The UK IT and Communications Industry - Case Study Example

Global Running and Risk Management of Spirent Communications Plc. Spirent Communications Plc. Introduction Spirent Communications is a communications technology company with its businesses being operated through two segments including service assurance and performance analysis. Among its duties is to provide communication test and measurement solutions as they help in planning, developing and delivering network services, devices and application. It has a wide customer base of around 1,400 customers worldwide. Its other services include the provision of wireless devices, cloud computing, as well as network infrastructure, applications and visualizations, locating technologies and satellite navigation. Field test solutions and monitoring of network are also other things that the company does to allocate service providers in order to help them analyze, troubleshoot and resolve issues with the network. Spirent has an exchange market size of 20,000 and a quarterly turnover of 2.42 for the quarter that ended in June 2014. It operates in the UK IT and communications industry, where it provides services such as evaluation of the performance, agility and the latest technologies in the industry. The company operates in the global market where it has emerged to be a leader in IT and Communications services with a market share of 30.9%. The current share price of this company is 67.20 pounds, and this shows a 0.9% increase. Its dividends per share are 2.20 pounds while its earnings per share are currently 5.10 pounds. The company is also involved in trading and supplying a range of products that they secure from a reputed brand known as Duro Engineering (Benjamin, 2000). Important Financial Trends As the world markets dilapidated over the years and more in 2011-2012 due to losing of confidence among the consumers, the Spirent experienced exciting times as it delivered new and enhanced capabilities to the consumers. It won more customers industry recognition and grew in revenues and profit in the financial year and increased business investments which generated a positive return. There were improvements in various financial sectors from group revenues, operating profits and the earnings per share. During the period, Group revenues increased by 10% to $528.2 million from $482.2 million in 2010 which indicated a growth across all the regions including a book to bill ratio of 102. There was an increase in the performance analysis by 14% in revenue. However, there was a slight reduction in sales for service assurance by 5%. In adjusted group operation, profits grew up by 10% to $125.9 million with a reported operating profit up by 10% to $125.9 million. All these showed a development and growth in performance analysis by 18%. In the period of 2010, the basic earnings per share had an increase of 20% while the adjustable basic earnings per share rose by 17%. Contributed by the strong financial performance support, there occurred an increase of 17% in the total dividend up to 2.93 cents per share with a final proposal on dividend of 1.67 cents per share. Earnings per share Figure 1: Earnings per share of the company in five years The data in the table above and the graphical representation of the earnings per share of the company, there has been a decline in the companys earnings per share in the first three years from 0.16 to 0.12 in 2008-2010. This was followed with a minimal increase from 0.12 to 0.13 in 2011. However in the period 2011-2012, the decline continued up to its original level of 0.12 earnings per share. However, the constant fall in the earnings per share did not affect the book value of shares as it continued to rise across the years (Adams, 2013). The return on sales showed a constant 24% based on the adjusted operating profit after the increased investments on product upgrading for future growth. The analysis of financial performance has shown that there was a free cash flow of up to $76.1 million which was a reflection of increased investments on the business. The year 2011 showed an upsurge in the demand for various products for the Spirent test solutions. In the year 2013, the company has seen important in the history of the company due to the changes in its markets and the shifts that have taken place in the life of the company. Due increased competition, underinvestment as well as a lack of expansions of products to the new markets, there has been a negative impact on the companys performance compared to the previous years (Gandolfo, 2010). The company in turn has employed radical reorganizations of its activities that are objectively oriented towards harnessing the winning strength and talent of the company. These initiatives are expected to take shape by 2014 in order to fund its operations. In 2013, the group revenue declined to $413.5 million which led to a fall on the profit before tax to $ 39.1 million. There occurred a revenue fall in the first half of the year by 19 per cent but slowed down in the rate of fall in the second half of the year. During the time, revenues fell by 6 per cent but there was an increase of $21.4 million in the order book. The group had a 12 percent returns on sale that was down from 25 percent based on the adjusted operating profit. This was a reflection of the impact on the fall on the revenue and invests to generate long-term growth for the company. In the process, there was an increased expenditure in development by $14.4 million with $4.9 million on sales and marketing (Bradbury, 2014). There was a further decrease in the basic earnings per share in 2013 to 5.10 cents per share while 5.71 cents was for adjustable basic earnings. In the same year, the free cash flow generation for the group was $43.9 million which reflected a conversion ratio for cash of 1.3 times. By the close of 2013, the companys cash balance was at $216.2 million with no debts. However, during the year the operating return on capital use stood at 16 per cent minus the cash balances. The year 2013 saw declining revenue for the company with a significant impact on the profits. It also saw the loss in the market share in its major markets; there was a decreased demand due to customer loss of businesses The balance in the proceeds that was estimated at $33 million was used to buy the companys shares in the market. The group expected to have an addition investment level of $33 million within the year 2013. This was expected to be through a 15 per cent increase in product development, sales extension and capability expansion in the main markets and the new markets. Despite the challenges in 2013, the company also progressed in some areas such as; in the structural reorganization into a business unit to improve on customer needs satisfaction and service delivery (Ballantine, 2013). Risk Management Risk Management of enterprises has become one of the mainstream agenda in every corporate consciousness over the past decade. Too much money is being spent by corporations and financial institutions globally in developing systems and processes that can enable them to assess and manage risks and uncertainty in a more effective and sustainable manner. These are done in an attempt to help the company from getting preventable losses. The Spirent communication company has adopted mechanisms that enable it to serve a more strategic function in the understanding where and how risks arise in the business. Risk and uncertainty are inevitable in an organizations operation. The major risks involved in the operations of such an organization include; exchange rate risks, political and county risks which are beyond the organizations control. As such, the organization has come up with measures of handling such a situation. Risks and uncertainty often present to an organization threats if not well checked and put under control (Covello, 2011). Exchange rate risk management With the extension of the companys geographical coverage in the world, different exchange rates do affect the operations of the company. The demand for risk management by organizations around the globe has led to the globalization of the Global Running and Risk Management of Spirent Communication Plc. The action has led to a total of $23.3 unrealized foreign gain in the year 2013 and $19.6 in the 2011. In 2010, it showed a total of $19.3 loss while, in 2009, it showed a loss of $12.2 (Chess, 2009). The major instruments in the management of finances in the company include trade payables and receivables, short-term deposits and short-dated commercial paper. The company deals in derivative transactions for forward foreign exchange. It has been known by financial operatives that trading in the foreign and often result into translation and net assets often results into currency exposure. Due to the companys high presence overseas, the trading results can highly be affected due to the US dollar exchange rates. The global world, the nature of such multilateral organizations is such that they are likely to be hit by risks on the exchange rates in the foreign countries. Net assets transformation on to the financial statements of foreign investments gets affected. More often than not, the foreign exchange rates do affect the profits of a company due to its varying impacts concerning the different countries of the organizations (Wiedemann, 2010). The acquisition and adoption of knowledge on foreign currency are necessary to enable an organization achieves a forward oriented foreign exchange contracts. The companys report has shown an adoption of foreign exchange mechanism with a forward orientation with variable provision for risk and charges in every year. However, there has been an occurrence on income accumulations due to the deferment of the incomes though at a decreasing rate as indicated in the balance sheets (Gatto, 2011). Due to these risks, the company carries out most of its transaction hedging activity in relation to normal trading activity. It does not participate in the hedging of translation exposure of the net results of overseas operations that are accounting and not liquid cash exposure. It ensures that sufficient funding sources are available to cater for the planned activity requirements. It mainly operates in finance that deals with cash and cash equivalents being held commonly in a central place. The risk of foreign currency exchange rates affecting the equivalent value of sterling denominates assets and liabilities that the fund accounts for. The risk of low market liquidity leading to reduced trading volumes and affects the ability of the company to compete with the long term brokers in the market. In order to control this, the company conducts a daily valuation of stock through their specification as either illiquid for the review of pricing accuracy. The adoption of the method of currency forward control has been useful due to its ability to be modified for certain delivery periods. The future prices of products and services can, therefore, be protected in case the forward contracts exchange rates lock. It, therefore, provides a good tool for protecting the companys earnings and cash flow (Fisher, 2010). These risks and uncertainty are monitored by the company management pursuant to the investment objectives and laid down policy as is stated in the Trust Deed. Sticking to the investment and borrowing guidelines as is set out by the Trust Deed, Prospectus and in the Collective Investment Schemes are the major risk mitigation procedures by the company. Furthermore, the company has developed a tendency of setting out the information on the investment portfolio in every report on investment and portfolio statements (ECHA, 2010). Political Risks Most companies have become successful in developing the metrics for the estimation of profitability and how it is impacted under varying financial scenarios. However, they have not been able to develop comparative rigorous methods of the outcomes as a result of the inherent political risks in the international business activities (Davies, 2006). Political risk is a function of the preferences of the political leaders their parties and factions. It is with the consideration that "globalization can be referred to as a process of rising acceptance of political risk while searching for greater economic rewards. Economic success has bred acceptance of ever-greater political risk exposure. As the Spirent communication has chat the murky waters of globalization and has put forward a framework in the understanding of the influences of local political and market dynamics affect foreign ventures. It has developed political analysis mechanisms in its investment operations that allow it to not only contemplate broad, easily observable trends and societal nuances, but also the personality quirks that may derail the success of the venture. The company has mechanisms for observing the political risks that are there especially in the emerging markets. It analyzes the countries with positive account balances and supports low domestic interest rates. Being aware of the international political dynamics helps the company to anticipate the shifts in the countries of investments macro-levels that may have an effect on the interest rates that the company is interested in (Mintel, 2012). Today, with the increased globalization politics has become a business to every business venture. With the prior analysis of the trends, the Spirent Company has adopted to the business of offshoring and outsourcing which radically changed its cost structures in the year 2013. Their original international expansion plan which has been factored in its operations has enabled it to evaluate its political risk exposure and assessment of the impacts to come up with effective plans of cushioning itself from such risks. In conclusion, for profitability achievement in 2014, the company must increase rationality on investment expenditure and focus more on returns to avoid the slowdown in growth and profit generation as was witnessed in the year 2013 (Khalik, 2013). List of References Adams, W.C. (2013). The role of media relations in risk communication. Public Relations Quarterly. Winter. 28-32. Benjamin, S.J. & Belluck, D.A. (2000).Risk feedback: an important step in risk communication. Management Operations. Bradbury, J.A. (2014). Risk communication in environmental restoration programs. Ballantine, B. (2013) Improving the quality of risk management in the EU: Risk communication. EPC Working paper. Chess, C. & Hance, B.J. (2009). Opening doors: making risk communication agency reality. Conservation Foundation. Covello, V.T., von Winterfeldt, D. & Slovic, P. (2008). Risk communication. Carcinogen Risk Assessment. Covello, V.T. (2011). 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