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telent plc: Unaudited results for the six months ended 30 september 2007London – 23 November 2007 – telent plc (LSE: TLNT) today announced results for the six months ended 30 September 2007.
Notes: 1 ‘Trading Activities’ comprise the results of our Continuing Operating segments - Telco Services and Enterprise Services. 2 Representing operating profit before exceptional items, liability management costs (see page 4) and share option costs (see reconciliation to ‘Operating profit from Continuing Operations’ on page 3).
Recommended Cash Offer by Pension Corporation It was announced on 25 September 2007 that the Board of telent and Co-Investment No. 5 L.P. Incorporated (“CILP”) a limited partnership whose general partner is advised by Pension Corporation LLP (“Pension Corporation”) had reached agreement on the terms of a recommended cash offer by CILP to acquire the whole of the issued and to be issued share capital of telent at a price of 600 pence per share. The offer document was posted to telent shareholders on 2 October 2007. On 15 November 2007, CILP declared the offer unconditional in all respects. As at 3.45 pm on 15 November 2007, CILP had received valid acceptances in respect of a total of 40,586,442 telent shares, representing approximately 91.90 per cent. of telent's issued share capital to which the Offer relates. CILP has become entitled to acquire compulsorily the remaining telent shares pursuant to the Companies Act 2006 and it intends to exercise that right shortly.
Overview We recorded broadly stable revenues (30 September 2007: £149 million; 30 September 2006: £147 million) and adjusted operating profit from Trading Activities (30 September 2007: £11 million; 30 September 2006: £11 million) during the first half of the year, despite challenging conditions in some of our main market sectors. In Germany, we experienced a slowdown in spending by our major Utility customers, while in the UK, our Telco Services business was impacted by lower than expected levels of next generation network build activity. Our UK Enterprise Services business has had a good start to the financial year with major order wins (including Firelink maintenance, FiReControl, South West Trains and Northern Line contract extension – see Contract Wins below) and strong revenue growth particularly in our Emergency Services and Rail sectors. Further significant contract opportunities are in the pipeline. We continue to make good progress in liability management, with the further reduction of some 39 legal entities achieved in the first half of the year and one-off legacy income contributing to Group profit in the period. As previously disclosed, we completed the disposal of our German facility, retained post completion of the Ericsson transaction in 2006, for cash proceeds and profit on disposal of £15 million respectively. Group cash, excluding UK Pension Escrow was £253 million (31 March 2007: £235 million), including £25 million of restricted cash balances (31 March 2007: £34 million). At 30 September 2007 the UK Pension Escrow amounted to £514 million (31 March 2007: £514 million), comprising primarily Sterling corporate bond investments of £506 million and cash deposits of £8 million. Further details are provided under Cash (see page 10).
Contract Wins In the six months ended 30 September 2007, we were awarded a number of new contracts, as well as extensions to existing long-term maintenance contracts. We were awarded, successively, two multi-million three-year contracts to support COLT customers’ telecommunications IT infrastructure. The first contract was awarded in the UK in May 2007, and the second in Germany in August 2007. These both involve telent employing engineers from COLT’s existing staff alongside its own field engineers. The combined workforce is now planning, installing, supporting and maintaining customer communications systems across a multitude of networking platforms. In the Emergency Services sector, we booked the award by EADS in September 2007 of a £25 million eight-year contract to design and install state-of-the art equipment in the English Fire & Rescue Service’s Regional Control Centres and 1,440 fire stations, in the framework of the FiReControl project. Further options on the existing contract, which includes ongoing maintenance and support, are currently under discussion. We have also received further orders totalling approximately £8 million under our contract to support deployment of the Airwave Tetra Radio Communication System as part of the National Firelink Programme. Announced in September 2007, the extension brings the total value of telent ’s framework contract, which will run until December 2016, to £29 million. In September 2007, we were awarded our first contract by a train operating company - Stagecoach’s South West Trains. Under the three-year contract, worth over £1 million a year, telent will provide maintenance and support for South West Trains’ stations and control rooms. In July 2007, an existing contract with ALSTOM to maintain communications systems on London Underground’s Northern Line was extended by five years. Valued at £8 million, the contract extension involves pro-active maintenance on train-to-track CCTV, train and station radio and data systems, alongside management of logistics and asset monitoring.
Financial Review A summary of the key financial results for our two main operating segments – Telco Services and Enterprise Services - is set out in the table below and discussed in this section. A detailed review of our segmental operations is included in Segment Review on page 5 . Key Financials
Revenues Revenues amounted to £149 million in the six months ended 30 September 2007 compared to £147 million in the previous year. Revenues in our Telco Services business remained stable at £89 million while revenues in our Enterprise business were up £2 million to £60 million, with reduced volumes in Germany more than offset by good growth in the UK. See Segment Review on page 5 for further details.1 Representing operating profit before exceptional items, liability management (see page 4) and share option costs. 2 See note 4 to the non-statutory accounts. 3 See note 5 to the non-statutory accounts.
Profit Group profit for the period amounted to £48 million (30 September 2006: £12 million) and comprised operating profit from Continuing Operations of £31 million (30 September 2006: £8 million loss) and investment income of £91 million (30 September 2006: £84 million), partially offset by finance costs of £70 million (30 September 2006: £72 million) and a tax charge of £4 million (30 September 2006: £5 million credit). The £36 million improvement in Group profit compared to the previous year (30 September 2006: £12 million) was driven by three main factors: i) exceptional profit of £17 million compared to an exceptional charge of £14 million in the previous year; ii) £4 million profit recorded from liability management activities compared to a £5 million charge in the previous year; and iii) increased investment income. Adjusted operating profit from Trading Activities 1 remained stable at £11 million. Overall, Business Unit contribution (defined as gross profit and direct Business Unit costs) was broadly in line with the level recorded in the previous year. Operating cost reductions achieved across central functions were largely offset by a reduction in rental income following completion of the disposal of our facility in Germany and the impact of higher IT costs due to discounts received on our outsourced IT services in the first half of the previous financial year. See Segment Review on page 5 for further details. Share option costs amounted to £1 million. The £nil million charge for share options in the previous year comprised a £3 million charge offset by a £3 million credit in respect of option lapses. We recorded a profit from liability management activities of £4 million, as the costs associated with our ongoing Legal Entity Rationalisation programme were more than offset by legacy income, particularly in relation to a previously completed UK property transaction and the wind-down of legacy operations in the Middle East. In addition, we recorded approximately £2 million of foreign exchange gains on legacy intercompany trading balances retained within the Group compared to a £3 million foreign exchange loss in the previous year.
Exceptional items within Continuing Operations amounted to a net credit of £17 million compared to a net charge of £14 million in the previous year. The £17 million credit arose mainly upon completion of the disposal of our facility in Germany (£15 million comprising the net proceeds on disposal and the release of a rental prepayment previously held on the balance sheet). In addition, we closed the remaining legacy US post-retirement benefit plan during the period and recorded an actuarial settlement gain of £1 million. The £14 million charge in the previous year mainly comprised a settlement loss on the annuity purchase of a legacy US pension plan (£9 million) and professional fees associated with the proposed scheme of arrangement by Holmar Holdings, which lapsed in August 2006 (£4 million). Investment income of £91 million (30 September 2006: £84 million) principally comprised an expected return on pension scheme assets of £71 million and interest received on the UK Pension Plan Escrow of £14 million. Interest income on Group cash balances amounted to £6 million. The increase in investment income compared to the previous year arose mainly as a result of the higher value of the Group’s cash and investments as well as improved interest rates. Finance costs of £70 million (30 September 2006: £72 million) related mainly to notional interest on pension scheme liabilities. We recorded a tax charge for the period of £4 million. This was partly due to tax payable in Germany on the disposal of our German facility (£2 million) and partly due to the restatement of the deferred tax asset recognised at 31 March 2007 (£2 million) due to reductions in the rates of corporate tax in the UK and Germany, see Note 9 to the non-statutory accounts. The £5 million tax credit in the previous year related to the release of tax provisions upon the successful conclusion of certain legacy tax issues. 1 See reconciliation to ‘Operating profit from Continuing Operations’ on page 3.
Segment Review The results of our operating segments within Continuing Operations, Telco Services and Enterprise Services, are set out below. This includes each segment’s share of the Group’s corporate costs. Telco Services
Revenues from Telco Services remained stable at £89 million, despite slower than expected levels of next generation network build activity during the period. The resulting reduction in Installation and Commissioning (I&C) volumes compared to the previous year was offset by increased revenues from External Networks (formerly Infrastructure Services) and System X. The increase in External Networks was due to the onset of a new activity for BT Openreach in the field of heavy cable recovery, where we are providing services to recover redundant cables from Openreach’s network in Birmingham, London and Eastern areas. Revenues from System X support and maintenance contracts have begun to decline as expected, but this was more than offset during the first half by deliveries under a customer order for additional equipment supply, previously announced. The main customers of our Telco Services segment are UK telecommunications operators and equipment vendors including (in alphabetical order) BT, Cable & Wireless, Easynet, Ericsson, Thus and Virgin Media. BT remains our largest customer and accounted for 38% of our revenues for the six months ended 30 September 2007 (30 September 2006: 37%). We successfully concluded our contract negotiations with COLT and were awarded two three year contracts to support COLT customers' telecommunications IT infrastructure in the UK and Germany. Adjusted operating profit from Telco Services improved by £3 million to £11 million in the first half of the year. We took immediate action to stem the impact of lower I&C volumes by reducing the level of sub-contract labour employed within our UK fieldforce and by announcing restructuring measures in our Midlands-based Contract Marshalling Centre and these measures are ongoing. The improvement in profit compared to the previous year was driven primarily by the increase in System X equipment deliveries. 1 See reconciliation to ‘Operating profit from Continuing Operations’ on page 3.
Enterprise Services
Revenues from Enterprise Services improved by £2 million to £60 million, with reduced revenues in Germany and the UK Roads sector more than offset by strong growth in the UK Emergency Services and Rail sectors. In Germany, revenues were impacted by capital expenditure constraints amongst major German Utility customers as well as the completion of major re-signalling projects in the previous year, which has resulted in reduced revenues in the German Rail sector. In the UK, we have seen a reduced level of additional-to-contract works in the Roads sector after a particularly high level of activity in the previous year. This however, has been more than offset by strong growth in our Emergency Services business, as we ramp up activity under our recently awarded contracts with Airwave (Ground-Based Network Resilience and National Firelink projects), as well as a significant increase in re-signalling projects for Network Rail. The main customers of our Enterprise Services segment are (in alphabetical order) ADC Krone, Airwave, ALSTOM, Anglian Water, Deutsche Bahn, Highways Agency, Mersey Fire & Rescue Service, Network Rail, RWE, Tube Lines and Westinghouse. In September 2007 we booked a major new contract with EADS to support the FiReControl project with a value of £25 million as well as our first contract with South West Trains for maintenance and support over three years at £4 million. We also secured additional works of £8 million under our Firelink contract for Airwave and extended an existing contract with ALSTOM to maintain communications systems on London Underground's Northern Line. Adjusted operating profit from Enterprise Services dropped from a profit of £3 million to £nil million in the period. This was largely due to the one-off benefit of contract accrual releases (£2 million) recorded and disclosed in the first half of the previous financial year. Profitability in the Enterprise sector was also impacted by i) under-recoveries in Germany due to the lower business volumes - management has now agreed action plans to address this issue during the second half of the year and ii) growth in revenues under a previously disclosed loss-making contract - good progress is being made to address contract delays and to reach commercial settlement with our customer. In addition, we are investing in the future growth of our Enterprise sector, particularly in the UK, with the recruitment of additional resource and the recent opening of a new Network Services Centre in London’s Docklands area. 1 See reconciliation to ‘Operating profit from Continuing Operations’ on page 3.
Balance Sheet Our balance sheet at 30 September 2007 can be summarised as set out in the table below.
Group Net Assets increased by £80 million to £730 million during the first six months of the financial year. The main movements in balance sheet items related to:
Pensions and Other Retirement Benefits IAS 19 valuation at 30 September 2007 Our net pension scheme deficit as at 30 September 2007 amounted to £14 million (31 March 2007: £65 million) comprising a £48 million surplus in our UK Pension Plan and liabilities of £62 million relating entirely to the un-funded legacy pension liabilities we have retained in our German business. Actuarial assessments of our defined benefit pension scheme liabilities and valuation of our pension scheme assets in accordance with IAS 19 were undertaken as at 30 September 2007. The movements in the Group net pension scheme deficit since 31 March 2007 are summarised in the table below:
The key elements of the net actuarial gain were as follows:
The assumptions set for the IAS 19 valuations were subject to a full review as at 31 March 2007 and the basis for setting these assumptions has remained consistent as at 30 September 2007. The principal assumptions for the UK Pension Plan are set out in the table below:
The life expectancy basis adopted assumes that males currently aged 65 would expect to live to 84, and females to 85. Full details of the assumptions adopted are set out in Note 19 to the non-statutory accounts. The £48 million loss on assets in the UK Pension Plan was a result of changes in investment market conditions. The investment strategy seeks to protect the Plan by substantially matching movements in the value of assets and the value of liabilities. Accordingly, there was also a net fall in the value of liabilities. A 17 basis point increase in the UK inflation rate assumption from 2.90% to 3.07% and in the UK pension increase assumption for pensions in payment from 2.80% to 2.97% resulted in a net loss of £55 million, recorded through the SORIE. A 52 basis point increase in the discount rate assumption from 5.37% to 5.89% has led to a gain of £171 million, recorded through the SORIE. The impact of the movements in all assumptions has driven the UK Pension Plan into a £74 million surplus position. IAS 19 (paragraph 58b) restricts the surplus that can be recognised in the consolidated accounts to the present value of the economic benefit available to the Group. Therefore, a loss of £26 million has been recognised within the SORIE to affect the asset ceiling as required. Service costs, plan contributions, benefit payments and net finance income have been recognised in accordance with the actuarial assumptions set at the beginning of the year and published as at 31 March 2007. During the six months, the Group terminated its remaining US post-retirement medical benefit plan, which resulted in a settlement gain of £1 million.
Cash Cash and cash equivalents as at 30 September 2007 amounted to £ 261 million compared to £749 million at 31 March 2007 and £702 million at 30 September 2006. This includes restricted cash balances as follows:
The single largest movement in our cash balances during the period related to the transfer of the majority of the cash held in an escrow account owned by telent but secured in favour of the Trustees of our UK Pension Plan (“UK Pension Plan Escrow”), from cash deposits to the purchase of primarily UK sterling corporate bond investments. These are now recorded as “available for sale investments”, marked to market at each balance sheet date and the coupon interest received is re-invested. At 30 September 2007, the total value of the UK Pension Plan Escrow amounted to £514 million (31 March 2007: £514 million) and comprised bond investments of £506 million and cash holdings of £8 million. The bonds are invested through three investment managers whose performance is measured against the IBoxx Sterling Non-Gilt Index. Performance was achieved in line with this benchmark index during the period. Given the recent volatility in the UK credit market, this caused an unrealised loss of £14 million to be charged against Group reserves. See Note 17 to the non-statutory accounts. Excluding cash held in the UK Pension Plan Escrow, Company cash amounted to £253 million at 30 September 2007 (31 March 2007: £235 million; 30 September 2006: £201 million). We made further progress during the first six months of the financial year in releasing previously restricted balances relating to collateral held against bonding facilities and amounts deposited in a High Court escrow account for the protection of creditors not included within the Scheme of Arrangement as part of the Group’s financial restructuring in 2003.
Cash Flow The following table sets out a summary of the £489 million net cash outflow recorded during the first six months of the financial year. This comprised a net £506 million outflow relating to the UK Pension Plan Escrow account (being the net impact of the purchase of corporate bond investments and the receipt of coupon interest described above) and a net cash inflow of £17 million relating to other Company cash balances. The table separates out the cash flows from our ongoing trading activities from those cash flows relating to exceptional items and liability management activities.
Operating cash inflow from Trading Activities was £8 million (before capital expenditure of a further £1 million) giving cash conversion from adjusted operating profit from Trading Activities of 64%. Operating cash flows utilised within our liability management activities related primarily to costs associated with our ongoing Legal Entity Rationalisation programme (£6 million) and the payment of the administration costs relating to our UK Pension Plan (£2 million). Exceptional cash spend of £3 million related mainly to costs associated with legacy restructuring programmes and litigation. The net cash outflow from investing activities related primarily to the purchase of and interest received on sterling corporate bond investments held in the UK Pension Plan Escrow, described on page 10. In addition, we received cash proceeds of £15 million upon completion of the disposal of our facility in Backnang, Germany. Interest received on Company cash balances (excluding UK Pension Plan Escrow) amounted to £6 million. See reconciliation to ‘Operating profit from Continuing Operations’ on page 3.
Financial risks As part of its ordinary activities, telent is exposed to a number of financial risks, including liquidity risk, credit risk, foreign exchange risk and insurance risk management. Other risks and uncertainties As a service company with a large field force working in challenging environments there are a number of other risks and uncertainties that could have an impact on our future performance. These include the following. Market telent is a major supplier of telecommunications services to a number of large customers. A shift in customer strategy towards in-sourcing of their telecommunications services could have a significant impact on our business. We therefore focus on diversity both within our market sectors and customers within the sector, offering a range of services from more basic services right through to more complex and sophisticated services. It is unlikely that such a significant change would be realised across this diverse group of sectors or services within a sector. We also regularly monitor our competitors’ positioning and approach to ensure we remain current and cost competitive. Operational telent operates in a number of demanding environments, including tube and main line railways, highways, motorways and customer telephone exchange buildings. We have a field force working 24 hours per day, sometimes using sophisticated heavy equipment. Safe working practices are extremely important to protect everyone affected by our activities. We have highly developed quality and safety processes within our business and are regularly audited by professional bodies and our customers, where specifically necessary. We have long established working practices and controls to minimise the risks of injury and damage to property and carry appropriate insurance to mitigate the potential financial impact associated with these risks.
Responsibility statement We confirm that to the best of our knowledge:
By Order of the Board Heather Green Chief Financial Officer 23 November 2007 Enquiries: tel: +44 (0) 20 7936 9604; email: press.enquiries@telent.com Monica Coull tel: +44 (0) 20 7005 6260; email: press.enquiries@telent.com
Important Notice This report is prepared under International Financial Reporting Standards (IFRS) adopted by the European Union and therefore complies with Article 4 of the EU IAS Regulations. Forward Looking Statements It is possible that this announcement could or may contain forward-looking statements that are based on current expectations or beliefs, as well as assumptions about future events. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements often use words such as anticipate, target, expect, estimate, intend, plan, goal, believe, will, may, should, would, could or other words of similar meaning. Undue reliance should not be placed on any such statements because, by their very nature, they are subject to known and unknown risks and uncertainties and can be affected by other factors that could cause actual results, and telent's plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. There are several factors which could cause actual results to differ materially from those expressed or implied in forward looking statements. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are delays in obtaining, or adverse conditions contained in regulatory approvals, competition and industry restructuring, changes in economic conditions, currency fluctuations, changes in interest and tax rates, changes in energy market prices, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, technological developments, the failure to retain key management, or the key timing and success of future acquisition opportunities. telent undertakes no obligation to revise or update any forward looking statement contained within this announcement, regardless of whether those statements are affected as a result of new information, future events or otherwise, save as required by law and regulation.
About telent plc: telent plc supplies a broad range of telecommunications and IT network services to enterprises, equipment vendors, public sector organisations and network operators in the UK, Ireland and Germany, leveraging its accumulated knowledge of customers’ networks, its expert field force, its scale and reputation for quality. Formerly the UK and German services business of Marconi Corporation plc, the Company was renamed telent plc in January 2006 on the sale of the telecommunications equipment and international services businesses to Ericsson. The Company is listed on the London Stock Exchange under the symbol TLNT. Additional information about telent plc can be found at www.telent.com Copyright © telent plc 2007. All rights reserved. All brands and product names and logos are trademarks of their respective holders.
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