Sprout Social, Inc. Annual Report 2018

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FY2018 Annual Report · Sprout Social, Inc.

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SPIRENT COMMUNICATIONS PLC
ANNUAL REPORT 2018

PROMISE.ASSURED.

PROMISE.
ASSURED.

FINANCIAL HIGHLIGHTS

Revenue

Adjusted operating profit1

$476.9m
2018

5%
$454.8m
2017

$77.1m
2018

31%

$58.9m
2017

Adjusted operating margin2

Profit before tax

16.2%
2018

3.2%

13.0%
2017

$61.2m
2018

31%

$46.6m
2017

Free cash flow3

Adjusted basic earnings per share4

$50.9m
2018

10%

$56.4m
2017

10.86c
2018

44%

7.55c
2017

Dividend per share

4.49c
2018

10%

4.08c
2017

Notes
1. Before exceptional items, acquired
intangible asset amortisation and
share-based payment amounting to
$19.6 million in total (2017 $15.2 million).
2. Adjusted operating profit as a percentage

of revenue in the period.

3. Operating cash flow after tax, net interest

and net capital expenditure.

4. Adjusted basic earnings per share is
based on adjusted earnings as set
out in note 11 of Notes to the full year
consolidated financial statements.

Items with notes 1 to 4 above are non-GAAP
alternative performance measures, see
pages 182 and 183 for more detail.

Strategic Report
IFC Results and highlights
2
Promise. Assured.
10 Business at a glance
12 Chairman’s statement
14 Chief Executive Officer’s strategic review
16 Our markets
18 Our business model and strategy
20 Strategy at a glance
22 Key performance indicators
24 Risk management
26 Principal risks and uncertainties
30 Operating review
42 Financial review
50 Sustainability

Corporate Governance
54 Chairman’s introduction to governance
55 Board statements
56 Board of Directors
58 Directors’ statement on

corporate governance

66 Nomination Committee Report
68 Audit Committee Report
74 Report on Directors’ Remuneration
96 Directors’ Report
101 Directors’ responsibilities statement

Financial Statements
102 Independent auditor’s report
111 Consolidated income statement
112 Consolidated statement of
comprehensive income
113 Consolidated balance sheet
114 Consolidated statement of changes

in equity

115 Consolidated cash flow statement
116 Notes to the consolidated
financial statements

159 Parent Company balance sheet
160 Parent Company statement of changes

in equity

161 Notes to the parent Company

financial statements

178 Full list of subsidiary undertakings

Other Information
180 Financial history
182 Alternative performance measures
184 Shareholder information
185 Glossary
187 Contact details

Our customers operate in markets
characterised by relentless traffic growth,
ever-increasing security challenges and
continual pressure to innovate while generating
revenue and managing operating costs.

Our testing and measurement capabilities
are needed now more than ever to assure our
customers can deliver on the promises they
make to their customers to keep them safe,
secure and connected.

PERFORMANCE HIGHLIGHTS

GROUP
• Demonstrable delivery of our strategy in action – revenue
growth 5 per cent, adjusted operating profit increased
31 per cent, adjusted basic EPS up 44 per cent.
• Robust results across all three operating segments.
• Networks & Security delivered strong growth with Lifecycle

Service Assurance building scale.

• Connected Devices benefitted from cost management actions

whilst revenue from ongoing businesses has stabilised.

• High cash conversion delivered, maintaining strong balance

sheet, $121.6 million cash at bank.

• 5G development gathering pace with positive impact on

portfolio performance across all segments.
• We have created a robust platform to leverage

growth opportunities.

NETWORKS & SECURITY
• Our high-speed Ethernet business grew; we won multiple

strategic deals to validate our market and product leadership
in 400G.

• Our Positioning business secured record sales driven by US

military spend.

• Application Security growth in order intake in excess of 20 per
cent, with 25 new customers and increased subscription sales.

• Application Security expanded the functionality of its
flagship product (CyberFlood) and won more security
consulting business.

LIFECYCLE SERVICE ASSURANCE
• We focused our investment on laying the foundations for
future growth in our Lifecycle Service Assurance business.
• We expanded our deployment of Spirent VisionWorks in our
key tier 1 mobile operator customers in North America and
added three new major customers.

• 5G drove demand for our Landslide mobile infrastructure test
system, for which we now have more than ten 5G customers,
including five tier 1 mobile service providers, multiple
infrastructure providers and a leading university.

CONNECTED DEVICES
• Strong profit growth, revenue from ongoing businesses

stabilised with previous cost management actions underpinning
improved operating margin.

• We have developed strong partnerships to launch new 5G

device test products in the second half of 2019.

• We won significant 5G channel emulation deals throughout

2018 for testing new, complex 5G radio frequency technologies.

Cautionary statement regarding forward-looking statements
This Annual Report 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 Annual Report, whether as a result of new information, future events or otherwise.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

PROMISE. ASSURED.

OUR CUSTOMERS’ PROMISES

Now more than ever, our test and measurement capabilities are needed to assure
our customers can deliver on the promises they make to keep users safe, secure
and connected. The solutions we provide remove doubt and give our customers the
confidence and assurance they need to fulfil promises they make to their customers
every day.

We already embody what this brand is all about but ‘Promise. Assured’ allows us to
articulate that clearly and simply to our customers. It acts as a new lens through which to
view all of the work we do.

ASSURSpirent Communications plc Annual Report 20183

INGSpirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT

PROMISE. ASSURED.

ACTING AS

ADVISERS

We are committed to extending our market-leading positions among developers and developing new
products and services for the production network, providing customers with service assurance and analytics,
5G and cyber security solutions. Beyond this, we are now looking at new areas where we have identified
opportunities for growth, alongside our customers, including virtualisation, autonomous vehicles and
automotive testing.

We are helping our customers make critical investment decisions as a trusted adviser, assuring service
performance and supporting revenue growth. Our work with China Mobile in its extensive 5G rollout,
described in the case study on page 32, is an example of how we enable and assure they fulfil their promises.

Our ‘Spirent Days’ demonstrate to customers how we help to accelerate time to market, reduce costs and
improve network performance and customer experiences. We have also strengthened our specialised and
consultative sales force and enhanced how we understand and act on customer satisfaction. In addition, we aim
to create new services, leveraging the expertise, technologies and experience we have across the Company.

TRUST EDSpirent Communications plc Annual Report 2018ADVISERS

TRUST EDSpirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT

PROMISE. ASSURED.

PROVIDING

SUPPORT

We are increasingly engaging the CEO, the Chief Information Officer or the Chief Security Officer.
We have a global footprint and work with leading enterprises, moving up the value chain within
those organisations.

One of the important actions we have taken to drive this forward is to establish an Industry Advisory
Council made up of a group of external industry advisers to provide business and technical advice
from a customer perspective. By building our understanding of the issues our customers face, we
can help deliver the key information their decision makers need to move forward. Our business is
transforming in line with theirs.

We have invested in key account management and account-based marketing focused on our top
customers to develop our relationship and grow our business.

STRAT EGICSpirent Communications plc Annual Report 2018PROVIDING

SUPPORT

STRAT EGICSpirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT

PROMISE. ASSURED.

BRINGING

TO COMPLEXITY

There are critical issues our customers face as they rollout virtual technologies, 5G
wireless and tackle cyber security risks. At Spirent, we have a passion for solving
problems and, with decades of experience to draw on, we help our customers navigate
through these threats and challenges as they pursue new opportunities for their business.

Part of the important work we are doing in this area is our collaboration with Surrey
University, one of the Government’s 5G innovation centres, to enable the university’s
independent 5G test bed with over one million emulated users and traffic mixes, making
it the world’s largest capacity test bed available today.

We are aware of the pain points our customers feel in the fast paced markets in which they
operate and we see our role as enabling and assuring they fulfil their promises and plans.

CLARI TYSpirent Communications plc Annual Report 20189

CLARI TYSpirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT

BUSINESS AT A GLANCE

WE ARE COMMITTED TO BEING A

TRUSTED

PARTNER AND STRATEGIC ADVISER TO OUR CUSTOMERS

Our new initiative, ‘Promise.
Assured.’ represents our recognition
and understanding of the critical
issues facing our customers and
our commitment to being a true
partner and trusted adviser as their
businesses transform.

We understand the promises our
customers make to their customers
and we enable and assure they
keep them.

We will maintain strong leadership
among developers while expanding
into the production networks and
into new industries, right alongside
our customers.

Through our products and services,
we are helping customers enable and
assure performance and revenues
for their next-generation devices
and networks.

CUSTOMER BUSINESS IMPERATIVES

Manage
complexity

Reduce costs

Generate new
revenues

Launch new
products

Ensure
continuous service

Meet the challenges
of cyber security

Developers
• Devices
• Applications
• Network Infrastructure

Operators
• Communication
Service Providers

• Enterprises

Spirent Communications plc Annual Report 2018OUR FOCUS AREAS

MARKET OPPORTUNITIES FOR SPIRENT

Networks
& Security

Connected
Devices

Lifecycle
Service
Assurance

Extend market-
leading position
• Ethernet
• Positioning
• Mobile
network
infrastructure

Grow revenue
• 5G
• Cyber security
• Service

assurance
and analytics

Explore new
business opportunities
• Virtualisation
• Autonomous vehicles
• Automotive

C
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F
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STRATEGIC REPORTSpirent Communications plc Annual Report 2018

STRATEGIC REPORT

CHAIRMAN’S STATEMENT
BILL THOMAS

SPIRENT IS PASSIONATE ABOUT

DELIVERING
VALUE

I AM CONFIDENT
THAT WITH GOOD
EXECUTION AGAINST
OUR PRIORITIES WE
WILL BE ABLE TO
REALISE SPIRENT’S
POTENTIAL FOR
THE BENEFIT OF ALL
OUR STAKEHOLDERS.”

Spirent Communications plc Annual Report 2018Adjusted basic earnings per share1

10.86c
44%

2017 7.55c

Dividend per share

4.49c

10%
2017 4.08c

Note
1. Adjusted basic earnings per share is

based on adjusted earnings as set out
in note 11 of Notes to the full year
consolidated financial statements.

I am pleased to present our Annual Report
for the year to 31 December 2018.

Ever since joining the Board of Spirent
I have been struck by the calibre and
commitment of our people who work
tirelessly to deliver value for all our
stakeholders. In 2018, this work has been
rewarded with growth in our order intake,
revenue and profitability. I want to thank
all of our employees for delivering such a
pleasing result.

PERFORMANCE
The Executive team has made good strides
towards achieving our strategic priorities.
In 2019 and beyond we will continue
to focus on executing in those markets
where we have a leadership position and
investing in our identified growth areas.

We saw a 31 per cent year-on-year increase
in adjusted operating profit and an
increase of $22 million in Group revenue.
Aside from the financial performance
delivered in 2018, I believe that we have
also made some key changes to the way
in which we seek to service our larger
customers, harness input from leaders
in our industry and increase our sales
effectiveness, which we expect to set us
up for further success in the future.

Adjusted basic earnings per share was
up 44 per cent at 10.86 cents (2017
7.55 cents). Basic earnings per share
was 9.14 cents (2017 4.75 cents).

DIVIDEND
In line with the Board’s progressive
dividend policy, and in the light of the
strength of performance in 2018, the
Board is recommending a final dividend of
2.73 cents (2.08 pence) per share, resulting
in a total dividend for 2018 of 4.49 cents
(3.42 pence) per share, a 10 per cent
increase on 2017.

BOARD
Wendy Koh and Edgar Masri joined our
Board early in January 2018 and have
each made a strong contribution to our
meetings. Their deep technical knowledge
in our served markets and extensive
knowledge of dealing with our customer
base has been a welcome addition to
our discussions and the effectiveness of
our Board and its Committees has been
enhanced by their contribution.

On 15 November 2018, we announced
that Eric Hutchinson, our CEO, had
informed the Board of his wish to retire
from the Company in 2019. Eric has
been with Spirent over the last 37 years,
spending 13 years as CFO and the last five
years as CEO. He really was instrumental in
forming the business that Spirent is today
and the Board and I would like to thank
Eric for his contribution to Spirent and
wish him and his wife Rosemarie our best
wishes for his retirement.

OUTLOOK
The Board is confident that the Group
will continue to see steady profitable
growth in 2019, leveraging our technology
platform to meet demand whilst
adopting a balanced approach to driving
efficiency and investment to support
growth agendas.

Bill Thomas
Chairman
7 March 2019

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

CHIEF EXECUTIVE OFFICER’S STRATEGIC REVIEW
ERIC HUTCHINSON

BUILDING
NEW

MARKET
OPPORTUNITIES

SPIRENT HAS CLEARLY
DEMONSTRATED
ITS LEADERSHIP IN
TAKING MARKET
SHARE IN ITS
SERVED MARKET.”

OVERVIEW – DELIVERING ON
OUR POTENTIAL
In early 2017, Spirent launched a new
strategy designed to focus on high-
potential areas and deliver sustainable,
profitable growth. The Group reorganised
into three new segments focused around
growth opportunities in each of Networks
& Security, Lifecycle Service Assurance and
Connected Devices and 2018 saw Spirent
deliver a material increase in operating
profit and earnings and begin to realise its
significant potential.

MARKET
The prevailing market trends continue
to be favourable to Spirent. The world’s
consumption and generation of data
continues to drive relentless traffic
growth, while in an effort to increase scale,
telecoms equipment manufacturers and
network operators need to reduce both
operating costs and capital expenditure.
Spirent’s customers face these issues
at the same time as seeking to meet

Spirent Communications plc Annual Report 2018BUILDING

end-customer demands for an improved
quality of experience. These challenges
are particularly acute for service providers
with complex hybrid networks.

for which we now have more than ten 5G
customers including five tier 1 mobile
service providers, multiple infrastructure
providers and a leading university.

These dynamics are driving the need for
new high-speed Ethernet technologies,
the virtualisation of networks and the
move to utilise capacity through cloud
technologies. High-speed Ethernet
increases capacity in physical networks
and data centers, while virtualisation
lowers the cost of capital expenditure in
building networks and allows the turn
up of new services to be managed more
efficiently. Spirent’s technology leads in
both of these areas, assuring functionality
before deployment and during operations
to deliver real-time responses to the
changing conditions in live networks.

Pervasive security threats are now a daily
occurrence, impacting any individual or
business connected to the digital world.
The cost of cybercrime continues to grow
and is heaviest in financial services, utilities,
aerospace & defence and healthcare.
Spirent’s ability to assess vulnerabilities
and detect data breaches are therefore
especially well-suited to the needs of the
security test market.

Perhaps most importantly, we have now
begun to see the major market impact of
the development and deployment of 5G.
Around the globe, vendors and operators
race to develop and deploy 5G devices,
networks and services. With mobile
subscribers and connected devices
saturating the global connectivity market,
machine-to-machine connections are
growing exponentially. Investment in 5G
wireless infrastructure will grow to billions
of dollars over the next three years, and 5G
wireless deployment will enable innovation
in the ways in which economic activity is
undertaken and how entertainment and
services are consumed. The work Spirent
has done to position itself to benefit from
this trend is starting to bear fruit.

5G DEVELOPMENT
5G development is acclerating with
postitive impact on our portfolio
performance across our segments.
Spirent has the industry’s broadest and
most innovative set of 5G test and service
assurance solutions. We had over 30
customer wins in 2018. Our customers
range across tier 1 service providers,
major network equipment manufacturers
and the largest 5G semi-conductor and
device manufacturers. We provide a safe
pathway for our customers across the
lifecycle as they look to develop, launch
and operationalise 5G. 5G drove demand
for our mobile infrastructure test system,

STRATEGIC PRIORITIES
Spirent’s vision is to be our customers’
trusted adviser, partnering with them
to enable and assure their product and
service offerings secure their ongoing
business success.

Spirent’s enabling technology allows
customers to accelerate innovation,
reduce time to market, achieve superior
performance with their products, solutions
and services, differentiate their quality
of service and enhance their security of
operations. Meanwhile, the Group’s family
of assurance solutions allow customers
to manage complexity in an increasingly
multi-technology world. It does this
through the application of Spirent’s
expertise and codified methodologies in
testing, measurement, assurance, analytics
and security.

Our clear strategic priorities are as follows:

1. Focus on key markets and customers
Our first strategic priority is to focus
on target markets and customers
establishing new growth prospects
for Spirent. For example, in Lifecycle
Service Assurance, through the growth
of our VisionWorks solutions, we serve
the emerging needs of virtualised
networks and 5G wireless service
deployment. Another major initiative is
the development, nurturing and growth
of our new CyberFlood security products
and services aimed at enterprise networks.
The achievement of new customer wins
for both VisionWorks and for CyberFlood
shows that the strategy is being executed
successfully, while the focus for 2019 will
be about increasing the pace of execution.
Looking ahead, we will continue to focus
on appropriate investment to underpin
growth whilst maintaining an efficient
cost structure.

2. Innovate and continue leading-edge

product development

The second strategic priority is innovation
to further Spirent’s leadership in the
development and service assurance
markets. Innovation is the life blood of
the business, and we have successfully
evolved capabilities in the high-speed
Ethernet test market to establish
leadership in 400G Ethernet and all
other required variants. Through this
activity, we have laid the foundations for
ever-increasing scale. Innovation also
includes the creation of new 5G wireless
test solutions for both development test

and service assurance across the entire
portfolio and collaboration with partners.
Leveraging Spirent’s leadership in Global
Navigation Satellite Systems (GNSS), we
have also created systems utilised by US
Government and commercial businesses to
enable the testing of vulnerabilities linked
to GNSS, like global positioning systems,
sensor fusion, connected autonomous
vehicles and transport infrastructure.
Importantly, innovation also includes
improvement in our internal processes,
changing the way Spirent goes to market
across its portfolio, to provide seamless
service and support to the customer.

3. Maintain financial strength

and flexibility

The third strategic priority is to ensure
Spirent continues to have financial
strength and a strong operational
platform. 2018 saw the realisation of
significant internal efficiency and cost-
effective management programmes.
Customer relationships have been
strengthened through the client partner
executive initiative at our key accounts.
Our new Pace global channel partner
programme was launched in 2018 to help
expand Spirent’s served markets. We retain
a strong balance sheet with $121.6 million
of cash, as we continue to focus on
optimising cash conversion.

OPERATIONAL HIGHLIGHTS
• Strategy is delivering on Spirent’s

potential across all operating segments.

• Networks & Security delivered strong

growth with Lifecycle Service Assurance
building scale.

• Connected Devices benefitted from cost

management actions whilst revenue
from ongoing businesses has stabilised.

• 5G development is gathering pace
with positive impact on portfolio
performance across all segments.

2018 OPERATING PERFORMANCE
Adjusted basic earnings per share
increased by 44 per cent to 10.86 cents
(2017 7.55 cents). This reflected the 31 per
cent increase in adjusted operating profit
to $77.1 million (2017 $58.9 million) and
the reduction in the effective tax rate to
15.4 per cent from 22.1 per cent in 2017.
Group revenue grew by 5 per cent, an
increase of $22.1 million to $476.9 million.
Strong revenue growth was achieved in
Networks & Security, Lifecycle Service
Assurance consolidated its position with
major customers and Connected Devices
was stable after accounting for the
previously reported cessation in certain
product lines in 2017.

Eric Hutchinson
Chief Executive Officer
7 March 2019

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

OUR MARKETS

WE ARE FOCUSED ON

CAPTURING

NEW MARKET OPPORTUNITIES

CYBER SECURITY

CLOUDIFICATION

NETWORK

VIRTUALISATION

CONNECTED AND

AUTONOMOUS VEHICLES

Market driver

The development and deployment of
mobile 5G networks and applications
is fuelling new investments in telecom
infrastructure and innovative applications,
such as autonomous vehicles and
augmented reality.

The global 5G equipment market was
estimated at $2.4 billion in 2015 and is
forecast to reach $9.6 billion by 2020, a
compound annual growth rate (CAGR) of
32 per cent1.

As cyber security threats grow globally,
the requirement to verify the effectiveness
and performance of security products
becomes paramount.

The security testing market is forecasted
to grow from $3.3 billion in 2016 to
$7.6 billion in 2021, a CAGR of 18 per cent2.

Enterprises adopt the cloud

as an increasingly important

part of their information

technology infrastructure.

The worldwide public cloud

services market is forecast

to grow by 18 per cent to

$247 billion in 2017³.

Connected and autonomous vehicles have ever-increasing

complexity. As vehicles adopt higher levels of Assisted Driver &

Safety functions the in-vehicle networking becomes complex,

the networking becomes critical, and the reliability of GNSS

is essential.

The global market for connected and autonomous vehicles

will reach £907 billion by 2035 with a £63 billion market for

the connected and autonomous vehicle technologies5.

Opportunities for Spirent

New test systems are required for the
development and management of 5G
devices, networks and applications.

Solutions are required to verify the
effectiveness and performance of
security products as they are developed
and deployed.

to understand the performance

functions under various conditions

autonomous cars will require real-world simulation solutions and

Solutions are required to

benchmark virtualised network

New testing solutions will be needed to test and secure

networking technologies used by vehicles. The development of

Service providers and

enterprises seek

of their cloud services.

emulation of GNSS cyber attacks.

As network operators develop,

trial and implement virtualised

network functions, developers

and operators are faced with

challenges to test and deploy

their virtualised implementations.

The service provider network

functions virtualisation market for

purchase of hardware, software,

and services will grow from

$10 billion in 2016 to almost

$37 billion in 2021, a CAGR of

30 per cent4.

in the lab and then, as they

are deployed in the network,

operators are challenged to

understand their performance on

an ongoing basis and to isolate

and diagnose problems as network

conditions change.

Our response

We have products for 5G development.
We have a new channel emulator for 5G
base stations and fronthaul testing (Spirent
Vertex). We have products that automate
performance and security testing of
Cloud RAN virtual environments (Spirent
TestCenter and CyberFlood). We have
performance test systems for 5G backhaul
and testing and benchmarking virtualised
network functions (Spirent TestCenter).
We have products (Spirent Landslide) to
emulate the 5G core network to test 5G
New Radio (NR) and to test the evolution
of the core network. We have products that
will be ready to actively test and assure 5G
production networks (Spirent VisionWorks).

We provide a comprehensive security
testing product (Spirent CyberFlood)
and services (Spirent SecurityLabs).

We stay current with emerging threats
and provide test solutions quickly when
new threats are discovered.

We are a founding member of the industry
group NetSecOPEN, focused on defining
new open standards for testing enterprise
network security performance.

We earned global CREST accreditation
for penetration testing. UK-based CREST
is an accreditation and certification
body that supports the information
security market.

We developed a new product

We have test systems to benchmark

Spirent was the first company to provide a certified V2X

(Spirent CloudScore), the

industry’s first comprehensive

baseline and benchmarking

solution. It provides an

assessment and comparison

of the performance of any

virtualised or cloud infrastructure.

virtualised network functions in the

lab and to verify their performance

in networks using our active

service assurance and analytics

solutions (Spirent VisionWorks).

emulation test bed to complement our existing broad set of

solutions for testing the conformance and performance of

Automotive Ethernet.

Spirent provides software to simulate GNSS in a real-world

environment that can interface to other industry-leading

Sensor Fusion drive test simulation solutions. Spirent provides

best-in-class GNSS simulation and emulation solutions to test

the performance and reliability of GNSS receivers and their

integration into the vehicle, including their reliability when

jammed or spoofed.

Spirent’s SecurityLabs services have been used by leading

global automotive companies to test the security of their

vehicles and their connection to cloud infrastructure.

Spirent Communications plc Annual Report 2018 Read more on pages 20, 22 and 26: Strategy at a glance, KPIs and Principal risks.

Sources
1. Technavio, “Global 5G Equipment Market” (October 2016).
2. MarketsandMarkets, “Security Testing Market” (October 2016).
3. Forbes, “Roundup of Cloud Computing Forecasts, 2017” (April 2017).
4.
5. Catapult Transport Systems Market Forecast for Connected and Autonomous Vehicles (July 2017).

IHS Technology, “NFV Hardware, Software & Services Tracker” (November 2017).

CYBER SECURITY

CLOUDIFICATION

NETWORK
VIRTUALISATION

CONNECTED AND
AUTONOMOUS VEHICLES

Market driver

The development and deployment of

mobile 5G networks and applications

is fuelling new investments in telecom

As cyber security threats grow globally,

the requirement to verify the effectiveness

and performance of security products

infrastructure and innovative applications,

becomes paramount.

such as autonomous vehicles and

augmented reality.

The global 5G equipment market was

estimated at $2.4 billion in 2015 and is

forecast to reach $9.6 billion by 2020, a

compound annual growth rate (CAGR) of

32 per cent1.

The security testing market is forecasted

to grow from $3.3 billion in 2016 to

$7.6 billion in 2021, a CAGR of 18 per cent2.

Enterprises adopt the cloud
as an increasingly important
part of their information
technology infrastructure.

The worldwide public cloud
services market is forecast
to grow by 18 per cent to
$247 billion in 2017³.

Opportunities for Spirent

New test systems are required for the

development and management of 5G

devices, networks and applications.

Solutions are required to verify the

effectiveness and performance of

security products as they are developed

and deployed.

Service providers and
enterprises seek
to understand the performance
of their cloud services.

Our response

We have products for 5G development.

We have a new channel emulator for 5G

We provide a comprehensive security

testing product (Spirent CyberFlood)

base stations and fronthaul testing (Spirent

and services (Spirent SecurityLabs).

Vertex). We have products that automate

performance and security testing of

Cloud RAN virtual environments (Spirent

TestCenter and CyberFlood). We have

performance test systems for 5G backhaul

and testing and benchmarking virtualised

network functions (Spirent TestCenter).

We have products (Spirent Landslide) to

emulate the 5G core network to test 5G

New Radio (NR) and to test the evolution

of the core network. We have products that

will be ready to actively test and assure 5G

production networks (Spirent VisionWorks).

We stay current with emerging threats

and provide test solutions quickly when

new threats are discovered.

We are a founding member of the industry

group NetSecOPEN, focused on defining

new open standards for testing enterprise

network security performance.

We earned global CREST accreditation

for penetration testing. UK-based CREST

is an accreditation and certification

body that supports the information

security market.

We developed a new product
(Spirent CloudScore), the
industry’s first comprehensive
baseline and benchmarking
solution. It provides an
assessment and comparison
of the performance of any
virtualised or cloud infrastructure.

As network operators develop,
trial and implement virtualised
network functions, developers
and operators are faced with
challenges to test and deploy
their virtualised implementations.

The service provider network
functions virtualisation market for
purchase of hardware, software,
and services will grow from
$10 billion in 2016 to almost
$37 billion in 2021, a CAGR of
30 per cent4.

Solutions are required to
benchmark virtualised network
functions under various conditions
in the lab and then, as they
are deployed in the network,
operators are challenged to
understand their performance on
an ongoing basis and to isolate
and diagnose problems as network
conditions change.

We have test systems to benchmark
virtualised network functions in the
lab and to verify their performance
in networks using our active
service assurance and analytics
solutions (Spirent VisionWorks).

Connected and autonomous vehicles have ever-increasing
complexity. As vehicles adopt higher levels of Assisted Driver &
Safety functions the in-vehicle networking becomes complex,
the networking becomes critical, and the reliability of GNSS
is essential.

The global market for connected and autonomous vehicles
will reach £907 billion by 2035 with a £63 billion market for
the connected and autonomous vehicle technologies5.

New testing solutions will be needed to test and secure
networking technologies used by vehicles. The development of
autonomous cars will require real-world simulation solutions and
emulation of GNSS cyber attacks.

Spirent was the first company to provide a certified V2X
emulation test bed to complement our existing broad set of
solutions for testing the conformance and performance of
Automotive Ethernet.

Spirent provides software to simulate GNSS in a real-world
environment that can interface to other industry-leading
Sensor Fusion drive test simulation solutions. Spirent provides
best-in-class GNSS simulation and emulation solutions to test
the performance and reliability of GNSS receivers and their
integration into the vehicle, including their reliability when
jammed or spoofed.

Spirent’s SecurityLabs services have been used by leading
global automotive companies to test the security of their
vehicles and their connection to cloud infrastructure.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

OUR BUSINESS MODEL
AND STRATEGY

OUR BUSINESS MODEL

BUSINESS PLANNING
We target attractive

business opportunities

and we organise and focus

our businesses on

these opportunities.

CREATION
We employ talented

marketing and engineering

teams to design and develop

new products and services.

GLOBAL AND

SPECIALISED

SALES ORGANISATION
We have a global and

consultative sales team focused on

delivering our solutions. We partner

with specialised distributors and

agents when selling directly

is not financially viable.

UNDERSTANDING OUR

CUSTOMERS’ NEEDS
We work closely with our

customers and participate in

industry groups to understand

our customers’ technological and

operational challenges, and business

direction.

Spirent is an expert
in understanding and
addressing our customers’
complex technical
requirements and
business imperatives.

COLLABORATION

WITH CUSTOMERS AND

CUSTOMER TRIALS
We collaborate closely

with customers on

the new solutions to meet

their needs. Our sales cycle often

involves the customer evaluating

the product before

they purchase.

ONGOING CLIENT RELATIONSHIPS

AND FOLLOW ON BUSINESS
Much of our income comes

from established customers.

Long-term customer retention

is key to our success.

DELIVERY OF PRODUCTS

AND SERVICES
We use world class contract

manufacturers to ensure quality

and timeliness of supply.

ASSURING OUR

CUSTOMERS’ PROMISES
We have professional services

for installation and training.

We sell annual maintenance

and support services.

Spirent Communications plc Annual Report 2018HOW WE CREATE VALUE

STRATEGY

OUR VISION
Spirent’s vision is to be our customers’ trusted adviser, partnering
with them to enable and assure their product and service
offerings, and secure their ongoing business success.

OUR STRATEGY
We work closely with customers to understand their plans and
challenges, and develop first-to-market products and services
to fulfil their requirements and exceed their expectations.

OUR SIX STRATEGIC PRIORITIES:
1. Work closely with our customers
2. Establish and maintain technology leadership
3. Grow our business in target markets
4. Acquire new capabilities and technologies
5. Invest in our people
6. Maintain financial strength and flexibility

HOW OUR STRATEGY AND BUSINESS MODEL
WORK TOGETHER
Our business model embodies our critical success factors
of working closely with customers and designing innovative
first-to-market products and services and selling through our
specialised sales force.

Read more on page 26

Note
1. Operating cash flow after tax, net

interest and net capital expenditure.
Included in the Group’s KPIs, read more
on pages 22 and 23.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

KEY PERFORMANCE INDICATORS

REASON FOR
MEASUREMENT
The ratio of orders booked to
revenue billed is a measure of
the visibility of future revenues
at current levels of activity and
provides an indication of the
underlying trend in Spirent’s
future revenue stream.

PERFORMANCE
The increase in book to
bill ratio to 99, from 98 in
2017, reflects increased
US Government business
and core Ethernet product
performance, partially
offset by timing of
Lifecycle Service Assurance
VisionWorks orders.

RELEVANCE TO STRATEGY
The book to bill ratio is an
indicator of whether future
activity levels are rising or
slowing, and therefore how
effective we have been in the
execution of our strategy.

REASON FOR
MEASUREMENT
Spirent monitors growth in
revenue as this shows how
successful Spirent has been
in expanding its markets and
growing its customer base.

PERFORMANCE
5 per cent revenue increase
in 2018, following flat
revenue in 2017, reflecting
strong Positioning business
performance in North
America, 400G upswing and
core high-speed Ethernet
product performance.

REASON FOR
MEASUREMENT
Adjusted operating profit is
the measure used to evaluate
the overall performance of the
Group as well as each of the
operating segments.

PERFORMANCE
Adjusted operating profit
increased by 31 per cent
to $77.1 million, from
$58.9 million in 2017, as
a result of strong revenue
growth and engineering
spend efficiencies.

RELEVANCE TO STRATEGY
Revenue demonstrates the
effectiveness of our strategy:
our success in expanding
our markets both organically
and through acquisition;
maintaining technology
leadership; and our strong
relationships with our
customers, all of which ensure
that we continue to win and
maintain business.

RELEVANCE TO STRATEGY
Adjusted operating profit
indicates our financial strength
and our ability to invest in the
business for future growth.

REASON FOR
MEASUREMENT
Adjusted operating
margin is a measure of the
Group’s overall profitability.
Spirent operates in markets
which have high operating
returns and strives to achieve
best-in-class operating returns
compared with its peers.

PERFORMANCE
Increase in adjusted operating
margin to 16.2 per cent, from
13.0 per cent in 2017, reflects
a combination of revenue
growth and continued
cost management.

RELEVANCE TO STRATEGY
Adjusted operating margin is
a measure of how successful
we are in our overall strategy
and demonstrates our
ability to improve margin
through efficient operations
whilst being mindful of the
need to invest for the future.

BOOK TO BILL
Ratio1

3
0
1

1
0
1

3
0
1

8
9

9
9

REVENUE
$ million

2
7
5
4

1
7
7
4

9
7
5
4

8
4
5
4

9
6
7
4

ADJUSTED OPERATING
PROFIT2
$ million

1
7
7

9
8
5 5
6
4

0
6
4

1
2
4

ADJUSTED OPERATING
MARGIN3
%

2
6
0 1
3
2 1
0
1

1
0
1

8
8

Spirent Communications plc Annual Report 2018Spirent’s strategy focuses on medium to long-term growth and
therefore its achievement cannot just be measured by looking at
performance in 2018 compared to the prior year; trends over a
number of years must also be considered.

Executive Director remuneration is linked to certain financial,
strategic and operational KPIs with further information available
in the Remuneration Report on pages 77 to 79.

Notes
1. Ratio of orders booked to revenue in the period.
2. Before exceptional items, acquired intangible asset amortisation

and share-based payment.

3. Adjusted operating profit as a percentage of revenue in the period.
4. Adjusted basic earnings per share is based on adjusted earnings as set

out in note 11 of Notes to the full year consolidated financial statements.

5. Operating cash flow after tax, net interest and net capital expenditure.

Items with notes 1 to 5 above are non-GAAP alternative performance
measures, see pages 182 and 183 for more detail.

BOOK TO BILL RATIO1
ADJUSTED BASIC EARNINGS
PER SHARE4 (EPS)
Cents

X
X
X

2
8
5

X
X
X

0
0
5

X
X
X

5
5
7

X
6
X
8
X
0
1

X
X
X

9
2
5

REASON FOR
REASON FOR
MEASUREMENT
MEASUREMENT
Long-term growth in adjusted
The ratio of orders booked to
basic EPS is a fundamental
revenue billed is a measure of
driver to increasing
the visibility of future revenues
shareholder value.
at current levels of activity and
provides an indication of the
underlying trend in Spirent’s
future revenue stream.

PERFORMANCE
PERFORMANCE
The reduction in book to bill
Spirent’s aim is to achieve
ratio to 98, from 103 in 2016,
growth in adjusted basic EPS.
reflects decline in orders in
Part of the Executive Directors’
the Americas, and continued
remuneration is dependent on
headwinds in the wireless
achieving EPS targets. In 2018,
device test market.
adjusted basic EPS grew 44
per cent as a result of the
increase in adjusted earnings.

RELEVANCE TO STRATEGY
RELEVANCE TO STRATEGY
The book to bill ratio is an
Adjusted basic earnings
per share is a measure of
indicator of whether future
activity levels are rising or
how successful we are in
slowing, and therefore how
our strategy and ultimately
effective we have been in the
how Spirent increases value
for its shareholders.
execution of our strategy.

BOOK TO BILL RATIO1
PRODUCT DEVELOPMENT
SPEND AS A PERCENTAGE
OF REVENUE
%

X
X
X
2
5
2

X
X
X

8
4
2

X
X
X

4
4
2

X
X
X

6
2
2

X
X
X

3
0
2

BOOK TO BILL RATIO1
VOLUNTARY EMPLOYEE
TURNOVER
%

X
X
X

3
7

X
X
1
X
9

X
X
X

4
7

X
X
X
9
7

X
X
X

4
4

BOOK TO BILL RATIO1
FREE CASH FLOW5
$ million

X
4
X
6
X
5

9
X
X
0
5
X

X
X
X

3
5
3

X
X
X

9
5
2

X
X
X

7
0
1

14
14

15
15

16
16

17
17

18
18

REASON FOR
REASON FOR
MEASUREMENT
MEASUREMENT
The ratio of orders booked to
To maintain its competitive
revenue billed is a measure of
position, Spirent must invest
the visibility of future revenues
at suitable levels to support
future organic growth
at current levels of activity and
initiatives in line with the
provides an indication of the
underlying trend in Spirent’s
strategic objectives, whilst
future revenue stream.
driving improved productivity
and effectiveness.

PERFORMANCE
PERFORMANCE
In 2018, product development
The reduction in book to bill
ratio to 98, from 103 in 2016,
spend reduced to 20.3 per
reflects decline in orders in
cent of revenue from 22.6 per
the Americas, and continued
cent in 2017, as a result
headwinds in the wireless
of spend efficiencies and
revenue growth.
device test market.

RELEVANCE TO STRATEGY
RELEVANCE TO STRATEGY
It is critical that Spirent’s
The book to bill ratio is an
indicator of whether future
product development
activity levels are rising or
investment keeps pace with the
slowing, and therefore how
speed of change in technology,
effective we have been in the
and that it is directed at the
right key technology areas;
execution of our strategy.
it enables us to expand our
markets and to maintain our
technology leadership position.

PERFORMANCE
PERFORMANCE
Our 2018 voluntary turnover
The reduction in book to bill
rate of 7.9 per cent remains
ratio to 98, from 103 in 2016,
well below the global industry
reflects decline in orders in
average of 12.8 per cent.
the Americas, and continued
headwinds in the wireless
device test market.

REASON FOR
REASON FOR
MEASUREMENT
MEASUREMENT
Spirent’s success is
The ratio of orders booked to
dependent on its talented
revenue billed is a measure of
employees and retaining
the visibility of future revenues
them is extremely important.
at current levels of activity and
Voluntary employee turnover
provides an indication of the
compared to the industry
underlying trend in Spirent’s
average is the measure used
future revenue stream.
to assess how well the Group
has performed.

RELEVANCE TO STRATEGY
RELEVANCE TO STRATEGY
We cannot avoid the fact that
The book to bill ratio is an
some of our employees will
indicator of whether future
move on but we can avoid a
activity levels are rising or
skills shortage by appropriately
slowing, and therefore how
managing, recognising
effective we have been in the
and rewarding our people.
execution of our strategy.
Voluntary employee turnover
is a measure of how successful
Spirent is in its strategy of
retaining and investing in
its people.

REASON FOR
REASON FOR
MEASUREMENT
MEASUREMENT
The ratio of orders booked to
Free cash flow is a measure
revenue billed is a measure of
of the quality of Spirent’s
the visibility of future revenues
earnings. The aim is to achieve
at current levels of activity and
a high conversion of earnings
provides an indication of the
into cash.
underlying trend in Spirent’s
future revenue stream.

PERFORMANCE
PERFORMANCE
The reduction in book to bill
Free cash flow in 2018 was
ratio to 98, from 103 in 2016,
impacted by the timing of
reflects decline in orders in
fourth quarter business which
the Americas, and continued
increased working capital,
headwinds in the wireless
offsetting growth in earnings.
device test market.
Free cash flow conversion
for 2018 was 77 per cent of
adjusted earnings (2017 122
per cent).

RELEVANCE TO STRATEGY
RELEVANCE TO STRATEGY
The book to bill ratio is an
Having strong free cash flow
indicator of whether future
reflects Spirent’s ability to
activity levels are rising or
generate funds for future
slowing, and therefore how
investment. It gives us financial
effective we have been in the
strength and flexibility and
execution of our strategy.
the ability to pay sustainable
dividends to our shareholders.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

RISK MANAGEMENT

STRONG

RISK MANAGEMENT

UNDERPINS EVERYTHING WE DO

IDENTIFYING AND ASSESSING RISK

Risk Assessment

Review

Identify

Group Executive Committee

Assess

Audit Committee

Mitigate

Board

Like all businesses, Spirent is exposed
to a number of risks and uncertainties.
These risks may arise from internal factors,
but some will be a result of external factors
over which the Group has little or no direct
control. It is the effective management
of these risks that supports Spirent in
delivering on its strategic objectives,
safeguards the Group’s assets and, over
time, will enhance shareholder value.
The process to identify and manage the
principal risks and uncertainties of the
Group is an integral component of the
internal control system.

The risk assessment process starts in the
businesses, where up-to-date risk registers
are maintained and updated as part of the
normal operating and control procedures
and is facilitated by the Head of Risk &
Internal Audit. Each business identifies
its key risks and mitigating factors and
nominates a risk owner. The impact and
the likelihood of occurrence of each risk is
ranked, which assists the Group Executive
Committee in assessing the likely impact
in aggregate of each risk to the Group
as a whole. The individual businesses are
required to update their risk registers
regularly to reflect new or emerging risks
as they are identified.

It is not possible to identify every risk that
could affect the business and the actions
described below to mitigate those risks
cannot provide absolute assurance that
the risk will not occur or adversely affect
the operating or financial performance of
the Group.

The Board has classified the principal risks
by the impact the risk would be expected
to have on the Group should it occur, and
the anticipated likelihood that that risk may
occur using the following classifications:

Risk

Impact

Likelihood
of occurrence

Impact

High
Medium
Low
Likely
Possible
Unlikely

The Board takes the view that a High
impact risk could lead to a 10 per cent
or more reduction in revenue, a Medium
impact risk a 5 to10 per cent reduction in
revenue and a Low impact risk a reduction
of up to 5 per cent in revenue.

The Audit Committee reviews and
monitors the Group’s risk processes and
reports to the Board on their effectiveness.
Risk is considered by the Audit Committee
at least twice each year, at which time
risk registers for both the Group and the
material business units within the Group
are reviewed. The Audit Committee
challenges and debates the risks with
reference to risk tolerance and appetite,
as set by the Board. Progress made and
any further actions to be taken regarding
mitigation plans, as well as any changes to
the risk profile, are discussed in detail.

Spirent Communications plc Annual Report 2018The Board has identified the following principal risks, each of which is discussed on pages 26 to 29:

Risk

Macro-economic change

Technology change

Customer dependence/
Customer investment plans
Business continuity

Competition

Acquisitions

Employee skillbase

Impact

High

Medium

Likelihood

Change

Likely

Possible

CURRENT TOPICAL RISKS
AND UNCERTAINTIES
Brexit
The United Kingdom’s exit from the
European Union is anticipated to have a
low impact on the Group by virtue of the
small proportion of sales into Europe,
the nature of our operations in Europe
and the mitigating actions we have taken
to adopt alternative channels to service
those customer relationships that could be

impacted. In addition, the Group’s main
functional currency and presentational
currency are both US dollars which largely
mitigates our exposure to adverse foreign
currency impact arising on Brexit.

US China Trade
Trade tensions and tariffs between the US
and China are anticipated to have a low
impact on the Group. Group sales to China
were $92 million in 2018, 19 per cent of

total. It is highly unlikely that sales to China
would completely cease, more plausible is
the scenario where one or more customers
would be embargoed for a period of time.
In these circumstances, disruption would
be short-term with demand deferred and
not lost, therefore the impact on trading
over the medium-term is not considered
material. Short-term revenue impact
is possible.

RISK APPETITE AND
DEVELOPING THE LONG-TERM
VIABILITY STATEMENT
Provision C.2.2 of the 2016 UK
Corporate Governance Code requires
the Board to assess the viability of the
Group over a period significantly longer
than 12 months and confirm whether
it has a reasonable expectation that
the Group will be able to continue in
operation and meet its liabilities as they
fall due over that period. The Board
has determined that a three-year
period should be used when assessing
viability, as explained on page 100 of
this Annual Report.

The Board has sought to frame its risk
appetite in terms of the markets and
technologies in which it is prepared
to make significant investments,
and those in which it would expect
its scale of investment to be more
modest. Except where very attractive
opportunities were to present themselves
to achieve greater scale in well-known
markets, which would be inherently cash-
generative, the Board would expect to
maintain a healthy net cash position.

combination, might threaten the Group’s
viability. The expected aggregate impact
of Macro-economic change, Technology
change, Customer dependence and
Competition were modelled based on
historical trends experienced across the
Group. A severe but plausible combination
of those risks was considered for the
purposes of determining the revenue and
free cash flow scenarios that should be
stress tested via financial modelling.

The impacts were modelled over the three-
year period, using the Group’s strategic
three-year plan as a basis, with two
different assumptions in relation to timing:

1) with emphasis on a stressed scenario

in years two and three, given
management’s view that such risks were
unlikely to materialise in year one, as the
Group had just completed a detailed full
year budget for 2019; and

2) an even more severe, yet less plausible
scenario where those same impacts
are immediate with significant revenue
decline in 2019 and years two and three
acutely impacted.

Management, together with members
of the Board, considered which of
the principal risks, either alone or in

The analysis included assumptions in
relation to the ability of the Group to take
successful mitigating actions, including the

ability to make significant reductions in
its non-fixed operating costs. In doing
so appropriate adjustment was made
for the cost of taking those actions.

In performing the Viability Statement
modelling the Board took into
consideration the Company’s healthy
cash balance of $121.6 million at
31 December 2018 and the ability of
the Company to continue to generate
positive free cash flow even in stressed
scenarios, as has historically been
the case.

The Board reviewed and discussed
with management:

• the process undertaken by

management to decide which
scenarios to stress test;

• the results of the stress testing

performed, including an illustration
of the reduction in revenue and cash
generation and consequently the
availability of cash to fund operations;
and

• the ability of management to

successfully take the mitigating
actions identified.

The resulting Viability Statement is set
out in the Directors’ report on page 100.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

PRINCIPAL RISKS AND UNCERTAINTIES

RISK

POTENTIAL IMPACT

MITIGATING ACTIONS

Macro-economic change
Spirent is a global business exposed to current
world economic conditions and political
uncertainties over which it has no control.
The business is also exposed to government
spending priorities, principally in the
United States.

Deterioration in economic conditions and
a change to the terms of conventional
international trade may lead to a reduction
in the level of demand for Spirent’s
products and services and cause customers
to delay their purchasing decisions.

The Group closely monitors both
market and geographic trends in order
to respond to changes in demand and
be in a position to take timely actions
to protect profitability where possible.

In addition, Spirent has a large
number of geographically diverse
customers, which may mitigate the
impact of issues in any one area.

Technology change
Spirent sells complex solutions in industries
that can be subject to rapid technological
changes. Testing new technologies drives our
business, but the opportunity also brings high
risk since keeping at the forefront of these key
future technologies is critical to our success
and to ensuring that we remain competitive in
our markets.

It is critical that our product development
investment is directed at the right areas
in order to deliver the solutions that our
customers need, when they need them.

Spirent’s success is dependent in part on
proprietary technology which may be
infringed by others.

Protecting the Group’s proprietary
technology is important to enable
Spirent to compete successfully.

If product development investment does
not keep pace with the speed of change in
technologies, or if it is not directed at the
right key areas, our competitive position
and financial performance will suffer.

If Spirent’s solutions take longer to develop
than anticipated or longer to develop
than our competitors then our competitive
position and financial performance will
also suffer.

Changes in technologies may lead to
a short-term pause by our customers
investing in our solutions.

Intellectual property claims can result in
significant defence costs, and may affect
Spirent’s ability to market its products.

All Spirent’s businesses work very
closely with customers and remain
focused on their requirements.

Each business makes investment
decisions specifically related to
their solutions portfolio based on
market needs.

Spirent continues to focus its
investment into areas that offer
the most potential for sustainable
earnings growth. In 2018 the product
development investment was
$96.9 million (2017 $103.0 million).

Spirent has active intellectual property
protection programmes in place to
obtain appropriate protection in a
cost-effective manner.

Spirent Communications plc Annual Report 2018RISK

POTENTIAL IMPACT

MITIGATING ACTIONS

Customer dependence / Customer investment plans
The Group sells its products and services to a
wide range of companies and continually seeks
to expand its customer base. In 2018, no one
customer accounted for more than 10 per cent of
Group revenue, although the top 10 customers
represented 40 per cent of Group revenue (2017
41 per cent).

Loss of one or more of Spirent’s major
customers could have a significant impact
on Spirent’s financial results.

Spend on Spirent’s products is often capital
in nature and so customer spend can
fluctuate significantly from year-to-year.

In some of our markets certain customers have
a dominant market share, which makes doing
business with these customers and their
suppliers critical to the success of our business.

Significant failings in either quality or being
able to deliver in the appropriate timescale
could cause long-lasting damage to
Spirent’s reputation and relationships.

In addition, many of the companies with
which we do business are some of the largest
global telecommunications corporations.
Therefore meeting our development obligations,
producing high quality products, and being on
time are vital to Spirent’s reputation and success.

Changes in our major customers’ priorities
in technology investments can also have a
significant impact on their spending on Spirent
products and on those in the customers’
supply chain.

The industry continues to experience
consolidation which does disrupt the
spending patterns of affected customers.

Over recent years there has been significant
consolidation in our customer base
amongst service providers and network
equipment manufacturers. This trend
continues and often results in delays in
spending, thereby reducing demand for
Spirent’s solutions and services. It also
reduces the potential number of customers
to whom those solutions and services could
be sold.

Changes in our customers’ technology
investments can result in reduced spending
on our existing solutions before customers
and those in the customer’s supply chain
increase spending on new technologies.

Strong customer relationships are
critical to Spirent. We aim to provide
innovative solutions which meet
customers’ needs and we place great
emphasis on providing professional
service and support.

One of the Group’s strategic
objectives is to invest in deepening
our customer relationships. We place
engineers on-site with our customers
and undertake site surveys of intended
plans for the use of test solutions in
their business.

We seek to establish thought
leadership in our industry through
participation in standards bodies and
industry forums, which in turn creates
additional links with customers.
Our approach is to play a key part
in the wider supply chain to our key
service provider customers by aligning
with early adopters of technology.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

PRINCIPAL RISKS AND UNCERTAINTIES
CONTINUED

RISK

POTENTIAL IMPACT

MITIGATING ACTIONS

Business continuity
Operational risks are present in the Group’s
businesses, including the risk of failed internal
and external processes and systems, human
error and external events, such as a natural
disaster or cyber security attacks. For example,
a significant portion of our communications
operations are located in California which has in
the past experienced natural disasters, including
earthquakes and wildfires.

Contract manufacturers are used for the
manufacture of a substantial amount of Spirent’s
products. Spirent’s major contract manufacturer
is located in Thailand.

The incidence of cyber crime continues to
rise. Spirent is dependent on its information
technology systems for both internal and
external communications as well as for its
day-to-day operations.

A significant natural disaster could disrupt
the Group’s ability to conduct business
and adversely impact revenue and
operating results.

Failed internal and external processes,
systems or human error could lead to
compliance issues.

Disruption, financial problems of contract
manufacturers or limitations in their
manufacturing capacity could limit
supply and/or increase cost.

If a cyber-attack were to be successful it
could result in loss of data, confidential
information and damage to Spirent’s
intellectual property, causing major
disruption to the business. There would
also be a potential impact on Spirent’s
credibility in the security market.

Competition
Spirent operates in a range of highly competitive
niche markets which experience rapid
technological change. In order to compete
effectively, it is necessary to establish and
maintain technological differentiation in
our solutions.

Actions by competitors and increased
competition can bring about pressure
on Spirent’s gross margin. These factors
could also affect Spirent’s competitive
position, thereby reducing revenue and
consequently affecting financial results.

The Group faces competition from new market
start-ups as well as more established and
well-resourced companies.

Industry consolidation amongst our direct
competitors may bring about a shift in
competitive advantage.

In the last two years, significant
consolidation has been announced in our
sector. The consolidation of competitors
may bring opportunities for Spirent but can
also change the competitive landscape as
competitors are able to leverage product
capabilities or sales channels.

An important component of Spirent’s
corporate governance is its risk
management strategy. IT disaster
recovery plans are in place for all core
business systems and ensure that the
wider operations are all fully covered.
In 2018, we tested the new Group
Business Continuity and Disaster
Recovery Policy and Procedure.

Regular meetings are held with
contract manufacturers and a regular
on-site presence is maintained.
In addition, the Group’s largest
manufacturing subcontractor
has multiple worldwide sites
and comprehensive business
continuity plans.

During 2018, we continued with
a programme of work to develop
processes and procedures in the
area of cyber security.

The Group’s broad solution portfolio,
market-leading capabilities and
customer focus continue to address
this risk.

Spirent aims to maintain market-
leading positions through significant
investment in the development of
differentiated products.

Competitor activity is closely
monitored with a view to maintaining
clear differentiation based on Spirent’s
products, services and global reach.

Spirent Communications plc Annual Report 2018RISK

POTENTIAL IMPACT

MITIGATING ACTIONS

Acquisitions
A key element of Spirent’s strategy is to develop
new capabilities and technologies, sometimes
through acquisition.

Integration of acquisitions can be a complex
process and the results expected from
acquisitions may not be achieved due to
problems encountered in integration, changes
in market conditions, the rate of adoption of
new technologies, or sometimes deficiencies
arising in the due diligence processes.

Underperformance by acquisitions will
impact the Group’s results and may
lead to impairment of goodwill and/or
intangible assets.

Rigorous strategic and financial
evaluations of all acquisition
opportunities are carried out.
Detailed financial and commercial due
diligence is performed. The Board
will only authorise transactions
after all due diligence has been
successfully completed and where
the financial hurdles are within the
agreed guidelines.

Integration plans and processes
are carefully considered prior
to acquisition.

The Board reviews post-
acquisition performance.

Employee skillbase
Employees are crucial to the success of our
business. Attracting and retaining highly qualified
and skilled employees is essential to enable
the Group to deliver on its strategy and to the
success of the business.

Intense competition for personnel is
faced from other companies and
organisations and the loss of key
employees, the failure to attract and
retain other highly skilled employees,
or the failure to adequately plan for
succession may impair Spirent’s ability to
run and expand the business effectively.

Investing in people is at the core of
the Group’s strategy. The aim is to
find, keep and engage the highest
calibre of employees and encourage
their contribution and development.
An environment that fosters innovation
and collaboration is critical to Spirent’s
success, as is ensuring incentive plans
are competitive.

Succession planning for senior
posts in the Company is reviewed
periodically by the Board.

Appropriate career paths and
internal recognition programmes
are developed for both technical
and non-technical staff.

Regular reviews are performed
to ensure that all elements of
compensation across the Group
are competitive with the market.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

OPERATING REVIEW

NETWORKS & SECURITY

We delight in knowing that our products
and expertise keep people and companies
connected, communicating and safe online.
Our products enable vendors to accelerate the
time required to get their products to market
while ensuring the quality and performance
of their products protects their brand and
the value they create for their stakeholders.

Revenue

$285.1m
2017 $261.0m

Operating profit1

$56.4m
2017 $43.9m

Operating margin2

19.8%
2017 16.8%

Notes
1. Before exceptional items (2017).
2. Operating profit before exceptional items

as a percentage of revenue.

Spirent Communications plc Annual Report 2018PERFORMANCE HIGHLIGHTS
• Revenue growth: 9 per cent,

driven by high-speed Ethernet,
cyber security and positioning.
• Extended our market-leadership.

in 100G and 400G Ethernet
performance test. Key 400G
wins secured in the second half.
Demonstrated the world’s highest
density 400/200/100/50G test system
at Optical Fibre Communication
conference. Launched the industry’s
first 25G network emulator.

• Expanded our cyber security product
capability and sales coverage, which
led to greater than 20 per cent
orders growth. Gained traction with
new enterprise and government
customers. Experienced an increase
in subscription sales.

• Extended our market-leadership
in global navigation satellite
systems (GNSS) simulation systems.
Reported our highest revenue in our
20-year history. Grew revenue 22 per
cent, driven by contracts in the US.

Read how we partnered with
China Mobile Research Institute to
demonstrate an automated integration
and delivery system at MWC 2018.

STRATEGY
Our business objectives are to extend our
market-leadership in Ethernet/IP, mobile
infrastructure and positioning test systems
and to grow our business in emerging
technologies and new application areas,
such as cyber security.

Our business strategy is to:

• extend our lead in high-speed Ethernet/
IP performance testing for emerging
standards for data centers and wide
area networks, such as 100G and 400G;
wireless local area networks (LAN) and
automotive Ethernet;

• develop software-defined network (SDN)

and network functions virtualisation
(NFV) test methodologies and tools;

• expand our security test business
footprint in manufacturers, service
providers and large enterprises by
developing new product capabilities,
investing in our security consulting
services and expanding our marketing
and sales channel globally; and

• extend our lead in GNSS simulation
and the development of products
for the detection and assessment of
security threats and vulnerabilities.
We will explore exciting new business
opportunities in autonomous vehicles.

WHAT WE TEST
We develop performance and security
testing systems for next-generation
networks and applications, simulating
real-world high-capacity conditions in
the lab and on the network. Our portfolio
covers high-speed Ethernet/IP for data
centers and networks, cloud, virtualisation,
applications and GNSS. Using our test
systems, developers and test engineers
create and transmit complex and high-
capacity traffic and can safely assess the
resilience of their products against security
threats and vulnerabilities.

High-speed Ethernet/IP,
cloud and virtualisation
Our high-speed Ethernet/IP test systems
help our customers to validate high-speed
network infrastructures, up to 400G,
ensuring network functions and services
can scale to millions of subscribers and to
assess the security of devices, networks
and applications. Our target customers are
developers of devices, network equipment
or applications and data centers, network
operators, cloud and service providers.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT

OPERATING REVIEW
NETWORKS & SECURITY

CASE STUDY:
Better together: Spirent partners
with China Mobile Research
Institute for 5G C-RAN platform
performance testing
The performance capability of 5G
will place massive demands on the
technical infrastructure supporting it.
To demonstrate the integrity of that
infrastructure, Spirent, using its NFV
infrastructure (NFVi) automated test
solution, and China Mobile jointly
demonstrated the performance of
virtualisation platforms from eight major
providers, as well as the maturity of
NFVi in supporting 5G C-RAN (cloud,
or centralised, radio access network)
capabilities. This also provided a solid
foundation for large scale field tests of
5G by China Mobile during 2018.

“The tests demonstrated that the
wireless cloud platform is capable of
supporting 5G wireless commercial
service deployments and is able to
provide high-quality services for carrier
capacities, throughput and latency,
providing assurance for the commercial
implementation of 5G cloud base
stations,” says Dr. Yi Zhiling, Chief
Scientist of China Mobile Research
Institute. “We are looking forward to
more partners joining our research into
the maturity of 5G C-RAN technologies.”

Applications performance and security
We offer security test tools and consulting
services. Our security test products offer
unprecedented realism, threat modelling
and ease of use. They directly address
the proliferation and complexity of
applications and vulnerability concerns
of vendors, service providers, enterprises
and government.

Positioning, navigation and timing
We have a portfolio of test systems and
services to support the development of
positioning, navigation and timing systems
for military, space, research and other
high-precision applications. Our Spirent
GSS9000 global positioning system
(GPS)/GNSS simulator is the world’s
leading GNSS test solution. In terms of
performance, flexibility and capability,
it outperforms any other GNSS test
solution. Our Spirent GSS7000 multi-
GNSS constellation simulator targets R&D,
verification and integration testing of
location-enabled civilian and consumer
products. We have an interference
detection system and vulnerability
assessment products and services.
Spirent is also a leader in the testing of
hybrid positioning and sensor fusion
under real-world conditions for connected
autonomous vehicles (CAVs) development.

PERFORMANCE
Networks & Security revenue grew
by 9 per cent to $285.1 million (2017
$261.0 million), driven by strong demand
for high-speed Ethernet and positioning
test systems. During the year a trade
embargo with ZTE disrupted supply for
a few months only and normal trading
operations have resumed. Despite such
challenges, sales into China have remained
strong and continue to grow.

In the year we benefitted from circa
$10 million of Positioning business with
one customer which is unlikely to repeat.

Networks & Security generated operating
profit before exceptional items of
$56.4 million, an increase of 28 per cent
on the prior year (2017 $43.9 million).
Operating profit margin before exceptional
items increased from 16.8 per cent in 2017
to 19.8 per cent.

ACCOMPLISHMENTS
High-speed Ethernet/IP, cloud
and virtualisation
• Spirent won key 100G and 400G deals
through 2018, affirming our product
and market leadership in high-speed
Ethernet testing.

• Spirent launched the industry’s first 25G

network emulator for verification of
Ethernet products and networks.
• Spirent demonstrated the world’s
highest density 400/200/100/50G
test system at the Optical Fiber
Communication Conference &
Exhibition. This product was a finalist in
the 2018 Lightwave Innovation Reviews.
• Spirent released the Spirent TestCenter

WLAN 802.11ax (Wi-Fi 6) testing
solution to accelerate the development
and deployment of Wi-Fi 6 technology,
access points, gateways and end-to-
end testing.

• Spirent, China Telecom Guangzhou

Research Institute and Huawei
completed the first successful carrier
Flex Ethernet line test at China Telecom’s
Network and Terminal Lab.

• As members of the OPEN Alliance
Special Interest Group, Spirent and
Rohde & Schwarz collaborated to
develop an unrivalled, fully integrated
test solution, offering full coverage
of the physical and protocol layers
for automotive Ethernet TC8 ECU
test specifications.

Applications performance and security
• Spirent increased cyber security sales
to our enterprise and government
customers. The contracts’ subscription-
based revenue streams had an initial
delaying impact on revenue recognition
but will improve revenue sustainability
and predictability going forward.
• At Black Hat Europe in London, in
December, Spirent demonstrated
the new CyberFlood Data Breach
Assessment, the first data breach
validation solution based on emulation
technology. Unlike simulation-based
data breach validation tools that only
replay traffic, our solution provides a
holistic and realistic security evaluation
of an organisation’s networks and
devices by emulating hackers, malware
and attack behaviours.

Spirent Communications plc Annual Report 2018• Spirent was approved as an

Authorised Test Lab for new CTIA IoT
Cybersecurity Certification, a new
testing programme to confirm the
security designs and capabilities of
cellular-connected Internet of Things
(IoT) devices. As globally acknowledged
industry leaders, Spirent SecurityLabs
collaborated with leading wireless
operators, technology companies,
security experts and other test labs
on the programme’s development.

Positioning, navigation and timing
• Spirent’s Positioning business had the
highest revenue in its 20-year history,
driven by contracts in the US.

• To mitigate any effect of the UK leaving
the EU, Spirent, Fraunhofer Institute for
Integrated Circuits and LZE GmbH (the
latter two both in Germany) collaborated
to ensure the continuity of supply
of Spirent’s leading Galileo Public
Regulated Service Radio Frequency
Constellation Simulator product
extension for the Spirent GSS9000
GNSS test systems.

• The industry’s first M-Code solution,
SimMNSA, developed and sold by
Spirent Federal Systems, the leading
provider of GPS/GNSS test equipment
in the US, has been granted security
approval by the Global Positioning
System Directorate. Spirent is the
first company to provide this highly
anticipated solution for simulating
classified GPS signals.

• The European GNSS Agency and Joint

Research Centre announced they
will test eCall (automatic emergency
services call) devices using Spirent’s
GNSS simulators. The devices, which
relay important information regarding
a vehicle’s location and damage status
to the emergency services following an
accident, have been a requirement for
all new cars from April 2018.

• Spirent announced a collaboration

with Italdesign, the leading automotive
design company, to create an integrated
system for testing CAVs during
their development.

IMPACT OF MARKET DYNAMICS
ON SPIRENT BUSINESS
Accelerate time to market
The primary value we deliver is to
accelerate the time to market for
developers and vendors. We enable our
customers to launch their new chipsets,
modules, devices, equipment and
applications and to connect to networks
globally, while providing a comprehensive
assessment of the performance and
security of their products so they can
protect and strengthen their brand and
reputation. As developers and vendors
seek to reduce their time to market and to
ensure their product quality, the demand
for Spirent’s test systems rises.

Meet increasing network performance
and security demands
The growth of cloud services drives
innovation at an ever faster pace.
Service providers worldwide are investing
in their networks to keep up with demand.
Over the year, we saw strong demand for
100G and 400G Ethernet/IP testing by data
center and network equipment suppliers.
We also saw the advent of 200G Ethernet
development projects. As new routers,
switches and other network equipment
are developed, manufacturers, service
providers and third party test labs buy our
test systems to measure and validate their
performance and security.

Communications service providers are
undergoing vast changes driven by
virtualisation enabling technologies, such
as SDN and NFV. We provide test tools
and services to measure and benchmark
the performance of virtualised products
in a range of operating environments and
under different conditions.

We see strong demand for our security
testing solutions across network
equipment manufacturers, service
providers and enterprise customers.
Equipment providers with security
capabilities, service providers, enterprises
and government organisations contract our
Spirent SecurityLabs service. Our security
experts carry out assessments and provide
a report and advice. Organisations also
purchase our application and security
products outright in order to evaluate the
functionality and performance of their
products and networks themselves.

CASE STUDY:
How do you test a driverless vehicle?
Ask Spirent!
Spirent is collaborating with Italdesign,
the world famous automotive design
company, to combine industry-leading
systems in different domains to create
an integrated system for testing CAVs
during their development. Spirent’s
simulation combines different vehicle
components, positioning information
and traffic data to provide significantly
more realistic scenarios and improve
simulated device testing, even before
prototypes have been built. This will
help CAV teams reduce their product
development times and give them far
greater confidence in the positioning
accuracy of their vehicles.

“Conventional vehicles are
driven thousands of miles during
development, but this is not feasible
for autonomous vehicles,” said Antonio
Casu, Italdesign’s Chief Technology
Officer. “So we needed a new approach
to R&D development testing that
combined best-in-class components.
By working with Spirent’s experts, we
have created a system that will help to
bring connected cars to market faster.”

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

OPERATING REVIEW

LIFECYCLE SERVICE ASSURANCE

Our service assurance solutions accelerate the
turn up of new services and the troubleshooting
of customer and network performance
problems. Our objective is to enable our service
provider customers to reduce their costs while
radically reducing their time to isolate problems
and improve their network performance and
customer experience.

Revenue

$112.8m
2017 $109.2m

Operating profit1

$17.4m
2017 $17.9m

Operating margin2

15.4%
2017 16.4%

Notes
1. Before exceptional items (2017).
2. Operating profit before exceptional items

as a percentage of revenue.

Spirent Communications plc Annual Report 2018PERFORMANCE HIGHLIGHTS
• Revenue growth: 3 per cent,

driven by VisionWorks service
assurance solutions.

• Expanded VisionWorks at all existing

customers. Secured three new
customers for VisionWorks.

• Significant order growth for 10G

and 100G probes.

• Awarded Leading Lights Award for
Outstanding Test and Measurement
Vendor for our innovative Lifecycle
Service Assurance strategy.

• 5G driving demand for Landslide
mobile infrastructure test system.

Read how we partnered with the
University of Surrey 5G Innovation
Centre to advance development
of the next-generation of mobile
and wireless communications.

STRATEGY
Our business objective is to develop
innovative service assurance and analytics
solutions focused on the rollout and
optimisation of mobile networks and
services, Ethernet business services and
virtualised network functions.

Our strategy is to radically reduce the
time and cost to turn up new services
and to speedily 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. We provide
systems to enable 4G/LTE, IoT and 5G
devices and applications to connect to
networks seamlessly, reducing the time
and cost of pre-deployment qualification,
and use analytics to manage the on-
boarding and scaling of network devices
and applications.

Spirent’s patented, active test technology
provides unprecedented visibility of
the customer’s true service experience
for complex IP services that flow across
providers, domains and hybrid networks.
Our active test solutions effectively
isolate and resolve issues in virtualised
network environments. By bringing
these capabilities together in the Spirent
VisionWorks platform, we expect to win
business and expand our existing business
at multiple top-tier carriers, as they expand
their mobile networks and deploy SDN,
NFV and next-generation IP services,
including 5G and IoT.

Our strategy is to:

• develop active service assurance

systems for Ethernet business service
and mobile network turn up, active
testing and troubleshooting;

• develop new active service assurance

solutions for mobile networks,
leveraging our mobile test tool and
our analytics expertise and technology;

• expand our footprint in our current

installed-base and take in new
service providers;

• continue to develop new capabilities
for our mobile infrastructure test tool,
fulfilling emerging requirements in labs
and operational networks; and

• develop and deploy our test creation,

management and automation platform.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONSTRATEGIC REPORT

OPERATING REVIEW
LIFECYCLE SERVICE ASSURANCE

WHAT WE TEST
Service assurance and analytics
Our service assurance systems help
service providers turn up new services
and diagnose and troubleshoot issues
within mobile backhaul, business services
and global internet protocol networks
to support Ethernet service delivery.
Our customer experience management
solutions help service providers to identify
critical network issues affecting customers.
Our solutions reduce churn by aggregating
and analysing data from multiple sources
to provide real-time insights into the
customer experience.

Mobile infrastructure test
Our mobile infrastructure test systems
emulate subscribers and adjacent nodes.
They enable active testing of mobile
network equipment and networks,
including mobile core, wireless LAN,
internet protocol multimedia subsystems
and Diameter networks, in the lab and
in the network. Network equipment
manufacturers buy our test systems
to develop and test their products.
Service providers buy our test systems to
qualify and validate network equipment
in their vendor selection and acceptance
testing and to actively test the functionality
and performance of their network
and services.

Test automation
Our industry leading lab-as-a-service
and automation solutions deliver
efficient, scalable and cost-effective
physical and virtual build, test and
deployment environments for wireline
and wireless service providers, network
equipment manufacturers or anyone
actively developing software-enabled
virtual networks.

PERFORMANCE
Lifecycle Service Assurance revenue
grew by 3 per cent to $112.8 million
(2017 $109.2 million), driven by demand
for our VisionWorks solutions at network
operators and multiple system operators
(MSOs) in North America and 5G
applications of our Landslide mobile
infrastructure test solution.

In 2018, Lifecycle Service Assurance
generated operating profit before
exceptional items of $17.4 million,
remaining broadly level in comparison
to the prior year (2017 $17.9 million),
following marketing investments to
support our growth agenda.

ACCOMPLISHMENTS
Service assurance and analytics
• Major tier 1 mobile operators in

North America are expanding their
rollout of Spirent VisionWorks to
automate operations, engineering
and care functions amid a growing
industry realisation of the critical
need for network automation.
Following successful initial rollouts
of Spirent VisionWorks for unified
service assurance, these operators
are significantly expanding their
deployments to automate more
than 50 different operational,
engineering and customer care
functions. These deployments have
delivered seven-times faster service
activation, large cost savings and
higher-quality, leading to differentiated
service offerings.

• We expanded our deployment of Spirent
VisionWorks with our key tier 1 mobile
operator customers in North America.
We received new orders for VisionWorks
from all current customers and added
three new major customers.

• We saw significant demand for our 10G
and 100G probes driven by network
rollouts of 100G and 10G Ethernet to
support increased traffic for mobile
backhaul and business services and
to prepare for expected mobile traffic
growth with 5G.

• In May, Light Reading awarded Spirent
the 2018 Leading Lights Award for
Outstanding Test and Measurement
Vendor for the innovative Lifecycle
Service Assurance strategy embodied in
our VisionWorks solutions.
• At the Metro Ethernet Forum

(MEF), Spirent showcased a proof-
of-concept called ‘Fulfilment and
activation of an intercontinental MEF
3.0 service spanning four operators’.
Spirent demonstrated how a cloud-
native service assurance solution such as
VisionWorks enables rapid, cost-effective
network automation deployments and
how service providers can completely
automate intercarrier connectivity.

CASE STUDY:
5G and the phenomenal arithmetic
of amazing algorithms
Each new-generation of cellular
mobile communications technology
has significantly ramped up system
capabilities and 5G presents
opportunities that have commentators,
entrepreneurs and innovators awestruck
by the possibilities. But between theory
and reality lies an uncertain world of
testing and verification. It is in this
world that Spirent Landslide comes
into its own.

Regius Professor Rahim Tafazolli,
Founder and Director of the University
of Surrey 5G Innovation Centre
(5GIC), takes up the story: “One of
our key objectives is to enable our
researchers and industry partners to
develop innovative algorithms and then
analyse their performance in real-world
scenarios. Spirent Landslide supports
this objective by validating new 5G
algorithms before they are deployed in
the live test bed.”

This is all certainly a feather in Spirent’s
cap. The university’s 5GIC, a member
of the 5G UK Digital Strategy, is one of
only three leading academic research
centres selected by the UK Government
to advance the development of the
next generation of mobile and wireless
communications. Needless to say,
we’re delighted to be on the team.

Spirent Communications plc Annual Report 2018Mobile infrastructure test
• We extended our leadership position

in the mobile infrastructure test market
with our revenue up 26 per cent driven
by demand for 5G infrastructure
verification solutions. We now have
more than ten 5G customers, including
five tier 1 mobile service providers,
multiple infrastructure providers and a
leading university.

• The 5GIC selected Spirent’s mobile

infrastructure test system (Landslide)
for its test bed to analyse performance
of innovative 5G algorithms. The 5GIC
is a member of the 5G UK Digital
Strategy and one of only three leading
academic research centres selected
by the UK Government to advance the
development of the next-generation of
mobile and wireless communications.
The 5GIC operates an indoor test bed
with the aim of the project to study
and provide context about users,
services, networks and devices for next-
generation services such as broadband,
mobile and IoT.

Test automation
We announced that Spirent’s iTest
solution has been helping Aston Martin
Racing (AMR), the world championship
motorsports team, to ensure that their
monitoring of real-time race systems is as
fast as the action on track. AMR deploys
a high-speed LAN trackside to connect
team drivers and cars with the pit
lane. Flawless network connectivity is
essential to success; any failure in radio
communications could cost the team its
position in a race. iTest enables the race
team to automatically ensure its network is
configured correctly and faulty segments,
connections or devices are replaced, not
only providing peace of mind, but also
dramatically boosting team effectiveness
with a 20X test productivity gain.

IMPACT OF MARKET DYNAMICS
ON SPIRENT BUSINESS
We compete in the service assurance
market. The estimated size of this market
is about $3.1 billion in 2018, with growth
forecast at a compound annual rate of
1.7 per cent between 2017 and 20211.

Our current business is driven by
service provider investment in Ethernet/
IP services, virtualisation, in-home
data services, carrier Wi-Fi and mobile
technologies, such as long-term evolution
(LTE), voice over long-term evolution
(VoLTE), and IP multimedia subsystem
(IMS). The current market dynamics and
outlook are favourable for our business.
The investment in mobile networks
and their operation and management
remains a priority for network operators.
As 4G LTE rolls out globally, there is wider
commercial deployment of VoLTE, more
3G and LTE-connected vehicles and an
increase in IoT applications.

Network operators are facing major
challenges in reducing operating
expenses. We reduce operating costs by
accelerating service turn up, reducing
time to diagnose problems and helping
our customers understand and improve
their network performance and customer
experience. Continued growth in the
complexity of networks and services,
coupled with intense competition between
service providers and the fear of customer
churn, has led to greater emphasis on
customer experience management.
Many operators are evolving from network-
centric to customer-centric operations, and
need to support new technologies, such as
VoLTE, voice over Wi-Fi (VoWi-Fi), 5G, IoT
and virtualisation.

Service providers remain cautious as
they continue their shift from legacy
networks to virtualisation and as they
determine how best to realise the potential
benefits. To manage NFV in a complex
hybrid network and to manage new
services, network operators require active
performance test systems for service
turn up and troubleshooting. Active test
systems can be combined with analytics
to measure network performance and
customer experience periodically and to
quickly isolate and diagnose performance
and customer experience problems.

Note
1. Analysys Mason “Service Assurance Systems:
Worldwide Forecast 2017–2021” (June 2017).

CASE STUDY:
Ready? Get set. Go! Spirent’s
go-faster set up solution for
Aston Martin Racing
Even a casual look at a race track pit
lane will show that as well as a helmeted
team of flameproof-suited mechanics
buzzing around each car, there will be a
phalanx of headset-wearing technicians
glued to the telemetry displayed on
their laptops. Real-time data fed from
car to pit lane is critical to gaining
an edge in today’s high-pressure
racing, and the IT requirements are
extensive. AMR deploys a high-
speed LAN trackside to connect
drivers and cars with the pit crew,
engineers and managers, to carry radio
communications, telemetry and video
data. To address its complex set up
needs, the team turned to its technical
partnership with Spirent.

As AMR Senior Analysis Engineer,
Alistair Grimshaw explains: “We travel
to races all over the world and until
recently, every time we set up the pit
garage, we had to manually check the
LAN’s viability and performance – a task
that was taking up a lot of time and
resources. But with Spirent iTest, all we
have to do is click a button and wait a
few minutes for the report.”

The automated tests not only speed up
the team in getting everything ready for
race day, there has also been a dramatic
boost to team effectiveness, with a 20X
test productivity gain.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

OPERATING REVIEW

CONNECTED DEVICES

Today, everyone wants to do things faster.
Our test systems reduce the time to develop and
test new devices and connect them to the network.
Using our products or services, manufacturers and
service providers can understand how new products
operate on real networks.

Revenue

$79.0m
2017 $84.6m

Operating profit1

$10.5m
2017 $5.2m

Operating margin2

13.3%
2017 6.1%

Notes
1. Before exceptional items (2017).
2. Operating profit before exceptional
items as a percentage of revenue.

Spirent Communications plc Annual Report 2018PERFORMANCE HIGHLIGHTS
• Revenue stabilised. Operating margin

increased 7.2 percentage points.

• Collaborating with National

Instruments to develop performance
test systems for 5G New Radio (NR)
devices.

• Won 5G channel emulation deals.
• Strong demand for our Service

Experience products from EMEA.
• Demonstrated the world’s first 5G

Over-the-Air Massive multiple-input
multiple-output (MIMO) Beamforming
RF Test Bed with China Academy
of Information and Communication
Technology and Huawei.

Read how we collaborated with
The China Academy of Information
and Communication Technology in
designing a 5G over-the-air massive
MIMO beamforming RF test bed.

STRATEGY
Our business objectives are to stabilise
our revenue and improve our operating
margin as the mobile device test business
consolidates and declines and we develop
new solutions for 5G.

Our strategy focuses on reducing cost
to develop and launch new devices and
services accelerating time to market while
helping to ensure the highest service
quality and user experience.

Our strategy is to:

• invest in wireless device test products
for development, location and carrier
acceptance, while adapting those
products and offering new services to
meet the emerging requirements and
changing customer expectations for
video services, 5G and IoT; and

• provide products and services to test
the service experience over different
networks or to benchmark a variety of
devices over the same network.

WHAT WE TEST
Wireless Device Test
Spirent develops systems for testing
functionality and measuring performance
of 4G LTE and 3G mobile devices and
services, with a roadmap to 5G:

• Research & development. We offer a
range of innovative industry-leading
test systems that are easy to configure
and use for all forms of LTE technology,
including LTE-Advanced, frequency
division duplex (FDD) and time division
duplex (TDD).

• Conformance and certification. We help
manufacturers, application developers
and operators address signalling,
data throughput, mobility, and other
cellular specification conformance
requirements for LTE, universal mobile
telecommunications system (UMTS),
code division multiple access (CDMA),
and evolution-data optimised (EV-DO).

• Carrier acceptance. Leading carriers
demand performance that goes
far beyond standard specifications.
Our solutions enable customers
to validate the most stringent
requirements, including internet
protocol multimedia subsystem (IMS)
signalling themes, mobility scenarios
and user experience evaluation.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION• Location test. Our Location Technology
Solution (Spirent 8100 LTS) is the most
comprehensive, cutting-edge solution
for wireless device and chipset location
technology testing. It addresses both
indoor and outdoor testing scenarios
covering enhanced 911, eCall, assisted-
GNSS, observed time difference
of arrival and cellular positioning.
The platform spans conformance,
certification and operator acceptance
of mobile device and chipset design,
and can be built to accommodate both
full-rack or desktop environments in
testing location-enabled 2G, 3G and 4G
LTE devices.

• Channel emulation. We enhanced our

Spirent Vertex Channel Emulator, which
provides an unprecedented level of
scalability and modularity for wireless
RF testing. Vertex can scale in the field
to address a wide range of uses from
basic RF device tests to complex MIMO
beamforming base station antenna
tests. Vertex addresses high-density
channel requirements and complex
configurations needed to evaluate
5G technologies.

Service Experience
Our UMETRIX platform accelerates
user experience evaluation for new
devices and services (VoLTE, VoWi-Fi,
etc.). UMETRIX automates readiness
assessments of the launch of new
services, device acceptance and pre-
testing, eliminating test set up errors,
and accelerating data aggregation and
reporting. Fit4Launch is our service to
conduct these tests. We have evaluated
over 1,300 devices, with more than
450 devices requiring changes due
to the serious user experience issues
detected by our Fit4Launch service and
UMETRIX platform.

PERFORMANCE
In 2018, Connected Devices maintained
level revenue from ongoing businesses, at
$79.0 million (2017 $78.7 million), as our
device testing revenue stabilised and we
saw early 5G RF test wins and strength in
our Service Experience business.

Operating profit before exceptional
items from ongoing businesses increased
by $6.7 million to $10.5 million (2017
$3.8 million) which resulted in an increase
in operating margin before exceptional
items to 13.3 per cent (2017 4.8 per
cent). A relentless focus to reduce cost
associated with legacy business, whilst
directing resource to 5G products, has
been implemented successfully.

ACCOMPLISHMENTS
• We announced an important

collaboration with National Instruments
(Nasdaq: NATI) to develop performance
test systems for 5G NR devices.
This comes at a time when chipset
and device manufacturers are looking
to accelerate the development of
5G-capable devices. Through our
collaboration with National Instruments,
we will be able to provide test solutions
that can validate the performance of
5G NR smartphones and IoT devices
in the lab, without requiring access to
expensive and complex base stations,
while being flexible enough to quickly
adapt to standards as they evolve.
We believe this collaboration will allow
us to build even stronger, long-term
working relationships with industry
partners to help them accelerate
commercialisation of 5G NR. We will
have the first prototype solutions towards
the end of 2019, aligned with the
emerging market need for 5G NR
device performance testing.

STRATEGIC REPORT

OPERATING REVIEW
CONNECTED DEVICES

CASE STUDY:
A world first! Spirent collaborates
on 5G over-the-air massive MIMO
beamforming RF test bed
5G base stations use multiple antenna
elements to move as much as ten times
the amount of data per second as their
4G equivalents. The China Academy
of Information and Communication
Technology (CAICT) developed
sophisticated channel models that
capture how 5G radio signals travel
through the air and the effect on them
of disruption caused by absorption or
reflective surfaces, among other factors.
Following this groundbreaking work,
CAICT collaborated with Spirent in
designing a test bed to replicate those
effects on demand.

“It is a privilege to work with Spirent and
Huawei to pioneer the test systems that
the industry needs to make 5G a reality,”
said Dr. Zhang Xiang, product manager
for 5G at CAICT. “As 5G work moves
from trials to commercial deployments,
Spirent and CAICT will continue to
evolve the test methodology to support
additional real-world scenarios and
evolving 5G capabilities.”

Spirent Communications plc Annual Report 2018CASE STUDY:
National Instruments and Spirent
collaborate on 5G performance
test solution
Following approval of the first round
of 5G specifications in June 2018 by
the 5G standards body, 3GPP, new
architectural options and additional
capabilities have been developed at
pace, all of which need test solutions
flexible enough to quickly adapt to
further changes and upgrades while
avoiding costly hardware changes.
This is an area in which Spirent is pre-
eminent, as acknowledged by National
Instruments’ Director of Wireless
Research, James Kimery.

“The marriage of our high-performance
platform and Spirent’s best-in-class
test methodology for measuring the
mobile user experience is exciting for
the industry,” said James. “Being able to
assess the accuracy of cellular location
in 5G environments and measuring the
performance of video and data delivery
are critical needs as 5G devices come
on line in 2019.”

We look forward to the challenge
with relish.

• We continued to enhance our new

Spirent Vertex Channel Emulator, which
offers unprecedented scalability and
modularity for wireless RF testing.
Spirent won several key deals for 5G RF
testing with the Vertex and collaborated
with Huawei and leading Chinese test
lab CAICT to demonstrate the world’s
first 5G over-the-air Massive MIMO
beamforming test bed.

• We announced a partnership with ETS-
Lindgren to pursue joint research and
development on a complete radiated
test system to evaluate over-the-air
performance of 5G devices.

IMPACT OF MARKET DYNAMICS
ON SPIRENT BUSINESS
Economic pressure and consolidation
in the smartphone supply chain
Economic pressure and consolidation
of top-tier global smartphone, chipset
and network equipment vendors has led
to a fiercely challenging, competitive
and shrinking market. We anticipate the
wireless device test market will continue to
contract as wireless component, module
and network equipment manufacturers’
spending slows in the cyclical market lull
between ongoing 4G enhancements and
the very early days of 5G.

4G LTE services growth
Spirent benefits from the development
phase of 4G LTE services, such as VoLTE
and VoWi-Fi, and the focus on the user
experience. GSA1 reported that, although
already widely deployed, LTE continued
to be introduced into markets and regions
around the world in 2018. By the end of
2018, GSA had identified 712 operators
running LTE networks providing mobile
and/or fixed wireless broadband services
in 213 countries worldwide.

5G development
The standardisation workplan for 5G
has been accelerated. The standard as
specified in 3GPP Release 15 has been
finalised in 2017 for Non-Standalone 5G
NR and by mid-2018 for Standalone 5G
NR. Early 5G deployments are anticipated
in several markets, including the US, South
Korea, Japan and China. By mid-January
2019, GSA2 had identified 2,010 operators,
in 83 countries, investing in 5G mobile
and 5G FWA networks, in the form of tests,
trials, planned and pilot deployments,
and launches.

The first commercial networks based on
Standalone 5G NR are expected to go live in
2019, with major network deployments from
2020. By the end of 2023, over one billion
5G subscriptions are forecast for enhanced
mobile broadband3. Spirent benefits from
the development of Non-Standalone and
Standalone 5G NR technology and from the
development of 5G devices.

Growing opportunities
and challenges in IoT
The importance of wireless IoT connectivity
continues to rise in a variety of segments
from connected vehicles, homes and
industry, to smart cities. This results in
challenges in developing, connecting and
operating IoT devices and applications
on mobile and non-cellular networks,
an attractive new market opportunity for
Spirent. The number of IoT connected
devices worldwide was 6.2 billion in 2015
and is expected to reach 32.5 billion by
2020, growing at a compound annual
growth rate of 39 per cent4.

1. GSA, “Snapshot LTE Ecosystem”

(December 2017).

2. GSA, “Snapshot Global 5G Status”

(January 18, 2019).

3. Ericsson, “Ericsson Mobility Report”

(November 2017).

4. Technavio, “GLOBAL 5G EQUIPMENT
MARKET 2016–2020” (October 2016).

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

FINANCIAL REVIEW
PAULA BELL, CHIEF FINANCIAL OFFICER

A SECOND YEAR OF
SUPERIOR GROWTH,
DRIVEN BY EFFECTIVE
OPERATIONAL
ACTIONS WHILST
CREATING A ROBUST
GROWTH PLATFORM.”

CONTINUED

STRONG
MOMENTUM

Spirent Communications plc Annual Report 2018GROUP OVERVIEW
A strong performance was delivered
in 2018. Robust revenue growth was
underpinned by progress across all
operating segments as we continue to
leverage our leading-edge technolgy
portfolio. Cost efficiency actions
implemented during 2017 and 2018 have
kept the cost base relatively flat, ensuring
strong earnings growth, with a resulting
increase in adjusted basic earnings per
share of 44 per cent. As we look forward,
the market growth drivers remain positive,
as we enter a new technology upcycle with
the development of 5G.

We will continue to invest effectively in
our product development and marketing
activities to support growth, whilst carefully
managing our operating model to deliver
a robust operating margin.

The Group delivered revenue growth
from ongoing businesses of 6 per cent,
finishing at $476.9 million. The primary
driver for this growth was our Networks &
Security operating segment, which grew
revenue by 9 per cent, with strong demand
for GPS test solutions produced by our
Positioning business and, as predicted,
increasing demand for 400G high-speed
Ethernet testing. Our Positioning line of
business, in particular, benefitted from
a significant one-off project with a US
defence contractor for circa $10 million,
which we do not expect to repeat.
Our Lifecycle Service Assurance operating
segment delivered 3 per cent revenue
growth but experienced some order
placement delays, in particular from
reorganisation at key North American
customers. Connected Devices maintained
level revenue with the transition to 5G
progressing as expected.

Effective management of the cost base has
continued during the year. Cost inflation
has been largely mitigated with the
overall cost base maintained broadly flat,
allowing the incremental gross profit from
higher revenues to flow down to adjusted
operating profit. Consequently, adjusted
operating profit margin from continuing
businesses has increased to 16.2 per cent
from 12.8 per cent in 2017.

The following table shows summary financial performance for the Group:

$ million
Ongoing businesses1
Order intake2
Revenue
Adjusted operating profit3

Total Group
Order intake2
Revenue
Gross profit
Gross margin (%)
Adjusted operating costs3
Adjusted operating profit3
Adjusted operating margin4 (%)
Reported operating profit
Reported profit before tax
Adjusted basic earnings per share5 (cents)
Basic earnings per share (cents)
Free cash flow6
Closing cash
Final dividend per share7 (cents)
Special dividend per share (cents)

2018

2017

Change (%)

470.0
476.9
77.1

470.0
476.9
344.5
72.2
267.4
77.1
16.2
57.5
61.2
10.86
9.14
50.9
121.6
2.73
–

442.6
448.9
57.5

447.8
454.8
325.0
71.5
266.1
58.9
13.0
43.7
46.6
7.55
4.75
56.4
128.4
2.40
5.00

6
6
34

5
5
6
0.7
–
31
3.2
32
31
44
92
(10)
(5)
14

Note on Alternative Performance Measures (APM)
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 on page 182. 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.

Notes
1. The Device Intelligence and Developer Tools lines of business, divested 30 June 2017, and

therefore excluded in the measures for ongoing businesses, contributed $5.2 million of order
intake, $5.9 million of revenue and $1.4 million of adjusted operating profit to the Connected
Devices operating segment result in 2017.

2. Order intake represents commitments from customers to purchase goods and/or services that will

ultimately result in recognised revenue.

3. Before exceptional items, acquired intangible asset amortisation and share-based payment

amounting to $19.6 million in total (2017 $15.2 million).

4. Adjusted operating profit as a percentage of revenue in the period.
5. Adjusted basic earnings per share is based on adjusted earnings as set out in note 11 of Notes to

the full year consolidated financial statements.

6. Operating cash flow after tax, net interest and net capital expenditure.
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 2018 of 2.73 cents per Ordinary Share is
equivalent to 2.08 pence per Ordinary Share.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

FINANCIAL REVIEW
CONTINUED

REVENUE

$ million

Revenue by segment
Networks & Security
Lifecycle Service Assurance
Connected Devices

Revenue by geography
Americas
Asia Pacific
Europe, Middle East and Africa

2018

% of total

2017

% of total

285.1
112.8
79.0
476.9

265.4
159.1
52.4
476.9

59.8
23.6
16.6
100.0

55.7
33.3
11.0
100.0

261.0
109.2
84.6
454.8

248.6
160.2
46.0
454.8

57.4
24.0
18.6
100.0

54.7
35.2
10.1
100.0

Exceptional costs include $9.1 million
provision for French import duty, following
receipt of a Notice of Recovery from
French Customs in relation to an ongoing
dispute dating back to 2011, previously
disclosed as a contingent liability at
31 December 2017, and $4.0 million in
relation to Guaranteed Minimum Pension
(GMP) equalisation on the UK defined
benefit pension plan (2017 $6.7 million
of exceptional costs for restructuring and
strategic review).

Adjusted basic earnings per share
increased by 44 per cent to 10.86 cents
reflecting the growth in adjusted operating
profit together with the benefit from a
reduction in the effective tax rate from 22.1
per cent in 2017 to 15.4 per cent this year,
following the implementation of a number
of tax management initiatives and US
tax reform.

Cash at bank closed at $121.6 million,
down slightly on the position at
31 December 2017 of $128.4 million,
following dividend payments totalling
$54.8 million in the year, including the
special dividend of $29.9 million. Free cash
flow was $50.9 million, also slightly lower
than the prior year (2017 $56.4 million),
as higher activity levels in the final quarter
of the year were reflected in working
capital, despite mitigation from improved
receivables collection performance year-
on-year. Free cash flow represented
77 per cent of adjusted earnings
(2017 122 per cent).

As a result of the strong financial
performance, we propose a 10 per cent
increase to the full year dividend per share,
from 4.08 cents to 4.49 cents.

REVENUE
Group revenue grew by $22.1 million in
2018, an increase of 5 per cent over the
prior year. Excluding businesses divested
in 2017, which contributed $5.9 million of
revenue in the prior year, the increase was
higher at $28.0 million, or 6 per cent.

All operating segments achieved revenue
growth from ongoing businesses in 2018
but the primary driver was the Networks
& Security operating segment with 9 per
cent growth year-on-year. Within that
segment all our lines of business grew
revenue compared to the prior year.
As anticipated, we saw growth in 400G
in the second half of the year and our
Application Security test solutions
continued to gain traction. Orders for our
Application Security solutions grew more
than 20 per cent and subscription-based
sales also grew which deliver revenue to
future years and generate a sustainable
revenue stream over the longer-term.
Positioning benefitted from strong US
military-related business in the year and, in
particular, one US Government contractor
placed business worth circa $10 million,
which is one-off in nature and not expected
to repeat.

Major reorganisations at key service
provider customers for our Lifecycle
Service Assurance solutions constrained
growth to 3 per cent year-on-year.
Within this segment, Mobility Infrastructure
was again a highlight but this positive
was tempered by delays at a major
customer experience management
project implementation at a key customer.
Excluding businesses divested in 2017,
Connected Devices revenues were
level year-on-year as device testing
demand stabilised, we saw early 5G RF
test wins and strength in our Service
Experience business.

Geographically, we saw good growth in
the Americas, driven primarily by Networks
& Security, in particular US military
business within Positioning. The trend of
decreasing revenue in EMEA was reversed
in 2018 with strong growth in sales into
Europe from Networks & Security and also
this year from Mobility Infrastructure within
Lifecycle Service Assurance. For ongoing
businesses, the growth in revenue in
EMEA was even more pronounced at 20
per cent year-on-year. Similarly, excluding
businesses divested in 2017, APAC
revenue was flat year-on-year, with modest
growth in sales to China, despite the trade
difficulties, offset by softness in other parts
of the region, especially South East Asia.

Spirent Communications plc Annual Report 2018GROSS MARGIN

$ million

Networks & Security
Lifecycle Service Assurance
Connected Devices

2018

205.3
87.9
51.3
344.5

72.0
77.9
64.9
72.2

2017

186.7
84.7
53.6
325.0

71.5
77.6
63.4
71.5

Gross margin increased by 0.7 percentage points, to 72.2 per cent from 71.5 per cent in the prior year. All the operating segments
achieved an improvement in gross margin but it was most pronounced in Connected Devices at 1.5 percentage points, benefitting from
a higher proportion of software sales.

OPERATING COSTS

$ million

Product development
Selling and marketing
Administration1
Adjusted operating costs1

Networks & Security
Lifecycle Service Assurance
Connected Devices
Corporate
Adjusted operating costs1

2018

96.9
123.9
46.6
267.4

148.9
70.5
40.8
7.2
267.4

2017

103.0
116.8
46.3
266.1

142.8
66.8
48.4
8.1
266.1

Note
1. Before exceptional items, acquired intangible asset amortisation and share-based payment amounting to $19.6 million in total (2017 $15.2 million).

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

FINANCIAL REVIEW
CONTINUED

Overall adjusted operating costs were
broadly flat in 2018 compared to 2017,
with much of the increase due to inflation
mitigated by effective cost management
actions. $3.8 million of adjusted operating
costs in 2017 were associated with the
divested businesses held for six months.

Following the completion of the
portfolio review programme and sales
reorganisation last year, management
continues to focus on effective resource
allocation and cost control, with investment
directed to high-growth, high-margin
areas. The impact of the focus on resource
allocation is evident from the analysis of
operating cost by type and segment, with
expenditure focused on investment in sales
and marketing to address strategic growth
areas and the cost base of Connected
Devices materially reduced. The overall
level of investment was increased in
Networks & Security and, to a lesser extent,

in Lifecycle Service Assurance to drive
and support increased activity levels.
Corporate costs in 2017 included one-off
costs associated with governance and
tax compliance, which have not repeated
in 2018.

The total Group investment in product
development was reduced by
$6.1 million overall, and by $4.9 million
excluding businesses divested in 2017.
Connected Devices product development
costs represent $4.2 million of the
overall decrease.

Selling and marketing costs increased by
$7.1 million in total and by $8.9 million
excluding businesses divested in 2017.
This reflects the full year impact of specific
investments made following the review
undertaken by external consultants last
year, including a key account management
programme and an EMEA sales

reorganisation. In addition, 2018 reflects
the costs associated with the rebranding
launched in August.

Administration costs have been
maintained essentially flat year-on-year.
Overall exchange rate movements have
had little impact on the cost base in 2018,
compared to 2017.

Following several years of implementing
cost initiatives the cost base has now
been effectively reshaped to match our
strategic agenda, and as we look forward,
we will continue to selectively invest in our
product development and associated sales
and marketing expertise to support our
growth agenda.

OPERATING PROFIT

$ million

Networks & Security
Lifecycle Service Assurance
Connected Devices
Corporate
Adjusted operating profit1
Exceptional items
Acquired intangible asset amortisation
Share-based payment

Reported operating profit

Adjusted
operating

margin1, 2
%

19.8
15.4
13.3

16.2

2018

56.4
17.4
10.5
(7.2)
77.1

(13.1)
(3.7)
(2.8)
57.5

Adjusted
operating
margin1, 2
%

16.8
16.4
6.1

13.0

2017

43.9
17.9
5.2
(8.1)
58.9

(6.7)
(6.3)
(2.2)
43.7

Notes
1. Before exceptional items, acquired intangible asset amortisation and share-based payment amounting to $19.6 million in total (2017 $15.2 million).
2. Adjusted operating profit as a percentage of revenue in the period.

Adjusted operating profit increased by 31 per cent to $77.1 million, compared with $58.9 million in 2017, and adjusted operating
margin increased to 16.2 per cent from 13.0 per cent in 2017. For ongoing businesses, excluding divestments made in 2017, the
growth in adjusted operating profit was 34 per cent (2017 adjusted operating profit from ongoing businesses: $57.5 million) and
the increase in adjusted operating margin was more pronounced at 3.4 per cent (2017 adjusted operating margin from ongoing
businesses: 12.8 per cent).

Other items charged in arriving at reported operating profit were exceptional items, acquired intangible asset amortisation and share-
based payment, which totalled $19.6 million in 2018 compared to $15.2 million last year.

Spirent Communications plc Annual Report 2018EXCEPTIONAL ITEMS
Exceptional items totalling $13.1 million
have been charged in 2018, these were
comprised of:

1) $9.1 million provision for import duty

following receipt of a Notice of Recovery
from French Customs in relation to an
ongoing inquiry which commenced
in 2011. The Notice of Recovery is
disputed. The issue relates to the
valuation and classification of imports
into France and was disclosed as a
contingent liability in note 17 of Notes
to the consolidated financial statements
in our 2017 Annual Report; and

2) a pension scheme past service cost of
$4.0 million (£3.1 million) arising from
a benefit change for GMP equalisation
under our UK defined benefit pension
plans. The requirement to make
provision for these costs arose from the
High Court ruling on 26 October 2018
on the Lloyds Bank GMP Inequalities
case. See the ‘Defined benefit pension
plans’ section below for further detail.

In 2017, the Group incurred $6.7 million of
exceptional costs in relation to:

1) a portfolio review together with a

programme to increase the effectiveness
and efficiency of the sales organisation,
which resulted in exceptional
restructuring costs of $5.4 million; and

2) a strategic review of Connected Devices
at an exceptional cost of $1.3 million.

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 decreased significantly
in 2018 to $3.7 million, down from
$6.3 million in 2017.

Share-based payment has increased to
$2.8 million in 2018 (2017 $2.2 million)
reflecting adjustments to the expected
vesting of previous awards with non-
market based performance conditions
and the incremental cost associated with
new awards.

DIVESTMENTS
There were no divestments in 2018.

The gain on divestment in 2018 of
$2.4 million arose as a result of the
repayment in full of a $2.0 million loan for
working capital purposes extended to the
purchaser of the Device Intelligence and
Developer Tools lines of business, within
Connected Devices, divested 30 June
2017, which had previously been impaired.
In addition, during 2018 a provision
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 (2017
$1.6 million) arising from:

1) transacting in foreign currencies,
primarily US dollars in the United
Kingdom, of $0.4 million (2017
$0.9 million); and

2) translation of foreign currency cash

balances of $0.2 million (2017
$0.7 million).

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 pound sterling against the US dollar,
there are other less significant currency
exposures, notably the Euro and
Chinese Yuan.

FINANCE INCOME AND COSTS
Finance income of $1.4 million was
earned from cash held on deposit (2017
$0.6 million). Surplus funds are held
principally in the United Kingdom and
United States on short-term deposit and
earn market rates of interest which remain
relatively low. No interest cost arose on
the defined benefit pension plan in 2018
(2017 $0.3 million).

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

FINANCIAL REVIEW
CONTINUED

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 15.4 per cent in
2018, down from 22.1 per cent in 2017.

The US Tax Cuts and Jobs Act (the
Act) became effective on 1 January
2018. The Act includes a number of
significant changes in the tax law that
have implications for Spirent. The most
significant change is a permanent
reduction in the corporate income tax
rate from 35 per cent to 21 per cent.
Other changes that impact the Group
include the repeal of the Domestic
Production Activity Deduction (DPAD)
and the enactment of a new deduction,
the Foreign-Derived Intangible Income
(FDII) deduction.

The impact of the US tax rate reduction,
together with the repeal of the DPAD
and the addition of the FDII deduction,
and an increased UK Patent Box deduction
are the main drivers of the decrease in the
Group’s 2018 adjusted effective tax rate to
15.4 per cent.

The Group continues to receive a tax
benefit from both the US Research &
Experimental tax credit and the UK Patent
Box Scheme.

EARNINGS PER SHARE
Adjusted basic earnings per share was
up 44 per cent to 10.86 cents (2017
7.55 cents). Basic earnings per share was
9.14 cents (2017 4.75 cents). There were
610.4 million (2017 610.6 million)
weighted average Ordinary Shares in
issue. See note 11 of Notes to the full
year consolidated financial statements on
page 137 for the calculation of earnings
per share.

TREASURY MANAGEMENT
The key objective of the Group’s treasury
department is to manage the financial
risks of the business and to ensure that
sufficient liquidity is available to the Group.
All treasury activity operates within a
formal control framework. The Board has
approved treasury policies and guidelines
and periodically reviews treasury activities.
Additionally, it is the Group’s policy that
speculative treasury transactions are
expressly forbidden.

Spirent’s financial risk management
objectives and policies and its exposure
to risks are discussed in note 29 of Notes
to the consolidated financial statements.

CASH FLOW
The Group delivered healthy cash
generation in 2018. Cash flow from
operations in the prior year benefitted
from a release in working capital
driven by a focus on improving trade
receivables collection performance.
Further improvements were made in
the current year but working capital was
adversely impacted by higher activity
levels in the last quarter which drove up
trade receivables at the year end. Free cash
flow came in marginally lower than last
year at $50.9 million (2017 $56.4 million),
resulting in a free cash flow conversion
which represented 77 per cent of adjusted
earnings (2017 122 per cent).

Cash and cash equivalents were
$121.6 million at 31 December 2018,
compared with $128.4 million at
31 December 2017. Although 2018
finished lower than last year, this was
after paying dividends of $54.8 million in
the year, including the special dividend
of $29.9 million. There continues to be
no debt.

Tax payments of $5.7 million were
lower in 2018 than the prior year (2017
$8.4 million), primarily due to the impact of
US tax reform which lowered the statutory
rate of tax. Net capital expenditure of
$10.6 million was lower than last year in
part due to timing and also as we continue
to exercise careful management of capital
investment to ensure efficient use of
capital and maximise return on investment.

In 2018, the final dividend for 2017
and an interim dividend for 2018
totalling $24.9 million were paid (2017
$24.6 million). In addition, the special
dividend for 2017 of $29.9 million
was paid at the same time as the final
dividend for 2017 (2017 nil cash out
flow from special dividend). Also during
2018, 1.5 million shares were purchased
and placed into the Employee Share
Ownership Trust at a cost of $2.5 million.

Effective tax rate1

15.4%
6.7%

2017 22.1%

Free cash flow2

$50.9m
10%
2017 $56.4m

Notes
1. Adjusted tax charge as a percentage

of adjusted profit before tax.

2. Operating cash flow after tax, net interest

and net capital expenditure.

DEFINED BENEFIT PENSION PLANS
The Group operates two funded defined
benefit pension plans in the United
Kingdom, both of which were closed to
new entrants some time ago.

The accounting valuation of the funded
defined benefit pension plans at
31 December 2018 gave rise to a net
surplus of $2.5 million compared with a
net deficit of $2.2 million at 31 December
2017. The basis of the assumptions
underlying the valuation at 31 December
2018 were consistent with those used at
31 December 2017. Contributions to the
plans paid in the year were $6.8 million
(2017 $6.6 million).

The valuation at 31 December 2018 was
based on the triennial actuarial valuation
dated 31 March 2015. The latest triennial
valuation as at 31 March 2018 is in
progress. The Company is currently paying
an annual contribution of £5.0 million
(circa $6.6 million), which commenced
1 July 2016 for a period of seven years,
under a deficit reduction plan agreed
with the trustees following the 2015
triennial valuation.

Spirent Communications plc Annual Report 2018Free cash flow is set out below:

$ million

Cash flow from operations
Tax paid
Net cash inflow from operating activities
Interest received
Net capital expenditure
Free cash flow

In addition, there is a liability for
an unfunded plan of $0.6 million
(31 December 2017 $0.6 million).

On 26 October 2018, the High
Court ruled on the Lloyds Bank GMP
Inequalities case. In response to this,
an amount of $4.0 million (£3.1 million)
has been included on the Company
and consolidated balance sheets at
31 December 2018 to make an allowance
for the estimated costs arising from
the judgement. This is required to be
accounted for as a benefit change,
included as a past service cost in the
income statement for 2018. Due to its size
and nature, this charge has been classified
as an exceptional item.

The Group also operates a deferred
compensation plan for employees in
the United States. As at 31 December
2018, the deferred compensation plan
deficit amounted to $3.5 million (2017
$3.7 million). The key financial assumptions
include a discount rate used to discount
plan liabilities of 4.2 per cent (2017 3.4 per
cent) and an expected investment yield of
6.4 per cent (2017 7.5 per cent).

BALANCE SHEET
The consolidated balance sheet is set out
on page 113.

Overall net assets were little changed at
$355.3 million, compared to $354.1 million
last year. The corresponding small
movement in equity reflects the fact that
the profit for the year has been almost
entirely returned to shareholders as
dividend, both ordinary and special.

In terms of non-current assets, amortisation
of acquired intangible assets together with
management of capital investment has led
to a year-on-year decrease of $11.2 million.

Current assets have increased by
$5.3 million as a result of growth in trade
receivables due to higher activity levels
at the end of 2018, compared to 2017,
this is despite successful action taken
by management to reduce the number
of days sales outstanding reflected in
trade receivables.

Non-current liabilities are virtually
unchanged at $27.2 million, with higher
deferred income offsetting a reduction in
the defined benefit pension plan deficit.

Current liabilities have decreased by
$6.7 million, with lower deferred revenue,
due to timing of shipments, lower trade
payables, due to a different profile of
purchasing in the year, and a fall in the
value of payments received on account,
offset to some extent by an increase in
provisions. The latter being primarily
due to the booking of a provision
for $8.9 million in respect of French
import duty.

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.

2018

65.9
(5.7)
60.2
1.3
(10.6)
50.9

2017

77.7
(8.4)
69.3
0.6
(13.5)
56.4

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,
as it did during 2018 with payment of a
special dividend.

The Board is pursuing a progressive
dividend policy targeting cover of 2 to
2.5 times adjusted earnings.

DIVIDEND
The Board is recommending the payment
of a final dividend for 2018 of 2.73 cents
(2.08 pence) per share which, together
with the interim dividend of 1.76 cents
(1.34 pence) per share paid in September
2018, brings the full year dividend to
4.49 cents (3.42 pence) per share. This is
a 10 per cent increase compared to full
year dividend for 2017. In sterling terms
this represents an increase of 14 per cent.
The dividend is covered 2.4 times by
adjusted earnings.

Subject to approval by shareholders at the
Annual General Meeting on 1 May 2019,
the final dividend will be paid on 3 May
2019 to shareholders on the register at
15 March 2019. Payment to ADR holders
will be made on 10 May 2019.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

FUTUREPOSITIVE: OUR SUSTAINABILITY APPROACH

DELIVERING A

POSITIVE
IMPACT

Our material sustainability issues
Our material sustainability issues were
reviewed in 2018 using the AA 1000
standard. The review reaffirmed the
importance of anti-corruption and business
ethics for the business and identified the
importance of our product functionality in
unlocking sustainability performance for
our customers.

POLICIES
Spirent maintains a suite of responsible
business policies which commit the
Group to compliance with high standards
of ethics and business integrity,
environmental management, and
employee and community welfare.

All policies are available on our website at
https://corporate.spirent.com.

Progress in 2018
Key achievements
We have rolled out our STEM
programme globally, with
programmes now in place across
EMEA, North America and APAC.

All hardware businesses have
now introduced sustainability
metrics in their product
development processes.

We exceeded our supply chain
sustainability targets (22 audits
(target 18) and 89.6 per cent from
verified sources (target 80 per cent).

We reduced our carbon emissions
by 18 per cent.

We manage our material sustainability
impacts and opportunities through
our FuturePositive programme.
Our comprehensive programme not only
ensures we comply with legislation and
stakeholder expectations, but also has
positive social and environmental impacts
for customers and for our own business.

The Board has designated the CEO as
being the Board member responsible for
corporate social responsibility matters
within the Group.

The key areas of management and
performance are set out below, but we
also publish a comprehensive report
on our corporate responsibility activities
which is available on our website at
https://corporate.spirent.com

SUSTAINABILITY AT SPIRENT
We are committed to embedding the
highest standards of environmental
management, social practices and
governance into our operations,
products and across our supply chain.
We look to create long-term value for
our shareholders by:

• protecting our reputation and ability

to grow;

• focussing on winning business

from customers who value strong
environmental, social and governance
(ESG) performance;

• enhancing our efficiency;
• enabling our people to work
productively in a safe and
inclusive environment;

• helping us to attract and retain talent,
and encouraging employees to take
pride in working for us; and

• reducing the risk of incidents and their

associated costs.

OUR FOCUS AREAS
Our FuturePositive programme covers
four main areas: Product, People, Property
and Procurement. Full details of our
programmes are set out in our 2018
Sustainability Report available on our
website at https://corporate.spirent.com.

PRODUCT
Electronic waste and use of
hazardous materials
Spirent’s business units comply with
the EU’s Waste Electrical and Electronic
Equipment Regulations 2013, EU’s
Restriction of Hazardous Substances
Directive (RoHS), Batteries Directive
and the California Electronic Waste
Recycling Programme.

Conflict minerals
The Group is not directly required to
comply with or report under Section 1502
of the Dodd-Frank Act, the US Conflict
Minerals Law. However, it has robust
procedures in place to ensure that it would
be in compliance if it were brought within
the scope of this legislation. The Group
will be subject to the EU Directive on
Conflict Minerals and we are monitoring
the development of the legislation and are
confident our existing practices will meet
the specifications required.

Spirent Communications plc Annual Report 2018PEOPLE
Business ethics and human rights
Spirent’s values and principles are
set out in the Group’s Ethics Policy.
These principles apply to all dealings
with our customers, suppliers and other
stakeholders, and are included in pre-
contract due diligence and monitored
through ongoing supplier audits.

The Group has a zero-tolerance approach
to all forms of bribery and corruption.
As a UK registered company, Spirent
Communications plc is bound by the
laws of the UK, including the Bribery Act
2010, in respect of our conduct both at
home and abroad. In addition, we will
uphold all laws relevant to countering
bribery and corruption, including the US
Foreign Corrupt Practices Act, as well as
human rights, in all jurisdictions in which
we operate.

Anti-bribery training is required to be
taken by certain employees periodically
and will be rolled out to employees again
in 2019.

Equality and diversity
The Group employs a diverse workforce
and prides itself in providing equal
opportunities for all. High value is
placed on rewarding our people for their
commitment, their integrity and their
service. Our commitment to a fair and
inclusive workplace is governed by our

Ethics and HR policies which ensure that
no employee is discriminated against,
directly or indirectly, on the grounds of
colour, race, ethnic and national origins,
sexual orientation or gender, marital status,
disability, religion or belief, being a part
time employee or on the grounds of age.

Using the data provided in the Hampton-
Alexander Review “Improving gender
balance in FTSE leadership” published in
November 2018, Spirent compares well
with its peers for women on boards, with
28.6 per cent of the Board being female,
compared to the FTSE 250 total of
24.9 per cent. However, we still have
a long way to go to reach the 33 per
cent target set in the review for female
representation on the Executive
Committee and Direct Reports and the
Board will be working to improve these
figures during 2019 and beyond.

Gender Pay Gap
Spirent is not required to comply with the
Gender Pay Gap Reporting Regulations
but intends to voluntarily publish data later
in 2019.

Health and safety
The Board has designated the CFO as
being the Board member responsible for
health and safety within the Group and
procedures are in place for incidents to be
reported through the Audit Committee to
the Board as necessary.

The health and safety risk profile for the
Group remained low during 2018, with 12
reported accidents, of which none were
reportable under the RIDDOR regulations
and none of which required hospitalisation.

Training and skills
Spirent provides all its employees with
a wide range of technical and business
training opportunities. We manage training
through personal development plans
which are assessed by all managers and
updated periodically.

Information security
Spirent takes data security and privacy
seriously and we continually review
the security of our data systems and
procedures in order that we comply with
all legislation and can react to areas of
heightened risk promptly and effectively.

The Group undertook a General Data
Protection Regulations readiness exercise
across 2017 and 2018 and updated
our policies and procedures to ensure
compliance with the new EU regulation.
We also achieved certification to ISO
27001 for our SecurityLabs business based
in Plano and San Jose.

Our procedures restrict the type and
quantity of confidential information
collected and stored and there are
robust procedures in place to protect
customer data from unauthorised access
and disclosure.

At 31 December 2018, our gender diversity was:

Level of organisation

Board
Executive management1
Senior management2
Total employees

2
1
54
300

Female

28.6%
9.1%
19.7%
21.0%

5
10
220
1124

Male

71.4%
90.9%
80.3%
78.7%

Other or no gender
reported

–
–
–
5

–
–
–
0.3%

Total

7
11
274
1,429

Notes
1. The data for Executive management includes members of the first layer of management below Board level, including the Company Secretary.
2. The data for Senior management includes operational managers.

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONSTRATEGIC REPORT

FUTUREPOSITIVE: OUR SUSTAINABILITY APPROACH
CONTINUED

Periodic information security risk
assessments are performed, and training is
provided to all staff to prevent information
security breaches. Our internal controls
are audited, and we have a whistleblower
procedure in place for staff to report
information security or any other concerns.

PROPERTY
Energy use
Spirent’s energy use increased in 2018
by 4 per cent to 14,527MWh. This is
predominantly due to the return to typical
gas usage following abnormally low usage
in 2017 and increased operational activity.

Spirent has implemented a response
procedure to manage breaches of
confidential information if they were
to occur.

Confidential waste is shredded if in hard
copy and certificates of destruction are
provided for any electronic storage
devices disposed of at end-of-life.

STEM initiatives and community
impact projects
Spirent actively encourages its employees
to become STEM ambassadors around
the globe. Our ambassadors work with
students in local schools and institutions
to help them develop STEM skills and
help them in their professional journey.

We also provide our employees in the
US and EMEA with volunteering time
off to make a positive contribution to
the communities in which they work.
The programme will be expanded to
employees in APAC in 2019.

Through financial donations and
volunteering, Spirent has continued to
support community projects worldwide.
Projects include ongoing initiatives to
rebuild homes after hurricanes Sandy and
Harvey in the US and supporting education
projects in India and China.

Greenhouse gas emissions
Spirent is committed to acting to combat
climate change and reporting our
progress. Our total emissions dropped
by 18 per cent from 2017, and emissions
per $ million of revenue were down by 22
per cent.

The Group responded to the Carbon
Disclosure Project in 2018, completing
the Climate Change and Supply Chain
questionnaire. In 2018 we achieved a
Climate Change rating of C (2017 B), and a
rating of B in Supplier Engagement.

2018
Tonnes
of CO2e

2017
Tonnes
of CO2e

137.2

100.5

4,950.4
5,087.6

6,099.7
6,200.2

0.112

0.137

10.67

13.63

Emissions from:
Combustion of fuel
and operation of
facilities (scope 1)
Electricity, heat,
steam and cooling
purchased for own
use (scope 2)
Total emissions
Emissions intensity
metrics:
Normalised per
square metre of
gross internal area
of our facilities
Normalised per $
million of revenues

Methodology
Reporting on emission sources is required
under the Companies Act 2006 (Strategic
Report and Directors’ Report) Regulations
2013 and these sources fall within our
consolidated financial statements.
We have reported on all the emission
sources that fall within our consolidated
financial statements. We do not have
responsibility for any emission sources
that are not included in our consolidated
financial statements.

We have used the GHG Protocol
Corporate Accounting and Reporting
Standard (Revised Edition), along with
data gathered to fulfil our requirements
under these Regulations. We used
emission factors from the UK Government’s
GHG Conversion Factors for Company
Reporting 2018 for UK sites, US EPA 2018
eGrid emissions factors for the applicable
individual states and emissions factors
from the International Energy Agency for
all other sites.

Spirent Communications plc Annual Report 2018NON-FINANCIAL REPORTING COMPLIANCE STATEMENT
We aim to comply with the new Non-Financial Reporting requirements contained in Sections 414CA and 414CB of the Companies Act
2006. The table below, and the information it refers to, is intended to help stakeholders understand our position on key non-financial
matters. This builds on existing reporting that we already do under the following frameworks: CDP, Global Reporting Initiative, Guidance
on the Strategic Report (UK Financial Reporting Council).

Non-financial reporting matter

Policy/Code

Environmental matters

Environmental Policy

Policies page 50, Property, page 52

Sustainability Policy

Sustainability at Spirent page 50

Employees

Supplier Code of Conduct
Business Ethics Policy

Sustainability at Spirent page 50
People page 50, Committee oversight page 72

Whistleblowing Policy

Raising concerns at work page 71

Occupational Safety Policy

Health and safety page 51

Volunteering Time-Off Policy

STEM initiatives and community impact projects page 52

Human rights

GDPR Privacy Notice
Business Ethics Policy

Information security page 51
People page 51, Committee oversight page 72

Modern Slavery Statement

People page 51

Supplier Code of Conduct

Social matters

Supporting charities

Anti-corruption and anti-bribery

Anti-bribery Policy

Policy embedding, due diligence and outcomes

Whistleblowing Policy

Description of principal risks
and impact of business activity
Description of the business model
Non-financial key performance indicators

Sustainability at Spirent page 50, Business ethics and
human rights page 51
STEM initiatives and community impact projects
page 52
People page 51, Committee oversight page 72

Raising concerns at work page 71
Policies page 50, Business ethics and human rights
page 51
Risk Management pages 24-25, Principal risks and
uncertainties pages 26-29
Our business model and strategy pages 18-19
Key Performance Indicators page 53

Pages IFC to 53 form part of the Strategic Report which has been reviewed and approved by the Board.

Angus Iveson
Company Secretary
7 March 2019

STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSSpirent Communications plc Annual Report 2018OTHER INFORMATIONThe Board is committed to high standards
of corporate governance, with a firm belief
that good corporate governance enhances
long-term shareholder value and sets the
culture, ethics and values for the rest of the
Group. We also recognise the importance
of our wider stakeholders and the Board’s
responsibility and duty to them under
Section 172 of the Companies Act 2006;
our Business Model and Strategy on pages
18 and 19 illustrates how we create value for
our stakeholders.

Each year, the Board undertakes a formal
evaluation of its effectiveness. The results of
this year’s externally-led process confirmed
that the Board and its Committees continue
to function effectively, with no significant
concerns among the Directors about its
effectiveness. A number of actions which
were identified to enhance effectiveness
along with the progress on the actions
identified in the 2017 Board evaluation can
be found on page 62.

During 2018 a review of Spirent’s
Remuneration Policy for executive directors
was completed and a revised Policy has
been designed to operate for three years.
The Policy is being proposed for approval
by shareholders at the Annual General
Meeting on 1 May 2019. Further details are
provided in the Directors’ Remuneration
Report, which can be found on pages 74
to 95.

We announced in November 2018 Eric
Hutchinson’s wish to retire from his role as
CEO of the Company after a career with
Spirent spanning 37 years. The Nomination
Committee have launched a search process
for his replacement. We will ensure that the
successful candidate is well-grounded in
corporate governance requirements and
supports the Board’s goal of ensuring a
healthy culture and strong core values as
the basis for the way in which we conduct
our business.

Bill Thomas
Chairman
7 March 2019

CORPORATE GOVERNANCE

CHAIRMAN’S INTRODUCTION TO GOVERNANCE
BILL THOMAS, CHAIRMAN

THE BOARD IS COMMITTED TO HIGH STANDARDS
OF CORPORATE GOVERNANCE, WITH A FIRM
BELIEF THAT GOOD CORPORATE GOVERNANCE
ENHANCES LONG-TERM SHAREHOLDER VALUE
AND SETS THE CULTURE, ETHICS AND VALUES
FOR THE REST OF THE GROUP. “

Spirent Communications plc Annual Report 2018BOARD STATEMENTS

The Board considers that this Annual Report, taken as a whole, is fair, balanced and understandable and gives shareholders the
information needed to assess the Group’s performance, business model and strategy. Further confirmations to support the disclosures
provided in this Annual Report are provided below.

Requirement

Strategic report

NFR statement

S172 of the Companies
Act 2006

Compliance statement

The Strategic report was approved by the Board of Directors on
7 March 2019

Where to find
further information

Pages IFC to 53

The Company has complied with the Non-Financial Reporting Directive
contained in Sections 414CA and 414CB of the Companies Act 2006

Page 53

The Board of Directors, through the Strategic report, provides information
for shareholders to help them assess how the Directors have performed
their duty, under Section 172, to promote the success of the Company and,
in doing so, had regard to the matters set out in that section. This includes
considering the interests of other stakeholders which will have an impact on
the long-term success of the Company

Pages IFC to 53

Compliance with the UK
Corporate Governance Code

In accordance with the Listing Rules of the UK Listing Authority, the Company
confirms that throughout the period ended 31 December 2018 and at
the date of this Annual Report, it was in compliance with all the relevant
provisions as set out in the April 2016 UK Corporate Governance Code

Pages 54 to 101

Going concern

After making appropriate enquiries and taking into account the matters set
out in this Annual Report, the directors have a reasonable expectation that
the Group has adequate resources to continue in operational existence for
the foreseeable future and therefore continue to adopt the going concern
basis when preparing the financial statements

Page 99

Viability statement

The Directors confirm that they have a reasonable expectation that the
Group will continue in operation and meet its liabilities as they fall due over
the three-year period under review

Page 100

Robust assessment of
the principal risks facing
the Group

The Directors confirm that they have carried out a robust assessment of
the principal risks facing the Group, including those that would threaten
its strategy, business model and future performance. The Directors also
assessed the Group’s risk appetite with regard to each risk and considered
how to manage and mitigate such risks

Pages 24 to 29

Annual review of the systems
of risk management and
internal control

During the period ended 31 December 2018, the Audit Committee
provided transparency on the Group’s systems of risk management and
internal control which were confirmed as effective

Pages 68 to 73

Directors’ report
on remuneration

Competition and
Markets Authority

Modern Slavery Act 2015

The Directors confirm that their report on remuneration for the period
ended 31 December 2018 complies with the requirements of the Listing
Rules of the UK Listing Authority, Schedule 8 of the Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations
2008 (as amended) and the provisions of the April 2016 UK Corporate
Governance Code

Pages 74 to 95

The Audit Committee considers that the Company complied with the
mandatory audit processes and audit committee responsibility provisions
of the Competitions and Markets Authority Audit Order for the period
ended 31 December 2018

Pages 68 to 73

The Directors confirm, for the financial year ended 31 December 2018,
that steps that have been taken in relation to our responsibilities under
Section 54 of the Modern Slavery Act 2015 and that the Board approved
a statement setting out the steps that have been taken to combat modern
slavery in the Group’s supply chain

Page 51 to 52

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION
CORPORATE GOVERNANCE

BOARD OF DIRECTORS

PROVIDING THE RIGHT MIX OF

KNOWLEDGE
SKILLS

AND

BILL THOMAS
Chairman

ERIC HUTCHINSON
Chief Executive Officer

PAULA BELL
Chief Financial Officer

JONATHAN SILVER
Senior Independent
Non-executive Director

GARY BULLARD
Independent
Non-executive Director

WENDY KOH
Independent
Non-executive Director

EDGAR MASRI
Independent
Non-executive Director

Spirent Communications plc Annual Report 2018BILL THOMAS
Chairman
Appointed: Chairman in May 2017;
Non-executive Director in December 2016

Committees: Nomination (Chair)

Skills and experience
Bill brings strong commercial and
management experience to the Board.
His extensive international technology
experience, together with his track
record in leading major change in large
organisations, provides valuable insight.
Bill is a former Senior Vice President at
Hewlett Packard and was on the executive
committee of EDS plc as Executive
Vice President.

Other roles
Member of the Council and President
of the Alumni Association at Cranfield
University School of Management; Chair
of Clarkson PLC; Chair of Node4, a private
equity-owned IT services firm; Chair of
the Royal Navy and Royal Marines Charity;
non-executive director of The Co-operative
Bank; member of Advisory Board of
FireEye, Inc.

ERIC HUTCHINSON
Chief Executive Officer
Appointed: CEO in September 2013;
Chief Financial Officer in January 2000

Skills and experience
Eric has extensive experience in the
technology industry worldwide. He joined
the Company in 1983 and was appointed to
the Board as Chief Financial Officer in 2000,
stepping up to the role of Chief Executive
Officer in September 2013.

Eric is a Fellow of the Association of
Chartered Certified Accountants.

Other roles
Member of the Financial Reporting
Review Panel.

PAULA BELL
Chief Financial Officer
Appointed: Chief Financial Officer in
September 2016

Skills and experience
Paula joined Spirent in 2016, bringing
extensive board experience of working
with global technology and engineering
businesses. Paula has demonstrable
experience of effective financial and
commercial management, driving cost-
efficient organisations and improved cash
management whilst driving a strategic
agenda. Paula was previously CFO at
John Menzies Plc from 2013 and CFO at
Ricardo Plc from 2006 to 2013. Paula has
held senior management roles at BAA plc,
AWG plc and Rolls-Royce, leading business

development for international growth
underpinned by extensive M&A activity.

Paula is a Fellow of the Chartered
Institute of Management
Accountants and a Chartered
Global Management Accountant.

Other roles
Since September 2018, non-executive
director and, since January 2019, Chair
of Audit Committee at Keller Group plc;
until June 2018 non-executive director
and Chair of Audit Committee of Laird plc.

JONATHAN SILVER
Senior Independent
Non-executive Director
Appointed: Senior Independent
Non-executive Director, November 2016;
Chair of Audit Committee, August 2015;
Non-executive Director, June 2015.

Committees: Audit (Chair),
Nomination, Remuneration

Skills and experience
Jonathan brings experience in finance,
risk, control, governance and international
business expertise. He was Chief Financial
Officer at Laird plc until 2015, having
held a variety of roles in his 30 years with
the company.

Jonathan is a Member of the Chartered
Accountants of Scotland.

Other roles
Non-executive director and Chair of Audit
Committee of Invesco Income Growth
Trust; non-executive director, Chair of Audit
Committee of East and North Hertfordshire
NHS Trust, and non-executive director of
Henderson High Income Trust PLC.

GARY BULLARD
Independent Non-executive Director
Appointed: Chair of Remuneration
Committee, May 2017; Non-executive
Director, December 2016

Committees: Remuneration (Chair),
Audit, Nomination

Skills and experience
Gary brings extensive experience in senior
management positions, including sales
and marketing roles, at IBM and BT Group
plc and was a non-executive director of
Chloride Group plc. Until 2012 he was
President at Logica UK and a member of
the Executive Committee of Logica plc.

Other roles
Non-executive chairman of Gooch &
Housego PLC; non-executive director
and Chair of Remuneration Committee of
Rotork plc.

WENDY KOH
Independent Non-executive Director
Appointed: Non-executive Director,
January 2018

Committees: Audit, Nomination,
Remuneration

Skills and experience
Wendy brings strong technology sector
experience from various strategic and
sales roles she has undertaken in the
APAC region with Juniper Networks,
most recently as Senior Vice President
Global GTM Strategy and Business
Development, a global role focused on
leading transformational strategy and
establishing partnerships to increase value
proposition for customers. Wendy also
previously worked for Cisco Systems from
1998 to 2003.

Wendy holds a Bachelor of Engineering in
Electrical and Electronics from Nanyang
Technological University and a Graduate
Diploma in Marketing Management from
the Singapore Institute of Management.

Other roles
Vice President, Pathways, Alliance &
Strategy APAC at NetApp Singapore.

EDGAR MASRI
Independent Non-executive Director
Appointed: Non-executive Director,
January 2018

Committees: Audit, Nomination,
Remuneration

Skills and experience
Edgar brings to the Board wide-ranging
experience of managing companies across
the technology sector with a focus on driving
investment and profitability. Edgar was
President and Chief Executive Officer of
Qualtre, Inc., a US-based startup acquired
by Panasonic Corporation in December
2016 at the same time as acting as a member
of the board of Calient Technologies until
its acquisition by Chunxing Precision
Mechanical Co., Ltd. Prior to this, Edgar was
President and CEO of 3Com Corporation, a
leading global data networking company,
bringing the company to record revenue
and gross margins before it was taken into
private ownership.

Edgar holds a Diplome d’Ingenieur from
Ecole Centrale de Paris, a Master of Science
degree in Electrical Engineering from
the University of California at Berkeley,
and a Master of Business Administration
with distinction (Arjay Miller Scholar) from
Stanford University.

Other roles
Director of Kollective Technology, Inc;
Board adviser and senior consultant to
Accton Technology Corporation.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE

COMPLIANCE WITH THE UK
CORPORATE GOVERNANCE CODE
As a premium listed company on the
London Stock Exchange, the Company
is reporting in accordance with the UK
Corporate Governance Code (the “2016
Code”) published in April 2016 which sets
out standards of good practice in relation
to board leadership and effectiveness,

remuneration, accountability and relations
with shareholders. The Code is published
by the UK Financial Reporting Council
(“FRC”) and a copy of the Code is available
from the FRC website at www.frc.org.uk.

The Board confirms that the Company
has complied in full with the 2016 Code
throughout the period under review.

The Board acknowledges the revised UK
Corporate Governance Code published by
the FRC in July 2018 (the “2018 Code”), and,
in line with reporting requirements, will
report to shareholders on the Company’s
compliance with the 2018 Code in its 2019
Annual Report.

Index to 2016 Code disclosures

Leadership

Effectiveness

Every company should be headed by an effective board which is
collectively responsible for the long-term success of the company.
There should be a clear division of responsibilities at the head of the
company between the running of the board and the executive
responsibility for running of the company’s business.
The chairman is responsible for leadership of the board and ensuring its
effectiveness on all aspects of its role.
As part of their role as members of a unitary board, non-executive directors
should constructively challenge and help develop proposals on strategy.
The board and its committees should have the appropriate balance of
skills, experience, independence and knowledge of the company to enable
them to discharge their respective duties and responsibilities effectively.
There should be a formal, rigorous and transparent procedure for the
appointment of new directors to the board.

All directors should be able to allocate sufficient time to the company to
discharge their responsibilities effectively.

Board of directors
The Board
Chairman and CEO

Chairman and CEO

Non-executive Directors
Board composition
Board of directors
Nomination Committee Report

Election and Re-election of
directors
Appointments to the Board
Nomination Committee Report
Commitment

All directors should receive induction on joining the board and should
regularly update and refresh their skills and knowledge.

Board development

Page

56-57
59
59

59
62
56-57
66-67

60
62
66-67

The board should be supplied in a timely manner with information in a
form and of a quality appropriate to enable it to discharge its duties.
The board should undertake a formal and rigorous annual evaluation of
its own performance and that of its committees and individual directors.
All directors should be submitted for re-election at regular intervals,
subject to continued satisfactory performance.

Accountability The board should present a fair, balanced and understandable

assessment of the company’s position and prospects.
The board is responsible for determining the nature and extent of the
principal risks it is willing to take in achieving its strategic objectives. The
board should maintain sound risk management and internal control systems.

The board should establish formal and transparent arrangements for
considering how they should apply the corporate reporting, risk
management and internal control principles and for maintaining an
appropriate relationship with the company’s auditors.
Remuneration Executive directors’ remuneration should be designed to promote the

long-term success of the company. Performance-related elements should
be transparent, stretching and rigorously applied.
There should be a formal and transparent procedure for developing policy on
executive remuneration and for fixing the remuneration packages of individual
directors. No director should be involved in deciding his or her own remuneration.
These should be a dialogue with shareholders based on the mutual
understanding of objectives. The board as a whole has responsibility for
ensuring that a satisfactory dialogue with shareholders takes place.

The board should use general meetings to communicate with investors
and to encourage their participation.

Relations
with
shareholders

Information flow

Board performance evaluation

Election and Re-election of
directors
Re-election of directors
Strategic Report
Directors’ Report
Risk Management
Internal control and risk
management
Audit Committee Report
Audit Committee Report

67
2-53
96-100
24-25
71

68-73
68-73

Directors’ report on remuneration74-95

Relations with shareholders

64-65

Stakeholder engagement

Spirent Communications plc Annual Report 2018LEADERSHIP
The Board
The Board of Directors is collectively
responsible to the Company’s shareholders
for the direction and oversight of the
Company to ensure its long-term success.

The Board met regularly throughout the
year to approve the Group’s strategic
objectives, to lead the Group within a
framework of effective controls which
enable risk to be assessed and managed
and to ensure that sufficient resources are
available to meet the objectives set.

There are a number of matters which
are specifically reserved for the Board’s
approval. These are set out in a clearly
defined schedule which includes: matters
relating to the Group’s strategic plan;
approving the annual business strategy
and objectives; the nature and extent of
principal risks to be taken to achieve the
strategic objectives; changes relating to
structure and capital; approval of trading
statements, half year results, final results
and annual report and accounts; declaring
interim dividends and recommending final
dividends; the Group’s policies and systems
of internal control and risk management,
approving capital projects, acquisitions
and disposals valued at over $2 million; and
provision of adequate succession planning.

The schedule of matters reserved for the
Board was reviewed during the year and

approved and adopted at the March 2018
Board meeting.

Certain specific responsibilities are
delegated to the committees of the
Board, notably the Audit, Nomination
and Remuneration Committees, which
operate within clearly defined terms of
reference and report regularly to the Board.
For further details, please see the reports of
each Committee that follow this statement.

Chairman and CEO
The roles of the Chairman and the CEO are
separately held and the division of their
responsibilities is clearly established, set out
in writing, and agreed by the Board to ensure
that no one person has unfettered powers
of decision. The Chairman is responsible for
the operation and leadership of the Board,
ensuring its effectiveness and setting its
agenda. The CEO is responsible for leading
and managing the Group’s business within
a set of authorities delegated by the Board
and the implementation of Board strategy
and policy.

Authority for the operational management
of the Group’s business has been delegated
to the CEO for execution or further
delegation by him for the effective day-to-
day running and management of the Group.
The Group Executive Committee, led by the
CEO, consists of the CFO, the EVP Global
Sales, the EVP Strategic Marketing and the

Company Secretary & General Counsel, with
the VP Global Operations and Global Head
of Human Resources joining the Executive
Committee in December 2018.

Senior Independent Director
The role of Senior Independent Director is
to act as a sounding board for the Chairman
and to serve as an intermediary for other
directors as necessary. He is also available
to shareholders to convey concerns to the
Board which they have been unable to
convey through the Chairman or through
the Executive Directors. During the year,
led by the Senior Independent Director, the
Non-executive Directors have met without
the presence of the Chairman (including to
appraise the Chairman’s performance).

Non-executive Directors
In addition to their responsibilities for
strategy and business results, the Non-
executive Directors play a key role in
providing a solid foundation for good
corporate governance and ensure that no
individual or group dominates the Board’s
decision making. They each occupy, or
have occupied, senior positions in industry,
bringing valuable external perspective to
the Board’s deliberations through their
experience and insight from other sectors
enabling them to contribute significantly
to Board decision making. The formal
letters of appointment of the Non-executive
Directors are available for inspection at the
Company’s registered office.

BOARD
Non-executive Chairman, two Executive Directors, four Independent Non-executive Directors

AUDIT COMMITTEE
Four Independent
Non-executive Directors

Provides oversight and governance
over the Group’s financial reporting,
internal controls, risk management and
relationship with external auditor

Committee report pages 68 to 73

NOMINATION COMMITTEE
Non-executive Chairman

Four Independent
Non-executive Directors

Primary responsibility for succession planning,
director selection and Board composition

Committee report pages 66 and 67

REMUNERATION COMMITTEE
Four Independent
Non-executive Directors

Agrees remuneration policy
and sets individual compensation
levels for executive directors
and senior management

Committee report pages 74 to 95

EXECUTIVE DIRECTORS
CEO, CFO

GROUP EXECUTIVE COMMITTEE
CEO, CFO, EVP Global Sales, EVP Strategic Marketing, Company Secretary & General Counsel,
VP Global Operations, Global Head of Human Resources

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

The written terms of reference for the
Audit, Nomination and Remuneration
Committees, all of which were reviewed,
updated where necessary and approved
during the year, are available on the
Company’s website at
https://corporate.spirent.com

DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE
CONTINUED
Board Committees
The Board has established three
principal Board committees, to
which it has delegated certain of its
responsibilities. These are the Audit
Committee, the Nomination Committee
and the Remuneration Committee.
The membership, responsibilities
and activities of these committees
are described later in this Corporate
Governance statement and, in the case of
the Remuneration Committee, in the Report
on directors’ remuneration beginning on
page 74. Membership of these committees
is reviewed annually and minutes of
committee meetings are made available to
all directors on a timely basis.

Election and re-election of Directors
In accordance with the 2016 Code’s
recommendations, all Directors who wish to
continue in their roles will be proposed for
election or re-election at the 2019 Annual
General Meeting to be held in May.

The Board confirms that each of the
Directors standing for re-election has been
subject to a formal performance evaluation
in relation to their duty to act in the long-
term interests of the Company, while also
having regard to other stakeholders.

The chairmen of the Audit, Nomination
and Remuneration Committees intend to
be present at the Annual General Meeting
to answer questions on the work of their
respective committees.

Company Secretary
In his role of Company Secretary and
General Counsel, Angus Iveson is
responsible for advising and supporting
the Chairman and the Board on corporate
governance matters as well as ensuring
that there is a smooth flow of information
to enable effective decision making.
All Directors have access to the advice
and services of the Company Secretary
and can take independent professional
advice in respect of their duties, at the
Company’s expense.

Board meetings
The Board held eight meetings during
the year, including a two-day strategy
meeting held at the Company’s site in
Calabasas, California.

Bill Thomas
Paula Bell
Eric Hutchinson
Gary Bullard
Wendy Koh1
Edgar Masri2
Jonathan Silver

Notes
1. Wendy Koh was appointed to the Board on 11 January 2018.
2. Edgar Masri was appointed to the Board on 11 January 2018.

Board

Audit
Committee

Nomination
Committee

Remuneration
Committee

8/8
8/8
8/8
8/8
7/7
7/7
8/8

–
–
–
4/4
4/4
4/4
4/4

3/3
–
–
3/3
2/2
2/2
3/3

–
–
–
8/8
8/8
8/8
8/8

Spirent Communications plc Annual Report 2018Senior executives below Board level are
invited, when appropriate, to attend Board
meetings and to make presentations
relating to the results and strategies of
their business units and Group-wide
responsibilities. Papers for Board and
Committee meetings are provided to
Directors in advance of the meeting.
The attendance of the Directors at Board
and Committee meetings during the year
under review is shown in the table above.
If a Director is unable to participate in a
meeting either in person or remotely, the
Chairman will solicit their views on key
terms of business in advance of the relevant
meeting, so that these can be shared with
the meeting.

Directors’ indemnity provisions
In accordance with its Articles of
Association, the Company has granted
a qualifying third party indemnity, to the
extent permitted by law, to each Director.
The Company also maintains directors’ and
officers’ liability insurance.

These provisions are qualifying third
party indemnity provisions as defined in
Section 234 of the Companies Act 2006.
Neither the Company’s indemnity nor the
insurance provides cover in the event that a
director is proven to have acted dishonestly
or fraudulently.

Board activities during 2018
At each Board meeting, the CEO presents
an update on the performance, strategy
and business issues across the Group and
the CFO presents a detailed analysis of the
financial performance of the business units.
Senior executives below Board level attend
relevant parts of Board meetings in order
to make presentations on their areas of
responsibility; this gives the Board access
to a broader group of executives and helps
the Directors make ongoing assessments
of the Group’s succession plans. The Board
has a rolling programme of visits to
business unit locations to deepen its
appreciation of the different opportunities
and challenges that each unit faces.

Key issues considered by the Board during 2018

Governance/Compliance

Finance

Business/Strategy

January
March

May

June

August

October

November

December

• NED succession update
• Stakeholder engagement
• 2017 Full Year compliance and

Annual Report review

• Legal review

• 2017 Full Year results review
• Viability Statement review
• Dividend policy review
• Capital policy review
• Receive Audit Committee

report on internal controls and
risk management

• AGM voting review
• Stakeholder engagement update
–

• 2018 Q1 results review
• Tax strategy update
–

• 2018 Half-year compliance review
• Board evaluation kick-off
• Regulatory and legal review
• Succession planning and

• 2018 Half-year results review
• CFO update
• Insurance review

leadership programme review
• Stakeholder engagement update
• Governance Code update

–

• Board evaluation results review
• Governance compliance review
• Legal review
• CEO succession planning
• Governance compliance review
• Workforce engagement review
• CEO succession update

• 2018 Q3 results review
• Treasury policy review
• Pension update

• Budget 2019

• Group performance review
• Sector/industry review
• Business initiatives update

and review

• Group performance review
• Strategic benchmarking
• Group performance review
• Strategy presentations

• Group performance review
• Channel strategy review

• Group performance review
• Sales organisation review
• Strategic Marketing review
• Group performance review
• Sales organisation review
• M&A landscape review

• Group performance review
• Sales organisation review
• Future investments review
• Cyber security review

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE
CONTINUED
EFFECTIVENESS
Board composition
At the date of this Report, the Board
comprises the Non-executive Chairman,
four Independent Non-executive Directors
and two Executive Directors.

Appointments to the Board
There is a formal, rigorous and transparent
procedure for the appointment of new
directors to the Board. Details are available
in the Nomination Committee report on
pages 66 and 67 which also provides details
of the Committee’s role and activities.

The Chairman and the Non-executive
Directors contribute entrepreneurial
leadership and external expertise and
experience in areas of importance to the
Company, such as strategic investments,
corporate finance, general finance
and corporate governance. They also
contribute independent challenge and
rigour to the Board’s deliberations and
assist in the development of the Company’s
strategy, scrutiny of the performance of
management in meeting agreed goals and
targets, and satisfying themselves of the
integrity of the Company’s internal controls
and risk management systems. The Board
believes that all of the directors devote
sufficient time and attention as is necessary
in order to perform their duties.

The Chairman holds regular discussions
with the Non-executive Directors without
the Executive Directors present to ensure
a free and frank exchange of views on the
effectiveness of the Executive Directors
and senior management.

Independence
The independence of each Non-executive
Director is reviewed on appointment and
at least annually. The Board determined
that the current Non-executive Directors
are each independent in character and
judgement, save for the Chairman who was
deemed independent by the Board at the
date of his appointment. None have been
employed by the Company previously
in any capacity or have any current
material business relationship with any
Group company.

Non-executive Directors at Spirent receive
no remuneration from the Company other
than their fees (detailed in the Report on
directors’ remuneration on page 80) and
each Non-executive Director has confirmed
that they do not represent any significant
shareholder in the Company. No individual
or group of individuals dominates the
Board’s decision making and the 2016
Code requirement stating that at least
half of the Board (excluding the Chairman)
should comprise independent non-
executive directors is satisfied.

BOARD PERFORMANCE EVALUATION
An evaluation to assess the performance
of the Board as a whole, its committees
and that of the individual directors is
conducted annually.

In accordance with the 2016 Code
requirement that the evaluation should
be conducted by an external facilitator
at least every three years, in 2018
Independent Audit Limited (“IAL”) was
engaged to undertake a review of
the Board and its Committees. IAL is
independent, with no other connection
with the Company.

Process
Following a scoping exercise with the
Chairman, Company Secretary and IAL
to agree the priority areas and issues to
be addressed in the review, the Directors
and Company Secretary completed an
online questionnaire, centring on themes
including the strengths and values of the
Board, the quality of succession planning,
the interaction of the Board members with
the Group’s various business units, the
process of managing strategic planning
and the management of risk. A report
setting out details of the responses
received was provided to the Board by IAL
for discussion and to support the target-
setting process for 2019 objectives.

During the period, the Chairman held
one-to-one sessions with each of the
Directors following which feedback was
shared on performance and contribution.
Alongside the wider evaluation process,
the Senior Independent Director led a
session with the other Directors without
the Chairman present to discuss and
reflect on the Chairman’s performance.
Feedback from this session was discussed
with the Chairman.

The implementation of a number of
recommended action points arising
from the 2017 evaluation was overseen
by the Chairman and included the
following actions:

Commitment
The letters of appointment for the
Chairman and non-executive directors
set out the expected time commitment
required of them and are available for
inspection at the Company’s registered
office and at the Annual General Meeting.

2018 actions
• Further explore the articulation of

Spirent’s strategic vision;

• Continue to review the effectiveness of

research and development spend;

• Deepen visibility of product

development investment decisions
and understanding of progress of
such investments;

• Increase exposure to senior

management for the purposes of
developing internal talent pipeline;

• Monitor effectiveness of revised
internal control procedures; and
• Review ‘Go To Market’ approach.

All respondents to the 2018 evaluation
agreed that the conduct of Board
meetings allows for an open and
constructive communication style and
that the appointment of new Non-
executive Directors would continue to
expand the breadth of market and sector
experience to the benefit of the Company.

The Board members agreed that the
Board and its principal committees
continued to perform effectively.

The Board concluded that the actions
arising from the 2018 review would
continue to be developed through 2019,
with the addition of the following areas
of focus:

2019 Objectives
• Further develop the Board’s

understanding of the impact of
emerging technology trends on
Spirent’s existing business model and
on its longer-term strategic vision;

• Monitor the effectiveness of the

Group’s new approach to internal
talent development;

• Review key leading indicators of

performance within Group;

• Undertake a deep review of the Group’s

IT strategy to ensure it meets the
evolving needs of the business; and
• Evolve Spirent’s culture and values to
ensure that they meet the current and
future needs of the business.

Spirent Communications plc Annual Report 2018Other significant commitments of the
Chairman and Non-executive Directors
are disclosed on appointment and require
approval thereafter.

Board development
On appointment, directors are offered an
induction programme on the operations
and activities of the Group, the role of
the Board and the matters reserved
to its decision, the Group’s corporate
governance practices and procedures and
their duties, responsibilities and obligations
as directors of a listed public limited
company. This may be supplemented by
visits to key locations and meetings with,
and presentations by, senior executives.

Further training for Directors is available as
required and can be provided by means of
external courses, internal computer-based
training, briefings from specific consultants
or in-house presentations. In addition,
directors’ knowledge and understanding
of the legal and regulatory environment
is updated through the provision of
information by the Group’s advisers and
by means of regular updates from the
Company Secretary.

New Directors are encouraged to take
advantage of opportunities to meet
with major shareholders and attend
presentations to analysts where possible.

Information flow
The Company Secretary manages the
provision of information to the Board at
appropriate times in consultation with
the Chairman and CEO. In addition to
formal meetings, the Chairman and CEO
maintain regular contact with all Directors.
The Chairman also holds informal meetings
with Non-executive Directors, without any
of the executives being present, to discuss
any issues affecting the Group, if this is
thought necessary. Regular management
updates are sent to Directors to keep the
Non-executive Directors informed of events
throughout the Group between Board
meetings and to ensure that they are kept
fully advised of the latest issues affecting
the Group.

Conflicts of interest procedures
The Company has procedures in place,
which were reviewed and updated during
the year, to deal with the situation where a
director has a conflict of interest.

As part of this process, the Board:

• considers each potential conflict situation

separately on its particular facts;

• considers the potential conflict situation

in conjunction with the rest of the
directors’ duties under the Companies
Act 2006;

• keeps records and Board minutes as to
authorisations granted by directors and
the scope of any approvals given; and
• regularly reviews conflict authorisation.

ACCOUNTABILITY
Financial and business reporting
The Board recognises its responsibility
to present a fair, balanced and
understandable assessment of Spirent
in all of its reporting obligations.
This responsibility covers the Annual
Report and extends to the half year report
and other regulatory announcements.
The Directors consider this Annual Report,
taken as a whole, to be fair, balanced and
understandable, providing the information
necessary for shareholders to assess the
Company’s performance, business model
and strategy. In arriving at this position,
the Board asked the Audit Committee to
review and confirm a process is in place
to support this assessment. The Audit
Committee confirmed that a robust
approach is in place to support the fair,
balanced and understandable assessment,
details of which can be found in the Audit
Committee’s report on pages 68 to 73.

Business model
A description of the Company’s business
model for sustainable growth is set out in
“Our business model” on pages 18 and 19.
This section provides an explanation of the
basis on which the Group generates value
and preserves it over the long-term and its
strategy for delivering its objectives.

Going concern
After making enquiries, the Directors have
a reasonable expectation that the Company
and the Group have adequate resources
to continue in operational existence for
the foreseeable future. Accordingly, and
consistent with the guidance contained
in the document titled ‘Guidance on
Risk Management, Internal Control and
Related Financial and Business Reporting’
published by the FRC, they continue to
adopt the going concern basis in preparing
the annual financial statements.

Internal control and risk management
The Board acknowledges its responsibilities
for the Group’s system of internal control
to facilitate the identification, assessment
and management of risk, the protection of
shareholders’ investments and the Group’s
assets. The Directors recognise that they
are responsible for providing a return to
shareholders which is consistent with the
responsible assessment and mitigation
of risks.

Effective controls ensure that the Group’s
exposure to avoidable risk is minimised,
that adequate accounting records are
maintained, that the financial information
used within the business is reliable and
that the consolidated accounts preparation
and financial reporting processes comply
with all relevant regulatory reporting
requirements. The dynamics of the Group
and the environment within which it
operates are continually evolving, together
with its exposure to risk. Internal controls
can only provide reasonable and not
absolute assurance against material
misstatement or loss.

The Directors confirm that there is an
ongoing, robust process for identifying,
evaluating and managing the principal risks
faced by the Group and the operational
effectiveness of the related controls, which
has been in place for the year under review
and up to the date of approval of the annual
report and accounts. They also confirm that
they have regularly reviewed the system
of risk management and internal controls
utilising the review process set out below.

The Directors confirm that a robust
assessment of the principal risks facing the
Company has been carried out, including
those risks that would threaten its business
model, future performance, solvency or
liquidity. More details are set out in the
Principal risks and uncertainties section on
pages 26 to 29 of this Annual Report.

Management and control of
US subsidiary
Spirent Federal Systems Inc (“Spirent
Federal”), which contributed approximately
$46.9 million (2017 $40.8 million) to the
Group’s revenue in 2018, operates under
a Proxy agreement, as detailed below,
with the remainder of the US business
operating outside the Proxy regime and
therefore allowing the same reporting lines
and processes as the Group’s other, non-
regulated businesses.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

Proxy Board. Members of Spirent’s senior
management team attend meetings of the
Proxy Board periodically.

DIRECTORS’ STATEMENT ON CORPORATE GOVERNANCE
CONTINUED
Spirent Federal and the
Proxy arrangement
Spirent Federal Systems Inc is a wholly-
owned subsidiary of Spirent in the United
States. It has been placed under a Proxy
arrangements as it is required by the US
National Industrial Security Program to
maintain facility security clearances and
to be insulated from foreign ownership,
control or influence for the business it
undertakes. Under the Proxy agreement,
Spirent Federal and the US Department
of Defense (”DoD”) are parties to a Proxy
agreement that relates the management
and operation of Spirent Federal.

Standards
Guidelines on the minimum Group-wide
requirements for health and safety and
environmental standards are set out
in policy documents and procedures.
There are also guidelines on the minimum
level of internal control that each of the
business units should exercise over
specified processes. Each business has
developed and documented policies and
procedures to comply with the minimum
control standards established, including
procedures for monitoring compliance and
taking corrective action.

High level controls
All businesses prepare annual
operating plans and budgets which
are supplemented by regular forecasts
throughout the year. Performance against
budget is monitored at operational
level and centrally, with variances being
reported promptly. The cash position at
Group and operational level is monitored
constantly and variances from expected
levels are investigated thoroughly.

Clearly defined guidelines have been
established for capital expenditure and
investment decisions. These include
the preparation of budgets, appraisal
and review procedures, and delegated
authority levels.

Financial reporting
Detailed management accounts are
prepared every month, consolidated in
a single system and reviewed by senior
management and the Board. They include
a comprehensive set of financial reports
and key performance indicators covering
commercial and operational issues.
Performance against budgets and forecasts
is discussed regularly at Board meetings
and at meetings between operational and
Group management. The adequacy and
suitability of key performance indicators is
reviewed regularly.

Internal audit
All of the internal audit activities are co-
ordinated by the Head of Risk & Internal
Audit, who has direct access to the Board
Chairman and to the Audit Committee
Chairman and is accountable to the
Audit Committee.

In addition to their powers as directors, the
Proxy holders have power under the Proxy
arrangements to exercise all prerogatives
of share ownership of Spirent Federal.
The Proxy holders have a fiduciary duty,
and agree, to perform their interests in the
best interests of Spirent as a shareholder
(including the legitimate economic
interest), and in a manner consistent
with the national security interests of the
United States. Spirent may not remove the
Proxy holders other than for acts of gross
negligence or wilful misconduct or for
breach of the Proxy agreement (and always
only with the consent of the US Defense
Security Service).

In terms of the power to govern, the Proxy
agreement vests certain powers solely
with the Proxy holders and certain powers
solely with Spirent. For example, the Proxy
holders cannot carry out any of the below
without Spirent’s express approval:

• sell or dispose of, in any manner, capital
assets or the business of Spirent Federal;
• pledge, mortgage or encumber assets of
Spirent Federal for purposes other than
obtaining working capital or funds for
capital improvements;

• merge, consolidate, reorganise or

dissolve Spirent Federal;

• file or make any petition under the
federal bankruptcy laws or similar
law or statute of any state or any
foreign country.

Spirent can require the above to be carried
out and these are, therefore, considered to
be significant participative features.

Spirent maintains its involvement in Spirent
Federal’s activities through normal business
interaction and liaison with the Chair of the

All Group businesses are required to
comply with the Group’s financial control
framework that sets out minimum control
standards. A key function of the Group’s
internal audit resource is to undertake
audits to ensure compliance with the
financial control framework and make
recommendations for improvement in
controls where appropriate.

Senior members of the Group finance
team meet with the Chairman of the Audit
Committee as appropriate but at least
annually, without the presence of executive
management, and have direct access to
the Chairman.

REMUNERATION
The Directors’ report on remuneration is
set out on pages 74 to 95 and provides
details of our remuneration policy and how
it has been implemented, together with the
activities of the Remuneration Committee.

ARTICLES OF ASSOCIATION
AND SHARE CAPITAL
Information in relation to share capital,
the appointment and powers of directors
and the issue and buy back of shares and
significant interests in share capital is set
out in the Directors’ report on pages 96
to 100.

RELATIONS WITH SHAREHOLDERS
The Board is committed to maintaining
good communications with shareholders.
The Chairman, CEO and CFO have
regular face to face contact with individual
institutional shareholders in order to
develop an understanding of their views
which are then discussed with the Board.
Key themes for discussion in 2018 have
included the appointment processes for
the new Non-executive Directors and the
Remuneration Committee’s review of the
executive remuneration policy.

All directors are offered the opportunity
to develop a dialogue with major
shareholders to listen to their views and
Executive Directors receive regular reports
prepared by an independent capital
markets advisory firm which provides
comprehensive information relating to the
Company’s major shareholders.

Spirent Communications plc Annual Report 2018Presentations are made to analysts,
investors and prospective investors
covering the full year and half year results
and the Company seeks to maintain a
dialogue with the various bodies which
monitor the Company’s governance
policies and procedures.

The Company is always keen to hear the
views of its private shareholders and we
encourage them to access our website
at https://corporate.spirent.com for our
Company reports and business information
and to use our shareholder mailbox
at investor.relations@spirent.com for
detailed enquiries.

Any concerns raised by shareholders or
their representatives, whether expressed
directly or through voting patterns at the
Company’s AGM, are discussed by the
directors and an appropriate response
given either specifically to the concerned
party or, if it is felt to be of wider benefit,
made available to all shareholders via the
Company’s website.

ANNUAL GENERAL MEETING
The Company’s 2019 Annual General
Meeting (“2019 AGM”) will be held at
12.30pm on Wednesday 1 May 2019 at the
offices of FTI Consulting, 200 Aldersgate,
Aldersgate Street, London EC1A 4HD.

The Board views the AGM as a valuable
opportunity to communicate with private
shareholders in particular, for whom it
provides the opportunity to hear about
the general development of the business
and to ask questions of the Chairman
and, through him, the chairmen of the key
Committees and other directors.

The Board looks forward to welcoming
all our shareholders to our 2019
AGM and to updating them on our
business developments.

Stakeholder

Why is it important to engage?

Ways Spirent engages

Shareholders’ key interests

Customers

Understanding our customers’ needs and behaviours
allows us to deliver relevant products and services,
retain customers and also attract new ones. It also
identifies opportunities for growth.

Colleagues

Suppliers

Investors

Interactions with our colleagues are the main ways
that customers experience the brand of the Company.
Our colleagues are fundamental to the achievement
of our customer experience ambitions and are the
cornerstone of our service and services proposition.
Engaging with our supply chain means that we can
ensure security of supply and speed to market.
Our brand relies heavily on the high standards of our
carefully selected suppliers, in order for us to deliver
market-leading products and services.
As a publicly listed company we need to provide fair,
balanced and understandable information to instil
trust and confidence and allow informed investment
decisions to be made.

Communities Ensures continued viability of the business into the

long-term. We aim to contribute positively to the
communities and environment in which we operate.
Ensures transparency of information on the business
and Spirent’s brand position in the various markets
we serve.

Media and
industry
analysts

Government Policies and regulatory changes may provide
opportunities and pose risk to our operations.

• Social media engagement
• Product website
• Customer relevant events
• Industry forums and
customer groups

• Training and

development programme

• Recognition and reward
• Apprenticeship and
intern programmes

• Logistics efficiencies and

environmental management

• Supplier audits

• Value for money
• Customer service
• Reliability

• Career opportunities
• Pay and conditions
• Training and development
• Innovation
• Colleague engagement
• Quality management
• Cost efficiency
• Ethical business model

• Annual reports
• Regulatory news releases
• Annual General Meetings
• Investor presentations
• Corporate website
• One-on-one meetings
• Community

• Future-oriented information
• Risk information
• Operating and

financial performance

• Dividend
• Access to management
• Impact of Group activities on

investment initiatives

the wider community

• Press releases
• Media and analyst events
• Participation in
industry reports

• Reliable product information
• Transparency of reliable and
timely Group information

• Participation in government
funded/sponsored smart
technology initiatives

• CO2 reduction strategies
• Ethical business model
• Socially responsible strategy

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

NOMINATION COMMITTEE REPORT

MEMBERS
During the year and at the date of
this Report:

When dealing with the appointment of the
Chairman, the Committee is chaired by the
Senior Independent Director.

• Bill Thomas (Chairman)
• Jonathan Silver
• Gary Bullard
• Wendy Koh (appointed 11 January 2018)
• Edgar Masri (appointed 11 January 2018)

The terms of reference of the Nomination
Committee, which were updated as
necessary and approved during the year,
are available on the Company’s website at
https://corporate.spirent.com

KEY DUTIES
In accordance with its terms of reference,
the Nomination Committee’s key
duties include:

MEETINGS
The Nomination Committee met three
times during the year under review.

• leading the search process and making
recommendations to the Board for the
appointment of new directors;

• regularly reviewing the Board structure,

size and composition (including the skills,
knowledge, independence, experience
and diversity), recommending any
necessary changes and considering
plans for orderly succession; and
• making recommendations to the
Board about suitable candidates
for the role of Senior Independent
Director, and membership of the Audit
and Remuneration Committees in
consultation with the chairmen of the
relevant Committees.

HOW THE COMMITTEE OPERATES
Members of the Nomination Committee
are appointed by the Board from the
directors of the Company. The Committee
comprises a minimum of three independent
non-executive directors. A quorum
consists of two members, being either two
independent non-executive directors or
one independent non-executive director
and the Chairman.

Only members of the Committee have
the right to attend Committee meetings.
Other individuals, such as the CEO and
external advisers, may be invited to attend
meetings when appropriate.

COMMITTEE ACTIVITIES DURING 2018
Policy on diversity and inclusion at
Board level
Although the Board does not currently
set specific aspirations in respect of
diversity at Board level, it has a policy of
supporting fully the 2016 Code’s principles
in respect of this key issue. Spirent as a
whole recognises the benefits of diversity
beyond that of gender, taking account of
diversity of social and ethnic backgrounds
and cognitive and personal strengths
when considering appointments at all
levels whilst ensuring appointments are
made on merit and ability to enhance the
performance of the business.

An analysis of data on the gender balance
at different levels within the Company can
be found in the Sustainability section on
page 51 of this Annual Report.

Board appointments process
The Chairman leads the process for new
appointments with external, independent
consultants engaged to conduct a search
for potential candidates. These are
considered on the basis of their skills,
experience and fit with the existing
members of the Board. Procedures for
appointing a non-executive or an executive
director are set out in the Committee’s
terms of reference.

AS PART OF
ITS ONGOING
ASSESSMENT OF
SENIOR LEADERSHIP
DEPTH, THE
COMMITTEE AND THE
BOARD CONTINUE
TO WORK TOWARDS
DEVELOPING A
DIVERSE INTERNAL
PIPELINE FOR FUTURE
SUCCESSION TO THE
BOARD AND SENIOR
MANAGEMENT.”

Spirent Communications plc Annual Report 2018Recruitment of new CEO
Following Eric Hutchinson’s decision to
inform the Board of his wish to retire from
the Company, the Chairman has initiated
a search process for a new Chief Executive
Officer. Mr Hutchinson has agreed to
continue in the role until a replacement
has been appointed and for a transitional
period thereafter.

The services of external executive
consulting firm Korn Ferry has been
retained to identify candidates. Korn Ferry
is independent, with no other connection
to the Company, and is a signatory to
the “Voluntary Code of Conduct for
Executive Search Firms” on diversity and
best practice.

The Company will report on progress in
due course.

Appointment of new Independent
Non-executive Directors
During the year, the Chairman completed
the process for the appointment of two
new Independent Non-executive Directors
as part of the progressive refreshing of
the Board.

The services of external executive
consulting firm Russell Reynolds
Associates were retained to identify
candidates. Russell Reynolds Associates
is independent, with no other connection
to the Company, and is a signatory to
the “Voluntary Code of Conduct for
Executive Search Firms” on diversity and
best practice.

Following a rigorous process of
interviews and assessments and, on the
recommendation of the Nomination
Committee, the Board approved the
appointments of Wendy Koh and Edgar
Masri with effect from 11 January 2018.

Board succession
As part of its ongoing assessment of
senior leadership depth, the Committee
and the Board continue to work towards
developing a diverse internal pipeline
for future succession to the Board and
senior management.

Performance review
The performance of the Committee was
evaluated as part of the annual Board
performance evaluation and the Committee
was found to be operating effectively.

Re-election of Directors
The Committee reviews the results of the
annual Board performance evaluation that
specifically relate to the composition of the
Board and whether the time commitment
of those who fulfil the roles of Chairman,
Senior Independent Director and non-
executive director was appropriate.

The Committee was satisfied that all non-
executive members of the Board devote
sufficient time to their duties and remain
independent in nature and recommends
all continuing Directors for re-election by
shareholders at the forthcoming AGM.

Bill Thomas
Chairman
7 March 2019

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

AUDIT COMMITTEE REPORT

ENSURING THE
INTEGRITY OF
FINANCIAL
REPORTING AND
APPROPRIATE RISK
MANAGEMENT.”

DEAR SHAREHOLDER
On behalf of the Audit Committee, I am
pleased to present its report for the period
ending 31 December 2018.

The Committee has focused on the
integrity of the Group’s financial reporting
and ensuring the appropriate challenge
and governance around risk management.
We have continued to follow a detailed
programme of work and to respond to the
increasing depth of review and reporting
that is now required of audit committees
and are mindful of the 2018 UK Corporate
Governance Code’s requirement for
boards to perform a robust assessment of
emerging risks in addition to the principal
risks. The Committee has adapted its
scope accordingly.

During 2018 the Committee continued to
monitor the implementation of IFRS 15 on
revenue recognition. It also assessed the
Group’s readiness to comply with IFRS 16
on Leases which becomes effective for the
2019 financial period and has considered
the impact it will have on disclosure in
the Group’s Income Statement and the
increase in both assets and liabilities in its
Balance Sheet.

In 2018, the Group had to contend with
a fire which surrounded its Calabasas
site which was closed as a result and its
business continuity plan was invoked.
The site reopened with minimal disruption,
providing the Committee with further
assurance as to the effectiveness of its risk
management practices.

During the year, the Committee has also
considered the implications of Brexit, but
given the Group’s global footprint, which is

largely outside the UK, it does not consider
it to be one of the Group’s principal risks.

The Committee has continued to
develop the internal audit function with
its outsource partner in accordance with
an agreed strategic internal audit plan.
This plan contributes to the assessment
of the level and effectiveness of controls
across the Group. In addition, the
Committee reviews the results of a biannual
internal assessment of internal controls
carried out by management across
all businesses.

In 2018, the Committee continued
to monitor and review the Group’s
preparations for the introduction of the
General Data Protection Regulation
which became effective in May 2018.
Further details on the Committee’s
activities during the year under review are
set out in the report to follow.

Looking ahead, the Committee is aware
that under the EU Audit Regulation it will
be necessary to change the Company’s
external auditor in time for the new
auditor’s term to begin in 2021.

The Committee remains fully committed
to championing good financial and risk
reporting and to ensuring we have in place
the appropriate internal controls. I look
forward to meeting any shareholders who
attend our AGM this year to answer any
questions shareholders may have on this
report or on the Committee’s activities.

Jonathan Silver
Chairman, Audit Committee
7 March 2019

FAIR, BALANCED, UNDERSTANDABLE
In making its recommendation to
the Board that the Annual Report,
taken as a whole, is fair, balanced
and understandable, the Committee
applied robust governance
arrangements, including:

• clear guidance and instruction of the
disclosure requirement provided
to contributors;

• comprehensive Group and subsidiary

accounts processes, with written
confirmations provided by business unit

management teams on the health of the
financial control environment;

• a verification process applied to factual
content with the aim of providing the
information necessary to assess the
Company’s performance, business
model and strategy;

• reviews of the Annual Report

undertaken at different levels of the
Group and by the senior management
team that aim to ensure consistency and
overall balance;

• additional scrutiny by senior

management including focused review
of risk registers;

• additional Committee reviews of the

draft Annual Report in advance of final
sign-off; and

• external audit review.

Final approval of the Annual Report
is provided by the Board, on the
recommendation of the Committee.

Spirent Communications plc Annual Report 2018MEMBERS
During the year and at the date of this
report, Committee members were:

KEY DUTIES
In accordance with its terms of reference,
the Audit Committee’s key duties include:

• Jonathan Silver (Committee Chairman)
• Gary Bullard
• Wendy Koh (appointed 11 January 2018)
• Edgar Masri (appointed 11 January 2018)

It is intended that the Audit Committee
is comprised of at least three members,
all of whom are independent non-
executive directors of the Company who
have the necessary range of financial
and commercial expertise to challenge
management. Two members constitute
a quorum.

The 2016 Code requires the inclusion
of one financially qualified member
(as recognised by the Consultative
Committee of Accountancy Bodies) with
recent and relevant financial experience.
Currently, the Committee Chairman fulfils
this requirement.

• monitoring the integrity of the

Group’s financial statements and
any formal announcements relating
to the Company’s performance,
reviewing significant financial reporting
judgements contained in them
before their submission to the Board
for approval;

• on matters of financial reporting,
reviewing and challenging where
necessary the consistency of and any
changes to accounting and treasury
policies; for example whether the Group
has followed appropriate accounting
policies and made appropriate estimates
and judgements, the clarity and
completeness of disclosure, significant
adjustments resulting from the audit,
and the going concern assumption and
compliance with auditing standards;
at the request of the Board, reviewing
the content of the Annual Report and
Accounts and advising the Board on
whether, taken as a whole, it is fair,
balanced and understandable and
provides the information necessary for
shareholders to assess the Company’s
position and performance, business
model and strategy;

• as requested by the Board, assisting in

relation to the Board’s assessment of the
principal risks facing the Company and
the prospects of the Company for the

purposes of disclosures required in the
Annual Report and Accounts;

• reviewing the effectiveness of the
Group’s internal financial controls,
including the policies and overall process
for assessing established systems of
internal financial control and timeliness
and the effectiveness of corrective action
taken by management;

• reviewing the most appropriate fulfilment
of the internal audit function, agreeing
and assessing the annual internal
audit plan and its effectiveness in the
context of the Company’s overall risk
management system;

• overseeing the Group’s policies,

procedures and controls for preventing
bribery, identifying money laundering,
and the Group’s arrangements for
whistleblowing; and

• overseeing the relationship with the
Group’s external auditors, reporting
to the Board each year whether it
considers the audit contract should be
put out to tender taking into account
any legal requirements for tendering or
rotation of the audit contract, reviewing
and monitoring their objectivity and
independence including seeking
information from the external auditor
on an annual basis about its policies
and procedures for maintaining
independence, agreeing the scope of
their work and fees paid to them for
audit, assessing the effectiveness of the
audit process, and agreeing the policy
in relation to the provision of non-
audit services.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

AUDIT COMMITTEE REPORT
CONTINUED
HOW THE COMMITTEE OPERATES
All Committee members are expected
to be financially literate and to have an
understanding of the following areas:

• the principles of, and developments in,
financial reporting including applicable
accounting standards and statements of
recommended practice;

• key aspects of the Company’s operations

including corporate policies and the
Group’s internal control environment;

• matters which may influence the

presentation of accounts and key figures;

• the principles of, and developments in,
company law, sector-specific laws and
other relevant corporate legislation;

• the role of internal and external auditing

and risk management; and

• the regulatory framework for the

Group’s businesses.

The Committee invites the CEO, CFO
and senior representatives of the external
auditor to attend its meetings in full,
although it reserves the right to request any
of these individuals to withdraw.

During the year, the Committee held two
meetings with the external auditor without
any executive members of the Board
being present.

The Committee has unrestricted access to
Company documents and information, as
well as to employees of the Company and
the external auditor.

The Committee’s effectiveness is
reviewed on an annual basis as part of the
Board’s performance evaluation process
and the Committee was found to be
operating effectively.

The terms of reference of the Audit
Committee were reviewed and updated
during the year and can be viewed
on the Company’s website at
https://corporate.spirent.com

MEETINGS
The Audit Committee met four times during
the year, with the Committee agenda linked
to events in the Group’s financial calendar.

ACTIVITIES DURING 2018
The Audit Committee’s activities
principally related to financial reporting,
internal control and risk management,
the preparation for publishing a
viability statement and the external
audit. In addition, the Audit Committee
considered other specific matters such as
the Group’s approach to IT controls and
cyber security.

FINANCIAL REPORTING AND
SIGNIFICANT ISSUES
During the year, the Audit Committee:

• reviewed the full year and half year

financial statements, trading updates,
key accounting policies and significant
financial reporting judgements contained
therein (with particular reference to the
critical accounting assumptions and
judgements as set out in note 2 of the
consolidated financial statements) and
recommended the financial statements
to the Board for approval;

• reviewed whether the Annual Report
taken as a whole is fair, balanced and
understandable and formed an opinion
thereon prior to recommending it to
the Board;

• reviewed and monitored risk

management processes and their
potential to impact on the viability of
the Group;

• reviewed and considered assumptions

in relation to the going concern basis for
preparation of financial statements; and

• reviewed the external auditor’s report

on the interim review and year end audit
and management’s responses to the
issues raised.

The Committee Chairman reports
any significant findings or identified
weaknesses to the Board.

SIGNIFICANT FINANCIAL
ISSUES CONSIDERED
The Audit Committee has reviewed each
of the following key significant financial
risks by:

• reviewing papers and
management updates;

• holding discussions with management

and key finance staff to challenge
assumptions made;

• debating alternative treatments;
• receiving periodic reports on key areas

of judgement;

• discussing with the external auditor; and
• considering presentations to analysts
to assess for inconsistencies or areas
of bias.

Revenue recognition
The Committee is aware that pressure on
management to meet certain targets, and
to respond to specific customer requests
may drive additional deal complexity which
in turn could lead to complex accounting.
This may result in inappropriate recognition
of revenue and associated balances.
The Committee has monitored the finance
organisation’s implementation of the
new revenue recognition standard (IFRS
15), which has applied to the Company’s
financial statements for the period
beginning 1 January 2018.

As part of their audit procedures agreed
with the Committee, Ernst & Young LLP
(“EY”) has examined the allocation of
revenue, reviewing specific large and
complex transactions and contracts
containing non-standard acceptance
clauses to ensure that revenue has been
recognised appropriately. EY has also
tested the allocation of revenue to the
service element of multi-element contracts
to ensure that deferred revenue and other
associated balances have been recognised
in accordance with Group accounting
policies and IFRS.

Spirent Communications plc Annual Report 2018Deferred tax assets
The Committee recognises there is a risk
that inappropriate use of brought forward
tax losses and volatility in forecast sales
may result in incorrect recognition of
deferred tax assets. In addition, following
the significant reduction in US Federal
tax rates in 2017, due consideration has
continued to be given to the change in the
measurement and resulting disclosures of
these assets. Anticipated restrictions on the
utilisation of carry forward losses in the UK
may also increase the risk and uncertainty.

The Committee noted that EY has
performed a detailed review of the
recognition of deferred tax assets in the
Group accounts as part of their audit
review, with a good level of challenge of
management’s underlying assumptions.

Goodwill impairment
Management undertook its annual review
of impairment at the end of 2018 and the
Committee challenged the assumptions
made and concluded that management’s
assessment of goodwill is appropriate.

As part of its audit process, EY undertook
a review of the procedures followed and
judgements made by management and
agreed that management’s conclusions.

Exceptional items
The Committee has reviewed and agreed
the quantum and disclosure of the
provisions for pension equalisation and the
French Customs dispute.

MISSTATEMENTS
Management reported to the Committee
that they were not aware of any material
or immaterial misstatements made
intentionally to achieve a particular
outcome. The auditor reported to the
Committee misstatements they had found
in the course of their work. After due
consideration, the Committee concurred
with management that no adjustments
were required.

INTERNAL CONTROL AND
RISK MANAGEMENT
During the year, the Audit Committee:

• monitored and reviewed internal control

and risk management systems;

• reviewed and approved the internal audit

programme for 2018;

• monitored and reviewed the Group’s

preparations for the introduction of the
General Data Protection Regulation
(“GDPR”) in May 2018; and

• reviewed regular reports on taxation,
treasury operations, health and safety
and cyber security.

The Board has overall responsibility for
the Group’s system of internal control
and risk management and for reviewing
its effectiveness. The Board, assisted
by the Audit Committee, has reviewed
the effectiveness of this system and has
enhanced the approach to Internal Control
and Raising Concerns at Work as described
below during 2018.

Internal audit
During 2018 the Head of Risk & Internal
Audit has worked with an outsourced
provider for financial control activities, with
an Internal Audit Charter being approved
by the Committee.

The Committee approved the
programme of work for the Internal
Audit function, which was focused on
addressing both financial and overall risk
management objectives across the Group.
The Committee oversees and monitors
the work of the Internal Audit function,
which reviews key controls and processes
throughout the Group on a rolling
basis, including resources, scope and
effectiveness of the function.

The Head of Risk & Internal Audit has direct
access to the Board Chairman and to the
Committee Chairman, is accountable to the
Committee and meets regularly with both
the Committee and its Chairman, without
the presence of management, to consider
the work of Internal Audit.

Raising concerns at work
The Committee aims to ensure that
employees are able to raise any concern
in confidence about any possible
improprieties in business practices, or
other matters. In 2018, a revised Groupwide
Whistleblowing Policy was launched, and
an external third party was appointed to
receive any concerns raised by employees.
Disclosures under this arrangement are
investigated promptly by the Company
Secretary, with the support of the Head of
Risk & Internal Audit, and escalated to the
Executive Directors and the Committee as
appropriate, with follow-up action being
taken as soon as practicable thereafter.
The Committee is satisfied that the means
for employees to raise concerns at work
are appropriate to the size and scale of
the Group.

The primary aim of the Group’s internal
controls is to operate a system which is
appropriate to the business and which can
support the Group in delivering its strategic
objectives, safeguard the Group’s assets
and, over time, enhance shareholder value.
The system is designed to identify, evaluate
and manage the significant risks faced by
the Group rather than to eliminate the risk
of failure to achieve business objectives
and can only provide reasonable and
not absolute assurance against material
misstatement or loss. This is in accordance
with the Guidance on Risk Management,
Internal Control and Related Financial and
Business Reporting issued by the FRC in
September 2014.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

AUDIT COMMITTEE REPORT
CONTINUED
The CFO is responsible for internal
financial control and for ensuring that the
finance department employs a level of
management and specialists appropriate
for maintaining financial records and
processes that provide financial information
that is relevant, reliable, complies with
applicable laws and regulations, and is
distributed both internally and externally
in a timely manner. A review of the
consolidation and financial statements
is undertaken by senior management to
ensure that the financial position and results
of the Group are appropriately reflected.
All financial information published by the
Group is subject to the approval of the
Audit Committee prior to it being approved
by the Board.

Risk management
Members of the Group Executive
Committee meet to challenge and debate
the assessment of risk including emerging
risks, for the Group as a whole and within
each business unit, which have submitted
local risk registers for analysis and ranking
together with Company-wide risks to
form a robust corporate risk register.
This corporate risk register is presented
to the Audit Committee at least twice
each year. Actions arising from the Audit
Committee’s review of the corporate risk
register are fed back to the business units
for their management.

In 2018, the Calabasas site was closed
after being surrounded by a forest fire.
The business continuity plan was invoked
and the site was quickly reopened with
minimal interruption. A ‘lessons learnt’
exercise was undertaken and the business
continuity plan updated accordingly.

Committee oversight
Day-to-day responsibility for effective
internal control and risk management and
monitoring rests with senior management
at business unit level. During the year,
the CFO attended all Audit Committee
meetings to report on internal control
and risk management and notified the
Committee of any control weaknesses,
control failings and risks, their impact and
the actions taken to deal with the issues.
Detailed updates on specific areas, such as
cyber security or business continuity, are
provided at the Committee’s request.

The Board and Audit Committee consider
that having the following key elements in
place is critical to underpinning the overall
internal control environment:

Operating structure and controls
An organisational structure with clear
operating procedures, defined lines of
responsibility and delegated levels of
authority which were subject to a thorough
review during 2018.

Financial control structure
A comprehensive strategic planning,
financial control and budgeting system
which is properly documented and
regularly reviewed.

Business Ethics Policy
A policy that sets standards of
professionalism and integrity for all
employees and operations was relaunched
during 2018. The Business Ethics Policy
includes sections relating to bribery and
corruption to ensure that all of Spirent’s
systems, controls and training comply with
the anti-bribery and corruption legislation
in the countries in which we operate and
that a culture of prevention and detection
of all forms of bribery and corruption is in
place. Anti-bribery training is required to
be taken by certain employees periodically
and will be rolled out again during 2019.

Acquisitions and divestments
A disciplined due diligence process and
post-acquisition integration programme.

Fraud
The Group’s Business Ethics Policy has been
communicated to all employees and states
that all employees have a responsibility
for fraud prevention and detection.
Any suspicion of fraud will be reported
immediately and investigated vigorously.

EXTERNAL AUDIT
The Committee is responsible for
overseeing the Company’s relations with
the external auditor.

The Committee places great importance
on ensuring that high standards of quality
and effectiveness are maintained within
the external audit process. It considers a
number of areas in relation to the external
auditor: their performance in discharging
the audit and interim review of financial
statements, their independence and
objectivity, and their re-appointment
and remuneration.

Auditor appointment
Each year the Committee assesses
and reports to the Board on the
qualification, expertise and resources, and
independence of the external auditor and
the effectiveness of the audit process, with
a recommendation on whether to propose
to the shareholders that the external
auditor be re-appointed.

The Committee notes and confirms
compliance with the Competition and
Markets Authority Order 2014 (“CMA
Order”) in respect of statutory audit
services for large companies.

Spirent Communications plc Annual Report 2018Policy on non-audit services
The Committee is responsible for
approving non-audit services, with the
objective of ensuring that the provision
of such services by the external auditor
does not impair its independence or
objectivity. Taking into account relevant
ethical guidance, the Committee’s policy
precludes a number of non-audit services,
including those relating to the accounting
records and financial statements, internal
audit, IT consulting, legal and investment
services and other services deemed by
regulators to be precluded. The Committee
accepts that certain work of a non-audit
nature may be best undertaken by the
external auditor. The policy is reviewed
annually and financial limits for the
provision of non-audit services, including
audit-related fees and other fees, are set
on the same annual basis (2018 $0.3 million
(2017 $0.3 million)) and were less than one-
third of the Group’s audit fee of $0.9 million
(2017 $0.9 million). In accordance with the
Revised Ethical Standard issued by the FRC
in June 2016, the lead audit engagement
partner is required to notify the Audit
Committee Chairman in advance for
pre-approval of any proposed non-audit
services. The Committee can confirm that
no such non-audit services were provided
by EY during the period under review
(2017 nil).

In response to the introduction of further
measures under the EU Audit Reform
Directive, the Committee reviewed its
policy regarding the provision of non-
audit services in 2017 and since that time,
tax-related services previously provided by
the external auditor are now provided by
Deloitte LLP (“Deloitte”).

Following the recommendation of the
Board, EY was appointed (as predecessor
firm Lindsay, Jamieson & Haldane) by the
Company at its Annual General Meeting
on 9 May 1950 to audit the financial
statements of the Company for the period
ending 31 December 1949 and subsequent
financial periods. EY’s total uninterrupted
period of engagement, covering the period
from appointment to the period currently
under review, is 69 years.

The Committee is aware that the
transitional provisions of the CMA Order
and the EU Audit Regulations (which
became effective on 17 June 2016) will
require the Company to change its external
auditor no later than 2021. The Committee
further affirms that its current intention
is to change the external auditor no later
than the expiry of the five-year term of the
external audit partner (ie by 2021) and that
on that basis, a competitive tender process
will commence for the new auditor’s term to
begin in 2021.

The Committee will continue to monitor
legislative developments and will continue
to review its conclusions on an annual
basis, however it believes it is appropriate
to recommend the re-appointment of
the incumbent external auditor at the
2019 AGM.

There are no contractual obligations in
existence that restrict the Company’s
choice of auditor.

Auditor effectiveness
The Committee assesses the effectiveness
of the audit process on an ongoing
basis, with particular attention to the
mindset and culture, skills, character and
knowledge, quality control and judgement
of the external auditor in their handling
of key judgements, responsiveness to
the Committee and in their commentary
where appropriate on the systems of
internal control.

The Committee holds regular private
meetings with the external auditor to
assist with their assessment, including
discussion of:

• how the auditor has identified and

addressed potential risks to audit quality;
• the controls in place within the audit firm
to identify risks to audit quality, including
the results of internal and external
inspections of the audit team and firm;
• whether the auditor has met the agreed

audit plan, in particular how it has
responded to any changes that have
been required during the process;

• feedback from the key people involved in

the audit; and

• the content of the auditor’s

management letter.

The Committee reviewed and appropriately
challenged the basis for these before
agreeing the proposed approach and the
scope of the external audit was identified.

The Committee also monitored the audit
partner’s involvement in his team’s work to
ensure sufficient oversight and direction of
work was evident, in particular with regard
to the audit of significant components
involving judgements.

Auditor independence
The Committee assesses the independence
and objectivity of the external auditor
annually, taking into consideration relevant
UK law, regulation, the FRC Revised
Ethical Standard and other professional
requirements. EY has provided a letter
confirming its belief that it remained
independent throughout 2018 and has
discussed with the Committee the threats
to its independence and the safeguards
applied to mitigate those threats.

As part of this review, the Committee
examined in particular:

• a report from the external auditor

describing its arrangements to identify,
report and manage any conflicts of
interest; and

• the extent of non-audit services provided

by the external auditor.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION

• to remove the differential between CEO
and CFO’s maximum levels of annual
incentive from the remuneration policy.

Long-Term Incentive Plan (“LTIP”)
• the introduction of a two-year post-
vesting holding requirement; and

• to remove the differential between CEO
and CFO’s maximum levels of long-term
incentive from the remuneration policy.

Share Ownership Guidelines
• an increase of share ownership

requirements from 100 per cent to
200 per cent of base salary.

Post-cessation Shareholdings
• unvested shares under the deferred

share bonus plan will continue to vest on
the normal vesting date;

• unvested shares under the LTIP will,
subject to standard Good Leaver
provisions, continue to vest on the
normal vesting date and be subject
to a post-vesting holding period.
Vested shares under the LTIP will
continue to be subject to their holding
period; and

• other beneficially owned shares will not
be subject to any holding requirement
post-cessation.

Retirement Benefits
• The level of retirement benefits for future
newly-appointed executive directors
will be set in line with the general
rates applicable for new employees
in the country of residence of the new
executive director.

STAKEHOLDER ENGAGEMENT
The Committee is committed to open and
honest dialogue with its shareholders and
engaged with, and sought feedback from,
20 of its shareholders (representing 80 per
cent of the Company’s issued share capital)
and from investor advisory bodies with
respect to the proposed changes to the
Policy. The Committee is very appreciative
of the time, constructive dialogue and
engagement received.

Overall, feedback from shareholders has
indicated positive support for the proposed
Policy changes and, subject to the outcome
of the binding vote at the 2019 AGM, it is
the Committee’s expectation that it will
operate the Policy for the next three years.

VARIABLE REMUNERATION IN 2018
Annual incentives in 2018 were based on
achievement of targets for profitability,
revenue and strategic and operational
priorities. Full details of the specific targets,
and the Executive directors’ achievements
against them, can be found on pages 77
to 79. As demonstrated elsewhere in this
Annual Report, Spirent performed well in
2018 and this is reflected in the payouts
arising from the annual incentive.

Eric Hutchinson’s 2015 award under
the Spirent Employee Incentive Plan
achieved a partial vesting in 2018, with
the performance conditions vesting at
45.9 per cent for the earnings per share
(“EPS”) target and 81.0 per cent for the
Absolute Total Shareholder Return
(“Absolute TSR”) target.

The Long-term Incentive Plan award
given to Paula Bell in 2016 to ‘buy-out’
an award forfeited when she left her
previous employer to join Spirent also
achieved a partial vesting in 2018, with
the performance conditions vesting at
50.9 per cent for the EPS target and
81.1 per cent for the Absolute TSR target.

REMUNERATION IN 2019
Base salaries for the Executive directors
have been increased over the prior year,
reflecting the general level of increase in
the workforce.

For the annual incentive, the balance of the
metrics between targets for profitability,
revenue and strategic and operational
priorities remain the same, with the targets
for the financial metrics updated to require
significant growth from the achievements
of 2018. The Committee believes the
targets they have set to be challenging and
appropriate; details of the actual targets
will be disclosed in the 2019 Annual Report.

Long-term incentive awards in 2019 will
retain the EPS and Absolute TSR metrics,
each with a weighting at 50 per cent.
The Committee remains of the view that
Absolute TSR as a measure is appropriate
due to the limited number of true
comparator companies for Spirent.

Subject to the revised Policy receiving
shareholder approval, the Committee
is proposing to increase the incentive
opportunities for the CFO, Paula Bell, from
100 per cent to 125 per cent of base salary

DEAR SHAREHOLDER
I am pleased to present our Report on
Directors’ remuneration for the year ended
31 December 2018. This Report has been
prepared on behalf of the Board by the
Committee and has been approved by
the Board.

COMMITTEE’S ACTIVITIES IN 2018
In 2018 the Committee focused on:

• monitoring the changing landscape
of investor expectations with regard
to remuneration;

• consulting with shareholders on

remuneration policy proposals for 2019
and beyond;

• reviewing the base salary of the

Executive Directors;

• reviewing metrics and setting targets for

annual incentives; and

• reviewing metrics and targets for long

term incentives.

REMUNERATION POLICY REVIEW
During 2018, the Committee concluded
its in-depth review of the overall executive
remuneration policy and structure with a
view to ensuring that it is still fit for purpose
in light of our strategy over the coming
years and the nature of our business and
at the same time reflected the views of
our major stakeholders. As we move
forward the Committee must ensure that
our reward structure and remuneration
policy complement our future strategy and
incentivise our executives to drive long-
term shareholder value.

The principal changes from the current
policy are:

Annual Incentive
• the introduction of a deferral into

shares being applied to one-third of the
incentive achieved, for an additional
period of three years; and

Spirent Communications plc Annual Report 2018for the maximum opportunity under the
Annual Incentive and from an award based
on 100 per cent to 125 per cent of base
salary under the Long-Term Incentive Plan.
Paula’s current incentive opportunities
are below comparable market rates and,
given her proven performance in the role
since her appointment, the Committee
feels it is an appropriate time to bring
her variable pay opportunity to a more
appropriate level.

CEO EXIT AND RECRUITMENT
In November we announced that Eric
Hutchinson wished to retire from Spirent
after a 37-year career with the Company.
Full details of Mr Hutchinson’s exit
remuneration will be disclosed at the
appropriate time, as required by the
Companies Act.

My fellow directors and I are already
supporting the Nomination Committee
in the recruitment of a new CEO and, as
Chairman of the Remuneration Committee,
I will be working to ensure that the
remuneration package offered to the

appointee takes into account the skills and
experience of the individual and is aligned
with the expectations of stakeholders to
support the Board’s strategic priorities.

I hope you find this Report clear and
informative. I will be available at the 2019
AGM to respond to any questions that
shareholders may have with respect to the
work of the Committee.

Gary Bullard
Chairman, Remuneration Committee
7 March 2019

COMPLIANCE STATEMENT
This Report on Directors’ remuneration for the year ended 31 December 2018 has been prepared on behalf of the Board by the Remuneration
Committee in accordance with Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment)
Regulations 2013 and the relevant sections of the Companies Act 2006 and meets the requirements of the Listing Rules of the Financial Conduct
Authority. The Report also describes how the Board has complied with the provisions of the 2016 UK Corporate Governance Code and how it is
working to prepare to comply with the principles and provisions of the 2018 UK Corporate Governance Code.

The Report is presented in two parts: the Directors’ Annual Remuneration Report and the Directors’ Remuneration Policy.

The Directors’ Annual Remuneration Report sets out details of how our remuneration policy was implemented for the year ended
31 December 2018 and how it will be applied for the year ended 31 December 2019. At the 2019 AGM to be held on 1 May 2019 the
Directors’ Annual Remuneration Report on pages 75 to 87 will be put to an advisory shareholder vote.

The Company’s previous Directors’ Remuneration Policy was approved by a binding vote at the 2016 AGM and became effective on 5 May
2016. A revised remuneration policy, which is set out on pages 87 to 95 of this Report, will be put to shareholders at the 2019 AGM on
1 May 2019 and, if approved, will become effective on 2 May 2019 and apply for the following three years.

DIRECTORS’ ANNUAL REMUNERATION REPORT 2018
Statement of implementation of Remuneration Policy in 2019 (unaudited)
Information on how the Company intends to implement the Directors’ Remuneration Policy in 2019 is set out below.

Base salary

Paula Bell
Eric Hutchinson

Benefits
• Life insurance cover of four times annual base salary
• Permanent health insurance
• Private healthcare cover for executive and family
• Car allowance

2019

2018

per cent
change

£350,097
£422,300

£339,900 3.0 per cent
£412,000 2.5 per cent

Retirement benefits
Eric Hutchinson and Paula Bell will each receive a taxable cash sum in lieu of pension at a rate of 20 per cent of base salary.

Annual incentive
The Committee has set targets for the year focused on adjusted operating profit, revenue and strategic and operational priorities.

Although the target detail is considered commercially sensitive, the weightings for the year ended 31 December 2019 are as follows:

Adjusted Operating Profit
Revenue
Strategic and Operational Priorities

50 per cent
30 per cent
20 per cent

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
On-target and maximum annual incentive payments are as follows:

Paula Bell
Eric Hutchinson

On target
performance
per cent of
base salary

Maximum
performance
per cent of
base salary

75
90

125
150

Details of these targets and their achievement will be disclosed in the Directors’ Annual Remuneration Report 2019.

Award under Spirent Long-term Incentive Plan
It is anticipated that the following award will be made under the LTIP in 2019:

Paula Bell
Eric Hutchinson

per cent of
base salary

Anticipated
Value of
Award

125
150

£437,621
£633,450

The awards are made in the form of performance shares, which are valued at the share price on the date of grant.

Having reviewed the performance targets for awards under the LTIP, the Committee has determined that for the Performance Shares
awards to be made in 2019, the following parameters are appropriate, calculated over a three-year performance period:

50 per cent of award:

The EPS performance period starts at the beginning of the financial year in which the award is made, in this case on 1 January 2019, and
ends after three years, in this case on 31 December 2021. The adjusted EPS figure reported for the financial period to 31 December 2018,
which forms the baseline for this performance target, is 10.86 cents.

Target EPS (adjusted) at the conclusion of the performance period

Proportion of Performance shares vesting (per cent)

Below 12.90 cents
12.90 cents
Above 12.90 cents and below 14.45 cents
14.45 cents
Above 14.45 cents and below 18.75 cents
18.75 cents and higher

50 per cent of award:

0
25
On a straight-line basis between 25 and 50
50
On a straight-line basis between 50 and 100
100

In determining TSR growth for the Company, share prices will be averaged over 90-day periods immediately prior to, and at the end of,
the performance period.

Absolute TSR1

Below 17 per cent growth
17 per cent growth

Proportion of Performance shares vesting (per cent)

0
25

Above 17 per cent growth but below 25 per cent growth
25 per cent growth
Above 25 per cent growth and below 42 per cent growth
42 per cent growth or higher

On a straight-line basis between 25 and 50
50
On a straight-line basis between 50 and 100
100

Note
1. Share price including reinvested dividends.

Spirent Communications plc Annual Report 2018AUDITED INFORMATION
Single figure of total remuneration for 2018
The table below provides a single figure of total remuneration for 2018 and 2017 for the Executive directors1.

2018

Paula Bell
Eric Hutchinson

2017

Paula Bell
Eric Hutchinson

Salary2
£000

339.9
412.0

Benefits3
£000

16.4
17.1

Annual
Incentive4
£000

Long-term
Incentive5
£000

Pension6
£000

Total 2018
£000

278.8
494.6

267.5
527.3

68.0
82.4

970.6
1,533.4

Salary2
£000

330.0
400.0

Benefits3
£000

16.2
17.0

Annual
Incentive4
£000

Long-term
Incentive7
£000

310.6
520.8

80.6
274.8

Pension6
£000

Total 20178
£000

66.0
80.0

803.4
1,292.6

Notes
1. All executive directors who served during 2017 and 2018 are UK based and paid in sterling, therefore the data is presented in this currency.
2. Salary and fees: cash paid in respect of the year.
3. Benefits: taxable value of all benefits in respect of the year which comprise relocation expenses, private healthcare, permanent health insurance, life

insurance and car allowance.

4. Annual Incentive: cash incentive payable in respect of the year.
5. Long-term Incentive:

The figures quoted comprise values for the elements of LTIP awards which vest based on performance during the period:
(i) TSR element of 2015 EIP Award to Eric Hutchinson and 2016 LTIP Award to Paula Bell – actual value calculated based on the market price of a Spirent
Ordinary Share at the date of vesting (118.0 pence on 23 March 2018 for Paula Bell and 117.4 pence on 18 May 2018 for Eric Hutchinson);
(ii) EPS element of 2016 LTIP Award – level of vesting calculated based on audited EPS figure published in this Annual Report 2018; estimated value
calculated based on the 3-month average price of a Spirent Ordinary Share to 31 December 2018 of 120.9 pence. This estimated value will be restated in
the 2019 Annual Report on Remuneration to reflect the actual share prices on the dates of vesting for each award.

6. Pension: cash value in lieu of pension.
7. The Long-term Incentive figures for 2017 are restated to represent the actual value of the EPS element of the 2015 EIP Award to Eric Hutchinson and the
2016 LTIP Award to Paula Bell, both of which vested based on performance during 2017. The actual values are calculated based on the market price of a
Spirent Ordinary Share at the date of vesting (118.0 pence on 23 March 2018 for Paula Bell and 117.4 pence on 18 May 2018 for Eric Hutchinson).
8. The total single figure of remuneration for 2017 for each Executive director is restated to reflect the restated Long-term Incentive figure (see note

7 above).

ANNUAL PERFORMANCE INCENTIVES
During 2018, cash incentives were available to Executive directors on an annual basis, with a maximum total cash incentive available of 150
per cent of base salary and 100 per cent for Eric Hutchinson and Paula Bell respectively.

The maximum annual incentive which could be earned was determined by reference to growth targets in the Company’s adjusted
operating profit and revenue, representing 50 per cent and 30 per cent of the incentive respectively, with performance against an agreed
set of strategic and operational priorities linked to improving Spirent’s operational effectiveness in the areas of sales, engineering and
finance representing the remaining 20 per cent of the incentive.

Adjusted operating profit element (50 per cent of annual incentive)

Entry point (20 per cent)
On-target (60 per cent)
Maximum (100 per cent)
Achievement

Target Achievement

$60.9
$68.9
$78.9

$77.1
92.8 per cent

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION

CORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
Revenue (30 per cent of annual incentive)

Entry point (20 per cent)
On-target (60 per cent)
Maximum (100 per cent)
Achievement

Target Achievement

$456.8
$478.8
$503.8

$476.9
56.5 per cent

Strategic and Operational Priorities (20 per cent of annual incentive)
The CEO and CFO were each set three priorities, with performance of each target to be equally weighted.

Productivity improvement over 2017 (CEO and CFO)

Objective: To drive cost management and growth in profitability
Metric: Total expenditure as a ratio of profit over gross profit achieved for product development, product marketing and gross profit (2017
2.5 times)

Entry point (20 per cent)
On-target (60 per cent)
Maximum (100 per cent)
Achievement

Key account management (CEO only)
Objective: To increase business focus on key accounts

Metric:

Recruitment (50 per cent)
Improvements in target accounts (50 per cent)
Achievement

Developing our leadership and talent and organisation (CEO only)
Objective: Develop leadership programme and succession plan for key management roles

Metric:

Target
improvement

2.575
2.600
2.625
100 per cent

Achievement

50 per cent

Achievement

Externally-led assessment of sales talent (20 per cent)
Development of Future Leaders development programme (40 per cent)

Development of succession plan for key management roles below Board and Executive Committee level (40 per cent)
Achievement

100 per cent

Business unit restructuring risk mitigation (CFO only)
Review impact of certain business unit restructuring and develop detailed trategic plans for a range of outcomes

Achievement

100 per cent

Achievement

Spirent Communications plc Annual Report 2018Improvement in cash collection measures (CFO only)
Objective: To drive improvements in receivable days’ sales outstanding (2017 76.7 days)

Metric:

Entry point (20 per cent)
On-target (60 per cent)
Maximum (100 per cent)
Achievement

Total Annual Incentive performance

Paula Bell
Eric Hutchinson

Achievement

=< 75 days
=< 73 days
=< 71 days
80 per cent

2018

2017

per cent
on-target
annual
incentive

136.7
133.4

per cent of
base salary

82.0
120.0

278,821
494,821

per cent
on-target
annual
incentive

134.5
130.2

per cent of
base salary

94.1
130.2

310,596
520,800

RELOCATION EXPENSES
No relocation expenses were paid to either Executive Director during 2018.

Following her appointment as CFO in 2016, Paula Bell received a relocation payment of £100,000, on which the Company paid an
associated tax liability of £76,940, giving a total gross relocation package to the value of £176,940. The amount reimbursed is subject to a
three-year clawback from her start date (5 September 2016), with the balance of the clawback reducing by one-third on each anniversary
of that start date.

TOTAL PENSION ENTITLEMENTS
Eric Hutchinson receives a taxable cash allowance in lieu of pension of 20 per cent of base salary. For 2018, the allowance paid was
£82,400 (2017 £80,000).

Paula Bell receives a taxable cash allowance in lieu of pension of 20 per cent of base salary. For 2018, the allowance paid was £68,000
(2017 £66,000).

EXTERNAL APPOINTMENTS
Eric Hutchinson held no external positions during the year under review or to the date of this Report.

On appointment in 2016, the Board agreed that it was acceptable for Paula Bell to continue with her non-executive role with Laird plc,
however this appointment ended in July 2018 on the acquisition of Laird plc by Advent International.

From 1 September 2018, and with the approval of the Company’s Board, Paula Bell was appointed to a non-executive director role with
Keller Group plc; she became Chairman of the Audit Committee of Keller Group plc on 1 January 2019.

Fees in respect of this directorship are paid directly to and retained by Ms Bell.

PAYMENTS TO PAST DIRECTORS
There were no payments made to past directors during the year under review.

PAYMENTS FOR LOSS OF OFFICE
There were no payments for loss of office during the year under review.

PAYMENTS OF ADVANCES, CREDITS OR GUARANTEES
There were no payments of advances, credits or guarantees to directors during the year under review.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
NON-EXECUTIVE DIRECTOR FEES
Details of individual appointments are as follows:

Director

Gary Bullard
Wendy Koh
Edgar Masri
Jonathan Silver
Bill Thomas

First appointed
as a director

Current
appointment
due to expire

1 December 2016
11 January 2018
11 January 2018
25 June 2015
1 December 2016

2020 AGM
2021 AGM
2021 AGM
2019 AGM
2020 AGM

During 2018, fees for the Non-executive Directors were reviewed with effect from 1 January 2019.

Under the matters reserved to the Board, the Board considered and agreed that in keeping with the salary increase applied across the
Group’s employees, the basic annual fee for non-executive directors should be increased by 3 per cent, from £50,000 to £51,500 with
effect from 1 January 2019.

It was decided that the additional fees payable to the Chairman of the Audit and Remuneration Committees would remain at £11,000 and
£9,000 respectively. The role of Senior Independent Director was entitled to receive an additional fee of £7,500 per annum in recognition
of the increased time commitment associated with the role but the individual who currently fills this role has chosen to continue to waive
this additional fee during the period under review and for 2019.

Similarly, under the terms of reference of the Committee, it considered and agreed that the annual fee for the Chairman, having been
frozen since January 2009, should be increased from £160,000 to £175,000 with effect from 1 January 2019.

Fees for Non-executive Directors and the Chairman will be reviewed again in 2019 for the period from 1 January 2020.

Details of fees paid to Non-executive Directors in 2018 and 2017 are as follows:

Current directors
Bill Thomas (Chairman)1
Gary Bullard2
Wendy Koh3
Edgar Masri4
Jonathan Silver

Former directors
Alex Walker (Chairman)5
Tom Lantzsch6
Tom Maxwell7
Sue Swenson8
Total

Notes
1. Bill Thomas was appointed Chairman on 19 May 2017.
2. Gary Bullard was appointed Chairman of the Remuneration Committee on 3 May 2017.
3. Wendy Koh was appointed to the Board on 11 January 2018.
4. Edgar Masri was appointed to the Board on 11 January 2018.
5. Alex Walker stepped down as Chairman and from the Board on 3 May 2017.
6. Tom Lantzsch stepped down from the Board on 3 March 2017.
7. Tom Maxwell stepped down as Chairman of the Remuneration Committee and from the Board on 3 May 2017.
8. Sue Swenson stepped down from the role of Senior Independent Director and from the Board on 8 March 2017.

2018
£000

160.0
59.0
48.7
48.7
61.0

–
–
–
–
377.4

2017
£000

114.2
45.9
–
–
51.0

55.2
7.1
16.9
7.4
297.7

Spirent Communications plc Annual Report 2018STATEMENT OF DIRECTORS’ SHAREHOLDINGS AND SHARE INTERESTS
The beneficial interests of the directors and their connected persons in the shares of the Company are set out below:

Executive Directors
Paula Bell
Eric Hutchinson

Non-executive Directors
Gary Bullard
Wendy Koh3
Edgar Masri4
Jonathan Silver
Bill Thomas

At 31
December
2017
Ordinary
shares1

At 31
December
2018
Ordinary
shares1

At 7
March
2019
Ordinary

shares1,2

150,000
2,007,219

227,096
2,010,420

227,096
2,010,768

40,000
–
–
70,000
46,199

50,830
–
20,000
70,000
67,442

Notes
1. Directors’ beneficial interests do not form part of the remuneration provided by the Company.
2. Events since 31 December 2018:
On 24 January 2019, Eric Hutchinson acquired 180 Ordinary Shares under the UK Employee Share Purchase Plan at a price of 138.00 pence per share.
On 25 February 2019, Eric Hutchinson acquired 168 Ordinary Shares under the UK Employee Share Purchase Plan at a price of 150.00 pence per share.
3. Wendy Koh was appointed to the Board on 11 January 2018.
4. Edgar Masri was appointed to the Board on 11 January 2018.

SHAREHOLDING GUIDELINES FOR EXECUTIVE DIRECTORS
The Committee believes that to further align their interests with those of shareholders, Executive Directors should have a significant
shareholding in the Company. Under the 2016 Remuneration Policy, the Committee required Executive Directors to hold shares with a
value equivalent to at least 100 per cent of their base salary in the form of shares and unfettered share incentive awards which may be built
up over time following appointment as an Executive Director. Under the revised Remuneration Policy, for which approval will be sought
from shareholders at the 2019 AGM, this requirement will increase to a holding of shares equivalent in value to 200 per cent of base salary.

The table below sets out the holdings of the Executive Directors who served during the year at 31 December 2018:

Guideline holding

Beneficially
owned
shares

Unfettered
share
incentives

Value of holding at
31 December 2018
as percentage of salary

Paula Bell1
Eric Hutchinson

100 per cent of base salary
100 per cent of base salary

227,096
2,010,420

–
–

79.1 per cent
577.8 per cent

Guideline
met?

No
Yes

Note
1. Paula Bell joined the Board in September 2016 and is in the process of building up a shareholding to meet the guideline.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
OUTSTANDING SHARE INCENTIVE AWARDS1
The share incentive interests of Executive Directors who served during the period 1 January 2018 to the date of this Report are set
out below:

Paula Bell

Plan Type

Award Type

Award Date
At 1 January 2018 (or date of appointment)
Granted during the period
Vested during the period
Lapsed during the period
Any other adjustments during the period
At 31 December 2018 (or at date of cessation)
Market price at date of award (£)2
Face value of award granted in period (£)
Exercise price (£)3
Subject to performance conditions?
Performance condition
Performance condition testing date4
Result of performance condition testing

Market price at vesting date (£)
Exercise date
Market price at exercise date (£)
Gain on exercise (£)

Expiry date

Eric Hutchinson

Plan Type

Award Type

LTIP

30 September 2016 30 September 2016
292,683
–
–
–
–
292,683
0.8200
–
Nil
Yes
50% EPS, 50% TSR
5 March 20185 30 September 2019

268,293
–
177,073
91,220
–
–
0.8200
–
Nil
Yes
50% EPS, 50% TSR

4 May 2017
279,661
–
–
–
–
279,661
1.1800
–
Nil
Yes
50% EPS, 50% TSR
4 May 2020

22 May 2018
–
302,402
–
–
–
302,402
1.1240
339,900
Nil
Yes
50% EPS, 50% TSR
22 May 2021

EPS 50.9% vest,
TSR 81.1% vest
1.180000
26 March 2018
1.14492
208,946.14

–
–
–
–

23 March 20185 30 September 2019

04 May 2020

22 May 2021

EIP

LTIP

Market price at vesting date (£)
Exercise date
Market price at exercise date (£)
Gain on exercise (£)
Expiry date

18 May 2015
578,035
–
366,762
211,273
–
–
0.8650
–
Nil
Yes
50% EPS, 50% TSR
18 May 2018
EPS 81.0% vest,
TSR 45.9% vest
1.174000
21 May 2018
1.126000
430,578.59
18 May 2018

16 June 2016
781,758
–
–
–
–
781,758
0.7675
–
Nil
Yes
50% EPS, 50% TSR
16 June 2019

4 May 2017
508,474
–
–
–
–
508,474
1.1800
–
Nil
Yes
50% EPS, 50% TSR
4 May 2020

22 May 2018
–
549,822
–
–
–
549,822
1.1240
618,000
Nil
Yes
50% EPS, 50% TSR
22 May 2021

–
–
–
–
16 June 2019

–
–
–
–
4 May 2020

–
–
–
–
22 May 2021

Spirent Communications plc Annual Report 2018Notes
An explanation of each share plan and its operation is given in note 32 to the audited consolidated financial statements of the Group.
1. Key to share plan and type of award:

EIP PS – 2005 Employee Incentive Plan Performance Shares awarded as conditional share awards.
LTIP PS – 2016 Long-term Incentive Plan Performance Shares awarded as conditional share awards.

2. The market price on date of grant is the price of an Ordinary Share at the close of business on the day before the date of grant.
3. There is no exercise price payable for a Performance Share upon vesting.
4. Awards which have passed the date first exercisable have vested and are unfettered, having passed the relevant performance conditions.
5. The performance conditions for this award were based on (i) an EPS growth target based on performance reported for 31 December 2017 and (ii) a TSR

growth target based on the Company share price averaged over a 90-day period immediately prior to the announcement of the 2017 Full Year results.
Full Year results for 2017 and EPS performance to 31 December 2017 were reported on 8 March 2018, not 5 March 2018 as previously anticipated and
therefore the performance condition testing date for this award was updated accordingly.

SHARE INCENTIVE INTERESTS AWARDED DURING THE YEAR
In 2018, the Committee approved an award of Performance Shares to Mr Hutchinson and Ms Bell equivalent to 150 per cent and 100 per
cent of base salary respectively.

50 per cent of award:

The EPS performance period for this award started at the beginning of the financial year in which the award is made, in this case on
1 January 2018, and ends after three years, in this case on 31 December 2020.

Target EPS (adjusted) at the conclusion of the performance period

Proportion of Performance shares vesting (per cent)

Below 9.3 cents
9.3 cents
Above 9.3 cents and below 10.6 cents
10.6 cents
Above 10.6 cents and below 13.5 cents
13.5 cents and higher

50 per cent of award:

Absolute TSR1

Below 17 per cent growth
17 per cent growth
Above 17 per cent growth but below 25 per cent growth
25 per cent growth
Above 25 per cent growth and below 42 per cent growth
42 per cent growth or higher

Note
1. Share price including reinvested dividends.

0
25
On a straight-line basis between 25 and 50
50
On a straight-line basis between 50 and 100
100

Proportion of Performance shares vesting (per cent)

0
25
On a straight-line basis between 25 and 50
50
On a straight-line basis between 50 and 100
100

In determining TSR growth for the Company, share prices will be averaged over 90-day periods immediately prior to the announcement of
the 2017 Full Year results on 8 March 2018 and the 2020 Full Year results, which will be announced in March 2021.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION

CORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
SHARE INCENTIVE INTERESTS VESTING DURING 2019
Both Mr Hutchinson’s award which is due to vest on 16 June 2019 and Ms Bell’s award which is due to vest on 30 September 2019 are
subject to the same performance conditions: an EPS performance condition and a TSR performance condition.

• The EPS condition has passed the growth threshold required for partial vesting but has not achieved the growth required for

full vesting.

• The TSR condition will be tested after the conclusion of the performance period. Current estimates, based on the growth in market

price of a Spirent Ordinary Share between the beginning of the performance period and the date of this Report, suggest it is likely that
this will achieve a significant level of vesting.

No new shares were issued during the year, with all exercises of share incentives being satisfied by the transfer of shares held by the
Company’s Employee Share Ownership Trust (“ESOT”). At the date of this Report, the ESOT holds 0.5 million Ordinary Shares for the
purpose of satisfying the exercises of current and future awards by employees and former employees of the Group.

DILUTION
Overall shareholder dilution resulting from the Company’s share incentive plans (on a rolling ten-year basis) has fallen by 1.1 per cent when
comparing the positions at 31 December 2018 (4.0 per cent) and 31 December 2017 (5.1 per cent). The overall number of share incentives
outstanding has decreased by 0.9 million during the year to 9.1 million at 31 December 2018 (2017 10.0 million).

UNAUDITED INFORMATION
Total Shareholder Return performance
The graph below shows the TSR performance for the last ten financial years of Spirent Communications plc against the FTSE 250 Index
and the FTSE TechMARK 100 Index, excluding those companies who were also constituents of the FTSE 100 Index at the commencement
of the period.

Ten-year TSR performance – Spirent vs FTSE TechMARK1 and FTSE 250

500

400

300

200

100

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18

Spirent

FTSE 250

FTSE TechMARK 1001

Note
1. As of 1 January 2009, excluding FTSE 100 companies.

The middle market price of an Ordinary Share at the close of business on 2 January 2018 and 31 December 2018 (being the first and last
days the London Stock Exchange was open for trading in 2018) was 102.00 pence and 118.40 pence respectively, and during that period
ranged between a high of 138.00 pence and a low of 96.60 pence.

Spirent Communications plc Annual Report 2018Percentage change in the remuneration
of the director undertaking the role
of CEO compared to the percentage
change in remuneration
of average employee1

Remuneration paid to all employees4
$ million

Returns to shareholders5
$ million

%
0
7
9
6

%
0
0
3
1

7
1

9
8
0
2

4
7
0
2

7
1

8
1

%
5
.
1
-

8
1

%
8
3

8
1

CEO2

Average employee3

9
9
2

2
4
1

4
0
1

3
4
1

6
0
1

7
1

8
1

Final dividend

Interim dividend

Special dividend

Notes
1. The graph shows the change in CEO’s annual cash remuneration, defined as base salary, taxable benefits and Annual Incentive, compared to that of
the average employee for 2017 and 2018. The 2017 average employee figure has been restated since the disclosure in the 2017 Annual Report on
Remuneration to ensure that the same elements of remuneration are being compared.

2. As explained on the 2017 Annual Report on Remuneration, the CEO received a base salary increase of 3% in 2018 but did not receive a base salary
increase in 2017. The increase shown in this graph represents the payout of the CEO’s Annual Incentive relating to 2018, compared to the Annual
Incentive payout received in 2017.

3. As set out in note 8 to the consolidated financial statements.
4. Total as set out in note 8 to the consolidated financial statements.
5. Total as set out in note 12 to the consolidated financial statements.

CEO Pay Ratio disclosure
The Committee is aware of the requirement in the 2018 UK Corporate Governance Code for the disclosure of more detailed CEO pay ratio
data and will make the appropriate disclosures in the 2019 Annual Remuneration Report.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
TABLE OF CEO REMUNERATION1

Year

2018
2017
2016
2015
2014
2013
2013
2012
2011
2010
2009

CEO

Eric Hutchinson
Eric Hutchinson
Eric Hutchinson
Eric Hutchinson
Eric Hutchinson
Eric Hutchinson2
Bill Burns3
Bill Burns
Bill Burns
Bill Burns
Bill Burns

Annual
bonus
payout
against
maximum
opportunity
per cent

Long-term
incentive
vesting rates
against
maximum
opportunity
per cent

CEO single
figure of total
remuneration
£000

1,533.4
1,292.6
632.6
497.1
521.6
186.9
401.3
931.8
1,309.6
1,279.9
997.8

80.0
86.8
22.6
–
–
12.0
–
40.5
93.3
100.0
93.9

63
–
–
–
–
–
–
34
84
100
100

Notes
1. Prior year data in this table has been recalculated from US dollars to be presented in sterling at the following average exchange rates: 2014 $1.65:£1;

2013 $1.56:£1; 2012 $1.58:£1; 2011 $1.60:£1; 2010 $1.54:£1; 2009 $1.57:£1.

2. Eric Hutchinson took up the position of CEO on 3 September 2013.
3. Earnings disclosed are to 3 September 2013, when Bill Burns stepped down as CEO.

STATEMENT OF SHAREHOLDER VOTING
At the 2018 AGM on 2 May 2018 the results of shareholder voting on remuneration matters were as follows:

Advisory vote regarding the Report on directors’ remuneration for the year to 31 December 2017:

Votes For1

478,462,934

per cent

Votes Against

94.12

29,903,021

per cent

Votes Cast

Votes Withheld2

5.88

508,365,955

2,281,361

The most recent binding vote for the Company’s Remuneration Policy, approved by shareholders at the 2016 AGM and effective from
5 May 2016:

Votes For1

461,594,887

per cent

Votes Against

96.70

15,772,687

per cent

Votes Cast

Votes Withheld2

3.30

477,367,574

28,531

Notes
1. The “For” vote includes those giving the Company Chairman discretion.
2. A vote withheld is not a vote in law and is not counted in the calculation of the votes “For” and “Against” the resolution.

Votes “For” and “Against” are expressed as a percentage of total votes cast.

REMUNERATION COMMITTEE
Responsibilities
The Remuneration Committee is responsible to the Board for determining:

• remuneration policy for the Executive Directors and Chairman taking into account remuneration trends across the Company;
• specific terms and conditions of employment of each individual Executive Director;
• overall policy for remuneration for the Executive Directors’ direct reports;
• design and monitoring of the operation of any Company share incentive plans;
• setting stretching incentive targets to encourage enhanced performance;
• an approach that rewards fairly and responsibly contribution to the Company’s long-term success; and
• other provisions of the Executive Directors’ service agreements and ensuring that contractual terms on termination, and payments

made, are fair to the individual and the Company and that failure is not rewarded and loss is mitigated.

The Committee’s remit is set out in detail in its terms of reference, which are reviewed regularly and were approved in March 2018 and are
available on the Company’s website at https://corporate.spirent.com

Spirent Communications plc Annual Report 2018Composition of the Committee
At the date of this Report, the Remuneration Committee comprises four Independent Non-executive Directors, one of whom acts as
Committee Chairman. The Company Secretary serves as Secretary to the Committee. All members are considered independent within
the meaning of the 2016 UK Corporate Governance Code (the “2016 Code”).

Advisers to the Committee
During the period under review the Committee consulted with the Company’s Chairman, CEO, CFO and the Company Secretary &
General Counsel but not on matters relating to their own remuneration.

Following a formal tender, Aon was appointed by the Committee in August 2018 to undertake a market review of executive remuneration
practices and assist with the design and introduction of an updated Remuneration Policy to be put to shareholders at the 2019 Annual
General Meeting. The Committee is satisfied that Aon is independent, thoughtful and challenging. Aon is also a member of the
Remuneration Consultants Group and complies with its voluntary Code of Conduct in respect of the provision of remuneration consulting
services, details of which can be found at www.remunerationconsultantsgroup.com. The Committee considers Aon to be independent in
its approach.

The fees paid to Aon to carry out work for the Remuneration Committee during the period under review totalled £33,900 (2017 nil).
Fees are based on a fixed retainer for certain services and time and materials otherwise.

Deloitte LLP was appointed by the Committee in 2015 to undertake a market review of executive remuneration practices and continued
to assist the Committee through early 2018. The Committee is satisfied that Deloitte LLP is independent, thoughtful and challenging.
Deloitte LLP is also a member of the Remuneration Consultants Group and complies with its voluntary Code of Conduct in respect of the
provision of remuneration consulting services, details of which can be found at www.remunerationconsultantsgroup.com. The Committee
considers Deloitte LLP to have been independent in its approach during its time as advisers to the Committee.

The fees paid to Deloitte LLP to carry out work for the Remuneration Committee during the period under review totalled £16,200 (2017
£25,380) and were based on time and materials.

Kepler Associates Limited, who were acquired in June 2015 by Mercer Limited, were appointed by the Committee some years ago to
provide the results of TSR testing to determine the vesting of share incentives. The Committee has retained Mercer Limited in this role
because it values the robust data provided and continuity of advice from the consultants involved. The Committee is satisfied that Mercer
Limited is independent, thoughtful and challenging. Mercer Limited is a member of the Remuneration Consultants Group and complies
with its voluntary Code of Conduct in respect of the provision of remuneration consulting services, details of which can be found at
www.remunerationconsultantsgroup.com and has no other connection to the Company. The Committee considers Mercer Limited to be
independent in its approach.

The fees paid to Mercer Limited to carry out work for the Remuneration Committee during the period under review totalled £8,040 (2017
£11,325) and were based on time and materials.

DIRECTORS’ REMUNERATION POLICY (UNAUDITED)
The Committee’s policy is to set remuneration levels which ensure that the Executive Directors are fairly and responsibly rewarded in
return for high levels of performance. The remuneration policy aims to promote value creation through transparent alignment with the
agreed corporate strategy, supporting performance and encouraging the underlying sustainable financial health of the business while
promoting sound risk management for the benefit of all stakeholders. The Committee believes that the aims of the policy are achieved by
ensuring that a significant proportion of executive remuneration is tied to the achievement of the agreed corporate strategy and long-
term value creation.

The Company’s previous remuneration policy was subject to a binding vote at the 2016 AGM on 4 May 2016 and received 96.7 per cent of
all votes cast in favour. A revised remuneration policy will be put to shareholders for approval at the AGM on 1 May 2019 and, if approved,
is intended to apply for the next three years. The revised policy is broadly consistent with the previously approved policy. However,
certain changes have been made to ensure that the new policy remains fit for purpose for the next three years for the Company and its
shareholders. The principal changes from the previously approved policy are:

• introduction of a cap on the maximum pension contribution (or cash allowance in lieu) that may be offered to a newly-appointed

Executive Director;

• introduction of mandatory deferral into shares for one-third of the Annual Incentive for Executive Directors for bonuses paid with

respect to 2019 and beyond;

• addition of a two year post-vesting holding requirement for the long-term incentive plan awards;
• clarification of the malus and clawback provisions operable in each of the Company’s incentive plans; and
• an increase to the share ownership guideline for Executive Directors to 200 per cent of salary (whilst in employment) and the

introduction of a formal policy on post-cessation holdings.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
POLICY TABLE
This section of the Report describes the key components of each element of the remuneration arrangements for the Executive Directors.

Component and link to strategy

Operation

Maximum opportunity

Framework to assess performance

Fixed pay
Base salary
To provide fixed remuneration
for each role which reflects the
size and scope of the Executive
Director’s responsibilities and
their individual skills and
experience.

Benefits
To provide market levels of
benefits on a cost-effective
basis.

Retirement benefits
To provide cost-effective
and competitive
post-retirement benefits.

Variable pay
Annual Incentive
To reward and incentivise the
achievement of annual financial
and strategic goals which are
selected to align the strategy
of the business and support
enhancement of shareholder
value.

Long-term Incentive
To incentivise executives to
achieve the Company’s
long-term strategy and enhance
sustainable shareholder value.

Base salaries are normally reviewed annually.

While there is no defined maximum salary, any increase

Not applicable

Set at levels to recruit and retain the high calibre talent needed to deliver the Group’s strategy without
paying more than is considered necessary.

Salaries are typically set after considering various factors including the salary levels in companies of a
similar size and complexity, the responsibilities of each individual role, internal relativities, progression
within the role, individual performance and an individual’s experience and with regard to market
salary levels in the country in which the executive resides. Our overall policy, having had due regard to
the factors noted, is normally to target salaries at the median market level.

May include private health cover for the Executive Director and their family, life insurance cover,
permanent health insurance and a car allowance.

The overall value of benefits will depend on the

Not applicable

individual’s circumstances and therefore there is no

Executive Directors may participate in any all-employee share plans which may be operated by the
Company on the same terms as other employees.

Relocation support and any associated costs or benefits may also be provided if considered by the
Committee to be appropriate and reasonable to meet the requirements of the business.

Other benefits may be offered from time to time broadly in line with local market practice in the
country of residence of the Executive Director. Reasonable business-related expenses may be
reimbursed (including tax thereon, if deemed to be a taxable benefit).

Defined contribution scheme or cash allowance in lieu of Company pension contributions or a
combination of both.

Other post-retirement benefits may be offered from time to time broadly in line with local market
practice in the country of residence of the Executive Director.

in salary will ordinarily be (in percentage terms) in line

with those of the wider workforce, having regard to the

increases in the country in which the individual resides.

Increases beyond those granted to the wider workforce

(in percentage terms) may be awarded in certain

circumstances, for example where there is a change

in responsibility, progression in the role, experience

or a significant increase in the scale of the role and/or

size, value and/or complexity of the Group.

Details of current salary levels are set out in the Annual

report on remuneration.

formal maximum.

Participation in all-employee share plans will be in line

with relevant statutory limits.

It is intended that the maximum value of benefits offered

will remain broadly in line with market practice in the

location in which the Executive Director operates.

It is intended that the maximum value of retirement

Not applicable

benefits offered will remain broadly in line with market

practice in the location in which the Executive Director

operates. The maximum Company contribution is set

at 20 per cent of base salary (combined cash

supplement and/or defined contribution plan).

Retirement benefit levels for newly-appointed Executive

Directors will be set in line with the general rates

applicable to new employees in the country of residence

of the new Executive Director.

Pension arrangements for current Executive Directors

are set out in the Annual Remuneration Report.

Two-thirds of any bonus earned is payable in cash with the remaining one-third deferred into shares.

Maximum opportunity is capped at 150 per cent of

Annual incentives may be based on a mix of financial, individual and business

The deferred bonus shares ordinarily vest after three years. Dividend equivalents may be paid on
vested shares in respect of dividends arising over the period between the grant date and the vesting
date.

Both the cash and deferred share elements of the annual bonus are subject to clawback and malus
provisions.

base salary.

objectives with the majority of the weighting being given to financial metrics.

The annual incentive starts accruing from threshold

Measures, weightings and targets are determined by the Remuneration Committee

levels of performance.

Current maximum potential for each Executive Director

each year taking into account the Group’s key strategic priorities and the approved

budget for the year and are set out in the Annual Remuneration Report.

is set out in the Annual Remuneration Report.

The payment of any bonus is at the absolute discretion of the Committee.

Discretionary awards of conditional shares or nil-cost options may be granted to Executive Directors
annually, calculated as a percentage of base salary.

Awards will ordinarily vest, subject to performance, on the third anniversary of grant and will be
subject to an additional two-year holding period post vesting, during which time awarded shares may
not ordinarily be sold (other than to settle tax liabilities incurred by the vesting of the award).

Dividend equivalents may be paid on vested shares in respect of dividends arising over the period
between the grant date and the vesting date (or, where an award is structured as a nil-cost option and
subject to a holding period, to the expiry of the holding period or the date of exercise (if earlier)).

Malus and clawback provisions will apply to all awards made under the Spirent Long-term Incentive Plan.

Maximum plan limit for awards is 200 per cent of base

Award levels and performance conditions are reviewed before each award

salary in respect of any financial year.

cycle to ensure they remain appropriate.

No more than 25 per cent of the relevant part of the

Awards are currently subject to challenging Earnings per Share and Total

award will vest for achieving threshold performance,

Shareholder Return targets. However, different measures may be applied for

increasing to full vesting for the achievement of

future award cycles as appropriate to reflect the business strategy.

Details of proposed award levels for 2019 are set out in

incentive awards is set out in the Annual Remuneration Report.

A full description of the performance conditions applicable to long-term

maximum performance.

the Annual Remuneration Report.

In respect of awards granted in 2019 and beyond, the Committee has the

discretion to override the formulaic out-turn of the award if appropriate to do so

to take into account the underlying financial and operational performance of

the Company and, in exceptional circumstances, individual performance.

Spirent Communications plc Annual Report 2018POLICY TABLE

Fixed pay

Base salary

Benefits

basis.

To provide fixed remuneration

Base salaries are normally reviewed annually.

for each role which reflects the

size and scope of the Executive

Director’s responsibilities and

their individual skills and

experience.

Set at levels to recruit and retain the high calibre talent needed to deliver the Group’s strategy without

paying more than is considered necessary.

Salaries are typically set after considering various factors including the salary levels in companies of a

similar size and complexity, the responsibilities of each individual role, internal relativities, progression

within the role, individual performance and an individual’s experience and with regard to market

salary levels in the country in which the executive resides. Our overall policy, having had due regard to

the factors noted, is normally to target salaries at the median market level.

To provide market levels of

May include private health cover for the Executive Director and their family, life insurance cover,

benefits on a cost-effective

permanent health insurance and a car allowance.

Executive Directors may participate in any all-employee share plans which may be operated by the

Company on the same terms as other employees.

Relocation support and any associated costs or benefits may also be provided if considered by the

Committee to be appropriate and reasonable to meet the requirements of the business.

Other benefits may be offered from time to time broadly in line with local market practice in the

country of residence of the Executive Director. Reasonable business-related expenses may be

reimbursed (including tax thereon, if deemed to be a taxable benefit).

To provide cost-effective

Defined contribution scheme or cash allowance in lieu of Company pension contributions or a

Retirement benefits

and competitive

post-retirement benefits.

combination of both.

Other post-retirement benefits may be offered from time to time broadly in line with local market

practice in the country of residence of the Executive Director.

This section of the Report describes the key components of each element of the remuneration arrangements for the Executive Directors.

Component and link to strategy

Operation

Maximum opportunity

Framework to assess performance

Not applicable

While there is no defined maximum salary, any increase
in salary will ordinarily be (in percentage terms) in line
with those of the wider workforce, having regard to the
increases in the country in which the individual resides.

Increases beyond those granted to the wider workforce
(in percentage terms) may be awarded in certain
circumstances, for example where there is a change
in responsibility, progression in the role, experience
or a significant increase in the scale of the role and/or
size, value and/or complexity of the Group.

Details of current salary levels are set out in the Annual
report on remuneration.

The overall value of benefits will depend on the
individual’s circumstances and therefore there is no
formal maximum.

Participation in all-employee share plans will be in line
with relevant statutory limits.

It is intended that the maximum value of benefits offered
will remain broadly in line with market practice in the
location in which the Executive Director operates.

It is intended that the maximum value of retirement
benefits offered will remain broadly in line with market
practice in the location in which the Executive Director
operates. The maximum Company contribution is set
at 20 per cent of base salary (combined cash
supplement and/or defined contribution plan).

Retirement benefit levels for newly-appointed Executive
Directors will be set in line with the general rates
applicable to new employees in the country of residence
of the new Executive Director.

Pension arrangements for current Executive Directors
are set out in the Annual Remuneration Report.

Variable pay

Annual Incentive

achievement of annual financial

and strategic goals which are

selected to align the strategy

of the business and support

enhancement of shareholder

value.

Long-term Incentive

date.

provisions.

long-term strategy and enhance

sustainable shareholder value.

To reward and incentivise the

Two-thirds of any bonus earned is payable in cash with the remaining one-third deferred into shares.

The deferred bonus shares ordinarily vest after three years. Dividend equivalents may be paid on

vested shares in respect of dividends arising over the period between the grant date and the vesting

Both the cash and deferred share elements of the annual bonus are subject to clawback and malus

Maximum opportunity is capped at 150 per cent of
base salary.

Annual incentives may be based on a mix of financial, individual and business
objectives with the majority of the weighting being given to financial metrics.

The annual incentive starts accruing from threshold
levels of performance.

Current maximum potential for each Executive Director
is set out in the Annual Remuneration Report.

Measures, weightings and targets are determined by the Remuneration Committee
each year taking into account the Group’s key strategic priorities and the approved
budget for the year and are set out in the Annual Remuneration Report.

The payment of any bonus is at the absolute discretion of the Committee.

To incentivise executives to

Discretionary awards of conditional shares or nil-cost options may be granted to Executive Directors

achieve the Company’s

annually, calculated as a percentage of base salary.

Maximum plan limit for awards is 200 per cent of base
salary in respect of any financial year.

Award levels and performance conditions are reviewed before each award
cycle to ensure they remain appropriate.

Awards will ordinarily vest, subject to performance, on the third anniversary of grant and will be

subject to an additional two-year holding period post vesting, during which time awarded shares may

not ordinarily be sold (other than to settle tax liabilities incurred by the vesting of the award).

Dividend equivalents may be paid on vested shares in respect of dividends arising over the period

between the grant date and the vesting date (or, where an award is structured as a nil-cost option and

subject to a holding period, to the expiry of the holding period or the date of exercise (if earlier)).

Malus and clawback provisions will apply to all awards made under the Spirent Long-term Incentive Plan.

No more than 25 per cent of the relevant part of the
award will vest for achieving threshold performance,
increasing to full vesting for the achievement of
maximum performance.

Details of proposed award levels for 2019 are set out in
the Annual Remuneration Report.

Awards are currently subject to challenging Earnings per Share and Total
Shareholder Return targets. However, different measures may be applied for
future award cycles as appropriate to reflect the business strategy.

A full description of the performance conditions applicable to long-term
incentive awards is set out in the Annual Remuneration Report.

In respect of awards granted in 2019 and beyond, the Committee has the
discretion to override the formulaic out-turn of the award if appropriate to do so
to take into account the underlying financial and operational performance of
the Company and, in exceptional circumstances, individual performance.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
NOTES TO THE POLICY TABLE
Performance conditions applicable to the Annual Incentive
The Annual Incentive is designed to drive and reward excellent short-term financial and operational performance. The Committee reviews
the Annual Incentive plan measures each year in order to ensure that they are aligned with the Group’s strategy. The Committee may alter
the choice and weighting of the metrics for future Annual Incentive cycles to reflect the changing needs of the business. The Committee
also retains the discretion to retrospectively amend the measures, weightings, targets and/or method of assessment for the in-year Annual
Incentive to take into account changes in the business strategy, significant acquisitions or disposals, changes in accounting treatment or
other exceptional events to ensure that the scheme is able to fulfil its original purpose. The payment of any Annual Incentive is at the sole
discretion of the Committee.

Annual Incentives are currently based on:

• adjusted operating profit – a key driver of shareholder return and a key measure of business success;
• revenue – reflecting Spirent’s strategic priority of delivering top-line growth;
• other strategic and operational priorities – these account for a minority of the Annual Incentive and ensure a rounded assessment

of performance.

Performance conditions applicable to awards under the Spirent Long-Term Incentive Plan (“LTIP”)
Long-term incentive awards will be granted in accordance with the rules of the LTIP and the discretions contained therein. The Committee
reviews the appropriateness of performance parameters for each award under the LTIP and sets stretching performance conditions in
light of the Company’s current and expected performance over the performance cycle.

The performance conditions for awards to Executive Directors are (ordinarily) measured over a period of three years and are set using a
sliding scale of targets and no more than 25 per cent of the award (under each measure) will vest for achieving the threshold performance
hurdle. The choice of measures may change for future award cycles, but is currently based on:

• Absolute Total Shareholder Return – generates a strong alignment of interest between executives and shareholders; and
• Adjusted Earnings per Share – this provides an assessment of the profitability of the revenues delivered and aligns with the interests of

shareholders. Challenging targets for earnings per share are set based on internal and external forecasts.

The Committee would consult with shareholders in advance of a significant change in the choice or weighting of the performance
measures to be applied to future award cycles. Under the rules of the LTIP, the Committee has the discretion to amend or substitute
the performance conditions for inflight awards in exceptional circumstances, providing the new targets are no less challenging than
originally envisaged.

Malus and clawback
The rules of the LTIP and the Company’s Annual Incentive (including any element deferred into shares) include provisions for malus and
clawback to apply if the Committee concludes that:

• the relevant individual has committed misconduct;
• there has been a restatement of any member of the Group’s financial results, due to inaccurate or misleading data;
• the extent to which an award was granted or has vested was based on inaccuracy or error;
• the Group (or a business unit within the Group) suffered a material financial loss as a result of circumstances that could reasonably have

been risk managed;

• where the Company has suffered an instance of corporate failure resulting in the appointment of a liquidator or administrator;
• a material failure of risk management and/or regulatory non-compliance resulting in damage to the Company’s business or reputation; or
• any other circumstances that the Board considers to have a similar nature or effect.

Clawback may be applied for up to two years following cash payment of an Annual Incentive and vesting under the LTIP, and up to three
years following the granting of awards under the Company’s deferred bonus arrangements.

Shareholding guideline
The Executive Directors are required to build and maintain a shareholding in the Company equivalent to 200 per cent of salary and are
expected to retain shares vesting under the deferred annual bonus and LTIP (net of tax) until such time as the guideline shareholding has
been achieved.

The Company’s policy in respect of vested and unvested share awards post-cessation of employment is set out below in the section on
Exit Payment Policy.

Spirent Communications plc Annual Report 2018Discretions retained by the Committee in operating the LTIP and other variable pay schemes
The Committee operates the Group’s various incentive plans according to their respective rules and (where applicable) in accordance
with relevant legislation and HMRC guidance. In order to ensure efficient administration of these plans, certain operational discretions are
reserved to the Committee. These include:

• determining who may participate in the plans;
• determining the timing of grants of awards and/or payments under the plans;
• determining the quantum of any awards and/or payments (within the limits set out in the policy table above);
• in exceptional circumstances, determining that a share-based award (or any dividend equivalent) shall be settled (in full or in part)

in cash;

• determining the performance measures and targets applicable to an award (in accordance with the statements made in the policy

table above);

• where a participant ceases to be employed by the Company, determining whether “good leaver” status shall apply;
• determining the extent of vesting of an award based on assessment of the performance conditions, including discretion as to the basis
on which performance is to be measured if an award vests in advance of normal timetable (on cessation of employment as a ‘good
leaver’ or on the occurrence of corporate events);

• whether, and to what extent, pro ration shall apply in the event of cessation of employment as a “good leaver” or on the occurrence of

corporate events;

• whether malus and/or clawback shall be applied to any award and, if so, the extent to which they shall apply; and
• making appropriate adjustments to awards on account of certain events, such as major changes in the Company’s capital structure.

Approach to recruitment remuneration
In the event that the Company recruits a new Executive Director (either from within the organisation or externally), when determining
the appropriate remuneration arrangements, the Committee will take into consideration all relevant factors, (including but not limited
to quantum, the type of remuneration being offered and the jurisdiction which the candidate was recruited from) to ensure that
arrangements are in the best interests of both shareholders and the Company without paying more than is necessary to recruit an
executive of the required calibre.

Element

Base salary

Benefits

Retirement benefits
Annual Incentive

Long-term Incentive
Buy-out awards

Recruitment policy

The Committee will take into consideration a number of factors, including internal relativities, external market
forces, skills and current level of pay.

Salary may (but need not necessarily) be set below the normal market rate, with a series of planned increases
implemented over the following few years to bring it to the desired positioning, subject to individual
performance.
Benefits provision would be in line with normal policy

The Committee may agree that the Company will meet appropriate relocation costs.
In line with normal policy.
Eligible to take part in the Annual Incentive, with a maximum bonus of up to 150 per cent of salary in line with
policy.

Depending on the timing of the appointment, the Committee may deem it appropriate to set Annual Incentive
performance metrics that are different from those that apply to the current Executive Directors for the first
performance year in which the appointment falls.
A normal award of up to 200 per cent of salary, in line with policy.
In exceptional circumstances, the Committee may offer additional cash or share incentive awards (using Listing
Rule 9.4.2, if necessary) to compensate an individual for remuneration forfeited on leaving a previous employer.
The awards would not exceed what is felt to be a fair estimate of the remuneration forfeited and would reflect (as
far as possible) the nature and time horizons attached to that remuneration and the impact of any performance
conditions. The Company would aim to replace any forfeited cash awards with shares wherever possible.
Shareholders will be informed of any such payments at the time of appointment.

For an internal appointment, any remuneration terms awarded in respect of the previous role may either continue on its original terms or
be adjusted to reflect the new appointment.

When recruiting Non-executive Directors, the remuneration arrangements offered would normally be in line with those paid to existing
Non-executive Directors, details of which are set out in the Annual Remuneration Report.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
Service contracts
Executive directors
In normal circumstances, it is the Company’s policy that service contracts for Executive Directors have no fixed term and are capable of
termination on no more than 12 months’ notice from either the Company or the Executive Director. It is intended that this policy would
also apply to new appointments of Executive Directors.

Both Eric Hutchinson and Paula Bell currently have a service agreement with Spirent Communications plc, and, being UK residents,
both their contracts are in line with UK employment practice and are governed by the laws of England and Wales. Eric Hutchinson’s
service agreement dated 8 December 2014 may be terminated on 12 months’ notice from the Company and six months’ notice from Mr
Hutchinson. Paula Bell’s service agreement, dated 12 April 2016, may be terminated on 12 months’ notice from the Company and six
months’ notice from Ms Bell.

The Company recognises that its Executive Directors may, from time to time, be invited to become non-executive directors of other
companies and that such appointments can broaden their knowledge and experience, to the benefit of the Company. Details of any such
appointments are set out in the Annual Remuneration Report.

The service agreements of Executive Directors are available for inspection at the Company’s registered office on request and will be
available for inspection at the 2019 AGM.

Exit payment policy
The Committee is committed to ensuring that it does not pay more than is necessary when Executive Directors leave Spirent and its policy
on exit payments is and will continue to be in line with market practice in the country in which the Executive Director resides. The current
exit payment policy is:

• service contracts contain provisions for the removal of the Executive Director without compensation for not performing their duties to

the standard required by the Board or material misconduct;

• payment in lieu of notice may be paid under service contracts if the relevant notice period is not given to the Executive Director or if,

having received notice from the Executive Director, the employer does not wish him/her to serve it. Any payment in lieu of notice shall
ordinarily be paid in monthly instalments, in respect of annual base salary and pension contributions only;

• unless provided for in the service contract, the Company would seek to apply practical mitigation measures to any payment of

compensation on termination, for example by reducing payments to reflect payments received in respect of alternative employment,
taking into account all relevant circumstances;

• service contracts do not contain provision for additional compensation on termination following a change of control (as detailed in the

Change of Control provisions set out in the Report of the directors);

• service contracts do not contain provision for liquidated damages of any kind; and
• service contracts contain appropriate provisions to protect the legitimate interests of the Company with respect to preventing any

terminated Executive Director from working in a business which competes against the Company.

Spirent Communications plc Annual Report 2018The table below sets out key provisions for Executive Directors under their service contracts and the Incentive Plan rules:

Element

Termination policy

Salary, benefits
and pension
Annual Incentive

Deferred Share
Bonus Plan

Spirent Long-term
Incentive Plan 2016

Legacy arrangements:

Employee Incentive
Plan (EIP)

Payment will be made up to the termination date in line with relevant contractual notice periods and will not
exceed contractual entitlements.
Unless otherwise provided in the service contract to be consistent with market practice in the country in which
the Executive Director resides, Executive Directors are not entitled to accrued cash incentives payable following
termination unless the individual is determined by the Committee to be a good leaver (defined as an individual
leaving employment due to redundancy, ill-health, injury or disability, retirement, death, the individual’s
employing company ceasing to be under the control of the Group, or a transfer of the undertaking in which the
individual works (“Good Leaver”)).
Awards will ordinarily continue to vest on the normal vesting date, unless the Committee determines that early
vesting should apply. The Committee reserves the discretion to scale the awards down (including to nil) in the
event of misconduct by the individual or to reflect individual performance.
Unvested awards will generally lapse at the time of exit.

For individuals determined by the Committee to be a “Good Leaver” (see below), the Committee will ordinarily
assess the performance conditions at the end of the applicable vesting period and unvested awards will
ordinarily vest on the normal timetable.

Exceptionally, and always in the case of death, the Committee may assess performance conditions at the point of
cessation by testing the performance conditions up to (or as close as reasonably practicable to) the date of
cessation. Awards will then vest following such early assessment of performance.

Except in the case of death, any shares which vest following the assessment of the performance conditions would
normally be pro-rated to reflect the proportion of the vesting period actually served by the individual.

For the purposes of the LTIP, a Good Leaver is any individual who leaves due to death, ill-health, injury, disability,
agreed retirement, redundancy, a transfer of the business for which the individual works out of the Group or for
any other reason at the Committee’s discretion (except where the individual is summarily dismissed).

Any post-vesting holding period would normally continue to apply to a leaver’s vested and unvested awards.
Unvested awards generally lapse at the time of exit. For individuals determined by the Committee to be a Good
Leaver, performance conditions are assessed by the Committee at the point of exit by testing the performance
conditions up to the date of exit for TSR performance and to the end of the most recent financial period for EPS
performance. Vesting is then pro-rated for the proportion of the performance period actually served and the
individual has 12 months following the date of termination of employment in which to exercise them.

For all leavers, the Committee may also determine to make a payment in reimbursement of a reasonable level of outplacement and legal
fees in connection with a settlement agreement. The Company may pay any statutory entitlements, to which an Executive Director is
entitled, or settle or compromise any claims made in connection with the termination of employment or appointment of an Executive
Director where the Committee considers such claims to have a reasonable prospect of success and that it is in the best interests of the
Company to do so. Where appropriate, private health cover may continue for a suitable period post-cessation of employment.

The Committee has now introduced a formal policy in respect of post-cessation shareholdings. On approval of this policy and in respect
of the incentive awards to be granted thereafter, the following will ordinarily apply:

• unvested shares under the deferred share bonus plan – will continue to vest on the normal vesting date (ie up to four years post-

cessation);

• unvested shares under the LTIP – will, subject to the participant being a Good Leaver, continue to vest on the normal vesting date and

be subject to a post-vesting holding period;

• vested shares under the LTIP – the holding period will continue to apply;
• other beneficially owned shares – no sale restriction applies.

The above will ensure that the Executive Directors continue to have an interest in the Company after having left employment, promoting
a culture of sustainable long-term performance. Furthermore, additional safeguards are in place through the malus and clawback
provisions which can continue to be invoked irrespective of employment status.

In the event of change in control of the Company, in accordance with rules of the respective plans, any outstanding share awards will
ordinarily vest on the date of such an event. For awards under the LTIP, vesting will be subject to an assessment of achievement against the
applicable performance conditions and, unless the Board determines otherwise, a reduction to reflect the curtailed vesting period.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

REPORT ON DIRECTORS’ REMUNERATION
CONTINUED
Non-executive Directors
All Non-executive Directors have a letter of appointment with the Company for a period of not more than three years, subject to the
Company’s Articles of Association. However, since 2011 and in accordance with the 2016 Code, all directors who are not stepping down
from the Board will stand for re-election at each AGM.

The letters of appointment of Non-executive Directors are available for inspection on request and will be available for inspection
at the 2019 AGM. An example of a letter of appointment for a non-executive director is available on the Company’s website at
https://corporate.spirent.com

Consideration of employee remuneration arrangements elsewhere in the Group
When setting the policy for directors’ remuneration, the Committee has regard to the pay and employment conditions elsewhere within
the Group, particularly in the jurisdictions in which the Executive Directors are based. The Committee is kept informed on a regular basis
of salary increases for the general employee population and takes these into account when determining salary increases for Executive
Directors and the Executive Management Team.

Where relevant, the Committee seeks to align the remuneration policy for Executive Directors with that for other senior managers.
Selected employees are able to share in the success of the Group through participation in the Management Incentive Plan.
Executive Directors, other members of the Executive Management Team and key employees are also eligible for participation in the
Long-Term Incentive Plan.

The Committee is aware of the 2018 UK Corporate Governance Code and its requirements for increasing engagement with stakeholders
including employees and will be introducing an enhanced workforce engagement programme in 2019 to facilitate this.

Consideration of the views of shareholders in setting Remuneration Policy
The Committee is mindful of the views of shareholders in determining appropriate levels of remuneration and in ensuring that shareholder
and director interests are aligned. The Committee is committed to an ongoing dialogue with shareholders and seeks shareholder views
when any significant changes are proposed to remuneration arrangements. Over the past few years, the Committee consulted with major
shareholders and shareholder representatives as follows:

• January 2016: consultation related to the introduction of the new LTIP;
• December 2017: consultation related to the Committee’s approach to base salary, cash incentives and LTIP awards in 2018; and
• December 2018: consultation regarding the revised remuneration policy for which the Committee is proposing to seek shareholder

approval at the 2019 Annual General Meeting.

Legacy matters
For the avoidance of doubt, in approving this Remuneration Policy, authority is given to the Company to make payments and honour any
commitments entered into with current or former directors (such as the payment of pension or the unwinding of legacy share schemes)
where the terms were agreed either prior to 24 April 2014 (the effective date of the first Directors’ remuneration policy) or at a time when a
previous remuneration policy was in force. Details of any payments will be set out in the Annual Remuneration Report as they arise.

Spirent Communications plc Annual Report 2018Illustrations of the application of Remuneration Policy in 2019
A significant proportion of remuneration is linked to performance, particularly at maximum performance levels. The charts below show
how much the Executive Directors could earn under Spirent’s Remuneration Policy under different performance scenarios in the 2019
financial year. The following assumptions have been made:

Fixed remuneration

Variable remuneration

Minimum

Target

Maximum

Annual Incentive
–

Long-term Incentive
–

On-target4

Threshold vest (25 per cent)

Maximum5

Full vest (100 per cent)

Base salary1
Benefits2
Pension3
Base salary1
Benefits2
Pension3
Base salary1
Benefits2
Pension3

Maximum + 50 per cent share price growth Base salary1

Maximum5

Benefits2
Pension3

Full vest (100 per cent) + 50 per
cent growth in share price from
date of grant

Notes:
1 Base salary effective 1 January 2019
2 Benefits as received during 2018 financial year
3 Cash sum in lieu of pension equal to 20 per cent of base salary
4 Annual Incentive on-target payout of 90 per cent of base salary for CEO and 75 per cent of base salary for CFO
5 Annual Incentive maximum payout of 150 per cent of base salary for CEO and 125 per cent of base salary for CFO

CEO

Minimum performance

On-target performance

Maximum performance

Maximum + share
price growth

100%

49.29%

29.23%

24.84%

35.80% 14.91%

35.38%

30.06%

523.4

1,061.8

1,790.3

45.10%

2,107.0

35.38%

Fixed

Annual incentive

Long-term incentive

CFO

Minimum performance

100%

On-target performance

53.99%

32.48% 13.53%

Maximum performance

Maximum + share
price growth

33.28%

28.52%

33.36%

28.59%

33.36%

42.89%

Fixed

Annual incentive

Long-term incentive

436.54

808.5

1,311.8

1,530.6

Dilution
The Committee is strongly committed to continuing to manage shareholder dilution in a responsible manner. Details of the Company’s
dilution are set out in the Annual Remuneration Report.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

DIRECTORS’ REPORT

This section contains additional information which the Directors are required by law and regulation to include within the Annual Report.

This section along with the information from the Board of Directors and the Directors’ statement on corporate governance on pages
56 to 65 (which are incorporated herein by reference) constitutes the Directors’ Report for the purposes of the Companies Act 2006.

FUTURE DEVELOPMENTS
The Company has chosen, in accordance with the Companies Act 2006 Section 414C(II), to include the disclosure of likely future
developments in the Strategic Report on pages IFC to 53.

RESEARCH AND DEVELOPMENT
The Company has chosen, in accordance with the Companies Act 2006 Section 414C(II), to include the disclosure of research and
development in the Strategic Report on pages IFC to 53.

GREENHOUSE GAS EMISSIONS AND GENDER DIVERSITY
Information on environmental matters and disclosures relating to diversity, gender and human rights are contained in the Sustainability
section on pages 50 to 53.

RESULTS AND DIVIDENDS
The consolidated income statement is on page 111. Profit for the financial year attributable to equity shareholders amounted to
$55.8 million.

The directors recommend a final dividend of 2.73 cents per Ordinary Share to be paid. Subject to approval by shareholders at the 2019
AGM, the final dividend will be paid on 3 May 2019 to shareholders on the Register of Members at close of business on 15 March 2019.

This final dividend, together with the interim dividend paid in September 2018, will represent a total dividend of 4.49 cents per Ordinary
Share for the year ended 31 December 2018 (2017 4.08 cents).

DIRECTORS
The names of the persons who were Directors of the Company during the period under review and as at 7 March 2019 appear on page 60.
All current Directors are standing for election or re-election at the 2019 AGM.

APPOINTMENT OF DIRECTORS
The Company’s Articles of Association (the “Articles”) give the Directors power to appoint and replace directors. Under the terms of
reference of the Nomination Committee, an appointment must be recommended by the Nomination Committee for approval by the
Board. The Articles require Directors to submit themselves for election at the first AGM following their appointment and all Directors who
held office at the time of the two preceding AGMs to submit themselves for re-election. The Articles notwithstanding, all Directors will
stand for election or re-election at the AGM this year in compliance with the 2016 UK Corporate Governance Code. Details of unexpired
terms of directors’ service contracts are set out in the Directors’ report on remuneration on page 80.

POWERS OF DIRECTORS
The Directors are responsible for managing the business of the Company and may exercise all the powers of the Company subject to the
provisions of relevant statutes, to any directions given by special resolution and to the Company’s Articles. Powers relating to the issuing
of shares are included in the Articles and such authorities are renewed by shareholders at the AGM each year.

DIRECTORS’ SHARE INTERESTS
Details regarding the share interests of Directors and their connected persons in the share capital of the Company, including any interests
under long-term incentive plans, are set out in the Directors’ report on remuneration on page 81.

EMPLOYEES
The average number of Group employees during 2018 was 1,457 worldwide (2017 1,505). The Group strives to maintain the
following principles:

Spirent Communications plc Annual Report 2018Equal opportunities
The Group is committed to offering equal opportunities in recruitment, training, career development and promotion to all people,
including those with disabilities, having regard for their particular aptitudes and abilities. As a matter of policy, full and fair consideration
is given to applicants with disabilities and every effort is made to give employees who become disabled whilst employed by the Group
an opportunity for retraining and continuation in employment. It is Group policy that the training, career development and promotion of
disabled persons should, as far as possible, be the same as that of other employees.

Health and safety
Health and safety are considered as equal in importance to that of any other function of the Group and its business objectives and
the Group is committed to providing a safe and healthy workplace to protect all employees, visitors and the public from foreseeable
work hazards.

Harassment
Sexual, mental or physical harassment in the workplace will not be tolerated. It is expected that incidents of harassment are reported to
the appropriate Human Resources director.

Human rights
The Group provides opportunities that promote human rights and dignity every day through the employment created, both directly
and indirectly in its global supply chains and through the positive contribution its products make to people’s lives. Further details on the
Group’s approach to human rights can be found in the Sustainability section of the Strategic Report on pages 50 to 53.

Communication
Employees are briefed on all relevant matters on a regular basis to achieve a common awareness of all the financial and economic factors
affecting the performance of the Group. Information relevant to employees will be provided to them.

Employees are provided with information on the performance of their business unit and their involvement is encouraged in a variety of
ways, such as through engagement surveys, “town hall” meetings and management presentations.

The Group encourages an open culture in all its dealings between employees and people with whom it comes into contact. The Group’s
whistleblowing procedure sets out guidelines for individuals who feel they need to raise issues in confidence with the Company or their
own business unit or through an independent third party. Every effort is made to protect the confidentiality of those who raise concerns
and employees may come forward without fear for their position.

CHANGE OF CONTROL PROVISIONS
The Company does not have agreements with any director or employee that would provide compensation for loss of office or
employment resulting from a takeover except that provisions of the Company’s share incentive plans may cause outstanding unvested
options and awards granted to employees under such plans to vest on a takeover as follows:

Share incentive plan

Change of control

Effect on vesting provisions in the rules

Performance condition

2005 Employee Incentive Plan
Spirent Long-term Incentive Plan

Yes
Yes

Pro-rated
Pro-rated

Still applies
Still applies

The Company is not aware of any significant agreements to which it is party that take effect, alter or terminate upon a change of control of
the Company following a takeover.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

DIRECTORS’ REPORT
CONTINUED
SUBSTANTIAL SHAREHOLDINGS
In accordance with Listing Rule 9.8.6(2), the Company has been notified of the following significant interests in its Ordinary Shares
pursuant to Disclosure Guidance and Transparency Rule 5:

The following notifications have been received during the period 1 January 2018 to 31 December 2018 or earlier as applicable:

Ameriprise Financial, Inc
Teleios Capital Partners LLC
Prudential plc
AXA Investment Managers SA
Standard Life Investments Limited
PrimeStone Capital LLP
Aberforth Partners
Brandes Investment Partners LP
Neptune Investment Management Limited
Artemis Investment Management Limited
Schroders plc
Sun Life Assurance Company of Canada (UK) Limited
Kames Capital

Date of notification

Total holding

15 March 2017
26 October 2018
14 March 2018
18 October 2011
27 January 2011
13 November 2015
17 August 2017
3 March 2016
24 July 2018
6 November 2017
9 October 2014
5 December 2008
6 February 2012

92,804,839
63,229,576
59,795,222
47,515,946
32,370,026
31,215,569
31,012,618
30,537,440
29,775,214
29,195,146
26,986,598
23,382,347
18,507,514

per cent of
Company’s
total voting
rights

15.17
10.34
9.77
7.77
5.29
5.10
5.07
4.99
4.87
4.77
4.41
3.82
3.03

No further notifications have been received during the period 1 January 2019 to 7 March 2019.

SHARE CAPITAL
The Company has a single class of share which is divided into Ordinary Shares of 3&1/3 pence each. Each Ordinary Share carries one
vote and all of the Ordinary Shares rank pari passu. There are no special control rights relating to any of the Ordinary Shares. At the date
of this Report, 611.7 million Ordinary Shares of 3&1/3 pence each had been issued which are fully paid up and are listed on the London
Stock Exchange. The Company also operates a Level 1 American Depositary Receipt (“ADR”) programme with each ADR representing
four Ordinary Shares. The ADRs trade on the US over-the-counter market and BNY Mellon is the authorised depositary bank for the
programme. Further details on share capital are set out in note 31 to the consolidated financial statements and note 16 to the parent
Company financial statements. The rights, including those relating to voting, obligations and any restrictions on transfer relating to the
Company’s Ordinary Shares, as well as the powers of the Company’s Directors, are set out in the Company’s Articles of Association, a
copy of which can be found on our website at https://corporate.spirent.com/ or can be obtained from Companies House or by writing
to the Company Secretary. The Company’s Articles of Association may only be amended by a special resolution at a general meeting of
shareholders. The most recent changes to the Articles of Association were approved at the 2010 AGM and became effective at the close
of that meeting on 5 May 2010.

The Company has established two employee benefit trusts in connection with the operation of the Company’s share incentive plans: the
Spirent Employee Share Ownership Trust (“ESOT”) and the Spirent Sharesave Trust (“SST”). The trustees of both trusts have waived their
right to receive dividends on any Ordinary Shares held by them except for a nominal amount of 1 pence other than for those Ordinary
Shares held in the ESOT which are the beneficial property of an employee/shareholder. For further details on the employee benefit
trusts see “Investment in own Ordinary Shares” in note 31 to the consolidated financial statements and note 16 to the parent Company
financial statements. Trustees of both trusts do not vote their Ordinary Shares, except for those Ordinary Shares held in the ESOT that are
the beneficial property of an employee/shareholder, which the trustees will vote in accordance with the instructions received from the
beneficial owner.

Spirent Communications plc Annual Report 2018RESTRICTIONS ON SHARE TRANSFERS
There are no restrictions on the transfer of Ordinary Shares in the capital of the Company other than certain restrictions which may from
time to time be imposed by law, for example insider trading law. In accordance with the Market Abuse Regulation, certain employees are
required to seek the approval of the Company prior to dealing in its securities.

The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or
on voting rights. The Company is also not aware of any contract of significance between itself or any subsidiary undertaking and a
controlling shareholder.

POWERS FOR ISSUE OF NEW SHARES
During the year to 31 December 2018 and to the date of this Report, no new Ordinary Shares have been allotted as a result of the exercise
of options and rights pursuant to the Company’s share incentive plans.

At each AGM, the directors seek authority to allot shares for cash and to disapply pre-emption rights within prescribed limits. At the 2019
AGM, authority will be sought to allot new Ordinary Shares up to a nominal value of £6,797,132, which is equal to approximately 33.3 per
cent of the Company’s issued share capital as at 7 March 2019.

RETURN OF CAPITAL
The Company was first authorised to repurchase up to 14.99 per cent of its own issued Ordinary Shares, within certain limits and as
permitted by the Company’s Articles of Association, at the 2006 AGM.

This authority has been renewed at each subsequent AGM, reducing to 9.99 per cent at the 2010 AGM and subsequent AGMs.
The authority from the 2018 AGM remains valid until the earlier of the 2019 AGM or 30 June 2019. Since the Company began returning
capital to shareholders in May 2006, a total of £270.2 million has been returned, through the repurchase of 397.6 million Ordinary Shares.

No shares were repurchased during 2018 or to the date of this Report.

The Company will seek authority to repurchase up to 9.99 per cent of its own Ordinary Shares at the 2019 AGM to facilitate any further
return of capital if the Board concludes that it is in the best interests of shareholders to do so.

POLITICAL DONATIONS
In accordance with the Group’s Ethics Policy, no political donations were made during the year (2017 nil).

FINANCIAL RISK MANAGEMENT
Details of the Group’s use of financial instruments, together with information on our risk objectives and policies and our exposure to price,
credit, liquidity, cash flow and interest rate risks, can be found in note 29 to the consolidated financial statements.

GOING CONCERN
After making appropriate enquiries and taking into account the matters set out in the Principal risks and uncertainties section on pages
26 to 29 of this Annual Report, the directors have a reasonable expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis when preparing the
financial statements.

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONCORPORATE GOVERNANCE

DIRECTORS’ REPORT
CONTINUED
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the viability of the Group
over a period significantly longer than 12 months from the date of approval of the financial statements and concluded whether they have
a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over that period.
The Board has concluded that the most appropriate period for this assessment should be three years.

This period was selected for the following reasons:

• the Group’s strategic planning cycle covers a three-year period;
• the Board reviews a three-year financial corporate plan;
• it reflects the period over which the principal risks would be realised; and
• when considering a major investment in product development, three years is considered by the Board to be a reasonable time horizon

in which the product should achieve meaningful sales.

The Board’s assessment has been made with reference to the Company’s current financial position and prospects, the budget for 2019,
the Group’s long-term strategy, the Board’s risk appetite and the Group’s principal risks and uncertainties as set out on pages 26 to 29 of
this Annual Report.

The plans and cash flow projections used as the basis for the assessment were the 2019 budget and the three-year strategic plan.

They were drawn up on the basis that the Group ends 2018 with a cash balance of circa $120 million and maintains a cash balance
sufficient to fund normal operations, and that there will be no material changes to the business structure, throughout the review period.

The Board has reviewed plausible and severe stress tests based on the occurrence of a combination of the principal risks to which the
Company is exposed, considering the potential impact of these risks on the business model, future performance, solvency and liquidity
over the period.

Based on this assessment and the expected successful impact of mitigating actions, the Directors have a reasonable expectation that the
Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period.

POST-BALANCE SHEET EVENTS
No post-balance sheet events are required to be disclosed in the consolidated financial statements.

DISCLOSURE OF INFORMATION TO AUDITOR
Each of the Directors of the Company at the date of this Report confirms that:

• so far as the Director is aware, there is no information needed by the Company’s auditor in connection with preparing their Report of

which the Company’s auditor is unaware; and

• he (she) has taken all the steps that he (she) ought to have taken as a director in order to make himself (herself) aware of any information
needed by the Company’s auditor in connection with preparing their Report and to establish that the Company’s auditor is aware of
that information.

INDEPENDENT AUDITOR
As described in more detail on page 72 of the Audit Committee report, the Board will be proposing a resolution to re-appoint EY as
auditor at the 2019 AGM.

ANNUAL GENERAL MEETING
The 2019 AGM will be held at 12.30pm on Wednesday 1 May 2019 at the offices of FTI Consulting, 200 Aldersgate, Aldersgate Street,
London EC1A 4HD.

By Order of the Board

Angus Iveson
Company Secretary
7 March 2019

Spirent Communications plc
Company number 470893

100

Spirent Communications plc Annual Report 2018DIRECTORS’ RESPONSIBILITIES STATEMENT

The Directors are responsible for preparing the Annual Report, the Report on directors’ remuneration, the consolidated financial
statements of the Group and the financial statements of the parent Company.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the
consolidated financial statements of the Group in accordance with International Financial Reporting Standards (IFRS) as adopted by the
European Union (EU) and have elected to prepare the parent Company financial statements in accordance with UK Generally Accepted
Accounting Principles (including FRS 101) and applicable law.

The consolidated financial statements of the Group are required by law and IFRS to present fairly for each financial period the financial
position and performance of the Group; the Companies Act 2006 provides, in relation to such financial statements, that references in the
relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation.

The parent Company financial statements are required by law to give a true and fair view of the state of affairs of the parent Company.

In preparing each of the consolidated financial statements of the Group and parent Company financial statements, the Directors are
required to:

• select suitable accounting policies and apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state for the audited consolidated financial statements of the Group whether they have been prepared in accordance with IFRS as

adopted by the EU;

• state for the parent Company financial statements whether applicable UK Accounting Standards have been followed, subject to any

material departures disclosed and explained in the parent Company financial statements; and

• prepare the financial statements on a going concern basis unless it is inappropriate to presume the Group and the parent Company will

continue in operational business for the foreseeable future.

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and that disclose with reasonable accuracy at any time the financial position of the Group and the parent Company and
enable them to ensure that its financial statements comply with the Companies Act 2006 and, for the Group, Article 4 of the International
Accounting Standards (IAS) Regulation. They have general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a strategic report, a directors’ report, a directors’
remuneration report and a statement on corporate governance that comply with the law and those regulations. They are also responsible
for the maintenance and integrity of the corporate and financial information included on the Company’s website.

Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information
necessary to assess the Company’s performance, business model and strategy.

This Annual Report complies with the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority in respect of the
requirement to produce an annual financial report.

The Annual Report and consolidated financial statements are the responsibility of, and have been approved by, the Directors.

Each of the Directors confirms that, to the best of their knowledge:

• the consolidated financial statements of the Group and parent Company financial statements, prepared in accordance with the

applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and the profit or loss of the
Company and the undertakings included in the consolidation taken as a whole; and

• the Annual Report includes a fair review of the development and performance of the business and the position of the Company and the

undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By Order of the Board

Paula Bell
Chief Financial Officer
7 March 2019

101

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF SPIRENT COMMUNICATIONS PLC

OPINION
In our opinion:

• Spirent Communications plc’s Group financial statements and parent Company financial statements (the “financial statements”) give
a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 December 2018 and of the Group’s profit
for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the
Group financial statements, Article 4 of the IAS Regulation.

•
•

•

We have audited the financial statements of Spirent Communications plc which comprise:

Group

Parent Company

Consolidated balance sheet as at 31 December 2018
Consolidated income statement for the year then ended
Consolidated statement of comprehensive income for the year
then ended
Consolidated statement of changes in equity for the year then ended
Consolidated cash flow statement for the year then ended
Related notes 1 to 37 to the financial statements, including
a summary of significant accounting policies

Balance sheet as at 31 December 2018
Statement of changes in equity for the year then ended
Related notes 1 to 17 to the financial statements including
a summary of significant accounting policies

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been
applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards,
including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice).

BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our
report below. We are independent of the Group and parent Company in accordance with the ethical requirements that are relevant
to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities,
and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT
We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to
report to you whether we have anything material to add or draw attention to:

•

the disclosures in the Annual Report set out on page 26 that describe the principal risks and explain how they are being managed
or mitigated;
the directors’ confirmation set out on page 100 in the Annual Report that they have carried out a robust assessment of the
principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;
the directors’ statement set out on page 100 in the financial statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to
continue to do so over a period of at least 12 months from the date of approval of the financial statements;

• whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule

•

9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
the directors’ explanation set out on page 100 in the Annual Report as to how they have assessed the prospects of the entity,
over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they
have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

102

Spirent Communications plc Annual Report 2018OVERVIEW OF OUR AUDIT APPROACH

Key audit matters

Audit scope

•
Inappropriate revenue recognition
• Recoverability of deferred tax assets
• Carrying value of goodwill (Group) and investments in subsidiary undertakings (parent Company only)
• We performed an audit of the complete financial information of three components and audit procedures

on specific balances for a further five components.

• The components where we performed full or specific audit procedures accounted for 93 per cent of

profit before tax adjusted for non-recurring items, 93 per cent of revenue and 96 per cent of total assets.

Materiality

• Overall Group materiality of $3.5 million which represents 5 per cent of profit before tax adjusted for

non-recurring items.

KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of
the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

Key observations communicated
to the Audit Committee

We concluded that revenue
recognised in the year, and
deferred as at 31 December
2018, is materially correct
on the basis of our
procedures performed.

Risk

Our response to the risk

Inappropriate Revenue Recognition
Refer to the Audit Committee Report
(page 68); Accounting policies (page
121); and note 3 of the consolidated
financial statements (page 126).

The Group has reported revenues of
$476.9 million (2017 $454.8 million).
The Group enters into multi-element
contracts comprising software, hardware
and post-contract support service
elements. Such arrangements can be
complex or judgemental and can require
separate recognition of the different
elements of revenue in order to comply
with Group accounting policies and IFRS.

Furthermore, pressure on management
to meet certain targets may result in
inappropriate recognition of revenue
and associated balances which may lead
to judgement over revenue recognition
on transactions completed closer to the
year end.

This risk is consistent with the prior year.

We performed full and specific scope audit procedures
over this risk area in four locations, which covered
93 per cent of Group reported revenue. For revenue
in each full and specific scope audit location:

• We performed walkthroughs of significant classes
of revenue transactions and assessed the design
effectiveness of key controls;

• For a sample of transactions in each location, we

agreed revenue recognised to sales contracts focusing
on the allocation of revenue in contracts with separate
components consisting of hardware, software and
support services. This included recalculating revenue
allocations, agreeing revenue to cash receipts and, where
appropriate, testing whether revenue had been deferred
correctly at year end;

• We performed detailed testing of the completeness

and valuation of deferred revenue and other associated
balance sheet accounts by selecting a sample of
transactions included within these balances to ensure
they have been recognised in accordance with Group
accounting policies and IFRS;

• We performed cut-off testing by tracing a

sample of revenue transaction close to the year-
end to third party delivery notes and customer
acceptance documentation;

• We validated management’s approach to determining
their best estimate of relative standalone selling prices
in accordance with IFRS;

• For a sample of transactions, we performed procedures
to ensure that the transaction price was allocated to
separate performance obligations on a reasonable and
consistent basis;

• We tested a sample of journal entries made to revenue
specifically focusing on significant manual or unusual
journal entries to revenue to test whether each entry
is supported by an appropriate, underlying business
rationale, is properly authorised, accounted for correctly
and properly recorded in the correct period; and
• We also considered the adequacy of the Group’s

disclosures in respect of the accounting policies for
revenue recognition under IFRS 15 as disclosed in notes
2 and 3 including the impact of the Group’s adoption of
IFRS 15 in note 37.

103

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONKey observations communicated
to the Audit Committee

We concluded that
management’s judgements
in relation to the extent of
recognition of deferred tax
assets is appropriate.

We concluded that there is
no goodwill impairment as at
31 December 2018. We note
that whilst the performance
of Connected Devices has
improved during the year
there remains judgement
with regards to the expected
future cash flows as a result of
the upcoming 5G technology.
We also concluded that there
is no impairment required to
parent Company investments.

FINANCIAL STATEMENTS

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF SPIRENT COMMUNICATIONS PLC CONTINUED

Risk

Our response to the risk

Procedures on the deferred tax assets were performed
centrally by the Group team supported by overseas teams
including specialists:

• We performed walkthroughs of the tax process and
assessed the design effectiveness of key controls;
• With the assistance of our EY Tax specialists, we have
evaluated management’s rationale for the forecast
periods selected in determining the likelihood of the
Group generating suitable future profit to support the
recognition of deferred tax assets;

• We evaluated the historical accuracy of forecasting

taxable profits, the integrity of the forecast models and
the consistency of the projections with other forecasts
made by management and approved by the Board;

• We formed our own view of the Group’s capacity

to obtain effective tax relief for tax losses and other
temporary differences over the forecast period;
• With the assistance of our US Tax specialists, we
assessed the completeness and correctness of
management’s assessment of the impact of the US Tax
reform and its correct application of the methods to
calculate deferred tax assets;

• We considered the impact of the restrictions on

recognising carry forward losses and assessed the
correctness of management’s assessment that they
would be used during the forecast period; and
• We considered the accuracy and appropriateness

of related disclosures and offsetting of deferred tax
balances in the Group financial statements.
Procedures on the carrying value of goodwill and
investments in subsidiary undertakings were performed
centrally by the Group team:

• With the support of our valuation specialists, we
assessed the discount rate used by obtaining
the underlying data used in the calculation and
benchmarking it against comparable organisations
and market data;

• We validated the growth rates assumed by comparing

them to economic and industry forecasts;

• We challenged management on the achievability of the
cash flow forecasts, the downside risk relating to Brexit
and possible US-China trade wars, and we assessed the
projected financial information against original forecasts
and other market data to assess the robustness of
management’s forecasting process;

• We analysed the historical accuracy of budgets to actual
results to determine whether forecast cash flows are
reliable based on past experience;

• We performed sensitivity analyses by testing key
assumptions in the model to recalculate a range
of potential outcomes in relation to the size of the
headroom between carrying value and fair value;
• We have compared the carrying value of the CGUs to

the market capitalisation of the Group; and

• We considered the appropriateness of the related
disclosures provided in note 13 to the Group
financial statements.

Recoverability of deferred tax assets
Refer to the Audit Committee Report
(page 68); Accounting policies (page
124); and note 25 of the consolidated
financial statements (page 145).

The Group has deferred tax assets
of $22.0 million (2017 $23.2 million).
There is a risk that inappropriate
recognition of brought forward tax losses
and other temporary differences due to
the volatility in forecast taxable income
may result in incorrect recognition and
disclosure of deferred tax assets.

Furthermore, there is risk of incorrect
application of legislative changes to
deferred tax recognition.

The risk has decreased from the prior
year due to the improving performance
of the Group.

Carrying value of goodwill (Group),
and investments in subsidiary
undertakings (parent Company)
Refer to the Audit Committee Report
(page 68); Accounting policies (page
123); and note 13 of the consolidated
financial statements (page 139).

The Group has goodwill of
$155.7 million (2017 $156.8 million) and
investments in subsidiary undertakings
of £366.6 million (2017 £351.8 million).

Given the continuing uncertain political
and economic environment, there is a
risk that goodwill in the Group financial
statements and investments in the parent
Company financial statements may
be overstated.

In 2016 management impaired goodwill
relating to the Connected Devices
segment by $41.3 million down to its
recoverable amount. Headroom for
this segment has increased following
improving profitability, however we
continue to monitor this segment
in particular.

The risk has decreased from the prior
year due to the improving performance
of the Group.

104

Spirent Communications plc Annual Report 2018AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope
for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements.
We take into account size, risk profile, the organisation of the Group and effectiveness of group-wide controls, changes in the business
environment and other factors such as recent internal audit results when assessing the level of work to be performed at each entity.

In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage
of significant accounts in the financial statements, of the reporting components of the Group, we selected components covering entities
within the United Kingdom, North America and Asia, which represent the principal business units within the Group.

Of the eight components selected, we performed an audit of the complete financial information of three components (“full scope
components”) which were selected based on their size or risk characteristics. For the remaining five components (“specific scope
components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the
greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile.

Reporting
Components
Full Scope
Specific Scope
Full and
Specific scope
coverage
Remaining
components
Total Reporting
components

Number

3
5

% of Group
adjusted
profit
before tax*

104%
(11%)

2018

2017

% of Group
Revenue

% of Group
Assets

See Note

Number

% of Group
adjusted
profit before
tax*

% of Group
Revenue

% of Group
Assets

83%
10%

73%
23%

1,2
3,4,5

93%

96%

100%

3
5

95%
(5%)

90%

10%

84%
9%

93%

61%
33%

94%

100%

* Profit before tax adjusted for non-recurring items as defined in the ‘Our application of materiality’ section of this report.

Note 1
The Group audit risk in relation to the carrying value of goodwill was subject to full scope audit procedures by the Group audit team on the entire balance.
Note 2
The Group audit risk in relation to the recoverability of deferred tax assets was subject to full scope audit procedures by the Group audit team on the
entire balance.
Note 3
One of the five specific scope components relates to the corporate division of the parent Company which includes consolidation and
elimination adjustments.
Note 4
The specific scope loss before tax adjusted for non-recurring items coverage of 11 per cent represents four specific scope components having a positive
contribution of 15 per cent offset by the corporate component having a negative contribution of 26 per cent.
Note 5
The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage
of the significant account tested for the Group.
Note 6
Of the remaining components that together represent 7 per cent of the Group’s profit before tax adjusted for non-recurring items, none are individually
greater than 2 per cent of the Group’s profit before tax adjusted for non-recurring items. For these components, we performed other procedures, including
analytical review procedures and specified procedures to respond to any potential risks of material misstatement to the Group financial statements.

105

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF SPIRENT COMMUNICATIONS PLC CONTINUED

Changes from the prior year
Our scoping is comparable with the prior year. We note that the number of ‘Remaining components’ in the table above has reduced
reflecting the 2017 disposal of the Developer Tools (DT) and Device Intelligence (DI) line of business and associated components.

Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the
components by us, as the Group audit engagement team, or by component auditors from other EY global network firms operating
under our instruction. Of the three full scope components, audit procedures were overseen on one of these directly by the Group
audit partner with the other two performed by component audit teams. Of the five specific scope components audit procedures were
performed on three of these directly by the Group audit team and two by component audit teams. Where the work was performed by
component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had
been obtained as a basis for our opinion on the Group as a whole.

At the start of the audit, a Global Team Planning event was held in the UK with representatives from all full and specific scope
component audit teams in attendance. Detailed instructions were sent to all auditors in these locations. These instructions covered the
significant areas that should be addressed by the component team auditors (which included the relative risks of material misstatement
detailed above) and set out the information to be reported back to the Group audit team. In addition, the Group audit team continued
to follow a programme of planned visits that has been designed to ensure that the Senior Statutory Auditor visits certain material
or high risk locations on a rotational basis. During the current year’s audit cycle, visits were undertaken by the Group audit team
to the component teams in North America and Asia. These visits involved meeting with our component team to discuss and direct
their planned audit approach, holding meetings with local management and reviewing procedures performed to date on the Group
risk areas.

The Group team interacted regularly with the component teams where appropriate during various stages of the audit, including
attendance at all closing meetings by phone, review of key working papers and were responsible for the scope and direction of the
audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion
on the Group financial statements.

106

Spirent Communications plc Annual Report 2018OUR APPLICATION OF MATERIALITY
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the
audit and in forming our audit opinion.

Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our
audit procedures.

We determined materiality for the Group to be $3.5 million (2017 $2.5 million), which is 5 per cent (2017 5 per cent) of profit before
tax adjusted for non-recurring items, of $71.9 million (2017 $50.7 million). We consider that profit before tax adjusted for non-recurring
items provides us with a consistent year on year basis for determining materiality and is the most relevant performance measure to the
stakeholders of the entity. Detailed audit procedures are performed on material non-recurring items.

We determined materiality for the parent Company to be £3.0 million (2017 £2.8 million), which is 1 per cent (2017 1 per cent) of net
assets. Parent Company materiality is higher than Group materiality as it is calculated on a different basis as it is primarily a head office
company rather than the trading group.

STARTING BASIS
• Profit before tax $61.2 million (2017 profit before tax $46.6 million)

ADJUSTMENTS
Adjusted for non-recurring items:
• Exceptional costs of $13.1 million (2017 $6.7 million)
• Gain on divestments of $2.4 million (2017 $2.6 million)

MATERIALITY
• Profit before tax adjusted for non-recurring items $71.9 million (basis for materiality) (2017 $50.7 million)
• Materiality of $3.5 million (2017 $2.5 million) (5 per cent of materiality basis)

Management make further adjustments to profit before tax adjusted for non-recurring items (basis for materiality) to arrive at adjusted
operating profit, the measure used by the directors to evaluate the overall performance of the Group. These adjustments include
intangible asset amortisation of $3.7 million (2017 $6.3 million), Share based payment expense of $2.8 million (2017 $2.2 million), and
net interest income of $1.3 million (2017 $0.3 million). Adjusting for these items gives adjusted operating profit of $77.1 million (2017
$58.9 million).

The $1.0 million increase in materiality is in proportion to the $21.2 million increase of profit before tax adjusted for non-recurring
items (2018 $71.9 million, 2017 $50.7 million). That increase is a result of the $18.2 million increase in adjusted operating profit (2018
$77.1 million, 2017 $58.9 million), the $2.6 million reduction in intangible asset amortisation (2018 $3.7 million, 2017 $6.3 million), and
the $1.0 million increase in net finance income (2018 $1.3 million, 2017 $0.3 million) partially offset by a $0.6 million increase in share
based payment expense (2018 $2.8 million, 2017 $2.2 million).

During the course of our audit, we reassessed initial materiality and the only change in final materiality was to reflect the actual reported
performance of the Group in the year.

107

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF SPIRENT COMMUNICATIONS PLC CONTINUED

Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was
that performance materiality was 75 per cent (2017 75 per cent) of our planning materiality, namely $2.6 million (2017 $1.8 million).
We have set performance materiality at this percentage to ensure that total detected and undetected audit differences do not
exceed our planning materiality of $3.5 million (2017 $2.5 million) for the financial statements as a whole.

Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is
undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based
on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that
component. In the current year, the range of performance materiality allocated to components was $0.4 million to $1.3 million
(2017 $0.3 million to $1.1 million).

Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of $0.17 million (2017
$0.12 million), which is set at 5 per cent of planning materiality, as well as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of
other relevant qualitative considerations in forming our opinion.

OTHER INFORMATION
The other information comprises the information included in the Annual Report, including the strategic report (set out on pages IFC to
53), corporate governance and directors’ report (set out on pages 96 to 100), and other information (set out on pages 180 to 187) other
than the financial statements and our auditor’s report thereon. The directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this
report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements,
we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the
other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information,
we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet
the following conditions:

• Fair, balanced and understandable set out on page 68 – the statement given by the directors that they consider the Annual

Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary
for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or

• Audit Committee reporting set out on page 68 – the section describing the work of the Audit Committee does not appropriately

address matters communicated by us to the Audit Committee or is materially inconsistent with our knowledge obtained in the audit; or

• Directors’ statement of compliance with the UK Corporate Governance Code set out on page 58 – the parts of the directors’
statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance Code.

108

Spirent Communications plc Annual Report 2018OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

•

the information given in the strategic report and the directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
In the light of the knowledge and understanding of the Group and the parent Company and its environment obtained in the course of
the audit, we have not identified material misstatements in the strategic report or the directors’ report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you
if, in our opinion:

• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received

•

from branches not visited by us; or
the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.

RESPONSIBILITIES OF DIRECTORS
As explained more fully in the directors’ responsibilities statement set out on page 101, the directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group and parent Company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so.

AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

109

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS
OF SPIRENT COMMUNICATIONS PLC CONTINUED

EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES,
INCLUDING FRAUD
The objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the financial statements
due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud,
through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified
during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with
governance of the entity and management.

Our approach was as follows:

• We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the
most significant frameworks which are directly relevant to specific assertions in the financial statements are those that relate to
the reporting framework (IFRS, FRS 101, the Companies Act 2006 and the UK Corporate Governance Code) and the relevant tax
compliance regulations in the jurisdictions in which the Group operates.

• We understood how Spirent Communications plc is complying with those legal and regulatory frameworks by making enquires of

management, Internal Audit, those responsible for legal and compliance procedures and the Company Secretary. We corroborated
our enquires through our review of Board minutes and papers provided to the Audit Committee.

• We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur, by

meeting with management from various parts of the business to understand where it considered there was susceptibility to fraud.
We also considered performance targets and their propensity to inﬂuence efforts made by management to manage earnings.
We considered the programmes and controls that the Group has established to address risks identified, or that otherwise prevent,
deter and detect fraud; and how senior management monitors those programmes and controls.

• Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations

identified in the paragraphs above. Our procedures involved: journal entry testing, with a focus on manual consolidation journals
and journals indicating large or unusual transactions based on our understanding of the business; enquiries of Legal Counsel,
Group management, Internal Audit, and component management. Where the risk was considered to be higher, we performed
audit procedures to address the identified fraud risk as referred to in the key audit matters section above. In addition, we completed
procedures to conclude on the compliance of the disclosures in the Annual Report and Accounts with the requirements of the
relevant accounting standards, UK legislation and the UK Corporate Governance Code 2016.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s (FRC)
website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

OTHER MATTERS WE ARE REQUIRED TO ADDRESS
• We were appointed by the Company on 3 August 2018 to audit the financial statements for the year ending 31 December 2018 and

subsequent financial periods.

• Following the recommendation of the Board we were appointed (as predecessor firm Lindsay, Jamieson & Haldane) by the Group
at its annual general meeting on 9 May 1950 to audit the financial statements of the Group for the period ending 31 December
1949 and subsequent financial periods. Our total uninterrupted period of engagement is 69 years, covering periods from our
appointment through to the period ending 31 December 2018.

• The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent Company and we

remain independent of the Group and the parent Company in conducting the audit.

• The audit opinion is consistent with the additional report to the Audit Committee.

USE OF OUR REPORT
• This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to
state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.

Joe Yglesia
(Senior Statutory Auditor)
For and on behalf of Ernst & Young LLP, Statutory Auditor
Reading
7 March 2019

Notes
1. The maintenance and integrity of the Spirent Communications plc website is the responsibility of the directors; the work carried out by the auditors

does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the
financial statements since they were initially presented on the website.

2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

110

Spirent Communications plc Annual Report 2018CONSOLIDATED INCOME STATEMENT
YEAR TO 31 DECEMBER 2018

Revenue
Cost of sales

Gross profit
Product development
Selling and marketing
Administration
Other items

Operating profit

Other items charged in arriving
at operating profit:
Exceptional items
Acquired intangible asset
amortisation
Share-based payment
Other items

Finance income
Finance costs
Gain on divestment

Profit before tax
Tax

Profit for the year attributable
to owners of the parent Company

Earnings per share (cents)
Basic
Diluted

Year ended 31 December 2018

Year ended 31 December 2017

Notes

Adjusted
$ million

Adjusting
items1
$ million

Reported
$ million

Adjusted
$ million

Adjusting
items1
$ million

Reported
$ million

6
7
35
4
10

476.9
(132.4)
344.5
(96.9)
(123.9)
(46.6)
–
77.1

–

–
–
–

1.4
(0.1)
–
78.4
(12.1)

–
–
–
–
–
–
(19.6)
(19.6)

476.9
(132.4)
344.5
(96.9)
(123.9)
(46.6)
(19.6)
57.5

(13.1)

(3.7)
(2.8)
(19.6)

–
–
2.4
(17.2)
6.7

(3.7)
(2.8)
(19.6)

1.4
(0.1)
2.4
61.2
(5.4)

454.8
(129.8)
325.0
(103.0)
(116.8)
(46.3)
–
58.9

–

–
–
–

0.6
(0.3)
–
59.2
(13.1)

–
–
–
–
–
–
(15.2)
(15.2)

454.8
(129.8)
325.0
(103.0)
(116.8)
(46.3)
(15.2)
43.7

(6.7)

(6.3)
(2.2)
(15.2)

–
–
2.6
(12.6)
(4.5)

(6.3)
(2.2)
(15.2)

0.6
(0.3)
2.6
46.6
(17.6)

66.3

(10.5)

55.8

46.1

(17.1)

29.0

10.86
10.75

9.14
9.05

7.55
7.48

4.75
4.71

Note
1. Adjusting items comprise exceptional items, amortisation of acquired intangible assets, share-based payment, gain on divestment, tax on adjusting

items and prior year tax. 2017 also includes revaluation of deferred tax assets due to US tax reform.

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 on page 182.

The notes on pages 116 to 158 and pages 178 and 179 form part of these financial statements.

111

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNotes

2018
$ million

55.8

2017
$ million

29.0

–

(3.1)

(3.1)
(3.1)

2.8
(0.6)
0.5
(0.1)
2.6
(0.5)
55.3

4.1
1.0

5.5
(1.0)
(0.9)
0.2
3.8
4.8
33.8

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
YEAR TO 31 DECEMBER 2018

Profit for the year attributable to owners of the parent Company
Other comprehensive (loss)/income
Items reclassified to profit or loss:

Reclassification of foreign exchange on overseas divestments

Items that may subsequently be reclassified to profit or loss:

Exchange differences on retranslation of foreign operations

Items that will not subsequently be reclassified to profit or loss:

Re-measurement of the net defined benefit pension asset/liability
Income tax effect of re-measurement of the net defined benefit pension asset/liability
Re-measurement of the deferred compensation liability
Income tax effect of re-measurement of the deferred compensation liability

9
10
9
10

Other comprehensive (loss)/income
Total comprehensive income for the year attributable to owners of the parent Company

The notes on pages 116 to 158 and pages 178 and 179 form part of these financial statements.

112

Spirent Communications plc Annual Report 2018CONSOLIDATED BALANCE SHEET
AT 31 DECEMBER 2018

Assets
Non-current assets
Intangible assets
Property, plant and equipment
Trade and other receivables
Assets recognised from costs to obtain a contract
Investment in associate
Cash on deposit
Defined benefit pension plan surplus
Deferred tax asset

Current assets
Inventories
Trade and other receivables
Assets recognised from costs to obtain a contract
Other financial assets
Current tax asset
Cash and cash equivalents

Total assets
Liabilities
Current liabilities
Trade and other payables
Deferred income
Other financial liabilities
Current tax liability
Provisions

Non-current liabilities
Trade and other payables
Deferred income
Deferred tax liability
Defined benefit pension plan deficit
Provisions

Total liabilities
Net assets

Capital and reserves
Share capital
Share premium account
Capital redemption reserve
Other reserves
Translation reserve
Retained earnings

Total equity attributable to owners of the parent Company

Note
1. Restated for the adoption of IFRS 15 on 1 January 2018, as per note 37.

The notes on pages 116 to 158 and pages 178 and 179 form part of these financial statements.

Signed on behalf of the Board

Paula Bell
Director
7 March 2019

Notes

2018
$ million

Restated1
2017
$ million

Restated1
At 1 January
2017
$ million

13
14
19
20
15

9
25

18
19
20
19

22
24

26
24
25
9
27

158.0
36.1
4.5
0.5
–
–
2.5
22.0
223.6

25.7
139.9
0.5
–
1.4
121.6
289.1
512.7

(63.1)
(55.2)
–
(1.2)
(10.7)
(130.2)

(5.4)
(14.4)
–
(4.1)
(3.3)
(27.2)
(157.4)
355.3

26.0
25.7
16.8
17.5
8.2
261.1
355.3

163.6
42.3
4.1
0.4
–
–
1.2
23.2
234.8

23.6
130.1
0.6
0.1
1.0
128.4
283.8
518.6

(70.2)
(61.7)
–
(1.4)
(3.6)
(136.9)

(5.4)
(11.0)
(0.3)
(7.7)
(3.2)
(27.6)
(164.5)
354.1

27.5
27.3
17.8
13.4
11.3
256.8
354.1

169.8
47.3
4.6
0.4
–
0.1
0.9
33.1
256.2

27.4
128.9
0.6
–
0.4
96.1
253.4
509.6

(67.8)
(59.4)
(0.1)
(1.5)
(4.2)
(133.0)

(3.4)
(11.2)
(0.3)
(16.7)
(2.6)
(34.2)
(167.2)
342.4

25.3
25.0
16.3
19.4
10.3
246.1
342.4

113

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

At 1 January 2017, as reported
Impact of change in accounting
standards – IFRS 15
At 1 January 2017, restated1
Profit for the year
Other comprehensive income2
Total comprehensive income
Share-based payment
Tax credit on share incentives
Equity dividends
Exchange adjustment
At 1 January 2018, restated1
Profit for the year
Other comprehensive (loss)/income3
Total comprehensive (loss)/income
Share-based payment
Tax credit on share incentives
Equity dividends
Employee Share Ownership Trust
Exchange adjustment

At 31 December 2018

Attributable to the equity holders of the parent Company

$ million

Notes

Share
capital

25.3

–
25.3
–
–
–
–
–
–
2.2

27.5
–
–
–
–
–
–
–
(1.5)
26.0

33
10
12

33
10
12
31

Share
premium
account

Capital
redemption
reserve

Other
reserves

Translation
reserve

Retained
earnings

25.0

–
25.0
–
–
–
–
–
–
2.3

27.3
–
–
–
–
–
–
–
(1.6)
25.7

16.3

19.4

10.3

245.3

–
16.3
–
–
–
–
–
–
1.5

17.8
–
–
–
–
–
–
–
(1.0)
16.8

–
19.4
–
–
–
–
–
–
(6.0)

13.4
–
–
–
–
–
–
–
4.1
17.5

–
10.3
–
1.0
1.0
–
–
–
–

11.3
–
(3.1)
(3.1)
–
–
–
–
–
8.2

0.8
246.1
29.0
3.8
32.8
2.2
0.3
(24.6)
–

256.8
55.8
2.6
58.4
2.8
0.4
(54.8)
(2.5)
–
261.1

Total
equity

341.6

0.8
342.4
29.0
4.8
33.8
2.2
0.3
(24.6)
–

354.1
55.8
(0.5)
55.3
2.8
0.4
(54.8)
(2.5)
-
355.3

Notes
1. Restated for the adoption of IFRS 15 on 1 January 2018, as per note 37.
2. The amount included in other comprehensive income for 2017 of $3.8 million represents re-measurement gains on the net defined benefit pension

liability of $5.5 million, net of a tax charge of $1.0 million, and re-measurement losses on the deferred compensation liability of $0.9 million, net of a tax
credit of $0.2 million. The amount included in the translation reserve of $1.0 million represents other comprehensive income related to the translation
of foreign operations of $4.1 million net of an other comprehensive loss arising on the reclassification of foreign exchange on overseas divestments of
$3.1 million.

3. 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.

The notes on pages 116 to 158 and pages 178 and 179 form part of these financial statements.

114

Spirent Communications plc Annual Report 2018CONSOLIDATED CASH FLOW STATEMENT
YEAR TO 31 DECEMBER 2018

Cash flows from operating activities
Cash flow from operations
Tax paid

Net cash inflow from operating activities
Cash flows from investing activities
Interest received
Purchase of intangible assets
Purchase of property, plant and equipment
Proceeds from the sale of property, plant and equipment
Net expenses of divestments
Loan from/(to) divested subsidiaries

Net cash used in investing activities
Cash flows from financing activities
Dividend paid
Share purchase into Employee Share Ownership Trust

Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes

Cash and cash equivalents at the end of the year

The notes on pages 116 to 158 and pages 178 and 179 form part of these financial statements.

Notes

35
35

12
31

2018
$ million

2017
$ million

65.9
(5.7)
60.2

1.3
–
(12.0)
1.4
(0.2)
2.0
(7.5)

(54.8)
(2.5)
(57.3)
(4.6)
128.4
(2.2)
121.6

77.7
(8.4)
69.3

0.6
(0.4)
(14.9)
1.8
(0.7)
(2.0)
(15.6)

(24.6)
–
(24.6)
29.1
96.1
3.2
128.4

115

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. CORPORATE INFORMATION
The Group’s consolidated financial statements for the year ended 31 December 2018 were authorised for issue by the Board of
directors on 7 March 2019. Spirent Communications plc is a public limited company incorporated and domiciled in England and Wales
(registration number 00470893). The registered address of the Company is Northwood Park, Gatwick Road, Crawley, West Sussex,
RH10 9XN, United Kingdom.

The Company’s Ordinary Shares are traded on the London Stock Exchange.

As required by the European Union’s (EU) IAS Regulation and the Companies Act 2006, the Group has prepared its consolidated
financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and issued by the
International Accounting Standards Board (IASB).

The Company has elected to prepare the Company financial statements in accordance with UK Accounting Standards. These are
presented on pages 159 to 160 and the accounting policies in respect of the Company are set out on pages 161 to 166.

2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING CONVENTION
The consolidated financial statements are prepared on a historical cost basis apart from certain financial instruments that have been
measured at fair value.

GOING CONCERN BASIS OF ACCOUNTING
At 31 December 2018 the Group had cash balances of $121.6 million and no debt.

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 2020 and 2021 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.

NEW ACCOUNTING STANDARDS
There have been no applicable new standards, amendments to standards and interpretations effective from 1 January 2018 that have
been applied by the Group which have resulted in a significant impact on its consolidated results or financial position, other than in
relation to IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’.

IFRS 9 Financial Instruments
IFRS 9 ‘Financial Instruments’ is effective from 1 January 2018 and replaces the existing standard, IAS 39: ‘Financial Instruments:
Recognition and Measurement’. The consolidated financial statements for the year ending 31 December 2018 are the first financial
statements presented under IFRS 9. There is no material impact to the financial statements on transition to IFRS 9, other than the
classification effects described below, which have not impacted the measurement or carrying amount of financial instruments.

Original measurement category under IAS 39 New measurement category under IFRS 9

Loans and receivables

Cash and cash equivalents, trade and other
receivables (excluding corporate owned
life insurance)
Trade and other receivables (corporate
owned life insurance)
Current other financial assets and
liabilities (forward foreign currency
exchange contracts)
Trade payables, other payables and accruals Financial liabilities at amortised cost
Financial liabilities at amortised cost
Contractual provisions

Derivatives designated at FVTPL

Available-for-sale through profit or loss

Financial assets at amortised cost

Financial assets at FVTPL

Derivatives designated at FVTPL
Financial liabilities at amortised cost
Financial liabilities at amortised cost

116

Spirent Communications plc Annual Report 20182. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
IFRS 15 Revenue from Contracts with Customers
IFRS 15 ‘Revenue from Contracts with Customers’ is effective from 1 January 2018 and replaces all existing revenue requirements in
IFRS. The consolidated financial statements for the year ending 31 December 2018 are the first financial statements presented under
IFRS 15.

IFRS 15 applies to all revenue arising from contracts with customers unless the contracts are in scope of other standards.

The standard establishes a new five-step model that applies to revenue from contracts with customers. Under IFRS 15, the core
principle is that revenue is recognised to depict the transfer of promised goods and services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services.

The standard requires entities to exercise considerable judgement taking into account all the relevant facts and circumstances when
applying each step of the model to its contracts with customers. The standard also specifies how to account for the incremental costs of
obtaining a contract and the costs directly related to fulfilling a contract.

The Group has applied IFRS 15 fully retrospectively in accordance with paragraph C3 (a) of the standard, restating the prior period
comparatives and electing to use the following practical expedients:

•

in respect of completed contracts, the Group will not restate contracts that (i) begin and end within the same annual reporting
period; or (ii) are completed contracts at the beginning of the earliest period presented (para. C5(a); and
for all reporting periods presented before the date of initial application, the Group will not disclose the amount of the transaction
price allocated to the remaining performance obligations or an explanation of when the Group expects to recognise that amount as
revenue (para C5(d)).

Details of the Group’s accounting policy in respect of revenue is presented on page 121. An explanation of the impact on the Group’s
prior period financial statements and related matters consequent upon the adoption of IFRS 15 are set out in note 37.

PRESENTATION
The Group’s deferred compensation plan balance has been reclassified from ‘trade and other payables – non-current’ to ‘defined
benefit pension plan deficit’ to appropriately aggregate pension-related liabilities. 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 $3.7 million in 2017 and
$2.3 million in 2016. The related cash flow movement in 2017 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 or 2017.

BASIS OF CONSOLIDATION
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to
31 December each year. The financial statements of subsidiaries are prepared for the same reporting year as the parent Company,
using consistent accounting policies. A full list of subsidiary undertakings is provided on pages 178 and 179.

Subsidiary undertakings are entities that are directly or indirectly controlled by the Group. The Group controls an entity when it is
exposed, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its
power over the entity.

Results of subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from
the date on which control is transferred out of the Group.

The separable net assets, including intangible assets of newly acquired subsidiaries, are incorporated into the consolidated financial
statements based on their fair values at the effective date of control.

The Group includes a subsidiary that is operated under the management of a Proxy Board. Details of the Proxy Board arrangements
and the powers of the Proxy holders and Spirent’s management are set out in the Corporate Governance section of this Annual Report
on page 63. The directors consider that the Group meets the requirements of IFRS 10 ‘Consolidated Financial Statements’ in respect of
control over the entity in question as Spirent maintains the following:

• rights to appoint, reassign or remove members of key management and the ability to appoint proxy holders and change directors

every 5 years;

• rights to direct the investee to enter into, or veto any changes to, transactions; and
• decision-making rights and rights to direct activities including the ability to change products, territories and customers and the

ability to terminate product selling (with notice).

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies.
Significant influence is presumed to exist when the Group holds between 20 and 50 per cent of the voting power of another entity.

117

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Associates are accounted for using the equity method and are initially recognised at cost. The Group’s investment includes goodwill
identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share
of the total comprehensive income from the date that significant influence commences until the date that significant influence ceases.
When the Group’s share of losses exceeds its interest in an equity accounted investee, the Group’s carrying amount is reduced to nil
and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or
made payments on behalf of an associate.

Dividends received from associates reduce the carrying value of the associate. Investments in associates are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.

All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

BUSINESS COMBINATIONS AND GOODWILL
A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.
Business combinations are accounted for using the acquisition method.

At acquisition date, the identifiable assets acquired and liabilities assumed, including intangible assets, are measured at their fair values.
The cost of an acquisition is measured as the aggregate of the consideration transferred and the amount of any non-controlling interest
in the acquiree. Non-controlling interests are measured at the proportionate share of the acquiree’s identifiable net assets.

Contingent consideration resulting from business combinations is valued at fair value at the acquisition date as part of the business
combination. When the contingent consideration meets the definition of a financial liability, it is subsequently re-measured to fair value
at each reporting date, with changes in fair value recognised in profit or loss. The determination of fair value is based on discounted
cash flows. The key assumptions take into consideration the probability of meeting each performance target and the discount rate.

Acquisition costs are expensed and included in administration costs.

Goodwill arising on the acquisition of subsidiaries, representing the excess of cost over the net fair value of the net assets acquired, is
capitalised as an intangible asset. Goodwill is carried at cost less any accumulated impairment losses.

Goodwill is subject to an annual review for impairment. For the purpose of impairment testing, goodwill is allocated to the related cash-
generating units monitored by management. Where the recoverable amount of the cash-generating unit is less than its carrying amount,
including goodwill, an impairment loss is recognised in the income statement.

INTANGIBLE ASSETS
Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Separately identifiable
intangible assets such as patent fees, licence fees, trademarks and customer lists and relationships are capitalised on the balance
sheet only when the value can be measured reliably, or the intangible asset is purchased as part of the acquisition of a business.
Such intangible assets are amortised over their useful economic lives on a straight line basis. The carrying value of intangible
assets is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable.

Acquired intangible assets, being customer lists, current technology, database, brand names and a non-compete covenant, are
amortised on a straight line basis over their estimated useful lives and the charge is included within other items in the income
statement. Licences are amortised over their useful lives or term, and are expensed within cost of sales or selling costs.

The estimated useful lives of intangible assets and the amortisation expiry dates are as follows:

Customer lists
Current technology
Brand names
Licences

Useful life

Expiry date

2 to 7 years
5 to 7 years
5 years
3 to 5 years

2020
2021
2020
2020

PRODUCT DEVELOPMENT
Research expenditure is charged to product development in the income statement in the year in which it is incurred. Intangible assets
arising on the Group’s various product development projects are recognised only if the recognition criteria of IAS 38 ‘Intangible Assets’
are met.

Product development costs are expensed as incurred until the technological feasibility of the product under development has
been established. Technological feasibility in Spirent’s circumstances occurs when a working model is completed. For software
development, technological feasibility is not established until the process of developing the software is complete. After technological
feasibility is established, additional costs are capitalised and amortised on a straight line basis over the estimated useful life.

At 31 December 2018 and 31 December 2017, no amounts have met the recognition criteria.

118

Spirent Communications plc Annual Report 20182. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment. Depreciation is not
provided on freehold land. Depreciation is provided to write-off the cost, less estimated residual value, of all other assets over their
estimated useful lives on a straight line basis at rates which take into account commercial conditions at their location. Usual asset lives
are as follows:

Freehold buildings
Plant and machinery
Fixtures, fittings and equipment

Building installations
Fittings and equipment
Motor vehicles
Business systems software

50 years
3 to 8 years

20 years or lease period if lower
3 to 8 years
3 to 5 years
4 years

The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the
carrying value may not be recoverable.

IMPAIRMENT OF ASSETS
Intangible assets with finite useful lives and property, plant and equipment are tested for impairment at each reporting date where there
is an indication that an asset may be impaired. Goodwill and intangible assets with an indefinite useful life are assessed at least annually.
When an impairment test is performed, the recoverable amount is assessed by reference to the higher of the net present value of the
expected cash flows (value in use) of the relevant cash-generating unit or asset and the fair value less cost of disposal. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. Where the carrying amount of an asset exceeds its
recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Impairment losses are recognised
in the income statement in those expense categories consistent with the function of the impaired asset.

Where an impairment loss has been recognised against an asset, it may be reversed in future periods where there has been a change
in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised, but only to the
extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, had no impairment loss been recognised in prior years. Such a reversal is recognised in the income statement.
This does not apply for goodwill, for which an impairment loss must not be reversed in any circumstances.

LEASES
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset
for an agreed period of time.

Operating leases are leases where the lessor retains substantially all the risks and rewards of ownership of the asset and are not finance
leases. Operating lease rentals are charged to the income statement on a straight line basis over the period of the lease.

Inventories Inventories are stated at the lower of cost and estimated net realisable value, after provisions for obsolescence.
Cost includes all costs incurred in bringing each product to its present location and condition, being the full manufacturing cost on a
first-in, first-out basis, including all attributable overheads based on a normal level of activity.

PROVISIONS
Provisions are recorded when the Group has a present, legal or constructive obligation as a result of a past event, for which it is
probable that the Group will be required to settle by an outflow of resources and for which a reliable estimate of the amount of the
obligation can be made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.

Where the effect of the time value of money is material, the amount of the provision shall be the present value of the expenditures
expected to be required to settle the obligation.

CONTINGENT LIABILITIES
Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of uncertain
future events outside the Group’s control, or present obligations that are not recognised because it is not probable that a settlement
will be required or the value of such a payment cannot be reliably measured. The Group does not recognise contingent liabilities but
discloses them.

119

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
FOREIGN CURRENCIES
The consolidated financial statements are presented in US dollars, which is the Group’s presentation currency.

Transactions in foreign currencies are initially recorded at the rates ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are retranslated at the rates ruling at the balance sheet date. All exchange differences are taken to
the consolidated income statement. Non-monetary assets and liabilities denominated in foreign currencies are measured in terms of
historical costs using the exchange rate at the date of the initial transaction.

The functional currencies of the Group’s operations are principally US dollar, sterling or Euro. On consolidation, the assets and liabilities
of the Group’s foreign operations are translated into the Group’s presentation currency at exchange rates ruling at the balance sheet
date. The results of foreign operations are translated into US dollars using average rates for the period. The exchange differences
arising on retranslation are classified as a separate component of equity, the translation reserve. Such translation differences are
recognised as part of the profit or loss on disposal should an operation be disposed of. The Group has elected to apply the exemption
in IFRS 1 ‘First Time Adoption of International Financial Reporting Standards’ which allows the cumulative translation differences for all
foreign operations to be deemed to be zero at the date of transition to IFRS, being 1 January 2003.

FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised on the Group’s balance sheet when it becomes a party to the contractual provisions of
the instrument.

Trade receivables
Trade receivables are non-interest bearing and are stated at original invoiced amount less an appropriate allowance for expected credit
losses. At each reporting date, the Group measures the loss allowance at an amount equal to the lifetime expected credit losses.

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance
for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk
characteristics and the days past due.

The expected loss rates are based on the payment profiles of trade receivables over a period of 12 months before 31 December 2017
and the corresponding historical credit losses experienced within this period.

Trade receivables are written off when there is no reasonable expectation of recovery.

A default on a trade receivable occurs when the debtor fails to make contractual payments when they fall due.

Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits which usually have an
original maturity of three months or less. For the purposes of the consolidated cash flow statement, cash and cash equivalents consist of
cash and cash equivalents as defined above. There are no bank overdrafts.

Also recognised within cash and cash equivalents are shares in money market funds which, due to their first-class credit rating and
investment in extremely short term money market securities, undergo only minor fluctuations and can be readily converted within one
day into known amounts of cash.

Trade payables
Trade payables are non-interest bearing and are stated at the original invoiced amount.

Equity instruments
Equity instruments are recorded at the proceeds received, net of direct issue costs. Spirent Communications plc Ordinary Shares held
by the Group are classified in equity as treasury shares and are recognised at cost and included as a deduction from retained earnings.
Consideration received for the sale of such treasury shares is also recognised in equity.

Derivative financial instruments and hedge accounting
The Group uses forward foreign currency exchange contracts to manage exposures arising on receipts and payments in foreign
currencies relating to firm commitments.

Forward foreign currency exchange contracts are initially recognised at fair value on the date on which the contract is entered into,
and are subsequently re-measured to fair value at each reported balance sheet date. The fair value of forward foreign currency
exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The Group
has not adopted the hedge accounting rules. Consequently all gains and losses arising from changes in fair value are taken to the
income statement.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of the host contracts.

120

Spirent Communications plc Annual Report 20182. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
RETIREMENT BENEFITS
The Group operates two funded defined benefit pension plans which are in the United Kingdom, all other pension plans are defined
contribution in nature. For the defined contribution plans, the amount charged to the income statement is the employers’ contributions
paid or payable during the year.

For defined benefit pension plans, full actuarial valuations are carried out every three years using the projected unit credit method,
and updates are performed at each balance sheet date. Re-measurement, comprising actuarial gains and losses, the effect of changes
to the asset ceiling (if relevant) and the return on plan assets (excluding interest), is reflected immediately in the balance sheet liability
or asset with a charge or credit recognised in other comprehensive income in the period in which they occur. Re-measurement
recognised in other comprehensive income will not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the
period of plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined
benefit pension liability or asset, taking account of any changes in the net defined benefit pension liability during the period as a result
of contribution and benefit payments. Defined benefit pension costs are categorised as:

• service cost (including current service cost, past service cost and gains and losses on curtailments or settlements);
• net interest expense or income; and
• re-measurement.

The Group presents the first two components of defined benefit pension costs in profit or loss.

The Group also operates a deferred compensation plan 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’. For the deferred
compensation plan, the recognised investment gains or losses in the period are charged or credited to the income statement whereas
the re-measurement, comprising actuarial gains or losses, is reflected immediately in the balance sheet liability with a charge or credit in
other comprehensive income in the period in which it occurs. Re-measurement recognised in other comprehensive income will not be
reclassified to profit or loss.

REVENUE
Revenue represents the transfer of promised products or services to customers in an amount that reflects the consideration to which the
Group expects to be entitled in exchange for those products or services.

Revenue from product sales of hardware and perpetual software licences is recognised at the point in time when the customer has
obtained control of the products sold. This is usually when the products have been delivered in accordance with the contractual terms.
In most instances it is not until acceptance has occurred that control of the asset is transferred to the customer. Terms of acceptance are
dependent upon the specific contractual arrangement agreed with the customer. If it can be objectively determined that control has
been transferred to the customer in accordance with the agreed contract specifications, customer acceptance is a formality that would
not affect the determination of when the customer has obtained control of the products. However, if it cannot be objectively determined
that the products delivered are in accordance with the agreed-upon contract specifications, revenue would not be recognised until
customer acceptance has been granted.

For the sale of services, revenue is generally recognised over time with reference to when or as the performance obligations are
satisfied by transferring the service to the customer. Revenue from support and maintenance service contracts and software subscription
sales is recognised over the period of performance on a straight-line basis. Revenue from professional services is generally recognised
as work progresses in accordance with agreed upon contractual terms, either based on a measure of progress towards complete
satisfaction of the performance obligation or at periodic intervals. Progress is measured with reference to the actual cost of services
provided as a proportion of the total cost of services expected to be provided under the contract. Where the professional service has a
predetermined or fixed output deliverable, revenue is recognised at a point in time once the performance obligation has been satisfied
and the customer has received the agreed deliverable.

Revenue from multi-component and bundled orders that includes both products and services is accounted for as two or more separate
performance obligations only where the commercial substance is that the individual components operate independently of each
other, because they are capable of being distinct and are separately identifiable from other promises in the context of the contract with
the customer.

COST OF SALES
The Group’s cost of sales related to the sale of its products includes materials, payments to third party contract manufacturers, royalties
and salaries and other expenses related to its manufacturing and supply operations personnel. Cost of sales related to the provision of
services includes salaries and other expenses associated with technical support services and the cost of extended maintenance services.

121

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
COSTS TO OBTAIN A CONTRACT
The incremental costs of obtaining a contract with a customer are capitalised as an asset if the Group expects to recover them.
The Group incurs costs such as sales commissions when it enters into a new contract. Such costs are presented in the consolidated
balance sheet as assets recognised from costs to obtain a contract where the related revenue is recognised over time, usually in relation
to support and subscription agreements. These assets are amortised on a systematic basis consistent with how the related revenue is
recognised. The amortisation is recognised in selling costs within the income statement.

The Group applies the practical expedient in paragraph 94 of IFRS 15 and recognises incremental costs of obtaining a contract as an
expense when incurred if the amortisation period of the asset that the Group would otherwise have recognised is one year or less.

Management is required to determine the recoverability of assets recognised from costs to obtain a contract. At each reporting date,
the Group determines whether or not the assets are impaired by comparing the carrying amount of the asset to the remaining amount
of consideration that the Group expects to receive less the costs that relate to providing services under the relevant contract. No assets
were impaired as at 31 December 2018 (31 December 2017 no assets).

DEFERRED INCOME
Deferred income is only recognised on non-cancellable contracts that provide unconditional rights to payment from the customer for
products and services that the Group has not yet completed providing or that it will provide in the near future.

Revenue from product sales of hardware and perpetual software licences is recognised at the point in time when the customer has
obtained control of the products sold. In the instances where the customer has been invoiced and revenue from hardware or perpetual
software licences is unable to be recognised, revenue would not be recognised until control has passed, resulting in deferred income.

Support services and software subscription agreements are generally billed at commencement of the support or subscription contract,
while revenue is recognised over the period of the support or subscription agreement, resulting in deferred income.

The Group occasionally receives advance payments from customers on account, before products or services are delivered and revenue
is recognised, resulting in liabilities. These liabilities are reported on the consolidated balance sheet within trade and other payables on
a contract-by-contract basis at the end of each reporting period.

GOVERNMENT GRANTS
A government grant is recognised in the balance sheet initially within trade and other payables when there is reasonable assurance
that it will be received and that the Group will comply with the conditions attached to it. Grants that compensate the Group for
expenses incurred are recognised as other operating income on a systematic basis in the same periods in which expenses are incurred.
Grants that compensate the Group for the acquisition of an asset are presented by deducting them from the acquisition cost of the
related asset in accordance with IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’.

EMPLOYEE BENEFITS
When an employee has rendered services to the Group during an accounting period, short-term benefits expected to be paid in
exchange for those services are recognised in the same accounting period.

SHARE-BASED PAYMENT
The Group operates various equity-settled share-based compensation plans and accounts for these awards in accordance with IFRS 2
‘Share-based Payment’.

The fair value of these awards is recognised in the income statement on a straight line basis over the vesting period together with
a corresponding change in equity. The fair value is measured using the Hull-White trinomial model by reference to the share price,
and taking into account the terms and conditions of the award, excluding non-market vesting conditions, at the date the awards
were granted. The charge is reassessed at each balance sheet date to reflect the expected and actual levels of vesting, due to
achievement or otherwise of non-market conditions. Awards where vesting is conditional upon satisfying a market condition or non-
vesting condition are treated as vesting irrespective of whether the market or non-vesting condition has been satisfied.

The Group has an employee share trust for the granting of certain share incentives to employees. Shares in the Group held by the
employee share trust are treated as treasury shares and presented in the balance sheet as a deduction from equity.

122

Spirent Communications plc Annual Report 20182. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
TAX
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement
except to the extent that it relates to items in other comprehensive income or equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the
balance sheet date, and any adjustments to tax payable for previous years.

Deferred tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts
in the financial statements, with the following exceptions:

• where the temporary difference arises from the initial recognition of goodwill (taxable temporary differences only) or of an asset or
liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable
profit or loss;
in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the
timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not
reverse in the foreseeable future.

•

A deferred tax asset is recognised only to the extent that it is probable that taxable profits will be available against which the deductible
temporary differences, carried forward tax credits or tax losses can be utilised.

Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related
asset is realised or the liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.

DIVIDENDS PAID
The interim dividend is included in the financial statements in the period in which it is paid, and the final dividend and the special
dividend are included in the period in which they are approved by the shareholders at an annual general meeting.

ADJUSTING ITEMS
Adjusting items are disclosed separately in the income statement where it is necessary to do so due to their nature or amount and
to provide further understanding of the Group’s financial performance. Adjusting items comprise exceptional items, amortisation of
acquired intangible assets, share-based payment, gain on divestment, the tax effect of these items, prior year tax and revaluation of
deferred tax assets due to US tax reform (in 2017).

Certain items are classified as exceptional items due to their nature, amount or infrequency. Such presentation is relevant to an
understanding of the Group’s financial statements. These items are not part of the Group’s normal ongoing operations.

CRITICAL ACCOUNTING ASSUMPTIONS AND JUDGEMENTS
The preparation of financial statements requires the Group to make estimates and assumptions that affect items reported.
Such estimates and assumptions are based on management’s best knowledge of current facts, circumstances and future events.
Actual results may differ, possibly significantly, from those estimates. The areas requiring a high degree of judgement or where
assumptions and estimates are significant to the consolidated financial statements are discussed below.

Estimates
Business combinations and goodwill
For the purpose of impairment tests, the goodwill arising from each business combination is allocated to cash-generating units (“CGUs”)
that are expected to benefit from the combination and which represent the lowest level within the Group at which management
monitors goodwill. There have been no changes to the CGUs in the year.

The Group tests annually by CGU whether goodwill has suffered impairment and more frequently when events or circumstances
indicate that the current carrying value may not be recoverable. The recoverable amounts of CGUs have been determined based on
value in use calculations which require estimates and assumptions to be made in relation to management’s expectations of growth in
adjusted operating profit before depreciation and amortisation; long-term growth rates; and appropriate discount rates to reflect the
risks involved.

Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash
flow projections, could significantly affect the Group’s impairment evaluation and hence reported assets and profits and losses.
Further details, including sensitivity analysis, is included in note 13.

Defined benefit pension plans
The pension cost and the defined benefit pension obligation of the Group’s defined benefit pension plans are based on a number
of selected assumptions; these include the discount rate, inflation rate, salary growth and longevity. Differences arising from actual
experience or future changes in assumptions will be reflected in future periods. The effect of changing these assumptions is described
in note 9.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
At 31 December 2018, the Group has estimated an allowance of $4.0 million (£3.1 million) in respect of GMP equalisation, a past
service cost charged to exceptional items in the income statement in 2018. The data used in the calculation is high-level and
appropriate for an approximate calculation. Detailed data which will be required for member-by-member recalculation of benefits is not
generally available, and we believe would not significantly reduce the overall uncertainty in the calculation. We have therefore not used
more detailed data on the grounds that it would be disproportionate for the purposes of this calculation. The cost of GMP equalisation
remains highly uncertain due to legal uncertainty, political uncertainty, historical data which is unavailable at this stage, and future
trustee decisions. The ultimate cost of equalising GMPs will only be known once the trustees have completed an exercise to equalise
benefits, and it could be significantly different to this estimate. The process followed and assumptions used are disclosed in note 9.

Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is more likely than not that there will be sufficient and suitable taxable
profits in the relevant legal entity or tax group against which to utilise the assets in the future. The extent to which deferred tax assets
can be recognised is based on current forecasts and estimates prepared by management. A change to these forecasts and estimates
could result in a different recognition outcome. Judgement is required when determining probable future taxable profits, which are
estimated using the latest available profit forecasts. Unrecognised deferred tax assets are disclosed in note 25.

Provisions and contingent liabilities
Provisions are estimates and the actual cost and timing of future cash flows are dependent on future events. The Group exercises
judgement in recognising provisions and the exposures to contingent liabilities. Judgement is necessary to assess the likelihood that
a liability will arise and to quantify the possible amount of any financial settlement. The inherent uncertainty of such matters means
that actual amounts of transactions may differ materially from estimates provided. Any difference between the amounts previously
recognised and the actual amount is recognised immediately in the consolidated income statement. Provisions and contingent liabilities
are disclosed in notes 27 and 16, respectively.

Judgements
Revenue recognition
To determine the appropriate revenue recognition for contracts containing multiple elements or complex solutions that include both
products and services, we evaluate whether the contract should be accounted for as a single or multiple performance obligation.
This evaluation requires significant judgement. For revenue recognition purposes contractual arrangements are accounted for as two or
more separate performance obligations only where the commercial substance is that the individual components operate independently
of each other, because they are capable of being distinct and are separately identifiable from other promises in the context of the
contract with the customer. Management exercises a degree of judgement in setting the criteria used for determining when revenue
which involves several elements should be recognised and the stand-alone selling prices of each element. The Group generally
determines the stand-alone selling prices of individual elements based on prices which are not observable and are therefore based on
stand-alone internal list prices which are then subject to discount.

For professional services revenue recognised over time, the selection of the method to measure progress towards completion requires
judgement and is based on the nature of the services to be provided.

Contracts are sometimes modified to account for changes in customer requirements. Contract modifications are considered to exist
when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of the Group’s contract
modifications are for products and services that are distinct from existing performance obligations and are made prior to the transfer
of the products or services to the customer. Accordingly, these are included in the products and services to be transferred and are
included in the accounting of the contract on a prospective basis or as a separate performance obligation as appropriate.

In instances where the receipt of the consideration does not match the timing of the transfer of products or services because the
customer has paid in advance, the Group evaluates whether the difference between the amount of promised consideration and the
cash selling price of the promised products or services is significant. The Group generally determines any difference arising is not
significant and therefore a financing component does not exist. This evaluation requires judgement.

124

Spirent Communications plc Annual Report 20182. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
APPLICABLE NEW STANDARDS AND INTERPRETATIONS NOT APPLIED
The IASB and IFRIC have issued the following standards and interpretations with an effective date for the Group after the date of these
financial statements:

International Accounting
Standards (IAS/IFRS)

Effective for annual periods
beginning on or after

IAS 1
IAS 19

IFRS 3
IFRS 16
IFRIC 23

Annual Improvements
2015-2017 Cycle

Definition of Material (Amendments to IAS 1)
Plan Amendment, Curtailment or Settlement
(Amendments to IAS 19)
Definition of a Business (Amendments to IFRS 3)
Leases
Uncertainty over Income Tax Treatments

1 January 2020
1 January 2019

1 January 2020
1 January 2019
1 January 2019

1 January 2019

The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s
financial statements in the period of initial application other than in relation to IFRS 16 which is discussed below.

IFRS 16 Leases
IFRS 16 ‘Leases’ was issued in January 2016 to replace IAS 17 ‘Leases’ and is effective for accounting periods beginning on or after
1 January 2019. IFRS 16 has been adopted by the European Union. The Group will first adopt IFRS 16 in the financial year ending
31 December 2019.

The Group has completed its impact assessment and determined that the application of the new standard will have a material impact on
both gross assets and gross liabilities, adding circa $29 million of right-of-use assets and circa $32 million of lease liabilities. There will
be a decrease in retained earnings of circa $3 million. There will also be an impact to the income statement, resulting in an increase
to adjusted operating profit through the operating lease expense being removed and replaced with a smaller depreciation charge.
This impact is deemed to be immaterial. There will be an interest expense under the new accounting, that would not have occurred
under IAS 17, which will substantially offset the increase in adjusted operating profit and result in an immaterial difference to profit
before tax. There will not be an impact to total cash flows, however there will be an increase in cash flows from operating activities of
circa $7 million, and a corresponding decrease in cash flows from financing activities.

The impact on the parent Company financial statements is deemed immaterial as the majority of leases are situated outside of the UK.

The most significant judgement area in the application of the standard is the determination of a suitable discount rate. The Group
has set the discount rate based upon the local base rate with an additional premium to reflect various factors such as credit risk.
This approach enables an appropriate rate to be set for each lease depending on geographic location and lease classification.

At the point of transition the Group has elected to apply the standard using the modified retrospective approach, in accordance
with paragraph C7 of the standard, meaning comparatives do not get restated. Under this option, the Group has decided to
calculate the asset value as if the standard had always been applied (para. C8 (b)(i)). The Group has also elected to use the following
practical expedients:

• 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 (para. C10 (b));
leases with less than 12 months remaining at date of initial application can be accounted for as short-term leases and continue to be
expensed as incurred (para. C10 (c));
initial direct costs can be excluded from the measurement of the right-of-use assets at the date of initial application (para. C10 (d));
and

• hindsight can be used in determining the lease term if the contract contains options to extend or terminate the lease (para. C10 (e)).

The Group will also make 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.

125

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

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, 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.

Notes

Networks &
Security

Lifecycle
Service
Assurance

Connected
Devices

Corporate

Total

2018
$ million

Revenue
Nature of products and services
Sale of hardware and software
Maintenance and support services

Primary geographical markets
Americas
Asia Pacific
Europe, Middle East and Africa

Inter-segment revenue is eliminated.

Profit before tax
Total reportable segment profit before exceptional
items
Exceptional items
Total reportable segment profit
Unallocated amounts

Acquired intangible asset amortisation
Share-based payment

Operating profit
Finance income
Finance costs
Gain on divestment

Profit before tax

Other information
Product development
Intangible asset amortisation – other
Depreciation

239.8
45.3
285.1

133.7
112.6
38.8
285.1

66.9
45.9
112.8

93.4
9.8
9.6
112.8

56.4
–
56.4

17.4
–
17.4

40.0
39.0
79.0

38.3
36.7
4.0
79.0

10.5
–
10.5

–
–
–

–
–
–
–

(7.2)
(13.1)
(20.3)

53.0
–
9.7

29.6
–
3.1

14.3
0.6
3.6

–
–
0.1

346.7
130.2
476.9

265.4
159.1
52.4
476.9

77.1
(13.1)
64.0

(3.7)
(2.8)
57.5
1.4
(0.1)
2.4
61.2

96.9
0.6
16.5

126

Spirent Communications plc Annual Report 20183. OPERATING SEGMENTS CONTINUED

Revenue
Nature of products and services
Sale of hardware and software
Maintenance and support services
Royalty income

Primary geographical markets
Americas
Asia Pacific
Europe, Middle East and Africa

Inter-segment revenue is eliminated.

Profit before tax
Total reportable segment profit before exceptional
items
Exceptional items
Total reportable segment profit

Unallocated amounts

Acquired intangible asset amortisation
Share-based payment

Operating profit
Finance income
Finance costs
Gain on divestment

Profit before tax

Other information
Product development
Intangible asset amortisation – other
Depreciation

Notes

Networks &
Security

Lifecycle
Service
Assurance

Connected
Devices

Corporate

Total

2017
$ million

214.2
46.8
–
261.0

116.9
111.4
32.7
261.0

68.6
40.6
–
109.2

90.0
12.2
7.0
109.2

37.7
45.7
1.2
84.6

41.7
36.6
6.3
84.6

–
–
–
–

43.9
(3.9)
40.0

17.9
(0.1)
17.8

5.2
(1.4)
3.8

(8.1)
(1.3)
(9.4)

320.5
133.1
1.2
454.8

248.6
160.2
46.0
454.8

58.9
(6.7)
52.2

(6.3)
(2.2)
43.7
0.6
(0.3)
2.6
46.6

53.6
–
9.6

30.9
–
3.5

18.5
0.8
4.8

–
–
0.1

103.0
0.8
18.0

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 $6.8 million (2017 $8.1 million).

Americas includes United States revenue of $254.1 million (2017 $237.8 million).

Asia Pacific includes China revenue of $92.2 million (2017 $88.3 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 2018 or 2017.

127

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

3. OPERATING SEGMENTS CONTINUED

Non-current assets1
Americas
Asia Pacific
Europe, Middle East and Africa

2018
$ million

2017
$ million

184.6
4.4
5.1
194.1

195.4
4.9
5.6
205.9

Note 1. Non-current assets excludes trade and other receivables, assets recognised from costs to obtain a contract, defined benefit pension plan surplus

and deferred tax asset.

Europe, Middle East and Africa includes United Kingdom non-current assets of $2.0 million (2017 $2.9 million).

Americas includes United States non-current assets of $171.1 million (2017 $182.5 million).

4. PROFIT BEFORE TAX
The following items have been charged in arriving at profit before tax:

Employee benefit costs
Costs of inventories recognised as an expense
Write-down of inventories to net realisable value
Amortisation of intangible assets
Depreciation of property, plant and equipment – owned assets
Amortisation of assets recognised from costs to obtain a contract
Operating leases – minimum lease payments
Product development costs
Net foreign exchange loss

Notes

2018
$ million

2017
$ million

18
13
14
20

208.9
79.8
0.1
4.3
16.5
0.6
8.5
96.9
0.6

207.4
78.4
2.3
7.1
18.0
0.6
9.1
103.0
1.6

Services provided to all of the operations of the Group by the auditor, Ernst & Young LLP, and its associates:

Audit services
Group audit fee

2018
$ million

2017
$ million

0.9

A description of the work of the Audit Committee is set out in the Audit Committee report on pages 68 to 73 and includes an
explanation of how auditor objectivity and independence is safeguarded when non-audit services are provided by the auditor.

5. EXCEPTIONAL ITEMS

French Customs duty
UK pension fund GMP equalisation past service cost
Portfolio review and sales organisation restructuring

Strategic review of Connected Devices

Note

2018
$ million

2017
$ million

9.1
4.0
–

–
13.1

–
–
5.4

1.3
6.7

128

Spirent Communications plc Annual Report 2018

5. EXCEPTIONAL ITEMS CONTINUED
In 2018, the Group has 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 is comprised of a provision for $8.9 million (note 27) and $0.2 million other costs.

In addition, following the Lloyds Bank GMP inequalities court judgement published in October 2018, the Group has equalised GMP
benefits amounting to $4.0 million (£3.1 million) of defined benefit pension past service costs.

In 2017, Spirent concluded a portfolio and sales organisation review and also incurred a contract amendment fee in relation to
outsourced research and development services. In addition, in 2017 the Group undertook a strategic review of the Connected Devices
operating segment incurring advisers’ fees of $1.3 million.

The tax effect of exceptional items is a credit of $3.8 million (2017 $1.9 million). The total cash outflow in respect of exceptional items
charged in 2018 is anticipated to be $9.1 million, with $0.2 million paid in the year (2017 $6.8 million with $3.4 million paid in that year).
The cash outflow in 2018 in respect of exceptional items charged in 2017 was $3.4 million (2017 $2.5 million).

The total cash outflow in respect of exceptional items is reported within cash flows from operating activities in the consolidated cash
flow statement.

6. FINANCE INCOME

Bank interest receivable

7. FINANCE COSTS

Net defined benefit pension plan interest
Unwind of discount on provisions

8. EMPLOYEES
The average number of people employed by the Group during the year was:

Manufacturing
Product development
Selling and marketing
Administration

Employee benefit costs were:

Remuneration
Social security costs
Pension and other related costs
Expense of share-based payment

2018
$ million

1.4

2017
$ million

0.6

Notes

9
27

2018
$ million

2017
$ million

–
0.1
0.1

0.2
0.1
0.3

2018
Number

2017
Number

329
478
456
194
1,457

330
531
447
197
1,505

Note

2018
$ million

2017
$ million

183.3
15.6
7.2
2.8
208.9

184.4
14.3
6.5
2.2
207.4

Please refer to the Report on Directors’ Remuneration on pages 74 to 95 and note 36 for disclosures relating to the emoluments,
share incentives and pensions of the directors.

129

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FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

9. PENSIONS
DEFINED BENEFIT PLANS
i) Characteristics and risks associated with the Plans
The Group sponsors two funded defined benefit pension plans in the United Kingdom: the Spirent Communications plc Staff
Pension & Life Assurance Plan (“Staff Plan”) and the Spirent Communications plc Retirement Cash & Life Assurance Plan (“Cash Plan”).
These plans are funded and have full UK HM Revenue & Customs (“HMRC”) tax-exempt approval. Both schemes are administered by
a trustee board which is comprised of representatives from the employer, member nominated trustees and an independent trustee.
The trustee board operates in accordance with the Trust Deed and Rules of each Plan and acts in the interests of all of its members.

• The Staff Plan is the Group’s most significant plan, and it provides its members with retirement benefits based on their final salary

and length of service. The Staff Plan is closed to new entrants.

• The Cash Plan is primarily a defined contribution arrangement, although there are some legacy defined benefits (“Old Section”)

that have been valued for the purpose of these accounts in accordance with IAS 19 ‘Employee Benefits’. Members who left service
before 1992 are entitled to a cash lump sum on retirement that is based on their salary and length of service. Members of the Old
Section are entitled to defined contribution benefits, but with an underpin based on salary and length of service. The Cash Plan is
closed to new entrants.

There is also a UK unfunded plan, which consists of a contractual obligation for the Group to top up certain former employees’ benefits
whose salaries exceeded the statutory earnings cap.

As with the vast majority of similar arrangements in the United Kingdom, the Group ultimately underwrites the risks relating to the defined
benefit plans. These risks include investment risks and demographic risks, such as the chance of members living longer than expected.

The plans hold a significant proportion of their assets in equity. Strong future equity returns would be expected to reduce the Group’s
future cash contributions (and vice versa).

Expected contributions to the defined benefit plans in 2019 are $6.4 million. This includes the contributions agreed with the funded
plans’ trustees in accordance with UK legislation. The triennial valuation as at 1 April 2015 was in deficit, whereas the IAS 19 accounting
valuation is in surplus, therefore the Group has agreed to pay $6.4 million (£5.0 million) per annum into the Staff Plan from 1 July 2016,
over a seven-year period, in order to clear the funding deficit as assessed by the trustees’ independent actuary.

If the contributions currently agreed are insufficient to pay the benefits due, the Group will need to make further contributions.

GMP equalisation
On 26 October 2018, the High Court ruled on the Lloyds Bank GMP Inequalities case. In response to this, an allowance of $4.0 million
(£3.1 million) has been included on the balance sheet at 31 December 2018 to make provision for the estimated costs arising from the
judgement. This past service cost has been charged to exceptional items in the income statement in the year and relates to the Staff
Plan. There is no impact on the Cash Plan.

The Staff Plan was contracted-out between 17 May 1990 and 5 April 1997, and therefore has accrued GMP benefits for all members who
were active during that period. From the data available as at 31 March 2018, which was provided for the formal valuation of the Staff
Plan as at that date, we have estimated the amount of the GMP liability in the Plan applicable for each member for this period of service.

In estimating the impact of equalising these benefits, we have considered the possible range of results that could arise from the various
different possible methods given the circumstances of the Plan. In particular, we note that:

• no decision has been made on the methodology to be adopted to equalise GMPs, but we would expect the cost to be broadly in line

with “method D2” (or “method C2”, which is similar) considered by the Lloyds Bank judgement;
legal opinion is not yet available on how historical claims will be dealt with; at this stage we have included allowance for full back-
payments on pensions in payment, but no allowance for payments in respect of past transfers and deaths; and
financial assumptions, demographic assumptions, and benefits are consistent with those disclosed below.

•

Based on these considerations, we have included an allowance of 15 per cent of the estimated GMP liability affected by the
equalisation process.

130

Spirent Communications plc Annual Report 20189. PENSIONS CONTINUED
We have therefore adopted the process below to calculate the allowance:

1. Calculate proportion of Plan’s obligations relating to Post-1988 GMP
The proportion of the Plan’s liabilities on an accounting basis that relate to Post-1988 GMP is estimated as 14 per cent, based on the
valuation data as at 31 March 2018. Overall, this implies that approximately 14 per cent of the Plan’s total IAS 19 obligations relate to
Post-1988 GMPs.

2. Estimate the proportion of GMPs relating to benefits that need to be equalised (post-1990 GMPs)
The requirement to equalise relates only to benefits accrued after 17 May 1990. We estimate the obligation for GMPs accrued after this
date on a pro rata basis as seven-ninths of the Post-1988 GMP obligation.

3. We have estimated the cost of removing GMP inequalities in the Plan is 15 per cent of post-1990 GMP obligation, giving a figure of
$4.0 million (£3.1 million)
This estimate of 15 per cent is informed by the actuary’s experience of working with schemes that have already undertaken a process
to remove GMP inequalities. We have not considered the specific circumstances of the scheme in detail, on the grounds that this would
be disproportionate.

The Group also operates an unfunded deferred compensation plan for employees in the United States. The plan enables participating
employees to defer a portion of their salary and invest it in deemed investments, that are used to measure the gains or losses that are
attributed to the deferral account over time. The plan has elements of a defined benefit pension retirement obligation and therefore is
required to be valued in accordance with IAS 19.

ii) Amounts in the financial statements
The assets and liabilities on the balance sheet are as follows:

Schemes in net asset position
UK defined benefit pension plan – Staff Plan
UK defined benefit pension plan – Cash Plan

Schemes in net liability position
UK defined benefit pension plan – Staff Plan
UK unfunded plan
US deferred compensation plan

Net pension plan deficit on the balance sheet

2018
$ million

2017
$ million

1.4
1.1
2.5

–
(0.6)
(3.5)
(4.1)
(1.6)

–
1.2
1.2

(3.4)
(0.6)
(3.7)
(7.7)
(6.5)

131

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

9. PENSIONS CONTINUED
a) The assets and liabilities in each plan

Staff Plan
Quoted

Equities
Government bonds
Corporate bonds

Unquoted
LDI funds
Cash benchmarked bonds
Hedge funds
Insured annuities
Property
Cash and other

Fair value of plan assets
Present value of defined benefit pension plan obligations

Surplus/(deficit) in the plan

Cash Plan
Quoted

Equities
Government bonds

Unquoted

Insured annuities
Cash and other

Fair value of plan assets
Present value of defined benefit pension plan obligations

Surplus in the plan
Total net surplus/(deficit) recognised

Unfunded plan
Present value of unfunded obligations

Deferred compensation plan
Present value of deferred compensation obligations

Net pension plan deficit on the balance sheet

2018
$ million

2017
$ million

53.4
5.2
4.1

40.4
95.5
23.8
2.7
1.4
17.9
244.4
(243.0)
1.4

4.2
3.4

0.1
2.1
9.8
(8.7)
1.1
2.5

(0.6)

(3.5)
(1.6)

65.7
5.8
5.3

50.0
102.0
26.7
3.4
1.5
10.9
271.3
(274.7)
(3.4)

4.6
4.3

0.1
2.3
11.3
(10.1)
1.2
(2.2)

(0.6)

(3.7)
(6.5)

Approximately two-thirds of the Staff Plan’s assets are held in a combination of LDI funds, cash benchmarked bonds and hedge funds.
The objective of this allocation is to hedge against the plan’s liabilities, provide protection against inflation risk and to provide a level of
investment returns in all market scenarios.

These funds have a wide investment remit and as such the investments of the funds may or may not be listed on recognised exchanges
and markets and will be without restriction as to geographical, industrial or sectoral exposure. These funds may take both long and
short positions and may utilise a broad range of derivatives. The funds’ investments may include sub-investment grade securities,
corporate debt securities, gilts, sale and repurchase agreements, loans, and emerging markets debt and currencies.

The plans are prohibited from investing in Spirent’s own financial instruments.

The fair values of the quoted equity and debt instruments are determined based on quoted market prices in active markets whereas the
fair values of the other assets are not. Unquoted investments are included at values provided by the fund managers and are generally
valued using recent market data and external sources, with a hierarchy that follows the principles of IFRS 13 ‘Fair Value Measurement’.

The Group has determined that it has an unconditional right to refund of surplus assets if the schemes are run off until the last member
dies, on which basis IFRIC 14 does not cause any change in the balance sheet disclosures before tax.

For the purposes of the following disclosures the Staff Plan and Cash Plan have been combined as the Cash Plan is immaterial to these
financial statements.

132

Spirent Communications plc Annual Report 2018
9. PENSIONS CONTINUED
b) Analysis of the amounts charged to the income statement

Plan administration expenses
Current service cost

Amount charged to operating costs
Past service cost charged to exceptional items (GMP equalisation)
Net interest on the net defined benefit pension liability

Net charge to the income statement

c) Analysis of amount recognised directly in the statement of comprehensive income

Re-measurement (loss)/gain on plans’ assets
Actuarial gain/(loss) arising from experience
Actuarial gain arising from the demographic assumptions
Actuarial gain/(loss) arising from changes in financial assumptions

Re-measurement of the net defined benefit pension liability

d) Movements in the present value of funded defined benefit obligations

At 1 January
Current service cost
Past service cost
Interest cost
Benefit payments
Actuarial (gain)/loss arising from experience
Actuarial gain arising from the demographic assumptions
Actuarial (gain)/loss arising from changes in financial assumptions
Exchange adjustment

Present value of funded defined benefit pension plans’ obligations

e) Movements in the fair value of plans’ assets

At 1 January
Interest income on plans’ assets
Employer contributions
Benefit payments
Plan administration expenses
Re-measurement (loss)/gain on plans’ assets
Exchange adjustment

Fair value of plans’ assets

2018
$ million

2017
$ million

0.5
0.1
0.6
4.0
–
4.6

0.4
0.1
0.5
–
0.2
0.7

2018
$ million

2017
$ million

(14.2)
3.1
1.9
12.0
2.8

10.5
(0.8)
5.5
(9.7)
5.5

2018
$ million

2017
$ million

284.8
0.1
4.0
7.0
(12.1)
(3.1)
(1.9)
(12.0)
(15.1)
251.7

260.9
0.1
–
7.3
(11.7)
0.8
(5.5)
9.7
23.2
284.8

2018
$ million

2017
$ million

282.6
7.0
6.8
(12.1)
(0.5)
(14.2)
(15.4)
254.2

248.1
7.1
6.6
(11.7)
(0.4)
10.5
22.4
282.6

133

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION

FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

9. PENSIONS CONTINUED
f) The key financial assumptions
The assumptions used for both plans using a weighted average were as follows:

Inflation – RPI
Inflation – CPI
Rate of increase in pensionable salaries
Rate of increase for pensions in payment pre 2001 service
Rate of increase for pensions in payment 2001 to 5 April 2005 service
Rate of increase for pensions post 5 April 2005 service
Rate of increase in deferred pensions
Rate used to discount plan liabilities

2018
%

3.2
2.1
2.1
3.7
3.1
2.1
2.1
2.8

2017
%

3.1
2.0
2.0
3.6
3.0
2.1
2.0
2.5

The mortality assumptions are based on standard mortality tables which allow for future mortality improvements. The assumptions are
such that a member currently aged 65 (2017 aged 65) will live on average for a further 22.5 years (2017 22.7 years) if they are male and
for a further 24.5 years (2017 24.6 years) if they are female. For a member who retires in 2038 (2017 in 2037) at age 65 (2017 age 65),
the assumptions are that they will live on average for a further 23.9 years (2017 24.1 years) after retirement if they are male and for a
further 26.0 years (2017 26.1 years) after retirement if they are female.

iii) Amount, timing and uncertainty of future cash flows
The approximate impact to the past service liabilities of changing these main assumptions is as follows:

• Reducing the discount rate by 0.1 per cent per annum would increase past service liabilities by $3.4 million (2017 $4.2 million).
•
•

Increasing RPI inflation by 0.1 per cent would increase the plans’ liabilities by $1.3 million (2017 $1.5 million).
Increasing the life expectancy of a member by one year (by modifying the standard mortality tables using an appropriate scaling
factor) would increase past service liabilities by $11.5 million (2017 $13.9 million).

There will also be an impact on the future service cost but given the small active population in these plans this is likely to be insignificant.
The sensitivity analysis may not be representative of the actual change as the changes in assumptions may not occur in isolation.

The liability has the following duration and maturity:

Weighted average duration of the defined benefit obligation (years)

Maturity analysis of benefit payments (non-discounted amounts) $ million
Maturity ≤ 1 year
Maturity > 1 ≤ 5 years
Maturity > 5 ≤ 10 years
Maturity > 10 ≤ 20 years
Maturity > 20 ≤ 30 years
Maturity > 30 years

2018

10.4
43.2
119.0
103.0
68.0
42.9

2017

10.4
43.5
124.9
113.3
78.8
52.4

DEFERRED COMPENSATION PLAN
At 31 December 2018, the deferred compensation plan deficit amounted to $3.5 million (2017 $3.7 million).

During the year, $0.2 million was charged to the income statement (2017 $0.3 million) and a re-measurement gain of $0.5 million (2017
$0.9 million loss) was recognised directly in the statement of other comprehensive income. The key financial assumptions include a
discount rate used to discount plan liabilities of 4.2 per cent (2017 3.4 per cent) and an expected investment yield of 6.4 per cent (2017
7.5 per cent). There is no material impact in 2018 or 2017 of changing each of the key assumptions by 0.1 per cent, in isolation.

DEFINED CONTRIBUTION PLANS
United Kingdom
The Group contributes towards defined contribution pension plans for employees in the United Kingdom. Employer contributions into
these plans for 2018 were $0.9 million (2017 $0.8 million).

United States
The Group maintains a defined contribution pension plan for employees of its United States subsidiaries. This plan, also known as a 401(k)
Plan, allows employees to defer a percentage of their salary for retirement. In aggregate, the Group’s contributions to the US plan totalled
$3.9 million for 2018 (2017 $4.0 million). There were no defined benefit plans in the United States in 2018 or 2017.

134

Spirent Communications plc Annual Report 20189. PENSIONS CONTINUED
Other jurisdictions
Outside the United Kingdom and the United States, employees are provided with pension arrangements determined in accordance
with approved local practice and regulations. These arrangements are defined contribution plans. Total employer contributions for 2018
in respect of these plans amounted to $1.2 million (2017 $1.1 million).

Total employer contributions to defined contribution plans were $6.0 million (2017 $5.9 million).

Directors’ pension arrangements
The pension arrangements of the executive directors are described in detail in the Report on Directors’ Remuneration on pages 74 to 95.

10. TAX

Tax charge in the income statement

Current income tax
UK tax
Foreign tax
Amounts (overprovided)/underprovided in previous years
Total current income tax charge

Deferred tax
Recognition of deferred tax assets – US Research and Experimental tax credit
Recognition of deferred tax assets – other
Write-off of previously recognised tax assets including rate changes
Reversal of temporary differences
Adjustments in respect of prior years
Total deferred tax charge

Tax charge in the income statement

2018
$ million

2017
$ million

0.1
6.2
(1.2)
5.1

–
(0.8)
–
1.4
(0.3)
0.3
5.4

0.1
7.4
0.1
7.6

(1.5)
(0.8)
8.0
3.0
1.3
10.0
17.6

The tax charge for the year ended 31 December 2018 was $5.4 million (2017 $17.6 million). This was after a prior year tax credit of
$1.5 million and a tax credit on the adjusting items of $5.2 million (2017 prior year charge of $1.4 million and tax charge on adjusting
items of $3.1 million). Excluding the prior year and tax charge on adjusting items, the effective tax rate was 15.4 per cent (2017 22.1
per cent).

Tax relating to items charged/(credited) to other comprehensive income or equity:

Deferred tax on share incentives
Current tax on share incentives
Tax credit on share incentives
Deferred tax charge on defined benefit pension plan
Deferred tax charge/(credit) on deferred compensation plan

2018
$ million

2017
$ million

(0.3)
(0.1)
(0.4)
0.6
0.1

(0.3)
–
(0.3)
1.0
(0.2)

135

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION
FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

10. TAX CONTINUED
RECONCILIATION OF THE TOTAL TAX CHARGE
The tax charge in the income statement for the year is lower than the standard rate of corporation tax in the UK of 19.00 per cent (2017
19.25 per cent). The differences are reconciled below:

Accounting profit before tax
Accounting profit multiplied by the UK standard rate
of corporation tax of 19.00 per cent
Differences in overseas rates
Non-taxable income
Recognition of temporary differences previously not recgonised for deferred tax
Current year losses upon which no deferred tax recognised
Utilisation of temporary differences not previously recognised
UK & US Research and Experimental tax credit
Withholding tax
Permanent differences
Tax overprovided in prior years

Total tax charge reported in the income statement

Accounting profit before tax
Accounting profit multiplied by the UK standard rate
of corporation tax 19.25 per cent
Differences in overseas rates
US tax rate change
Non-taxable income
Recognition of deferred tax assets
Write-off of previously recognised tax assets including rate changes
Current year losses upon which no deferred tax recognised
UK & US Research and Experimental tax credit
Withholding tax
Permanent differences
Tax underprovided in prior years

Total tax charge reported in the income statement

Year ended 31 December 2018

Adjusted
$ million

Adjusting
$ million

Reported
$ million

78.4

(17.2)

61.2

14.9
3.3
(0.8)
(0.8)
0.4
(1.3)
(2.0)
0.8
(2.4)
–
12.1

(3.3)
(1.5)
(0.4)
–
–
–
–
–
–
(1.5)
(6.7)

11.6
1.8
(1.2)
(0.8)
0.4
(1.3)
(2.0)
0.8
(2.4)
(1.5)
5.4

Year ended 31 December 2017

Adjusted
$ million

Adjusting
$ million

Reported
$ million

59.2

(12.6)

46.6

11.4
5.5
–
(1.0)
(0.3)
0.2
(0.6)
(2.5)
0.8
(0.4)
–
13.1

(2.4)
(1.6)
7.9
(0.3)
(0.5)
–
–
–
–
–
1.4
4.5

9.0
3.9
7.9
(1.3)
(0.8)
0.2
(0.6)
(2.5)
0.8
(0.4)
1.4
17.6

Included in the above reconciliation are the following items: Research and Experimental tax credits of $2.0 million; non-taxable income
of $1.2 million, most of which relates to offshore income in the rest of the world; permanent differences of $2.4 million largely relating
to the UK patent box deduction; and a recognition of deferred tax assets in Canada of $0.8 million.

The Group’s tax rate is sensitive to the geographic mix of profits and reflects a combination of higher statutory tax rates in certain
jurisdictions, and other regions with significantly lower statutory tax rates. Regional statutory tax rates range from a high of 33.3 per cent
to a low of 15 per cent. The UK Patent Box deduction benefit of $1.6 million (2017 $0.7 million) and Research and Experimental credits
of $2.0 million (2017 $2.5 million) bring down the rate but items such as state taxes and withholding tax increase our tax rate.

136

Spirent Communications plc Annual Report 201811. 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.

Profit for the year attributable to owners of the parent Company

Weighted average number of Ordinary Shares in issue – basic
Dilutive potential of employee share incentives
Weighted average number of Ordinary Shares in issue – diluted

Earnings per share
Basic
Diluted

2018
$ million

55.8

2017
$ million

29.0

Number
million

610.4
6.5
616.9

610.6
5.5
616.1

Cents

9.14
9.05

4.75
4.71

ADJUSTED
The Group is disclosing adjusted earnings per share for continuing operations 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
• Acquired intangible asset amortisation
• Share-based payment
• Gain on divestment
• Tax effect on the above items
• Prior year tax (adjustments made to provisions in respect of prior years)
• Revaluation of deferred tax assets due to US tax reform (in 2017)

137

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

11. EARNINGS PER SHARE CONTINUED
A reconciliation is provided below:

Profit for the year attributable
to owners of the parent Company
Exceptional items
Acquired intangible asset amortisation
Share-based payment
Gain on divestment
Tax effect on the above items
Revaluation of deferred tax assets due to US tax reform
Prior year tax (credit)/charge

Adjusted basic
Adjusted diluted

Notes

$ million

EPS (cents)

$ million

EPS (cents)

2018

2017

33
35
10
10
10

55.8
13.1
3.7
2.8
(2.4)
(5.2)
–
(1.5)
66.3

9.14

10.86
10.75

29.0
6.7
6.3
2.2
(2.6)
(4.8)
7.9
1.4
46.1

4.75

7.55
7.48

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.

12. DIVIDENDS PAID AND PROPOSED

Declared and paid in the year
Equity dividend on Ordinary Shares
Final dividend 2017 of 2.40 cents (1.73 pence) per Ordinary Share (2016 2.21 cents (1.59 pence))
Special dividend 2017 of 5.00 cents (3.60 pence) per Ordinary Share
Interim dividend 2018 of 1.76 cents (1.34 pence) per Ordinary Share (2017 1.68 cents (1.27 pence))

Proposed for approval at AGM (not recognised as a liability at 31 December)
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))
Special dividend 2017 of 5.00 cents (3.60 pence) per Ordinary Share

2018
$ million

2017
$ million

14.3
29.9
10.6
54.8

16.7
–
16.7

14.2
–
10.4
24.6

14.3
29.9
44.2

The directors are proposing a final dividend in respect of the financial year ended 31 December 2018 of 2.73 cents per Ordinary
Share (2.08 pence) (2017 2.40 cents (1.73 pence)), which will absorb an estimated $16.7 million of shareholders’ funds (2017
$14.3 million). The final dividend will be paid on 3 May 2019 to Ordinary shareholders who are on the Register of Members at close of
business on 15 March 2019. Payment will be made to ADR holders on 10 May 2019. No liability is recorded in the financial statements in
respect of these dividends.

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 2018 was $1.31: £1 (2017 $1.39: £1).

138

Spirent Communications plc Annual Report 2018
13. INTANGIBLE ASSETS

Cost, net of accumulated
amortisation and impairment losses
At 1 January 2017
Additions
Adjustments
Amortisation for the year
Exchange adjustment

At 1 January 2018
Additions
Disposals
Amortisation for the year
Exchange adjustment

At 31 December 2018

At 31 December 2017
Cost (gross carrying amount)

Amortisation and accumulated
impairment losses

Net carrying amount

At 31 December 2018
Cost (gross carrying amount)
Amortisation and accumulated
impairment losses

Net carrying amount

Goodwill

Customer
list

Current
technology

Brand
names

Other

Licences

Total

$ million

155.7
–
–
–
1.1

156.8
–
–
–
(1.1)
155.7

4.0
–
(0.1)
(1.8)
–

2.1
–
–
(1.5)
–
0.6

7.4
–
(0.3)
(4.2)
–

2.9
–
–
(2.0)
–
0.9

595.4

16.9

36.2

(438.6)
156.8

(14.8)
2.1

(33.3)
2.9

593.4

16.9

36.2

(437.7)
155.7

(16.3)
0.6

(35.3)
0.9

0.5
–
–
(0.3)
–

0.2
–
–
(0.2)
–
–

2.3

(2.1)
0.2

2.3

(2.3)
–

–
–
–
–
–

–
–
–
–
–
–

2.2
0.4
–
(0.8)
(0.2)

1.6
–
(0.2)
(0.6)
–
0.8

169.8
0.4
(0.4)
(7.1)
0.9

163.6
–
(0.2)
(4.3)
(1.1)
158.0

3.6

12.1

666.5

(3.6)
–

(10.5)
1.6

(502.9)
163.6

3.6

11.9

664.3

(3.6)
–

(11.1)
0.8

(506.3)
158.0

Goodwill is allocated at acquisition to the cash generating units (CGUs) that are expected to benefit from that business combination.

The Group identifies CGUs at the lowest level at which cash flows are largely independent of other cash flows.

Goodwill has been allocated to three CGUs, which align with the reportable operating segments, as follows:

Networks & Security
Lifecycle Service Assurance
Connected Devices

2018
$ million

2017
$ million

72.0
37.6
46.1
155.7

73.1
37.6
46.1
156.8

139

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION
FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

13. INTANGIBLE ASSETS CONTINUED
ANNUAL IMPAIRMENT TEST
The Group has an annual impairment testing date of 30 November. The key assumptions used in the value in use calculations were:

• revenue growth rates;
• gross margin;
• operating expenses;
• discount rate; and
• growth rate used to extrapolate cash flows beyond the five-year period covered by management’s projections.

The cash flows are derived from the most recent financial budgets for the next financial year, as approved by management, and the
Group’s three-year strategic plan. Cash flows in years four and five are extrapolated based on long range plans. Cash flows in subsequent
years have been extrapolated using a steady 2.5 per cent for all CGUs (2017 2.5 per cent for all CGUs), which management estimates to
be the approximate average long-term growth rate for the industries in which these units operate. Fundamentally this long-term growth is
based on a proxy for global long-term inflation taking into consideration more developed and developing markets. The growth rates used
in the value in use calculations are set at the same level for each CGU as all the CGUs operate within similar markets which share the same
growth drivers and characteristics. The discount rates incorporate the specific risks relating to each CGU.

The discount rate applied to the cash flows is based on the weighted average cost of capital of comparable companies by taking the
risk free rate for 30-year government bonds and making an adjustment to reflect the increased risk of investing in equities. In making
this adjustment, the inputs required are the equity market risk premium, beta, and the risk adjustment applied to reflect the systematic
risk of Spirent and the specific CGUs, taking into account factors such as size and the territories in which each CGU operates.

The cash flows have been discounted using the following pre-tax discount rates:

Networks & Security
Lifecycle Service Assurance
Connected Devices

2018
%

15.1
14.3
14.8

2017
%

15.6
16.7
14.9

For Spirent the key factor in relation to the cash flow forecasts is the ability to forecast revenue. All CGUs operate in the data technology
market and generate a high gross profit (gross margin); consequently changes in revenue can have a significant impact on the operating
profit and cash flows. Revenue growth rates used in the projections are based on management’s estimate of growth in the markets served
and take into account historical levels of growth, expected future developments in products and technology, industry forecasts and macro-
economic conditions in the territories in which the CGUs operate. Gross margin and operating expenses are based on historical values
adjusted for the effect of revenue growth and cost reduction actions committed prior to the impairment testing date.

At Networks & Security, Cloud and IP is expected to maintain its leadership position in high-speed Ethernet , and this together with
optimised 400G volumes and growth in network virtualisation, is expected to drive earnings. Further growth in Networks & Security
is expected in the Positioning business, with focus on core markets in APAC and on the emerging autonomous vehicle market.
Management expects that the security business will benefit in the longer term from the launch of data breach emulation, and also the
move to a subscription model and further expansion of SecurityLabs into EMEA and APAC. Application Security is expected to benefit
from synergies with Positioning and continued expansion in complementary solutions with Cloud and IP.

The continuing drive in lab sales and enhancements to the feature set at the Mobility Infrastructure business unit is expected to
grow revenue in Lifecycle Service Assurance on a relatively flat cost base in the near term. Management expects revenue increases
at the Customer Experience Management business unit driven by the VisionWorks sales strategy and a relatively flat gross margin
over the three-year forecast period. The Lumos legacy business in Lifecycle Service Assurance is expected to drop in the near term
to be replaced by growth in new Ethernet products supported by investment in product development, particularly in virtualisation.
The individual business units in Lifecycle Service Assurance are expected to work together to deliver the three-year plan to meet
changes in customer needs and the competitive landscape.

Revenue is expected to grow at Connected Devices as the smartphone market recovers, driven by network emulator partnerships
with growth in 5G. Management expects gross margin improvement as a result of product mix shifting to more software solutions and
cost reduction initiatives, including a new channel emulator platform and a new network emulator platform. Operating expenses are
expected to remain relatively flat as business unit integration synergies are leveraged following recent organisational change and
research and development flexibility is gained from outsourcing programmes and shifting investment to new growth areas.

The recoverable amount of each CGU was calculated on a value in use basis and was in excess of its carrying value. Consequently, no
impairment has been recognised.

140

Spirent Communications plc Annual Report 201813. INTANGIBLE ASSETS CONTINUED
SENSITIVITY TO CHANGES IN KEY ASSUMPTIONS
The directors believe that no reasonable possible change in any of the key assumptions used, in isolation, would cause the value in use
of the Networks & Security and Lifecycle Service Assurance CGUs to fall below the carrying value.

The headroom on the Connected Devices CGU was $38.9 million. Sensitivity analysis around the key assumptions has indicated that
for the Connected Devices CGU, a 30 per cent decrease in forecast revenue in year one and continuing to apply the forecast growth
rates to subsequent years, in isolation and without cost mitigation, would cause the value in use to fall below the carrying value. There is
no reasonable possible change in the discount rate and long-term growth rate, in isolation, that would cause the value in use of the
Connected Devices CGU to fall below the carrying value.

OTHER INTANGIBLE ASSETS
There was no impairment charge in respect of the other intangible assets in either 2018 or 2017.

14. PROPERTY, PLANT AND EQUIPMENT

Cost, net of accumulated depreciation and accumulated impairment
At 1 January 2017
Additions – owned assets
Disposals
Inter-class transfers
Depreciation charge for the year
Exchange adjustment

At 1 January 2018
Additions – owned assets
Disposals
Depreciation charge for the year
Exchange adjustment

At 31 December 2018

At 31 December 2017
Cost
Accumulated depreciation and accumulated impairment

Net carrying amount

At 31 December 2018
Cost
Accumulated depreciation and accumulated impairment

Net carrying amount

Land and
buildings

Plant and
machinery

Fixtures,
fittings and
equipment

15.3
1.7
(0.2)
–
(2.6)
0.1

14.3
0.8
–
(2.9)
(0.1)

12.1

26.4
(12.1)
14.3

26.1
(14.0)
12.1

19.9
10.1
(1.9)
(0.5)
(10.7)
0.2

17.1
9.7
(1.4)
(9.2)
(0.2)

16.0

82.1
(65.0)
17.1

80.7
(64.7)
16.0

12.1
3.1
(0.2)
0.5
(4.7)
0.1

10.9
1.5
–
(4.4)
–

8.0

57.3
(46.4)
10.9

57.3
(49.3)
8.0

$ million

Total

47.3
14.9
(2.3)
–
(18.0)
0.4

42.3
12.0
(1.4)
(16.5)
(0.3)

36.1

165.8
(123.5)
42.3

164.1
(128.0)
36.1

None of the property, plant and equipment is held under finance lease arrangements.

15. INVESTMENT IN ASSOCIATE
The carrying amount for Jolata is nil in 2018 (2017 nil) and is individually immaterial.

Jolata, Inc. (“Jolata”) is a company incorporated in the United States and its principal activity is the provision of network testing.

Jolata is considered an associate as the Group controls 26 per cent (2017 26 per cent) of the voting power and therefore has significant
influence over the entity.

The investment in Jolata has been impaired in full and the recoverable amount is therefore nil.

The Group has $1.0 million cumulative unrecognised share of losses in Jolata (2017 $1.0 million).

The Group’s share of Jolata’s total comprehensive income is immaterial in 2018 and 2017.

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FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

16. CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES
The Group had capital commitments in relation to property, plant and equipment of $0.7 million at 31 December 2018 (31 December
2017 $0.8 million).

17. SUBSIDIARIES
A list of subsidiaries, including the name, country of incorporation and proportion of ownership interest is given on pages 178 and 179
of these financial statements.

18. INVENTORIES

Raw materials
Work in progress
Finished goods

2018
$ million

2017
$ million

6.6
1.2
17.9
25.7

4.3
0.8
18.5
23.6

An expense of $0.1 million (2017 $2.3 million) has been recognised in the year for inventory write-downs. There were no reversals of
prior period inventory write-downs (2017 nil).

No inventories are carried at fair value less costs to sell (2017 nil).

19. TRADE AND OTHER RECEIVABLES

Non-current
Other receivables
Prepayments

Current
Trade receivables
Other receivables
Prepayments
Deferred costs

2018
$ million

2017
$ million

3.5
1.0
4.5

123.4
3.5
11.2
1.8
139.9
144.4

4.1
–
4.1

113.8
4.8
9.2
2.3
130.1
134.2

The trade receivables are stated net of an allowance for expected credit losses. The movement in the allowance was as follows:

At 1 January
Charge for the year
Released in the year

At 31 December

2018
$ million

2017
$ million

1.2
0.5
(0.8)
0.9

2.3
0.3
(1.4)
1.2

The directors consider that the carrying amount of trade and other receivables approximates their fair value.

The Group has no significant concentration of credit risk attributable to its trade receivables as the exposure is spread over a large
number of customers.

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19. TRADE AND OTHER RECEIVABLES CONTINUED
OTHER FINANCIAL ASSETS – CURRENT

Other financial assets

Other financial assets comprises forward foreign currency exchange contracts.

20. ASSETS RECOGNISED FROM COSTS TO OBTAIN A CONTRACT

Non-current
Assets recognised from costs to obtain a contract

Current
Assets recognised from costs to obtain a contract

2018
$ million

–

2017
$ million

0.1

2018
$ million

2017
$ million

0.5

0.5
1.0

0.4

0.6
1.0

These assets relate to capitalised incremental costs to obtain a contract, being sales commissions, arising on contracts with customers of
over one year in length.

During the year, amortisation of $0.6 million was charged to the income statement (2017 $0.6 million).

No assets were impaired or derecognised during the current year or prior year.

21. CASH AND CASH EQUIVALENTS

Cash at bank and in hand
Short-term bank deposits

2018
$ million

2017
$ million

57.7
63.9
121.6

83.3
45.1
128.4

Cash at bank and in hand earns interest at floating interest rates. Of the total cash and cash equivalents balance, $63.9 million
(2017 $45.1 million) is callable at notice of three months or less at the date of investment.

Short-term bank deposits are made for varying periods of between one day and three months depending on the cash requirements of
the Group and earn interest at the short-term deposit rates appropriate for the term of the deposit and currency.

At the end of 2018, the currency split of cash and cash equivalents was US dollar 83 per cent (2017 85 per cent), sterling 8 per cent
(2017 11 per cent) and other currencies 9 per cent (2017 4 per cent).

For the purposes of the cash flow statement, cash and cash equivalents comprise the above amounts.

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FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

22. TRADE AND OTHER PAYABLES – CURRENT

Trade payables
Payments received on account
Other taxes and social security costs
Other payables
Accruals

2018
$ million

20171
$ million

12.9
1.4
3.7
1.0
44.1
63.1

16.3
3.8
3.5
0.9
45.7
70.2

Note
1. Deferred income has been reclassified to its own line item in the balance sheet. See note 37 for further details.

Trade payables are non-interest bearing and are normally settled on 30 to 60 day terms. Other payables are non-interest bearing.

The directors consider that the carrying amount of trade payables approximates their fair value.

23. GOVERNMENT GRANTS
The following government grants are included within trade and other payables:

At 1 January
Received during the year
Released to the income statement

At 31 December

Current
Non-current

2018
$ million

2017
$ million

2.6
0.1
(0.4)
2.3

2.4
0.5
(0.3)
2.6

2018
$ million

2017
$ million

1.3
1.0
2.3

1.2
1.4
2.6

Government grants have been received to accelerate and support research and development in the vulnerability of Global Navigation
Satellite Systems and other high technology projects.

24. DEFERRED INCOME

Current
Deferred income

Non-current
Deferred income

The Group’s deferred income balances relate solely to revenue from contracts with customers.

2018
$ million

2017
$ million

55.2

14.4

69.6

61.7

11.0

72.7

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Spirent Communications plc Annual Report 2018
25. DEFERRED TAX
The movements in the deferred tax assets/(liabilities) are as follows:

At 1 January 2017, restated1
Credited in the year
Deferred tax on defined benefit pension plan
Deferred tax on deferred compensation plan
Deferred tax on share incentives recognised in
equity
Exchange adjustment

At 1 January 2018, restated1
Charged/(credited) in the year
Deferred tax on defined benefit pension plan
Deferred tax on deferred compensation plan
Deferred tax on share incentives recognised in
equity
Transfers
Exchange adjustment

At 31 December 2018

Amounts on the balance sheet:

At 31 December 2017
Deferred tax asset
Deferred tax liability, restated1

At 31 December 2018
Deferred tax asset
Deferred tax liability

Notes

Temporary
differences

Tax losses

Tax credits

UK pension
plans

10
10
10

18.1
(5.3)
–
0.2

0.3
0.1

13.4
2.3
–
(0.1)

0.3
–
(0.2)
15.7

13.7
(0.3)
13.4

15.9
(0.2)
15.7

8.2
(1.3)
–
–

–
0.5

7.4
(1.5)
–
–

–
(1.0)
(0.1)
4.8

7.4
–
7.4

4.8
–
4.8

3.9
(2.3)
–
–

–
–

1.6
(0.7)
–
–

–
1.0
–
1.9

1.6
–
1.6

1.9
–
1.9

2.6
(1.1)
(1.0)
–

–
–

0.5
(0.4)
(0.6)
–

–
–
0.1
(0.4)

0.5
–
0.5

–
(0.4)
(0.4)

$ million

Total

32.8
(10.0)
(1.0)
0.2

0.3
0.6

22.9
(0.3)
(0.6)
(0.1)

0.3
–
(0.2)
22.0

23.2
(0.3)
22.9

22.6
(0.6)
22.0

Note
1. Restated for the adoption of IRFS 15 on 1 January 2018, as per note 37.

In 2018, the deferred tax asset and liability have been offset on the balance sheet as they relate to income taxes raised by the same
authority on the same taxable entity.

A deferred tax asset of $22.0 million has been recognised at 31 December 2018 (2017 $23.2 million). $2.0 million is in the United
Kingdom (2017 $3.5 million), $14.7 million is in the United States (2017 $18.8 million), $3.6 million is in France (2017 $0.1 million)
and $1.7 million is in the rest of the world (2017 $0.8 million).

The deferred tax asset includes $1.6 million (2017 $1.1 million) in respect of the tax deduction which may be available on the future
exercise of share incentives.

The Group has tax losses arising in the United Kingdom of $38.3 million (2017 $40.0 million), at the State level in the United States
of $5.5 million (2017 $22.4 million), and the rest of the world of $0.0 million (2017 $0.4 million) that are available for offset against
suitable future taxable profits. The US tax losses can be carried forward until 2036 . Additionally, there are short-term timing differences
in the rest of the world of $4.9 million (2017 $3.5 million), tax credits at the State level in the United States and the rest of the world of
$7.2 million and $1.2 million, respectively (2017 $7.1 million and $2.2 million). A deferred tax asset has not been recognised in respect
of these items as their future recovery is uncertain.

The Group has capital losses carried forward of $1,045.6 million (2017 $1,103.2 million) for which no deferred tax asset has been
recognised on the balance sheet. This change is due to foreign exchange movements. These capital losses have no expiry date.

The temporary difference associated with investments in the Group’s subsidiaries for which a deferred tax liability has not been
recognised in the periods presented, aggregate $255.8 million (2017 $258.4 million). The Group does not expect a significant amount
of the undistributed profits to be distributed in the foreseeable future.

145

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

25. DEFERRED TAX CONTINUED
CHANGES IN TAX RATES
Following the enactment of the United Kingdom Finance Act 2016, which reduced the United Kingdom rate of corporation tax to 19 per
cent from 1 April 2017 and by a further 2 per cent to 17 per cent from April 2020, no further United Kingdom corporation tax reductions
have been announced. As such, the United Kingdom temporary differences have been recognised at the rate at which the temporary
differences are expected to unwind. In line with these rate changes, deferred tax assets and liabilities being realised or settled before
2020 have been based on a rate of 19 per cent. Those being realised or settled after 2020 have been based on a rate of 17 per cent.

26. TRADE AND OTHER PAYABLES – NON-CURRENT

Other payables

27. PROVISIONS

At 1 January 2017
Charged in the year
Asset retirement obligation
Released in the year
Utilised in the year
Unwind of discount
Disposals
Exchange difference

At 1 January 2018
Charged in the year
Asset retirement obligation
Released in the year
Utilised in the year
Unwind of discount
Exchange difference

At 31 December 2018

Current
Non-current

2018
$ million

5.4

2017
$ million

5.4

Lease
provisions

Restructuring
provisions

Other
provisions

3.1
0.8
0.1
(0.1)
(0.3)
0.1
(0.2)
–

3.5
–
0.5
–
(0.5)
0.1
–
3.6

2.3
3.7
–
–
(4.6)
–
(0.1)
0.1

1.4
0.5
–
(0.1)
(1.8)
–
–
–

1.4
0.5
–
(0.1)
–
–
–
0.1

1.9
9.4
–
(0.9)
(0.1)
–
0.1
10.4

$ million

Total

6.8
5.0
0.1
(0.2)
(4.9)
0.1
(0.3)
0.2

6.8
9.9
0.5
(1.0)
(2.4)
0.1
0.1
14.0

2018
$ million

2017
$ million

10.7
3.3
14.0

3.6
3.2
6.8

The lease provisions are for the continuing obligations under leases in respect of space which has been vacated by the Group and
property dilapidation and restoration provisions. Where material, lease obligations are discounted. The Group expects these provisions
to be utilised over one to six 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.

The Group has 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 is
an ongoing dispute which commenced with enquiries in 2011. Spirent adopted a duty tariff based on World Customs Organisation
guidelines which conflicted with European Union regulation. A contingent liability relating to French Customs was disclosed in the
prior year.

The import regulations changed on 1 January 2017 and no liability exists after that date. Spirent has provided for the liability up until
the date of the change, which encompasses the period covered by the Notice of Recovery. The amount of the provision includes
uncertainties with regard not only to the legitimacy of the basis of the claim made by the French authorities, but also in relation to the
period in question, the appropriate tariff classification, the recoverability of import VAT, and the population and valuation of goods
potentially subject to duty. The Group strongly refutes the basis of claim received under the Notice of Recovery.

146

Spirent Communications plc Annual Report 2018

28. CONTRACT BALANCES
The following table provides information about receivables and contract liabilities from contracts with customers. The Group does not
have any contract assets.

Trade receivables

Contract liabilities

Payments received on account
Deferred income

Revenue recognised in the period from amounts included in contract liabilities
at the beginning of the period

Notes

22
24

2018
$ million

123.4

2017
$ million

113.8

2016
$ million

112.2

1.4
69.6
71.0

65.5

3.8
72.7
76.5

62.1

2.7
70.6
73.3

61.6

There was no revenue recognised in 2018, 2017, or 2016 from performance obligations satisfied in previous periods.

The timing of revenue recognition, invoicing and cash collections results in trade receivables, deferred income and advance customer
payments received on account on the balance sheet.

The Group receives payments from customers based on a billing schedule, as established in the contract. Trade receivables are
recognised when the right to consideration becomes unconditional. Contract liabilities are recognised as revenue as (or when) we
perform under the contract.

The Group also recognises incremental costs incurred to obtain a contract as an asset if it expects to recover those costs. Such costs are
presented in the balance sheet as assets recognised from costs to obtain a contract and disclosed in note 20.

EXPECTED REALISATION OF REMAINING PERFORMANCE OBLIGATIONS AT YEAR END
The Group applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining performance
obligations that have original expected durations of one year or less.

For contracts that exceed one year, deferred income that relates to unsatisfied or partially satisfied performance obligations at year end,
are expected to be recognised as revenue in the future as follows:

Within 1 year
Greater than 1 year

2018
$ million

2017
$ million

15.5
12.7
28.2

17.1
11.5
28.6

The above information represents the revenue the Group will recognise when it satisifies the remaining performance obligations in the
contracts. The amounts presented do not include orders for which neither party has performed.

Revenue from the sale of hardware and software generally arises from contracts less than one year in length. Consequently, the above
amounts predominantly relate to the sale of maintenance and support services.

Virtually all of the revenue will be recognised within three years.

The Group provides standard warranties on its products and services. The nature of these warranties is considered to provide customers
with assurance that the related product or service will function as intended in accordance with the agreed specification, and does not
contain or imply any additional service obligation to the customer. Warranty obligations are estimated and recognised as liabilities
based on the probable outflow of resources.

147

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

29. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
The main purpose of the Group’s financial instruments, other than trade receivables, trade payables and provisions, is to fund the
Group’s liquidity requirements.

All of the Group’s financial assets and liabilities are categorised as financial assets/liabilities stated at amortised cost, except for forward
foreign currency exchange contracts, included within current other financial assets, that are designated as financial assets at fair value
through profit or loss and corporate owned life insurance, amounting to $2.4 million (2017 $2.5 million), included within non-current
trade and other receivables, that is designated as financial assets at fair value through profit or loss. These are shown in the below table:

Non-current trade and other receivables
Cash and cash equivalents
Current trade and other receivables
Current other financial assets

Financial assets

Non-current other payables, excluding government grants
Current trade payables, other payables and accruals
Contractual provisions

Financial liabilities

Notes

2018
$ million

2017
$ million

19
21
19
19

26
22
27

3.5
121.6
126.9
–
252.0

4.4
58.0
3.6
66.0

4.1
128.4
118.6
0.1
251.2

4.0
62.9
3.5
70.4

The Group enters into derivative transactions, forward foreign currency exchange contracts, for the management of the Group’s foreign
currency exposures when deemed appropriate.

The key objective of the Group’s treasury department is to manage the financial risks of the business and to ensure that sufficient
liquidity is available to the Group. All treasury activity operates within a formal control framework. The Board has approved treasury
policies and guidelines and periodically reviews treasury activities. Additionally, it is the Group’s policy that speculative treasury
transactions are expressly forbidden.

A) MARKET RISK
The main types of market risk that affect the Group are interest rate risk and exchange rate risk.

Interest rate risk
The Group has no external debt and has limited exposure to interest rate risk. The Group’s excess funds are principally held in the
United Kingdom and the United States and invested in on-demand or short-term bank deposits. It therefore has some exposure to
interest rate risk arising on changes in sterling and US dollar interest rates.

Cash and cash equivalents, long-term cash on deposit and forward foreign currency exchange contracts are the Group’s financial
instruments which are exposed to interest rate risk.

Short-term bank deposits and forward foreign currency exchange contracts mature within three months. The financial instruments bear
the following interest rates:

Fixed rate
Fixed deposits

Floating rate
Cash at bank and in hand

2018

2017

Effective
interest rate
%

$ million

2.52

63.9

1.46

57.7

$ million

45.1

83.3

Interest rates on financial instruments classified as fixed rate are fixed until the maturity of the instrument. All fixed rate deposits mature
within three months after which date they will be exposed to floating rates of interest.

Interest receivable for the year (note 6) was $1.4 million (2017 $0.6 million) and is under the effective interest method.

The other financial instruments of the Group that are not included in the above table are non-interest bearing and are therefore not
subject to interest rate risk.

A movement of 25 basis points in interest rates based on levels of investment at 31 December 2018 would increase or reduce interest
income and equity by $0.2 million (2017 $0.2 million).

148

Spirent Communications plc Annual Report 201829. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT CONTINUED
Exchange rate risk
Currency exposures arise from trading transactions undertaken by the Group in foreign currencies and on the translation of the
operating results and net assets of overseas subsidiaries.

The Group has the majority of its operations in the United States and presents its consolidated financial statements in US dollars.
The Company’s functional currency is sterling and its share capital is denominated in pounds sterling; the Group also has operations
in Europe and Asia and therefore its results and assets and liabilities are affected on translation by movements in exchange rates in
relation to the US dollar. The Group does not enter into instruments to hedge the translation exposure of the operating results or net
assets of its overseas subsidiaries since these are considered accounting and not cash exposures.

The Group undertakes transactions denominated in foreign currencies; consequently exposures to exchange rate fluctuations arise.
Exchange rate exposures are managed within approved policy parameters using forward foreign currency exchange contracts.

The main exposures arise in relation to the retranslation of foreign operations to US dollar, on non-local currency denominated
transactions and on non-local currency denominated cash balances. These exposures predominantly arise on sterling, Euro and Chinese
Yuan transactions and balances. A 10 per cent appreciation or depreciation of these currencies against the US dollar would decrease
or increase profit before tax based on the activity in the period and balances at the reporting date as follows; sterling $3.1 million, Euro
$0.3 million and Chinese Yuan $1.4 million (2017 in aggregate $1.9 million).

B) CREDIT RISK
Investment counterparties are subject to pre-approval by the Board with pre-approved limits set for each bank to avoid any
concentrations of credit risk.

The maximum credit exposure at the balance sheet date under financial instruments in relation to cash and bank deposits is equal to the
carrying value of $121.6 million (2017 $128.4 million).

Trade receivables, which generally have 30 to 90 day terms, are carried at original invoice amount less an allowance for expected credit
losses. Trade receivable exposures are managed in the business units where they arise.

The Group has no significant concentration of credit risk attributable to its trade receivables as the exposure is spread over a large
number of customers with no one customer accounting for more than 10 per cent of total Group revenue. The maximum credit
exposure at the balance sheet date in relation to trade receivables is equal to the carrying value of $123.4 million (2017 $113.8 million).
The credit risk relating to trade receivables has not increased significantly from the prior year.

The composition of trade receivables at 31 December is as follows:

Neither impaired nor past due
Past due but not impaired:

Less than 30 days overdue
30 to 60 days
Over 60 days

Trade receivables

2018
$ million

99.8

2017
$ million

86.0

16.8
3.2
3.6
123.4

15.1
6.7
6.0
113.8

The Group closely monitors amounts due from customers and performs activities such as credit checks and reviews of payment
history and has put in place appropriate credit approval limits. Based on these procedures, management assessed the quality of those
receivables that are past due but not impaired as low risk.

The receivables’ provision is based on expected credit losses. The movement on the provision during the year is given in note 19.
The value of impaired trade receivables is $0.9 million (2017 $1.2 million). For all other financial assets, the maximum exposure to credit
risk is represented by the carrying amount.

149

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

29. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT CONTINUED
C) LIQUIDITY RISK
The Group’s objective is to ensure that there are sufficient sources of funding to meet projected requirements. Its operations are
financed through cash and cash equivalents held centrally and cash generated from operations.

At 31 December 2018, the Group had cash and cash equivalents of $121.6 million (2017 $128.4 million), of which $57.7 million (2017
$83.3 million) is available on demand and $63.9 million matures within three months (2017 $45.1 million matures within three months).

During 2018, the Group generated $60.2 million of cash from operating activities (2017 $69.3 million) and considers that, with current
cash resources, no debt and positive cash flow from its operating activities, it has adequate resources available to it to remain in
operational existence for the foreseeable future.

The Group has entered into forward foreign currency exchange contracts at 31 December, all of which mature within three months.
The gross settlement amounts of these contracts are as follows:

Sale of US dollars against sterling

2018
$ million

13.1

2017
$ million

8.0

The Group is debt free and does not have loans payable. Financial liabilities are trade and other payables, the majority of which are due
to be settled within one year, and contractual provisions (note 27).

The Group does not have any other material financial contractual commitments.

D) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of all financial assets and liabilities is a reasonable approximation of fair value.

Derivative financial instruments are stated at fair value although the amounts at 31 December 2018 and 2017 were immaterial.

Corporate owned life insurance 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.

E) CAPITAL MANAGEMENT
The primary objective of the Group’s capital management is to support its business and maximise shareholder value. The Group’s
capital is its total shareholders’ funds.

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions.

Spirent’s policy on the payment of dividends to shareholders is to maintain a sustainable dividend.

30. OPERATING LEASE COMMITMENTS
At 31 December, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases,
which fall due as follows:

Within one year
In the second to fifth years
Over five years

2018
$ million

2017
$ million

9.6
28.7
2.2
40.5

9.2
30.2
6.9
46.3

The Group leases certain land and buildings under non-cancellable operating lease agreements with a variety of terms. The Group also
leases certain plant and equipment under non-cancellable operating lease agreements.

150

Spirent Communications plc Annual Report 201831. EQUITY
A) ISSUED SHARE CAPITAL
Issued and fully paid Ordinary Shares of 3⅓ pence each:

At 1 January 2017
Exchange adjustment

At 1 January 2018
Exchange adjustment

At 31 December 2018

Number of
Ordinary
Shares
million

611.7

$ million

25.3
2.2

27.5
(1.5)
26.0

B) EQUITY AND RESERVES
The nature and purpose of each reserve within equity is as follows:

• Share premium account: this reserve records the consideration premium for shares issued at a value that exceeds their nominal value;
• Capital redemption reserve: this reserve arises in relation to share capital cancellation;
• Other reserves: share capital, share premium account and capital redemption reserve are translated into US dollars at the rates of

exchange at the balance sheet date and the resultant exchange differences are included in other reserves; and

• Translation reserve: this reserve is used to record exchange differences arising from the translation of the financial statements of

foreign subsidiaries.

Investment in own Ordinary Shares
During the year, 1.5 million shares were purchased and placed into the Employee Share Ownership Trust at a cost of $2.5 million,
and 1.5 million shares were also transferred from the Employee Share Ownership Trust to satisfy options exercised under the Spirent
employee share plans.

At 31 December 2018, the Employee Share Ownership Trust held 0.6 million Ordinary Shares (2017 0.6 million Ordinary Shares) to
satisfy awards under various share incentive plans. At 31 December 2018, the Spirent Sharesave Trust held 0.5 million Ordinary Shares
(2017 0.5 million Ordinary Shares) to satisfy awards made to United Kingdom based employees under an all employee share scheme.
The market value of own Ordinary Shares held in trust, being in total 1.1 million Ordinary Shares (2017 1.1 million Ordinary Shares), at
31 December 2018 was $1.7 million (2017 $1.5 million).

32. EMPLOYEE SHARE PLANS
Movements in share incentives over a two-year period ending on 31 December 2018 are shown below:

2005 Employee
Incentive Plan1

Spirent Long-Term
Incentive Plan2

Number of
share
incentives
million

Weighted
average
exercise
price pence

Number of
share
incentives
million

Weighted
average
exercise
price pence

Incentives outstanding at 31 December 2016
Exercised
Granted
Forfeited

Incentives outstanding at 31 December 2017
Exercised
Granted
Forfeited

Incentives outstanding at 31 December 2018

Incentives exercisable
At 31 December 2017

At 31 December 2018

6.7
–
–
(3.2)

3.5
(1.7)
–
(1.0)
0.8

–

0.8

53
–
–
50

55
45
–
47
89

–

3.9
–
2.9
(0.3)

6.5
(0.4)
2.7
(0.5)
8.3

–

Notes
1. Figures for the 2005 Employee Incentive Plan include share options, stock appreciation rights and Performance Shares in aggregate.
2. Figures for the Spirent Long-term Incentive Plan include restricted stock and Performance Shares in aggregate.

The weighted average share price at exercise date was 118 pence (2017 103 pence).

–
–
–
–

–
–
–
–
–

–

151

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

32. EMPLOYEE SHARE PLANS CONTINUED
The following information relates to outstanding share incentives at 31 December 2018:

Share plan

2005 Employee
Incentive Plan
Spirent Long-Term
Incentive Plan

Exercise period
(as at 31 December)

28.04.17-17.05.25
23.03.18-23.03.25

16.06.19-16.12.28

2018

Weighted
average
exercise
price
pence

Number
of share
incentives
outstanding
million

Weighted
average
remaining
contractual
life years

Weighted
average
exercise
price
pence

Number
of share
incentives
outstanding
million

Exercise
price
pence

–
89

–

–
89

–

–
0.8

8.3
9.1

–
6.2

8.4

–
89

–

1.3
2.2

6.5
10.0

2017

Weighted
average
remaining
contractual
life years

7.3
7.2

9.9

DISCRETIONARY PLANS
Spirent Long-Term Incentive Plan (LTIP)
The LTIP, which was approved by shareholders at the 2016 AGM, is available for selected employees, including executive directors,
on a discretionary basis.

Under the LTIP, the Company is able to grant share options, including HMRC-approved options, share settled stock appreciation
rights (SARs), Performance Shares and Restricted Stock. No price is payable on the grant of an award.

In normal circumstances, LTIP awards vest three years following the date of grant provided the relevant performance conditions have been
met. For Performance Share awards, performance conditions related to Total Shareholder Return (TSR) and the Company’s earnings per share
(EPS). For Restricted Stock, the performance conditions relate to the recipient’s continued employment with the Company.

Further information on the performance conditions for LTIP share incentives is set out in the Report on directors’ remuneration.

2005 Employee Incentive Plan (EIP)
The EIP closed for new awards following the 2016 AGM and was replaced by the Spirent Long-term Incentive Plan.

The EIP, which was approved by shareholders and introduced in 2005, was available for selected employees, including executive
directors, on a discretionary basis.

Under the EIP, the Company was able to grant share options, including HMRC-approved options, share settled stock appreciation rights
(SARs) and Performance Shares. No price was payable on the grant of an award.

In normal circumstances, EIP awards vest three years following the date of grant provided the relevant performance conditions
have been met. For share options and SARs, the performance conditions relate to the Company’s earnings per share (EPS).
For Performance Share awards made prior to 2011, performance conditions related to Total Shareholder Return (TSR). For awards made
since 2011, performance conditions relate to the Company’s EPS and TSR.

Further information on the performance conditions for EIP share incentives is set out in the Report on directors’ remuneration.

Options and SARs granted under the EIP expire on the tenth anniversary of their grant unless they have previously lapsed or been exercised.

ALL EMPLOYEE PLANS
UK Employee Share Purchase Plan (UK ESPP)
The UK ESPP, which is an HMRC-approved share incentive plan, was approved by shareholders in 2005 and 2015 and is available to
all UK employees. The UK ESPP offers four ways to provide Ordinary Shares to employees: free shares, partnership shares, matching
shares and dividend shares. The UK ESPP operates in conjunction with a trust, which holds the shares on behalf of participants.

In November 2010, the Company commenced making invitations to all UK employees to acquire partnership shares on market using
deductions from payroll.

152

Spirent Communications plc Annual Report 201832. EMPLOYEE SHARE PLANS CONTINUED
US Employee Stock Purchase Plan (US ESPP)
The US ESPP was initially approved by shareholders in 2000, with amendments being approved by shareholders in 2005 and 2011.

The US ESPP enables the Company to invite all US employees to acquire Ordinary Shares in the Company on market using deductions
from payroll. In November 2010, the Company commenced making six-monthly invitations to employees.

The US ESPP also enables the Company to grant eligible US employees the right to acquire Ordinary Shares in the Company using
the proceeds of a savings contract. If such a grant were made, when joining the US ESPP, participants would enter into a 12 month
contract to save up to 15 per cent of base salary subject to an individual limit of $1,000 per month. No grants of this nature have been
made since 2003.

Global All Employee Share Purchase Plan (GAESPP)
The GAESPP was initially approved by shareholders in 2001 with amendments being approved by shareholders in 2005 and 2011.
The GAESPP enables the Company to invite employees in countries other than the United States or United Kingdom to acquire Ordinary
Shares in the Company on market using deductions from payroll. In September 2011, the first such invitation was made to all employees
in Canada, Hong Kong, France and Germany and subsequent invitations have been made on a six-monthly basis since 2012.

The GAESPP can also be operated on similar terms to the US ESPP above, with participants entering into a 12 month contract to save up
to 15 per cent of base salary subject to an individual limit. No grants of this nature have been made since 2003.

33. SHARE-BASED PAYMENT

2005 Employee Incentive Plan
Spirent Long-Term Incentive Plan

All schemes are equity-settled.

2018
$ million

2017
$ million

0.1
2.7
2.8

0.5
1.7
2.2

2.7 million share incentives were granted during 2018 (2017 2.9 million). The fair value of share incentives has been estimated as at
the date of grant using the Hull-White trinomial model. The following table gives the assumptions made in arriving at the share-based
payment charge and the fair value:

Weighted average share price (pence)
Weighted average exercise price (pence)
Weighted average fair value (pence)
Expected volatility (%)
Option life (years)

Performance Shares
Options and SARs

Sub-optimal exercise factor
Risk free rate (%)
Dividend yield (%)

2018

112.9
–
95.1
30.6

3.0
10.0
1.5
0.88
3.0

2017

118.1
–
92.8
31.0

3.0
NA
1.5
1.1–1.2
3.5

The expected volatility was determined by calculating the historical volatility of the Company’s share price over the previous two
years which management considers to be the period which is likely to be most representative of future volatility. The risk free rate
is calculated by reference to UK government bonds.

153

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION
FINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

34. RECONCILIATION OF PROFIT BEFORE TAX TO CASH GENERATED FROM OPERATIONS

Profit before tax
Adjustments for:
Finance income
Finance costs
Intangible asset amortisation
Depreciation of property, plant and equipment
Loss on the disposal of property, plant and equipment
Gain on divestment
Share-based payment
Changes in working capital

Deferred income (released)/received
Increase in receivables
(Increase)/decrease in inventories
(Decrease)/increase in payables

Increase in provisions
Defined benefit pension plan
Defined benefit pension plan re-measurement (GMP equalisation)
Deferred compensation plan

Cash flow from operations

35. DIVESTMENTS
There were no divestments in 2018.

2018
$ million

61.2

2017
$ million

46.6

(1.4)
0.1
4.3
16.5
–
(2.4)
2.8

(2.5)
(11.0)
(2.2)
(4.7)
7.6
(6.7)
4.0
0.3
65.9

(0.6)
0.3
7.1
18.0
0.2
(2.6)
2.2

5.1
(2.3)
3.7
5.5
0.1
(6.1)
–
0.5
77.7

The gain on divestments in 2018 of $2.4 million represents the repayment of a $2.0 million loan from the subsidiaries the Group
divested of on 30 June 2017, together with the release of a $0.5 million provision relating to unsettled legal claims from a disposal the
Group made in 2012. The $2.0 million loan had previously been impaired. The Group also incurred legal fees of $0.1 million relating to
the divestments made in 2017. The net cash inflow from divestments in 2018 was $1.8 million.

On 16 February 2017, the Group divested of certain assets and liabilities of Epitiro Group Limited (Epitiro) for consideration of
$0.4 million. Epitiro was reported within the Lifecycle Service Assurance operating segment.

On 30 June 2017, the Group divested the entire issued share capital of its subsidiaries, Spirent Communications Israel Limited,
its Developer Tools (DT) line of business, and Spirent Holdings Denmark ApS and its subsidiaries, its Device Intelligence (DI) line
of business, to Dorfi Limited, an Israeli entity established by the former General Manager of the business units, for a total cash
consideration of $1. Both DI and DT were reported within the Connected Devices operating segment.

In 2017, DI and DT reported combined revenue of $5.9 million and made an adjusted operating profit and profit before tax of
$1.4 million. These divestments did not constitute discontinued operations under IFRS 5 ‘Non-current Assets Held for Sale and
Discontinued Operations’.

154

Spirent Communications plc Annual Report 2018
35. DIVESTMENTS CONTINUED
The gain on divestments during 2017 was as follows:

Gross consideration
Net liabilities/(assets) at date of divestment
Provision against loan to divested subsidiaries
Expenses of sale
Foreign exchange adjustments

Net gain/(loss) on divestments before and after tax

DI/DT
$ million

Epitiro
$ million

–
2.9
(2.0)
(0.8)
3.1
3.2

0.4
(0.5)
–
(0.5)
–
(0.6)

2017
Total

0.4
2.4
(2.0)
(1.3)
3.1
2.6

Accumulated foreign exchange gains of $3.1 million were recycled to profit or loss on divestment of DI and DT in 2017.

As part of the sale of DI and DT, Spirent made a $2.0 million interest bearing loan to the divested subsidiaries to fund working capital
requirements. This loan was fully provided for by the Group in 2017 and expensed in the calculation of the gain on divestments.

The net cash impact of divestments in 2017 was as follows:

Cash consideration
Loan to divested subsidiaries
Expenses of sale

Net cash impact from divestments in the year

The net (liabilities)/assets divested during 2017 were as follows:

At date of divestment
Intangible assets
Property, plant and equipment
Cash on deposit
Inventories
Trade and other receivables
Trade and other payables
Provisions

Net (liabilities)/assets

DI/DT
$ million

Epitiro
$ million

–
(2.0)
(0.7)
(2.7)

0.4
–
(0.4)
–

2017
Total

0.4
(2.0)
(1.1)
(2.7)

DI/DT
$ million

Epitiro
$ million

2017
Total

–
0.3
0.1
–
3.0
(6.0)
(0.3)
(2.9)

0.4
–
–
0.1
–
–
–
0.5

0.4
0.3
0.1
0.1
3.0
(6.0)
(0.3)
(2.4)

155

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

36. RELATED PARTY TRANSACTIONS
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note.

REMUNERATION OF KEY MANAGEMENT PERSONNEL
The remuneration of the directors, who are the key management personnel of the Group, is set out below in aggregate for each of the
categories specified in IAS 24 ‘Related Party Disclosures’:

Short-term employee benefits
Share-based payment

2018
$000

3,842.1
664.6
4,506.7

2017
$000

2,629.4
493.3
3,122.7

No director received compensation for loss of office (2017 $nil).

There were gains of $852,742 (2017 no gains) on the exercise of options by key management personnel in 2018.

For further details refer to the Report on Directors’ Remuneration on pages 74 to 95.

37. TRANSITION TO IFRS 15
The Group adopted IFRS 15 ‘Revenue from Contracts with Customers’ on 1 January 2018 using the fully retrospective transition method,
requiring restated comparatives. This note presents the impact of the adoption of IFRS 15 on the Group’s financial statements.

The cumulative effect of the adoption of IFRS 15 has resulted in an increase in net assets of $0.8 million as at 1 January 2017
(31 December 2017 $0.8 million). This reflects the capitalisation of incremental costs incurred to obtain a contract, being sales
commissions previously expensed as incurred, net of the associated deferred tax impact. The adoption of IFRS 15 has not impacted
revenue previously reported.

156

Spirent Communications plc Annual Report 201837. TRANSITION TO IFRS 15 CONTINUED
CONSOLIDATED BALANCE SHEET RESTATEMENT UNDER IFRS 15

$ million

Assets
Non-current assets
Intangible assets
Property, plant and equipment
Trade and other receivables
Assets recognised from
costs to obtain a contract
Cash on deposit
Defined benefit pension plan surplus
Deferred tax asset

Current assets
Inventories
Trade and other receivables
Assets recognised from
costs to obtain a contract
Other financial assets
Current tax asset
Cash and cash equivalents

Total assets
Liabilities
Current liabilities
Trade and other payables
Deferred income
Other financial liabilities
Current tax liability
Provisions

Non-current liabilities
Trade and other payables
Deferred income
Deferred tax liability
Defined benefit pension plan deficit
Provisions

Total liabilities
Net assets

Capital and reserves
Share capital
Share premium account
Capital redemption reserve
Other reserves
Translation reserve
Retained earnings

Total equity attributable to
owners of the parent Company

Notes

As reported
1 Jan 2017

Impact of
IFRS 15

Restated
1 Jan 2017

As reported
31 Dec 2017

Impact of
IFRS 15

Restated
31 Dec 2017

169.8
47.3
4.6

–
0.1
0.9
33.1
255.8

27.4
128.9

–
–
0.4
96.1
252.8
508.6

(127.2)
–
(0.1)
(1.5)
(4.2)
(133.0)

(14.6)
–
(0.1)
(16.7)
(2.6)
(34.0)
(167.0)
341.6

25.3
25.0
16.3
19.4
10.3
245.3

341.6

B
B

B
B
C

A, C

–
–
–

0.4
–
–
–
0.4

–
–

0.6
–
–
–
0.6
1.0

59.4
(59.4)
–
–
–
–

11.2
(11.2)
(0.2)
–
–
(0.2)
(0.2)
0.8

–
–
–
–
–
0.8

0.8

169.8
47.3
4.6

0.4
0.1
0.9
33.1
256.2

27.4
128.9

0.6
–
0.4
96.1
253.4
509.6

(67.8)
(59.4)
(0.1)
(1.5)
(4.2)
(133.0)

(3.4)
(11.2)
(0.3)
(16.7)
(2.6)
(34.2)
(167.2)
342.4

25.3
25.0
16.3
19.4
10.3
246.1

163.6
42.3
4.1

–
–
1.2
23.2
234.4

23.6
130.1

–
0.1
1.0
128.4
283.2
517.6

(131.9)
–
–
(1.4)
(3.6)
(136.9)

(16.4)
–
(0.1)
(7.7)
(3.2)
(27.4)
(164.3)
353.3

27.5
27.3
17.8
13.4
11.3
256.0

342.4

353.3

–
–
–

0.4
–
–
–
0.4

–
–

0.6
–
–
–
0.6
1.0

61.7
(61.7)
–
–
–
–

11.0
(11.0)
(0.2)
–
–
(0.2)
(0.2)
0.8

–
–
–
–
–
0.8

0.8

163.6
42.3
4.1

0.4
–
1.2
23.2
234.8

23.6
130.1

0.6
0.1
1.0
128.4
283.8
518.6

(70.2)
(61.7)
–
(1.4)
(3.6)
(136.9)

(5.4)
(11.0)
(0.3)
(7.7)
(3.2)
(27.6)
(164.5)
354.1

27.5
27.3
17.8
13.4
11.3
256.8

354.1

157

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

37. TRANSITION TO IFRS 15 CONTINUED
NOTES
A. Recognition and utilisation of assets recognised from costs to obtain a contract
IFRS 15 specifies that the incremental costs of obtaining a contract are capitalised if the entity expects to recover them.

At 1 January 2017, the Group has capitalised sales commissions amounting to $1.0 million that were previously expensed as incurred.
These assets are amortised on a systematic basis through selling costs in the income statement consistent with how the related revenue
is recognised. At 31 December 2017, the assets capitalised also amounted to $1.0 million.

B. Reclassification of trade and other payables
Deferred income has been reclassified from trade and other payables to its own line item in the balance sheet as required by IFRS 15,
reflecting the materiality and nature of this balance in the context of the Group’s business.

C. Deferred tax
The recognition of assets recognised from costs to obtain a contract on the balance sheet from 1 January 2017 as stated above resulted
in a deferred tax liability of $0.2 million. There was an immaterial adjustment to deferred tax in the year ended 31 December 2017.

Consolidated income statement under IFRS 15
There is no material impact to the consolidated income statement on transition to IFRS 15.

Consolidated cash flow statement under IFRS 15
As a result of the adoption of IFRS 15, certain reclassifications are required in relation to the following cash flow movements
between relevant balance sheet accounts. There has been no change in the net cash generated from operations as a result of these
reclassifications or restatement of these balance sheet accounts.

• As identified in adjustment A, on transition to IFRS 15 on 1 January 2018, the Group has recognised assets from costs to obtain a

contract. Movements in the operating cash flow note reflect the relevant movements in the assets, which have been included within
the movement in receivables.

• As identified in adjustment B, the Group has reclassified deferred income in the balance sheet. This reclassification has not impacted

the consolidated cash flow statement.

Consolidated statement of changes in equity restatement under IFRS 15
No reconciliation of the restated consolidated statement of changes in equity is presented, as the only changes for the relevant period
are presented as follows:

• Consolidated statement of changes in equity as at 1 January 2017: recognition of the restated retained earnings figure as presented

in the restated consolidated balance sheet at this date.

• Consolidated statement of changes in equity as at 31 December 2017: recognition of the restated retained earnings figure as

presented in the restated consolidated balance sheet at this date.

ALTERNATIVE PERFORMANCE MEASURES AND KEY PERFORMANCE INDICATORS UNDER IFRS 15
There is no material impact to alternative performance measures or key performance indicators on transition to IFRS 15.

158

Spirent Communications plc Annual Report 2018PARENT COMPANY BALANCE SHEET
AT 31 DECEMBER 2018

Fixed assets
Intangible assets
Tangible assets
Investments

Current assets
Stocks
Debtors
Cash at bank and in hand

Creditors: amounts falling due within one year
Net current liabilities
Total assets less current liabilities

Creditors: amounts falling due after more than one year
Defined benefit pension plan surplus
Defined benefit pension plan deficit

Net assets

Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account

Shareholders’ funds – equity

Notes

2018
£ million

2017
£ million

4
5
6

7
8

10
3
3

2.4
1.6
366.6
370.6

2.3
22.1
10.6
35.0
(95.9)
(60.9)
309.7

(1.7)
2.0
(0.5)
309.5

20.4
20.2
13.1
255.8
309.5

2.4
1.6
351.8
355.8

1.6
23.0
13.4
38.0
(98.3)
(60.3)
295.5

(1.0)
0.9
(3.0)
292.4

20.4
20.2
13.1
238.7
292.4

The Company has taken advantage of the exemption under Section 408 of the Companies Act 2006 from presenting its own profit and
loss account. In 2018, the profit for the year amounted to £55.7 million (2017 £22.5 million).

The notes on pages 161 to 177 form part of these financial statements.

Signed on behalf of the Board

Paula Bell
Director
7 March 2019

159

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

PARENT COMPANY STATEMENT OF CHANGES IN EQUITY

At 1 January 2017
Profit for the year
Other comprehensive income1
Total comprehensive income
Share-based payment
Equity dividends

At 1 January 2018
Profit for the year
Other comprehensive income2
Total comprehensive income
Share-based payment
Tax credit on share incentives
Employee share ownership trust
Equity dividends

At 31 December 2018

Notes

Attributable to the equity holders
of the parent Company

£ million

Called up
share capital

Share
premium
account

Capital
redemption
reserve

Profit and
loss account

Total equity

20.4
–
–
–
–
–

20.4
–
–
–
–
–
–
–
20.4

20.2
–
–
–
–
–

20.2
–
–
–
–
–
–
–
20.2

13.1
–
–
–
–
–

13.1
–
–
–
–
–
–
–
13.1

229.8
22.5
3.5
26.0
1.7
(18.8)

238.7
55.7
1.7
57.4
2.1
0.1
(1.8)
(40.7)
255.8

283.5
22.5
3.5
26.0
1.7
(18.8)

292.4
55.7
1.7
57.4
2.1
0.1
(1.8)
(40.7)
309.5

16
15

1. The amount included in other comprehensive income for 2017 of £3.5 million represents re-measurement gains on the net defined benefit pension

liability of £4.3 million, net of a tax charge of £0.8 million.

2. The amount included in other comprehensive income for 2018 of £1.7 million represents re-measurement gains on the net defined benefit pension

asset of £2.1 million, net of a tax charge of £0.4 million.

The notes on pages 161 to 177 form part of these financial statements.

160

Spirent Communications plc Annual Report 2018NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES
CORPORATE INFORMATION
Spirent Communications plc (the Company) is a public limited company incorporated and domiciled in England and Wales (registration
number 00470893). The registered address of the Company is Northwood Park, Gatwick Road, Crawley, West Sussex, RH10 9XN,
United Kingdom.

BASIS OF ACCOUNTING
The financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework
(FRS 101).

In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of
International Financial Reporting Standards as adopted by the EU (EU Adopted IFRS), but makes amendments where necessary in order
to comply with the Companies Act 2006 and has set out below the FRS 101 disclosure exemptions that have been taken in respect of
the following disclosures:

• A Cash Flow Statement and related notes;
• Comparative period reconciliations for share capital, tangible fixed assets and intangible assets;
• Disclosures in respect of transactions with wholly owned subsidiaries;
• Disclosures in respect of capital management;
• The effects of new but not yet effective IFRS; and
• Disclosures in respect of the compensation of key management personnel.

As the consolidated financial statements include the equivalent disclosures, the Company has also taken the exemptions under
FRS 101 available in respect of the following disclosures:

IFRS 2 ‘Share-based payment’ in respect of Group-settled share-based payments.

•
• Certain disclosures required by IAS 36 ‘Impairment of Assets’ in respect of the impairment of goodwill and indefinite life

intangible assets.

• The disclosures required by IFRS 7 ‘Financial Instruments Disclosures’ and IFRS 13 ‘Fair Value Measurement’ regarding financial

instrument disclosures have not been provided apart from those which are relevant for the financial instruments which are held at
fair value.

The following exemptions have been taken in these financial statements, as granted by IFRS 1 ‘First-time adoption of IFRS’:

• Business combinations – business combinations that took place prior to 1 January 2014 have not been restated.
• Use of previous GAAP carrying amounts as at date of transition as a deemed cost for investment in subsidiaries.

As the Company is included in the consolidated financial statements, made up to 31 December each year, it is not required to present
a separate profit and loss account as provided by Section 408 of the Companies Act 2006. Information on fees for non-audit services in
respect of the parent Company accounts have not been disclosed as the Company prepares Group accounts which disclose information
on fees for non-audit services on a consolidated basis.

ACCOUNTING CONVENTION
The financial statements are prepared on a historical cost basis apart from certain financial instruments that have been measured at
fair value.

GOING CONCERN BASIS OF ACCOUNTING
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 2020 and 2021 financial years. They have also considered the principal risks and uncertainties that the Company faces and
its current financial position and are satisfied that the Company 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.

NEW ACCOUNTING STANDARDS
There have been no applicable new standards, amendments to standards or interpretations effective from 1 January 2018 that
have been applied by the Company which have resulted in a significant impact on its results or financial position. IFRS 9 ‘Financial
Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’ were effective from 1 January 2018 and have had an immaterial
impact on the Company’s results and financial position.

161

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted IFRS 15 on 1 January 2018 using the fully retrospective transition method, requiring restated comparatives.

The cumulative effect of the adoption of IFRS 15 has resulted in an increase to net assets of £0.1 million as at 1 January 2018.
This reflects the capitalisation of incremental costs incurred to obtain a contract, being sales commissions previously expensed as
incurred, net of the associated deferred tax impact. These assets are presented within debtors as assets recognised from costs to obtain
a contract. There is no impact to the profit and loss account.

The impact on the 2017 financial statements is immaterial, therefore, the adjustment will be reflected in the balance sheet and the profit
and loss account in 2018.

The impact of IFRS 15 on the Group financial statements is presented in note 37 of Notes to the consolidated financial statements on
page 156.

BUSINESS COMBINATIONS AND GOODWILL
Goodwill arising on the acquisition of a business, representing the excess of cost over the net fair value of the net assets acquired,
is capitalised as an intangible asset. Goodwill is carried at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to the related cash-generating units monitored by management. Where the
recoverable amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in
the profit and loss account.

The UK Companies Act requires goodwill to be reduced by provisions for depreciation on a systematic basis over a period chosen by
the directors, it’s useful economic life. However, under IFRS 3 ‘Business Combinations’ goodwill is not amortised. Consequently the
Company does not amortise goodwill, but reviews it for impairment on an annual basis or whenever there are indicators of impairment.
The Company is therefore invoking a ‘true and fair view override’ to overcome the prohibition on the non-amortisation of goodwill in
the Companies Act.

Had the Company amortised goodwill a period of 20 years would have been chosen as the useful life for goodwill. The profit for the
year would have been £0.6 million lower had goodwill been amortised in the year.

TANGIBLE ASSETS
Tangible assets are stated at cost less accumulated depreciation and accumulated impairment. Depreciation is not provided on freehold
land. Depreciation is provided to write-off the cost of all other assets, less residual value, on a straight line basis over their estimated
useful lives at rates which take into account commercial conditions at their location. Usual asset lives are as follows:

Freehold buildings
Plant and machinery
Fixtures, fittings and equipment

Building installations
Fittings and equipment
Motor vehicles
Business systems software

50 years
3 to 8 years

20 years or lease period if lower
3 to 8 years
3 to 5 years
4 years

The carrying values of tangible fixed assets are reviewed for impairment if events or changes in circumstances indicate that the carrying
value may not be recoverable.

IMPAIRMENT OF ASSETS
Tangible assets with finite useful lives are tested for impairment at each reporting date where there is an indication that an asset may
be impaired. Goodwill with an indefinite useful life is assessed at least annually. When an impairment test is performed, the recoverable
amount is assessed by reference to the higher of the net present value of the expected cash flows (value in use) of the relevant cash-
generating unit or asset and the fair value less cost of disposal. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is
written down to its recoverable amount. Impairment losses are recognised in the profit and loss account in those expense categories
consistent with the function of the impaired asset.

Where an impairment loss has been recognised against an asset, it may be reversed in future periods where there has been a change
in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised, but only to the
extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, had no impairment loss been recognised in prior years. Such a reversal is recognised in the profit and loss account.
This does not apply for goodwill, for which an impairment loss must not be reversed in any circumstances.

162

Spirent Communications plc Annual Report 20181. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
INVESTMENTS
Investments in subsidiaries are stated at cost and reviewed for impairment if there are indications that the carrying value may not
be recoverable.

LEASES
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset
for an agreed period of time.

STOCKS
Stocks are valued at the lower of cost and estimated net realisable value, after provisions for obsolescence. Cost includes all costs in
bringing each product to its present location and condition, being the full manufacturing cost on a first-in, first-out basis, including all
attributable overheads based on a normal level of activity.

PROVISIONS
Provisions are recorded when the Company has a present, legal or constructive obligation as a result of a past event, for which it is
probable that it will be required to settle by an outflow of resources and for which a reliable estimate of the amount of the obligation
can be made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate.

Where the effect of the time value of money is material, the amount of the provision shall be the present value of the expenditures
expected to be required to settle the obligation.

CONTINGENT LIABILITIES
Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of
uncertain future events outside the Company’s control, or present obligations that are not recognised because it is not probable
that a settlement will be required or the value of such a payment cannot be reliably measured. The Company does not recognise
contingent liabilities but discloses them.

FOREIGN CURRENCIES
The financial statements are presented in pound sterling, which is the Company’s functional and presentation currency.

FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognised on the Company’s balance sheet when it becomes a party to the contractual provisions of
the instrument.

Trade debtors
Trade debtors are non-interest bearing and are stated at original invoiced amount less an appropriate allowance for expected credit
losses. At each reporting date, the Company measures the loss allowance at an amount equal to the lifetime expected credit losses.

The Company applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss
allowance for all trade debtors. To measure the expected credit losses, trade debtors have been grouped based on shared credit risk
characteristics and the days past due.

The expected loss rates are based on the payment profiles of trade debtors over a period of 12 months before 31 December 2017 and
the corresponding historical credit losses experienced within this period.

Trade debtors are written off when there is no reasonable expectation of recovery.

A default on a trade debtor occurs when the debtor fails to make contractual payments when they fall due.

Cash at bank and in hand
Cash at bank and in hand in the balance sheet comprise cash at bank and in hand and short-term deposits which usually have an
original maturity of three months or less.

Trade creditors
Trade creditors are non-interest bearing and are stated at the original invoiced amount.

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NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Loans and borrowings
Loans and borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, loans and
borrowings are stated at amortised cost using the effective interest method, and in respect of financial assets, less any impairment losses.

Impairment losses are based on lifetime expected credit losses.

Equity instruments
Equity instruments are recorded at the proceeds received, net of direct issue costs. Spirent Communications plc Ordinary Shares
held by the Company are classified in equity as treasury shares and are recognised at cost and included as a deduction from retained
earnings. Consideration received for the sale of such treasury shares is also recognised in equity.

Derivative financial instruments and hedge accounting
The Company uses forward foreign currency exchange contracts to manage exposures arising on receipts and payments in foreign
currencies relating to firm commitments.

Forward foreign currency exchange contracts are initially recognised at fair value on the date on which the contract is entered into, and
are subsequently re-measured to fair value at each reported balance sheet date. The fair value of forward foreign currency exchange
contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The Company has not
adopted the hedge accounting rules. Consequently all gains and losses arising from changes in fair value are taken to the profit and
loss account.

PENSIONS
The Company operates two funded defined benefit pension plans. All other pension plans are defined contribution in nature where
the amount charged to the profit and loss account is the employer’s contributions paid or payable during the year.

For defined benefit pension plans, full actuarial valuations are carried out every three-years using the projected unit credit method, and
updates are performed at each balance sheet date. Re-measurement, comprising actuarial gains and losses, the effect of changes to the
asset ceiling (if relevant) and the return on plan assets (excluding interest), is reflected immediately in the balance sheet liability or asset
with a charge or credit recognised in other comprehensive income in the period in which they occur. Re-measurement recognised in
other comprehensive income will not be reclassified to profit or loss. Past service cost is recognised in profit or loss in the period of plan
amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit pension
liability or asset, taking account of any changes in the net defined benefit pension liability during the period as a result of contribution
and benefit payments. Defined benefit pension costs are categorised as:

• service cost (including current service cost, past service cost and gains and losses on curtailments or settlements);
• net interest expense or income; and
• re-measurement.

The Company presents the first two components of defined benefit pension costs in profit or loss.

REVENUE
Revenue represents the transfer of promised products or services to customers in an amount that reflects the consideration to which the
Company expects to be entitled in exchange for those products or services.

Revenue from product sales of hardware and perpetual software licenses is recognised at the point in time when the customer has
obtained control of the products sold. This is usually when the products have been delivered in accordance with the contractual terms.
In most instances it is not until acceptance has occurred that control of the asset is transferred to the customer. Terms of acceptance are
dependent upon the specific contractual arrangement agreed with the customer. If it can be objectively determined that control has
been transferred to the customer in accordance with the agreed contract specifications, customer acceptance is a formality that would
not affect the determination of when the customer has obtained control of the products. However, if it cannot be objectively determined
that the products delivered are in accordance with the agreed-upon contract specifications, revenue would not be recognised until
customer acceptance has been granted.

For the sale of services, revenue is recognised over time with reference to when or as the performance obligations are satisfied by
transferring the service to the customer. Revenue from support and maintenance service contracts and software subscription sales
is recognised over the period of performance on a straight-line basis. Revenue from professional services is generally recognised
as work progresses in accordance with agreed upon contractual terms, either based on a measure of progress towards complete
satisfaction of the performance obligation or at periodic intervals. Progress is measured with reference to the actual cost of services
provided as a proportion of the total cost of services expected to be provided under the contract. Where the professional service has a
predetermined or fixed output deliverable, revenue is recognised at a point in time once the performance obligation has been satisfied
and the customer has received the agreed deliverable.

164

Spirent Communications plc Annual Report 20181. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Revenue from multi-component and bundled orders that includes both products and services is accounted for as two or more separate
performance obligations only where the commercial substance is that the individual components operate independently of each
other, because they are capable of being distinct and are separately identifiable from other promises in the context of the contract with
the customer.

COST OF SALES
The Company’s cost of sales related to the sale of its products includes materials, payments to third party contract manufacturers,
royalties and salaries and other expenses related to its manufacturing and supply operations personnel. Cost of sales related to
the provision of services includes salaries and other expenses associated with technical support services and the cost of extended
maintenance services.

COSTS TO OBTAIN A CONTRACT
The incremental costs of obtaining a contract with a customer are capitalised as an asset if the Company expects to recover them.
The Company incurs costs such as sales commissions when it enters into a new contract. Such costs are presented within debtors in the
balance sheet as assets recognised from costs to obtain a contract where the related revenue is recognised over time, usually in relation
to support and subscription agreements. These assets are amortised on a systematic basis consistent with how the related revenue
is recognised.

The Company applies the practical expedient in paragraph 94 of IFRS 15 and recognises incremental costs of obtaining a contract as an
expense when incurred if the amortisation period of the asset that the Company would otherwise have recognised is one year or less.

Management is required to determine the recoverability of assets recognised from costs to obtain a contract. At each reporting date,
the Company determines whether or not the assets are impaired by comparing the carrying amount of the asset to the remaining
amount of consideration that the Company expects to receive less the costs that relate to providing services under the relevant contract.
No assets were impaired as at 31 December 2018.

DEFERRED INCOME
Deferred income is only recognised on non-cancellable contracts that provide unconditional rights to payment from the customer for
products and services that the Company has not yet completed providing or that it will provide in the near future.

The Company occasionally receives advance payments from customers on account, before products or services are delivered and
revenue is recognised, resulting in liabilities. These liabilities are reported on the balance sheet within trade and other payables on
a contract-by-contract basis at the end of each reporting period.

GOVERNMENT GRANTS
A government grant is recognised in the balance sheet initially within creditors when there is reasonable assurance that it will be
received and that the Company will comply with the conditions attached to it. Grants that compensate the Company for expenses
incurred are recognised as other operating income on a systematic basis in the same periods in which expenses are incurred.
Grants that compensate the Company for the acquisition of an asset are presented by deducting them from the acquisition cost of the
related asset in accordance with IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’.

PRODUCT DEVELOPMENT
Research expenditure is recorded as a product development cost in the year in which it is incurred. Intangible assets arising on the
Company’s various product development projects are recognised only if the recognition criteria of IAS 38 ‘Intangible Assets’ are met.

At 31 December 2018 and 31 December 2017, no amounts have met the recognition criteria.

165

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

1. SIGNIFICANT ACCOUNTING POLICIES CONTINUED
EMPLOYEE BENEFITS
When an employee has rendered service to the Company during an accounting period, short-term benefits expected to be paid in
exchange for that service are recognised in the same accounting period.

SHARE-BASED PAYMENT
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted.
The fair value is determined using the Hull-White trinomial model.

The cost of equity-settled transactions is recognised as a cost to the Company or as an addition to the cost of investment in the
subsidiary in which the relevant employees work, over the vesting period of the equity-settled transactions with a corresponding
adjustment to reserves. Any payments received from the Company’s subsidiaries in respect of these share-based payments result in
a reduction in the cost of investment.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market
condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other vesting
conditions are satisfied.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation and any expense not yet
recognised for the award is recognised immediately.

The Company has an employee share trust for the granting of certain share incentives to employees. Shares are held by the employee
share trust, treated as treasury shares and presented in the balance sheet as a deduction from equity.

TAX
Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the profit and loss account
except to the extent that it relates to items in other comprehensive income or equity.

Deferred tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts
in the financial statements, with the following exceptions:

• where the temporary difference arises from the initial recognition of goodwill (taxable temporary differences only) or of an asset or
liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable
profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the
timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not
reverse in the foreseeable future.

•

DIVIDENDS PAID
The interim dividend is included in the financial statements in the period in which it is paid, and the final dividend in the period in which
it is approved by the shareholders at an annual general meeting.

CRITICAL ACCOUNTING ASSUMPTIONS AND JUDGEMENTS
The preparation of financial statements requires the Company to make estimates and assumptions that affect items reported.
Such estimates and assumptions are based on management’s best knowledge of current facts, circumstances and future events.
Actual results may differ, possibly significantly, from those estimates. The areas requiring high degree of judgement or where
assumptions and estimates are significant to the parent Company financial statements are revenue recognition, defined benefit pension
plans (note 3) and recognition of deferred tax assets (note 12). Please refer to note 2 of Notes to the consolidated financial statements
on page 123 for detailed disclosures.

APPLICABLE NEW STANDARDS AND INTERPRETATIONS NOT APPLIED
IFRS 16 LEASES
See note 2 of Notes to the consolidated financial statements on page 125 for an explanation of the impact of IFRS 16.

166

Spirent Communications plc Annual Report 20182. EMPLOYEES
Please refer to the Report on Directors’ Remuneration on pages 74 to 95 and note 36 of Notes to the consolidated financial statements
on page 156 for disclosures relating to the emoluments, share incentives and long-term incentive interests and pensions of the directors.

The average number of people employed by the Company during the year was:

Manufacturing
Product development
Selling and marketing
Administration

Employee benefit costs were:

Remuneration
Social security costs
Pension and other related costs
Expense of share-based payment

2018
Number

2017
Number

37
50
45
30
162

37
44
41
30
152

2018
£ million

2017
£ million

12.3
1.6
1.6
0.7
16.2

12.2
1.3
1.4
0.5
15.4

3. PENSIONS
DEFINED BENEFIT PLANS
i) Characteristics and risks associated with the Plans
The Company sponsors two funded defined benefit pension plans in the United Kingdom: the Spirent Communications plc Staff
Pension & Life Assurance Plan (“Staff Plan”) and the Spirent Communications plc Retirement Cash & Life Assurance Plan (“Cash Plan”).
These plans are funded and have full UK HM Revenue & Customs (“HMRC”) tax-exempt approval. Both schemes are administered by
a trustee board which is comprised of representatives from the employer, member nominated trustees and an independent trustee.
The trustee board operates in accordance with the Trust Deed and Rules of each Plan and acts in the interests of all of its members.

• The Staff Plan is the Company’s most significant plan. It provides its members with retirement benefits based on their final salary and

length of service. The Staff Plan is closed to new entrants.

• The Cash Plan is primarily a defined contribution arrangement, although there are some legacy defined benefits (“Old Section”) that
have been valued for the purpose of these accounts in accordance with IAS 19 ‘Employee Benefits’. Members who left service before
1992 are entitled to a cash lump sum on retirement that is based on their salary and length of service. Members of the Old Section
are entitled to defined contribution benefits, but with an underpin based on salary and length of service. The cash plan is closed to
new entrants.

There is also a UK unfunded plan, which consists of a contractual obligation for the Company to top up certain former employees’
benefits whose salaries exceeded the statutory earnings cap.

As with the vast majority of similar arrangements in the United Kingdom, the Company ultimately underwrites the risks relating to
the defined benefit plans. These risks include investment risks and demographic risks, such as the chance of members living longer
than expected.

The plans hold a significant proportion of their assets in equity. Strong future equity returns would be expected to reduce the
Company’s future cash contributions (and vice versa).

Expected contributions to the defined benefit plans in 2019 are £5.1 million. This includes the contributions agreed with the funded
plans’ trustees in accordance with UK legislation. The triennial valuation as at 1 April 2015 was in deficit, whereas the IAS 19 accounting
valuation is in surplus, therefore, the Company has agreed to pay £5.0 million per annum into the Staff Plan from 1 July 2016, over a
seven-year period, in order to clear the funding deficit as assessed.

If the contributions currently agreed are insufficient to pay the benefits due, the Company will need to make further contributions.

167

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

3. PENSIONS CONTINUED
GMP EQUALISATION
On 26 October 2018, the High Court ruled on the Lloyds Bank GMP Inequalities case. In response to this, an allowance of £3.1 million
has been included on the Company’s balance sheet at 31 December 2018 to make provision for the estimated costs arising from the
judgement. This past service cost has been charged to the income statement in the year and relates to the Staff Plan. There is no impact
on the Cash Plan.

• no decision has been made on the methodology to be adopted to equalise GMPs, but we would expect the cost to be broadly in line

•

Based on these considerations, we have included an allowance of 15 per cent of the estimated GMP liability affected by the equalisation
process. We have therefore adopted the process below to calculate the allowance:

3. We have estimated the cost of removing GMP inequalities in the Plan is 15 per cent of post-1990 GMP obligation, giving a figure of

£3.1 million.

This estimate of 15 per cent is informed by the actuary’s experience of working with schemes that have already undertaken a process
to remove GMP inequalities. We have not considered the specific circumstances of the scheme in detail, on the grounds that this would
be disproportionate.

ii) Amounts in the financial statements
The assets and liabilities on the balance sheet are as follows:

Schemes in net asset position
UK defined benefit pension plan – Cash Plan
UK defined benefit pension plan – Staff Plan

Schemes in net liability position
UK defined benefit pension plan – Staff Plan
UK unfunded plan

Net pension plan surplus/(deficit) on the balance sheet

2018
£ million

2017
£ million

0.9
1.1
2.0

–
(0.5)
(0.5)
1.5

0.9
–
0.9

(2.5)
(0.5)
(3.0)
(2.1)

168

Spirent Communications plc Annual Report 20183. PENSIONS CONTINUED
a) The assets and liabilities in each plan

Staff Plan
Quoted

Equities
Government bonds
Corporate bonds

Unquoted
LDI funds
Cash benchmarked bonds
Hedge funds
Insured annuities
Property
Cash and other

Fair value of plan assets
Present value of defined benefit pension plan obligations

Surplus/(deficit) in the plan on the balance sheet

Cash Plan
Quoted

Equities
Government bonds

Unquoted

Insured annuities
Cash and other

Fair value of plan assets
Present value of defined benefit pension plan obligations

Surplus in the plan

Total net surplus/(deficit) recognised

Unfunded plan
Present value of unfunded obligations

Net pension plan surplus/(deficit) on the balance sheet

2018
£ million

2017
£ million

41.9
4.1
3.2

31.7
75.0
18.7
2.1
1.1
14.1
191.9
(190.8)
1.1

3.3
2.7

0.1
1.6
7.7
(6.8)
0.9

2.0

(0.5)
1.5

48.6
4.3
4.0

36.8
75.8
19.8
2.5
1.1
8.1
201.0
(203.5)
(2.5)

3.4
3.2

0.1
1.7
8.4
(7.5)
0.9

(1.6)

(0.5)
(2.1)

Approximately two thirds of the Staff Plan’s assets are held in a combination of LDI funds, cash benchmarked bonds and hedge funds.
The objective of this allocation is to hedge against the plan’s liabilities, provide protection against inflation risk and to provide a level of
investment returns in all market scenarios.

The plans are prohibited from investing in Spirent’s own financial instruments.

169

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FINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

3. PENSIONS CONTINUED
The fair values of the quoted equity and debt instruments are determined based on quoted market prices in active markets whereas the
fair values of the other assets are not. Unquoted investments are included at values provided by the fund managers and are generally
valued using recent market data and external sources, with a hierarchy that follows the principles of IFRS 13 ‘Fair Value Measurement’.

The Company has determined that it has an unconditional right to refund of surplus assets if the schemes are run off until the last
member dies, on which basis IFRIC 14 does not cause any change in the balance sheet disclosures before tax.

For the purposes of the following disclosures, the Staff Plan and Cash Plan have been combined as the Cash Plan is immaterial to these
financial statements.

b) Analysis of the amounts charged to the profit and loss account

Plan administration expenses
Current service cost

Amount charged to operating costs
Past service cost (GMP equalisation)
Net interest on the net defined benefit pension liability

Net charge to the profit and loss account

c) Analysis of the amount recognised directly in the statement of comprehensive income

Re-measurement of the net defined benefit pension liability

d) Movements in the present value of funded defined benefit obligations

Present value of funded defined benefit pension plans’ obligations

e) Movements in the fair value of plans’ assets

At 1 January
Interest income on plans’ assets
Employer contributions
Benefit payments
Plan administration expenses
Re-measurement (loss)/gain on plans’ assets

Fair value of plans’ assets

170

2018
£ million

2017
£ million

0.4
0.1
0.5
3.1
–
3.6

0.3
0.1
0.4
–
0.2
0.6

2018
£ million

2017
£ million

(10.6)
2.3
1.4
9.0
2.1

8.1
(0.6)
4.3
(7.5)
4.3

2018
£ million

2017
£ million

211.0
0.1
3.1
5.2
(9.1)
(2.3)
(1.4)
(9.0)
197.6

210.4
0.1
–
5.8
(9.1)
0.6
(4.3)
7.5
211.0

2018
£ million

2017
£ million

209.4
5.2
5.1
(9.1)
(0.4)
(10.6)
199.6

200.1
5.5
5.1
(9.1)
(0.3)
8.1
209.4

Spirent Communications plc Annual Report 2018

3. PENSIONS CONTINUED
f) The key financial assumptions
The assumptions used for both plans using a weighted average were as follows:

2018
%

3.2
2.1
2.1
3.7
3.1
2.1
2.1
2.8

2017
%

3.1
2.0
2.0
3.6
3.0
2.1
2.0
2.5

The mortality assumptions are based on standard mortality tables which allow for future mortality improvements. The assumptions are
such that a member currently aged 65 will live on average for a further 22.5 years (2017 22.7 years) if they are a male and for a further
24.5 years (2017 24.6 years) if they are female. For a member who retires in 2038 (2017 in 2037) at age 65 the assumptions are that they
will live on average for a further 23.9 years (2017 24.1 years) after retirement if they are male and for a further 26.0 years (2017 26.1
years) after retirement if they are female.

iii) Amount, timing and uncertainty of future cash flows
The approximate impact to the past service liabilities of changing these main assumptions is as follows:

• Reducing the discount rate by 0.1 per cent per annum would increase past service liabilities by £2.7 million (2017 £3.1 million)
•
•

Increasing RPI inflation by 0.1 per cent would increase the plans’ liabilities by £1.0 million (2017 £1.1 million)
Increasing the life expectancy of a member by one year (by modifying the standard mortality tables using an appropriate scaling
factor) would increase past service liabilities by £9.0 million (2017 £10.3 million)

The liability has the following duration and maturity.

Weighted average duration of the defined benefit obligation (years)

Maturity analysis of benefit payments (non-discounted amounts) £ million
Maturity ≤ 1 year
Maturity > 1 ≤ 5 years
Maturity > 5 ≤ 10 years
Maturity > 10 ≤ 20 years
Maturity > 20 ≤ 30 years
Maturity > 30 years

2018

8.2
33.9
93.4
80.9
53.4
33.7

2017

7.7
32.2
92.5
83.9
58.4
38.8

Defined contribution plans
The Company contributes to defined contribution pension plans for employees. Employer contributions for 2018 were £0.6 million
(2017 £0.6 million).

4. INTANGIBLE ASSETS

Cost
At 1 January 2018 and 31 December 2018

Accumulated amortisation and impairment losses
At 1 January 2018 and 31 December 2018

Net book value at 31 December 2017 and 31 December 2018

Goodwill
£ million

6.8

4.4
2.4

The carrying value of goodwill has been tested by reference to the value in use of the Networks & Security CGU. No impairment of
goodwill was required.

The goodwill arose upon the acquisition of the Positioning Business within the Networks & Security CGU.

171

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION
FINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

5. TANGIBLE FIXED ASSETS

Cost
At 1 January 2018
Additions
Disposals

At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2018
Depreciation charge for the year
Disposals

At 31 December 2018
Net book value at 31 December 2017

Net book value at 31 December 2018

6. INVESTMENTS

Cost
At 1 January 2018
Additions
Share-based payment

At 31 December 2018

Amounts provided

At 1 January 2018
Provided in year

At 31 December 2018
Net book value at 31 December 2017

Net book value at 31 December 2018

Freehold
land and
buildings

Plant and
machinery

Fixtures,
fittings and
equipment

0.7
–
–
0.7

0.3
–
–
0.3
0.4

0.4

4.0
0.5
(0.3)
4.2

3.3
0.4
(0.3)
3.4
0.7

0.8

2.1
–
(0.2)
1.9

1.6
0.1
(0.2)
1.5
0.5

0.4

Shares in
subsidiaries

Loans to
subsidiaries

1,095.3
13.6
1.4

1,110.3

743.7

–

743.7
351.6

366.6

3.7
–
–

3.7

3.5

0.2

3.7
0.2

–

£ million

Total

6.8
0.5
(0.5)
6.8

5.2
0.5
(0.5)
5.2
1.6

1.6

£ million

Total

1,099.0
13.6
1.4

1,114.0

747.2

0.2

747.4
351.8

366.6

The recoverability of the carrying value of investments in subsidiaries has been assessed by reference to value in use.

During the year, capital contributions of £10.9 million were paid to subsidiaries (2017 £15.3 million) and loans of £2.7 million due from
Spirent Communications SAS were capitalised (2017 no loans capitalised).

7. STOCKS

Work in progress
Finished goods

2018
£ million

2017
£ million

0.6
1.7
2.3

0.3
1.3
1.6

There were no stock write-downs recognised in the period (2017 nil) and there were no reversals of prior period stock write-downs
(2017 nil).

No stock is carried at fair value less costs to sell (2017 nil).

172

Spirent Communications plc Annual Report 2018

8. DEBTORS

Due within one year
Trade debtors
Owed by subsidiaries
Other debtors
Prepayments
Current tax asset
Deferred tax (note 12)
Assets recognised from costs to obtain a contract

2018
£ million

2017
£ million

7.0
9.6
0.7
2.8
0.6
1.3
0.1
22.1

7.7
9.1
0.8
2.6
0.4
2.4
–
23.0

The directors consider that the carrying amount of trade and other debtors approximates their fair value.

The Company has no significant concentration of credit risk attributable to its trade debtors as the exposure is spread over a large
number of customers.

Assets recognised from costs to obtain a contract relate to capitalised incremental costs to obtain a contract, being sales commissions
arising on contracts with customers of more than one year in length. No assets were impaired or derecognised during the current year
or prior year.

9. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

Trade creditors
Owed to subsidiaries
Accruals
Deferred income
Other taxes and social security costs
Government grants

2018
£ million

2017
£ million

1.4
84.8
4.5
4.4
0.5
0.3

95.9

1.6
82.1
7.8
5.8
0.3
0.7

98.3

Trade creditors are non-interest bearing and are normally settled on 30 to 60 day terms. Other creditors are non-interest bearing.

The directors consider that the carrying amount of trade creditors approximates their fair value.

10. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

Deferred income
Government grants

2018
£ million

2017
£ million

0.9
0.8
1.7

–
1.0
1.0

173

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATION

FINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

11. GOVERNMENT GRANTS
The following government grants are included within creditors:

At 1 January
Received during the year
Released to the profit and loss account

At 31 December

Current
Non-current

2018
£ million

2017
£ million

1.3
–
(0.2)
1.1

1.2
0.3
(0.2)
1.3

2018
£ million

2017
£ million

0.3
0.8
1.1

0.3
1.0
1.3

A government grant has been received to accelerate and support research and development in the vulnerability of Global Navigation
Satellite Systems.

12. DEFERRED TAX
The movements in the deferred tax asset is as follows:

At 1 January 2017
Charged in the year
Deferred tax on defined benefit pension plan

At 1 January 2018
Charged in the year
Deferred tax on defined benefit pension plan

At 31 December 2018

Temporary
differences

Tax losses

UK pension
plans

Credits

0.2
–
–

0.2
–
–
0.2

0.6
1.1
–

1.7
(0.4)
–
1.3

2.1
–
(1.7)

0.4
–
(0.7)
(0.3)

–
0.1
–

0.1
–
–
0.1

£ million

Total

2.9
1.2
(1.7)

2.4
(0.4)
(0.7)
1.3

The Company has tax losses of £23.9 million (2017 £23.9 million) that are available for offset against suitable future taxable profits.

A deferred tax asset has not been recognised in respect of these losses as their future recovery is uncertain. These losses can be carried
forward indefinitely. The Company also has capital losses carried forward of £823.3 million (2017 £823.3 million) for which no deferred
tax asset has been recognised on the balance sheet. These capital losses have no expiry date.

£0.0 million (2017 £0.4 million) of the deferred tax asset is due after one year.

13. CONTRACT BALANCES
The following table provides information about debtors and contract liabilities from contracts with customers. The Company does not
have any contract assets.

Trade debtors
Contract liabilities – Deferred income
Revenue recognised in the period from amounts included in contract liabilities
at the beginning of the period

Note

2018
£ million

2017
£ million

2016
£ million

7.0
5.3

5.8

7.7
5.8

5.0

7.5
5.0

5.1

The timing of revenue recognition, invoicing and cash collections results in trade debtors and deferred income on the balance sheet.

174

Spirent Communications plc Annual Report 201813. CONTRACT BALANCES CONTINUED
The Company receives payments from customers based on a billing schedule, as established in the contract. Trade debtors are
recognised when the right to consideration becomes unconditional. Contract liabilities are recognised as revenue as (or when) we
perform under the contract.

The Company also recognises incremental costs incurred to obtain a contract as an asset if it expects to recover those costs. Such costs
are presented within debtors in the balance sheet as assets recognised from costs to obtain a contract and disclosed in note 8.

EXPECTED REALISATION OF REMAINING PERFORMANCE OBLIGATIONS AT YEAR END
The Company applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining
performance obligations that have original expected durations of one year or less.

Within 1 year
Greater than 1 year

2018
£ million

2017
£ million

1.2
0.9
2.1

1.1
1.2
2.3

The above information represents the revenue the Company will recognise when it satisfies the remaining performance obligations in
the contracts. The amounts presented do not include orders for which neither party has performed.

Virtually all of the revenue will be recognised within three years.

The Company provides standard warranties on its products and services. The nature of these warranties is considered to provide
customers with assurance that the related product or service will function as intended in accordance with the agreed specification, and
does not contain or imply any additional service obligation to the customer. Warranty obligations are estimated and recognised as
liabilities based on the probable outflow of resources.

14. OPERATING LEASE COMMITMENTS
At the balance sheet date, the Company had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:

Within one year
In the second to fifth years

2018
£ million

2017
£ million

0.2
0.5
0.7

0.1
0.5
0.6

175

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED

15. DIVIDENDS

Declared and paid in the year
Equity dividend on Ordinary Shares
Final dividend 2017 of 1.73 pence per Ordinary Share (2016 1.80 pence)
Special dividend 2017 of 3.60 pence per Ordinary Share
Interim dividend 2018 of 1.34 pence per Ordinary Share (2017 1.27 pence)

Proposed for approval at AGM (not recognised as a liability at 31 December)
Equity dividend on Ordinary Shares
Final dividend 2018 of 2.08 pence per Ordinary Share (2017 1.73 pence)
Special dividend 2017 of 3.60 pence per Ordinary Share

2018
£ million

2017
£ million

10.5
22.0
8.2
40.7

12.7
–
12.7

11.0
–
7.8
18.8

10.5
22.0
32.5

The directors are proposing a final dividend in respect of the financial year ended 31 December 2018 of 2.08 pence per Ordinary Share
(2017 1.73 pence), which will absorb an estimated £12.7 million of shareholders’ funds (2017 £10.5 million). The final dividend will be
paid on 3 May 2019 to Ordinary shareholders who are on the Register of Members at close of business on 15 March 2019. Payment will
be made to ADR holders on 10 May 2019. No liability is recorded in the financial statements in respect of these dividends.

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 2018 was $1.31: £1 (2017 $1.39: £1).

16. CAPITAL AND RESERVES
Changes during the year in the issued Ordinary Share capital were as follows:

Issued and fully paid Ordinary Shares of 3 1/3 pence each at 1 January 2018 and 31 December 2018

Number of
Ordinary
shares
million

611.7

There has been no material increase in the issued Ordinary Share capital, whether by exercise of share incentives or otherwise, between
31 December 2018 and 7 March 2019, the date on which these financial statements have been signed.

Please refer to note 31 of the Notes to the consolidated financial statements on page 151 for disclosures relating to the nature and
purpose of each reserve within equity.

176

Spirent Communications plc Annual Report 2018

16. CAPITAL AND RESERVES CONTINUED
INVESTMENT IN OWN ORDINARY SHARES
During the year, 1.5 million shares were purchased and placed into the Employee Share Ownership Trust at a cost of £1.8 million
and 1.5 million shares were also transferred from the Employee Share Ownership Trust to satisfy options exercised under the Spirent
employee share plans.

At 31 December 2018, the ESOT held 0.6 million Ordinary Shares (2017 0.6 million Ordinary Shares) to satisfy awards under various
share incentive plans. At 31 December 2018, the Spirent Sharesave Trust held 0.5 million Ordinary Shares (2017 0.5 million Ordinary
Shares) to satisfy awards made to United Kingdom-based employees under an all-employee share scheme. The market value of own
Ordinary Shares held in trust, being in total 1.1 million Ordinary Shares (2017 1.1 million Ordinary Shares), at 31 December 2018 was
£1.3 million (2017 £1.1 million).

CAPITAL REDEMPTION RESERVE
During 2018, the Company did not cancel any Ordinary Shares (2017 nil) and did not make any transfers to the capital redemption
reserve (2017 nil).

EMPLOYEE SHARE PLANS
The Company operates a number of employee share incentive plans which are described in note 32 of Notes to the consolidated
financial statements. The following share incentives over Ordinary Shares under these plans have been granted and remain outstanding,
held by employees of the parent Company.

The following information relates to outstanding share incentives at 31 December 2018:

Exercise period
(as at 31
December)

Exercise
price
pence

Weighted
average
exercise
price
pence

Number of
share
incentives
outstanding
million

2018

Weighted
average
remaining
contractual
life
years

Weighted
average
exercise
price
pence

Number of
share
incentives
outstanding
million

23.03.18-23.05.25

16.06.19-20.05.28

–

3.4

6.3

8.4

–

0.8

2.6

3.4

2017

Weighted
average
remaining
contractual
life
years

8.4

9.9

Share plan

2005 Employee
Incentive Plan1
Spirent Long-Term
Incentive Plan²

Notes
1. Figures for the 2005 Employee Incentive Plan include share options, stock appreciation rights and Performance Shares in aggregate. No exercise price

is payable on the vesting of a Performance Share.

2. Figures for the Spirent Long-Term Incentive Plan include restricted stock and Performance Shares in aggregate. No exercise price is payable on the

vesting of a Performance Share.

17. SUBSIDIARIES
A list of subsidiaries, including the name, country of incorporation, registered office address and proportion of ownership interest is
given on pages 178 and 179 of this Annual Report.

177

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONFINANCIAL STATEMENTS

FULL LIST OF SUBSIDIARY UNDERTAKINGS

A full list of subsidiaries and companies in which Spirent Communications plc has an interest of more than 20 per cent at 31 December
2018. The country of incorporation and the effective percentage of equity owned (if less than 100 per cent) is also detailed below.
Unless otherwise noted, the share capital comprises Ordinary Shares which are indirectly held by Spirent Communications plc.

Company Name

Registered in

Registered office address

Notes

Spirent Communications
of Ottawa Limited

Canada

Spirent Communications
Technology (Beijing) Limited

China

Bowthorpe Limited

Cambridge Analytical
Group Limited
Earlynow Limited

England

Epitiro Group Limited

England

Metrico Wireless Limited

England

PG International Limited

England

Shipbrick Limited

England

Spirent Capital Limited

England

Spirent Communications
(International) Limited
Spirent Communications
(Scotland) Limited
Spirent Communications
(SW) Limited
Spirent Financial Limited

England

Spirent Financing Limited

England

Spirent Holdings Limited

England

Spirent Investment Limited

England

Spirent Limited

England

Spirent Sharesave Trust Limited

England

100 King Street West, 41st Floor,
1 First Canadian Place,
Toronto, Ontario, M5X 1B2
Suite 1302, Shining Tower,
No 35 Xue Yuan Road,
Haidian District, Beijing 100191
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN

Held directly

54.55 per cent held directly,
45.45 per cent held indirectly
Held directly

Held directly

178

Spirent Communications plc Annual Report 2018Company Name

Registered in

Registered office address

Notes

Spirent Systems Limited

England

Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN

Spirent Systems No 2 Limited

England

TFDC Limited

England

Spirent Communications SAS

France

Spirent Communications GmbH Germany

Spirent Technologies GmbH
Spirent (Overseas) Limited

Germany
Guernsey

Spirent Communications
(Asia) Limited
Spirent Communications
(India) Pvt Limited

Hong Kong

India

Spirent Communications
Japan KK
Spirent Communications
Singapore Pte Limited
Spirent Communciations
Korea Inc
Spirent Communications
Taiwan Limited
Jolata, Inc

Japan

Singapore

South Korea

Taiwan

US (Delaware)

Netcom Systems
Holding Corporation
Spirent Communications Inc

US (Delaware)

Spirent Federal Systems Inc

US (Delaware)

Spirent Holdings Corporation

US (Delaware)

Spirent Communications
Hawaii LLC

US (Hawaii)

Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Northwood Park, Gatwick Road,
Crawley, West Sussex RH10 9XN
Gaia, 9 Parc Ariane,
Boulevard des Chenes,
78280 Guyancourt
Leopoldstrasse 252a,
80807 Munich
Michaelkirchstr 17/18, 10179 Berlin
Suite 6, Provident House,
Havilland Street, St Peter Port GY1 2QE
Suites 1603-05, 16th Floor,
625 King’s Road, North Point
9th Flr Umiya Business Bay Tower,
1 Cessna Business Park,
Marathahalli-Sarjapur Ring Road,
Kadubeesanahalli, Bangalore 560037
Karnataka
4th Floor Kyodotsushin Kaikan, 2-2-5,
Toranomon, Minato-ku, Tokyo 105-0001
101 Thomson Road, #30-01
United Square, Singapore 307591
2F, 16 Gangnam-daero 95-gil,
Seocho-gu, Seoul 06526
10F, No 66, Sec 1, Neihu Road,
NeiHu District, Taipei City 11493
3500 South Dupont Highway,
Dover, Delaware 19901
1209 Orange Street,
Wilmington, Delaware 19801
1209 Orange Street,
Wilmington, Delaware 19801
1209 Orange Street,
Wilmington, Delaware 19801
1209 Orange Street,
Wilmington, Delaware 19801
1209 Orange Street,
Wilmington, Delaware 19801

100 per cent ‘A’ shares held
indirectly
100 per cent ‘B’ shares held
directly

Held directly

26 per cent held indirectly*

Note
* Spirent Communications plc holds 26 per cent of the issued share capital in Jolata, Inc through one of its subsidiaries; this has been treated as an

associate company in these financial statements. Jolata, Inc was dissolved on 31 January 2019.

179

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOTHER INFORMATION

FINANCIAL HISTORY

Summary income statement
Continuing operations
Revenue
Cost of sales

Gross profit
Product development
Selling and marketing
Administration
Other items

Operating profit/(loss)
Share of loss of associate
Net finance income/(costs)
Gain on divestment

Profit/(loss) before tax
Tax

Profit/(loss) for the year

Summary balance sheet
Intangible assets
Property, plant and equipment
Working capital (excluding cash and deferred tax)

Operating assets
Investment in associate
Net funds including long-term cash
Provisions and other liabilities
Deferred tax
Defined benefit pension plan deficit

Net assets
Total equity

Summary cash flows
Cash flow from operating activities
Net interest received
Net capital expenditure

Free cash flow
Acquisitions and disposals and investment in associate
Share capital, share repurchase and ESOT
Dividends paid
Transfer from long-term deposit and loan repayment

Net (decrease)/increase in cash and cash equivalents

2018

Restated1
2017

Restated1
2016

$ million

2015

2014

476.9
(132.4)
344.5
(96.9)
(123.9)
(46.6)
(19.6)
57.5
–
1.3
2.4
61.2
(5.4)
55.8

158.0
36.1
33.2
227.3
–
121.6
(14.0)
22.0
(1.6)
355.3
355.3

60.2
1.3
(10.6)
50.9
1.8
(2.5)
(54.8)
–
(4.6)

454.8
(129.8)
325.0
(103.0)
(116.8)
(46.3)
(15.2)
43.7
–
0.3
2.6
46.6
(17.6)
29.0

163.6
42.3
10.2
216.1
–
128.4
(6.8)
22.9
(6.5)
354.1
354.1

69.3
0.6
(13.5)
56.4
(2.7)
–
(24.6)
–
29.1

457.9
(133.6)
324.3
(111.7)
(125.4)
(40.7)
(87.6)
(41.1)
(4.5)
(0.4)
–
(46.0)
3.7
(42.3)

169.8
47.3
18.9
236.0
–
96.2
(6.8)
32.8
(15.8)
342.4
342.4

42.7
0.3
(17.1)
25.9
(2.7)
–
(24.2)
–
(1.0)

477.1
(145.3)
331.8
(118.3)
(127.2)
(44.2)
(32.0)
10.1
(0.4)
(0.1)
–
9.6
3.9
13.5

251.6
51.1
8.8
311.5
4.6
102.1
(11.3)
25.0
(19.8)
412.1
412.1

60.4
0.4
(25.5)
35.3
(6.7)
0.1
(23.5)
(0.1)
5.1

457.2
(140.9)
316.3
(115.4)
(113.5)
(41.4)
(22.3)
23.7
–
0.4
–
24.1
(3.5)
20.6

273.3
52.2
13.9
339.4
–
99.8
(8.3)
18.0
(14.5)
434.4
434.4

41.7
0.6
(31.6)
10.7
(85.9)
(16.4)
(22.2)
–
(113.8)

180

Spirent Communications plc Annual Report 2018Other information – continuing operations
Expenditure on property, plant and equipment
Depreciation
Product development

Share information
Earnings/(loss) per share from continuing operations (cents)
Basic
Diluted
Adjusted basic2,3

Dividend per Ordinary Share (cents)
Special dividend per Ordinary Share (cents)
Fully paid Ordinary Shares in issue at year end
(number, million)
Segmental analysis – continuing operations
Revenue4
Networks & Security
Lifecycle Service Assurance
Connected Devices

Adjusted operating profit4
Networks & Security
Lifecycle Service Assurance
Connected Devices
Corporate – non-segmental
Adjusted operating profit2
Exceptional items
Acquisition related costs
Acquired intangible asset amortisation
Goodwill and acquired intangible asset impairment
Share-based payment
Operating profit/(loss)

Geographical information – continuing operations
Revenue by market
Americas
Asia Pacific
Europe, Middle East and Africa

2018

12.0
16.5
96.9

9.14
9.05
10.86
4.49
–

611.7

285.1
112.8
79.0
476.9

56.4
17.4
10.5
(7.2)
77.1
(13.1)
–
(3.7)
–
(2.8)
57.5

265.4
159.1
52.4
476.9

2017

2016

2015

14.9
18.0
103.0

4.75
4.71
7.55
4.08
5.00

17.3
19.1
111.7

(6.93)
(6.93)
5.29
3.89
–

26.5
25.0
118.3

2.18
2.17
5.00
3.89
–

$ million

2014

33.8
19.7
115.4

3.35
3.35
5.82
3.89
–

611.7

261.0
109.2
84.6
454.8

43.9
17.9
5.2
(8.1)
58.9
(6.7)
–
(6.3)
–
(2.2)
43.7

248.6
160.2
46.0
454.8

262.2
99.2
96.5
457.9

47.2
11.2
(4.4)
(7.5)
46.5
(4.8)
–
(12.9)
(69.1)
(0.8)
(41.1)

254.1
149.3
54.5
457.9

239.2
112.2
125.7
477.1

34.6
17.7
(4.4)
(5.8)
42.1
(12.5)
(0.1)
(14.8)
(3.8)
(0.8)
10.1

268.1
148.2
60.8
477.1

457.2

(6.3)
46.0
(4.1)
(3.8)
(12.7)
(1.0)
(0.7)
23.7

245.0
142.5
69.7
457.2

Notes
1. Balance sheet has been restated for the adoption of IFRS 15 on 1 January 2018, as per note 37 of Notes to the consolidated financial statements.

Deferred compensation balance has been reclassified from trade and other payables to defined benefit pension plan deficit, as per note 2 of Notes to
the consolidated financial statements.

2. Before exceptional items, acquisition related costs, acquired intangible asset amortisation, goodwill and acquired intangible asset impairment and

share-based payment.

3. Before gain on divestment, impairment of investment in associate, items in note 2, tax effect of items in note 2, revaluation of deferred tax assets due to US

tax reform (in 2017) and prior year tax.

4. Restated operating segment information is not available for corresponding amounts prior to 2015.

181

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOTHER INFORMATION

ALTERNATIVE PERFORMANCE MEASURES

The performance of the Group is assessed using a variety of alternative performance measures which are presented to provide users
with additional financial information that is regularly reviewed by management. The alternative performance measures 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 alternative performance measures reflect the underlying performance of the Group and provide a more
meaningful comparison of how the Group is managed and measured on a day-to day basis. Such alternative performance measures
should not be viewed in isolation or as an alternative to the equivalent GAAP measure.

The alternative performance measures 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 on pages 22 and 23.

ORDER INTAKE
Order intake represents requests 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, 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 believe 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.

182

Spirent Communications plc Annual Report 2018ADJUSTED 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 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, amortisation of acquired intangible assets, share-based payment, gain on divestment, tax on adjusting items, significant one-off
tax impacts, for example revaluation of deferred tax assets due to US tax reform in 2017 and prior year tax.

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 11 of Notes to the full year consolidated
financial statements.

FREE CASH FLOW
Free cash flow is cash flow generated from operations, less tax and net capital expenditure, after interest paid and/or received.

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 the 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 48.

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 profits into cash
and ultimately to generate funds for future investment.

183

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONOTHER INFORMATION

SHAREHOLDER INFORMATION

FINANCIAL CALENDAR 2019

7 March 2019
14 March
15 March
1 May
3 May
10 May
30 June
August
August
August
September
September
31 December 2019
February/March 2020

Full Year results and final dividend announcement
Final dividend – ex-dividend date
Final dividend – record date
Annual General Meeting
Final dividend – payment date (Ordinary shareholders)
Final dividend – payment date (ADR holders)
Half-year end
Half-year results and interim dividend announcement
Interim dividend – ex-dividend date
Interim dividend – record date
Interim dividend – payment date (Ordinary shareholders)
Interim dividend – payment date (ADR holders)
Financial year end
2019 Full Year results and final dividend announcement

ORDINARY SHARES AND AMERICAN DEPOSITARY RECEIPTS
The Company’s Ordinary Shares are traded on the London Stock Exchange (ticker: SPT). The Company operates a Level 1 American
Depositary Receipt (ADR) programme with each ADR representing four Ordinary Shares. The ADRs trade on the US over-the-counter
market (symbol: SPMYY; CUSIP: 84856M209). BNY Mellon is the authorised depositary bank for the Company’s ADR programme.
The ADRs are quoted on the OTC Pink electronic quotation service which can be found at www.otcmarkets.com/otc-pink/home.

ANNUAL GENERAL MEETING
The Company’s 2019 Annual General Meeting (2019 AGM) will be held at 12.30pm on Wednesday 1 May 2019 at the offices of FTI
Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD.

COMPANY’S REGISTRAR
Enquiries concerning shareholdings, change of address or other particulars should be directed in the first instance to the Company’s
registrar, Equiniti, on 0371 384 2126. Equiniti also provide a range of online shareholder information services at www.shareview.co.uk,
where shareholders can check their holdings and find practical help on transferring shares or updating their details.

DIVIDENDS
Shareholders are able to choose to receive their dividends direct to their bank account, reinvested in Ordinary Shares through the
Company’s Dividend Reinvestment Plan (see below), paid by cheque or paid in foreign currencies. To change how you receive your
dividends please contact the Company’s registrar, Equiniti, on 0371 384 2268 or log on to www.shareview.co.uk.

DIVIDEND REINVESTMENT PLAN
The Company has a Dividend Reinvestment Plan (DRIP) delivered by Equiniti Financial Services Limited. The DRIP allows eligible
shareholders to use their cash dividend to buy additional shares in the Company, so increasing their shareholding. If you would like
additional information, please contact the Company’s registrar, Equiniti, on 0371 384 2268 or log on to www.shareview.co.uk.

SHAREHOLDER SECURITY
Shareholders are advised to be wary of any unsolicited advice, offers to buy shares at a discount or offers of free reports about
the Company.

Details of any share dealing facilities that the Company endorses will be included in the Company’s mailings or on our website.
More detailed information can be found at www.fsa.gov.uk/consumerinformation.

184

Spirent Communications plc Annual Report 2018
GLOSSARY

4G (Fourth Generation)

5G (Fifth Generation)

5G New Radio (5G NR)

Cloud

Code Division Multiple
Access (CDMA)
Data Center

Enhanced 911 (E911)

Enhanced Multimedia
Broadcast Multicast
Service (eMBMS)
Ethernet

Evolution-Data Optimised
(EV-DO or EVDO)

Frequency division
duplex (FDD)
Global Navigation
Satellite Systems (GNSS)

Global Positioning
System (GPS)

Internet of Things (IoT)

Internet Protocol (IP)

Internet
Protocol Multimedia
Subsystem (IMS)
Jamming

Lab-as-a-Service (LaaS)

Long-Term Evolution (LTE)

Fourth generation of mobile communications that delivers data rates of tens to hundreds of
megabits per second.
The next major phase of mobile telecommunications standards beyond the current
4G/IMT-Advanced standards.
5G NR is a new air interface being developed for 5G. An air interface is the radio frequency
portion of the circuit between the mobile device and the active base station. The active base
station can change as the user is on the move, with each changeover known as a handoff.
A variety of computing concepts that involve a large number of computers connected through a
real-time communication network such as the internet. Often used in reference to network-based services
served up by virtual hardware, simulated by software running on one or more physical machines.
A digital cellular technology standard which allows numerous signals to occupy a single transmission
channel, thus increasing network capacity; used in 2G and 3G radio communications.
A centralised location where computing resources critical to an organisation are maintained in a
highly controlled environment.
A support for wireless phone users to dial 911 to request help in an emergency that allows the location of
the user to be known to the call receiver.
eMBMS offers LTE service providers an effective way to lower cost per bit when delivering the same
content simultaneously to multiple end users.

A family of networking technologies originally developed for local area networks, which migrated to
metro area networks and eventually became the dominant standard in wireline networks worldwide.
A telecommunications standard for the wireless transmission of data through radio signals, typically
for broadband internet access. EV-DO is an evolution of the CDMA2000 (IS-2000) standard that
supports high data rates and can be deployed alongside a wireless carrier’s voice services.
A technique where separate frequency bands are used at the transmitter and receiver side.

The standard generic term for satellite navigation systems that provide autonomous geo-spatial
positioning with global coverage. GNSS allows users’ receivers to determine their location to within
a few metres by employing a triangulation technique that uses information from multiple satellites.
A global navigation satellite system operated by the United States government for determining
a user’s location and height at any point on the earth’s surface. A receiver uses minute differences
in measured time signals from clocks on satellites to calculate these positions and altitudes.
A network of physical objects or “things” embedded with electronics, software, sensors and
connectivity to enable data exchange with the manufacturer, operator and/or other connected
devices. Each thing is uniquely identifiable through its embedded computing system but is able
to interoperate within existing internet infrastructure.
The primary network protocol used on the internet and on other network devices to facilitate and control
the flow of data.
A standardised next-generation architecture for telecoms operators who want to provide mobile and
fixed multimedia services.

The intentional emission of radio frequency signals to interfere with the operation of GNSS receiver by
saturating it with noise or false information.
A cloud-based build and deploy environment to manage lab resources required by developers, testers,
pre and post-sales support teams and others on an on-demand basis. LaaS is proven to reduce CapEx
and increase lab user efficiency.
An advanced wireless data communications technology standard (sometimes called “4G”) which is an
evolution of 3G UMTS standards. In addition to its wireless interface specification, LTE uses a simplified
flat IP-based network architecture.

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GLOSSARY

Multiple-Input Multiple-
Output (MIMO)
Network Functions
Virtualisation (NFV)

Observed Time Difference
of Arrival (OTDOA)
Radio Frequency (RF)

Software-Defined
Network (SDN)
Spoofing

Time Division
Duplex (TDD)
Universal Mobile
Telecommunications
System (UMTS)
Virtualisation

Voice over LTE (VoLTE)

Voice over Wi-Fi (VoWi-Fi)
Wireless Local Area
Network (WLAN)

A wireless technology that employs multiple radio antennas on both the transmitter and receiver to
improve the data transmission speeds and capacity of wireless networks.
An initiative to provide a network production environment which lowers cost, raises efficiency
and increases agility by hosting network functions previously carried out by proprietary, dedicated
hardware on virtual machines running on industry-standard commodity hardware.
A positioning feature in which user equipment measures the time difference between some specific
signals from several base stations and reports these time differences to a specific device in the network.
A technology used for wireless broadcasting and/or communications that uses radio waves within
the range over which they may be transmitted, from about 3 kilohertz to about 300,000 megahertz.
An approach to networking in which control is decoupled from hardware and given to a software
application called a controller.
An attempt to deceive a GNSS receiver’s estimate of its position or time by broadcasting counterfeit
GNSS signals, structured to resemble a set of normal GNSS signals, or by rebroadcasting genuine signals
captured elsewhere or at a different time.
TDD refers to duplex communication links where uplink is separated from downlink by the allocation of
different time slots in the same frequency band.
The most common 3G wireless technology globally, which uses wideband code division multiple access on
its underlying air interface and offers support for data transfer rates from hundreds of kilobits per second to
tens of megabits per second.
Technologies designed to provide a layer of abstraction from the physical characteristics of computing
resources to simplify the way in which other systems, applications or end users interact with those resources.
A standards-based scheme adopted by the GSMA, the cellular industry’s association, to provide voice
service over data-only LTE networks. VoLTE’s use of an IP Media Subsystem enables voice to be offered
as part of a rich communications solution, integrated with services such as messaging, live video sharing
and file transfer.
Transmission of IP-based voice communication (VoIP) over a Wi-Fi network.
A wireless distribution method for two or more devices that use high-frequency radio waves and often
includes an access point to the internet. A WLAN allows users to move around the coverage area, often
a home or small office, while maintaining a network connection.

186

Spirent Communications plc Annual Report 2018Brokers (joint)
Jefferies Hoare Govett
Vintners Place
68 Upper Thames Street
London EC4V 3BJ
United Kingdom
Tel: +44 (0)20 7029 8000
Website: www.jefferies.com

UBS Limited
5 Broadgate
London EC2M 2QS
United Kingdom
Tel: +44 (0)20 7567 8000
Website: www.ubs.com

Financial Adviser
NM Rothschild & Sons Limited
New Court
St Swithin’s Lane
London EC4N 8AL
United Kingdom
Tel: +44 (0)20 7280 5000
Website: www.rothschildandco.com

Financial PR Advisers
FTI Consulting Limited
200 Aldersgate
Aldersgate Street
London EC1A 4HD
United Kingdom
Tel: +44 (0)20 3727 1000
Website: www.fticonsulting.com

CONTACT DETAILS

Registered office
Spirent Communications plc
Northwood Park
Gatwick Road
Crawley
West Sussex RH10 9XN
United Kingdom
Tel: +44 (0)1293 767676
Fax: +44 (0)1293 767677
Email: investor.relations@spirent.com
Website: https://corporate.spirent.com
Registered in England No: 470893

Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
United Kingdom
Tel: +44 (0)20 7951 2000
Website: www.ey.com

Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
United Kingdom
Tel: 0371 384 2126 (UK)
Tel: +44 (0)121 415 7047 (overseas)
Text phone (for shareholders with hearing difficulties):
0371 384 2255 (UK)
+44 (0)121 415 7028 (overseas)
Website: www.shareview.co.uk

ADR depositary
BNY Mellon Corporation
PO Box 30170
College Station
TX 77842-3170
USA
Tel: +1 888 269 2377 (toll free US)
Tel: +1 (201) 680 6825 (outside US)
Email: shrrelations@cpushareownerservices.com
Website: www.computershare-na.com/bnym_adr

187

Spirent Communications plc Annual Report 2018STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTSOTHER INFORMATIONBoth the paper manufacturer and printer are registered to the Environmental Management System
ISO14001 and are Forest Stewardship Council (FSC) chain-of-custody certified.

Consultancy, design and production
www.luminous.co.uk

Design and production

www.luminous.co.uk

Spirent Communications plc
Northwood Park
Gatwick Road
Crawley
West Sussex
RH10 9XN
United Kingdom

Tel: +44 (0)1293 767676
Fax: +44 (0)1293 767677

Email: investor.relations@spirent.com
Website: https://corporate.spirent.com

Registered in England No: 470893

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.