|
Giles Kerr
Finance Director
2002 has proved to be both a challenging and exciting year for
Amersham. We have again shown our resilience to the difficult economic
conditions, posting a solid set of results with good sales growth
and double digit growth in earnings per share. Amersham Health and
the protein
separations business area in Amersham Biosciences have again delivered
strong performance.
In March 2002 we purchased Pharmacia Corp’s 45 per cent shareholding
in Amersham Biosciences for £704 million, taking Amersham’s ownership
of the business to 100 per cent. This represents a significant development
for Amersham and completes the merger process started in 1997. For
the first time we have the opportunity to share fully our managerial
skills and technical competence across the whole of Amersham. The
purchase was financed by the proceeds of an issuance of 57.5 million
new shares, which generated £397 million, together with existing
cash resources and drawings under our committed bank facilities.
The transaction has had a small accretive impact on earnings in
the year.
Following the purchase of Pharmacia Corp’s 45 per cent stake in
Amersham Biosciences our net debt is £182 million at 31 December
2002, up from £25 million last year end, but down from the £259
million reported at 30 June 2002.
We continue to assess the performance of the business on a like
for like basis with the impact of exceptional items, goodwill amortisation,
foreign exchange and disposed businesses removed.
Sales during 2002 were £1,618 million, up seven per cent at constant
exchange rates, excluding the impact of disposed businesses. The
sales growth was broadly distributed across both businesses, with
Amersham Health up eight per cent on last year and Amersham Biosciences
up by six per cent. Our businesses continue to benefit from the
geographical breadth and robustness of their market positions. Within
Amersham Health the patented product portfolio achieved over 20
per cent growth. Within Amersham Biosciences, protein separations
sales grew by 15 per cent with sales accelerating through the year.
Sales in discovery systems fell by one per cent, with the challenging
conditions seen in the life sciences industry impacting in particular
on instrument sales, which were down significantly on 2001, whilst
sales of consumables and reagents remained good.
Operating profit before exceptional items and goodwill amortisation
was £310 million, seven per cent higher than last year. Following
a number of years of significant increases in R&D investment, we
have reduced our R&D expenditure growth to six per cent to match
more closely the general growth in the business. This continued
investment in R&D reflects our strong commitment to the development
of the product portfolio. In Amersham Health there have been new
initiatives in life cycle projects, partnerships and in-licensing,
as well as internal research and development. In Amersham Biosciences,
the rate of growth in R&D was lowered to three per cent following
significant investment in discovery systems over the last three
years. The total operating profit before R&D costs, exceptional
items and goodwill amortisation was £494 million, also up by seven
per cent from last year.
Interest costs have been reduced this year as the net debt has
been held in currencies with lower interest rates. We have also
taken a charge of £2.4 million against the carrying value of listed
investments following a reduction in their market value during the
year. We hold a small number of equity positions in companies with
which we have collaboration agreements, with the total value of
our listed trade investments standing at £6 million at the year
end.
Profit before tax was £300 million before exceptional items and
goodwill amortisation, up from £279 million in 2001. The impact
of foreign exchange, after hedging, in the year was neutral when
compared to 2001. Profit before tax including exceptional items
and goodwill amortisation was £264 million, down from £314 million
in 2001. Goodwill amortisation increased by £25 million in 2002
and in 2001 there were net exceptional credits of £47 million.
In 2002 we have recognised as an exceptional item a deferred tax
asset of £9.2 million, relating to the utilisation of prior period
tax losses following the formation of a consolidated tax group in
the US. In 2001, we realised a pre-tax exceptional profit of £47
million. Included within the £47 million is £55 million profit generated
by the sale in September 2001 of our remaining 29 per cent stake
in Nycomed Pharma. Exceptional operating costs incurred in 2001
totalled £9 million and these are analysed in note
3 to the financial statements (PDF).
The group’s tax rate, before exceptional items and goodwill amortisation,
was 31.4 per cent (35.8 per cent after goodwill amortisation). Following
the introduction of FRS 19 ‘Deferred Taxation’ during 2002, the
2001 tax charge has been restated to 34.7 per cent (previously 33.1
per cent). The 3.3 per cent reduction in effective tax rate reflects
the tax efficiencies derived following the purchase of the minority
stake in Amersham Biosciences and the favourable settlement of a
number of prior year items, which contributed approximately 1.1
per cent to the reduction.
Earnings per share were 29.9p before exceptional items and goodwill
amortisation, compared with 26.6p last year (restated to reflect
the impact of FRS 19 ‘Deferred Taxation’ on EPS), representing a
growth of 12 per cent at actual exchange rates and 15 per cent at
constant exchange rates. The average number of shares increased
from 634.4 million to 684.7 million, primarily as a result of the
issue of shares to finance the minority stake acquisition in Amersham
Biosciences. Overall, basic earnings per share, after exceptional
items and goodwill amortisation, have decreased from 33.2p (as restated
following the introduction of FRS 19) in 2001 to 26.1p in 2002.
We paid an interim dividend of 2.65p per share and the Board is
recommending a final dividend of 5.15p per share, bringing the total
dividend to 7.80p for the year, an increase of ten per cent. This
is in line with our policy of growing dividends progressively in
line with earnings providing dividend per share cover does not fall
below three times or exceed four times. Given that exchange rate
fluctuations often have a significant and unpredictable impact on
our results, it has also been part of our policy to grow dividends
in line with the underlying growth rate in earnings rather than
actual earnings including exchange effects.
During 2002 we implemented Financial Reporting Standard (FRS) 19
‘Deferred Taxation’, and have included the further relevant disclosure
requirements of FRS 17 ‘Retirement Benefits’.
Prior to implementing FRS 19 provision was made for deferred taxation,
using the liability method, on all material timing differences to
the extent that it was probable that a liability or asset would
crystallise. Following the implementation of FRS 19, liabilities
will be recognised for most types of timing differences regardless
of whether they are anticipated to reverse in the foreseeable future.
Deferred tax assets will be recognised to the extent that it is
more likely than not they will be recoverable. The introduction
of FRS 19 has not had any significant impact on the group’s balance
sheet. We have however restated the effective tax charge for 2001
to take account of the new accounting standard, increasing last
year’s effective tax rate from 33.1 per cent to 34.7 per cent and
reducing 2001 earnings per share before exceptional and goodwill
amortisation from 27.2p to 26.6p.
FRS 17 will change the way that companies account for pensions
and other retirement benefits. During 2002 the introduction of the
standard was deferred until accounting periods ending after 1 January
2005. However, the transition disclosure period has been extended
until this time and so there are further new disclosures required
for the first time in 2002, which are contained in note
29 to the financial statements (PDF). In common with many of
our peer companies, the fall in equity markets has had a significant
impact on our net liability under FRS 17, which has increased from
£24 million to £127 million taking into account provisions we have
on our balance sheet for pensions, primarily for unfunded plans
in territories where it is not normal practice to have funded arrangements.
This level of net liability, while significant, can be managed comfortably
within the liquidity of the group going forward. Had we adopted
FRS 17 in 2002, then the charge would have been broadly the same
as under the current accounting standard SSAP 24. It should also
be noted that the net liability required to be disclosed under FRS
17 is not necessarily the basis on which the funding decisions of
the pension plans within the group are made. In particular, the
triennial valuation of the company’s UK plan will be made in 2003
and we expect the outcome of the valuation to be adopted in 2003.
|
2002 |
|
2001 |
|
| |
£m |
|
£m |
|
 |
| Cash flow from operations before |
|
|
|
|
| exceptional items |
346 |
|
342 |
|
|
| Capital expenditure and investments |
|
|
|
|
| (prior to disposal of Nycomed Pharma) |
(152 |
) |
(106 |
) |
| Asset disposals |
3 |
|
22 |
|
| Dividends received,taxation and interest |
(58 |
) |
(54 |
) |
|
| Free cash flow |
139 |
|
204 |
|
| Disposal of Nycomed Pharma (net of costs) |
(3 |
) |
118 |
|
| Acquisitions |
(749 |
) |
(4 |
) |
| Exceptional items |
– |
|
12 |
|
| Shares issued |
408 |
|
16 |
|
| Equity dividends paid |
(52 |
) |
(42 |
) |
| Other |
8 |
|
– |
|
|
| Cash flow before (drawdown)/repayment |
|
|
|
|
| of debt |
(249 |
) |
304 |
|
|
Whilst cash flow in 2002 is lower than in the particularly strong
year of 2001, cash flow from operations before exceptional items
was slightly higher than in 2001, resulting from profit growth offset
by additional working capital through the building of inventories
in Amersham Health. Amersham continues to generate operating cash
in excess of operating profits. Capital expenditure has been increased
in 2002 with a large investment in manufacturing capacity in Amersham
Health. Asset disposals in 2001 included the cash realisation on
the sale of the group’s US research facility (TARC). Tax paid was
lower in prior periods due to the availability of tax credits which
reduced the payments required, but there were lower interest payments
in 2002. Overall free cash flow is therefore £65 million lower than
in 2001.
Acquisitions include the £709 million (including costs) paid to
purchase the 45 per cent holding in Amersham Biosciences. There
are also a number of other acquisitions that are detailed in note
24 to the financial statements (PDF) which make up the £40 million
balance of acquisitions. These relate primarily to the acquisition
of new technologies in filtrations, informatics
and the CodeLink™ arrays. The company issued 57.5 million new shares,
to help finance the purchase of the 45 per cent minority holding
in Amersham Biosciences.
Net cash outflow before repayment of debt was £249 million, compared
to a cash inflow of £304 million in 2001. With the purchase of the
minority holding in Amersham Biosciences partially financed by using
existing cash resources and drawings under committed bank lines,
net debt at 31 December 2002 is £182 million. This is reduced from
the net debt of £259 million reported at 30 June 2002. Net debt
is £92 million lower as a result of exchange movements following
the significant weakening of the US dollar in which we have borrowings
and the strengthening of the Norwegian krone in which we have monetary
assets.
The cash flow generated by our businesses is analysed in the following
table:
|
2002 |
|
2001 |
|
| |
£m |
|
£m |
|
|
| Business cash flows |
|
|
|
|
| Amersham Health |
142 |
|
175 |
|
| Amersham Biosciences |
51 |
|
91 |
|
| Corporate |
(54 |
) |
(62 |
) |
|
| Free cash flow |
139 |
|
204 |
|
|
Amersham Health continues to provide good solid cash flow for the
group. Cash generation this year was £33 million lower than in 2001
after building inventory and increasing capital expenditure to expand
manufacturing capacity and support our strategy of packaging differentiation.
Amersham Biosciences’ cash flow is lower in 2002, following an increase
in working capital from a low base in 2001 and a modest growth in
capital expenditure. Corporate cash flow includes interest and taxes
paid and the dividend received from the NMP joint venture.
Our treasury activities are co-ordinated and managed by the group
treasury department in accordance with policies approved by the
Board. These policies are reviewed regularly and have not changed
significantly over the past year. The department operates under
close management supervision and is subject to review by the risk
and operational review department. It does not operate as a profit
centre and no speculative transactions are undertaken.
The group uses financial instruments, primarily forward foreign
exchange contracts and interest rate swaps, in the management of
currency and interest rate exposures. Clear procedures have been
established, including levels of authority, regarding the type and
use of financial instruments to manage these exposures. The Board
has approved these procedures. The group controls credit risk by
entering into transactions involving financial instruments only
with authorised counter-parties of strong credit quality. Counter-party
positions are monitored regularly.
Group treasury manages the group requirement for debt funding. The
group finances its operations through a variety of instruments and
maturities. In general, subsidiaries’ borrowing requirements are
funded by loans from group treasury, except where precluded by local
regulations. In February 2002 the company entered into a new $750
million syndicated bank facility committed to February 2007. In
March the company issued 57.5 million ordinary shares at 700 pence
each, raising £397 million after expenses. The principal borrowings
during the period were $193 million (£123 million) of private placement
loan notes and drawings under the new revolving bank credit facility.
At 31 December 2002, the group had net debt of £182 million and
undrawn committed facilities of £404 million.
The group’s interest charge is exposed to movements in interest
rates as well as debt levels. We maintain a policy of holding between
30 and 70 per cent of debt at fixed rates. The group uses currency
and interest rate swaps to manage its interest rate exposures on
debt and cash positions. The interest rate profile of the group
is shown in note 20
to the financial statements (PDF). At 31 December 2002, after
taking into account interest rate swaps, 45 per cent of debt was
at fixed rates. The average maturity of this fixed rate debt was
1.5 years.
The group’s manufacturing activities and costs are concentrated
in a small number of countries, primarily the US, Norway, Sweden
and the United Kingdom. Sales income is spread more widely.Overall
we have net income in US dollars, euros and Japanese yen and net
costs in sterling, Swedish kronor and Norwegian kroner.
The group’s principal financial exposures are to movements in currency
exchange rates. These comprise transaction exposures arising from
currency cash flows and translation exposures arising from the conversion
of the results of foreign subsidiaries. Transaction exposures are
hedged on a rolling six-month basis, primarily by forward foreign
exchange transactions. In addition, where sterling has deviated
significantly from its long-term purchasing power parity rates,
strategic hedging is undertaken for periods of up to three years.
We took advantage of the strength of the US dollar in the early
months of the year, by selling forward a proportion of our anticipated
US dollar income for the next three years in accordance with our
strategic hedging policy.Translation exposures on the net monetary
assets of foreign subsidiaries are generally hedged by borrowings
and deposits with group treasury. An analysis of net monetary assets
by functional currency is shown in note
20 to the financial statements (PDF). Translation exposures
on the results of foreign subsidiaries are not hedged. Equity investments
in certain subsidiaries and associated companies are hedged by financial
instruments in the currencies of those investments.
During 2002, reported sales growth in sterling was adversely impacted
by the weakening of the dollar and the yen against sterling, but
the impact on reported profit before tax was neutral as a result
of the currency hedging programme. Assuming current rates of exchange
prevail for the remainder of 2003, there will be an adverse impact
on Amersham’s sales of £40 million and on profit before tax of £30
million.
Giles Kerr Finance Director
|
