Capita plc
Full Year Results
2018
Summary
First year of multi-year transformation executed as
planned in 2018:
• Corporate purpose and strategy defined
• First-ever operating model rolled out
• Leadership strengthened and governance improved
• Balance sheet strengthened; £1.1bn raised through rights issue
and disposals
• £282m profit before tax1, slightly ahead of our
guidance
• Real progress on ‘challenging’ contracts
• Rebuilt relationships and partnerships with clients
• £1.8bn order intake
• £140m invested in infrastructure, products and systems
• Hit target of £70m in-year savings from cost
competitiveness
• Pension deficit reduction plan agreed.
Clear plan for 2019:
• Accelerating cost competitiveness to realise cumulative
savings of £175m by end 2019
• Increasing investment - in our people, systems and digital
capability - to support long-term, sustainable growth
• Profit before tax1 expected to be between £265m and
£295m in 2019
• Transformation of sales as part of new growth function.
On track for 2020 targets:
• Achieve double-digit margins1
• At least £200m of sustainable free cash flow2.
Jon
Lewis, Chief Executive Officer, said:
“We’ve successfully completed year one of our multi-year
transformation, fixed the basics and are firmly on track. We’ve
strengthened our balance sheet, achieved cost savings, and invested
in our people. On top of that, we’ve improved our governance,
introduced a ‘One Capita’ operating model, and started turning
around challenging contracts. I am particularly proud of our new
corporate purpose and refreshed values.
The lion’s share of our business is providing digitally-enabled
services and software solutions, using a combination of technology,
data and insight to help deliver better outcomes for clients. This
gives us a strong platform for significant, long-term structural
growth.
Our transformation still has some way to go. But I am very
pleased with our progress. Our targets remain on track, and I’m
excited about the prospects for a simplified and strengthened
Capita.”
Financial outlook
Capita is entering the second year of a major transformation and
the successful delivery of this programme is critical to the future
performance of the Group. We expect net finance costs1
to be in the region of £40m and profit before tax1 to be
between £265m and £295m in 2019. We expect our headline net debt to
EBITDA ratio to be in the top half of our stated range of 1.0 times
to 2.0 times before adoption of IFRS 16.
Our 2020 targets of £175m initial cost savings, double-digit
EBIT margins1 and at least £200m of sustainable annual
free cash flow, before exceptional and restructuring charges and
additional pension contributions, remain unchanged.
Year
ended 31 December 2018 |
Financial highlights -
continuing operations |
Reported 2018 |
Reported
2017 |
Adjusted1 2018 |
Adjusted1 2017 |
Adjusted1
YOY change |
Revenue |
£3,918.4m |
£4,234.6m |
£3,867.6m |
£4,091.8m |
(5)% |
Operating
profit/(loss) |
£34.9m |
(£420.1)m |
£335.3m |
£447.5m |
(25)% |
Profit/(loss)
before tax |
£272.6m |
(£513.1)m |
£282.1m |
£383.1m |
(26)% |
Earnings/(loss) per
share |
17.99p |
(48.82)p |
16.37p |
27.99p |
(42)% |
Free cash
flow |
(£260.5)m |
£66.6m |
(£82.5)m |
£75.4m |
(209)% |
The following table sets out the main differences between
reported and adjusted profit for 2018:
Year
ended 31 December 2018 |
|
Reported profit
before tax |
£272.6m |
Amortisation and
impairment of acquired intangibles |
£143.5m |
Impairment of
goodwill |
£33.8m |
Impairment of loans
and investments |
£1.6m |
Litigation and
claims |
(£1.8)m |
GMP and retirement age
equalisation |
£5.4m |
Net finance costs |
£18.8m |
Contingent
consideration movements |
(£5.0)m |
Business exit –
trading |
(£16.8)m |
Business exit –
non-trading expenses |
£29.7m |
Business exit –
(gain)/loss on disposals |
(£309)m |
Significant
restructuring |
£110.0m |
Adjusted1 profit before tax |
£282.1m |
|
|
|
Refer to note 1 for further details of the above items.
1 Adjusted. Refer to appendix for calculation of alternative
performance measures
2 Before exceptional and restructuring charges and additional
actuarial pension deficit contributions
This preliminary announcement is extracted from Capita's
financial statements for the year ended 31
December 2018 and the basis of its preparation can be found
in the notes to the statements in this announcement.
Annual Report
Our 2018 Annual Report and Accounts has been published today and
is available on www.capita.com/investors.
Investor presentation
A presentation for institutional investors and analysts hosted
by Jon Lewis, CEO, and Patrick Butcher, CFO, will be held today,
starting at 09.00 UK time. There will be a live audio webcast of
the presentation on our website www.capita.com/investors and
subsequently available on demand. A dial-in facility is also
available. The presentation slides will be published on our web
site at 9.30am and a full transcript
will be available by midday the following day.
Webcast link (Live and On-demand):
http://webcast.openbriefing.com/capita14319/
Conference call
Participant dial-in numbers:
United Kingdom 0800 640
6441
United Kingdom (Local) 020 3936
2999
United States 1 845 709
8568
All other locations +44 20 3936 2999
Participant access code
939460 -Participants will be greeted by an operator who will
register their details
For further information:
Capita |
Andrew Ripper, Head of
Investor Relations |
T +44 (0) 20 7654
0220 |
Fiona O'Nolan,
Investor Relations Director |
T +44 (0) 20 7654
2281 |
Capita press
office |
T +44 (0) 20 7654
2399 |
Powerscourt |
Victoria Palmer-Moore
or Mazar Masud |
T +44 (0) 20
72501446 |
This announcement contains inside information for the purposes
of article 7 of EU Regulation 596/2014.
LEI no. CMIGEWPLHL4M7ZV0IZ88.
Chief Executive Officer's Review
Executing our strategy
It’s now been more than a year since I joined Capita and the
company has achieved a considerable amount. We have launched a
multi-year transformation process and are rebuilding the
organisation. Our mission is to become ‘One Capita’, an integrated
and refocused business, successful and sustainable, with stronger
client relationships. We want to make a positive, responsible
contribution to society and be a force for good. From the financial
perspective, the business will be more predictable, more profitable
and sustainably cash-generative.
This has meant going back to fix the fundamentals and devising a
new strategy, underpinned by a company-wide purpose and clear new
operating model. We are continuing to execute our strategy – to
simplify, strengthen and succeed – and have made real progress on
remedying many of the basics. Over the past year, our thousands of
people, in the UK and abroad, have proved very resilient. Important
work has been done every day, aimed at delivering better outcomes
for all stakeholders – our people, shareholders, clients, suppliers
and the communities we serve.
Fixing the basics
Capita had become overly complex and inefficient, focused on
short-term performance, characterised by a lack of long-term
planning and investment, and challenged by execution issues on
several major contracts.
We made a strong start in 2018 to turning the company around and
are on track with the execution of our transformation plan. We
started to rebuild, redefining the divisions and creating robust,
accountable and centralised functions which define how we do things
company-wide.
Further top-level talent has been recruited to senior leadership
positions, and a clear sense established of what Capita is and
should be, and of how it can succeed. We have introduced a
purpose-driven and values-based culture, alongside our operating
model. It provides managerial discipline and a corporate blueprint
and is designed to deliver the highest standards of service,
delight clients and deliver value for all our stakeholders.
We raised, with shareholder support, £701m gross proceeds in a
rights issue, and £408m from disposals; we have de-leveraged our
balance sheet. We delivered on our cost-competitiveness
initiatives. We agreed a pension deficit reduction plan. We have
updated our payment terms for suppliers in the UK and Ireland to build better relationships with our
partners.
Our corporate risk profile has stayed largely the same as in
2017. However, we are continually improving the way we manage our
risks; effective risk management will be key to the successful
delivery of Capita’s strategic objectives.
It’s a mark of good management teams that they deliver what they
said they would deliver, and I’m pleased with our achievements over
the past year. We are fundamentally in a much better place. At the
end of year one of our three-year turnaround, we are where we
expected to be and have a clear plan laid out for 2019.
Purpose and operating model
We recently unveiled Capita’s purpose – ‘we create better
outcomes’ – allied to a refreshed set of values and behaviours. For
the first time, the company’s true purpose has been defined. It is
the single reason we exist; it directs and motivates all of us; and
shapes all our decisions and actions. Capita never had this before
– that is why we had to change, swing the pendulum, and provide
direction and clarity.
Cultural and behavioural changes will inevitably take time to
become fully integrated into the organisation. But our new purpose
and re-emphasised values will be the driving forces behind Capita’s
transformation into a collaborative business, founded on robust
governance. As a responsible business, we’ve refocused our approach
to addressing the most material challenges that we and society
face.
How Capita carries out its purpose and delivers better outcomes
is now defined by our new operating model. It constitutes the
blueprint for how together we run the company – underpinned by a
clear strategy, an organised structure, stronger governance and
controls, and well-defined accountabilities.
I believe our operating model represents the single biggest
lever of change the new leadership team has introduced at Capita.
It’s truly self-reinforcing, joins everything together corporately,
and makes the reforming Capita real for all stakeholders.
Despite being a major step forward, the operating model will
also take some time to become truly embedded. I don’t expect
everything to happen easily. But what I do expect is for every
leader and everyone in the company to start making the changes that
will reform Capita as a truly purpose-led, values-driven business.
This is the journey we are on together and I’m committed to seeing
us get there.
Cost competitiveness
Capita has identified a significant, multi-year opportunity to
reduce costs and improve operational efficiency, including:
• Reductions in general and administration, IT and property
expenses.
• Centralising more of our procurement and driving value from
our ~£1bn external spend with suppliers.
• Operational excellence, increasing the use of offshoring and
automation, and improving the consistency of our operations.
• Adopting lean methodologies and being smarter in terms of how
we work.
We made a strong start on executing these cost competitiveness
initiatives in 2018, delivering in-year savings of £70m. We plan to
accelerate the realisation of savings from our programmes, and now
expect to realise £175m of cumulative savings from these
initiatives by the end of 2019. We will invest some of these
savings in building our capability to drive growth. The cost of
achieving these savings was £55m in 2018 and is expected to be £95m
in 2019, making a total of £150m which is included as part of the
total restructuring costs.
Targeted investments
Since April, we have formed an investment review committee for
capital allocation. It is part of the disciplined system put in
place to ensure more predictable outcomes. The committee supports
our goal of investing a total of up to £500m over three years,
addressing historical under-investment and, increasingly over time,
facilitating organic growth.
We have subsequently approved a number of investments
including:
• IT systems and infrastructure
- An organisation-wide customer relationship management (CRM)
system, giving a holistic view and understanding of our customers,
providing robust and granular data to better predict future sales
and monetise customer relationships.
- A new human resources system, to improve engagement and
development opportunities for all our people.
• Services and products
- Software – completing the development of the next version of
SIMS (School Information Management System) for secondary schools;
an education software parental engagement app; the creation of a
cloud-based public safety platform for emergency services products
to facilitate new sales opportunities; an initial investment in a
payment facilitation solution for Pay360 and the re-platforming of
our Retain resource management software to a new SaaS-based
(software as a service) solution.
- People Solutions – next generation of the candidate portal;
automation of our pre-employment screening system; and the
development of a digital on-boarding product to complement our
suite of ‘hire to retire’ services.
- Customer Management – a new digital, omni-channel contact
platform to support webchat, automation and messaging.
- Government Services – developing business processing as a
service capability to provide scalable, replicable services to a
wider customer-base. Targeted investments in robotic process
automation (RPA) and machine-learning technologies to support the
execution of contracts.
- IT & Networks – modernising and strengthening our IT
infrastructure; developing new products for cloud services,
cybersecurity and workspace agility; automating and improving IT
service desk customer experience.
The above are in addition to our ongoing investment in the
upgrading of our financial system – to improve our reporting,
processes and controls.
Challenging contracts
I have talked previously of three ‘problem’ contracts which
continued to present Capita with some challenges in 2018. But we
have made encouraging progress with fixing the performance of these
contracts and are delivering against more of the key performance
indicators. It is part of how we have introduced a more
disciplined, company-wide contractual process.
First, we’ve completely rebuilt Capita’s relationship and
partnership with the British Army, and re-set our Recruiting
Partnering Project (RPP) contract. We remain committed to making a
success of RPP and, thanks to great work being done by our
partnership, the contract is starting to show signs of improvement.
The number of regular soldier recruitment applications are at a
five-year high and we’re working hard to reduce the amount of time
it takes to join the Army. We have been open about mistakes made in
the past and we know there is still a lot for us to do to deliver
on our commitments. But RPP is a critical public service to the
Armed Forces and we’re determined to get it right.
Second, we took firm action towards the end of 2018 over issues
relating to our Primary Care Support England (PCSE) contract with
NHS England. This followed the discovery of delays in the issuing
of cervical screening correspondence, which forms part of the PCSE
contract, to thousands of women. We apologised to all the women
affected by this administrative error and, following an
investigation of the managerial handling of the matter, appropriate
internal disciplinary action was taken. We have improved quality
processes, and other operational service delivery levels on the
contract continue to be stable.
Finally, the transformation of our seven-year customer services
contract with mobilcom-debitel – one of Germany’s largest mobile,
internet services and telecoms products providers – is now
progressing well. All revised transformation milestones have been
met, including the launch of IOS and Android mobile
customer-service apps.
The aggregate financial loss from these challenging contracts
reduced from over £50m in 2017 to around £30m in 2018. We plan to
generate an aggregate profit on the contracts in 2020, including
reaching break even on the PCSE and mobilcom-debitel contracts by
the end of 2020.
Sales and growth
Our transformation programme will continue through 2019 and, in
fact, be intensified. All six Capita divisions now have clearly
defined value propositions, a simpler set of offerings and, in some
cases, a fresh methodology by which to create growth opportunities.
While there are early signs that we can make real progress in 2019,
there is still much more to do; and we must demonstrate that we can
again grow organically.
Transformation of our growth function under a new Chief Growth
Officer will be a crucial factor in how we will pivot to growth. We
need to become more agile in our thinking, approach and
skill-sets.
I have personal experience of running consulting businesses in
software tech and the oil and gas industry. At Capita, we already
have consulting services – providing insight and expertise in our
chosen markets – but they have been run in silos and not leveraged
across the business. I am convinced that a stronger consulting
capability at Capita is going to remove our revenue dependency on
tenders and help create new growth opportunities with existing and
new clients. A stronger consulting capacity will also provide
opportunities for consultative selling.
A shift to consultative selling, based on industry knowledge,
will transform Capita in the sales and marketing area – and leave
no-one in any doubt that what we now have instead is a modern-day
growth function.
The performance assessment of our existing sales resources and
the establishment of a focused customer account management
structure, with well-honed consultative selling skills, is helping
change how we engage with clients. We are aiming to understand our
clients better and build stronger, long-term partnerships,
providing the best of Capita to create better outcomes and realise
growth opportunities.
This has already seen progress, including in our partnership
with Transport for London (TfL).
Core to this is the London
congestion charge zone, low emissions zone and enforcement contract
which involves service provision from five Capita divisions –
Government Services (to run the contract), IT & Networks (the
underlying IT infrastructure and network provision), Customer
Management (customer accounts and enquiries), Software (payment
platforms) and Specialist Services (document services). This
contract led in turn to the opportunity to provide ultra-low
emissions zone charging. More widely, we provide core network,
asset, workplace and enforcement services to TfL, as well as
infrastructure consultancy. It shows how we can work successfully
across divisions and functions, and is a good example of getting
account management right.
In 2018, we formed a new pre-bid contract review committee,
which is operating well. The committee reviews all contracts above
certain financial thresholds, evaluating the risks and commitments
to ensure complete alignment with our operational and financial
goals. We strike an appropriate balance between delighting the
customer, growing operating profit and the risk profile.
Order intake in the year was £1.8bn, largely comprising contract
wins and renewals in Customer Management, which won a £300m
extension and expansion of our existing contract with Germany’s
largest integrated telecommunications provider, and in
Software.
We also announced a number of new contracts, some of which were
delayed from earlier in the year, which are discussed in more
detail under divisional performance.
Capita's order book at 31 December
2018 stood at £7.1bn, compared with £8.2bn at 31 December
2017, reflecting that order intake was lower than revenue
recognised in the year and low levels of bid activity in 2017. The
decline in our order book in 2018 was driven by two parts of the
business:
• Life Insurance, which is running off and was impacted by the
loss of Prudential.
• Local government, where the market has structurally changed,
and clients are shifting from long-term multi-activity contracts to
buying processes as a service.
The order book for the rest of the business – largely
digitally-enabled services and software – was stable. This part of
Capita operates in growth markets and includes higher value-added
services that we are investing in and want to grow. I expect to see
these trends continue this year, as Life Insurance and local
government continue to decline and our investment in core
propositions begins to bear fruit. Capita continues to plan for a
return to year-on-year organic growth in 2020, driven by
digitally-enabled services and software.
Digital capabilities
Getting back onto a growth trajectory, and optimising our
portfolio, are part of our multi-year transformation process, which
we have clearly set out for all stakeholders. The focus of the
leadership team at Capita remains firmly on delivering that
transformation and prosecuting our strategy of simplify, strengthen
and succeed. But we will also need to look ahead carefully to the
Capita of the future, based increasingly around our digital
capabilities.
The lion’s share of the contracts we have today involve a deep
understanding of the business processes of a client and the use of
technology to provide insight, reduce risk, drive productivity and
produce a superior experience for clients’ customers.
Digitally-enabled transformation is a common thread running through
all this.
It’s why we are investing more in digital technology and
entering into strategic IT partnerships. For example, we agreed a
five-year strategic partnership with Microsoft for the use of
Azure, its cloud computing service, to support the roll-out of our
cloud services, particularly in our Software and Customer
Management businesses. This will help facilitate the roll-out of
the next version of our education software SIMS8 and make it easier
to internationalise the business.
We have significantly increased the capacity of our Indian
digital development centre in Pune, near Mumbai, which now employs more than 1,100
people developing standardised software, alongside more than 500
colleagues there in IT & Networks. We also agreed a digital
partnership with McKinsey to accelerate our analytics and digital
transformation capabilities.
There are big opportunities in a fast-changing world – with
digitally-based services being purchased in a much more flexible
way – which Capita is well equipped to take advantage of. But we
need to make sure that our tech solutions are designed and marketed
to provide clients and their customers with superior experiences
and better outcomes. We have to identify the nature of clients’
work and define the potential for them and us from new digital
technology, data and analytics-focused solutions, based on deep
industry knowledge.
Investment in our people
Capita is a people-focused business and the leadership team is
committed to putting our people at the very centre of how we
operate, and on respecting and valuing all of them. We are
determined to instil a much stronger commitment to how we attract,
develop, reward and retain our talented employees; and for them to
start to really experience the positive changes taking place within
the business. We want our people to feel part of the company’s
success, and to be excited and motivated to work hard to help
achieve it.
This is why we appointed a Chief People Officer for the first
time to run the new people function. We are investing in training
and development, and succession and talent management, and have –
for the first time at Capita – introduced a performance management
and assessment system. Such moves are reflective of being a
responsible business and constitute a vital part of how we will
succeed.
I am disappointed that our gender pay gap increased in 2018;
this is simply not good enough, but we are taking steps to
understand and eventually eliminate the gap. We’re investing in
activity to improving gender and pay equality through our people
and responsible business strategies. At the same time, I am very
proud that our ranking in the Hampton-Alexander Review of the FTSE
250 has improved, up from 219 in 2017 to 110; it represents
progress, though there is clearly still a lot of work to do.
We are also very serious in the leadership team about widening
diversity. We want a workforce that is inclusive and reflects the
diversity of our communities – as shown by the imminent appointment
of two employee directors to the Board, the first such move by a
FTSE 250 company since the late 1980s. But, as I have stated
previously, this is not a case of gesture politics: employees on
the Board does not feel radical to me; it’s just the right thing
for our company to do.
At a leadership level, we have further strengthened the
executive committee to support the delivery of our new strategy. As
well as a new Chief Growth Officer, we now also have a Chief
Digital Officer; these new growth and digital roles are enormously
important in underpinning our strategy. Our Chief Financial Officer
joined us in January to form part of our world-class new leadership
team, which also includes a Chief General Counsel and leads for the
new transformation, corporate development and corporate affairs
functions. We now have a mature and disciplined team running Capita
in a responsible, sustainable way – with stronger controls and
risk-management, and improved quality and assurance.
Global perspective
Capita is clearly not a multinational company in the
conventional sense, but we do have an international dimension that
I think has been underestimated in the past. While we are the UK’s
largest business processes outsourcing provider, we also have a
growing international operation and sales focus.
Almost 20,000 of our people are based outside the UK and we have
employees as far afield as the United
States, Ireland,
Germany, Poland, Switzerland, India and South
Africa. We have myriad capabilities within our global
network, with more than 8,000 employees in India and 3,000 people in Cape Town.
Indeed, our workforce in South
Africa – where we’ve been winning new work – is set to
expand over the next two years. We currently deliver services
including customer service, sales, debt collection and technical
support from two centres in Cape Town.
South Africa represents a new and exciting services
destination, offering a unique combination of talented people and
commercial advantages. It also has a mature domestic market and an
attractive investment climate – with strong public sector support
and excellent telecoms infrastructure. South Africa is a people-centric culture; and
our presence there is reflective of how we are helping facilitate
social mobility.
Overall, our aim is to evolve into a digitally-enabled services,
software and consulting business with an increasingly international
footprint, which delivers for all its stakeholders and values all
its people, whatever their roles and wherever they work.
Responsible business
The transformation of a purpose-driven Capita must be placed in
the context of our becoming a truly responsible business.
I’ve talked about our new strategy, the sense of a refreshed
culture and values, and our initiative to put two employees on the
Board. The phased £176m pension deficit reduction plan, agreed with
the trustees, was in line with a commitment we made in January 2018 and is an important milestone in
Capita's transformation. It’s a reflection of the importance we
place on good corporate responsibility.
We have been working with the Cabinet Office to develop reforms
on how the Government partners with the private sector to provide
public services. We have welcomed the opportunity to work openly
towards the development of a practical framework and approach to
procurement and delivery that brings real value to all
concerned.
We need to make sure we continue to focus on minimising
operational issues and must ensure we are effective in engaging
with our new ways of working and operating systems.
However, there is a fresh sense of a reforming Capita with a
leadership team that is properly accountable to all its
stakeholders, focused on fulfilling contractual obligations,
meeting expectations, cultivating better relationships with clients
and delighting our customers.
We’ve also refocused our approach to how we are responding to
the most material challenges that our business and society face –
youth unemployment, digital exclusion, gender equality, climate
change, business governance and ethics.
We are calling our approach responsible business, as it defines
how – true to our purpose – we operate, serve society, respect our
people and the environment, and deliver a fair return to our
investors. We have, for example, recently launched two new charity
partnerships with Teach First and Young Enterprise where we aim to
empower 100,000 young people to progress into the world of
work.
But we must improve in these and many other areas, if Capita is
to become a genuinely accountable leader within UK plc and help set
the agenda for responsible business. The country is grappling with
low productivity, slowing economic growth, an ageing population and
limited social mobility. Business will have to step up and be part
of the solution, be it through technology, including that designed
to enhance productivity, innovation, training apprentices and
graduates, or by simply providing good jobs.
However, a legacy of the financial crisis is that big companies
are still treated with suspicion at best, outright hostility at
worst. Business won't get a seat at the table to shape these
solutions unless it is trusted and takes its broader role in
society seriously, approaching challenges with honesty. I want to
show how and why Capita – and big business in the UK – can actually
be a force for good in society and start to change public
perceptions.
Change in Board responsibilities
John Cresswell has informed the
Board of his intention to step down as Chair of the Remuneration
Committee but will remain on the Board as a Non-Executive Director.
John took up a new CEO role in 2018 and feels he can no longer
provide the Company with the time and attention the Remuneration
Chair role requires. He will remain as Chair until a replacement is
appointed.
The way ahead
Overall, I’m pleased with how far we have come at Capita on our
transformation journey. After the first of three years, we are on
track.
Looking forward, Capita has a clear plan for 2019, including
embedding our first ever operating model which defines the way we
work as ‘One Capita’, accelerating our cost-competitiveness
programme and investing more in the business to support sustainable
growth. These are important stepping stones as we work towards a
return in 2020 to organic growth and sustainable cash
generation.
Capita still faces a number of challenges; the political and
economic environment and trading and market conditions clearly
remain uncertain. Yet my confidence in Capita remains undimmed. We
want to become a more profitable, sustainable and responsible
business, creating long-term value for shareholders – and external
challenges will only serve to intensify our attention on the task
ahead.
As a more simplified and strengthened company, Capita will be
well prepared to take advantage of the opportunities that lie
before us in a fast-moving world. I am confident we will maintain
our reforming momentum over the coming year – and am excited about
the prospects for a successful, technology-driven,
digitally-enabled Capita.
Divisional performance review
The following divisional financial performance is presented on
an adjusted revenue and operating profit basis. Reported profit is
not included, as the Board assesses divisional performance on
adjusted results. The calculation of adjusted figures and our KPIs
are contained in the APMs in the appendix to this statement.
Software
Capita’s Software division is one of the UK’s largest software
companies. Our specialist enterprise software products serve sector
specific and cross-sector markets in the UK and overseas. We
develop and deliver specialist application software and wider
solutions for education, local government, public safety, utilities
and transport, consulting and legal, and payments. As a software
products provider, our deep industry expertise and functional IP
supports critical public services and business processes. Our
software and technology expertise forms a differentiating component
of Capita’s wider digitally-enabled services offering.
Strategy and markets
We are a top-five provider of enterprise software products in
the UK, a market currently valued at £17bn and expected to grow at
8% CAGR through 2022 (source: Gartner). Our products compete in a
wide range of market sectors, primarily in the UK, and in many
sectors we have market-leading positions. We mainly compete with
other specialist product software providers.
Our strategic priorities are focused on creating a world-class
specialised software products business, investing in our core
products with distinctive offerings and providing best-in-class
solutions for clients in the UK and in targeted international
markets.
The division is transforming what was once a division of 29
siloed businesses into a single software business. This
transformation was started in 2017 and during 2018 many of the
structural and operational changes required to create a single
business were put in place. We have built a best-in-class digital
delivery centre in India for the
production of standardised, repeatable software and to support the
rest of Capita and are creating scaled, integrated, shared service
functions. We are investing in both our existing and new products
and markets to defend and grow the business, with the aim of
achieving mid to high single digit revenue growth in 2020.
Sales and operational performance
Over the course of 2018 we have been increasing our focus on
sales and standardising our sales processes and demand generation
marketing, which is resulting in a stronger qualified pipeline.
There were a number of notable wins in the year. In partnership
with Motorola Solutions, we were awarded a contract to supply our
ControlWorks solution to a major metropolitan police service in
Asia. We were also awarded a
contract to provide ControlWorks to West
Midlands Police, worth £6m over 10 years, and renewed our
contract to provide support and maintenance to the Ministry of
Justice for digital radio networks across the prison estate in
England and Wales for the next five years. Pay360, our
payment platform, won a significant contract with Luxon Payments,
to support its global e-wallet launch. SIMS won a contract with
City Montessori School (CMS) in India, the world’s largest private school with
more than 56,000 pupils.
We piloted the next cloud-based version of our main education
software product SIMS8, launched SIMS Finance, a cloud-based
financial reporting product and started development of a
‘light-touch’ smartphone-enabled version of SIMS for emerging
markets. We also set up a marketing and sales operation in the US
to roll out selected products, including AMTSybex, Retain, Pay360
and 911eye, and consolidated multiple support desks into an
integrated shared service.
The increasing focus on application development offshoring led
us to build a strong development skill base in India at a lower cost base, with particular
focus on key technologies such as cloud and digital transformation.
This will enable us to fully support our multi-year product
development cycles, critical to supporting our future sales
pipeline.
Financial performance
Adjusted revenue fell by 1.3%, reflecting good growth in
AMT-Sybex and growth in our cross-sector products, including
Payments, which was offset by declines in Healthcare Decisions, as
a result of the end of our NHS24 Scotland contract, and Secure Solutions.
Education Software was flat. Our book-to-bill ratio was 104%,
reflecting an encouraging improvement in order intake, and we
expect revenue to grow in 2019.
Adjusted operating profit increased by 1%, due to the
aforementioned changes in revenue, investments in sales, including
the US pilot, and benefits from transformation actions.
Software financial
summary |
2018 |
2017 |
YOY
change |
Adjusted
revenue |
£396.4m |
£401.7m |
(1.3)% |
Adjusted operating
profit |
£112.4m |
£111.7m |
0.6% |
Margin |
28.4% |
27.8% |
|
Order book |
£559.6m |
£543.4m |
3.0% |
People Solutions
This division provides a full suite of HR offerings across the
employment life cycle.
They include leading market positions in recruitment process
outsourcing (RPO), learning process outsourcing, HR service
(including payroll), and pensions and benefits administration,
which are supported by our proprietary digital platforms, Orbit,
Hartlink and Tessello.
We also provide attraction, screening and performance management
services, and best-in-class fire prevention and protection training
facilities from the Fire Service College.
Strategy and markets
The UK market for people services was valued at £6bn in 2018 and
is expected to grow at an annual growth rate of 5% through to 2022.
The market is being driven by a customer propensity to buy digital
self-service, a move away from large-scale contracts to modular
product buying, where customers require expert advisory support as
they transition to digitally-enabled operating models.
In April 2018, we brought our
existing HR businesses together under a single leadership team for
the first time, to create the People Solutions division. Our
strategy is to derive benefits from the new structure, by creating
and leveraging a single sales engine and realising cost savings. We
are investing in our core products and platforms, developing a
suite of new products and solutions, strengthening our analytics
capability and growing our scalable, repeatable solutions.
Sales and operational performance
Our forward order book was £715m at year-end. We signed a number
of new contracts in the year, including the provision of resourcing
services for the Home Office and German energy company Innogy, the
management of apprenticeships for the Department of Work and
Pensions and provision of learnings services for Vodafone. We also
extended our learning services contract with a major retail
bank.
We started investments in: the development of a digital
onboarding product to complement our suite of ‘hire to retire’
services; the next generation of the Orbit benefits platform, onto
which a number of clients were migrated; our KnowledgePool learning
booking system; and the candidate portal of our pre-employment
screening system to improve customer experience.
We have re-set our partnership with the Army on the Recruiting
Partnering Project (RPP) at a senior level and the contract is
starting to show signs of improvement. The number of regular
soldier recruitment applications were at a five-year high at the
time of writing this Annual Report and we’re working hard to reduce
the amount of time it takes to be offered a job in the Army. The
contract aims and performance were the subject of an National Audit
Office report in December 2018, the
findings of which related to what are now largely historical
contract issues, and we attended a Public Accounts Committee with
the Army in January 2019. We have
been open about mistakes made in the past and we know there is
still a lot for us to do to deliver on our commitments.
Financial performance
Adjusted revenue fell by 4.3% as a result of declines in our
transactional businesses Capita Resourcing and Learning Services,
which were impacted by the transition to a new public sector
training framework, previously Civil Service Learning, and the
transfer of the Contingent Labour One (CL1) public sector
resourcing contract to a new provider in the second half .
Adjusted operating profit decreased, reflecting the above
decline in revenue, investment to strengthen the business and lower
margins in Employee Solutions, which have yet to be offset by cost
reduction actions.
People Solutions
financial summary |
2018 |
2017 |
YOY
change |
Adjusted
revenue |
£498.3m |
£520.5m |
(4.3)% |
Adjusted operating
profit |
£40.7m |
£62.7m |
(35.1)% |
Margin |
8.2% |
12.0% |
|
Order book |
£715.3m |
£786.5m |
(9.1)% |
Customer Management
Capita is a leading provider of multi-channel customer
engagement services, underpinned by full-service business
management capabilities, in the UK, Switzerland and Germany.
We primarily serve customers in the telecommunications, retail
and utility sectors, from a mix of onshore locations in
Europe and offshore locations in
India, Poland, South
Africa, Argentina and
Bulgaria.
The division also provides remediation, complaints management
and collections services, including TV Licensing. Our approach is
to build shared outcome partnerships, increasingly based on
partnering for value, not transactional supply. The value we bring
to our clients is increasingly built around transforming the
customer experience through the application of data insight and
analytics. These enable us to manage complex, high-value
interactions, drive positive quality improvement, and improve
financial benefits for clients.
Strategy and markets
We are the largest provider of customer management services in
the UK with a 14% market share. The UK market is estimated to be
worth £4bn a year and is expected to grow at approximately 4% per
annum through 2022 (source: Nelson
Hall). The German and Swiss customer management markets are
estimated to be valued at £4bn per annum and are expected to grow
at around 5% per annum through to 2022.
We have a differentiated strategy and core-value proposition in
our markets; our approach is customer experience-led, tech-enabled
and underpinned by contracted commitment to business outcomes. We
are building capability to underpin our core value proposition that
we ‘make great customer experience happen’. Our commercial model
increasingly includes a commitment to client outcomes such as
improvements in the net promoter score, revenue generation,
customer acquisition and cost-to-serve, deploying a range of
operational, technology and process capabilities from within both
Customer Management and the wider Capita group.
Sales and operational performance
Our order book increased by 10% to £2.0bn in 2018, due to the
extension and expansion of existing contracts and signing of new
contracts to deliver high-quality services for a number of leading
clients, including:
• The extension and expansion of our existing contract with
Germany’s largest integrated telecommunications provider, taking
over the operation of three contact centres and 640 employees. This
contract is estimated to be worth £300m (€340m) to Capita to
December 2022.
• British Airways selected us to deliver a new five-year
contract to deliver enhanced customer services from our global
centre in Cape Town, South
Africa.
• Expanded contract with Southern Water for end-to-end customer
services – including the management of back-office billing
processes, correspondence-handling, print and mail – worth £30m
over five years.
• Expanded contract with the Financial Services Compensation
Scheme (FSCS) – to consolidate all its claims handling services,
including all inbound and outbound customer contact – worth £37m
over four years and nine months.
• Extensions of our contracts with: npower, worth £41m over
three years; Marks & Spencer, worth £70m over five years; and
BBC Audience Services for five years.
The transformation of our seven-year customer services contract
with mobilcom-debitel – one of Germany’s largest mobile, internet
services and telecoms products providers – is now progressing well.
During 2018, the investment of management time has improved
contract performance, and we delivered all transformation
milestones on time. This included the roll out of a new
multi-channel telephony platform and the launch of IOS and Android
mobile apps. We continue to plan to reach break even on the
mobilcom-debitel contract by the end of 2020.
Financial performance
Adjusted revenue fell by 4.2%, due to contract scope changes and
lower volume in the UK retail and energy sectors and Switzerland. Adjusted operating profit
decreased due to: the aforementioned decline in revenue; a weaker
performance in Europe, which was
impacted by lower profits in Switzerland, and a slightly higher loss on our
contract with mobilcom-debitel; increases in some cost items
including the adoption of General Data Protection Regulation; and
the dropping-out of a one-off contract modification benefit in
2017. Excluded from 2018 adjusted profit is a charge of £61.7m from
the impairment of acquired intangibles.
Customer Management
financial summary |
2018 |
2017 |
YOY
change |
Adjusted
revenue |
£794.2m |
£828.9m |
(4.2)% |
Adjusted operating
profit |
£39.6m |
£57.8m |
(31.5)% |
Margin |
5.0% |
7.0% |
|
Order book |
£2,011.8m |
£1,843.6m |
9.1% |
Government Services
Capita is a trusted strategic partner to central government for
the delivery and transformation of technology-enabled business
services. It includes the operation of large, complex contracts
that underpin the achievement of policy outcomes.
We are also a leading provider of support services such as
revenues, benefits and back-office processing, IT, HR, and finance
to local authorities, and education and health organisations.
Strategy and markets
Capita is one of the largest providers to government in the UK
with an estimated market share of 13%. Our strategy is to focus on
and leverage areas where Capita has core expertise, invest in our
transformation, technology and operational capabilities, package
more of our services making them simpler to procure, improve the
performance of challenging contracts, and implement structured
client account management. We are also discontinuing smaller
non-core activities such as facilities management and focusing on
core areas of collections and disbursement, regulatory and planning
services, and customer and digital services. Since April, we have
begun a programme to drive operational excellence and put in place
continuous improvement plans for all businesses.
The UK market for central and local government services is
valued at £6.7bn a year and estimated to be growing at
approximately 3% per annum (source: Nelson
Hall). However, the local government market for large
outsourced contracts is declining with a significant drop-off in
the number and size of opportunities coming to market and existing
clients choosing to end contracts early and take services back
in-house. Brexit is still affecting the volume of new policy
initiatives by Government departments, resulting in fewer new
opportunities for private sector contractors.
Sales and operational performance
Despite the difficulties faced by the company in the early part
of 2018, we remain a strategic partner to the Cabinet Office.
We won, renewed and extended a number of contracts in 2018,
including:
• Department for Education’s Standards and Testing Agency – new
contract to manage the administration, processing and support for
all primary school national curriculum assessment tests in
England.
• Transport for London –
implementation and management of the Central London
Ultra Low Emission Zone.
• Renewed contracts with Westminster City Council to manage the
authority’s revenues and benefits services, and the Health and
Safety Executive to continue to manage the Gas Safe Register
In 2018 Capita’s subsidiary, SmartDCC, went live with its
GB-wide infrastructure for the rollout of second-generation smart
meters. Alongside this service, SmartDCC is delivering key
programmes of work for the government and energy industry to
integrate first-generation smart meters into its network and
deliver next-day consumer switching in the energy retail
market.
We took firm action towards the end of 2018 over issues relating
to our PCSE contract with NHS England. This followed the discovery
of delays in the issuing of cervical screening correspondence,
which forms part of PCSE , to thousands of women. We apologised to
all the women affected by this administrative error and, following
an investigation of the managerial handling of the matter,
appropriate internal disciplinary action was taken. We have
improved quality processes and other operational service delivery
levels on the contract continue to be stable. We continue to expect
the PCSE contract to reach breakeven by the end of 2020.
The local government market for large, multi-year deals,
declined at an accelerated rate during the year. Southampton, Sheffield and Birmingham City Councils have
notified us of their intention to end contracts with them ahead of
their contracted end-dates. Barnet
Council has agreed to take a small number of services back
in-house.
Capita is committed to the local government market and is
working closely with all our council partners to agree and manage a
smooth transfer of services back to local authority management.
Financial performance
Adjusted revenue fell by 13.5%, due to the re-shaping of our
Defence Infrastructure Organisation (DIO) contract, which benefited
from the recognition of previously deferred income in the prior
year, and a decline in our local government long-term strategic
partnerships, reflecting the aforementioned market weakness.
Adjusted operating profit decreased due to the dropping-out of the
£22m one-off benefit from DIO, as previously disclosed, and
weakness in local government, which were partially offset by a
reduction in loss on Primary Care Support England (PCSE). Excluded
from 2018 adjusted profit is a charge of £33.8m from the impairment
of goodwill.
Government Services
financial summary |
2018 |
2017 |
YOY
change |
Adjusted
revenue |
£745.5m |
£861.7m |
(13.5)% |
Adjusted operating
profit |
£35.2m |
£78.7m |
(55.3)% |
Margin |
4.7% |
9.1% |
|
Order book |
£2,187.5m |
£2,660.6m |
(17.8)% |
IT & Networks
Capita is one of the top 10 suppliers of IT Services and
networks in the UK, focused on the mid-sized market.
Our IT services business acts as a technology enabler across all
of Capita’s services both internally and externally. We provide
end-to-end enterprise IT services and solutions focused around four
key areas: digital transformation and innovation; core platforms –
cloud, hosted and on-premise and services; LAN and WAN connectivity
solutions; and professional services – advising and running IT
solutions for our customers, testing, data consulting and
cybersecurity.
We operate across the UK and from our operations in India, supporting clients at a local and
national level. We have strategic partnerships with leading global
IT vendors, have invested in our own portfolio of hosted platforms
and operate our own UK-wide network and data centres.
Strategy and markets
The IT infrastructure services market in the UK was estimated to
be worth £28bn in 2018. The overall market is expected to grow at
2% a year to 2021 (source: TechMarketView). However, this is highly
polarised with high growth in cloud services and shrinking client
device support.
Our strategy is to consolidate separately run entities into
single IT & Networks businesses. We will: simplify the service
catalogue and professionalise internal relationships; invest in our
infrastructure, cloud and people; and build technical and sales
capabilities to improve customer experience.
In 2018, we launched the 'One ITS' programme, which is expected
to realise significant cost savings over the next three years and
includes the introduction of shared service centres with common
processes and an increase in the use of offshoring.
We also started a programme to invest in our data centre network
to simplify and consolidate the existing environment and improve
performance and consistency.
Sales and operational performance
2018 was a year of fixing the basics across the division,
bringing together the separate operating businesses and stabilising
them. This 'One ITS' programme is expected to realise significant
cost savings over three years and includes the introduction of
shared service centres with common processes and an increase in the
use of offshoring.
Following an IT data centre outage in 2017, we have invested
significantly in our existing data centre estate to simplify and
consolidate the environment and improve performance and
consistency. Plans are progressing for the phasing of legacy
clients onto a new cloud infrastructure.
We began work on simplifying our product and service portfolio
into six key product lines to position the division for improved
client retention and growth. As part of this review, we retired a
number of legacy brands and brought all our services together under
the Capita brand. In November, a new divisional sales and marketing
organisation was created, with additional resource focused on
product cross-sell and key account management.
We began the implementation of the Transport for London networks contract in March and
successfully went live in late August. Transformation of the
network is ongoing and is due to be completed by the end of
2020.
Contract wins and renewals in the year included the NHS Business
Services Authority, Ministry of Defence, Kent Public Service
Network, North Essex Partnership, Driver and Vehicle Standards
Agency, and Transport for London.
Financial performance
Adjusted revenue fell by 2.7%, due to contract losses and lower
volume in Managed IT Solutions and Enterprise Services. Adjusted
operating profit decreased due to the dropping-out of a £9m one-off
supplier settlement in the prior year and lower margins in
Networking Solutions.
IT & Networks
financial summary |
2018 |
2017 |
YOY
change |
Adjusted
revenue |
£404.0m |
£415.4m |
(2.7)% |
Adjusted operating
profit |
£45.3m |
£62.0m |
(26.9)% |
Margin |
11.2% |
14.9% |
|
Order book |
£380.4m |
£508.3m |
(25.2)% |
Specialist Services
Our Specialist Services division comprises a portfolio of 16
businesses, delivering a range of services offerings through joint
ventures, trading businesses and traditional IT-enabled legacy BPO
contracts. The division includes those businesses which either are
not within Capita's growth markets and/or have little in common
with our other divisions and/or are at an early phase in their
development but may be scaled up in the future. These businesses
are mostly stand-alone operations and are actively managed on a
portfolio basis in order to maximise value and include Life
Insurance, Insurance Services, Mortgage Services & Collections,
Optima, Travel & Events, Evolvi, Real Estate &
Infrastructure, AXELOS, Fera, Managed Print, Hardware Reselling and
Enforcement.
Strategy and markets
We enjoy strong market positions in many of the verticals
sectors, which are generally maturing, with strong brands and
positive client perception of our services. This provides an
ongoing opportunity to leverage Capita’s wider client base better,
and to simplify and strengthen the portfolio. The focus across the
portfolio is on operational excellence, cost-optimisation and
leveraging Capita-wide infrastructure, clients and capabilities
where possible.
Parts of our life insurance administration business is in
structural decline as books run off and some customers, with legacy
IT systems, are switching to suppliers who can provide a single
digital platform for all their life books.
Due to the varied nature of the activities in the division, each
business has its own strategy uniquely tailored to their service
offerings and the needs of their clients which has been defined
through a ‘value optimisation’ programme. This programme, which
involved a detailed review of each business and its market
position, identified strategic and tactical opportunities to
improve value generation from them.
Sales and operational performance
During the year we disposed of a number of businesses notably
Supplier Assessment Services (including Constructionline) and
ParkingEye, delivering over £400m in disposal proceeds.
The Life Insurance and Insurance Services businesses were
impacted by the loss of the Prudential UK and Marsh contracts. We
are focusing the business on supporting our customer services
clients, where we are delivering high quality services for open
book products.
We have restructured our Real Estate and Infrastructure
business, invested in our IT infrastructure and client portals and
enhanced our security and compliance in our regulated
businesses.
New sales wins in the year included: the award of a new courts
enforcement contract by the Ministry of Justice; Travel &
Events contracts with the Department for International Trade, and
Rolls Royce; and a Customer Solutions win with Electric Ireland,
providing collection and credit-control services.
Financial performance
Adjusted revenue decreased by 3%. This reflected good growth at
AXELOS and modest growth at Fera and Enforcement, which was
outweighed by declines in Real Estate & Infrastructure,
Insurance Services and Life Insurance. Revenue included a £38m
release of deferred income on the early transfer of Prudential UK’s
life insurance business to a new supplier in the second half of
2018.
Adjusted operating profit fell by 1%, as a result of increases
in AXELOS and Real Estate, which benefited from restructuring
actions, which were offset by declines in Managed Print and
Mortgage Services. Profits included a £9m one-off benefit on the
end of the general insurance contract with Marsh and a £6m one-off
benefit on the end of the Prudential contract, which were partly
offset by one-off write downs and provisions.
Specialist Services
financial summary |
2018 |
2017 |
YOY
change |
Adjusted
revenue |
£992.2m |
£1,022.7m |
(3.0)% |
Adjusted operating
profit |
£139.5m |
£140.6m |
(0.8)% |
Margin |
14.1% |
13.7% |
|
Order book |
£1,241.4m |
£1,844.8m |
(32.7)% |
Financial review
This preliminary announcement is extracted from Capita's
financial statements for the year ended 31
December 2018 and the basis of its preparation can be found
in the notes to the statements in this announcement.
Changes to non-statutory reporting
We have simplified our non-statutory reporting measures to
improve understanding of the Group’s financial performance.
Historically, the Group separated underlying, non-underlying
results (comprising business exits and specific items) and reported
these on the face of the income statement. In the notes, underlying
results before significant new contracts and restructuring were
disclosed.
There are a number of items that influence the profit reported
in any one year. These can lead to significant differences between
reported profit and the generation of free cash flow,
including:
• IFRS 15 and the timing of reported profits compared to the
receipt of cash. Under IFRS 15, revenue is more evenly distributed
over the life of contracts, with the timing of profits re-profiled.
There are typically lower profits in the early years on contracts,
with significant restructuring costs or higher operating costs
prior to transformation, with a compensating increase in profits in
later years. Typically, cash receipts are aligned to when the costs
are incurred. This results in income being deferred and released as
we continue to deliver against our obligation to provide services
and solutions to our clients. Further reporting improvements are
being considered to make the impact of this more transparent.
• Contract terminations which can lead to major gains or losses
in the year of termination, and where cash inflows/outflows have
occurred in prior years.
• Additional pension contributions to address pension deficits
are not reflected in our adjusted1 or reported profit,
in accordance with IAS 19, but will reflect a significant future
cash commitment, totalling £176m to 2021, as described below.
To provide better understanding of our financials, we will
continue to provide guidance on our sustainable free cash flow
targets, with disclosures where the Company has committed to future
cash outflows, as was done in relation to the cash contributions to
the Group’s defined benefit schemes.
The revised presentation provides reported results on the face
of the income statement, with a footnote detailing adjusted
results, and a note to the accounts providing a reconciliation
between reported and adjusted results. Those items which relate to
the ordinary course of the Group’s operating activities remain
within the adjusted results. In the Directors’ judgement, a number
of items need to be disclosed separately by virtue of their nature,
size and/or incidence, in order for users of the financial
statements to obtain a proper understanding of the financial
information and the underlying performance of the business.
Accordingly, our presentation of the performance of the divisions
does not comment on these adjustments, as they do not impact our
consideration of in-year performance. We have treated items
consistently with the approach adopted at the time of the rights
issue in 2018. We will be giving consideration to further
improvements in 2019.
Revenue
Adjusted revenue1, excluding results from businesses
exited in both years, was £3,867.6m (2017: £4,091.8m), an organic
decline of 5%.
This was due to the limited benefit from contract wins being
outweighed by contract losses and scope and volume changes in
Government Services, Customer Management and Specialist Services,
including the re-shaping of our DIO contract with the Ministry of
Defence, and Home Office escorting, on which we chose not to
re-bid. There was also a decline in transactional revenue in People
Solutions and IT & Networks.
Adjusted
revenue1 year-on-year |
£m |
2017 |
4,092 |
Contract wins |
25 |
Contract losses |
(172) |
Scope and volume
changes |
(61) |
Transactional
business |
(62) |
One-offs |
48 |
Other |
(2) |
2018 |
3,868 |
Reported revenue decreased by 7% to £3,918.4m (2017:
£4,234.6m).
Operating profit
Adjusted operating profit1 decreased by 25.1% to
£335.3m (2017: £447.5m), as a consequence of the revenue decline
year-on-year, due to the limited benefit from contract wins being
outweighed by contract losses and scope and volume changes in
Government Services, Customer Management and Specialist Services, a
decline in People Solutions margin, the re-shaping of the DIO
contract in Government Services and a one-off supplier settlement
in the prior year in IT & Networks. These were partially
off-set by cost savings achieved from the transformation plan
announced earlier in 2018 along with the full-year benefits of
restructuring begun in prior years, and one-off contract-related
profits of £6m on Prudential and £9m on Marsh that arose on the
earlier than planned terminations of contracts in Specialist
Services.
These contract profits arose as a result of the Group’s revenue
recognition policy under IFRS 15, where revenue is deferred over
the expected life of a contract. Where a contract is terminated
early, all deferred revenue is pulled forward and recognised in the
year of termination. Similarly, any associated contract-specific
assets that were being amortised over the expected life of the
contract are written off in the year of termination, unless there
are alternative uses on other contracts.
Adjusted operating margin1 was 8.7% (2017: 10.9%). We
continue to target double digit adjusted EBIT margins in 2020.
Adjusted operating profit1 is before charging a
number of specific items detailed further below.
The table below provides a reconciliation for 2018 and 2017
between reported and adjusted profit1.
Adjusted1 to reported profit bridge |
|
|
Operating profit |
|
|
Profit before tax |
|
2018
£m |
2017
£m |
|
2018
£m |
2017
£m |
Adjusted1 |
|
335.3 |
447.5 |
|
282.1 |
383.1 |
Amortisation and
impairment of acquired intangibles |
|
(143.5) |
(138.3) |
|
(143.5) |
(138.3) |
Impairment of
goodwill |
|
(33.8) |
(551.6) |
|
(33.8) |
(551.6) |
Impairment of other
non-current assets |
|
— |
(63.5) |
|
— |
(63.5) |
Impairment of Life
& Pensions assets |
|
— |
(61.2) |
|
— |
(61.2) |
Impairment of loans
and investments |
|
(1.6) |
(9.0) |
|
(1.6) |
(9.0) |
Litigation and
claims |
|
1.8 |
(30.0) |
|
1.8 |
(30.0) |
GMP and retirement age
equalisation |
|
(5.4) |
— |
|
(5.4) |
— |
Net finance costs |
|
— |
— |
|
(18.8) |
2.1 |
Contingent consideration movements
(and acquisition costs in 2017) |
|
5.0 |
0.8 |
|
5.0 |
0.8 |
Business exit –
trading |
|
16.8 |
16.8 |
|
16.8 |
16.7 |
Business exit –
non-trading expenses |
|
(29.7) |
(13.7) |
|
(29.7) |
(13.7) |
Business exit –
(gain)/loss on disposals |
|
— |
— |
|
309.7 |
(30.6) |
Significant
restructuring |
|
(110.0) |
(17.9) |
|
(110.0) |
(17.9) |
Reported |
|
34.9 |
(420.1) |
|
272.6 |
(513.1) |
Reported operating profit for the year was £34.9m (2017: loss
£420.1m). Further detail of the specific items charged in arriving
at reported operating profit for 2018 is provided in the notes to
the financial statements.
The Group’s policy is to disclose significant restructuring
separately so users of the financial statements can more clearly
understand the financial performance of the business. As announced
in 2018, the Board has launched a multi-year transformation plan to
support the objectives of simplifying and strengthening Capita. The
plan includes restructuring, property rationalisation, procurement
centralisation, finance transformation and operational excellence.
Activities are designed to improve the cost competitiveness of the
Group and secure Capita’s position in the markets it serves.
In prior years, the Board disclosed profit before ‘significant
new contracts and restructuring’. This altered the previous
presentation of significant restructuring. We have further
simplified our reporting and now exclude significant restructuring
costs from adjusted operating profit1. The Board
recognises that this reflects a change in presentation but, given
the critical nature of the multi-year transformation plan,
concluded that this new presentation met the objectives of
simplifying the Group’s structure. The Board also considered other
items that impact the reported results and the consolidated
financial statements that have a material impact on in-year
performance. This policy will remain under review by the Audit and
Risk Committee and the costs will be reported over the life of the
plan. The costs incurred in 2018 totalled £110.0m. An update will
be provided at the next reporting period at 30 June 2019.
The impairment and amortisation of acquired intangibles,
including goodwill, amounted to £177.3m (2017: £689.9m). The
amortisation of acquired intangibles, and any impairment charges,
are reported separately, due to the size of the annual charges and
because the performance of the acquired businesses is assessed
through the adjusted operating profit1 which, for
internal purposes, excludes any amounts associated with the
acquired intangible assets. During the year, impairment charges
were recorded in relation to businesses of £95.5m (2017: £565.6m).
As noted in divisional performance, the local government market for
large BPO contracts is declining, with a significant drop-off in
the number and size of opportunities coming to market and existing
clients choosing to end contracts early and take services back
in-house. These events and circumstances led to the recognition of
the goodwill impairment charge of £33.8m.
The Board has considered the appropriate guidance and FRC
thematic review on alternative performance measures and concluded
that it is appropriate to exclude the above items in arriving at
adjusted profit before tax1.
Finance costs
The adjusted interest charge1 in 2018, excluding the
fair value movement on mark-to-market fixed rate swaps, was £53.2m
(2017: £64.4m), reflecting the benefit from the repayment of debt
following the rights issue and disposals. Interest cover was 8.2
times for the year (2017: 8.6 times).
Profit before tax
Adjusted profit before tax1 decreased by 26% to
£282.1m (2017: £383.1m). Reported profit before tax increased by
153% to £272.6m (2017: loss £513.1m). Both reported and adjusted
profit1 in 2017 were impacted by significant
impairment.
Discontinued operations
The disposal of the Capita Asset Services businesses in 2017 was
treated as a discontinued operation as stipulated by IFRS 5. The
profit on the disposal of these businesses was £445.4m. This profit
is specific to the disposed businesses and is therefore excluded
from both the adjusted1 and reported results of the
continuing operations. Adjustments in 2018 to provisions related to
this disposal are also disclosed as discontinued.
Taxation
The income tax charge of £27.4m on adjusted profit1
resulted in an adjusted tax rate of 9.7% (2017: income tax charge
of £65.8m and adjusted tax rate 17.2%). This is a reduction
year-on-year as a result of deferred tax credits arising from a
re-assessment of the recognition of deferred tax assets and
true-ups of positions to filed tax returns, together with an
unremitted earnings charge. It is expected that the adjusted tax
rate will return to a level closer to the UK tax rate of 19% in
2019.
The income tax credit of £0.9m on reported profit resulted in a
tax rate of (0.3%) (2017: income tax credit of £14.0m and tax rate
(2.7)%. The reported tax rate will generally vary from the adjusted
tax rate year-on-year due to the items excluded from adjusted
profit1 in a period, for example non-taxable
profits/losses on disposals or non-deductible impairment of certain
acquired intangible assets.
Capita has an open and positive working relationship with HMRC,
has a designated customer compliance manager, and is committed to
prompt disclosure and transparency in all dealings with HMRC and
overseas tax authorities. The Group does not have a complex tax
structure, nor does it pursue aggressive tax avoidance activities.
The Group has a low-risk rating from HMRC. The Group has operations
in a number of countries outside the UK. All Capita operations in
non-UK jurisdictions are trading operations and pay the appropriate
local taxes on these activities. Further detail, regarding the tax
strategy, can be found on the Policies and Principles area of the
Capita website (capita.com/about-us/policies-and-principles).
In total, Capita contributed £164.3m (2016: £204.8m) in taxes
from its UK operations in the year. This consisted of a net refund
of £37.5m (2017: £12.7m) of UK corporation tax; £16.0m (2017:
£21.4m) in irrecoverable VAT payments; £143.1m (2017: £155.5m) in
employer NIC; and £42.7m (2017: £40.6m) in other levies including
business rates, import duties, the apprenticeship levy and
environmental taxes. Additionally, the Group collected and remitted
to the UK Government £360.5m (2017: £409.9m) of VAT and £333.3m
(2017: £367.7m) of Capita employee PAYE and NIC. Capita entities in
overseas jurisdictions paid £4.6m (2017: £6.4m) of tax on local
profits.
Earnings per share
Adjusted basic earnings per share1 for continuing
operations decreased by 42% to 16.37p (2017: 27.99p) as a result of
the performance explained above.
The reported basic earnings per share for continuing operations
was 17.99p (2017: loss 48.82p).
Dividend
The Board is not recommending the payment of a final dividend
(2017: £nil). However, the Board recognises the importance of
regular dividend payments to investors in forming part of their
total shareholder return and will consider the payment of dividends
when the Group is generating sufficient sustainable free cash
flow.
Cash flow
Adjusted free cash flow2 from continuing operations
was an outflow of £82.5m (2017: inflow £75.4m). The Group has
represented and restated its 2017 cash flow statement - refer to
note 13 for details.
The Group’s free cash flow was affected by the aforementioned
decline in profit and a £372.4m working capital outflow from
continuing operations. The change in working capital reflected the
final elimination of period-end cash management activity, having
historically optimised the working capital position at the end of
reporting periods, and a £110m outflow from the phasing-out of
non-recourse trade receivables financing. Deferred income declined
due to limited new large contract wins, termination of contracts
and a change in mix of licence sales in our Software division. Net
capital expenditure on continuing operations was £139.9m in 2018
(2017: £110.2m), mainly attributable to an increase of investments
in systems and infrastructure.
Adjusted operating
profit to adjusted free cash flow2 |
2018
£m |
2017
£m |
Adjusted operating
profit1 |
335.3 |
447.5 |
Add back:
Depreciation |
59.1 |
56.4 |
Add back: Amortisation
of intangible assets |
27.9 |
15.4 |
Add back: Impairment
of property plant and equipment |
6.1 |
— |
Adjusted
EBITDA |
428.4 |
519.3 |
Working
capital: |
(372.4) |
(263.2) |
Non-recourse
receivables financing cleared |
(110.0) |
(23.6) |
Full normalisation of
period-end cash management |
(126.3) |
(85.0) |
Deferred income |
(243.4) |
(75.2) |
Accrued income |
24.8 |
(52.2) |
Other movements in
working capital |
82.5 |
(27.2) |
Interest |
(39.0) |
(54.2) |
Taxation |
26.6 |
9.5 |
Capital
expenditure |
(139.9) |
(110.2) |
Provision movements
and non-cash items |
13.8 |
(25.8) |
Adjusted free cash
flow2 |
(82.5) |
75.4 |
We continue to expect to deliver at least £200m of sustainable
free cash flow in 2020, before exceptional and restructuring
charges, and the pension deficit recovery payments set out
below.
.
Adjusted to
reported free cash flow |
2018
£m |
2017
£m |
Adjusted |
(82.5) |
75.4 |
Pension deficit
contributions |
(46.9) |
— |
Significant
restructuring |
(100.8) |
(45.0) |
Business exits |
(6.6) |
19.5 |
Other |
(23.7) |
16.7 |
Reported |
(260.5) |
66.6 |
Reported free cash flow was an outflow of £260.5m (2017: inflow
£66.6m). This reflected spend in relation to known commitments,
including the Connaught settlement, the separation of Capita Asset
Services, pension contributions (which the Directors consider to be
debt like in nature), restructuring costs, professional fees,
contingent and deferred consideration, litigation and other
items.
Net debt
Net debt at 31 December 2018 was
£466.1m (2017: £1,117.0m), reflecting the completion of the rights
issue and the receipt of the proceeds from the disposal of Supplier
Assessment Services, including Constructionline, and ParkingEye,
which were partially offset by the free cash outflow.
At 31 December 2018, the Group had
£1,108.0m of private placement notes which mature over the period
up to 2027. In addition, the Group has £100.0m of bank debt which
matures in 2019, and an undrawn £600m revolving credit facility of
which £81m matures in August 2020 and
£519m in August 2021.
The Board’s view is that the appropriate leverage ratio for
Capita over the medium term should be between 1.0 and 2.0 times
adjusted net debt to adjusted EBITDA1 (prior to the
adoption of IFRS 16). At 31 December
2018, the Group’s adjusted net debt to adjusted
EBITDA1 covenant ratio was 1.2 times (2017: 2.2 times)
and interest cover1 was 8.2 times (2017: 8.6 times).
At each reporting date, the calculation of the Group’s debt
covenants is assessed, both for that period and subsequent ones.
These covenants are calculated based on the adjusted performance of
the Group, in that they exclude exceptional items. The Group has
been consistent with previous years in its treatments of these
items.
Capital management
The Group’s policy is to hold cash and undrawn committed
facilities at a level sufficient to fund the Group’s operations and
its medium-term plans. The Group holds cash and undrawn committed
facilities to enable the Group to manage its liquidity risk. At
31 December 2018, the Group held cash
and cash equivalents net of overdrafts of £642.7m and had available
to it a committed Revolving Credit Facility of £600m.
The Group agreed comprehensive amendments with the holders of
its US private placement notes, euro fixed rate bearer notes and
the Schuldschein loan to address certain issues which arose from
the early adoption of IFRS 15 and the Group’s strategy of disposal
of certain non-core businesses. The amendments established a
robust framework supporting the new corporate strategy.
As at 31 December 2018, the Group
has future minimum rental payments under its lease arrangements of
£736.0m.
Pension
In November, the Group announced that it had agreed a deficit
recovery plan with the Trustees of the Capita Pension and Life
Assurance Scheme (the ‘Scheme’).
This pension deficit recovery plan is in line with the
commitment made by the Group in January
2018 to reduce the deficit over the medium term as a
priority. The actuarial deficit at 31 March
2017, the date of the last triennial valuation, was £185m,
before the impact of the recent High Court ruling on Guaranteed
Minimum Pension equalisation.
The agreed deficit recovery plan, with payments totalling £176m,
aligns with the Group’s transformation plan, reflects the higher
than expected proceeds the Group received in 2018 from its disposal
programme, and incorporates steps to continue to lower the level of
investment risk in the Scheme, benefiting the Scheme and the
Group.
The expected pension deficit recovery plan payment schedule
is:
Expected pension deficit repayment schedule |
2018 |
2019 |
2020 |
2021 |
Total |
£42m |
£71m |
£59m |
£4m |
£176m |
The current deficit is supported by an asset-backed funding
arrangement of c.£70.0m, the value of which is not included in the
IAS 19 deficit of £219.0m at 31 December
2018 (31 December 2017:
£406.8m). In addition, further contributions totalling £21.5m were
paid in January 2018, comprising
£17.0m following the disposal of Capita Asset Services, and £4.5m
following closure of the Scheme in 2017 to future accrual for the
majority of members of the Scheme.
IFRS 16 Leases
IFRS 16 was effective for the Group from 1 January 2019 and replaced IAS 17 Leases. The
standard will have a material impact for the Group as it introduces
a single lessee accounting model and requires the recognition of
assets and liabilities for all leases. Rental costs currently
recognised in operating profit will be replaced by depreciation of
the assets and net finance costs on the liability. The total cash
outflow for lease payments will not change. However, the payments
related to the principal liability will be presented as cash
outflows from financing activities, as opposed to the current
treatment as cash outflow from operating activities.
At 31 December 2018, the Group
held a significant number of operating leases for which the future
minimum lease payments amount to £736.0m On adoption of IFRS 16,
the expected effect on the balance sheet is the recognition of an
asset in the range of £579m to £591m, a liability in the range of
£640m to £650m, and an increase in retained deficit in the range of
£23m to £25m. The expected effect on the income statement for 2019
is an improvement in EBITDA of £130m to £135m, an improvement in
operating profit of £19m to £21m as rental payments are replaced by
a lower depreciation charge, and an increase in finance costs of
£28m to £30m, resulting in a reduction in profit of £8m to
£10m.
The above changes are expected to increase our leverage ratio by
0.6 times. However, the impact on our adjusted net debt to adjusted
EBITDA1 covenant ratio is expected to be neutral to
positive as the Group covenants are on frozen GAAP, with the
exception of the US private placement notes. The US private
placement notes covenant test includes the income statement impact
of IFRS 16, but not the balance sheet.
Due to the Group transformation plan, which includes a
consolidation of Capita’s properties, the Group’s lease portfolio
is expected to materially change over the next few years. Any
changes to the lease portfolio will be accounted for when
transacted. The costs arising from the property rationalisation
programme will be excluded from adjusted1 profit in line
with the current Group policy.
The Group will continue to implement and refine procedures and
processes to apply the new requirements of IFRS16. As a result of
this ongoing work, it is possible that there may be some changes to
the adoption impact outlined above, before the 30 June 2019 results are issued. However, at this
time these are not expected to be material.
1 Adjusted. Refer to appendix for
calculation of alternative performance measures
2 Refer to note 13 of the consolidated
financial statements for details.
Financial outlook
Capita is entering the second year of a major transformation and
the successful delivery of this programme is critical to the future
performance of the Group. We expect adjusted net finance costs to
be in the region of £40m and adjusted profit before tax to be
between £265m and £295m in 2019. We expect our headline net debt to
EBITDA ratio to be in the top half of our stated range of 1.0 times
to 2.0 times before adoption of IFRS 16.
Our 2020 targets of £175m initial cost savings, double-digit
adjusted1 EBIT margins and at least £200m of sustainable
annual free cash flow, before exceptional and restructuring charges
and additional pension contributions, remain unchanged.
Forward looking statements
This full-year results statement is prepared for and addressed
only to the Company's shareholders as a whole and to no other
person. The Company, its Directors, employees, agents and advisers
accept and assume no liability to any person in respect of this
trading update save as would arise under English law. Statements
contained in this trading update are based on the knowledge and
information available to Capita’s Directors at the date it was
prepared and therefore facts stated and views expressed may change
after that date.
This document and any materials distributed in connection with
it may include forward-looking statements, beliefs, opinions or
statements concerning risks and uncertainties, including statements
with respect to Capita’s business, financial condition and results
of operations. Those statements and statements which contain the
words "anticipate", "believe", "intend", "estimate", "expect" and
words of similar meaning, reflect Capita’s Directors' beliefs and
expectations and involve risk and uncertainty because they relate
to events and depend on circumstances that will occur in the future
and which may cause results and developments to differ materially
from those expressed or implied by those statements and
forecasts.
No representation is made that any of those statements or
forecasts will come to pass or that any forecast results will be
achieved. You are cautioned not to place any reliance on such
statements or forecasts. Those forward-looking and other statements
speak only as at the date of this trading update. Capita undertakes
no obligation to release any update of, or revisions to, any
forward-looking statements, opinions (which are subject to change
without notice) or any other information or statement contained in
this trading update. Furthermore, past performance cannot be relied
on as a guide to future performance.
No statement in this document is intended as a profit forecast
or a profit estimate and no statement in this document should be
interpreted to mean that earnings per Capita share for the current
or future financial years would necessarily match or exceed the
historical published earnings per Capita share.
Nothing in this document is intended to constitute an invitation
or inducement to engage in investment activity. This document does
not constitute or form part of any offer for sale or subscription
of, or any solicitation of any offer to purchase or subscribe for,
any securities nor shall it or any part of it nor the fact of its
distribution form the basis of, or be relied on in connection with,
any contract, commitment or investment decision in relation
thereto. This document does not constitute a recommendation
regarding any securities.
Consolidated income
statement |
|
|
|
for the year ended 31
December 2018 |
|
|
|
|
|
2018 |
2017 |
|
Notes |
Total
reported
£m |
Total
reported
£m |
Continuing
operations: |
|
|
|
Revenue |
|
3,918.4 |
4,234.6 |
Cost of sales |
|
(2,951.4) |
(3,182.0) |
Gross profit |
|
967.0 |
1,052.6 |
Administrative
expenses |
1,2 |
(932.1) |
(1,472.7) |
Operating
profit/(loss) |
1,2 |
34.9 |
(420.1) |
Net finance costs |
4 |
(72.0) |
(62.4) |
Gain/(loss) on
business disposal |
2 |
309.7 |
(30.6) |
Profit/(loss)
before tax |
1,2 |
272.6 |
(513.1) |
Income tax
credit/(expense) |
|
0.9 |
(14.0) |
Profit/(loss) for
the year from continuing operations |
|
273.5 |
(527.1) |
Discontinued
operations: |
|
|
|
Profit for the
year |
|
5.6 |
416.4 |
Total profit/(loss)
for the year |
|
279.1 |
(110.7) |
Attributable
to: |
|
|
|
Owners of the
Company |
|
269.0 |
(117.1) |
Non-controlling
interests |
|
10.1 |
6.4 |
|
|
279.1 |
(110.7) |
Earnings/(loss) per
share |
5 |
|
|
Continuing: |
|
|
|
– basic |
|
17.99p |
(48.82)p |
– diluted |
|
17.77p |
(48.82)p |
Total operations: |
|
|
|
– basic |
|
18.37p |
(10.72)p |
– diluted |
|
18.15p |
(10.72)p |
|
|
|
|
Adjusted operating
profit |
1 |
335.3 |
447.5 |
Adjusted profit before
tax |
1 |
282.1 |
383.1 |
Adjusted earnings per
share |
5 |
16.37p |
27.99p |
Adjusted and diluted
earnings per share |
5 |
16.17p |
27.99p |
Consolidated statement of comprehensive income |
for the year ended 31
December 2018 |
|
|
|
|
|
|
|
|
2018 |
|
2017 |
|
|
£m |
£m |
£m |
£m |
Profit/(loss) for
the year |
|
|
279.1 |
|
(110.7) |
Other comprehensive
income/(expense): |
|
|
|
|
|
Items that will not
be reclassified subsequently to profit or loss |
|
|
|
|
|
Actuarial gain/(loss)
on defined benefit pension schemes |
|
134.9 |
|
(51.4) |
|
Income tax effect |
|
(22.9) |
|
8.8 |
|
|
|
|
112.0 |
|
(42.6) |
|
|
|
112.0 |
|
(42.6) |
Items that will or
may be reclassified subsequently to profit or loss |
|
|
|
|
|
Exchange differences
on translation of foreign operations |
|
|
2.0 |
|
(4.6) |
Net investment hedge
of foreign operations |
|
— |
|
10.4 |
|
Income tax effect |
|
— |
|
— |
|
|
|
|
— |
|
10.4 |
Gain on cash flow
hedges |
|
2.0 |
|
2.0 |
|
Reclassification
adjustments for (income)/expenses included in the income
statement |
|
(2.5) |
|
0.3 |
|
Income tax effect |
|
0.1 |
|
(0.4) |
|
|
|
|
(0.4) |
|
1.9 |
|
|
|
1.6 |
|
7.7 |
Other comprehensive
income/(expense) for the year net of tax |
|
|
113.6 |
|
(34.9) |
Total comprehensive
income/(expense) for the year net of tax |
|
|
392.7 |
|
(145.6) |
Attributable
to: |
|
|
|
|
|
Owners of the
Company |
|
|
382.6 |
|
(152.0) |
Non-controlling
interests |
|
|
10.1 |
|
6.4 |
|
|
|
392.7 |
|
(145.6) |
Consolidated
balance sheet |
|
|
|
As at 31 December
2018 |
|
|
|
|
|
|
|
|
Notes |
2018
£m |
2017
£m |
Non-current
assets |
|
|
|
Property, plant and
equipment |
7 |
213.6 |
219.3 |
Intangible assets |
8,9 |
1,587.7 |
1,812.1 |
Contract fulfilment
assets |
11 |
264.2 |
252.5 |
Financial assets |
|
109.1 |
132.3 |
Deferred taxation |
|
144.6 |
159.3 |
Trade and other
receivables |
|
26.2 |
28.0 |
|
|
2,345.4 |
2,603.5 |
Current
assets |
|
|
|
Financial assets |
|
18.2 |
88.7 |
Disposal group assets
held for sale
|
|
— |
5.9 |
Trade and other
receivables |
|
771.7 |
775.8 |
Cash |
|
957.5 |
921.7 |
Income tax
receivable |
|
0.9 |
25.6 |
|
|
1,748.3 |
1,817.7 |
Total
assets |
|
4,093.7 |
4,421.2 |
Current
liabilities |
|
|
|
Trade and other
payables |
|
668.7 |
755.2 |
Deferred income |
11 |
980.3 |
1,201.2 |
Overdrafts |
|
314.8 |
443.3 |
Financial
liabilities |
|
303.1 |
265.6 |
Disposal group
liabilities held for sale
|
|
— |
1.4 |
Provisions |
12 |
96.8 |
164.1 |
|
|
2,363.7 |
2,830.8 |
Non-current
liabilities |
|
|
|
Trade and other
payables |
|
11.6 |
17.0 |
Deferred income |
11 |
277.3 |
314.0 |
Financial
liabilities |
|
1,084.2 |
1,721.7 |
Deferred taxation |
|
15.2 |
12.2 |
Provisions |
12 |
19.4 |
48.5 |
Employee benefits |
|
219.0 |
406.8 |
|
|
1,626.7 |
2,520.2 |
Total
liabilities |
|
3,990.4 |
5,351.0 |
Net
assets/(liabilities) |
|
103.3 |
(929.8) |
Capital and
reserves |
|
|
|
Issued share
capital |
|
34.5 |
13.8 |
Share premium |
|
1,143.3 |
501.3 |
Employee benefit trust
and treasury shares |
|
(11.2) |
(0.2) |
Capital redemption
reserve |
|
1.8 |
1.8 |
Foreign currency
translation reserve |
|
1.6 |
(0.4) |
Cash flow hedging
reserve |
|
1.5 |
1.9 |
Retained deficit |
|
(1,135.3) |
(1,517.2) |
Surplus/(deficit)
attributable to owners of the Company |
|
36.2 |
(999.0) |
Non-controlling
interests |
|
67.1 |
69.2 |
Total
equity |
|
103.3 |
(929.8) |
Consolidated statement of changes to equity |
for the year ended 31
December 2018 |
|
|
|
|
|
|
|
|
|
|
|
Share
capital
£m |
Share
premium
£m |
Employee
benefit
trust and
treasury
shares
£m |
Capital
redemption
reserve
£m |
Retained
earnings/
(deficit)
£m |
Foreign
currency
translation
reserve
£m |
Cash
flow
hedging
reserve
£m |
Total
£m |
Non-
controlling
interests
£m |
Total
equity/
(deficit)
£m |
At 1 January 2017 |
13.8 |
501.3 |
(0.2) |
1.8 |
(1,131.8) |
(6.2) |
— |
(621.3) |
68.4 |
(552.9) |
Profit/(loss) for the
year |
— |
— |
— |
— |
(117.1) |
— |
— |
(117.1) |
6.4 |
(110.7) |
Other
comprehensive
(expense)/income |
— |
— |
— |
— |
(42.6) |
5.8 |
1.9 |
(34.9) |
— |
(34.9) |
Total comprehensive
(expense)/income for the year |
— |
— |
— |
— |
(159.7) |
5.8 |
1.9 |
(152.0) |
6.4 |
(145.6) |
Share based
payment |
— |
— |
— |
— |
2.9 |
— |
— |
2.9 |
— |
2.9 |
Equity dividends
paid |
— |
— |
— |
— |
(211.0) |
— |
— |
(211.0) |
(5.6) |
(216.6) |
Investment in
non-controlling interest |
— |
— |
— |
— |
(11.1) |
— |
— |
(11.1) |
— |
(11.1) |
Movement in put
options held by non-controlling interests |
— |
— |
— |
— |
(6.5) |
— |
— |
(6.5) |
— |
(6.5) |
At 1 January 2018 |
13.8 |
501.3 |
(0.2) |
1.8 |
(1,517.2) |
(0.4) |
1.9 |
(999.0) |
69.2 |
(929.8) |
Profit for the
year |
— |
— |
— |
— |
269.0 |
— |
— |
269.0 |
10.1 |
279.1 |
Other
comprehensive
income/(expense) |
— |
— |
— |
— |
112.0 |
2.0 |
(0.4) |
113.6 |
— |
113.6 |
Total comprehensive
income/(expense) for the year |
— |
— |
— |
— |
381.0 |
2.0 |
(0.4) |
382.6 |
10.1 |
392.7 |
Share based
payment |
— |
— |
— |
— |
3.4 |
— |
— |
3.4 |
— |
3.4 |
Deferred income tax
relating to share based payments |
— |
— |
— |
— |
0.4 |
— |
— |
0.4 |
— |
0.4 |
Shares
issued/(purchased) |
20.7 |
642.0 |
(11.0) |
— |
— |
— |
— |
651.7 |
— |
651.7 |
Equity dividends
paid |
— |
— |
— |
— |
— |
— |
— |
— |
(12.2) |
(12.2) |
Movement in put
options held by non-controlling interests |
— |
— |
— |
— |
(2.9) |
— |
— |
(2.9) |
— |
(2.9) |
As at 31 December
2018 |
34.5 |
1,143.3 |
(11.2) |
1.8 |
(1,135.3) |
1.6 |
1.5 |
36.2 |
67.1 |
103.3 |
Share capital – The balance classified as share capital
is the nominal proceeds on issue of the Company’s equity share
capital, comprising 2 1/15p ordinary shares.
Share premium – The amount paid to the Company by
shareholders, in cash or other consideration, over and above the
nominal value of shares issued to them.
Employee benefit trust and treasury shares – Shares that
have been bought back by the Company which are available for
retirement or resale; shares held in the employee benefit trust
have no voting rights and do not have entitlement to a
dividend.
Capital redemption reserve – The Company can redeem
shares by repaying the market value to the shareholder, whereupon
the shares are cancelled. Redemption must be from distributable
profits. The Capital redemption reserve represents the nominal
value of the shares redeemed.
Foreign currency translation reserve – Gains or losses
resulting from the process of expressing amounts denominated or
measured in one currency in terms of another currency by use of the
exchange rate between the two currencies. This process is required
to consolidate the financial statements of foreign affiliates into
the total Group financial statements and to recognise the
conversion of foreign currency or the settlement of a receivable or
payable denominated in foreign currency at a rate different from
that at which the item is recorded.
Cash flow hedging reserve – This reserve records the
portion of the gain or loss on a hedging instrument in a cash flow
hedge that is determined to be an effective hedge.
Retained earnings – Net profits kept to accumulate in the
Group after dividends are paid and retained in the business as
working capital.
Non-controlling interests (NCI) – This represents the
equity in a subsidiary that is not attributable directly or
indirectly to the parent company.
Consolidated cash flow statement |
for the year ended 31
December 2018 |
|
|
|
|
|
|
|
Notes |
2018 |
Restated1 2017 |
£m |
£m |
Cash generated from
operations |
|
(75.7) |
225.4 |
Cash generated
from/(used by) discontinued operations |
|
(99.2) |
6.7 |
Income tax
received |
|
25.3 |
9.5 |
Net interest paid |
|
(52.5) |
(54.2) |
Net cash
inflow/(outflow) from operating activities |
|
(202.1) |
187.4 |
Cash flows from
investing activities |
|
|
|
Purchase of property,
plant and equipment |
7 |
(89.4) |
(66.2) |
Purchase of intangible
assets |
8 |
(70.1) |
(71.0) |
Proceeds from sale of
property, plant and equipment/intangible assets |
7,8 |
1.9 |
23.1 |
Acquisition of
subsidiary undertakings and businesses |
|
— |
(24.5) |
Cash acquired with
subsidiary undertakings |
|
— |
4.5 |
Deferred consideration
received |
|
5.2 |
11.8 |
Cancellation of put
options |
|
(6.8) |
— |
Deferred consideration
paid |
|
(11.1) |
(5.8) |
Contingent
consideration paid |
|
(19.8) |
(11.7) |
Purchase of financial
assets |
|
(0.9) |
(0.7) |
Net proceeds on
disposal of subsidiary undertakings |
2 |
407.8 |
17.0 |
Cash disposed of with
subsidiary undertakings |
2 |
(11.2) |
(0.1) |
Cash flows from
investing activities used by discontinued operations |
|
— |
825.2 |
Net cash
inflow/(outflow) from investing activities |
|
205.6 |
701.6 |
Cash flows from
financing activities |
|
|
|
External dividends
paid |
6 |
— |
(211.0) |
Dividends paid to
non-controlling interest |
6 |
(12.2) |
(5.6) |
Purchase of
shares |
|
(11.0) |
— |
Capital element of
finance lease rental payments |
|
(0.2) |
(2.1) |
Issue of share capital
net of issue costs |
|
662.7 |
— |
Repayment of loan
notes |
|
(577.2) |
(124.1) |
Proceeds/(Repayment)
of fixed rate swaps |
|
103.6 |
(84.6) |
Repayment of term
debt |
|
— |
(550.0) |
Financing arrangement
costs |
|
(3.7) |
(2.1) |
Net cash
inflow/(outflow) from financing activities |
|
162.0 |
(979.5) |
Increase in cash
and cash equivalents |
|
165.5 |
(90.5) |
Cash and cash
equivalents at the beginning of the period |
|
478.4 |
565.8 |
Movement in exchange
rates |
|
(1.2) |
3.1 |
Cash and cash
equivalents as at 31 December |
|
642.7 |
478.4 |
Cash and cash
equivalents comprise: |
|
|
|
Cash at bank and in
hand |
|
957.5 |
921.7 |
Overdrafts |
|
(314.8) |
(443.3) |
Total |
|
642.7 |
478.4 |
|
|
|
|
Adjusted cash
generated from operations |
13 |
69.8 |
230.3 |
Adjusted free cash
flows |
13 |
(82.5) |
75.4 |
1 The Group has represented and
restated its cash flow statement. Refer to note 13 for
details.
Notes to the financial statements
Corporate information
The consolidated financial statements of Capita plc for the year
ended 31 December 2018 were
authorised for issue in accordance with a resolution of the
Directors on 13 March 2019. Capita
plc is a public limited company incorporated in England and Wales whose shares are publicly traded.
Basis of preparation
The consolidated financial statements have been prepared under
IFRS where certain financial instruments and the pension assets
have been measured at fair value. The carrying value of recognised
assets and liabilities that are hedged are adjusted to record
changes in the fair values attributable to the risks that are being
hedged. The consolidated financial statements are presented in
pounds sterling and all values are rounded to the nearest tenth of
a million (£m) except when otherwise indicated.
In determining the appropriate basis of preparation of the
financial statements for the year ending 31
December 2018, the Directors are required to consider
whether the Group can continue in operational existence for the
foreseeable future. Having taken decisive action to strengthen the
balance sheet through the raising of new equity and the disposal of
non-core businesses, and undertaking a rigorous assessment of the
financial forecast, the Board have concluded that the Group will
continue to have adequate financial resources to realise their
assets and discharge its liabilities as they fall due.
Accordingly, the Directors have formed the judgement that it is
appropriate to prepare these consolidated financial statements on
the going concern basis. Therefore, the consolidated
financial statements do not include any adjustments which would be
required if the going concern basis of preparation is
inappropriate.
The Group’s committed revolving credit facility, bank term loan
facilities and private placement loan notes are subject to
compliance with covenant requirements including maximum ratios of
adjusted net debt to adjusted EBITDA. The Group’s covenanted
maximum ratio is 3.0 times or to 3.5 times depending on the debt
instrument in question. They are tested semi-annually.
The Group has net debt of £466.1m at 31
December 2018 (2017: £1,117.0m) and adjusted net debt
of £494.7m at 31 December 2018 (2017:
£1,153.0m). Net debt is reported in note 13 - additional cash
flow information. Adjusted net debt is used to calculate the
gearing ratio adjusted net debt to adjusted EBITDA (refer to
alternative performance measures in the appendix to this
statement).
The Group’s calculation of adjusted net debt to adjusted EBITDA
at 31 December 2018 is 1.2 times and
is compliant with the relevant ratios.
Changes to non statutory reporting
The Group has simplified its non-statutory reporting measures to
improve transparency and make it easier for the readers of its
annual report and accounts to understand its financial performance.
Historically, the Group presented underlying and non-underlying
results (comprising business exits and specific items) on the face
of the income statement. In the notes, underlying results before
significant new contracts and restructuring was disclosed. The
revised presentation has only the reported results on the face of
the income statement, with a footnote detailing adjusted profit and
earnings per share, and a reference to a note to the consolidated
financial statements (see note 1) providing a reconciliation
between reported and adjusted profit. The presentation of the cash
flow statement and additional cash flow information in note 13 have
also been revised to show the same split.
Adjusted profit
IAS 1 permits an entity to present additional information for
specific items to enable users to better assess the entity’s
financial performance. In practice these items are commonly
referred to as ‘specific’ or ‘non-underlying’ items although such
terminology is not defined in IFRS and accordingly there is a level
of judgement required in determining what items to separately
identify. The Board has adopted a policy to separately disclose
those items that it considers are outside the underlying operating
results for the particular year under review and against which the
Group’s performance is assessed.
Those items which relate to the ordinary course of the Group’s
operating activities remain within adjusted profit. The following
items are excluded from adjusted profit: acquired intangible
amortisation, impairment of goodwill and acquired intangibles,
acquisition contingent consideration movements, the financial
impact of business exits or businesses in the process of being
exited, acquisition expenses, movements in the mark-to-market
valuation of certain financial instruments, the impact of
significant new contracts and restructuring (see below), and other
specific non-recurring items in the income statement.
Under IFRS 15, contracts potentially recognise lower profits or
losses in their early years where there are significant upfront
restructuring costs or higher operating costs prior to
transformation. As such, following the adoption of IFRS 15, the
Board adopted a policy to separately disclose the operating
profit/loss from significant new contract wins in-period and
significant restructuring, in order for users of the financial
statements to obtain a proper understanding of the financial
information and the performance of the underlying business. The
impact of these significant new contracts and restructuring are
excluded in arriving at adjusted profit. A significant new contract
is assessed as that which is significant and either entirely new to
the Group, or a significant amendment to the scope and scale of an
existing contract. The Group continually assesses the resourcing
levels, both at a divisional level and also in relation to the
management and delivery of individual contracts. This results in
restructuring in the normal course of business and any such charges
are recorded in adjusted profit. A significant restructuring is
assessed as that above this normal level of restructuring. As
discussed in the strategic report, a major transformation plan has
been launched and costs incurred in support of this, including
external adviser costs, are presented as restructuring charges.
Contract terminations arising in the normal course of business and
which result in the disposal of a contract fulfilment asset and/or
a true-up of revenue recognised, will be included within adjusted
profit, and separately disclosed if considered material.
Except for the disposal of our Capita Asset Services businesses,
none of our 2018 or 2017 business exits or businesses in the
process of being exited meet the definition of ‘discontinued
operations’ as stipulated by IFRS 5, which requires disclosure and
the restatement of comparative information where the relative size
of a disposal or business closure is significant. Accordingly, the
separate presentation described above does not fall within the
requirements of IFRS 5 concerning discontinued operations. The 2017
adjusted comparatives are restated for business exits or businesses
in the process of being exited in 2018 to enable better
comparability.
Significant accounting judgements,
estimates and assumptions
The preparation of financial statements in line with generally
accepted accounting principles requires the Directors to make
judgements and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingencies at the date
of the financial statements and the reported income and expense
during the presented periods. Although these judgements and
assumptions are based on the Directors’ best knowledge of the
amount, events or actions, actual results may differ.
Preliminary announcement
A duly appointed and authorised committee of the Board of
Directors approved the preliminary announcement on 13 March 2019. The financial information set out
above does not constitute the Company’s statutory accounts for the
years ended 31 December 2018 and 2017
but is derived from those accounts. Statutory accounts for 2017
have been delivered to the Registrar of Companies and those for
2018 will be delivered in due course. The auditor has reported on
those accounts. Their report for the accounts of 2018 was (i)
unqualified, (ii) did not include a reference of any matters to
which the auditor drew attention by way of emphasis without
qualifying their report and (iii) did not contain a statement under
section 498(2) or (3) of the Companies Act 2006. Their report for
2017 was (i) unqualified, (ii) contains a material uncertainty in
respect of going concern to which the auditor drew attention by way
of emphasis without modifying their report and (iii) did not
contain a statement under section 498(2) or (3) of the Companies
Act 2006.
1 Adjusted operating profit and
adjusted profit before tax
|
|
|
Operating profit |
|
|
Profit before tax |
|
Notes |
2018
£m |
2017
£m |
|
2018
£m |
2017
£m |
Reported |
|
34.9 |
(420.1) |
|
272.6 |
(513.1) |
Amortisation and
impairment of acquired intangibles |
8 |
143.5 |
138.3 |
|
143.5 |
138.3 |
Impairment of
goodwill |
9 |
33.8 |
551.6 |
|
33.8 |
551.6 |
Impairment of other
non-current assets |
7 |
— |
63.5 |
|
— |
63.5 |
Impairment of Life
& Pensions assets |
7 |
— |
61.2 |
|
— |
61.2 |
Impairment of loans
and investments |
|
1.6 |
9.0 |
|
1.6 |
9.0 |
Litigation and
claims |
|
(1.8) |
30.0 |
|
(1.8) |
30.0 |
GMP and retirement age
equalisation |
|
5.4 |
— |
|
5.4 |
— |
Net finance costs |
4 |
— |
— |
|
18.8 |
(2.1) |
Contingent consideration movements
(and acquisition costs in 2017) |
|
(5.0) |
(0.8) |
|
(5.0) |
(0.8) |
Business exit –
trading |
2 |
(16.8) |
(16.8) |
|
(16.8) |
(16.7) |
Business exit –
non-trading expenses |
2 |
29.7 |
13.7 |
|
29.7 |
13.7 |
Business exit –
(gain)/loss on disposals |
2 |
— |
— |
|
(309.7) |
30.6 |
Significant
restructuring |
|
110.0 |
17.9 |
|
110.0 |
17.9 |
Adjusted |
|
335.3 |
447.5 |
|
282.1 |
383.1 |
Amortisation and impairment of acquired intangible
assets: the Group carries on its balance sheet significant
balances related to acquired intangible assets. The amortisation of
these assets, and any impairment charges, are reported separately
as they distort the in-year trading results, and performance of the
acquired businesses is assessed through the underlying operational
results. In 2018 the Group amortised £86.7m of which £4.9m belongs
to disposed entities and is included in business exit. In addition,
the Group recognised an impairment charge relating to acquired
intangible assets of £61.7m in relation to the Swiss business in
Customer Management.
Impairment of goodwill: the Group carries on its balance
sheet significant balances related to acquired goodwill. Goodwill
is subject to annual impairment testing, and any impairment charges
are reported separately as they distort the in-year trading results
and IFRS does not permit the recognition of any increases in value
of acquisitions, potentially leading to an unbalanced picture being
shown over time. Refer to note 9 for further detail on these
impairments.
Impairment of other non-current assets: as part of its
year-end close process in 2017, Capita undertook a comprehensive
review of its tangible and intangible assets. Following the review,
management took a decision to impair, as at 31 December 2017, a number of assets relating to
specific programmes resulting from changes in client and Capita
strategy in the second half of 2017. These impairments have no
adverse impact on future cash or trading. Non-current assets
amounting to £63.5m (£35.2m property, plant and equipment – see
note 7; £28.3m capitalised software intangible assets – see note 8)
were written off and excluded from adjusted profit as the assets
have no further value to the Group.
Impairment of life and pensions assets: the Group’s
life and pension business developed a platform to support an
existing life and pensions contract, but which could provide
services to multiple clients in the future. In 2017, the Group
identified there was no longer a market for this platform and
accordingly the carrying value of this and associated assets were
written off as at 31 December 2017.
The impact on the financial statements is a non-underlying charge
of £61.2m (£54.7m property, plant and equipment – see note 7; £1.0m
capitalised software intangible assets – see note 8; £5.5m contract
fulfilment asset – see note 10) representing the write-off of the
non-current assets. The charge was excluded from adjusted profit as
the assets had no further value to the Group.
Impairment of loans and investments: the Group fully
impaired an investment in the year, and a historical loan and
investment in the prior year. The charge is reported separately due
to its nature and to be consistent to prior years. In 2018 the
Group impaired £1.6m of investments.
Litigation and claims: the significant litigation
costs provided in 2017 relate to two claims in respect of:
- a contract within the Group’s Real Estate and Infrastructure
business notified to the Group during 2017. The related contract
began in 2007; and
- a contract within the Group’s Employee Benefits business where
more information on the progress of the claim became apparent. The
related contract was delivered from 2009.
The amount provided in respect of these two claims has been
recognised in non-underlying due to their age and significance.
The gain of £1.8m in 2018 arises from a loss of derecognition of
an insurance asset of £3.7m off-set by a release of £5.5m in
respect of the above provisions recognised in 2017. The original
claim to which the asset related was excluded from adjusted profit
due to its nature and size.
GMP and retirement age equalisation: the High Court
issued a judgment in October 2018
which concluded that pension schemes should be amended to equalise
pension benefits for men and women in relation to guaranteed
minimum pension ‘GMP’ benefits. This will impact many pension
schemes including the Group’s defined benefit schemes. The Group is
working with the Trustees and their advisers to understand the
extent to which the judgment crystallises additional liabilities.
For the purpose of these financial statements, we have estimated
that this will increase the reported liability of the pension
schemes by £4.4m and this is reflected as a past service cost in
2018 and thus taken through the income statement. In addition,
there is a past service cost of £1m in relation to the correction
of a historical retirement age equalisation issue for a small group
of members in the main scheme. The amounts provided in respect of
GMP and retirement age equalisation are excluded from adjusted
profit because they relate to past service costs and therefore not
reflective of in-year performance.
Net finance costs: non-underlying net finance costs
includes the movements in the mark to market valuation of certain
financial instruments, and in 2018, the make-whole costs paid to
noteholders on early repayment of principal on the Private
Placement loan notes from the proceeds of the rights issue and
disposals. Refer to note 4 for further details.
Contingent consideration movements and acquisition related
costs: in accordance with IFRS 3, movements in the fair value
of contingent consideration on acquisitions go through the Group
income statement. These are reported separately because performance
of the acquired businesses is assessed through the underlying
operational results and such a charge/credit movement would distort
underlying results. Acquisition-related costs incurred with
acquisitions are not included in the assessment of business
performance which is based on the adjusted results. IFRS requires
certain costs incurred in connection with acquired businesses to be
recorded within the Group income statement. These charges are not
included in the internal assessment of business performance which
as above is based on the underlying operational results. These
charges are therefore separately disclosed as specific items.
Business exits: the trading result of businesses exited,
or in the process of being exited, and the gain or loss on
disposals, are disclosed outside the adjusted results. The 2017
results have been restated for the trading of those businesses
exited, or in the process of being exited, in 2018 to enable
comparability of the adjusted results.
Significant restructuring: in January 2018, the Group announced a multi-year
transformation plan. In the period to 31
December 2018, a charge of £110.0m (2017: £17.9m) was
recognised in relation to the cost of the transformation plan, and
restructuring costs relating to Capita’s previously announced cost
reduction plan. The costs include the following sub-categories:
• Cost to realise cost savings and efficiencies from
the transformation plan (£55m): including significant reductions in
overheads via support function restructuring, and the elimination
of duplicate roles. These costs also include engaging the Group’s
property expertise to rationalise and increase the utilisation of
Capita’s property estate, in metro centres and regionally. As the
Group continues to rationalise the property estate cost associated
with onerous lease commitments and dilapidation liabilities will be
captured and presented as part of the transformation
adjustments.
• Professional fees (£31m): incurred to support the
delivery of the future strategy, redesign of the Group’s operating
model, re-ignite sales growth and increasing the proportion of
centrally controlled spend, consolidating the supplier base and
leveraging the Group’s scale.
• Finance transformation (£6m): improving the
Group’s financial reporting systems, processes and controls,
through increasing standardisation, automation and the quality and
availability of data. The Group is investing in an upgrade of its
financial system and increasing the use of offshoring and shared
services. This programme is titled ‘Smarter Faster Finance’ and all
costs associated with this programme are recorded separately,
excluding any costs capitalised as part of the investment and the
ongoing depreciation and amortisation of such assets.
• Previously announced cost-reduction plan (£18m):
restructuring costs related to the Group’s cost-reduction plan
announced in prior periods, but did not meet the criteria for
provision at the end of 2017.
2 Business exits
Business exits are businesses that have been exited during the
year or are in the process of being disposed of. None of these
business exits meet the definition of ‘discontinued operations’ as
stipulated by IFRS 5, which requires disclosure and comparatives to
be restated where the relative size of a disposal or business
closure is significant, which is normally understood to mean a
reported segment. Accordingly, the separate presentation described
below does not fall within the requirements of IFRS 5 concerning
discontinued operations. However, to enable a like-for-like
comparison of adjusted results, the 2017 comparatives have been
restated to include 2018 business exits.
During the period, the Group disposed of five businesses and
exited one business – Capita Specialist Insurance Solutions, Projen
(which was held for sale as at 31 December
2017), Medicals Direct Group, Supplier Assessment Services
(including Constructionline), ParkingEye and REI Health.
Income
statement impact |
|
Non-trading disposal |
|
Trading
£m |
Cash
£m |
Non-cash
£m |
Total
£m |
Total
£m |
Revenue |
50.8 |
— |
— |
— |
50.8 |
Cost of sales |
(20.2) |
— |
— |
— |
(20.2) |
Gross profit |
30.6 |
— |
— |
— |
30.6 |
Administrative
expenses |
(13.8) |
(1.0) |
(28.7) |
(29.7) |
(43.5) |
Operating
profit/(loss) |
16.8 |
(1.0) |
(28.7) |
(29.7) |
(12.9) |
Net finance costs |
— |
— |
— |
— |
— |
Gain on business
disposal |
— |
367.4 |
(57.7) |
309.7 |
309.7 |
Profit before
tax |
16.8 |
366.4 |
(86.4) |
280.0 |
296.8 |
Taxation |
(3.1) |
(23.4) |
— |
(23.4) |
(26.5) |
Profit after
tax |
13.7 |
343.0 |
(86.4) |
256.6 |
270.3 |
Trading revenue and costs represent the current period trading
performance of those businesses up to the point of being disposed
or exited. The 2017 comparative trading operating profit for the
year ended 31 December 2017 was
£17.8m, representing a full year of trading.
Non-trading administrative expenses comprise £1.0m of closure
costs, £24.3m of goodwill impairment, £4.9m of acquired intangible
amortisation and £0.5m release of provisions.
There are no cumulative income or expenses included in other
comprehensive income relating to the disposal group.
The gain on disposal of £309.7m arises from the disposal of net
assets of £69.0m for £400.7m consideration and costs of disposal of
£22.0m. Cash proceeds of £400.7m net of cash disposed amounted to
£389.5m.
Gain on business
disposal |
Cash
£m |
Non-cash
£m |
Total
£m |
Property, plant and
equipment |
— |
19.9 |
19.9 |
Intangible assets |
— |
12.4 |
12.4 |
Goodwill |
— |
50.9 |
50.9 |
Trade and other
receivables |
— |
8.5 |
8.5 |
Deferred tax
asset |
— |
0.1 |
0.1 |
Trade and other
payables |
— |
(26.8) |
(26.8) |
Deferred income |
— |
(4.6) |
(4.6) |
Income tax
payable |
— |
(1.5) |
(1.5) |
Deferred tax
liability |
— |
(0.9) |
(0.9) |
Provisions |
— |
(0.2) |
(0.2) |
Cash disposed of |
11.2 |
— |
11.2 |
Total net assets
disposed of |
11.2 |
57.8 |
69.0 |
Cash purchase
consideration received |
400.7 |
— |
400.7 |
Costs of disposal –
paid and accrued |
(22.0) |
— |
(22.0) |
Proceeds, less
costs, on disposal |
378.7 |
— |
378.7 |
Gain on business
disposal |
367.5 |
(57.8) |
309.7 |
|
|
|
|
Cash proceeds in
2018 |
Cash
£m |
|
|
Cash purchase
consideration received |
400.7 |
|
|
Settlement of
receivables sold as part of the disposal
|
19.0 |
|
|
Total consideration
received |
419.7 |
|
|
Cost of disposal –
paid in the year |
(11.9) |
|
|
Net proceeds
received in year |
407.8 |
|
|
Business exit cash flows
Business disposed of during 2018 generated operating cash
outflows of £6.6m.
3 Segmental information
The Group’s operations are managed separately according to the
nature of the services provided, with each segment representing a
strategic business division offering a different package of client
outcomes across the markets the Group serves. A description of
the service provision for each segment can be found in the
strategic report on pages 21–33 of the Annual Report 2018.
As announced in the Annual Report 2017, the Group introduced a
new simplified divisional structure in 2018 around five markets:
Software, People Solutions, Customer Management, Government
Services and IT & Networks. Capita has also formed a sixth
division, Specialist Services, which includes those businesses
which either (a) are not within Capita's key growth markets and/or
(b) are at an early phase in their development but may be scaled up
in the future. These businesses are mostly stand-alone operations
and are being managed on a portfolio basis in order to maximise
value. These divisions are supported by a common set of Group
capabilities and functions, and are reported separately as 'Group
trading and central services'.
Comparative information has been restated accordingly. The Board
believes the changes improve accountability and transparency across
the Group.
Before eliminating sales between business units on
consolidation, the Group accounts for sales between business units
as if they were to a third party at market rates.
The tables below present revenue, trading result and certain
asset and liability information for the Group’s business segments
for the years 2018 and 2017. All operational divisions are
continuing and the 2017 segmental information has been restated for
the impact of businesses exited or held for sale in 2018 with total
adjusted revenue reduced by £76.1m and profit before tax reduced by
£17.8m.
Year ended
31 December 2018 |
Notes |
Software
£m |
People Solutions
£m |
Customer Management
£m |
Government Services
£m |
IT
& Networks
£m |
Specialist Services
£m |
Group
trading and central services
£m |
Total
adjusted
£m |
Adjusting items
£m |
Total
reported
£m |
Continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
Long-term
contractual |
|
353.9 |
295.2 |
563.6 |
647.4 |
296.5 |
601.0 |
13.8 |
2,771.4 |
3.2 |
2,774.6 |
Short-term
contractual |
|
34.7 |
38.0 |
228.7 |
4.7 |
55.3 |
201.3 |
24.5 |
587.2 |
47.6 |
634.8 |
Transactional (point
in time) |
|
7.8 |
165.1 |
1.9 |
93.4 |
52.2 |
189.9 |
(1.3) |
509.0 |
— |
509.0 |
Total segment
revenue |
|
396.4 |
498.3 |
794.2 |
745.5 |
404.0 |
992.2 |
37.0 |
3,867.6 |
50.8 |
3,918.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue |
|
447.4 |
649.4 |
904.3 |
758.5 |
636.8 |
1,087.0 |
81.2 |
4,564.6 |
— |
4,564.6 |
Inter-segment
revenue |
|
(51.0) |
(151.1) |
(110.1) |
(13.0) |
(232.8) |
(94.8) |
(44.2) |
(697.0) |
— |
(697.0) |
Total adjusted
segment revenue |
|
396.4 |
498.3 |
794.2 |
745.5 |
404.0 |
992.2 |
37.0 |
3,867.6 |
|
3,867.6 |
Business exits –
trading |
2 |
— |
— |
— |
— |
— |
50.8 |
— |
— |
50.8 |
50.8 |
Total segment
revenue |
|
396.4 |
498.3 |
794.2 |
745.5 |
404.0 |
1,043.0 |
37.0 |
— |
— |
3,918.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
profit |
1 |
112.4 |
40.7 |
39.6 |
35.2 |
45.3 |
139.5 |
(77.4) |
335.3 |
— |
335.3 |
Restructuring |
1 |
(9.3) |
(12.5) |
(10.9) |
(6.3) |
(4.5) |
(15.9) |
(50.6) |
— |
(110.0) |
(110.0) |
Business exits –
trading |
2 |
— |
(0.3) |
0.3 |
— |
— |
16.8 |
— |
— |
16.8 |
16.8 |
Total trading
result |
|
103.1 |
27.9 |
29.0 |
28.9 |
40.8 |
140.4 |
(128.0) |
335.3 |
(93.2) |
242.1 |
Non-trading
items: |
|
|
|
|
|
|
|
|
|
|
|
Business exits –
non-trading |
2 |
|
|
|
|
|
|
|
— |
(29.7) |
(29.7) |
Other adjusting
items |
1 |
|
|
|
|
|
|
|
— |
(177.5) |
(177.5) |
Operating
profit |
|
|
|
|
|
|
|
|
335.3 |
(300.4) |
34.9 |
Net finance costs |
4 |
|
|
|
|
|
|
|
(53.2) |
(18.8) |
(72.0) |
Gain on business
disposal |
2 |
|
|
|
|
|
|
|
— |
309.7 |
309.7 |
Profit before
tax |
|
|
|
|
|
|
|
|
282.1 |
(9.5) |
272.6 |
Income tax
credit/(expense) |
|
|
|
|
|
|
|
|
(27.4) |
28.3 |
0.9 |
Profit for the year
–
continuing operations |
|
|
|
|
|
|
|
|
254.7 |
18.8 |
273.5 |
Profit for the year
–
discontinued operations |
|
|
|
|
|
|
|
|
— |
5.6 |
5.6 |
Profit for the year
– total |
|
|
|
|
|
|
|
|
254.7 |
24.4 |
279.1 |
Year ended
31 December 2017 |
Notes |
Software
£m |
People
Solutions
£m |
Customer
Management
£m |
Government Services
£m |
IT &
Networks
£m |
Specialist Services
£m |
Group
trading and central services
£m |
Total
adjusted
£m |
Adjusting items
£m |
Total
reported
£m |
Continuing
operations |
|
|
|
|
|
|
|
|
|
|
|
Long-term
contractual |
|
361.6 |
295.2 |
582.2 |
752.3 |
278.7 |
632.2 |
22.6 |
2,924.8 |
5.2 |
2,930.0 |
Short-term
contractual |
|
32.6 |
42.7 |
245.9 |
4.1 |
63.6 |
198.9 |
9.1 |
596.9 |
81.6 |
678.5 |
Transactional (point
in time) |
|
7.5 |
182.6 |
0.8 |
105.3 |
73.1 |
191.6 |
9.2 |
570.1 |
56.0 |
626.1 |
Total segment
revenue |
|
401.7 |
520.5 |
828.9 |
861.7 |
415.4 |
1,022.7 |
40.9 |
4,091.8 |
142.8 |
4,234.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Trading revenue |
|
441.7 |
662.4 |
944.1 |
884.9 |
652.4 |
1,119.4 |
97.4 |
4,802.3 |
— |
4,802.3 |
Inter-segment
revenue |
|
(40.0) |
(141.9) |
(115.2) |
(23.2) |
(237.0) |
(96.7) |
(56.5) |
(710.5) |
— |
(710.5) |
Total adjusted segment
revenue |
1 |
401.7 |
520.5 |
828.9 |
861.7 |
415.4 |
1,022.7 |
40.9 |
4,091.8 |
— |
4,091.8 |
Business exits –
trading |
2 |
— |
55.1 |
0.8 |
— |
— |
86.9 |
— |
— |
142.8 |
142.8 |
Total segment
revenue |
|
401.7 |
575.6 |
829.7 |
861.7 |
415.4 |
1,109.6 |
40.9 |
— |
— |
4,234.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating
profit |
1 |
111.7 |
62.7 |
57.8 |
78.7 |
62.0 |
140.6 |
(66.0) |
447.5 |
— |
447.5 |
Restructuring |
1 |
(2.2) |
(4.3) |
1.3 |
(3.9) |
(1.1) |
5.9 |
(13.6) |
— |
(17.9) |
(17.9) |
Business exits –
trading |
2 |
— |
(1.7) |
0.7 |
— |
— |
17.8 |
— |
— |
16.8 |
16.8 |
Total trading
result |
|
109.5 |
56.7 |
59.8 |
74.8 |
60.9 |
164.3 |
(79.6) |
447.5 |
(1.1) |
446.4 |
Non-trading
items: |
|
|
|
|
|
|
|
|
|
|
|
Business exits –
non-trading |
2 |
|
|
|
|
|
|
|
— |
(13.7) |
(13.7) |
Other adjusting
items |
1 |
|
|
|
|
|
|
|
— |
(852.8) |
(852.8) |
Operating
profit/(loss) |
|
|
|
|
|
|
|
|
447.5 |
(867.6) |
(420.1) |
Net finance costs |
4 |
|
|
|
|
|
|
|
(64.4) |
2.0 |
(62.4) |
Loss on business
disposal |
2 |
|
|
|
|
|
|
|
— |
(30.6) |
(30.6) |
Profit/(loss) before
tax |
|
|
|
|
|
|
|
|
383.1 |
(896.2) |
(513.1) |
Income tax
(expense)/credit |
|
|
|
|
|
|
|
|
(65.8) |
51.8 |
(14.0) |
Profit/(loss) for the
year –
continuing operations |
|
|
|
|
|
|
|
|
317.3 |
(844.4) |
(527.1) |
Profit for the year –
discontinued operations |
|
|
|
|
|
|
|
|
— |
416.4 |
416.4 |
Profit/(loss) for the
year – total |
|
|
|
|
|
|
|
|
317.3 |
(428.0) |
(110.7) |
Order book
The tables below show the order book for each division,
categorised into long-term contractual (contracts with length
greater than two years) and short-term contractual (contracts with
length less than two years). The length of the contract is
calculated from the start of the service commencement date. The
figures represent the aggregate amount of currently contracted
transaction price allocated to the performance obligations that are
unsatisfied or partially unsatisfied. Revenue expected to be
recognised upon satisfaction of these performance obligations is as
follows:
Order book
31 December 2018 |
Software
£m |
People Solutions
£m |
Customer Management
£m |
Government Services
£m |
IT
& Networks
£m |
Specialist Services
£m |
Group
trading and central functions
£m |
Total
£m |
Long-term
contractual |
559.6 |
715.3 |
2,011.8 |
2,187.5 |
380.4 |
1,239.1 |
— |
7,093.7 |
Short-term
contractual |
— |
— |
— |
— |
— |
2.3 |
— |
2.3 |
Total |
559.6 |
715.3 |
2,011.8 |
2,187.5 |
380.4 |
1,241.4 |
— |
7,096.0 |
Order book
31 December 2017 |
Software
£m |
People
Solutions
£m |
Customer
Management
£m |
Government Services
£m |
IT
&
Networks
£m |
Specialist Services
£m |
Group
trading and central functions
£m |
Total
£m |
Long-term
contractual |
543.4 |
786.5 |
1,843.6 |
2,660.6 |
508.3 |
1,833.7 |
3.8 |
8,179.9 |
Short-term
contractual |
— |
— |
— |
— |
— |
11.1 |
— |
11.1 |
Total |
543.4 |
786.5 |
1,843.6 |
2,660.6 |
508.3 |
1,844.8 |
3.8 |
8,191.0 |
The table below shows the time bands of the expected timing of
revenue to be recognised on long-term contractual at 31 December 2018:
Time bands of
long-term contractual
in order book |
Software
£m |
People Solutions
£m |
Customer Management
£m |
Government Services
£m |
IT
& Networks
£m |
Specialist Services
£m |
Group
trading and central functions
£m |
Total
£m |
< 1 year |
331.3 |
222.9 |
602.8 |
425.3 |
169.3 |
336.0 |
— |
2,087.6 |
1–5 years |
196.7 |
451.3 |
1,400.1 |
1,432.7 |
167.7 |
683.0 |
— |
4,331.5 |
> 5 years |
31.6 |
41.1 |
8.9 |
329.5 |
43.4 |
220.1 |
— |
674.6 |
Total |
559.6 |
715.3 |
2,011.8 |
2,187.5 |
380.4 |
1,239.1 |
— |
7,093.7 |
The order book represents the consideration to which the Group
will be entitled to receive from the customers when the Group
satisfies the remaining performance obligations in the contracts.
However, the total revenue that will be earned by the Group will
also include non-contracted volumetric revenue, new wins, scope
changes and anticipated contract extensions. These elements have
been excluded from the figures in the tables above as they are not
contracted. In addition, revenue from contract extensions is also
excluded in the order book unless they are pre-priced extensions
whereby the Group has a legal binding obligation to deliver the
performance obligations during the extension period. The total
revenue related to pre-priced extensions that has been included in
the tables above amounted to £508.0m (2017: £502.0m). The amounts
presented do not include orders for which neither party has
performed and each party has the unilateral right to terminate a
wholly unperformed contract without compensating the other
party.
Of the £7.1bn (2017: £8.2bn) revenue to be earned on long-term
contractual, £4.2bn (2017: £4.9bn) relates to material contracts to
the Group. This amount excludes revenue that will be derived from
frameworks (transactional (point in time) contracts),
non-contracted volumetric revenue, non-contracted scope changes and
future unforeseen volume changes from these material contracts,
which together are expected to contribute an additional £2.2bn
(2017: £1.8bn) of revenue to the Group over the life of these
contracts.
4 Net finance costs
|
2018
£m |
2017
£m |
|
|
Interest
receivable |
(2.6) |
(0.7) |
|
Private placement loan
notes1 |
40.4 |
37.7 |
|
Fixed rate interest
rate swaps |
— |
2.6 |
|
Cash flow hedges
recycled to the income statement |
(2.5) |
— |
|
Bank loans and
overdrafts |
8.5 |
15.6 |
|
Net interest cost on
defined benefit pension schemes |
9.4 |
9.2 |
|
Interest
payable |
55.8 |
65.1 |
|
Net finance costs
included in adjusted profit |
53.2 |
64.4 |
|
Fixed rate interest
rate swaps – mark-to-market |
— |
(0.5) |
|
Discount unwind on
public sector subsidiary partnership payment |
1.7 |
1.8 |
|
Fair value movement in
trade investments |
— |
0.6 |
|
Non-designated foreign
exchange forward contracts – mark-to-market |
5.1 |
(3.4) |
|
Interest payable –
business exit2 |
— |
0.1 |
|
Fair value hedge
ineffectiveness3 |
(3.9) |
(0.6) |
|
Private placement loan
notes prepayments costs4 |
15.9 |
— |
|
Net finance costs
excluded from adjusted profit |
18.8 |
(2.0) |
|
Total net finance
costs |
72.0 |
62.4 |
|
1 Private placement loan notes include US private placement loan
notes, euro fixed rate bearer notes and a Schuldschein loan.
Included in private placement loan notes interest payable is £7.0m
of additional interest at a rate of 0.75% per annum which was
imposed as part of amendment agreements reached with lenders during
2018.
2 Interest payable included within business exit trading. Refer
to note 2 for further details.
3 Fair value hedge ineffectiveness includes the costs of the
early termination of fair value hedges related to the early
repayment of private placement loan notes, ineffectiveness from
changes in currency basis, and the movement in mark-to-market
valuations on hedge derivatives from the perceived change in the
credit worthiness of the counterparties to those instruments.
4 Private placement loan notes prepayment costs include
make-whole costs paid to noteholders on early repayment of
principal. The early repayment was made from the proceeds of the
rights issue and disposals.
5 Earnings/(loss) per share
Basic earnings/(loss) per share amounts are calculated by
dividing net profit for the period attributable to ordinary equity
holders of the parent company by the weighted average number of
ordinary shares outstanding during the year.
Diluted earnings/(loss) per share amounts are calculated by
dividing the net profit for the period attributable to ordinary
equity holders of the parent company by the weighted average number
of ordinary shares outstanding during the year plus the weighted
average number of ordinary shares that would be issued on the
conversion of all the dilutive potential ordinary shares into
ordinary shares.
The weighted average number of ordinary shares for the year
ended 31 December 2017 has been
restated to reflect the rights issue completed in the period. The
adjustment to the weighted average number of ordinary shares
reflects the bonus element of the rights issue.
The following reflects the earnings and share data used in the
basic and diluted earnings/(loss) per share computations:
|
|
|
Restated |
|
As previously reported |
|
2018 |
2017 |
|
|
2017 |
|
Continuing operations
£m |
Total
operations
£m |
Continuing operations
£m |
Total
operations
£m |
|
Continuing operations
£m |
Total
operations
£m |
Adjusted profit
attributable to shareholders 1 |
239.7 |
239.7 |
305.9 |
305.9 |
|
303.6 |
303.6 |
Total profit/(loss)
attributable to shareholders |
263.4 |
269.0 |
(533.5) |
(117.1) |
|
(533.5) |
(117.1) |
1 The adjusted profit attributable to shareholders from
continuing operations for the year ended 31
December 2017, previously reported has been restated to
reflect change in presentation during the year as well as the
businesses that have been disposed of during the year ended
31 December 2018 (see notes 1 and
2).
|
|
Restated |
As
previously reported |
|
2018
m |
2017
m |
2017
m |
Weighted average
number of ordinary shares (excluding trust and treasury shares) for
basic earnings per share |
1,463.9 |
1,092.8 |
665.7 |
Dilutive potential
ordinary shares: |
|
|
|
Employee share
options |
18.3 |
— |
— |
Weighted average
number of ordinary shares (excluding trust and treasury shares)
adjusted for the effect of dilution |
1,482.2 |
1,092.8 |
665.7 |
At 31 December 2017, 3,395,030
options were excluded from the diluted weighted average number of
ordinary shares calculation because their effect would have been
anti-dilutive. Under IAS 33-Earnings per Share, potential ordinary
shares are treated as dilutive when, and only when, their
conversion to ordinary shares would decrease earnings per share or
increase loss per share from continuing operations. The Group made
a loss in the prior year from continuing operations hence the
diluted earnings/(loss) per share for each component of continuing
and total operations needs to be the same amount as the basic
earnings/(loss) per share.
There have been no other transactions involving ordinary shares
or potential ordinary shares between the reporting date and the
date of completion of these financial statements.
The earnings per share figures are calculated based on adjusted
earnings attributable to ordinary equity holders of the parent
company of £239.7m (2017: £305.9m) and reported earnings of £269.0m
(2017: loss of £117.1m). They are both included to provide a better
understanding of the trading performance of the Group.
|
|
|
|
Restated |
|
As previously reported |
|
|
2018 |
2017 |
|
2017 |
|
|
Continuing operations
p |
Total
operations
p |
Continuing operations
p |
Total
operations
p |
|
Continuing operations
p |
Total
operations
p |
Basic
earnings/(loss) per share |
– adjusted |
16.37 |
16.37 |
27.99 |
27.99 |
|
45.61 |
45.61 |
– reported |
17.99 |
18.37 |
(48.82) |
(10.72) |
|
(80.14) |
(17.59) |
Diluted
earnings/(loss) per share |
– adjusted |
16.17 |
16.17 |
27.99 |
27.99 |
|
45.61 |
45.61 |
– reported |
17.77 |
18.15 |
(48.82) |
(10.72) |
|
(80.14) |
(17.59) |
6 Dividends paid and proposed
|
2018
£m |
2017
£m |
|
Declared and paid
during the year |
|
|
Ordinary shares
(equity): |
|
|
Final for 2017 paid:
nil per share (2016: 21.2p per share) |
— |
137.1 |
Interim for 2018 paid:
nil per share (2017: 11.1p per share) |
— |
73.9 |
Dividends paid to
shareholders |
— |
211.0 |
Dividends paid to
non-controlling interest |
12.2 |
5.6 |
Total dividends
paid |
12.2 |
216.6 |
Proposed for
approval at AGM (not recognised as a liability at 31
December) |
|
|
Ordinary shares
(equity): |
|
|
Final for 2018: nil
per share (2017: nil per share) |
— |
— |
7 Property, plant and equipment
|
Leasehold
improvements,
land and
buildings
£m |
Plant
and
machinery
£m |
Total
£m |
Cost |
|
|
|
As at 1 January
2017 |
105.0 |
420.3 |
525.3 |
Subsidiaries
acquired |
0.1 |
0.1 |
0.2 |
Disposal of
business |
(15.8) |
(98.2) |
(114.0) |
Additions |
5.8 |
63.1 |
68.9 |
Disposals – included
in adjusted profit |
(3.6) |
(10.7) |
(14.3) |
Disposals – excluded
from adjusted profit |
(7.3) |
(91.9) |
(99.2) |
Asset retirements |
(7.6) |
(75.2) |
(82.8) |
Re-class to intangible
assets (net) |
— |
(13.1) |
(13.1) |
Exchange movement |
0.5 |
0.6 |
1.1 |
As at 31 December
2017 |
77.1 |
195.0 |
272.1 |
Disposal of
business |
— |
(22.8) |
(22.8) |
Additions |
33.1 |
56.3 |
89.4 |
Disposals – included
in adjusted profit |
(0.6) |
(19.7) |
(20.3) |
Asset retirements |
(5.9) |
(33.1) |
(39.0) |
Exchange movement |
(0.7) |
— |
(0.7) |
As at 31 December
2018 |
103.0 |
175.7 |
278.7 |
Depreciation and
impairment: |
|
|
|
As at 1 January
2017 |
38.8 |
91.8 |
130.6 |
Depreciation charged
during the year |
11.1 |
58.9 |
70.0 |
Impairment – excluded
from adjusted profit |
— |
10.0 |
10.0 |
Disposal of
business |
(6.9) |
(32.9) |
(39.8) |
Disposals – included
in adjusted profit |
(1.4) |
(7.0) |
(8.4) |
Disposals – excluded
from adjusted profit |
(1.5) |
(17.8) |
(19.3) |
Asset retirements |
(7.6) |
(75.2) |
(82.8) |
Re-class to intangible
assets |
— |
(8.0) |
(8.0) |
Exchange movement |
0.2 |
0.3 |
0.5 |
As at 31 December
2017 |
32.7 |
20.1 |
52.8 |
Depreciation charged
during the year |
9.7 |
50.4 |
60.1 |
Impairment – included
in adjusted profit |
6.1 |
— |
6.1 |
Disposal of
business |
— |
(2.9) |
(2.9) |
Disposals – included
in adjusted profit |
(0.6) |
(10.8) |
(11.4) |
Asset retirements |
(5.9) |
(33.1) |
(39.0) |
Exchange movement |
(0.2) |
(0.4) |
(0.6) |
As at 31 December
2018 |
41.8 |
23.3 |
65.1 |
Net book
value |
|
|
|
As at 1 January
2017 |
66.2 |
328.5 |
394.7 |
As at 31 December
2017 |
44.4 |
174.9 |
219.3 |
As at 31 December
2018 |
61.2 |
152.4 |
213.6 |
The net book value of plant and machinery includes an amount of
£nil (2017: £0.2m) in respect of assets held under finance
leases.
Depreciation charged during the year includes £nil (2017: £0.2m)
of accelerated depreciation in relation to businesses disposed
of.
In 2017 a comprehensive review was undertaken as part of the
year-end close process and a number of assets relating to specific
programmes resulting from changes in client and Capita strategy in
the second half of 2017 were fully written down. Property, plant
and equipment amounting to £89.9m was fully written down and
excluded from the adjusted profit for the year. The charge is shown
above within impairment – excluded from adjusted profit (£10.0m)
and disposals – excluded from adjusted profit (£79.9m, being cost
£99.2m less accumulated depreciation £19.3m). The write-downs
relate to life and pensions assets (£54.7m) and other non-current
assets (£35.2m) as detailed in note 1.
The table below reconciles the 2017 disposals and impairments of
non-current assets between notes 1, 8 and 10.
|
Property,
plant and
equipment
£m |
|
Intangible
assets
£m |
Notes |
Contract
fulfilment assets
£m |
Notes |
Total
£m |
Notes |
Life and pension
assets |
|
|
|
|
|
|
|
|
Impairment |
— |
|
— |
|
5.5 |
|
5.5 |
|
Disposals – cost |
56.2 |
|
1.0 |
|
— |
|
57.2 |
|
Disposals –
accumulated depreciation/amortisation |
(1.5) |
|
— |
|
— |
|
(1.5) |
|
|
54.7 |
|
1.0 |
|
5.5 |
|
61.2 |
1 |
Other non-current
assets |
|
|
|
|
|
|
|
|
Impairment |
10.0 |
|
4.0 |
|
— |
|
14.0 |
|
Disposals – cost |
43.0 |
|
39.3 |
|
— |
|
82.3 |
|
Disposals –
accumulated depreciation/amortisation |
(17.8) |
|
(15.0) |
|
— |
|
(32.8) |
|
|
35.2 |
|
28.3 |
|
— |
|
63.5 |
1 |
Total |
|
|
|
|
|
|
|
|
Total impairment |
10.0 |
|
4.0 |
8 |
5.5 |
10 |
19.5 |
|
Total disposals –
cost |
99.2 |
|
40.3 |
8 |
— |
|
139.5 |
|
Total disposals –
accumulated depreciation/amortisation |
(19.3) |
|
(15.0) |
8 |
— |
|
(34.3) |
|
|
89.9 |
|
29.3 |
|
5.5 |
|
124.7 |
|
8 Intangible assets
|
Intangible assets acquired in business combinations |
|
Intangible assets capitalised/purchased |
|
|
Brands
£m |
IP,
software
and licences
£m |
Contracts
and
committed
sales
£m |
Client
lists and
relationships
£m |
Goodwill
£m |
Total
acquired
in business
combinations
£m |
|
Capitalised
software
development
£m |
Other
intangibles
£m |
Total
capitalised/purchased £m |
Total
£m |
Cost |
|
|
|
|
|
|
|
|
|
|
|
As at 1 January
2017 |
69.3 |
96.5 |
75.3 |
742.7 |
2,327.6 |
3,311.4 |
|
197.0 |
57.9 |
254.9 |
3,566.3 |
Subsidiaries
acquired |
0.4 |
6.8 |
1.3 |
3.9 |
15.1 |
27.5 |
|
— |
— |
— |
27.5 |
Business disposal |
(3.0) |
(0.4) |
— |
(50.3) |
(266.9) |
(320.6) |
|
(17.2) |
(0.7) |
(17.9) |
(338.5) |
Additions |
— |
— |
— |
— |
— |
— |
|
43.4 |
29.5 |
72.9 |
72.9 |
Disposals – included
in adjusted profit |
— |
— |
— |
— |
— |
— |
|
(2.7) |
(17.5) |
(20.2) |
(20.2) |
Disposals – excluded
from adjusted profit |
— |
— |
— |
— |
— |
— |
|
(31.0) |
(9.3) |
(40.3) |
(40.3) |
Transfer to assets
held for sale |
(0.2) |
— |
— |
(3.7) |
(7.1) |
(11.0) |
|
— |
— |
— |
(11.0) |
Re-class from
property, plant and equipment |
— |
— |
— |
— |
— |
— |
|
13.1 |
— |
13.1 |
13.1 |
Asset retirement |
(9.7) |
(3.4) |
(6.1) |
(201.9) |
— |
(221.1) |
|
(46.6) |
(1.9) |
(48.5) |
(269.6) |
Fair value adjustments
in 2017 relating to
2016 acquisitions |
— |
— |
— |
— |
1.2 |
1.2 |
|
— |
— |
— |
1.2 |
Exchange movement |
(0.3) |
0.7 |
— |
(2.6) |
1.3 |
(0.9) |
|
0.4 |
0.1 |
0.5 |
(0.4) |
As at 31 December
2017 |
56.5 |
100.2 |
70.5 |
488.1 |
2,071.2 |
2,786.5 |
|
156.4 |
58.1 |
214.5 |
3,001.0 |
Subsidiaries
acquired |
— |
— |
— |
2.7 |
— |
2.7 |
|
— |
— |
— |
2.7 |
Business disposal |
(3.5) |
(6.7) |
— |
(38.5) |
(50.9) |
(99.6) |
|
— |
(7.3) |
(7.3) |
(106.9) |
Additions |
— |
— |
— |
— |
— |
— |
|
64.8 |
5.3 |
70.1 |
70.1 |
Disposals – included
in adjusted profit |
— |
— |
— |
— |
— |
— |
|
(5.0) |
(0.1) |
(5.1) |
(5.1) |
Asset retirement |
(5.7) |
— |
(9.2) |
(108.4) |
— |
(123.3) |
|
(16.6) |
(2.2) |
(18.8) |
(142.1) |
Exchange movement |
0.1 |
0.2 |
(0.1) |
6.3 |
0.3 |
6.8 |
|
0.5 |
0.1 |
0.6 |
7.4 |
As at 31 December
2018 |
47.4 |
93.7 |
61.2 |
350.2 |
2,020.6 |
2,573.1 |
|
200.1 |
53.9 |
254.0 |
2,827.1 |
Amortisation and impairment |
|
|
|
|
|
|
|
|
|
|
As at 1 January
2017 |
28.6 |
36.7 |
35.9 |
468.6 |
152.0 |
721.8 |
|
73.9 |
16.4 |
90.3 |
812.1 |
Amortisation charged
during the year |
11.4 |
12.8 |
9.0 |
92.0 |
— |
125.2 |
|
16.6 |
6.6 |
23.2 |
148.4 |
Impairment – excluded
from adjusted profit |
0.7 |
— |
4.0 |
9.3 |
551.6 |
565.6 |
|
4.0 |
— |
4.0 |
569.6 |
Impairment - business
exit |
— |
— |
— |
— |
7.1 |
7.1 |
|
— |
— |
— |
7.1 |
Business disposal |
(2.6) |
(0.3) |
— |
(45.2) |
(0.2) |
(48.3) |
|
(7.1) |
(0.1) |
(7.2) |
(55.5) |
Disposals – included
in adjusted profit |
— |
— |
— |
— |
— |
— |
|
(0.8) |
(6.7) |
(7.5) |
(7.5) |
Disposals – excluded
from adjusted profit |
— |
— |
— |
— |
— |
— |
|
(13.5) |
(1.5) |
(15.0) |
(15.0) |
Asset retirement |
(9.7) |
(3.4) |
(6.1) |
(201.9) |
— |
(221.1) |
|
(46.6) |
(1.9) |
(48.5) |
(269.6) |
Transfer to assets
held for sale |
(0.1) |
— |
— |
(2.3) |
(7.1) |
(9.5) |
|
— |
— |
— |
(9.5) |
Re-class from
property, plant and equipment |
— |
— |
— |
— |
— |
— |
|
8.0 |
— |
8.0 |
8.0 |
Exchange movement |
(0.3) |
0.1 |
— |
0.8 |
(0.1) |
0.5 |
|
0.1 |
0.2 |
0.3 |
0.8 |
As at 31 December
2017 |
28.0 |
45.9 |
42.8 |
321.3 |
703.3 |
1,141.3 |
|
34.6 |
13.0 |
47.6 |
1,188.9 |
Amortisation charged
during the year |
9.7 |
13.3 |
6.1 |
57.6 |
— |
86.7 |
|
21.1 |
6.8 |
27.9 |
114.6 |
Impairment – excluded
from adjusted profit |
— |
— |
— |
61.7 |
33.8 |
95.5 |
|
— |
— |
— |
95.5 |
Impairment – business
exit |
— |
— |
— |
— |
24.3 |
24.3 |
|
— |
— |
— |
24.3 |
Business disposal |
(2.4) |
(4.7) |
— |
(34.2) |
— |
(41.3) |
|
— |
(3.9) |
(3.9) |
(45.2) |
Disposals – included
in adjusted profit |
— |
— |
— |
— |
— |
— |
|
(0.6) |
(0.1) |
(0.7) |
(0.7) |
Asset retirement |
(5.7) |
— |
(9.2) |
(108.4) |
— |
(123.3) |
|
(16.6) |
(2.2) |
(18.8) |
(142.1) |
Exchange movement |
0.3 |
0.5 |
(0.1) |
3.3 |
0.2 |
4.2 |
|
— |
(0.1) |
(0.1) |
4.1 |
As at 31 December
2018 |
29.9 |
55.0 |
39.6 |
301.3 |
761.6 |
1,187.4 |
|
38.5 |
13.5 |
52.0 |
1,239.4 |
Net book
value |
|
|
|
|
|
|
|
|
|
|
|
As at 1 January
2017 |
40.7 |
59.8 |
39.4 |
274.1 |
2,175.6 |
2,589.6 |
|
123.1 |
41.5 |
164.6 |
2,754.2 |
As at 31 December
2017 |
28.5 |
54.3 |
27.7 |
166.8 |
1,367.9 |
1,645.2 |
|
121.8 |
45.1 |
166.9 |
1,812.1 |
As at 31 December
2018 |
17.5 |
38.7 |
21.6 |
48.9 |
1,259.0 |
1,385.7 |
|
161.6 |
40.4 |
202.0 |
1,587.7 |
Amortisation charged during the year includes £nil (2017: £1.7m
(£0.3m in acquired intangibles and £1.4m in capitalised/purchased
intangibles)) of accelerated amortisation in relation to businesses
disposed or held for sale.
Goodwill impairments: The Group recognised an impairment
charge relating to goodwill of £33.8m (2017: £551.6m). Refer to
note 9 for further details.
Intangible assets acquired in business combination
impairments: Customer Management saw a weaker
performance in Europe, which was
impacted by lower profits in Switzerland. The Group recognised an
impairment charge relating to intangible assets acquired in
business combinations of £61.7m in relation to the Swiss business
in Customer Management. The recoverable amount of the intangible
asset is £12.2m, based on its value in use and a pre-tax discount
rate of 11.9%. (2017: In 2017, £14.0m of intangibles acquired in
business combinations in relation to the Insurance, Life and
Pensions businesses in Specialist Services were identified as
impaired).
Intangible assets capitalised impairment and disposals:
As part of its year-end close process, Capita undertook a review of
its tangible and intangible assets, resulting in £nil (2017: £29.3m
resulting from changes in client and Capita strategy) impairments.
The 2017 charge is shown in the table within ‘impairment – excluded
from adjusted profit’ (£4.0m) and ‘disposals – excluded from
adjusted profit’ (£25.3m, being cost £40.3m less accumulated
depreciation £15.0m). This impairment charge relates to life and
pension assets (£1.0m) and other non-current assets (£28.3m). The
table in note 7 reconciles the disposals and impairments of
non-current assets between notes 1, 7, 8 and 10.
9 Goodwill
Goodwill acquired through business combinations has been
allocated to Cash-Generating Units (CGUs), for impairment testing
purposes, on the basis of the expected benefit that will accrue to
the individual CGU through synergies realised from the acquisitions
and integration with the Group as a whole. These represent the
lowest level within the Group at which goodwill can be allocated on
a reasonable and consistent basis.
The enterprise value of each CGU is dependent on the successful
implementation of the transformation plan described earlier in the
strategic report. The objective of the new strategy announced in
April 2018 is to become a more
focused and predicable business with improved returns, stronger
client relationships and sustainable free cash flow. The Group has
put in place a new organisational structure, which comprises six
divisions: Software, People Solutions, Customer Management,
Government Services, IT & Networks, and Specialist Services.
Following this re-organisation, the Group has reviewed the
historical assessment of CGUs and the allocation of goodwill.
Reflecting the way management now exercises oversight and monitors
the Group’s performance, the Board concluded that the lowest level
at which goodwill is monitored is at the divisional level for three
divisions, and at a sub-divisional level for the other three
divisions, and goodwill has been reallocated to these new CGUs or
groups of CGUs. As at 31 December
2018, the Group has 9 CGUs or groups of CGUs for the purpose
of impairment testing of goodwill. The opening goodwill balance has
been reallocated for comparable purposes. As the transformation
plan progresses, the Board will continue to assess the level at
which management exercise oversight and monitors the Group’s
performance to ensure the allocation of goodwill to CGUs remains
appropriate.
Carrying amount of goodwill allocated
to groups of Cash-Generating Units
The following table shows the allocation of goodwill to groups
of CGUs.
CGU |
Software
£m |
People Solutions
£m |
Customer Management
£m |
Government Services |
|
IT & Networks |
Specialist Services
£m |
Total
£m |
Central
Government
£m |
Local
Government
£m |
|
IT
Services
£m |
Network
Services
£m |
1 January 2018 |
275.6 |
203.5 |
138.6 |
8.7 |
33.8 |
|
117.7 |
108.5 |
481.5 |
1,367.9 |
Additions |
— |
— |
— |
— |
— |
|
— |
— |
— |
— |
Fair value
adjustment |
— |
— |
— |
— |
— |
|
— |
— |
— |
— |
Disposals and business exits |
— |
— |
— |
— |
— |
|
— |
— |
(75.2) |
(75.2) |
Exchange movement |
— |
— |
0.1 |
— |
— |
|
— |
— |
— |
0.1 |
Impairment |
— |
— |
— |
— |
(33.8) |
|
— |
— |
— |
(33.8) |
31 December
2018 |
275.6 |
203.5 |
138.7 |
8.7 |
— |
|
117.7 |
108.5 |
406.3 |
1,259.0 |
Specialist Regulated Services is not included in the table above
as goodwill and acquired intangibles were fully impaired in 2017,
and therefore an impairment test is not required.
The impairment test
The Group tests intangible assets, including goodwill, for
impairment on an annual basis or more frequently if there are
indications that any of these assets may be impaired.
The Group’s impairment test compares the carrying value of each
CGU with its recoverable amount. The recoverable amount of a CGU is
the higher of fair value less cost of disposal and value in use. As
the Group continues to implement the Group-wide transformation plan
it has been determined that for 2018, fair value less costs of
disposal will generate the higher recoverable amount. Fair value
less costs of disposal have been estimated using discounted cash
flows. The fair value measurement was categorised as a Level 3 fair
value based on the inputs in the valuation technique used.
In undertaking the annual impairment review, the Directors have
considered both external and internal sources of information, and
any observable indications that may suggest that the carrying value
of goodwill may be impaired.
As set out in ‘divisional performance’ in the strategic report,
the local government market for large BPO contracts is declining
with a significant drop-off in the number and size of opportunities
coming to market and existing clients choosing to end contracts
early and take services back in house. This decline is being driven
by fiscal pressures, the expectation that this will provide a more
flexible cost and delivery model, but also by an ideological shift
away from outsourcing by some council leaderships. The local
government BPO market, which we anticipated reducing, declined at
an accelerated rate during the year. Southampton, Sheffield and Birmingham City Councils have
notified us of their intention to end contracts with us ahead of
their contracted-end dates. Barnet
Council has agreed to take a small number of services back
in House. Capita is committed to the local government market and is
working closely with all our Council partners to agree and manage a
smooth transfer of services back to council management. The
deterioration in the market opportunities and continued challenges
were monitored throughout the year and crystallised in the final
quarter of 2018 leading to the recognition of the impairment
charges as set out in this note.
The key inputs to the calculations are described below,
including changes in market conditions.
Forecast cash flows
In the first half of 2018, the Board approved a five-year
strategic plan covering the period from 2018 to 2022. As the
five-year strategic plan was approved prior to the finalisation of
the Annual Report and Accounts 2017, it was used to derive cash
flow forecasts for the purposes of the impairment test for the year
ended 31 December 2017.
The bottom-up business planning process completed at the end of
2018, reviewed years two and three (2019 and 2020) of the strategic
plan in detail. The resulting business plan for 2019 and 2020 was
approved by the Board. For the 2018 impairment test, the 2019 and
2020 business plan was used to derive the cash flow forecasts for
the purpose of the impairment test. The cash flows are adjusted to
exclude working capital movements as the corresponding balances are
not included in the carrying amount. The cash flows also include
forecast capital expenditure and restructuring, as well as an
allocation the costs of central functions. The Board considered an
appropriate methodology to apply in allocating the costs of the
central functions, which is a key sensitivity. The forecast 2021
EBITDA measures have been used as these represent a steady state
forecast for the Group and an appropriate approximation of the
attention and focus of the central functions. As the transformation
plan delivers, the Board will assess any changes required to ensure
the allocation methodology continues to reflect the efforts of the
central functions.
The forecasts are cash flow projections for 2021 and 2022,
represent management’s assessment of future trends in relevant
industries and have been based on data from both external and
internal sources.
The long-term growth rate is based on inflation forecasts by
recognised bodies and this has been applied to both 2023 and the
terminal period. The 2018 long-term growth rate is 1.5% (2017:
1.5%).
Discount rates
Management estimates discount rates using pre-tax rates that
reflect the latest market assumptions for the risk-free rate, the
equity risk premium and the net cost of debt, which are all based
on publicly available external sources.
The table below represents the pre-tax discount rates used on
the cash flows. The 2017 rates have not been reported, due to the
CGU restructure and the adoption of fair value less costs of
disposal.
Division |
Pre-tax
discount rate |
|
% |
|
Software |
12.7 |
|
People Solutions |
12.1 |
|
Customer
Management |
11.9 |
|
Central
Government |
11.4 |
|
Local Government |
16.8 |
|
IT Services |
11.1 |
|
Network Services |
11.1 |
|
Specialist Regulated
Services |
11.5 |
|
Specialist
Services |
11.8 |
|
Sensitivity analysis
The impairment testing as described is reliant on the accuracy
of management’s forecasts and the assumptions that underlie them
and also on the selection of the discount and growth rates to be
applied. In order to gauge the sensitivity of the result to a
change in any one, or combination of the assumptions that underlie
the model, a number of scenarios have been run to identify the
range of reasonably possible alternatives and measure which CGUs
are the most susceptible to an impairment should the assumptions
used be varied. This sensitivity analysis is only applicable to the
CGUs that have goodwill.
The table below shows how the enterprise value would be impacted
(with all other variables being equal) by an increase in discount
rate of 1%, or if the business plan was missed by 10% for each of
the five years or a decrease of 1% in the long-term growth rate for
the Group in total and each of the CGUs. We have also considered
the impact of all of the scenarios together and disclosed the
impact on impairment in the final column.
|
1%
increase in
discount rate |
Miss
targets by 10% |
Long-term growth rate decrease by 1% |
Combination sensitivity |
Increase
in 2018 impairment using combination scenario |
Software |
(66.1) |
(73.3) |
(48.5) |
(168.7) |
— |
People Solutions |
(77.5) |
(78.4) |
(56.2) |
(189.4) |
— |
Customer
Management |
(43.8) |
(31.6) |
(34.2) |
(96.0) |
— |
Central
Government |
(60.4) |
(48.2) |
(47.5) |
(137.0) |
— |
IT Services |
(19.5) |
(17.7) |
(13.9) |
(47.5) |
(5.0) |
Network Services |
(19.7) |
(20.0) |
(14.4) |
(49.4) |
— |
Specialist
Services |
(88.1) |
(96.4) |
(63.6) |
(222.2) |
— |
Total |
(375.1) |
(365.6) |
(278.3) |
(910.2) |
(5.0) |
Management continue to monitor closely the performance of all
CGUs and consider the impact of any changes to the key assumptions.
In conclusion, other than the local government impairment in the
year, management believe there is no reasonably possible change in
the underlying assumptions that would result in a further
significant impairment charge in the consolidated income
statement.
10 Contract fulfilment assets
|
Total
£m |
At 1 January 2017 |
240.6 |
Additions |
101.2 |
Impairment |
(14.1) |
Derecognition |
(9.9) |
Utilised during the
year |
(65.3) |
At 31 December
2017 |
252.5 |
Additions |
113.8 |
Transfers from current
contract fulfilment assets |
25.4 |
Impairment |
(22.2) |
Derecognition |
(17.4) |
Utilised during the
year |
(87.9) |
At 31 December
2018 |
264.2 |
Impairment
In preparing these consolidated financial statements, management
undertook a review to identify indicators of impairment of contract
fulfilment assets. Management determined whether or not the
contract fulfilment assets and capitalised costs to obtain a
contract were impaired by comparing the carrying amount of the
asset to the remaining amount of consideration that the Group
expects to receive less the costs that relate to providing services
under the relevant contract. In determining the estimated amount of
consideration, the Group uses the same principles as it does to
determine the contract transaction price, except that any
constraints used to reduce the transaction price will be removed
for the impairment test.
In line with the Group’s accounting policy, if a contract
exhibited marginal profitability or other indicators of impairment,
judgement was applied to ascertain whether or not the future
economic benefits from these contracts were sufficient to recover
these assets. In performing this impairment assessment, management
is required to make an assessment of the costs to complete the
contract. The ability to accurately forecast such costs involves
estimates around cost savings to be achieved over time, anticipated
profitability of the contract, as well as future performance
against any contract-specific KPIs that could trigger variable
consideration or service credits.
Following this review, contract fulfilment asset provisions for
impairment of £22.2m (2017: £14.1m) were identified relating to
assets capitalised in the year and recognised within adjusted cost
of sales.
Derecognition
A contract fulfilment asset is derecognised either when it is
disposed of or when no further economic benefits are expected to
flow from its use or disposal. In 2018, £17.4m (2017: £9.9m) of
contract fulfilment assets were derecognised as the related
contracts, Prudential and Marsh, were terminated in the year and
the Group had no further use for the assets. Of the assets
derecognised in the prior year, £5.5m was included as an adjustment
to operating profit and related to the write-off of the carrying
value of a platform developed by the Group’s life and pension
business. The Group’s transformation plan identified that there was
no longer a market for this platform.
11 Deferred income
Current |
|
|
2018
£m |
2017
£m |
Current |
|
|
980.3 |
1,201.2 |
|
|
|
980.3 |
1,201.2 |
Non-current |
|
|
2018
£m |
2017
£m |
Non-current |
|
|
277.3 |
314.0 |
|
|
|
277.3 |
314.0 |
The Group’s deferred income balances solely relate to revenue
from contracts with customers. Revenue recognised in the reporting
period that was included in the deferred income balance at the
beginning of the period was £1,220.8m (2017: £1,381.0m). Movements
in the deferred income balances were driven by transactions entered
into by the Group within the normal course of business in the year,
other than the accelerated revenue recognised of £10.0m and £38.4m
relating to the ending of our general insurance contract with Marsh
and our life and pensions contract with the Prudential respectively
(2017: £22.0m from the re-shaping of the DIO contract).
12 Provisions
|
Restructuring
provision
£m |
Business
exit
provision
£m |
Asset
services
indemnity
provision
£m |
Claim
and
litigation
provision
£m |
Property
provision
£m |
Other
£m |
Total
£m |
As at 1 January
2018 |
10.6 |
37.0 |
69.1 |
64.3 |
22.5 |
9.1 |
212.6 |
Provisions provided
for in the year |
41.9 |
22.7 |
— |
6.4 |
2.3 |
12.7 |
86.0 |
Provisions released in
the year |
(5.0) |
(1.7) |
(4.6) |
(7.9) |
(1.8) |
(1.7) |
(22.7) |
Utilisation |
(35.5) |
(40.9) |
(61.5) |
(16.4) |
(3.5) |
(3.9) |
(161.7) |
Provisions
acquired |
— |
— |
— |
— |
0.6 |
1.5 |
2.1 |
Disposal of
subsidiaries |
— |
— |
— |
— |
(0.1) |
— |
(0.1) |
Reclassification
between categories |
— |
0.4 |
— |
— |
(0.1) |
(0.3) |
— |
As at 31 December
2018 |
12.0 |
17.5 |
3.0 |
46.4 |
19.9 |
17.4 |
116.2 |
The provisions made above have been shown as current or
non-current on the balance sheet to indicate the Group’s expected
timing of the matters reaching conclusion.
Judgement is required in measuring and recognising provisions
related to pending litigation or other outstanding claims subject
to negotiated settlement, mediation and arbitration, as well as
other contingent liabilities. Judgement is necessary in assessing
the likelihood that a pending claim will succeed, or a liability
will arise, and to quantify the possible range of the financial
settlement. Because of the inherent uncertainty in this evaluation
process, actual losses may be different from the originally
estimated provision. Where practicable, the range of reasonably
possible outcomes and sensitivities of the carrying amounts to the
methodology, assumptions and estimates, the reason for the
sensitivity, the expected resolution of uncertainties and the range
of reasonable possible alternatives, are provided below. Where no
reliable basis of estimation can be made, no provision is recorded.
However, contingent liabilities disclosures are given when there is
a greater than a remote probability of outflow of economic
benefits.
Restructuring provision: The provision represents the
cost of reducing role count where there is a constructive
obligation created through communication to affected employees
which has crystallised a valid expectation that roles are at risk.
Additionally, it reflects the onerous nature of property lease
provisions (net of any sub-letting opportunity) on a discounted
basis, where due to the reduced requirement for space there is
additional surplus capacity. During the year, additional provision
has been made for costs as further restructuring opportunities
related to the transformation plan have been identified.
Business exit provision: The provision relates to the
cost of exiting businesses through disposal or closure including
professional fees related to business exits and the costs of
separating the businesses being disposed.
Capita Asset Services indemnity provision: In 2017 the
Group agreed a full and final settlement with the Financial Conduct
Authority (FCA) regarding the Connaught Income Series 1 Fund (the
Fund). Capita Financial Managers Limited (CFM) was the Operator of
the Fund until September 2009, when
it was replaced by an unrelated company as Operator, following
which CFM had no further involvement with the Fund. The Fund went
into liquidation in 2012 and its liquidator brought a claim against
both former Operators, which for its part, Capita settled in 2016
for a sum of £18.5m.
The FCA undertook a formal review of the activities of both
Operators and announced that its conclusion was that CFM did not
meet all of its regulatory requirements in the period April 2008 to September
2009. To ensure that investors receive appropriate redress
and to bring this matter to a close enabling the smooth disposal of
CFM, CFM and Capita agreed a full and final settlement with the
FCA. In reaching this settlement, the full cooperation which CFM
gave to the FCA during the course of its investigation was
acknowledged.
CFM agreed to a further £66.0m being made available for the
benefit of the Fund’s investors, with Capita agreeing to fund this
amount. The FCA considered that this payment was sufficient to
return the amount originally invested, taking into account any
interest, distributions and other payments that had already been
received, with the intention of placing investors as closely as
possible back into the position they would have been in if they had
never invested in the Fund.
This settlement allowed for the available funds to be directed
towards the Fund’s Investors. Given the circumstances, the FCA did
not consider that it would be appropriate to require CFM to pay a
financial penalty.
Capita made provision for the redress payment and associated
legal costs of £66.8m as at 31 December
2017. CFM and the FCA subsequently reached agreement, on the
basis of third-party calculations of the liability due, such that
the final amount of the redress payment will not exceed £61.5m, and
accordingly £4.6m of the provision has been released. The final
quantum of the redress payments is expected to be determined in the
first half of 2019.
Capita completed the disposal of its Asset Services businesses,
including CFM, to the Link Group on 3
November 2017. Capita plc, as part of the sale of the Capita
Asset Services businesses, has provided an indemnity against
certain legacy claims. The provisions held, namely the Asset
Services settlement provision which includes provisions for Arch
Cru, Connaught and other legacy claims, have therefore been
retained within the Group. Giving due consideration to these
claims, the Group provided £69.1m (including the £66.8m above) as
at 31 December 2017. A provision of
£3.0m remains as at 31 December 2018
and is expected to unwind within the next 12 months.
Claims and litigation provision: In addition to the
Capita Asset Services Indemnity provision, the Group is exposed to
other claims and litigation. The Group makes a provision when a
claim has been made where it is more probable than not that a loss
might occur. These provisions are reassessed regularly to ensure
that the level of provisioning is consistent with the claims that
have been reported. The range of values attached to these claims,
can be significant and, where obligations are probable and
estimable, provisions are made representing the Group’s best
estimate of the expenditure to be incurred. The Group robustly
defends its position on each claim, and they are often settled for
amounts significantly smaller than the initial claim and may result
in no transfer of economic benefits. Therefore, we do not disclose
a range of possible outcomes for these claims.
In the period, the Group has settled a number of liabilities
which it had provided for in previous years. Additionally, it has
provisions, which originate due to the nature of the Group’s
activities and revised existing provisions where more information
on the progress of the claim has become apparent. In addition,
£5.5m provision was released from a provision made in 2017 relating
to the Group’s Real Estate & Infrastructure business.
The Group’s exposure to claims is mitigated by having in place a
number of large insurers providing cover for the Group’s
activities, albeit insurance recoveries are only recognised as an
asset at the point the recovery is virtually certain. At the
31 December 2017, an asset had been
recognised of £5.0m in respect of recoveries under an indemnity, no
other recovery assets had been recognised. No recovery assets have
been recognised as at 31 December
2018.
Due to the nature of these claims, the Group cannot give an
estimate of the period over which this provision will unwind.
Property provision: Includes a provision of £10.7m (2017:
£12.8m), made on a discounted basis, for the difference between the
market value of property leases acquired in 2011 with the Ventura
and Vertex Private Sector acquisitions and the lease obligations
committed to at the date the leases were signed by the previous
owners. This is in accordance with IFRS 3 (revised) which requires
the use of fair value measurement.
The remaining property provision of £9.2m (2017: £9.7m) is made
on a discounted basis for the future rent expense and related cost
of leasehold property (net of estimated sub-lease income) where the
space is vacant or currently not planned to be used for ongoing
operations. The expectation is that this expenditure will be
incurred over the remaining periods of the leases which range from
1 to 24 years.
Other provisions: Relates to provisions in respect of
other potential exposures arising due to the nature of some of the
operations that the Group provides, the most significant of which
are in respect of immaterial onerous contracts. These are likely to
unwind over a period of 1 to 10 years.
13 Additional cash flow
information
Operating cash flow for the year ended
31 December 2018
The Group has simplified its non-statutory reporting measures to
improve transparency and make it easier for the readers of its
annual report and accounts to understand its financial performance.
The revised presentation is reported results on the face of the
income statement, with a footnote detailing adjusting profit and
earnings per share, and a note to the accounts (see note 1)
providing a reconciliation between reported and adjusted profit.
The presentation of the cash flow statement and additional cash
flow information in the notes have also been revised to show the
same split.
The 2017 cash flow has also been restated to: (i) include £28.9m
of cash costs previously omitted from cash flows from investing
activities used by discontinued operations; (ii) remove a £33.5m
business exit provision from adjusted non-cash items; and (iii)
correct a disclosed £0.5m loss of sale of property, plant and
equipment to a £4.5m gain. The net result of these items is to
reduce net cash inflow from investing activities by £28.9m and
to increase net cash inflow from operating activities and reported
free cash flow by £28.9m. There is no impact on the reported net
movement in cash and cash equivalents as the adjustments were off
set within movements in trade and other
receivables/payables.
|
|
|
2018 |
|
|
Restated
2017 |
|
Note |
Adjusted
£m |
Reported
£m |
|
Adjusted
£m |
Reported
£m |
Cash flows from
operating activities: |
|
|
|
|
|
|
Operating
profit/(loss) |
1 |
335.3 |
34.9 |
|
447.5 |
(420.1) |
|
|
|
|
|
|
|
Adjustments for
non-cash items: |
|
|
|
|
|
|
Depreciation |
7 |
59.1 |
60.1 |
|
56.4 |
63.5 |
Amortisation of
intangible assets |
8 |
27.9 |
114.6 |
|
15.4 |
144.2 |
Share based payment
expense |
|
3.4 |
3.4 |
|
2.9 |
2.9 |
Employee benefits |
|
12.3 |
17.7 |
|
30.8 |
30.8 |
(Profit)/loss on sale
of property, plant and equipment |
|
11.4 |
11.4 |
|
(4.5) |
(4.5) |
Accelerated
depreciation / amortisation on business exit |
|
— |
— |
|
— |
1.9 |
Contingent
consideration |
1 |
— |
(5.4) |
|
— |
(2.5) |
Impairment of property
plant and equipment |
7 |
6.1 |
6.1 |
|
— |
9.0 |
Impairment of
intangibles acquired in business combinations |
1 |
— |
61.7 |
|
— |
14.0 |
Impairment of goodwill
and intangible assets |
1 |
— |
58.1 |
|
— |
551.6 |
Impairment of contract
related assets and investment loan |
1 |
— |
— |
|
— |
119.2 |
Impairment of loans
and investments |
1 |
— |
1.6 |
|
— |
— |
|
|
|
|
|
|
|
Other
adjustments: |
|
|
|
|
|
|
Movement in
provisions |
|
2.8 |
(9.1) |
|
(25.2) |
(22.7) |
|
|
|
|
|
|
|
Other
adjustments: |
|
|
|
|
|
|
Pension deficit
contribution |
|
— |
(42.0) |
|
— |
— |
Other contributions
into pension schemes |
|
(16.1) |
(21.0) |
|
(29.8) |
(29.8) |
Professional fees on
acquisition |
|
— |
— |
|
— |
0.5 |
Re-measurement of
businesses held for disposal |
|
— |
— |
|
— |
8.6 |
Movement in Capita
Asset Services settlement provisions |
|
— |
— |
|
— |
3.4 |
|
|
|
|
|
|
|
Movements in
working capital: |
|
|
|
|
|
|
Trade and other
receivables |
|
91.2 |
89.3 |
|
(37.2) |
(30.6) |
Non-recourse
receivables financing |
|
(110.0) |
(110.0) |
|
(23.6) |
(23.6) |
Trade and other
payables |
|
(98.5) |
(91.7) |
|
(115.3) |
(111.7) |
Deferred income |
|
(243.4) |
(243.7) |
|
(75.2) |
(66.8) |
Contract fulfilment
assets (non current) |
|
(11.7) |
(11.7) |
|
(11.9) |
(11.9) |
Cash generated from
operations |
|
69.8 |
(75.7) |
|
230.3 |
225.4 |
|
|
|
|
|
|
|
Adjustments for
free cash flows: |
|
|
|
|
|
|
Income tax
received |
|
26.6 |
25.3 |
|
9.5 |
9.5 |
Net interest paid |
4 |
(39.0) |
(52.5) |
|
(54.2) |
(54.2) |
Purchase of property,
plant and equipment |
7 |
(74.6) |
(89.4) |
|
(62.5) |
(66.2) |
Purchase of intangible
assets |
8 |
(67.2) |
(70.1) |
|
(70.8) |
(71.0) |
Proceeds from sale of
property, plant and
equipment/intangible assets |
|
1.9 |
1.9 |
|
23.1 |
23.1 |
Free cash
flow |
|
(82.5) |
(260.5) |
|
75.4 |
66.6 |
Adjusted free cash flow and cash generated from operations
|
Free cash flow |
|
Cash generated from operations |
|
2018
£m |
2017
£m |
|
2018
£m |
2017
£m |
Reported |
(260.5) |
66.6 |
|
(75.7) |
225.4 |
Pension deficit
contributions |
46.9 |
— |
|
46.9 |
— |
Significant
restructuring |
100.8 |
45.0 |
|
100.8 |
45.0 |
Business exits |
6.6 |
(19.5) |
|
(11.1) |
(23.4) |
Other |
23.7 |
(16.7) |
|
8.9 |
(16.7) |
Adjusted |
(82.5) |
75.4 |
|
69.8 |
230.3 |
Pension deficit contributions: in November 2018, the Group agreed a deficit
recovery plan with the Trustees of the Capita Pension and Life
Assurance Scheme (the ‘Scheme’). The payments under the agreed
deficit recovery plan total £176m, of which £42.3m was paid in
2018. In addition, further contributions of £4.5m were made
following closure of the Scheme in 2017 to future accrual for the
majority of members of the Scheme. These payments have been
excluded from adjusted cash flows as the Group treats them like a
debt like item.
Significant restructuring: in April 2018, the Group announced a multi-year
transformation plan. In the period to 31
December 2018, a cash outflow of £100.8m (2017: £45.0m) was
incurred in relation to the cost of the transformation plan, and
restructuring costs relating to Capita’s previously announced cost
reduction plan.
Business exits: the cash flows of businesses
exited, or in the process of being exited, and the proceeds on
disposals, are disclosed outside the adjusted results. The 2017
results have been restated for those businesses exited, or in the
process of being exited, in 2018 to enable comparability of the
adjusted results.
Other: includes the cash flows related to other items
excluded from adjusted profit.
Reconciliation of net cash flow to movement in net
funds/(debt)
|
|
|
Non-cash flow movements |
|
|
|
Net debt at
1 January
2018
£m |
Cash flow
movements
£m |
Acquisitions
in 2018
£m |
Foreign
exchange
movements
£m |
Fair value
changes
£m |
Other2
£m |
Net debt at
31 December
2018
£m |
|
|
|
Cash, cash equivalents
and overdrafts |
478.4 |
165.5 |
— |
(1.2) |
— |
— |
642.7 |
|
Other loan notes |
(0.3) |
— |
— |
— |
— |
— |
(0.3) |
|
Private placement loan
notes1 |
(1,664.0) |
580.9 |
— |
3.1 |
(27.5) |
(0.5) |
(1,108.0) |
|
Currency swaps in
relation to USD denominated private placement loan
notes1 |
176.8 |
(103.6) |
— |
— |
26.4 |
— |
99.6 |
|
Interest rate swaps in relation to
GBP denominated private placement loan notes1 |
5.4 |
— |
— |
— |
(3.5) |
— |
1.9 |
|
Term loan |
(100.0) |
— |
— |
— |
— |
— |
(100.0) |
|
Finance leases |
(0.2) |
0.2 |
— |
— |
— |
— |
— |
|
Total net liabilities
from financing activities |
(1,582.3) |
477.5 |
— |
3.1 |
(4.6) |
(0.5) |
(1,106.8) |
|
Deferred
consideration |
(13.1) |
11.1 |
— |
— |
— |
— |
(2.0) |
|
Net debt |
(1,117.0) |
654.1 |
— |
1.9 |
(4.6) |
(0.5) |
(466.1) |
|
1 The sum of these items held at fair value equates
to the underlying value of the Group’s private placement loan
note’s debt of £1,006.6m (2017: £1481.8m). Cash flow movement
in private placement loan notes includes both repayment of private
placement loan notes of £(577.2)m and financing arrangement costs
of £(3.7)m.
2 Other comprises the amortisation of the discount
on the euro debt issue
The aggregate private placement loan note’s fair value above of
£1,108.0m (2017: £1,664.0m) includes the GBP value of the USD, GBP
and EUR denominated loan notes at 31
December 2018. To remove the Group’s exposure to currency
fluctuations it has entered into currency swaps which effectively
hedge the movement in the underlying USD loan notes’ fair value.
The interest rate swap is being used to hedge the exposure to
changes in the fair value of GBP denominated private placement loan
notes.
The combined fair value of the interest and currency swaps, of
£101.5m (2017: £182.2m).
|
|
|
Non-cash flow movements |
|
|
|
Net debt at
1 January
2017
£m |
Cash flow
movements
£m |
Acquisitions
in 2016
£m |
Foreign
exchange
movements
£m |
Fair value
changes
£m |
Other2
£m |
Net debt at
31 December
2017
£m |
|
|
|
Cash, cash equivalents
and overdrafts |
565.8 |
(90.5) |
— |
3.1 |
— |
— |
478.4 |
|
Other loan notes |
(0.3) |
— |
— |
— |
— |
— |
(0.3) |
|
Private placement loan
notes1 |
(1,961.7) |
126.2 |
— |
(10.7) |
184.0 |
(1.8) |
(1,664.0) |
|
Interest and currency swaps in
relation to USD denominated private placement loan
notes1 |
357.9 |
— |
— |
— |
(181.1) |
— |
176.8 |
|
Interest rate swaps in relation to
GBP denominated private placement loan notes1 |
7.7 |
— |
— |
— |
(2.3) |
— |
5.4 |
|
Term loan |
(650.0) |
550.0 |
— |
— |
— |
— |
(100.0) |
|
Finance leases |
(2.3) |
2.1 |
— |
— |
— |
— |
(0.2) |
|
Total net liabilities
from financing activities |
(2,248.7) |
678.3 |
— |
(10.7) |
0.6 |
(1.8) |
(1,582.3) |
|
Fixed rate interest
rate swaps |
(85.1) |
84.6 |
— |
— |
0.5 |
— |
0.0 |
|
Deferred
consideration |
(10.8) |
10.8 |
(2.0) |
— |
— |
(11.1) |
(13.1) |
|
Net debt |
(1,778.8) |
683.2 |
(2.0) |
(7.6) |
1.1 |
(12.9) |
(1,117.0) |
|
1 The sum of these items held at fair value equates
to the underlying value of the Group’s private placement loan
note’s debt of £1,006.6m (2016: £1,481.8m). Cash flow
movement in private placement loan notes includes both repayment of
private placement loan notes of £(124.1)m and financing arrangement
costs of £(2.1)m..
2 Other comprises the amortisation of the discount
on the euro debt issue
14 Contingent liabilities
Contingent liabilities represent potential future cash outflows
which are either not probable or cannot be measured reliably.
The Group has provided, through the normal course of its
business, performance bonds and bank guarantees of £84.0m (2017:
£88.4m).
We are in discussions with a number of the Group’s life
insurance clients, the outcomes and timings of which are uncertain
but could result in the continuation of a contract with amended
terms or the termination of a contract. If an operation is
terminated, the Group may incur associated costs or accelerate the
recognition of deferred income. As the outcome of these discussions
is uncertain, the Group has not made any provision for a future
outflow of funds that might result from the eventual outcome.
Capita completed the disposal of its Capita Asset Services
businesses, including CFM, to the Link Group on 3 November 2017. Capita plc, as part of the sale
of the Capita Asset Services businesses, has provided an indemnity
against certain legacy claims.
The Capita Group entities are parties to legal actions and
claims which arise in the normal course of business. The Group
throughout the year needs to apply judgement in determining the
merit of litigation against it and the chances of a claim
successfully being made. It needs to determine the likelihood of an
outflow of economic benefits occurring and whether there is a need
to disclose a contingent liability or whether a provision might be
required due to the probability assessment.
At any time there are a number of claims or notifications that
need to be assessed across the Group. The disparate nature of
the Group entities heightens the risk that not all potential claims
are known at any point in time. Under the transformation plan,
the support functions including commercial and legal are being
strengthened and a Chief General Counsel has been
appointed. This enhances the current processes in place to
assess the likelihood of historical claims arising.
15 Related-party transactions
Compensation of key management personnel
|
2018
£m |
2017
£m |
|
|
Short-term employment
benefits |
11.9 |
11.3 |
|
Pension |
0.2 |
0.2 |
|
Share-based
payments |
— |
0.1 |
|
|
12.1 |
11.6 |
|
Gains on share options exercised in the year by Capita plc
Executive Directors were £nil (2017: £0.7m) and by key management
personnel £nil (2017: £0.2m), totalling £nil (2017: £0.9m).
During the year, the Group rendered administrative services to
Smart DCC Ltd, a wholly-owned subsidiary which is not consolidated.
The Group received £64.3m (2017: £55.5m) of revenue for these
services. The services are procured by Smart DCC on an arm’s length
basis under the DCC licence. The services are subject to review by
Ofgem to ensure that all costs are economically and efficiently
incurred by Smart DCC.
Capita Pension and Life Assurance Scheme is a related party of
the Group. Transactions with the Scheme are disclosed in the Annual
Report.
The following companies are substantial shareholders in the
Company and therefore a related party of the Company (in each case,
for the purposes of the Listing Rules of the UK Listing Authority).
The number of shares held on 5 March 2019 was as below:
Shareholder |
No.
of shares |
% of
voting rights |
Veritas Asset
Management LLP1 |
192,533,863 |
11.54 |
Invesco Ltd |
191,409,106 |
11.47 |
Investec Asset
Management Ltd |
153,805,729 |
9.22 |
RWC Asset Management
LLP |
127,012,876 |
7.61 |
Schroder Investment
Management |
101,030,829 |
6.06 |
Woodford Investment
Management LLP |
93,562,659 |
5.60 |
Coltrane Asset
Management, L.P |
82,388,589 |
4.94 |
BlackRock, Inc. |
74,230,358 |
4.45 |
Marathon Asset
Management LLP |
64,756,810 |
3.88 |
Veritas Funds PLC |
55,009,900 |
3.30 |
Vanguard Group |
54,711,874 |
3.28 |
Norges Bank Investment
Management |
54,273,873 |
3.25 |
Jupiter Asset
Management |
53,573,060 |
3.21 |
1 This includes the holding of Veritas Funds PLC.
16 Post balance sheet event
As set out in note 12, the Company continues to discuss with the
Financial Conduct Authority the final quantum of the redress
payments regarding the Connaught Income Series 1 Fund. Since
the year end the Company has been notified that it is probable that
a reimbursement will be due to Capita. The amount is subject
to final agreement but is not material to the financial statements.
There are no post balance sheet events that have an adjusting
effect on the financial statements.
17 Preliminary announcement
Copies of the announcement can be obtained from the Company's
registered office at 30 Berners Street, London W1T 3LR, or on the Company's corporate
website www.capita.com/Investors.
It is intended that the Annual Report and Accounts will be
posted to shareholders early April 2019. It will be available
to members of the public at the registered office and on the
Company's Corporate website
www.capita.co.uk/investors/Pages/Investors.aspx from that date.
Appendix - alternative performance
measures
The Group presents various APMs as the Directors believe that
these are useful for users of the financial statements in helping
to provide a balanced view of, and relevant information on, the
Group’s financial performance, position and cash flows. These APMs
are mainly measures which disclose the ‘adjusted’ performance of
the Group excluding specific items which are regarded as
adjustments. Those items which relate to the ordinary course of the
Group’s operating activities remain within adjusted profit. The
following items are excluded from adjusted profit: intangible
amortisation, impairment of goodwill and acquired intangibles,
acquisition contingent consideration movements, the financial
impact of business exits or businesses in the process of being
exited, acquisition expenses (if material), movements in the
mark-to-market valuation of certain financial instruments, the
impact of significant new contracts and restructuring (see below),
and specific non-recurring items in the income statement. In
the Directors’ judgement, these need to be disclosed separately
(see notes 1, 2, and 4) by virtue of their nature, size and/or
incidence, in order for users of the financial statements to obtain
a proper understanding of the financial information and the
underlying performance of the business.
In addition, the Group presents other APMs including key
performance indicators (KPIs) such as return on capital employed
and interest cover by which we monitor our performance and others
such as organic and acquisition revenue growth which provide useful
information to users which is not otherwise readily available from
the financial statements.
APMs
presented |
2018 |
2017 |
% change |
Source |
Revenue – continuing
operations |
|
|
|
|
Total revenue as
reported |
£3,918.4m |
|
£4,234.6m |
|
(7.5%) |
|
Line item in income
statement |
Deduct: business
exit |
(£50.8m) |
|
(£66.7m) |
|
|
Line item in note
2 |
Deduct: business
exited in 2018 |
|
(£76.1m) |
|
|
Revenue from
businesses exited in 2018 |
1. Adjusted
revenue |
£3,867.6m |
|
£4,091.8m |
|
(5.5%) |
|
Adjusted revenue as
per note 1 |
Deduct: 2017
acquisitions |
(£2.8m) |
|
— |
|
|
Additional
contribution in 2018 of acquisitions acquired in 2017 |
Deduct: 2018
acquisitions |
— |
|
— |
|
|
Contribution in 2018
of acquisitions acquired in 2018 |
2. Adjusted organic
revenue |
£3,864.8m |
|
£4,091.8m |
|
(5.4%) |
|
Adjusted revenue
excluding businesses exited and acquired |
Prior year adjusted
revenue on a like-for-like basis |
£4,091.8m |
|
— |
|
|
From line 1 above |
Total
acquisitions |
£2.8m |
|
— |
|
|
2017 acquisitions plus
2018 acquisitions |
3. Growth from
acquisitions |
0.1% |
|
— |
|
|
Total
acquisitions/Prior-year adjusted revenue on a like-for-like
basis |
Profit – continuing
operations |
|
|
|
|
Operating profit as
reported |
£34.9m |
|
(£420.1m) |
|
|
Line item in income
statement |
Adjusting items in
note 1 |
£300.4m |
|
£867.6m |
|
|
|
4. Adjusted
operating profit |
£335.3m |
£447.5m |
(25.1%) |
|
Line item in note
1 |
5. Adjusted
operating margin [KPI] |
8.7% |
|
10.9% |
|
|
Adjusted operating
profit/adjusted revenue |
Profit/(loss) before tax as reported
[KPI] |
£272.6m |
|
(£513.1m) |
|
|
Line item in income statement |
Adjusting items in
note 1 |
£9.5m |
|
£896.2m |
|
|
|
6. Adjusted profit
before tax [KPI] |
£282.1m |
£383.1m |
(26.4%) |
|
Line item in note
1 |
7. Adjusted
earnings per share [KPI] |
16.37p |
|
27.99p |
|
(41.5%) |
|
Line item in income
statement and note 5 - earnings per share |
Gearing |
|
|
|
|
Adjusted operating
profit1 |
|
£335.3m |
£447.5m |
Line item in note
1 |
Add business exit –
trading |
|
£16.8m |
£16.8m |
Line item in note
2 |
Deduct:
non-controlling interest |
|
(£12.5m) |
(£14.1m) |
Underlying EBIT
attributable to non-controlling interests |
Deduct: acquisition
costs |
|
£—m |
(£1.7m) |
|
Add back: share-based
payment charge |
|
£3.4m |
£2.9m |
Line item in note
13 |
Add back: non-current
service pension charge |
|
£9.5m |
£0.8m |
|
Add back: amortisation
on purchased intangibles |
|
£27.8m |
£19.9m |
Line item in note
13 |
Adjusted EBITA |
a |
£380.3m |
£472.1m |
|
Add back:
pre-acquisition underlying profit |
|
£—m |
£0.3m |
|
Deduct business exit –
trading |
|
(£19.7m) |
(£16.8m) |
Line item in note
2 |
Add back:
depreciation |
|
£65.2m |
£63.5m |
Line item in note
13 |
Covenant calculation -
adjusted EBITDA |
b |
£425.8m |
£519.1m |
|
8. Adjusted
interest charge |
|
(£53.2m) |
(£64.4m) |
Line item in note
4 |
Interest cost
attributable to pensions |
|
£9.4m |
£9.2m |
Line item in note
4 |
Cash flow hedges recycled to the
income statement |
|
(£2.5m) |
- |
|
Borrowing costs |
c |
(£46.3m) |
(£55.2m) |
|
9. Interest cover
2 |
a/c |
8.2x |
8.6x |
Adjusted
EBITA/Borrowing costs |
Money Market
Funds |
d |
£—m |
£14.0m |
|
Net debt |
e |
£466.1m |
£1,117.0m |
Line item in note
13 |
Restricted cash
3 |
f |
£28.6m |
£22.0m |
Cash that may not be
applied against net debt for covenant calculation purposes |
Adjusted net debt |
g =
d+e+f |
£494.7m |
£1,153.0m |
|
10. Adjusted net
debt to adjusted EBITDA ratio [KPI] |
g /
b |
1.2x |
2.2x |
Adjusted net
debt/adjusted EBITDA |
1.
Adjusted operating profit excludes items that are separately
disclosed and considered to be outside the underlying operating
results for the particular year under review and against which the
Group’s performance is assessed.
2. As noted in the Annual Report and Accounts 2017, on 20 April
2018, Capita agreed various amendments with the noteholders under
its US private placement notes. This included the carve-out of up
to £100m worth of bonds and guarantees from the definition of
indebtedness. For covenant test purposes, this is effective from
the 12-month period ended 30 June 2018, but for the Group's
alternative performance measures, the comparatives have been
restated to be presented on a consistent basis. In addition, the
comparatives have been restated to include results of business
exits during 2018.
3. Restricted cash includes cash held by FCA regulated entities,
cash held in foreign bank accounts in Malaysia and Nigeria and
distributable reserves in joint ventures which does not belong to
Capita and is excluded from adjusted net debt. |
ROCE |
|
|
|
|
Adjusted operating
profit |
a |
£335.3m |
£447.5m |
Line item in note
1 |
Tax rate |
b |
9.7% |
17.7% |
|
Tax |
c = a x
b |
£32.5m |
£79.2m |
Adjusted profit
multiplied by tax rate |
Adjusted operating
profit after tax |
d = a -
c |
£302.8m |
£368.3m |
Adjusted profit less
tax |
Current year net
assets/(liabilities) |
e |
£103.3m |
(£929.8m) |
Line in balance
sheet |
Current year adjusted
net debt |
f |
£464.1m |
£1,103.9m |
Line item in note 13 –
additional cash flow information, net debt excluding the impact of
deferred consideration |
Adjustments to capital
employed |
g |
£1,276.5m |
£1,359.7m |
Includes post-tax
impact of accumulated acquired intangible amortisation, fixed rate
swaps, put options and pensions |
|
m1 = e+f+g |
£1,843.9m |
£1,533.8m |
Used in 2018 average
capital employed |
Less acquisition spend in year |
h |
£—m |
(£18.8m) |
Consideration paid - cash acquired +
debt acquired |
Current year capital
employed |
i =
e+f+g+h |
£1,843.9m |
£1,515.0m |
|
Prior year net
liabilities |
j |
|
(£552.9m) |
|
Prior year adjusted
net debt |
k |
|
£1,682.9m |
|
Comparative prior year
adjustments |
l |
|
£1,280.3m |
Includes post-tax
impact of accumulated acquired intangible amortisation, fixed rate
swaps, put options and pensions |
Prior year capital
employed |
m2 = j+k+l |
|
£2,410.3m |
Used in 2017 average
capital employed |
Average capital
employed pre-acquisitions |
n =
(i+m)/2 |
£1,688.9m |
£1,962.7m |
|
Weighted average
acquisition spend in year |
o |
£—m |
£35.8m |
Pro rata number of
months post-acquisition (including contingent and deferred
consideration payments) |
Average capital
employed |
p =
n+o |
£1,688.9m |
£1,998.5m |
|
15. ROCE
[KPI] |
q =
d/p |
17.9% |
18.4% |
|