring costs in June. Increases in working capital wereexperienced partly due to inventory build in preparation for the launch of thelatest release of Spirent TestCenter. Net interest payments were £10.6 million, this includes the make-whole amount of£7.4 million and interest rate swap break fees of £2.3 million. The disposal of the HellermannTyton Division contributed £278.5 million to thecash inflow from investing activities and the acquisitions of SwissQual andQuadTex resulted in a cash outflow of £32.6 million. The cash outflow in respect of the on-market share repurchase programme duringthe period amounted to £7.2 million. Net capital expenditure was £8.2 million in the first half of 2006 (first half2005: £15.8 million, of which £8.0 million related to the Network Productsgroup). We expect capital expenditure for the full year to be in the region of£13 million. The depreciation charge was £6.7 million in the first half for thecontinuing operations and is expected to be approximately £13 million for thefull year. Pension fund At the end of the first half of 2006 the UK final salary pension scheme was £4.3million in surplus (31 December 2005: deficit £50.8 million) having been fundedin February 2006 by way of a special contribution of £47.0 million from theproceeds of the disposal of the HellermannTyton Division. Other pensionobligations amounted to £0.9 million (31 December 2005: £0.7 million). On-market share repurchase programme We commenced an on-market share repurchase programme in May 2006 followingcompletion of certain actions, one of which was obtaining shareholder approvalfor Spirent to make on-market share repurchases of up to 14.99 per cent of theissued share capital. In the first half year we repurchased 20.1 million shares at an average price of40.6 pence. During July we have bought a further 16.0 million shares, whichbrings the average price per share to date to 38.3 pence. Dividend No dividend is being declared in respect of the first half of 2006. Consolidated income statement --------------------------------------------------------------------------------£ million Notes First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Continuing operationsRevenue 2, 3 138.2 126.5 259.3Cost of sales (78.3) (76.0) (153.1)-------------------------------------------------------------------------------- Gross profit 59.9 50.5 106.2Operating expenses (70.5) (94.6) (145.2)-------------------------------------------------------------------------------- Operating loss 2 (10.6) (44.1) (39.0)Profit on the disposal of operations - 0.9 3.9-------------------------------------------------------------------------------- Loss before interest (10.6) (43.2) (35.1)Finance income 3.6 1.0 1.5Finance costs (1.3) (3.9) (8.1)Costs associated with the repaymentof loan notes (8.8) - --------------------------------------------------------------------------------- Loss before tax (17.1) (46.1) (41.7)Tax - overseas (0.3) (0.1) 4.0-------------------------------------------------------------------------------- Loss for the period from continuingoperations after tax (17.4) (46.2) (37.7)Discontinued operations 5Profit from discontinued operations 158.7 9.4 13.2-------------------------------------------------------------------------------- Profit/(loss) for the period 141.3 (36.8) (24.5)-------------------------------------------------------------------------------- Attributable to:Equity holders of parent 141.3 (37.0) (24.9)Minority shareholders' interests -discontinued operations - 0.2 0.4-------------------------------------------------------------------------------- Profit/(loss) for the period 141.3 (36.8) (24.5)-------------------------------------------------------------------------------- Earnings/(loss) per share (pence) 6Basic earnings/(loss) 14.80 (3.90) (2.62)Basic loss from continuing operations (1.82) (4.87) (3.97)Diluted earnings/(loss) 14.71 (3.90) (2.62)Diluted loss from continuingoperations (1.82) (4.87) (3.97)-------------------------------------------------------------------------------- Consolidated statement of recognised income and expense --------------------------------------------------------------------------------£ million First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Exchange differences on retranslation offoreign operations (3.9) 1.4 4.1Exchange gain taken to profit on sale (1.3) - -Actuarial gains/(losses) on defined benefitpension plans 6.8 (4.2) (16.1)(Losses)/gains on cash flow hedges (1.9) (0.9) 1.4Deferred tax asset on pension liability - - (11.1)Tax on actuarial losses - 0.3 --------------------------------------------------------------------------------- Net expense recognised directly in equity (0.3) (3.4) (21.7)Profit/(loss) for the period 141.3 (36.8) (24.5)-------------------------------------------------------------------------------- Total recognised income and expense for theperiod 141.0 (40.2) (46.2)-------------------------------------------------------------------------------- Attributable to:Equity holders of parent 141.0 (40.5) (46.8)Minority shareholders' interests -discontinued operations - 0.3 0.6-------------------------------------------------------------------------------- 141.0 (40.2) (46.2)-------------------------------------------------------------------------------- Consolidated statement of changes in equity --------------------------------------------------------------------------------£ million First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Total recognised income and expense 141.0 (40.2) (46.2)New shares issued 1.0 2.3 2.7Share-based payment 2.7 2.2 5.4On-market share repurchase (8.2) - -Employee share ownership trust 0.4 - -Minority interests sold (1.9) - --------------------------------------------------------------------------------- Total movement 135.0 (35.7) (38.1)At 1 January 122.2 160.3 160.3-------------------------------------------------------------------------------- At the end of the period 257.2 124.6 122.2-------------------------------------------------------------------------------- Consolidated balance sheet --------------------------------------------------------------------------------£ million First half First half 31 December 2006(1) 2005(1) 2005-------------------------------------------------------------------------------- AssetsNon current assetsIntangible assets 96.3 74.4 71.5Property, plant and equipment 27.7 94.0 30.1Investment in associates - 14.6 -Trade and other receivables 1.6 - 1.7Defined benefit pension plansurplus 4.3 - -Deferred tax 1.1 11.4 1.0-------------------------------------------------------------------------------- 131.0 194.4 104.3-------------------------------------------------------------------------------- Current assetsInventories 32.3 57.8 27.0Trade and other receivables 59.5 99.1 56.3Financial assets 0.4 - 2.6Cash and cash equivalents 146.3 40.1 49.2-------------------------------------------------------------------------------- 238.5 197.0 135.1-------------------------------------------------------------------------------- Assets held in disposal groupheld for sale - - 164.1-------------------------------------------------------------------------------- Total assets 369.5 391.4 403.5-------------------------------------------------------------------------------- LiabilitiesCurrent liabilitiesTrade and other payables (67.6) (94.3) (62.9)Current tax (31.1) (29.2) (24.7)Financial liabilities - (2.7) (4.6)Provisions and other liabilities (3.3) (3.3) (4.1)-------------------------------------------------------------------------------- (102.0) (129.5) (96.3)-------------------------------------------------------------------------------- Non-current liabilitiesTrade and other payables (1.0) (4.6) (0.7)Financial liabilities - (80.8) (73.2)Defined benefit pension plandeficit (0.9) (39.2) (51.5)Deferred tax - (2.2) (0.8)Provisions and other liabilities (8.4) (10.5) (10.1)-------------------------------------------------------------------------------- (10.3) (137.3) (136.3)-------------------------------------------------------------------------------- Liabilities included in disposalgroup held for sale - - (48.7)-------------------------------------------------------------------------------- Total liabilities (112.3) (266.8) (281.3)-------------------------------------------------------------------------------- Net assets 257.2 124.6 122.2-------------------------------------------------------------------------------- Capital and reservesShare capital 32.3 32.1 32.2Share premium account 8.7 3.9 4.4Capital reserve 6.8 10.4 10.2Retained earnings, translationreserve and net unrealised gainsand losses 209.4 76.6 73.5-------------------------------------------------------------------------------- Equity holders of parent 257.2 123.0 120.3Minority interests - 1.6 1.9-------------------------------------------------------------------------------- Total equity 257.2 124.6 122.2-------------------------------------------------------------------------------- 1 First half 2006 refers to the position at 2 July 2006 and first half 2005 refers to the position at 3 July 2005. Consolidated cash flow statement --------------------------------------------------------------------------------£ million Notes First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Cash flows from operating activitiesCash (used in)/generated fromoperations 7 (49.9) 6.1 34.0Tax paid (2.7) (1.9) (4.6)-------------------------------------------------------------------------------- Net cash (used in)/from operatingactivities (52.6) 4.2 29.4-------------------------------------------------------------------------------- Cash flows from investing activitiesDividends received from associates - - 0.2Interest received 2.1 0.9 1.4Disposal of operations 278.5 0.9 2.4Purchase of property, plant andequipment (8.4) (16.1) (30.5)Proceeds from sale of property, plantand equipment 0.2 0.3 0.6Acquisition of subsidiaries (32.6) - --------------------------------------------------------------------------------- Net cash from/(used in) investingactivities 239.8 (14.0) (25.9)-------------------------------------------------------------------------------- Cash flows from financing activitiesInterest paid (0.9) (3.7) (7.4)Interest element of finance leaserental payments - (0.2) (0.5)Costs associated with the repaymentof loan notes and swap break fees (9.7) - -Proceeds from the issue of sharecapital 1.4 2.3 2.7On-market share repurchase (7.2) - -Repayment of borrowings (95.6) - (0.2)New borrowings 23.0 - -Repayment of capital element offinance lease rentals - (0.5) (1.4)-------------------------------------------------------------------------------- Net cash used in financing activities (89.0) (2.1) (6.8)-------------------------------------------------------------------------------- Net increase/(decrease) in cash andcash equivalents 98.2 (11.9) (3.3)Cash and cash equivalents at thebeginning of the period 48.8 51.0 51.0Effect of exchange rate changes (0.7) 0.2 1.1-------------------------------------------------------------------------------- Cash and cash equivalents at the endof the period 146.3 39.3 48.8-------------------------------------------------------------------------------- Cash and cash equivalents comprise:Cash and cash equivalents 146.3 40.1 49.2Overdrafts - (0.8) (0.4)-------------------------------------------------------------------------------- 146.3 39.3 48.8-------------------------------------------------------------------------------- Notes to the financial information 1 Basis of preparation The interim financial information has been prepared on the basis of theaccounting policies set out in the Group's statutory accounts for the year to 31December 2005, which have been filed with the Registrar of Companies. Theinterim financial information is unaudited but has been reviewed by theauditors. The interim financial information does not constitute statutoryaccounts as defined in Section 240 of the Companies Act 1985. The comparativefinancial information for the year to 31 December 2005 is based on the statutoryaccounts for that period. The auditors report on those accounts was unqualifiedand did not contain a statement made under Section 237(2) or Section 237(3) ofthe Companies Act 1985. The Interim Report for the period ended 2 July 2006 was approved by thedirectors on 10 August 2006. 2 Segmental analysis --------------------------------------------------------------------------------£ million Performance Service Commun- Systems Non- Continuing Analysis Assurance ications segmental operations Total-------------------------------------------------------------------------------- First half 2006Revenue 94.5 24.9 119.4 18.8 - 138.2-------------------------------------------------------------------------------- Operatingprofit/(loss)beforematerialone-timeitems,goodwillimpairment,intangibleamortisationandshare-basedpayment 3.3 0.7 4.0 2.6 (2.8) 3.8Materialone-time items(note 4) 0.8 (2.4) (1.6) - - (1.6)Goodwillimpairment - (9.5) (9.5) - - (9.5)Intangibleamortisation (0.9) - (0.9) - - (0.9)Share-basedpayment (1.5) (0.6) (2.1) (0.1) (0.2) (2.4)-------------------------------------------------------------------------------- Operating(loss)/profit 1.7 (11.8) (10.1) 2.5 (3.0) (10.6)-------------------------------------------------------------------------------- First half 2005Revenue 87.6 20.2 107.8 18.7 - 126.5-------------------------------------------------------------------------------- Operatingprofit/(loss)beforematerialone-timeitems,goodwillimpairment andshare-basedpayment 11.4 (9.0) 2.4 2.1 (2.7) 1.8Materialone-time items(note 4) (2.4) (4.0) (6.4) - (0.3) (6.7)Goodwillimpairment - (37.0) (37.0) - - (37.0)Share-basedpayment (1.4) (0.6) (2.0) (0.1) (0.1) (2.2)-------------------------------------------------------------------------------- Operating(loss)/profit 7.6 (50.6) (43.0) 2.0 (3.1) (44.1)-------------------------------------------------------------------------------- Year 2005Revenue 178.8 42.8 221.6 37.7 - 259.3-------------------------------------------------------------------------------- Operatingprofit/(loss)beforematerialone-timeitems,goodwillimpairment andshare-basedpayment 22.0 (9.6) 12.4 4.4 (5.3) 11.5Materialone-time items(note 4) (2.5) (5.4) (7.9) - (0.5) (8.4)Goodwillimpairment - (37.0) (37.0) - - (37.0)Share-basedpayment (3.6) (1.2) (4.8) (0.1) (0.2) (5.1)-------------------------------------------------------------------------------- Operating(loss)/profit 15.9 (53.2) (37.3) 4.3 (6.0) (39.0)-------------------------------------------------------------------------------- Revenue and operating profit for discontinued operations is disclosed in note 5. 3 Geographical analysis --------------------------------------------------------------------------------£ million First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Revenue by marketContinuing operationsEurope 24.0 20.7 43.0North America 80.3 75.1 158.2Asia Pacific, Rest of Americas, Africa 33.9 30.7 58.1-------------------------------------------------------------------------------- 138.2 126.5 259.3-------------------------------------------------------------------------------- Revenue by sourceContinuing operationsEurope 35.8 30.5 61.2North America 92.3 87.2 180.9Asia Pacific, Rest of Americas, Africa 10.1 8.8 17.2-------------------------------------------------------------------------------- 138.2 126.5 259.3-------------------------------------------------------------------------------- Average exchange ratesUS dollar 1.79 1.87 1.82Euro 1.46 1.46 1.46-------------------------------------------------------------------------------- 4 Material one-time items --------------------------------------------------------------------------------£ million First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Continuing operationsRestructuring costs (including write-down ofproperty, plant and equipment and leaseprovisions) 3.9 5.4 6.9Inventory absorption adjustment (2.3) - -Inventory provision - 1.3 1.4Exit from joint venture - - 0.1-------------------------------------------------------------------------------- 1.6 6.7 8.4-------------------------------------------------------------------------------- There is no tax effect in respect of the material one-time items. 5 Discontinued operations -------------------------------------------------------------------------------- First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Revenue 28.0 103.9 205.5-------------------------------------------------------------------------------- Operating profit 2.3 11.7 24.4Share of profit of associates 0.2 0.7 2.7Profit on disposal of operations 165.3 - (6.7)Net finance costs (0.1) (0.4) (1.1)-------------------------------------------------------------------------------- Profit before tax 167.7 12.0 19.3Tax (0.8) (2.6) (6.1)Tax on the disposal of operations (8.2) - --------------------------------------------------------------------------------- Profit for the period 158.7 9.4 13.2-------------------------------------------------------------------------------- Discontinued operations relate to the HellermannTyton Division. 6 Earnings/(loss) per share --------------------------------------------------------------------------------£ million Continuing Discontinued Total operations operations operations-------------------------------------------------------------------------------- First half 2006(Loss)/profitfor the yearattributableto equityholders ofparent (17.4) 158.7 141.3Materialone-time items 1.6 - 1.6Goodwillimpairment 9.5 - 9.5Share-basedpayment 2.4 0.3 2.7Intangibleamortisation 0.9 - 0.9Costsassociatedwith therepayment ofloan notes 8.8 - 8.8Profit on thedisposal ofoperations - (165.3) (165.3)Tax on thedisposal ofoperations - 8.2 8.2-------------------------------------------------------------------------------- Adjustedearningsattributableto equityholders ofparent 5.8 1.9 7.7-------------------------------------------------------------------------------- First half 2005(Loss)/profitfor the period (46.2) 9.4 (36.8)Less: minorityshareholders'interests - (0.2) (0.2)-------------------------------------------------------------------------------- (Loss)/profitfor the yearattributableto equityholders ofparent (46.2) 9.2 (37.0)Materialone-time items 6.7 0.4 7.1Goodwillimpairment 37.0 - 37.0Share-basedpayment 2.2 0.2 2.4Profit on thedisposal ofoperations (0.9) - (0.9)-------------------------------------------------------------------------------- Adjusted(loss)/earnings attributableto equityholders ofparent (1.2) 9.8 8.6-------------------------------------------------------------------------------- Year 2005(Loss)/profitfor the period (37.7) 13.2 (24.5)Less: minorityshareholders'interests - (0.4) (0.4)-------------------------------------------------------------------------------- (Loss)/profitfor the yearattributableto equityholders ofparent (37.7) 12.8 (24.9)Materialone-time items 8.4 0.4 8.8Goodwillimpairment 37.0 - 37.0Share-basedpayment 5.1 0.5 5.6Profit/(loss)on thedisposal ofoperations (3.9) 6.7 2.8Prior year taxcredit (5.9) - (5.9)Prior year taxcredit onassociate - (1.5) (1.5)-------------------------------------------------------------------------------- Adjustedearningsattributableto equityholders ofparent 3.0 18.9 21.9-------------------------------------------------------------------------------- 6 Earnings/(loss) per share continued -------------------------------------------------------------------------------- First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Earnings/(loss) per share (pence)Basic 14.80 (3.90) (2.62)Basic from continuing operations (1.82) (4.87) (3.97) Diluted 14.71 (3.90) (2.62)Diluted from continuing operations (1.82) (4.87) (3.97) Adjusted 0.81 0.91 2.30Adjusted from continuing operations 0.61 (0.13) 0.32-------------------------------------------------------------------------------- Weighted average number of shares in issue (million)Basic and adjusted 954.5 948.8 950.4Dilutive potential of employee share options 6.1 11.6 10.2-------------------------------------------------------------------------------- Weighted average number of shares in issue -diluted 960.6 960.4 960.6-------------------------------------------------------------------------------- 7 Cash generated from operations --------------------------------------------------------------------------------£ million First half First half Year 2006 2005 2005-------------------------------------------------------------------------------- Continuing operationsOperating loss (10.6) (44.1) (39.0)Goodwill impairment 9.5 37.0 37.0Amortisation of intangibles 0.9 - -Depreciation of property, plant and equipment 6.7 5.5 11.4(Profit)/loss on disposal of property, plantand equipment (0.1) - 0.1Share-based payment 2.4 2.2 5.1Deferred income received 0.4 9.4 5.8Decrease in receivables 0.8 - 0.4Increase in inventories (6.6) - (0.4)Decrease in payables (4.1) (11.7) (16.8)Decrease in provisions (2.1) (0.7) (0.9)Retirement benefit obligations (47.0) (3.5) (3.8)-------------------------------------------------------------------------------- Net cash used in continuing operations (49.8) (5.9) (1.1)-------------------------------------------------------------------------------- Discontinued operationsOperating profit 2.3 11.7 24.4Depreciation of property, plant and equipment 1.6 5.4 11.2Profit on disposal of property, plant andequipment (0.1) (0.1) (0.1)Share-based payment 0.3 0.2 0.5Increase in receivables (3.8) (5.7) (1.7)Decrease/(increase) in inventories 0.5 (2.1) (3.0)(Decrease)/increase in payables (0.9) 2.6 3.8-------------------------------------------------------------------------------- Cash (used in)/from discontinued operations (0.1) 12.0 35.1-------------------------------------------------------------------------------- Cash flows from operating activities (49.9) 6.1 34.0-------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Spirent