Draft Ass#1 Step 3

Step 3 – Knowing my company & Annual Report KCQ’s

First thoughts

My company is called Spirent Communications PLC and I had never heard of them prior to this unit. Initially, I was left a little disappointed seeing who was chosen for me as I had hoped I would know of them or at least have a familiarity to the industry they were in, like the automotive industry as I work in a car dealership.

I had my firm’s home page saved in my internet bookmarks for over a week before really taking a look into their website. I clicked on the link through the spreadsheet, downloaded the annual report and then a 192 page PDF document generated – that’s when I bookmarked the link and decided that I would come back to it later.

Well after returning to my company’s website, I have found out that they are actually quite interesting.

Knowing my firm & KCQ’s on my firm’s annual report

Jack Bowthorpe was the founder of Spirent Communications PLC, though in 1936 when the company was founded, it was known as Goodliffe Electrical Supplies Ltd. Back then, the company was a designer and supplier of overhead powerline fittings which, as mentioned in their website history page, is a lot different to what they do today.

Spirent Communications PLC is in the Telecommunications industry or Telecom industry for short. Although I initially thought that this company is probably just like another Telstra I have found that they provide more than a phone or internet plan. In fact, my company doesn’t provide phone or internet plans at all. Their main service is developing and providing test systems to vendors who can then ensure that their products are of quality and performance before going to market. For example, they test the effectiveness of security products, the performance and speed of cloud based infrastructure and how vehicle navigation systems operate and perform in a real-world environment. And they must be good at what they do because for the second year in a row, they were announced as the Leading Lights Awards Outstanding Test & Measurement Vendor of the year.

What I found most interesting is that they are involved in the 5G network. As stated in this blog post and press release 5G is expected to have time and position delays between satellites and antennas because of multipath effects (signals being bounced or reflected off of buildings). Developers are already working on creating better technologies to combat these multipath effects. However what is absent is having the tool to test that these new technologies will work in the real world. This is where Spirent comes in with their Sim3D environment modelling software.

Moving onto my firm’s annual report I read about their goals for future growth through new and existing market opportunities. My company appears to understand their existing markets and what their consumers want but they also recognise future opportunities. For example, Spirent forecasts (within the annual report) that the global market for autonomous (driverless) vehicles will be £907 billion by 2035. And to keep up with this growing market, new testing solutions will be needed to examine the security technologies used in autonomous vehicles. Spirent provides these testing solutions and keep their technologies up-to-date when new security threats are discovered.

My firm mentions quite a few times in their report that product development is very important to them, it made me feel that it is one of their most critical and strongest points of their business. However after looking at the consolidated income statement they spent less on product development in 2018 compared to 2017. I wanted to know why as this wasn’t the impression I first had whilst reading. They mentioned that better spending efficiencies and revenue growth contributed to the decrease. So while it may look like they are not wanting to spend the dollars on product development, the reality (to me) is that they have become even smarter with their investments and expenditure on product development.

The words gain on divestment were listed on the income statement. I wasn’t sure what this meant; my guess was that it meant a gain on selling something. After a quick google search it was confirmed, a divestment is the opposite of investment. So rather than investing (buying) an asset or into shares of another business, divestment is when someone sell’s an asset or shares and they make a gain (profit). Reading through the footnotes I learnt that my firm did not sell any assets or shares in 2018 but rather they received a loan repayment of $2m in relation to subsidiaries that were sold in 2017.

Another item listed on my income statement was acquired intangible asset amortisation. Now this I had to breakdown. Acquired is something that is purchased or obtained. Intangible asset is an item that is not physical in nature, so it cannot be seen or touched. I found a great example of this – intellectual property. Lastly amortization is an accounting process where the cost of something is expensed over a specific timeframe. So my example of acquired intangible asset amortization is that a company may purchase the rights to a trading name (a trading name is not physical in nature) and account for the cost of purchasing the name over a timeframe of 5 years. On my search to understand this I also came across tangible assets, which are the opposite of intangible assets, so physical assets like equipment, machinery and furniture.

Compared to 2017 revenue increased by $22.1 million, I was curious about this. Looking through the ‘notes to the financial statements’ section it appears that a large portion of this increase came from Spirent’s Network & Security division. Whilst reading the group review (on page 43 of the annual report) it is mentioned that the company secured a significant contract with a US defence contractor. The contract was significant because it was worth approximately $10 million. However my firm does not expect to repeat such a contract in the future. This leaves me wondering about where my firm’s revenue will end up for 2019, perhaps they will secure another contract in a different sector or perhaps not.

Exceptional items stood out to me as it sounded important. They were adjusted out on the income statement but I still wanted to know what such things would fall into this category and if they were infact important. I did a google search and was pleasantly surprised with some familiar words from early study readings, Generally Accepted Accounting Principles. ‘An exceptional item is unusually large and an uncommon transaction to a business. These items must be disclosed on a company’s balance sheet.’ I was a little confused because I was just reading about this item on my income statement and now I’m taken to the balance sheet. A quick skim over my balance sheet and ‘exceptional items’ were not listed. So I did some digging through my firm’s current and non-current liabilities thinking this would be a good place to look. I still wasn’t able to find ‘exceptional items’ or the distinct figure of $13.1 million (this was the amount adjusted out). However moving onto the footnotes I found a figure that I thought was exceptional. Spirent was issued with a Notice of Recovery from French Customs for import duty equalling to $8.9 million. For now they have only provisioned for this amount as they have many uncertainties regarding the notice (as mentioned in the last paragraph on page 146).

My firm’s balance sheet has two lots of restated 2017 figures. This was very confusing to me. I really had to pick my brain to work to figure out what was going on. Firstly the reason for the restated figures was because of the adoption of the International Financial Reporting Standards as per the note at the bottom of the balance sheet. Within the note was a reference to note 37. Contained in note 37 was a balance sheet restatement which clearly showed the impact of the IFRS change. I realised that the last column on my balance sheet was actually the figures for 2016, I concluded that my firm must have ran their balance sheet as at 1 Jan 2017 for their 2016 reporting. I confirmed this by comparing the balance sheet and restatement balance sheet side by side. Whilst doing this I noticed that the balance sheet ran the oldest to newest year’s right to left but the balance sheet restatement was left to right. I think this is puzzling and not sure why it would be done this way. Perhaps not to confuse one with the other?

One of the things Maria mentioned in her lecture this week was about the order of liquidity of assets on the balance sheet. I hadn’t heard of order of liquidity. But my understanding is that whatever asset is the easiest or quickest to turn into cash wins first place on the list, then so on and so forth. For example cash would be first as it’s already cash, any receivables would then be next as these are paid in cash and can be demanded. Followed by inventories which can be sold for cash but this can take time compared to receiving your receivables.  Well I must say, I could not establish any sort of order on my firm’s balance sheet. Under current assets, cash at $121.6m was listed last, trade and other receivables at $139.9m was listed second from the top and inventories at $25.7m was listed at the top of the list. So I guess my firm just doesn’t use an order of liquidity or perhaps there is a reason and I have not recognised it.

A good point (to me) I noticed on the balance sheet about my firm was that their total assets far outweigh their total liabilities. Now if I remember correctly ‘Equity= Assets less Liabilities’, and equity relates back to the owners. So I imagine that the owners of my firm must be quite happy with how the company finished out 2018.

The only real concerning point I had about my company was that cash and cash equivalents were lower than the prior year. Looking into the footnotes had me even more concerned as the cash on hand was substantially lower than 2017, $25.6m lower to be exact. My firm placed more cash ($18.8m) into short-term bank deposits. They mention earning interest on these deposits, so I guess they’ve taken the opportunity to capitalise on the extra funds they have. The remaining cash difference was contributed to an increase in working capital which offsetted growth in earnings, which happened in the final quarter of 2018. I tried to understand what this meant but could only find some information that I was able to understand. My interpretation of an increase of working capital is that when we pay off some of our creditors we reduce what we owe (liability), but in doing this we reduce our cash at the same time. I tried to understand the other side which mentions that increasing receivables then increases assets but I didn’t really grasp it.

From reading the annual report along with the financial statements I think I am starting to put together the reality of my firm. I believe that my company is thriving and can only go up from here.

 

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T