TIDMSPT
RNS Number : 0568F
Spirent Communications PLC
05 March 2020
Spirent Communications plc
Full year results for the year ended 31 December 2019
Change
$ million 2019 2018 (%)
-------------------------------------- ------- ------- --------
Order intake (1) 532.0 470.0 +13.2
Revenue 503.6 476.9 +5.6
Adjusted operating profit(2) 92.9 77.1 +20.5
Adjusted operating margin(3) (%) 18.4 16.2 +2.2
Adjusted profit before tax(4) 93.9 78.4 +19.8
Adjusted basic earnings per share(5)
(cents) 13.40 10.86 +23.4
Reported operating profit 88.6 57.5 +54.1
Reported profit before tax 89.6 61.2 +46.4
Closing cash 183.2 121.6 +50.7
Dividend per share(6) (cents) 5.39 4.49 +20.0
-------------------------------------- ------- ------- --------
Strong profitable growth
-- Order intake was up 13.2 per cent and benefited from an
increased level of multi-year support contract wins, with 24 per
cent of the closing orderbook for delivery in more than 12 months,
compared to 17 per cent at the end of last year, which improves
visibility of future revenue.
-- Revenue up 5.6 per cent, driven by demand for 400G high-speed
Ethernet and a higher win rate with US defence contractors for GNSS
positioning products.
-- Adjusted operating profit increased by 20 per cent, with an
improved operating margin of 18.4 per cent.
-- Adjusted basic EPS up 23 per cent to 13.40 cents.
-- Cash closed at $183.2 million, following another year of
highly effective working capital management.
-- 20 per cent increase in full year dividend, up 25 per cent in
sterling, broadly in line with the increase in earnings. Final
dividend of 3.45 cents to be paid in May 2020.
Operational highlights - continuing progress across segments
-- Secured over 250 5G related wins and are well positioned for
ongoing growth across the Spirent portfolio.
-- Focus on driving services revenue has already resulted in a
large strategic win for 'testing-as-a-service' (TaaS) with a
leading North American service provider for 2020 delivery.
-- Continued innovation and investment in leading technologies
to enable sustainable revenue growth.
-- Strategy review instigated by the CEO involving a number of
initiatives designed to maximise market opportunities and become
more agile and customer-centric, including the reorganisation of
the marketing function to drive further effectiveness ($1.8 million
exceptional cost in 2019, $2.7 million estimated for 2020).
- Key customer account management programme extended to
strengthen our relationships with more of our largest
customers.
- Several new experienced leaders added to the senior management
team to drive and evolve our growth strategy.
Networks & Security
-- Leading market positions and technologies are driving good
growth with revenue up 12 per cent.
-- Surge in order placements for 400G high-speed Ethernet in the
latter part of the year validates our market leadership.
-- Positioning business delivered a record year for revenue,
benefiting from continued momentum across its customer base and
maintaining a high win rate for GNSS defence projects in the United
States.
-- Released new data breach assessment security product and won
first landmark deal in China with continued focus on building
pipeline for 2020 revenue.
Lifecycle Service Assurance
-- Strong orders growth, secured later in the year, resulted in
a robust close to the orderbook with revenue broadly level in
2019.
-- Strong demand for lab-based 5G network testing (Landslide
products) mitigated some slower traction of VisionWorks
solutions.
-- New leader appointed in October 2019, who is evolving our
strategies for growth and global expansion.
Connected Devices
-- Maintained a solid operating margin, despite some revenue
decline driven by expected decline of 4G testing.
-- Robust 5G market demand, including the release of a new 5G
device testing product for which we won the first orders.
-- Secured a key win for our Service Experience field test
methodology for proving 5G networks and devices from a tier-one
service provider.
Summary and outlook
Our strategy to focus on applying our market-leading technology
and expertise to address key customer business challenges continues
to yield success.
In 2019, Spirent delivered another year of robust revenue growth
and a material increase in earnings and cash. The momentum of our
high-speed Ethernet sales and the US government requirement for our
GNSS positioning solutions remained strong.
We are focused on increasing visibility and decreasing
cyclicality risks in our portfolio by expanding our services and
software offerings. Order intake grew solidly as we secured more
large, multi-year contracts, building orderbook for delivery in
future years across all operating segments. Our investment in, and
rollout of, our key account programme is delivering successfully
and will expand in 2020.
5G is an important driver for the business. We are benefiting
across the portfolio from customers seeking our market-leading
expertise and solutions to develop, deploy and secure their 5G
infrastructure and network equipment.
We are carefully managing the coronavirus situation and already
have in place processes to protect our staff, including working
from home and restricted travel arrangements. We are continuing to
engage with our customers in the most optimal way during this
period. Supplies for our products and solutions are in the vast
majority dual sourced to mitigate against potential risk in the
supply chain process. We continue to be extremely vigilant and at
this time we have not assumed a financial impact to our outlook. We
will continue to analyse potential implications and implement
Government guidelines as the situation evolves.
At present, the Board is confident that the Group will continue
to see steady profitable growth in 2020. The target operating model
of mid-single digit revenue growth, whilst broadly maintaining our
operating margin target of 17-19 per cent, allows for a healthy
level of investment to continue to develop our leading technologies
to sustain momentum, whilst delivering attractive returns for
shareholders.
Eric Updyke, Chief Executive Officer, commented:
"As I complete my first year with Spirent, I'm delighted with
the progress we have made and remain optimistic about our ability
to seize opportunities and ensure we are well positioned for
continued sustainable, profitable growth. We have a world class
customer base that trusts us and respects our expertise. We have
market-leading technology in which we continue to invest and
innovate and our strong financial platform affords us great
flexibility to evolve and grow our business.
"We have also further strengthened our leadership team during
the year, adding more expertise and new energy to an already
excellent talent base. This team will execute our strategy with a
focus on three key pillars: Customer Centricity, Innovation for
Growth and Operational Excellence.
"Overall, we are confident in our ability to continue to add
value to each of our stakeholders, our customers, our investors and
our people."
- ends -
Notes
1. Order intake represents commitments from customers to
purchase goods and/or services that will ultimately result in
recognised revenue.
2. Adjusted operating profit is before charging exceptional
items, acquisition related costs, acquired intangible asset
amortisation and share-based payment amounting to $4.3 million in
total (2018: $19.6 million).
3. Adjusted operating profit as a percentage of revenue in the period.
4. Before the items set out in note 2 and gain on divestment in 2018.
5. Adjusted basic earnings per share is based on adjusted
earnings as set out in note 6 of Notes to the full year
consolidated financial statements.
6. Dividends are determined in US dollars and paid in sterling
at the exchange rate prevailing when the dividend is proposed. The
final dividend proposed for 2019 of 3.45 cents per Ordinary Share
is equivalent to 2.70 pence per Ordinary Share.
Enquiries
Eric Updyke, Chief Executive Spirent Communications
Officer plc +44 (0)1293 767676
Paula Bell, Chief Financial &
Operating Officer
James Melville-Ross/Dwight Burden/Emma +44 (0)20 3727
Hall FTI Consulting 1000
The Company will host a results presentation today at 9.15am for
9.30am UK time at FTI Consulting Limited, 200 Aldersgate,
Aldersgate Street, London EC1A 4HD. A simultaneous webcast of the
presentation will be available in the Investors section of the
Spirent Communications plc website https://corporate.spirent.com/
.
About Spirent Communications plc
Spirent Communications plc (LSE: SPT) offers test, measurement,
analytics and assurance solutions for next-generation devices and
networks. Spirent provides products, services and information
solutions for high-speed Ethernet, positioning mobile network
infrastructure markets, with expanding focus on service assurance,
cybersecurity and 5G. Spirent is accelerating the transition of
connected devices, network equipment and applications from
development labs to the operational network, as it continues to
innovate toward fully-automated testing and autonomous service
assurance solutions . Further information about Spirent
Communications plc can be found at https://corporate.spirent.com/
.
Spirent Communications plc Ordinary Shares are traded on the
London Stock Exchange (ticker: SPT; LEI: 213800HKCUNWP1916L38). The
Company operates a Level 1 American Depositary Receipt (ADR)
programme with each ADR representing four Spirent Communications
plc Ordinary Shares. The ADRs trade in the US over-the-counter
(OTC) market under the symbol SPMYY and the CUSIP number is
84856M209. Spirent ADRs are quoted on the Pink OTC Markets
electronic quotation service which can be found at
http://www.otcmarkets.com/marketplaces/otc-pink .
Spirent and the Spirent logo are trademarks or registered
trademarks of Spirent Communications plc. All other trademarks or
registered trademarks mentioned herein are held by their respective
companies. All rights reserved.
Cautionary statement regarding forward-looking statements
This document may contain forward-looking statements which are
made in good faith and are based on current expectations or
beliefs, as well as assumptions about future events. You can
sometimes, but not always, identify these statements 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-looking
statements are inherently predictive and speculative and involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. You should not place
undue reliance on these forward-looking statements, which are not a
guarantee of future performance and are subject to factors that
could cause our actual results to differ materially from those
expressed or implied by these statements. The Company undertakes no
obligation to update any forward-looking statements contained in
this document, whether as a result of new information, future
events or otherwise.
Chief Executive Officer's review
I am delighted to have joined Spirent in April 2019 and to be
leading a business that is so well respected by its customers, has
such engaged and innovative employees, and has a solid financial
platform. We have a strong foundation to drive sustainable,
profitable growth but as I highlighted at the half year, we need to
move faster to capture new opportunities.
As such, we will accelerate our growth by pushing beyond selling
products into labs to solving customer issues across their
lifecycle and expanding our customer reach. We remain focused on
the opportunities arising from emerging market drivers, including
5G, 400G Ethernet and cloud.
Market overview
In this digital age, our customers face ever-increasing demands
from massive network traffic and escalating customer expectations,
to pervasive security threats and cost pressures. We are in a
continuum of testing, measuring, monitoring and optimising where
service assurance is no longer an afterthought. As networks become
more complex and virtualised, the challenge of delivering flawless
performance to satisfy customers is a constantly evolving journey.
Spirent is well positioned to help customers navigate this
challenge.
In 2019, Spirent successfully demonstrated the ability to reach
beyond the lab and pursue next-generation opportunities. We are
leading the industry at the front lines of 5G and closed over 250
5G deals this year. We look forward to maintaining our leadership
in enabling 5G networks, devices and services in 2020.
In order to realise our vision, we are focused on three
strategic priorities: Customer Centricity, Innovation for Growth
and Operational Excellence.
Customer Centricity
We are evolving our strategic direction, working to increase
share of wallet with our existing customers and broadening our
customer base in new segments, adjacencies and geographies.
Across our business, we partner as our customers' trusted
advisers across the DevOps journey, helping them overcome the
challenges of a transforming world. In order to seize the
opportunities open to us, we are positioning ourselves to take on a
broader role on behalf of our customers by solving bigger problems
and adding more value. We plan to deliver this value by enhancing
our portfolio to offer innovative solutions and services addressing
key business challenges.
Our Client Partner Executive initiative was a great success this
year in our key accounts, moving us from transactional buying
centres into ones with broader business impact. We plan to expand
this programme, along with our account-based marketing approach, to
strengthen our relationships with our largest customers. Spirent
has a diversified customer base, with no single customer accounting
for more than 8 per cent of total revenue in 2019.
Customers are more connected than ever in this digital age and
expect their business partners to be proactive in addressing
potential issues. However, often only after a network outage or
service-impacting event, do organisations perform manual tests to
evaluate data and find root causes. With Spirent solutions, they
can identify and address degradation before the customer experience
is affected.
We say to our customers: Every day, you make a promise to your
customers. We're here to assure that you fulfil it.
Innovation for Growth
As a global leader in testing and assurance, it's vital that we
invest to stay ahead on key emerging technologies. To maintain our
leadership in key areas such as 5G, cloud and cybersecurity, we
invested 19.2 per cent of revenue on research and development in
2019.
As our customers' businesses and networks become increasingly
complex, our tools help them gain clarity. We are investing in
enhancing our solution portfolio, augmenting feature functionality
and making our products even easier to use, which in turn will
expand our customer reach. To best leverage increasing market
opportunities, we are making our solutions more flexible and
scalable.
In addition to investing in product innovation to drive
sustainable, profitable growth, we remain invested in our people.
In 2019, in order to evolve Spirent into a more customer-focused
organisation, we have made new senior leadership appointments,
adding valuable experience and new energy to strengthen our
teams.
To support our growth and to gain more future visibility, we
will be focused on building recurring revenue streams over time.
With our talented leadership team and refreshed, solutions-selling
mindset, we will expand our software and service offerings.
As we focus on innovating and expanding our customer base, we
are investing in strategic partnerships to provide new growth
opportunities. In 2019, our 5G solution partnership with National
Instruments (NI) yielded excellent strategic value and enabled us
to reach adjacent markets. NI is part of Spirent's recent 5G
End-to-End Digital Twin solution and is bringing Spirent into
universities and research organisations focused on leading-edge 5G
applications.
Operational Excellence
We are focused on cash generation and maintaining a strong
balance sheet. Our results, including our improved operating
margin, demonstrate strong operational discipline and dedication to
our competitive cost structure. In 2019, we maintained a strong
balance sheet with $183.2 million of cash and no bank debt.
Sustainability and corporate responsibility are integral to the
success of our business. Spirent is committed to embedding the
highest standards of environmental management, social practices and
governance into our operations, products and across our supply
chain. We do this via our FuturePositive programme aimed at
addressing sustainability issues facing our business and how we can
contribute to the communities in which we operate. Building on a
foundation of compliance, we will continue to seek out innovation
and drive commercial performance by continuing to embed sustainable
thinking across our entire business.
The geopolitical landscape was particularly turbulent in 2019
with US/China trade challenges. We navigated regulatory changes
throughout the year and continue to work closely with our customers
in impacted regions.
In order to pivot to a more customer-centric organisation, we
are evolving our sales and marketing structure and we remain
focused on improving the overall efficiency and effectiveness of
these teams. This will result in a more agile, collaborative
organisation, capable of solving bigger business problems for our
customers.
We will continue evaluating and rationalising our portfolio to
meet the needs of our customers. We will look to grow our portfolio
both organically and inorganically to keep pace with those
objectives and the markets that we serve.
Business review
Spirent operates in three strategic business segments: Networks
& Security, Lifecycle Service Assurance and Connected Devices.
This structure best positions the Group to meet the needs and
expectations of our customers and to capitalise on the business
opportunities created as they:
-- develop innovative devices, applications, network equipment and networks; and
-- operate those networks and services.
We improve network performance and end user experience in our
connected world and help create our smarter future.
Networks & Security - 64% of Group revenue
Networks & Security is a world leader in high-speed
Ethernet/IP performance testing, in Wi-Fi and automotive Ethernet,
and develops test methodologies, tools and services for virtualised
networks and cloud. We provide consulting services, test tools,
methodologies and proactive security validation solutions. We
continue to be the world leader for global navigation satellite
systems (GNSS) simulation products and tailored solutions as we
expand into the positioning, navigation and timing (PNT)
market.
Change
$ million 2019 2018 (%)
---------------------- ------- ------- --------
Revenue 319.9 285.1 12.2
Operating profit(1) 73.9 56.4 31.0
Operating margin(1) 23.1% 19.8% 3.3
---------------------- ------- ------- --------
Note
1. Before exceptional items of $1.1 million charged in 2019.
Performance highlights
-- Revenue growth of 12.2 per cent resulted in strong profit
growth and operating margin improvement, driven in particular by
high-speed Ethernet and demand from US government contracts for our
GNSS positioning products.
-- We also built a strong opening orderbook for 2020 as a result
of large Cloud and IP contracts and custom solution projects at our
Positioning business, as well as growth in subscription solutions
from our cybersecurity business.
-- Our Cloud and IP business extended our market leadership in
100G and 400G Ethernet performance test with the introduction of
the industry's highest-density solution and 400G growth, securing
multiple 400G wins in the second half.
-- Cloud and virtual solutions from our Cloud and IP business
also saw a strong performance on the back of cloud and 5G
transformation wins with tier-one service providers in North
America and APAC.
-- Our Positioning business had another record revenue year,
cementing our market leadership in GNSS simulation systems, driven
primarily by government projects in the United States.
-- Our cybersecurity business gained additional traction with
new enterprise and government customers and once again grew its
year-on-year subscription sales. We introduced our Cyberflood Data
Breach Assessment solution, providing holistic and hyper-realistic
security testing of production networks and devices.
Accomplishments
High-speed Ethernet/IP, cloud and virtualisation
-- We saw robust high-speed Ethernet test growth in 2019, with
multiple key 100G and 400G wins, particularly in the second half of
the year, that affirmed our product and market leadership.
-- We demonstrated the world's highest density 400/200/100/50G
test system at the Optical Networking and Communication conference
& exhibition (OFC), which subsequently won a 2019 Lightwave
Innovation Honouree award and 2019 Best of Interop Tokyo award.
-- Our Wi-Fi business grew significantly in 2019, driven by our
Wi-Fi 6 test leadership. We launched the industry leading Spirent
TestCenter Wi-Fi 6 test solution to accelerate development and
deployment of the technology, access points, gateways and for
end-to-end testing, which also won a 2019 Best of Interop Tokyo
award.
-- The automotive Ethernet business grew, with wins at
automotive original equipment manufacturers in APAC and EMEA, to
meet the need for compliance to industry standards, including such
world-class customers as Jaguar Land Rover.
-- Spirent introduced CloudSure, a cloud test platform designed
to enable customers to validate and certify their virtualised
infrastructure and network functions.
Applications performance and cybersecurity
-- In the second half of the year, we introduced our Cyberflood
Data Breach Assessment solution, providing holistic and
hyper-realistic security testing of networks and devices for
awareness of data breach and intruder activity. The solution was
selected by a leading Chinese consulting company for deployment
throughout Chinese financial markets.
-- We released our C200, the industry's most powerful 1U
appliance for security and application assessment. It offers
support for five data speeds from 10G to 100G, while doubling the
cryptographic acceleration capacity of the previous generation of
solutions.
-- Our SecurityLabs services offering continued to successfully
provide security certification and penetration testing for critical
Internet of Things (IoT) and Industrial Internet of Things (IIoT)
devices globally, including those authorised for CTIA IoT
Cybersecurity and the First Responder Network Authority (FirstNet)
in the US.
Positioning, navigation and timing
-- We saw strong momentum for our Positioning business in the US
defence market. We further enhanced our solutions to maintain our
leadership in this space, with Spirent Federal Systems becoming the
unique provider of simulation for the US government's next phase of
signal modernisation for its global positioning system (GPS). A
major upgrade to our flagship GNSS simulator, providing
significantly improved capability, flexibility and performance, was
released mid-year and very well received in this demanding
market.
-- In addition to commercial off-the-shelf products and
solutions, Positioning has also expanded its capability to design
and build solutions to meet an individual customer's specific
testing need. This tailored solution capability is a clear
differentiator.
-- Growth in the China market was underpinned by two large
tailored solution sales to the National Space and Science Institute
of Metrology.
-- Traction in our strategy of moving beyond GNSS simulation
towards the use of co-simulation of multiple PNT sensors and
assurance solutions in adjacent markets, such as autonomous
vehicles.
Lifecycle Service Assurance - 22% of Group revenue
Our Lifecycle Service Assurance solutions radically reduce the
time and cost to turn-up new services and to rapidly diagnose,
troubleshoot and resolve issues with production networks and
services. We do this through automation, visibility and analytics,
all of which improve customer satisfaction and retention while
reducing the cost and complexity of operating and managing a
network.
Change
$ million 2019 2018 (%)
---------------------- ------- ------- --------
Revenue 111.2 112.8 (1.4)
Operating profit(1) 18.1 17.4 4.0
Operating margin(1) 16.3% 15.4% 0.9
---------------------- ------- ------- --------
Note
1. Before exceptional items of $0.4 million charged in 2019.
Performance highlights
-- In 2019, Spirent extended its position as a leading provider
of validation and assurance solutions to ddress emerging, rapidly
growing new segments for 5G, SD-WAN, DevOps Automation and
test-as-a-service (TaaS).
-- Although revenue was broadly level, orders grew year-on-year
building a strong opening orderbook for 2020.
-- A favourable mix of software to hardware sales, resulting in an increase in operating profit.
-- We secured a major strategic win for an innovative new TaaS
managed service for one of the largest mobile service providers in
the world, to reduce the upfront investment in testing
infrastructure and expertise required for new technologies, such as
5G.
-- We benefited from strong demand for our automated validation
and assurance solutions for 5G, SD-WAN and virtual networks, in
particular our Landslide products.
-- Our cutting-edge work in validating new technologies in the
lab enabled us to bring operational network assurance solutions to
market with unprecedented speed. Our first 5G assurance solution is
already delivered to a tier-one US service provider to accelerate
its rollout.
-- Spirent's 5G mobile core validation solutions were selected
by over 70 service providers, network equipment manufacturers
(NEMs) and research centre labs worldwide.
-- We launched a new category of solutions that help network
operators automate their DevOps workflows (known as NetDevOps). Our
first NetDevOps solution deployment is underway, automating complex
network troubleshooting for a tier-one network operator.
Accomplishments
-- Spirent was recognised as 2019 Leading Lights "Outstanding
Test & Measurement Vendor" due to our industry leadership in 5G
and adoption of our solutions by 5G pioneers.
Network validation
-- Spirent is the 5G mobile core validation leader, with
Landslide for 5G adopted by over 50 service providers, NEMs and
research centre labs worldwide, including Nokia, a leading 5G NEM,
making this a key contributor to Spirent's overall 5G success.
-- We secured a large multi-million dollar contract for a TaaS
managed service offering, a collaboration between Spirent's
Lifecycle Service Assurance and Cloud and IP businesses. A tier-one
US mobile provider selected Spirent to design 5G core network
validation tests and provide web-accessible test infrastructure to
it and its vendors. This will result in reductions in the upfront
capital spend on testing infrastructure and expertise for new 5G
technologies, shifting instead to a more nimble operating
expenditure cost model.
Active assurance
-- In our first VisionWorks 5G active assurance win, Spirent was
selected by a tier-one US mobile service provider to support its
nationwide 5G assurance efforts. The service provider will deploy
Spirent VisionWorks for active assurance, initially testing
end-to-end performance across its non-standalone 5G network.
-- A tier-one mobile service provider is deploying VisionWorks
to automate change management. VisionWorks is enabling the service
provider's operations teams to run pre-defined tests prior, during
and after updates, to automatically validate changes to their LTE
core network and proactively identify issues.
DevOps automation
-- We launched our VisionWorks NetDevOps solution in 2019 and
closed the first sale with a tier-one US fixed network operator.
This deployment automates advanced troubleshooting of complex
network issues and manages their distribution and operational
use.
Connected Devices - 14% of Group revenue
Ubiquitous wireless connectivity drives our modern lifestyle.
Our mission is to help those who build wireless devices and
networks to meet their promise of delivering the very best end-user
experience. Our live network testing and digital twins for network
and radio systems let manufacturers and service providers get to
market faster with peak performance.
Change
$ million 2019 2018 (%)
---------------------- ------- ------- --------
Revenue 72.5 79.0 (8.2)
Operating profit(1) 9.5 10.5 (9.5)
Operating margin(1) 13.1% 13.3% (0.2)
---------------------- ------- ------- --------
Notes
1. Before exceptional items of $0.3 million charged in 2019.
Performance highlights
-- As planned, 2019 was a transition year for Connected Devices
as we launched our new 5G location device test solution ready for
market demand in 2020.
-- Revenue reduced as 4G legacy device test declined, however,
multi-year support contracts were secured to strengthen the opening
orderbook for 2020.
-- 5G related orders saw good growth with sales to all major
customer sub-segments including research institutions, chipset
vendors, infrastructure suppliers, device manufacturers and service
providers.
-- Demand for our Vertex Channel Emulation solution was robust,
driven by the industry's investment in 5G as well as sales into new
use cases, such as V2X and Defence.
Accomplishments
5G radio channel emulation and services testing
-- We delivered our first 5G Mobile Device Test System solution
through our National Instruments partnership. Using this platform,
several rounds of interoperability testing were completed with
leading tier-one chipset vendors, and 5G location test cases were
validated.
-- A tier-one US service provider turned to Spirent's Fit4Launch
advanced field test methodology for proving in its 5G network and
devices. Vendors use the service before launching a device with the
carrier.
-- With a unique ability to lower the cost of testing through
instrument integration and modularity, we won several
multi-million-dollar deals with a tier-one 5G chipset vendor to
evaluate its modem performance, in multiple 5G frequency bands.
-- China Mobile collaborated with Spirent to build the first
comprehensive 5G over-the-air device evaluation system, using the
solution to benchmark and publish the performance of new flagship
5G chipsets and handsets.
Expanding the use cases of our products into applications beyond
smartphones
-- Two global-leading chipset manufacturers began using
Spirent's Vertex RF Channel Emulation solution to prove in the
unique device-to-device radio challenges of their V2X chipsets,
relying on our expertise in device-to-device channel modelling to
provide the most realistic test scenarios.
-- Warwick University in the UK adopted Spirent's 5G "digital
twin" as part of its end-to-end solution to develop 5G-based
Industry 4.0 applications.
Financial review
Group overview
2019 trading performance demonstrably proves our strategy is
working with continued revenue growth and another year of material
profit growth. Our operational execution model is strong, balancing
investment into our leading technology portfolio and our people, to
drive sustainable revenue and earnings growth.
We secured double digit growth in orders, and we saw progress in
all operating segments. We benefited from some late support
contracts from 2018 closing in early 2019, and we are also winning
more multi-year contracts providing more underpin to revenue in the
forthcoming years.
Revenue growth of 5.6 per cent was driven by demand for
high-speed Ethernet test solutions and satellite simulators within
our Networks & Security operating segment. Orders for our
Lifecycle Service Assurance business, secured late in 2019, built a
strong opening orderbook for 2020, but as a result revenue was
level for 2019. Connected Devices revenue was impacted by a faster
decline in the 4G legacy smartphone device lab test business,
outpacing the ramp-up in 5G related business. Another year of
expansion in gross margin was driven by new product launches and
higher software sales. We continued to be mindful of resource
allocation and exercised careful management of the cost base,
directing product development effort to high-growth, high-margin
areas and targeting sales and marketing investment to expand our
key account management programme and develop routes to market for
our new technologies to a broadening customer base.
The year-on-year increase in revenue of $26.7 million has driven
increased adjusted operating profit to $92.9 million, from $77.1
million in 2018. Adjusted operating margin has increased by 2.2
percentage points to 18.4 per cent, from 16.2 per cent last
year.
Net exceptional income was $0.5 million in the year (2018: $13.1
million cost), being the net of the cost associated with a
strategic review initiated by our new CEO of $1.8 million and $2.3
million of income following a successful reclaim for VAT on French
Custom's duty, treated as an exceptional cost in 2018. We
anticipate incurring a further cost of circa $2.7 million in 2020
to complete the strategic review.
A further reduction in the Group's effective tax rate from 15.4
per cent in 2018 to 13.0 per cent for 2019, due to a combination of
factors including a new tax treaty between Hong Kong and India, has
also benefited earnings. Adjusted basic earnings per share has
increased by 23 per cent, up from 10.86 cents last year to 13.40
cents for 2019.
Cash at bank closed at $183.2 million, up $61.6 million on the
position at the end of last year, with free cash flow effectively
doubling year-on-year, driven by highly effective working capital
management. Free cash flow conversion increased significantly and
now stands at 123 per cent of adjusted earnings (2018: 77 per
cent).
As a result of the strong financial performance, we propose a 20
per cent increase to the full year dividend per share, from 4.49
cents to 5.39 cents, and looking forward we will maintain our
progressive dividend policy ensuring that we maintain dividend
cover of 2 to 2.5 times.
The following table shows summary financial performance for the
Group:
$ million 2019 2018 Change (%)
----------------------------------- ------- ------- ------------
Order intake(1) 532.0 470.0 +13.2
Revenue 503.6 476.9 +5.6
Gross profit 368.6 344.5 +7.0
Gross margin (%) 73.2 72.2 +1.0
Adjusted operating costs(2) 275.7 267.4 +3.1
Adjusted operating profit(2) 92.9 77.1 +20.5
Adjusted operating margin(3)
(%) 18.4 16.2 +2.2
Reported operating profit 88.6 57.5 +54.1
Effective tax rate(4) (%) 13.0 15.4 * 2.4
Reported profit before tax 89.6 61.2 +46.4
Adjusted basic earnings per
share(5) (cents) 13.40 10.86 +23.4
Basic earnings per share (cents) 12.79 9.14 +39.9
Free cash flow(6) 100.1 50.9 +96.7
Closing cash 183.2 121.6 +50.7
Final dividend per share(7)
(cents) 3.45 2.73 +26.4
----------------------------------- ------- ------- ------------
Notes
1. Order intake represents commitments from customers to
purchase goods and/or services that will ultimately result in
recognised revenue.
2. Before exceptional items, acquisition related costs, acquired
intangible asset amortisation and share-based payment amounting to
$4.3 million in total (2018: $19.6 million).
3. Adjusted operating profit as a percentage of revenue in the period.
4. Effective tax rate is the adjusted tax charge, before tax on
adjusting items, expressed as a percentage of adjusted profit
before tax.
5. Adjusted basic earnings per share is based on adjusted
earnings as set out in note 6 of Notes to the full year
consolidated financial statements.
6. Cash flow generated from operations, less tax and net capital
expenditure, interest paid and/or received, and payment of lease
liabilities/sublease income.
7. Dividends are determined in US dollars and paid in sterling
at the exchange rate prevailing when the dividend is proposed. The
final dividend proposed for 2019 of 3.45 cents per Ordinary Share
is equivalent to 2.70 pence per Ordinary Share.
Note on Alternative Performance Measures (APMs)
The performance of the Group is assessed using a variety of
performance measures, including APMs which are presented to provide
users with additional financial information that is regularly
reviewed by management. These APMs are not defined under IFRS and
therefore may not be directly comparable with similarly identified
measures used by other companies.
The APMs adopted by the Group are defined in appendix 2. The
APMs which relate to adjusted income statement lines are presented
and reconciled to GAAP measures using a columnar approach on the
face of the income statement and can be identified by the prefix
'adjusted' in the commentary. All APMs are clearly identified as
such, with explanatory footnotes to the tables of financial
information provided, and reconciled to reported GAAP measures in
the Financial review or Notes to the consolidated financial
statements.
Revenue
$ million 2019 % of total 2018 % of total
--------------------------------- ------- ------------ ------- ------------
Revenue by segment
Networks & Security 319.9 63.5 285.1 59.8
Lifecycle Service Assurance 111.2 22.1 112.8 23.6
Connected Devices 72.5 14.4 79.0 16.6
--------------------------------- ------- ------------ ------- ------------
503.6 100.0 476.9 100.0
--------------------------------- ------- ------------ ------- ------------
Revenue by geography
Americas 266.1 52.8 265.4 55.7
Asia Pacific 187.8 37.3 159.1 33.3
Europe, Middle East and Africa 49.7 9.9 52.4 11.0
--------------------------------- ------- ------------ ------- ------------
503.6 100.0 476.9 100.0
--------------------------------- ------- ------------ ------- ------------
Total Group revenue grew by $26.7 million in 2019, an increase
of 5.6 per cent over the prior year.
The Networks & Security operating segment achieved
year-on-year revenue growth of 12.2 per cent. Within that segment
all of our lines of business grew revenue compared to the prior
year but the primary growth drivers were demand for high-speed
Ethernet testing within our core business, particularly from China
customers, and satellite simulators provided by our Positioning
business, particularly US government related. The cybersecurity
line of business also experienced revenue growth, although this
remains a relatively small part of the overall Networks &
Security portfolio.
Revenue at Lifecycle Service Assurance was essentially level
year-on-year with revenue growth for next-generation automated
validation and assurance solutions offset by a reduction in legacy
solution revenues. However, we experienced robust growth in order
intake year-on-year, growing the orderbook as a result of strong
demand for our automated validation and assurance solutions for 5G,
SD-WAN and virtual networks. New product offerings for automated
NetDevOps testing and TaaS managed services also saw significant
initial orders late in the year, with revenue to be recognised in
2020 and beyond.
Connected Devices experienced a reduction in revenue of 8.2 per
cent, primarily a consequence of the continuing decline in the 4G
legacy smartphone device lab test business outpacing the ramp-up in
5G-related business. Notwithstanding the fall in recognised
revenue, order intake showed some growth over the prior year, as
several large multi-year support contracts and orders closed in the
final quarter that will not convert to revenue until 2020.
Geographically, we have continued to see growth in revenue from
the Asia Pacific region (up 18 per cent year-on-year), particularly
China customers purchasing high-speed Ethernet test solutions, with
the Americas broadly level and EMEA marginally down. The growth in
China revenue has been achieved despite the ongoing geopolitical
landscape challenges. However, we saw order intake growth in the
Americas and EMEA and closed the year with a solid orderbook for
all regions.
Gross margin
$ million 2019 % 2018 %
------------------------------ ------- ------ ------- ------
Networks & Security 232.3 72.6 205.3 72.0
Lifecycle Service Assurance 88.6 79.7 87.9 77.9
Connected Devices 47.7 65.8 51.3 64.9
------------------------------ ------- ------ ------- ------
368.6 73.2 344.5 72.2
------------------------------ ------- ------ ------- ------
The Group achieved further gross margin expansion in 2019 with
an increase of 1.0 percentage points, to 73.2 per cent from 72.2
per cent in 2018. This followed an increase of 0.7 percentage
points last year. Once again, all the operating segments achieved
an improvement in gross margin, benefiting from new product
launches and a higher proportion of software sales.
Operating costs
$ million 2019 2018
------------------------------- ------- -------
Product development 96.5 96.9
Selling and marketing 129.2 123.9
Administration (1) 50.0 46.6
------------------------------- ------- -------
Adjusted operating costs (1) 275.7 267.4
------------------------------- ------- -------
Networks & Security 158.4 148.9
Lifecycle Service Assurance 70.5 70.5
Connected Devices 38.2 40.8
Corporate 8.6 7.2
------------------------------- ------- -------
Adjusted operating costs (1) 275.7 267.4
------------------------------- ------- -------
Note
1. Before exceptional items, acquisition related costs, acquired
intangible asset amortisation and share-based payment amounting to
$4.3 million in total (2018: $19.6 million).
Total Group adjusted operating costs were up $8.3 million or 3.1
per cent in 2019 compared to last year, broadly in line with
inflation. The emphasis remained on effective resource allocation
and careful cost management. The overall investment in product
development was maintained, with continuing focus on high-growth,
high-margin areas. Investment in the sales and marketing
organisation was targeted on expanding our key account management
programme to drive incremental business with our most valuable
customers and developing routes to market for our new technologies
to a broadening customer base. Administration costs in 2019
reflected an inflationary increase and higher corporate costs,
primarily due to CEO transition.
Segmentally, investment continued in Networks & Security,
where we see the most near-term opportunities for growth,
particularly in relation to 400G high-speed Ethernet and our
Positioning business. A new General Manager joined Lifecycle
Service Assurance in October and a review is in progress to evolve
the business and optimise the organisational structure to expand
the customer base and deliver on our growth agenda. Proactive cost
management has once again been demonstrated within Connected
Devices, where we have seen a decrease in legacy product revenue
year-on-year. As stated above, corporate costs in 2019 included
costs associated with CEO transition.
Operating profit
Adjusted Adjusted
operating operating
margin(1, margin(1,
2) 2)
$ million 2019 % 2018 %
------------------------------- ------- ------------ -------- ------------
Networks & Security 73.9 23.1 56.4 19.8
Lifecycle Service Assurance 18.1 16.3 17.4 15.4
Connected Devices 9.5 13.1 10.5 13.3
Corporate (8.6) (7.2)
------------------------------- ------- ------------ -------- ------------
Adjusted operating profit(1) 92.9 18.4 77.1 16.2
------------------------------- ------- ------------ -------- ------------
Exceptional items 0.5 (13.1)
Acquisition related costs (0.1) -
Acquired intangible asset
amortisation (1.2) (3.7)
Share-based payment (3.5) (2.8)
------------------------------- ------- ------------ -------- ------------
Reported operating profit 88.6 57.5
------------------------------- ------- ------------ -------- ------------
Notes
1. Before exceptional items, acquisition related costs, acquired
intangible asset amortisation and share-based payment amounting to
$4.3 million in total (2018: $19.6 million).
2. Adjusted operating profit as a percentage of revenue in the period.
Adjusted operating profit increased by $15.8 million or 20.5 per
cent to $92.9 million in 2019, compared with $77.1 million in 2018.
Adjusted operating margin increased by 2.2 per cent to 18.4 per
cent, from 16.2 per cent in 2018.
Reported operating profit was up by $31.1 million or 54.1 per
cent to $88.6 million (2018: $57.5 million). Total adjusting items
were lower in 2019 at $4.3 million, compared to $19.6 million in
2018, mainly due to exceptional items totalling $13.1 million
charged last year (see below).
Exceptional items
Net exceptional income of $0.5 million has been recognised in
2019, this was comprised of:
1) $2.3 million of income received in relation to the provision
set up in 2018 for French import duty (see below), which arose
following a successful claim for reimbursement of VAT on the duty,
and
2) $1.8 million of costs associated with a strategic review
instigated by Spirent's new CEO, appointed 1 May 2019, involving a
number of initiatives designed to evolve the strategic direction of
Spirent to maximise market opportunities by creating a more agile,
customer-focused organisation. These include a strategic focus on
recurring revenue streams over time; a strengthened leadership team
and development of our sales and marketing structure to drive
improved effectiveness to exploit our leading technologies. The
total exceptional cost of these planned changes is circa $4.5
million with the remainder of this cost to be incurred in 2020.
In 2018, the Group incurred $13.1 million of exceptional costs
in relation to:
1) a provision for $9.1 million in respect of import duty and
VAT following receipt of a Notice of Recovery from French Customs;
and
2) a pension scheme past service cost of $4.0 million (GBP3.1
million) arising from a benefit change for GMP equalisation under
the UK defined benefit pension plans.
Acquired intangible asset amortisation and share-based
payment
As a result of some acquired intangible assets reaching the end
of their useful economic lives and no longer being amortised,
acquired intangible asset amortisation has continued to reduce,
decreasing to $1.2 million in 2019 from $3.7 million in 2018.
Share-based payment has increased to $3.9 million in 2019 (2018:
$2.8 million), of which $3.5 million (2018: $2.8 million) has been
treated as an adjusting item. This increase reflects the
incremental cost associated with new awards.
Acquisitions and divestments
On 31 May 2019, Spirent acquired a key business from a small
navigation systems company based in the United Kingdom, for cash
consideration of $1.9 million. This company develops and supplies
the Group with a system for recording GNSS and Wi-Fi signals, and
is reported within the Group's Networks & Security operating
segment. Costs related to the acquisition of $0.1 million were
expensed and treated as an adjusting item. The transaction gave
rise to an intangible asset of $1.0 million, being current
technology with a useful life of five years, and goodwill of $0.9
million.
During 2018, a $2.0 million loan, which had previously been
impaired, was repaid to the Group from subsidiaries divested of in
2017. In addition, a provision for $0.4 million relating to a
disposal in 2012, which was classified as a discontinued operation,
was released.
Currency impact
The Group's revenue and costs are primarily denominated in US
dollars or US dollar-linked currencies. Currency exposures arise
from trading transactions undertaken by the Group in foreign
currencies and on the retranslation of the operating results and
net assets of overseas subsidiaries.
The Group's income statement includes a foreign exchange loss,
included in administration costs, of $0.6 million (2018: $0.6
million) arising from transacting in foreign currencies, primarily
US dollars in the United Kingdom, and the translation of foreign
currency cash balances.
Forward foreign currency exchange contracts are entered into to
manage the exposure arising from transacting in US dollars in the
United Kingdom.
Although the most significant currency exposure arises in
relation to movements in pounds sterling against the US dollar,
there are other less significant currency exposures, notably the
Euro and Chinese Yuan.
Finance income and costs
Interest income of $2.7 million was earned from cash on deposit
(2018: $1.4 million) and $0.1 million (2018: nil) of interest
income was recognised in relation to the UK defined benefit pension
plans. The increase in bank interest received year-on-year
reflected higher cash balances and proactive treasury management
across the Group. Surplus funds are held principally in the United
Kingdom and United States on short-term or overnight deposit and
earn market rates of interest.
Finance costs in 2019 were $1.8 million (2018: $0.1 million),
$1.7 million of which related to interest on lease liabilities
following the implementation of IFRS 16 on 1 January 2019.
Tax
The adjusted effective tax rate, being the adjusted tax charge
expressed as a percentage of adjusted profit before tax, shown on
the face of the consolidated income statement, was 13.0 per cent in
2019, down from 15.4 per cent in 2018.
Spirent's effective tax rate has benefited from a combination of
factors in 2019, including the ratification of a new tax treaty
between India and Hong Kong, and an increase in non-taxed income.
Additionally, the Group received tax benefits from the United
Kingdom Patent Box Scheme, the United States R&D Tax Credit,
and a current year recognition of deferred tax assets in the United
States.
Going forward it is anticipated that Spirent's effective tax
rate will be maintained at around 13-14 per cent, subject to
changes in tax legislation.
Earnings per share
Adjusted basic earnings per share was up 23.4 per cent to 13.40
cents (2018: 10.86 cents). Basic earnings per share was 12.79 cents
(2018: 9.14 cents). There were 609.9 million (2018: 610.4 million)
weighted average Ordinary Shares in issue. See note 6 of Notes to
the full year consolidated financial statements on page 33 for the
calculation of earnings per share.
Financing and cash flow
The Group delivered very strong cash generation in 2019, driven
by higher operating profit and effective working capital
management. Changes in working capital, reflected within cash flow
from operations, benefited from:
-- our continued focus on improving trade receivables collection;
-- a reduction in inventory levels due to a high level of shipments at the end of 2019; and
-- growth in payables, resulting from the increase in activity
levels and emphasis on extending supplier payment terms.
Free cash flow for 2019 almost doubled year-on-year coming in at
$100.1 million, compared to $50.9 million in 2018, resulting in a
free cash flow conversion which represented 123 per cent of
adjusted earnings (2018: 77 per cent).
Free cash flow is set out below:
$ million 2019 2018
-------------------------------------------- -------- --------
Cash flow from operations 124.9 65.9
Tax paid (5.6) (5.7)
-------------------------------------------- -------- --------
Net cash inflow from operating activities 119.3 60.2
Interest received 2.6 1.3
Net capital expenditure (11.9) (10.6)
Payment of lease liabilities, principal
and interest (1) (10.3) -
Lease payments received from finance
leases 0.4 -
-------------------------------------------- -------- --------
Free cash flow 100.1 50.9
-------------------------------------------- -------- --------
Note
1. Spirent adopted IFRS 16 on 1 January 2019, in prior periods
operating lease payments were included within cash flow from
operations.
Free cash flow includes a net cash outflow in respect of
exceptional items in 2018 and 2019 of $5.5 million (2018: $3.6
million in respect of exceptional items charged in 2017 and
2018).
Tax payments of $5.6 million made in 2019 were consistent with
the prior year (2018: $5.7 million). Net capital expenditure of
$11.9 million was also broadly consistent with the prior year
(2018: $10.6 million), with the incremental spend of $1.3 million
primarily related to investment in 5G. We continue to exercise
careful management of capital investment to ensure efficient use of
capital and maximise return on investment.
Following the adoption of IFRS 16 on 1 January 2019, the payment
of lease liabilities, both the principal and interest elements, are
shown separately from net cash flow from operating activities. In
previous periods they would have been reflected in that number.
There is no overall impact in comparing free cash flow
year-on-year.
In 2019, the final dividend for 2018 and an interim dividend for
2019 totalling $28.6 million were paid. This compared to total
dividends of $54.8 million paid in 2018, including a special
dividend of $29.9 million. In addition, 4.0 million shares were
purchased and placed into the Employee Share Ownership Trust at a
cost of $8.6 million (2018: 1.5 million shares at a net cost of
$2.5 million) and $1.9 million of cash consideration was paid to
acquire the business of a navigation systems company based in the
United Kingdom.
Following these payments, cash and cash equivalents closed at
$183.2 million at 31 December 2019, compared with $121.6 million at
31 December 2018. There continues to be no bank debt.
Defined benefit pension plans
The Group operates two funded defined benefit pension plans in
the United Kingdom, both of which are closed to new entrants.
The accounting valuation of the funded defined benefit pension
plans at 31 December 2019 gave rise to a net surplus of $11.6
million, compared with a net surplus of $2.5 million at 31 December
2018. The 31 December 2019 position has benefited from
contributions paid to the plans in the year of $6.6 million (2018:
$6.8 million) together with a return on pension plan assets in
excess of the increase in plan liabilities, the latter arising
primarily from a reduction in discount rate.
The latest triennial actuarial valuation dated 31 March 2018
indicated a deficit of GBP22.5 million, calculated on a technical
provisions basis using more prudent assumptions than the accounting
valuation, particularly in relation to discount rate, inflation and
demographic. A deficit reduction plan has been agreed with the
Trustees which requires the Company to pay an annual contribution
of GBP5.0 million, increasing in line with CPI, through to June
2023 (or earlier if self-sufficiency is reached). In addition, the
Company will fund the plan by an amount equal to 10 per cent of any
special dividend paid during that period.
Additionally, there is a liability for an unfunded plan of $0.7
million (31 December 2018: $0.6 million).
The Group also operates a deferred compensation plan for
employees in the United States. As at 31 December 2019, the
deferred compensation plan deficit amounted to $4.8 million (2018:
$3.5 million). The key financial assumptions include a discount
rate used to discount plan liabilities of 2.9 per cent (2018: 4.2
per cent) and an expected investment yield of 6.4 per cent (2018:
6.4 per cent).
Balance sheet
The consolidated balance sheet is set out on page 25.
Overall, net assets have increased by $47.0 million to $402.3
million at 31 December 2019, from $355.3 million at 31 December
2018. Much of the increase arises from the change in cash and cash
equivalents, which have grown by $61.6 million to $183.2 million
(31 December 2018: $121.6 million), offset by increased liabilities
driven by higher activity levels at the end of 2019, relative to
2018.
In terms of non-current assets, these have increased by $33.4
million, with $26.0 million of right-of-use assets now on the
balance sheet following the implementation of IFRS 16 on 1 January
2019. The UK defined benefit pension plan surplus has increased by
$9.1 million to $11.6 million but this has been substantially
offset by a $6.6 million fall in the value of property, plant and
equipment.
Current assets have increased by $58.6 million, primarily
reflecting the increase in cash. High levels of activity at year
end 2019 resulted in an increase in receivables of $4.7 million,
constrained to some extent by successful action taken by management
to reduce the number of days sales outstanding reflected in trade
receivables, offset by a decrease in inventory of $6.9 million, due
to a high level of year end shipments.
Current liabilities have increased by $24.2 million to $154.4
million (31 December 2018: $130.2 million), with growth in trade
and other payables driven by higher activity levels. In addition,
the 31 December 2019 balance sheet includes $8.5 million of lease
liabilities arising from the implementation of IFRS 16 on 1 January
2019. Provisions have decreased by $5.9 million following payment
of $6.5 million during the year in respect of French Customs import
duty.
The implementation of IFRS 16 on 1 January 2019 has added $24.5
million of lease liabilities to non-current liabilities at 31
December 2019.
Liquidity and dividend policy
The Board currently intends to maintain a cash positive balance
sheet over the medium to long-term. This should allow the Company
to maintain a strong capital position in the face of business
risks, trading fluctuations and working capital demands. In
addition, the Board wishes to maintain flexibility to invest in the
business organically and inorganically. If and when it is deemed
appropriate, the Company may take on modest gearing to fund
inorganic investments.
The Board will regularly review the Company's balance sheet in
light of current and expected trading performance and cash
generation, working capital requirements and expected investments.
To the extent the Company has excess cash, it will consider
returning such cash to shareholders. The Board will consider from
time to time the appropriate mechanism for returning surplus cash
to shareholders.
The Board has implemented a progressive dividend policy
maintaining cover in the range of 2 to 2.5 times adjusted
earnings.
Dividend
The Board is recommending the payment of a final dividend for
2019 of 3.45 cents (2.70 pence) per share which, together with the
interim dividend of 1.94 cents (1.59 pence) per share paid in
September 2019, brings the full year dividend to 5.39 cents (4.29
pence) per share, a dividend cover of 2.5 times adjusted earnings.
This is a 20 per cent increase compared to the full year dividend
for 2018. In sterling terms this represents an increase of 25 per
cent.
Subject to approval by shareholders at the Annual General
Meeting on 29 April 2020, the final dividend will be paid on 1 May
2020 to shareholders on the register at 13 March 2020. Payment to
ADR holders will be made on 8 May 2020. In total the payment of the
final dividend for 2019 will consume approximately $21 million of
cash.
New accounting standards - IFRS 16
The Group transitioned to IFRS 16, the new lease accounting
standard, on 1 January 2019, using the modified retrospective
transition method. This approach does not require comparatives to
be restated. Instead, the cumulative effect of applying IFRS 16 is
applied to the opening balance of retained earnings at 1 January
2019.
The cumulative effect of the adoption of IFRS 16 has resulted in
a decrease in net assets of $3.4 million as at 1 January 2019. This
reflects the difference between right-of-use assets and lease
liabilities, as right-of-use assets depreciate quicker than lease
liabilities are settled.
The following balances have been added to the Group's balance
sheet at 1 January 2019:
-- right-of-use assets of $30.9 million;
-- lease liabilities of $36.7 million; and
-- deferred tax assets of $1.0 million.
The above balances include net reclassification adjustments to
liabilities of $1.4 million.
In terms of the income statement impact, adjusted operating
profit marginally increased in 2019 through the operating lease
expense being removed and replaced by a smaller depreciation
charge. There was also an increase to finance costs under IFRS 16
as a result of interest on lease liabilities, which offset the
increase to adjusted operating profit. The impact to the Group's
earnings and income statement overall was immaterial.
An explanation of the impact of IFRS 16 on the Group's financial
statements and related matters consequent upon the adoption of IFRS
16 are set out in appendix 1.
Consolidated income statement
Year ended 31 December Year ended 31 December
2019 2018
----------------------------------- -----------------------------------
Adjusting Adjusting
$ million Notes Adjusted items(1) Reported Adjusted items(1) Reported
---------------------------------- ------- ---------- ----------- ---------- ----------- ----------
Revenue 3 503.6 - 503.6 476.9 - 476.9
Cost of sales (135.0) - (135.0) (132.4) - (132.4)
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Gross profit 368.6 - 368.6 344.5 - 344.5
Product development 3 (96.5) - (96.5) (96.9) - (96.9)
Selling and marketing (129.2) - (129.2) (123.9) - (123.9)
Administration (50.0) - (50.0) (46.6) - (46.6)
Other items - (4.3) (4.3) - (19.6) (19.6)
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Operating profit 92.9 (4.3) 88.6 77.1 (19.6) 57.5
Other items credited/(charged) in arriving at operating
profit:
Exceptional items 4 - 0.5 0.5 - (13.1) (13.1)
Acquisition related costs 13 - (0.1) (0.1) - - -
Acquired intangible asset
amortisation - (1.2) (1.2) - (3.7) (3.7)
Share-based payment - (3.5) (3.5) - (2.8) (2.8)
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Other items - (4.3) (4.3) - (19.6) (19.6)
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Finance income 2.8 - 2.8 1.4 - 1.4
Finance costs (1.8) - (1.8) (0.1) - (0.1)
Gain on divestment 12 - - - - 2.4 2.4
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Profit before tax 93.9 (4.3) 89.6 78.4 (17.2) 61.2
Tax 5 (12.2) 0.6 (11.6) (12.1) 6.7 (5.4)
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Profit for the year attributable
to owners of the parent
Company 81.7 (3.7) 78.0 66.3 (10.5) 55.8
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Earnings per share (cents) 6
Basic 13.40 12.79 10.86 9.14
Diluted 13.23 12.63 10.75 9.05
---------------------------------- ------- ---------- ----------- ---------- ---------- ----------- ----------
Note
1. Adjusting items comprise exceptional items, acquisition
related costs, amortisation of acquired intangible assets,
share-based payment, gain on divestment, tax on adjusting items and
prior year tax.
The performance of the Group is assessed using a variety of
non-GAAP alternative performance measures which are presented to
provide additional financial information that is regularly reviewed
by management. Adjusting items are identified and excluded by
virtue of their size, nature or incidence as they do not reflect
management's evaluation of the underlying trading performance of
the Group. The alternative performance measures are presented in
appendix 2.
Consolidated statement of comprehensive income
Year ended 31
December
----------------------
$ million Note 2019 2018
-------------------------------------------------------------- ------ ---------- ----------
Profit for the year attributable to owners of
the parent Company 78.0 55.8
-------------------------------------------------------------- ------ ---------- ----------
Other comprehensive income/(loss)
Items that may subsequently be reclassified
to profit or loss:
* Exchange differences on retranslation on foreign
operations 1.9 (3.1)
-------------------------------------------------------------- ------ ---------- ----------
Items that will not subsequently be reclassified
to profit or loss:
* Re-measurement of the net defined benefit pension
asset 9 2.7 2.8
* Income tax effect of re-measurement of defined
benefit pension asset (0.5) (0.6)
* Re-measurement of the deferred compensation liability 9 (0.4) 0.5
* Income tax effect of re-measurement of the deferred
compensation liability 0.1 (0.1)
-------------------------------------------------------------- ------ ---------- ----------
1.9 2.6
-------------------------------------------------------------- ------ ---------- ----------
Other comprehensive income/(loss) 3.8 (0.5)
-------------------------------------------------------------- ------ ---------- ----------
Total comprehensive income for the year attributable
to owners of the parent Company 81.8 55.3
-------------------------------------------------------------- ------ ---------- ----------
Consolidated balance sheet
At 31 December
--------------------
$ million Notes 2019 2018
----------------------------------------- ------ --------- ---------
Assets
Non-current assets
Intangible assets 160.3 158.0
Property, plant and equipment 29.5 36.1
Right-of-use assets 26.0 -
Trade and other receivables 6.9 4.5
Assets recognised from costs to obtain
a contract 0.3 0.5
Defined benefit pension plan surplus 9 11.6 2.5
Deferred tax asset 22.4 22.0
----------------------------------------- ------ --------- ---------
257.0 223.6
----------------------------------------- ------ --------- ---------
Current assets
Inventories 20.6 27.5
Trade and other receivables 142.8 138.1
Assets recognised from costs to obtain
a contract 0.5 0.5
Other financial assets 0.1 -
Current tax asset 0.5 1.4
Cash and cash equivalents 183.2 121.6
----------------------------------------- ------ --------- ---------
347.7 289.1
----------------------------------------- ------ --------- ---------
Total assets 604.7 512.7
----------------------------------------- ------ --------- ---------
Liabilities
Current liabilities
Trade and other payables (84.1) (63.1)
Deferred income (53.2) (55.2)
Lease liabilities (8.5) -
Current tax liability (3.8) (1.2)
Provisions 8 (4.8) (10.7)
----------------------------------------- ------ --------- ---------
(154.4) (130.2)
----------------------------------------- ------ --------- ---------
Non-current liabilities
Trade and other payables (1.0) (5.4)
Deferred income (13.6) (14.4)
Lease liabilities (24.5) -
Defined benefit pension plan deficit 9 (5.5) (4.1)
Provisions 8 (3.4) (3.3)
----------------------------------------- ------ --------- ---------
(48.0) (27.2)
----------------------------------------- ------ --------- ---------
Total liabilities (202.4) (157.4)
----------------------------------------- ------ --------- ---------
Net assets 402.3 355.3
----------------------------------------- ------ --------- ---------
Capital and reserves
Share capital 26.8 26.0
Share premium account 26.6 25.7
Capital redemption reserve 17.4 16.8
Other reserves 15.2 17.5
Translation reserve 10.1 8.2
Retained earnings 306.2 261.1
----------------------------------------- ------ --------- ---------
Total equity attributable to owners
of the parent Company 402.3 355.3
----------------------------------------- ------ --------- ---------
Consolidated statement of changes in equity
Attributable to the equity holders of the
parent Company
-----------------------------------------------------------------------------------------
Share Capital
Share premium redemption Other Translation Retained Total
$ million Notes capital account reserve reserves reserve earnings equity
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
At 1 January 2018 27.5 27.3 17.8 13.4 11.3 256.8 354.1
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Profit for the
year - - - - - 55.8 55.8
Other
comprehensive
(loss)/income(1) - - - - (3.1) 2.6 (0.5)
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Total
comprehensive
(loss)/income - - - - (3.1) 58.4 55.3
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Share-based
payment - - - - - 2.8 2.8
Tax credit on
share
incentives - - - - - 0.4 0.4
Equity dividends 7 - - - - - (54.8) (54.8)
Employee Share
Ownership
Trust 15 - - - - - (2.5) (2.5)
Exchange
adjustment (1.5) (1.6) (1.0) 4.1 - - -
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
At 31 December
2018,
as reported 26.0 25.7 16.8 17.5 8.2 261.1 355.3
Impact of change
in
accounting
standard
- IFRS 16 2 - - - - - (3.4) (3.4)
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
At 1 January 2019 26.0 25.7 16.8 17.5 8.2 257.7 351.9
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Profit for the
year - - - - - 78.0 78.0
Other
comprehensive
income(2) - - - - 1.9 1.9 3.8
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Total
comprehensive
income - - - - 1.9 79.9 81.8
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Share-based
payment - - - - - 3.9 3.9
Tax credit on
share
incentives - - - - - 1.9 1.9
Equity dividends 7 - - - - - (28.6) (28.6)
Employee Share
Ownership
Trust 15 - - - - - (8.6) (8.6)
Exchange
adjustment 0.8 0.9 0.6 (2.3) - - -
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
At 31 December
2019 26.8 26.6 17.4 15.2 10.1 306.2 402.3
------------------ ------- ---------- ---------- ------------- ----------- ------------- ----------- ---------
Notes
1. The amount included in other comprehensive (loss)/income for 2018 of $2.6 million represents re-measurement gains on the net defined benefit pension asset of $2.8 million, net of a tax charge of $0.6 million, and re-measurement gains on the deferred compensation liability of $0.5 million, net of a tax charge of $0.1 million. The amount included in the translation reserve of $3.1 million represents other comprehensive loss related to the translation of foreign operations.
2. The amount included in other comprehensive income for 2019 of
$1.9 million represents re-measurement gains on the net defined
benefit pension asset of $2.7 million, net of a tax charge of $0.5
million, and re-measurement losses on the deferred compensation
liability of $0.4 million, net of a tax credit of $0.1 million. The
amount included in the translation reserve of $1.9 million
represents other comprehensive income related to the translation of
foreign operations.
Consolidated cash flow statement
Year ended 31 December
--------------------------
$ million Notes 2019 2018
---------------------------------------------- ------- ------------ ------------
Cash flows from operating activities
Cash flow from operations 10 124.9 65.9
Tax paid (5.6) (5.7)
---------------------------------------------- ------- ------------ ------------
Net cash inflow from operating activities 119.3 60.2
---------------------------------------------- ------- ------------ ------------
Cash flows from investing activities
Interest received 2.6 1.3
Purchase of intangible assets (2.0) -
Purchase of property, plant and equipment (10.9) (12.0)
Proceeds from the sale of property,
plant and equipment 1.0 1.4
Lease payments received from finance
leases 0.4 -
Net expenses of divestments 12 - (0.2)
Repayment of loans to divested subsidiaries 12 - 2.0
Acquisition of business 13 (1.9) -
---------------------------------------------- ------- ------------ ------------
Net cash used in investing activities (10.8) (7.5)
---------------------------------------------- ------- ------------ ------------
Cash flows from financing activities
Lease liability principal repayments (8.6) -
Lease liability interest paid (1.7) -
Dividend paid 7 (28.6) (54.8)
Share purchase into Employee Share
Ownership Trust 15 (8.6) (2.5)
---------------------------------------------- ------- ------------ ------------
Net cash used in financing activities (47.5) (57.3)
---------------------------------------------- ------- ------------ ------------
Net increase/(decrease) in cash and
cash equivalents 61.0 (4.6)
Cash and cash equivalents at the beginning
of the year 121.6 128.4
Effect of foreign exchange rate changes 0.6 (2.2)
---------------------------------------------- ------- ------------ ------------
Cash and cash equivalents at the end
of the year 183.2 121.6
---------------------------------------------- ------- ------------ ------------
Notes to the full year consolidated financial statements
1 Financial information presented
The financial information contained in this document does not
constitute the Group's statutory accounts for the year ended 31
December 2019.
As required by the European Union's IAS Regulation and the
Companies Act 2006, the Group has prepared its consolidated
financial statements for the year ended 31 December 2019 in
accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union and issued by the International
Accounting Standards Board. The comparative financial information
is based on the statutory accounts for the year ended 31 December
2018 which have been delivered to the Registrar of Companies. The
report of the auditors on those accounts was unqualified, did not
draw attention to any matters by way of emphasis and did not
contain a statement made under Section 498 of the Companies Act
2006.
The full year announcement was approved by the Board of
Directors on 5 March 2020.
2 Accounting policies
The accounting policies adopted and methods of computation used
are consistent with those applied in the consolidated financial
statements for the year ended 31 December 2018, except for the
adoption of IFRS 16 'Leases' effective 1 January 2019.
Presentation
The Group's deferred costs balance has been reclassified from
'trade and other receivables - current' to 'inventories' as this
classification more appropriately represents the nature of the
balance. The presentation of the comparative amounts in the Group's
balance sheet has also been amended to reflect this change. This
resulted in a reclassification of $1.8 million in 2018. The related
cash flow movement in 2018 was also reclassified using the
appropriate corresponding line item within the 'cash flow from
operating activities' category in the Group's cash flow statement.
This reclassification had no impact on the Group's net assets,
income statement or net cash flow from operating activities
reported in 2018.
New accounting standards
The Group has adopted IFRS 16 'Leases' on 1 January 2019. Other
than this, there have been no new standards or amendments to
existing standards and interpretations that have been applied by
the Group which have resulted in a significant impact on its
consolidated results or financial position.
IFRS 16 Leases
IFRS 16 'Leases' is effective from 1 January 2019 and replaces
the existing standard IAS 17 'Leases'. The consolidated financial
statements for the year ending 31 December 2019 are the first
financial statements presented under IFRS 16.
In the lessee's financial statements, the standard eliminates
the classification of leases as either operating leases or finance
leases as per IAS 17 and introduces a single lessee accounting
model. Lease agreements give rise to the recognition of an asset
representing the right to use the leased item and a corresponding
loan obligation for future lease payables.
The Group has applied IFRS 16 using the modified retrospective
approach, meaning comparatives are not restated and the cumulative
effect of initially applying the standard is recognised as an
adjustment to the opening balance of retained earnings at the date
of initial application. Under this option, the Group has elected to
calculate the asset value as if the standard had always been
applied since the lease commencement date but discounted using the
Group's incremental borrowing rate at the date of initial
application. Lease liabilities were recognised based on the present
value of the remaining lease payments, discounted using the
incremental borrowing rate at the date of initial application. The
Group has also elected to use the following practical
expedients:
-- the application of a single discount rate to a portfolio of leases with reasonably similar characteristics;
-- use of its onerous lease assessment calculated in accordance
with IAS 37 'Provisions, Contingent Liabilities and Contingent
Assets' as an alternative to performing an impairment review of
right-of-use assets on initial application;
-- leases with less than 12 months remaining at the date of
initial application can be accounted for as short-term leases and
continue to be expensed as incurred;
-- initial direct costs can be excluded from the measurement of
right-of-use assets at the date of initial application; and
-- hindsight can be used in determining the lease term if the
contract contains options to extend or terminate the lease.
The Group also made use of the exemptions in respect of
short-term leases and leases for which the underlying asset is of
low value in accordance with paragraph 6 of IFRS 16.
An explanation of the impact of IFRS 16 on the Group's financial
statements and related matters consequent upon the adoption of IFRS
16 are set out in appendix 1. The accounting policy in respect of
leases, from 1 January 2019, is set out in the Group's 2019 Annual
Report.
Going concern
At 31 December 2019, the Group had cash of $183.2 million and
external debt only in relation to its lease liabilities.
The directors have reviewed the detailed financial projections
for a period of 12 months from the date of this report and the
business plans for the 2021 and 2022 financial years. They have
also considered the principal risks and uncertainties that the
Group faces and its current financial position and are satisfied
that the Group has adequate financial resources to continue in
operational existence for the foreseeable future, a period of not
less than 12 months from the date of this report. Accordingly, the
going concern basis of accounting continues to be used in the
preparation of the financial statements.
3 Operating segments
The Group's organisational structure is based on differences in
the products and services offered by each segment and information
regularly reviewed by the Group's Chief Executive Officer, its
chief operating decision maker, is presented on this basis. The
Group's operating segments follow this structure.
The Group's reportable operating segments are Networks &
Security, Lifecycle Service Assurance and Connected Devices. The
Group evaluates adjusted operating profit before exceptional items,
acquisition related costs, acquired intangible asset amortisation
and share-based payment. Finance income, finance costs and gain on
divestment are not allocated to the reportable segments. Corporate
is not an operating segment and costs are separately reported and
not allocated to the reportable segments. Information on segment
assets and segment liabilities is not regularly provided to the
Group's Chief Executive Officer and is therefore not disclosed
below. There is no aggregation of operating segments.
The Group disaggregates revenue from contracts with customers by
nature of products and services and primary geographical markets as
this best depicts how the nature, amount, timing and uncertainty of
the Group's revenue and cash flows are affected by economic
factors.
Lifecycle
Networks Service Connected
$ million & Security Assurance Devices Corporate Total
----------------------------------------------- ------------- ------------ ----------- ----------- -------
2019
Revenue
Nature of products and services
Sale of hardware and software 272.0 67.8 32.6 - 372.4
Maintenance and support services 47.9 43.4 39.9 - 131.2
----------------------------------------------- ------------- ------------ ----------- ----------- -------
319.9 111.2 72.5 - 503.6
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Primary geographical markets
Americas 141.0 85.5 39.6 - 266.1
Asia Pacific 143.3 15.2 29.3 - 187.8
Europe, Middle East and Africa 35.6 10.5 3.6 - 49.7
----------------------------------------------- ------------- ------------ ----------- ----------- -------
319.9 111.2 72.5 - 503.6
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Profit before tax
Total reportable segment profit
before exceptional items 73.9 18.1 9.5 (8.6) 92.9
Exceptional items note 4 (1.1) (0.4) (0.3) 2.3 0.5
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Total reportable segment profit 72.8 17.7 9.2 (6.3) 93.4
Unallocated amounts:
* Acquisition related costs note 13 (0.1)
* Acquired intangible asset amortisation (1.2)
* Share-based payment (3.5)
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Operating profit 88.6
Finance income 2.8
Finance costs (1.8)
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Profit before tax 89.6
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Other information
Product development 56.0 27.6 12.9 - 96.5
Intangible asset amortisation
- other - - 0.9 - 0.9
Depreciation of property,
plant and equipment 9.2 2.7 2.7 0.1 14.7
Depreciation of right-of-use
assets 4.4 1.7 1.1 0.3 7.5
----------------------------------------------- ------------- ------------ ----------- ----------- -------
Lifecycle
Networks Service Connected
$ million & Security Assurance Devices Corporate Total
----------------------------------------------- ------------- ------------ ----------- ----------- --------
2018
Revenue
Nature of products and services
Sale of hardware and software 239.8 66.9 40.0 - 346.7
Maintenance and support services 45.3 45.9 39.0 - 130.2
----------------------------------------------- ------------- ------------ ----------- ----------- --------
285.1 112.8 79.0 - 476.9
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Primary geographical markets
Americas 133.7 93.4 38.3 - 265.4
Asia Pacific 112.6 9.8 36.7 - 159.1
Europe, Middle East and Africa 38.8 9.6 4.0 - 52.4
----------------------------------------------- ------------- ------------ ----------- ----------- --------
285.1 112.8 79.0 - 476.9
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Profit before tax
Total reportable segment profit
before exceptional items 56.4 17.4 10.5 (7.2) 77.1
Exceptional items note 4 - - - (13.1) (13.1)
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Total reportable segment profit 56.4 17.4 10.5 (20.3) 64.0
Unallocated amounts
* Acquired intangible asset amortisation (3.7)
* Share-based payment (2.8)
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Operating profit 57.5
Finance income 1.4
Finance costs (0.1)
Gain on divestment note 13 2.4
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Profit before tax 61.2
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Other information
Product development 53.0 29.6 14.3 - 96.9
Intangible asset amortisation
- other - - 0.6 - 0.6
Depreciation 9.7 3.1 3.6 0.1 16.5
----------------------------------------------- ------------- ------------ ----------- ----------- --------
Inter-segment revenue is eliminated in the above periods. All of
the Group's revenue arose from contracts with customers.
Generally, revenue from the sale of hardware and software is
recognised at a point in time and revenue from maintenance and
support services is recognised over time.
Europe, Middle East and Africa includes United Kingdom revenue
of $8.2 million (2018: $6.8 million).
Americas includes United States revenue of $252.4 million (2018:
$254.1 million).
Asia Pacific includes China revenue of $114.1 million (2018:
$92.2 million).
Revenues are attributed to regions and countries based on
customer location.
No one customer accounted for 10 per cent or more of total Group
revenue in either 2019 or 2018.
4 Exceptional items
$ million 2019 2018
------------------------------------------------ ------- ------
CEO strategic review 1.8 -
French Customs (refund)/duty (2.3) 9.1
UK pension fund GMP equalisation past service
cost - 4.0
------------------------------------------------ ------- ------
(0.5) 13.1
------------------------------------------------ ------- ------
In 2019, the Group incurred $1.8 million of costs associated
with a strategic review, instigated by Spirent's new CEO, involving
a number of initiatives designed to evolve the strategic direction
of Spirent to maximise market opportunities by creating a more
agile, customer-focused organisation. These include a strategic
focus on recurring revenue streams over time; a strengthened
leadership team and development of our sales and marketing
structure to drive improved effectiveness to exploit our leading
technologies. This charge comprised employee severance costs of
$1.1 million, recruitment costs of $0.3 million and consulting
costs of $0.4 million. This review will continue into 2020.
In 2018, the Group recognised a $9.1 million charge in relation
to an ongoing compliance dispute with Direction Générale des
Douanes et Droits Indirects (French Customs) concerning the
valuation and classification of imports into France which commenced
in 2011. The amount was comprised of a provision for $8.9 million
(note 8) and $0.2 million of other costs. In 2019, the Group
received a refund amounting to $2.3 million following a successful
claim for reimbursement of VAT paid on the imports.
Additionally in 2018, following the Lloyds Bank GMP inequalities
court judgement published in October of that year, the Group
equalised GMP benefits amounting to $4.0 million (GBP3.1 million)
of defined benefit pension past service costs.
The tax effect of exceptional items is a charge of $0.2 million
(2018: $3.8 million credit). There will be a total net cash inflow
of $0.5 million in respect of exceptional items credited in 2019,
$1.0 million of which was received in 2019 (2018: $9.1 million with
$0.2 million paid in 2018). The cash outflow in 2019 in respect of
exceptional items charged in 2018 was $6.5 million (2018: $3.4
million).
The total cash outflow in respect of exceptional items is
reported within cash flows from operating activities in the
consolidated cash flow statement.
5 Tax
$ million 2019 2018
--------------------------------------------------- ------- -------
Current income tax
UK tax 0.3 0.1
Foreign tax 9.2 6.2
Amounts underprovided/(overprovided) in previous
years 0.3 (1.2)
--------------------------------------------------- ------- -------
Total current income tax charge 9.8 5.1
--------------------------------------------------- ------- -------
Deferred tax
Recognition of deferred tax assets (1.5) (0.8)
Reversal of temporary differences 3.5 1.4
Adjustments in respect of prior years (0.2) (0.3)
--------------------------------------------------- ------- -------
Total deferred tax charge 1.8 0.3
--------------------------------------------------- ------- -------
Tax charge in the income statement 11.6 5.4
--------------------------------------------------- ------- -------
The tax charge for the year ended 31 December 2019 was $11.6
million (2018: $5.4 million). This was after a prior year tax
charge of $0.1 million and a tax credit on adjusting items of $0.7
million (2018: prior year credit of $1.5 million and a tax credit
on adjusting items of $5.2 million). Excluding the prior year and
tax credit on adjusting items, the effective tax rate was 13.0 per
cent (2018: 15.4 per cent).
6 Earnings per share
Basic
Earnings per share is calculated by dividing the profit for the
year attributable to owners of the parent Company by the weighted
average number of Ordinary Shares outstanding during the year.
Diluted
Diluted earnings per share is calculated by dividing the profit
for the year attributable to owners of the parent Company by the
weighted average number of Ordinary Shares outstanding during the
year plus the weighted average number of Ordinary Shares that would
be issued on the conversion of all dilutive potential Ordinary
Shares into Ordinary Shares.
$ million 2019 2018
-------------------------------------------------- ------- -------
Profit for the year attributable to owners
of the parent Company 78.0 55.8
-------------------------------------------------- ------- -------
Number million
-------------------------------------------------- ------- -------
Weighted average number of Ordinary Shares
in issue - basic 609.9 610.4
Dilutive potential of employee share incentives 7.5 6.5
-------------------------------------------------- ------- -------
Weighted average number of Ordinary Shares
in issue - diluted 617.4 616.9
-------------------------------------------------- ------- -------
Cents
-------------------------------------------------- ------- -------
Earnings per share
Basic 12.79 9.14
Diluted 12.63 9.05
-------------------------------------------------- ------- -------
Adjusted
The Group is disclosing adjusted earnings per share attributable
to owners of the parent Company in order to provide a measure to
enable period-on-period comparisons to be made of its performance.
The following items are excluded from adjusted earnings:
- exceptional items;
- acquisition related costs;
- acquired intangible asset amortisation;
- share-based payment;
- gain on divestment;
- tax effect on the above items; and
- prior year tax (adjustments made to provisions in respect of prior years).
A reconciliation is provided below:
2019 2018
----------------------------------- --------------------- ---------------------
EPS EPS
$ million cents $ million cents
----------------------------------- ----------- -------- ----------- --------
Profit for the year attributable
to owners of the parent
Company 78.0 12.79 55.8 9.14
Exceptional items (credit)/charge
note 4 (0.5) 13.1
Acquisition related costs 0.1 -
Acquired intangible asset
amortisation 1.2 3.7
Share-based payment 3.5 2.8
Gain on divestment - (2.4)
Tax effect on the above
items (0.7) (5.2)
Prior year tax charge/(credit) 0.1 (1.5)
----------------------------------- ----------- -------- ----------- --------
Adjusted basic 81.7 13.40 66.3 10.86
----------------------------------- ----------- -------- ----------- --------
Adjusted diluted 13.23 10.75
----------------------------------- ----------- -------- ----------- --------
There were no Ordinary Share transactions that occurred after 31
December that would have significantly changed the number of
Ordinary Shares or potential Ordinary Shares outstanding at the
period end if those transactions had occurred before the end of the
reporting period in either year.
7 Dividends paid and proposed
$ million 2019 2018
--------------------------------------------------- ------ ------
Declared and paid in the year
Equity dividend on Ordinary Shares
Final dividend 2018 of 2.73 cents (2.08 pence)
per Ordinary Share (2017: 2.40 cents (1.73
pence)) 16.7 14.3
Special dividend 2017 of 5.00 cents (3.60 pence)
per Ordinary Share - 29.9
Interim dividend 2019 of 1.94 cents (1.59 pence)
per Ordinary Share (2018: 1.76 cents (1.34
pence)) 11.9 10.6
--------------------------------------------------- ------ ------
28.6 54.8
--------------------------------------------------- ------ ------
Proposed for approval at AGM (not recognised
as a liability at 31 December)
Equity dividend on Ordinary Shares
Final dividend 2019 of 3.45 cents (2.70 pence)
per Ordinary Share (2018: 2.73 cents (2.08
pence)) 21.0 16.7
--------------------------------------------------- ------ ------
The directors are proposing a final dividend in respect of the
financial year ended 31 December 2019 of 3.45 cents per Ordinary
Share (2.70 pence) (2018: 2.73 cents (2.08 pence)), which will
absorb an estimated $21.0 million of shareholders' funds (2018:
$16.7 million). The final dividend will be paid on 1 May 2020 to
Ordinary shareholders who are on the Register of Members at close
of business on 13 March 2020. Payment will be made to ADR holders
on 8 May 2020. No liability is recorded in the financial statements
in respect of this dividend.
Dividends are determined in US dollars and paid in pounds
sterling. The exchange rate for determining the amount of the final
dividend to be paid for 2019 was $1.28: GBP1 (2018: $1.31:
GBP1).
8 Provisions
Restructuring
$ million Lease provisions provisions Other provisions Total
--------------------------------- ------------------ --------------- ------------------ -------
At 1 January 2018 3.5 1.4 1.9 6.8
Charged in the year - 0.5 9.4 9.9
Asset retirement obligation 0.5 - - 0.5
Released in the year - (0.1) (0.9) (1.0)
Utilised in the year (0.5) (1.8) (0.1) (2.4)
Unwind of discount 0.1 - - 0.1
Exchange difference - - 0.1 0.1
--------------------------------- ------------------ --------------- ------------------ -------
At 31 December 2018, as
reported 3.6 - 10.4 14.0
Impact of change in accounting
standard - IFRS 16 (0.6) - - (0.6)
--------------------------------- ------------------ --------------- ------------------ -------
At 1 January 2019 3.0 - 10.4 13.4
Charged in the year 0.1 1.3 0.9 2.3
Asset retirement obligation 0.4 - - 0.4
Released in the year - - (0.3) (0.3)
Utilised in the year - (0.9) (6.5) (7.4)
Unwind of discount 0.1 - - 0.1
Exchange difference - - (0.3) (0.3)
--------------------------------- ------------------ --------------- ------------------ -------
At 31 December 2019 3.6 0.4 4.2 8.2
--------------------------------- ------------------ --------------- ------------------ -------
$ million 2019 2018
-------------- ------ ------
Current 4.8 10.7
Non-current 3.4 3.3
-------------- ------ ------
8.2 14.0
-------------- ------ ------
The lease provisions are for the continuing obligations under
leases in respect of property dilapidation and reinstatement
provisions. The Group expects these provisions to be utilised over
one to ten years. Other provisions comprise environmental
provisions related to property disposed of, provisions relating to
legal claims and a provision relating to a Notice of Recovery
received from French Customs, discussed below. The Group expects
these provisions to be utilised in less than one year.
In 2018, the Group made a provision for $8.9 million following
the receipt of a Notice of Recovery from the Direction Générale des
Douanes et Droits Indirects (French Customs) in relation to the
valuation and classification of duty on certain imports into
France. This dispute commenced with enquiries in 2011. The import
regulations changed on 1 January 2017 and no liability exists after
that date. During the period in question, Spirent adopted a duty
tariff based on World Customs Organisation guidelines which
conflicted with European Union regulation. In 2019, the Group paid
$6.5 million in relation to this claim but strongly refutes the
basis of it and reserves the right to challenge it in the courts at
some future date.
9 Defined benefit pension plans
The Group has ongoing obligations in relation to two funded
defined benefit pension plans in the United Kingdom. In addition,
there is a United Kingdom unfunded plan and a deferred compensation
plan in the United States.
The most recent actuarial valuations, at 31 March 2018, of the
funded defined benefit pension plans' assets and the present value
of the plans' obligations, using the projected unit credit method,
have been used and updated at 31 December 2019 as the basis for the
accounting valuation.
The assets and liabilities on the balance sheet are as
follows:
$ million 2019 2018
---------------------------------------- ------- -------
Schemes in net asset position
UK funded defined benefit pension plan
surplus 11.6 2.5
---------------------------------------- ------- -------
Schemes in net liability position
UK unfunded plan (0.7) (0.6)
US deferred compensation plan (4.8) (3.5)
---------------------------------------- ------- -------
(5.5) (4.1)
---------------------------------------- ------- -------
Net pension plan surplus/(deficit)
on the balance sheet 6.1 (1.6)
---------------------------------------- ------- -------
The assets and liabilities in the funded defined benefit pension
plans were as follows:
$ million 2019 2018
---------------------------------------------- --------- ---------
Fair value of defined benefit pension plans'
assets 291.1 254.2
Present value of defined benefit pension
plans' obligations (279.5) (251.7)
---------------------------------------------- --------- ---------
Net UK funded defined benefit pension plan
surplus on the balance sheet 11.6 2.5
---------------------------------------------- --------- ---------
The key financial assumptions are as follows:
% 2019 2018
------------------------------------------ ------ ------
Inflation - RPI 3.0 3.2
Inflation - CPI 2.2 2.1
Rate of increase in pensionable salaries 2.2 2.1
Rate of increase for pensions in payment
Pre-2001 service 3.6 3.7
2001 to 5 April 2005 service 2.9 3.1
Post-5 April 2005 service 2.0 2.1
Rate of increase in deferred pensions 2.2 2.1
Rate used to discount plan liabilities 2.1 2.8
------------------------------------------ ------ ------
An operating charge of $0.7 million (2018: $0.6 million) and
finance income of $0.1 million (2018: nil) have been recognised in
the income statement.
The Group also operates a deferred compensation plan for
employees in the United States. The plan has elements of a defined
benefit pension retirement obligation and therefore is required to
be valued in accordance with IAS 19 'Employee Benefits'. At 31
December 2019, the deferred compensation deficit amounted to $4.8
million (31 December 2018: $3.5 million). A re-measurement loss of
$0.4 million (31 December 2018: $0.5 million gain) was recognised
directly in the statement of comprehensive income.
10 Reconciliation of profit before tax to cash generated from
operations
$ million 2019 2018
-------------------------------------------------------- ------- --------
Profit before tax 89.6 61.2
Adjustments for:
Finance income (2.8) (1.4)
Finance costs 1.8 0.1
Intangible asset amortisation 2.1 4.3
Depreciation of property, plant and equipment 14.7 16.5
Depreciation of right-of-use assets 7.5 -
Loss on the disposal of property, plant
and equipment 0.2 -
Gain on divestment - (2.4)
Share-based payment 3.9 2.8
Changes in working capital:
Deferred income released (3.0) (2.5)
Increase in receivables (4.4) (11.5)
Decrease/(increase) in inventories 7.0 (1.7)
Increase/(decrease) in payables 18.7 (4.7)
(Decrease)/increase in provisions (5.4) 7.6
Defined benefit pension plan employer
contributions net of administration expenses
paid by the plan (5.9) (6.7)
Defined benefit pension plan re-measurement
(GMP equalisation) - 4.0
Deferred compensation plan 0.9 0.3
-------------------------------------------------------- ------- --------
Cash flow from operations 124.9 65.9
-------------------------------------------------------- ------- --------
11 Contract balances
The following table provides information about receivables and
contract liabilities from contracts with customers. The Group does
not have any contract assets.
$ million 2019 2018 2017
------------------------------------- ------- ------- -------
Trade receivables 128.7 123.4 113.8
Contract liabilities
Payments received on account 2.3 1.0 3.8
Deferred income 66.8 69.6 72.7
------------------------------------- ------- ------- -------
69.1 70.6 76.5
------------------------------------- ------- ------- -------
Revenue recognised in the period
from amounts included in contract
liabilities at the beginning of
the period 56.2 65.5 62.1
------------------------------------- ------- ------- -------
12 Divestments
There were no divestments in 2018 or 2019.
In 2018, a $2.0 million loan was repaid to the Group from
subsidiaries divested of in 2017. The loan had previously been
impaired. The Group also incurred $0.1 million of expenses relating
to the divestment. In addition, a provision for $0.5 million
relating to a disposal in 2012, which was classified as a
discontinued operation, was released.
13 Business combinations
On 31 May 2019, Spirent acquired a key business from Integrated
Navigation Systems Limited (INS), a company based in United
Kingdom, for cash consideration of $1.9 million. The acquired
business is reported within the Group's Networks & Security
operating segment. INS develops and supplies the Group with a
system for recording GNSS and Wi-Fi signals. The business
acquisition will enable Spirent to streamline its supply chain
process and improve gross margin on this product line.
The acquisition gave rise to a current technology intangible
asset of $1.0 million and goodwill of $0.9 million.
Acquisition related costs were $0.1 million and have been
expensed to other items within the income statement.
14 Fair value
The directors consider that the carrying amounts of the
financial instruments included within trade and other receivables,
trade and other payables and contractual provisions approximates
their fair value.
Corporate owned life insurance, included within trade and other
receivables, is stated at fair value and is at Level 1 in the fair
value hierarchy as the valuation of the linked investments is based
on quoted prices in active markets.
15 Employee Share Ownership Trust
During the year, 4.0 million shares were purchased and placed
into the Employee Share Ownership Trust at a cost of $8.6 million,
and 3.0 million shares were transferred from the Employee Share
Ownership Trust to satisfy options exercised under the Spirent
employee share plans (2018: 1.5 million shares purchased and placed
at a net cost of $2.5 million, and 1.5 million shares
transferred).
Appendix 1
Impact of IFRS 16
The Group adopted IFRS 16 'Leases' on 1 January 2019 using the
modified retrospective transition method. This approach does not
require restated comparative figures and therefore the comparative
information is reported under IAS 17. Instead, the cumulative
effect of applying IFRS 16 is applied to the opening balance of
retained earnings at 1 January 2019. This appendix presents the
impact of the adoption of IFRS 16 on the Group's financial
statements.
The cumulative effect of the adoption of IFRS 16 has resulted in
a decrease of net assets of $3.4 million as at 1 January 2019. This
reflects the difference between right-of-use assets and lease
liabilities, as right-of-use assets depreciate quicker than lease
liabilities are settled.
The following balances have been added to the Group's balance
sheet at 1 January 2019:
-- right-of-use assets of $30.9 million;
-- lease liabilities of $36.7 million; and
-- deferred tax assets of $1.0 million.
Of the above balances:
-- $1.5 million of the right-of-use assets have been
reclassified from property, plant and equipment at 1 January 2019,
offset by $0.6 million reclassified from provisions at 1 January
2019; and
-- $2.3 million of the lease liabilities relates to lease
incentives that have been derecognised from trade and other
payables at 1 January 2019.
Therefore, the net decrease in net assets and adjustment to
retained earnings is $3.4 million. The net decrease in retained
earnings reflects the additional expense that would have be charged
to the income statement under IFRS 16 before 1 January 2019.
In terms of the income statement impact in 2019, the operating
lease expense per IAS 17, amounting to $9.3 million, was removed
and replaced by a smaller depreciation charge of $7.5 million.
Finance costs, being interest on the lease liabilities, of $1.7
million were also incurred resulting in an immaterial impact
overall to the Group's profit before tax and earnings.
The accounting policy in respect of leases is disclosed in the
Group's 2019 Annual Report.
Impact on financial statements
On transition to IFRS 16, the following adjustments were made to
the Group's balance sheet:
At 1 January
$ million Notes 2019
------------------------------------------------------- --------- --------------
Right-of use assets' cost A 65.2
Right-of-use assets' accumulated depreciation B (35.2)
Right-of-use assets' impairment C (0.6)
Lease reinstatement reclassification from
property, plant and equipment
* Right-of-use assets' cost D 2.7
* Right-of-use assets' accumulated depreciation D (1.2)
------------------------------------------------------- --------- --------------
Total right-of-use assets recognised, at
net book value 30.9
Lease liabilities E (36.7)
Lease reinstatement provisions reclassified
to right-of-use assets C 0.6
Property, plant and equipment reclassified
to right-of-use assets D (1.5)
Lease incentives reclassified from trade
and other payables F 2.3
Deferred tax assets recognised G 1.0
------------------------------------------------------- --------- --------------
Total decrease to retained earnings, at 1
January 2019 (3.4)
------------------------------------------------------------------ --------------
Notes
A. Right-of-use assets' cost recognised at 1 January 2019
(excluding lease reinstatement costs in note D). The Group has
taken advantage of the practical expedient that permits initial
direct costs to be excluded from the measurement of the
right-of-use assets at the date of initial application (para. C10
(d)).
B. Right-of-use assets' accumulated depreciation at 1 January
2019 (excluding lease reinstatement costs in note D).
C. Reclassification of onerous lease provision to right-of-use
assets. On initial application of IFRS 16, the onerous lease
assessment calculated in accordance with IAS 37 is permitted as an
alternative to an impairment assessment (para. C10 (b)).
D. Reclassification of lease reinstatement costs from property,
plant and equipment to right-of-use assets on 1 January 2019. Under
IFRS 16, the right-of-use assets cost includes an estimate of costs
to dismantle and remove the underlying asset or to restore the
underlying asset or the site on which it is located. Under IAS 17,
the lease reinstatement costs were included within property, plant
and equipment.
E. Lease liabilities recognised at 1 January 2019. The Group has
applied a single discount rate to a portfolio of leases with
similar characteristics (para. C10 (a)) and hindsight has been used
in determining the lease term if the contract contains options to
extend or terminate the lease (para. C10 (e)).
F. On transition to IFRS 16, lease incentives previously
included within trade and other payables have been derecognised as
they form part of the measurement of the lease liability.
G. Deferred tax impact on transition to IFRS 16.
A reconciliation between the Group's operating lease commitment
at 31 December 2018 and the lease liabilities at 1 January 2019 is
presented below:
$ million At 1 January 2019
------------------------------------------------------ -------------------
Operating lease commitment at 31 December 2018
as disclosed in the Group's consolidated financial
statements 40.5
------------------------------------------------------ -------------------
Discounted using the incremental borrowing
rate at 1 January 2019 (4.6)
Other 0.8
------------------------------------------------------ -------------------
Lease liabilities recognised at 1 January 2019 36.7
------------------------------------------------------ -------------------
The lease liabilities were discounted at the incremental
borrowing rate at 1 January 2019. The weighted average discount
rate was 4.9 per cent. The average discount rate differs between
regions due to differing base rates.
Appendix 2
Alternative Performance Measures (APMs)
The performance of the Group is assessed using a variety of APMs
which are presented to provide users with additional financial
information that is regularly reviewed by management. The APMs
presented are not defined under IFRS and therefore may not be
directly comparable with similarly identified measures used by
other companies.
In management's view, the APMs reflect the underlying
performance of the Group and provide an alternative basis for
evaluating how the Group is managed and measured on a day-to-day
basis. Such APMs should not be viewed in isolation or as an
alternative to the equivalent GAAP measure.
The APMs and key performance indicators are aligned to the
Group's strategy and collectively are used to measure the
performance of the Group and form the basis of the metrics for
director and management remuneration. The Group's key performance
indicators are presented within the Strategic Report of its 2019
Annual Report.
Order intake
Order intake represents commitments from customers to purchase
goods and/or services from Spirent that will ultimately result in
recognised revenue.
Order intake is a measure of operating performance used by
management to assess whether future activity levels are increasing
or slowing and therefore how effective we have been in the
execution of our strategy. Order intake is a key performance
indicator used to measure Group, operating segment and regional
performance for internal reporting purposes.
Order intake is a non-GAAP measure and as such should not be
considered in isolation or as a substitute for GAAP measures of
operating performance.
Book to bill
Book to bill is the ratio of orders booked to revenue billed in
the period and is a measure of the visibility of future revenues at
current levels of activity. Book to bill is a key performance
indicator used to measure Group and operating segment performance
for internal reporting purposes.
Book to bill is a non-GAAP measure and as such should not be
considered in isolation or as a substitute for GAAP measures of
operating performance.
Adjusted operating profit
Adjusted operating profit is reported operating profit excluding
exceptional items, acquisition related costs, amortisation of
acquired intangible assets and share-based payment. Management uses
adjusted operating profit, in conjunction with other GAAP and
non-GAAP financial measures, to evaluate the overall operating
performance of the Group as well as each of the operating segments
and believes that this measure is relevant to understanding the
Group's financial performance, as specific items (adjusting items)
are identified and excluded by virtue of their size, nature or
incidence, as they do not reflect the underlying trading
performance of the Group. The exclusion of adjusting items from
adjusted operating profit is consistent from year to year.
Adjusted operating profit is also used in setting director and
management remuneration targets and in discussions with the
investment analyst community.
Adjusted operating margin
Adjusted operating margin is adjusted operating profit as a
percentage of revenue. It is a measure of the Group's overall
profitability and how successful we are in executing on our overall
strategy, and demonstrates our ability to improve margin through
efficient operations and cost management, whilst being mindful of
the need to invest for the future.
Adjusted basic earnings per share
Adjusted basic earnings per share (EPS) is adjusted earnings
attributable to owners of the parent Company divided by the
weighted average number of Ordinary shares outstanding during the
year. Adjusted earnings is reported profit before tax excluding
exceptional items, acquisition related costs, amortisation of
acquired intangible assets, share-based payment, gain on divestment
and tax on adjusting items.
Adjusted basic EPS is a measure of how successful we are in
executing on our strategy and ultimately delivering increased value
for shareholders. Adjusted basic EPS is also used in setting
director and management remuneration targets and in discussions
with the investment analyst community. The Group sets out the
calculation of adjusted EPS in note 6 of Notes to the full year
consolidated financial statements.
Product development spend as a percentage of revenue
Product development as a percentage of revenue in the period. It
is a measure of how much the Group is investing to support further
organic growth initiatives in line with the strategic objectives,
whilst driving improved productivity and effectiveness.
Free cash flow
Free cash flow is cash flow generated from operations, less tax
and net capital expenditure, lease liability principal repayments
and lease liability interest paid, and interest received and lease
payments received from finance leases.
Free cash flow is a measure of the quality of the Group's
earnings and reflects the ability to convert profits into cash and
ultimately to generate funds for future investment. It gives us
financial strength and flexibility and the ability to pay
sustainable dividends to our shareholders. Free cash flow is an
important indicator of overall operating performance as it reflects
the cash generated from operations after capital expenditure,
financing and tax which are significant ongoing cash flows
associated with investing in the business and financing
operations.
Free cash flow excludes corporate level cash flows that are
independent of ongoing trading operations such as dividends,
acquisitions and disposals and share repurchases and therefore is
not a measure of the funds that are available for distribution to
shareholders.
A reconciliation of cash generated from operations, the closest
equivalent GAAP measure, to free cash flow is provided within the
Financial review on page 19.
Free cash flow conversion
Free cash flow conversion is the ratio of free cash flow to
adjusted earnings, presented as a percentage.
Free cash flow conversion is a measure used in conjunction with
free cash flow to assess the Group's ability to convert profit into
cash and ultimately to generate funds for future investment.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR EAEDLELKEEAA
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