FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of May 2005 Commission File Number: 1-14836 ALSTOM ------ (Translation of registrant's name into English) 3, avenue André Malraux, 92300 Levallois-Perret, France ------------------------------------------------------- (Address of principal executive offices) Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F Form 20-F X Form 40-F ----- ----- Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): Yes No X ----- ----- Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): Yes No X ----- ----- 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 ----- ----- If "Yes" is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b)Enclosures: Press release dated May 16, 2005, "ALSTOM and Dongfang Electric Win Ling AO Phase 2 2000 MW Steam Turbine-Generator Package Order" Press release dated May 24, 2005, "ALSTOM and LØGSTØR RØR Sign an Agreement for the Sale of ALSTOM's Flowsystems Business" Press release dated May 31, 2005, "Full Year Results 2004/05 (1st April 2004 - 31st March 2005)" Consolidated Financial Statements for Fiscal Year 2004/2005 Management Discussion and Analysis on Consolidated Financial Statements dated March 31, 2005. SIGNATURE 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. ALSTOM Date: June 3, 2005 By: /s/ Henri Poupart-Lafarge ----------------------------------- Name: Henri Poupart-Lafarge Title: Chief Financial Officer
16 May 2005 ALSTOM AND DONGFANG ELECTRIC WIN LING AO PHASE 2 2000 MW STEAM TURBINE-GENERATOR PACKAGE ORDER This strengthens the Company's position in China's nuclear conventional island market ALSTOM has won a contract worth more than €80 million with Dongfang Electric Group Corporation (DEC) for its part in the supply of two 1000 MW Arabelle steam turbine and generator packages for phase II of construction at Ling Ao nuclear power station, run by China Guangdong Nuclear Power Corporation (CGNPC), in Shenzhen, China. This partnership reinforces the leadership position of ALSTOM and its technologies in China's nuclear conventional island market. It is the third significant nuclear power contract ALSTOM has won in China in recent years. Previously, the company has recorded two major contracts for the supply of Daya Bay and Ling Ao nuclear power stations. ALSTOM's Arabelle steam turbine is the only state-of-the-art, proven technology covering 1000 MW to 1800 MW range. Its configuration gives high overall efficiency, extended design lifetime, short overhaul periods, and low maintenance costs. Arabelle can operate with any type of nuclear island configuration. ALSTOM is the world's No.1 supplier of nuclear steam turbines and generators. With over 40 years' experience and 175 units installed in more than 12 countries, ALSTOM technology is present in over a third of the world's total installed nuclear capacity. Winning of the Ling Ao Phase II project builds on ALSTOM's successful execution of Ling Ao Phase I project. As the design and supply contractor for the two units of the Phase I project, ALSTOM contributed to the commercial inauguration of Unit 1 and the Unit 2 in 2002, respectively 48 days and 66 days earlier than the dates specified in the contract. Philippe Joubert, President of ALSTOM's Power Turbo Systems and Power Environment Sectors, said : "ALSTOM is very pleased to be chosen by our Chinese partner and customer to serve this key project in China's programme of nuclear power generation. It confirms ALSTOM's position as a key worldwide player and technology leader in conventional islands for nuclear power plants and its commitment to participate, alongside Chinese partners, to the ambitious development of power generation in China."Press relations: G. Tourvieille / Séverine Gagneraud (Tél. +33 1 41 49 27 13 / 27 40) internet.press@chq.alstom.com Investor relations: E. Chatelain (Tél. +33 1 41 49 37 38) Investor.relations@chq.alstom.com
24 May 2005 ALSTOM AND LØGSTØR RØR SIGN AN AGREEMENT FOR THE SALE OF ALSTOM'S FLOWSYSTEMS BUSINESS ALSTOM and LØGSTØR RØR Holding A/S have signed an agreement regarding the sale of ALSTOM's Flowsystems business to LØGSTØR. ALSTOM's Flowsystems Business is headquartered in Fredericia (Denmark) and has units in Sweden, Poland, Finland, Lithuania, Germany, Austria, France, Italy and Holland. FlowSystems is currently part of ALSTOM's Power Service Sector. This operation is subject to its approval by the relevant competition authorities and therefore closing could be anticipated before the end of June. Flowsystems manufactures and sells insulated pipe systems for district heating to approximately 40 countries and recorded sales of €150 million in 2004/05, mainly in Northern and Central Europe. It employs approximately 600 persons. LØGSTØR manufactures and sells similar products and is headquartered in Løgstør (Denmark). Press relations: S. Gagneraud / G. Tourvieille (Tél. 01 41 49 27 40) internet.press@chq.alstom.com Investor Relations: E. Châtelain (Tél. 01 41 49 37 38) investor.relations@chq.alstom.com
PRESS INFORMATION 31st May 2005 FULL YEAR RESULTS 2004/05 1st April 2004 - 31st March 2005 ALSTOM's recovery is clearly reflected in the FY04/05 results: o Orders received of €15.8 billion, up 15 per cent on a comparable basis from FY03/04 o Operating income at €550 million, multiplied by three on a comparable basis versus €168 million in the previous fiscal year; operating margin up from 1.2 per cent in FY03/04 to 4.0 per cent in FY04/05 o Net losses cut in half to €0.86 billion from €1.84 billion in FY03/04 in spite of significant non-recurring charges o Net debt strongly reduced during the fiscal year, down to €1.4 billion from €3.7 billion o Free Cash Flow showing strong improvement at -€170 million versus -€1007 million in the last fiscal year o Liquidity reinforced due to the financial consolidation undertaken during the fiscal year 2005/06 objectives confirmed: o 6 per cent operating margin leading to a return to profitability o Positive Free Cash Flow with continuing debt reduction The Board, in its meeting held on 30th May 2005, has approved the accounts for the fiscal year 2004/05. Commenting on these results, Patrick Kron, Chairman & Chief Executive Officer said: "The results we are presenting today clearly demonstrate the ongoing recovery of ALSTOM. All key indicators are in line with, or better than the guidance previously given. These results enable us to confirm the FY 2005/06 targets announced in March 2003 when we launched our recovery plan: an operating margin of 6 per cent leading to a return to profitability and a positive Free Cash Flow. Customers' renewed confidence in ALSTOM is clearly evidenced by €15.8 billion of orders, up 15 per cent on a comparable basis from FY03/04. This positive trend is not only quantitative but also qualitative. Margins on orders booked continue to improve; those in our current order book, which represents two years of sales, are in line with the profitability targets announced for the ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Group and its operational Sectors. On a geographical basis, the commercial success achieved in markets with strong growth potential is encouraging. Chinese orders reached €1.6 billion, more than twice the level of the previous year, and orders from India were close to €0.5 billion. Our operational performance is greatly enhanced: the GT24/GT26 heavy-duty gas turbine issue is now resolved, with the remaining disbursements fully reserved. Agreements with our customers have been reached on 74 out of the 76 turbines sold. New orders - for a total of seven machines - have been secured in Spain and in Thailand, and new tenders are under review in several countries. We have actively pursued our cost-cutting programme; a set of restructuring measures, aimed at adapting our industrial and engineering capacity and improving our overall efficiency has led to a reduction of the workforce by 11,500 (8,000 departures to date), which should bring an annual reduction in costs of €500 million. We have focused on the improvement of contract execution, adapting our manpower, organisation and internal controls. These actions have allowed us, in spite of the low level of sales resulting from low order intake 12 to 18 months ago, to significantly increase our operational income, with the operating margin, on a comparable basis, rising from 1.2 per cent to 4 per cent. Our Free Cash Flow is also considerably better with net cash outflow reduced from €1,007 million last financial year to €170 million in 2004/05 - out of which €366 million were spent as part of the settlement of the GT24/26 problem. Thanks to our ongoing disposal programme and to the capital increases which took place in July 2004, our net debt has been significantly reduced, from €3.7 billion to €1.4 billion in March 2005. The successful refinancing undertaken in February 2005 and our current headroom (our cash at holding company level and the available undrawn credit lines at 31 March 2005 stood at €2 billion) give us a considerable buffer to cover our future liquidity needs. The progress achieved makes us confident for the future. The ambitious objectives we have set for March 2006 are thus confirmed: an operating margin of 6 per cent allowing for the return to profitability and a positive Free Cash Flow. Obviously we intend to further improve our performance beyond our current financial year: operating margin at the end March 2008 should be up by one or two percent, reaching 7 to 8 percent, and Free Cash Flow, thanks to a strict management of working capital, should also continue to show strong growth. Thus, from a significantly stronger base, ALSTOM will pursue an ambitious and profitable development strategy in its growing markets. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION ALSTOM's recovery is clearly reflected in the FY04/05 results Key financial figures The following tables set out, on a consolidated basis, some of our key financial and operating figures: - ----------------------------------------------------------------------------------------- Total Group % Variation % Variation Actual figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 30,330 25,368 27,203 (16%) 7% Orders received 19,123 16,500 15,841 (14%) (4%) Sales 21,351 16,688 13,662 (22%) (18%) Operating income (loss) (507) 300 550 Operating margin (2.4%) 1.8% 4.0% Net income (loss) (1,432) (1,836) (865) Free Cash Flow (265) (1,007) (170) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Total Group % Variation % Variation Comparable figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 26,180 24,792 27,203 (5%) 10% Orders received 13,774 13,776 15,841 0% 15% Sales 16,107 14,202 13,662 (12%) (4%) Operating income (loss) (581) 168 550 Operating margin (3.6%) 1.2% 4.0% - ----------------------------------------------------------------------------------------- * French GAAP Orders up 15 per cent as compared with previous fiscal year During fiscal year 2004/05, we faced contrasted markets. Demand for new power generation equipment in Asia and particularly in China and India remained strong by contrast to the United States and some European countries, where demand remained very low. As a result of the increasing importance of environmental concerns, demand for environmental control equipment remained strong. In the field of Rail Transport, the European market has provided opportunities in Italy, Spain and France while the German and UK markets have been slower; the Asia market has been strong. The cruise ship market has become more active. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION The strong rebound in our commercial activity illustrates the return of customer confidence: we have booked €15.8 billion of orders in fiscal year 2004/05, an increase of 15 per cent compared with fiscal year 2003/04 on a comparable basis, with all of our Sectors contributing to this increase. Of note among the main orders received are an order received in November 2004 for four new GT26 heavy-duty gas turbines in Thailand (the second order for these machines following an order received in Spain in January 2004), a contract in China for passenger trains (Electrical Multiple Units) and an order for two cruise ships. Our backlog was €27 billion at 31 March 2005, representing approximately two years of sales. Sales impacted by low level of orders in 2003 Sales were €13.6 billion in fiscal year 2004/05, decreasing by 4 per cent compared with fiscal year 2003/04 on a comparable basis, mainly in our Power Turbo-Systems / Power Environment and Marine Sectors, due to the impact of the low level of orders in the second half of fiscal year 2002/03 and in the first half of fiscal year 2003/04. Sales in other Sectors increased on a comparable basis. Operating income improving strongly as a result of continuing cost reduction and improvement in contract execution Our operating income in fiscal year 2004/05 was €550 million or 4.0 per cent of sales, as compared with €168 million or 1.2 per cent of sales in fiscal year 2003/04 on a comparable basis. This strong improvement of our operating margin despite a lower level of sales is notably due to a reduction in our cost base and to improved performance in the execution of our contracts. Net loss cut in half Net results showed a loss of €865 million, resulting notably from the high level of restructuring charges (€358 million), financial expenses (€346 million) and tax expenses (€203 million) from the write-off of deferred tax assets. The net loss was cut in half compared with €1,836 million in fiscal year 2003/04. Free Cash Flow Our Free Cash Flow was negative at -€170 million in fiscal year 2004/05, improving strongly despite cash outflows of €366 million related to GT24/GT26 gas turbines and the high level of restructuring and financial cash outflows. This progress was derived from a further improvement of our working capital in all Sectors excluding Marine. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Further scope adjustments After the disposals of the Transmission & Distribution Sector and the Industrial Turbines activity carried out during fiscal year 2003/04, we have continued our disposal programme during fiscal year 2004/05, in line with the commitments made to the European Commission. With respect to the disposals identified in May 2004: - - the locomotives manufacturing unit of Valencia, Spain, has been sold to Vossloh. - - the sale of our transport activities in Australia and New Zealand is in final negotiation. - - the disposal of our industrial boiler business is underway. As for the other disposals needed to reach the total activity turnover of approximately €1.5 billion as agreed with the European Commission: - - an agreement has just been signed for the sale of our Flowsystems activity. - - miscellaneous activities have been sold in Australia. - - the sale of Power Conversion has been launched. The completion of these disposals should cover our commitment made to the European Commission with respect to disposals of industrial activities. Net debt strongly reduced Net debt was reduced during the fiscal year to €1.4 billion on 31 March 2005 compared with €3.7 billion. This significant decrease is due to the capital increases and the proceeds of the disposals. Bonding We have syndicated our 2-year bonding programme launched in July 2004 with 17 banks, for a total of €7.4 billion. This program, together with the additional bilateral lines obtained recently, should cover our needs until July 2006. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Sector Review Power Turbo-Systems / Power Environment - ----------------------------------------------------------------------------------------- Power Turbo-Systems / Power Environment % Variation % Variation Actual figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 7,308 6,448 7,139 (12%) 11% Orders received 4,404 5,107 5,181 16% 1% Sales 6,955 5,059 4,256 (27%) (16%) Operating income (loss) (1 175) (253) (35) Operating margin (16.9%) (5.0%) (0.8%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Power Turbo-Systems / Power Environment % Variation % Variation Comparable figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 7,062 6,395 7,139 (9%) 12% Orders received 4,128 5,047 5,181 22% 3% Sales 6,437 4,997 4,256 (22%) (15%) Operating income (loss) (996) (251) (35) Operating margin (15.5%) (5.0%) (0.8%) - ----------------------------------------------------------------------------------------- * French GAAP Orders received in fiscal year 2004/05 by the Power Turbo-Systems / Power Environment Sector were 3 per cent higher than in fiscal year 2003/04 on a comparable basis, at €5.2 billion. The main improvements were due to the Hydro and Utility Boiler businesses. From a geographical point of view, orders have increased significantly in Asia, which provided 42 per cent of our orders received in fiscal year 2004/05. Sales in fiscal year 2004/05 decreased by 15 per cent on a comparable basis. This was mainly due to the exceptionally low level of orders received during fiscal year 2002/03 and during the first half of fiscal year 2003/04. The operating loss of €35 million in fiscal year 2004/05 is strongly reduced from the loss of €251 million recorded in fiscal year 2003/04, with operating margin improving from -5 per cent to -0.8 per cent. This marked improvement reflects a better portfolio of projects, improved project execution and a reduction of costs. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Power Service - ----------------------------------------------------------------------------------------- Power Service % Variation % Variation Actual figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 2,793 3,107 3,669 11% 18% Orders received 2,934 3,023 3,228 3% 7% Sales 2,678 2,747 2,844 3% 4% Operating income (loss) 403 417 473 Operating margin 15.0% 15.2% 16.6% - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Power Service % Variation % Variation Comparable figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 2,723 3,083 3,669 13% 19% Orders received 2,775 2,967 3,228 7% 9% Sales 2,579 2,690 2,844 4% 6% Operating income (loss) 426 410 473 Operating margin 16.5% 15.3% 16.6% - ------------------------------------------------------------------------------- * French GAAP The power service market remained sound in fiscal year 2004/05. Orders received amounted to €3.2 billion, 9 per cent higher than fiscal year 2003/04 on a comparable basis. They remained at a high level despite the fact that a limited number of long-term maintenance contracts were booked over the fiscal year. Sales continued to increase at €2.8 billion. The operating margin, at 16.6 per cent of sales, benefited from increased sales in the more profitable segments of the business and good contract execution. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Transport - ----------------------------------------------------------------------------------------- Transport % Variation % Variation Actual figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 14,676 14,321 14,489 (2%) 1% Orders received 6,412 4,709 5,490 (27%) 17% Sales 5,072 4,862 5,134 (4%) 6% Operating income (loss) (24) 64 260 Operating margin (0.5%) 1.3% 5.1% - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Transport % Variation % Variation Comparable figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 14,283 13,945 14,489 (2%) 4% Orders received 6,054 4,687 5,490 (23%) 17% Sales 4,877 4,836 5,134 (1%) 6% Operating income (loss) (8) 71 260 Operating margin (0.2%) 1.5% 5.1% - ----------------------------------------------------------------------------------------- * French GAAP During fiscal year 2004/05, the market remained active in Europe and in Asia, especially in China where we were awarded a large contract for mainline passenger rolling stock. The market for urban transport has been sound and we were awarded several contracts in Europe, North America and South America. We also recorded significant successes in intercity and freight rolling stock, with orders for regional trains in Italy and Belgium and locomotives for France. Orders received by Transport in fiscal year 2004/05 amounted to €5.5 billion, up 17 per cent on a comparable basis, mainly due to a higher order intake in Asia and in Southern Europe. Sales increased by 6 per cent at €5.1 billion. The main contributor to this sales increase was Europe. The operating margin amounted to 5.1 per cent of sales versus 1.5 per cent on a comparable basis for the previous fiscal year, mainly due to better project execution and continued cost reduction. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Marine - ----------------------------------------------------------------------------------------- Marine % Variation % Variation Actual figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 1,523 817 1,266 (46%) 55% Orders received 163 381 1,104 134% 190% Sales 1,568 997 630 (36%) (37%) Operating income (loss) 24 (19) (103) Operating margin 1.5% (1.9%) (16.3%) - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Marine % Variation % Variation Comparable figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 1,523 817 1,266 (46%) 55% Orders received 163 381 1,104 134% 190% Sales 1,568 997 630 (36%) (37%) Operating income (loss) 24 (19) (103) Operating margin 1.5% (1.9%) (16.3%) - ----------------------------------------------------------------------------------------- * French GAAP In fiscal year 2004/05, the shipbuilding market experienced an increased level of orders, both for cruise ships and LNG tankers. Orders received during fiscal year 2004/05 by our Marine Sector reached €1.1 billion and sales amounted to €630 million, reflecting the low level of orders during previous fiscal years. A charge of approximately €50 million related to the difficulties experienced in the construction of an LNG tanker for Gaz de France, along with the under-activity during this fiscal year, have led to an operating loss of €103 million. Strengthening the order book and strongly reducing costs are the priorities of the Marine Sector. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Power Conversion - ----------------------------------------------------------------------------------------- Power Conversion % Variation % Variation Actual figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 568 495 529 (13%) 7% Orders received 533 434 579 (19%) 33% Sales 523 499 539 (5%) 8% Operating income (loss) 15 15 36 Operating margin 2.9% 3.0% 6.7% - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Power Conversion % Variation % Variation Comparable figures* Year ended 31 March March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 -------- -------- -------- ----------- ----------- Order backlog 539 487 529 (10%) 9% Orders received 494 433 579 (12%) 34% Sales 492 498 539 1% 8% Operating income (loss) 17 15 36 Operating margin 3.5% 3.1% 6.7% - ----------------------------------------------------------------------------------------- * French GAAP Orders received in fiscal year 2004/05 are up 34 per cent on a comparable basis at €579 million, mainly due to two large orders in the UK marine activity. Sales continued to increase at €539 million. The operating margin, at 6.7 per cent, increased as a result of the actions launched across businesses to improve performance, as well as better market conditions. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Outlook Fiscal year 2004/05 was a transition year. The encouraging results recorded during this period enable us to confirm our objectives for financial year 2005/06 and, looking further ahead, target an operating margin of 7 to 8 per cent in March 2008, a significant increase in Free Cash Flow and a continued reduction of net debt. Once our base is strengthened, we are determined to pursue a profitable development strategy in the expanding markets where ALSTOM is already active. Through partnerships wherever appropriate and advantageous, we intend to take advantage of profitable growth opportunities, both in transport and energy, particularly in Asia which shows the strongest growth potential in our activities. * * * Press relations: S. Gagneraud / G. Tourvieille (Tél. 01 41 49 27 40) press@chq.alstom.com Investor Relations: E. Châtelain (Tél. 01 41 49 37 38) investor.relations@chq.alstom.com ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Forward-Looking Statements: This press release contains, and other written or oral reports and communications of ours may from time to time contain, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Examples of such forward-looking statements include, but are not limited to (i) projections or expectations of sales, income, operating margins, dividends, provisions, cash flow, debt or other financial items or ratios; (ii) statements of plans, objectives or goals of the Group or its management; (iii) statements of future product or economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes", "anticipates", "expects", "intends", "aims", "plans" and "will" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. By their very nature, forward-looking statements involve risks and uncertainties that the forecasts, projections and other forward-looking statements will not be achieved. Such statements are based on our current plans and expectations and are subject to a number of important factors that could cause actual results to differ materially from the plans, objectives and expectations expressed in such forward-looking statements. These factors include: (i) the inherent difficulty of forecasting future market conditions, level of infrastructure spending, GDP growth generally, interest rates and exchange rates; (ii) the effects of, and changes in, laws, regulations, governmental policy, taxation or accounting standards or practices; (iii) the effects of currency exchange rate movements and increases of overall prices of raw materials,; (iv) the effects of competition in the product markets and geographic areas in which we operate; (v) our ability to increase market share, control costs and enhance cash generation while maintaining high quality products and services; (vi) the timely development of new products and services; (vii) the results of our restructuring and cost reduction programmes; (viii) continued capability to obtain bonds in amounts that are sufficient to meet the needs of our business; (ix) the timing of and ability to meet the cash generation and other initiatives of our action plan; (x) the results of the investigations by the SEC; (xi) the outcome of the putative class action lawsuit filed against us and certain of our current and former officers; (xii) our ability to improve operating margins in a timely manner and to progressively increase the after-sales service and maintenance in our businesses; (xiii) the availability of external sources of financing on commercially reasonable terms; (xiv) the inherent technical complexity of many of our products and technologies and our ability to resolve effectively, on time, and at reasonable cost technical problems, infrastructure constraints or regulatory issues that inevitably arise, including in particular the problems encountered with the GT24/GT26 gas turbines; (xv) risks inherent in large contracts and/or significant fixed price contracts that comprise a substantial portion of our business; (xvi) the inherent difficulty in estimating our vendor financing risks or exposure and other credit risks, which may notably be affected by customers' payment defaults; (xvii) our ability to invest successfully in, and compete at the leading edge of, technology developments across all of our sectors; (XVIII) the availability of adequate cash flow from operations or other sources of liquidity to achieve management's objectives or goals, including our goal of reducing indebtedness; (xix) the effects of acquisitions and disposals generally and the outcome of claims related to our disposals; (xx) the unusual level of uncertainty at this time regarding the world economy in general; and (xxi) our success in adjusting to and managing the foregoing risks. We caution you that this list of important factors is not exhaustive; when relying on forward-looking statements to make decisions with respect to us, you should carefully consider the foregoing factors and other uncertainties and events, as well as other factors described in other documents we file with or submit to, from time to time, the SEC and/or the AMF, including our Annual ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
PRESS INFORMATION Report for the fiscal year ended 31 March 2004 and any update thereof . Such forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. ALSTOM - 3 avenue André Malraux - 92309 Levallois-Perret cedex - Tel : 33 (0)1 41 49 27 40 - Fax : 33 (0)1 41 49 79 35
Consolidated financial statements Fiscal year 2004 / 2005
ALSTOM CONSOLIDATED INCOME STATEMENTS Year ended 31 March ---------------------------------- Note 2003 2004 2005 ---------- ---------- ---------- (in € million) SALES (26) 21,351 16,688 13,662 Of which products 16,374 12,786 9,858 Of which services 4,977 3,902 3,804 Cost of sales (19,187) (14,304) (11,601) Of which products (15,504) (11,353) (8,752) Of which services (3,683) (2,951) (2,849) Selling expenses ((970) (785) (545) Research and development expenses ((622) (473) (336) Administrative expenses (1,079) (826) (630) ---------- ---------- ---------- OPERATING INCOME (LOSS) (26) (507) 300 550 Other income (expenses), net (4) (555) (1,111) (583) Other intangible assets amortisation (8) (67) (60) (59) ---------- ---------- ---------- EARNINGS (LOSS) BEFORE INTEREST AND TAX (26) (1,129) (871) (92) Financial income (expense), net (5) (270) (460) (346) ---------- ---------- ---------- PRE-TAX LOSS (1,399) (1,331) (438) Income tax (charge) credit (6) 263 (251) (203) Share in net income (loss) of equity investments 3 - - Minority interests (15) 2 ((1) Goodwill amortisation (7) (284) (256) (223) ---------- ---------- ---------- NET LOSS (1,432) (1,836) (865) ========== ========== ========== Earnings per share in Euro Basic (5.4) (4.1) (0.2) Diluted (5.4) (4.1) (0.2) The accompanying Notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS At At At At 31 March 31 March 1 April 31 March Note 2003 2004 2004(1) 2005 -------- -------- -------- -------- (in € million) ASSETS Goodwill, net (7) 4,440 3,424 3,424 3,194 Other intangible assets, net (8) 1,168 956 956 909 Property, plant and equipment, net (9) 2,331 1,569 2,262 1,468 Investments in equity method investees and other investments, net (10) 245 160 160 118 Other fixed assets, net (11) 1,294 1,217 1,102 1,264 -------- -------- -------- -------- Tangible, intangible and other fixed assets, net 9,478 7,326 7,904 6,953 Deferred taxes (6) 1,831 1,561 1,561 1,370 Inventories and contracts in progress, net (12) 4,608 2,887 2,997 2,760 Trade receivables, net (13) 4,855 3,462 3,462 3,446 Other accounts receivables, net (15) 2,265 2,022 2,160 1,661 -------- -------- -------- -------- Current assets 11,728 8,371 8,619 7,867 Short term investments (18) 142 39 39 15 Cash and cash equivalents (19) 1,628 1,427 1,427 1,462 -------- -------- -------- -------- TOTAL ASSETS 24,807 18,724 19,550 17,667 ======== ======== ======== ======== LIABILITIES Shareholders' equity 758 29 29 1,182 Minority interests (20) 95 68 68 74 Bonds reimbursable with shares (17) - 152 152 133 Provisions for risks and charges (21) 3,698 3,489 3,484 3,156 Accrued pension and retirement benefits (22) 972 842 842 826 Financial debt (23) 6,331 4,372 5,199 2,907 Deferred taxes (6) 37 30 30 21 Customers' deposits and advances 3,541 2,714 2,714 3,150 Trade payables 4,629 3,130 3,130 2,992 Other payables (24) 4,746 3,898 3,902 3,226 -------- -------- -------- -------- Current liabilities 12,916 9,742 9,746 9,368 ======== ======== ======== ======== TOTAL LIABILITIES 24,807 18,724 19,550 17,667 ======== ======== ======== ======== Commitments and contingencies (27)&(28) - -------------------- (1) Amended opening balance sheet at 1 April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2 (a) The accompanying Notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended 31 March --------------------------------- 2003 2004 2005 --------- --------- --------- (in € million) Net loss (1,432) (1,836) (865) Minority interests 15 (2) 1 Depreciation and amortisation 754 726 639 Changes in provision for pension and retirement benefits, net 22 85 - Net (gain) loss on disposal of fixed assets and investments (19) (175) (51) Share in net income (loss) of equity investees (net of dividends received) (3) - - Changes in deferred tax (424) 149 185 --------- --------- --------- Net loss after elimination of non cash items (1,087) (1,053) (91) Decrease (increase) in inventories and contracts in progress, net 415 389 205 Decrease (increase) in trade and other receivables, net 650 770 423 Increase (decrease) in sale of trade receivables, net (661) (267) (87) Increase (decrease) in provisions for risks and charges 82 89 (301) Increase (decrease) in customers' deposits and advances (98) (1) 510 Increase (decrease) in trade and other payables 162 (985) (786) Changes in net working capital (1) 550 (5) (36) --------- --------- --------- Net cash provided by (used in) operating activities (537) (1,058) (127) Proceeds from disposals of property, plant and equipment 252 244 52 Capital expenditures (410) (254) (182) Decrease (increase) in other fixed assets, net (2) (55) 125 (372) Cash expenditures for acquisition of investments, net of net cash acquired (166) (8) - Cash proceeds from sale and de-consolidation of investments, net of net cash sold (3) 38 1,454 928 --------- --------- --------- Net cash provided by (used in) investing activities (341) 1,561 426 Capital increase 622 1,024 2,022 Issuance (conversion) of Bonds reimbursable with shares - 152 (19) Dividends paid including minorities (1) (3) (5) --------- --------- --------- Net cash provided by (used in) financing activities 621 1,173 1,998 Net effect of exchange rate (41) (7) 48 Net effect of new accounting pronouncement at 1st April 2004 (4) - - ( 827) Other changes (5) (464) (14) (42) --------- --------- --------- Decrease (increase) in net debt (762) 1,655 1,476 --------- --------- --------- Net debt at the beginning of the period (*) (3,799) (4,561) (2,906) --------- --------- --------- Net debt at the end of the period (*) (4,561) (2,906) (1,430) ========= ========= ========= Cash paid for income taxes 70 75 92 Cash paid for net interest (6) 254 275 204 - ------------------ (*) Net debt includes short-term investments and cash and cash equivalents net of financial debt. (1) See Note 16 (2) In the year ended 31 March 2005, the outflow relating to other fixed assets is mainly due to the €700 million cash deposit made to secure the new Bonding Guarantee Facility Programme (see Note 11) partially offset by €328 million repayment of other long term deposits. (3) In the year-ended 31 March 2004, the net proceeds of €1,454 million are made of: - Total selling price of €1,977 million including a total amount of €1,927 million for T&D Sector and Industrial Turbines businesses - Consideration to be received for a total amount of €263 million of which €214 million are held in escrow at 31 March 2004, - Net cash sold to be reimbursed by the acquirers and selling costs of €260 million. In the year year-ended 31 march 2005, the net proceeds of €928 million are made of : - proceeds of €207 million related to the completion of the disposal of certain non significant entities of the former T&D Sector not yet sold at 31 March 2004 (see Note 3) and partial reimbursement of the receivables retained at 31 March 2004.
- proceeds of €59 million related to the completion of the disposal of US entities of the former Industrial Turbines business (see Note 3) and partial reimbursement of the escrow accounts retained at 31 March 2004. - Other proceeds net of net cash sold of €35 million including the disposal of the freight locomotive business in Spain - Net debt of €627 million sold as part of the disposal of one Special Purpose Entity in the Transport Sector and the de-consolidation of Two Special Purpose Entity in the Marine Sector consolidated at 1st April 2004 (see Note 3) (4) Effect at 1st April 2004 on Financial debt pursuant to the first application of the Règlement CRC 2004-03. See Notes 2(a) and 25. (5) Including in the year-ended 31 March 2003 the reclassification in financial debt of redeemable preference shares of a subsidiary and subordinated notes totalling €455 millions (see Note 23) (6) Including cash paid related to interest on securitisation of future receivables The accompanying Notes are an integral part of these Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Number of | Additional Cumulative In € million outstanding | Paid-in Retained Translation Shareholders' Except for number of shares shares | Capital Capital Earnings Adjustment Equity - ---------------------------- ------------ | ---------- --------- -------- ----------- ------------- At 1st April 2002 215,387,459 | 1,292 85 516 (141) 1,752 Capital increase 66,273,064 | 398 224 - - 622 Changes in Cumulative Translation Adjustments _ | _ _ - (184) (184) Net loss _ | _ _ (1,432) _ (1,432) ------------- | ---------- --------- -------- ---------- ----------- At 31 March 2003 281,660,523 | 1,690 309 (916) (325) 758 Capital decrease (1) | (1,338) (309) 1,647 - - Capital increase (2) 774,997,049 | 969 64 - - 1,033 Changes in Cumulative Translation Adjustments - | - - - 74 74 Net loss - | - - (1,836) - (1,836) ------------- | ---------- --------- -------- ---------- ----------- At 31 March 2004 1,056,657,572 | 1,321 64 (1,105) (251) 29 Conversion of ORA (3) 15,473,425 | 14 5 - - 19 Conversion of TSDDRA (4) 240,000,000 | 300 - - - 300 Capital decrease (5) - | (1,175) (64) 1,239 - - Capital increase (6) 4,185,080,412 | 1,464 261 - - 1,725 Changes in Cumulative Translation Adjustments - | - - - (26) (26) Net loss - | - - (865) - (865) ------------- | ---------- --------- -------- ---------- ----------- At 31 March 2005 5,497,211,409 | 1,924 266 (731) (277) 1,182 ============= | ========== ========= ======== ========== =========== - -------------- o Net equity movement between 1 April 2003 and 31 March 2004 At 31 March 2003, the issued paid-up share capital of the parent company, ALSTOM, amounted to €1,689,963,138 and was divided into 281,660,523 shares having a par value of €6. At the Ordinary General Shareholders' Meeting held on 2 July 2003, it was decided that no dividend be paid. (1) The ALSTOM shareholders' equity at 31 march 2003 constituted less than 50 % of its share capital. Therefore, in accordance with article L. 225-248 of the French Code de commerce, the shareholders were requested and agreed, at the General Shareholders' Meeting held on 2 July 2003, not to liquidate the company by anticipation. Further, it was decided at such General Shareholders' Meeting, to reduce ALSTOM's share capital, due to losses, from €1,689,963,138 to €352,075,653.75. This reduction in the share capital was implemented through the reduction in the nominal value of ALSTOM ordinary share from €6 per share to €1.25 per share. (2) Subsequently, in November 2003, an issue of shares was made and 239,933,033 shares with a par value of €1.25 were subscribed. In December 2003, an issue of bonds reimbursable into shares "Obligations remboursables en actions" was made and 643,795,472 bonds were subscribed at €1.4 per bonds with a par value of €1.25. At 31 March 2004, 535,064,016 bonds were converted into shares on the basis of one share for one bond. Related costs of €16 million (net of tax of €9 million) were charged against additional paid-in capital of €80 million. At 31 March 2004, the share capital amounted to €1,320,821,965 consisting of 1,056,657,572 shares with a nominal value of €1.25 per share. All shares were fully paid up. At the Ordinary General Shareholders' Meeting held on 9 July 2004, it was decided that no dividend be paid.
o Net equity movement between 1 April 2004 and 31 March 2005 (3) During the period, 14,112,541 bonds reimbursable into shares "Obligation Remboursables en Actions" were converted into shares initially on the basis of one share for one bond and as from 16 August 2004 following completion of the capital increase with preferential subscription rights, on the basis of the adjusted ratio of 1.2559 share for one bond, resulting in the issue of 15,473,425 new shares (see Note 17). (4) On 7 July 2004, following the European Commission's approval, the subordinated bonds reimbursable with shares "Titres Subordonnés à Durée Déterminée Remboursables en Actions" held by the French Republic were repaid into 240,000,000 new shares at a par value of €1.25. (5) The ALSTOM shareholders' equity at 31 march 2004 constituted less than 50 % of its share capital. Therefore, in accordance with article L. 225-248 of the French Code de commerce, the shareholders were requested and agreed, at the Extraordinary General Shareholders' Meeting held on 9 July 2004 not to liquidate the company by anticipation. Further, it was decided to reduce ALSTOM's share capital, due to losses, from €1,631,815,076.25 to €456,908,221.35 This reduction in the share capital was implemented through the reduction in the nominal value of one ALSTOM ordinary share from €1.25 per share to €0.35 per share. (6) On 12 and 13 August 2004, the Group closed two simultaneous capital increases : - A capital increase with preferential subscription rights to be subscribed either in cash or by set-off against certain of our outstanding debt was subscribed for a total gross amount of €1,508 million as follows : o €1,277 million gross amount consisting of 3,192,826,907 new shares issued at €0.40 having a par value of €0.35 subscribed in cash. o €231 million gross amount consisting of 462,438,861 new shares issued at €0.50 having a par value of €0.35, subscribed by set-off against debt. - A second capital increase which was reserved for certain Group's creditors to be subscribed by set off against certain of our outstanding debts was subscribed for a total gross amount of €240 million consisting of 480,000,000 new shares issued at €0.50 having a par value of €0.35. On 6 December 2004, the Group closed a share capital increase reserved for its employees consisting of 49,814,644 new shares issued at a par value of €0.35. Related costs of €40 million (net of tax of €22 million) were charged against additional paid in capital of €301 million. At 31 March 2005, the share capital amounted to €1,924,023,993.15 consisting of 5,497,211,409 shares with a nominal value of €0.35 per share. All shares are fully paid up.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Description of business and basis of preparation (a) Description of business ALSTOM (the Group) is a provider of energy and transport infrastructure. The energy market is served through activities in the fields of power generation and, power conversion, and the transport market through rail and marine activities. A range of components, systems and services is offered by the Group covering design, manufacture, commissioning, long-term maintenance, system integration, management of turnkey projects and applications of advanced technologies. (b) Basis of preparation The consolidated financial statements for year ended 31 March 2005 have been prepared on the basis of the accounting principles generally accepted in France and methods of computation as set out in Note 2. During the year ended 31 March 2005 a number of issues concerning the financing of the Group were resolved: - - The Group secured bonding and guarantee facilities to a maximum outstanding amount of up to €8 billion of which €7.15 billion have already been committed at 31 March 2005. - - Agreement was reached with the Group's banks on a new set of financial covenants and amendments required to allow implementation to a financial plan. - - The European Commission, approved, under certain conditions, the Group's financing plan including the French State's participation in the plan. - - Shareholders approved at a General Shareholders Meeting the financing Plan and authorised the Group to launch a capital increase of €2,048 million (before related costs) through cash injection and debt to equity swaps. To respond to the European Commission requirements the Group has committed in July 2004 to dispose of, over the next two years, businesses representing approximately €1.5 billion in sales. The divestments include the industrial boilers business which is part of the Power Turbo Systems/ Power Environment Sector, Transport Sector's operations in Australia and New Zealand and freight locomotive business in Spain (disposed at 31 March 2005 (see Note 3)), and other activities/businesses now identified (see Note 32). In addition, the Group is required to establish a 50-50 joint venture for Hydro power business and to enter, within four years, into industrial partnerships. In the Transport Sector, the Group must forgo acquisitions for four years in the European Union over a certain threshold. The French State has committed to sell its shares at the latest twelve months following the Group's obtaining an investment-grade rating, or in any event prior to July 2008. The Group's Consolidated Financial Statements for the year-ended 31 March 2004 were prepared after taking into account a number of matters including : - - The Financing Package negotiated in September 2003 resulted in a new set of financial covenants. As at 31 March 2004, the Group would have failed to comply with those covenants related to "consolidated net worth" and "EBITDA". Accordingly, the Group obtained agreement from its lenders to suspend the covenants it had previously negotiated until 30 September 2004. - - The Group obtained bonding and guarantee facilities as a result of the Financing Package agreed in September 2003 of €3.5 billion, of which 65% was guaranteed by the French State. This facility was sufficient to meet approximately one year of orders and was expected to be used during the summer 2004. The Group entered into discussions with certain of its main banks to secure access to contract bonding and guarantee facilities. - - The approval of the European Commission for the Financing Package announced on 22 September 2003 was outstanding.
Having considered the matters set out above, the Group concluded that the going concern principle was the appropriate basis of preparation for the 31 March 2004 Consolidated Financial Statements on the assumptions that it would be able to : - - secure contract bonding and guarantee facilities to meet its normal business activity, - - successfully negotiate new covenants with its lenders, - - obtain all necessary approvals from the European Commission, - - generate operating income and cash flow sufficient to respect covenants or waivers being granted, thus ensuring continued availability of debt financing. Note 2 - Summary of accounting policies The Consolidated Financial Statements of the Group are prepared in accordance with French Generally Accepted Accounting Principles and Règlement 99-02 of the Comité de Réglementation Comptable (French consolidation methodology). Benchmark treatments are generally used. However, capital lease arrangements and long term rentals are not capitalised (see Note 27 (b)). (a) New accounting pronouncement effective 1 April 2004 The Financial Security Act of 1 August 2003 (article 133 modifying article L-233-16 of the French "Code de commerce") has modified the conditions of exercise of the control on an entity by cancelling the obligation to hold at least one share in the controlled enterprise. Consequently, the ss. 10052 of the Règlement 99-02 of the Comité de Réglementation Comptable has been amended by Règlement 2004-03 of the 4 May 2004, which cancelled the obligation to hold at least one share of the capital of the controlled enterprise to be consolidated. This Règlement is applicable for the fiscal years starting on the 4 August 2003 or later, ie for the Group the year commencing 1 April 2004. The Group has reviewed its existing interests in Special Purpose Entities previously not consolidated but now falling into the scope of the Règlement 2004-03 of the 4 May 2004. The Group concluded that at 1 April 2004 five ad-hoc entities have to be fully consolidated in application of the Règlement 2004-03 of the 4 May 2004.
The impacts of the change in accounting principles have been determined retrospectively, after tax effect, and allocated to the opening net equity as follows : Consolidated Balance Sheet At 31 March 2004 (As approved by the Shareholders' meeting Impact of On 9 July Règlement At 2004) CRC 2004-03 (1) 1 April 2004 ------------- --------------- ------------ (in € million) Property, plant and equipment, net 1,569 693 2,262 Inventories and contract in progress, net 2,887 110 2,997 Other fixed assets, net 1,217 (115) 1,102 Other assets, net 11,585 138 11,723 Short term investments and cash equivalents 1,466 - 1,466 ------------- --------------- ------------ Total assets 18,724 826 19,550 ============= =============== ============ Shareholders' equity 29 - 29 Provisions for risks and charges 3,489 (5) 3,484 Financial debt 4,372 827 5,199 Other liabilities 10,834 4 10,838 ------------- --------------- ------------ Total liabilities 18,724 826 19,550 ============= =============== ============ - ------------- (1) See Note 25 (b) Consolidation methods Entities over which the Group has direct or indirect control of more than 50% of the outstanding voting shares, or over which it exercises effective control, are fully consolidated. Control exists where the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities, whether it holds shares or not. Joint ventures in companies in which the Group has joint control are consolidated by the proportionate method with the Group's share of the joint ventures' results, assets and liabilities recorded in the Consolidated Financial Statements. Entities in which the Group has an equity interest of 20% to 50% and over which the Group exercises significant influence, but not control, are accounted for under the equity method. Results of operations of subsidiaries acquired or disposed of during the year are recognised in the Consolidated Income Statements as from the date of acquisition or up to the date of disposal, respectively. Inter company balances and transactions are eliminated on consolidation. A list of the Group's major consolidated businesses and investees and the applicable method of consolidation is provided in Note 33. (c) Use of estimates The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period. Management reviews estimates on an ongoing basis using currently available information. Costs to date are considered, as are estimated costs to complete and estimated future costs of warranty obligations. Estimates of future cost reflect management's current best estimate of the probable outflow of financial resources that will be required to settle contractual
obligations. The assumptions to calculate present obligations take into account current technology as well as the commercial and contractual positions, assessed on a contract by contract basis. The introduction of technologically advanced products exposes the Group to risks of product failure significantly beyond the terms of standard contractual warranties applying to suppliers of equipment only. Changes in facts and circumstances may result in actual financial consequences different from the estimates. (d) Revenue and cost recognition Revenue on contracts which are of less than one year duration, including the sale of manufactured products and rendering of services, is recognised upon transfer of title, including the risks and rewards of ownership, which generally occurs on delivery to the customer and performance of service activities. Revenue on construction type contracts of more than one year, long term contracts, is recognised on the percentage of completion method, measured either by segmented portions of the contract "contract milestones" or costs incurred to date compared to estimated total costs. For long term service contracts, revenues are generally recognised over the term of the contract as work is performed and services rendered. Claims are recognised as revenue when it is probable that the claim will result in additional revenue and the amount can be reasonably estimated, which generally occurs upon agreement by the customer. Government subsidies relating to the shipbuilding sector are added to the related contract value and are recognised as revenue using the percentage of completion method. Total estimated costs at completion include direct (such as material and labour) and indirect contract costs incurred to date as well as estimated similar costs to complete, including warranty accruals and costs to settle claims or disputes that are considered probable. Selling and administrative expenses are charged to expense as incurred. As a result of contract review, accruals for losses on contracts and other contract related provisions are recorded as soon as they are probable in the line item "Cost of sales" in the Consolidated Income Statement. Adjustments to contract estimates resulting from job conditions and performance, as well as changes in estimated profitability, are recognised in "Cost of Sales" as soon as they occur. Cost of sales is computed on the basis of percentage of completion measured either by segmented portions of the contract "contract milestones" or costs incurred to date compared to estimated total costs. The excess of this amount over the cost of sales reported in prior periods is the cost of revenues for the period. Contract completion accruals are recorded for future expenses to be incurred in connection with the completion of contracts or of identifiable portions of contracts. Warranty provisions are estimated on the basis of contractual agreement and available statistical data. (e) Translation of financial statements denominated in foreign currencies The functional currency of the Group's foreign subsidiaries is the applicable local currency. Assets and liabilities of foreign subsidiaries located outside the Euro zone are translated into euros at the period end rate of exchange, and their income statements and cash flow statements are converted at the average rate of exchange for the period. The resulting translation adjustment is included as a component of shareholders' equity. (f) Foreign currency transactions Foreign currency transactions are translated into local currency at the rate of exchange applicable to the transaction (market rate or forward hedge rate). At period end, foreign currency assets and liabilities to be settled are translated into local currency at the rate of exchange prevailing at that date or the forward hedge rate. Resulting exchange rate differences are included in the Consolidated Income Statement.
(g) Financial instruments The Group operates internationally giving rise to exposure to market risks and changes in interest rates and foreign exchange rates. Financial instruments are utilised by the Group to reduce those risks. The Group's policy is to hedge currency exposures by holding or issuing financial instruments. The Group enters into various interest rate swaps to manage its interest rate exposures. Net interest is accrued as either interest receivable or payable with the offset recorded in financial interest. The Group enters into forward foreign exchange contracts to hedge foreign currency transactions. Realised and unrealised gains and losses on these instruments are deferred and recorded in the carrying amount of the related hedged asset, liability or firm commitment. Changes in the value of forward exchange contracts are thus recognised in the results of the same period as changes in the value of the underlying assets and liabilities. The Group also uses export insurance contracts to hedge its currency exposure on certain long-term contracts during the open bid time as well as when the commercial contract is signed. If the Group is not successful in signing the contract, the Group incurs no additional liability towards the insurance company except the prepaid premium. As a consequence, during the open bid period, these insurance contracts are accounted for as such, the premium being expensed when incurred. When the contract is signed, the insurance contract is accounted for as described above for forward foreign exchange contracts. In addition, the Group may enter into derivatives in order to optimise the use of some of its existing assets. Such a decision is taken on a case by case basis and is subject to approval by the management. (h) Goodwill Goodwill represents the excess of the purchase price over the fair value of the assets and liabilities acquired in a business combination. Initial estimates of fair values are finalised at the end of the financial year following the year of acquisition. Thereafter, releases of unrequired provisions for risks and charges resulting from the purchase price allocation are applied to goodwill. Goodwill is amortised on the straight-line basis over a period of twenty years in all sectors due to the long-term nature of the contracts and activities involved. (i) Other intangible assets The Group recognises other intangible assets such as technology, licensing agreements, installed bases of customers, etc. These acquired intangible assets are amortised on the straight-line basis over a period of twenty years in all sectors due to the long-term nature of the contracts and activities involved. (j) Impairment At the balance sheet date, whenever events or changes in markets indicate a potential impairment to goodwill, other intangible assets and property, plant and equipment, the carrying amount of such assets is reduced to their estimated recoverable value. Impairment tests are performed at each year-end.
(k) Property, plant and equipment Property, plant and equipment are recorded at historical cost to the Group. Depreciation is computed using the straight-line method over the following estimated useful lives : Estimated useful life in years ----------------- Buildings 25 Machinery and equipment 10 Tools, furniture, fixtures and others 3-7 Cruise ships 30 Assets financed through capital lease are not capitalised (see Note 27 (b)). (l) Other investments Other investments are recorded at the lower of historical cost or net realisable value, assessed on an individual investment basis. The net realisable value is calculated using the following parameters : equity value, profitability and expected cash flow from the investment. (m) Other fixed assets Other fixed assets are recorded at the lower of historical cost or net realisable value, assessed on an individual investment basis. (n) Inventories and contracts in progress Raw materials and supplies, work and contracts in progress, and finished products are stated at the lower of cost, using the weighted average cost method, or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Inventory cost includes costs of acquiring inventories and bringing them to their existing location and condition. Finished goods and work and contract in progress inventory includes an allocation of applicable manufacturing overheads. (o) Short-term investments Short-term investments include debt and equity securities and deposits with an initial maturity greater than three months but available for sale. Short-term investments are recorded at the lower of cost or market value, on a line by line basis. (p) Cash and cash equivalents Cash and cash equivalents consist of cash and highly liquid investments with an initial maturity of less than three months. (q) Deferred taxation Deferred taxes are calculated for each taxable entity for temporary differences arising between the tax value and book value of assets and liabilities. Deferred tax assets and liabilities are recognised where timing differences are expected to reverse in future years. Deferred tax assets are recorded gross and valuation allowances are recorded when necessary to reflect the estimated recoverable amount. Deferred tax amounts are adjusted for changes in the applicable tax rate upon enactment. Deferred tax assets and liabilities are netted first by legal entity and then by tax grouping.
No provision is made for income taxes on accumulated earnings of consolidated businesses or equity method investees for whom no distribution is planned. (r) Customer deposits and advances Customer deposits and advances are shown net, and represent amounts received from customers in advance of work being undertaken on their behalf. Where trading has taken place under the long term contract trading rules, but provisional acceptance of the contract has not taken place, the related customer advance is shown as a deduction from the related receivables. If any balance of customer deposits and advances is still outstanding and where work is undertaken on behalf of customers before sale, the related customer advance, termed a progress payment is deducted from Inventories and Contracts in Progress on a contract by contract basis. (s) Provisions for risks and charges A provision is recognised when : - - the Group has a present legal or constructive obligation of uncertain timing or amount as a result of a past event; - - it is probable that an outflow of economic resources will be required to settle the obligation; - - and such outflow can be reliably estimated. Provisions for warranties are recognised based on contract terms. Warranty periods may extend up to five years. The provisions are based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. Provisions for contract losses are recorded at the point where the loss is first determined. Provisions are recorded for all penalties and claims based on management's assessment of the likely outcome. (t) Stock options Stock options are not recorded by the Group at the date of grant. However, upon exercise of stock options, the Group will record the issuance of the common shares as an equity transaction based on the amount of cash received from the holders. (u) Research and development Internally generated research and development costs are expensed as incurred. (v) Employee benefits The estimated cost of providing benefits to employees is accrued during the years in which the employees render services. For single employer defined benefit plans, the fair value of plan assets is assessed annually and actuarial assumptions are used to determine cost and benefit obligations. Liabilities and prepaid expenses are accrued over the estimated term of service of employees using actuarial methods. Experience gains and losses, as well as changes in actuarial assumptions and plan assets and provisions are amortised over the average future service period of employees. For defined contribution plans and multi-employer pension plans, expenses are recorded as incurred. (w) Restructuring Restructuring costs are accrued when reduction or closure of facilities, or a program to reduce the workforce is announced and when management is committed with the concerned employees and when related costs are precisely determined.
Such costs include employees' severance and termination benefits, estimated facility closing costs and write-off of assets. (x) Financial income (expense) Financial income (expense) is principally comprised of interest payable on borrowings, interest receivable on funds invested, foreign exchange gains and losses, and gains and losses on hedging instruments, fees paid for putting in place guarantees, syndicated loans and other financing facilities, depreciation of financial assets and investments. Interest income is recognised in the income statement as it accrues, taking into account the effective yield on the asset. Dividend income is recognised in the income statement on the date that the dividend is declared. All other costs incurred in connection with borrowings are expensed, when appropriate, over the maturity period of the borrowings (y) Earnings per share Basic Earnings per share are computed by dividing the period net income (loss) by the weighted average number of outstanding shares during the financial year. Diluted earnings per share are computed by dividing the period net income (loss) by the weighted average number of shares outstanding plus the effect of any dilutive instruments. For the diluted earnings per share calculation, net income (loss) is not adjusted as the Group is loss making. (z) Exchange rates used for the translation of main currencies 2003 2004 2005 ------------------- ------------------- ------------------- € for 1 monetary unit Average Closing Average Closing Average Closing - ----------------------- -------- -------- -------- -------- -------- -------- British pound 1.549571 1.450116 1.444363 1.501727 1.463325 1.452433 Swiss franc 0.682536 0.677323 0.646074 0.641272 0.650036 0.645745 US dollar 0.997990 0.917852 0.849427 0.818063 0.791901 0.771367 Canadian dollar 0.646284 0.623558 0.628913 0.625821 0.621966 0.635445 Australian dollar 0.563472 0.553220 0.591628 0.622975 0.585581 0.596552 Note 3 - Changes in consolidated companies o Starting 1 April 2004, pursuant to the first application of the Règlement CRC 2004-03, the Group fully consolidates five Special Purpose Entities (see Notes 2(a) and 25). On 20 September 2004, the Group completed the disposal of one of these entities financing sixty locomotives. The net debt associated with this entity amounted to €243 million. This entity has been de-consolidated from the date of disposal. On 1st December 2004, the Group completed the disposal to a third party of its loans to two entities financing two Cruise ships. From that date, the Group concluded that the criterias of the Règlement CRC 2004-03, triggering at 1st April 2004 the consolidation of these two entities, were no longer met. The net debt associated with these entities amounted to €384 million. These entities have been de-consolidated from 1st December 2004. o On 15 April 2004, the disposal of the US entities of the former Industrial Turbines Businesses (disposed of during the year-ended 31 March 2004) was completed with effect from 1 April 2004. This business has been de-consolidated from 1 April 2004.
o During the year ended 31 March 2005, following the obtaining of local regulatory approvals, the disposal of certain non significant entities of the former T&D Sector (disposed of during the year-ended 31 March 2004) was completed. At 31 March 2005, the former T&D Indian units are still in the process of being sold (see Note 32). o On 31 March 2005, the Group completed the sale of its freight locomotive business in Spain. This business has been deconsolidated from that date. o During the year ended 31 March 2005, the Group disposed of its non core Information Technology and Industrial products business in Australia. No other significant changes in the scope of consolidated companies in the year ended 31 March 2005 occurred. Note 4 - Other income (expense), net Year ended 31 March -------------------------------------- 2003 2004 2005 ---------- ----------- ---------- (in € million) Net gain on disposal of fixed assets (1) 29 13 8 Net gain (loss) on disposal of investments (2) (35) (24) 1 Restructuring costs (3) (268) (655) ( 358) Employees' profit sharing (18) (16) ( 8) Pension costs (4) (214) (263) ( 175) Others, net (5) (49) (166) ( 51) ---------- ----------- ---------- Other income (expense), net (555) (1,111) ( 583) ========== =========== ========== - ------------- (1) In the year ended 31 March 2003 and in the year ended 31 March 2004 it mainly corresponds to the net gain on the disposal of real estate portfolio in Western Europe (2) In the year ended 31 March 2003, it mainly corresponds to the net losses on disposal of South Africa operations and Alstom Power Insurance Ltd. In the year ended 31 March 2004 it mainly corresponds to: - the net loss of €10 million on the disposal of the Industrial Turbine businesses. The Group disposed of its Industrial Turbines businesses in a two part transaction with effect from, respectively, 30 April 2003 and 31 July 2003. As a result, the consolidation packages prepared for each unit disposed of for the last month of activity prior to sale were prepared under the control of the acquirer. The Group made certain adjustments to the consolidation packages received to ensure conformity with Group accounting principles and judgements, consistently applied. These adjustments resulted in no impact on Earnings Before Interest and Taxation and Net income, but did result in a reclassification reducing the gain on disposal included within other income (expense), net and increasing operating income by €67 million. - the net gain of €4 million on the disposal of T&D sector excluding the Power Conversion business. Certain restructuring costs in T&D totalling €62 million accruals recorded prior to disposal but not impacting cash and wholly for the benefit of the acquirer are shown as part of the Net gain (loss) on disposal of investments. - the net loss of €10 million on the disposal of the Group's 40% shareholding in the Chinese entity "FIGLEC" - other net losses of €8 million on various disposals of non significant consolidated companies In the year ended 31 March 2005 it mainly corresponds to the net gains on disposal of activities including the freight locomotive business in Spain offset by costs and provisions on guarantees, claims and price adjustments on past disposals. (3) In the year ended 31 March 2004, it corresponds to additional plans accrued for a net amount of €628 million relating to downsizing of activities including closure of plants or activities and reduction in employees in all sectors except Marine and €27 million of write-off of assets. In the year ended 31 March 2005, it corresponds to additional plans accrued for a net amount of €343 million relating to the downsizing of activities including closure of plants or activities and reduction in employees mainly in the Power Turbo-Systems / Power Environment and Transport Sectors, and to €15 million of write-off of assets (see Note 21). (4) See Note 22 "Retirement, termination and post-retirement benefits"
(5) In the year ended 31 March 2003, in addition to other non operating costs it mainly include €15 million of costs related to past acquisition and disposal of activities. In the year ended 31 March 2004, in addition to other non operating costs it mainly includes costs related to past acquisitions and disposal of activities of €59 million, costs of existing or reorganising activities not qualifying as restructuring costs of €34 million, and €10 million of costs related to the capital increase. In the year ended 31 March 2005, in addition to other non operating incomes it mainly includes contract costs related to past acquisitions and disposal of activities of €34 million, costs of exiting or reorganising activities not qualifying as restructuring costs of €22 million. Note 5 - Financial income (expense) Year ended 31 March ------------------------------------- 2003 2004 2005 ---------- ----------- ---------- (in € million) Net interest expense (1) (264) (271) (208) Foreign currency gain (loss) (2) 55 (19) (27) Other financial expense (3) (61) (170) (111) ---------- ----------- ---------- Financial income (expense), net (270) (460) (346) ========== =========== ========== - -------------- (1) Including interests on securitisation of future receivables of €82 million, €24 million and €19 million for the years-ended 31 March 2003, 2004 and 2005 respectively. The reduction of the net interest income (expense) mainly results from the reduction of the level of net debt during the year-ended 31 March 2005. (2) The foreign currency gain in the year ended 31 March 2003 mainly results from the unwinding of forward sale contracts of US dollars against euros following a reassessment of the financing structure in the USA. (3) Other financial income (expenses), net include fees paid on guarantees, syndicated loans and other financing facilities of €41 million , €125 million and €83 million for the years ended 31 March 2003, 2004 and 2005 respectively. Note 6 - Income tax (a) Analysis by nature and geographic origin Year ended 31 March ------------------------------------- 2003 2004 2005 ---------- ----------- ---------- (in € million) France (3) (7) 14 Foreign (150) (95) (32) ---------- ----------- ---------- Current income tax (153) (102) (18) France 8 14 (112) Foreign 408 (163) (73) ---------- ----------- ---------- Deferred income tax 416 (149) (185) ---------- ----------- ---------- Income tax (charge) credit 263 (251) (203) ========== =========== ==========
(b) Effective income tax rate Year ended 31 March ------------------------------------- 2003 2004 2005 ---------- ----------- ---------- (in € million) France (218) (796) ( 332) Foreign (1,181) (535) (106) ---------- ----------- ---------- Pre-tax loss (1,399) (1,331) (438) Statutory income tax rate of the parent company 35.43% 35.43% 34,93% Expected tax (charge) credit 496 472 153 Impact of: - - difference in rate of taxation (1) (110) 5 16 - - reduced taxation of capital gain (non recognised losses on disposals) (2) 36 (172) (23) - - recognition (non recognition) of deferred tax assets (3) (76) (377) (218) - - net change in estimate of tax liabilities 35 (43) (38) - - intangible assets (22) (21) (18) - - other permanent differences (96) (115) (75) ---------- ----------- ---------- Income tax ( charge ) credit 263 (251) (203) ---------- ----------- ---------- Effective tax rate - - - ========== =========== ========== - --------------- (1) At 31 March 2003, the effective income tax rate was affected by the lower rate of taxation in Switzerland. (2) At 31 March 2004, it was affected by the reduced taxation of capital gain. (3) In all years the effective tax rate was principally affected by the non-recognition of deferred tax assets resulting from the generation of losses. The Group consolidates most of its country operations for tax purposes, including in France, the United Kingdom, the United States, and Germany. The basis of tax loss carry forward by maturity is as follows : At 31 March At 31 March At 31 March 2003 2004 2005 ----------- ------------ ----------- (In € million) Expiring within 1 year 221 20 36 2 years 66 15 26 3 years 157 75 34 4 years 507 80 182 5 years and more 2,873 1,999 1,532 Not subject to expiration 1,501 2,293 2,679 ----------- ------------ ----------- Total 5,325 4,482 4,489 =========== ============ =========== The basis of tax losses carry forward after valuation allowance amounts to €1,721 million ; of this amount €453 million expires within 15 years or more and €723 million is not subject to expiry. The losses incurred over the last three years have led to a detailed review by jurisdiction of deferred tax assets. This review took into account current and past performance, length of carry back, carry forward and expiry periods, existing contracts in the order book, budget and three years plan. This review led to a valuation allowance on deferred tax assets of €948 million at 31 March 2005 (€730 million at March 31 2004). Most of the deferred tax assets currently subject to valuation allowance remain available to be utilised in the future.
The deferred tax assets and liabilities are made up as follows : At 31 March ------------------------------------- 2003 2004 2005 ---------- ----------- ---------- (in € million) Accelerated depreciation 48 54 78 Intangible assets 245 337 338 Profit sharing, annual leave and pension accrual not yet deductible 113 89 89 Provisions and other expenses not currently deductible 535 512 482 Contract provisions taxed in advance 110 38 55 Tax loss carry forwards 1,755 1,510 1,504 Others 149 161 100 ---------- ----------- ---------- Gross Deferred tax assets 2,955 2,701 2,646 ---------- ----------- ---------- Valuation allowance (365) (730) (948) ---------- ----------- ---------- Netting by tax grouping or by legal entity (759) (410) (328) ---------- ----------- ---------- Deferred tax assets 1,831 1,561 1,370 ========== =========== ========== Accelerated depreciation for tax purposes (81) (63) (50) Contract revenues not currently taxable (255) (132) (126) Losses on inter company transfers (34) (4) (4) Deferred income related to leasing transactions (60) (67) (16) Inventory valuation methods (49) (22) (9) Pensions and other adjustments not currently taxable (91) (57) (25) Provisions and other expenses deducted in advance (226) (95) (119) ---------- ----------- ---------- Gross Deferred tax liabilities (796) (440) (349) ---------- ----------- ---------- Netting by tax grouping or by legal entity 759 410 328 ---------- ----------- ---------- Deferred tax liabilities (37) (30) (21) ---------- ----------- ---------- Net deferred tax 1,794 1,531 1,349 ========== =========== ========== The Group is satisfied as to the recoverability of the deferred tax assets, net at 31 March 2005 of €1,349 million, on the basis of an extrapolation of the three year business plan, approved by the Board of Directors, which shows a capacity to generate a sufficient level of taxable profits to recover its net tax loss carry forward and other net assets generated through timing differences over a period of four to twelve years, this reflecting the long term nature of the Group's operations. On the basis of an extrapolation of the Company's three years business plan, it is estimated that around 60% of the net deferred tax assets will be recovered within 5 years. Note 7 - Goodwill, net Net Net Translation Net value at value at Adjustments value at 31 March 31 March Acquisitions/ and other 31 March 2003 (1) 2004 (1) Disposals Amortisation changes 2005 --------- --------- ------------ ------------ ----------- --------- (In € million) Power Turbo-Systems / Power Environment (1) 870 817 - (52) - 765 Power Service (2) 2,166 1,991 - (128) - 1,863 Transport 558 530 - (37) (3) 490 Marine 2 2 - - - 2 Power Conversion (3) 87 79 - (6) 1 74 Power Industrial Turbines (2) 329 - - - - - Transmission & Distribution (3) 428 - - - - - Other - 5 (5) - - - --------- --------- ------------ ------------ ----------- --------- Goodwill, net 4,440 3,424 (5) (223) (2) 3,194 ========= ========= ============ ============ =========== =========
- ---------------------- (1) From 1 April 2004, the former Power Turbo-Systems and Power Environment sectors were merged into one Sector (See Note 26 (a)). Consequently, the Goodwill, net allocated to the former Power Turbo-Systems and Power Environment sector is now presented to reflect the current reporting structure. (2) In April 2003, the Group announced the completion of the disposal of its small gas turbine business and on 1 August 2003, the completion of the disposal of the medium gas turbines and industrial steam turbines business was announced, both to Siemens. The related Service activities were sold in the same transactions. (3) In January 2004, the Group announced the completion of the disposal of the majority of its T&D Sector (excluding Power Conversion business). As a result, Power Conversion goodwill, included in T&D Sector in March 2003, has been presented in a separate line. Goodwill relating to the T&D activities not de-consolidated at 31 March 2004 is shown in the line "other". The gross value of goodwill was €5,449 million, €4,420 million and €4,405 million at 31 March 2003, 2004 and 2005 respectively. At 31 March 2005, the Group requested a third party valuer to provide an independent report as part of its impairment test, performed annually, on goodwill and other intangible assets (see Note 8). The valuation in use was determined primarily by focusing on the discounted cash flow methodology which captured the potential of the asset base to generate future profits and cash flow and was based on the following factors: - - The Group's internal three year Business Plan prepared as part of its annual budget exercise at sector level and reviewed by external experts. - - Extrapolation of the three year Business Plan by up to 10 years. - - The Group's Weighted Average Cost of Capital, post-tax, of 9% to 11% reflecting the differing risks profiles of each Sector of the Group. The terminal value at the end of the ten year period represents approximately 50 % of total enterprise value. The valuation supported the Group's opinion that its goodwill and other intangible assets were not impaired. Note 8 - Other intangible assets, net Translation At At adjustments At 31 March 31 March Acquisitions/ and other 31 March 2003 2004 Amortisation Disposals changes 2005 --------- --------- ------------ ----------- ----------- --------- (In € million) Gross value 1,354 1,172 12 - - 1,184 Amortisation (186) (216) (59) - - (275) --------- --------- ------------ ----------- ----------- --------- Other intangible assets, net 1,168 956 (47) - - 909 ========= ========= ============ =========== =========== ========= Other intangible assets mainly result from the allocation of the purchase price following the acquisition of ABB's 50% shareholding in Power. It includes technology, an installed base of customers and licensing agreements. Additions in the year-end 31 March 2005 reflect payments under a technology sharing agreement. The decrease in the year-ended 31 March 2004 reflects the disposal of the Industrial Turbines businesses and amortisation of the period.
Note 9 - Property, plant and equipment, net Translation At At At Changes in Adjustments At 31 March 31 March 1st April Acquisitions/ scope of and other 31 March 2003 2004 2004(*) Depreciation Disposals consolidations(1) changes 2005 -------- -------- --------- ------------ --------- ---------------- ----------- -------- (In € million) Land 286 152 152 0 (5) (2) (1) 144 Buildings 1,505 1,113 1,113 21 (12) (6) 5 1,121 Machinery and Equipment 3,174 2,320 2,320 81 (168) (8) (32) 2,193 Tools, furniture, fixtures and others 947 558 1,443 79 (60) (730) (76) 656 -------- -------- --------- ------------ --------- ---------------- ----------- -------- Gross value 5,912 4,143 5,028 181 (245) (746) (104) 4,114 -------- -------- --------- ------------ --------- ---------------- ----------- -------- Land (8) (6) (6) (3) 0 0 0 (9) Buildings (638) (491) (491) (58) 19 0 (5) (535) Machinery and Equipment 2,415) (1,717) (1,717) (159) 151 4 34 (1,687) Tools, furniture, fixtures and others (520) (360) (552) (98) 57 178 0 (415) -------- -------- --------- ------------ --------- ---------------- ----------- -------- Accumulated depreciation (3,581) (2,574) 2,766) (318) 227 182 29 (2,646) -------- -------- --------- ------------ --------- ---------------- ----------- -------- Land 278 146 146 (3) (5) (2) (1) 135 Buildings 867 622 622 (37) 7 (6) 0 586 Machinery and Equipment 759 603 603 (78) (17) (4) 2 506 Tools, furniture, fixtures and others 427 198 891 (19) (3) (552) (76) 241 -------- -------- --------- ------------ --------- ---------------- ----------- -------- Net value 2,331 1,569 2,262 (137) (18) (564) (75) 1,468 ======== ======== ========= ============ ========= ================ =========== =======- - -------------------- (*) Amended amounts at 1st April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a) (1) Change in scope of consolidation is mainly due to the deconsolidation during the period of three special purpose entities consolidated at 1st April 2004 following the the first application of the Règlement CRC 2004-03 (see Note 25). Assets financed through capital leases are not capitalised (see Note 27 (b)). Note 10 - Equity method investments and other investments, net Investments in which the Group has direct or indirect control of more than 50% of the outstanding voting shares or over which it exercises effective control are fully consolidated. Only investments in which the Group has an equity interest of 20% to 50% and over which it exercises significant influence are accounted for under the equity method. (a) Equity method investments At 31 March -------------------- % Share in 2003 2004 2005 Interest Net income ------ ------ ------ -------- ---------- (in € million) Guangxi Laibin Electric Power Co Ltd "Figlec" (1) 59 - - Termoeléctrica del Golfo and Termoeléctrica Peñoles 87 66 66 49.5 - ALSTOM S.A. de C.V., Mexico (2) 8 8 - - Others 8 10 4 - - ------ ------ ------ ---------- Total 162 84 70 - ====== ====== ====== ========== - ---------------- (1) During the year ended 31 March 2004, the Group sold to a third party its shareholding of 40% of the registered capital of a Chinese entity "Figlec", a company which operates a thermal Power Plant at Laibin, China (2) The 49% interest in ALSTOM S.A de C.V, Mexico which the Group did not intend to transfer has in fact been transferred with a sold subsidiary to the purchaser of the former T&D Sector following refusal of the entity's lenders to approve a transaction back to the Group. The Group has no indication the entity's lenders will change their position. It has reached an agreement with the holder of the 49% interest in ALSTOM S.A de CV Mexico confirming their best efforts to obtain a transaction back to the Group and defining
their role until this event. Having reviewed the position the Group would intend to dispose of the asset after recovery. On this basis, the assets of €8 million is included in "other receivables, net" (see Note 15). The Group counter guarantees part of the entity's financial debt for €33 million included in the line "other guarantees" in Note 27. (b) Other investments, net At 31 March --------------------------------------- 2003 2004 2005 % ------ ------ ------------------------ Interest Net Net Gross Provision Net 2005 ------ ------ ------ --------- ------ --------- (in € million) Ballard Power Systems Inc (1) 22 27 22 (15) 7 1.8% Birecik Baraj ve Hidroelektrik Santrali Tesis ve Isletme AS (2) 20 15 20 (5) 15 13.6% A-Train AB & A-Train Invest AB (3) 5 - - - - Tramvia Metropolita SA 8 8 8 - 8 25.35% Tramvia Metropolita del Besos 8 8 8 - 8 25.35% Others (4) 20 18 22 (12) 10 ------ ------ ------ --------- ------ TOTAL 83 76 80 (32) 48 ====== ====== ====== ========= ====== (1) During the fiscal year ended 31 March 2005, the Group disposed of 0.57% of its shareholding in Ballard. In addition, the remaining interests in Ballard Power Systems Inc have been depreciated to align with the stock price at 31 March 2005 on the Toronto Stock Exchange. (2) During the fiscal year ended 31 March 2005, the Group signed a sale agreement for its 13.6% of its shareholding in Birecik Barajve Hidroelektrik Santrali Tesis ve Isletme AS for a consideration close to the net book value but subject to the obtaining of approvals from external parties. These approvals have been obtained subsequent to 31 March 2005. (3) A-Train AB & A-Train Invest AB were sold in January 2004 (4) No other investments' net value exceeds €5 million Information on the main other investments at 31 March 2005 is based on the most recent financial statements available and is the following: Share in Net income Net Equity ---------- ----------- (in € million) Ballard Power Systems Inc (139) 8 Birecik Baraj ve Hidroelektrik Santrali Tesis ve Isletme AS 119 43 Tramvia Metropolita SA 0 8 Tramvia Metropolita del Besos (Trambesos) 0 8 Note 11 - Other fixed assets, net At At At At 31 March 31 March 1st April 31 March 2003 2004 2004 (*) 2005 -------- -------- --------- -------- (in € million) Long term loans and deposits (vendor financing) (1) 510 329 250 - Deposits securing the Bonding Guarantee Facility (2) - - - 700 Other long term loans and deposits (3) 304 469 433 129 Prepaid assets - pensions (see Note 22) 397 357 357 353 Others 83 62 62 82 -------- -------- --------- -------- Other fixed assets, net 1,294 1,217 1,102 1,264 ======== ======== ========= ======== - ---------------- (*) Amended amounts at 1st April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a)
(1) The long term loans and deposits relating to vendor financing concern the Marine Sector and are the following: At At At At 31 March 31 March 1st April 31 March 2003 2004 2004 2005 -------- -------- --------- -------- (en € million) Cruiseinvest/Renaissance (a) 261 240 226 - Festival (b) 26 41 24 - Others (c) 223 48 - - -------- -------- --------- -------- TOTAL 510 329 250 - ======== ======== ========= ======== (a) Cruiseinvest / Renaissance -At 31 March 2003 and 2004, the Group held US$170 million (€156 million at 31 March 2003 and €139 million at 31 March 2004) of limited recourse notes issued by Cruiseinvest (Jersey) and bearing interest at 6 % per annum payable half yearly in arrears, and maturing in December 2011. At 31 March 2005, after the disposal of part of the notes the Group held US$42 million (€33 million). -The Group guaranteed the financing arrangements of a subsidiary of Cruiseinvest (Jersey)Ltd, Octavian Shipping LLC of which USD84 million (€77 million at 31 March 2003 and €69 million at 31 March 2004) were supported by a cash deposit. In the year-ended 31 March 2005, this deposit has been fully released. -The Group provided Cruiseinvest LLC with a €40 million line of credit, of which €15 million was drawn down at 31 March 2003 and €16 million was drawn at 31 March 2004 and 31 March 2005, respectively. -The Group also granted loans for €16 million at 31 March 2004 and €4 million at 31 March 2003 to Cruiseinvest (Jersey) Ltd subsidiaries. At 1 April 2004, pursuant to the application of the Règlement CRC 2004-03, Octavian shipping LLC, a subsidiary of Cruiseinvest (Jersey) Ltd is fully consolidated and the related Group financing (€14 million) has been eliminated as part of the consolidation process. At 31 March 2005, the Group has reviewed the risks associated with the € 53 million remaining Marine vendor financing assets and depreciated them. This depreciation was covered by the Marine vendor financing provision of €140 million at 31 March 2004 included in Provision for risks and charges (see Note 21- Other provisions). (b) Festival -At 31 March 2004, the Group granted a loan of €17 million to an entity involved in the financing of one cruise-ship. At 1 April 2004, pursuant to the application of the Règlement CRC 2004-03, this entity is fully consolidated and the related Group financing has been eliminated as part of the consolidation process. -In addition, at 31 March 2003 and 31 March 2004 the Group guaranteed the financing arrangements of two cruise ships delivered to Festival of which €26 million and €24 million, respectively were supported by a cash deposit. At 31 March 2005, following the sale of these Cruise ships during the period, the cash deposit was reimbursed and the guarantees released (see Note 27 (a) (2)). (c) Others At 31 March 2003 and 31 March 2004, the Group granted loans of €223 million and €48 million, respectively to two entities involved in the financing of two cruise-ships. At 1 April 2004, pursuant to the application of the Règlement CRC 2004-03, the two entities were fully consolidated and the related financing has been eliminated as part of the consolidation process. On 1st December 2004, these loans have been sold to third party (See Note 3). (2) It corresponds to a cash deposit made by the Group with a third party Trustee to secure in the form of remunerated collateral the new Bonding Guarantee Facility Programme of up to €8 billion implemented during the year-ended 31 March 2005 (see Note 27 (a) (1)) and invested by the Trustee into Euro government bonds and/or central bank securities with a residual maturity of less than 12 months. The release of this collateral will depend on release of the bonds and guarantees issued under the Programme. (3) At 31 March 2004 and 31 March 2005, it includes €125 million and €74 million, respectively held in escrow following the disposal of the small and medium gas turbine businesses and the industrial steam turbines business. The decrease is due to the use of €19 million to cover post closing adjustments and a partial payment of €32 million.
Note 12 - Inventories and contracts in progress, net At 31 March At 1st At 31 ---------------- April March 2003 2004 2004 (*) 2005 -------- ------- -------- -------- (in € million) Raw materials and supplies 1,485 1,094 1,094 647 Work and contracts in progress 5,198 3,363 3,363 3,240 Finished products 276 63 173 60 -------- ------- -------- -------- Inventories, and contracts in progress, gross 6,959 4,520 4,630 3,947 Less valuation allowance (301) (241) (241) (242) -------- ------- -------- -------- Inventories, and contracts in progress, net of valuation allowances 6,658 4,279 4,389 3,705 Less related customers' deposits and advances (2,050) (1,392) (1,392) (945) -------- ------- -------- -------- Inventories, and contracts in progress, net of valuation allowances and related customers' deposits and advances 4,608 2,887 2,997 2,760 ======== ======= ======== ======== - --------------- (*) Amended amounts at 1st April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a) Note 13 - Trade receivables, net At 31 March ----------------------------- 2003 2004 2005 ------- -------- -------- (in € million) Trade receivables on contracts 10,941 7,499 7,415 Other trade receivables 1,142 692 641 ------- -------- -------- Trade receivables, gross (1) 12,083 8,191 8,056 Less valuation allowance (130) (113) ( 142) ------- -------- -------- Trade receivables, net of valuation allowances 11,953 8,078 7,914 Less related customers' deposits and advances (7,098) (4,616) ( 4,468) ------- -------- -------- Trade receivables, net of valuation allowances and related customers' deposits and advances 4,855 3,462 3,446 ======= ======== ======== - ------------------- (1) after sale of trade receivables (see Note 14) Note 14 - Sale of trade receivables The following table shows net proceeds from sale of trade receivables: At 31 March ----------------------------- 2003 2004 2005 ------- -------- -------- (in € million) Trade receivables sold 357 94 7 Net cash proceeds from sale of trade receivables 357 94 7 ======= ======== ======== - ---------------- During the years ended 31 March 2003, 2004 and 2005, the Group sold, irrevocably and without recourse, trade receivables to third parties. The Group generally continues to service, administer and collect the receivables on behalf of the purchasers.
Note 15 - Other accounts receivables, net At 31 March At 1st At 31 ------------------ April March 2003 2004 2004 (*) 2005 -------- ------- -------- -------- (in € million) Advances paid to suppliers 758 528 528 603 Amounts due on local part of contracts 248 111 111 74 Income tax and other government receivables 496 450 450 387 Prepaid expenses 262 200 200 163 Others (1) 501 733 871 434 -------- ------- -------- -------- Other accounts receivables, net 2,265 2,022 2,160 1,661 ======== ======= ======== ======== - ----------------- (*) Amended amounts at 1st April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a) (1) the variation between fiscal year 2003 and 2004 is mainly due to the receivables held at 31 March 2004 following the disposal of the T&D Sector to Areva. The decrease in the year-ended 31 March 2005, is mainly due to the final settlement of the T&D Sector disposal and the deconsolidation during the period of three special purpose entities consolidated at 1st April 2004 following the first application of the Règlement CRC 2004-03 (see Note 25). Note 16 - Changes in net working capital At At Changes in At 31 March 1 April Cash Translation scope and 31 March 2004 2004(*) flow adjustments others 2005 -------- ------- ------- ----------- ---------- -------- (in € million) Inventories and contract in progress, net 2,887 2,997 (205) (26) (6) 2,760 Trade and other receivables, net (1) 5,578 5,717 (423) (51) (129) 5,114 Sale of trade receivables, net (94) (94) 87 - - (7) Contract related provisions (2,703) (2,703) 195 11 19 (2,478) Other provisions (401) (396) 160 - (2) (238) Restructuring provisions (385) (385) (54) 2 (3) (440) Customers' deposits and advances (2,714) (2,714) (510) 23 51 (3,150) Trade and other payables (7,028) (7,032) 786 22 6 (6,218) -------- ------- ------- ----------- ---------- -------- Net working capital (4,860) (4,610) 36 (19) (64) (4,657) ======== ======= ======= =========== ========== ======== - -------------- (1) Before impact of net proceeds from sale of trade receivables (*) Amended amounts at 1 April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a) Note 17 - Bonds reimbursable with shares "Obligations Remboursables en Actions" During the year ended at 31 March 2004 the group issued 643,795,472 bonds reimbursable with shares at €1.4 per bond with a par value of €1.25. During this period 535,064,016 bonds were converted into shares on the basis of one share for one bond. At 31 March 2004, 108,731,456 bonds reimbursable with shares were outstanding for an amount of €152 million. During the year ended at 31 March 2005, 14,112,541 bonds reimbursable into shares were converted into shares initially on the basis of one share for one bond and as from 16 August 2004 following completion of the capital increase with preferential subscription rights, on the basis of an adjusted ratio of 1.2559 share for one bond. At 31 March 2005, 94, 618,915 bonds reimbursable with shares were outstanding for an amount of €133 million.
Note 18 - Short-term investments Carrying Within 1 Over 5 Value year 1 to 5 years years --------- -------- ------------ -------- (in € million) Government debt securities 4 1 3 - Deposits 53 53 - - Bonds and other debt securities 85 36 43 6 --------- -------- ------------ -------- At 31 March 2003 142 90 46 6 ========= ======== ============ ======== Bonds and other debt securities 39 35 4 - --------- -------- ------------ -------- At 31 March 2004 39 35 4 - ========= ======== ============ ======== Other debts securities 15 15 - - --------- -------- ------------ -------- At 31 March 2005 15 15 - - ========= ======== ============ ======== The aggregate fair value is €143 million, €39 million and €15 million at 31 March 2003, 2004 and 2005, respectively. Note 19 - Cash and cash equivalents Cash and cash equivalents include cash at banks and cash on hand of €897 million, €735 and €653 million at 31 March 2003, 2004 and 2005 respectively, and highly liquid investments of €731 million, €692 million and €809 million, at 31 March 2003, 2004 and 2005, respectively. Note 20 - Minority interests At 31 March ------------------------------ 2003 2004 2005 -------- --------- --------- (in € million) Balance beginning of year 91 95 68 Share of net income 15 (2) 1 Translation adjustment (15) (4) (3) Dividend paid (1) (3) (5) Change in scope and other changes 5 (18) 13 -------- --------- --------- Balance end of year 95 68 74 ======== ========= ========= Note 21 - Provisions for risks and charges At At At Translation 31 March 31 March 1st April Adjustments 31 March 2003 2004 2004 (*) Addition Releases Applied and other 2005 -------- -------- --------- -------- -------- ------- ----------- -------- (in € million) Warranties 815 807 807 475 (118) (207) (5) 952 Penalties and claims 1,766 1,078 1,078 225 (77) (555) 7 678 Contract loss 412 304 304 314 (33) (234) 5 356 Other risks on contracts 271 514 514 283 (79) (189) (37) 492 Provisions on contracts 3,264 2,703 2,703 1,297 (307) (1,185) (30) 2,478 Restructuring 138 385 385 363 (20) (289) 1 440 Other provisions 296 401 396 166 (39) (287) 2 238 -------- -------- --------- -------- -------- ------- ----------- -------- Total 3,698 3,489 3,484 1,826 (366) (1,761) (27) 3,156 ======== ======== ========= ======== ======== ======= =========== ======== - -------------- (*) Amended amounts at 1 April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a).
Provisions on contracts GT24/GT26 heavy-duty gas turbines During the year ended 31 March 2005, the Group utilised provisions of €359 million and retains at 31 March 2005, after exchange rate effects, €379 million in provisions for risks and charges in respect of these turbines. The mitigation plan related to formerly identified potential risks which were not covered by provisions has been completed during the fiscal year ended 31 March 2005. During the year ended 31 March 2004, the Group utilised provisions and accrued contract costs for €825 million and retained at 31 March 2004 , after exchange rate effects, €738 million in Provisions for risks and charges in respect of these turbines. These provisions did not include €234 million of exposure for which the Group considered the risks mitigated by appropriate action plans During the year ended 31 March 2003, the Group recorded an additional €1,637 million of provisions and accrued contract costs related to these turbines, including €83 million recorded in the Customer Service Segment (now Power Service Sector) in respect of contracts transferred to this Segment as part of the Group's after market operations and on which it has no uncovered exposure. The Group, therefore, retained €1,655 million of provisions and accrued contract costs at 31 March 2003 in respect of these turbines. These provisions did not include €454 million of exposure for which the Group considered the risks mitigated by appropriate action plans. In addition, these provisions did not take into account interest to be paid to customers (cost of carry), the cost of which are recorded when it falls due. Restructuring expenditures and provisions During the year ended 31 March 2005, further restructuring plans were adopted for an amount of €363 million mainly in Power Turbo-Systems / Power Environment and Transport Sectors. At 31 March 2005, provisions of €440 million were retained after an expenditure in the period of €289 million. During the year ended 31 March 2004, further restructuring plans were adopted for an amount of €645 million in all Sectors other than Marine, and also in Corporate headquarters. At 31 March 2004, provisions of €385 million were retained after an expenditure in the period of €357 million. During the year ended 31 March 2003, restructuring expenditure amounted to €297 million. New plans were adopted during the period in Power, Transmission & Distribution and Transport, for which provisions have been created. Other provisions During the year-ended 31 March 2005, the Group has reviewed its residual exposure attached to Marine Vendor financing and confirmed that the provision was adequate to cover the costs and risks attached. At 31 March 2005, the remaining provision for risks and charges amounts to €14 million. The reduction results from the utilisation against losses incurred (€73 million) and the remainder has been allocated to Marine Vendor financing assets for €53 million (see Note 11). At 31 March 2003 and 2004, the line "other provisions" included €140 million to cover Marine vendor financing exposure (see Note 27). Note 22 -- Retirement, termination and post-retirement benefits The Group provides various types of retirement, termination benefits and post retirement benefits (including healthcare benefits and medical cost) to its employees. The type of benefits offered to an individual employee is related to local legal requirements as well as operating practices of the specific subsidiaries.
Termination benefits are generally lump sum payments based upon an individual's years of credited service and annualised salary at retirement or termination of employment. Pension benefits are generally determined using a formula which uses the employee's years of credited service and average final earnings. Most defined-benefit pension liabilities are funded through separate pension funds. Pension plan assets related to funded plans are invested mainly in equity and debt securities. Other supplemental defined-benefit pension plans sponsored by the Group for certain employees are funded from the Group's assets as they become due. Change in benefit obligation Pension Benefits Other Benefits Total ------------------------ ------------------------ ------------------------ At 31 March At 31 March At 31 March ------------------------ ------------------------ ------------------------ 2003 2004 2005 2003 2004 2005 2003 2004 2005 ------- ------- ------- ------- ------- ------- ------- ------- ------- (In € million) Accumulated Benefit Obligation At end of year (3,137) (3,335) (4,072) (204) (144) (145) (3,341) (3,479) (4,217) Benefit Obligation at beginning of year (1) (3,527) (3,339) (4,003) (242) (204) (145) (3,769) (3,543) (4,148) Service cost (107) (86) (81) (2) (1) (1) (109) (87) (82) Interest cost (196) (184) (209) (15) (11) (9) (211) (195) (218) Plan participants contributions (20) (26) (29) - - - (20) (26) (29) Amendments 1 (2) (5) - 15 - 1 13 (5) Business Combinations/ disposals (2) (3) 129 (15) - - - (3) 129 (15) Curtailment 12 6 18 - - - 12 6 18 Settlements 91 74 15 - - - 91 74 15 Actuarial (loss) gain (97) (234) (252) (12) 17 (13) (109) (217) (265) Benefits paid 149 206 269 17 18 14 166 224 283 Foreign currency translation 358 (32) 96 50 21 8 408 (11) 104 ------- ------- ------- ------- ------- ------- ------- ------- ------- Benefit Obligation at end of year (3,339) (3,488) (4,196) (204) (145) (146) (3,543) (3,633) (4,342) ======= ======= ======= ======= ======= ======= ======= ======= ======= - -------------- (1) During the fiscal year ended 31 March 2005, the Group has elected to account for its Swiss cash balance pension plan under French GAAP as defined benefits plan, as now required by a recent US accounting pronouncement. The costs of this plan have been included as net periodic benefit costs and not as costs of scheme mixing defined benefits and defined contributions. The scheme was fully funded as at 1st April 2004 with assets and liabilities of €515 million. (2) In the year ended 31 March 2004, the Business combination relates mainly to the Disposal of T&D Sector (excluding Power Conversion business).
Change in plan assets Pension Benefits Other Benefits Total ------------------------ ------------------------ ------------------------ At 31 March At 31 March At 31 March ------------------------ ------------------------ ------------------------ 2003 2004 2005 2003 2004 2005 2003 2004 2005 ------- ------- ------- ------- ------- ------- ------- ------- ------- (In € million) Fair value of plan assets at Beginning of year (1) 2,712 2,012 2,778 - - - 2,712 2,012 2,778 Actual return on plan assets (282) 302 242 - - - (282) 302 242 Company contributions 73 74 99 - - - 73 74 99 Plan participant contributions 23 26 28 - - - 23 26 28 Business Combinations/ disposals (2) (30) 12 10 - - - (30) 12 10 Settlements (75) (33) (13) - - - (75) (33) (13) Benefits paid (95) (159) (210) - - - (95) (159) (210) Foreign currency translation (314) 29 (79) - - - (314) 29 (79) ------- ------- ------- ------- ------- ------- ------- ------- ------- Fair value of plan assets at end of year 2,012 2,263 2,855 - - - 2,012 2,263 2,855 Funded status of the plan (1,327) (1,225) (1,341) (204) (145) (146) (1,531) (1,370) (1,487) Unrecognised actuarial loss (gain) 933 904 1,020 34 14 21 967 918 1,041 Unrecognised prior service cost 11 8 11 (1) (14) (12) 10 (6) (1) Unrecognised transitional obligation (24) (29) (28) 3 2 2 (21) (27) (26) ------- ------- ------- ------- ------- ------- ------- ------- ------- (Accrued) prepaid benefit cost (407) (342) (338) (168) (143) (135) (575) (485) (473) ------- ------- ------- ------- ------- ------- ------- ------- ------- Of which: Accrued pensions and retirement Benefits (804) (699) (691) (168) (143) (135) (575) (842) (826) Prepaid assets (Note 11) 397 357 353 - - - 397 357 353 - -------------- (1) During the fiscal year ended 31 March 2005, the Group has elected to account for its Swiss cash balance pension plan under French GAAP as defined benefits plan, as now required by a recent US accounting pronouncement. The scheme was fully funded as at 1st April 2004 with assets and liabilities of €515 million. (2) In the year ended 31 March 2004, the Business combination relates mainly to the Disposal of T&D Sector (excluding Power Conversion business). Components of plan assets At 31 March ------------------------------------------------------------ 2003 2004 2005 ----------------- ----------------- ----------------- (In € (In € (In € million) % million) % million) % Equities 1,156 57.5 1,289 57.0 1,445 50.6 Bonds 641 31.8 734 32.4 1,042 36.5 Properties 129 6.4 137 6.0 248 8.7 Others 86 4.3 103 4.6 120 4.2 -------- ------- -------- ------- -------- ------- TOTAL 2,012 100 2,263 100 2,855 100 ======== ======= ======== ======= ======== =======
The actuarial assumptions used vary by business unit and country, based upon local considerations: Assumptions (weighted average rates) Pension Benefits Other Benefits ------------------------ ------------------------ Year ended 31 March Year ended 31 March ------------------------ ------------------------ 2003 2004 2005 2003 2004 2005 ------ ------ ------ ------ ------ ------ Discount rate 5.90% 5.66% 5.09% 6.75% 6.3% 6.00% Rate of compensation increase 3.28% 3.00% 2.97% N/A N/A N/A Expected return on plan assets 7.57% 8.00% 7.07% N/A N/A N/A - -------------- Regarding the Expected return of plan assets, the same basis has been applied in all countries where the Group has assets covering its pension liabilities: the Expected return on plan assets is the weighted average of the returns of bonds, equities and properties portfolios determined as follows: - - Equity return = risk free rate (government bond yield) + Equity risk premium (4%) - - Bond return = Discount rate - - Property return = Equity return - 1% The 4% equity risk premium is considered to be a fair assumption given the following reasons: - - It reflects the relatively low valuation of stock markets, following 3 years of stock market declines, - - In addition, risk free rates are low by historical standards due to disappointing growth and aggressive monetary policies. The following table shows the amounts of net periodic benefit cost for each of the three years ended 31 March 2003, 2004 and 2005. Pension Benefits Other Benefits Total ------------------------ ------------------------ ------------------------ Year ended 31 March Year ended 31 March Year ended 31 March ------------------------ ------------------------ ------------------------ 2003 2004 2005 2003 2004 2005 2003 2004 2005 ------- ------- ------- ------- ------- ------- ------- ------- ------- (in € million) Service cost 107 86 81 2 1 1 109 87 82 Interest cost 196 184 209 15 11 9 211 195 218 Expected return on plan assets (193) (147) (198) - - - (193) (147) (198) Amortisation of unrecognised prior service cost 2 1 1 - - (1) 2 1 - Amortisation of actuarial net loss (gain) 16 61 55 1 - - 17 61 55 Curtailments/Settlements 9 (143) (3) - - - 9 (143) (3) ------- ------- ------- ------- ------- ------- ------- ------- ------- Net periodic benefit cost 137 42 145 18 12 9 155 54 154 ======= ======= ======= ======= ======= ======= ======= ======= ======= Curtailments/Settlements effects included in Net gain on disposal of investments (See Note 4)(1) - 149 - - - - - 149 - ------- ------- ------- ------- ------- ------- ------- ------- ------- Net periodic benefit cost classified in pensions 137 191 145 18 12 9 155 203 154 ======= ======= ======= ======= ======= ======= ======= ======= ======= Costs contributions related to schemes mixing defined benefits and defined contributions 32 32 - - - - 32 32 - Multi-employer contributions 27 28 21 - - - 27 28 21 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total pension cost (See Note 4) 196 251 166 18 12 9 214 263 175 ======= ======= ======= ======= ======= ======= ======= ======= ======= (1) Disposal of T&D Sector as well as Small and Medium gas turbines and Industrial steam turbines businesses.
The Group's health care plans, disclosed in other benefits are generally contributory with participants' contributions adjusted annually. The healthcare trend rate is assumed to be 10% in the year ended 31 March 2005 and 8% to 9.5% thereafter. The total of pension and other post retirement benefit costs for each of the three fiscal years are shown in Note 4 - Other income (expenses), net. The total cash spent in the year ended 31 March 2005 was €193 million. Estimated Future Benefit Payments The estimated future benefit payments expected to be paid are as follows : Pension Other Benefits Benefits Total ------------- ------------- ------------- 2006 200 13 213 2007 213 12 225 2008 223 13 236 2009 232 13 245 2010 243 13 256 Years 2011-2015 1,373 60 1,433 ------------- ------------- ------------- Total over the next 10 years 2,484 124 2,608 ============= ============= ============= Note 23 - Financial Debt (a) Analysis by nature At 31 At 31 At 1st At 31 March March April March 2003 2004 2004(*) 2005 ----- ----- ----- ----- (in € million) Redeemable preference shares (1) 205 205 205 205 Subordinated notes (2) 250 250 250 5 Bonds (2) 1,200 650 650 1,228 Bonds exchange premium (2) - - - (26) Syndicated loans (3) 2,627 1,922 1,922 1,039 Subordinated long term bond (TSDD) (4) - 200 200 - Subordinated bonds reimbursable with shares (TSDDRA) (5) - 300 300 - Bilateral loans 358 260 260 33 Commercial paper (6) 83 - - 14 Future receivables securitised, net (7) 1,292 265 265 49 Other borrowings facilities (8) 196 1,023 252 Bank overdraft 266 78 78 58 Accrued interest 50 46 46 50 ----- ----- ----- ----- Financial debt 6,331 4,372 5,199 2,907 ===== ===== ===== ===== Long-term 3,647 3,829 4,602 2,414 Short-term 2,684 543 597 493 - -------------- (*) Amended amounts at 1 April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2 (a). (1) On 30 March 2001, a wholly owned subsidiary of ALSTOM Holdings issued perpetual, cumulative, non voting, preference shares for a total amount of €205 million.
The preference shares have no voting rights. They were not redeemable, except at the exclusive option of the issuer, in whole but not in part, on or after the 5th anniversary of the issue date or on the 5th anniversary in case of certain limited specific pre identified events. Included in those events, are changes in tax laws and the issuance of new share capital. In July 2002 an issue of shares was made triggering the contractual redemption of the preferred shares at 31 March 2006 at a price equal to par value together with dividends accrued, but not yet paid. (2) At 31 March 2004, the Group had: - €250 million of Auction Rate Coupon Undated Subordinated Notes redeemable at par in September 2006, (with floating rate coupon reset at 4.99% over Euribor p.a. until maturity, following auctions in September 2004), - €650 million of bonds listed on the Paris and Luxembourg Stock Exchanges, bearing a 5% coupon and redeemable at par on 26 July 2006, During the fiscal year ended 31 March 2005, these bonds were offered to be exchanged for new bonds due March 2010. €668 million of the €900 million bonds eligible for exchange were tendered to the offer, leading, after application of the exchange ratio to €695,3 million of new 2010 Bonds being issued as a result of the exchange, in addition to which, the Group issued €304.7 million of additional bonds with same terms and condition. The related exchange premium of €26 million has been recorded in diminution of the bonds and is amortised up to March 2010. As a result of the above, at 31 March 2005, the Group has: - €5 million of Auction Rate redeemable in September 2006, - €228 million of bonds bearing a 5% coupon and redeemable at par on 26 July 2006, - €1,000 million of bonds bearing a 6.25 % coupon with a 5 year maturity, - €(26) million of bonds exchange premium. (3) Syndicated loans include: o A 2008 Subordinated Debt Facility signed on 30 September 2003 with a syndicate of banks and financial institutions for an amount up to €1,563 million (the "PSDD"), and comprising a Term Loan Tranche A for €1,200 million (fully drawn until maturity or redemption), and a Revolving Facility Tranche B for €363 Million. At 31 March 2005, this subordinated debt facility was divided between: - the Term Loan "Tranche A" of €1,039 million following the redemption of €161 million thereof into shares as part of the capital increase closed in August 2004. - and the Revolving Credit "Tranche B" of €281 million following the redemption of €82 million thereof into shares as part of the capital increase closed in August 2004. The full amount of €363 million was available for draw down as at 31 March 2004. The full amount of €281 million was available for draw down as at 31 March 2005. o A 2006 Multicurrency Revolving Credit Agreement initially signed for an amount up to €1,110 million, amortised down to €722 million as at March 2004, and was fully drawn as at 31 March 2004. During the fiscal year ended 31 March 2005, €18 million have been redeemed into shares as part of the capital increase closed in August 2004 and the remaining amount of €704 million was fully available for draw down as at 31 March 2005.
At 31 March 2005, the 2008 Subordinated Debt Facility ("the PSDD") and the 2006 Multicurrency Revolving Credit Agreement are subject to the following financial covenants amended with unanimous agreement by the lenders on 23 June 2004 and on 24 December 2004, and as adjusted to take into account the results of the August 2004 capital increases: Minimum Minimum Maximum Maximum Minimum Interest Consolidated Total Net debt EBITDA Cover net worth debt leverage Covenants (a) (b) (c) (d) (e) -------- ------------ ------- -------- -------- (in € million) (in € million) (in € million) September 2004 - 1,000 4,329 - - December 2004 - - 4,129 - - March 2005 - 1,100 3,979 - - June 2005 - - 4,179 - - September 2005 - 850 4,179 - 0 December 2005 - - 4,129 - - March 2006 3 1,150 3,979 4.0 - June 2006 - - 3,929 - - September 2006 3 1,150 3,929 3.6 - December 2006 - - 3,929 - - March 2007 3 1,150 3,929 3.6 - June 2007 - - 3,929 - - September 2007 3 1,150 3,929 3.6 - December 2007 - - 3,929 - - March 2008 3 1,150 3,929 3.6 - June 2008 - - 3,929 - - - -------------- (a) Ratio of EBITDA (see (e) below) to consolidated net financial expense (interest income less interest expense including securitisation interest). (b) Sum of shareholders' equity (excluding the cumulative impact of any deferred tax assets impairment arising after 31 March 2004 and including Bonds Reimbursable with Shares "ORA" not yet reimbursed) and minority interests (this covenant will not apply if and for as long as ALSTOM's rating is Investment Grade). After excluding the impact of the impairment of deferred tax assets recorded in the fiscal year ended 31 March 2005 of €218 million the minimum consolidated net worth to compare with the covenant above is €1,607 million. (c) Sum of the financial debt (SPEs excluded) and the net amount of sale of trade receivables (this covenant will not apply if and for as long as ALSTOM is Investment Grade). (d) Ratio of total net debt (total financial debt less short-term investments and cash and cash equivalents) to EBITDA (see (e) below). (e) Earning Before Interest and Tax plus Depreciation and Amortisation as set out in Consolidated Statements of Cash Flow less goodwill amortisation and less capital gain on disposal of investments. The EBITDA shall be positive at 30 September 2005. These covenants have been contractually determined based on accounting standards generally accepted in France at 31 March 2004. The agreement states that any change in the accounting standards will be neutralised either through an amendment of the covenants or through the recalculation of the aggregates mentioned above excluding the impact of the change in accounting principles. (see Note 2 (a)). At 31 March 2005, the total debt to compare with the covenants above is €2,820 million excluding the impact of €94 million of the first application of the Règlement CRC 2004-03 (see Note 2 (a) and 25). The amendment signed 24 December 2004 confirms the exclusion of the SPEs' financial debt.
(4) During the fiscal year ended 31 March 2004, €200 million of subordinated bonds were issued with a 15-year maturity to the French State ("TSDD" or Titres Subordonnés à Durée Déterminée). In August 2004, the French State has subscribed shares as part of the capital increase with preferential subscription rights by way of set-off of the €200 million "TSDD". The "TSDD" was carrying an interest rate of EURIBOR plus 5% of which 1.5% were capitalised annually and paid upon set-off. (5) During the fiscal year ended 31 March 2004, €300 million of subordinated bonds were issued with a 20-year maturity to the French State, which should be automatically reimbursable with shares upon the approval of the reimbursement with shares by the European Commission ("TSDDRA" or Titres Subordonnés à Durée Déterminée Remboursables en Actions). On 7 July 2004, following the approval of the European commission, the €300 million of "TSDDRA" held by the French State have been reimbursed into shares. These subordinated bonds were carrying an interest rate of 2 % paid upon their reimbursement. The issue price for each bond was €1.25, and each bond was reimbursed with one share. (6) The total authorised commercial paper program is €2,500 million, availability being subject to market conditions. At 31 March 2005, €14 million of commercial paper were outstanding from this program. (7) The Group sold, in several past transactions, the right to receive payment from certain customers for future receivables. The total net amounts outstanding under these transactions were of €265 million and €49 Millions at 31 March 2004 and 31 March 2005, respectively. The total amount concerns the Transport Sector. (8) Following the application of Règlement CRC 2004-03 (see Note 2(a) and Note 25), bank overdraft and "other borrowings facilities" include, at 1 April 2004, €827 million of borrowings related to special purpose entities. At 31 March 2005, these borrowings have been reduced to €94 million following: - the sale of one special purpose entity during the period (€243 million), - the deconsolidation of two special purpose entities (€384 million), - repayments and impact of foreign exchange (€106 million). Total available undrawn credit lines at Group level amounts to €1,202 million at 31 March 2005 (€783 million at 31 March 2004) and is constituted of: - €217 million under several bilateral lines of credit, - €281million under the Tranche B of the 2008 Subordinated Debt Facility "PSDD", - €704 million under the 2006 Multicurrency Revolving Credit Agreement. (b) Analysis by maturity and interest rate Short term Long term -------------------------------------------------- Within 1-2 2-3 3-4 4-5 Over 5 Average rate TOTAL 1 year years years years years years Of interest ------------- -------------------------------------------------- (in € million) (in € million) Redeemable preference shares 205 205 - - - - - 4.8% Subordinated notes 5 - 5 - - - - 10.6% (1) Bonds 1,228 - 228 - - 1,000 - 6% Bonds exchange premium (26) (6) (5) (5) (5) (5) - Syndicated loans 1,039 - - - 1,039 - - 6.6% Bilateral loans 33 - 33 - - - - 6.6% Commercial Paper 14 14 - - - - - 2.4% Other facilities 252 123 20 20 19 38 32 3.0% Bank overdraft 58 58 - - - - - 4.4% Accrued interests 50 50 - - - - - Future receivables securitised, net (2) 49 49 - - - - - 5.7% ------------- -------------------------------------------------- Financial debt 2,907 493 281 15 1,053 1,033 32 ============= ================================================== - -------------- (1) On 23 September 2004, the margin above Euribor of these notes have been reset through an auction process at 4.99%.
(2) The reimbursement of which will come from the direct payment of the customer to the investor to whom the Group sold the right to receive the payment. At 31 March 2004 At 31 March 2005 ----------------------- ------------------------- Amount Amount Amount Amount before after before after Hedging Hedging Hedging (1) Hedging (1) ----------------------- ------------------------- (in € million) (in € million) Financial debt at fixed rate 1,055 735 1,375 1,375 Financial debt at floating rate 3,317 3,637 1,532 1,532 ---------- ---------- ----------- ----------- Total 4,372 4,372 2,907 2,907 ========== ========== =========== =========== (1) Following the cancellation of a portion of the €650 million bond issue, there is no longer any interest rate hedging on the Group's financial debt. The result generated from the swap cancellation is spread unti the initial maturity date of the instrument. (c) Analysis by currency At 31 March ------------------------------ 2003 2004 2005 -------- -------- -------- (in € million) Euro 6,205 4,214 2,722 US dollar 22 112 130 British Pound 3 12 7 Other currencies 101 34 48 -------- -------- -------- Financial debt 6,331 4,372 2,907 ======== ======== ======== Note 24 - Other payables At 31 March At 1st At 31 --------------- April March 2003 2004 2004 (*) 2005 ------ ------ -------- ----- (in € million) Accrued contract cost (contract completion) 2,822 2,229 2,229 1,913 Staff and associated costs 888 694 694 673 Income taxes 192 195 195 107 Other taxes 254 291 291 213 Others 590 489 493 320 ------ ------ -------- ----- Other payables 4,746 3,898 3,902 3,226 ====== ====== ======== ====== - -------------- (*) Amended amounts at 1st April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a) Note 25 - Special Purpose Entities At 31 March 2004, the Group did not consolidate its interests in four active entities (three in Marine and one in Transport) and Cruiseinvest Jersey Ltd , parent company of Cruiseinvest LLC and Octavian Shipping LLC as it held no shares. As mentioned in Note 2(a) the Group applied the Règlement CRC 2004-03 with effect from 1 April 2004. Under this Règlement, the Group reviewed its accounting treatment for all special purpose entities at 1 April 2004 assessing its level of control over the entities and its participation in the risks and rewards of ownership. The Group concluded that four Special purpose leasing entities and Octavian Shipping LLC should be fully consolidated from 1 April 2004 and these entities are included in the Consolidated Financial Statements from that date. The five ships held by subsidiaries of Cruiseinvest LLC have not been consolidated as it has been determined that the Group does not have control of the structure and does not bear the major part of the risks and rewards of ownership.
At 1 April 2004, four Marine entities and one Transport entity are fully consolidated. On 20 September 2004, the Group completed the disposal of its interests in the Transport entity. On 1st December 2004, the Group completed the disposal to third party of its loans in two entities financing two Cruise ships. From those respective dates, the Group concluded that the criterias of the Règlement CRC 2004-03 triggering at 1st April 2004 the consolidation were no longer met. At 31 March 2005, two Marine entities are consolidated with only one being active and owning one cruise. In assessing the provisional opening balance sheet impact of the consolidation of the four entities and Octavian Shipping LLC, the Group recorded their fixed assets at the lower of historical cost and fair value, current assets at realisable value and liabilities at the amount required to settle the obligations. At 1 April 2004, three entities were structured in such a way that cumulative results of each special purpose leasing entity equal zero at the end of each arrangement, interest expenses being compensated by leasing revenues. As a consequence, interim net income (loss) is put to zero by the recording of a corresponding liability (asset) to reflect the substance of the transactions. At 31 March 2005, this aforementioned accounting treatment is no longer applicable as a result of the de-consolidation of the related entities. The contribution of these entities at 1 April 2004 and 31 March 2005 consolidated balance sheets before intra-group elimination is as follows:. At At 1st April 2004 31 March 2005 -------------- ------------- Assets Property, plant and equipment, net 693 85 Inventories, and contract in progress, net 110 - Other assets, net 138 39 Cash equivalents - 2 -------------- ------------- Total 941 126 ============== ============= Liabilities Net equity (*) (8) (29) Provisions for risks and charges (*) 3 3 Financial debt 827 94 Group financing (*) 115 52 Other liabilities 4 6 -------------- ------------- Total 941 126 ============== ============= - -------------- (*) before intra-group elimination. The significant decrease of the balance sheet in the fiscal year ended 31 March 2005 is explained by the deconsolidation of three special purpose entities (as explained above) and the sale to a cruise operator of one cruise ship recorded at 1st April 2004 within "Inventories and contract in progress, net". At 31 March 2005, the remaining Property, plant and equipment, net corresponds to one cruise ship currently chartered to a cruise operator. The negative net equity is offset by a corresponding utilisation of the provision for Marine vendor financing (see Note 21-other provisions). Note 26 - Sector and geographic data a) Sector data The Group is managed through Sectors of activity and has determined its reportable segments accordingly.
Starting from 1 April 2004, the former Power Turbo- Systems Sector and the former Power Environment Sector were merged into one Sector «Power Turbo-systems / Power Environment». At 31 March 2005, the Group is organised in four Sectors and one Business: • Power Turbo-Systems / Power Environment Sector Power Turbo-Systems / Power Environment provides steam turbines, generators and power plant engineering, including hydro construction and heavy duty gas turbines. It also focuses on boilers and emissions control equipment in the power generation, petrochemical and industrial markets; demand for upgrades and modernisation of existing power plants. • Power Service Sector Power Service promotes the service activities relating to the Power Turbo Systems / Environment Sector and services to customers in all geographic markets. • Transport Sector Transport offers equipment, systems, and customer support for rail transportation including passenger trains, locomotives, signalling equipment, rail components and service. • Marine Sector Marine designs and manufactures cruise and other speciality ships. • Power Conversion Business Power Conversion provides solutions for manufacturing processes and supplies high-performance products including motors, generators, propulsion systems for marine applications and drives for a variety of industrial applications. The composition of the Sectors may vary slightly from time to time. As part of any change in the composition of its sectors, Group management may also modify the manner in which it evaluates and measures profitability. It evaluates internally their performance on Operating income, Free Cash Flow as well as Margin in backlog and other specific ones. Some units, not material to the sector presentation, have been transferred between sectors. The revised Sector composition has not been reflected on a retroactive basis as the Group determined it was not practicable to do so. Sales At 31 March ----------------------------------------- 2003 2004 2005 ---------- ---------- ---------- (in € million) Power Turbo-Systems/Power Environment 6,955 5,059 4,256 Power Service 2,678 2,747 2,844 Transport 5,072 4,862 5,134 Marine 1,568 997 630 Power Conversion 523 499 539 Corporate & others (1) 205 241 259 Transmission & Distribution (2) 3,082 2,073 - Power Industrial Turbines (3) 1,268 210 - ---------- ---------- ---------- TOTAL 21,351 16,688 13,662 ========== ========== ==========
Operating income At 31 March ----------------------------------------- 2003 2004 2005 ---------- ---------- ---------- (in € million) Power Turbo-Systems/Power Environment (1,175) (253) (35) Power Service 403 417 473 Transport (24) 64 260 Marine 24 (19) (103) Power Conversion 15 15 36 Corporate & others (1) (44) (59) (81) Transmission & Distribution (2) 212 121 - Power Industrial Turbines (3) 82 14 - ---------- ---------- ---------- TOTAL (507) 300 550 ========== ========== ========== EBIT At 31 March 2003 2004 2005 ---------- ---------- ---------- (in € million) Power Turbo Systems/Power Environment (1,420) (641) (361) Power Service 304 227 360 Transport (113) (189) 168 Marine 12 (40) (16) Power Conversion (22) (19) 15 Corporate & others (1) (46) (252) (258) Transmission & Distribution (2) 103 36 - Power Industrial Turbines (3) 53 7 - ---------- ---------- ---------- TOTAL (1,129) (871) (92) ========== ========== ========== Capital employed (**) At 31 March At 1st At 31 --------------- April March 2003 2004 2004 (*) 2005 ------ ------ -------- ----- (in € million) Power Turbo-Systems/Power Environment N/A (499) (499) (608) Power Service N/A 1,921 1,921 1,683 Power Industrial Turbines (3) N/A - - - TOTAL POWER 2,383 1,422 1,422 1,075 Transport 738 360 653 125 Marine (343) (580) 59 (234) Power Conversion (4) N/A 25 25 (4) Corporate & others (1) 1,208 1,333 1,228 1,341 Transmission & Distribution (2) 963 - - - ------ ------ -------- ----- TOTAL 4,949 2,560 3,387 2,303 ====== ====== ======== ===== - -------------- (*) Amended amounts at 1st April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a) (**)Capital employed is defined as the closing position of the total of tangible, intangible and other fixed assets net, current assets (excluding net amount of securitisation of existing receivables) less current liabilities and provisions for risks and charges. (1) Corporate & others include all units accounting for Corporate costs, the International Network and the overseas entities in Australia, New Zealand and India, that are not allocated to Sectors.
(2) Disposed of in January 2004 (3) Disposed of in April 2003 and August 2003. (4) Included in Transmission & Distribution at 31 March 2003 b) Geographic data Sales by country of destination Year ended 31 March ---------------------------------------- 2003 2004 2005 ---------- ---------- ---------- (in € million) Europe 9,219 8,002 7,429 North America 4,719 3,001 1,977 South & Central America 1,534 857 575 Asia / Pacific 3,727 3,401 2,489 Middle East / Africa 2,152 1,427 1,192 ---------- ---------- ---------- TOTAL 21,351 16,688 13,662 ========== ========== ========== Sales by Country of Origin Year ended 31 March ---------------------------------------- 2003 2004 2005 ---------- ---------- ---------- (in € million) Europe 14,762 12,204 9,951 North America 3,935 2,519 1,919 South & Central America 601 415 374 Asia / Pacific (*) 1,833 1,416 1,301 Middle East / Africa 220 134 117 ---------- ---------- ---------- TOTAL 21,351 16,688 13,662 ========== ========== ========== Net sales of €3,300 million (15.5%), €2,650 million (15.9%) and €3,420 million (25.0%) in the years ended 31 March 2003, 2004 and 2005 respectively, are obtained from a group of state owned companies, independently managed, the largest of which represented, 4.2%, 3.9% and 4.9% in the years ended 31 March 2003, 2004 and 2005, respectively. No client represented more than 10% of net sales in any of the three years. Note 27 - Off balance sheet commitments and other obligations a) Off balance sheet commitments At 31 March At 31 March At 31 March 2003 2004 2005 ----------- ----------- ----------- (in € million) Guarantees related to contracts (1) 9,465 8,169 7,526 Guarantees related to Vendor financing (2) 749 640 429 Discounted notes receivable 11 6 5 Commitments to purchase fixed assets 7 - 1 Other guarantees 94 43 114 ----------- ----------- ----------- TOTAL 10,326 8,858 8,075 =========== =========== =========== - -------------- (1) Guarantees related to contracts
In accordance with industry practice, the above instruments can, in the normal course, extend from the tender period until the final acceptance by the customer, up to the end of the warranty period and may include guarantees on project completion, contract specific defined performance criteria or plant availability. The guarantees are provided by banks or surety companies by way of performance bonds, surety bonds and letters of credit and are normally for defined amounts and periods and are issued in favour of the customer with whom the commercial contracts have been signed. The Group provides a counter indemnity to the bank or Surety Company which issues the said instrument. The projects for which the guarantees are given are regularly reviewed by management and should payments becomes probable pursuant to guarantees, the necessary accruals will be made and recorded in the Consolidated Financial Statement at that time. In the context of the Share Purchase and Settlement Agreement signed with ABB Ltd in March 2000 pursuant to which the Group purchased ABB's 50% share of the joint venture ABB ALSTOM Power, the Group has agreed to indemnify ABB with respect to parent company guarantees that it had previously issued with respect to certain of power contracts, the total outstanding amount of such ABB guarantees being €2.7 billion at 31 March 2005. These parent company guarantees are included in the above figures. The above figures exclude: - €3.8 billion at 31 March 2005 (€3.2 billion at 31 March 2004 and €2.9 billion at 31 March 2003) of advance and progress payment related guarantees which payments have been included over time in the balance sheet in "Customers deposits and advances, gross". - €2.1 billion at 31 March 2005 (€3.3 billion at 31 March 2004 and €4.3 billion at 31 March 2003) of surety and conditional bonds where the likelihood of the commitments becoming obligations is considered to be remote. The bonding guarantees relating to contracts, issued by banks or surety companies, amount to €10.7 billion at 31 March 2005. The Group has put in place a up to €8 billion committed bonding guarantee facility programme, with an initial commitment of our banks for €6.6 billion. This programme includes the bonds issued under the bonding line of €3.5 billion provided during the summer 2003 and new bonds to be issued over a two year period up to 27 July 2006. The bonds under this new programme benefit from a €2 billion security package consisting of: - a first loss guarantee in the form of cash collateral provided by the Group for €700 million (see Note 11); and - a second rank security for a total amount of €1,300 million covering second losses in excess of the cash collateral, in the form of guarantees, given on a pari passu basis by a French State- guaranteed institution (Caisse Française de Développement Industriel) for an amount of €1,250 million, and the remainder (€50 million) by a group of banks consisting of the initial banks of the program. This programme is revolving : any bond expiring releases capacity to issue new bonds within the €8 billion limit and the two year period. The commitment of our core banks was for an initial volume of up to €6.6 billion, of which final documentation was dated July 27th 2004. This initial amount was expected to cover the Group's forecasted bonding needs for approximately 18 months. Since that date further syndication in the program has allowed us to secure to date €7.4 billion (€7.15 billion at 31 March 2005) which together with bilateral capacity obtained outside of the program is at this stage anticipated to cover all our needs till the end of the program in July 2006.
The bonds and guarantees issued in the syndicated facility under that programme are covered by counter indemnities from ALSTOM Holdings and from the Group subsidiary performing the contractual obligations pertaining to the guarantee. The banks can make a claim under the security package if, and only if, a bond issued under the programme has been called by a customer, paid by the bank to the beneficiary and neither the Group subsidiary nor ALSTOM Holdings have been in a position to indemnify the banks. The issuance of new bonds under the bonding programme mentioned above is also subject to the financial covenants disclosed in the Note 23(a)(3). At 31 March 2005, €78 million of bonds and guarantees relating to units sold as part of disposals were still held by the Group. (2) Vendor financing The Group has provided financial support, referred to as vendor financing, to financial institutions and granted financing to certain purchasers of its cruise-ships for ship-building contracts signed up to fiscal year 1999 and other equipment. The off-balance sheet "vendor financing" is €749 million at 31 March 2003, €640 million at 31 March 2004 and €429 million at 31 March 2005. The table below sets forth the breakdown of the outstanding off-balance sheet vendor financing by Sector at 31 March 2003, 2004 and 2005: At 31 March At 31 March At 1st April At 31 March 2003 2004 2004(*) 2005 ----------- ----------- ------------ ----------- (in € million) Marine 423 314 174 120 Cruiseinvest/ Renaissance 107 83 40 38 Festival 208 144 48 - Others 108 87 86 82 Transport 317 321 321 309 European Metro Operator (2) 257 266 266 257 Others 60 55 55 52 Other Sectors 9 5 5 - ----------- ----------- ------------ ----------- Off balance sheet (1) 749 640 500 429 =========== =========== ============ =========== - -------------- (*) Amended amounts at 1 April 2004 pursuant to the first application of the Règlement CRC 2004-03. See Note 2(a). (1) Off-balance sheet figures correspond to the total guarantees and commitments, net of related cash deposits, which are shown as balance-sheet item (see Note 11) (2) Guarantees given include the requirement to deposit funds in escrow in the event of non-respect of certain covenants, waived through 30 June 2005
The total vendor financing exposure at 31 March 2003, 2004 and 2005 is the following: At 31 March At 31 March At 1st April At 31 March 2003 2004 2004(*) 2005 ----------- ----------- ------------ ----------- (in € million) Off balance- sheet exposure 749 640 500 429 Balance sheet exposure (see Note 11) 510 329 250 - Exposure relating to consolidated entities (*) - - 219 146 ----------- ----------- ------------ ----------- VENDOR FINANCING EXPOSURE 1,259 969 969 575 =========== =========== ============ =========== (*) corresponding to the maximum exposure related to four Marine entities consolidated at 1st April 2004 following the first application of the Règlement CRC 2003-04 (see Notes 2(a) and 25). At 31 March 2005, this exposure is covered by €117 million of assets, net. Marine Cruiseinvest / Renaissance At 31 March 2003 and 2004, it corresponds to the guarantees of the financing of two subsidiaries of Cruiseinvest Jersey Ltd for respectively US$89 million and US$72 million (€82 million and €59 million) and to the undrawn portion of the credit line granted to Cruiseinvest LLC of respectively €25 million and €24 million. At 1st April 2004, the decrease of the exposure is due to the consolidation of Octavian shipping LLC, a subsidiary of Cruiseinvest Jersey Ltd pursuant to the application of the Règlement CRC 2004-03 (see Note 25), the relating guarantee becoming internal and consequently no longer reported. At 31 March 2005, it corresponds to the guarantees of the financing of one subsidiary of Cruiseinvest LLC for US$18 million (€14 million) and to the undrawn portion of the credit line granted to Cruiseinvest LLC of €24 million. Festival At 31 March 2003 and 2004, the Group guaranteed the financing of one special purpose leasing entity relating to one cruise-ship for an amount €111 million and €96 million respectively. At 1st of April 2004, pursuant to the application of the Règlement CRC 2004-03, this entity is fully consolidated and the relating financial debt is included in the Net financial debt of the Group. At 31 March 2005, following the sale of this cruise ship, the associated debt was fully reimbursed (see Note 25). In addition, at 31 March 2003 and 2004 the Group guaranteed the financing arrangements of two cruise ships delivered to Festival for an amount of €97 million and €48 million respectively. At 31 March 2005, following the sale of these Cruise ships during the period, the guarantees were released. At 31 March 2005, the Group has no outstanding guarantees relating to Festival. Other At 31 March 2003, 2004 and 2005, it mainly corresponds to the guarantees provided by the Group on the financing arrangements of one cruise-ship and two high speed ferries delivered to three customers for an amount of €91 million, €86 million and €82 million, respectively. Based on known facts and on assumptions as to leases renewal and ships sales for Cruiseinvest and other cruise-ships, the Group considers that the provision in respect of Marine Vendor financing of €14 million at 31 March 2005 (€140 million at 31 March 2003 and 2004) remains adequate to cover the probable risk.
Transport At 31 March 2003, 2004 and 2005, guarantees given as part of vendor financing arrangements in Transport Sector amount to €317 million, €321 million and €309 million, respectively. Included in this amount are guarantees totalling US$63 million (€58 million, €52 million and €49 million at 31 March 2003, 2004 and 2005, respectively) given with respect to equipment sold to Amtrak and also guarantees given as part of a leasing scheme involving a major European metro operator as described in Note 27(b). If the metro operator decides in year 2017 not to extend the initial period the Group has guaranteed to the lessors that the value of the trains and associated equipment at the option date should not be less than GBP177 million (€257 million, €266 million and €257 million at 31 March 2003, 2004 and 2005, respectively). b) Capital and operating lease obligations Total Within 1 year 1 to 5 years Over 5 years -------------- --------------- -------------- -------------- (in € million) Long term rental (1) 667 6 48 613 Capital leases obligation (2) 278 31 93 154 Operating leases (3) 534 90 225 219 -------------- --------------- -------------- -------------- At 31 March 2003 1,479 127 366 986 ============== =============== ============== ============== Long term rental (1) 683 11 75 597 Capital leases obligation (2) 237 37 94 106 Operating leases (3) 430 62 181 187 -------------- --------------- -------------- -------------- At 31 March 2004 1,350 110 350 890 ============== =============== ============== ============== Long term rental (1) 650 13 86 551 Capital leases obligation (2) 335 46 118 171 Operating leases (3) 403 57 183 163 -------------- --------------- -------------- -------------- At 31 March 2005 1,388 116 387 885 ============== =============== ============== ============== - -------------- (1) Long term rental Pursuant to a contract signed in 1995 with a major European metro operator, the Group has sold 103 trains and associated equipment to two leasing entities. These entities have entered into an agreement by which the Group leases back the trains and associated equipment from the lessors for a period of 30 years. The trains are made available for use by the metro operator for an initial period of 20 years, extendible at the option of the operator for a further ten year period. The trains are being maintained and serviced by the Group. These commitments are in respect of the full lease period and are covered by payments due to the Group from the metro operator. If this lease was capitalised it would increase long-term assets and financial debt by €667 million, €683 million and €650 million at 31 March 2003, 2004 and 2005, respectively.
(2) Capital leases If capital leases had been capitalised, it would have had the following effects on the consolidated balance sheet: At 31 March At 31 March At 31 March 2003 2004 2005 ------------- ------------- ------------- (in € million) Increase in property plant and equipment, net 212 205 248 Increase in financial debt 216 200 255 ------------- ------------- ------------- Increase in (decrease) of shareholder's equity (4) 5 (7) ============= ============= ============= (3) Operating leases A number of these operating leases have renewal options. Rent expense was €110 million, €87 million and €72 million in the year ended 31 March 2003, 2004 and 2005, respectively. No material commitments are omitted in this note in accordance with current accounting rules. Note 28 - Contingencies - - Litigation The Group is engaged in several legal proceedings, mostly contract related disputes that have arisen in the ordinary course of business. Contract related disputes, often involving claims for contract delays or additional work, are common in the areas in which the Group operates, particularly for large, long-term projects. In some cases, the amounts claimed against the Group, sometimes jointly with its consortium partners, in these proceedings and disputes are significant, ranging up to around €500 million in one particular dispute. Some proceedings against the Group are without a specified amount. Amounts retained in respect of litigation, considered as best estimates of probable liabilities are included in provisions for risks and charges and other payables. Actual costs incurred may exceed the amount of provisions for litigation because of a number of factors including the inherent uncertainties of the outcome of litigation. - - Claim from Royal Caribbean Cruises Limited ("RCCL") In August 2003, RCCL and various RCCL group companies filed a lawsuit in Florida, USA against various Rolls Royce group companies and against various ALSTOM group companies claiming damages for a global amount of approximately €230 million (USD300 million) for alleged misrepresentations in the selling of pods, and negligence in the design and manufacture of pods. The Group and Rolls Royce are strongly contesting this claim. - - Asbestos The Group is subject to regulations in many countries in which it operates, regarding the control and removal of asbestos-containing material and identification of potential exposure of employees to asbestos. It has been the Group's policy for many years to abandon definitively the use of products containing asbestos by all of our operating units worldwide and to promote the application of this principle to all of our suppliers, including in those countries where the use of asbestos is permitted. In the past, however, the Group has used and sold some products containing asbestos, particularly in France in our Marine Sector and to a lesser extent in our other Sectors. The Group is subject to asbestos-related legal proceedings or claims including in France, the United States and the United Kingdom. Some of the Group's subsidiaries are the subject in France of judicial proceedings instituted by certain employees or former employees with the aim of obtaining a court decision holding these subsidiaries liable for an inexcusable fault (faute inexcusable) which would allow them to obtain a supplementary compensation above the payments made by the French Social Security funds of related medical costs. Although the courts of competent jurisdiction have made
findings of inexcusable fault, the damages in most of these proceedings have been borne to date by the general French Social Security (medical) funds. Although no assurance can be given, the Group believes that those cases where it may be required to bear a portion of the damages do not represent a material exposure and therefore, no provisions have been recorded. In addition to the foregoing, in the United States, the Group is subject to asbestos-related personal injury lawsuits which have their origin solely in the Company's purchase of certain former power businesses of Combustion Engineering, Inc.("CE") or its former subsidiaries for which the Group is indemnified by its parent company, ABB Ltd. The Group is also subject to two putative class action lawsuits in the United States asserting fraudulent conveyance claims against various ALSTOM and ABB entities in relation to CE, for which the Group has asserted indemnification against ABB. CE is a United States subsidiary of ABB, and its power activities were part of the power generation business purchased by us from ABB. In January 2003, CE filed a "pre-packaged" plan of reorganisation in United States bankruptcy court. In addition to its protection under the ABB indemnity, the Group believes that under the terms of this plan, it would have been protected against pending and future personal injury asbestos claims, or fraudulent conveyance claims, arising out of the past operations of CE. The pre-packaged plan was confirmed by the bankruptcy court on 23 June 2003 and by the United States federal district court on 31 July 2003. The plan, however, subsequently was appealed, and the United States Court of Appeals for the Third Circuit vacated the plan confirmation order and remanded the case to the federal district court for further proceedings. As a result, confirmation of the plan will be subject to further lower district court and/or bankruptcy court proceedings and the plan will have to be revised and approval thereof re-solicited from creditors and asbestos claimants. On 21 March 2005, ABB announced that it had reached agreement with certain representatives of asbestos claimants on certain "settlement points" that would form the basis for such a revised plan. All of the pending CE-related asbestos cases currently are stayed by virtue of a bankruptcy court order issued at the outset of the case. At 31 March 2005, the Group is subject to approximately 31 other asbestos-related personal injury lawsuits in the United States involving approximately 486 claimants that, in whole or in part, assert claims against the Group which are not related to the power generation business purchased by us from ABB or as to which the complaint does not provide details sufficient to permit us to determine whether the ABB indemnity applies. Most of these lawsuits are in the preliminary stages of the litigation process and they each involve multiple defendants. The allegations in these lawsuits are often very general and difficult to evaluate at preliminary stages in the litigation process. In those cases where the Group's defence has not been assumed by a third party and meaningful evaluation is practicable, the Group believes that it has valid defences and, with respect to a number of lawsuits, the Group is asserting rights to indemnification against a third party. For purposes of the foregoing discussion, the Group considers a claim to no longer be pending against it if the plaintiff's attorneys have executed a notice or stipulation of dismissal or non-suit, or other similar document. While the outcome of the existing asbestos-related cases described above is not predictable, the Group believes that those cases will not have a material adverse effect on our financial condition. The Group can give no assurances that asbestos-related cases against us will not grow in number or that those we have at present, or may face in the future, may not have a material adverse impact on our financial condition. - - Product liability The Group designs, manufactures, and sells several products of large individual value that are used in major infrastructure projects. In this environment, product-related defects have the potential to create liabilities that could be material. If potential product defects become known, a technical assessment occurs whereby products of the affected type are quantified and studied. If the results of the study indicate that a product liability exists, provisions are recorded. The Group believes that it has made adequate provisions to cover currently known product-related liabilities, and regularly revises its estimates using currently available information. Neither the Group nor any of its businesses are aware of product-related liabilities which are expected to, exceed the amounts already recognised and believes it has provided sufficient amounts to satisfy its litigation, environmental and product liability obligations to the extent they can be estimated.
- - SEC investigation The SEC is conducting a formal investigation, and the Group has conducted its own internal review, into certain matters relating to ALSTOM Transportation Inc. ("ATI"), one of the Group's subsidiaries. These actions followed receipt of anonymous letters alleging accounting improprieties on a railcar contract being executed at ATI's New York facility. Following receipt of these letters, the United States Federal Bureau of Investigation (the "FBI") also began an informal inquiry. The Group has fully cooperated with the SEC and the FBI in this matter and intends to continue to do so. - - United States Putative Class Action Lawsuit The Group, certain of its subsidiaries and certain of its current and former employees, officers and directors, have been named as defendants by shareholders in the United States in a number of putative shareholder class action lawsuits filed on behalf of various alleged classes of purchasers of American Depositary Receipts or other ALSTOM securities between various dates beginning as of 17 November 1998. These lawsuits which are now consolidated into one proceeding before the Federal District Court of the Southern District of New York seek to allege violations of United States federal securities laws, on the basis of various allegations that there were untrue statements of materials facts, and/or omissions to state material facts necessary to make the statements made not misleading, in various ALSTOM public communications regarding its business, operations and prospects, causing the putative classes to purchase ALSTOM securities at artificially inflated prices. The plaintiffs seek, among other things, class action certification, compensatory damages in an unspecified amount, and an award of costs and expenses, including counsel fees. - - Environmental, health and safety The Group is subject to a broad range of environmental laws and regulations in each of the jurisdictions in which it operates. These laws and regulations impose increasingly stringent environmental protection standards regarding, among other things, air emissions, wastewater discharges, the use and handling of hazardous waste or materials, waste disposal practices and the remediation of environmental contamination. These standards expose the Group to the risk of substantial environmental costs and liabilities, including liabilities associated with divested assets and past activities. In most of the jurisdictions in which operations take place, industrial activities are subject to obtaining permits, licenses or/and authorisations, or to prior notification. Most facilities must comply with these permits, licenses or authorisations and are subject to regular administrative inspections. Significant amounts are invested to ensure that activities are conducted in order to reduce the risks of impacting the environment and capital expenditures are regularly incurred in connection with environmental compliance requirements. Although involved in the remediation of contamination of certain properties and other sites, the Group believes that its facilities are in compliance with its operating permits and that operations are generally in compliance with environmental laws and regulations. The outcome of environmental matters cannot be predicted with certainty and there can be no assurance that the amounts provided will be adequate. In addition, future developments, such as changes in law or environmental conditions, could result in increased environmental costs and liabilities that could have a material effect on the financial condition or results of operations. To date, no significant liability has been asserted against us, and compliance with environmental regulations has not had a material effect on the results of operations. - - Claims relating to disposals From time to time the Group disposes of certain businesses or business segments. As is usual certain acquirers make claims against the Group as a result of price adjustment mechanisms and warranties generally foreseen in the sale agreements. At 31 March 2005, the Group has outstanding warranties and has received claims in connection with the disposals of certain of its activities including its former T&D Sector (excluding Power Conversion), the Small and Medium Industrial Turbines and Industrial Steam Turbine businesses, the former Contracting Sector and part of the former Industrial Sector.
The Group has received a number of demands from the acquirer following the disposal of the T&D Sector, including with respect to investigation by a number of national authorities and the European Commission of alleged anti-competitive arrangements among suppliers in certain T&D activities and an administrative procedure in Mexico concerning the alleged payments by an agent that could result in an entity sold as part of the T&D Sector being prevented from bidding for government contracts for a two year period. The Group considers that there are no matters outstanding and unprovided that are capable of estimation that are likely to have a material adverse impact on the consolidated financial statements. Note 29 - Market related exposures (a) Currency risk In the course of its operations, the Group is exposed to currency risk arising from tenders for business remitted in foreign currency, and from awarded contracts or "firm commitments" under which revenues are denominated in foreign currency. The principal currencies to which we had significant exposure in fiscal year ended 31 March 2005 were the US dollar, British Pound and Swiss Franc. Due to these exposures, numerous cash flows of the Group are denominated in foreign currencies. The Group acquires financial instruments with off balance sheet risk solely to hedge such exposure on either anticipated transactions or firm commitments. The instruments used are exchange rate guarantees obtained through export insurance companies, forward exchange contracts and options. The Group may not, in specific circumstances, and as an exception to the policy described above, fully hedge certain identified exposures or anticipate the forthcoming risks on its operating transactions with management approval. With respect to anticipated transactions: • During the tender period, depending on the probability of obtaining the project and market conditions, the Group generally hedges a portion of its tenders using options or export insurance contracts when possible. The guarantees granted by these contract become firm if and when the underlying tender is accepted. • Once the contract is signed, forward exchange contracts or currency swaps are used to adjust the hedging position to the actual exposure during the life of the contract (either as the only hedging instruments or as a complement to existing export insurance contracts).
(b) Interest rate risk The Group does not have a dynamic interest rate risk management policy. However, it may enter into transactions in order to hedge its interest rate risk on a case by case basis according to market opportunities, under the supervision of the Executive Committee. At 31 March 2005 ‹1 year 1 - 5 years ›5 years ----------- ----------- ----------- ----------- ( in € million ) Financial assets at floating rate 2,325 1,564 13 748 Financial assets at fixed rate 5 2 3 - Financial assets not bearing interests 58 18 20 20 ----------- ----------- ----------- ----------- Financial assets 2,388 1,584 36 768 Financial debt at floating rate (1,532) (410) (1,107) (15) Financial debt at fixed rate (1,375) (83 ) (1,275) (17) ----------- ----------- ----------- ----------- Financial debt (2,907) (493) (2,382) (32) Net position at floating rate before hedging 793 1,154 (1,094) 733 Net position at fixed rate before hedging (1,370) (81 ) (1,272) (17) ----------- ----------- ----------- ----------- Net position before hedging (577) 1,073 (2,366) 716 Swap fixed to variable - - - - Net position at floating rate after hedging 793 1,154 (1,094) 733 Net position at fixed rate after hedging (1,370) (81 ) (1,272) (17) ----------- ----------- ----------- ----------- Net position after hedging (577) 1,073 (2,366) 716 -------------- The net short term loan position at floating rate after hedging amounts to €1,154 million. A 100 bps increase in the market rates would have decreased the net interest expense by €12 million, representing 5.7% of the net interest expense for the year ended 31 March 2005. (c) Nominal and fair value of financial instruments outstanding at year-end Nominal value of financial instruments At 31 March 2005 ------------------------------------------------------ Remaining Average term fixed rate Total ‹1 year 1-5 years ›5 years (*) --------- --------- --------- --------- ---------- (in € million) Interest rate instruments: Interest rate swaps - receive fixed (1) 94 - 94 - 4% Foreign exchange instruments: Currency swaps - currencies purchased (2) 1,241 1,179 62 - Currency swaps - currencies sold (2) 2,459 2,247 212 - Forward contracts - currencies purchased 1,534 1,232 302 - Forward contracts - currencies sold 2,300 1,766 534 - Insurance contracts - currencies purchased 3 3 - - Insurance contracts - currencies sold 193 34 159 - Currency options - purchased 130 130 _ - Currency options - sold 75 75 _ - - -------------- (*) Floating rates are generally based on EURIBOR/LIBOR. (1) The interest rate swaps of €320 million that were hedging a portion of the €650 million bond issue were cancelled before maturity.
(2) The currency swaps whose final pay-off were related to the Group's share price reached maturity during the period. At 31 March 2004 ------------------------------------------------------ Remaining Average term fixed rate Total ‹1 year 1-5 years ›5 years (*) --------- --------- --------- --------- ---------- (in € million) Interest rate instruments: Interest rate swaps - receive fixed (1) 374 21 353 - 5.1% Foreign exchange instruments: Currency swaps - currencies purchased (2) 2,728 2,705 23 - Currency swaps - currencies sold (2) 4,708 4,511 197 - Forward contracts - currencies purchased 922 691 231 - Forward contracts - currencies sold 2,477 2,028 449 - Insurance contracts - currencies purchased - - - - Insurance contracts - currencies sold 161 148 13 - Currency options - purchased 557 557 - - Currency options - sold 522 522 - - - -------------- (*) Floating rates are generally based on EURIBOR/LIBOR. (1) At 31 March 2004, the outstanding interest rate swaps mainly relate to €320 million receiving fixed rates hedging a portion of the €650 million bond issue. (2) the currency swaps include four swaps, two swaps - currency purchased for a notional amount of €1,200 million and two swaps - currency sold for a notional amount of €1,200 million, whose final pay-off are also related to Group's share price. As a whole, these swaps do not create any currency position and their future potential losses are capped. At 31 March 2003 ------------------------------------------------------ Remaining Average term fixed rate Total ‹1 year 1-5 years ›5 years (*) --------- --------- --------- --------- ---------- (in € million) Interest rate instruments: Interest rate swaps - receive fixed (1) 649 248 401 - 4.4% Foreign exchange instruments: Currency swaps - currencies purchased (1) 2,906 1,658 1,249 - Currency swaps - currencies sold (1) 6,898 4,867 2,031 - Forward contracts - currencies purchased 798 584 214 - Forward contracts - currencies sold 2,708 1,646 895 168 Insurance contracts - currencies purchased 96 78 18 - Insurance contracts - currencies sold - - - - Currency options - purchased 591 568 23 - Currency options - sold 564 544 20 - - -------------- (*) Floating rates are generally based on EURIBOR/LIBOR. (1) At 31 March 2003, the main interest rate swaps outstanding are: - - €353 million receiving fixed rates, €320 million hedging a portion of the €650 million bond issue and €33 million hedging a bilateral loan. - - €33 million receiving fixed rates with an effective starting date at 20 January 2004. - - €200 million receiving fixed rates to optimise the short term liquidity management. (2) the currency swaps include four swaps, two swaps - currency purchased for a notional amount of €1,200 million and two swaps - currency sold for a notional amount of €1,200 million, whose final pay-off are also related to Group's share price. As a whole, these swaps do not create any currency position and their future potential losses are capped.
Fair value of financial instruments Publicly traded equity and marketable debt securities are disclosed at market prices. The fair values of all financial instruments other than specified items such as lease contracts, controlled businesses and Equity method investees, other investments and employers' pension and benefit obligations have been estimated using various valuation techniques, including the present value of future cash flows. However, methods and assumptions followed to disclose data presented herein are inherently judgmental and involve various limitations, including the following: - - Fair values presented do not take into consideration the effects of future interest rate and currency fluctuations, - - Estimates as at 31 March 2005 are not necessarily indicative of the amounts that the Group would record upon further disposal/termination of the financial instrument. The use of different estimations, methodologies and assumptions may have a material effect on the estimated fair value amounts. The methodologies used are as follows: Long term loans, deposits and other fixed assets The fair values of these financial instruments were determined by estimating future cash flows discounted using a risk free rate (Government bond yield)on an item-by-item basis or external valuations when available. Cash and cash equivalents and short term investments The carrying amounts reflected in the consolidated balance sheet approximate fair value due to the short-term maturity of theses instruments. Financial debt The fair value of the financial debt is estimated based on either quoted market prices for traded instruments or current rates offered to the Group for debt of the same maturity. Interest rate swaps, currency swaps, options, and forward exchange contracts The fair value of these instruments is the estimated amount that the Group would receive or pay to settle the related agreements, valued upon relevant yield curves and foreign exchange rates as of 31 March 2003, 2004 and 2005. The fair value of forward exchange contracts was computed by applying the difference between the contract rate and the market forward rate at closing date to the nominal amount. Export insurance contracts related to tenders are insurance contracts that are not marked to market. Export insurance contracts that hedge firm commitments are considered as acting as derivatives and were marked to market for the purpose of the disclosure.
The fair value of financial instruments outstanding is analysed as follows: At 31 March 2003 At 31 March 2004 At 31 March 2005 ------------------ ------------------ ------------------ Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value -------- ------ -------- ------ -------- ------ (in € million) Balance sheet Assets Long term loans, deposits and retentions 814 701 798 782 829 829 Other fixed assets 83 83 62 62 82 82 Short-term investments 142 143 39 39 15 15 Cash & cash equivalents 1,628 1,628 1,427 1,427 1,462 1,462 Liabilities Financial debt 6,331 5,909 4,372 4,310 2,907 2,934 Off balance sheet Interest rate instruments: Interest rate swaps - receive fixed - 39 - 18 - 3 Foreign exchange instruments Currency swaps - currencies purchased - (178) - (127) - - Currency swaps - currencies sold - 257 - 121 - 41 Forward contracts - currencies purchased - (30) - (58) - (91) Forward contracts - currencies sold - 87 - 94 - 106 Insurance contracts - currencies purchased - (6) - - - - Insurance contracts - currencies sold - - - (5) - (2) Currency option contracts - purchased - 37 - 19 - 19 Currency option contracts - sold - (7) - (4) - (1) - -------------- The increase in fair value of forward contracts and currency swaps (currency sold) and the decrease in fair value of forward contracts and currency swaps (currency purchased) during the fiscal years ended 31 March 2003, 2004 and 2005 is mainly due to the appreciation of the Euro against the US Dollar. (d) Credit risk The Group hedges up to 90% of the credit risk on certain contracts using export credit insurance contracts. The Group believes the risk of counterparty failure to perform as contracted, which could have a significant impact on the Group's financial statements or results of operations, is limited due to the Group seeking to ensure that customers generally have strong credit profiles or adequate financing to meet their project obligations. (e) Liquidity risk The analysis by maturity and interest rate of the Group's debt is set out in Note 23(b). Details of short-term liquidity are set out below. The Group available liquidity within one year at 31 March 2004 and 31 March 2005 is as follows: At 31 March At 31 March 2004 2005 ----------- ----------- (in € million) Available credit lines (see Note 23(a)) 783 1,202 Cash equivalents available at parent Company level (1) 532 796 Cash equivalents and Short term investments at subsidiary level (1) 934 681 ----------- ----------- Available liquidity 2,249 2,679 Financial debt to be reimbursed within one year (see Note 23)(b) (278) (444) Available credit line to be reimbursed within one year (420) (27) ----------- ----------- Available liquidity for the coming year 1,551 2,208 =========== =========== - ---------------- (1) See Notes 18 & 19
(2) The reimbursement of securitisation of future receivables is excluded as it come from the direct payment of the customer to the investor to whom the Group sold the right to receive the payment. The Group's lines of credit as well as certain of its other financing agreements contain covenants requiring it to maintain compliance with financial covenants as disclosed in Note 23(a) . Note 30 - Payroll, staff, employee profit sharing Year ended 31 March ---------------------------------- (in € million except number of employees) 2003 2004 2005 ---------- ---------- ---------- Total wages and salaries 3,919 3,274 2,715 Of which executive officers (*) 5 5 6 Social security payments and other benefits 1,032 866 744 Employee profit sharing 18 16 8 Staff of consolidated companies at year-end Managers, Engineers and professionals 35,983 23,885 23,691 Other employee 73,688 52,926 45,903 ---------- ---------- ---------- Approximate number of employees 109,671 76,811 69,594 ========== ========== ========== - --------------- (*) executive officers at closing.
Note 31 - stock options Following the approval of the annual shareholders' meeting held on 9 July 2004, the Board of Directors decided on 17 September 2004 the implementation of a share capital increase reserved for the employees participating in the Group's saving plan and a new stock option plan (plan n°7). The characteristics of the plan n°7 are the following: Plan no. 7 ------------------------------ Date of shareholders' meeting 9 July 2004 Creation date 17 September 2004 Exercise price (1) € 0.43 Beginning of exercise period 17 September 2007 Expiry date 16 September 2014 Number of beneficiaries 1,007 Number of options initially granted 111,320,000 Number of options exercised since the origiN 0 Number of options cancelled 1,200,000 Number of remaining options at 31 march 2005 110,120,000 Number of shares that may be subscribed 24,400,000 by the members of the executive committee Terms and conditions of exercise - 50% of options granted to each beneficiary are subject to exercise conditions relating to the group's free cash flow and operating margin for fiscal year 2006. The conditional options may only be exercised entirely if at the closing of fiscal year 2006, the free cash flow of the Group is positive and the operating margin of the group is superior or equal to 6%. Below these thresholds the options shall be partially exercisable. They will be forfeited if the free cash flow is negative at more than €(500) million or if the operating margin is inferior to 5%.
In addition, the characteristics of the previous stock option plan outstanding at 31 March 2005 have been adjusted following the completion on 13 August 2004 of the share capital increase with preferential subscription rights and are as follows: Plan no. 3 Plan no. 5 Plan no. 6 ------------ ------------ ------------ Date of shareholders' meeting 24 July 2001 24 July 2001 24 July 2001 Creation date 24 July 2001 8 January 2002 7 January 2002 Exercise price (1) € 33.00 € 13.09 € 6.00 Adjusted exercise price (2) € 20.48 € 8.13 € 3.86 Beginning of exercise period 24 July 2002 8 January 2003 7 January 2004 Expiration date 23 July 2009 7 January 2010 6 January 2011 Number of beneficiaries 1,703 1,653 5 Number of options originally granted 4,200,000 4,200,000 1,220,000 Number of options exercised 0 0 0 Number of options cancelled since the origin 1,225,251 1,093,784 0 Adjusted number of remaining options at 31 March 2005 (2) 4,793,296 5,001,275 1,899,378 Number of shares that may be subscribed by the members of the executive committee 124,077 169,068 1,868,239 Terms and conditions of exercise - 1/3 of - 1/3 of - 1/3 of options options options exercisable exercisable exercisable as from as from as from 24 July 8 January 7 January 2002 2003 2004 - 2/3 of - 2/3 of - 2/3 of options options options exercisable exercisable exercisable as from as from as from 24 July 8 January 7 January 2003 2004 2005 - all - all - all options options options exercisable exercisable exercisable as from as from as from 24 July 8 January 7 January 2004. 2005. 2006. (1) Subscription price corresponding to the average opening price of the shares during the twenty trading days preceding the day on which the options were granted by the board (no discount or surcharge) or the nominal value of the share when the average share price is lower. (2) Plans n°3, 5 and 6 have been adjusted in compliance with French law as a result of the completion of the operations which impacted the share capital in 2002, 2003 and August 2004.
The following is a summary of activity of the plans: Weighted average exercise price per Shares share ------------- ------------- Outstanding at 1 April 2002 adjusted 14,726,354 € 24.81 Granted 1,220,000 € 6.00 Exercised - - Cancelled (4,833,091) € 28.62 Outstanding at 31 March 2003 11,113,263 € 21.09 Outstanding at 1 April 2003 adjusted 13,775,923 € 17.01 Granted - - Exercised - - Cancelled (1) (3,267,286) € 20.25 Outstanding at 31 March 2004 10,508,637 € 16.00 Outstanding at 1 April 2004 adjusted 12,855,532 € 12.65 Granted 111,320,000 € 0.43 Exercised - - Cancelled (2,361,563) € 7.17 Outstanding at 31 March 2005 121,813,949 € 1.59 - ------------------- (1) including Plan n°1 which became void in April 2004. Note 32 - Subsequent events - - On 6 April 2005, the Group signed a selling agreement with Areva for the acquisition of its T&D business of Alstom Ltd (India). - - On 23 May 2005, the Group signed a binding agreement to dispose of our Flow Systems Business headquartered in Fredericia (Denmark). This business manufactures district heating equipment mainly for the Northern Europe market and other Continental Europe markets. It was integrated in the Power Service Sector. This disposal will be included in the Group's commitment towards the European Commission. - - The Group launched the disposal of its Power Conversion Business. Note 33 - Major companies included in the scope of consolidation The major companies are selected according to the following criteria: - - holding companies - - sales above €50 million Consolidation Companies Country Ownership % Method - --------- ------- ----------- -------------- ALSTOM............................. France Parent company ALSTOM Holdings.................... France 100.0 Full consolidation ALSTOM Gmbh (holding).............. Germany 100.0 Full consolidation ALSTOM UK Holding Ltd.............. United Kingdom 100.0 Full consolidation ALSTOM Inc (holding)............... United-States 100.0 Full consolidation ALSTOM NV (holding)................ Netherlands 100.0 Full consolidation ALSTOM Mexico SA de CV (holding)... Mexico 100.0 Full consolidation ALSTOM Espana IB (holding)......... Spain 100.0 Full consolidation ALSTOM (Switzerland) Ltd........... Switzerland 100.0 Full consolidation ALSTOM Australia Ltd............... Australia 100.0 Full consolidation ALSTOM Belgium SA ................. Belgium 100.0 Full consolidation
ALSTOM Brasil Ltda................. Brazil 100.0 Full consolidation ALSTOM Canada Inc.................. Canada 100.0 Full consolidation ALSTOM Controls Ltd................ United Kingdom 100.0 Full consolidation ALSTOM Ferroviaria Spa............. Italy 100.0 Full consolidation ALSTOM K.K......................... Japan 100.0 Full consolidation ALSTOM Leroux Naval................ France 100.0 Full consolidation ALSTOM LHB GmbH.................... Germany 100.0 Full consolidation ALSTOM Ltd ........................ United Kingdom 100.0 Full consolidation ALSTOM Ltd ........................ India 100.0 Full consolidation ALSTOM NL Service Provision Ltd.... United Kingdom 100.0 Full consolidation ALSTOM Power Asia Pacific Sdn Bhd.. Malaysia 100.0 Full consolidation ALSTOM Power Boiler................ France 100.0 Full consolidation ALSTOM Power Boiler GmbH........... Germany 100.0 Full consolidation ALSTOM Power Centrales............. France 100.0 Full consolidation ALSTOM Power Conversion GmbH....... Germany 100.0 Full consolidation ALSTOM Power Conversion Inc........ United-States 100.0 Full consolidation ALSTOM Power Conversion SA France.. France 100.0 Full consolidation ALSTOM Power Energy Recovery GmbH.. Germany 100.0 Full consolidation ALSTOM Power Flowsystems A/S....... Denmark 100.0 Full consolidation ALSTOM Power Generation AG......... Germany 100.0 Full consolidation ALSTOM Power Hydraulique........... France 100.0 Full consolidation ALSTOM Power Hydro................. France 100.0 Full consolidation ALSTOM Power Inc................... United States 100.0 Full consolidation ALSTOM Power Italia Spa............ Italy 100.0 Full consolidation ALSTOM Power ltd................... Australia 100.0 Full consolidation ALSTOM Power Norway AS............. Norway 100.0 Full consolidation ALSTOM Power O&M Ltd............... Switzerland 100.0 Full consolidation ALSTOM Power SA.................... Spain 100.0 Full consolidation ALSTOM Power Service............... France 100.0 Full consolidation ALSTOM Power Service Ltd........... United Arab Emirate 100.0 Full consolidation ALSTOM Power Service GmbH.......... Germany 100.0 Full consolidation ALSTOM Power Sp Zoo................ Poland 100.0 Full consolidation ALSTOM Power Sweden AB............. Sweden 100.0 Full consolidation ALSTOM Projects India Ltd.......... India 68.5 Full consolidation ALSTOM Transport SA................ France 100.0 Full consolidation ALSTOM Transportation Inc.......... United States 100.0 Full consolidation ALSTOM Transport BV................ Netherlands 100.0 Full consolidation ALSTOM Transporte ................. Spain 100.0 Full consolidation Chantiers de l'Atlantique.......... France 100.0 Full consolidation West Coast Traincare............... United Kingdom 100.0 Full consolidation Companies included in the list of major companies at 31 March 2004 for which sales are below €50 million at 31 March 2005. ALSTOM Power Turbomachines......... France Eurokrail.......................... South Korea ALSTOM Power sro................... Czech republic ALSTOM Schienenfahrzeuge AG........ Switzerland Alstom Signalling Inc.............. United States Alstom Transporte SA de CV......... Mexico Alstom Power Mexico SA de CV....... Mexico Alstom Power Austria Gmbh.......... Austria Alstom Export SDN Bhd............. Malaysia Alstom T&D Inc..................... United States Alstom New Zealand Holding Ltd..... New Zealand
Companies included in the list of major companies at 31 March 2005 for which sales were below €50 million at 31 March 2004. Alstom Leroux Naval................ France Alstom NL Service Provision Ltd.... United Kingdom Alstom Power Boiler................ France Alstom Power Flowsystems A/S....... Denmark A list of all consolidated companies is available upon request at the head office of the Group.
MANAGEMENT DISCUSSION AND ANALYSIS ON CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 MARCH 2005 FISCAL YEAR 2004/05 The following discussion should be read together with the 31 March 2005 Consolidated Financial Statements. During the periods discussed in this section, we undertook several significant transactions that affected the comparability of our financial results with previous periods. In order to allow you to compare the relevant periods, we present certain information both as it appears in our financial statements and adjusted for business composition and exchange rate variations to improve comparability. These adjustments are described below, under "--Change in business composition and presentation of our accounts, non-GAAP measures--Comparable basis" below. OVERVIEW INTRODUCTION We serve the energy market through our activities in the field of power generation and the transport market through our activities in the rail transport and ship-building. We design, supply and service a complete range of technologically advanced products and systems for our customers, and possess a unique expertise in systems integration and through-life maintenance and service. We believe the power and transport markets we operate in are sound, offering: - solid long-term growth prospects based on customers' need to expand essential infrastructure systems in developing economies and to replace or modernise them in the developed world ; and - attractive opportunities in service and systems. We believe we can capitalise on our long-standing expertise in these two markets to achieve competitive differentiation. We are strategically well-positioned for the following reasons: - we are one of the top players in all major market segments ; - we benefit from one of the largest installed bases of equipment in power generation and rolling stock, which should enable us to develop our service business ; - we are a recognised technology leader in most of our fields of activity, providing best-in-class technology ; and - we have global reach, with a presence in around 70 countries worldwide.STATUS OF OUR ACTION PLAN AND MAIN EVENTS OF FISCAL YEAR 2004/05 On 12 March 2003, we presented our new strategy and action plan to overcome three key difficulties: an insufficient level of profitability and cash generation, problems with the GT24/GT26 gas turbines sold in previous years and, to a lesser extent, with certain individual contracts, and a high level of debt. Our action plan comprised three main elements: - focusing ALSTOM's range of activities through the disposal of certain assets ; - improving operational performance and adapting to market conditions ; and - strengthening our financial base. We achieved significant progress during fiscal year 2003/04: we put in place a more efficient organisation and launched significant restructuring plans; we achieved substantial progress in resolving past operational problems concerning our UK trains contract and our GT24/GT26 heavy duty gas turbines and we successfully re-introduced them in the market; finally, we reached agreement on a financing package which has strengthened our balance sheet and financial structure. In fiscal year 2004/05, we made further progress in our action plan, the results of which can be seen in our key performance indicators: - customers' confidence is renewed as underlined by a 15% increase in order intake on a comparable basis ; - our operational performance is improving as shown in the strong increase of our operating margin from 1.2% to 4.0% on a comparable basis, in line with our objectives and reflecting our improved project management and reduced cost base ; - our free cash flow has improved from €(1,007) million in fiscal year 2003/04 to €(170) million in fiscal year 2004/05 ; and - our overall financial situation has been strengthened by further reducing our net debt, and increasing our access to bonding facilities. DISPOSAL PROGRAMME Disposal of our Industrial Turbines businesses On 26 April 2003, we signed binding agreements to sell our small gas turbines business and medium-sized gas turbines and industrial steam turbines businesses in two transactions to Siemens AG. The first transaction covered our small gas turbines business, and the second transaction covered our medium-sized gas turbines and industrial steam turbines businesses. In the fiscal year ended 31 March 2003, the Industrial Turbines businesses generated sales of approximately €1.25 billion and had an operating margin of approximately 7%. At 31 March 2003, these businesses employed around 6,500 people. To date we have received total proceeds from Siemens of €904 million from the disposal of these businesses, including €59 million during fiscal year 2004/05. Of the €125 million of the initial escrowed amounts that were to be released to us on or before 3 May 2005, we agreed to use €19 million to cover some post-closing adjustments and we received €32 million. The release of the remaining €74 million is still under discussion. Disposal of our Transmission & Distribution (T&D) activities On 25 September 2003, we signed a binding agreement to sell our T&D activities (our T&D Sector excluding the Power Conversion business) to Areva. This transaction closed on 9 January 2004, except for some minor businesses located in jurisdictions where transfer procedures were mostly completed during fiscal year 2004/05, and for a T&D publicly-listed company in India for which Areva has launched a public offer in April 2005, with Alstom's agreement. The price after closing adjustments has been set at €1,053 million, including €140 million for cash transfered. As of 31 March 2005, we had received proceeds of €1,036 million from Areva, including €207 million in fiscal year 2004/05. A further €17 million were held in escrow primarily to cover the value of the shares of T&D India to be transferred at completion of the public offer launched by Areva. It is expected that this transaction will be completed during the first half of fiscal year 2005/06. Disposal of our Transport activities in Valencia, Spain On 29 November 2004, we signed a binding agreement to sell our Transport activities of the factory in Valencia, Spain, to Vossloh. This factory, located north of Valencia, was built in 1990 and as of the end of fiscal year 2004/05 employed 420 people. It specialises in the manufacturing of locomotives and bogies as well as non modular trains for the regional market. This transaction was closed on 31 March 2005. Disposal of various non-core activities in Australia We sold our Information Technology and Industrial Products activities in Australia during fiscal year 2004/05 in a management buy-out. These non-core activities, reported under "Corporate and other" employed around 130 people and recorded €90 million of sales in fiscal year 2003/04, a significant portion of which derived from the distribution in Australia of IT servers and software. PROGRESS ON OPERATIONAL PROBLEMS WITH OUR GT24/GT26 HEAVY-DUTY GAS TURBINES GT24 and GT26 gas turbines, with outputs of around 180 MW and 260 MW, respectively, are the largest of our extensive range of gas turbines. The technology was originally developed by ABB in the mid-1990s, with most sales made prior to the acquisition by ALSTOM. At the start of the commercial operation of the second generation, or "B" version turbines, in 1999 and 2000, a number of technical issues were identified, indicating that the turbines would not meet contractual performance obligations. We have implemented several technical improvements to the turbines, which generally permit flexible and reliable operation of the fleet. Cumulative plant reliability since the start of the commercial operation is now 97% for the GT24/GT26 fleet. Operational reliability and flexibility are important factors for our customers, particularly for those in merchant markets. Our confidence in the technology is being reinforced by major progress achieved to date. Modifications aimed at delivering enhancements to output and efficiency have been designed, validated, tested and are being implemented as follows: - Compressor mass flow and efficiency increase for GT24 and GT26, with increased electrical output. It has been successfully implemented on twenty-two engines in Mexico, USA, Spain, the UK, Ireland, Singapore and Canada totalling 120'000 hours of operation. The fleet lead unit, with the new compressor, has now been in operation for more than 17'300 hours. This compressor is now part of the standard design for new engines ; - Dual Fuel Capability - Successful demonstration in operation. The system is now available for commercial application on both existing and new gas installations ; - Life-time Package - twenty-five engines have been fitted with a blade improvement package, and after 15,200 hours of operation on the lead unit, inspection shows a fully satisfactory behaviour. The twenty-five units have now accumulated more than 140,000 hours of operation. The 76 machines in service today have accumulated appoximately 1,300,000 operating hours at high reliability levels. As a consequence of the technical improvements implemented on our GT24/GT26 gas turbines, we are now back in the large gas turbine market. The successful re-marketing of the GT26 machine was demonstrated by the securing of a significant contract for three GT26 turbines in Spain for Gas Natural in January 2004 and four GT26 units in Thailand for Gulf Power in November 2004. We believe that these contracts signal that both technology and performance are now fully in line with customer expectations. The commercial situation with respect to the 80 GT24/GT26 gas turbines initially sold continues to improve: as of today, 76 units are in commercial operation and four units have been cancelled. Today, we have reached commercial settlements for 74 out of the 76 units sold. Under agreements covering to date 8 of the units (9 as of 31 March 2005 and 22 as of 31 March 2004), the Group is committed to or otherwise has the opportunity to make upgrade improvements within agreed time periods. The other units in commercial operation are either under normal warranty or have had those warranty periods expire. All of the cases of client litigation which affected seven units as of March 2003 are now resolved via satisfactory commercial settlements. There are commercial disputes involving contractual arbitration ongoing with respect to one project for which the customer has accepted the two turbines, but alleges that contractual penalties are due in amounts contested by the Group. Cash outflow related to the GT24/GT26 gas turbines over fiscal year 2004/05 at €366 million has decreased as compared with €766 million in fiscal year 2003/04 and €1,055 million in fiscal year 2002/03 and was better than the amount expected (€500 million). We expect our remaining cash outflow related to the GT24/GT26 gas turbines issue to be around €380 million over the next three years including €200 million in fiscal year 2005/06. As of 31 March 2005, we retained €379 million of related provisions and accrued contract costs compared with €738 million as of 31 March 2004 and €1,655 million as of 31 March 2003. As of 31 March 2003 and 2004, these provisions were estimated without taking into account an additional exposure, which we consider will be mitigated by appropriate action plans. Such exposure to be mitigated by appropriate action plans amounted to €454 million at 31 March 2003 and had been reduced to €234 million as of 31 March 2004 and to nil as of 31 March 2005. Our mitigation plan has been successfully implemented with no significant impact on our operating income over the last two fiscal years. RESTRUCTURING AND COST REDUCTION PROGRAMMES Restructuring plans launched in fiscal year 2003/04 are progressing according to schedule. During fiscal year 2004/05 we launched new initiatives in order to further improve our operational performance and further reduce our cost base. As a result, we have recorded €358 million for restructuring in fiscal year 2004/05 in addition to the €655 million recorded in fiscal year 2003/04, of which mainly €190 million for Power Turbo-Systems / Power Environment, €105 million for Transport and €30 million for Power Service. In addition to the headcount reduction of 8,400 through restructuring announced during fiscal year 2003/04, new plans launched in fiscal year 2004/05 included an additional reduction of approximately 3,100. These new plans comprise notably a reduction of 1,600 employees in Power Turbo-Systems / Power Environment and 1,300 employees in Transport. Out of the total planned headcount reduction of 11,500 launched within the two last fiscal years, approximately 9,100 were in Europe. The plans have been largely implemented and as a result our workforce has been reduced through restructuring plans by around 8,000 positions during fiscal years 2003/04 and 2004/05. FINANCING PACKAGES Financing package - Summer 2003 We launched in the summer of 2003 a financing package that was fully completed in December 2003 and that comprised: - €300 million capital increase ; - €300 million of subordinated bonds issued to the French State, which were to be automatically reimbursable with shares upon the approval of the European Commission (TSDDRA) ; - €200 million of subordinated bonds issued to the French State (TSDD) ; - the issuance of €901 million of bonds mandatorily reimbursable with shares (ORA) ; - a subordinated debt facility due 2008 totalling €1,563 million (PSDD), of which our banks provided €1,263 million and a French State-guaranteed institution (CFDI) €300 million ; and - a bonding guarantee facility agreement of €3,500 million to support our commercial activity. CFDI provided counter guarantees of 65% of the aggregate amount of these bonds. This package also included some short-term liquidity rolled over until January 2005. Financing package - Summer 2004 In order to further reduce our debt, increase our equity, secure our access to contract bonding to support our commercial activity and to stabilise our shareholder base, we implemented during the summer of 2004 a supplemental financial package covering the following items: - a bonding programme aimed at covering our needs for 18 to 24 months ; - a total capital increase of €1,748 million subscribed either in cash or by set-off against certain of our outstanding debt. As part of this financing package, we have re-negotiated our financial covenants as described in Note 23 (a)(3) to our Consolidated Financial Statements. Bonding Programme We have put in place a up to €8 billion committed bonding guarantee facility programme, with an initial commitment of our banks for €6,6 billion. This programme includes the bonds issued under the bonding line of €3.5 billion provided during summer 2003 and new bonds to be issued over a two year period up to 27 July 2006. The bonds under this bonding programme benefit from a €2 billion security package consisting of: - a first loss guarantee in the form of cash collateral provided by ALSTOM for €700 million (out of the proceeds of the capital increases described below) ; and - a second rank security for a total amount of €1,300 million covering second losses in excess of the cash collateral, in the form of guarantees, given on a pari passu basis by a French State-guaranteed institution (Caisse Française de Développement Industriel) for an amount of €1,250 million, and by a group of banks consisting of the initial banks of the program for the remaining amount of €50 million. This programme is revolving: any bond expiring releases capacity to issue new bonds within the €8 billion limit and the two year period. The issuance of new bonds under the bonding programme mentionned above is subject to the financial covenants disclosed in the Note 23 (a) (3) to our Consolidated Financial Statements. The commitment of our core banks in July 2004 was for an initial volume of up to €6,600 million. This initial amount was expected to cover our forecasted bonding needs for approximately 18 months. Since that date further syndication in the program has allowed us to secure to date an amount of €7.4 billion which together with bilateral capacity obtained outside of the program is at this stage anticipated to cover all our needs till the end of the program in July 2006. Share capital increases We completed in fiscal year 2004/05 a global offering of new shares by way of transferable preferential subscription rights allocated to holders of our existing shares. The 3,655,265,768 new shares issued have been subscribed as follows: - 3,192,826,907 shares subscribed in cash at €0.40 representing an amount of €1,277 million, including 459,610,902 new shares subscribed by the French State representing an amount of €183.8 million ; and - 462,438,861 shares subscribed by set-off against debt from the French State and CFDI, an entity guaranteed by the French State, at €0.50 per share representing a total amount of €231.2 million: €200 million subscribed by set off against the TSDD subscribed by the French State as part of our Summer 03' Financing package and €31.2 million subscribed by set off against part of the CFDI's holding in the PSDD. We implemented a concurrent debt-for-equity exchange offering to holders of certain of our outstanding debt instruments through which we issued a further 480,000,000 new shares at the price of €0.50 per share representing an amount of €240 million subscribed by set-off against: - €212 million from the part of PSDD held by our banks ; - €18 million from our multi-currency Revolving Credit Agreement due 2006 of €722 million ; and - €10 million from committed bilaterals. Following the automatic reimbursement with 240,000,000 new shares of the €300 million TSDDRA on 7 July 2004 upon the European Commission approval and its participation in the above described capital increases, the French State's participation reached 21.4 % of the outstanding share capital of ALSTOM. The French State has committed to remain a shareholder during the recovery of ALSTOM. It has committed to sell its shares at the latest 12 months following ASLTOM's obtaining an investment grade rating, or in any event prior to July 2008. Finally, on 6 December 2004, we closed a share capital increase reserved to our employees consisting of 49,814,644 new shares issued at a value of €0.35. Approval by the European Commission and commitments The formal investigation launched by the European Commission in September 2003 concluded on 7 July 2004 with the positive approval by the European Commission of our financing packages. As part of this approval, we have committed not to make acquisitions in the Transport Sector within the European Union over the next four years above a certain level and to dispose of businesses representing approximately €1.5 billion in sales. Half of our disposal commitment is to be fulfilled by selling the following activities: - our freight locomotive business in Valencia, Spain (disposal completed at 31 March 2005) ; - our Transport Sector's activities in Australia and New Zealand (disposal on-going) ; and - our industrial boilers business, which is part of our Power Turbo-Systems / Power Environment Sector (disposal on-going). The remainder of our commitment, representing €800 million of annual sales from unspecified activities on the fiscal year 2002/03, is partially covered by the disposal of our Information Technology and Industrial Products activities in Australia (representing €103 million of sales in fiscal year 2002/03) and by the disposal of our Flow Systems activities (representing €131 million of sales in 2002/03). In addition, we have launched the disposal of our Power Conversion Business with sales of €592 million in fiscal year 2002/03 (including intercompany transactions). The achievement of all the disposals completed, or on-going, should enable us to fulfill our commitments towards the European Commission to dispose of certain industrial activities. We also agreed to enter into a 50-50 joint venture in our Hydro business. Finally, we committed to concluding industrial partnerships during a period of four years concerning a significant part of our activities to ensure our future development. DEBT REFINANCING In February 2005, we launched an exchange offer for €650 million of bonds due July 2006 and €250 million of Euribor-indexed Auction Rate Notes (ARN) due September 2006, to be exchanged for new 6.25% fixed-rate bonds due March 2010. A total of €668 million in principal amount of bonds were submitted in the exchange offer out of a total of €900 million principal amount of eligible bonds (respectively €422 million of the July 2006 bonds out of €650 million of existing bonds, and €245 million out of €250 million of September 2006 ARN) leading after application of the exchange ratio to €695 million in principal amount of new 2010 bonds. In addition, we issued €305 million additional bonds with the same terms and conditions. In total, the new 6.25% bonds due March 2010 are in the principal amount of €1,000 million. With this transaction, our liquidity and the maturity profile of our debt have been substantially improved. GENERAL COMMENTS ON ACTIVITY AND RESULTS Key financial figures The following tables set out, on a consolidated basis, some of our key financial figures: - --------------------------------------------------------------------------------- Total Group Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 30,330 25,368 27,203 (16%) 7% Orders received 19,123 16,500 15,841 (14%) (4%) Sales 21,351 16,688 13,662 (22%) (18%) Operating income (loss) (507) 300 550 Operating margin (2.4%) 1.8% 4.0% Net income (loss) (1,432) (1,836) (865) Free Cash Flow (265) (1,007) (170) - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Total Group Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 26,180 24,792 27,203 (5%) 10% Orders received 13,774 13,776 15,841 0% 15% Sales 16,107 14,202 13,662 (12%) (4%) Operating income (loss) (581) 168 550 Operating margin (3.6%) 1.2% 4.0% - --------------------------------------------------------------------------------- General comments on activity During fiscal year 2004/05, continuing expansion of our markets in the emerging countries contrasted sharply with the relatively weak markets in Europe. Power generation demand in Asia and particularly in China and India remained strong in contrast to the United States and European markets, where demand remained very low. As a result of this geographical shift as well as the increasing importance of environmental concerns, demand for hydro products remained strong. In the field of Transport, the market has been contrasted with opportunities in Italy, Spain and France and an overall growth in Asia while the German and UK markets have been slower. The cruise-ship market has become more active. Orders received and backlog We recorded during fiscal year 2004/05 a strong rebound in our commercial activity: we booked €15,841 million of orders in fiscal year 2004/05, an increase of 15% compared with fiscal year 2003/04 on a comparable basis (a decrease of 4% on an actual basis mainly due to the disposal of our T&D activities). On a comparable basis, all our Sectors contributed to the increase in order intake, with higher growth rates in the Transport, Marine and Power Service Sectors. Our backlog was €27.2 billion at 31 March 2005, representing approximately two years of sales. Sales Sales were €13,662 million in fiscal year 2004/05, decreasing by 4% compared with fiscal year 2003/04 on a comparable basis. The decrease resulted mainly from our Power Turbo-Systems / Power Environment and Marine Sectors due to the impact of the low level of orders in the second half of fiscal year 2002/03 and in the first half of fiscal year 2003/04. Sales in other Sectors increased on a comparable basis. Sales decreased by 18% in fiscal year 2004/05 on an actual basis. This decrease was mainly due to the disposal of our Industrial Turbines business and T&D activities and to a lesser extent to the decline of the US dollar against the Euro. Operating income (loss) On an actual basis, our operating income in fiscal year 2004/05 was €550 million or 4.0% of sales, as compared with an operating income of €300 million and an operating margin of 1.8% in fiscal year 2003/04. On a comparable basis, mainly when excluding the favourable effect of our T&D activity last year before its disposal, our operating income amounted to €168 million or 1.2% of sales in fiscal year 2003/04. This strong improvement of our operating margin despite a lower level of sales is notably due to a reduction in our cost base and to a better performance in the execution of our contracts. Net income (loss) Net loss after goodwill amortisation was €865 million resulting primarily from financial expenses (€346 million) and substantial restructuring charges (€358 million) as well as some additional write-off of deferred tax assets (€218 million). This represents a significant improvement as compared to a loss of €1,836 million in fiscal year 2003/04. Free cash flow Our free cash flow was €(170) million in fiscal year 2004/05; it included: - cash outflows of €366 million on the GT24/GT26 gas turbines, as compared with €766 million for fiscal year 2003/04 ; - high restructuring and financial expenses ; - the strong improvement in our working capital in all Sectors excluding Marine, mainly due to the reduction of our overdue receivables and higher customer deposits resulting from a recent rebound in orders received, partly offset by a negative change in working capital for our Marine Sector. The improvement from free cash flow of €(1,007) million for fiscal year 2003/04 stems mainly from lower cash outflow related to the GT24/GT26 gas turbines and improved operational performance. RECENT DEVELOPMENTS On 23 May 2005, we signed a binding agreement to dispose of our Flow Systems Business headquartered in Fredericia (Denmark). This operation is subject to its approval by the relevant competition authorities. This business which manufactures district heating equipment mainly for the Northern Europe market and other markets in continental Europe was part of our Power Service Sector and has recorded sales of €150 million in fiscal year 2004/05 with a total number of employees of 570. OUTLOOK The increase in the power generation new equipment market and the timing for recovery of the cruise-ship market remain uncertain over the short to medium-term even though we foresee some positive developments: we believe however that the rail transport and service markets should remain sound. Regardless of short term fluctuations, we believe that market fundamentals should lead, in the medium to long-term, to growing demand for both new equipment and services in all our markets. In the following outlook, operating income and operating margins are made by reference to current French GAAP. For internal planning purposes, we have established the following objectives to be achieved in fiscal year 2005/06: - 6% operating margin leading to return to profitability ; - positive free cash flow. Our ability to meet these objectives depends on a number of actions, including the successful completion of our restructuring and cost reduction programmes (our goal is to save approximately €500 million on an annualized basis in March 2006), recovery in our Power Turbo-Systems / Power Environment Sector, improvement of the performance of our Marine Sector, increase in operating margin in the Transport Sector as well as growth in the more profitable Service businesses. We are taking the following steps to reach our objectives in each of the Sectors: - Power Turbo-Systems / Power Environment: We aim to increase the intake of profitable orders, improving our project management and optimising further our cost base. Our business plan also includes seizing profit opportunities on certain targeted markets, such as environmental related projects, as well as benefiting from overall growth in the Asian markets, especially in China. Major restructuring plans are underway to adapt our industrial capacity to the new equipment market downturn and to cut losses and reach an operating margin of 3% in fiscal year 2005/06 ; - Power Service: We expect that the service market will continue to grow and we aim to develop our services based on our field presence, manufacturing and technical capabilities. We intend to maintain our operating margins above 15% through cost-cutting measures as well as through the evolution of our portfolio of businesses towards high margin segments ; - Transport: Based on our strong backlog and additional orders we target, our objective is to reach an operating margin of 7% due to growing sales, improvements in contract execution and cost reduction through standardisation, sourcing, restructuring plans and overhead adjustments ; - Marine: We are working on rebuilding our order backlog with cruise-ships and other high value-added ships and are implementing strong measures to reduce costs. Our target is to return to a positive operating margin within 2 to 3 years ; - Power Conversion: Our objective is to continue improving the performance of this business. Positive net income for fiscal year 2005/06 should result from increased operating profitability and lower restructuring and financial charges. Beyond the current fiscal year, we aim to improve further our operational performance targeting a 7 to 8% operational margin in March 2008 leading, through a strict management of our working capital management, to a strong increase of our free cash flow and thus to further reduce our debt. The foregoing are "forward-looking statements," and as a result they are subject to uncertainties. The success of our strategy and action plan, our sales, operating margin and financial position could differ materially from the goals and targets expressed above if any of the risks we describe in "Cautionary Note Regarding Forward- Looking Statements" and "Risk Factors", or other unknown risks, materialise. In particular, our ability to achieve our objectives depends, among other things, on our complying with the commitments requested by the European Commission, our financial position allowing us to obtain additional or extended sources of bonding, our meeting some of the financial covenants in our financing agreements, our successfully resolving litigation and performance-related issues, our managing working capital effectively, and our avoiding adverse effects relating to the credit of our customers. OPERATING AND FINANCIAL REVIEW CHANGE IN BUSINESS COMPOSITION AND PRESENTATION OF OUR ACCOUNTS, NON-GAAP MEASURES CHANGES IN BUSINESS COMPOSITION Our results of operations for the three years ended 31 March 2003, 2004 and 2005 have been significantly impacted by the acquisitions and disposals described below. The table below sets out our main acquisitions during the periods indicated. Sales and numbers of employees are presented for the fiscal year preceding the acquisition, except as otherwise indicated. - --------------------------------------------------------------------------------------------- Country/ % of shares Sales Number of Companies/Assets acquired Sectors Region acquired (in @ million) employees - --------------------------------------------------------------------------------------------- Fiscal year 2004/05 - ------------------- No acquisition - - - - - Fiscal year 2003/04 - ------------------- Innorail Transport France 100% 7 7 Fiscal Year 2002/03 - ------------------- Fiat Ferroviaria (1) Transport Italy Remaining 49% Farham T&D United Kingdom Assets 5 62 - --------------------------------------------------------------------------------------------- (1) Fiat Ferroviaria consolidated with effect from 1 October 2000 The table below sets out our main disposals during the periods indicated. Sales are presented for the fiscal year preceding disposal. - --------------------------------------------------------------------------------------------- Country/ % of shares Sales Number of Companies/Assets disposed Sectors Region acquired (in € million) employees - --------------------------------------------------------------------------------------------- Fiscal year 2004/05 - ------------------- Valencia plant Transport Spain 100% 58 420 Information Technology Corporate Australia Assets 90 130 Fiscal year 2003/04 - ------------------- T&D activities T&D World-wide 100% 3,082 28,182 Industrial Turbine activity Power World-wide 100% 1,268 6,327 Power Schilling Robotics Conversion USA 100% 14 54 Power AP Chaudieres lndustrielles Environment France 100% 33 209 FIGLEC shares Corporate China 40% Fiscal year 2002/03 - ------------------- Operations in South Africa All Sectors South Africa 90% 170 4,000 AP Insurance Ltd. All Sectors Switzerland 100% 28 0 Brazil Services T&D Brazil 51% 9 911 Reducteurs de Mesures T&D Italy Assets 7 98 - --------------------------------------------------------------------------------------------- Disposal of our Industrial Turbines businesses On 26 April 2003, we signed binding agreements to sell our small gas turbines business and medium-sized gas turbines and industrial steam turbines businesses in two transactions to Siemens AG. On 30 April 2003, we announced the closing of the sale of the small gas turbines business. On 1 August 2003, we announced that we had completed the major part of the disposal of the medium gas turbines and industrial steam turbines businesses. All other sites of our Industrial Turbines businesses have since been transferred to Siemens. Disposal of our Transmission & Distribution (T&D) activities On 25 September 2003, we signed a binding agreement to sell our T&D activities (our T&D Sector excluding the Power Conversion business) to Areva. This transaction closed on 9 January 2004, except for some minor businesses located in jurisdictions where transfer procedures were completed during fiscal year 2004/05 and a T&D publicly-listed company in India for which a selling agreement was signed with Areva on 6 april 2005. USE AND RECONCILIATION OF NON-GAAP FINANCIAL MEASURES In this section, we disclose figures, which are non-GAAP financial indicators. Under the rules of the United States Securities and Exchange Commission ("SEC") and the Autorité des Marchés Financiers ("AMF"), a non-GAAP financial indicator is a numerical measurement of our historical or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the most directly comparable measurement calculated and presented in accordance with GAAP in our consolidated income statement, consolidated balance sheet or consolidated statement of cash flows; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable measurement so calculated and presented. In this regard, GAAP refers to generally accepted accounting principles in France. Free cash flow We define free cash flow to mean net cash provided by (used in) operating activities less capital expenditures, net of proceeds from disposals of property, plant and equipment and increase (decrease) in existing receivables considered as a source of funding of our activity. Total proceeds from disposals of property, plant and equipment in our Consolidated Statements of Cash Flows include proceeds from our real estate disposal programme designed under our strategy and action plan that we eliminate from the calculation of free cash flow given that this programme is non-recurring and that we consider only the receipt of minor proceeds as part of our normal operations. Free cash flow does not represent net cash provided by (used in) operating activities, as calculated under French GAAP. The most directly comparable financial measure to free cash flows calculated and presented in accordance with French GAAP is net cash provided by (used in) operating activities. A reconciliation of free cash flows and net cash provided by (used in) operating activities is presented below. - -------------------------------------------------------------------------------- Total Group Year ended 31 March Actual figures (in € million) 2003 2004 2005 - -------------- ---- ---- ---- Net cash provided by (used in) operating activities (537) (1,058) (127) Elimination of variation in existing receivables 661 267 87 Capital expenditures (410) (254) (182) Proceeds from disposals of property, plant and equipment 252 244 52 Elimination of proceeds from our programme of disposal of real estate assets (231) (206) - ----- ----- - Free Cash Flow (265) (1,007) (170) - --------------------------------------------------------------------------------- We use the free cash flow measure both for internal analysis purposes as well as for external communications, as we believe it helps the reader understand the actual amount of cash generated or used by our operations. Capital employed We define capital employed to mean net fixed assets, plus current assets (excluding net amount of securitisation of existing receivables), less provisions for risks and charges and current liabilities. Capital employed does not represent current assets, as calculated under French GAAP. The most directly comparable financial measure to capital employed and presented in accordance with French GAAP is current assets, and a reconciliation of capital employed and current assets is presented below. - -------------------------------------------------------------------------------- Total Group At 31 March Actual figures (in € million) 2003 2004 2005 ---- ---- ---- Current assets 11,728 8,371 7,867 Net cash proceeds from sale of trade receivables 357 94 7 Current liabilities (12,916) (9,742) (9,368) Provisions for risks and charges (3,698) (3,489) (3,156) Fixed assets 9,478 7,326 6,953 ----- ----- ----- Capital employed 4,949 2,560 2,303 - -------------------------------------------------------------------------------- Capital employed by Sector and for the Group as a whole are also presented in Note 26 to the 31 March 2005 Consolidated Financial Statements. We use the capital employed measure both for internal analysis purposes as well as for external communications, as we believe they help the reader understand the amount of financial resources employed by a Sector or the Group as a whole and the profitability of a Sector or the Group as a whole in regard to the resources employed. COMPARABLE BASIS The figures presented in this section include performance indicators presented on an actual basis and on a comparable basis. Figures have been given on a comparable basis in order to eliminate the impact of changes in business composition and changes resulting from the translation of our accounts into Euro following variations of foreign currencies against the Euro. All figures provided on a comparable basis are non-GAAP measures. We use figures prepared on a comparable basis both for our internal analysis and for our external communications, as we believe they provide means by which to analyse and explain variations from one period to another on a comparable basis. However, these figures provided on a comparable basis are not measurements of performance under either French or US GAAP. To prepare figures on a comparable basis, we have performed the following adjustments to the corresponding figures presented on an actual basis: - restatement of the actual figures for fiscal years 2003/04 and 2002/03 using fiscal year 2004/05 exchange rates for order backlog, orders received, sales, operating income and elements constituting our operating income ; and - adjustments due to changes in business composition to the same line items for fiscal years 2003/04 and 2002/03. More particularly contributions of material activities sold since 1 April 2003 have been excluded from the figures reported in the fiscal years 2003/04 and 2002/03, i.e., mainly the Industrial Turbines businesses sold in the first half of fiscal year 2003/04 and our T&D activities sold as of 9 January 2004, have been excluded from the comparable figures. The following table sets out the estimated impact of changes in exchange rates and in business composition ("Scope impact") for all indicators disclosed in this document both on an actual basis and on a comparable basis for fiscal years 2003/04 and 2002/03. No adjustment has been made on figures disclosed for fiscal year 2004/05. - --------------------------------------------------------------------------------------------------------------------------------- March 2003 March 2004 March 2005 -------------------------------------- ------------------------------------- ----------------- Actual Scope Exchange Comparable Actual Scope Exchange Comparable Actual % Var 05 (in € million) figures Impact rate figures figures impact rate figures figures /04 ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- Power Turbo-Systems/Environment 7,308 19 (265) 7,062 6,448 10 (63) 6,395 7,139 12% Power Service 2,793 (19) (51) 2,723 3,107 (10) (14) 3,083 3,669 19% Transport 14,676 (86) (307) 14,283 14,321 (197) (179) 13,945 14,489 4% Marine 1,523 0 0 1,523 817 0 0 817 1,266 55% Power Conversion 568 (14) (15) 539 495 0 (8) 487 529 9% Corporate and other 51 0 (1) 50 70 0 (5) 65 111 71% - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- New ALSTOM 26,919 (100) (639) 26,180 25,258 (197) (269) 24,792 27,203 10% - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- T&D 2,126 (2,126) 0 0 110 (110) 0 0 0 Industrial Turbines 1,285 (1,285) 0 0 0 0 0 0 0 - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- ORDER BACKLOG 30,330 (3,511) (639) 26,180 25,368 (307) (269) 24,792 27,203 10% Power Turbo-Systems/Environment 4,404 38 (314) 4,123 5,107 15 (75) 5,047 5,181 3% Power Service 2,934 (38) (121) 2,775 3,023 (15) (41) 2,967 3,228 9% Transport 6,412 (7) (351) 6,054 4,709 0 (22) 4,687 5,490 17% Marine 163 0 0 163 381 0 0 381 1,104 190% Power Conversion 533 (10) (29) 494 434 0 (1) 433 579 34% Corporate and other214 214 (42) (12) 160 320 (48) (11) 261 259 (1%) - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- New ALSTOM 14,660 59 (827) 13,774 13,974 (48) (150) 13,776 15,841 15% - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- T&D 3,198 (3,198) 0 0 2,231 (2,231) 0 0 0 Industrial Turbines 1,265 (1,265) 0 0 295 (295) 0 0 0 - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- ORDERS RECEIVED 19,123 (4,522) (817) 13,774 16,500 (2,574) (150) 13,776 15,841 15% Power Turbo-Systems/Environment 6,955 23 (541) 6,437 5,059 24 (86) 4,997 4,256 (15%) Power Service 2,678 (23) (76) 2,579 2,747 (24) (33) 2,690 2,844 6% Transport 5,072 (6) (189) 4,877 4,862 0 (26) 4,836 5,134 6% Marine 1,568 0 0 1,568 997 0 0 997 630 (37%) Power Conversion 523 (12) (19) 492 499 0 (1) 498 539 8% Corporate and other 205 (41) (10) 154 241 (44) (13) 184 259 41% - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- New ALSTOM 17,001 (59) (835) 16,107 14,405 (44) (159) 14,202 13,662 (4%) - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- T&D 3,082 (3,082) 0 0 2,073 (2,073) 0 0 0 Industrial Turbines 1,268 (1,268) 0 0 210 (210) 0 0 0 - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- SALES 21,351 (4,409) (835) 16,107 16,668 (2,327) (159) 14,202 13,662 (4%) Power Turbo-Systems/Environment (1,175) (8) 187 (996) (253) (7) 9 (251) (35) Power Service 403 8 15 426 417 7 (14) 410 473 Transport (24) 1 15 (8) 64 0 7 71 Marine 24 0 0 24 (19) 0 0 (19) (103) Power Conversion 15 3 (1) 17 15 0 0 15 36 Corporate and other (44) 0 0 (44) (59) 0 1 (58) (81) - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- New ALSTOM (801) 4 216 (581) 165 0 3 168 550 - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- T&D 212 (212) 0 0 121 (121) 0 0 0 Industrial Turbines 82 (82) 0 0 14 (14) 0 0 0 - ------------------------------- ------- ------ -------- ---------- ------- ------ -------- ---------- ------- -------- OPERATING INCOME (LOSS) (507) (290) 216 (581) 300 (135) 3 168 550 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Total Group Sales 21,351 (4,409) (835) 16,107 16,688 (2,327) (159) 14,202 13,662 (4%) Cost of sales (19,187) 3,365 968 (14,854) (14,304) 1,709 149 (12,446) (11,601) (7%) Selling expenses (970) 354 33 (583) (785) 222 5 (558) (545) (2%) R & D expenses (622) 152 17 (453) (473) 86 1 (385) (336) (13%) Administrative expenses (1,079) 248 33 (798) (826) 174 7 (645) (630) (2%) Operating income (loss) 507 (290) 216 (581) 300 (135) 3 168 550 Operating margin (2.4%) (3.6%) (3.6%) 1.8% 1.2% 4.0% - --------------------------------------------------------------------------------------------------------------------------------- A significant part of our sales and expenditures are realised and incurred in currencies other than the Euro. The principal currencies to which we had significant exposures in fiscal year 2004/05 were the US Dollar, British Pound, Swiss Franc, Mexican Peso and Brazilian Real. Our orders received and sales have been impacted by the translation of our accounts into Euros resulting from changes in value of the Euro against other currencies in fiscal year 2004/05. The impact was a decrease of approximately 1% of the orders received and the sales compared with fiscal year 2003/04. KEY GEOGRAPHICAL FIGURES FOR FISCAL YEARS 2004/05, 2003/04 AND 2002/03 Geographical analysis of orders The table below sets out, on an actual basis, the geographic breakdown of orders received by region of destination: - -------------------------------------------------------------------------------- Year ended 31 March Total Group Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 8,889 46% 8,252 50% 7,416 47% North America 4,604 24% 2,079 13% 2,195 14% South and Central America 998 5% 704 4% 471 3% Asia/ Pacific 2,717 14% 3,063 19% 4,289 27% Middle East / Africa 1,915 10% 2,402 15% 1,470 9% Orders received by destination 19,123 100% 16,500 100% 15,841 100% - -------------------------------------------------------------------------------- Europe remained the largest market in terms of orders received, representing 47% of the total compared with 50% in the prior year. Asia/Pacific increased from 19% to 27% of our orders received. Middle East/ Africa decreased from 15% to 9% while Americas remained stable at 17%. The decrease of order intake in Europe was mainly due to Power Turbo-Systems / Power Environment after the large turnkey projects in Spain and Germany booked in fiscal year 2003/04. The increase in Asia/Pacific was mainly due to our performance in China (with approximately €1.6 billion of order intake mainly for Transport and Power Turbo-Systems / Power Environment) and in Thailand (with 4 GT26 gas turbines placed). The decrease in Middle East/Africa was mainly due to the decrease in orders received by Power Turbo-Systems / Power Environment, as booking were particularly high last year. In fiscal year 2003/04, the geographic breakdown of orders received compared to fiscal year 2002/03 saw the share of Asia/Pacific and Middle East/Africa increasing while North American share decreased from 24% to 13% due to lower order intake in Transport and Power Turbo-Systems / Power Environment. Geographical analysis of sales by region of destination The table below sets out, on an actual basis, the geographic breakdown of sales by region of destination: - -------------------------------------------------------------------------------- Total Group Year ended 31 March Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 9,219 43% 8,002 48% 7,429 54% North America 4,719 22% 3,001 18% 1,977 14% South and Central America 1,534 7% 857 5% 575 4% Asia / Pacific 3,727 17% 3,401 20% 2.489 18% Middle East / Africa 2,152 10% 1,427 9% 1,192 9% Sales by destination 21,351 100% 16,688 100% 13,662 100% - -------------------------------------------------------------------------------- Although the level of sales in Europe decreased in actual terms due to scope variation, Europe's share of total sales increased from 48% in the fiscal year 2003/04 to 54% in fiscal year 2004/05. North America decreased mainly as a result of the low level of sales in power generation, reflecting the current depressed state of the US market. The increase in order intake in Asia/Pacific recorded in fiscal year 2004/05 did not yet translate into high sales in this geographical area during the same year. In fiscal year 2003/04, the share of European sales increased compared to fiscal year 2002/03 while the share of North American sales decreased mainly as a result of the low level of sales in Power Turbo-Systems / Power Environment. Geographical analysis of sales by region of origin The table below sets out, on an actual basis, the geographical breakdown of sales by region of origin: - -------------------------------------------------------------------------------- Total Group Year ended 31 March Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 14,762 69% 12,204 73% 9,951 73% North America 3,935 18% 2,519 15% 1,919 14% South and Central America 601 3% 415 2% 374 3% Asia / Pacific 1,833 9% 1,416 8% 1,301 10% Middle East / Africa 220 1% 134 1% 117 1% Sales by origin 21,351 100% 16,688 100% 13,662 100% - -------------------------------------------------------------------------------- Although the overall level of sales decreased in actual terms as a result of the scope variation, the geographical distribution of our sales remained unchanged in fiscal year 2004/05 compared with fiscal year 2003/04. In particular, Europe's share of sales by origin remained at 73%. POWER TURBO-SYSTEMS / POWER ENVIRONMENT The following table sets out certain key financial data for the Power Turbo-Systems / Power Environment Sector: - --------------------------------------------------------------------------------- Power Turbo-Systems / Power Year ended 31 March Environment %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 7,308 6,448 7,139 (12%) 11% Orders received 4,404 5,107 5,181 16% 1% Sales 6,955 5,059 4,256 (27%) (16%) Operating income (loss) (1,175) (253) (35) Operating margin (16.9%) (5.0%) (0.8%) EBIT (1,420) (641) (361) Capital employed n/a (499) (608) - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Power Turbo-Systems / Power Year ended 31 March Environment %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 7,062 6,395 7,139 (9%) 12% Orders received 4,128 5,047 5,181 22% 3% Sales 6,437 4,997 4,256 (22%) (15%) Operating income (loss) (996) (251) (35) Operating margin (15.5%) (5.0%) (0.8%) - --------------------------------------------------------------------------------- Orders received Although to a lesser extent than in fiscal year 2003/04, China dominated the global power generation market in fiscal year 2004/05. The market size remained stable overall in the rest of the world, with some disparities across the regions: Europe and the Americas continued to show limited activity, while the market in Asia was marked mainly by strong demand in India. The Middle East, confirmed as a key development area, saw its demand for new power plants growing compared to the previous year. The regional switch from North America to Asia, particularly China, continues to give increasing importance to coal-based steam and hydro plants rather than gas turbine ones. Increasing price volatility for fuel and electricity triggers the need for diversity and flexibility of power generation products and technologies. Environmental policies are increasingly driving market requirements, favouring our environmental control solutions and equipment mainly in North America and Europe. Orders received in fiscal year 2004/05 were 3% higher than in fiscal year 2003/04 on a comparable basis (+1% on a actual basis). The main improvements were due to Hydro and Utility Boiler businesses offsetting fewer large turnkey contracts. By region, orders received have decreased in Europe compared with fiscal year 2003/04. Orders have increased in the Americas, despite a relatively low market, with the South American market being particularly depressed. We had numerous successes in North America with Boiler and Environmental Control orders. Orders have increased significantly in Asia, which provided 42% of our orders received in the fiscal year 2004/05, of which the major part comes from China (Hydro activity mainly) and from South East Asia (turnkey plants). Sales Sales in Power Turbo-Systems / Power Environment in fiscal year 2004/05 decreased by 16% compared with fiscal year 2003/04 on an actual basis, and by 15% on a comparable basis. This was mainly due to the low level of orders received during fiscal year 2002/03 and during the first half of fiscal year 2003/04. By geographical region, compared to fiscal year 2003/04, Europe decreased by 9%, North America decreased by 26%, South and Central America decreased by 42%, Asia/Pacific decreased by 26% while Middle East/Africa increased by 16%. The following table sets out, on an actual basis, the geographic breakdown of sales by destination: - -------------------------------------------------------------------------------- Power Turbo-Systems / Power Year ended 31 March Environment % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 1,877 27% 1,647 33% 1,495 35% North America 1,865 27% 979 19% 728 17% South and Central America 852 12% 402 8% 231 5% Asia / Pacific 1,390 20% 1,320 26% 977 23% Middle East/Africa 971 14% 711 14% 825 19% Sales by destination 6,955 100% 5,059 100% 4,256 100% - -------------------------------------------------------------------------------- Operating loss and operating margin Power Turbo-Systems / Power Environment operating loss was €35 million in fiscal year 2004/05, compared with €253 million in fiscal year 2003/04 on an actual basis. This strong improvement reflected better project execution and cost reduction partly offset by the under-absorption of fixed charges related to low sales (which are gradually being reduced through the implementation of restructuring plans). The operating margin improved from (5.0%) to (0.8%) on a comparable basis. The operating performance in fiscal year 2003/04 had been impacted by cost increases in the execution of certain turnkey contracts as well as significant under-absorption of fixed costs. POWER SERVICE The following table sets forth some key financial data for the Power Service Sector: - --------------------------------------------------------------------------------- Power Service Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 2,793 3,107 3,669 11% 18% Orders received 2,934 3,023 3,228 3% 7% Sales 2,678 2,747 2,844 3% 4% Operating income (loss) 403 417 473 Operating margin 15.0% 15.2% 16.6% EBIT 304 227 360 Capital employed n/a 1,921 1,683 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Power Service Year ended 31 March %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 2,723 3,083 3,669 13% 19% Orders received 2,775 2,967 3,228 7% 9% Sales 2,579 2,690 2,844 4% 6% Operating income (loss) 426 410 473 Operating margin 16.5% 15.3% 16.6% - --------------------------------------------------------------------------------- Orders received The power service market remained sound in fiscal year 2004/05. Growth in Europe is mainly due to on-going modernisation needs generated by environmental concerns. In North America, the power demand is stable as there are still high reserve margins of installed fleet. There is nevertheless some demand for asset optimisation and growth in steam turbines and generator services. In Asia, demand is growing due to existing plants upgrade needs and on-going market liberalisation. We have developed product strategies for each of our main product ranges that are designed to increase market penetration. The changing market conditions caused by energy price increases and further liberalisation of markets have led us to adopt different approaches to our customers and to follow up new opportunities, particularly with respect to upgrading existing equipment. Orders received were €3,228 million in fiscal year 2004/05, 9% higher than in fiscal year 2003/04 on a comparable basis. On an actual basis, orders were 7% higher. We have recorded an increase in orders for gas turbine parts and services and an increase in steam turbine parts and services partly offset by a decrease of construction and erection in North America, as a consequence of market evolutions and more selective order intakes. By region, on an actual basis, orders were down by 14% in the Americas, stable in Europe, up by 49% in Asia and by 51% in the Middle East and Africa. Sales Sales booked by Power Service in fiscal year 2004/05 increased by 4% as compared with fiscal year 2003/04 on an actual basis, and increased by 6% on a comparable basis. On a geographical basis, sales were up by 17% in Europe. Sales in Americas were down by 9% due to the reduced erection market and up by 5% in Asia. The following table sets out, on an actual basis, the geographic breakdown of sales by destination: - -------------------------------------------------------------------------------- Power Service Year ended 31 March Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 881 32% 989 36% 1,153 41% North America 984 36% 852 31% 784 28% South and Central America 131 5% 119 4% 95 3% Asia / Pacific 475 17% 534 19% 561 20% Middle East / Africa 207 8% 253 9% 251 9% Sales by destination 2,678 100% 2,747 100% 2,844 100% - -------------------------------------------------------------------------------- Operating income and operating margin Power Service's operating income was €473 million or 16.6% of sales in fiscal year 2004/05 compared with €410 million or 15.3% of sales for fiscal year 2003/04 on a comparable basis. Operating margin increased due to increased sales in the more profitable segments of the business and the positive evolution of several operation and maintenance contracts, as well as cost reductions, including with respect to overhead costs. TRANSPORT The following table sets out some key financial data for the Transport Sector: - --------------------------------------------------------------------------------- Transport Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 14,676 14,321 14,489 (2%) 1% Orders received 6,412 4,709 5,490 (27%) 17% Sales 5,072 4,862 5,134 (4%) 6% Operating income (loss) (24) 64 260 Operating margin (0.5%) 1.3% 5.1% EBIT (113) (189) 168 Capital Employed 738 360 125 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Transport Year ended 31 March %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 14,283 13,945 14,489 (2%) 4% Orders received 6,054 4,687 5,490 (23%) 17% Sales 4,877 4,836 5,134 (1%) 6% Operating income (loss) (8) 71 260 Operating margin (0.2%) 1.5% 5.1% - --------------------------------------------------------------------------------- Orders received During fiscal year 2004/05, the market remained active in several segments in Europe and in Asia, especially with the highly promising transportation market in China where we were awarded our first rolling stock contract of mainline passengers. The market for tramways has been sound. We were awarded several contracts, including Rotterdam, Lyon, Le Mans, Nice, Montpellier, Strasbourg, Tenerife and Madrid. We believe that this business will remain active and benefit from further orders in the coming months. We also confirmed five significant Metro contracts for Barcelona, Santiago, Shanghaï, Valencia and Washington. Finally, we also recorded significant locomotives orders in France and should record shortly a large order in China. Several countries, including Italy, Spain, Switzerland, the UK and the Netherlands, are expanding their high speed networks, offering significant business opportunities. Orders received by Transport in fiscal year 2004/05 amounted to €5,490 million compared with €4,709 million in fiscal year 2003/04, on an actual basis. This increase of 17% was due to a higher order intake in Asia Pacific and in Southern Europe compared to the previous fiscal year. As a percentage of total orders received, Asia/Pacific and the Americas represented 19% and 7% respectively, compared with 17% and 10% last year. Europe continued to represent a very significant market share with 68% of orders received. Sales Sales in Transport increased by 6% in fiscal year 2004/05 compared with fiscal year 2003/04 on both an actual and comparable bases. The main contributor to this increase was Europe. The Americas increased slightly and the Asia Pacific region decreased due to the end of the High Speed Train project in Korea which started its commercial service in April 2004. With respect to fiscal year 2003/04 as compared to fiscal year 2002/03, sales decreased to €4,862 million on an actual basis from €5,072 million, reflecting decreases in the United States due to delivery delays. In fiscal year 2004/05, Transport's sales breakdown by region was as follows: Europe 74%, the Americas 12%, Asia/Pacific 12% and Middle East/Africa 2%. Compared with fiscal year 2003/04, Europe increased from 71% to 74% whereas the Americas and Asia decreased slightly. In fiscal year 2003/04, France was again the major contributor to the increase in sales, more than offsetting the decrease in the Asia / Pacific region. The following table sets out, on an actual basis, the geographic breakdown of sales by destination: - -------------------------------------------------------------------------------- Transport Year ended 31 March Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 3,367 66% 3,463 71% 3,817 74% North America 543 11% 419 9% 383 8% South and Central America 253 5% 145 3% 214 4% Asia / Pacific 764 15% 703 14% 638 12% Middle East / Africa 145 3% 132 3% 82 2% Sales by destination 5,072 100% 4,862 100% 5,134 100% - -------------------------------------------------------------------------------- Operating income and operating margin The operating income of Transport for fiscal year 2004/05 amounted to €260 million or 5.1% of sales, mainly due to volume increase, improved mix of product sales and further cost and overhead reduction. In fiscal year 2003/04, Transport recorded an operating profit of €64 million as compared to a loss of €(24) million in the prior year. This increase was due to one-off difficulties encountered with the UK Trains and US Trains issues in fiscal year 2002/03. MARINE The following table sets out some key financial and operating data for our Marine Sector: - --------------------------------------------------------------------------------- Marine Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 1,523 817 1,266 (46%) 55% Orders received 163 381 1,104 134% 190% Sales 1,568 997 360 (36%) (37%) Operating income (loss) 24 (19) (103) Operating margin 1.5% (1.9%) (16.3%) EBIT 12 (40) (16) Capital employed (343) (580) (234) - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Marine Year ended 31 March %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 1,523 817 1,266 (46%) 55% Orders received 163 381 1,104 134% 190% Sales 1,568 997 630 (36%) (37%) Operating income (loss) 24 (19) (103) Operating margin 1.5% (1.9%) (16.3%) - --------------------------------------------------------------------------------- Orders received In fiscal year 2004/05, the global shipbuilding market experienced an increased level of orders, compared to the level of the previous years. This growth was also observed into the main segment of our Marine sector, the cruise ships market, where eleven vessels were ordered worldwide, compared to only five vessels in 2002/03. The Liquefied Natural Gas LNG carrier market remained very active, with 69 units booked in 2004, increasing the worldwide order backlog to 113 LNG tankers, compared with a fleet in service of 174. These orders have been booked mainly by Korean shipyards. However newcomers, such as Chinese shipyards, have entered the market in 2004. Market prices, although improving remained depressed in spite of this high demand. With respect to the Marine Sector, orders received during fiscal year 2004/05 reached €1,104 million compared with €381 million in fiscal year 2003/04. Orders received included two cruise ships for Mediterranean Shipping Company (MSC) and one 153,000 m3 LNG tanker, which will be a sister-ship of the Gaz de France tanker ordered in the previous year. At the end of fiscal year 2004/05, the Marine backlog included two cruise-ships for MSC, two LNG tankers for Gaz de France, one LNG tanker for NYK, the forward part of one Land Helicopter Dock for the French Navy, one Yacht and one roll-in roll-out ferry. In fiscal year 2003/04, Marine's main market, cruise ships, remained weak and Marine registered no new cruise ship orders. Orders received in fiscal year 2003/04 comprised a trans-channel car-ferry for Seafrance and a 153,000 m3 LNG tanker for Gaz de France. Sales Sales amounted to €630 million in fiscal year 2004/05, during which Marine completed and delivered the following vessels: - the cruise ship MSC Opera for Mediterranean Shipping Company ; - the ferry SeaFrance Berlioz for SeaFrance ; and - the forward part of LHD Mistral for the French Navy. During fiscal year 2003/04 Marine completed and delivered a surveillance frigate for the Royal Moroccan Navy, the cruise ship Island Princess, the cruise ship Crystal Serenity, and the cruise-liner Queen Mary 2 for Cunard. The following table sets out, on an actual basis, the geographic breakdown of sales by destination: - -------------------------------------------------------------------------------- Marine Year ended 31 March Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 724 46% 442 44% 605 96% North America 636 41% 343 34% 2 0% South and Central America 0 0% 9 1% 14 2% Asia / Pacific 186 12% 192 19% 9 1% Middle East / Africa 22 1% 11 1% - 0% Sales by destination 1,568 100% 997 100% 630 100% - -------------------------------------------------------------------------------- Operating loss and operating margin The operating loss reached €103 million in fiscal year 2004/05, compared with a loss of €19 million in fiscal year 2003/04. The low level of activity has generated a significant under-activity which is being dealt with through the headcount decrease achieved over 2004/05. In addition, during fiscal year 2004/05, a technical deficiency arose with the new LNG tank containment system used in LNG tankers in the process of construction by our Marine Sector. This containment system uses the most advanced technology (called "CS1") developped by Marine's licensor Gas Transport & Technigaz ("GTT"). Difficulties revealed during sea trial of the LNG ENERGY have caused Marine to delay delivery of this ship and to stop work on the LNG PROVALYS. A sound technical solution is in the process of validation by GTT and the customer Gaz de France, with whom Marine is in the process of finalizing agreements as to the resulting financial consequences. A charge of around €50 million has been recorded for the net costs that Marine estimates will ultimately be borne by it, including costs of repair and potential penalties. POWER CONVERSION The following table sets out some key financial data for our Power Conversion Business: - --------------------------------------------------------------------------------- Power Conversion Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 568 495 529 (13%) 7% Orders received 533 434 579 (19%) 33% Sales 523 499 539 (5%) 8% Operating income (loss) 15 15 36 Operating margin 2.9% 3.0% 6.7% EBIT (22) (19) 15 Capital Employed 48 25 (4) - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Power Conversion Year ended 31 March %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 539 487 529 (10%) 9% Orders received 494 433 579 (12%) 34% Sales 492 498 539 1% 8% Operating income (loss) 17 15 36 Operating margin 3.5% 3.1% 6.7% - --------------------------------------------------------------------------------- Orders received On an actual basis, orders received in fiscal year 2004/05 increased by 33% compared with fiscal year 2003/04. This increase came mainly from the UK marine activity with the booking of two major orders, including one for the Royal Navy and from the development of the metal market notably in China and Brazil. Orders received in fiscal year 2003/04 decreased by 19% compared with fiscal year 2002/03. This decrease was mainly seen in Europe and was partially offset by a strong increase of orders in China and in the United-States. Sales On an actual basis, sales in fiscal year 2004/05 increased by 8% compared with fiscal year 2003/04 as a consequence of the improved order intake. On an actual basis, sales decreased by 5% in fiscal year 2003/04 compared with fiscal year 2002/03 as a consequence of order intake trend. The following table sets out, on an actual basis, the geographic breakdown of sales by destination: - -------------------------------------------------------------------------------- Power Conversion Year ended 31 March Actual figures % % % (in € million) 2003 contrib. 2004 contrib. 2005 contrib. ---------------- ---------------- --------------- Europe 305 58% 306 61% 332 62% North America 91 17% 79 16% 82 15% South and Central America 34 7% 28 6% 20 4% Asia / Pacific 42 8% 41 8% 72 13% Middle East / Africa 51 10% 45 9% 33 6% Sales by destination 523 100% 499 100% 539 100% - -------------------------------------------------------------------------------- Operating income and operating margin The increase in operating income from €15 million in fiscal year 2003/04 to €36 million in fiscal year 2004/05 was due to actions across businesses to improve performance. CORPORATE AND OTHER "Corporate and Other" comprises all units accounting for Corporate costs, the International Network and the overseas entities in Australia, New Zealand, and India which are not reported by Sectors. The following table sets out some key financial data for our Corporate and Other organisation: - --------------------------------------------------------------------------------- Corporate & Other Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 52 70 111 35% 59% Orders received 214 295 259 38% (12%) Sales 205 241 259 18% 7% Operating income (loss) (44) (59) (81) EBIT (46) (252) (258) Capital Employed 1,208 1,333 1,341 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Corporate & Other Year ended 31 March %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- Order backlog 50 65 111 30% 71% Orders received 160 261 259 63% (1%) Sales 154 184 259 20% 41% Operating income (loss) (44) (58) (81) - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Operating income (loss) Operating income includes Corporate costs as well as the contribution of the International Network and the overseas entities. Since fiscal year 2003/04, operating income also included costs of the former Power Sector headquarters which are now borne by Corporate and that amounted to approximately €25 million in fiscal year 2002/03. Operating income was €(81) million in fiscal year 2004/05, compared with €(59) million in fiscal year 2003/04. The variation is mainly due to changes in the way costs of information technology services are re-invoiced to the Sectors. Gross spending at Corporate level was reduced due to restructuring actions implemented in fiscal year 2003/04. Capital employed In fiscal year 2004/05, capital employed for Corporate was high at €1,341 million because the main part of our other fixed assets is allocated to Corporate's capital employed as they are managed by Corporate; they mainly included: - the collateral provided by Alstom Holdings for €700 million as a first loss guarantee for the bonding facility programme launched in 2004 for a maximum of €8 billion ; and - prepaid assets - pensions (€311 million). Capital employed was €1,333 million in fiscal year 2003/04 compared to €1,208 million in fiscal year 2002/03. FINANCIAL STATEMENTS INCOME STATEMENT The following table sets out, on a consolidated basis, the elements of our operating income both on an actual and on a comparable bases for the Group as a whole: - --------------------------------------------------------------------------------- Total Group Year ended 31 March %Variation %Variation Actual figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- SALES 21,351 16,688 13,662 (22%) (18%) Cost of sales (19,187) (14,304) (11,601) (25%) (19%) Selling expenses (970) (785) (545) (19%) (31%) R&D expenses (622) (473) (336) (24%) (29%) Administrative expenses (1,079) (826) (630) (23%) (24%) OPERATING INCOME(LOSS) (507) 300 550 Operating margin (2.4%) 1.8% 4.0% - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- Total Group Year ended 31 March %Variation %Variation Comparable figures March 04/ March 05/ (in € million) 2003 2004 2005 March 03 March 04 ---- ---- ---- -------- -------- SALES 16,107 14,202 13,662 (12%) (4%) Cost of sales (14,854) (12,446) (11,601) (16%) (7%) Selling expenses (583) (558) (545) (4%) (2%) R & D expenses (453) (385) (336) (15%) (13%) Administrative expenses (798) (645) (630) (19%) (2%) OPERATING INCOME (LOSS) (581) 168 550 Operating margin (3.6%) 1.2% 4.0% - --------------------------------------------------------------------------------- Sales Sales were €13,662 million in fiscal year 2004/05, decreasing by 4% compared with fiscal year 2003/04 on a comparable basis, mainly in Power Turbo-Systems / Power Environment and Marine Sectors due to the impact of the low level of orders in the second half of fiscal year 2002/03 and in the first half of fiscal year 2003/04. Sales in other Sectors increased on a comparable basis. Sales decreased by 18% in fiscal year 2004/05 on an actual basis. This decrease was mainly due to the disposal of our Industrial Turbines business and T&D activities and, to a lesser extent, the depreciation of the US dollar against the Euro. Sales in fiscal year 2003/04 decreased by 22% as compared with sales in fiscal year 2002/03 on an actual basis, due principally to disposals and exchange rate variations. No single customer represented more than 10% of our sales in any of the three periods discussed. Selling and administrative expenses Selling and administrative expenses were €1,175 million in fiscal year 2004/05 compared to €1,611 million in fiscal year 2003/04 and €2,049 million in fiscal year 2002/03, due principally to the disposal of our T&D and Industrial Turbines activities. On a comparable basis, selling and administrative expenses decreased by 2% between fiscal year 2003/04 and fiscal year 2004/05 following a 13% decrease between fiscal years 2002/03 and 2003/04. This decrease reflected the results of our launched restructuring programmes. On an actual basis, selling and administrative expenses have decreased by 21% between fiscal year 2002/03 and fiscal year 2003/04 mainly due to the disposal of our Industrial Turbines and T&D activities and restructuring actions. Research and development expenses Research and development expenses were €336 million in fiscal year 2004/05, as compared to €473 million in fiscal year 2003/04 and €622 million in fiscal year 2002/03. On a comparable basis, research and development expenses have decreased by 13% in fiscal year 2004/05 as compared to fiscal year 2003/04. This decrease was mainly due to a reduction of expenses related to the GT24/GT26 gas turbines development programme as the technology has now stabilised. The decrease recorded between fiscal year 2003/04 and 2002/03 was also mainly due to a decrease in the GT24/GT26 gas turbines development programme. Operating income (loss) and operating margin Operating income is measured before restructuring costs, goodwill and other intangible assets amortisation expenses, and other items including foreign exchange gains and losses, gains and losses on sales of assets, pension costs and employee profit sharing and before taxes, interest income and expenses. The operating margin is calculated by dividing the operating income by total annual sales. On an actual basis, our operating income in fiscal year 2004/05 was €550 million or 4.0% of sales, as compared with an operating income of €300 million and an operating margin of 1.8% in fiscal year 2003/04 and an operating loss of €507 million and an operating margin of (2.4%) in fiscal year 2002/03. On a comparable basis, mainly when excluding the favourable effect of our T&D activity last year before its disposal, our operating income amounted to €168 million or 1.2% of sales in fiscal year 2003/04. This year's strong improvement of our operating margin despite a lower level of sales is notably due to a reduction in our cost base and to improved performance in the execution of our contracts, as compared to last year where exceptional charges related to execution of contracts in the previous fiscal year were accounted for. In fiscal year 2002/03, exceptional provisions and accrued costs were recorded for the GT24/GT26 heavy duty gas turbines and for UK trains leading to a substantial operating loss. Earnings Before Interest and Tax (EBIT) EBIT was €(92) million in fiscal year 2004/05, compared with €(871) million in fiscal year 2003/04 and €(1,129) million in fiscal year 2002/03. The improvement in EBIT in fiscal year 2004/05 was mainly due to: - the improvement of our operating income ; - the decrease of restructuring costs amounting to €358 million in fiscal year 2004/05, compared with €655 million in fiscal year 2003/04 as the restructuring programme initiated in March 2003 has now been fully recorded in our accounts ; and - the decrease in pension costs at €175 million in fiscal year 2004/05, compared with €263 million in fiscal year 2003/04. This decrease was primarily due to scope variation and to reduced service costs resulting from a smaller workforce. The negative EBIT in fiscal year 2003/04 was mainly due to a low level of operating income and high levels of pension and restructuring costs. Financial expenses, net The improvement of our net financial expenses, €346 million in fiscal year 2004/05 compared with €460 million in fiscal year 2003/04 was due to the decrease in net interest expenses as a consequence of the reduction in our level of indebtedness. The financial charges included fees paid on guarantees, syndicated loans and other financing facilities, which amounted to €83 million in fiscal year 2004/05 compared with €125 million in 2003/04. Income tax The income tax charge was €203 million for fiscal year 2004/05 as we recognised a deferred tax charge of €185 million and a current income tax charge of €18 million. This deferred tax charge of €185 million in fiscal year 2004/05 compared with €149 million in fiscal year 2003/04 was due to the valuation allowance made after a detailed review by tax jurisdiction as described in Note 6 to the Consolidated Financial Statements. Given the ability to carry forward indefinitely certain tax losses and that some other losses expire within 15 years or more, those deferred tax assets currently subject to valuation allowance remain available to be utilised in the future. Our deferred tax assets amounted to €1,370 million as of 31 March 2005. Based on our business plan, we expect the deferred tax that is not currently subject to valuation allowance will be recovered over a period of four to twelve years. For more details, see Note 6 to the Consolidated Financial Statements. Goodwill amortisation Goodwill amortisation amounted to €223 million in fiscal year 2004/05 compared with €256 million in fiscal year 2003/04 and €284 million in fiscal year 2002/03. The decrease was due to the disposal of our Industrial Turbine businesses and our T&D activities. We requested an independent third party evaluation as part of our annual impairment tests of goodwill and other intangible assets. The valuation as at 31 March 2005 supported our opinion that our goodwill and other intangible assets were not impaired. Net income (loss) Net loss in fiscal year 2004/05 amounted to €865 million, compared with a net loss of €1,836 million in fiscal year 2003/04 and a net loss of €1,432 million in fiscal year 2002/03. BALANCE SHEET Special Purpose Entities Following a new accounting pronouncement effective 1 April 2004, we have consolidated several Special Purpose Entities with an effect notably of increasing our financial debt by €827 million, increasing our Property, plant and equipment by €693 million and Inventories and contracts in progress by €110 million as of 1 April 2004. See Note 2 (a) and 25 to our Consolidated Financial Statements. The effect on our net debt was reduced to €94 million at 31 March 2005 due to : - the sale of one special purpose entity during the period (€243 million) ; - the deconsolidation of two special purpose entities (€384 million) ; and - repayments and impact of foreign exchange (€106 million). Goodwill, net Net Goodwill decreased to €3,194 million at 31 March 2005 compared to €3,424 million at 31 March 2004 mainly due to the amortisation of the period for €223 million. Net Goodwill decreased to €3,424 million at 31 March 2004 compared to €4,440 million at 31 March 2003 due to the amortisation of goodwill for €256 million and to the disposal of our industrial Turbine and Transmission & Distribution businesses, which led to a decrease of the corresponding goodwill of €759 million. Working capital Working capital (defined as current assets less current liabilities and provisions for risks and charges) at 31 March 2005 was €(4,657) million compared with €(4,860) million as reported at 31 March 2004 or €(4,610) million as at 1 April 2004 to account for the impact of the consolidation of our special purpose entities. The variance reflected primarily: - changes in the scope of our activities ; and - a decrease in trade payables partly offset by the significant increase in customer deposits and advances. See Note 16 to the Consolidated Financial Statements for more details. Working capital at 31 March 2004 was €(4,860) million compared with €(4,886) million as reported at 31 March 2003. This variation was mainly due to a positive net effect of foreign currency and to changes in scope. Customer deposits and advances We record customer deposits and advances on our balance sheet upon receipt as gross customer deposits and advances. The gross amounts were €8,563 million, €8,722 million and €12,689 million at 31 March 2005, 31 March 2004 and 31 March 2003 respectively. At the balance sheet date, we apply these deposits first to reduce any related gross accounts receivable and then to reduce any inventories and contracts in progress relating to the project for which we received the deposit or advance. Any remaining deposit or advance is recorded as "Customer deposits and advances" on our balance sheet. As of 31 March 2005, our net customer deposits and advances were €3,150 million, compared with €2,714 million as of 31 March 2004 and €3,541 million as of 31 March 2003. The impact on our cash flow of the change in customer deposits and advances was positive by €510 million in fiscal year 2004/05 after a negative €1 million in fiscal year 2003/04. This is due to the significant increase in our backlog in fiscal year 2004/05. The decrease of customer cash deposits at the end of fiscal year 2003/04 as compared to fiscal year 2002/03 was mainly due to currency translation effects and the impact of the disposal of our Industrial Turbines and T&D businesses. Net deferred tax assets Net deferred tax assets amounted to €1,349 million at 31 March 2005 compared with €1,531 million at 31 March 2004. At 31 March 2005, we reviewed by jurisdiction the recoverability of these deferred tax assets on the basis of extrapolation from our business plan. This review led to a cumulative valuation allowance on deferred tax assets of €948 million at 31 March 2005 compared with €730 million at 31 March 2004. At 31 March 2005 we are satisfied as to the recoverability of our net deferred tax assets. Pensions Under French GAAP and US GAAP, we have reviewed the accounting treatment for the Swiss pension schemes from defined contribution to defined benefits accounting. The impact at 1 April 2004 is an increase in projected benefits of €515 million and an increase in the fair value of assets by €515 million. Provisions for risks and charges At 31 March 2005, the provisions for risks and charges were €3,156 million compared with €3,489 million at 31 March 2004. This net decrease was accounted for mainly by the following movements: - a decrease in provisions on contracts for €225 million, mainly resulting from the application of the GT24/GT26 gas turbines provisions ; - an increase in restructuring provisions of €55 million due to the new restructuring plans announced ; and - a decrease of other provisions mainly due to the utilisation against losses incured and remaining assets related to Marine vendor financing. At 31 March 2004, the provisions for risks and charges were €3,489 million compared with €3,698 million at 31 March 2003. The decrease was due to a decrease in provisions for contracts partially offset by an increase in provisions for restructuring. Shareholders' equity and minority interests Shareholders' equity at 31 March 2005 was €1,256 million, including minority interests, compared with €97 million at 31 March 2004 and €853 million at 31 March 2003. This increase at 31 March 2005, was mainly due to the capital increases described above for a total amount of €1,725 million net of related cost, to the reimbursement with shares of the TSDDRA subscribed by the French State for €300 million, reduced by the net loss for the period of €865 million. The decrease at 31 March 2004 was mainly due to the net loss and translation adjustments, partially offset by a capital increase of €300 million and the issuance of convertible bonds for €733 million net of related costs. As at 31 March 2005, €133 million of bonds, out of the €901 million issued, have not yet been converted into capital. Securitisation of existing receivables We sell selected existing trade receivables to a third party on an irrevocable, without recourse basis. The net cash proceeds from securitisation of existing trade receivables at 31 March 2005 was €7 million compared with €94 million at 31 March 2004 and €357 million at 31 March 2003. Securitisation of future receivables In order to finance working capital and to mitigate the cash-negative profiles of some contracts, we have sold to third parties selected future receivables due from our customers. This securitisation of future receivables applies principally to Marine and Transport. The total securitisation of future receivables at 31 March 2005 was €49 million compared with €265 million at 31 March 2004 and €1,292 million at 31 March 2003. The decrease in fiscal year 2004/05 compared with fiscal year 2003/04 was mainly due to the amortisation of the current programmes. The decrease in fiscal year 2003/04 compared with fiscal year 2002/03 was mainly due to the delivery of two cruise-ships by our Marine Sector. Financial debt Our financial debt was €2,907million at 31 March 2005, compared with €4,372 million at 31 March 2004, €5,199 million at 1 April 2004, pursuant to the first application of the Règlement CRC 2004-03, and €6,331 million at 31 March 2003. Borrowings decreased by €1,271 million and securitisation of future receivables decreased by €216 million, while other facilities increased by €558 million due to the consolidation of Special Purpose Entities net of the disposal during the period of one such entity in the Transport Sector. At 31 March 2005, we were in compliance with our covenants as follows: - our consolidated net worth, as defined in our covenant agreement, was €1,607 million (contractually defined as the sum of €1,182 million of shareholders' equity, €74 million of minority interests, €133 million of bonds reimbursable with shares, €218 million of additional deferred tax valuation allowance in year 2004/05), which exceeds the €1,100 million required by our covenants ; and - our total debt was €2,820 million (contractually defined as the sum of €2,907 million of financial debt, €7 million of sale of trade receivables, minus €94 million as the net impact of the consolidation of our SPE to neutralise the effect of a new accounting pronouncement, see Note 23(a) (3) in our Consolidated Statements), which is below the €3,979 million required by our covenants. Net debt We define net debt as financial debt less short-term investments, cash and cash equivalents. Net debt was €1,430 million at 31 March 2005, compared with €2,906 million at 31 March 2004 and €4,561 million at 31 March 2003. Our net debt decreased due to the capital increase (net of the cash collateral on the bonding programme accounted for in other fixed assets), the reimbursement by shares of the TSDDRA and proceeds of the disposal of investments partly offset by net cash used in operating activities. The net impact of the consolidation of Special Purpose Entities amounted to €94 million at 31 March 2005. The decrease in net debt in fiscal year 2003/04 was due to the capital increase, the issuance of bonds mandatorily reimbursable with shares and proceeds on disposal of investments partly offset by net cash used in operating activities. LIQUIDITY AND CAPITAL RESOURCES CONSOLIDATED STATEMENT OF CASH FLOWS The following table sets out selected figures concerning our Consolidated Statement of Cash Flows: - -------------------------------------------------------------------------------- Total Group Year ended 31 March Actual figures (in € million) 2003 2004 2005 - ------------------- --------------------------- ---- ---- ---- Net income (loss) after elimination of non cash items (1,087) (1,053) (91) Change in networking capital 550 (5) (36) Net cash provided by (used in) operating activities (537) (1,058) (127) Net cash provided by (used in) investing activities (341) 1,561 426 Net cash provided by (used in) financing activities 621 1,173 1,998 (257) 1,676 2,297 Net effect of exchange rate (41) (7) 48 Net effect of new accounting pronouncement* (827) Other changes and reclassifications (464) (14) (42) Decrease (increase) in net debt (762) 1,655 1,476 - -------------------------------------------------------------------------------- *Effect at 1 April 2004 on Financial debt pursuant to the first application of the Règlement CRC 2004-03. Net cash provided by (used in) operating activities Net cash provided by (used in) operating activities is defined as the net income after elimination of non-cash items plus working capital movements. Net cash provided by (used in) operating activities was €(127) million in fiscal year 2004/05 compared to €(1,058) million in fiscal year 2003/04 and €(537) million in the fiscal year 2002/03. Net income after the elimination of non-cash items was €(91) million in fiscal year 2004/05. This amount represented the cash generated by net income before working capital movements. As provisions are included in the definition of our working capital, provisions are not part of the elimination of non-cash items. This negative amount was mainly due to high levels of restructuring and financial expenditures. Change in net working capital was €(36) million. Working capital was affected principally by: - a decrease of €(87) million in sale of trade receivables (securitisation of existing receivables) ; - a decrease of €(195) million in contract-related provisions mainly due to the application of GT24/GT26 provisions ; - an increase of €510 million in customer deposits and advances following a continuing rebound in orders received and the resulting increase of our backlog ; - a decrease of €(786) million in trade payables and other payables related to the lower level of sales ; and - a decrease by €205 million of inventories and contracts in progress ; - a decrease by €423 million of trade and other receivables. The net cash used in operating activities of €(1,058) million in fiscal year 2003/04 was mainly due to the net loss of the fiscal year. The net cash used in operating activities of €(537) million in fiscal year 2002/03 was mainly due to the net loss of the fiscal year partly offset by a positive change in working capital. Net cash provided by (used in) investing activities Net cash provided by investing activities was €426 million in fiscal year 2004/05. This amount comprised: - proceeds of €52 million from disposals of property, plant and equipment ; - capital expenditures for €182 million ; - variation in other fixed assets of €(372) million mainly due to the €700 million cash collateral made to secure the new bonding programme partially offset by monetisation of other financial fixed assets ; and - cash proceeds from the sale of investments, net of net cash sold, for €928 million. The cash proceeds from the sale of investment included for €627 million the net debt sold as part of the disposal of one Special Purpose Entity in the Transport Sector and the deconsolidation of two Special Purpose Entities in the Marine Sector. Net cash provided by (used in) investing activities was €1,561 million in fiscal year 2003/04 and €(341) million in fiscal year 2002/03. The net cash inflow in fiscal year 2003/04 was mainly due to cash proceeds from sale of T&D Sector and Industrial Turbines businesses. The net cash outflow in fiscal year 2002/03 was mainly due to €410 million of capital expenditures and €154 million of cash expenditures for the acquisition of the remaining 49% in Fiat Ferroviaria Spa. Net cash provided by (used in) financing activities Net cash provided by financing activities in fiscal year 2004/05 was €1,998 million, including capital increases for €1,725 million net of related cost and the redemption on shares of the TSDDRA for €300 million. Net effect of new accounting pronouncement As discussed above and in Note 2 (a) to our Consolidated Financial Statements, following a new accounting pronouncement effective 1 April 2004, we have consolidated several Special Purpose Entities with an effect of increasing our financial debt by €827 million at 1 April 2004 and €94 million at 31 March 2005. Decrease (increase) in net debt As a result of the above, our net debt decreased by €1,476 million in fiscal year 2004/05 after a decrease of €1,655 million in fiscal year 2003/04 and an increase of €762 million in fiscal year 2002/03. MATURITY AND LIQUIDITY We have a variety of sources of liquidity in order to finance our operations, including principally borrowings under revolving credit facilities, the issuance of commercial paper and asset disposals. Additional sources include customer deposits and advances and proceeds from the sale of trade receivables, including future trade receivables. In the past, we have also used the issuance of securities, including debt securities and preferred shares, as a source of liquidity. The following table sets forth the list of our drawn and undrawn lines of credit and financial debt obligations (including future receivables securitised) and as part of these, the available lines of credit as of 31 March 2005: (in € million) At 31 Fiscal Fiscal Fiscal Fiscal Fiscal After Fiscal March Year Year Year Year Year Year 2005 2005/06 2006/07 2007/08 2008/09 2009/10 2009/10 Maturity ----- ------- ------- ------- ------- ------- ------------ -------- Redeemable preference shares 205 (205) 31-Mar-06 Subordinated notes 5 (5) 30-Sep-06 Bonds 2010 1,000 (1,000) 03-Mar-10 Bonds 228 (228) 26-Jul-06 Bonds exchange premium (26) 6 5 5 5 5 PSDD 1,320 (1,320) 30-Sep-08 Syndicated loans 704 (704) 03-Aug-06 Bilateral loans 250 (27) (33) (190) Commercial Paper 14 (14) Other facilities (I) 252 (123) (20) (20) (19) (38) (32) Bank overdraft 58 (58) Accrued interests 50 (50) Future receivables securitized, net 49 (49) ----- ------- ------- ------- ------- ------- ------------ Total lines of credit 4,109 (520) (985) (205) (1,334) (1,033) (32) ----- ------- ------- ------- ------- ------- ------------ Financial debt 2,907 ----- Available lines 1,202 27 704 190 281 ----- (1) Most facilities held by subsidiaries have been classified as being immediately due because such facilities are generally uncommitted Total available unused credit lines together with cash available in the Group and short term investments amounted to €2,679 at 31 March 2005, compared to €2,249 million at 31 March 2004. These amounts consisted of: - Available credit lines at Group level for €1,202 million, which comprised €281 million of part B of the PSDD, €704 Million of syndicated loan and €217 million of bilateral facilities at 31 March 2005, compared with €420 million of commercial paper and €363 million of part B of the PSDD at 31 March 2004 ; - Cash available at parent company level of €796 million at 31 March 2005, compared with €532 million at 31 March 2004 ; and - Cash and cash equivalent, short term investments available at subsidiary level of €681 million at 31 March 2005 compared with €934 million at 31 March 2004. ALSTOM, the Group parent company, can access some cash held by wholly owned subsidiaries through the payment of dividends or pursuant to intercompany loan arrangements. Local constraints can delay or restrict this access, however. Furthermore, while we have the power to control decisions of subsidiaries of which we are the majority owner, our subsidiaries are distinct legal entities and the payment of dividends and the granting of loans, advances and other payments to us by them may be subject to legal or contractual restrictions, be contingent upon their earnings or be subject to business or other constraints. These limitations include local financial assistance rules, corporate benefit laws and other legal restrictions. Our policy is to centralise liquidity of subsidiaries at the parent company level when possible, and to continue to progress towards this goal. The cash and cash equivalents, short term investments available at subsidiary level were €1,160 million, €934 million and €681 million respectively in March 2003, 2004 and 2005. PENSION ACCOUNTING We provide various types of retirement, termination and post-retirement benefits (including healthcare and medical) to our employees. The type of benefits offered to an individual employee is related to local legal requirements as well as operating practices of the specific subsidiaries and involves us in the operation of, or participation in, various retirement plans. These plans are either defined-contribution, defined-benefit or multi-employer plans. Defined contribution plans For the defined-contribution plans, we pay contributions to independently administered funds at a fixed percentage of employees' pay. The pension costs in respect of defined-contribution plans are charged in the income statement as operating expenses and represent the contributions paid by the Company to these funds. Defined-benefit plans These plans mainly cover retirement and termination benefits and post-retirement medical benefits. For the defined benefit plans, which we operate, benefits are normally based on an employee's pensionable remuneration and length of service. These plans are either funded through independently administered pension funds or unfunded. Pension liabilities are assessed annually by external professionally qualified actuaries. These actuarial assessments are carried out for each plan using the Projected Unit Credit method with generally a measurement date of 31 December. The financial and demographic assumptions used are determined at the measurement date as being appropriate for the plan and the country in which it is situated. The most important assumptions made are listed below: - discount rate ; - inflation rate ; - rate of salary increases ; - long-term rate of return on plan assets ; - mortality rates ; and - employee turnover rates. Certain assumptions used are discussed in Note 22 to the Consolidated Financial Statements. The assets of externally administrated defined-benefit plans are invested mainly in equity and debt securities. The components of these assets are disclosed in Note 22 to the Consolidated Financial Statements. The expected costs of providing retirement pensions under defined benefit plans, as well as the costs of other post-retirement benefit plans, are charged to the profit and loss account over the periods benefiting from the employees' services. Valuation of the Projected Benefit Obligation The actuarial value of the future obligations of the employer estimated with the Projected Unit Credit method (Projected Benefit Obligation - "PBO") fluctuates annually, depending upon the following: - increases related to the acquisition by the employees of one additional year of rights ("service cost") ; - increases in the present value of the PBO which arises because the benefits are one year closer to their payment dates ("interest cost") ; - decreases related to the benefits paid during the year ; - changes related to modifications of the actuarial assumptions ("actuarial gains and losses": discount rate, inflation rate, rate of salary increases etc.) ; - changes in obligations related to plan amendments ; and - changes due to curtailments or settlements applied on the plans ; - changes in scope ("business combinations/disposals"). The change in the PBO is disclosed in Note 22 to the Consolidated Financial Statements. Valuation of plan assets The fair value of the assets held by each plan is the amount that the plan could reasonably expect to receive in a current sale of the assets between a willing buyer and a willing seller. This is compared with the PBO and the difference is referred to as the "funded status" of the plan. The changes in the fair value of assets and the funded status are disclosed in Note 22 to the Consolidated Financial Statements. Actuarial gains and losses, prior year service costs and transition obligations A number of factors can trigger actuarial gains and losses: - differences between the assumptions used and the actual experience (for instance, an actual return on assets differing from the expected rate of return at the beginning of the year) ; - changes in the long-term actuarial assumptions (inflation rate, discount rate, rate of salary escalation, mortality table etc.) ; and - changes due to plan amendments. The impact of these factors is shown in the table entitled "Change in plan assets" in Note 22 to the "Consolidated Financial Statements": - unrecognised actuarial loss (gain) ; - unrecognised prior service cost (due to plan amendments) ; and - unrecognised transition. The unrecognised actuarial loss (gain) at the year-end is compared on a plan-by-plan basis with the higher of the PBO and the fair value of the assets held. If the unrecognised actuarial loss (gain) exceeds 10% of this amount, the excess above the 10% level is spread across the remaining working lives of the employees of the respective plan. As of 31 March 2005, the actuarial losses unrecognised in the balance sheet were €1,041 million, an increase of €123 million since March 2004. Recognition of these liabilities under French GAAP is allowed over the average remaining working lives of the relevant participants. The portion above a 10% corridor calculated scheme by scheme, is spread over the average remaining working lives of participants in these plans, being 10-15 years. The unrecognised gains on prior service costs and on transition amounted to €27 million at 31 March 2005. The total amount is amortised on a straight-line basis over the remaining working lives of the plans' participants. Pension cost The total pension cost related to defined benefit is defined annually by qualified actuaries and is detailed in Note 22 to the "Consolidated Financial Statements" as follows: - service cost, which corresponds to the acquisition of one additional year of rights ; - interest cost, which is due to the increase in the present value of the PBO which arises because the benefits are one period closer to their payment dates ; - expected return on plan assets (profit) ; - cost (or potentially profit) corresponding to the amortisation of prior service cost ; - cost (or potentially profit) corresponding to the amortisation of actuarial gains and losses ; and - profit (or potentially cost) of Curtailments/Settlements corresponding to the impact of a reduction/cancellation of the obligation mainly due to a modification of the plan's scope (downsizing, business disposals, closing of a defined-benefits plan, etc.). Multi-employer plans in the United States and Canada We employ workers from US and Canadian trade unions mainly in our Power Service activity related to the boiler after-market. The pension costs charged in the income statement as "Other expenses - Pension costs" represent contributions payable by us to these dedicated funds. During the year ended 31 March 2005, pension and other post retirement benefit costs of a total of €175 million were recorded. Of this amount €145 million related to defined benefit schemes, €21 million to multi-employer schemes and €9 million to other post retirement benefits. The total cash spend in the year was €193 million. The fair value of defined benefit scheme asset totaled €2,855 million at 31 March 2005 and the benefit obligations, pension and other benefits, totaled €4,342 million leaving an underfunding in the plans of €1,487 million. We have recorded accrued a net benefit cost of €473 million in our Consolidated Financial Statements. The remaining €1,014 million relates to the unrecognised items that are to be amortised over the average future service period of employees and reassessed periodically taking into account changes in the actuarial assumptions on benefit obligations and plan assets. OFF BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATION OFF BALANCE SHEET COMMITMENTS The following table sets forth our off-balance sheet commitments, which are discussed further at Note 27 to the Consolidated Financial Statements: - -------------------------------------------------------------------------------- Total Group At 31 March Actual figures (in € million) 2003 2004 2005 - -------------- ---- ---- ---- Guarantees related to contracts 9,465 8,169 7,526 Guarantees related to vendor financing 749 640 429 Discounted notes receivables 11 6 5 Commitments to purchase fixed assets 7 0 1 Other guarantees 94 43 114 Off balance sheet commitments 10,326 8,858 8,075 - -------------------------------------------------------------------------------- Guarantees related to contracts The overall amount given as guarantees on contracts decreased from €8,169 million in March 2004 to €7,526 million in March 2005, a decrease by 8% mainly as a result of the disposal of our T&D activities. Vendor Financing Exposure In some instances, we have in the past years provided financial support to institutions which finance some of our customers and also, in some cases, directly to our customers for their purchases of our products. We refer to this financial support as "vendor financing". We have not committed to provide any vendor financing guarantees to our customers since fiscal year 1998/99. The following table set forth our vendor financing exposure, which are discussed further at Note 27 to the Consolidated Financial Statements: - -------------------------------------------------------------------------------- Vendor Financing Exposure At 31 March (in € million) 2003 2004 2005 - -------------- ---- ---- ---- Marine 933 643 266 Transport 317 321 309 Other 9 5 0 Total vendor financing exposure 1,259 969 575 - -------------------------------------------------------------------------------- Vendor financing exposure has decreased from €969 million at 31 March 2004 to €575 million at 31 March 2005 as a result of : - the sale of ALSTOM loans to two entities involved in the financing of two cruise ships ; - the sale of the notes of ALSTOM in Cruiseinvest related to five ships previously owned by Renaissance ; and - the sale of the three ships previously owned by Festival and for which ALSTOM was holding some financing exposure. See Note 11 and Note 27 (a) (2) to our Consolidated Financial Statements. Vendor financing exposure decreased from €1,259 million at 31 March 2003 to €969 million at 31 March 2004 due to the early reimbursement to us of €180 million due to us from two special purpose entities following our agreement with lenders under our financing package. CRITICAL ACCOUNTING POLICIES The preparation of our Consolidated Financial Statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of commitments and contingencies, including financing arrangements. On a regular ongoing basis, we evaluate our estimates, including those relating to projects, products, parts and other after-market operations, and included in accrued contract costs, provisions for risks and charges, bad debts, inventories, investments, intangible assets, including goodwill and other acquired intangibles, taxation including deferred tax assets and liabilities, warranty obligations, restructuring, long-term service contracts, pensions and other post-retirement benefits, commitments, contingencies and litigation. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities. Actual results may differ from those estimates under different circumstances, assumptions or conditions. Accounting policies important to an understanding of the financial statements include business combinations, consolidation methods, goodwill, other acquired intangible assets and restructuring that may be subject to the application of differing accounting principles. We believe the following critical accounting policies are most affected by our judgements and estimates in preparing our consolidated financial statements. Revenue recognition on long term contracts We recognise revenue and profit as work in progress progresses on long-term, fixed-price contracts using the percentage of completion method, based on contract milestones or costs incurred (See Note 2 (c) to the Consolidated Financial Statements), which relies on estimates of total expected contract revenue and cost. We follow this method because we believe we can make reasonably dependable estimates of the revenue and costs applicable to various defined stages, or milestones, of a contract. Recognised revenues and profit taken are subject to revisions as the contract progresses to completion. Revisions to profit estimates are charged to income in the period in which the facts that give rise to the revision become known. When we book revenue, we also book certain contract cost (including direct materials and labour costs and indirect costs related to the contract) so that the contract margin, on a cumulative basis, equals to the total contract gross margin determined in the latest project review. We generally account for long-term service contracts using the percentage of completion method, recognising revenue as performance of the contract progresses using estimated contract profit rates. Selling and administrative expenses are charged to expenses as incurred. Contract accruals Significant estimates are involved in the determination of provisions related to contract losses and warranty costs. If a project review indicates a negative gross margin, we recognise the entire expected loss on the contract when we identify the negative gross margin. Estimates of future costs reflect our current best estimate of the probable outflow of financial resources that will be required to settle contractual obligations. These estimates are assessed on a contract-by-contract basis. Such estimates are subject to change based on new information as projects progress toward completion. We provide for the estimated cost of product warranties at the time revenue is recognised. Our warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting any failures. Should actual failure rates, material usage or service delivery cost of the products differ from current estimates, revisions to the estimated warranty liability would required. The introduction of technologically advanced products exposes us to risk of product failure significantly beyond the terms of standard contractual warranties applying to suppliers of equipment only. Should adverse changes to product failure rates occur, additional cost to complete may be required and result in actual financial consequences different from our estimates. Inventories We write down our inventories for estimated obsolescence or unmarketability in an amount equal to the difference between the cost of the inventory and the estimated market value based on assumptions about future demand and market conditions. If actual market conditions are less favourable than those we project, additional inventory write-downs may be required. Doubtful accounts We maintain allowances for doubtful accounts, for estimated losses resulting from the inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. Impairment of fixed assets and valuation of deferred tax assets We review our fixed assets, both tangible and intangible, on an annual basis and record an impairment charge when we believe an asset has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results from underlying assets could result in losses or an inability to recover the carrying value of the assets that may not be reflected in the current carrying value. This could require us to record an impairment charge in the future. In respect of goodwill and other intangible assets we base our impairment testing by Sector on the Group's internal 3 year Business Plan and extrapolate over up to ten years together with a terminal value. These are discounted at the Group's Weighted Average Cost of Capital "WACC". We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realised. We take into account future taxable income based on an extrapolation of the Group's internal 3 year Business Plan and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. When we determine that we are able to realise our deferred tax assets in excess of our net recorded amount, we make an adjustment to the deferred tax asset, to increase income in the period that such determination is made. Likewise, when we determine that we are not able to realise all or part of our net deferred tax assets, an adjustment to the deferred tax asset is charged to income. Pension benefits We sponsor pension and other retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by us, within certain guidelines. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate these factors. The actuarial assumptions we use may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences could result in a significant change to the amount of pension expense recorded and on the assessment of the benefit obligations. Capital leases Under French GAAP the Group can elect whether or not to capitalise finance leases (benchmark treatment). The Group has chosen not to capitalize them. Operating income The Group does not include restructuring costs, employee profit sharing and pension costs within its Income Statement line item Operating Income. These are included within the line item Earnings before Interest and Tax. Other significant accounting policies Other significant accounting policies are important to an understanding of the financial statements. Policies related to purchase accounting, consolidation policies, provisions and financial instruments and debt require difficult judgements on complex matters that are often subject to multiple sources of authoritative guidance. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRS Following the coming into force of European Regulation n° 1606/2002, European-listed companies are required to adopt International Financial Reporting Standards (IFRS/IAS) in the preparation of their Consolidated Financial Statements covering periods beginning on or after 1 January 2005. Consequently, ALSTOM's Consolidated Financial Statements covering the period beginning 1 April 2005 will be presented according to IFRS, together with comparative information related to the previous period converted to the same standards. In order to present those comparative data, an opening balance sheet at 1 April 2004 (transition date) converted to IFRS is being produced. Management information including an Income Statement reconciliation of IFRS to French GAAP and Balance Sheet under IFRS at 31 March 2005 is also currently being prepared. The Group has set up an IFRS implementation program aiming at the following objectives: - Identification of differences between the accounting principles currently followed by the Group and the applicable provisions of IFRS, with respect to recognition, measurement and presentation ; - Estimation of main impacts ; - Analysis of required adaptations of corporate processes and information systems ; and - Organisation of training action plans. The project is supervised by a Management Committee, chaired by the Group Chief Financial Officer and composed of representatives of Sectors and Corporate. Working groups were set up in order to address the main issues potentially impacting the Group's financial statements and the existing information systems. A central team is in charge of co-ordinating the project. However the IFRS information being produced is transitional information, which will be finalised on production of the audited consolidated Financial Statements of ALSTOM for the year ended 31 March 2006, the first year in which accounts prepared under IFRS will be the Group's primary accounts. The Group will prepare its 6 months to 30 September 2005 Consolidated Financial Statements under IFRS. As of today, the Group is of the opinion that the main differences in accounting treatments due to the conversion to IFRS already identified are the following: Options taken at first time adoption of IFRS at 1 April 2004 Pension and long-term benefits According to IFRS 1, which governs the preparation of the balance sheet at the transition date, two alternative treatments of unrecognised actuarial gains or losses can be considered: - Immediate recognition in the balance sheet of all actuarial gains or losses related to pension benefits existing at the date of transition, measured according to IAS 19 (Employee Benefits) ; or - Complete retrospective application of IAS 19 since inception of all plans with cumulative amortisation of actuarial gains and losses, as if the standard had been applied in the previous years. The Group has elected to adopt the complete retrospective application of IAS 19. In addition it has also elected to include the service cost element of pension benefit costs in Income from operating activities. Other elements of pension benefit cost including interest cost and asset returns will be included in Financial Income/Expense. Business combinations As permitted by IFRS 1, the Group has elected not to restate past business combinations according to IFRS. Under the new standard, goodwill will no longer be amortised. Impairment tests have to be performed at transition date and at regular intervals, at least, yearly. Financial instruments Derivative instruments will have to be recorded at their fair value in the balance sheet, whatever the nature of the underlying asset or liability. The new standards will mainly affect foreign currency hedges. Financial instruments must meet documentation and hedge effectiveness criteria in order to qualify for hedge accounting. At the inception of the hedge and in subsequent periods the hedge must be highly effective in achieving offsetting changes in fair value attributable to the hedge risk during the period for which the hedge is designated. Currency derivative financial instruments which will not meet the documentation and effectiveness criteria required by the standard will be recorded without any corresponding offset by the recognition of the fair value of hedged items. Such a situation may generate volatility in income from operations. There are major implications for accounting and treasury systems, as hedging instruments are required to be reviewed with the underlying assets or liabilities to which they relate. The Group Treasurer has reviewed the systems and processes to ensure they meet the new requirements of IFRS and new Treasury software has been acquired and installed. Due to the complexity of processes to be implemented to satisfy the IFRS requirements on financial derivatives, the group has decided, as authorised by IFRS 1 - First time application of IFRS, not to apply IAS 32-39 (Financial instruments) in the comparative data being prepared for the fiscal year 2005. Revaluation of property, plant and equipment net and other intangible assets net The Group has decided not to apply the exemption provided for in IFRS 1, allowing property, plant and equipment and other intangible assets to be revalued at fair value in the opening IFRS balance sheet at 1 April 2004. The option chosen by the Group therefore has no impact on equity in the opening IFRS balance sheet at 1 April, 2004. Other Accounting Policies Recognition of development costs as assets Development costs which meet the conditions set out in IAS 38 (Intangible assets) must be recognised as assets, whereas they are presently expensed as incurred. The Group has reviewed its information systems in order to identify costs that meet the IFRS criteria for recognition as assets, with respect to the technology internally developed and in use at the date of first-time adoption of the standard. The counterpart of any recognition of development assets is an increase in assets and opening equity at the transition date. Leases including sales type leases The main impact of the conversion to IFRS will relate to assets financed through capital leases and sales type leases. Those assets, as well as corresponding liabilities, will be recognised in the balance sheet, while they are presently disclosed as off balance sheet commitments. This change of accounting method will significantly increase both fixed assets and financial debt. Opening equity and future earnings will be marginally affected. Revenue and cost recognition Revenue and cost recognition on construction and long term service contracts has been reviewed. The Group has recognised revenue on construction type contracts on the percentage of completion method, measured either by segmented portions of the contract, "contract milestones" or costs incurred to date compared to estimated total costs. From 1 April 2005 the Group will harmonise its approach to revenue recognition on construction type contracts to the milestone method at the same date as accounts under IFRS become its primary accounts. IFRS will lead to a number of reclassifications of contract items including reclassification of penalties and claims as a reduction of sales instead of increase in costs, which will reduce future revenues on contracts subject to penalties, if any. Reclassifications in the presentation of construction contracts in the balance sheet will occur. Deferred taxation - Business Combinations In business combinations, the cost is allocated by recognising the identifiable assets acquired and liabilities assumed at their fair values at the acquisition date. Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination or are affected differently. When the carrying amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises which results in a deferred tax liability. Under IFRS, the difference between the carrying amount of a revalued asset, in ALSTOM's case included in other intangible assets Net (note 8), and its tax base is a temporary difference and gives rise to a deferred tax liability. Under French GAAP as the revalued carrying amount of the asset will be recovered and refreshed through use and thus generate taxable income in excess of depreciation allowable for tax purposes in future periods, no deferred tax liability was recognised as the timing differences were not expected to reverse. IFRS will also require a number of additional disclosures and footnotes. IMPACT OF EXCHANGE RATE AND INTEREST RATE FLUCTUATIONS Our policy is to use derivatives, such as forward foreign exchange contracts, in order to hedge exchange rate fluctuations and, to a much lesser extent, interest rate fluctuations. Our policy does not permit any speculative market position. We have implemented a centralised treasury policy in order to better control the company's financial risks and to optimise cash management by pooling our available cash, thereby reducing the amount of external debt required and permitting us to obtain better terms under our various financing arrangements. The Corporate Treasurer reports to the Senior Vice-President funding and treasury (who reports to the Chief Financial Officer) and has global responsibility for foreign exchange risk, interest rate management, and cash management. He manages a team of more than 20 people located in the Paris Headquarters. Corporate Treasury is organised in a Front-Office or Dealing Room, a Middle-Office and a Back-Office to ensure segregation of duties. In addition to this, a small team operates the netting of intercompany payments and prepares a weekly cash forecast. A network of Country Treasurers supports Corporate Treasury in the countries where we have a significant presence. Corporate Treasury acts as an in-house bank for subsidiaries by providing hedging and funding and maintaining internal current accounts. We have implemented cash pooling structures to centralise cash on a daily basis in the countries where local regulations permit it. Corporate Treasury uses the Reuters CashFlow Treasury Management System for straight-through processing of treasury transactions from dealing to settlement and management of inhouse banking activity. Our Treasury Management System is interfaced with SAP for automatic generation of accounting entries. The Dealing Room is equipped with a Reuters Information System for realtime market data and uses a professional telephone dealing system provided by Etrali to tape all exchanges with bank's dealing rooms. A dedicated Information Technology team administers Treasury systems and guarantees back-up and contingency plans. The Middle Office monitors the Dealing Room activity, guarantees that no open positions are maintained, and produces regular risk reporting. Exchange rate risks In the course of our operations, we are exposed to currency risk arising from tenders for business remitted in foreign currency, and from awarded contracts or "firm commitments" under which revenues are denominated in foreign currency. The principal currencies to which we had significant exposure in fiscal year 2004/05 were the US dollar, British Pound and Swiss Franc. We hedge risks related to firm commitments and tenders as follows: - by using forward contracts for firm commitments ; - by using foreign exchange derivative instruments, for tenders, usually pursuant to strategies involving combinations of purchased and written options ; or - by entering into specific insurance policies, such as with Coface in France or Hermes in Germany. The purpose of these hedging activities is to protect us against any adverse currency movements which may affect contract revenues should the tender be successful, and to minimise the cost of having to unwind the strategy in the event of an unsuccessful tender. The decision whether to hedge tender volumes is based on the probability of the transaction being awarded to us, expected payment terms and our assessment of market conditions. Under our policy, only senior management may make such decisions. When a tender results in the award of a contract, we hedge the resulting net cash flows mainly in the forward markets or, in some exceptional cases, keep them covered under insurance policies. Due to the long-term nature of our business, the average duration of these forward contracts is approximately 12-14 months. We may, in some circumstances, enter into forward foreign exchange contracts of a shorter maturity than the expected underlying currency flow. Such contracts are rolled over until the occurrence of the underlying flow. Although this provides adequate protection against exchange rate fluctuations, we remain exposed to variations in the differential between the interest rates of the two currencies involved. The impact of such variations remains however relatively minor. We do not hedge our net assets invested in foreign operations. We monitor our market positions closely and regularly analyse market valuations. We also have in place counter-party risk management guidelines. All derivative transactions, including forward exchange contracts, are designed and executed by our central corporate treasury department, except in some specific countries where restrictive regulations prevent centralised execution. Interest rate risks See Note 29(b) to the Consolidated Financial Statements for discussion of our interest rate risks and of sensitivity to interest rate variation. VALUE OF FINANCIAL INSTRUMENTS ---------------------------------------------------------------------- | Nominal value | Fair market value | ---------------------------------------------------------------------- (in € million) Maturing in year ending 31 March 2005 ---------------------------------------------------------------------- |Total | ‹1 | 1-5 |›5 | | Total | ‹1 | 1-5 |›5 | | | year | years |years | | | year | years |years | ---------------------------------------------------------------------- ------------------------------------ ---------------------------------------------------------------------- |BALANCE SHEET ITEMS | | | | | | | | | | | | ASSETS | | | | | | | | | | | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | Loans and long term deposits | | 82 | 21 | 26 | 35 | | 82 | 21 | 26 | 35 | | Other assets | | 829 | 86 | 10 | 733 | | 829 | 86 | 10 | 733 | | Short-term investments | |1,462 |1,462 | 0 | 0 | | 1,462 | 1,462 | 0 | 0 | | Cash and cash equivalent | | 15 | 15 | 0 | 0 | | 15 | 15 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | LIABILITIES | | | | | | | | | | | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | | Financial debt | |2,907 | 493 |2,382 | 32 | | 2,934 | 499 | 2,403 | 32 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| |OFF BALANCE SHEET ITEMS | | | | | | | | | | | | | | | | | | | | | | | | Interest rate instruments | | | | | | | | | | | | | | | | | | | | | | | |Interest rate swaps: receive fixed | | | | | | | | | | | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | USD US Dollar | | 94 | 0 | 94 | 0 | | 3 | 0 | 3 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | Foreign exchange instruments | | | | | | | | | | | | | | | | | | | | | | | |Currency swaps - Currency purchased | |1,241 |1,180 | 61 | 0 | | 0 | 3 | (3) | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | CHF Swiss Franc | | 363 | 343 | 20 | 0 | | (1) | (1) | 0 | 0 | | USD US Dollar | | 249 | 230 | 19 | 0 | | (1) | 2 | (3) | 0 | | SEK Swedish Krona | | 230 | 216 | 14 | 0 | | (2) | (2) | 0 | 0 | | CZK Czech Krona | | 79 | 77 | 2 | 0 | | 0 | 0 | 0 | 0 | | FLN Polish New Zloty | | 63 | 61 | 2 | 0 | | 2 | 2 | 0 | 0 | | GBP British Pound | | 59 | 59 | 0 | 0 | | 0 | 0 | 0 | 0 | | AUD Australian Dollar | | 56 | 56 | 0 | 0 | | 0 | 0 | 0 | 0 | | Other Currencies | | 141 | 137 | 4 | 0 | | 1 | 1 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | |Currency swaps - Currency sold | |2,459 |2,247 | 212 | 0 | | 40 | 26 | 14 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | USD US Dollar | |1,012 | 826 | 186 | 0 | | 25 | 11 | 14 | 0 | | CHF Swiss Franc | | 847 | 841 | 6 | 0 | | 6 | 6 | 0 | 0 | | GBP British Pound | | 199 | 187 | 12 | 0 | | (1) | (1) | 0 | 0 | | SGD Singapore Dollar | | 88 | 88 | 0 | 0 | | 12 | 12 | 0 | 0 | | SEK Swedish Krona | | 70 | 63 | 7 | 0 | | 0 | 0 | 0 | 0 | | JPY Japanese Yen | | 54 | 54 | 0 | 0 | | 0 | 0 | 0 | 0 | | CAD Canadian Dollar | | 41 | 41 | 0 | 0 | | (1) | (1) | 0 | 0 | | Other Currencies | | 147 | 147 | 0 | 0 | | (1) | (1) | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | |Foreign exchange contracts | |1,534 |1,232 | 302 | 0 | | (91) | (12) | (79) | 0 | |- Contracts purchased | | | | | | | | | | | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | CHF Swiss Franc | | 976 | 926 | 50 | 0 | | (5) | (3) | (2) | 0 | | USD US Dollar | | 308 | 96 | 212 | 0 | | (91) | (14) | (77) | 0 | | FLN Polish New Zloty | | 63 | 62 | 1 | 0 | | 3 | 3 | 0 | 0 | | SEK Swedish Krona | | 55 | 33 | 22 | 0 | | 0 | 0 | 0 | 0 | | AUD Australian Dollar | | 52 | 50 | 2 | 0 | | 0 | 0 | 0 | 0 | | GBP British Pound | | 17 | 16 | 1 | 0 | | 0 | 0 | 0 | 0 | | SAR Saudi Riyal | | 17 | 17 | 0 | 0 | | 0 | 0 | 0 | 0 | | Other Currencies | | 45 | 32 | 13 | 0 | | 2 | 2 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | |Foreign exchange contracts | |2,300 |1,766 | 534 | 0 | | 106 | 22 | 84 | 0 | |- Contracts sold | | | | | | | | | | | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | CHF Swiss Franc | |1,010 | 952 | 58 | 0 | | 4 | 3 | 1 | 0 | | USD US Dollar | | 981 | 586 | 395 | 0 | | 107 | 19 | 88 | 0 | | GBP British Pound | | 109 | 54 | 55 | 0 | | (6) | (2) | (4) | 0 | | AUD Australian Dollar | | 38 | 33 | 5 | 0 | | (2) | (1) | (1) | 0 | | CAD Canadian Dollar | | 37 | 30 | 7 | 0 | | 0 | 0 | 0 | 0 | | JPY Japanese Yen | | 29 | 22 | 7 | 0 | | 4 | 4 | 0 | 0 | | CZK Czech Krona | | 17 | 17 | 0 | 0 | | 0 | 0 | 0 | 0 | | Other Currencies | | 79 | 72 | 7 | 0 | | (1) | (1) | 0 | 0 | ------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------- | Nominal value | Fair market value | ---------------------------------------------------------------------- (in € million) Maturing in year ending 31 March 2005 ---------------------------------------------------------------------- |Total | ‹1 | 1-5 |›5 | | Total | ‹1 | 1-5 |›5 | | | year | years |years | | | year | years |years | ---------------------------------------------------------------------- ------------------------------------ ---------------------------------------------------------------------- |Interest contracts - Contracts | | | | | | | | | | | |purchased | | 3 | 3 | 0 | 0 | | 0 | 0 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | USD US Dollar | | 3 | 3 | 0 | 0 | | 0 | 0 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| |Insurance contracts - Contracts sold| | 192 | 34 | 158 | 0 | | (2) | (5) | 3 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | USD US Dollar | | 176 | 29 | 147 | 0 | | 0 | (5) | 5 | 0 | | JPY Japanese Yen | | 9 | 0 | 9 | 0 | | (2) | 0 | (2) | 0 | | SEK Swedish Krona | | 4 | 4 | 0 | 0 | | 0 | 0 | 0 | 0 | | DZD Algerian Dinar | | 2 | 0 | 2 | 0 | | 0 | 0 | 0 | 0 | | GBP British Pound | | 1 | 1 | 0 | 0 | | 0 | 0 | 0 | 0 | | CAD Canadian Dollar | | 0 | 0 | 0 | 0 | | 0 | 0 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | |Currency options - Purchased | | 130 | 130 | 0 | 0 | | 19 | 19 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | CALL: | | 4 | 4 | 0 | 0 | | (0) | (0) | 0 | 0 | | USD US Dollar | | 4 | 4 | 0 | 0 | | (0) | (0) | 0 | 0 | | | | | | | | | | | | | | PUT: | | 126 | 126 | 0 | 0 | | 19 | 19 | 0 | 0 | | USD US Dollar | | 106 | 106 | 0 | 0 | | 17 | 17 | 0 | 0 | | JPY Japanese Yen | | 20 | 20 | 0 | 0 | | 2 | 2 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | |Currency options - Sales | | 75 | 75 | 0 | 0 | | 0 | 0 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | CALL: | | 71 | 71 | 0 | 0 | | 0 | 0 | 0 | 0 | | USD US Dollar | | 71 | 71 | 0 | 0 | | 0 | 0 | 0 | 0 | | | | | | | | | | | | | | PUT: | | 4 | 4 | 0 | 0 | | 0 | 0 | 0 | 0 | | USD US Dollar | | 4 | 4 | 0 | 0 | | 0 | 0 | 0 | 0 | | ---------------------------------|-|-------|-------|--------|--------|-|--------|--------|--------|-------| | | | | | | | | | | | | ------------------------------------- -----------------------------------------------------------------------