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 December 2002
Commission file number: 0-30924
MARCONI PLC
(Exact name of Registrant as specified in its Charter)
One Bruton Street
London W1J 6AQ
England
(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 INTERIM STATEMENT
for the six months ended 30 September 2002
- Solid progress on cost reduction and cash generation initiatives despite
continuing tough market conditions
- Core sales GBP992 million; Q2 vs Q1 decline contained at 6%
- Core operating cost run-rate reduced to GBP635 million by end
September 2002
- Significant reduction of operating cash outflows in second
quarter; progressing towards operating cash breakeven
- Further aggressive management of cost base
- Breakeven Core sales to be reduced to below GBP1.9 billion per
annum
- Plans to achieve Core gross margin run-rate of 24 to 27 per
cent of sales and Core operating cost run-rate of GBP450 million
during next financial year ending 31 March 2004
- Financial Restructuring progressed to next phase
- Agreement with Syndicate Banks and informal bondholder
committee regarding revised proposals will allow Restructuring
to be formally documented and launched
- On track to deliver GBP260 million cash distribution to
creditors as part of proposed financial restructuring (including
GBP95 million interest accrued at 15 October 2002 and already
paid)
- Completion now expected by 15 March 2003
London - 16 December 2002 - Marconi (MONI) today announced financial results for
the six months ended 30 September 2002.
Commenting on the results, Mike Parton, Chief Executive, said "The results for
the first six months of the year demonstrate clearly that the aggressive cost
reduction actions undertaken, together with our focus on cash generation and
debt reduction, are beginning to flow through. This has been achieved despite
further deterioration in the telecoms equipment and services market world-wide.
Furthermore, our continued commitment to customer service has been rewarded by
our customers' ongoing support.
"The improvements in our operational performance, together with the commitment
of our creditors to our financial restructuring and the appointment of our new
Board announced today, illustrate the progress that has been made in building
solid foundations for the business."
This news release should be read in conjunction with Marconi's Operational and
Financial Review for the six months ended 30 September 2002.
Conference Call Details
Management will host a conference call and audiocast for analysts and investors
on Monday 16 December at 4 pm UK time.
The call can be accessed on Marconi's website or by dialling +44 (0) 20 8996
3900 from Europe or +1 617 801 9702 from US and quoting "Marconi".
An instant replay will be available for seven days by dialling +44 (0) 1296
618700, pass code 661008 from Europe or +1 617 801 6888, passcode 71903 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 six months ended 30 September 2002
INTRODUCTION
Management has prepared this Operational and Financial Review to be read in
conjunction with the Group's interim financial statements and notes for the six
months ended 30 September 2002.
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.
As set out in the announcement ("Financial Restructuring: Update"), Marconi has
today concluded modifications to the Heads of Terms. The terms of the
Restructuring as updated by these modifications are in most respects, including
the initial cash distribution, the same as those announced by Marconi on 29
August 2002.
Please refer to these announcements for further details on the Restructuring.
Going Concern
There is no guarantee that the negotiations relating to the Restructuring will
reach a satisfactory conclusion. However, 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 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 the going concern basis. Should the Group's bankers,
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, 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. (cf Note 1 to the Group's Interim Financial
Statements).
Definitions
Unless otherwise stated, references to "Group" in the trading section of this
Operational and Financial Review refer to the Marconi Group including its share
of joint ventures, but excluding its share of results of associates.
The figures for the six month period to 30 September 2001 have been restated (as
reported in the Group's annual report and accounts for the year ended 31 March
2002) to reflect the adoption of Financial Reporting Standard no. 17 "Retirement
Benefits".
Throughout this Operational and Financial Review, the terms "gross profit",
"operating profit" and "operating loss" refer to the gross profit or operating
profit/(loss) before goodwill amortisation and exceptional items.
Reporting Structure
For reporting purposes, the Group divides its continuing operations into 2
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 for value and ultimately for
disposal. In the accompanying financial information, Capital includes Applied
Technologies until its disposal on 12 July 2002, Infochain until its closure on
18 August 2002, Online, Tetra and UMTS mobile activities and other smaller joint
ventures and investments. In addition, the Group has an economic interest of
71.9 per cent, but voting rights of only 49.9 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.
Strategic Communications is reported as a discontinued operation following
completion of the sale of this business on 2 August 2002. Discontinued
operations in the previous financial year also includes 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 Network Services. The Group confirms that as previously disclosed in its
announcement of 29 August 2002, OPP and North American Access are being managed
for value and upon ultimate disposal, the proceeds would be used to pay down the
US dollar limited recourse notes proposed as part of the Restructuring.
OVERVIEW
The first half of the financial year was characterised by a further
deterioration in trading conditions as many telecom operators applied
substantial incremental capital expenditure limitations to their already reduced
budgets.
In the face of this extremely challenging environment, Marconi continued to
focus on its principal short-term business objectives: i) to maintain its cash
flows in line with its commitment to deliver a proposed GBP260 million cash
distribution to creditors (including GBP95 million of interest accrued to 15
October 2002 and already paid) as part of the Group's proposed financial
restructuring; ii) to improve gross margins and reduce its annualised Core
operating cost base to no more than GBP520 million. The Group today announced
plans to further reduce this target annualised Core operating cost base to
GBP450 million during the next financial year (cf Recent Developments).
Group operating loss before goodwill amortisation and exceptional items amounted
to GBP235 million, or GBP156 million before depreciation and amortisation
(EBITDA), and was the main driver of the Group's operating cash outflow before
exceptionals and after capital expenditure of GBP169 million during the period.
Net cash proceeds from business disposals of GBP387 million were more than
sufficient to fund exceptional cash restructuring costs of GBP186 million, net
interest payments of GBP133 million and other non-operating cash outflows of
GBP11 million incurred during the period.
The Group reported progress on gross margins during the period. Cost reductions
achieved in the supply chain during the first quarter were more than offset by
the lower level of activity in the period as well as an unfavourable business
mix. As a result, gross margin in the Core fell to 17.5 per cent of sales (Q4
2002: 20 per cent). Further cost reductions and a more favourable business mix
in the second quarter, however, enabled the Group to increase gross margin in
the Core to 22 per cent of sales before the impact of additional stock
provisions of GBP25 million which reduced second quarter gross margin to 16 per
cent of sales. The Group expects future gross margin improvement in the
near-term to result from further supply chain rationalisation and outsourcing
initiatives, along with additional planned product cost reductions, lower
materials and engineering costs and expected improvements in business mix.
Significant progress was made to further cut operating expenditure during the
period. By the end of September 2002, the Group had achieved an annualised
operating cost rate of GBP635 million in the Core, down almost 30 per cent from
GBP890 million at 31 March 2002. This was mainly driven by headcount reductions.
The number of employees in the Core fell by around 4,600 from approximately
23,600 at the end of March 2002 to just over 19,000 by the end of September
2002.
The Group benefits from the continued support of its strong customer base of
mainly incumbent operators and government agencies. The 20 largest customers
during the first half accounted for 57 per cent of Core sales, up from 53 per
cent in the previous six month period and 45 per cent in the first half of the
last financial year. Recent major new contract wins include a four-year frame
contract with O2 in Germany for the supply of fixed wireless access and optical
transmission equipment; the first sale of the Group's new multi-service
switch-router platform, the BXR 48000 to the US Federal Government; a two-year
frame contract with Telkom South Africa for the supply and installation of the
Group's Access Hub and Access network management platforms and a contract
extension from Alstom to deliver a voice radio system as part of the UK West
Coast Main Line signalling and communications upgrade.
Also, during the period, the Group launched a number of new products including
its next generation Series 4 SDH SMA 1 to 4 products which have been designed to
be more cost effective and offer service providers greater functionality than
previous generations of the product; its next generation digital cross connect,
the MSH2K; OC192 ATM port cards which will provide an additional feature for the
Group's BBRS product ranges; a new range of short-haul radio SDH which has
already benefited from wide market acceptance amongst German mobile operators;
the second release of the Group's Access Hub platform; as well as an upgraded
version of the Group's Softswitch product.
RECENT DEVELOPMENTS
Core Cost Reduction
Given the current market conditions, management consider it prudent to reduce
the breakeven level of sales below the annualised run-rate achieved in the
second quarter. Consequently, the Group now expects to reduce its Core operating
cost run-rate to GBP520 million per annum before the end of the current
financial year, ahead of its previously disclosed schedule. Furthermore, the
Group intends to implement further cost reduction actions to reduce the
annualised Core operating cost base to GBP450 million during the next financial
year.
Of the total cost savings to be achieved, the Group already has plans in place
to reach a run-rate of GBP480 million and is currently considering initiatives
to save the further GBP30 million required to achieve the new target during the
next financial year. Once the new operating expenditure target is achieved, the
level of sales at which the Group would break even in its Core business at an
operating profit level will be reduced to below GBP1.9 billion per annum.
Core headcount has been reduced by approximately 1,700 since the end of
September 2002 and, at the end of November 2002 was approximately 17,300. A
further 2,700 leavers have been identified and announced and are due to leave
the business in the next few months, giving a known headcount target of around
14,600. Once the reduced operating cost target has been achieved, the Group
expects to employ around 14,000 people in its Core business.
Core Operating Model
As a result of these further cost reductions and based on current market
conditions Marconi expects to achieve a gross margin run-rate in the range of 24
to 27 per cent of sales in the Core and an operating expenditure run-rate in the
range of 21 to 24 per cent of sales during the next financial year ending 31
March 2004. Of this, the Group expects that its US businesses would contribute a
gross margin run-rate in the range of 33 to 35 per cent of sales and an
operating expenditure run-rate in the range of 29 to 33 per cent of sales, while
its businesses in Europe and Rest of the World would contribute a gross margin
run-rate in the range of 23 to 26 per cent of sales and an operating expenditure
run-rate in the range of 20 to 23 per cent of sales.
NEW BOARD
Marconi has appointed John Devaney, most recently Chairman of Exel plc, as the
new Chairman of Marconi Corporation and Marconi plc. The Group also appointed
former Lloyds TSB Group Finance Director, Kent Atkinson, as a non-executive
Director of both Marconi Corporation and Marconi plc, and Chairman of the Audit
Committee and Werner Koepf, most recently executive Chairman of Compaq Computer
in Europe, the Middle East and Africa, as a non-executive Director of both
Marconi Corporation and Marconi plc. All of these appointments will take
immediate effect upon announcement. Derek Bonham will remain on the board as a
non-executive director of Marconi plc through the completion of Marconi's
financial restructuring.
In addition, Sir Alan Rudge and Hon Raymond G H Seitz, both non-executive
Directors, communicated their intentions to resign from the Board immediately to
make way for an orderly reconstruction of the Board. Sir William Castell and
Nigel J Stapleton, both non-executive Directors did not offer themselves for
re-election to the Board at Marconi's annual general meeting in October this
year.
On 14 November 2002, Marconi reached agreement with Steve Hare, Chief Financial
Officer to leave the business on 31 January 2003. Mr Hare stepped down from the
Board with immediate effect and Chris Holden, formerly Group Financial
Controller within the business joined the Board of Marconi Corporation and
Marconi plc as acting Chief Financial Officer.
As a result of these announcements, the Marconi Board comprises:
Executive Directors Mike Parton Chief Executive Officer
Mike Donovan Chief Operating Officer
Chris Holden Chief Financial Officer
Non-Executive Directors John Devaney Chairman
Kent Atkinson Chairman of Audit Committee
Derek Bonham
Werner Koepf
Allen Thomas Chairman of Remuneration Committee
CORE BUSINESS REVIEW
Core Key Figures
in GBP million FY03 FY02
Q1 Q2 H1 H1
Orders Received 466 379 845 1,402
Sales 510 482 992 1,448
Gross Profit 89 79 168 340
Operating Loss (115) (90) (205) (247)
Operating Cash Flow after capital (81) (43) (124) (358)
expenditure
Orders Received, Order Backlog, Book to Bill Ratio
Core orders received at GBP845 million were GBP557 million or 40 per cent lower
than in the corresponding period of the previous financial year (H1 2002:
GBP1,402 million). A lower order intake occurred in both Network Equipment (down
41 per cent) and in Network Services (down 37 per cent). In Network Equipment,
orders received fell in all major product areas, with the most marked declines
in Optical Networks and BBRS. In Network Services, the decline was most marked
in Installation & Commissioning as a direct result of the lower level of orders
received for network equipment and in the Group's Integrated Systems activity,
part of Value-Added Services, where there were no renewals or award of new major
long-term service contracts programmed in the second quarter of the year.
The order backlog in the Core stood at approximately GBP916 million compared to
GBP1,119 million at 31 March 2002, a reduction of GBP203 million. This reduction
occurred in both Network Equipment and Network Services. In Network Services
which accounted for 64 per cent of the backlog, the decline was a result of a
higher proportion of sales traded under existing orders and the absence, in the
second quarter, of major long-term service contracts. In Network Equipment which
accounted for the remaining 36 per cent, the consumption of the order backlog
resulted from an overall reduction in the time between order to shipment evident
across the telecommunications industry and a higher proportion of shipments made
under existing frame contracts.
Core book to bill stood at 0.85 compared to 0.97 one year earlier.
Sales by Geography
in GBP million FY03 FY02
Q1 Q2 H1 H1
EMEA 285 285 570 752
US 153 142 295 463
APAC 47 45 92 107
CALA 25 10 35 126
Core 510 482 992 1,448
Overall Core sales fell GBP456 million or 31 per cent to GBP992 million. The
decline in second quarter sales compared to the first quarter was limited to
GBP28 million, or 6 per cent.
Market conditions have deteriorated in all geographies but the extent of the
further decline varies from country to country and depends on individual telecom
operators' spending profiles.
Sales in Europe, Middle East and Africa (EMEA) fell by GBP182 million, or
approximately 24 per cent to GBP570 million. Within the first half, sales in the
region remained stable quarter on quarter. Market dynamics in the UK showed
signs of stabilisation. BT continues its broadband access campaign, which does
not lead to immediate sales for Marconi but is expected over time to lead to
increased traffic flows onto the core transmission network and, in turn, to
renewed spending in optical equipment. In addition, a number of second operators
are expected to complete financial restructuring initiatives in the coming
period, although this has not yet translated to new orders. Italian market
volumes also remained relatively stable mainly as a result of the absence of 3G
debt issues amongst Italian telecom operators although the pricing environment
in Southern Europe generally has become increasingly challenging. Elsewhere in
Europe, major operators are continuing to cut capital expenditure budgets as
they focus on debt reduction. This particularly impacted Core sales in Germany
during the period.
The further market decline has been most marked in the Americas. Sales in the
United States (US) fell by GBP168 million, or approximately 36 per cent to
GBP295 million while sales in Central & Latin America (CALA) were down GBP91
million, or approximately 72 per cent to GBP35 million. In the US, regional bell
operating companies (RBOCs) have continued to maintain tight controls over
capital expenditure further reducing overall budgets during the period whilst
political and macro-economic issues in CALA have had a significant negative
impact on the telecoms market, particularly in Brazil and Mexico.
Sales in APAC fell by GBP15 million or approximately 14 per cent to GBP92
million. The decrease occurred mainly in Optical Networks as a result of
increased competition and pricing pressure in the region.
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 first half 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.
Pricing
A high proportion of Core sales, particularly in Europe, are derived from
existing frame contracts. 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.
Key Customers
The Core business serves a strong customer base of predominantly incumbent
operators and government agencies. The ten largest customers during the first
six months were BT, BellSouth, Metro City Carriers (Germany), Telecom Italia,
Telkom South Africa, UK Government, US Federal Government, Verizon, Vodafone
Group and Wind (Italy). In aggregate, these customers accounted for 46 per cent
of Core sales during the period (H1 2002: 32 per cent). BT remains the Group's
largest customer and accounted for 17 per cent of Core sales during the period
(H1 2002:11 per cent).
In EMEA, the five largest customers during the first six months were BT, Metro
City Carriers, Telecom Italia, UK Government and Vodafone Group and in aggregate
accounted for 55 per cent of Core sales in the region during the period (H1
2002: top 5 EMEA customers accounted for 31 per cent).
In the US, the five largest customers during the first six months were
BellSouth, Qwest, SBC, US Federal Government and Verizon and in aggregate
accounted for 47 per cent of Core sales in the region during the period (H1
2002: top 5 US customers accounted for 46 per cent).
Gross Profit
Core gross profit before exceptional items amounted to GBP168 million, or 17 per
cent of sales. This included the impact of additional stock provisions of
approximately GBP25 million charged to cost of sales in the second quarter of
the financial year. In line with the Group's accounting policy, these stock
provisions were created as a consequence of the continued decline in market
conditions. They related mainly to optical networking and access equipment.
For the purposes of this Core Business Review, the Group has analysed Core gross
margin on an underlying basis, excluding the impact of these stock provisions
and before exceptional items.
Underlying gross profit in the Core amounted to GBP193 million or 19 per cent of
sales (H1 2002: GBP340 million; 23 per cent of sales). The decrease compared to
the previous year related mainly to reduced sales volumes in Network Equipment
and IC&M activities, unfavourable business mix issues and some price erosion,
particularly in Optical Networks. Significant cost savings have already been
achieved and further cost reduction plans are under way in order to address the
continued under-utilisation of resources mainly in the supply chain.
On a sequential basis within the period, first quarter Core gross margin
declined to approximately 17.5 per cent of sales compared to 20 per cent in the
final quarter of the previous financial year. This was mainly due to the reduced
level of sales volumes in the period (over GBP180 million lower than in the
previous quarter) and the unfavourable business mix which more than offset cost
reductions achieved in the supply chain during the period.
In the second quarter, underlying gross margin in the Core improved sequentially
to approximately 22 per cent despite the further decline in Core sales.
Approximately two-thirds of this improvement over the first quarter related to
direct cost savings which included further manufacturing rationalisation,
improved utilisation of resources in services and procurement and engineering
cost reductions. The balance was driven by the more favourable business mix
compared to the previous quarter.
Operating Expenses
During the first half, operating cost reduction remained a key focus of the
Group's strategy.
Core operating expenses totalled GBP373 million or 38 per cent of Core sales
during the period, a reduction of GBP214 million or 36 per cent compared to the
first half of the previous year (GBP587 million; 41 per cent of Core sales).
Significant savings were achieved across all main categories of operating
expenditure.
By the end of September 2002, the Group had reached an annualised operating cost
run-rate in the Core business of GBP635 million, reduced from GBP1.1 billion at
the end of September 2001 and GBP890 million at the end of March 2002.
Operating Expenses - Research & Development (R&D)
Core R&D expenditure amounted to GBP163 million, a 35 per cent reduction
compared to the first half of the previous financial year (GBP249 million).
Optical Networks accounted for almost 40 per cent of the total Core R&D spend
during the first half (H1 2002: approximately 30 per cent). The main focus of R&
D in Optical Networks remains the continued development of Marconi's next
generation SDH Series 4 product range and digital cross connect, the PMM metro
DWDM product range and further upgrades to the Group's network management
software. In July 2002, the Group announced its decision to terminate the
development of its SONET technology and the consequent closure of its
Canadian-based SONET facility, contributing to the overall R&D savings achieved
during the period.
R&D spend across the Group's Access portfolio, in Europe and North America
combined, accounted for a further 25 per cent of total Core R&D. On-going
development programmes are focused on fixed wireless access, Softswitch and
Access Hub platforms as well as sustaining investment on certain legacy products
to support existing customers. R&D investment in North American Access has been
significantly reduced as a result of the Group's previously announced decision
to cease investment in next generation fibre-to-the-home technologies.
BBRS accounted for 23 per cent of Core R&D. Over 50 per cent of this spend was
focused on the development of the Group's new multi-service core switch, the BXR
48000. Other ongoing programmes include the further development of the ASX 1000
and 4000 platforms.
The remaining 12 per cent of R&D spend in the period related mainly to OPP,
wireless software and Other Network Equipment.
Operating Expenses - Sales & Marketing
Core Sales & Marketing expenditure amounted to GBP145 million, a 36 per cent
reduction compared to the first half of the previous financial year (GBP228
million). These savings have been achieved mainly through headcount reductions,
reduced spend on marketing programmes and initiatives, the consolidation and
closure of several sales offices world-wide, and the transition to indirect
sales channels in a number of countries, particularly in the APAC region.
Operating Expenses - General & Administrative (G&A)
G&A expenses in the Core amounted to GBP59 million, a 45 per cent reduction
compared to the first half of the previous financial year (GBP108 million).
Actual savings have been achieved mainly through headcount reductions 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.
Operating Expenses - Other
Other Core operating expenses amounted to approximately GBP6 million and related
mainly to patent and royalty fees as well as to foreign exchange. (H1 2002:
operating income GBP2 million)
Operating Loss
in GBP million FY03 FY02
Q1 Q2 H1 H1
Network Equipment (96) (83) (179) (216)
Network Services (2) 7 5 2
Other (17) (14) (31) (33)
Core (115) (90) (205) (247)
Core operating loss was reduced to GBP205 million (H1 2002: operating loss
GBP247 million). The significant reduction in gross profit was more than offset
by the operating cost savings achieved during the period, giving rise to a GBP42
million or 17 per cent improvement.
Core operating loss comprised an operating loss of GBP179 million in Network
Equipment and an operating profit of GBP5 million in Network Services. In
addition, the Group incurred GBP31 million of other costs mainly relating to
Head Office and other central costs.
Analysis by Business Type
Core Sales by Product Area
in GBP million FY03 FY02
Q1 Q2 H1 H1
Optical Networks 134 108 242 357
Broadband Routing and Switching 38 35 73 113
European Access 59 69 128 189
North American Access 25 23 48 65
Outside Plant & Power 46 34 80 156
Other Network Equipment 14 15 29 63
Network Equipment 316 284 600 943
IC&M 97 89 186 271
VAS 97 109 206 234
Network Services 194 198 392 505
Core 510 482 992 1,448
Sales of the group of activities defined in the Heads of Terms as "US Assets"
had sales of GBP295 million during the first half and are included in the Core
sales reported above (H1 2002: GBP479 million).
Network Equipment
Sales
Sales of Network Equipment amounted to GBP600 million, a decline of GBP343
million or 36 per cent (H1 2002: GBP943 million). Sales declined across all
major product areas as a result of the further reductions in capital expenditure
by the majority of telecom operators world-wide.
Optical Networks
Optical Networks sales declined by GBP115 million or 32 per cent to GBP242
million (H1 2002: GBP357 million). All areas of the business were affected as a
result of a combination of three main factors: i) the general market downturn
arising from further reductions in capital spending by many telecom operators;
ii) priority by many operators to maximise utilisation in existing core networks
rather than proceeding with new network roll-outs; iii) a refocusing of the
reduced investment, by certain customers, from core transmission networks to
broadband access equipment.
Sales of SDH equipment accounted for around 80 per cent of total Optical
Networks sales during the period (H1 2002: 75 per cent) and DWDM for around 15
per cent (H1 2002: 15 per cent). This split reflects the higher proportion of
orders for in-fill equipment relating to existing networks which are typically
based on low-order SDH technology as opposed to new network build which would be
orientated towards high-order SDH and DWDM technology. The balance represented
sales of network management software and a small amount of SONET equipment sold
prior to the Group's decision to cease further development and sales of this
technology.
Despite the overall reduction in market size, and the 27 per cent decline in
sales of SDH equipment during the period, Marconi maintained its market share in
all areas of SDH with the exception of its position in digital cross connects.
In September 2002, the Group announced the availability of its next generation
digital cross connect, the MSH2K which is currently on trial in a number of
European customers' labs and for which Marconi has been awarded initial orders.
Sales of DWDM equipment fell 28 per cent compared to the level recorded in the
first half of the previous year. This was mainly a result of a high proportion
of sales to China Railcom in the previous year as Marconi completed the
deployment of equipment for the North West Ring project, which was not repeated
in the first half.
Sales were down across all geographic zones. In EMEA, the Group's main market
for Optical Networks equipment, sales performance has varied across countries.
Sales increased in the United Kingdom in comparison to the low level recorded in
the first half of the previous year, and also in Italy as a result of continued
network roll-outs, particularly by Wind and Vodafone-Omnitel. These increases
were more than offset, however, by declines in direct and indirect sales through
channel partners in other European markets mainly as a result of general market
softness. This trend was particularly marked in Germany as a result of the
completion of the Group's roll-out of SDH equipment under a frame contract to
Deutsche Telekom (DT), and continued capital expenditure reductions by DT and
other German wireline and wireless operators. Sales in CALA have been affected
by the uncertain macro-economic and political environment prevalent in the
region during the period. Sales in APAC decreased as a result of the completion
of the North West Ring project in China and due to increased competition in the
region.
Broadband Routing and Switching (BBRS)
BBRS comprises mainly sales of multi-service switching products such as the ASX
4000 multi-service core switch and the smaller ASX and TNX edge switches and a
range of legacy ATM switching and routing products designed for enterprise
customers. In addition, during the period, Marconi began to ship the first units
of its new high capacity multi-service core switch, the BXR 48000 to the US
Federal Government.
Sales of BBRS equipment decreased by GBP40 million or 35 per cent to GBP73
million (H1 2002: GBP113 million).
Sales to customers requiring carrier-class networks accounted for 64 per cent of
BBRS sales during the first half (H1 2002: 62 per cent of sales). This included
sales to the US Federal Government, the Group's single largest customer of BBRS
equipment which increased year on year mainly as a result of increased shipments
of ATM edge switching equipment and first sales of the BXR 48000. This increase
partially offset the substantial decline in sales to service provider customers
resulting from the significantly reduced capital spending by US operators.
Sales to Enterprise customers accounted for 36 per cent of BBRS sales during the
first half (H1 2002: 38 per cent). This decrease in sales to Enterprise
customers follows the Group's decision, in 2001, to refocus its technical and
commercial resources towards customers requiring carrier class networks.
BBRS service sales are reported within Network Services. These amounted to GBP43
million during the first half of the financial year, a 16 per cent increase on
the corresponding period last year (GBP37 million). This increase was due to one
specific major contract for airport communications services in the United
States, which the Group expects to complete before the end of the current
financial year.
European Access
European Access comprises Fixed Wireless Access (accounting for approximately 34
per cent of European Access sales), Multimedia Voice Systems (approximately 24
per cent), Marconi's High Density DSLAM, the Access Hub (over 10 per cent) and
other, mainly narrowband access products (representing the balance of
approximately 30 per cent).
Sales of European Access equipment fell by GBP61 million or 32 per cent to
GBP128 million (H1 2002: GBP189 million). Within the period, at GBP69 million,
second quarter sales were 17 per cent higher than the first quarter (GBP59
million) as a result of increased sales of High Density DSLAM in Italy and voice
systems in the United Kingdom.
Sales fell year on year across all main product areas with the exception of
sales of the Group's High Density DSLAM product, launched during the first half
of the previous financial year. The increase in DSLAM sales was particularly due
to increased volumes in the Italian market during the second quarter of the
financial year, as Telecom Italia aggressively deployed Marconi's equipment
under an existing frame contract.
Conditions remain tough in Germany, the Group's main market for its fixed
wireless access products. Sales were down compared to the first half of the
previous year mainly as a result of the high levels of debt amongst German
mobile operators leading to a focus on balance sheet restructuring and tight
constraints on capital spending. Delays to planned 3G network rollouts during
the first half have also contributed to the difficult business environment. Two
major operators - O2 and D2 Vodafone - have recently confirmed 3G network
rollout plans and are now beginning initial deployments of equipment. In October
2002, Marconi was awarded a major new frame contract from mobile operator O2's
German subsidiary for the supply of fixed wireless access and optical networking
equipment to support its planned 3G network roll-out.
Sales of multimedia voice systems were down year on year as the Group's
customers, including BT, continued to switch investment from their narrowband
access to broadband access networks.
North American Access
North American Access comprises mainly copper and fibre-based digital loop
carrier equipment.
Sales fell by GBP17 million or 26 per cent to GBP48 million (H1 2002: GBP65
million). This was mainly due to the difficult market conditions in North
America and the continued slowdown of narrowband access infrastructure
investment. Sales of Marconi's legacy DISC*S copper product range were
particularly affected following the Group's announcement in March 2002 that it
had discontinued future research and development spending in this area.
Outside Plant & Power (OPP)
OPP comprises sales of connection, protection and enclosure products for the
outside plant portion of access networks as well as sales of power equipment to
telecommunications service providers and original equipment manufacturers.
OPP equipment sales fell by GBP76 million or 49 per cent to GBP80 million (H1
2002: GBP156 million). This was mainly a result of the significant reductions in
capital spending in the United States, which accounted for GBP74 million of OPP
sales during the period (H1 2002: GBP129 million). The general market downturn
in CALA also contributed to the sales decline. OPP recorded GBP6 million of
sales in CALA during the first six months compared to GBP26 million in the
corresponding period of the previous financial year.
OPP service sales are reported within Network Services. These amounted to GBP51
million during the first half of the financial year, a reduction of GBP57
million, or 53 per cent compared to GBP108 million in the corresponding period
of the previous year. This decline was a direct result of the reduced level of
sales of OPP equipment.
Other Network Equipment
Other Network Equipment comprises mainly the Group's interactive systems
activity as well as legacy operations in South Africa and Asia Pacific.
Sales in this group of activities fell by GBP34 million or 54 per cent to GBP29
million (H1 2002: GBP63 million). This was mainly the result of reduced sales in
the Group's legacy optical cable business in South Africa and the absence of
sales in Hong Kong following completion of a major long-term contract during the
previous financial year. Sales of interactive systems remained stable during the
period.
Operating Loss
Network Equipment incurred an operating loss of GBP179 million, an improvement
of GBP37 million or 17 per cent compared to an operating loss of GBP216 million
in the first six months of the previous financial year. The main product areas
contributing to this improvement during the period were BBRS and North American
Access. Operating performance improvement in Optical Networks remains difficult
in the face of continued volume reductions, contractual annual price reductions
under existing frame contracts and some price erosion on new orders as well as
issues relating to business and geographic mix.
Network Services
Sales of Network Services amounted to GBP392 million, a reduction of GBP113
million or 22 per cent (H1 2002: GBP505 million). Whilst sales fell across both
main types of service activity, the decline was most marked in the field of IC&M
which accounted for 47 per cent of Network Services sales during the period (H1
2002: 54 per cent).
Installation, Commissioning and Maintenance (IC&M)
IC&M sales fell by GBP85 million or 31 per cent to GBP186 million (H1 2002:
GBP271 million) as a direct result of the decline in equipment sales to telecom
operators with which these services are associated.
Approximately GBP65 million, or around 76 per cent of this decline, occurred in
the Americas and related mainly to sales of OPP services.
In EMEA, which accounted for approximately 65 per cent of IC&M sales during the
period (H1 2002: 52 per cent), sales were down around 14 per cent, with an
increased level of installation and commissioning activity in Italy partially
off-setting higher percentage declines in other countries. This was due to the
phasing of network deployments by Telecom Italia, Vodafone-Omnitel and Wind
during the final quarter of the previous year and during the first half of the
current year.
IC&M sales are not common in APAC as these activities tend to be handled by the
Group's local partners.
Value-Added Services (VAS)
VAS comprises three main activities: i) integrated systems which provides
integrated network solutions to mainly non-telecom customers including
government agencies, transportation organisations and utilities; ii) global
managed services which is mainly the services branch of the Group's BBRS
business and also includes the Group's IT outsourcing service activities; and
iii) wireless services which, for reporting purposes, consolidates the Group's
wireless network planning activities worldwide.
Overall, VAS sales fell by GBP28 million or 12 per cent to GBP206 million (H1
2002: GBP234 million). Sales in integrated systems and global managed services
remained relatively stable and were offset by a decline in wireless services.
During the first half of the previous financial year, integrated systems
benefited from a high proportion of sales arising from the completion of the
long-term Jubilee Line Extension communications project for London Underground.
Excluding the impact of this one major contract, the increase in underlying
sales of integrated systems was driven by the trading of long-term service
contracts during the period, particularly in the United Kingdom (eg West Coast
Main Line) and Germany (eg Ramstein).
Global managed services recorded a single-digit decrease during the period.
Increased sales of BBRS-related services were offset by lower sales of IT
outsourcing services prior to the Group's ongoing managed exit from this
activity.
Sales of wireless services decreased by over 30 per cent during the period. This
was mainly a result of reduced capital expenditure in the wireless market
affecting all geographic areas, but most notably the Americas.
On a sequential basis, VAS sales increased from GBP97 million in the first
quarter to GBP109 million in the second quarter as a result of increased trading
under long-term service contracts, particularly in the transportation and
government sectors.
Operating Profit
Network Services recorded an improvement in operating profit from GBP2 million
in the first half of the previous financial year to GBP5 million during the
period. Improved resource utilisation in IC&M and other ongoing cost reduction
initiatives were the main drivers of the increased profitability.
While improvements were recorded across most major service activities, wireless
services generated an operating loss during the period mainly as a result of the
substantially lower sales recorded during the period.
GROUP REVIEW
Group Key Figures (including joint ventures)
in GBP million 6 months ended
30 September
2002 2001
Sales 1,106 2,578
Gross Profit 199 664
Operating Loss (235) (238)
Operating Exceptionals (242) (4,502)
Non-Operating Exceptionals (14) 75
Associates (70) 5
Retained Loss (731) (5,076)
Group Sales
in GBP million 6 months ended
30 September
2002 2001
Core 992 1,448
Capital 32 207
Other (5) (27)
Continuing operations 1,019 1,628
Discontinued operations 87 950
Group 1,106 2,578
Group sales for the six months to 30 September 2002 amounted to GBP1,106
million, representing a decrease of GBP1,472 million or 57 per cent compared to
the first six months of the previous year (H1 2002: GBP2,578 million).
Sales from continuing operations amounted to GBP1,019 million, a decrease of
GBP609 million or 37 per cent compared to the corresponding period of the
previous financial year. This decrease was mainly the result of reduced demand
in the global market for telecommunications equipment and services resulting in
lower sales in the Group's Core business and the disposal of businesses from
Marconi Capital including the Group's 50 per cent stake in General Domestic
Appliances and Marconi Optical Components completed during the previous
financial year as well as the sale of Applied Technologies Group completed in
July 2002.
Sales from discontinued operations amounted to GBP87 million during the period
and related mainly to Strategic Communications prior to its disposal on 2 August
2002. Of the GBP950 million of sales from discontinued operations during the
first half of the previous year, approximately GBP133 million related to
Strategic Communications. The balance of GBP817 million related to business
disposals: Medical, Commerce and Data Systems.
Group Gross Profit (including joint ventures)
in GBP million 6 months ended
30 September
2002 2001
Continuing operations 175 391
Discontinued operations 24 273
Group 199 664
Gross profit before exceptional items at Group level amounted to GBP199 million,
representing a gross margin of 18 per cent (H1 2002: GBP664 million; 26 per cent
of sales). Of this amount, the Group's continuing operations contributed a gross
profit of GBP175 million and a gross margin of 17 per cent (H1 2002: GBP391
million; 24 per cent of sales) and discontinued operations contributed a gross
profit of GBP24 million and a gross margin of 28 per cent (H1 2002: GBP273
million; 29 per cent of sales). The overall decrease in gross profit at Group
level was mainly attributable to the reduction in sales volumes in the Core
business and the resulting under-utilisation of resources in the supply chain
and services activity. Business disposals included in discontinued operations
also contributed to the absolute decrease in gross profit.
Group Operating Profit/(Loss) by Segment
in GBP million 6 months ended
30 September
2002 2001
Core (205) (247)
Capital (28) (40)
Continuing operations (233) (287)
Discontinued operations (2) 49
Group (235) (238)
Operating cost savings achieved mainly in the Core (cf Core Business Review)
during the first half were more than offset by the reduction in gross
profitability, leading to an overall Group operating loss of GBP235 million.
This represented a GBP3 million improvement compared to the first half of the
previous year. (H1 2002: operating loss GBP238 million).
Of this, an operating loss of GBP233 million was attributable to the Group's
continuing operations (GBP205 million of which related to the Core and GBP28
million to Capital) and an operating loss of GBP2 million was attributable to
the Group's discontinued operations.
OTHER FINANCIAL ITEMS
Exceptional Items
Operating Exceptionals
For the six months to 30 September 2002, exceptional items charged to Group
operating loss (excluding joint ventures) totalled GBP211 million, of which
GBP24 million was charged to cost of sales and GBP187 million was charged to
administrative expenses.
Of the total, exceptional restructuring and reorganisation costs amounted to
GBP195 million. Impairment of tangible fixed assets, relating mainly to
impairment of the Group's remaining mobile assets and legacy operations in South
Africa, and a provision for onerous leases amounted to GBP31 million. These were
partially offset by exceptional income of GBP15 million arising from the release
of previously established exceptional provisions with respect to certain
doubtful debtors mainly in the United Kingdom and to the settlement of a
litigation relating to IT costs at a lower level than originally envisaged.
The exceptional restructuring costs related mainly to the restructuring of the
Group's supply chain and other facilities including fixed asset impairments
associated with the downsizing of the Core business (GBP103 million) and costs
associated with headcount reductions (GBP67 million). The balance relates mainly
to costs associated with the Group's financial restructuring.
A further review of the carrying value of the Group's fixed assets, including
goodwill was undertaken at 30 September 2002. The average discount rate applied
to the future cash flows was 15 per cent and was based upon a weighted average
cost of capital percentage. The results of the review indicated that no further
goodwill impairment charge was necessary for the 6 months to 30 September 2002.
However, due to the significant uncertainties over the timing and extent of any
recovery in the telecommunications market, the Board acknowledges that the Group
is likely to have to continue to review its assumptions against future
performance.
In addition, the Group recorded GBP18 million of exceptional costs in relation
to its share in associates and GBP31 million relating to the impairment of
intangible assets in its joint ventures.
Exceptional items charged to Group operating loss (including joint ventures) in
the six months to 30 September 2001 totalled GBP4,502 million and related mainly
to charges to write down goodwill and tangible fixed assets, to increase
doubtful debt provisions and to increase provisions for slow-moving and obsolete
inventory. Restructuring and reorganisation charges totalled GBP293 million.
Non-Operating Exceptionals
For the six months to 30 September 2002, non-operating exceptional charges
amounted to GBP17 million. This comprised a GBP5 million net loss on disposal of
discontinued operations, a GBP9 million net loss on disposal of fixed assets and
investments in continuing operations and a GBP3 million loss relating to the
Group's share of associates' non-operating exceptional charges.
In discontinued operations, the loss on disposal of Strategic Communications
(GBP41 million) was partially offset by the release of provisions relating to
Medical Systems and other previously completed disposals.
Of the GBP9 million loss in continuing operations, GBP40 million related to the
write-down 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 booked at their net realisable
value. This was partially offset by a GBP28 million curtailment gain associated
with retirement benefits arising mainly from the disposal of the Group's share
in GDA, GBP12 million gain on property disposals and a net GBP9 million charge
relating to current and prior period disposals and business closures and other
provision movements.
INTEREST AND FINANCE INCOME
In the six months to 30 September 2002, the Group's net interest charge to the
Profit and Loss Account was GBP106 million (H1 2002: GBP122 million). The
interest charge decreased as a result of the Group's reduced net debt position.
The charge during the period mainly comprised approximately GBP64 million of
interest charged on the Group's bond debt and approximately GBP52 million of
interest charged on the Group's Syndicate Bank debt, partially offset by
interest income on the Group's cash balances and repayment supplement on tax
refunds.
Net finance income amounted to GBP2 million.
TAXATION
The tax charge on ordinary activities was GBP10 million in the period compared
with a credit of GBP36 million in the first half of the previous year. The net
tax credit on exceptionals was GBPnil (H1 2002: GBPnil).
GOODWILL AMORTISATION
The Group incurred a charge of GBP55 million for goodwill amortisation for the
six months to 30 September 2002 compared to a charge of GBP350 million in the
corresponding period of the previous year. This significant reduction is 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.
EARNINGS PER SHARE
Basic and diluted loss per share, which reflects goodwill amortisation and
exceptional items was 26.2 pence (H1 2002: loss of 182.3 pence).
The loss per share excluding goodwill amortisation and exceptional items was
13.1 pence compared to a loss per share of 10.7 pence in the first half 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.
FINANCIAL CONDITION
Balance Sheet
Three main factors have contributed to the overall change in shape of the
Group's balance sheet during the first half of the financial year: i) the
disposal of Strategic Communications; ii) the losses incurred during the period
and iii) the further market decline and continued downsizing of Marconi's Core
business.
Net Assets/Liabilities
As at 30 September 2002, the Group had net current liabilities of GBP1,027
million compared to net current liabilities of GBP662 million as at 31 March
2002. As at 30 September 2002, net liabilities before net retirement benefit
deficits stood at GBP2,104 million compared to GBP1,420 million at 31 March
2002. The increase in net liabilities was mainly due to the loss incurred during
the period.
Fixed Assets
The GBP672 million of goodwill on the balance sheet at 30 September 2002 relates
mainly to the acquisitions of GPT and Reltec and businesses acquired from Nokia
and Bosch. The decrease from GBP877 million at 31 March 2002 arose as a result
of the disposal of Strategic Communications (GBP121 million), the amortisation
charge incurred during the period (GBP54 million), currency effects (GBP21
million) and a reduction of GBP9 million due to the lapsing of certain share
options relating to businesses acquired in previous financial years.
Tangible assets decreased by GBP193 million from GBP522 million at 31 March to
GBP329 million at 30 September 2002. This was mainly due to depreciation (GBP79
million), the disposals of Strategic Communications and Applied Technologies
(GBP56 million), fixed asset impairments as a result of the downsizing and
restructuring of the Core business (GBP49 million), and foreign exchange
movements. Capital spend during the period was restricted to items essential to
support the business.
Investments decreased by GBP129 million from GBP250 million at 31 March to
GBP121 million at 30 September 2002. This was mainly due to the Group's share of
the losses of Easynet and write downs of a number of the Group's other
investments.
Working Capital
The disposal of Strategic Communications led to a reduction of GBP162 million in
net stock and contracts in progress, a reduction of GBP318 million in net
debtors and a reduction of GBP320 million in trade, other creditors and
accruals.
At a Group level, net stock and contracts in progress reduced by approximately
GBP364 million to GBP356 million (31 March 2002: GBP720 million). In the Core,
net stock and contracts in progress reduced by GBP177 million. GBP25 million of
this reduction related to the additional stock provisions raised during the
period. Significant improvement in the Group's process to align the purchase of
new inventory with forecast sales demand has been a major driver behind the
inventory reduction achieved during the period. The increase in Core net stock
turns from 4 to 5.1 reflects this improved utilisation and management of
inventory.
Group net debtors decreased by approximately GBP435 million to GBP862 million
(31 March 2002: GBP1,297 million). Core net trade debtors decreased by
approximately GBP105 million partly as a result of the reduced trading volumes
during the period and partly as a result of the Group's focus on the management
of debtor collection and overdue debts.
Net Core trade debtor days increased from 87 in March 2002 to 107 in September
2002. The low level in March 2002 reflects the impact of the one-off sale of SDH
inventory to BT in the final quarter of the previous year. Excluding this
impact, net trade debtor days at March stood at 103. The increase of 3 debtor
days compared to the September position of 104 published in the Group's Q2
trading update relates to a reclassification from other debtors to trade debtors
following finalisation of the Group's interim accounts. The level of net trade
debtor days remains high mainly as a result of sales in Southern Europe and APAC
where payment terms tend to be significantly longer than average.
Other debtors and prepayments in the Core increased by GBP27 million to GBP190
million. This was a mainly due to an increase in prepayments on annual contracts
payable at the beginning of the financial year.
Trade, other creditors and accruals fell from GBP1,632 million at 31 March 2002
to GBP1,126 million, a reduction of GBP506 million. Trade creditors in the Core
were reduced by GBP65 million to GBP262 million. Core trade creditor days
remained stable during the period at 54 days after adjusting the March position
to exclude the one-off impact of the sale of SDH inventory to BT in the final
quarter of the previous year. Other Creditors and accruals in the Core reduced
by GBP243 million to GBP505 million due largely to the conversion of interest
swap arrangements into loans, the payment of accrued interest on the Group's
euro bonds and a payment made to Court in relation to litigation concerning the
Group's joint venture, Ultramast.
Provisions
Provisions for liabilities and charges stood at GBP456 million at 30 September
2002, a net reduction of GBP49 million compared to March 2002 (GBP505 million).
Share option and restructuring provisions accounted for GBP176 million (March
2002: GBP179 million) and GBP69 million (March 2002: GBP96 million)
respectively. The remainder includes provisions for warranty and contract
losses, industrial injury claims, supplier obligations and provision related to
previous disposals.
In addition to the normal movements in warranty and contract loss provisions,
provisions have been increased to provide for losses on industrial injuries.
These movements were offset by disposals and currency movements.
Retirement Benefits
The Group adopted accounting standard FRS17 "Retirement benefits" in the year
ended 31 March 2002.
The net retirement benefit deficit increased by GBP313 million from GBP126
million at 31 March 2002 to GBP439 million at 30 September. This was mainly the
result of adverse variances between the actuarial assumptions and actual results
for returns on plan assets and discount rates used to value liabilities. These
actuarial assumption losses are reflected through the Statement of Total
Recognised Gains and Losses.
The main component of the pension liability at 30 September 2002 is the deficit
on the funded UK plan (GBP298 million). The balance relates to retirement
benefit plans in Germany, Italy and the United States.
The UK Plan's exposure to equity markets is limited to 21 per cent of plan
assets totalling GBP2,355 million. The remaining scheme assets are held in bonds
(72 per cent) and property and cash (7 per cent).
In assessing the funding rate, the actuary uses a different set of assumptions
to that required by the FRS17 accounting standard and takes a broader view of
the fund's income generating capacity over a longer period. Based on a
preliminary view of the Group's latest tri-annual actuarial review of the UK
plan, Marconi and the Trustees of the plan have agreed adjustments to pension
contributions with effect from 6 April 2003. While the rate of employer's
contributions will remain unchanged at 8.2 per cent of pensionable payroll,
these adjustments will have the effect of reducing the funding to cover past
service deficit to GBP7 million per annum (previously recommended GBP16 million
per annum).
At GBP23 million, the operating charge relating to retirement benefits for the
six months ended 30 September 2002 was lower than the corresponding charge in
the previous year (H1 2002: GBP26 million) due to a reduction in the number of
plan members.
The Group recognised curtailment and settlement gains during the reporting
period of GBP66 million. These related mainly to the disposal of Strategic
Communications and the Group's 50 per cent stake in GDA and have been recognised
within non-operating exceptional items.
Cash Flow
The Group incurred a GBP112 million cash outflow before use of liquid resources
and financing during the first half. The main components of this outflow were a
net cash outflow from operating activities before capital expenditure and
exceptional items of GBP142 million, an exceptional cash outflow from operating
activities of GBP186 million, net interest paid of GBP133 million and other net
cash outflows of GBP38 million. These outflows were partially offset by cash
inflows from disposals of GBP387 million.
Operating Cash Flow
Operating losses of GBP285 million partially offset by depreciation and
amortisation of GBP133 million and a GBP10 million cash inflow from working
capital movements led to the Group's operating cash outflow of GBP142 million
during the period. After capital expenditure, the Group operating cash outflow
was GBP169 million.
The Group recorded significant progress in reducing operating cash outflows
within the period, the outflow of GBP117 million after capital expenditure in
the first quarter reducing to GBP52 million in the second quarter. This
improvement was predominantly driven by progress within the Core business where
operating cash outflow after capital expenditure reduced from GBP81 million in
the first quarter to GBP43 million in the second quarter. This was a result of
the reduced operating losses (Q1: GBP115 million; Q2: GBP90m) and increased
contribution from working capital (Q1: GBP8 million; Q2: GBP22 million). This
GBP30 million reduction in working capital during the first half was largely
driven by improved utilisation of inventory, partially offset by a reduction in
creditors.
Capital Expenditure and Financial Investment
Capital expenditure amounted to GBP27 million during the period, of which GBP19
million related to the Core. Marconi has maintained capital expenditure well
below the level of depreciation, which amounted to GBP79 million, of which GBP70
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 first half, the majority of Core capital
expenditure was incurred in Optical Networks and BBRS.
Financial investments contributed a GBP2 million cash inflow during the period.
This related mainly to proceeds from property disposals largely offset by a cash
payment made to Court in relation to a litigation concerning the Group's joint
venture, Ultramast.
Returns on Investments and Servicing of Finance
Net interest paid during the period amounted to GBP133 million comprising mainly
interest paid on the Group's Syndicate Bank and bond debt, partially offset by
interest received on a refund relating to tax paid in prior years and on the
Group's cash balances. Interest paid on the Group's outstanding euro and yankee
bond debt amounted to approximately GBP104 million. This comprised GBP44 million
paid on 2 April, the first business day following the bond coupon due date of 30
March 2002 and GBP60 million interest due and accrued up to 15 September 2002
and paid prior to 30 September 2002. Approximately GBP52 million of interest was
paid on the Group's Syndicate Bank debt.
As part of the proposed restructuring, GBP260 million is to be distributed to
the relevant scheme creditors, of which GBP95 million represents the payment of
due and accrued interest. Of this GBP95 million, GBP8 million was paid on 30
August 2002, GBP66 million was paid on 15 September 2002 and GBP4 million was
paid on 30 September 2002. In addition, after the period end, GBP14 million was
paid on 15 October 2002 and GBP3 million was paid on 4 November 2002.
Exceptional Cash Flows
The Group incurred operating exceptional cash costs of GBP186 million during the
first half of the year. Over half of this amount related to the direct cash cost
of severance payments and site closures in the context of the Group's
operational restructuring and reorganisation. The balance relates to cash costs
associated with the Group's manufacturing outsourcing programme and payments
made under onerous contracts and as a result of supplier liability claims. The
payment of fees and expenses to advisors in the context of the Group's financial
restructuring is also included in operating exceptional cash flows.
Cash Flows from Acquisitions and Disposals
Net proceeds from acquisitions and disposals led to a cash inflow of GBP387
million during the first half of the year. This related mainly to the disposals
of Strategic Communications and Applied Technologies, partially offset by the
payment of transaction-related costs and fees.
Tax Paid
The Group paid GBP13 million net of repayments in relation to tax including US
state taxes on gains on disposals. There were no tax payments or receipts
relating to hedging arrangements during the period.
Net Debt
Net debt was GBP2,846 million at 30 September 2002 compared to GBP2,865 million
at 31 March 2002. The decrease of GBP19 million results from the Group's cash
outflow of GBP112 million, a favourable foreign exchange movement of GBP168
million and GBP37 million of other non-cash movements relating to interest swap
arrangements converted to new loan agreements during the period and debt
transferred to Finmeccanica SpA upon disposal of Strategic Communications.
At 30 September 2002, net debt comprised GBP3,917 million of gross financial
debt made up of GBP1,695 million of Euro and US dollar bond debt, GBP2,117
million of Syndicate Bank debt (including GBP51 million as at 30 September 2002
relating to the conversion of interest swap arrangements to new US dollar loans
with Syndicate Banks during the period) and GBP105 million of bilateral and
other bank debt and GBP1,071 million of cash.
Syndicate Bank and Bond Debt
At 30 September 2002, drawings under the Group's remaining syndicated facility
amounted to an equivalent of GBP2,066 million, comprising of actual drawings of
GBP650 million and US$2,226 million.
At 30 September 2002, Marconi had yankee bond debt outstanding with principal
US$1,539 million (GBP979 million) and euro bond debt outstanding with principal
EUR1,175 million (GBP739 million). The difference between the principal amounts
totalling GBP1,718 million and the balance sheet value of bond debt totalling
GBP1,695 million relate to discounts and related fees.
The sterling equivalent amounts of Syndicate Bank debt and bonds outstanding
reduced compared to the respective values at 31 March 2002 as a result of
foreign exchange translation. In addition, interest rate swap arrangements
totalling approximately GBP54 million were converted to new loan agreements
during the period.
Current Liquidity Position
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 certain ESOP derivative providers who have
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 Syndicate Banks and
bondholders. The interim security arrangements contemplated by the Heads of
Terms were implemented on 13 September 2002. At that time, the balance of the
secured accounts was approximately GBP866 million. At 30 September 2002, the
balance of the secured cash amounted to GBP735 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, releases from the secured accounts will be approved in
accordance with the Group's revised monthly cash flow forecast, subject to
specified maximum amounts. This schedule takes account of the Group's
anticipated cash inflows and outflows, and is consistent with the Group's
expectations as to its liquidity needs in the period prior to the expected
completion of the Restructuring.
At 30 September 2002, the Group had a total restricted cash balance, defined as
cash pledged or advanced as collateral, of GBP872 million. Of this, GBP735
million reflects the cash in the secured accounts described above, GBP79 million
reflects cash collateral placed against bonding facilities; GBP18 million
reflects cash in the Group's captive insurance company and GBP15 million
reflects cash deposited against secured loans in Italy. In addition, GBP25
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 (cf "Share Price Risk" for further information).
Of the Group's GBP199 million unrestricted cash held outside of the secured
accounts as at 30 September 2002, GBP124 million was a combination of cash in
transit and global working capital balances with the remaining GBP75 million
held in money market deposits in the Group's Treasury centres.
Group Financial Management
Treasury Policies and Organisation
The Group's treasury activities are coordinated by its Treasury function which
operates in accordance with policies and procedures approved by Marconi's Board
of Directors. It does not operate as a profit centre. Treasury advises
operational management on treasury matters and undertakes all derivative
transactions except certain forward exchange contracts relating to the hedging
of foreign currency transaction exposures arising in the operating businesses
which have in the past been managed by those operating units as described below.
All treasury related transactions undertaken by the Group's operating businesses
are required to be in accordance with guidelines laid down by the central
treasury function and comply with the Group risk management policies.
Responsibility for the management of working capital, other than cash, is
undertaken by the individual businesses. Cash balances at individual businesses
are reported to Group Treasury on a daily basis for material business units and
on a weekly basis for other business units. Group Treasury seeks explanations
for any significant movements. In addition, the cash movements of each business
unit are monitored on a weekly basis against rolling forward projections and
these forecasts are used to monitor likely future trends in cash balances. In
addition, capital expenditure is budgeted, reported and controlled on a
segmental basis.
Group Treasury oversees the management of the Group's cash and borrowings. At
present, these arrangements are subject to the interim security over Marconi
Corporation's cash balances described above. Each business has its own bank
accounts. The main centres for cash management are in the United Kingdom, United
States and Italy, where Group Treasury staff conduct cash management activities.
Some businesses have had in the past and may have in the future limited access
to local overdraft facilities with banks to meet operational funding
requirements. The cash balances of the businesses are effectively managed so
that the cash surpluses of the Group are used by these treasury centres to fund
businesses with net cash outflows through inter-company cash transfers, which
may be on a secured or unsecured basis. In accordance with the Letters of
Undertaking dated 25 April 2002 and 30 May 2002 signed between Marconi and its
Syndicate Banks, there are certain restrictions on funding of subsidiary
companies from central Group Treasury. However, these undertakings do not
restrict activities conducted by companies in the normal course of trading. The
Group manages balances of all the accounts on a daily basis. The remaining
surplus funds are invested in money market deposits.
Financial Market Risks
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
For a discussion regarding liquidity risk, see "Current Liquidity" section
above.
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
including the cancellation all outstanding derivatives positions. Consequently,
during the first half of the financial year, certain out-of-the-money interest
rate swap arrangements were converted to new loan agreements as previously
discussed. At 30 September 2002, 48 per cent of the Group's interest-bearing
borrowings were at fixed rates after taking account of interest rate swaps. Of
this total, 29 per cent were at fixed dollar rates of interest and 19 per cent
were at fixed euro rates of interest.
In the six months ended September 30, 2002, the average interest rate received
on cash and liquid investments was approximately 2.4 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 $856
million in US dollar deposits, earning an average interest rate of 1.75 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's ability to enter such contracts is currently
restricted by the reduced availability of counter-party banks.
The Group also has overseas subsidiaries that earn profits and whose 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
profits and net assets into pounds sterling. However, approximately 83 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, 63 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 income from continuing operations would have been reduced by 7.1 per
cent, in the year ended 30 September 2002 (twelve months ended 31 March 2002:
4.6 per cent).
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 38.5 million remain
outstanding. The Group's maximum exposure under the contracts is GBP337 million,
plus accrued finance charges. This level of exposure had accrued as at 30
September 2002. For every 10 per cent movement in the share price, the change in
the fair value of these contracts is immaterial. Certain of the contracts
require the Marconi Employee Trust to deposit cash collateral with the
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. At 30 September 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 as at 30
September 2002 is comprised of principal of GBP123 million, together with
accrued finance charges of GBP44 million.
Under the Heads of Terms, the Group expects to implement separate arrangements
for the Group's ESOP derivative providers in connection with the Restructuring.
These arrangements are conditional on the commitment of the respective ESOP
derivative providers to support the Restructuring. To date, one of the Group's
three ESOP derivative providers has given such a commitment and an escrow
agreement has been entered into with this ESOP derivative provider to give
effect to these arrangements. The arrangements made with this party, and, if
they commit to support the Restructuring (with the consent of the relevant
parties) with the other ESOP derivative providers, entail the following:
- if an enforcement event occurs in connection with the interim security
arrangements, a rateable portion (up to a maximum of GBP145 million) of the
remaining part of the GBP866 million held in the secured accounts will be
set aside pending determination of any claims which the participating ESOP
derivative providers may have against Group companies other than Marconi
plc. The participating ESOP derivative providers will lose these rights if
any ESOP derivative provider precipitates an insolvency event with respect
to a material Group company; and
- otherwise, as part of the schemes of arrangement, cash up to a maximum of
GBP145 million is to be set aside in an escrow account pending these claims.
These arrangements are in addition to the existing arrangements implemented as
part of the Group's recent disposal of its Strategic Communications business, in
which GBP25 million was set aside in an escrow account pending determination of
any claims which the ESOP derivative providers may have had against the
Strategic Communications companies. As a result, a total of up to GBP170 million
may be set aside pending determination of any claims which the ESOP derivative
providers may have against Group companies other than Marconi plc.
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 spend 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 and from some long-term
deals.
Vendor Finance
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 30 September 2002, the Group had vendor finance commitments of
approximately GBP68 million of which GBP54 million had been drawn. The reduction
compared to commitments of GBP100 million at 31 March 2002 was primarily due to
an agreement with a customer to cancel vendor finance commitments which had
become unlikely to be drawn.
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 GBP221 million of such
bonds outstanding as at 30 September 2002 with both banks and insurance
companies world-wide. The reduction from GBP500 million of bonds outstanding at
31 March 2002 was mainly the result of the disposal of Strategic Communications.
Some of these facilities are covered by counter-indemnities from Marconi
Corporation plc and others have individual 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 cash collateralised. Since February 2002, Marconi Bonding
Limited (a special purpose vehicle used for this purpose) has procured the issue
of approximately GBP80 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 30 September 2002
is set out below:
As at GBPm
30 September 2002
2003 or earlier 74
2004 10
2005 16
2006 45
2007 25
Thereafter 4
No expiry date 46
Total 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 30 September 2002,
performance bonds with a face value of approximately GBP89 million have varying
rights to call for cash collateral.
Bonding and guarantee facilities 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.
Obligations
Marconi has obligations beyond the current financial year in terms of long-term
debt, equity forward contracts, finance leases and operating leases. In addition
to the GBP1,727 million of long-term debt and finance leases reported in Note 8
of the Interim Accounts, other long-term financial obligations are as follows:
As at Equity Forward Operating Total
30 September 2002 Contracts Leases
in GBPm
2004 - 26 26
2005 123 23 146
2006 - 19 19
2007 - 17 17
Thereafter - 79 79
Total 123 164 287
In addition, at 30 September 2002, the equity forward contract had accrued
interest of GBP44 million.
END/...
Consolidated Profit and Loss Account
6 months 6 months Year to
to 30 to 30 31
September September March
2002 2001 2002
(restated)
Note GBP million GBP million GBP million
Turnover
Continuing operations 2 1,019 1,499 2,906
Discontinued operations 2 87 950 1,404
---------- ---------- ----------
Group 1,106 2,449 4,310
Share of joint ventures - 129 257
---------- ---------- ----------
2 1,106 2,578 4,567
---------- ---------- ----------
Operating loss
Group operating loss
Excluding goodwill amortisation and exceptional items (231) (243) (474)
Goodwill amortisation (54) (349) (431)
Operating exceptional items 4 (211) (4,501) (5,210)
---------- ---------- ----------
3 (496) (5,093) (6,115)
Share of operating profit of joint ventures
Excluding goodwill amortisation and exceptional items (4) 5 11
Goodwill amortisation (1) (1) (2)
Operating exceptional items 4 (31) (1) (6)
---------- ---------- ----------
(36) 3 3
---------- ---------- ----------
(532) (5,090) (6,112)
Group and joint venture operating loss before goodwill 2 (235) (238) (463)
amortisation and exceptional items
Share of operating (loss)/profit of associates
Excluding goodwill amortisation and exceptional items (17) 5 (1)
Goodwill amortisation (5) - (7)
Goodwill impairment (27) - -
Operating exceptional items (18) - (173)
---------- ---------- ----------
(67) 5 (181)
---------- ---------- ----------
Operating loss 2,9 (599) (5,085) (6,293)
Non-operating exceptional items
(Loss)/gain on disposal of discontinued operations 4 (5) - 358
(Loss)/gain on disposal of fixed assets and investments
in continuing operations 4 (9) (219) 18
Merger/demerger items 4 - 294 291
Group share of associates' non-operating exceptional 4 (3) - -
items
---------- ---------- ----------
(17) 75 667
---------- ---------- ----------
(616) (5,010) (5,626)
Net interest payable
Group (107) (123) (240)
Share of joint ventures and associates 1 1 2
---------- ---------- ----------
(106) (122) (238)
Net finance income
Group excluding exceptional items 2 21 34
Exceptional gain on repurchase of bonds - - 166
---------- ---------- ----------
2 21 200
Loss on ordinary activities before taxation
Excluding goodwill amortisation and exceptional items (356) (334) (668)
Goodwill amortisation and exceptional items (364) (4,777) (4,996)
---------- ---------- ----------
(720) (5,111) (5,664)
Tax (charge)/credit on profit on ordinary activities
Excluding tax on goodwill amortisation and (10) 36 21
exceptional items
Tax on goodwill amortisation and exceptional items - - (231)
---------- ---------- ----------
6 (10) 36 (210)
Loss on ordinary activities after taxation (730) (5,075) (5,874)
Equity minority interests (1) (1) (1)
---------- ---------- ----------
Loss on ordinary activities attributable to the
equity shareholders and retained loss for the period (731) (5,076) (5,875)
---------- ---------- ----------
Basic and diluted loss per share 5 (26.2p) (182.3p) (210.6p)
Loss per share excluding goodwill
amortisation and exceptional items 5 (13.1p) (10.7p) (23.2p)
The figures for the six months ended 30 September 2001 have been restated to
reflect the adoption of FRS 17 "Retirement benefits".
Summarised Group Balance Sheet
30 September 30 September 31 March
2002 2001 2002
(restated)
GBP million GBP million GBP million
Fixed Assets
Goodwill 672 1,579 877
Tangible assets 329 888 522
Investments 121 356 250
---------- ---------- ----------
1,122 2,823 1,649
Current Assets
Stocks and contracts in progress 356 1,219 720
Debtors 862 2,247 1,297
Investments - 15 15
Cash at bank and in hand 1,071 573 1,374
---------- ---------- ----------
2,289 4,054 3,406
Loans and overdrafts (2,190) (2,580) (2,436)
Trade, other creditors and accruals (1,126) (1,872) (1,632)
---------- ---------- ----------
Creditors: amounts falling due within one year (3,316) (4,452) (4,068)
---------- ---------- ----------
Net current liabilities (1,027) (398) (662)
---------- ---------- ----------
Total assets less current liabilities 95 2,425 987
Creditors: amounts falling due after more than one year (1,743) (2,402) (1,902)
Provisions for liabilities and charges (456) (626) (505)
---------- ---------- ----------
Net liabilities before retirement benefit surpluses and (2,104) (603) (1,420)
deficits
Retirement benefit scheme surpluses - 20 19
Retirement benefit scheme deficits (439) (155) (145)
---------- ---------- ----------
Net liabilities after retirement benefit surpluses and deficits (2,543) (738) (1,546)
Equity minority interests (9) (14) (12)
---------- ---------- ----------
Equity shareholders' deficit (2,552) (752) (1,558)
---------- ---------- ----------
Consolidated Cash Flow Statement
6 months 6 months Year to
to 30 to 30 31
September September March
2002 2001 2002
(restated)
GBP million GBP million GBP million
Group operating loss after exceptional items (496) (5,093) (6,115)
Operating exceptional items 211 4,501 5,210
---------- ---------- ----------
Group operating loss before exceptional items (285) (592) (905)
Depreciation and amortisation 133 480 676
Changes in working capital 10 (154) 239
---------- ---------- ----------
Net cash (outflow)/inflow from operating activities before (142) (266) 10
exceptional items
Exceptional cash outflows from operating activities (186) (95) (368)
---------- ---------- ----------
Net cash outflow from operating activities after exceptional (287) (366) (409)
items - continuing operations
Net cash (outflow)/inflow from operating activities after (41) 5 51
exceptional items - discontinued operations
---------- ---------- ----------
Net cash outflow from operating activities after exceptional (328) (361) (358)
items
Dividends and management fees received from
joint ventures and associates - 4 29
Returns on investments and servicing of finance (133) (126) (262)
Tax (paid)/received (13) 12 (13)
Capital expenditure and financial investment (25) (290) (196)
Acquisitions and disposals 387 (363) 1,025
Equity dividends paid to shareholders - (95) (95)
---------- ---------- ----------
Cash (outflow)/inflow before use of liquid resources and (112) (1,219) 130
financing
Net cash (outflow)/inflow from management of liquid resources (77) 68 186
Net cash (outflow)/inflow from financing
Issues of ordinary shares - 11 7
Net cash (outflow)/inflow from changes in debt and lease (62) 1,206 972
financing
---------- ---------- ----------
(Decrease)/increase in cash and net bank balances repayable on (251) 66 1,295
demand
---------- ---------- ----------
Reconciliation of Net Cash Flow to Movements in Net Monetary Debt
6 months 6 months Year to
to 30 to 30 31
September September March
2002 2001 2002
Note GBP million GBP million GBP million
(Decrease)/increase in cash and net bank balances repayable on (251) 66 1,295
demand
Net cash outflow/(inflow) from management of liquid resources 77 (68) (186)
Net cash outflow/(inflow) from decrease/(increase) in debt and 62 (1,206) (972)
lease financing
---------- ---------- ----------
Change in net monetary debt resulting from cash flows (112) (1,208) 137
Net debt disposed/(acquired) with subsidiaries 17 (3) (3)
Other non-cash changes (54) - 162
Effect of foreign exchange rate changes 168 96 6
---------- ---------- ----------
Movement in net monetary debt in the period 19 (1,115) 302
Net monetary debt at 1 April 8 (2,865) (3,167) (3,167)
---------- ---------- ----------
Net monetary debt at end of period 8 (2,846) (4,282) (2,865)
---------- ---------- ----------
Consolidated Statement of Total Recognised Gains and Losses
6 months to 6 months to Year to
30 30 31
September September March
2002 2001 2002
(restated)
GBP million GBP million GBP million
Loss on ordinary activities attributable to the equity shareholders (731) (5,076) (5,875)
Deficit on valuation of listed fixed asset investments - (31) (30)
Unrealised gain on exchange of businesses - - 9
Exchange differences on translation 115 (79) (66)
Tax charge on exchange differences (3) - -
Actuarial loss recognised on retirement benefit schemes (373) (337) (351)
Tax credit on net retirement benefit items charged in the statement of - 68 68
total recognised gains and losses
---------- ---------- ----------
Total recognised gains and losses (992) (5,455) (6,245)
---------- ---------- ----------
Reconciliation of Movements in Equity Shareholders' Interests
6 months 6 months Year to
to 30 to 30 31
September September March
2002 2001 2002
(restated)
GBP million GBP million GBP million
Total recognised gains and losses (992) (5,455) (6,245)
Release of provision in respect of shares to be issued (5) (247) (260)
Group share of associates' shares to be issued 3 - -
Issues of ordinary shares - 11 8
---------- ---------- ----------
Total movement in the period (994) (5,691) (6,497)
Equity shareholders' interests at 1 April (1,558) 4,939 4,939
---------- ---------- ----------
Equity shareholders' deficit at the end of the period (2,552) (752) (1,558)
---------- ---------- ----------
Notes
1 Fundamental uncertainty in respect of the application of the going concern
basis
Marconi Corporation plc owes approximately GBP2.1 billion under a syndicated
credit facility which expires 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 bonds with a face value of GBP1.7 billion. Marconi plc
guarantees Marconi Corporation plc's debt obligations under the bonds and the
syndicated facility. As at 30 September 2002, net debt stood at GBP2.8 billion.
On 29 August 2002, Marconi plc announced that non-binding indicative Heads of
Terms, which set out the principles for the financial restructuring of Marconi
plc and Marconi Corporation plc, had been concluded with the co-ordination
committee of syndicate banks and an informal ad hoc committee of bondholders.
The non-binding indicative Heads of Terms envisage that the creditors of Marconi
plc and Marconi Corporation plc, other than certain excluded creditors, will be
subject to schemes of arrangement under which creditor claims will be settled in
consideration for cash, new equity and new debt securities of Marconi
Corporation plc. As part of the restructuring Marconi Corporation plc will
become the listed parent for the Group and, following completion of its schemes
of arrangement, Marconi plc will be dissolved.
The non-binding indicative Heads of Terms envisage a new capital structure for
the Group that is appropriate to a business plan developed by the Group. The
implementation of this capital structure involves, among other things, the
payment of GBP165 million of cash and the issue of new equity and new bonds with
a face value, using 30 September 2002 exchange rates, of GBP900 million by
Marconi Corporation plc to schemed creditors through the operation of the
schemes of arrangement. The financial restructuring will leave existing Marconi
plc shareholders with 0.5% of the equity in Marconi Corporation plc.
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) and also to certain ESOP derivative
providers who have committed to support the proposed Restructuring. At 30
September 2002, the balance of the secured cash amounted to GBP735 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 will be allowed in
accordance with an agreed schedule, subject to specified maximum amounts. This
schedule is consistent with the Group's expectation as to its liquidity needs in
the period prior to the expected completion of the Restructuring.
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, as amended from time to time.
The occurrence of an enforcement event would materially prejudice the ability of
Marconi plc and Marconi Corporation plc to successfully complete the financial
restructuring. At the date of the approval of these financial statements, no
enforcement event had occurred.
The Group has concluded modifications to the non-binding indicative Heads of
Terms. These revised Heads of Terms are in most respects the same as those
announced on 29 August 2002. Letters of current intention to support the
restructuring and to vote for the Marconi plc and Marconi Corporation plc
schemes have been obtained from the joint lead co-ordinators of the syndicate
banks and from each of the members of the bondholder committee.
The proposed restructuring is dependent on the approval of the Marconi plc and
Marconi Corporation plc schemes of arrangement. Approval of the schemes of
arrangement will be dependent on, among 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 of arrangement process, as well as the approval of the
English court and the granting of a permanent restraining order from the U.S.
Bankruptcy Court.
In the light of the information currently available to them, the Directors
believe that the Group's bankers, bondholders and other creditors will support
it 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 the going concern basis. Should the
Group's bankers, 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, 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 Principal activities for 6 months to 30 September
(Loss)/profit Turnover Net assets
2002 2001 2002 2001 2002 2001
(restated) (restated) (restated)
GBP million GBP million GBP million GBP million GBP million GBP million
Network equipment (179) (216) 600 943 )
) 451 1,144
Network services 5 2 392 505 )
Other (including intra-activity sales) (31) (33) (5) (27) 11 9
---------- ---------- ---------- ---------- ---------- ----------
(205) (247) 987 1,421 462 1,153
Capital (28) (40) 32 207 (19) 140
---------- ---------- ---------- ---------- ---------- ----------
Continuing operations (233) (287) 1,019 1,628 443 1,293
Discontinued operations (2) 49 87 950 - 608
---------- ---------- ---------- ---------- ---------- ----------
(235) (238) 1,106 2,578 443 1,901
---------- ----------
Goodwill and goodwill amortisation (55) (350) 672 1,564
Operating exceptionals (242) (4,502)
---------- ---------- ---------- ----------
(532) (5,090) 1,115 3,465
Associates (67) 5 69 42
---------- ----------
Operating loss (599) (5,085)
Non-operating exceptional items, gains less
losses on disposal of subsidiaries
and other fixed assets (17) 75
Net interest payable and interest bearing (106) (122) (2,838) (4,220)
assets and liabilities
Net finance income 2 21
Unallocated net liabilities (898) (39)
---------- ---------- ---------- ----------
(720) (5,111) (2,552) (752)
---------- ---------- ---------- ----------
Analysis of turnover and operating loss before goodwill amortisation and operating exceptionals by territory
(Loss)/profit by Turnover by Territory Turnover by Territory of
Territory of Origin of Origin Destination
2002 2001 2002 2001 2002 2001
(restated)
GBP million GBP million GBP million GBP million GBP million GBP million
United Kingdom (69) (193) 372 611 273 481
The Americas (57) (64) 340 1,264 342 1,216
Rest of Europe (90) 25 309 525 293 605
Africa, Asia and Australasia (19) (6) 85 178 198 276
---------- ---------- ---------- ---------- ---------- ----------
(235) (238) 1,106 2,578 1,106 2,578
---------- ---------- ---------- ---------- ---------- ----------
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 six months to 30 September 2002. Currently, 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.
The Marconi share of joint ventures' turnover, profit and net assets are
included in Capital.
Assets and liabilities arising out of the Retirement Benefit Schemes are treated
as unallocated net liabilities.
It is not practical to disclose on a segmental basis, goodwill and goodwill
amortisation as any allocation would be arbitrary.
FRS 17 "Retirement benefits" was adopted in full replacing Statement of Standard
Accounting Practice 24 "Accounting for pension costs" and Urgent Issues Task
Force abstract 6 "Accounting for post-retirement benefits other than pensions".
The figures for the six months ended 30 September 2001 have been restated to
reflect the adoption of FRS 17.
3 Group operating loss (excluding joint ventures)
6 months to 30 September 2002
Continuing Discontinued Exceptional items Total
GBP million GBP million GBP million GBP million
Turnover 1,019 87 - 1,106
Cost of sales (842) (63) (24) (929)
---------- ---------- ---------- ----------
Gross profit 177 24 (24) 177
Selling and distribution expenses (152) (11) - (163)
---------- ---------- ---------- ----------
Administrative expenses - other (65) (6) (187) (258)
Research and development (182) (11) - (193)
Goodwill amortisation (51) (3) - (54)
---------- ---------- ---------- ----------
Administrative expenses - total (298) (20) (187) (505)
Other operating (expense)/income (7) 2 - (5)
---------- ---------- ---------- ----------
Operating loss (280) (5) (211) (496)
---------- ---------- ---------- ----------
6 months to 30 September 2001 (restated)
Exceptional
Continuing Discontinued items Total
GBP million GBP million GBP million GBP million
Turnover 1,499 950 - 2,449
Cost of sales (1,141) (680) (624) (2,445)
---------- ---------- ---------- ----------
Gross profit 358 270 (624) 4
Selling and distribution expenses (246) (95) - (341)
---------- ---------- ---------- ----------
Administrative expenses - other (123) (66) (470) (659)
Research and development (285) (52) - (337)
Goodwill amortisation (334) (15) - (349)
Goodwill impairment - - (3,407) (3,407)
---------- ---------- ---------- ----------
Administrative expenses - total (742) (133) (3,877) (4,752)
Other operating income/(expense) 7 (11) - (4)
---------- ---------- ---------- ----------
Operating (loss)/profit (623) 31 (4,501) (5,093)
---------- ---------- ---------- ----------
Year to 31 March 2002
Exceptional
Continuing Discontinued items Total
GBP million GBP million GBP million GBP million
Turnover 2,906 1,404 - 4,310
Cost of sales (2,277) (976) (830) (4,083)
---------- ---------- ---------- ----------
Gross profit 629 428 (830) 227
Selling and distribution expenses (450) (140) - (590)
---------- ---------- ---------- ----------
Administrative expenses - other (222) (86) (703) (1,011)
Research and development (547) (81) - (628)
Goodwill amortisation (406) (25) - (431)
Goodwill impairment - - (3,677) (3,677)
---------- ---------- ---------- ----------
Administrative expenses - total (1,175) (192) (4,380) (5,747)
Other operating income/(expense) 12 (17) - (5)
---------- ---------- ---------- ----------
Operating (loss)/profit (984) 79 (5,210) (6,115)
---------- ---------- ---------- ----------
The Group disposed of Medical, Data and Commerce Systems during the year to 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 in the note above.
Exceptional items are shown in further detail in note 4.
4 Exceptional items
In the year ended 31 March 2002, the Directors provided against several
categories of asset and provided for additional liabilities incurred due to the
down turn in the performance of several of the Group's businesses. In addition,
the Group incurred restructuring costs and charges associated with implementing
new IT systems across the Group. These (charges)/credits have been updated in
the light of subsequent experience (including the need to continue the
restructuring of the Group's activities) and are analysed as follows:
6 months to 6 months to Year to
30 September 30 September 31 March
2002 2001 2002
(restated)
GBP million GBP million GBP million
Stock write-downs and related costs - (518) (672)
Restructuring costs (24) (106) (158)
---------- ---------- ----------
Included in cost of sales (24) (624) (830)
---------- ---------- ----------
Impairment of goodwill & tangible fixed assets (31) (3,493) (3,831)
Restructuring & reorganisation costs (171) (186) (324)
Systems implementation costs 7 (50) (75)
Releases/(charges) in respect of doubtful debts 8 (148) (150)
---------- ---------- ----------
Included in administrative expenses (187) (3,877) (4,380)
---------- ---------- ----------
Group operating exceptionals (211) (4,501) (5,210)
Share of joint ventures' operating exceptional items (31) (1) (6)
Share of associates' operating exceptional items (18) - (173)
---------- ---------- ----------
Total operating exceptional items (260) (4,502) (5,389)
---------- ---------- ----------
(Loss)/gain on disposal of discontinued operations (5) - 358
(Loss)/gain on disposal of fixed assets and investments in (9) (219) 18
continuing operations
Merger/demerger items - 294 291
Group share of associates' non-operating exceptional items (3) - -
---------- ---------- ----------
Non-operating exceptional items (17) 75 667
---------- ---------- ----------
5 Loss per share
Loss per share is calculated by reference to a weighted average of 2,792.6
million ordinary shares (2001 2,784.0 million) 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 per share excluding goodwill amortisation and exceptional
items
6 months to 30 September
2002 2001
Loss Loss per share Loss Loss per share
(restated) (restated)
GBP million pence GBP million pence
Loss and basic loss per share (731) (26.2) (5,076) (182.3)
Exceptional items
Operating exceptionals 242 8.7 4,502 161.7
Group share of associates' operating exceptionals 18 0.7 - -
Non-operating exceptionals 17 0.6 (75) (2.7)
Goodwill amortisation and impairment 87 3.1 350 12.6
---------- ---------- ---------- ----------
(367) (13.1) (299) (10.7)
---------- ---------- ---------- ----------
6 Taxation
The tax charge/(credit) is analysed as follows
6 months to 30 September Year ended
31 March
2002 2001 2002
GBP million GBP million GBP million
Subsidiaries
UK taxation (1) (34) 18
Overseas taxation 11 (6) 188
Joint ventures and associates - 4 4
---------- ---------- ----------
10 (36) 210
---------- ---------- ----------
7 Equity dividend
The Directors have decided not to propose any dividends for the year ending 31
March 2003.
8 Analysis of net monetary debt
At 1 April Cash flow Acquisitions Other non- Exchange At 30 At 30
2002 / disposals cash rate September September
(excluding changes adjustment 2002 2001
cash and
overdrafts)
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Cash at bank and in hand 1,309 (330) - - (52) 927 299
Overdrafts (107) 79 - - 2 (26) (317)
----------
(251)
----------
----------
Liquid resources 65 77 - - 2 144 182
----------
Loans falling due
within one year (2,329) 55 17 (47) 140 (2,164) (2,263)
after more than one (1,803) 7 - (7) 76 (1,727) (2,183)
year
----------
62
----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
(2,865) (112) 17 (54) 168 (2,846) (4,282)
---------- ---------- ---------- ---------- ---------- ---------- ----------
9 Summary of differences between UK and US GAAP
The interim results have been prepared in accordance with UK generally accepted
accounting principles (UK GAAP) which differs in certain significant respects
from US generally accepted accounting principles (US GAAP). The (increase)/
decrease in operating loss as a result of these differences are as follows:
a) Operating loss
6 months to 6 months to Year to
30 September 30 September 31 March
(restated)
2002 2001 2002
GBP million GBP million GBP million
UK GAAP operating loss (599) (5,085) (6,293)
Joint ventures and associates operating loss/(profit) 103 (8) 178
UK GAAP non-operating exceptional items included in US GAAP 20 (107) 36
operating income
UK GAAP operating loss of discontinued operations 38 18 35
US GAAP adjustments:
Share option plans (11) 1 (31)
Long term contract adjustment - 29 30
Pension valuation and classification differences (1) 28 30
Goodwill amortisation and impairment charges 51 15 (298)
Gain/(loss) on sale of businesses 5 - (68)
Sale and leaseback (11) (6) (6)
Other (4) (7) (5)
---------- ---------- ----------
US GAAP operating loss (409) (5,122) (6,392)
---------- ---------- ----------
Certain reclassifications have been made to the 30 September 2001 balances to
reflect the adoption of FRS 17 under UK GAAP, to reflect discontinued operations
and to reflect fair value adjustments on the equity forward contracts on a
consistent basis with the Form 20-F for the year ended 31 March 2002.
b) Explanation of differences between UK GAAP and US GAAP
A description of the relevant accounting principles which differ materially
between UK GAAP and US GAAP is given below.
Joint ventures and associates operating loss/(profit)
Marconi's share of joint venture and associates operating results are reported
within operating loss under UK GAAP but reported after operating loss under US
GAAP.
UK GAAP non-operating exceptional items included in US GAAP operating income
Gains and losses on the disposal of businesses which are not reported as
discontinued operations are reported within non-operating exceptional items
after operating loss under UK GAAP but reported within US GAAP operating loss.
UK GAAP operating loss of discontinued operations
The operating results of businesses discontinued during the period are included
within operating profit up to the date of disposal under UK GAAP. US GAAP
reports these results, including goodwill amortisation and operating
exceptionals, after operating loss. Under US GAAP, the results of Medical
Systems, Data Systems and Mobile are treated as discontinued operations for all
periods presented.
Share option plans
Under both UK and US GAAP, share option plans give rise to compensation expense
when specified criteria are met. The measurement date and calculation of expense
can be different, giving rise to GAAP adjustments to compensation expense as
well as goodwill amortisation if such options are issued in connection with a
business combination.
Long term contract adjustment
An agreement exists for the sale of equipment which has been installed and
accepted by the customer. Under UK GAAP, these types of arrangements qualify for
long-term contract accounting with revenue recorded based on work performed
under the contract. US GAAP does not permit revenue recognition in those
instances where specific criteria has not yet occurred, and where the obligation
for the customer to pay has not yet fallen due. Accordingly, adjustments arise
due to timing differences for recognition under UK GAAP and US GAAP.
Pension valuation and classification differences
Under both UK GAAP and US GAAP, pension costs are provided so as to provide for
future pension liabilities. However, there are differences in the treatment of
actuarial and curtailment gains and losses which give rise to GAAP adjustments
to the pension costs charged against operating loss. Furthermore, under UK GAAP
the notional interest cost associated with the pension and post-retirement
benefit obligation is classified as interest expense, whereas under US GAAP it
is classified within operating loss.
Goodwill amortisation and impairment charges
Differences in the original value of goodwill recognised on an acquisition
between UK GAAP and US GAAP arise as a result of both differences in the fair
value of net assets acquired and different treatment of certain items, for
example share options, with respect to purchase consideration. Such differences
in the calculation of goodwill result in differences in amortisation expense and
impairment charges recognised for periods up to 31 March 2002. With effect from
1 April 2002, the Company has adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets", and accordingly has
ceased amortisation of goodwill and intangibles under US GAAP.
Loss on sale of businesses
Differences in the loss on sale of a business arise as a result of the
differences in the carrying value of the underlying net assets under UK GAAP and
US GAAP.
Sale and leaseback
Under UK GAAP, a gain is recognised upon the sale, at fair value, of a building
provided the leaseback is classified as an operating lease. However, since the
company is entitled to a share of any future appreciation in the value of the
property, US GAAP classifies the transaction as a financing arrangement and no
gain is recognised.
10 Key rates of exchange for GBP1 sterling used for translation in respect of
overseas subsidiaries, joint ventures and associates
Profit & loss and cash flows Balance sheet rates at 30
average rates to 30 September September
2002 2001 2002 2001
US Dollar 1.5204 1.4320 1.5726 1.4697
Italian Lira N/A 3,153 N/A 3,125
Euro 1.5813 1.6282 1.5913 1.6138
11 This interim statement was approved by the Board on 13 December 2002.
Financial information is presented on the basis of the accounting policies of
the Marconi Group as set out in the Annual Report and Accounts for the year
ended 31 March 2002. The interim results should therefore be read in conjunction
with the Marconi 2002 Annual Report and Accounts.
The results for the six months ended 30 September 2002 are unaudited, but have
been reviewed by the auditors. The interim results and the results for the year
ended 31 March 2002 do not comprise statutory accounts for the purposes of
Section 240 of the Companies Act 1985. The 31 March 2002 comparatives have been
extracted from the Group's published accounts for that period which have been
filed with the Registrar of Companies. The audit report on those accounts was
unqualified and did not contain a statement under Section 237 (2) or (3) of the
Companies Act 1985. Comparative figures have been restated to reflect changes in
presentation.
12 The interim report is available to view online at www.marconi.com or copies
are available from the Company Secretary at Marconi plc, 338 Euston Road,
London, NW1 3BT.
Independent review report by Deloitte & Touche to Marconi plc
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 30 September 2002 which comprises the consolidated profit
and loss account, the summarised group balance sheet, the consolidated cash flow
statement, the reconciliation of net cash flow to movements in net monetary
debt, the consolidated statement of total recognised gains and losses, the
reconciliation of movements in equity shareholders' interests and related notes
1 to 12. We have read the other information contained in the Interim Report and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Directors' Responsibilities
The Interim Report, including the financial information contained therein, is
the responsibility of, and has been approved by the Directors. The Directors are
responsible for preparing the Interim Report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom auditing standards and therefore
provides a lower level of assurance than an audit. Accordingly, we do not
express an audit opinion on the financial information.
Going Concern - fundamental uncertainty
In arriving at our review conclusion, we have considered the adequacy of the
disclosures made in note 1 of the financial information concerning the Group's
current borrowing facilities and ongoing negotiations with its bankers,
bondholders and other creditors. As indicated in note 1, the going concern
assumption is dependent on the Directors reaching a satisfactory resolution of
the re-financing negotiations with the Group's bankers, bondholders and other
creditors and the proposed schemes of arrangement becoming effective and legally
binding. Should the Group's bankers, bondholders and other creditors cease to
support the Group before the completion of the restructuring, or should all of
the conditions for restructuring not be met, the going concern basis of
preparation would no longer be applicable and adjustments to the consolidated
profit and loss account and summarised group balance sheet would be required to
record additional liabilities and write down assets to their recoverable amount.
It is not practicable to quantify these potential adjustments. In view of the
significance of this fundamental uncertainty, we consider that it should be
drawn to your attention.
Review Conclusion
On the basis of our review, we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 September 2002.
Deloitte & Touche
Chartered Accountants
London
13 December 2002
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: 16 December 2002