SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the Month of March 18 2003
Commission file number: 0-30924
MARCONI PLC
(Exact name of Registrant as specified in its Charter)
4th Floor
Regents Place
338 Euston Road
London
NW1 3BT
(Address of principal executive offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange
Act of 1934.)
Yes No X
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In order to utilize the "Safe Harbor" provisions of the United States Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), Marconi plc ( the
"Company") is providing the following cautionary statement. Except for
historical information contained herein, statements contained in this Report on
Form 6-K may constitute "forward-looking statements" within the meaning of the
Reform Act. The words "believe", "anticipate", "expect", "intend", "estimate",
"plan", "assume", "positioned", "will", "may", "risk" and other similar
expressions which are predictions of or indicate future events and future trends
which do not relate to historical matters identify forward-looking statements.
Reliance should not be placed on such statements because they involve known and
unknown risks, uncertainties and other factors which are in some cases beyond
the control of the Company, together with its subsidiaries (the "Group"), and
may cause the actual results, performance or achievements of the Group to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements (and from past results,
performance or achievement). Certain factors that may cause such differences
include but are not limited to the following: (1) any major disruption in
production at our key facilities; (2) changes in the environmental, tax and
other laws and regulations, which, among other things, could cause us to incur
substantial additional capital expenditures and operation and maintenance costs;
and (3) adverse changes in the markets for our products, including as a result
of increased competition in the highly competitive international markets for
such products. These and other risks, uncertainties and factors are discussed in
the Company's Registration Statement on Form F-1 and other filings with the
Securities and Exchange Commission, including this Form 6-K. Shareholders and
prospective investors are cautioned not to place undue reliance on these
forward-looking statements which speak only as to the Company's judgment as of
the date hereof. Any such forward-looking statements are not intended to give
any assurance as to future results. The Company undertakes no obligation to
publicly update or revise any of these forward-looking statements, whether to
reflect new information or future events or circumstances or otherwise.
MARCONI QUARTERLY REPORT
for the three months ended 31 December 2002
- Significant progress on cost reduction and cash generation despite
continued tough market conditions
- Direct cost savings more than offset lower Core sales volumes driving
improvement in Core gross margin before exceptional items: 22.1 per cent of
sales (Q3 FY02 19.3 per cent; Q2 FY03 21.6 per cent before impact of GBP25
million stock provisions) (see Core Gross Profit / Margin below)
- Core operating cost annual run-rate (before goodwill amortisation and
exceptional items) reduced to around GBP550 million by 31 December 2002
(approximately GBP1 billion at 31 December 2001); on track to achieve target
run-rate of GBP520 million by the end of the financial year (see Core
Operating Expenses below)
- Substantial reduction in Core operating loss (before goodwill amortisation
and exceptional items) to GBP41 million from GBP128 million in Q3 last year
and from GBP90 million in the previous quarter this year; further progress
towards EBITDA breakeven (GBP15 million adjusted Q3 EBITDA loss before
exceptional items in the Core) (see Core Adjusted Operating Profit/(Loss)
below)
- Reduced operating loss (before goodwill amortisation and exceptional
items) and significant progress in working capital drive GBP66 million
positive operating cash flow (net of capital expenditure and before
exceptional cash flows) in the Core during Q3 (Q3 2002 GBP25 million
outflow; Q2 FY03 GBP43 million outflow); (see Operating Cash Flow below)
- Group operating loss reduced to GBP130 million (Q3 2002: GBP256 million);
Increased loss on ordinary activities before taxation of GBP198 million (Q3
2002: profit before tax GBP76 million) due to non-operating gains of GBP341
million in prior year
- Outlook: seasonal Q4 sales uplift not expected; further sales declines
likely during the year ending 31 March 2004; appropriate cost actions will
be taken to further reduce breakeven level of Core sales to around GBP1.7
billion (see Outlook below)
- Major milestone in financial restructuring achieved with filing of scheme
documents with court on 17 March 2003 (see Financial Restructuring below and
separate announcement dated 18 March 2003)
- First European sale of BXR 48000 and first commercial sale of Marconi
Softswitch to Jersey Telecom during Q3; recent major order wins include
Access Hub and MSH2K optical backbone network for Telecom Italia; new 3-year
frame contract with TATA India for SDH equipment;
- Strong product pipeline; recent product launches include next generation
SDH equipment (Series 4); new release of Access Hub platform incorporating
voice over DSL, new Gigabit Ethernet and multicasting for video
functionality; enhanced features to ServiceOn network management portfolio;
integrated video application into next generation interactive kiosks;
further enhancements to BXR-48000 to enable 10Gbps secure encrypted data
transmissions; virtual presence desktop (Vipr) video conferencing platform
launched.
London - 18 March 2003: Marconi (MONI) today announced unaudited non-statutory
financial results for the three months ended 31 December 2002.
Commenting on the results, Mike Parton, Chief Executive, said "We are making
real progress towards our operational goals. Core gross margin improved by
almost three points over the same period a year ago despite lower volumes. Our
Core operating cost run rate was reduced by almost half over the same period.
While our markets remain difficult, we are continuing to improve our operating
performance."
This news release should be read in conjunction with Marconi's unaudited
non-statutory financial results and the Operational and Financial Review for the
three months ended 31 December 2002.
Conference Call Details
Management will host a conference call and audiocast for analysts and investors
today (Tuesday 18 March) at 4 pm UK time to discuss the Group's Q3 results and
details of its financial restructuring announced in a separate press release
this morning.
The call can be accessed on Marconi's web-site or by dialling +44 (0) 20 8996
3900 from Europe or 800 241 5872 (toll-free) or +1 617 847 8701 from US and
quoting "Marconi".
An instant replay will be available for fourteen days by dialling +44 (0) 1296
618700, pass code 563002 from Europe or 888 286 8010, passcode 48156936 from US.
Materials to accompany the call will be available on Marconi's website
www.marconi.com.
ENDS/...
About Marconi plc
Marconi plc is a global telecommunications equipment and solutions company
headquartered in London. The company's core business is the provision of
innovative and reliable optical networks, broadband routing and switching and
broadband access technologies and services. The company's aim is to help fixed
and mobile telecommunications operators worldwide reduce costs and increase
revenues.
The company's customer base includes many of the world's largest
telecommunications operators. The company is listed on the London Stock Exchange
under the symbol MONI. Additional information about Marconi can be found at
www.marconi.com.
This press release contains forward-looking statements with respect to products,
partners, customers, future growth and other matters. Please refer to the Form
20-F report and Form 6-K reports filed by Marconi plc with the United States
Securities and Exchange Commission for a discussion of risks that could cause
actual results to differ materially from such statements.
Copyright (c) 2002 Marconi plc. All rights reserved. All brands or product names
are trademarks of their respective holders.
Contacts
Joe Kelly/David Beck
Public Relations
Marconi plc
+44 (0) 207 306 1771
joe.kelly@marconi.com
Heather Green
Investor Relations
Marconi plc
+44 (0) 207 306 1735
heather.green@marconi.com
MARCONI PLC
OPERATIONAL AND FINANCIAL REVIEW
for the three months ended 31 December 2002
FORWARD-LOOKING STATEMENTS
This Operational and Financial Review contains certain statements that are or
may be forward-looking. These statements typically contain words such as
"intends", "expects", "anticipates", "estimates" and words of similar import. 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.
These factors and other factors that could effect these forward-looking
statements are described in the Company's Form 20-F report and Form 6-K reports
filed with the US Securities and Exchange Commission. The Company 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
Overall conditions in the telecommunications market remained tough during the
third quarter. Trading levels in EMEA in the third quarter remained stable
despite the continuing difficult market environment. Marconi is now beginning to
observe some slowing of business in the Middle East as a result of the current
political environment. The North American market continues to be characterised
by further tightening of capital expenditure by a number of large telecom
operators, particularly towards the end of their financial years in December. In
Central and Latin America (CALA), the market was relatively stable during the
quarter although capital expenditure amongst major operators in the region
remained at a low level. In Asia-Pacific (APAC), while the market remains
buoyant in Australia, conditions in the Chinese market are more difficult as a
result of delays in capital expenditure due to the re-organisation of key
customers, delays to the roll-out of certain network build projects and
increased pricing pressure on new business.
Despite the difficult market environment, the Group continued to make
significant progress during the quarter towards its targets to improve operating
performance in the Core business. In particular compared to the previous
quarter, further cost savings achieved during the period led to an approximate
0.5 percentage point increase in Core gross margin (before exceptional items) to
22.1 per cent and an approximate GBP85 million reduction in Core operating cost
run-rate (before goodwill amortisation and exceptional items) to GBP550 million
at 31 December 2002. Headcount reductions are a major driver of the Group's cost
reduction initiatives. At 31 December 2002, the Group employed just over 16,000
employees in its Core business, down from just over 19,000 at 30 September 2002.
The Group's improved operating performance combined with further progress in all
areas of working capital management, led to a significant improvement in
adjusted operating cash flow, with the Group recording an operating cash inflow
(before exceptional items) of GBP72 million during the quarter. Non-operating
and exceptional cash outflows (excluding tax) of GBP88 million relating mainly
to the Group's ongoing operational and financial restructuring processes and
interest paid were partially offset by a net GBP45 million tax repayment
received during the period. In total during the third quarter, the Group
generated cash of GBP29 million before use of liquid resources and financing.
The Group was awarded a number of important business wins during the period.
These included the first European sale of the Group's BXR 48000 multi-service
switch-router to a large financial institution and the first sale of the Group's
recently launched Softswitch to Jersey Telecom. In addition, since the beginning
of calendar year 2003, the Group has announced two major new business wins from
Telecom Italia: a Euro 80 million (approximately GBP50 million) frame contract
for the supply of the Access Hub and a new 2-year frame contract estimated at
approximately Euro 15 million (approximately GBP10 million) to build an optical
backbone network architecture based on the Group's recently launched next
generation digital cross-connect, the MSH2K.
Board
During the third quarter and more recently, Marconi has announced a number of
changes to its Board of Directors as a result of which, the Board now comprises:
Executive Directors Mike Parton Chief Executive Officer
Mike Donovan Chief Operating Officer
Chris Holden Interim Chief Financial Officer
Non-Executive Directors John Devaney Chairman
Kent Atkinson Chairman of Audit Committee
Derek Bonham*
Ian Clubb Chairman of Remuneration Committee
Kathleen Flaherty
Werner Koepf
* Member of the Board of Marconi plc only; all other Executive and Non-Executive
Directors are members of the Boards of both Marconi plc and Marconi Corporation
plc.
Please refer to the Group's announcements dated 14 November 2002, 16 December
2002 and 14 March 2003 for full details of these board changes.
Financial Restructuring
On 29 August 2002, Marconi announced that it had concluded non-binding
indicative heads of terms (the "Heads of Terms") for the financial restructuring
of Marconi plc and its wholly owned subsidiary Marconi Corporation plc (the
"Restructuring").
On 13 September 2002, Marconi announced that, in accordance with the Heads of
Terms, interim security over the balance of the lockbox accounts established in
April 2002 had been granted in favour of the Group's Syndicate Banks,
bondholders (including the bond trustees) and certain ESOP derivative providers.
On 16 December 2002, Marconi concluded modifications to the Heads of Terms. The
terms of the Restructuring as updated by these modifications were in most
respects, including the initial cash distribution, the same as those announced
by Marconi on 29 August 2002.
On 7 February 2003, Marconi announced that Marconi plc and Marconi Corporation
plc had reached agreement in principle with the Group's ESOP derivative banks
for a settlement of their ESOP derivative related claims against the Group.
Documentation reflecting this settlement has now been concluded. As a result of
this settlement, the initial cash distribution to be made as part of the
Restructuring is to be increased by GBP135 million, in return for a GBP123
million reduction in the face value of the Junior Notes to be issued as part of
the Restructuring (ie equivalent to redemption at 110 per cent of face value).
In the 7 February 2003 announcement, Marconi also indicated that the initial
cash distribution was to be increased by an additional GBP20 million (to a total
of GBP320 million) in replacement of the surplus cash element of the excess cash
mechanism outlined in the Group's announcement of 16 December 2002. This GBP320
million figure is in addition to GBP95 million which, as previously announced,
has already been paid on interest accrued on Marconi Corporation financial debt
in the period to 15 October 2002.
Further proposed changes to the Restructuring were announced on 18 March 2003.
In particular, Marconi announced proposed modifications to the scheme
consideration including an increase in the face value of the Junior Notes to the
sum of US$ 300 million and the US dollar equivalent of approximately GBP117
million and a proposal that the Limited Recourse Notes no longer be issued, as
well as a further increase to the initial cash distribution of an additional
GBP20 million (to a total GBP340 million). The Group further announced that
documentation for the proposed schemes of arrangement has been filed with the
High Court of England and Wales and that scheme documentation is expected to be
posted to creditors by 31 March 2003, with Restructuring targeted to be
completed by 31 May 2003.
Please refer to these announcements for further details on the Restructuring.
RECENT DEVELOPMENTS
On 24 February 2003, Marconi announced that, following approval from the High
Court in the United Kingdom, Marconi Corporation plc had completed a return of
capital from Ultramast Limited (a joint venture with Railtrack Telecom Services
Limited and settled all outstanding litigation relating to the joint venture
company set up in December 2000 with RT Group plc. As a result of the
transaction, Marconi received cash proceeds of approximately GBP41 million
(GBP20 million of which Marconi Corporation plc had previously paid into
court).
On 5 March 2003, Marconi announced that it had completed, in separate
transactions, the disposal of two of the businesses from its Capital portfolio.
First, the disposal of the Group's Private Mobile Networks division (also known
as TETRA) to Finmeccanica SpA for approximately GBP2 million in cash,
approximately GBP4.8 million in assumed financial debt and approximately GBP8.2
million in assumed debt to suppliers, and second, the disposal of Marconi Online
to Coca Cola Amatil (N.Z.) Limited for approximately GBP1 million.
OUTLOOK
The market for telecommunications equipment and services remains difficult.
During the first three quarters of the current financial year the annualised
rate of Core sales has declined by around 10 per cent from approximately GBP2
billion in the first quarter to approximately GBP1.8 billion in the third
quarter.
The Directors do not expect that the Group will benefit from a seasonal uplift
in Core sales during the fourth quarter of the financial year compared to the
level recorded in the third quarter (GBP456 million), contrary to the seasonal
pattern of customer demand in previous years.
Furthermore, the Directors believe that market volumes are likely to contract
further during the next financial year and do not expect to benefit from
significant market share gains. As a result, the Group believes that Core sales
could decline by up to a further 5 per cent during the next financial year
compared to the annualised third quarter trading levels (GBP1.8 billion).
In December 2002, the Group outlined its Core operating model and confirms its
targets to achieve a gross margin run-rate in the range of at least 24 to 27 per
cent of Core sales and an operating expenditure run-rate in the range of 21 to
24 per cent of Core sales during the next financial year ending 31 March 2004.
The Group now believes that it will be able to reduce the Core operating cost
base to an annual run rate below GBP450 million during the next financial year
and thereby reduce its targeted breakeven level of sales to below GBP1.7
billion.
BASIS OF PREPARATION
The non-statutory and unaudited financial statements that accompany this Review
have been prepared on a consistent basis with the Group's accounting policies as
stated as at 31 March 2002. However, as these accounts are not statutory
financial statements, the Group has not applied all of the requirements of the
Companies Act 1985 or of accounting standards in relation to items of disclosure
including, but not limited to retirement benefits, financial instruments and
directors' emoluments. The last actuarial assessment of the Group's defined
benefit pension scheme liabilities and valuation of pension assets was performed
at 30 September 2002 and has not been updated for the quarter ended 31 December
2002. Consequently, no amounts have been recognised in the Statement of Total
Recognised Gains and Losses for movements in the actuarial position of plan
assets and plan liabilities.
Unless otherwise stated, references to "Group" in the trading section of this
Financial Review refer to the Marconi Group including its share of joint
ventures, but excluding its share of results of associates. The Group currently
consists of Marconi plc and its subsidiaries, including Marconi Corporation plc.
After completion of the proposed financial restructuring (see Financial
Restructuring above), Marconi Corporation plc will replace Marconi plc as the
parent company of the Group. The major profit and loss differences between the
unaudited consolidated results of Marconi plc and Marconi Corporation plc for
the third quarter ended 31 December 2002 were:
- Marconi plc's share of the fees paid to advisers in connection with the
restructuring which have been charged to operating exceptional items (GBP8
million); and
- interest payable of GBP1 million on the bonds issued by Marconi Corporation
plc held by Ancrane Limited, a subsidiary of Marconi plc that does not form
part of the Marconi Corporation plc group;
The major balance sheet differences between the unaudited consolidated financial
position of Marconi plc and Marconi Corporation plc as at 31 December 2002 were:
- cash of GBP1 million held by Marconi plc; and
- net balances of GBP660 million being Marconi Corporation plc bonds and other
balances held by members of the Marconi plc group that are not members of
the Marconi Corporation plc group with members of the Marconi Corporation
plc group.
Throughout this Operational and Financial Review, the term:
- "adjusted gross profit" refers to gross profit before an exceptional
credit of GBP7 million (Q3 2002: GBP19 million exceptional charge) as
disclosed in Note 5a;
- "adjusted operating profit/(loss)" refers to operating profit/(loss)
before exceptional charges of GBP54 million (Q3 2002: GBP94 million) as
disclosed in Note 5a and goodwill amortisation of GBP28 million (Q3 2002:
GBP46 million) as disclosed in note 4;
- "adjusted operating cost run-rates" and "adjusted operating expenses"
refer to operating cost run rates and operating expenses before exceptional
charges of GBP60 million (Q3 2002: GBP75 million) as disclosed in note 5a
and goodwill amortisation of GBP28 million (Q3 2002: GBP46 million) as
disclosed in note 4;
- "adjusted operating cash flows" refers to operating cash flows before
exceptional cash outflows of GBP82 million (Q3 2002: GBP107 million) and
after net capital expenditure of GBP3 million inflow (Q3 2002: GBP29
million inflow).
Going Concern
There is no guarantee that the negotiations relating to the Restructuring
(discussed above) will reach a satisfactory conclusion. However, in the light of
the information currently available to them, the Directors of Marconi plc and
Marconi Corporation plc believe that the Group's bankers, bondholders and other
creditors will support the Group in achieving an appropriate capital structure
and that all the conditions for the Restructuring will be satisfied. On this
basis, the Directors consider it appropriate to prepare the accounts on a going
concern basis. Should the Group's bankers, bondholders and other creditors (or
some of them) cease to support the Group before the completion of the
Restructuring, or should all of the conditions for the Restructuring not be met,
adjustments would be necessary to record additional liabilities and to write
down assets to their recoverable amount. It is not practicable to quantify these
possible adjustments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Marconi's non-statutory financial statements and accompanying notes are prepared
in accordance with accounting principles generally accepted in the U.K.. The
preparation of these non-statutory financial statements requires the Group to
make estimates, judgements, and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. Note 2 of the Notes to the accompanying non-statutory
financial statements describes the significant accounting policies used in their
preparation. The Directors base their estimates on historical experience and
various other assumptions that they believe are reasonable under the
circumstances, the results of which form the basis for making judgements about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The Group believes that the following are some of the
more critical judgement areas in the application of its accounting policies that
affect the Group's financial position and results of operations.
The development and selection of these critical accounting estimates has been
discussed with the Audit Committee and the Audit Committee has reviewed the
Group's disclosure relating to it in this Operational and Financial Review.
Revenue Recognition
Revenue is recognised when all of the following conditions are satisfied 1)
there is persuasive evidence that an arrangement exists; 2) delivery has
occurred or services have been rendered; 3) the fee is fixed or determinable;
and 4) it is probable that the debtor will be converted into cash.
It is common for Marconi's sales agreements to cover the delivery of several
products and/or services. These range from arrangements where a contract covers
the delivery and installation of equipment to more complex arrangements, which
also include training of customer personnel, sale of software and other support
services. Revenue from contracts with multiple element arrangements, such as
those including installation and commissioning services, is recognised as each
element is earned based on objective evidence of the relative fair values of
each element and when there are no undelivered elements that are essential to
the functionality of the delivered elements.
Revenues and estimated profits on long-term contracts are recognised under the
percentage-of-completion method of accounting using a cost-to-cost methodology.
Significant judgement is required in determining progress toward completion and
in estimating revenues and costs. Profit estimates are revised periodically
based on changes in facts in the underlying contract. When estimates of total
contract revenues and costs indicate a loss, a provision for the entire amount
of the contract loss is recognised in the period in which the loss becomes
foreseeable. Advance payments received from contracts are recorded as a
liability unless there is a right of set-off against the value of work
undertaken.
Impairment of Long-Lived Assets
The Group reviews the carrying value of other fixed assets and assets to be
disposed of, including other intangible assets, whenever indicators of
impairment exist. Indicators of impairment include (but are not limited to):
- a significant adverse change in the extent or manner in which a long-lived
asset or asset group is being used or in its physical condition;
- a current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with the use of a long-lived asset or asset
group; and
- a current expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life.
These tests for impairment require significant judgements in determining
estimates of future cash flows and the resulting value in use of the relevant
fixed asset. Estimations of the present value of future cash flows contain
inherent uncertainty and include estimates of market size and market share
information, growth rates, product demand and technological development, costs
of labour and supplier purchases, working capital requirements, and discount
rates to be applied to future cash flows.
If the carrying value of a fixed asset is considered impaired, an impairment
charge is recorded for the amount by which the carrying value of the fixed asset
exceeds the higher of its net realisable value or its value-in-use. In the three
months ended 31 December 2002 and 2001, Marconi recorded impairment charges in
relation to tangible fixed assets of GBP9 million and GBPnil million,
respectively. In the year ended 31 March 2002, Marconi recorded an impairment
charge relative to goodwill of GBP3,677 million. The Group believes that its
estimates of future cash flows are reasonable; however, changes in such
estimates could affect the determination of the net realisable value or its
value-in-use of the relevant fixed asset.
Contingent Liabilities
Marconi is subject to legal proceedings and other claims arising in the ordinary
course of business. Various claims and proceedings have been or may be
instituted or asserted against Marconi relating to class shareholder actions and
the conduct of its business, including those pertaining to patents,
environmental, safety and health, employment and contract matters. The Group is
required to assess the likelihood of any adverse judgements or outcomes to these
matters, as well as potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies is based on a
careful analysis of each individual issue with the assistance of outside legal
counsel. Although the outcome of litigation cannot be predicted with certainty
and some lawsuits, claims or proceedings may be disposed of unfavourably to
Marconi, the Group believes that the ultimate outcome of these matters will not
have a material adverse effect on the results of operations or financial
position or cash-flows of Marconi, except as discussed in Note 21 to the
non-statutory financial statements.
Pension and other Post-retirement Benefits
Pension and other post-retirement benefits costs and obligations are dependent
on actuarial assumptions used in calculating such amounts. These assumptions
include discount rates, health care cost trend rates, benefits earned, interest
cost, expected return on plan assets, mortality rates, and other factors. While
the Group believes that the assumptions used are appropriate, the assumptions
used may differ materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer or shorter life
spans of participants. These differences may result in a significant impact on
the amount of future pension or post retirement benefits expense and the
resulting liability. Holding all other assumptions constant, a one-half percent
increase or decrease in the discount rate would have increased or decreased the
net loss for the three months ended 31 December 2002 by approximately GBP1
million. Likewise, a one-half percent increase or decrease in the expected
return on plan assets would have increased or decreased pre-tax loss for the
three months ended 31 December 2002 by GBP3 million.
In the three months ended 31 December 2002, the Group charged the profit and
loss account with GBP6 million of service cost and GBP2 million of notional
interest in respect of defined benefit schemes on the basis of the 30 September
2002 actuarial assessment. This will be updated during the final quarter of the
year ending 31 March 2003, and any actuarial gains and losses arising on pension
assets and liabilities in the balance sheet will be shown in the statement of
total recognised gains and losses for the year ending 31 March 2003. The
comparative period for the three months 31 December 2001 was based on actuarial
and investment reviews carried out between 1 January 2002 and 31 March 2002.
Product Warranties
Provisions for estimated expenses related to product warranties are made at the
time products are sold. These estimates are established using historical
information on the nature, frequency, and average cost of warranty claims. The
Group actively studies trends of warranty claims and takes action to improve
equipment quality and minimise warranty claims. The Group believes that the
warranty reserve is appropriate; however, actual claims incurred could differ
from the original estimates, requiring adjustments to the reserve. If the Group
were to experience an increase in warranty claims compared with its historical
experience, or if costs of servicing warranty claims were greater than the
expectations on which the accrual had been based, the Group's gross margins
could be adversely affected.
REPORTING STRUCTURE
For financial reporting purposes, the Group divides its continuing operations
into two segments: Core and Capital.
Core is further analysed by business-type: Network Equipment, comprising Optical
Networks, Broadband Routing and Switching (BBRS), European Access, North
American Access, Outside Plant & Power (OPP) and Other Network Equipment; and
Network Services comprising Installation, Commissioning & Maintenance (IC&M) and
Value-Added Services (VAS).
Capital comprises businesses which Marconi manages to create value and
ultimately for disposal. During the third quarter ended 31 December 2002,
Capital included the Group's Tetra and UMTS mobile activities, Marconi Online
and other smaller joint ventures and investments. In the comparative period of
the previous financial year, Capital also included Marconi Applied Technologies.
In addition, the Group has an economic interest of 71.6 per cent, but voting
rights of only 49.6 per cent, in Easynet Group Plc (Easynet). This investment is
managed through the Group's Capital division, but is accounted for as an
associate in the Group's consolidated accounts.
None of the Group's businesses were reported as discontinued operations during
the third quarter. Discontinued operations in the previous financial year
included Strategic Communications as well as Medical, Commerce and Data Systems
until the date of their respective disposals.
As part of the proposed Restructuring, it is intended that the Group will
segment its business along geographic lines and report the equipment and
services activities of BBRS, OPP and North American Access (US businesses)
separately from the Group's businesses based in Europe and the Rest of the
World, which comprise Optical Networks, European Access, Other Network Equipment
and the rest of Network Services. As previously disclosed in Marconi's
announcement of 29 August 2002, OPP and North American Access are being managed
for value and with a view to disposal, the proceeds of which would be used to
redeem in part the Junior Notes proposed as part of the Restructuring (or in the
event of disposal prior to 1 May 2003, to reduce the amount of Junior Notes
issued).
RESULTS OF OPERATIONS
GROUP REVIEW
Group Key Figures (including joint ventures)
in GBP million 3 months ended
31 December
2002 2001
Sales 466 1,041
Adjusted Gross Profit 102 241
Adjusted Operating Loss (51) (109)
Goodwill Amortisation (28) (46)
Operating Exceptionals (54) (94)
Operating Loss (133) (249)
Non-Operating Exceptionals (10) 341
Associates (11) (11)
Loss before interest, finance income (154) 81
and tax
Group Sales
in GBP million 3 months ended
31 December
2002 2001
Core 456 632
Capital 12 116
Other (2) 0
Continuing operations 466 748
Discontinued operations 0 293
Group 466 1,041
Group sales for the three months ended 31 December 2002 amounted to GBP466
million, representing a decrease of GBP575 million or 55 per cent to the
corresponding three months of the previous year (Q3 2002: GBP1,041 million).
Sales from continuing operations amounted to GBP466 million, a decrease of
GBP282 million or 38 per cent compared to the third quarter of the previous
year. This decrease was mainly the result of continued reductions in capital
expenditure in the global market for telecommunications equipment and services
resulting in lower sales in the Group's Core business (see Core Business Review
below). Sales in the Group's Capital business have been substantially reduced
since the third quarter of the previous year as a result of business disposals,
the major component of which was the disposal of the Group's 50 per cent stake
in General Domestic Appliances. The GBP12 million sales in Capital during the
period related to the Group's Mobile Tetra business and represented a GBP4
million increase compared to the third quarter of the previous year as a result
of an increase in sales of Tetra products outside the domestic Italian market,
particularly in APAC and CALA.
There were no sales from discontinued operations during the period. The GBP293
million of sales from discontinued operations for the three months ended 31
December 2001 related to disposed businesses, Strategic Communications, Data,
Commerce and Medical Systems.
Group Adjusted Gross Profit (including joint ventures)
in GBP million 3 months ended
31 December
2002 2001
Core 101 122
Capital 1 21
Continuing operations 102 143
Discontinued operations - 98
Group 102 241
Adjusted gross profit at Group level amounted to GBP102 million, representing an
adjusted gross margin of 21.9 per cent and was almost entirely attributable to
the Group's Core business. The GBP139 million decrease compared to the third
quarter of the previous year reflected mainly the loss of gross profit
attributed to business disposals from discontinued operations (GBP98 million)
and from Capital (GBP20 million). The GBP21 million reduction in the Core
business related mainly to the lower sales volumes in Network Equipment
described in the Core Business Review below.
Group Adjusted Operating Profit/(Loss) by Segment
in GBP million 3 months ended
31 December
2002 2001
Core (41) (128)
Capital (10) (7)
Continuing operations (51) (135)
Discontinued operations - 26
Group (51) (109)
Group adjusted operating loss was reduced by GBP58 million from a loss of GBP109
million in the third quarter of the previous year to a loss of GBP51 million in
the reporting period. Operating cost savings achieved in the Core business
described in the Core Business Review below were the main driver of the Group's
improved operating performance and more than offset the absence of GBP26 million
of adjusted operating profit recorded in the previous year relating to
discontinued operations.
Core Business Review
Core Key Figures
in GBP million FY03 FY02
Q1 Q2 Q3 Q3
Sales 510 482 456 632
Adjusted Gross Profit 89 79 101 122
Adjusted Operating Loss (115) (90) (41) (128)
Adjusted Operating Cash Flow after (81) (42) 66 (26)
capital expenditure
Core Sales by Geography
in GBP million FY03 FY02
Q1 Q2 Q3 Q3
EMEA 285 285 287 363
US 153 142 127 167
APAC 47 45 29 61
CALA 25 10 13 41
Core 510 482 456 632
Core sales in the third quarter amounted to GBP456 million, a decline of GBP176
million or 28 per cent compared to the corresponding quarter of the previous
year. Sales fell across all major geographic regions as a result of the
significant reductions in capital expenditure by the majority of telecom
operators world-wide. On a sequential basis, the quarter-on-quarter decline in
sales was limited to GBP26 million or 5 per cent (Q2 2003: GBP482 million).
Core sales in EMEA fell by GBP76 million or 21 per cent to GBP287 million (Q3
2002: GBP363 million. GBP56 million representing almost three-quarters of this
decline occurred in Optical Networks as telecom operators have concentrated
their reduced capital expenditure on maximising utilisation in their existing
networks to the detriment of new network build. A further GBP10 million of this
decline occurred in BBRS mainly as a result of the expiry of a third party
distributorship agreement in the United Kingdom during the current financial
year. Sales of Network Services in EMEA increased as a result of the phasing of
long-term service contracts particularly in the Middle East, UK and Germany.
Core sales in the US fell by GBP40 million or 24 per cent to GBP127 million (Q3
2002: GBP167 million). This was mainly a result of reduced sales of OPP
equipment and services following substantial reductions in capital expenditure
by US telecom operators. US sales of Optical Networks amounted to less then GBP1
million during the period (Q3 2002: GBP7 million) following the Group's decision
to cease the development and manufacture of its SONET product range in April
2002.
In APAC, Core sales declined by GBP32 million or 52 per cent to GBP29 million
(Q3 2002: GBP61 million). The main area of decline was Optical Networks and this
was mainly a result of the lower level of sales recorded in China following the
completion of large network build projects in the region in the previous
financial year and delays to certain network build projects by a number of the
Group's Chinese customers in the current financial year. Sales of Network
Services were also down in the region mainly as a result of business disposals.
Core sales in CALA were down GBP28 million or 68 per cent to GBP13 million (Q3
2002: GBP41 million). Sales were down across all product and service activities
as a result of the deterioration in economic conditions compared to the prior
year period and the consequent reductions in capital expenditure by most of the
major telecom operators in the region.
Core Sales by Product Area
in GBP million FY03 FY02
Q1 Q2 Q3 Q3
Optical Networks 134 108 96 189
Broadband Routing and Switching 38 35 32 40
European Access 59 69 69 85
North American Access 25 23 23 24
Outside Plant & Power 46 34 30 48
Other Network Equipment 14 15 11 21
Network Equipment 316 284 261 407
IC&M 97 89 93 122
VAS 97 109 102 103
Network Services 194 198 195 225
Core 510 482 456 632
Sales of the group of activities defined as "US businesses" had sales of GBP125
million during the third quarter and are included in the Core sales reported
above (Q3 2002: GBP171 million).
Network Equipment
Sales of Network Equipment amounted to GBP261 million, a decline of GBP146
million or 36 per cent compared to the previous year (Q3 2002: GBP407 million).
Significant reductions in capital spending by the majority of telecommunications
operators world-wide was the primary reason behind the lower level of sales
across all major product areas. This trend was particularly marked in Optical
Networks and Outside Plant and Power equipment. In some product areas,
particularly European Access, the trend was further exacerbated by the impact of
product line rationalisations undertaken in April 2002 as part of the Group's
operational restructuring.
Optical Networks
Optical Networks sales declined by GBP93 million, or 49 per cent to GBP96
million (Q3 2002: GBP189 million). Sales were down in all major geographic
regions.
Over half of the decline in sales arose in EMEA. In the United Kingdom, the drop
in sales was caused by the substantial decline in demand from second tier
operators, partially offset by slightly higher sales to BT. During the third
quarter, Marconi has begun discussions with a number of second tier operators,
who are now beginning to emerge from their own restructuring initiatives, with
regard to their future network plans but this has not yet translated to firm
sales. Sales to major German customers were lower than in the third quarter of
the previous year as a result of lower capital spending amongst operators. Sales
were also lower in Italy due to the phasing of the roll-out of Telecom Italia's
DWDM network, where the third quarter of the previous year was a peak stage in
the deployment of Marconi's PLT products.
In APAC, whilst sales into the Australian market increased as a result of SDH
Series 3 sales to Telstra, sales in China were down partly due to the completion
of DWDM sales to China Railcom for the North-West Ring project during the last
financial year but also as a result of the difficult conditions in the Chinese
market.
In CALA, third quarter capital spending by telecom operators remained at a very
low level and this led to reduced Optical Networks sales volumes compared to the
previous year.
Third quarter Optical Networks sales in the US were not material, following the
Group's decision during the first quarter of the financial year to cease the
development of its SONET products for the US market and the subsequent closure
of its North American manufacturing plant.
During the third quarter, SDH accounted for 89 per cent of Optical Networks
sales (Q3 2002: 91 per cent) and DWDM for 7 per cent (Q3 2002: 9 per cent). The
balance related mainly to network management systems.
Broadband Routing and Switching (BBRS)
Sales of BBRS equipment decreased by GBP8 million or 20 per cent to GBP32
million (Q3 2002: GBP40 million). The expiry of a distributorship agreement in
EMEA earlier in the current financial year, through which Marconi sold a third
party's equipment into the UK market, was the main cause of this decline. Sales
in the US remained stable compared to the third quarter of the previous year
mainly as a result of the consistent seasonal pattern of spending by the US
Federal Government, the largest single customer of Marconi's BBRS business.
European Access
European Access sales fell by GBP16 million or 19 per cent to GBP69 million (Q3
2002: GBP85 million). Reductions in capital spending by a number of European
Access customers, particularly second-tier operators in the United Kingdom and
Germany, as well as rationalisation of the Group's legacy product lines
following a strategic review of the Access portfolio in April 2002 were the
primary reasons behind this decline.
Sales of voice systems increased largely due to a software upgrade and the Group
recorded higher sales of its Access Hub compared to the modest initial sales of
this newly launched product platform in the third quarter of the previous year.
These increases were more than offset by lower sales of fixed wireless access
products mainly as a result of significant reductions in capital spending by a
number of German mobile operators and lower sales of other legacy and
discontinued products.
North American Access
At GBP23 million, North American Access sales remained relatively stable
compared to the third quarter of the previous year fell (Q3 2002: GBP24
million). This was mainly the result of the continued deployment of equipment
into BellSouth's access network.
Outside Plant & Power (OPP)
OPP equipment sales fell by GBP18 million or 38 per cent to GBP30 million (Q3
2002: GBP48 million. This was a result of the significant reductions in capital
spending in the United States and CALA.
Other Network Equipment
Other Network Equipment declined by GBP10 million or 48 per cent to GBP11
million. While Interactive Systems recorded a modest increase in sales, this was
more than offset by declining revenues from legacy businesses, particularly in
EMEA.
Network Services
Sales of Network Services decreased by GBP30 million or 13 per cent to GBP195
million (Q3 2002: GBP225 million). This was driven by decline in sales of
Installation, Commissioning and Maintenance activities, particularly in the US,
while sales of Value Added Services remained stable.
Installation, Commissioning and Maintenance (IC&M)
IC&M sales fell by GBP29 million or 24 per cent to GBP93 million. Some 65 per
cent of the decline arose in the US market and related to both OPP where sales
of services fell in line with declines in equipment sales and to
enterprise-specific service projects in the region as the Group continues to
refocus activities on the service-provider market. IC&M sales in EMEA remained
stable compared to the third quarter of the previous year mainly as a result of
ongoing long-term support contracts which typically account for approximately 40
per cent of IC&M sales in the region and which provide a more constant revenue
stream. In addition, the Group continues to benefit from new business
opportunities such as long-term support, repair and maintenance contracts as a
result of increased outsourcing of services by major European telecom operators.
Major service contracts were won or renewed with BT, Ericsson, Netcologne and
Belgacom during the quarter and these revenue streams were sufficient to offset
lower levels of installation and commissioning activities associated with sales
of Network Equipment.
Value-Added Services (VAS)
At GBP102 million, the Group recorded stable sales of Value-Added Services
compared to the third quarter of the previous year (Q3 2002: GBP103 million).
Sales were down in Managed Services as a result of the Group's exit from its IT
outsourcing activities completed during December 2002 and in the APAC region as
a result of the sale of part of the Group's Hong Kong based legacy operations in
October 2002. Sales of Wireless Services and BBRS-related services remained
stable while sales of Integrated Systems increased compared to the third quarter
of the previous year mainly as a result of the phasing of long-term service
contracts in the UK, the Middle East and in Germany.
Core Sales Channels
Marconi sells its products and services through its direct sales force and also
through indirect channels such as local partners or distribution partners such
as Ericsson, Italtel, Nokia and Siemens. Sales through channel partners were
significantly lower than the third quarter of the previous year as a result of
the overall reduction in market volumes and particularly, in the case of sales
through Ericsson and Nokia, as a result of the completion of 2G and 2.5G
wireless network rollouts in the previous year and the ongoing delays to the
deployment of 3G network rollouts.
Core Pricing
A high proportion of Core sales, particularly in Europe, are derived from
existing frame contracts, which typically contain annual price reductions. The
Group estimates that price erosion in Network Equipment under such contracts
ranges up to 8 per cent on an annual basis. The Group aims to continue to match
this price erosion with planned product cost savings to avoid erosion of gross
margins. Network Services tends to be more resilient to price erosion. During
the period, the Group has observed increased pricing pressure when competing for
new business in certain territories (particularly in China) and in certain
product areas (particularly Access and DWDM).
Key Core Customers
The Core business serves a strong customer base of predominantly incumbent
operators and government agencies. The ten largest customers during the third
quarter were BellSouth, BT, Ericsson, Metro City Carriers, Telecom Italia,
Telkom South Africa, UK Government, US Federal Government, Verizon and Vodafone
Group. In aggregate, these customers accounted for 46 per cent of third quarter
Core sales (Q3 2002: ten largest customers 36 per cent). BT remains the Group's
largest customer and accounted for 19 per cent of Core sales in the third
quarter (Q3 2002: 13 per cent).
In EMEA, the five largest customers during the third quarter were BT, Telecom
Italia, Telkom South Africa, the UK Government and Vodafone Group and in
aggregate accounted for 49 per cent of Core sales in the region during the
period (Q3 2002: top 5 EMEA customers accounted for 41 per cent).
In the US, the five largest customers during the third quarter were BellSouth,
Qwest, SBC, the US Federal Government and Verizon and in aggregate accounted for
52 per cent of Core sales in the region during the period (Q3 2002: top 5 US
customers accounted for 35 per cent). The increased concentration of sales
resulted from the decline in the number of second tier operator and enterprise
customers compared to the third quarter of the previous year.
Core Cost of Sales
Core cost of sales in the third quarter amounted to GBP355 million (Q3 2002:
GBP510 million). Of this, approximately 57 per cent related to Network Equipment
(Q3 2002: 64 per cent) and 43 per cent to Network Services (Q3 2002: 36 per
cent).
In Network Equipment, approximately 75 per cent are material costs, around
one-third of which relates to outsourced printed circuit board (PCB) assemblies.
The remaining 25 per cent relates to in-house labour and overhead and includes
functions and costs such as planning, supplier management, supply chain
management, logistics, engineering, quality control, final assembly and test,
property costs, asset depreciation, system maintenance and warranty costs.
The decrease in cost of sales in Network Equipment is due to substantial cost
savings achieved in both the European supply chain and in the Group's US
manufacturing operations. In Europe, material, labour and overhead costs have
been significantly reduced year on year and additional savings achieved through
asset disposal, site rationalisation and warehouse closures. In the US, three
factories have been closed during the current financial year and other plants
rationalised in line with the reduced level of sales volumes.
In Network Services, over 60 per cent of cost of sales relates to the cost of
in-house labour. The balance relates to the cost of sub-contract labour,
materials and other overheads. The reduced costs compared to the previous year
relate mainly to headcount reductions.
Core Gross Profit / Margin
The Group continued to make good progress in its initiatives to improve gross
margins during the period. Third quarter Core adjusted gross profit before
exceptional items amounted to GBP101 million, or 22.1 per cent of sales.
The decrease in adjusted gross profit compared to the previous year (Q3 2002:
GBP122 million) related mainly to the reduced volume of Network Equipment sales,
and particularly the lower level of sales in Optical Networks. This was
partially offset by cost savings achieved in the Group's European supply chain
during the period as a result of further rationalisation and benefits of
improved procurement. These savings were the main contributing factor to the
increase in adjusted gross margin as a percentage of sales compared to the
previous year (Q3 2002: 19.3 per cent of sales).
On a sequential basis, excluding the impact of GBP25 million of additional stock
provisions charged to cost of sales in the second quarter, adjusted gross profit
in the Core remained relatively stable despite the 5 per cent sequential sales
decline (Q2 2003: adjusted gross profit GBP104 million reduced to GBP79 million
after additional stock provisions). This was achieved through cost savings
realised during the period in both Network Equipment and Network Services. These
savings were the main drivers of the sequential improvement in adjusted gross
margin as a percentage of sales in the quarter (Q2 2003: 21.6 per cent of sales
before the impact of additional stock provisions of GBP25 million). They
accounted for a 3 percentage point increase in adjusted Core gross margin, which
was partially offset by a less favourable business mix (0.5 percentage point
decrease) and one-off items relating to contract completions (2 percentage point
decrease).
Core Operating Expenses
During the third quarter, operating cost reduction remained a key focus of the
Group's strategy.
Core adjusted operating expenses totalled GBP142 million or 31 per cent of Core
sales during the period, a reduction of GBP108 million or 43 per cent compared
to the third quarter of the previous year (GBP250 million; 40 per cent of Core
sales). Significant savings were achieved across all main categories of
operating expenditure.
By 31 December 2002, the Group had reached an annualised adjusted operating cost
run-rate in the Core business of approximately GBP550 million, reduced from
GBP1.1 billion at the end of September 2001 and GBP635 million at the end of
September 2002.
Core Operating Expenses - Research & Development (R&D)
Core R&D expenditure (before exceptional items) amounted to approximately GBP64
million, a 12 per cent reduction compared to the previous quarter (Q2 2003:
GBP73 million), and a 44 per cent reduction compared to the third quarter of the
previous financial year (GBP115 million). Cost savings achieved during the
quarter related mainly to headcount reductions and reduced facility costs as
well as reduced spend on development materials and a reduced level of
depreciation following exceptional asset write-downs relating to development
models in prior periods.
Optical Networks accounted for approximately 40 per cent of the total Core R&D
spend during the third quarter (Q3 2002: approximately 36 per cent). Around half
of this spend was focused on SDH and in particular the release into customer
trials of Marconi's new high-capacity SDH platform (MSH2K, MSH64c) and the
development of further enhancements to the data-handling capability of the
Group's next generation low-capacity SDH platform, the SMA Series 4. Marconi
also continued to invest in DWDM, targeting feature enhancements across the
Group's existing platforms for Core and Metro applications and further upgrades
to the Group's network management software.
R&D spend across the Group's Access portfolio, in Europe and North America
combined, accounted for a further 23 per cent of total Core R&D (Q3 2002:
approximately 32 per cent). The Group has further cut spend on legacy products
in North America and Europe to focus on R&D programmes relating to Fixed
Wireless Access products, the Access Hub and the recently launched Softswitch.
BBRS accounted for 21 per cent of Core R&D in the quarter (Q3 2002:
approximately 17 per cent). Over 50 per cent of this spend was focused on the
further development of the Group's multi-service core switch-router, the BXR
48000. Other ongoing initiatives include further enhancements to the Group's
ASX1000 and ASX4000 product ranges and the Group's ViPr project, a virtual
presence desk-top networking terminal which uses Marconi's ATM-based
multi-service broadband switch-routing platforms as transport infrastructure.
The remaining 16 per cent of R&D spend in the period related mainly to OPP,
wireless software and Other Network Equipment.
Core Operating Expenses - Sales & Marketing
Core Sales & Marketing expenditure (before exceptional items) amounted to GBP59
million, a 2 per cent reduction compared to the previous quarter (Q2 2003: GBP60
million), and a 45 per cent reduction compared to the third quarter of the
previous financial year (GBP107 million). Cost savings during the quarter have
been achieved mainly through further headcount reductions, a reduced level of
discretionary marketing spend and the closure of overseas sales offices.
Core Operating Expenses - General & Administrative (G&A)
G&A expenses (before goodwill amortisation and exceptional items) in the Core
amounted to GBP22 million, a 27 per cent reduction compared to the previous
quarter (Q2 2003: GBP30 million), and a 45 per cent reduction compared to the
third quarter of the previous financial year (GBP40 million). Cost savings
during the quarter have been achieved mainly through further headcount
reductions, site rationalisation (including the relocation of the Group's UK
head office) and reduced spend on professional fees incurred in the normal
course of business. Professional fees relating to the Group's financial
restructuring are classified as exceptional costs.
Core Operating Expenses - Other
Other Core operating income amounted to approximately GBP3 million and related
mainly to income from properties and royalties as well as a net favourable
foreign exchange translation gain. (Q2 2003: GBP6 million operating expense; Q3
2002: GBP12 million operating income).
Core Adjusted Operating Loss
in GBP million FY03 FY02
Q1 Q2 Q3 Q3
Network Equipment (96) (83) (49) (80)
Network Services (2) 7 20 (32)
Other* (17) (14) (12) (16)
Core (115) (90) (41) (128)
* Other relates mainly to Head Office and other central costs
The Group significantly reduced the adjusted operating loss in its Core business
to GBP41 million during the third quarter, compared to an adjusted operating
loss of GBP90 million in the previous quarter and an adjusted operating loss of
GBP128 million in the third quarter of the previous year.
This substantial improvement was driven by a combination of increased gross
margin and reduced operating expenditure resulting from the Group's ongoing
operational cost saving initiatives described above.
Network Equipment
The adjusted operating loss in Network Equipment amounted to GBP49 million, an
improvement of GBP34 million or 41 per cent compared to an adjusted operating
loss of GBP83 million in the previous quarter and an improvement of GBP31
million or 39 per cent compared to an adjusted operating loss of GBP80 million
in the third quarter of the previous year. Substantial cost reductions achieved
in the Group's supply chain and manufacturing operations in Europe and the US as
well as in all areas of operating expenditure were the main driver of this
improvement and more than offset the reductions in sales volumes across Network
Equipment.
Network Services
Network Services recorded a marked increase in adjusted operating profit from
GBP7 million in the second quarter of the financial year to GBP20 million during
the period despite the stable sequential sales profile. This represented a
significant increased compared to the third quarter of the previous year when
Network Services recorded an adjusted operating loss of GBP32 million. Improved
resource utilisation and other ongoing cost reduction initiatives were the main
drivers behind this enhanced performance. The most marked progress was recorded
in IC&M as a result of increased efficiency and an improved ratio of in-house to
sub-contracted labour, giving rise to greater flexibility in the work-force.
OTHER FINANCIAL ITEMS
Exceptional Items
Operating Exceptionals
For the three months to 31 December 2002, exceptional items charged to Group
operating loss (including joint ventures) totalled GBP54 million. Of this amount
GBP7 million was credited to restructuring costs classified within cost of sales
and GBP61 million was charged to administrative expenses.
The GBP7 million exceptional income arose as a consequence of the Group's
manufacturing outsourcing arrangements whereby Marconi was able to release stock
provisions where the corresponding components, previously provided for by
Marconi, had been utilised by the Group's outsourcing partner.
The GBP61 million charge, related mainly to exceptional restructuring and
reorganisation costs, comprising costs associated with the Group's operational
restructuring including headcount reductions (GBP32 million), site
rationalisation (GBP5 million) and fixed asset impairments (GBP11 million) as
well as costs associated with the Group's financial restructuring (GBP20
million). These charges were partially offset by a GBP7 million exceptional gain
due to lapses of share options granted to vendors of past acquisitions (MSI and
Mariposa).
In addition, the Group recorded its share of associates' operating exceptional
charges, which amounted to GBP3 million during the quarter.
During the three months to 31 December 2001, exceptional items charged to Group
operating loss (including joint ventures) totalled GBP94 million and related
wholly to the Group's operational restructuring.
Non-Operating Exceptionals
For the three months to 31 December 2002, non-operating exceptional charges
amounted to GBP10 million, which related mainly to the disposals of the Group's
legacy operations in South Africa and wireless operations in APAC as well as to
the write down of fixed asset investments.
During the three months to 31 December 2001, non-operating exceptional income
amounted to GBP341 million and related mainly to gains on disposals of
subsidiaries and other fixed assets including Medical Systems, properties and
the Group's stakes in Sietel and Lottomattica as well as the mark to market of
some of the Group's other investments, namely Lagardere (since disposed) and
Easynet.
Interest and Finance Income
In the three months to 31 December 2002, the Group's net interest charge to the
Profit and Loss Account was GBP51 million (Q3 2002: GBP66 million).
The charge during the period mainly comprised interest paid and accrued on the
Group's bond and bank debt (GBP60 million). These charges were partially offset
by interest received on the Group's cash balance and in relation to the tax
repayment received during the period (GBP4 million).
Finance income amounted to GBP7 million.
Taxation
The tax charge during the period was GBPnil (Q3 2002: GBPnil).
Goodwill Amortisation
The Group incurred a charge of GBP28 million for goodwill amortisation for the
three months to 31 December 2002 compared to a charge of GBP46 million in the
corresponding period of the previous year. This significant reduction was a
result of the reduced carrying value of goodwill on the Group's balance sheet
following the exceptional goodwill impairment charges in the year ended 31 March
2002 and the disposal of businesses and related goodwill.
Associates
The charge of GBP11 million for the three months ended 31 December 2002
represents the Group's share of operating losses and exceptional items of
Easynet plc as well as the amortisation of related goodwill. The charge in the
three months ended 31 December 2001 was GBP11 million.
Earnings per Share
Basic and diluted loss per share, which reflects goodwill amortisation and
exceptional items, was 7.1 pence (Q3 2002: earnings of 2.7 pence).
The loss per share excluding goodwill amortisation and exceptional items was 3.6
pence compared to earnings per share of 4.4 pence in the third quarter of the
previous year.
Dividend
In the light of the Group's ongoing financial restructuring, the Board has
decided not to propose the payment of a dividend for the year ending 31 March
2003. Furthermore, after the Restructuring, Marconi Corporation will be
restricted from paying dividends under the terms of the indentures governing the
New Notes. Accordingly Marconi Corporation does not expect to pay a dividend in
the foreseeable future.
FINANCIAL CONDITION
Balance Sheet
Net Assets/Liabilities
As at 31 December 2002, net liabilities before net retirement benefit deficits
stood at GBP2,285 million compared to GBP2,104 million at 30 September 2002. The
GBP181 million increase in net liabilities was due to the loss incurred during
the period partially offset by favourable foreign exchange translation
movements.
Fixed Assets
The GBP638 million of goodwill on the balance sheet at 31 December 2002 relates
mainly to the acquisitions of GPT and Reltec and businesses acquired from Nokia
and Bosch. The decrease of GBP34 million from GBP672 million at 30 September
2002 related mainly to the amortisation charge during the period (GBP28 million)
and foreign exchange translation movements.
Tangible assets decreased by GBP49 million from GBP329 million at 30 September
2002 to GBP280 million at 31 December 2002. This was mainly due to depreciation
(GBP28 million), fixed asset disposals (GBP19 million) and fixed asset
impairments as a result of the downsizing and restructuring of the Core business
(GBP9 million). The fixed asset disposals related mainly to the disposal of the
Group's legacy South African operations and various properties in EMEA and APAC.
Capital expenditure during the period was restricted to items essential to
support the business.
Investments decreased by GBP15 million from GBP121 million at 30 September 2002
to GBP106 million at 31 December 2002. This was mainly due to the Group's share
of the losses of joint ventures and associates and the write down of one of the
Group's other investments in Australia, offset by an increase in the value of
the Group's investment in Bookham Technology plc which was marked to market at
the end of the reporting period.
Working Capital
The Group made particularly strong progress in its initiatives to improve
working capital management during the period.
At Group level, net stock and contracts in progress reduced by approximately
GBP51 million to GBP305 million. This was driven primarily by reductions in the
Core where net stock and contracts in progress fell by GBP47 million. These
reductions were achieved mainly through improved control and alignment of
inventory in-feed with forecast sales demand, improvements in inventory
management practices and the continued rationalisation of stock locations. The
increase in Core net stock turns from 5.1 in September 2002 to 6.3 in December
2002 reflected this improved utilisation and management of inventory.
Group net debtors decreased by approximately GBP115 million to GBP747 million.
In the Core, net debtors decreased by approximately GBP116 million to GBP726
million. GBP76 million of the decrease in the Core related to net trade debtors
partly as a result of the reduced trading volumes during the period and partly
as a result of the Group's continued focus on the management of debtor
collection and overdue debts. Net Core trade debtor days decreased from 107 in
September 2002 to 100 in December 2002, reflecting the Group's continued focus
on cash collections, particularly in Northern Europe and Middle East and in
businesses in Network Services. Other debtors and prepayments in the Core
decreased by GBP39 million to GBP151 million mainly as a result of the release
and unwind of advances and prepayments.
Trade, other creditors and accruals fell from GBP1,142 million at 30 September
2002 to GBP1,090 million at 31 December 2002, a reduction of GBP52 million.
Trade creditors in the Core were reduced by GBP37 million to GBP225 million.
Core trade creditor days remained stable at approximately 54 days. Other
Creditors, accruals and prepayments on contracts in the Core reduced by GBP63
million to GBP442 million. This was mainly due to a lower level of contract and
payroll-related accruals as a result of the reduced size of the Core business as
well as to the settlement of a legal dispute in the field of IT.
Provisions
Provisions for liabilities and charges stood at GBP452 million at 31 December
2002, a net reduction of GBP4 million compared to GBP456 million at 30 September
2002.
Share option provisions amounted to GBP167 million (September 2002: GBP176
million). The net reduction of GBP9 million in share option provisions occurred
mainly as a result of the accrued interest on one of the Group's ESOP derivative
contracts to new loan agreements and the lapse of options relating to previous
acquisitions (namely Mariposa and MSI).
Restructuring provisions amounted to GBP79 million (September 2002: GBP69
million). The Group continues to implement its operational restructuring plans
and recorded a total exceptional charge of GBP51 million in the period
(including costs arising and settled in the period and a charge to provisions of
GBP25 million). Existing restructuring provisions utilised (GBP13 million) and
released (GBP3 million) were partially offset by the creation of new provisions,
leading to the GBP10 million net increase in restructuring provisions during the
quarter.
The balance included provisions for warranty and contract losses, industrial
injury claims, supplier obligations, provisions related to previous disposals
and deferred tax provisions.
LIQUIDITY AND CAPITAL RESOURCES
Net Debt
Group net debt amounted to GBP2,819 million at 31 December 2002 compared to
GBP2,846 million at 30 September 2002.
The decrease of GBP27 million achieved during the third quarter resulted from
the Group's total cash inflow before use of liquid resources and financing of
GBP29 million. A favourable foreign exchange translation gain of GBP28 million
was offset by a GBP30 million non-cash reduction in net debt relating to the
termination of interest rate and equity swap arrangements converted to new loan
agreements during the period.
The following table sets forth the composition of the Group's net debt at 31
December 2002 and 30 September 2002:
31.12.02 30.09.02
Euro and US$ Bond Debt 1,699 1,695
Syndicate Bank Debt1 2,114 2,117
Bilateral and Other Bank Debt 91 105
Gross Financial Indebtedness 3,904 3,917
Cash2 1,085 1,071
Net Financial Indebtedness 2,819 2,846
1. including GBP30 million relating to the termination of interest swap and
equity derivative arrangements during the quarter and GBP54 million
relating to the conversion of interest swap arrangements to new loan
agreements during the first half.
At 31 December 2002, the Group had a total restricted cash balance, defined
as cash pledged or advanced as collateral, of GBP868 million. Of this,
GBP701 million reflected the cash in the secured accounts described above,
GBP107 million reflected cash collateral placed against bonding facilities;
GBP17 million reflected cash in the Group's captive insurance company and
GBP16 million reflected cash deposited against secured loans in Italy. In
addition, GBP27 million has been placed in an escrow account pending
determination of certain claims of the Group's ESOP derivative providers in
respect of certain previously disposed companies (see "Share Price Risk" for
further information).
2. Of the Group's GBP217 million unrestricted cash held outside of the secured
accounts as at 31 December 2002, GBP110 million was a combination of cash in
transit and global working capital balances held at subsidiary level or
within the Group's joint ventures with the remaining GBP107 million held in
money market deposits in the Group's Treasury centres.
The Group has not taken into account the impact of its proposed Restructuring
when reporting its financial indebtedness position.
Cash Flow for the Three Months Ended 31 December 2002
The Group generated a net cash inflow of GBP29 million before use of liquid
resources and financing during the third quarter. This was driven by a net cash
inflow from operating activities before capital expenditure and exceptional
items of GBP72 million partially offset by net exceptional and non-operating
cash outflows of GBP43 million.
During the third quarter, the Group benefited from the receipt of a tax
repayment and the lower level of net interest paid in the context of the
financial restructuring (see Returns on Investments and Servicing of Finance
below), which partially offset the exceptional cash costs relating to the
Group's ongoing operating and financial restructuring processes.
Operating Cash Flow
The Group operating loss before exceptional items of GBP77 million offset by
depreciation and amortisation of GBP56 million and an GBP93 million reduction in
working capital led to the Group's operating cash inflow of GBP72 million during
the period. After a GBP3 million inflow from net capital expenditure (including
proceeds of fixed asset disposals), the Group adjusted operating cash inflow was
GBP75 million.
This was a marked improvement on the adjusted operating cash outflows recorded
during the previous quarters of the year (Q1 2003: GBP99 million; Q2 2003: GBP68
million) and was driven mainly by the reduced operating losses and improved
working capital contributions, particularly in the Core business where adjusted
operating cash flow improved from an outflow of GBP81 million and GBP43 million
in the first and second quarters respectively to an inflow of GBP66 million in
the third quarter. The overall reduction in working capital during the third
quarter was largely driven by cash collections from debtors relating to sales in
prior periods when trading volumes were higher than current levels as well as
the utilisation of inventory, partially offset by a reduction in creditors.
Capital Expenditure and Financial Investment
Gross capital expenditure amounted to GBP7 million during the period and related
primarily to the Core business (GBP6 million). Marconi has maintained capital
expenditure well below the level of depreciation, which amounted to GBP28
million, of which GBP26 million related to the Core. Core capital expenditure is
generally focused on development models, test equipment, sales demonstration
equipment and R&D laboratory equipment. During the third quarter, almost GBP4
million of Core capital expenditure was incurred in Optical Networks and BBRS
while a further GBP1 million was spent in North American Access in relation to
the purchase of assets from Jabil as part of the transfer of one of the US
facilities to a lower cost location.
The disposal of property and other tangible fixed assets contributed a GBP9
million cash inflow during the period.
Returns on Investments and Servicing of Finance
Net interest paid during the period amounted to GBP11 million, comprising
interest paid of GBP18 million relating mainly to the payment of interest
accrued on the Group's syndicate bank and bond debt, partially offset by
interest received on the Group's cash balance and in relation to the receipt of
a tax repayment during the quarter (GBP7 million).
As part of the proposed restructuring, GBP435 million is to be distributed to
the relevant scheme creditors, of which GBP95 million represents the payment of
due and accrued interest already made on Marconi Corporation plc's financial
debt. Of this GBP95 million, GBP78 million was paid during the first half of
the financial year and GBP17 million was paid during the third quarter. The
Group continues to accrue interest on Marconi Corporation plc's financial debt
and this is reflected in the Group's Profit and Loss account but no further
cash payments have been made in this respect since the payment of interest
accrued as at 15 October 2002. As disclosed in the Group's Financial
Restructuring announcement dated 18 March 2003, in common with Marconi
Corporation's and Marconi plc's approach to other scheme claims, pending the
outcome of the schemes of arrangement, neither Marconi Corporation nor Marconi
plc intends to make payment in respect of its obligations under its syndicate
bank or bond debt due during March 2003, in full or in part. Accrued but unpaid
interest of Marconi Corporation and Marconi plc at the record date for the
schemes of arrangement will form part of the scheme claims.
Exceptional Cash Flows
The Group incurred operating exceptional cash costs of GBP82 million during the
third quarter. Over half of this amount related to the direct cash cost of
severance payments and site rationalisation and closures in the context of the
Group's operational restructuring and reorganisation. The balance relates mainly
to the payment of fees and expenses to advisors in the context of the Group's
financial restructuring and to cash costs associated with the Group's
manufacturing outsourcing programme.
Cash Flows from Acquisitions and Disposals
Net proceeds from acquisitions and disposals led to a cash inflow of
approximately GBP2 million during the third quarter. This related mainly to the
disposal of the Group's legacy South African operations.
Tax
The Group received a net tax repayment of approximately GBP45 million during the
third quarter relating to the repayment of advanced corporation tax in the
United Kingdom on foreign income dividends from previous years.
Syndicate Bank and Bond Debt
At 31 December 2002, drawings under the Group's remaining syndicated facility
amounted to an equivalent of GBP2,033 million, comprising of actual drawings of
GBP650 million and US$2,226 million.
At 31 December 2002, Marconi had yankee bond debt outstanding with principal
US$1,539 million (GBP956 million) and euro bond debt outstanding with principal
EUR1,175 million (GBP766 million).
Customer Financing Commitments
Marconi, like its competitors, continues to experience demand for financing from
its customers. However, this demand has decreased significantly due to market
conditions and the Group's focus on its core base of incumbent carrier
customers. When the Group has supported customer financing requests, it has
significantly limited its own risk by: i) leveraging funds from third party
financiers' having strategic interests aligned with the Group, and ii)
developing innovative commercial alternatives that do not involve long-term cash
investments from Marconi. Through these actions, the Group has satisfactorily
accommodated most customer financing requests and will not require Group cash
resources to fund these activities in the foreseeable future.
As at 31 December 2002, the Group had vendor finance commitments of
approximately GBP46 million of which GBP39 million had been drawn. The reduction
compared to commitments of GBP68 million at 30 September 2002 was primarily due
to the resolution of two of the Group's outstanding positions.
In addition, the Group uses export credit agencies to assist in managing
political and credit risks on major contracts and makes extensive use of export
credit insurance in respect of small to medium-sized contracts.
Some customers in the telecommunications market require that bank bonds or
surety bonds (those issued by insurance companies) are provided to guarantee
performance of the supplier. Marconi Group companies had GBP213 million of such
bonds outstanding as at 31 December 2002 with both banks and insurance companies
world-wide (30 September 2002: GBP221 million). Some of these bonds are covered
by counter-indemnities from Marconi Corporation plc and others have
counter-indemnities from other Group companies. The Group's bonding is normally
provided on an uncommitted basis. As a consequence of the Group's ongoing
financial restructuring, all new bonds currently have to be fully cash
collateralised. Since February 2002, Marconi Bonding Limited (a special purpose
vehicle used for this purpose) has procured the issue of approximately GBP107
million of performance bonding (on a fully cash collateralised basis) on behalf
of other Group companies.
A maturity profile of all bonds and guarantees outstanding at 31 December 2002
is set out below:
Year ending 31 March, 31.12.02 30.09.02
in GBP million
2003 or earlier 29 48
2004 37 31
2005 16 13
2006 60 49
2007 35 27
Thereafter 8 6
No expiry date 28 47
Total 213 221
A number of the Group's performance bond arrangements carry rights for the
issuer to call for cash collateral, either unconditionally or upon the
occurrence of certain events. Marconi estimates that as at 31 December 2002,
performance bonds with a face value of approximately GBP70 million have varying
conditional or unconditional rights to call for cash collateral.
Bonds will frequently run beyond the contracted maturity dates indicated in the
table above. In addition, there are a number of bonds with no expiry date. These
may be cancelled by the beneficiaries when the guaranteed works are completed.
RISK MANAGEMENT
The main risks faced by the Group in the financial markets are liquidity risk,
interest rate risk, foreign exchange risk and share price risk.
Liquidity Risk
Marconi has funded its liquidity requirements mainly through a combination of
internally generated funds, bank borrowings, debt issues in the capital markets
and the disposal of non-core businesses. The Group is currently unable to
arrange any new lending facility or to raise new funds through the issuance of
debt or equity securities. Consequently, Marconi has little or no ability to
obtain new external funding and does not expect to have such ability unless and
until the proposed Restructuring is complete.
As previously disclosed, the majority of the Group's cash resources are
currently held in secured accounts which are subject to interim security
arrangements in favour of the Group's Syndicate Banks and bondholders (including
the bond trustees) and also to one ESOP derivative provider who has committed to
support the proposed Restructuring. The secured accounts were created at the end
of April 2002 in accordance with the previously disclosed lock box arrangements
entered into in favour of the Group's Syndicate Banks and bondholders. The
interim security arrangements contemplated by the Heads of Terms were
implemented on 13 September 2002 and were amended on 13 December 2002. As at 13
September 2002, the balance of the secured accounts was approximately GBP866
million. At 31 December 2002, the balance of the secured cash amounted to GBP701
million. The Group is dependent on amounts available to it from the secured
amounts in order to meet its short-term liquidity needs. The interim security
arrangements described above are not affected by the ESOP settlement referred to
below.
Prior to the release of interim security and so long as an enforcement event
does not occur, monthly releases from the secured accounts are approved in
accordance with an agreed cash flow schedule, subject to specified maximum
amounts. This agreed cash flow schedule is consistent with the Group's
expectations as to its liquidity needs for the relevant period. The schedule,
covering the period to the end of June 2003 is expected to be approved by the
Group's Syndicate Banks and the ad hoc committee of bondholders in connection
with the request for an extension of the timetable for the Restructuring
referred to below.
The interim security is subject to various enforcement events, some of which are
tied to the prospectus of successfully completing the Restructuring in
accordance with the non-binding indicative heads of terms (and within the agreed
timetable, which is currently 15 March 2003). The occurrence of an enforcement
event would entitle the requisite majority of creditors to block withdrawals
from the secured accounts and/or enforce the interim security. As at the present
date a request has been made to the Group's Syndicate Banks and ad hoc committee
of bondholders for an extension of the timetable for completion of the
Restructuring (to 19 May 2003) and the Marconi plc and Marconi Corporation plc
boards are confident that this extension will be granted.
Interest Rate Risk
It has in the past been Group policy to maintain at least 50% of debt at fixed
rates of interest. The term structure of interest rates was managed in
observance of this policy using derivative financial instruments such as
interest rate swaps. However, due to the Restructuring process described above,
this has been superceded by the requirement to manage immediate liquidity, which
involved the cancellation all outstanding interest-related derivatives
positions. Consequently, in the nine months to 31 December 2002, all the Group's
out-of-the-money interest rate swap arrangements were converted to new loan
agreements. At 31 December 2002, 44 per cent of the Group's interest-bearing
borrowings were at fixed rates after taking account of interest rate swaps. Of
this total, 24 per cent were at fixed dollar rates of interest and 20 per cent
were at fixed euro rates of interest.
In the three months ended 31 December 2002, the average interest rate received
on cash and liquid investments was approximately 2.25 per cent per annum, and
100 per cent of deposits were at floating rates. The largest proportion of
investments was in US dollar deposits - the Group held an average of
approximately $770 million in US dollar deposits, earning an average interest
rate of approximately 1.5 per cent per annum. These US dollar deposits match in
part the US dollar borrowings referred to under Syndicate Bank and Bond Debt
above.
Foreign Exchange risk
The Group conducts a significant portion of its business activities outside the
United Kingdom in currencies other than sterling. The Group's principal exchange
rate exposures relate to U.S. dollar/pounds sterling and euro/pounds sterling
exchange rates for both transactional and translation related exposures. As a
matter of general policy, the Group enters into foreign currency forward
exchange contracts in the ordinary course of business to protect itself from
adverse currency rate fluctuations on firm contracts where cash receipts or
payments are in a foreign currency different from that of the Marconi business
which is contracting with customers or suppliers. These contracts are executed
with creditworthy banks. Marconi has little or no ability to enter into such
contracts at present and does not expect to have such ability unless and until
the proposed Restructuring is complete.
The Group also has overseas subsidiaries that incur losses / earn profits and
whose net liabilities or net assets are denominated in foreign currencies. It is
not the Group's policy to use derivatives to hedge exposures arising from the
translation of these overseas losses/profits and net liabilities/assets into
pounds sterling. However, approximately 82 per cent of gross borrowings were
denominated in foreign currencies in order to form a hedge for investments in
currencies other than sterling. Of these, 62 per cent, denominated in U.S.
dollars, formed a hedge for the Group's investment in the United States, and 20
per cent, denominated in euro, formed a hedge for the Group's investment in the
euro zone.
If the pound had strengthened such that the average exchange rates used in the
translation of the Group's overseas earnings changed by 10 per cent, our
reported loss from continuing operations would have been reduced by 7.1 per
cent, in the nine months ended 31 December 2002.
Share price risk
The Group has, in the past, issued share options to its employees under a number
of different option plans, collectively known as the Employee Share Option Plans
("ESOP"). Under these plans, options may be satisfied by way of a transfer of
existing Marconi ordinary shares acquired in the market by an employee trust or
other vehicle, or, under some of the plans only, by an issue of new Marconi
shares.
As previously disclosed, during the first half of calendar year 2000, in order
to hedge part of the potential cost of the plans estimated at that time, the
Marconi Employee Trust entered into contracts with three banks (the "ESOP
derivative providers") to purchase a total of 40 million shares in the future at
prices which were fixed at the date of contract, of which as at 6 December 2002,
38.5 million remained outstanding. The equity derivative with UBS which related
to 10 million shares was consensually closed out on 6 December 2002. The Group's
maximum exposure under the equity derivative contracts (including the closed out
UBS equity derivative) is GBP337 million, plus accrued finance charges. This
level of exposure had accrued as at 31 December 2002. For every 10 per cent
movement in the share price, the change in the fair value of the ongoing
contracts is immaterial. One of the equity derivative contracts requires (and,
before its termination, the UBS equity derivative required) the Marconi Employee
Trust to deposit cash collateral with the respective derivative providers if the
share price falls to certain levels stipulated in the contracts. Marconi
Corporation plc has, in the past, funded the provision of this collateral. Prior
to the close out of the UBS equity derivative (and as at 31 December 2002),
GBP214 million of collateral, the maximum amount of collateral payable under
these contracts, had been paid. No further collateral will become due.
Due to the substantial deterioration in the Group's share price, only limited
amounts of options with zero exercise price have been or are likely to be
exercised.
The uncollateralised exposure under the ESOP derivative contracts (including the
closed out UBS equity derivative) as at 31 December 2002 is comprised of
principal of GBP123 million, together with accrued finance charges of GBP46
million.
As previously announced, up to GBP145 million (not including the previously
announced GBP25 million Strategic Communications escrow which benefited all of
the ESOP derivative providers) was to be set aside into escrow, on the effective
date of the Marconi Corporation Scheme, pending determination of potential
liabilities of Group companies to participating ESOP derivative providers (those
who had undertaken to support the Restructuring) in relation to the ESOP
derivative transactions. Only Barclays Bank plc ("Barclays") elected to
participate in these arrangements and on 13 September 2002, Barclays, Marconi
plc and Marconi Corporation plc entered into a restructuring undertaking
agreement under which Barclays undertook, subject to certain termination events,
to vote in favour of the Restructuring.
On 13 December 2002, a definitive agreement setting out the terms of that
proposed escrow arrangement was entered into between, inter alia, Marconi plc,
Marconi Corporation plc and Barclays. The terms of this escrow which would have
applied on the effective date of the Restructuring have now been superseded
somewhat by the ESOP settlement agreement referred to below.
Marconi plc and Marconi Corporation plc have reached agreement with the Group's
ESOP derivative providers for a settlement of their ESOP derivative related
claims against the Group (subject to obtaining any requisite creditor consents).
Under the terms of the settlement, which is conditional upon the Marconi
Corporation scheme of arrangement becoming effective, Marconi Corporation plc
will pay a total of GBP35 million (the "Settlement Amount") to the ESOP
derivative providers in full and final settlement of their ESOP related claims
against the Group.
The Settlement Amount will be paid from the fund of up to GBP170 million
(including the Strategic Communications escrow) which was to have been set aside
by Marconi Corporation plc, as part of the Restructuring, pending resolution of
potential liabilities of Group companies to participating ESOP derivative
providers in relation to the ESOP derivative transactions. The settlement has
made available approximately GBP135 million in cash which will now form part of
the GBP340 million initial cash distribution referred to above (in return for a
GBP123 million reduction in the face value of the Junior Notes to be issued as
part of the Restructuring i.e. equivalent to redemption at 110 per cent of face
value). Without the ESOP settlement, the GBP135 million sum would not have
formed part of the initial cash distribution.
Insurance Risk Management
Marconi manages centrally the purchase of global insurance policies in respect
of major insurable risks, including property (material damage/business
interruption), directors' and officers and public and products liability. The
use of global policies and centrally appointed brokers allows the Group to
improve internal control and optimise the overall level of retained risk. Risk
management and insurance expenditure are concentrated on those insurable risks
which are considered potentially catastrophic to the Group as a whole. The Group
continues to work with its insurers and advisers to improve its loss prevention
and mitigation processes. Insurance market conditions are currently very
challenging and premium rates have increased substantially. However, the Group
benefits from good relationships with its major insurers.
Marconi plc
Consolidated Profit and Loss Account unaudited
3 Months to 31 3 Months to 31
December 2002 December 2001
Note GBP million GBP million
Turnover
Continuing operations 4 466 669
Discontinued operations 4 - 293
________________________
Group 4 466 962
Share of joint ventures - 79
________________________
3 466 1,041
Operating loss ________________________
Group operating loss
Excluding goodwill amortisation and exceptional items (49) (116)
Goodwill amortisation (28) (46)
Operating exceptional items 5a (53) (94)
________________________
4 (130) (256)
Continuing operations ________________________
(130) (264)
Discontinued operations - 8
________________________
4 (130) (256)
Share of operating (loss)/profit of joint ventures
Excluding goodwill amortisation and exceptional items (2) 7
Operating exceptional items 5a (1) -
________________________
(3) 7
________________________
(133) (249)
____________________________________________________________________________________________________________________
Group and joint venture operating loss before goodwill amortisation and 3 (51) (109)
exceptional items
____________________________________________________________________________________________________________________
Share of operating loss of associates
Excluding goodwill amortisation and exceptional items (6) (9)
Goodwill amortisation (2) (2)
Goodwill impairment - -
Operating exceptional items 5a (3) -
________________________
(11) (11)
________________________
Operating loss 3 (144) (260)
Non-operating exceptional items
(Loss)/gain on disposal of discontinued operations 5b (1) 151
(Loss)/gain on disposal of fixed assets and investments
in continuing operations 5b (9) 190
________________________
(10) 341
________________________
(154) 81
Net interest payable 6 (51) (66)
Net finance income 7 61
(Loss)/profit on ordinary activities before taxation
Excluding goodwill amortisation and exceptional items (101) (123)
Goodwill amortisation and exceptional items (97) 199
________________________
3 (198) 76
Tax credit/(charge) on (loss)/profit on ordinary activities
Excluding tax on goodwill amortisation and exceptional items - -
Tax on goodwill amortisation and exceptional items - -
________________________
- -
(Loss)/profit on ordinary activities after taxation (198) 76
Equity minority interests - (1)
(Loss)/profit on ordinary activities attributable to the equity
shareholders and
retained (loss)/profit for the financial year (198) 75
Basic and diluted (loss)/earnings per share 8 (7.1p) 2.7p
Loss per share excluding goodwill amortisation and exceptional items 8 (3.6p) (4.4p)
31 December 30 September
2002 2002
Note GBP million GBP million
Fixed Assets
Goodwill 9 638 672
Tangible assets 10 280 329
Investments: 11
Joint ventures
Share of gross assets 45 48
Share of gross liabilities (13) (13)
________________________
32 35
Associates 57 69
Other investments 17 17
________________________
106 121
________________________
1,024 1,122
________________________
Current Assets
Stocks and contracts in progress 12 305 356
Debtors : amounts falling due within one year 13 695 803
Debtors : amounts falling due after more than one year 13 52 59
Cash at bank and in hand 14 1,085 1,071
________________________
2,137 2,289
Creditors: amounts falling due within one year 15 (3,253) (3,316)
________________________________________________________________________________________________________________________
Net current liabilities (1,116) (1,027)
________________________________________________________________________________________________________________________
Total assets less current liabilities (92) 95
Creditors: amounts falling due after more than one year 15 (1,741) (1,743)
Provisions for liabilities and charges 17 (452) (456)
________________________
Net liabilities before retirement benefit surpluses and deficits (2,285) (2,104)
________________________
Retirement benefit scheme surpluses - -
Retirement benefit scheme deficits (441) (439)
________________________
Net liabilities after retirement benefit surpluses and deficits (2,726) (2,543)
________________________
Capital and reserves
Called up share capital 140 140
Shares to be issued 31 40
Share premium account 500 500
Capital reserve 375 375
Profit and loss account (3,775) (3,607)
________________________
Equity shareholders' interests (2,729) (2,552)
Equity minority interests 3 9
________________________
(2,726) (2,543)
________________________
Marconi plc
Consolidated Statement of Total Recognised Gains and Losses unaudited
3 Months to 31
December 2002
GBP million
Loss on ordinary activities attributable to the shareholders
Group (184)
Share of joint ventures (3)
Share of associates (11)
____________
(198)
Exchange differences on translation 30
____________
Total recognised gains and losses (168)
____________
Reconciliation of Movements in Equity Shareholders' Interests unaudited
3 Months to 31
December 2002
GBP million
Total recognised gains and losses (168)
Release of reserve in respect of shares to be issued (9)
____________
Total movement in the period (177)
____________
Equity shareholders' interests at 1 October (2,552)
____________
Equity shareholders' interests at the end of period (2,729)
________________________________________________________________________________________________________________
Marconi plc
Consolidated Cash Flow Statement unaudited
3 Months to 31 3 Months to 31
December 2002 December 2001
Note GBP million GBP million
Net cash inflow from operating activities before exceptional items 19a 72 23
Exceptional cash flows from operating activities 5c (82) (107)
________________________
Net cash outflow from operating activities after exceptional items - (10) (61)
continuing operations
Net cash outflow from operating activities after exceptional items - - (23)
discontinued operations
________________________
Net cash outflow from operating activities after exceptional items (10) (84)
Dividends from joint ventures and associates - 1
Returns on investments and servicing of finance 19b (11) (51)
Tax received/(paid) 19c 45 (10)
Capital expenditure and financial investment 19d 3 96
Acquisitions and disposals 19e 2 812
________________________
Cash inflow before use of liquid resources and financing 29 764
Net cash (outflow)/inflow from management of liquid resources 19f (23) 42
Net cash outflow from financing - changes in debt and lease financing 19g (9) (107)
________________________
(Decrease)/increase in cash and net bank balances repayable on demand (3) 699
________________________
Marconi plc
Reconciliation of Net Cash Flow to Movements in Net Monetary Debt unaudited
3 Months to 31 3 Months to 31
December 2002 December 2001
Note GBP million GBP million
(Decrease)/increase in cash and net bank balances repayable on demand (3) 699
Net cash outflow/(inflow) from management of liquid resources 23 (42)
Net cash outflow from decrease in debt and lease financing 9 107
________________________
Change in net monetary debt resulting from cash flows 29 764
Net debt disposed with subsidiaries - 1
Other non-cash changes (30) -
Effect of foreign exchange rate changes 28 7
________________________
Movement in net monetary debt in the period 27 772
Net monetary debt at 1 October 20 (2,846) (4,282)
________________________
Net monetary debt at the end of the period 20 (2,819) (3,510)
______________________________________________________________________________
Notes
1 Fundamental uncertainty in respect of the application of the going concern
basis
Marconi Corporation plc ("Corp") owes approximately GBP2.1 billion under a
syndicated credit facility (the "Bank Facility") which is due for repayment on
25 March 2003. Borrowings under the facility are repayable on demand and no
further funds may be drawn under its terms. The Group also has in issue
Eurobonds and Yankee Bonds (the "Bonds") with a face value of approximately
GBP1.7 billion. Marconi plc ("plc") guarantees Corp's debt obligations under
the Bonds and the Bank Facility. As at 31 December 2002, net debt of the Group
stood at approximately GBP2.8 billion.
On 29 August 2002, plc announced that non-binding indicative Heads of Terms,
which set out the principles for the financial restructuring of plc and Corp
(the "Restructuring"), had been concluded with the co-ordination committee of
syndicate banks and an informal ad hoc committee of Bondholders. On 16 December
2002 plc announced that modifications to the non-binding indicative Heads of
Terms had been concluded. The non-binding indicative Heads of Terms envisage
that the creditors of plc and Corp, other than certain excluded creditors, will
be subject to schemes of arrangement ("Schemes") under which creditor claims
will be compromised in consideration for cash, new equity and new debt
securities of Corp. As part of the restructuring Corp will become the listed
parent for the Group and, following completion of its Scheme, it is currently
anticipated that plc will be dissolved. The Restructuring will leave existing
plc shareholders with 0.5% of the equity in Corp.
On 17 March 2003, documentation for the proposed Schemes was filed with the High
Court of England and Wales, initiating the final steps towards implementation of
the Restructuring.
The non-binding indicative Heads of Terms envisage a new capital structure for
the Group that is appropriate to the latest business plan developed by the
Group. The implementation of this capital structure involves, among other
things, the payment of GBP340 million of cash (in addition to GBP95 million
accrued interest on Corp's financial debt, paid in September and October 2002),
the issue of new equity and the issue of new notes with a face value, using 31
December 2002 exchange rates, of approximately GBP753 million by Corp to Scheme
creditors through the operation of the Schemes.
As part of the arrangements to implement the Restructuring, the majority of the
Group's cash resources are currently held in secured accounts which are subject
to interim security arrangements in favour of the Group's syndicate banks and
Bondholders (including the Bond trustees, but excluding Ancrane, a subsidiary of
plc which holds Bonds) and also to one of the Group's ESOP derivative providers
(who committed to support the proposed Restructuring within the required time
period). At 31 December 2002, the balance of this secured cash amounted to
GBP701 million. The Group is dependent on amounts available to it from the
secured amounts in order to meet its short-term liquidity needs.
Prior to the release of interim security and so long as an enforcement event
does not occur, monthly releases from the secured accounts are approved in
accordance with an agreed cash flow schedule, subject to specified maximum
amounts. This agreed cash flow schedule is consistent with the Group's
expectations as to its liquidity needs for the relevant period. The current
agreed cash flow schedule covers the period to the end of March 2003. A revised
schedule, covering the period to the end of June 2003 is expected to be approved
by the Group's syndicate banks and the ad hoc committee of Bondholders in
connection with the request for an extension of the timetable for the
Restructuring referred to below.
When the Heads of Terms were announced on 29 August 2002, the Group indicated
that the Restructuring was scheduled to be completed by 31 January 2003 (the
"Effective Date"). This date was extended to 15 March 2003 in December 2002. As
a result of the complexity of the Restructuring the Effective Date of the
Schemes is now expected to be on or around 19 May 2003. The change to the timing
of the Restructuring introduces risks associated with certain financial debt
falling due in March 2003. In particular, as noted above, the Bank Facility is
due for repayment on 25 March 2003 and interest payments were due on the Yankee
Bonds on 17 March 2003 and are due on the Eurobonds on 31 March 2003. Failure to
repay the Bank Facility, either on demand or on 25 March 2003, will give rise to
direct rights on the part of individual syndicate banks to bring actions for
recovery of the debt owing to them and, in addition, after the expiry of a five
business day grace period, result in a cross default under the Bonds. In common
with the Group's approach to other Scheme claims, pending the outcome of the
Schemes, the Group does not intend to make payment in respect of such
obligations, in full or in part.
The fact of the aforementioned payments falling due represents a risk to the
Restructuring, due to consequential legal action which syndicate banks or
Bondholders who are not supportive of the Restructuring process could take
against Corp or plc. However, the Directors are of the view that, given the
timing associated with any such legal action as well as the likely attitude of
the English and New York Courts to a creditor seeking to frustrate the
Restructuring (which is intended to be for the benefit of all Scheme creditors),
these risks should be manageable.
The interim security is subject to various enforcement events, some of which are
tied to the prospects of successfully completing the restructuring in accordance
with the non-binding indicative Heads of Terms (and within the agreed timetable,
which is currently, as mentioned above, 15 March 2003). The occurrence of an
enforcement event entitles the requisite majority of creditors to block
withdrawals from the secured accounts and/or enforce the interim security. At
the present date, following the delays to the timing of the Restructuring
described above, an unwaived enforcement event is continuing, although no
enforcement action has been taken. Corp's request for a waiver of this
enforcement event is due to be considered by the Group's syndicate banks on 19
March 2003 and by the ad hoc committee of Bondholders prior to posting of the
Scheme document to Scheme creditors. The Directors are confident that a waiver
will be granted.
The Restructuring of plc is dependent on approval of the Corp and plc Schemes.
Approval of these Schemes will be dependent on, amongst other things, securing
the necessary level of support of the syndicate banks, Bondholders and other
creditors whose claims will be compromised, in the relevant creditors' meetings
to be held as part of the Scheme process, as well as the approval of the English
court and the granting of a permanent restraining order by the U.S. Bankruptcy
Court.
Letters of current intention to support the Restructuring and to vote for the
plc and Corp Schemes were obtained from the joint lead coordinators of the
Group's syndicate banks and from each of the members of the ad hoc Bondholder
committee in December 2002. Neither plc nor Corp has received any notice of any
changes to this intention.
In the light of the information currently available to them, the Directors
believe that the Group's bankers, Bondholders and other creditors will support
the Restructuring and that all the conditions for the Restructuring will be
satisfied. On this basis, the Directors consider it appropriate to prepare the
accounts on the going concern basis. Should the Group's syndicate banks,
Bondholders and other creditors cease to support the Group before the completion
of the Restructuring, or should all of the conditions for the Restructuring not
be met, there would be no realistic alternative for plc and Corp but to commence
insolvency proceedings and the going concern basis of preparation would no
longer be applicable; adjustments would be necessary to record additional
liabilities and to write down assets to their recoverable amount. It is not
practicable to quantify these possible adjustments.
2 Accounting policies
The more important Marconi Group accounting policies are summarised below to
facilitate the interpretation of the non-statutory financial statements
As disclosed in the 2002 Annual Report and Accounts, the Group accounts for
pension costs and retirement benefits in accordance with FRS 17. This requires
an annual actuarial assessment of the defined benefit pension schemes, which is
carried out by the Group's independent actuarial advisers. The Group carried out
a further actuarial assessment for the six month period ended 30 September 2002.
Accounting convention
The non-statutory financial statements are prepared under the historical cost
convention, as modified by the valuation of listed current and fixed asset
investments.
Basis of consolidation
The non-statutory financial statements consolidate the accounts of Marconi plc
and all of its subsidiary undertakings (Group companies or subsidiaries). All
inter-company balances and transactions have been eliminated upon consolidation.
All Group companies' results and cashflows have been prepared for the three
months ended 31 December 2002 and 31 December 2001 with consolidated group
balance sheets at 31 December 2002 and 30 September 2002. Consequently,
comparative information has not been provided for the consolidated statement of
recognised gains and losses and reconciliation of movements in equity
shareholders' interests.
Turnover
Turnover, excluding VAT, comprises sales to outside customers, and the Group's
percentage interest in sales by their joint ventures. The Group records
transactions as sales when the delivery of products or performance of services
takes place in accordance with the terms of sale. Turnover on long term
contracts is calculated as a proportion of the total contract value based on the
ratio of costs incurred to date compared with the total expected costs for that
contract.
Currency translation
Transactions denominated in foreign currencies are translated into the
functional currency at the rates ruling at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the balance
sheet date are retranslated at the rates ruling at that date. These translation
differences are dealt with in the profit and loss account with the exception of
certain gains and losses arising under hedging transactions as described below.
Profits and losses of overseas subsidiaries, joint ventures and associates and
cash flows of overseas subsidiaries are translated at the average rates of
exchange during the period. Non-sterling net assets are translated at period end
rates of exchange. Key rates used are as follows:
Average rates Period-end rates
31 December 30 September 31 December 31 December 30 September 31 December
2002 2002 2001 2002 2002 2001
US dollar 1.5389 1.5204 1.4359 1.6098 1.5726 1.4554
Euro 1.5739 1.5813 1.6239 1.5342 1.5913 1.6346
The differences arising from the restatement of profits and losses and the
retranslation of the opening net assets/(liabilities) to period end rates are
taken to reserves.
Acquisitions and disposals
On the acquisition of a business, including an interest in an associated
undertaking, fair values are attributed to the group's share of separable net
assets. Where the cost of acquisition exceeds the fair values attributable to
such net assets, the difference is treated as purchased goodwill and capitalised
in the balance sheet in the year of acquisition.
The profit or loss on the disposal or closure of a previously acquired business
includes the attributable amount of any purchased goodwill relating to that
business not previously charged to the profit and loss account.
The results and cashflows relating to a business are included in the
consolidated profit and loss account and the consolidated cashflow statement
from the date of acquisition or up to the date of disposal.
Financial instruments
The Group uses financial instruments, including interest rate swaps, currency
swaps and other derivatives, solely for the purposes of raising finance for its
operations and managing interest and currency risk associated with the Group's
underlying business activities. There is no trading activity in financial
instruments.
Forward foreign exchange contracts
Forward foreign exchange contracts generally exhibit a high correlation to the
hedged items and are designated and considered effective as hedges of the
underlying assets, liabilities and firm commitments. Gains and losses on forward
foreign exchange contracts which are designated as hedges of assets, liabilities
and firm commitments of the group are recognised in the profit and loss account
or as adjustments to carrying amounts when the hedged transactions occurs.
Hedges of the net investment in overseas subsidiaries
The Group's policy has been to finance its activities in the same currencies as
those used for its foreign investments in order to hedge foreign currency
exposure of net investments in foreign operations. This policy is implemented
either by financing in the related currency or using derivatives, such as
currency swaps, which provide a synthetic effect of a foreign currency loan,
thereby reducing the exchange risk.
Exchange gains or losses arising on the hedging borrowings and on the notional
principal of currency swaps during their life and at termination or maturity,
together with the tax thereon, are dealt with as a movement in reserves, to the
extent they offset losses or gains on the hedged investment.
In respect of hedges of net investments, the Group enters into tax equalisation
swaps, the gains and losses of which are recognised through the statement of
total recognised gains and losses (in accordance with the underlying transaction
and the tax thereon) with any forward premium or discount recognised over the
life of the contract in the profit and loss account.
Equity forward contracts
Marconi has established three trusts for the purchase of shares and
share-related instruments for the benefit of employees - the Marconi Employee
Trust (MET), the GEC Employee Share Trust and the GEC Special Purpose Trust.
These trusts are consolidated in the financial statements of the Group.
The MET has entered into contracts (the Equity Forward Contracts) to hedge the
potential cost of the Group's share plans. On or before maturity of the Equity
Forward Contracts, the MET may either take delivery of Marconi plc shares at the
contracted purchase price (including accrued interest) or may cash settle the
contracts for a net amount based on the difference between the Marconi plc share
price and the contract purchase price (including accrued interest). The
obligation to settle the contracts including accrued interest is classified as a
provision within the Group's balance sheet. This liability is calculated by
taking the shares under contract and applying the difference between Marconi
plc's share price and the contract purchase price per share, adjusted for
brokerage costs, on a contract-by-contract basis.
No cash is exchanged until the maturity of the contract (or earlier upon either
option exercises by employees or cash settlement of the contracts at the MET's
option) unless collateral is required. Where the MET has provided collateral
this has been offset against the provision in the consolidated balance sheet.
Interest costs on the equity notional are calculated as LIBOR plus a margin,
represented by basis points, less dividends and are accrued on a monthly basis,
with a debit to interest and a credit to provisions.
Interest rate risk exposure
The Group hedges its exposure to movements in interest rates associated with its
borrowing primarily by means of interest rate swaps and forward rate agreements.
Payments and receipts under interest rate swap agreements specifically
designated for hedging purposes are recorded in the profit and loss account on
an accruals basis.
Gains and losses arising on termination of hedging instruments where the
underlying exposure remains are recognised in the profit and loss account over
the remaining life of the underlying exposure.
Tangible fixed assets
Property, plant, machinery, fixtures, fittings, tools and equipment are recorded
at cost and depreciated on a straight-line basis over their estimated useful
lives from the time they are brought into use. Freehold land does not bear
depreciation where the original cost of purchase was separately identified.
Provision is made for any impairment.
Tangible fixed assets are depreciated using the following rates:
Freehold buildings - 2 per cent to 4 per cent per annum
Leasehold property - over the period of the lease or 50
years for long leases
Plant and machinery - 10 per cent per annum on average
Fixtures, fittings, tools and equipment - 10 per cent per annum
Leased assets
Assets held under finance lease and other similar contracts, which confer rights
and obligations similar to those attached to owned asset, are capitalised as
tangible fixed assets and are depreciated over the shorter of the lease terms
and their useful lives. The capital elements of future lease obligations are
recorded as liabilities, while the interest elements are charged to the profit
and loss account over the period of the leases to produce a constant rate of
charge on the balance of the capital repayments outstanding. Hire purchase
transactions are dealt with similarly except that assets are depreciated over
their useful lives.
Rentals under operating leases are charged on a straight-line basis over the
lease term, even if the payments are not made on such a basis.
Goodwill
Purchased goodwill is capitalised and amortised on a straight-line basis over
its estimated useful economic life. Each acquisition is separately evaluated for
the purposes of determining the useful economic life, up to a maximum of 20
years. The useful economic lives are reviewed annually and revised if necessary.
Provision is made for any impairment.
Research and development
Expenditure incurred in the period is charged against profit unless specifically
chargeable to and receivable from customers under agreed contract terms.
Stock
Stock is stated at the lower of cost and net realisable value. Provision is made
for obsolete, slow-moving or defective items where appropriate.
Contracts in progress
Profit on long-term contracts in progress is taken when a sale is recorded on
part-delivery of products or part-performance of services, provided that the
outcome of the contract can be assessed with reasonable certainty. Amounts
recoverable on long-term contracts, which are included in debtors, are stated at
the net sales value of the work done less amounts received as progress payments
on account. Excess progress payments are included in creditors as payments
received in advance. Cumulative costs incurred net of amounts transferred to
cost of sales, less provision for contingencies and anticipated future losses on
contracts, are included as long-term contract balances in stock.
Warranties
Provisions for estimated expenses related to product warranties are made at the
time products are sold. These estimates are established using historical
information on the nature, frequency, and average cost of warranty claims.
Taxation
Taxation on profit on ordinary activities is that which has been paid or becomes
payable in respect of the profits for the year. Deferred taxation is provided in
full on timing differences that result in an obligation at the balance sheet
date to pay more tax, or a right to pay less tax, at a future date, at rates
expected to apply when they crystallise based on current tax rates and law.
Timing differences arise from the inclusion of items of income or expenditure in
taxation computations in periods different from those in which they are included
in the financial statements. Deferred tax assets are recognised to the extent
that it is regarded as more likely than not that they will be recovered.
Deferred tax assets and liabilities are not discounted.
Investments
Joint ventures comprise long-term investments where control is shared under a
contractual arrangement. The sector analysis of turnover, profit and net assets
includes the Group's share of the results and net assets of joint ventures.
Associates consist of long-term investments in which the Group holds a
participating interest and over which it exercises significant influence.
Investments in joint ventures and associates are stated at the amount of the
Group's share of net assets including goodwill at 31 December 2002 derived from
audited or management accounts made up to that date, other than Easynet Group
Plc whose results for the six months to 31 December 2002 have been prorated to
provide a three months movement. Loss before taxation includes the Group's share
of joint ventures and associates.
Other unlisted fixed asset investments are stated at cost less provision for
impairment in value. Listed fixed asset investments are stated at market value.
Current asset investments are stated at the lower of cost and net realisable
value except dated listed securities which are stated at market value.
Investments in Marconi plc's shares, held within the GEC Employee Share Trust
and the Marconi Employee Trust, are included on the Group balance sheet at cost,
less provision for impairment.
Pensions and other post retirement benefits
The operating cost of providing pensions and other post retirement benefits, as
calculated periodically by independent actuaries, is charged to the Group's
operating profit or loss in the period that those benefits are earned by
employees. The financial return expected on the schemes' assets is recognised in
the period in which they arise as part of finance income and the effect of the
unwinding of the discounted value of the schemes liabilities is treated as part
of finance costs. The changes in value of the schemes' assets and liabilities
are reported as actuarial gains or losses as they arise in the consolidated
statement of total recognised gains and losses. The pension schemes' surpluses,
to the extent they are considered recoverable, or deficits are recognised in
full and presented in the balance sheet net of any related deferred tax.
In the three months ended 31 December 2002 the Group has charged the profit and
loss account with GBP6 million of service cost and GBP2 million of notional
interest in respect of defined benefit schemes on the basis of the 30 September
2002 actuarial assessment. This will be updated during the final quarter of the
year ending 31 March 2003, and any actuarial gains and losses arising on pension
assets and liabilities in the balance sheet will be shown in the statement of
total recognised gains and losses for the year ending 31 March 2003.
Share options
The costs of awarding shares under employee share plans are charged to the
profit and loss account over the period to which the performance criteria
relate. When share options granted lapse, any associated costs that were treated
as cost of acquisition are credited to either goodwill, or to the profit and
loss account if there is no remaining goodwill.
Finance costs
Finance costs of debt are recognised in the profit and loss account over the
term of such instruments at a constant rate on the carrying amount.
Debt
Debt is initially stated at the amount of the net proceeds after deduction of
issue costs. The carrying amount is increased by the finance cost in respect of
the accounting period and reduced by payments made in the period.
Liquid resources
Liquid resources comprise term deposits with an original maturity of generally
less than one year and other readily disposable current asset investments.
3 Principal activities, (loss)/profit contributions, markets and net assets/
(liabilities) employed
Analysis of results and net assets/(liabilities) by class of business
(Loss)/profit Turnover Net assets/
(liabilities)
3 Months to 3 Months to 3 Months to 3 Months to 31 December 30 September
31 December 31 December 31 December 31 December 2002 2002
2002 2001 2002 2001
GBP million GBP million GBP million GBP million GBP million GBP million
Network equipment (49) (80) 261 407 ) 359 451
Network services 20 (32) 195 225 )
Other (including intra-activity (12) (16) (2) - 3 11
sales)
___________________________________________________________________________
(41) (128) 454 632 362 462
Capital (10) (7) 12 116 (33) (19)
___________________________________________________________________________
Continuing operations (51) (135) 466 748 329 443
Discontinued operations - 26 - 293 - -
___________________________________________________________________________
(51) (109) 466 1,041 329 443
Goodwill and goodwill amortisation (28) (46) _________________ 638 672
Operating exceptional items (note (54) (94)
5a)
_________________
(133) (249)
Associates (11) (11) 57 69
_________________
Operating loss (144) (260)
Non-operating exceptional items (10) 341
(note 5b)
Net interest payable and interest
bearing
assets and liabilities (51) (66) (2,807) (2,838)
Net finance income 7 61
Unallocated net liabilities (943) (889)
_________________ __________________
(198) 76 (2,726) (2,543)
_________________ __________________
The Group has divided its business into two segments: Core and Capital.
The Group's Core businesses are the provision of optical networks, broadband
routing and switching and broadband access technologies and associated
installation, maintenance and other value-added services. Their customer base
includes telecommunications companies, providers of Internet services for their
public networks, and to certain large corporations, government departments and
agencies, utilities and educational institutions for their private networks.
Core activities are divided into Network equipment, Network services and Other.
Capital comprises the businesses the Group manages for value and ultimately for
disposal. The Marconi share of joint ventures' (loss)/profit, turnover and net
assets are included under Capital.
Goodwill arising on acquisitions is amortised over a period not exceeding 20
years. Separate components of goodwill are identified and amortised over the
appropriate useful economic life. The remaining goodwill on the balance sheet
will be amortised over an average period of approximately 7 years.
Comparative figures have been restated to reflect the changes in the Group
structure during the period since 31 December 2001. The net assets of Network
equipment and Network services cannot be separately identified as the same
assets are, generally, used to generate sales in each of these segments. The
results of these segments are separately reportable.
Sales by Group companies to joint ventures and associates in the three months
amounted to GBP6 million (31 December 2001 GBP40 million). Purchases from joint
ventures and associates amounted to GBPnil (31 December 2001 GBP14 million).
Assets and liabilities arising out of the Retirement Benefit Plan are treated as
unallocated net liabilities.
It is not practical to disclose goodwill amortisation on a segmental basis as
any allocation would be arbitrary.
Analysis of turnover by class of business
To customers in the United Kingdom To customers overseas
3 Months to 31 3 Months to 31 3 Months to 31 3 Months to 31
December 2002 December 2001 December 2002 December 2001
GBP million GBP million GBP million GBP million
Network equipment 63 80 198 327
Network services 61 141 134 84
Other (including intra-activity sales) - - (2) -
___________________________________________________________
124 221 330 411
Capital - 71 12 45
___________________________________________________________
Continuing operations 124 292 342 456
Discontinued operations - 31 - 262
___________________________________________________________
124 323 342 718
___________________________________________________________
Analysis of turnover by territory of destination
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
United Kingdom 124 323
The Americas 137 323
Rest of Europe 137 305
Africa, Asia and Australasia 68 90
__________________________
466 1,041
__________________________
3 Principal activities, (loss)/profit contributions, markets and net assets/
(liabilities) employed continued
Analysis of Core segment turnover by product grouping
3 Months to 31 December 3 Months to 31
2002 December 2001
GBP million GBP million
Optical networks 96 189
Broadband switching 32 40
European access 69 85
Outside plant & power 30 48
North American access 23 24
Other network equipment 11 21
Network equipment 261 407
___________________________________
Installation, commissioning and maintenance 93 122
Value-added services 102 103
___________________________________
Network services 195 225
Other (including intra-activity sales) (2) -
Capital (including joint ventures of GBPnil (2001 GBP79 million)) 12 116
___________________________________
Continuing operations 466 748
Discontinued operations - 293
___________________________________
466 1,041
___________________________________
Analysis of operating loss before goodwill amortisation and exceptional items,
turnover and net assets by territory of origin
Loss Turnover Net assets/(liabilities)
3 Months to 31 3 Months to 31 3 Months to 31 3 Months to 31 31 December 30 September
December 2002 December 2001 December 2002 December 2001 2002 2002
GBP million GBP million GBP million GBP million GBP million GBP million
United Kingdom (11) (17) 178 339 408 435
The Americas (2) (31) 139 338 54 60
Rest of Europe (34) (56) 115 274 (129) (75)
Africa, Asia and (4) (5) 34 90 (4) 23
Australasia
_____________________________________________________________________________________
(51) (109) 466 1,041 329 443
_____________________________________________________________________________________
4 Operating (loss)/profit (excluding joint ventures)
Group
3 Months to 31 December 2002
Continuing Exceptional Total
items
GBP million GBP million GBP million
Turnover 466 - 466
Cost of sales (364) 7 (357)
_______________________________________
Gross profit 102 7 109
Selling and distribution expenses (61) - (61)
_______________________________________
Administrative expenses - other (22) (60) (82)
Research and development (71) - (71)
Goodwill amortisation (28) - (28)
_______________________________________
Administrative expenses - total (121) (60) (181)
Other operating income 3 - 3
_______________________________________
Operating loss (77) (53) (130)
_______________________________________
3 Months to 31 December 2001
Continuing Discontinued Exceptional Total
items
GBP million GBP million GBP million GBP million
Turnover 669 293 - 962
Cost of sales (547) (195) (19) (761)
_________________________________________________________
Gross profit/(loss) 122 98 (19) 201
Selling and distribution expenses (110) (32) - (142)
_________________________________________________________
Administrative expenses - other (52) (15) (75) (142)
Research and development (126) (18) - (144)
Goodwill amortisation (44) (2) - (46)
_________________________________________________________
Administrative expenses - total (222) (35) (75) (332)
Other operating income/(expense) 21 (4) - 17
_________________________________________________________
Operating (loss)/profit (189) 27 (94) (256)
_________________________________________________________
Exceptional items are shown in further detail in note 5.
The Group disposed of Medical, Data and Commerce Systems during the year ended
31 March 2002 and the Strategic Communications business during the six months
ended 30 September 2002. It is these activities which are shown as discontinued
operations.
5 Exceptional items
These charges have been analysed as follows:
a Operating exceptional items
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Reversal of stock write-downs and related costs - 1
Restructuring costs/(credits) 7 (20)
_________________________
Included in cost of sales 7 (19)
_________________________
Impairment of tangible fixed assets (9) -
Restructuring and reorganisation costs (51) (63)
Systems implementation costs - (11)
Charges in respect of doubtful debts - (1)
_________________________
Included in administrative expenses (60) (75)
_________________________
Group operating exceptional items (53) (94)
Share of joint ventures' operating exceptional items (1) -
Group share of associates' operating exceptional items (3) -
_________________________
Total operating exceptional items (57) (94)
_________________________
(i) In the three months ended 31 December 2002 GBP7 million was credited to
restructuring costs classified within cost of sales. This arose as a
consequence of the manufacturing outsourcing arrangement with Jabil
Circuits Inc whereby the Group was able to release stock provisions where
the components had been utilised. In the three months ended 31 December
2001 a charge of GBP20 million was incurred in respect of such inventory.
(ii) In the three months ended 31 December 2002 a charge of GBP9 million was
booked for impairment of Italian fixed assets and UK and US buildings in
continuing operations.
(iii)As part of the Group's cost reduction actions, a charge of GBP51 million
was recorded during the three months to 31 December 2002 associated with
employee severance, site rationalisation costs and other restructuring
costs (31 December 2001 GBP63 million).
The site rationalisation costs reflect the charges associated with closing
and consolidating various sites around the world as part of the business
restructuring.
(iv) During the year ended 31 March 2002 the Group planned to implement a new
global IT system. In light of the revised trading outlook and the continued
focus on cost reduction, the implementation was terminated. During the
three months ended 31 December 2001 charges of GBP11 million were incurred
in this respect.
Analysis by segment (including joint ventures)
3 Months to 31 3 Months to 31
December 2002 December 2001
GBPmillion GBP million
Network equipment & services (65) (98)
Other 14 10
_____________________________
(51) (88)
Capital (3) 13
_____________________________
Continuing operations (54) (75)
Discontinued operations - (19)
_____________________________
(54) (94)
United Kingdom (34) (81)
The Americas (4) 20
Rest of Europe (13) (31)
Africa, Asia and Australasia (3) (2)
(54) (94)
_____________________________
(54) (94)
_____________________________
5 Exceptional items continued
b Non-operating exceptional items
3 Months to 31 3 Months to 31
December 2002 December 2001
GBPmillion GBP million
(Loss)/gain on disposal of discontinued operations (1) 151
(Loss)/gain on disposal of fixed assets and investments _____________________________
in continuing operations
(Loss)/gain on disposals of subsidiaries and other fixed assets (8) 124
Amounts written off investments (1) 66
(9) 190
_____________________________
Included in non-operating exceptional items (10) 341
_____________________________
(i) The three months charge to 31 December 2002 comprised of a GBP1 million
additional charge on the disposal of discontinued operations and a GBP8
million net loss on disposal of other businesses and fixed assets in
continuing operations. The GBP1 million net loss related to the revaluation
of some of the Group's investments in line with its accounting policy
whereby listed investments are marked to their market value at the end of
each reporting period and unlisted investments are held at the lower of
cost less provision for impairment.
c Exceptional cash flows
3 Months to 31 3 Months to 31
December 2002 December 2001
GBPmillion GBP million
Operating
Restructuring costs (77) (71)
Systems implementation costs (5) (8)
Other - (28)
_____________________________
(82) (107)
_____________________________
Non-operating
Disposal of tangible fixed assets 8 67
Sale of interests in subsidiary companies and associates 3 810
Repurchase of bonds - 59
_____________________________
11 936
_____________________________
Non-operating exceptional cash flows from the disposal of tangible fixed assets
are included in note 19 (d). Non-operating exceptional cash flows from the sales
of interests in subsidiary companies and associates are included in note 19 (e).
6 Net interest payable
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Interest receivable
Loans and deposits 5 -
Other 4 -
_____________________________
Interest receivable - total 9 -
_____________________________
Interest payable
Bank loans and overdrafts (30) (24)
Other (30) (42)
_____________________________
Interest payable - total (60) (66)
_____________________________
Net interest payable - Group (51) (66)
_____________________________
7 Tax
a Deferred taxation liabilities
Group
GBP million
Tax effect of timing differences on:
Provisions and accruals for liabilities and charges (6)
____________
At 30 September and 31 December 2002 (6)
____________
No provision is made for any taxation that may arise if reserves of overseas
subsidiaries were distributed as such distributions are not expected to occur in
the foreseeable future.
b Reconcilation of current taxation charge for the period
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
(Loss)/profit before tax (198) 76
__________________________
Tax credit/(charge) on loss at a standard rate of 34% (31 December 2001 34%) 67 (26)
Non-deductible goodwill impairment, amortisation and other similar items (33) 100
Tax losses and other deferred tax items not recognised in current tax (34) (74)
__________________________
Current tax charge for the period - -
__________________________
The standard rate is calculated based on the locally enacted statutory rates in
the jurisdictions in which the Group operates.
c Factors that may affect future tax charges
Deferred tax assets totalling GBP820 million at 31 December 2002 have not been
recognised in respect of operating losses and exceptional expenditure as the
Group is not sufficiently certain that it will be able to recover those assets
within a relatively short period of time.
Included in the unrecognised deferred tax asset as at 31 December 2002 of GBP820
million are amounts that may be forfeited or restricted as a consequence of the
planned restructuring of the Group due to the requirements of tax legislation in
various jurisdictions. It is not possible at this stage to quantify the amount
of unrecognised deferred tax assets that may be forefeited.
8 (Loss)/earnings per share
Basic and diluted (loss)/earnings per share are calculated by reference to a
weighted average of 2,792.6 million ordinary shares (31 December 2001 2,789.6
million ordinary shares) in issue during the period.
The effect of share options is anti-dilutive for each period presented and has
therefore been excluded from the calculation of diluted weighted average number
of shares.
An adjusted basic loss per share has been presented in order to highlight the
underlying performance of the Group, and is calculated as set out in the table
below.
Reconciliation of (loss)/earnings per share excluding goodwill amortisation and
exceptional items
3 Months to 3 Months to
31 December 2002 31 December 2001
Loss Loss per Loss Loss per
share share
GBP million pence GBP million pence
(Loss)/earnings and basic (loss)/earnings per share (198) (7.1) 75 2.7
Exceptional items (note 5)
Operating exceptional items 54 1.9 94 3.4
Group share of associate's operating exceptional 3 0.1 - -
items
Non-operating exceptional items 10 0.4 (341) (12.2)
Goodwill amortisation 30 1.1 48 1.7
_________________________________________________________
(101) (3.6) (124) (4.4)
9 Goodwill
Cost
GBP million
At 1 October 2002 6,075
Adjustments in respect of prior year acquisitions (4)
Exchange rate adjustment (89)
____________
At 31 December 2002 5,982
Amortisation
GBP million
At 1 October 2002 (5,403)
Charged to profit and loss account (28)
Exchange rate adjustment 87
____________
At 31 December 2002 (5,344)
Net book value at 31 December 2002 638
Net book value at 30 September 2002 672
Following the continued difficult market conditions a further review of the
carrying value of goodwill has been undertaken at 31 December 2002.
The average discount rate applied to the future cash flows is 15% and is based
upon a weighted average cost of capital percentage.
The results of the review indicated that no further impairment charge in respect
of goodwill was necessary for the three months to 31 December 2002. However, due
to the significant uncertainties over the timing and extent of any recovery in
the telecommunications market, the directors acknowledge that they are likely to
have to continue to review their assumptions against future performance.
10 Tangible fixed assets
Freehold Leasehold property Plant and Fixtures, Payments on account and
fittings, assets under
tools and
property Long Short machinery equipment construction Total
Group GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Cost at 1 128 9 8 373 544 - 1,062
October 2002
Exchange rate 1 - - 2 1 - 4
adjustment
Additions - - - 5 2 - 7
Completed - - - - - - -
construction
Disposals (17) (7) - (25) (17) - (66)
Businesses - - - (6) (17) - (23)
disposed
______________________________________________________________________________________________________
Cost at 31 112 2 8 349 513 - 984
December 2002
______________________________________________________________________________________________________
Depreciation 37 2 5 258 431 - 733
at 1 October
2002
Exchange rate - - - - (2) - (2)
adjustment
Charged to - - - 8 20 - 28
profit and
loss account
Impairment of - - - - 9 - 9
fixed assets
Disposals (4) (1) - (24) (17) - (46)
Businesses - - - (4) (14) - (18)
disposed
______________________________________________________________________________________________________
-
Depreciation 33 1 5 238 427 - 704
at 31
December 2002
______________________________________________________________________________
Net book 79 1 3 111 86 - 280
value at 31
December 2002
Net book 91 7 3 115 113 - 329
value at 30
September
2002
11 Fixed asset investments
a Joint ventures, associates and other
Shares Cost less Share of post
amounts written Goodwill cost Goodwill acquisition
off amortisation reserves Total
Joint ventures and GBP million GBP million GBP million GBP million GBP million
associates
At 1 October 2002 334 79 (47) (262) 104
Profits less - - - (13) (13)
losses retained
Goodwill - - (2) - (2)
amortisation
__________________________________________________________________________________________
At 31 December 334 79 (49) (275) 89
2002
___________________________________________________________________________________________
Cost or Provisions Total
valuation
Other investments GBP million GBP million GBP million
At 1 October 2002 321 (304) 17
Disposals, impairments and repayments - (4) (4)
Reversal of past impairment of listed investments - 4 4
____________________________________________________
At 31 December 2002 321 (304) 17
____________________________________________________
Joint ventures, associates and other investments at 31 December 2002 106
Joint ventures, associates and other investments at 30 September 2002 121
During the 3 months to 31 December 2002, amortisation of GBP2 million (31
December 2001 GBP2 million) was charged for goodwill relating to Easynet Group
Plc
31 December 2002 30 September 2002
GBP million GBP million
Other investments - listed in the United Kingdom 12 8
The aggregate historic cost of the listed fixed asset investments was GBP49
million at 31 December 2002 (30 September 2002 GBP49 million). No provision has
been made for taxation (30 September 2002 GBPnil) which could arise if these
investments were realised at the values stated. At 14 March 2003 the market
value of the investments shown above was, in aggregate, GBP11 million.
Voting rights Country of Incorporation
Core businesses
Networks equipment and services
Marconi Communications Ltd. 100% Great Britain
Marconi Communications S.p.A. 100% Italy
Marconi Communications Inc. 100% USA
Marconi Communications GmbH. 100% Germany
Associated Companies Class of shares Number held Country of
Incorporation
Ultramast Ltd Ordinary shares of 100 pence 50.0% 500 Great Britain
Easynet Group Plc Ordinary shares of 4 pence 30,940,597 Great Britain
Convertible non-voting ordinary 48,553,661
shares of 4 pence
Equity Share 71.6%
Voting Share 49.6%
The principal activity of Ultramast Ltd is to build and market
telecommunications masts for use by mobile and fixed wireless network
operations.
Easynet Group Plc's year end is 31 December and it has been accounted for under
the equity accounting method. As it is a company quoted on the London Stock
Exchange, information that is not in the public domain cannot be disclosed.
Consequently its results for the six month period to 31 December 2002 have been
prorated for inclusion in the Group's results for the three months ended 31
December 2002 and the results for the six month period ended 31 December 2001
for inclusion in the Group's results for the three months ended 31 December
2001. Easynet is a network-based provider of broadband services and internet
solutions and is incorporated in Great Britain.
The above list of subsidiaries and associated companies includes those
businesses that had a material effect on the consolidated results to 31 December
2002.
12 Stocks and contracts in progress
31 December 2002 30 September 2002
GBP million GBP million
Raw materials and bought out components 63 104
Work in progress 109 119
Payments on account (2) (3)
Long-term contract work in progress 20 21
Finished goods 115 115
________________________________________
305 356
13 Debtors
31 December 2002 30 September 2002
GBP million GBP million
Amounts falling due within one year
Trade debtors 559 628
Amounts owed by joint ventures and associates 30 35
Other debtors 58 91
Prepayments and accrued income 48 49
_________________________________________
695 803
Amounts falling due after more than one year
Trade debtors 2 3
Other debtors 43 48
Prepayments and accrued income 7 8
___________________________________________
747 862
Amounts owed by joint ventures and associates relate to trading balances.
14 Current asset investments and cash at bank and in hand
Cash at bank and in hand
31 December 2002 30 September 2002
GBP million GBP million
Cash and bank deposits repayable on demand 921 927
Other cash deposits 164 144
_____________________________________
Cash at bank and in hand 1,085 1,071
_____________________________________
Included in the amounts above are restricted cash of
31 December 2002 30 September 2002
GBP million GBP million
Secured 744 775
Collateral against bonding facilities 107 79
Held by captive insurance company 17 18
Other - 8
_____________________________________
Restricted cash 868 880
Unrestricted cash 217 191
_____________________________________
Cash at bank and in hand 1,085 1,071
Of the secured cash, GBP701 million (30 September 2002 GBP735 milion) relates to
amounts held under an interim security arrangement by the Group's syndicate
banks and bondholders and also to employee share ownership plan derivative
providers granted on 13 September 2002. A further GBP27 million relates to cash
deposited against employee share option plan derivative providers for the
Strategic Communications business (30 September 2002 GBP25 million) and GBP16
million (30 September 2002 GBP15 million) relates to cash deposited against
secured loans in Italy.
15 Creditors
31 December 2002 30 September 2002
GBP million GBP million
Amounts falling due within one year
Bank loans and overdrafts
Repayable on demand 2,174 2,145
Other - 11
Debenture loans - 32
Obligations under finance leases - 2
_____________________________________
2,174 2,190
Payments received in advance 73 72
Trade creditors 258 284
Amounts owed to joint ventures and associates 9 9
Current taxation 345 306
Other taxation and social security 14 5
Other creditors 108 141
Accruals and deferred income 272 309
_____________________________________
3,253 3,316
Amounts falling due after more than one year
Bank loans 25 25
Bonds 1,699 1,695
Obligations under finance leases 6 7
_____________________________________
1,730 1,727
Other creditors 11 16
_____________________________________
1,741 1,743
Amounts owed to joint ventures and associates relate to trading balances.
16 Borrowings
31 December 30 September 2002
2002
GBP million GBP million
Bank loans and overdrafts
Secured 15 17
Unsecured 2,184 2,164
Unsecured debenture loans - 32
Bonds 1,699 1,695
Obligations under finance leases 6 9
________________________________________
3,904 3,917
Less amounts falling due within one year (2,174) (2,190)
________________________________________
1,730 1,727
Analysis of repayments of long-term borrowings
Bank loans
Between one and two years 4 4
Between two and five years 12 12
In more than five years 9 9
Bonds
Between two and five years 278 270
In more than five years 1,421 1,425
Finance leases
Between two and five years - 1
In more than five years 6 6
________________________________________
1,730 1,727
________________________________________
Bonds
Repayable at par wholly within five years (average 278 270
rate 5.6 per cent)
Repayable at par wholly after five years (average rate 1,421 1,425
7.5 per cent)
________________________________________
Security
The secured loans are all secured upon cash balances with the respective banks.
Maturity
The material payment obligations greater than five years are all payable wholly
at maturity, of which GBP479 million refer to Marconi's 6.375% eurobond due
2010, GBP471 million refer to Marconi's 7.75% yankee bond due 2010, and GBP471
million refer to Marconi's 8.375% yankee bond due 2030.
17 Provisions for liabilities and charges
Share Deferred
Restructuring options tax Other Total
GBP million GBP million GBP million GBP million GBP million
At 1 October 2002 69 176 6 205 456
Exchange rate 2 - - (8) (6)
adjustment
Disposals (1) - - - (1)
Charged 25 5 - 17 47
Released (3) (3) - (10) (16)
Utilised (13) (11) - (4) (28)
________________________________________________________________________________
At 31 December 2002 79 167 6 200 452
Share option provisions mainly comprise amounts owed on contracts taken out with
ESOP derivative providers to fix the future price at which the Group could
purchase shares to satisfy employee share option liabilities. The release in the
period relates mainly to the reduction of a provision held for employees of
previously acquired companies whose options have lapsed. The utilisation in the
period relates mainly to the conversion of accrued interest on the ESOP
derivatives into borrowings. An agreement to settle the ESOP derivative is
explained in note 22.
Restructuring provisions mainly comprise expected costs for termination of
employee contracts, costs for properties no longer occupied and onerous lease
contracts. The associated outflows are generally expected to occur over the next
year with vacant property costs being incurred over the next five years.
Other provisions mainly comprise the expected cost of maintenance under
guarantees, other work in respect of products delivered, employee related
claims, environmental liabilities, other litigation and losses on contract work
in progress. The associated outflows are generally expected to occur over the
lives of the products and contracts which are long term in nature.
18 Disposals
On 4 October 2002 the Group disposed of Marconi Communications Israel Limited
and on 24 December 2002 the Group disposed of ATC Pty Ltd for cash consideration
totalling GBP3 million.
19 Cash flow
a Net cash inflow from operating activities
Total
3 Months to 31 December 2002 Continuing
GBP million
Group operating loss after exceptional items (130)
Operating exceptional items 53
___________________________
Group operating loss before exceptional items (77)
Depreciation charge 28
Goodwill amortisation 28
Decrease in stock 51
Decrease in debtors 114
Decrease in creditors (68)
Decrease in provisions (4)
___________________________
72
3 Months to 31 December 2001 Continuing Discontinued Total
GBP GBP GBP
million million million
Group operating loss after exceptional items (256) - (256)
Operating exceptional items 75 19 94
___________________________________________
Group operating loss before exceptional items (181) 19 (162)
Depreciation charge 49 6 55
Goodwill amortisation 44 2 46
(Increase)/decrease in stock (213) 16 (197)
Decrease/(increase) in debtors 185 (8) 177
Decrease in creditors (96) (10) (106)
Increase in provisions 207 3 210
_________________________________________
(5) 28 23
b Returns on investments and servicing of finance
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Income from loans, deposits and investments 7 -
Interest paid (18) (51)
_______________________________________
(11) (51)
_______________________________________
Of the above amount, continuing operations account for an outflow of GBP11
million (31 December 2001 GBP48 million) and discontinued operations an outflow
of GBPnil (31 December 2001 GBP3 million).
c Tax received/(paid)
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
UK corporation tax received/(paid) 46 (10)
Overseas tax paid (1) -
_______________________________________
45 (10)
Tax repayments of GBP46m were received during the 3 months ended 31 December
2002 (31 December 2001 GBPnil repayments).
Continuing operations account for GBP45m inflow (31 December 2001 GBP10m
outflow) and discontinued operations GBPnil (31 December 2001 GBPnil).
d Capital expenditure and financial investment
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Purchases of tangible fixed assets (7) (57)
Purchases less sales of fixed asset investments 1 52
Sales of tangible fixed assets 9 101
_______________________________________
3 96
Sales of tangible fixed assets shown above includes an amount of GBP8 million
(31 December 2001 GBP67 million) in respect of disposals treated as exceptional
items in the profit and loss account.
Of the above amount, continuing operations account for an inflow of GBP3 million
(31 December 2001 GBP75 million) and discontinued operations an inflow of GBPnil
(31 December 2001 GBP21 million)
19 Cash flow continued
e Acquisitions and disposals
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Investments in subsidiary companies - (12)
Investments in joint ventures - 21
Sales of interests in subsidiary companies and associates 3 768
Net (overdraft)/cash disposed with subsidiary companies (1) 35
______________________________
2 812
f Net cash outflow/(inflow) from management of liquid resources
Comprising term deposits generally of less than one year and other readily
disposable current asset investments
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Deposits withdrawn from banks and similar financial institutions - (42)
Deposits made with banks and similar financial institutions 23 -
______________________________
23 (42)
g Net cash outflow from financing
3 Months to 31 3 Months to 31
December 2002 December 2001
GBP million GBP million
Decrease/(increase) in bank loans 6 (88)
Decrease in debenture loans - 90
Decrease in bonds - 103
Capital element of finance lease repayments 3 2
______________________________
9 107
20 Analysis of net monetary debt
At 1 October Cash flow Acquisitions/ Other non-cash Exchange rate At 31 December
2002 disposals (excluding changes adjustment 2002
cash and overdrafts)
GBP million GBP million GBP million GBP million GBP million GBP million
Cash at bank and in 927 (1) - - (5) 921
hand
Overdrafts (26) (2) - - 1 (27)
(3)
Liquid resources 144 23 - - (3) 164
Amounts falling due
within one year
Bank loans (2,130) 6 - (62) 39 (2,147)
Debenture loans (32) - - 32 - -
Finance leases (2) 3 - (1) - -
Amounts falling due
after more than one
year
Bank loans (25) - - - - (25)
Bonds (1,695) - - - (4) (1,699)
Finance leases (7) - - 1 - (6)
9
____________________________________________________________________________________________
(2,846) 29 - (30) 28 (2,819)
The non-cash movement in bank loans results from the settling of an interest
rate swap, an ESOP swap and a debenture loan by way of an increase in the
Group's borrowings.
21 Contingent liabilities
30 December 2002 30 September 2002
GBP million GBP million
Contingent liabilities at period end 30 30
_____________________________________
The Group is subject to potential and actual legal claims including shareholder
class actions and claims relating to contracts, industrial injury and patent
infringement. The Group has also provided third party guarantees and performance
bonds. The total amount disclosed above represents the Directors' best estimate
of possible unprovided exposures that may arise in respect of these legal claims
and the guarantees and bonds.
22 Post Balance Sheet Events
On 7 February 2003 the Group announced that it had agreed in principle with
Barclays Bank plc, Salomon Brothers International Limited and UBS AG to settle
potential claims under ESOP derivative arrangements. This settlement is
conditional upon the Marconi Corporation plc Scheme of Arrangement becoming
effective. At this point, all claims against Marconi plc, Marconi Corporation
plc and its subsidiaries in respect of this matter will be waived and the total
liabilities recorded within liability provisions and net debt of GBP169 million
will be released for a consideration of GBP35 million.
On 24 February 2003, Marconi announced that, following approval from the High
Court in the United Kingdom, Marconi Corporation plc had completed a return of
capital from Ultramast Limited (a joint venture company set up in December 2000
with Railtrack Telecom Services Limited) and settled all outstanding litigation
relating to it. As a result of the transaction, Marconi received net cash
proceeds of approximately GBP41 million.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARCONI PLC
By: ____M Skelly____
Name: M Skelly
Title: Secretary
Date: 18 March 2003