GSK Annual Report 2002

Contractual obligations and commitments
The following table sets out the Group’s contractual obligations
and commitments as they fall due for payment.
Total Under 1 yr 1-3 yrs 3-5 yrs 5 yrs+
£m £m £m £m £m
Loans 4,630 1,550 983 311 1,786
Finance lease obligations
Operating lease
13 1 3 2 7
commitments 702 168 177 108 249
Intangible fixed assets 1,410 214 282 262 652
Tangible fixed assets 382 325 54 3 –
Other commitments 162 63 75 20 4
Total 7,299 2,321 1,574 706 2,698
Intangible fixed asset commitments made in 2002 under licensing
and other agreements, were principally with elbion AG, Adolor
Corporation, Theravance, Inc and Unigene Laboratories, Inc.
Payments become due if future ‘milestones’ are achieved. As
some of these agreements relate to compounds in the early
stages of development, milestone payments will continue for a
number of years if the compounds move successfully through the
development process. Generally the closer the product is to
marketing approval the greater the possibility of success. The
payments shown above represent the maximum that would be
paid if all milestones are achieved.
Pension commitments are provided in Note 33 to the Financial
statements, ‘Employee costs’.
Contingent liabilities
The following table sets out contingent liabilities, comprising
discounted bills, performance guarantees and other items arising
in the normal course of business and when they are expected to
expire.
Total Under 1 yr 1-3 yrs 3-5 yrs 5 yrs+
£m £m £m £m £m
Guarantees 118 80 – 11 27
Other contingent liabilities 20 2 11 3 4
Total 138 82 11 14 31
In the normal course of business the Group has provided various
indemnification guarantees in respect of business disposals in
which legal and other disputes have subsequently arisen. A
provision is made where a reasonable estimate can be made of
the likely outcome of the dispute and this is included in Note 23
to the Financial statements, ‘Provisions for liabilities and charges’.
It is the Group’s policy to provide for the settlement costs of
asserted claims and environmental disputes when a reasonable
estimate may be made. Prior to this point no liability is recorded.
Legal and environmental costs are discussed in ‘Risk factors’ on
pages 64 and 65.
The effect of transfer pricing issues on taxation are inevitable for
a global business such as GlaxoSmithKline. The Group has had
significant open issues relating to transfer pricing for a number
of years. On the basis of external professional advice, provision
is made for those liabilities likely to arise from open assessments.
This is discussed further in Note 12 to the Financial statements,
‘Taxation’.
Cash flow
Operating and financial review and prospects GlaxoSmithKline 61
A summary of Group cash flow is set out below:
2002 2001
£m £m
Total operating cash flow 7,255 6,507
Dividends from associates 2 –
Net interest, minority and
preference share dividends (237) (191)
Tax payments (1,633) (1,717)
Free cash flow 5,387 4,599
Net capital expenditure (1,167) (1,240)
Net cash from operations 4,220 3,359
Dividends on shares (2,327) (2,325)
Business acquisitions (25) (747)
Business disposals 6 66
Sale less purchase of equity investments (10) 92
Sale less purchase of interest in associates (5) 80
Purchase of own shares for share options – (795)
Use of own shares on exercise of share options 58 194
Shares issued on exercise of share options 56 144
Purchase of shares for cancellation (2,220) (1,274)
Redemption of preference shares issued
by a subsidiary – (457)
Product divestments (1) (30)
Other movements including exchange 14 203
Increase in net debt (234) (1,490)
The net cash inflow from total operating activities was
£7,255 million, an increase of £748 million over 2001.
After merger and restructuring items of £669 million, net interest
payments, minority and preference share dividends and tax
payments, free cash flow, representing cash flow before
discretionary spending, amounted to £5,387 million, an increase
of £788 million over 2001.
Capital expenditure on tangible and intangible fixed assets
amounted to £1,226 million in 2002 (2001 – £1,311 million).
Disposals realised £59 million (2001 – £71 million).
A total of £15 million (2001 – £172 million realised) was spent on
purchases, less sales, of investments in equity shares.
Group purchases of its own shares in the market for cancellation
amounted to £2,220 million of which £219 million relates to the
new buy-back programme.
No shares of GlaxoSmithKline plc were purchased by the ESOTs to
satisfy future exercises of options and awards under employee
share incentive schemes (2001 – £795 million). A total of
£114 million (2001 – £338 million) was received on employees’
exercise of share options: exercises satisfied from shares previously
purchased by the ESOTs yielded £58 million (2001 – £194 million);
exercises satisfied from the issue of new shares yielded £56 million
(2001 – £144 million).
Future cash flow
The Group expects that future operating cash flow will be
sufficient to fund its operating and debt service costs, to satisfy
normal levels of capital expenditure, to meet obligations under
existing licensing agreements and to meet other routine
commitments including tax and dividends, subject to the risk
factors discussed on pages 64 and 65.