INFORMATION SERVICES: RESEARCH

14 October 2004

SUMMARY AND ANALYSIS OF DENEL ANNUAL REPORT 2003

 

1. Mission and Vision

The Mission of Denel is to create economic value by transforming its technological capabilities into superior quality defence and commercial products and related services for global market. It aims to achieve this by international partnering, international market penetration and maintaining the position of key supplier to the South African National Defence Force (SANDF).

The Vision of Denel is to be an acknowledged global player in aerospace and ordinance while also growing a commercial business.


2. History

Denel was established in 1992 as a result of the commercialisation of Armscor. Denel is a state owned enterprise reporting to the Department of Public Enterprises with the South African Government as its sole shareholder. Armscor is currently the procurement division of the SANDF.


3. Regulations and Guiding Legislation

The following instruments regulate Denel:

1. The South African Companies Act, Act 61 of 1973.

2. The Public Finance Management Act (PFMA), Act 1 of 1999.

3. The Firearms Control Act, Act 60 of 2000.

4. The Explosives Amendment Act, Act 83 of 1997.

5. The NCASS (the national Conventional Arms Control Committee, approved by Cabinet in 1 995).

6. International agreements and conventions, such as Nuclear Non-proliferation treaties, the Missile Technology Control Regime (MTCR) and the Biological and Chemical Weapons Convention.


4. Financial Information in Brief

Item 2004 2003

R millions R millions

Gross revenue 4 442,2 4 372,4

Gross profit 1 287,3 1 276,3

Loss before taxation (357,6) (43,6)

Net loss (377,5) (72,6)

Cash outflow before financing activities (200,8) (229,0)

Share and reserves 834,5 1 368,3

Non-current borrowings 832,1 840,9

Total assets 4091,9 4 254,0

The Gross Revenue Composition (%) and Gross Revenue and Gross Profit (%) graphs where presented, for any request for the graphs please contact Parliamentary Monitoring Group (PMG) for the hard Copy at: [email protected]

Gross profit for 2004 amounted to R1 287,3 million (2003: R1 276,3 million) despite the negative impact which the strengthening SA Rand had on margins of export sales. Net loss amounted to R377,5 million (2003: R72,6 million).

The main reasons contained in the Annual report for the increased loss are as follows:

· Impact of implementation of AC133 [Accounting practice. Fair value (R1 12,9 million).

· Impairment of assets and investments (R65,4 million).

· Provision to unite off-capitalised development expenses (R64,7 million).

· Provision for retrenchment cost (R22,9 million).

· Losses suffered by certain non-core businesses, two divisions and an associated company. These non-core businesses will be exited during 2004/05 and turnaround plans for the two divisions and an associated company has been implemented.

· Cash outflow before financing activities for 2004 amounted to R200,8 million (2003: outflow of R229,0 million). The figure for 2004 was achieved after investing R143,6 million on additions and replacement of fixed assets and R1 75,2 million on research and development.


5. Factors impacting on Denel's Financial Statement

· Short term and long term nature of Denel's business transactions - long term business cycles.

· Internal! external factors Denel can control! cannot control in the business environment.

· The global defence industry has become a buyer's rather than a seller's market. This is due to intense competition and alliance building between the major international players in the industry. This has drastically eroded the profitability of the defence industry.

Other factors impacting on the financial statement include:

· Global economics slowdown

· Asian crisis

· Exchange rate volatility

· September 11

· Conflict in Iraq

· Corporate governance

· Declining governments expenditure in defence

· International competition


6. Operating Structure

Denel's Head Office is in Pretoria and its 23 major divisions and subsidiaries are spread over three provinces. The three major parts of Denel include the Aerospace, Ordnance and Commercial. Denel has been able to recruit staff with a wide range of skills including management, research, engineering and manufacturing. Denel operates four overseas offices and is represented in most countries where it is active. Some of the companies included in the Denel stable include:

Aerospace. Denel Aviation OTB

DPS (Pty) Ltd Kentron

Eloptro

Ordnance: LIW Vektor

La Forge (Pty) Ltd Swartklip Products

Mechem Somchem

Naschem PMP

Commercial Dendustri Bonaero Park

Irenco (Pty) Ltd Denel Properties

SPP (Pty) Ltd Aero Properties

Densecure (Pty) Ltd


7. Employees

Number of employees: 10 925

· White48,4%

· BlackSl,6%

· Women 25,6%

· Black management - up from 35 to 65 in one year


8. Major Clients

Middle East

India

China

Malaysia

Europe


9. Strategic Positioning of Denel

The current management under the leadership of Mr Victor Moche is expected to reverse Denel's past poor performances. The key focus areas for the year ahead will include:

· Eliminating inefficiency and duplication in the Group

· Disposing of non-core and loss-making divisions and subsidiaries

· Renegotiating or exiting loss-making contracts

· Accessing new local and international markets

· Making Denel a representative and proudly South African organisation

· Creating capacity and developing employee skills for market leadership


10. Highlights for 2004

Aerospace

· Contracted by BAE Systems/Saab for design, development and supply of helmet tracking system for Eurofighter-Typhoon and export version of Gripen

· OTB involvement with NASA's Mars rover mission

· Installation of manufacturing cell and start of production of Boeing commercial airplanes detail components for The Boeing Company

· Further exports of lngwe anti-armour missile

· An international award for best live demonstration at IDEX 2003 exhibition in Abu Dhabi, UAE

Land Systems

· Despite the strengthening of the rand and postponement of awarding of a major contract (Kingfisher), Denel Land Systems achieved its profit and cash flow budgets

· Six sites have ISO 9000 quality certification

· Five sites have ISO 14000 environmental certification

· Four sites have NOSA NOSCAR gradings and two sites have five-star awards for safety, health and environment (SHE)

· The Naschem division at Potchefstroom was awarded first place in the NOSA Top 100 International award for compliance to SHE management

Commercial and IT Activities

· Good business performance by the properties group

· Solid financial performance by Dendustri

· A centralised property management model for Denel's industrial properties has been implemented

· Rigorous risk management processes have resulted in low claims ratio and good business performance for Densecure (Pty) Limited


11. Questions

1. What has been the progress on business restructuring? Targets and dates envisioned for turnaround strategy to take effect?

2. Factors impacting on efficiency, operations and financial status?

3. Factors within the control and factors beyond the control of Denel that impact on the company?

4. Minimising risk! maximising potential and strengths - strategies undertaken?

5. Improving market share - domestic and international?

6. Global political situation and its impact on arms manufacturing and sales?

7. International legal framework controlling the sales and distribution of weapons?

8. International manufacturing and sale networks?

9. Contribution of Denel to South African industry innovation, science, technology, output, jobs etc?

10. Staff profile race, gender and skills representation?

11. Attracting and retaining skilled staff?

12. Social responsibility of company? Impact assessment?

13. Future plans of company?

 


Sources

· Denel Annual Report 2004.

· Nickie Van Zyl. Report to the Portfolio Committee on Public Enterprises: Presentation by Denel on 8 September 2004.