RNS Number:0137S
Marconi Corporation PLC
13 November 2003
Press enquiries:
Joe Kelly, tel: 0207 306 1771; email: joe.kelly@marconi.com
David Beck, tel: 0207 306 1490; email: david.beck@marconi.com
Investor enquiries:
Heather Green, tel: 0207 306 1735; email: heather.green@marconi.com
MARCONI CORPORATION PLC: INTERIM RESULTS
FOR THE THREE AND SIX MONTHS ENDED 30 SEPTEMBER 2003
* Local areas of increased demand lead to 6% sequential sales growth from #367m
in Q1 to #389m in Q2
*Targeting further slight increase in Q3 sales following continued
stronger market dynamics in North America and Germany
*First Half sales #756m (H1 FY03: #992m Network Equipment and Network
Services)
* Solid progress in operational performance improvements from Q1 to Q2 in
Network Equipment and Network Services
*Adjusted (1) gross margin increased to 26.2% (Q1 FY04: 22.6%); gross
margin including impact of exceptional credits to 26.5% (Q1 FY04: 24.0%);
now targeting adjusted gross margin exit run-rate (2) in the range of 27 to
29% by 31 March 2004
*Adjusted (1) operating cost run-rate(2) reduced to #455m per annum by
30 September 2003 (30 June 2003: #475m; 30 September 2002: #635m); on track
to reduce exit run-rate below #425m by 31 March 2004
*Adjusted (1) EBITA operating loss (before goodwill amortisation,
exceptional items and share option costs) in Network Equipment and Network
Services reduced from #37m in Q1 to #16m in Q2; Adjusted(1) EBITDA in
Network Equipment and Network Services improved from #19m loss in Q1 to #7m
profit in Q2
*First Half Group operating loss #149m; reduced from #87m in Q1 to #62m in
Q2 (H1 FY03: #491m)
* Maintained strong performance against cash generation plans
*Fourth consecutive quarter of positive operating cash flow before
exceptional items; H1 FY04 #65m - Q1 FY04 #32m, Q2 FY04 #33m (H1 FY03 #142m
outflow); Group operating cash outflow after operating exceptional items and
before financial restructuring H1 FY04 #9m (H1 FY03 #323m outflow)
*Net cash position further reinforced through continued drive to maximise
cash generation; net cash of #99 million at 30 September 2003, up from #5m
at 30 June 2003
*Disposal proceeds applied to fund mandatory partial redemptions of Junior
Notes; principal amount reduced to $289m (c. #174m) at 17 October 2003
* Completion of financial restructuring in May 2003; net assets of #323m at 30
September 2003
(1) Adjusted measures are before share option costs, goodwill amortisation and
exceptional items; a full reconciliation to non-adjusted measures are provided
in the Group's Non-Statutory Accounts and Operating and Financial Review for the
three and six months ended 30 September 2003.
(2) Run-rate is the measure of annualised gross margin or operating costs before
share options, exceptional and non-recurring items calculated on the last day of
the period.
London - 13 November 2003 - Marconi Corporation plc (MONI) today provided
interim results for the three and six months ended 30 September 2003.
Commenting on the results, Mike Parton, Chief Executive, said: "Our results for
the period demonstrate the continuous progress we are making. We are continuing
to deliver market-leading products and services to our customers and are
maintaining a tight control of our cash and cost base.
Our markets are still difficult to predict beyond the current quarter. However I
believe our optimism for the longer term looks increasingly justified."
John Devaney, Chairman, added: "The company completed its balance sheet
restructuring, strengthened its Board further and made very strong operational
progress during the first six months of the year. We are building strong
foundations to support the business and our stakeholders' longer term success."
Important Notice
This news release should be read in conjunction with Marconi Corporation Group
Non-Statutory Accounts and Operating and Financial Review for the three and six
months ended 30 September 2003.
Marconi Corporation plc US GAAP accounts for the same periods will be filed with
the SEC later today and made available on Marconi's website by midday (UK time).
Throughout the period of restructuring which has spanned the two financial years
ended 31 March 2002 and 2003, the Group incurred significant exceptional items
and recorded a significant impairment of goodwill. In order to present more
clearly the underlying business in this Press Release and in the accompanying
Operating and Financial Review, management also presents and focuses its
commentary on adjusted gross margins, operating losses and cash flows after
removing the impact of these material items.
Analyst Presentation and Conference Call
Management will host a presentation and conference call for analysts and
investors at 4:00 p.m. (UK time) on Thursday 13 November 2003.
Analysts and investors wishing to register to attend the presentation should
contact Marconi Investor Relations on +44 (0) 207 306 1735.
The conference call can be accessed on Marconi's web-site or by dialling +44 (0)
20 8996 3900 (in the UK), or +1 617 847 3007 (in the US) and quoting "Marconi
Interim Results". A replay facility will be available for 14 days by dialling
+44 (0) 1296 618 700, access code 365495 (in the UK) or +1 617 801 6888, access
code 49665868 (in the US).
MARCONI CORPORATION GROUP NON-STATUTORY ACCOUNTS and OPERATING AND
FINANCIAL REVIEW For the three and six months ended 30 September 2003
INTRODUCTION
This document is an interim report prepared under UK Generally Accepted
Accounting Principles (GAAP).
References to pro forma balances are to reflect our financial position as at 31
March 2003 as adjusted for the estimated impact of the Scheme of Arrangement and
financial restructuring that became effective on 19 May 2003. This information
was previously disclosed in Note 1 to our financial statements for the year
ended 31 March 2003.
CONTENTS
Section No Section
1 Overview
2 Outlook
3 Reporting Structure
4 Accounting for the Financial Restructuring
5 Board Appointments
6 Results of Operations
- Group Key Figures
- Review of Continuing Operations
- Other Financial Items
7 Financial Condition - Balance Sheet
8 Liquidity and Capital Resources
- Net Cash / Debt
- Cash Flow
9 Risk Management
10 Group Non-Statutory Financial Statements
- Consolidated Profit and Loss Account
- Consolidated Balance Sheet
- Consolidated Cash Flow Statement
- Reconcilation of Net Cash Flow to Movements
in Net Monetary (Debt)/Funds
- Consolidated Statement of Total Recognised
Gains and Losses
- Reconciliation of Movements in Equity
Shareholders' Interests
11 Notes to the Non-Statutory Accounts
12 Independent Review Report
FORWARD-LOOKING STATEMENTS
This document contains certain statements that are not historical facts,
including statements about Marconi's expectations and beliefs and statements
with respect to its business plan and other objectives. Such statements are
forward-looking statements. These statements typically contain words such as
"intends", "expects", "anticipates", "estimates" and words of similar import.
Undue reliance should not be placed on such statements, which are based on
Marconi's current plans, estimates, projections and assumptions. By their
nature, forward-looking statements involve risk and uncertainty because they
relate to events and depend on circumstances which may occur in the future.
There are a number of factors that could cause actual results and developments
to differ materially from those expressed or implied by such forward-looking
statements. These factors include, but are not limited to future revenues being
lower than expected; increasing competitive pressures within the industry;
general economic conditions or conditions affecting the relevant industries,
both domestically and internationally, being less favourable than expected.
Marconi has identified some important factors that may cause such differences in
the Company's Form 20-F annual report for year ended 31 March 2003 and Form 6-K
report for the quarter ended 30 June 2003 filed with the US Securities and
Exchange Commission and Form 10-Q for the quarter ended 30 September 2003 to be
filed with the US Securities and Exchange Commission on 13 November 2003.
Marconi disclaims any obligation to publicly update or revise these
forward-looking statements, whether to reflect new information or future events
or circumstances or otherwise.
OVERVIEW
Marconi is a focused multi-regional provider of telecommunications equipment and
services, which it supplies to major telecommunications network operators,
government agencies and selected large enterprises world-wide.
Marconi Corporation plc is listed on the London Stock Exchange (ticker symbol:
MONI) and on NASDAQ (ticker symbol: MRCIY).
Conditions in our main markets remain challenging with customer spending on
telecommunications equipment and services running at a considerably lower level
than in the first half of the previous financial year. Nevertheless, pockets of
increased demand in some areas during the second quarter enabled us to increase
sales by 6 per cent to #389 million compared to the first quarter of the
financial year (#367 million). This growth was driven in particular by increased
sales across our three main US equipment businesses Broadband Routing and
Switching (BBRS), Outside Plant and Power (OPP) and North American Access (NAA)
as well as increased demand for our fixed wireless access products in Germany
(see Sales by Geographic Destination and Sales by Product Area on pages 10 - 19
below).
Order intake was also stronger in the second quarter, leading to a book to bill
ratio above 1 for both the second quarter and the first half. This was driven
partly by a high level of orders received for fixed wireless access products in
Germany but mainly resulted from two major long-term service contracts booked in
the Middle East and Germany during the second quarter, (see Book to Bill Ratio
on page 19 below). We have recently announced a number of significant successes
for our next generation products. These include a three-year frame contract with
BT for the provision of our multi-service access node, the Access Hub, and a
smaller order for this technology from Fastweb (Italy) to allow this operator to
offer live broadcast services over ADSL. In addition, in North America, we were
awarded follow-on orders for our newly launched BXR-48000 multi-service switch
router from the US Federal Government and a major European financial
institution.
Gross profit amounted to #191 million, or 25.3 per cent of sales, in the first
half of the financial year compared to #153 million, or 15.0 per cent of sales
in the first half of the previous financial year. Adjusted gross profit (gross
margin before an exceptional operating credit of #6 million) amounted to #185
million, giving an adjusted gross margin of 24.5 per cent of sales for the first
half of the financial year, compared to #177 million or 17.4 per cent of sales
in the first half of the previous financial year. We recorded a marked
improvement within the period from #83 million or 22.6 per cent of sales in the
first quarter to #102 million or 26.2 per cent of sales in the second quarter.
This was driven mainly by the increased level of higher-margin BBRS sales and
cost savings achieved in our supply chain and manufacturing operations (see
Gross Margin on page 20 below). Further cost savings achieved across all
categories of adjusted operating expenditure enabled us to reduce our annualised
adjusted operating cost run-rate (described on page 24 and before goodwill
amortisation, exceptional items and share option costs) to #455 million by 30
September 2003 (see Operating Expenses on page 23 below).
Our operating loss from continuing operations improved to #149 million in the
first half of the financial year from #485 million in the first half of the
previous financial year. This improvement was driven by a decrease in
exceptional items and further cost reductions improving the adjusted operating
loss. Our adjusted operating loss (operating loss before goodwill amortisation,
exceptional items and share option costs) amounted to #58 million in the first
half of the financial year compared to #229 million in the first half of the
previous year, with good progress made from an adjusted operating loss of #42
million in the first quarter to #16 million in the second quarter, (see Group
Operating Loss (excluding Joint Ventures) on page 29 below). The #58 million
adjusted operating loss in the first half comprised an adjusted operating profit
of #27 million in the businesses which constitute our North American Ring Fence
(NARF) and an adjusted operating loss of #85 million in our Non Ring-Fenced
businesses (Non-NARF). Profitability in NARF is driven by a number of factors:
i) the gross margin performance of our BBRS business, which is higher than our
Group average. This business forms a key component of our next generation
network offering and is central to our ongoing business plans; ii) the benefit
of cost savings from operational restructuring initiatives undertaken across our
US businesses, which have been completed more rapidly than the ongoing actions
within our European businesses which are expected to produce further cost
savings in Non-NARF during the second half of the financial year and iii) a
lower operating cost base partly as a result of the inclusion of all central
costs in Non-NARF (see Operating Profit/(Loss) NARF compared to Non-NARF on page
31 below).
We recorded our fourth consecutive quarter of positive operating cash flow
(operating cash flow before exceptional items) at #33 million in the second
quarter compared to #32 million in the first quarter, driven largely by reduced
operating losses and further contribution from working capital improvements.
This, and the receipt of disposal proceeds, were more than sufficient to cover
our non-operating cash outflows during the second half, which related mainly to
exceptional restructuring costs and interest payments, leading to a total cash
inflow for the six months ended 30 September 2003 of #74 million before the
impact of the financial restructuring, management of liquid resources, Junior
Notes redemption and repayment of other financing. In total in the period, we
paid #116 million to fund two partial redemptions of our Junior Notes. As a
result of the cash flows described above and the Notes redemptions, our net cash
position improved from #5 million at 30 June 2003 to #99 million at 30 September
2003 (see Liquidity and Capital Resources on page 37 below).
OUTLOOK
Sales
As previously disclosed in our Trading Update on 23 October 2003, we are
beginning to see early signs of some of our major customers looking towards next
generation network projects but at the same time maintaining a prudent stance to
spending on current technologies and a continued tight control of capital
expenditure budgets. As a result, we are maintaining our cautious view on
potential volatility in market conditions.
Nevertheless, six weeks into the third quarter, we continue to benefit from
improved market dynamics in Germany as a result of continued strong demand for
fixed wireless access products amongst mobile operators and in our OPP and NAA
businesses in North America as a result of increased spending from both wireless
and wireline operators. Good progress in order intake since the beginning of the
quarter has allowed us to reduce our order gap (which we define as the level of
orders required to be booked and shipped before the end of the quarter to reach
our targeted level of sales) such that we are now targeting a slight increase in
sales in the third quarter compared to the #389 million sales recorded in the
second quarter.
Operational Performance - Gross Margin
We continue to focus on reducing cost and generating cash.
In light of the strong improvement in gross margin (before exceptional items)
realised during the three months ended 30 September 2003, we are now targeting
to achieve a gross margin (before exceptional items) in the range of 27 to 29
per cent of sales by the end of March 2004 (an increase from our previously
disclosed 27 per cent gross margin (before exceptional items) target exit run
rate by the same date). Management use gross margins before exceptional items as
a measure for the gross margin, as it eliminates one-off material items and is
more representative of the underlying business.
Cost reduction plans already in place should allow us to make steady progress
within this range during the second half of this financial year, before the
impact of product mix.
We expect a large proportion of the margin improvement to result from:
i) the continued benefits of sourcing from lower cost locations and the
renegotiation of improved business terms with key suppliers, particularly in
respect of our revised manufacturing outsourcing agreement with Jabil, which
became effective from 30 June 2003;
ii) further rationalisation of those supply chain and manufacturing operations,
which we have retained in-house; and
iii) the benefits of re-designed and recently launched product lines, such as
Next Generation SDH, as the proportion of sales of these new products increases
during the second half of this financial year.
In any given period, product mix has a positive or negative impact on our gross
margin performance. In the three months ended 30 September 2003, for example,
approximately half of the sequential improvement from 22.6 per cent in the three
months ended 30 June 2003 to 26.2 per cent adjusted gross margin (before
exceptional items) was due to a more favourable product mix, which resulted
mainly from the higher proportion of sales of higher margin BBRS equipment.
Similarly, as previously disclosed, we expect gross margin performance during
the three months ended 31 March 2004 to benefit from the scheduled sale of high
margin wireless software licences to one of our large US customers.
Operational Performance - Operating Costs
We are maintaining our previously disclosed target to reduce our operating costs
(excluding the impact of share option costs - see below) to an annualised
run-rate below #425 million by the end of March 2004. See page 24 for details.
Our target annualised operating cost run-rate (as described on page 24) relates
to our Network Equipment and Network Services businesses and includes the impact
of central costs. Management use operating loss before exceptional items as a
measure for the operating loss, as it eliminates one-off material items and is
more representative of the underlying business.
We have plans in place to achieve the further annualised cost savings of at
least #30 million in the second half of this financial year. These actions
include: i) the completion of planned headcount reductions in Europe which have
now been agreed with the necessary authorities and have been announced to the
workforce; ii) the benefit from the previously announced closure of our
headquarters for the CALA region previously based in Florida (US) with all
corporate functions for the CALA region being managed from our Italian
operations; and iii) our drive for further efficiency gains in research and
development.
As previously announced, we expect total headcount to reduce to around 13,000
employees at the end of March 2004 from approximately 14,100 at 30 September
2003. This includes the impact of the transfer of approximately 340 employees to
Elcoteq as a result of our previously announced outsourcing agreement in the
field of fixed wireless access products in Germany which took effect in November
2003.
We expect to incur a total #55 million charge (excluding the cost of payroll
taxes) in relation to our nil cost share option plan once all options have been
granted. The total charge for share options, which were announced at the time of
the restructuring, and granted up to 30 September 2003 is #49 million. This is a
non-cash item and will be charged to the profit and loss account over the life
of the plan through to the financial year ending 31 March 2007. Assuming all
performance triggers are met by the earliest vesting dates, we estimate that the
cost incurred will be spread as #25 million during the financial year 2004, of
which #8 million has been incurred in the six months ended 30 September 2003,
#20 million during the financial year 2005, #8 million during the financial year
2006 and #2 million during the financial year 2007. The #8 million incurred in
the six months to 30 September 2003 is recorded in the balance sheet as shares
to be issued.
Operational Performance - Cash
We continue to maximise cash generation in order to pay down our Junior Notes as
soon as possible, thereby reducing the associated interest charges.
During the six months ended 30 September 2003, we generated #65 million cash
from operations before exceptional cash costs, which was mainly achieved through
improvements in working capital. During the second half of the financial year,
we aim to generate positive operating cash flow. We believe that there is scope
for some further cash generation from ongoing working capital improvements but
expect a lower contribution than in the six months ended 30 September 2003 as
our business stabilises. We expect future operating cash performance (before
exceptional cash costs) will be driven mainly by improvements in overall
operating performance.
During the six months ended 30 September 2003, we generated #74 million total
cash (before the impact of payments required under the financial restructuring
and before the repayment of debt, including the partial redemption of Junior
Notes). This was mainly the result of the proceeds from the disposal of assets
and investments (#163 million), which more than offset interest payments and
exceptional cash outflows predominantly associated with the operational
restructuring of the business. We will use operating cash flow and our existing
cash resources to fund interest payments (which following the third partial
redemption of our Junior Notes on 17 October 2003 amount to approximately #13
million per quarter for Senior and Junior Notes) and cash costs associated with
our ongoing operational restructuring. As previously disclosed, we expect cash
outflows of approximately #100 million during this financial year to complete
our ongoing operational restructuring, of which approximately #41 million was
spent during the six months ended 30 September 2003.
Although the Group has accumulated significant tax losses in recent years, these
may not be available to cover earlier years that are open for, or under, tax
audit. In addition, as previously disclosed and as a result of the financial
restructuring, we have forfeited all loss carry forwards accumulated in the US
prior to May 2003 and our use of loss carry forwards in certain other
jurisdictions (e.g. Germany and the UK) may also be restricted. We will,
therefore, be subject to ongoing tax cash costs, where losses are unavailable.
We estimate that tax cash costs incurred in the normal course of business could
be in the order of #10 million for each of the financial years ending 31 March
2004 and 2005. Any amounts which become payable as the result of settlement of
tax disputes relating to prior periods would be in addition to this amount.
REPORTING STRUCTURE
Segments
We have now completed the planned implementation of our previously disclosed new
reporting structure, segmenting our business along geographic lines.
During the current year to March 2004, our financial reporting will reflect both
our previous and new reporting structures as we are unable to provide
comparative information for our new segments. Our previous structure split the
business into three segments: Network Equipment, Network Services and Other
(including analysis of central costs). Our new structure separates the group of
businesses we refer to as our North American Ring Fence (NARF) from the rest of
the Group, which, for reporting purposes, we refer to as our Non Ring Fenced
businesses (Non-NARF).
NARF mainly comprises the equipment and services activities of three US-based
businesses: Broadband Routing and Switching (BBRS), Outside Plant & Power (OPP)
and North American Access (NAA) (irrespective of the country of destination of
these sales).
Non-NARF mainly comprises our European and Rest of the World based businesses:
Optical Networks, Access Networks, Other Network Equipment and Network Services
and includes central costs.
In certain specific cases prior to the completion of our financial restructuring
and the implementation of the North American Ring Fence, we entered into
contracts with customers for the supply of equipment or services, which now form
part of our Non Ring-Fenced business but did this through legal entities, which
now form part of NARF (or vice versa). In our analysis of sales by product area
on page 14, we show these sales in the product or service area from which the
sale originated rather than through the legal entity which invoiced the final
customer, and provide a detailed footnote to reconcile the product area
sub-totals to the NARF and Non-NARF sales as they are recorded in the NARF and
Non-NARF consolidated financial statements (see pages 68 to 80). During the
first half of the financial year, sales of NARF products direct to customers and
through Non-NARF entities totalled #256 million and sales of products or
services from Non-NARF businesses sold through NARF legal entities totalled
approximately #4 million bringing total NARF sales to #260 million for the six
months ended 30 September 2003.
During the current financial year, we will provide comparative data for the
corresponding period of the previous financial year relating to our former
structure. As the ring-fence mechanism was only established during the first
half of the current financial year, with the exception of sales, we do not have
meaningful comparative data and will therefore not disclose NARF and Non-NARF
financials for the corresponding period of the financial year ended 31 March
2003.
In accordance with the terms of our Notes, we will continue to provide the
additional disclosures in respect of the sales, gross profit, operating profit/
(loss), capital employed and operating cash flow of the businesses that make up
our NARF segment until we have completed the full pay down of the Junior Notes.
Discontinued Operations
None of our activities were classified as discontinued operations in the three
or six months ended 30 September 2003. In the three months ended 30 September
2002, discontinued operations comprised our Italian-based Strategic
Communications subsidiary, the disposal of which was completed in August 2002.
Discontinued operations accounted for #28 million of Group sales, #6 million of
Group gross profit and #6 million of operating expenses before exceptional costs
of #nil, leading to an operating loss before exceptional items of #nil in the
three months ended 30 September 2002.
In the six months ended 30 September 2002, discontinued operations accounted for
#87 million of our sales, #24 million of our gross profit and #29 million of
operating expenses before exceptional costs of #1 million, leading to an
operating loss before exceptional items of #5 million in the six months ended 30
September 2002.
ACCOUNTING FOR THE FINANCIAL RESTRUCTURING
On 19 May 2003, the restructuring of the Group was completed and the Schemes of
Arrangement for Marconi Corporation plc (the Company) and Marconi plc (now known
as M (2003) plc) became effective.
The Company Scheme of Arrangement cancelled specific borrowings and creditors
amounting to #4,816 million, comprising bank loans (#2.1 billion), bonds held
externally and by Ancrane Ltd, a subsidiary of Marconi plc (#2.5 billion),
accrued interest (#113 million) and other creditors (#13 million). In
consideration for the cancelled claims, we paid #340 million of cash, issued new
loan notes of #756 million and issued 1 billion of new shares with a nominal
value of 5 pence per share or #50 million in total. Share premium of #3,670
million arose on the issue of the new shares representing the difference between
the balances schemed and the consideration.
In addition to the cancellation of these balances, a credit of #2 million has
been recorded in the profit and loss account, comprising capitalised net losses
on interest rate swaps hedging the debt previously unwound in prior periods and
now written off (#46 million) (see Notes to the Non-Statutory Accounts; note 6,
page 58), a balance waived by a subsidiary of Marconi plc in favour of Marconi
Corporation plc (#25 million) (see note 4e, page 56), the release of certain tax
provisions no longer required (#20 million) (see note 7, page 58) and accrued
interest now not payable (#3 million) (see note 5, page 57).
In addition, a foreign exchange gain of #8 million arose between the year-end
and the date on which the balances were schemed.
On 19 May 2003, the ESOP derivative banks settlement became effective and #35
million was paid to the ESOP derivative banks (see note 4f, page 57).
On 21 May 2003, a capital reduction occurred which reduced share premium to #nil
and credited other reserves (see note 15, page 62).
As a consequence of the restructuring and following the loss in the two quarters
and actuarial gains, as at 30 September 2003, we had net assets (including
goodwill) of #323 million and net cash funds of #99 million.
BOARD APPOINTMENTS
On 24 July 2003, we announced the appointment of Pavi Binning as Chief Financial
Officer. He has taken up the role and joined the Board of Marconi Corporation
plc on his departure from Diageo Plc, on 20 October 2003. At the same time,
Chris Holden, previously Interim Chief Financial Officer, stepped down from the
Board and took up the position of Group Financial Controller on a permanent
basis. Pavi Binning is expected to be granted one million options (following the
one for five share consolidation on 9 September 2003) under the Marconi
Corporation nil cost share option plan.
On 19 August 2003, we announced the appointment of Douglas McWilliams, founder
and Chief Executive of the Centre for Economics and Business Research, as a
non-executive Board director. The appointment became effective after our Annual
General Meeting on 8 September 2003.
RESULTS OF OPERATIONS
Group Key Figures
The tables below set forth the key figures relating to our operating performance
for the three and six months ended 30 September 2003.
Continuing Three months ended Six months ended
30 September 2003 30 September 2003
# million Pre- Pre-
exceptional Exceptional exceptional Exceptional
items items Total items items Total
Sales 389 - 389 756 - 756
===== ===== ===== ===== ===== =====
Gross Margin 102 1 103 185 6 191
===== ===== ===== ===== ===== =====
Adjusted (16) (14) (30) (58) (33) (91)
operating
loss
Goodwill (24) - (24) (49) - (49)
amortisation
Share option (8) - (8) (9) - (9)
costs
----- ----- ----- ----- ----- -----
Group (48) (14) (62) (116) (33) (149)
operating
loss
===== ===== ===== ===== ===== =====
Continuing Three months ended Six months ended
30 September 2002 30 September 2002
# million Pre- Pre-
exceptional Exceptional exceptional Exceptional
items items Total items items Total
Continuing 486 - 486 1,019 - 1,019
Discontinued 28 - 28 87 - 87
----- ----- ----- ----- ----- -----
Sales 514 - 514 1,106 - 1,106
===== ===== ===== ===== ===== =====
Continuing 80 (8) 72 177 (24) 153
Discontinued 6 - 6 24 - 24
----- ----- ----- ----- ----- -----
Gross Margin 86 (8) 78 201 (24) 177
===== ===== ===== ===== ===== =====
Continuing (102) (121) (223) (229) (205) (434)
Discontinued - - - (2) (1) (3)
----- ----- ----- ----- ----- -----
Operating loss (102) (121) (223) (231) (206) (437)
pre goodwill
amortisation
Goodwill (23) - (23) (54) - (54)
amortisation
----- ----- ----- ----- ----- -----
Group operating (125) (121) (246) (285) (206) (491)
loss
===== ===== ===== ===== ===== =====
Continuing (125) (121) (246) (280) (205) (485)
Discontinued - - - (5) (1) (6)
----- ----- ----- ----- ----- -----
Group operating (125) (121) (246) (285) (206) (491)
loss
===== ===== ===== ===== ===== =====
Review of Continuing Operations
Sales - Analysis by Geographic Destination
# million and Per Cent of
Total Continuing Three months ended Six months ended
Operations 30 September 30 September
2003 2002 2003 2002
# m % # m % # m % # m %
United 89 22.9 128 26.3 200 26.4 261 25.6
Kingdom
Italy 40 10.3 33 6.8 74 9.8 85 8.3
Germany 41 10.5 33 6.8 77 10.2 71 7.0
Other EMEA 53 13.6 95 19.5 92 12.2 170 16.7
----- ----- ----- ----- ----- ----- ----- -----
EMEA 223 57.3 289 59.4 443 58.6 587 57.6
NA 131 33.7 142 29.2 242 32.0 303 29.7
CALA 12 3.1 10 2.1 21 2.8 35 3.4
APAC 23 5.9 45 9.3 50 6.6 94 9.3
----- ----- ----- ----- ----- ----- ----- -----
Total 389 100.0 486 100.0 756 100.0 1,019 100.0
Continuing
Operations
==== ==== ==== ==== ==== ==== ==== ====
Capital expenditure by our main incumbent telecommunications customers continued
to run at a considerably lower rate than in the previous financial year and
spending by second tier operators has significantly reduced, leading to sales
declines across most major geographic regions in both the three months and six
months ended 30 September 2003 compared to the corresponding periods ended 30
September 2002.
The net impact of foreign exchange rate movements on our sales in the three
months ended 30 September 2003 was to increase sales by approximately #7 million
from the rates used for the three months ended 30 September 2002.
Three months ended 30 September 2003 compared with three months ended 30
September 2002.
Sales from continuing operations of #389 million in the three months ended 30
September 2003 decreased by #97 million or 20 per cent compared to #486 million
in the three months ended 30 September 2002.
Of the overall reduction in sales during the period, 68 per cent occurred in the
Europe, Middle East and Africa region (EMEA), which at #223 million accounted
for approximately 57 per cent of sales in the three months ended 30 September
2003 compared to #289 million or 59 per cent of sales from continuing operations
in the three months ended 30 September 2002.
The #66 million or 23 per cent decrease in sales in EMEA was largely driven by a
reduced level of sales in the UK and the Middle East, which was partially offset
by increased sales in Italy and Germany.
Sales in the UK amounted to #89 million in the three months ended 30 September
2003, a decrease of #39 million or 30 per cent compared to #128 million in the
three months ended 30 September 2002. Of this #39 million decrease, #16 million
related to reduced sales to BT as our largest customer has focused its reduced
capital expenditure on the accelerated deployment of its broadband access
network and supporting technologies resulting in greater reductions in spend in
other areas, particularly Optical Networks. We were not a supplier of broadband
access equipment as part of BT's initial deployment but we expect to benefit in
the future from our three-year frame contract for the supply of our next
generation multi-service access node, the Access Hub. Conformance testing of our
Access Hub into BT's network is progressing well and we expect to initiate
shipments under our frame contract early in calendar year 2004. The balance of
the reduction in sales in the UK resulted from a general decline in demand from
second tier operators who, despite showing initial signs of increased interest
in our equipment and services, have not yet re-launched any major capital
expenditure programmes since emerging from their financial restructuring
processes. Sales of Network Services in the UK remained relatively stable during
the period.
In Italy, sales increased by #7 million or 21 per cent to #40 million compared
to #33 million in the three months ended 30 September 2002. Sales to Telecom
Italia (TI) were up slightly during the period as a result of increased
shipments of our Access Hub into TI's broadband access network and increased
deliveries of our next generation optical products, in particular the MSH64c and
MSH2K optical core switches to Vodafone (previously known as Omnitel in Italy).
In Germany, sales increased #8 million or 24 per cent to #41 million compared to
#33 million in the three months ended 30 September 2002 as a result of strong
demand from wireless operators such as O2, E-Plus and Vodafone, as these
customers began to roll out 3G mobile networks in order to reach the 25 per cent
mobile coverage threshold prior to the 31 December 2003 deadline set by the
national regulator.
Sales in other countries in the EMEA region of #53 million decreased #42 million
or 44 per cent compared to #95 million in the three months ended 30 September
2002. Over half of this decline occurred in the Middle East as a result of the
completion of a key phase of a long-term service contract in Saudi Arabia in the
three month period ended 31 December 2002 and a reduced level of sales of
wireless consultancy services. The recent conflict in Iraq has also caused a
general slowdown in customer spend and delays to projects in the region in
recent months. #4 million of the decrease in sales arose as a result of the
disposal of our South African legacy operations completed in December 2002. The
balance related mainly to the significant reduction in the level of sales
through indirect channel partners such as Ericsson and Nokia, as well as further
reductions in capital expenditure by other European second tier operators.
Sales in North America accounted for #131 million or 34 per cent of sales from
continuing operations. The #11 million or 8 per cent reduction compared to #142
million in the three months ended 30 September 2002 related mainly to the
disposal of our US-based SMS subsidiary, which was completed in December 2002. A
reduction in sales of wireless software and services in North America was offset
by an increase in total sales of BBRS, OPP and NAA equipment and services in
North America as a result of increased spending by key customers in the region
(see Sales by Product Area on page 14 below).
Sales in Central and Latin America (CALA) increased by #2 million or 20 per cent
to #12 million in the three months ended 30 September 2003 compared to #10
million in the three months ended 30 September 2002. Customer spending in the
region remains at very low levels as a result of the general downturn in
economic conditions and current demand is coming from the wireless rather than
fixed wireline operators and is focused mainly on optical networks and outside
plant and power equipment.
In Asia Pacific (APAC), sales of #23 million in the three months ended 30
September 2003 decreased by #22 million or 49 per cent compared to #45 million
in the three months ended 30 September 2002. Part of this decline was due to our
exit from legacy operations in the region during the previous financial year,
this totalled approximately #8 million. In the ongoing businesses, the market
environment in China has become increasingly challenging over the year due to
significant pricing pressure across all product areas. Sales of optical network
equipment to China Railcom and China Unicom reduced significantly during the
three months ended 30 September 2003 and we are adopting a cautious approach
when bidding for new business in the territory. Sales in Australia were also
lower than in the previous year when we were supplying optical network equipment
to second tier operator, IP1, which has since gone into receivership. This has
also caused a slowdown in capital expenditure by the main incumbent operator,
Telstra pending the outcome of its now successful bid to purchase the assets of
IP1 from the receiver.
Six months ended 30 September 2003 compared with six months ended 30 September
2002
In the six months ended 30 September 2003, sales from continuing operations
decreased #263 million or 26 per cent as compared to #1,019 million in the six
months ended 30 September 2002.
The trends in the geographic regions were broadly similar to those described
above in respect of the comparison for the three months ended 30 September 2002
and 2003, with EMEA accounting for over half of the reduction in sales between
periods.
Within EMEA, reduced sales in the UK, Middle East and Italy were partially
offset by growth in Germany. In the UK, sales of #200 million were down #61
million or 23 per cent as compared with #261 million in the six months ended 30
September 2002, mainly as a result of a reduction in sales of optical networking
equipment to BT and the impact of the sale of an intelligent network software
upgrade in our Access Networks business in the six months ended 30 September
2002, which was not repeated in the first six months of the current financial
year. In Italy, sales decreased by #11 million or 13 per cent to #74 million as
compared with #85 million in the six months ended 30 September 2002, a result of
phasing of network build projects with Vodafone and Wind. In the six months
ended 30 September 2002, we were supplying network equipment to Vodafone and
Wind in order to build new optical networks, while in the six months ended 30
September 2003, our sales were focused on infill and activities to increase the
efficiency of this existing infrastructure, which are typically not of the same
magnitude as initial network builds. In Germany, sales of #77 million increased
#6 million or 8 per cent as compared to #71 million in the six months ended 30
September 2002 as a result of the increased demand for fixed wireless access
equipment in the three months ended 30 September 2003 described above. Sales in
other countries of the EMEA region were #92 million, down #78 million or 46 per
cent compared to the six months ended 30 September 2002. As described above, the
main factor behind this sales decline was the reduced level of sales of Network
Services in the Middle East.
Sales in North America amounted to #242 million, a reduction of #61 million or
20 per cent compared to #303 million in the six months ended 30 September 2002.
We recorded growth in sales of North American Access equipment in the period as
a result of the acceleration of ADSL rollouts, particularly at BellSouth and
growth in sales of BBRS equipment to the US Federal Government. This was more
than offset, however, by a reduction in sales of BBRS services due to the
completion of a significant airport services contract in the previous year and a
reduction in sales of OPP equipment and services resulting from a general
contraction in capital expenditure amongst US service providers.
In CALA sales of #21 million decreased by #14 million or 40 per cent from #35
million in the six months ended 30 September 2002 primarily as a result of the
very low level of sales recorded in the three months ended 30 June 2003 as
political, regulatory and economic issues led network operators to restrict
capital expenditure.
In APAC, sales of #50 million, decreased by #44 million or 47 per cent from #94
million in the six months ended 30 September 2002. Major factors contributing to
this trend include i) our exit from legacy operations in the region described
above, ii) increased pricing pressure in China described above as well as the
limited mobility in the region during the three months ended 30 June 2003 caused
by the SARS virus; and iii) reduced sales in Malaysia as a result of the expiry
of a frame contract for optical networking equipment during the period, which
has since been renewed. Trading conditions also remain difficult for BBRS in
APAC. In particular, the large installed Service Provider and Enterprise
customer base in Japan has seen little new deployments or upgrades of BBRS
equipment during the six months ended 30 September 2003.
Key Customers
We serve a strong customer base of predominantly incumbent operators and
government agencies. The ten largest customers during the three months ended 30
September 2003 were (in alphabetical order): AT&T, BellSouth, BT, Metro City
Carriers (Germany), Sprint, Telecom Italia, US Federal Government, Verizon,
Vodafone and Wind. In aggregate, these customers accounted for 52 per cent of
sales from continuing operations, a similar level compared with the ten largest
customers in the three months ended 30 September 2002 which accounted for 51 per
cent of sales from continuing operations.
In EMEA, the five largest customers in the three months ended 30 September 2003
were BT, Metro City Carriers (Germany), Telecom Italia, Vodafone and Wind, which
in aggregate accounted for 54 per cent of sales in the region compared with 55
per cent for the five largest customers in EMEA in the three months ended 30
September 2002.
In North America, the five largest customers in the three months ended 30
September 2003 were AT&T, BellSouth, Sprint, US Federal Government and Verizon,
which in aggregate, accounted for 63 per cent of sales in the region compared
with 47 per cent for the five largest customers in North America in the three
months ended 30 September 2002. The increased customer concentration in this
region during the period has resulted from increased spending by these major
customers and by the continued decline in sales to our North American enterprise
customer base for BBRS equipment and services as a result of our strategy to
focus our commercial and technical resources on the service provider and federal
markets.
For the six months ended 30 September 2003, the UK Government was one of our ten
largest customers, replacing Wind in the list provided for the three-month
period above. Sales through the UK Government declined during the three months
ended 30 September 2003 as a result of the reduced level of service activity in
the Middle East (described above) where we operate under contracts in
conjunction with the UK Ministry of Defence.
BT remains our largest customer and accounted for 19 per cent of sales from
continuing operations in the three months ended 30 September 2003 and in the
three months ended 30 September 2002. In the six months ended 30 September 2003,
BT accounted for 20 per cent of sales from continuing operations compared to 17
per cent in the six months ended 30 September 2002. The reduction in absolute
spend of #22 million or 13 per cent has resulted mainly from the change in focus
of BT's reduced capital expenditure towards broadband access rather than optical
equipment described above, as well as the completion of a network build project
for BT Ignite (the Netherlands) during the previous financial year and a
software sale in the six months ended 30 September 2002 not repeated in the
first half of the current financial year.
Sales - Analysis by Product Area
Three Six
months months
ended ended
30 30
# million September September
2003 2002 2003 2002
Optical Networks 80 108 165 242
Access Networks 48 69 92 128
Other Network Equipment 16 15 28 29
----- ----- ----- -----
Europe/RoW Network Equipment 144 192 285 399
IC&M 47 51 90 100
VAS 61 105 125 203
----- ----- ----- -----
Europe/RoW Network Services 108 156 215 303
----- ----- ----- -----
TOTAL - Europe/RoW businesses 252 348 500 702
===== ===== ===== =====
BBRS Equipment 38 35 66 73
OPP Equipment 39 34 74 80
NAA Equipment 30 23 55 48
----- ----- ----- -----
US Network Equipment 107 92 195 201
BBRS Services 15 24 30 43
OPP Services 15 18 31 46
----- ----- ----- -----
US Network Services 30 42 61 89
----- ----- ----- -----
TOTAL - US businesses (1) 137 134 256 290
===== ===== ===== =====
Network Equipment 251 284 480 600
Network Services 138 198 276 392
----- ----- ----- -----
Total - Network Equipment and Network 389 482 756 992
Services
Other - 4 - 27
----- ----- ----- -----
Total Continuing operations 389 486 756 1,019
Discontinued operations - 28 - 87
----- ----- ----- -----
Group 389 514 756 1,106
===== ===== ===== =====
NARF 139 260
Non-NARF 250 496
----- -----
Group 389 756
===== =====
(1) NARF sales for the three months ended 30 September 2003 were #139 million
and include sales of NARF products of #137 million and sales of Non-NARF
products invoiced through NARF legal entities of #2 million.
NARF sales for the six months ended 30 September 2003 were #260 million and
include sales of NARF products of #256 million and sales of Non-NARF products
invoiced through NARF legal entities of #4 million.
Three months ended 30 September 2003 compared with three months ended 30
September 2002
OVERVIEW
Sales decreased in both Network Equipment and Network Services (hereafter "total
Network sales") in the three months ended 30 September 2003 with the most marked
declines in European/RoW Network Equipment and Value-Added Services partially
offset by 16 per cent growth in sales of US Network Equipment.
Network Equipment and Network Services
Sales of Network Equipment at #251 million accounted for 65 per cent of total
Network sales in the three months ended 30 September 2003, a decrease of #33
million or 12 per cent compared to #284 million or 59 per cent of total Network
sales in the three months ended 30 September 2002.
Sales of Network Services amounted to #138 million and represented the balance
of 35 per cent of total Network sales in the three months ended 30 September
2003, down by #60 million or 30 per cent compared to #198 million or 41 per cent
of total Network sales in the three months ended 30 September 2002.
Other sales of #4 million in the corresponding period of the previous year
related mainly to sales from Tetra prior to its disposal.
Europe/RoW Business (65 per cent of Q2 total Network sales)
Our businesses in Europe/RoW generated sales of #252 million, a reduction of #96
million or 28 per cent from #348 million in the three months ended 30 September
2002.
The reduction was spread evenly between Network Equipment, which accounted for
57 per cent of Europe/RoW sales in the three months ended 30 September 2003
compared to 55 per cent for the three months ended 30 September 2002 and Network
Services, which accounted for 43 per cent of sales compared to 45 per cent in
the three months ended 30 September 2002.
Optical Networks (21 per cent of Q2 total Network sales)
Sales of Optical Networks decreased by #28 million or 26 per cent to #80 million
compared to #108 million in the three months ended 30 September 2002.
There has been a significant reduction in capital expenditure on optical
networking equipment since the corresponding period of the previous year as
operators have increasingly focused their capital spend away from this area of
their networks and onto broadband access deployments, with the reduced spend in
optical focused on activities to maintain existing infrastructure rather than on
new network build projects. We expect this trend to continue in the medium-term.
From a geographic perspective, the decline in sales occurred primarily in EMEA
as well as in APAC while sales in CALA remained relatively stable albeit at a
low level. In EMEA, which accounted for approximately 75 per cent of Optical
Network sales in the three months ended 30 September 2003, the reduced level of
sales to BT discussed above was partially offset by increased sales to Vodafone
in Italy and particularly impacted sales of our SDH equipment, which in total
accounted for over 80 per cent of Optical Network sales in the period. We also
experienced a modest drop in sales of DWDM equipment as a result of decreased
demand for this technology across the industry.
Access Networks (12 per cent of Q2 total Network sales)
Access sales were down by #21 million or 30 per cent to #48 million in the three
months ended 30 September 2003 as compared with #69 million in the three months
ended 30 September 2002. Increased sales of our Access Hub were more than offset
by declines across all other product lines.
Fixed Wireless Access accounted for approximately 38 per cent of Access Network
sales in the three months ended 30 September 2003, an increase from 30 per cent
for the three months ended 30 June 2003 as a direct result of increased demand
for these products from wireless operators in Germany. Sales of these products
were lower than in the first three months of the previous financial year as a
result of a decline in other sales in central European markets.
Sales of our Access Hub accounted for approximately 20 per cent of Access
Network sales in the three months ended 30 September 2003, double the level of
sales in the three months ended 30 September 2002. This was a result of
increased sales to Italian customers, Telecom Italia and Wind.
Voice Systems and other legacy narrowband access products accounted for 25 per
cent and 17 per cent of Access Network sales respectively in the three months
ended 30 September 2003. Sales of these product lines fell as a result of an
intelligent network software upgrade carried out in the UK in the three months
ended 30 September 2002 as well as generally weaker market demand for narrowband
products amongst our major customers.
94 per cent of Access Network sales were generated in EMEA in the three months
ended 30 September 2003 with CALA and APAC accounting for the remaining 4 per
cent and 2 per cent respectively.
Other Network Equipment (4 per cent of Q2 total Network sales)
Other Network Equipment mainly comprised sales of our Interactive Systems,
Payphones and Internet terminals activity. The #1 million or 7 per cent increase
in sales to #16 million resulted mainly from shipments of multi-media terminals
to Telefonica (Spain) and payphones to customers in APAC.
Installation, Commissioning and Maintenance (IC&M) (12 per cent of Q2 total
Network sales)
IC&M activities mainly comprise the initial installation, commissioning and
longer-term support services element of sales of our Optical Networks and Access
Networks equipment.
IC&M sales in the three months ended 30 September 2003 decreased by #4 million
or 8 per cent to #47 million compared to #51 million in the three months ended
30 September 2002. This was due to the reduction in volumes of Network Equipment
deliveries, partially offset by a stable level of sales under ongoing support
contracts.
During the three months ended 30 September 2003, EMEA accounted for 96 per cent
of IC&M sales, with the balance mainly in APAC.
Value Added Services (VAS) (16 per cent of Q2 total Network sales)
VAS comprises three main activities: i) the provision of integrated network
solutions and services to non-telecom customers, mainly in the UK and Germany
(Integrated Systems), ii) long-term service contracts in the Middle East, and
iii) wireless software and services.
VAS sales of #61 million in the three months ended 30 September 2003, decreased
by #44 million or 42 per cent compared to #105 million in the three months ended
30 September 2002.
As previously disclosed in the three months ended 30 June 2003, there were three
main factors behind this substantial decline in sales:
i.) the completion in the year ended 31 March 2003 of a key phase of a long-term
service contract in Saudi Arabia and a general slowdown in customer spending
across the Middle East following the recent conflict in the region;
ii.) a reduction in the level of sales of wireless software and services due to
continued weak market conditions, particularly in the US; and
iii.) the disposal of our SMS subsidiary completed in December 2002, which
generated sales of #10 million in the three months ended 30 September 2002.
EMEA accounted for 90 per cent of VAS sales in the three months ended 30
September 2003, North America for 8 per cent and CALA for 2 per cent.
US Businesses (35 per cent of Q2 total Network sales)
Our US businesses generated sales of #137 million, an increase of #3 million or
2 per cent from #134 million in the three months ended 30 September 2002.
Network Equipment grew by 16 per cent and accounted for 78 per cent of total US
business sales in the three months ended 30 September 2003 as compared with 69
per cent in the three months ended 30 September 2002. This was partially offset
by an 29 per cent reduction in Network Services, which accounted for the balance
of the US business sales of 22 per cent as compared with 31 per cent in the
three months ended 30 September 2002.
Broadband Routing and Switching (BBRS) (14 per cent of Q2 total Network sales)
BBRS recorded total sales of #53 million in the three months ended 30 September
2003, down by #6 million or 10 per cent compared to #59 million in the three
months ended 30 September 2002. The 9 per cent growth in sales of BBRS
equipment, which amounted to #38 million compared to #35 million in the three
months ended 30 September 2002, was more than offset by a 38 per cent decline in
service sales to #15 million compared to #24 million in the three months ended
30 September 2002.
The increase in equipment sales was mainly due to a significantly higher level
of sales to BBRS' largest customer, the US Federal Government, which was
partially offset by reduced sales to North American enterprise customers in line
with our strategy to focus technical and commercial resources on the service
provider and government sectors. In addition, we experienced reduced sales in
APAC and in particular Japan where trading conditions remain difficult. The
lower level of service sales was mainly due to a combination of declining
support sales from enterprise customers and the completion of a significant
commercial airport project in the year ended 31 March 2003.
In the three months ended 30 September 2003 North America accounted for 87 per
cent of BBRS equipment sales, with EMEA at 11 per cent and APAC at 2 per cent.
Outside Plant and Power (OPP) (14 per cent of Q2 total Network sales)
Total OPP sales of #54 million in the three months ended 30 September 2003,
increased by #2 million or 4 per cent compared to #52 million in the three
months ended 30 September 2002. Growth in sales of OPP equipment, which
accounted for #39 million of the total as compared with #34 million in the three
months ended 30 September 2002, was offset by a decline in sales of OPP
services, which accounted for #15 million compared to #18 million in the three
months ended 30 September 2002.
In the three months ended 30 September 2003, 92 per cent of OPP equipment sales
were generated in North America and 8 per cent in CALA.
We have been successful in securing a number of new wins for outside plant and
power systems, primarily resulting from increased demand by North American
wireless operators. The reduction in sales of OPP services mainly resulted from
reduced spending on central office services by US regional customers.
We are currently managing our OPP business for value and ultimately for
disposal. We expect to use the net cash proceeds from this disposal to pay down
our loan notes.
North American Access (NAA) (8 per cent of Q2 total Network sales)
NAA sales of #30 million in the three months ended 30 September 2003, increased
by #7 million or 30 per cent compared to #23 million in the three months ended
30 September 2002. This increase was primarily a result of the acceleration of
ADSL rollouts and upgrade programmes (particularly at BellSouth). All NAA sales
are generated in the North American market.
We are currently managing our NAA business for value and ultimately for
disposal. We expect to use the net cash proceeds from its disposal to pay down
our loan notes.
Six months ended 30 September 2003 compared with six months ended 30 September
2002
With the exception of NAA, sales were down across all major product and service
areas in both our Europe/RoW and US businesses in the six months ended 30
September 2003 compared to the six months ended 30 September 2002. The most
marked declines occurred in the first three months of the financial year.
Network Equipment sales of #480 million or 63 per cent of total Network sales,
decreased by #120 million or 20 per cent compared with the #600 million or 60
per cent of sales from continuing operations in the six months ended 30
September 2002.
Network Services accounted for the remaining #276 million or 37 per cent of
sales in the six months ended 30 September 2003 as compared with #392 million or
40 per cent of sales in the same period last year.
Optical Network sales of #165 million decreased by #77 million or 32 per cent
from #242 million. This reduction was due to the general decline in demand for
optical equipment described above as well as the shift in our customers'
investment from optical transmission networks towards broadband access rollouts.
Also, in the first six months of the previous financial year, we completed a
number of new ON build projects, especially in Italy for Wind and Vodafone,
which have not been repeated this year.
Access Network sales of #92 million decreased by #36 million or 28 per cent as
compared with #128 million in the six months ended 30 September 2002. In the
three months ended 30 June 2003, we experienced a sharp decline in sales of
access products in the German market, which improved with increased demand for
fixed wireless access products from wireless operators in the three months ended
30 September 2003. Sales of these products were lower than in the previous
financial year as a result of a decline in sales in other central European
markets.
Sales of Other Network Equipment for the six months ended 30 September 2003 were
#28 million down by #1 million or 3 per cent on the six months ended 30
September 2002. This was mainly due to the disposal of the Group's South African
legacy operations, which more than offset increased sales of payphones in the
six months ended 30 September 2003.
Sales of Network Services in Europe/RoW declined by #88 million or 29 per cent
to #215 million as compared with the six months ended 30 September 2003. Most of
the reduction occurred in Value-Added Services where sales decreased from #203
million to #125 million as a result of significantly reduced sales in the Middle
East, a reduction in the level of sales of wireless software and services,
particularly in the US and the disposal of our SMS subsidiary. All of these
trends are described in more detail above. The #10 million decrease in sales of
IC&M resulted from the lower level of sales in our Optical Networks and Access
Networks activities.
Total BBRS sales for the six months ended 30 September 2003 were #96 million,
down by #20 million or 17 per cent as compared with the six months ended 30
September 2002. The majority of the decline occurred in the first three months
of the period mainly as a result of reduced sales through indirect channels in
APAC and EMEA. In North America, a lower level of sales to enterprise customers
as described above was more than offset by an increase in sales to the US
Federal Government during the period.
Total OPP sales for the six months ended 30 September 2003 amounted to #105
million, a #21 million or 17 per cent decrease as compared with #126 million in
the six months ended 30 September 2002. Modest growth in the three months ended
30 September 2003 was driven by increased sales of OPP equipment to North
American wireless operators but was not sufficient to offset the declines in
both equipment and services in the three months ended 30 June 2003, which were
largely due to the significant reductions in capital expenditure year on year by
telecom network operators in the US and Mexico.
NAA sales increased by #7 million or 15 per cent as compared with #48 million in
the six months ended 30 September 2002. After stable sales in the three months
ended 30 June 2003, growth in the three months ended 30 September was mainly
driven by BellSouth's accelerated ADSL roll-out programme.
Book to Bill Ratio
Three Six
months months
ended ended
30 30
September September
2003 2002 2003 2002
Total Network Equipment 1.14 0.98 1.08 0.95
Total Network Services 1.36 0.49 1.11 0.69
----- ----- ----- -----
Group 1.22 0.78 1.09 0.86
===== ===== ===== =====
Book-to-bill is the ratio of order intake divided by the level of sales in any
given period. Management use this as a key indicator of future short-term sales
performance in the Network Equipment business and the Group strives to increase
and maintain this ratio above 1.00 over any 12-month period. Book-to-bill in
Network Equipment increased to 1.14 from 0.98 in the three months ended 30
September 2003 and 2002 respectively.
This ratio is less meaningful in Network Services given the long-term contract
nature of this business where the full value of a service contract, which can
typically be tens of millions of #sterling is booked as an order at the point of
firm contract signature and then recognised as sales over the life of the
contract, which can be typically over a period of 2 to 5 years. Two major new
long-term service contracts booked in the three months ended 30 September 2003,
in the Middle East and Germany, were the main drivers of a book-to-bill ratio of
1.36 in Network Services compared to 0.49 in the three months ended 30 September
2002.
Gross Margin
The table below sets forth our gross margin and adjusted gross margin (before
operating exceptional items) from continuing operations for the three months and
six months ended 30 September 2002 and 2003. In addition, the adjusted gross
margin data is split between Network Equipment and Network Services and also,
with respect to the three and six months to September 2003, between NARF and
Non-NARF.
Three Six
months months
ended ended
30 30
# million September September
2003 2002 2003 2002
Gross profit by business
Network Equipment 67 36 126 73
% 26.7% 12.7% 26.3% 12.2%
Network Services 36 35 65 71
% 26.1% 17.7% 23.6% 18.1%
Other - 1 - 9
----- ----- ----- -----
Group - continuing 103 72 191 153
===== ===== ===== =====
% 26.5% 14.8% 25.3% 15.0%
Operating exceptional credit/
(charge) to cost of sales
Network Equipment / Non-NARF 1 (8) 6 (24)
===== ===== ===== =====
Adjusted Gross profit by business
Network Equipment 66 44 120 97
% 26.3% 15.5% 25.0% 16.2%
Network Services 36 35 65 71
% 26.1% 17.7% 23.6% 18.1%
Other - 1 - 9
----- ----- ----- -----
Group - continuing 102 80 185 177
===== ===== ===== =====
% 26.2% 16.5% 24.5% 17.4%
Gross profit NARF 53 94
% 38.1% 36.2%
Gross profit Non-NARF 50 97
% 20.0% 19.6%
===== =====
Three months ended 30 September 2003 as compared to the three months ended 30
June 2003
Gross profit amounted to #103 million or 26.5 per cent of sales in the three
months ended 30 September 2003, an increase of #15 million or 2.5 percentage
points compared to the #88 million or 24.0 per cent of sales recorded in the
three months ended 30 June 2003.
This sequential increase in gross profit was achieved despite the lower
exceptional credit recorded in cost of sales during the three months ended 30
September 2003 and was driven by a #19 million improvement in the adjusted gross
profit (before exceptional items) from #83 million or 22.6 per cent of sales in
the three months ended 30 June 2003 to #102 million or 26.2 per cent in the
three months ended 30 September 2003. An increase in gross profit was achieved
in both Network Equipment and Network Services.
A #12 million improvement in Network Equipment increased adjusted gross margin
from 23.6 per cent in the three months ended 30 June 2003 to 26.3 per cent in
the three months ended 30 September 2003 and was mainly due to:
i.) favourable business mix: in particular, the increase in sales of higher
margin BBRS equipment and Optical Network spares in the three months ended 30
September 2003 as compared with the three months ended 30 June 2003;
ii.) the achievement of cost savings in our supply chain and manufacturing
operations in Europe and North America through rationalisation and procurement
initiatives. In particular, during the three months ended 30 September 2003, we
began to realise the benefits of our increased sourcing from low cost locations
and successful renegotiation of business terms with key suppliers, including our
largest outsourcing partner, Jabil. These improvements more than offset a #4
million increase in depreciation resulting from the impairment of development
and test models, no longer required to support future business;
iii.) product cost reductions achieved through sales of our recently launched
next generation SDH products.
The #7 million improvement in Network Services increased adjusted gross margin
from 21.0 per cent in the three months ended 30 June 2003 to 26.1 per cent in
the three months ended 30 September 2003 and was achieved on stable sales,
partly as a result of the improved profitability on long term contracts in the
UK following our usual contract risk reviews and partly from favourable business
mix, in particular in wireless services in the US.
During the three months ended 30 September 2003, we recorded an exceptional
operating credit of #1 million in cost of sales relating to inventory for which
we had previously fully provided through an exceptional charge and which was
subsequently utilised by our outsourcing partner, Jabil. This compared to an
exceptional credit of #5 million in the three months ended 30 June 2003 relating
to the release of a provision following a reassessment of our outsourcing
arrangements with Jabil.
The gross margin in NARF increased from 33.9 per cent in the three months ended
30 June 2003 to 38.1 per cent in the three months ended 30 September 2003
primarily due to the improvement in volume and mix in BBRS. Non-NARF gross
margin increased from 19.1 per cent in the three months ended 30 June 2003 to
20.0 per cent in the three months ended 30 September 2003 primarily due to cost
reduction initiatives and the improved profitability on long term contracts
which more than offset the depreciation on development and test models mentioned
above. NARF gross margins are driven by the BBRS business which benefits from
gross margins which are higher than the average for our group. BBRS forms an
important part of our next generation product and service offering and is not
one of the businesses which we are currently managing for value and ultimately
disposal.
Three months ended 30 September 2003 as compared to the three months ended 30
September 2002
Gross profit of #103 million or 26.5 per cent of sales in the three months ended
30 September 2003 represented a marked increase as compared to the #72 million
or 14.8 per cent of sales recorded in the three months ended 30 September 2002.
This was achieved mainly through a strong improvement in adjusted gross margin
as well as the benefit of a #1 million exceptional operating credit incurred
during the period, and described above, compared to the #8 million exceptional
operating charge incurred during the three months ended 30 September 2002, which
related to the restructuring of our supply chain and our outsourcing agreement
with Jabil.
Adjusted gross profit (before the exceptional operating items detailed above) of
#102 million in the three months ended 30 September 2003, increased #22 million
compared to #80 million in the three months ended 30 September 2002. Adjusted
gross margin of 26.2 per cent of sales in the three months ended 30 September
2003 increased by 9.7 percentage points compared with adjusted gross margin of
16.5 per cent of sales in the three months ended 30 September 2002.
The #22 million improvement in adjusted gross profit resulted from cost
reductions in both Network Equipment (#22 million) and Network Services (#1
million), partially offset by gross profit of #1 million generated in non-core
businesses from our former Capital division, which have now been sold.
In Network Equipment, where gross margin increased from 12.7 per cent in the
three months ended 30 September 2002 to 26.7 per cent in the three months ended
30 September 2003, the improvement was largely driven by:
i.) the impact of stock write-offs totalling #25 million recorded during the
three months ended 30 September 2002, which reduced Network Equipment's adjusted
gross margin by 8.8 percentage points in that period and which were not required
in the three months ended 30 September 2003; and
ii.) the achievement of substantial cost savings in our supply chain and
manufacturing operations in Europe and North America through rationalisation and
procurement initiatives described above, which more than offset the increased
depreciation, price reductions under existing frame contracts and the #33
million reduction in sales volumes.
In Network Services, where gross margins increased from 17.7 per cent in the
three months ended 30 September 2002 to 26.1 per cent in the three months ended
30 September 2003, significant cost savings were achieved largely through
reductions in headcount and other overhead costs and improved profitability on
long term contracts in the UK following our usual contract risk reviews. These
were partially offset by the impact of the #60 million reduction in sales
volumes.
Six months ended 30 September 2003 as compared to the six months ended 30
September 2002
Gross profit amounted to #191 million or 25.3 per cent of sales in the six
months ended 30 September 2003 compared to #153 million or 15.0 per cent of
sales recorded in the six months ended 30 September 2002. This increase arose as
a result of the benefit of a #6 million exceptional operating credit incurred
during the six months ended 30 September 2003 compared to the #24 million
exceptional operating charge incurred during the six months ended 30 September
2002, as well as through an improvement in adjusted gross margin.
The #24 million operating exceptional charge incurred in the six months ended 30
September 2002 related to provisions created to cover costs incurred under our
outsourcing agreement with Jabil. The exceptional operating item of #6 million
credited to cost of sales during the six months ended 30 September 2003 related
mainly to the release of some of these provisions which we no longer deem to be
required following a reassessment of our outsourcing arrangements.
Adjusted gross profit (before the exceptional operating items detailed above) of
#185 million in the six months ended 30 September 2003 increased by #8 million
compared to #177 million in the six months ended 30 September 2002, which
included adjusted gross profit of #9 million relating to non-core businesses now
sold and the #25 million charge relating to inventory provisions described
above.
Cost reductions in both Network Equipment and Network Services, were more than
sufficient to offset the lower sales volumes (which are 24 per cent down on the
six months ended 30 September 2002), increased depreciation and continued
pricing pressure described above. In Network Equipment, gross margin increased
from 12.2 per cent in the six months ended 30 September 2002 to 26.3 per cent in
the six months ended 30 September 2003 partly as a result of the charge relating
to inventory provisions in the six months ended 30 September 2002 and partly due
to cost savings achieved through rationalisation and procurement initiatives in
our European and North American supply chain and manufacturing operations. In
Network Services, where gross margin increased from 18.1 per cent in the six
months ended 30 September 2002 to 23.6 per cent in the six months ended 30
September 2003, the improvement was largely achieved through headcount
reductions as we continued to target increasing efficiencies in our field forces
and as a result of provision releases described above.
Pricing Environment
A large proportion of our sales, particularly in Europe, are derived from
existing frame contracts where price reductions generally run at single digit
percentage declines year on year in Network Equipment. Network Services tend to
be more resilient to price erosion. Outside of these frame contracts, when we
are competing for new business with existing customers or with new customers,
pricing pressure tends to be more aggressive but varies from region to region
and from product to product. Conditions remain most challenging in APAC. We have
continued to adopt a cautious approach when bidding for contracts in these
conditions and maintain our focus on the margin and cash flow contributions of
potential business wins. We have, therefore, experienced some decline in sales,
particularly in these regions, as a direct result of declining to participate in
certain tender processes.
Operating Expenses
The table below provides an analysis of operating expenses incurred by our
continuing operations during the periods ended 30 September 2003 and 2002.
Three Six
months months
ended ended
30 30
# million September September
2003 2002 2003 2002
Research and Development (before share 49 82 104 182
option costs)
Sales and Marketing (before share option 51 62 102 152
costs)
General & Administration (before 20 32 42 65
goodwill, share option costs and
exceptional items)
Net Other Operating (Income) / Expense (2) 6 (5) 7
----- ----- ----- -----
Adjusted Operating Expenses 118 182 243 406
Operating Exceptional Charge to 15 113 39 181
Operating Expenses
Share options 8 - 9 -
Goodwill amortisation 24 23 49 51
----- ----- ----- -----
Operating Expenses 165 318 340 638
===== ===== ===== =====
Total operating expenses include operating exceptional costs relating mainly to
the operational and financial restructuring, charges relating to the
amortisation of goodwill and costs relating to our nil cost share options plan.
The share option costs are separately analysed as they are predominantly
non-cash items and are not included in management targets for the current
financial year. Details of the Company's share option schemes are set out in
Notes to the Non-Statutory Accounts; Note 9, page 59 and in the Outlook on page
4.
Three months ended 30 September 2003 compared to three months ended 30 September
2002
Total operating expenses in the three months ended 30 September 2003 amounted to
#165 million, a reduction of #153 million compared to #318 million in the three
months ended 30 September 2002. Of this reduction, #98 million related to the
significant reduction in operating exceptional costs and #56 million related to
cost savings achieved in all main categories of operating expenditure (see R&D,
Sales and Marketing and General and Administrative costs below) which reduced
adjusted operating expenses (before goodwill amortisation, exceptional items and
share options) from #182 million to #118 million. These reductions were
partially offset by the impact of share options costs, which amounted to #8
million in the three months ended 30 September 2003 compared to #nil in the
three months ended 30 September 2002. Goodwill amortisation increased by #1
million from #23 million to #24 million. Total operating expenses in the three
months ended 30 September 2003 included operating expenses of #nil incurred by
non-core businesses compared to #12 million for the three months ended 30
September 2002 relating mainly to our Italian mobile communications
subsidiaries, Tetra and UMTS since sold to Finmeccanica.
In the three months ended 30 September 2003, we charged operating exceptional
costs of #15 million to operating expenses. These related mainly to our ongoing
operational restructuring regarding employee severance and site closures.
Share option costs in the three months ended 30 September 2003 amounted to #8
million, as discussed on page 5. The total cost in the three months ended 30
September 2003 included a payroll taxes accrual for both schemes of
approximately #1 million.
Six months ended 30 September 2003 compared to six months ended 30 September
2002
Total operating expenses in the six months ended 30 September 2003 amounted to
#340 million, a reduction of #298 million compared to #638 million in the six
months ended 30 September 2002. Of this reduction #142 million related to the
significant reduction in operating exceptional costs and #151 million related to
cost savings achieved in all categories of operating expenditure (see R&D, Sales
and Marketing and General and Administrative costs below), which reduced
adjusted operating expenses (before goodwill amortisation, exceptional items and
share options) from #406 million to #243 million. These benefits were partially
offset by the impact of share option costs, which amounted to #9 million
(including #1 million payroll tax accrual) in the six months ended 30 September
2003 compared to #nil in the six months ended 30 September 2002. Goodwill
amortisation decreased by #2 million from #51 million to #49 million (see
Goodwill Amortisation on page 32 below). Total operating expenses in the six
months ended 30 September 2003 included operating expenses of #5 million
incurred by non-core businesses and related mainly to UMTS described above
compared to #24 million in six months ended 30 September 2002.
In the six months ended 30 September 2003, we charged operating exceptional
costs of #39 million to operating expenses. These related mainly to our ongoing
operational restructuring (#26 million) and our financial restructuring and
relisting (#13 million), partially offset by the release of provisions against
bad and doubtful debts charged to exceptional items during the financial year
ended 31 March 2002 (#4 million) following a reassessment we undertook in the
six months ended 30 September 2003.
Annualised Operating Cost Run Rate
We have targeted to reduce the annualised run-rate of operating costs before
goodwill, share options, exceptional and non-recurring items below #425 million
by 31 March 2004. We have elected to calculate this key business target on this
basis as it is the closest measure of the recurring cash costs required to
support our ongoing business insofar as it excludes non cash items relating to
goodwill and share options as well as material and other non-recurring items,
largely incurred as a result of our restructuring processes. We calculate the
exit run-rate on the last day of the period so that the full benefit of cost
saving measures actioned during the period are included in the calculation.
Three
months
ended
30
September
# million 2003
Total operating expenses 165
Deduct:
Goodwill amortisation (24)
Operating Exceptional Charge to Operating Expenses (15)
Share options (8)
-----
Adjusted Operating Expenses 118
Net Other Operating Income 2
-----
120
Less:
Non-recurring items (3)
Incremental impact of savings achieved in the quarter (1) (3)
-----
Exit run-rate of normalised operating costs 114
=====
Annualised 455
=====
(1) Further savings that would have been achieved in the three months ended 30
September 2003 if all cost savings had occurred on 1 July 2003.
The exit run-rate of normalised operating costs at the 30 September 2003 was
approximately #114 million, which on an annualised basis leads to an exit
run-rate of approximately #455 million, compared to approximately #490 million
at 31 March 2003 and #475 million at 30 June 2003.
We have therefore achieved annualised savings of approximately #20 million in
adjusted operating expenses in the three months ended 30 September 2003.
Underlying savings were made in R&D, S&M and G&A in the three months ended 30
September 2003 and these were driven largely through headcount and other
associated cost reductions. We employed a total workforce of 14,134 at 30
September 2003 compared to 14,735 employees at 30 June 2003. Of this reduction
of around 600 employees, approximately 260 were transferred to Finmeccanica as a
result of the disposal of our UMTS subsidiary completed in August 2003.
The #6 million reduction in R&D costs to #49 million in the three months ended
30 September 2003 as compared with the three months ended 30 June 2003 of #55
million was driven by the disposal of UMTS, headcount reductions, efficiencies
in material spend and reduced levels of depreciation arising from a continued
low level of capital expenditure. Reductions in headcount and marketing spend in
S&M costs were offset by non-recurring cost accruals under a legacy marketing
agreement, leading to unchanged costs of #51 million in the three months ended
30 June 2003 and to the three months ended 30 September 2003. G&A costs
decreased by #2 million to #20 million in the three months ended 30 September
2003 as compared with #22 million for the three months ended 30 June 2003,
predominantly due to reduced professional fees and further headcount reduction.
We have actions in place to make the remaining #30 million of annualised cost
savings by 31 March 2004 and achieve our target of #425 million, which are
discussed in the Outlook on page 4.
Operating Expenses - Research and Development (R&D)
R&D expenditure in our continuing operations (before share options) in the three
months ended 30 September 2003 of #49 million, decreased #33 million or 40 per
cent as compared to #82 million for the three months ended 30 September 2002. #7
million of this reduction resulted from the disposal of non-core businesses.
In addition to the #49 million, the share of share option costs attributable to
R&D amounts to #1 million in the three months ended 30 September 2003 and #nil
in the three months ended 30 June 2003.
Cost savings were achieved mainly through headcount reductions and initiatives
to significantly rationalise, consolidate and close research and development
centres around the world. Other factors contributing to the overall reduction in
R&D expenditure included lower levels of spend on third party sub contractors
and materials and a reduced level of depreciation due to lower levels of capital
expenditure and the write down of development and test models.
R&D by Product Area (Continuing Operations)
As % of Three Six
Group months months
Adjusted ended ended
R&D 30 30
Expenditure September September
2003 2002 2003 2002
% % % %
Optical Networks 38 37 36 34
Access Networks 21 17 21 17
BBRS 19 19 18 20
NAA 5 4 5 5
OPP 6 3 5 4
Other Network Equipment 6 3 6 4
Network Services 5 6 4 5
Other (non-core) - 11 5 11
----- ----- ----- -----
Group 100 100 100 100
===== ===== ===== =====
# million
Group Adjusted R&D Expenditure 49 82 104 182
(excluding share options)
===== ===== ===== =====
NARF 14 30
Non-NARF 35 74
----- -----
Group Adjusted R&D Expenditure 49 104
===== =====
We have continued to focus the majority of our R&D investment in three main
product areas: Optical Networks, Access Networks and BBRS and in aggregate,
spend in these three areas accounted for over three quarters of our adjusted R&D
expenditure during the three months ended 30 September 2003. Other included R&D
expenditure incurred by our Marconi Mobile Access S.p.A subsidiary (also known
as UMTS), which we sold to Finmeccanica during the three months ended 30
September 2003.
Major Optical Network programmes include the development and launch of our high
capacity optical core switch platform (MSH2K). We continue to invest in next
generation SDH including the introduction of our successful MSH64c product and
the new SMA 16-64 product range launched in November 2003. Our investment in
DWDM, is focused on modularising and simplifying our existing platforms for core
and metro applications. We also launched further upgrades to our network
management software. Since 30 September 2002, we have withdrawn from the US
Optical Networks market and ceased investment in our former SONET product range.
Investment in the Access Networks' business is focused on our Access Hub,
Softswitch and continued enhancements to our fixed wireless access product
ranges.
In BBRS, we have achieved significant cost savings in this area mainly as a
result of headcount reductions and realignment of core programmes to meet
specific customer demand. Almost half of the spend in the six months ended 30
September 2003 related to further enhancements to our latest multi-service core
switch router, the BXR. Other programmes focused on adding Gigabit Ethernet and
channelised interfaces to the smaller switch line, the release of Virtual
Presence (Vipr), and maintenance activities throughout the product portfolio. We
are seeking to leverage our own R&D spend in this field by establishing
partnerships in order to complement our own technology initiatives. As
previously announced, in May 2003, we launched our BXR-5000, 160 Gbps
multi-service switch router following the creation of one such technology
partnership with IP-routing specialist firm, Laurel Networks. Sales of this
product have been made to the US Federal Government.
Operating Expenses - Sales & Marketing
Sales & Marketing spend (before share options) during the three months ended 30
September 2003 of #51 million, decreased by #11 million or 18 per cent as
compared to #62 million in the three months ended 30 September 2002.
Significant savings have been achieved through a programme of focused headcount
reductions, organisational consolidation and rationalisation and closure of
sales offices worldwide. Sales and marketing spend during the six months ended
30 September 2003 of #102 million decreased by #50 million or 33 per cent as
compared to #152 million in the six months ended 30 September 2002. Further
headcount reductions have been announced in Germany and Italy that will reduce
run rates over the next two quarters, which will also impact R&D expenditure,
and G&A.
Sales and Marketing's share of Share option costs amounts to #2 million in the
three and six months ended 30 September 2003.
Operating Expenses - General and Administrative (G&A)
Adjusted G&A expenditure (before goodwill, exceptionals and share options)
during the three months ended 30 September 2003 of #20 million, decreased by
#12 million or 38 per cent as compared to #32 million in the three months ended
30 September 2002.
Savings were achieved through headcount reductions, site rationalisation
(including the relocation of our UK head office) and reduced spend on
professional fees incurred in the normal course of business. Adjusted G&A
expenditure of #42 million during the six months ended 30 September 2003,
decreased #23 million or 35 per cent as compared to #65 million in six months
ended 30 September 2002. The headcount reductions announced in the UK, Germany
and Italy will reduce costs in future periods.
G&A's share of share option costs amounts to #5 million and #6 million in the
three and six months ended 30 September 2003 respectively.
Operating Expenses - Net Other Operating (Expense)/Income
We generated other income of #2 million and #5 million during the three and six
months ended 30 September 2003 as compared to other expenses of #6 million and
#7 million in the three and six months ended 30 September 2002, primarily due to
foreign exchange translation movements, patents and royalty fees.
Group Operating Loss (excluding Joint Ventures)
Three Six
months months
ended ended
30 30
Continuing operations September September
# million 2003 2002 2003 2002
Network Equipment (19) (83) (51) (179)
Network Services 12 7 17 5
Central costs (9) (14) (19) (31)
Other - (12) (5) (24)
----- ----- ----- -----
Adjusted operating loss (16) (102) (58) (229)
Group operating exceptional items (14) (121) (33) (205)
Share option costs (8) - (9) -
Goodwill amortisation (24) (23) (49) (51)
----- ----- ----- -----
Group Operating loss (62) (246) (149) (485)
===== ===== ===== =====
At 30 June 2003 we reported an adjusted operating loss (before #1 million of
share options) of #42 million for the three months ended 30 June 2003. This was
analysed as #37 million loss in Network Equipment, #6 million profit in Network
Services, #6 million central costs and #5 million for Other. We have
re-allocated #4 million of central costs that had previously been allocated to
Network Equipment and Network Services.
Central costs are #19 million for the six months ended 30 September 2003. These
include all central function costs, for example the board, executive management
team, legal, finance, strategy, IT and communications.
We recorded an adjusted operating loss from continuing operations of #16 million
in the three months ended 30 September 2003 as compared to an adjusted operating
loss of #102 million from continuing operations in the three months ended 30
September 2002. This improvement of #86 million was achieved as a result of the
cost reduction initiatives to improve adjusted gross margin and to lower
adjusted operating costs which more than offset reductions in sales as described
above.
After total Group operating exceptional charges of #14 million and #121 million,
share options of #8 million and #nil and goodwill amortisation of #24 million
and #23 million, we recorded an operating loss of #62 million and #246 million
in the three months ended 30 September 2003 and 2002 respectively.
We recorded an adjusted operating loss in Network Equipment of #19 million in
the three months ended 30 September 2003 as compared to #83 million in the three
months ended 30 September 2002. The #64 million improvement was largely driven
by the substantial cost reductions achieved in our supply chain and savings
across all areas of operating expense. These savings more than offset the impact
of under-recoveries arising from the 12 per cent decline in Network Equipment
sales.
The adjusted operating profit of #12 million in Network Services in the three
months ended 30 September 2003 improved by #5 million as compared to adjusted
operating profit of #7 million in the three months ended 30 September 2002
despite the lower sales volumes. This increase was driven mainly by improved
utilisation of resources in this labour intensive activity.
Other consisted of the operating losses of Tetra and UMTS, which were disposed
of in July 2002 and March 2003 respectively.
The adjusted operating loss from continuing operations of #58 million in the six
months ended 30 September 2003 compared to an adjusted operating loss of #229
million from continuing operations in the six months ended 30 September 2002.
This improvement of #171 million was achieved as a result of the cost reduction
initiatives to improve adjusted gross margin and to lower adjusted operating
costs whilst more than offsetting reductions in sales.
After total Group operating exceptional charges of #33 million and #205 million,
share option costs of #9 million and #nil and goodwill amortisation of #49
million and #51 million, we recorded an operating loss of #149 million against a
#485 million loss in the six months ended 30 September 2003 and 2002
respectively.
In Network Equipment, we recorded an adjusted operating loss of #51 million in
the six months ended 30 September 2003 as compared to #179 million in the six
months ended 30 September 2002. The #128 million or 72 per cent improvement was
largely driven by the continued cost reductions in our supply chain together
with savings across all areas of operating expense. These savings more than
offset the impact of under-recoveries arising from the 20 per cent decline in
Network Equipment sales.
In Network Services, the adjusted operating profit of #17 million in the six
months ended 30 September 2003 improved by #12 million as compared to adjusted
operating profit of #5 million in the six months ended 30 September 2002 despite
the lower sales volumes. This increase was driven mainly by improved utilisation
of resources in this labour intensive activity.
Central costs of #19 million in the six months ended 30 September 2003,
decreased by #12 million as compared to the #31 million incurred in the six
months ended 30 September 2002. This decrease arose as a result of the reduction
of corporate overhead costs mainly through headcount reductions including
initiatives to reduce the number of management levels within the Group and site
rationalisation, as well as the relocation of certain head office functions from
London to Coventry where the costs are lower.
In the six months ended 30 September 2002, we charged #205 million of operating
exceptional costs, #24 million was charged to the gross margin and #181 million
was charged to administrative expenses. Of this amount, approximately #31
million related to the impairment of tangible fixed assets, approximately #140
million related to our operational restructuring (including employee severance
payments and site rationalisation costs) and approximately #26 million to the
financial restructuring process. In addition #7 million of accrued costs
relating to a planned IT system implementation, subsequently terminated, was
released, and a reassessment of provisions to cover bad debts led to a release
of #8 million.
Operating Profit/(Loss) NARF compared to Non-NARF
Three months ended Six months ended
30 September 2003 30 September 2003
# million NARF NON-NARF Total NARF NON-NARF Total
Adjusted 18 (25) (7) 27 (66) (39)
operating profit
/ (loss)
Share option - (8) (8) - (9) (9)
costs
Operating (2) (12) (14) (2) (31) (33)
exceptionals
Central costs - (9) (9) - (19) (19)
Goodwill (3) (21) (24) (6) (43) (49)
amortisation
----- ----- ----- ----- ----- -----
Operating profit 13 (75) (62) 19 (168) (149)
/ (loss)
===== ===== ===== ===== ===== =====
Our Group operating loss of #149 million in the six months ended 30 September
2003 comprised an operating loss of #168 million in Non-NARF businesses and
central costs of #19 million, share option costs of #9 million and #49 million
of goodwill amortisation, which was partially offset by an operating profit of
#19 million in NARF businesses.
Our two segments NARF and Non-NARF have very different operating profiles. The
main differences can be characterised as follows:
i.) Gross margin: NARF benefits from a higher adjusted gross margin (before
exceptional items) than Non-NARF. This is driven by our BBRS business, which has
a higher gross margin than our Group average. This is partially offset within
NARF by lower gross margins in OPP and NAA, the two businesses which we are
managing for value. In the six months ended 30 September 2003, NARF recorded
gross profit of #94 million on sales of #260 million, leading to a gross margin
of 32.6 per cent. This compared to a gross profit of #97 million in non-NARF on
sales of #496 million, leading to a gross margin of 19.6 per cent.
The operational restructuring of our supply chain and manufacturing cost base
has been achieved more rapidly in North America than in Europe. As described in
Outlook on page 4 above, we expect the benefits of initiatives currently under
way in Europe to contribute to an improvement in gross margin in future
quarters.
ii.) R&D investment: In aggregate, our NARF businesses spend a lower percentage
of sales on R&D than our non-NARF businesses. For the six months ended 30
September 2003, NARF invested #30 million in R&D which accounted for 28.9 per
cent of our total expenditure and represented 11.5 per cent of NARF sales. This
compared to #74 million invested within our Non-NARF businesses, accounting for
71.1 per cent of our total expenditure and representing 14.9 per cent of
Non-NARF sales.
R&D in our NARF businesses is mainly focused on BBRS (60.7 per cent of total
NARF R&D spend and 27.6 per cent of BBRS equipment sales in the six months ended
30 September 2003). We have realised significant savings in R&D in our BBRS
business in the first half of our financial year mainly as a result of headcount
reductions in order to align our costs to the current level of sales in the
business. Due to the nature of the business, OPP is a relatively low consumer of
R&D expenditure (18.3 per cent of total NARF R&D spend and 7.4 per cent of OPP
equipment sales in the six months ended 30 September 2003). We have
significantly reduced R&D spend in NAA as we manage this business for value
(16.3 per cent of total NARF R&D spend and 8.9 per cent of NAA equipment sales
in the six months ended 30 September 2003). Total R&D spend of #58 million or
11.7 per cent of sales in Non-NARF covers investment in Optical Networks, our
largest product area and also Access Networks where we are in the early stages
of the sales cycle for key new next generation products such as our Access Hub
and Softswitch and therefore have a lower revenue base over which to spread
these R&D costs.
iii.) Sales & marketing costs: our NARF businesses tend to incur a lower level
of sales and marketing costs both in absolute terms and as a percentage of sales
than our non-NARF businesses. This is partly because they benefit from a higher
customer concentration (58 per cent in the first six months ended 30 September
2003) than our businesses in the rest of the world (48 per cent in the first six
months ended 30 September 2003).
iv.) Central costs: the non-NARF operating results include central costs that
relate mainly to the cost of our executive management and corporate functions
such as finance, human resources, legal, strategy, communications and IT.
Excluding share option costs these amounted to #19 million in the six months
ended 30 September 2003; #10 million of which was incurred in the three months
ended 30 June 2003 and #9 million in the three months ended 30 September 2003.
v.) Goodwill amortisation: of the #49 million charge for amortisation of
goodwill in the six months ended 30 September 2003, #43 million related to our
previous acquisitions of GPT and certain activities from Nokia and Bosch within
Non-NARF and #6 million related to our previous acquisition of Reltec held
within NARF.
vi.) Share option costs: the #9 million of share option costs were charged to
the Non-NARF profit and loss account as the majority of participants in the nil
cost share option plan are employed by Non-NARF businesses at corporate level.
In addition to the factors listed above, it should be noted that we have been
able to complete the operational restructuring of our NARF businesses in a
significantly shorter period of time than within our Non-NARF businesses and
this has been a major driver in returning our NARF businesses to operating
profitability (before exceptional items). As described in the Outlook on page 4
above, further planned headcount reductions in Europe have been announced and
are now well under way and we expect that these will make a significant
contribution to cost savings in Non-NARF during the second half of the financial
year. At the same time, in CALA and APAC, we continue to rationalise our number
of operating locations by consolidating our employees onto the larger sites in
the region and closing remote offices. These actions are also expected to
contribute to cost savings in the second half of the financial year.
Other Financial Items - Group basis only
Exceptional Items
Details of Operating Exceptional Items included in the profit and loss account
in the three and six months ended 30 September 2002 and 2003 are set out in the
discussion on gross margin and operating expenses, above on pages 20 to 28 and
in the Notes to the Non-Statutory Accounts; note 4, page 54.
Details of Non-Operating Exceptional Items included in the profit and loss
account in the three and six months ended 30 September 2002 and 2003 are set out
in note 4c on page 55 below.
Goodwill Amortisation
Goodwill amortisation for the six months ended 30 September 2003 was #49
million, comprising #25 million in the three months ended 30 June 2003 and #24
million in the three months ended 30 September 2003. Goodwill amortisation in
the six months ended 30 September 2002 was #54 million. The #5 million decrease
related primarily to the disposal of Strategic Communications and the write-down
of goodwill relating to our former SMS subsidiary in the previous year.
Interest and Finance Expenditure/(Income)
Our net interest expense accrued was #20 million in the six months ended 30
September 2003, comprising a net expense of #4 million in the first three months
ended 30 June 2003 and a net expense of #16 million in the three months ended 30
September 2003. Interest accrued on our Junior and Senior loan notes from 1 May
2003 amounted to #27 million (#11 million in the three months ended 30 June 2003
and #16 million in the three months ended 30 September 2003). Interest earned on
cash deposits of #4 million in the three months ended 30 September was offset by
interest payable on other loans and by associates, whereas in the three months
ended 30 June 2003, interest earned of #5 million and a release of accrued
interest following the completion of the financial restructuring of #3 million
more than offset interest payable on other loans.
Net interest expense of #120 million in the six months ended 30 September 2002
was accrued on our bank loans and bonds in issue at the time.
Net finance expenditure for the six months ended 30 September 2003 amounted to
#47 million (#35 million in the three months ended 30 June 2003 and #12 million
in the three months ended 30 September 2003). Interest on pension scheme
liabilities and expected return on pension assets netted to a #2 million charge
in the three months ended 30 September 2003 compared with #1 million in the
three months ended 30 June 2003. The 10 per cent premium charged on the partial
redemption of our Junior loan notes completed during the period amounted to #10
million compared with #nil for the three months ended 30 June 2003 and foreign
exchange movements on our Euro-denominated cash balances led to a gain of #1
million compared with #4 million loss for the three months ended 30 June 2003.
In addition, in the three months ended 30 June 2003, as previously disclosed, we
benefited from a gain on unhedged foreign exchange borrowings (#16 million)
which did not re-occur in the three months ended 30 September 2003 and on
completion of the restructuring we wrote off capitalised losses on interest swap
arrangements of #46 million. In the six months ended 30 September 2002, net
finance income amounted to #2 million, resulting from net pension charges of #3
million offset by a gain on unhedged foreign exchange borrowings.
Taxation
We recorded a tax credit on ordinary activities to the profit and loss account
of #14 million in the six months ended 30 September 2003 as compared with a #10
million charge in the six months ended 30 September 2002. The net tax credit was
due to the release of tax provisions in respect of prior years following the
Marconi Corporation Plc Scheme of Arrangement, partly offset by tax charges for
those territories incurring tax payments.
Joint Ventures and Associates
During the six months ended 30 September 2003, operating losses in respect of
joint ventures were #2 million, relating primarily to our share of operating
losses of Confirmant Limited. In the six months ended 30 September 2002
operating losses in respect of joint ventures amounted to #36 million including
#32 million operating exceptional items mainly relating to Ultramast Limited.
Operating losses before goodwill amortisation in respect of associates for the
six months ended 30 September 2003 were #6 million. This mainly comprised our
share of operating losses of Easynet prior to disposal.
Operating losses before goodwill amortisation in respect of associates for the
six months ended 30 September 2002 were #17 million. Again, this mainly
comprised our share of operating losses of Easynet.
In the three months ended 30 June 2003, we charged goodwill amortisation in
respect of associates of #3 million on goodwill generated on the acquisition of
our stake in Easynet. In the three months ended 30 September 2003, goodwill
amortisation of #2 million was charged giving a total amortisation charge for
the six months ended 30 September 2003 of #5 million. In the six months ended 30
September 2002, goodwill amortisation amounted to #5 million. Goodwill
impairment charges relating to associates for the six months ended 30 September
2003 were #nil (#27 million in the six months ended 30 September 2002).
On 12 November 2003, we announced the disposal of our 50 per cent interest in
Confirmant Limited to Oxford GlycoSciences, a wholly owned subsidiary of
Celltech Group plc. The cash proceeds of over #4 million will be transferred
into the Mandatory Redemption Escrow Account and used in due course to fund a
partial redemption of our Junior Notes. In the six months ended 30 September
2003, we recorded a #2 million charge to the profit and loss account in respect
of our share of Confirmant's operating loss.
Dividend
As previously disclosed, as a result of our financial restructuring, there are
certain significant restrictions that prevent us from paying dividends under the
terms of the indentures governing the new Senior and Junior Notes. Accordingly,
the directors do not expect to declare a dividend for the foreseeable future.
FINANCIAL CONDITION
Balance Sheet
Net Assets
At 30 September 2003, we had net assets of #323 million compared to #303 million
at 30 June 2003 and net liabilities of #3,332 million at 31 March 2003. At 31
March 2003, we estimated the impact of the financial restructuring and disclosed
pro-forma net assets, which assumed the financial restructuring had been
effective at that date, of #400 million.
The difference between actual net assets at 30 June 2003 and the pro-forma net
assets at 31 March 2003, was mainly the result of the loss incurred during the
period partially mitigated by favourable foreign exchange movements in the three
months ended 30 June 2003.
The increase in net assets during the three months ended 30 September 2003
resulted mainly from the non-operating gains on disposals described in the Notes
to the Non-Statutory Accounts; Note 4c, page 55 (#103 million) and the gain
resulting from the actuarial review of our pension plans (#14 million). These
more than offset the negative impact of losses incurred in our operations and
interest and finance expenditure.
Goodwill
At 30 September 2003, the net book value of Group goodwill amounted to #541
million compared to a net book value at 30 June 2003 of #566 million and at 31
March 2003 of #597 million. The movement in the three months ended 30 June 2003
comprised amortisation for the period of #25 million and foreign exchange
movements of #6 million. The movement in the three months ended 30 September
2003 comprised amortisation for the period of #24 million and foreign exchange
movements of #1 million. The goodwill balance at 30 September 2003 related
mainly to GPT, Reltec and businesses acquired from Nokia and Bosch.
We have reviewed the carrying value of goodwill based on our business forecasts
at 30 September 2003 and are not required to make any provision in respect of
impairment.
Fixed Assets
As at 30 September 2003, we had tangible assets of #192 million compared to #209
million as at 30 June 2003 and #243 million at 31 March 2003.
The reduction in tangible assets is mainly due to depreciation (#23 million in
the three months ended 30 September 2003 and #42 million for the six months
ended 30 September 2003) and the disposal of IT assets as a result of the
completion of our outsourcing agreement with CSC in the three months ended 30
June 2003.
Capital expenditure in the first half of the year was restricted to items
essential to support the business.
Investments
As at 30 September 2003, we had fixed asset investments and our share of
interests in joint ventures and associates of #23 million compared to #57
million at 30 June 2003 and #63 million at 31 March 2003. The reduction in was
largely due to the sale of our investments in Easynet plc and Bookham Technology
plc.
Working Capital
We continued to make progress in improving working capital management in the
three months ended 30 September 2003.
The table below sets forth our working capital ratios:
Ratio 30 30 31 31 30 30
June September December March June September
2002 2002 2002 2003 2003 2003
Stock 2.9 4.5 4.8 5.6 5.3 5.7
Turns -
Group
Creditor 93 88 82 55 61 60
Days -
Group
Debtor 106 101 100 92 90 75
Days -
Group
Stock
Net stock and contracts in progress reduced to #202 million at 30 September 2003
compared to #215 million at 30 June 2003 and #234 million at 31 March 2003. The
reduction in the three months ended 30 September 2003 was primarily due to
continued tight control of inventory in-feed within the European supply chain.
The movement in the three months ended 30 June 2003 also included the impact of
the previously disclosed sale of circuits deployed over the ultra-broadband
optical equipment already installed in BT's transmission network under our "Pay
as You Grow" contract.
Net stock turns improved in the period from 5.3 in the three months ended 30
June 2003 to 5.7 in the three months ended 30 September 2003. This was primarily
due to continued focus on the alignment of inventory in-feed with forecast sales
demand as well as improved stock utilisation and management.
Stock provisions decreased from #406 million at 31 March 2003 to #317 million at
30 September 2003. This reduction mainly resulted from the utilisation of
provisions on scrapping of obsolete inventory (which we have not been able to
sell).
Debtors
Net debtors amounted to #472 million at 30 September 2003, a significant
reduction from #529 million at 30 June 2003 and #613 million at 31 March 2003.
We have reduced net trade debtor days from 92 at 31 March 2003 to 90 at 30 June
2003 and 75 at 30 September 2003. The significant improvement in the three
months ended 30 September 2003 was due to an increased proportion of debtors
with shorter payment terms partly as a result of our successful negotiation of
improved payment terms with a number of key customers in Northern Europe and
partly due to the increase in sales in North America where debtor days are
typically below our Group average. We continue to focus on cash collections and
management of overdue debts.
Other debtors and prepayments amounted to #102 million at 30 September 2003
compared to #118 million at 30 June 2003 and #117 million at 31 March 2003. The
reduction in the three months ended 30 September 2003 was largely driven by the
release of monies held in an escrow account, which had been accounted for within
other debtors following the disposal of Marconi Mobile Access S.p.A, as well as
the gradual unwinding of prepayments in the normal course of business over the
year.
Creditors
Trade creditors, other creditors, accruals and payments received in advance
(excluding current taxation) amounted to #503 million at 30 September 2003
compared to #544 million at 30 June 2003 and #675 million at 31 March 2003.
We reduced trade creditors from #174 million at 31 March 2003 to #169 million at
30 June 2003 and #158 million at 30 September 2003 as a result of our continued
tight control of inventory in-feed to forecast sales demand. Trade creditor days
remained stable in the three months ended 30 September 2003 at 60 days.
Other creditors, accruals and payments received in advance amounted to #345
million at 30 September 2003, reduced from #375 million at 30 June 2003 and #501
million at 31 March 2003. The decrease in the six months ended 30 September 2003
largely related to the final settlement of advisor fee obligations following
completion of our financial restructuring, partially offset by the previously
disclosed write off of capitalised losses relating to swaps.
Provisions
Provisions for liabilities and charges stood at #246 million at 30 September
2003 compared to #268 million at 30 June 2003 and #300 million at 31 March 2003.
The reduction of #22 million in the three months ended 30 September 2003 was due
to the net utilisation of restructuring provisions (#12 million), warranties and
contracts (#5 million) and other provisions (#5 million).
The reduction in the six months ended 30 September 2003 included the settlement
of a #35 million share option liability to the ESOP derivative banks on 19 May
2003.
Pensions and other retirement benefits
Our pension scheme deficits at 30 September 2003 amounted to #346 million
compared to #353 million at 31 March 2003.
At 30 September 2003 an actuarial assessment of our defined benefit pension
scheme liabilities and a valuation of the pension assets was performed. The
actuarial assumptions reported at 31 March 2003 were reviewed and the inflation
assumption of the UK scheme was increased from 2.5 per cent to 2.75 per cent.
This increase impacted other assumptions as disclosed in Note 1 on page 48. All
other assumptions remained unchanged. We did not update the actuarial assessment
at 30 June 2003.
The impact of the actuarial assessment of #14 million is recognised through the
Consolidated Statement of Total Recognised Gains and Losses where we recorded a
loss in the UK plan of #78 million due to the increased inflation and a gain of
#87 million in the UK and US plans due to actual returns on assets being higher
than previously assumed.
Service costs, plan contributions, benefit payments and net finance costs have
been recognised in accordance with the actuarial assumptions set at the
beginning of the year and published at 31 March 2003.
As previously disclosed, during the three months ended 30 June 2003 the Trustees
of our UK pension plan agreed the value to be transferred to the Merloni pension
plan in respect of the accrued benefits of the employees who transferred to
Merloni upon completion of the sale of our 50 per cent stake in GDA. Consistent
with previous transactions, the transfer value was calculated on a share of
funds basis, being the basis provided for in the sale agreement and consistent
with the amount assumed therein. As previously disclosed in our Prospectus dated
31 March 2003 (page 410), the Trustees were not bound by the provisions in the
original sale agreement which could have exposed us to an estimated maximum
liability of #14.7 million. This potential exposure is now remote.
During the six months ended 30 September 2003 we recognised a settlement loss of
#6 million in the profit and loss account arising from the difference in
accounting and actuarial assumptions on the transfer value as we are now
demonstrably committed to transferring deferred pensioners out of the UK plan.
In the six months ended 30 September 2002, a #28 million curtailment gain was
recognised primarily in respect of the disposal of our 50 per cent stake in GDA.
LIQUIDITY AND CAPITAL RESOURCES
Net Cash / Debt
On 19 May 2003, we completed our financial restructuring as a result of which
#4,723 million of financial indebtedness was cancelled and new Junior and Senior
Notes were issued.
30 30 31
September June March
# million 2003 2003 2003
Restructured Debt - - (4,723)
US $ denominated Senior Notes (432) (435) -
US $ denominated Junior Notes (191) (295) -
Other bilateral and bank debt (50) (53) (52)
----- ----- -----
Gross financial indebtedness (673) (783) (4,775)
Cash 772 788 1,158
----- ----- -----
Net cash / (financial indebtedness) 99 5 (3,617)
===== ===== =====
Gross financial indebtedness at 30 September 2003 was reduced by #110 million to
#673 million compared to the position at 30 June 2003. This resulted mainly from
the mandatory partial redemptions of the Junior Notes completed on 31 July 2003
(US$66 million, approximately #41 million) and 30 September 2003 (US$103
million, approximately #65 million). Proceeds from the sale of our stake in
Bookham Technology plc were transferred from available treasury deposits to the
Mandatory Redemption Escrow Account after 30 September 2003. As previously
disclosed, these were used to fund a further mandatory partial redemption of the
Junior Notes on 17 October 2003 (US$29 million, #17 million) further reducing
the principal amount of Junior Notes outstanding to US$289 million
(approximately #174 million) at that date. The balance of the reduction in gross
financial indebtedness during the three months ended 30 September 2003 related
to the reduction in bilateral and other bank debt (#3 million) and foreign
exchange translation movements (#1 million).
We elected to make the second coupon payment due on our Junior Notes on 31
October 2003 in cash (approximately #4.3 million).
Cash Flow
Three Six
months months
ended ended
30 30
# million September September
2003 2002 2003 2002
Group operating cash flow before 33 (39) 65 (142)
exceptional items
Exceptional operating cash flow (before (38) (97) (74) (181)
financial restructuring payments)
----- ----- ----- -----
Group operating cash flow (after (5) (136) (9) (323)
exceptional items and before financial
restructuring payments)
Capital expenditure and financial 19 (29) 41 (25)
investment
Returns on investments and servicing of (23) (94) (19) (158)
finance
Acquisition and disposals 104 392 98 387
Tax - (6) (2) (13)
----- ----- ----- -----
Group cash flow before financial 95 127 109 (132)
restructuring, use of liquid resources,
and financing
Exceptionals - payment to ESOP - - (35) -
creditors
----- ----- ----- -----
Group cash flow before use of liquid 95 127 74 (132)
resources, and financing
Management of liquid resources 5 (42) 19 (77)
Cash element of Scheme consideration - - (340) -
Other net cash outflow from financing (104) (54) (105) (38)
----- ----- ----- -----
Increase/(decrease) in cash and net bank (4) 31 (352) (247)
balances repayable on demand
===== ===== ===== =====
Cash Flow for the Three and Six Months Ended 30 September 2003
During the first half of the financial year, we made good progress towards our
previously stated goal of maximising cash generation in order to pay down our
Junior Notes as soon as possible. This was achieved mainly through proceeds from
the disposal of assets and investments and cash generated from operations
(before exceptional items) which were more than sufficient to fund the cash
costs of our ongoing operational restructuring and interest charges.
Before the impact on cash balances of our financial restructuring, management of
liquid resources and repayment of financing, we recorded a cash inflow of #95
million in the three months ended 30 September 2003 and #109 million for the six
months ended 30 September 2003.
On 19 May 2003, upon completion of the financial restructuring, we paid a #35
million settlement to our ESOP derivative banks and distributed #340 million to
scheme creditors. In addition, we used approximately US$186 million
(approximately #116 million) to fund the US$169 million (approximately #106
million) reduction in principal amount of the Junior Notes and the US$17 million
(approximately #10 million) redemption premium.
As a result, our cash and net bank balances repayable on demand decreased by #4
million in the three months ended 30 September 2003 and by #352 million in the
six months ended 30 September 2003.
Group Operating Cash Flow before exceptional items
We generated positive operating cash flow (before exceptional items) in both
quarters of the first six months of the financial year. Overall, operating
losses before exceptional items of #116 million were offset by depreciation and
amortisation (#91 million), non-cash costs relating to share options (#8
million) and an #82 million reduction in working capital. This led to an
adjusted operating cash flow of #65 million, of which #32 million was generated
in the three months ended 30 June 2003 and #33 million in the three months ended
30 September 2003.
The contribution from working capital amounted to #56 million in the three
months ended 30 June 2003 and #26 million in the three months ended 30 September
2003 and was driven largely by cash receipts from debtors, improved management
of overdue debts and the successful renegotiation of shorter payment terms with
certain key customers in Northern Europe. In addition, some cash was generated
through further improvements to management of inventory demand in the supply
chain.
Capital Expenditure and Financial Investment
Gross capital expenditure amounted to #12 million during the first six months,
with #6 million spent in each quarter. Most of this amount was incurred in
Optical Networks and BBRS. In the three months ended 30 June 2003, we generated
#26 million from the sale of our IT assets in associated with our outsourcing
agreement with CSC while in the three months ended 30 September 2003, we
generated #23 million on the disposal of financial investments, primarily our
stakes in Bookham Technology plc and Gamma Telecom Holding Ltd. As a result, net
capital expenditure and financial investment amounted to #41 million in the
first six months of the financial year.
Returns on Investments and Servicing of Finance
In the three months ended 30 September 2003, we paid interest of #16 million on
our Junior and Senior loan notes and an additional #10 million of financing
charges in respect of the 10 per cent premium due on the partial redemptions of
our Junior Notes completed during the quarter. Other net interest received on
our cash balances and paid on our bank loans amounted to #3 million.
No interest or redemption premiums were paid on our Junior and Senior loan notes
in the three months ended 30 June 2003. Other net interest received of #4
million in the three months ended 30 June 2003 was largely due to interest
earned on cash deposits.
Exceptional Cash Flows (before payment of ESOP settlement and Scheme
consideration)
We incurred total operating exceptional cash costs of #38 million during the
three months ended 30 September 2003, which resulted from severance payments
(#15 million), lease commitments and other obligations associated with our
ongoing operational restructuring and reorganisation (#12 million) and the final
payment of fees and expenses to advisors in the context of our financial
restructuring (#11 million). The severance payments include our share of Jabil's
costs to close the Coventry plant and transfer manufacturing to lower cost
locations in Scotland and Hungary. The lease commitments and other obligations
related mainly to vacant properties and other assets, which we no longer require
to support our downsized and restructured business and for which we have
provided in previous periods. During the three months ended 30 September 2003,
we agreed and paid out settlements on a number of these onerous leases.
This brought the total operating exceptional spend in the six months ended 30
September 2003 to #74 million, of which #33 million related to the financial
restructuring and #41 million to the operational restructuring.
Cash Flows from Acquisitions and Disposals
We generated a total of #104 million as a result of business disposals during
the first half of the financial year. This mainly related to the disposal of our
entire stake in Easynet plc (#94 million) with the balance relating mainly to
cash released from an escrow account following the disposal of Marconi Mobile
Access S.p.A and proceeds from other smaller disposals (including deferred
considerations received on disposals completed in prior periods - SMS and
Marconi Applied Technologies). These were partially offset by a deferred
consideration of approximately #6 million we paid during the three months ended
30 June 2003, which related mainly to our acquisition of Northwood Technologies
in May 2001.
Tax Paid
We paid net #2 million of tax in the six months ended 30 September, which was
all incurred in the three months ended 30 June 2003.
Cash Flow for the Six Months Ended 30 September 2002
During the 6 months ended 30 September 2002, we incurred a #132 million cash
outflow before use of liquid resources and financing. The main components of
this were;
i.) a net outflow from operating activities before capital expenditure and
exceptional items of #142 million driven largely by consumption of cash for
working capital requirements,
ii.) an exceptional cash outflow from operating activities of #181 million
relating mainly to our operational restructuring,
iii.) an outflow from returns on investments and servicing of finance of #158
million relating mainly to the burden of interest payments on our higher bank
and bond debt balances prior to completion of the financial restructuring, and
iv.) an inflow from acquisitions and disposals of #387 million largely relating
to the disposal of the Strategic Communications and Marconi Applied Technologies
businesses.
Other cash flows related to tax paid (#13 million), and cash outflows from
capital expenditure and financial investment (#25 million).
RISK MANAGEMENT
An update on the position with respect to the risks outlined in the Operating
and Financial Review for the three months to 30 June 2003 is provided below.
Liquidity Risk
At 30 September 2003, our cash and liquid resources totalled #772 million
compared with #788 million at 30 June 2003.
Of this total, #210 million represented amounts which would be classified as
restricted cash, and #562 million represented free cash available to us at 30
September 2003. The following table sets out the breakdown of these restricted
and free cash balances at 30 September and 30 June 2003:
# million 30 30
September June
2003 2003
Performance Bonds:
Cash collateral on existing performance bonds 108 121
Cash collateral on super-performance bonding 27 22
facility
Performance bonding escrow account 41 41
----- -----
Total cash collateralised against performance 176 184
bonds
Captive insurance company 19 18
Collateral on secured loans in Italy 13 15
Mandatory Redemption Escrow Account (MREA) 2 -
----- -----
Total Restricted Cash 210 217
Cash held at subsidiary level and cash in transit 65 84
Available Treasury deposits 497 487
----- -----
Total Cash and Liquid Resources 772 788
===== =====
During the three months ended 30 September 2003, we were able to release
approximately #13 million from cash collateral on performance bonds issued prior
to completion of the financial restructuring. Of this amount, approximately #4
million was placed as collateral against our new bonding facility and
approximately #9 million was applied to a partial redemption of our Junior
Notes. The new bonding facility allows Marconi Bonding Limited, a group
subsidiary, to procure a total of #50 million of performance bonding. These
bonds will be fully collateralised, with 50 per cent of the collateral being
placed at the time of issuance of the bond (#2 million at 30 September 2003, #1
million at 30 June 2003) and 50 per cent being rolled over from releases of
collateral on existing bonds (#25 million at 30 September 2003, #21 million at
30 June 2003).
During the three months ended 30 September 2003, we continued to optimise the
level of cash balances held within our treasury centres. This was the main
reason for the #19 million reduction in cash held at subsidiary level and cash
in transit in the table above.
Interest Rate Risk
As at 30 September 2003, 96 per cent of our borrowings were at fixed rates of
interest. Consequently, our exposure to interest rates will be limited to
changes in the interest rates earned on our short-term bank deposits. Under the
terms of the Senior and Junior Notes, no hedging of this risk is permitted.
During the three months ended 30 September 2003, a 1 per cent increase in
interest rates would have led to a #2 million increase in interest income, and
no significant impact on interest expense.
Foreign Exchange Risk
We are exposed to movements in foreign exchange rates against sterling for both
trading transactions and the translation of net assets and the profit and loss
accounts of overseas subsidiaries. Our main trading currencies are the US
dollar, sterling and the euro.
Following the restructuring, the majority of our debt (93 per cent as at 30
September 2003) is denominated in US dollars. It is our policy to take this US
dollar exposure into account when determining the appropriate currency mix of
the Group's cash balances.
As at 30 September 2003, #417 million of our cash balances were denominated in
US dollars (#432 million as at 30 June 2003), #156 million were in sterling
(#134 million as at 30 June 2003), and #172 million in euros (#170 million as at
30 June 2003), and the balance of #27 million (#52 million as at 30 June 2003)
in other currencies.
As at 30 September 2003, we held approximately euro 157 million (#110 million)
of cash denominated in euro within the UK, as collateral against bonding
facilities and to meet potential cash requirements in the euro zone. Since this
cash is designated for euro-denominated cash flow requirements, this cash is not
treated as a hedge for accounting purposes, and gains and losses on
retranslation of the cash into sterling are taken to net finance income /
(expense).
Exchange Rate Sensitivity
The table below sets out a sensitivity analysis of the impact of a 10 per cent
reduction in the value of the US Dollar, Euro-traded currencies and other
currencies on our reported operating result before goodwill amortisation and
exceptional items.
10 per cent Percentage reduction in reported sterling operating
reduction: losss/(increase in loss) before goodwill amortisation and
in the exceptional items
value of:
US Dollar (2.1)
Euro-traded 7.8
currencies
Other 0.3
-----
Total 6.0
=====
Customer Finance Commitments
We have not issued any new customer finance commitments during the six months
ended 30 September 2003, and will not require cash resources to fund these
activities in the foreseeable future. At 30 September 2003, in respect of the
commitments outstanding prior to the reporting period, we had customer finance
commitments of approximately #40 million of which #38 million had been drawn.
Contract Bonding Facilities
Some customers in the telecommunications market require that bank bonds or
surety bonds (issued by insurance companies) are provided to guarantee
performance of the equipment supplier. We had a total of #168 million of bonds
outstanding at 30 September 2003 with both banks and insurance companies
worldwide as compared with #171 million at 30 June 2003. Following our financial
restructuring, we have a committed super-priority bonding facility for a total
of #50 million of bonding, of which #6 million had been drawn at 30 September
2003. As part of our restructuring, substantially all new bonds currently have
to be cash collateralised. Of the #135 million of collateral at 30 September
2003, #25 million related to collateral on bonds which have been retired and
rolled into collateralisation of the new Super-priority Performance Bonding
Facility, and #10 million was collateral against bonds issued in favour of
companies which have now been sold. In the latter case, we are in the process of
procuring the release of this collateral.
A maturity profile of all bonds and guarantees outstanding at 30 September 2003
is set out below:
#million, Bonds Bonds
Expiring, outstanding outstanding
31 at 30 at 30
March, September June
2003 2003
2004 or earlier 43 60
2005 41 26
2006 12 16
2007 40 38
Thereafter 18 17
No expiry date 14 14
----- -----
Total 168 171
===== =====
A number of our performance bond arrangements carry rights for the issuer to
call for cash collateral, either unconditionally or upon the occurrence of
certain events. We estimate that as at 30 September 2003, performance bonds with
a face value of approximately #43 million had varying conditional or
unconditional rights to call for cash collateral.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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