2003 Annual Report 2003 ANNUAL REPORT 45, rue de Villiers - 92200 Neuilly-sur-Seine - France www.thalesgroup.com CONTENTS FINANCIAL REPORT ................................................................................................................................................ 5 Directors’ report .......................................................................................................................................................................... 7 Consolidated financial statements ................................................................................................................... 19 BUSINESS REVIEW .............................................................................................................................................. 49 Business description ......................................................................................................................................................... 51 International presence .................................................................................................................................................... 69 Research & Technology .................................................................................................................................................. 79 SHAREHOLDER INFORMATION ...................................................................................................... 83 Company and share capital ....................................................................................................................................... 85 Corporate governance ..................................................................................................................................................... 95 Stock market information ........................................................................................................................................ 109 CORPORATE SOCIAL RESPONSIBILITY ........................................................................ 119 A responsible company ............................................................................................................................................ 121 Employment policy and citizenship .............................................................................................................. 123 Relations with suppliers and customers ................................................................................................ 129 Environmental performance .................................................................................................................................. 132 Table of contents ................................................................................................................................................................ 137 The Group brochure is available from Thales Corporate Communication at Thales head office. Production: Créapix - Paris Chairman’s message Thales reached a turning point in 2003, completing the phase in our development that began with the acquisition of Racal in the United Kingdom in 2000. That period marked a step change in our international expansion, but it was also a time for refocusing our portfolio of businesses in order. It was a time to develop synergies within the Group, to concentrate our energies on growth sectors, and to leverage our international dimension to the full. So 2003 marked the successful completion of a first series of measures that have strengthened Thales’ ability to meet the challenges of the future, measures that have delivered satisfactory financial results despite a difficult international situation. In defence, Thales is positioned on the right markets and in the right countries. Our strategy here has succeeded, leading to a series of major contract awards. Our overall design was retained for the new aircraft carriers in the United Kingdom, where we were also selected for the future infantry soldier system and shortlisted for the major unmanned air vehicle (UAV) programme. In France, order intake was satisfactory. And we were pleased to sign the first production contract from the Joint Armaments Cooperation Organisation (OCCAr) on the major European FSAF (Future Surface-to- Air System) missile system programme. In addition, 2003 was an exceptional year for some of our “multi-domestic” operations, particularly in South Korea. In aerospace, despite the persistent down cycle in civil aviation, we are continuing to strengthen our valued relationship with Airbus as a first-tier partner, notably for the A380, and we are also striving to become a key partner for Boeing, particularly for the 7E7 programme. In security markets, we launched the Thales SHIELD™ concept, which draws on all our security-related technologies and skill sets to position the Group as a European leader in national and collective security. In the market for secure payment and ticketing systems for public transport networks, we won significant contracts not only in Asia but also in Europe (in the Netherlands, for example), where we are now a market leader. We are starting to benefit from our moves to rationalise our portfolio of non-defence businesses, and from our strategic focus on growth sectors that complement our other businesses. Our good performance in 2003 was a direct result of this strong strategic focus: operating income improved despite the impact of exchange rate fluctuations, defence order intake increased substantially, and we significantly reduced our debt. A new chapter opens for Thales in 2004. We live in a world fraught with armed conflicts and growing insecurity. Security requirements are on the increase at every level and in all walks of life. At the same time, customers are rightly keen to obtain value for money, and they expect us in the contractor community to assume more responsibilities as prime contractors for their projects. Institutional as well as industrial customers also expect a cost-effective service offering from contractors. Our strategic objectives today are extremely clear, namely more growth and better competitiveness on three markets: defence, aerospace and civil security. I am convinced that Thales, with its unrivalled platform of advanced technologies, a record of success in complex programme management and a growing international dimension, has what it takes to achieve those objectives. To strengthen our chances of success, I announced a thorough reorganisation of the Group in May 2004, to make our organisation simpler, clearer and more visible to customers and investors, to reduce costs, and to build cohesion within Thales teams and between our different areas of business. With a customer-facing organisation made up of six large divisions – Aerospace, Air Systems, Land & Joint Systems, Naval, Security, and Services – and each division organised on an international basis, we embrace the future with confidence on behalf of our customers, shareholders and employees. Our strength tomorrow lies in innovation, openness to the world and the ability to listen to customers today. Denis Ranque Chairman and Chief Executive Officer, Thales THALES // ANNUAL REPORT 2003 THALES // ANNUAL REPORT 1 ➥ Timeline Origins 1968: The professional electronics businesses of Thomson-Brandt CSF become a new company owned jointly by Alcatel (51%) and Thomson- (previously CFTH) merge with CSF to form Thomson-CSF. Compagnie CSF. This agreement enables Thomson-CSF to strengthen its scope of Française Thomson-Houston (CFTH) was formed in 1893 to operate the business, consolidate its market positions in defence and industrial patents of the US Thomson-Houston Electric Corp. in the emerging market electronics, and expand the Group's industrial presence in Europe, for power generation and transmission. Compagnie Générale de Télégraphie particularly in Germany, Italy and Norway. Sans Fil (CSF), founded in 1918, became a pioneer in broadcasting. It Following these operations, finalised in June 1998, the majority of the capital merged in 1957 with its subsidiary Société Française Radioélectrique SFR. of Thomson-CSF is under private ownership. The French State's interest is Both companies were key players in the 1930s development of reduced from 58% to 40%, and Alcatel and Dassault Industries are broadcasting, short wave, electro-acoustics and the very first radar and shareholders. television. 1970 – 1980: The company receives its first major export contracts in the From Thomson-CSF to Thales Middle East, after the 1973 and 1979 oil crises. It diversifies into telephone 1998 – 2000: After privatisation is finalised, a vast restructuring plan is switchgear, silicon semiconductors, and medical imaging (CGR). launched to integrate the businesses acquired from Dassault and Alcatel. 1982: The parent company Thomson SA is nationalised. Its financial situation The Group's "multi-domestic" strategy in defence markets is pursued is very weak, its portfolio of businesses highly diversified. Market share in throughout the 1990s in Europe, and then extended to South Africa, many areas is too small to be profitable. Despite the inflow of revenues from Australia, South Korea and Singapore. After the friendly takeover in June the first major contracts with the Gulf States, debt remains high. 2000 of the British company Racal Electronics, the United Kingdom becomes the Group's second-largest "domestic" industrial base, and Strategic refocusing expands its defence and information technology businesses. 1983 – 1987: The financial situation