FKI ANNOUNCES OUTCOME OF STRATEGIC REVIEW
FKI today announces details of the strategic review initiated by Paul Heiden, Chief Executive. The presentation to investors and the financial community, which will be available on the company's website (http://www.fki.co.uk), will set out the background, objectives, process, actions and conclusions of the review as well as providing further insight into the operations of key businesses within the Group.
The strategic review has taken place against a background of depressed markets for many of the Group's products, three years of declining profits and a net debt level of nearly GBP500 million at 31 March 2003, although the Group has continued to operate tight financial controls and generate operating cash flow well in excess of profits. Increasingly, over the last two or three years there have been radical changes in engineering and manufacturing as a result of changing customer requirements, globalization of certain industries and an increase in sourcing from low-cost manufacturing countries. All of this has led to the requirement to identify more competitive business models.
As a result of the review, the company confirms that it will remain a diversified engineering group and will actively manage the strategy and performance of its portfolio of businesses. They will be driven by value-based criteria of which return on invested capital will be the key metric.
Key changes to the way in which the businesses are run will include leading strategy from the center, improved planning, more rigorous risk management, increased emphasis on asset utilization and maximizing the value of the Group as a whole. A more entrepreneurial approach within individual business units will be encouraged and supported by new incentive arrangements. Strong financial controls will remain and the activities of the Group will be progressively simplified.
Five key businesses accounting for about 75% of the company's invested capital have been identified as having a major influence on the development of the Group's portfolio. These are:
Bridon (steel wire rope)
Crosby (lifting components)
Logistex (material handling products and systems)
Brush Electrical Machines (turbogenerators)
Truth and Wright Products (window and door hardware)
The characteristics of these businesses include superior and sustainable market positions within sizeable attractive markets, good brands and world-class technology. These businesses make good returns on invested capital through the cycle and offer growth opportunities.
In addition, three emerging businesses with good medium-term growth potential have been identified:
Bristol Babcock (measurement and control products and systems)
FKI Switchgear (switchgear)
De Wind (wind turbines)
In addition, there are a number of smaller businesses which will continue to be managed to maximise value.
At the interim presentation the strengthening of the balance sheet was highlighted as a key priority in order to provide a firmer financial base from which to evaluate and develop strategic options. The company has identified the potential for GBP110m of cash generation over this and the next three years. Of this amount, GBP45 million has been achieved by closing out interest rate swaps in the first half and GBP20 million from sales of surplus property in the second half of the current financial year. The balance of GBP45 million will largely come from surplus property sales. This amount will be in addition to normal strong free cash flow and the proceeds of any business disposals.
The review identified eight currently loss-making activities with little prospect of being sold, and few opportunities for improvement, which need to be exited as soon as possible. The cash costs of exit of GBP19 million will be covered by the recently generated proceeds from unforecast property sales. The actions taken will enhance future cash flow with a cash payback of three years and eliminate approximately GBP5 million of annual losses (based on 2003/04 forecast performance). These eight operations will have sales in the current year of about GBP50 million. In addition to the cash cost, there will be exceptional book write-offs of GBP20 million and goodwill previously written-off to reserves of GBP10 million will need to be recycled through the profit and loss account as part of the exceptional costs.
The strategic review also identified business units where cash generation does not support the underlying carrying value of the assets employed. Three businesses, which marginally contribute to cash and profit, require asset write-downs of GBP19 million which will be disclosed as exceptional impairments in the profit and loss account. These items have no impact on cash flow.
Four businesses, with turnover totaling GBP90 million and net assets of GBP34 million, have been targeted for disposal and actions are in progress. For commercial reasons the businesses are not being identified at this time.
As a result of identifying surplus assets, a number of property assets have been targeted for sale. As noted above, a number of properties have been disposed of already for GBP20 million and there are further properties with net book values of GBP37 million remaining (including GBP12 million relating to the eight closures above). The sale of these properties will be actively pursued and it is expected that proceeds of about GBP43 million will be realized over the next few years.
A summary of the impact of these exceptional costs of GBP68 million and property profits of GBP11 million, both before tax, on the financial accounts is given in the attached appendix.
Exceptional costs are ignored for the purpose of calculating compliance with banking covenants and therefore management is confident that the company will remain compliant with its banking financial covenants.
Outlook
As stated at the time of the interim report, markets remain difficult and continue to affect performance, and changing exchange rates have also impacted results. Current trading remains difficult, especially in Logistex, where orders continue to be delayed. The recent further weakening of the U.S. dollar is expected to impact full year profit by about GBP5 million and reduce net debt by GBP20 million (using $1.85 = GBP1 compared with $1.66 = GBP1 at 30 September 2003). However, subject to the above, overall operating performance is currently expected to be in line with market expectations.
Summary of Financial Impact of Actions Announced
(excluding disposals and tax)
Profit and loss account for year ending 31 March 2004
_____________________________________________________
All items are exceptional.
2004
H2
GBP million
Business Closures
Cash closure costs - redundancies, etc (19)
Asset write-offs and other non cash items (20)
Write-off goodwill previously written-off to reserves
(10)
Impairment write-down of assets (19)
----------
(68)
Profit on sale of properties 11
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Net impact on profit before interest (57)
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Cash flow and net debt
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31.3.04 31.3.05 Total
GBP million GBP million GBP million
Proceeds of property disposed of in 2003/04
18 2 20
Exceptional cash costs of strategic review
(2) (17) (19)
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Net cash inflow/(outflow) 16 (15) 1
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Consequently net debt expected to reduce by additional GBP16 million at 31.3.04
In addition, in the year ending 31.3.05 there are expected to be further proceeds from disposal of properties in 2004/05