REG-Capita PLC: Annual Financial Report
05/03/2020 07:05
Capita plc
Full Year Results 2019
Summary
We have made good progress with the transformation
• Creating a purpose-led organisation to drive long-term sustainable success
• Significant progress in fixing legacy issues and reducing ‘cost of poor
quality’
• Rebuilding trust with our colleagues and clients
• More investment needed than initially thought
Positioning ourselves for growth
• Focusing investment on software products and in-demand transformation
capabilities
• Launch of Capita Consulting to drive origination, pipeline and
pull-through revenue
2019 results
• Revenue decline reducing: revenue growth in H2 in four out of six
divisions, order intake of £2.2bn in 2019
• Profit before tax of £275m: underpinned by strong cost-saving programme
and one-offs
• Cash generation impacted by investment in delivering operational
improvements
2020 outlook updated
• Generating modest organic growth and sustainable free cash flow(1) of at
least £160m - both in line with current market expectations(2)
• Exploring non-core disposals to further simplify the portfolio and recycle
capital
Confidence in long term unchanged
• Continue to build a more focused, sustainable business for the long term
with growing free cash flow
Jon Lewis, Chief Executive Officer, said:
“Over the past two years, we have made significant progress with our
multi-year transformation at Capita to create the foundations for long-term,
sustainable success.
“We have continued to simplify and strengthen the business, fix legacy
issues, rebuild trust with clients, take out cost, reduce risk, and invest in
our growth capability.
“Transforming an organisation of Capita’s size is a complex challenge;
there remains more to do and it is requiring more investment than we had
expected in 2018.
“But our plan is the right one and remains unchanged. I am confident that,
with the work done to date and investment made in 2019, we can deliver organic
revenue growth for the first time in five years in 2020.”
Year ended 31 December 2019
Financial highlights - continuing operations Reported 2019 Reported 2018 Adjusted (1)2019 Adjusted (1)2018 Adjusted (1) YOY change
Revenue £3,678.6m £3,918.4m £3,647.4m £3,814.7m (4%)
Operating profit £0.4m £34.9m £306.1m £334.4m (8%)
(Loss)/profit before tax (£62.6m) £272.6m £275.0m £281.2m (2%)
(Loss)/earnings per share (4.18)p 17.99p 13.09p 16.33p (20%)
Free cash flow (£213.0m) (£260.5m) (£61.3m) (£78.8m) 22%
Board responsibility
Lyndsay Browne will be appointed a member of the Remuneration Committee and
Joseph Murphy will be appointed as a member of the Audit and Risk Committee,
effective from 6 March 2020.
(1) Capita reports results on an adjusted basis to aid understanding of
business performance. In 2019, International Financial Reporting Standard 16
Leases (IFRS 16), which has a material impact, has been adopted. However, to
aid comparison with the prior year, the primary adjusted measures used by the
Board for evaluating performance are before the impact of IFRS 16. Refer to
appendix for calculation of alternative performance measures.
(2) Market consensus for Revenue growth of 0.4% and Adjusted Free Cash Flow(1)
of £150m at 4 March 2020.
Investor presentation
A presentation for institutional investors and analysts hosted by Jon Lewis,
CEO and Patrick Butcher, CFO, will be held today, starting at 08:30am UK time.
There will be a live audio webcast of the presentation on our website
www.capita.com/investors and subsequently available on demand. The
presentation slides will be published on our website at 07:00am and a full
transcript will be available by midday the following day.
Webcast link (Live and On-demand):
https://webcast.openbriefing.com/capita050320/
For further information:
Capita
Stuart Morgan, Investor Relations Director T +44 (0) 20 7654 2281
Capita press office T +44 (0) 20 7654 2399
Powerscourt
Victoria Palmer-Moore or James White 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
Better positioned for growth
Capita is two years into a multi-year transformation to become a truly
progressive, purpose-led, responsible business. Over that period, we have made
significant progress, laying the foundations for a more focused, predictable
and sustainable business. We have continued to work hard to deliver on the
commitments of our strategy – to simplify, strengthen and succeed. But there
is more to do to achieve our goals and, while we are convinced that the plan
remains the right one, not everything has worked in our favour.
We started to rebuild the organisation in 2018, reorganising our divisions and
creating robust, accountable and centralised functions which define how we do
things company-wide. We defined our purpose and implemented our operating
model. We deleveraged our balance sheet and agreed a pension deficit reduction
plan.
In 2019, we continued to simplify and strengthen the organisation, fix legacy
issues, invest in our people, rebuild trust with clients, cut cost, improve
controls and reduce risk. We invested significantly in our growth capability
and the organisation’s products and services, particularly in consulting,
digital services and software. This will allow us to stimulate, and maximise,
future higher-margin growth opportunities in areas where Capita has a
competitive advantage and where we can offer cross-sell opportunities within
the Group.
During 2019, we also improved the operational performance that has weighed on
our finances, failed to reflect our client ambitions and sapped the energy of
our people for some time. We have now embedded a more disciplined approach to
bidding through our contract review committee, which helps to ensure we have
derisked the business for the future. The executive committee oversees
contract implementation, supported by our investment in skilled programme
managers. Cost competitiveness and efficiency are also now embedded throughout
Capita and we achieved £105m of year-on-year savings during 2019, delivering
our target of a cumulative £175m within two years. This followed changes to
divisions and business units, consolidating operations and restructuring
management layers, with further savings in property, procurement and
technology.
In line with our drive to simplify Capita, we continued to review and assess
our portfolio – to align better to our growth strategy; and decided in early
2020 to reorganise our Specialist Services division. We concluded that,
following a period of change and improved performance, a number of businesses
in the division would benefit from closer alignment with core Capita and
should be moved into other divisions. Some of the other businesses in the
division are now being prepared for disposal, with the proceeds earmarked to
help strengthen the organisation.
However, while good progress is being made, there is still more that needs to
be done and we are having to invest more than we initially thought to fully
transform Capita. In 2019, as well as investing in growth, we invested more to
fix and restructure internal systems and processes, and to address issues of
complexity, poor quality and technological deficit; it remains vital to build
the right foundations for Capita to drive sustainable growth. At the same
time, the external trading environment continued to be challenging.
It means that our progress has yet to be fully evidenced in our financial
performance. Revenue and profit for 2019 were in line with our expectations.
We have reduced the revenue decline during the last year, and four of our six
divisions grew in the second half. I am, however, disappointed that we are
updating our guidance for free cash flow and that we now expect to hit at
least £160m in 2020, in line with market consensus, and grow thereafter. We
recognise that the benefits due to many stakeholders, especially our
investors, still need to come through. But I am confident that, by investing
more now, we are enhancing our ability to deliver sustainable growth.
We are evolving as a consulting, digital services and software business, and
positioning ourselves to benefit from these growth markets. We are investing
significant resources to drive future growth. We are leveraging our experience
to address client and market demand. As we said at the half year, securing
returns on our investments in the form of organic revenue growth and cash
generation is our key priority for 2020. Our transformation plan remains the
right one.
Building for the future
Capita is aiming to become a leading player in digital transformation and we
are using our core skills and client relationships to position ourselves in
this strong, growing market where Capita has a competitive advantage. Global
spend on digital transformation is predicted by market research company IDC to
exceed £1.5trn by 2022 – and it is this market we are tapping into.
Fundamental to this approach is the newly launched Capita Consulting business
which gives us a front-end capability, an incremental revenue stream and
insight into the key strategic business challenges of our clients. This will
in turn allow us to create pull-through for other Capita services and maximise
opportunities across the whole of the organisation. It provides the potential
to cross sell products and move away from one-off solutions, while allowing us
to build relationships with our clients, better understand their needs and
offer them innovative solutions. The consulting business already has 30
partner-level consultants, supported by 270 analytical and technical
consultants, many incorporated from small, existing consultancies within
Capita. It is partnering with our well-established network of cloud technology
providers, fintechs, start-ups and subject experts to help deliver operational
transformation.
But the business is different from other established consultancies because, at
Capita, we are practitioners – with 30 years’ experience and deep
understanding of designing, building and running the systems of hundreds of
businesses. We expect Capita Consulting to help drive long-lasting
relationships with our clients, to help better prioritise which services to
develop for those clients, and to form a key pillar of our medium and
long-term growth strategies. Our consulting team has already been working
collaboratively in this way with a major client to assist them with their
cyber security requirements. We have also been selected as a partner to
support another client transform to an agile leadership model, while our
consultants are helping a south London borough design and build digital
services to transform residents’ experiences and outcomes.
We are committed to helping our clients take full advantage of current and
emerging opportunities in digital transformation. We now have a much better
sense of which of our products and services our clients need the most, and are
focusing on six key capabilities: customer experience, data and insight, cloud
platforms, automation, cyber, and the ‘internet of things’ (IoT). We
already have strong capabilities in these areas. For example, Capita
subsidiary DCC supports the UK roll-out of smart meters and is the largest IoT
project in the UK. DCC has an exciting future, providing further services for
the energy market, and Capita can take these skills to new projects and
clients, and identify new 5G and IoT opportunities.
Automation capability is a particular focus area for the new Capita; it will
drive both revenue and profit, by delivering faster, more accurate and more
reliable services, while saving costs through higher levels of productivity.
For this reason, in 2019 we established in Birmingham one of the UK’s
biggest centres of automation excellence. We have built a portfolio of
automation technologies that includes robotic process automation, artificial
intelligence, optical character recognition and webforms, through to machine
learning and natural language processing, and we are partnering with the
world’s leading technology companies in this area, including UI Path and
Blue Prism. Automation is already being used to help manage additional
workloads for a number of the charging schemes we operate; it has also been
introduced into Primary Care Support England (PCSE) services to improve the
speed and accuracy of calculating pension entitlements for 37,000 GPs.
We have continued to invest in and expand our digital delivery centre in
India, where we now employ 1,200 people. We are utilising the software
developments made there to optimise product management, drive standardisation
and reduce development lifecycles. We now have an agile, 13-week target
development cycle that increases our ability to deliver client solutions more
quickly. In 2019, we developed cloud-enabled versions of our SIMS, Retain, and
One platforms, as well as SaaS-enabling core enterprise products, and are
opening up these platforms to expand our client offerings.
Overall, the combination of our new consulting business, reorganised account
management and digital competencies will allow us to move away from being
mainly reactive to proactive in pursuit of new business opportunities. We will
aim to be less reliant on competitive tenders and instead look to secure a
higher percentage of revenues from opportunities that we co-create with client
partners. This approach marks an important turning point for the new Capita
– building on our deep industry expertise, while leveraging a portfolio of
innovative, scalable and repeatable solutions which we design once and
implement many times.
Our commitment to our people
Capita is a people-focused business and our leadership team is committed to
putting our colleagues at the very centre of how we operate. As a services
business, we are only as good as our ability to delight our clients and their
customers; that is what drives everything we do in terms of commitment to, and
investment in, our own people.
In 2019, we did much to improve the experience of working at Capita. With more
engaged people delivering better service to our clients, we believe we can
establish a platform for long-term, sustainable and efficient growth. Our
people survey recorded a rise in employee satisfaction levels, with 72% of our
employees saying they were proud to work for Capita, up from 56% two years
ago, alongside a net promoter score swing of 14 points. This shows our
colleagues feel increasingly engaged, which is important because we cannot
expect them to delight clients and customers unless they feel valued and proud
of the work they are doing.
In 2019, we became the only FTSE-listed business to have two employees from
its wider workforce appointed to the board of directors. We also committed to
pay all UK colleagues the ‘real living wage’ as a minimum from April 2020,
and improved our UK maternity, paternity and shared parental leave policies.
We launched our centre for learning and development, Capita Academy, providing
more training opportunities and apprenticeships, as well as a performance
management and development framework to ensure colleagues have clear
objectives and opportunities to develop their careers. In December, we
implemented Workday, our people management and data tool to oversee all
internal HR processes.
Importantly, we recruited industry-leading talent to head up four of our six
divisions to continue to enhance a senior leadership team capable of driving
significant change: Aimie Chapple joined us as Executive Officer for Customer
Management alongside Mark Cook in Technology Solutions, Chantal Free in People
Solutions, and Andy Start in Government Services.
Our commitment to our clients and customers
In 2019, we continued to focus on delivering for our client partnerships. We
are investing in the relationships we enjoy with a wide range of public and
private sector partners, while creating new partnerships and broadening our
reach. Our priority over the past two years has been to get closer to our
markets, improve our services to existing clients and better understand their
requirements, and strive for operational excellence. This has been reflected
in vastly improved service: we are hitting more than 92% of all our major
contractual key performance indicators; and achieving better customer net
promoter scores, with Government Services, for example, improving last year by
34 points.
Standout service delivery last year included the design, implementation and
ongoing operation of the technology for Transport for London’s ultra-low
emission zone (ULEZ). This project is helping to reduce levels of pollution in
the capital and has already reduced emissions of nitrogen oxides by
approximately 29% since it was introduced in April 2019; it is a great example
of Capita’s ability to create and deliver complex, critical, digital
infrastructure. We also achieved several important strategic business wins,
including a £525m contract with the Ministry of Defence to manage 53 fire
stations in the UK, Cyprus and the Falkland Islands, and to construct and
manage a new fire and rescue training facility in Gloucestershire. Our
stronger relationships, client insight, investment in account management and
improved service delivery enabled us to extend existing contracts with clients
such as The Co-Operative Bank, the Department for Work and Pensions, Energia,
Liberata, the National Trust, and Southern Water. Our renewal rates (by
contract value) showed a healthy improvement in 2019; excluding People
Solutions, where we have more to do, the renewal rate was 91%. Group order
intake for the year was £2.2bn.
We also focused on improving the performance of our three previously
‘challenging’ contracts, reducing losses on them, and delivering a
transformed service to our clients. Our reset Recruiting Partnering Project
(RPP) contract with the British Army is on track to hit its regular soldier
annual recruitment target for the first time since the start of the contract
in 2012, while we improved a range of other aspects of the contract. We have
also improved performance relating to our contracts with NHS England (PCSE)
and mobilcom-debitel, hitting significantly higher monthly key performance
indicators and reducing the needless financial drain of penalty payments.
Our commitment to our suppliers and partners
As a purpose-led, responsible organisation, Capita exists to create better
outcomes for all stakeholders, including our 26,000 suppliers and partners,
with whom we seek to build lasting relationships, treating them fairly and
paying promptly, while encouraging them to deliver.
In June, we published our first supplier charter to ensure our dealings with
our suppliers conform to best practice. The charter sets out the core
principles by which Capita does business, while outlining what we expect from
our suppliers in return. It covers a range of business and operational areas
from health and safety to human rights, diversity and inclusion, cyber
security, and how any breaches of the charter principles are reported.
We are signatories to the Government’s prompt payment code, reporting our
payment practices and performance every six months. In 2019, we spent £2.1bn
with suppliers, paying 97% of them within 60 days, surpassing the requirements
of the prompt payment code. The Federation of Small Businesses has paid
tribute to the example set by us and the “positive changes Capita has made
on this important agenda”.
In 2020, we will continue to strengthen our relationships with suppliers -
with particular focus on our approach to, and payment terms with, small and
medium-sized enterprises (SMEs). They make up approximately 46% of all our
suppliers and are strategically important to us. Capita supports the
Government’s aspiration that a third of companies’ external supplier spend
goes to micro and SME businesses by 2022; and we are taking positive action to
further increase our own spend with smaller businesses.
Our commitment to our investors
Revenue and profits were in line with our expectations, with cost reductions
offsetting investments, lost revenues and lower margins on some contract
renewals. Some of the benefits of the transformation work, such as profit
improvements on the three ‘challenging’ contracts were reflected in the
results. While our core businesses have largely shown growth in the second
half, it has been slower than we had hoped. As in 2018, the results were
improved by some one-off items, as is to be expected in a complex Group in
transition.
Adjusted revenue for the year was £3,647.4m, a decline from 2019, as the
benefit of contract wins was outweighed by contract losses, many of which
occurred in 2018. This was coupled with a decline in scope and volume, due to
high competition and market pressures in Technology Solutions, and lower
volumes in our Life and Pensions contracts and in our Real Estate and
Infrastructure business. There was also lower transactional revenue, mainly in
Specialist Services.
Adjusted profit before tax was £275.0m, also down compared with last year, in
line with expectations, as margin mix, investment and contract losses
outweighed new wins and cost savings. Adjusted free cash flow in 2019 was an
outflow, as we had expected. The balance sheet was significantly strengthened
in 2018, but net debt is at the upper end of our desired range, as a result of
lower conversion of profit to cash, and more investment being required to fix
contracts and lay the foundations for growth.
Our commitment to society
Capita employs 61,000 people globally, and we are acutely mindful of the
responsibility we have to support individuals and the communities we serve -
and be a force for good in society. We aim to help restore the connection
between companies and a public that has grown increasingly mistrustful of big
business. As we drive to be a truly responsible business, we recently became a
founder signatory of the Good Business Charter and gained Fair Tax Mark
accreditation.
In 2019, to ensure we could make as great an impact as possible to drive
positive change, we formulated our responsible business strategy, which is
aligned with the UN’s sustainable development goals in the areas of social
mobility and youth unemployment, digital exclusion, gender equality, climate
change, business governance and ethics. To drive social mobility, we launched
two new charity partnerships with Teach First and Young Enterprise, supporting
more than 7,000 young people to gain skills that make them more employable.
We sought to make a number of changes to the way we work to minimise our
negative impact on the environment. We focused on investing in energy
efficiency – upgrading heating, lighting and air-conditioning systems across
the business – and also on reducing our non-essential travel. We reduced our
carbon footprint over the year by 5.9% (based on emissions per headcount).
The way ahead
Transforming an organisation of Capita’s size into a more predictable,
lower-risk business is a complex challenge and, while we have made significant
progress, there remains much to do to meet our goals. Capita is in a stronger
position than it was two years ago. Our people are more engaged, we are
successfully delighting the great majority of our clients, have boosted levels
of trust, have reduced risk in the business, and we are doing business the
right way. I am grateful to all my colleagues at Capita and would like to
thank them for their continued hard work, commitment and dedication.
I believe 2020 will be another year of progress at Capita. We are investing in
our growth capability and are committed to delivering better outcomes. We are
continuing to build a more focused, sustainable business for the long term,
with growing free cash flow. My confidence in our purpose-led, multi-year
transformation plan remains unchanged.
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 is one of the UK’s largest software companies; and our specialist
enterprise software products serve sector-specific and cross-sector markets in
the UK and overseas. Our software, deep industry expertise and functional IP
supports critical public services and business processes. They also form a
differentiating component of Capita’s wider digitally enabled services
offering.
More than 70% of our revenue is recurring and more than 80% of licence revenue
is spread over the term of our client relationships, irrespective of whether
it is a perpetual licence or a ‘pay as you go’, software as a service
(SaaS) model.
Our markets and growth drivers
We are a UK top-10 provider of enterprise software products and the market is
expected to grow at around 4–5% in 2020. We have market-leading positions in
sectors such as education and emergency services and are a top-three provider
in local government.
Overall market growth is being driven by software’s deepening role in every
aspect of business and consumer life. The drive for automation and demand for
apps to engage with end-users is set to continue. We are focusing on
cross-selling opportunities in existing and adjacent markets, and strategic
expansion into new markets. With continued pressure on education budgets, and
increasing demand for access to cloud services, we are expanding our offerings
of complementary cloud products to schools. The growth of cloud solutions has
increased the accessibility of our products and allowed us to offer
alternative commercial models for clients.
Our strategy
Our strategic priorities are focused on creating a specialised software
products business, investing in our core products, and providing best-in-class
solutions for clients in our UK and targeted international markets.
The division is transforming 29 siloed businesses into a single software
business. We are aiming to invest in using reusable components and standard
architectures, supported by scaled, integrated, shared service functions and
our digital delivery centre in India. We are investing in both existing and
new products and markets to defend and grow the business, with the aim of
achieving market level revenue growth in 2020.
Financial performance
Divisional financial summary 2019 2018 % change
Adjusted revenue (£m) 375.4 379.9 (1.2)%
Adjusted operating profit (£m) 102.9 109.6 (6.1)%
Adjusted operating margin (%) 27.4% 28.8%
Order book (£m) 578.4 554.9 4.2%
Adjusted revenue in 2019 fell by 1.2% to £375.4m, with year-on-year growth in
the second half offset by annualising 2018 contract losses in the first half.
Notable contract wins included a number of emergency service contracts and
work to support delivery of the next generation of smart meters. There was an
encouraging improvement in order intake despite a slowdown in orders during
the fourth quarter, particularly in local government.
Adjusted operating profit decreased by 6.1% to £102.9m, due to the changes in
revenue, and investments in improving products, sales and marketing, including
in the US, which were partly offset by benefits from transformation cost
savings.
Cost and operational excellence
Many of the changes required to create a streamlined division are now in
place. We have built a best-in-class digital delivery centre to produce
standardised, repeatable software. It is supporting the rest of Capita in
creating scaled, integrated, shared service functions. It has also allowed us
to move to an agile delivery platform with releases every 13 weeks, providing
value adding enhancements to clients on a regular basis. We will continue to
drive consolidation and efficiency alongside productivity benefits to clients.
Investing in growth
During 2019, we ensured we had clearer propositions in the marketplace and
focused more on finding solutions to client problems in markets where we have
experience and through data-driven insight. Over the past two years we have
been reducing technological debt from prior under-investment and this is now
starting to normalise.
New product development in 2019 included a well-received lite version of
Retain, our resource planning software, with a cloud release in 2020. There
were a number of developments in education software including Reading Cloud,
Parental Engagement and SIMS 8, which is now live in a number of primary
schools with a pipeline of further interest. Robotic process automation will
also support SIMS migration for our clients who need it. Reading Cloud now
supports more than eight million students and allows us to enter the
schools’ literacy market with the launch of Literacy 360 in 2020. We have
also now built a sales team in North America and are focusing on pipeline
build and lead conversion. 911 Eye is proving popular and is currently with 13
police forces in the US, while we continue to pursue further opportunities.
Strategic priorities 2018–2020:
• Accelerate investment in key products and platforms.
• Transform the software lifecycle operations across all products.
• Create a software development centre of excellence for production of
standardised software.
• Create a market-aligned, high-performing sales force and marketing
capability.
• Selective sales drive in UK vertical, horizontal and international
markets.
2019 progress against strategic priorities:
• Investment in products such as SIMS, Retain, Payment Facilitator and One
Housing.
• Delivered cost savings through standardisation and further business
integration.
• Grew digital delivery centre in India to 1,200 employees.
• Cross-Capita collaboration, supporting new contracts such as for the
Standards and Testing Agency.
People Solutions
People Solutions solves complex people issues for large public and private
clients across the entire employment lifecycle. Our market-leading portfolio
of solutions range from sourcing the hardest to reach talent, such as IT and
cyber security, delivering learning to a large number of employees across all
sectors, to administrating payroll and pensions to a significant portion of
the UK workforce. We are focused on developing and delivering digitally
enabled, consultancy-led solutions that drive better outcomes for our clients
and deliver a consumer-grade experience to their employees and end-users.
In the second half of the year, we reassessed the leadership requirements of
the division and appointed a new Executive Officer, Chantal Free, to lead the
division through its next phase of transformation as it returns to growth.
Our markets and growth drivers
People are at the centre of our clients’ stated business strategies,
creating significant growth opportunities for our business. According to
NelsonHall, the market for people services is expected to grow at a rate of 5%
through to 2023. The key market growth drivers are: (i) our clients’ needs
for financial sustainability; (ii) a better employee experience to execute on
their strategy; and (iii) the necessity to have access to skills to enable
them to be fit for a digital future. Our divisional pillars help clients
address these issues: the pensions business helps with financial
sustainability; HR Solutions addresses the employee experience need; and
Learning and Resourcing are at the heart of the access to skills services.
Our strategy
Our strategy focuses on a rejuvenated account management model that aims to
retain and grow existing accounts, driving profitable growth. Profitability
improvements will be delivered by instilling operational excellence processes
and mindsets into our existing operations, as well as financial prudence in
investments and expenditure. The partnership with Capita Consulting, advising
clients on their digital transformation journey, is also a significant
opportunity for profitable growth.
Financial performance
Divisional financial summary 2019 2018 % change
Adjusted revenue (£m) 500.5 494.6 1.2%
Adjusted operating profit (£m) 34.9 45.0 (22.4)%
Adjusted operating margin (%) 7.0% 9.1%
Order book (£m) 497.2 715.3 (30.5)%
Adjusted revenue increased in 2019 by 1.2% to £500.5m, reflecting growth in
our Managed Learning and Apprenticeships and point solutions such as IT
Recruitment and Employed Resourcing model, which resulted from IR35 regulatory
changes, offsetting contract attrition in our Managed Resourcing Operations
and Pensions business.
Adjusted operating profit declined by 22.4% to £34.9m, reflecting change in
revenue mix in our Resourcing and Learning businesses, challenged
implementations in our Pensions business and capacity investment lag in our
Pensions consultancy business to deliver future growth. We also increased
investment to improve SLA performance and support client retention,
particularly in Pensions Administration. Savings in operational excellence and
technology were reinvested in strategic initiatives.
Cost and operational excellence
We have made progress on the integration of People Solutions and have driven
cost efficiencies across the division, which will drive incremental benefits
and service enhancements. We expect additional investment in 2020 to continue
our transformation journey.
Our army recruitment programme (RPP) contract saw significant improvement,
where the process review, technology advances and partnership with the client
produced vastly improved outcomes. Following a successful advertising
campaign, we have received the highest levels of applications to join the
British Army in more than five years, and we are on track to deliver our
regular soldier and officer targets for the recruitment year to 31 March 2020.
We also rolled out a new process that includes clinical triage, which has made
the candidate journey more rapid and bespoke. Inability to meet recruiting
targets could lead to reduced contract profitability and require an assessment
as to whether associated contract assets were generating sufficient profits to
support the carrying value.
Investing in growth
During 2019 we invested in the development of our first truly digital
products: Vetting and Onboarding. These investments are our model for our
digital strategy going forward, affording our clients the opportunity to buy a
positive employee experience. They reached MVP stage at the end of 2019, and
will launch in 2020. They will deliver greater value to our clients through
speed, efficiency and improved employee engagement.
We signed several new contracts in 2019, including: the provision of
resourcing services for the Home Office; learning services for Network Rail;
and screening services for Nestlé.
We have also taken advantage of the opportunities presented by the market
stimulated by changes in the regulatory environment, including: IR35,
apprenticeships levy and guaranteed minimum pension (GMP) equalisation.
Furthermore, we have continued to invest in upgrading our core business
process outsourcing platforms (learning and pensions software).
Strategic priorities 2018–2020:
• Integrate and enhance solutions to align to key client challenges.
• Invest in core products and technology platforms to deliver a better user
experience.
• Integrate solutions both intra and inter-divisionally, leveraging the
Group’s investment in the creation of Capita Consulting. Connect existing
standalone solutions to solve our clients’ complex issues through clearly
articulated client value propositions (CVPs).
2019 progress against strategic priorities:
• Invested in new digital solutions for Vetting and Onboarding which will be
launched in the first half of 2020. Both products reached minimum viable
product (MVP) stage by 31 December 2019 and the first live client has been
trialled on the new Vetting platform.
• Invested in improving client experience in pensions administration with an
improvement in service-level agreement (SLA) performance (and reduction in
cost of failure).
• Developed CVPs which connect our offerings.
• Improved performance of RPP through collaborative and effective strategic
partnership approach.
Customer Management
Capita is a leading provider of multi-channel customer engagement services, in
the UK, Germany and Switzerland. We primarily serve customers in the retail,
utility and telecommunications sectors, from a mix of locations in Europe,
India and South Africa. The division also provides remediation, complaints
management and collections services.
Our approach is to build partnerships, based on shared outcomes and value,
while continuing to deliver transactional supply where this helps our clients
to meet customer demands. The value we bring to our clients is increasingly
built around transforming the customer experience through the application of
digital services underpinned by data insight and analytics. These enable us to
manage complex, high-value interactions, automate repetitive tasks and use
technology and capability to drive positive quality improvement.
Our markets and growth drivers
Capita competes with a range of local and global players for transactional
contracts, typically priced on a price per full-time equivalent (FTE) hour
basis, and a smaller number of strategic players for outcome-based contracts.
We are the largest provider of customer management services in the UK.
According to NelsonHall, the UK market is estimated to be worth £4bn a year
and is expected to grow at approximately 4% a year through to 2022.
Our strategy
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
‘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.
This commitment to outcomes is core to our differentiation in the marketplaces
we serve. Our operational scale allows us to derive meaningful insight from
our customer interaction data, driving business improvement across our
operations. Automation and digital augmentation is increasingly a solution to
clients who want faster and closer interaction with customers.
Financial performance
Divisional financial summary 2019 2018 change %
Adjusted revenue (£m) 802.4 802.6 —%
Adjusted operating profit (£m) 54.9 41.7 31.7%
Adjusted operating margin (%) 6.8% 5.2%
Order book (£m) 1,723.7 2,012.2 (14.3)%
Adjusted revenue for 2019 was flat year on year at £802.4m. Following a 1%
decline in the first half, revenue increased by 1% in the second half thanks
to wins and scope increases with existing clients such as Southern Water and
British Gas.
Adjusted operating profit increased by 32% to £54.9m, mainly due to strong
cost management, including the increasing use of resources in India and South
Africa.
Cost and operational excellence
Cost improvement was delivered in 2019, particularly from operating model
initiatives and procurement. We have started to leverage our global delivery
centres in India, South Africa and Poland, offering efficiencies and
innovative solutions to our customers. We invested significantly in capability
and skills, as well as in our people, where better training and improved
financial and working conditions have improved attrition and customer service.
The transformation of our customer services contract with mobilcom-debitel
continues to progress well. We have been successfully driving the
transformation programme through implementation of the new Capita-built mobile
app, initiatives to shift the volume to digital channels and the increase in
automation and self-services. We continue to expect to reach the inflection
point and break even on the contract in 2020. Inability to achieve this key
milestone could lead to reduced contract profitability and a risk of
impairment of the associated contract assets. During 2019, the O2 contract saw
the best performance in both sales and service during the history of the
partnership, reflecting the growing impact of work jointly undertaken to
develop the target operating model.
Investing in growth
Clients are seeking partnerships which are characterised less by FTE numbers
and more by a range of value-adding services. This increasingly complex
service offering provides opportunities for players with deeper outsourcing
capabilities.
During the year, we won, renewed and extended a number of contracts. This
included the extension of contracts with:
• The National Trust – worth £46m over five years.
• British Gas – to November 2020, the contract has since been extended
further to June 2024.
During the year, we applied data and analytics technology to existing clients,
where examples include producing analytics on caller data and delivering
insight on social media mentions. In the second half of 2019, we rolled out a
like-for-like chat operation based in Pune and Mumbai; this will be followed
in 2020 by the introduction of messaging, in-chat payments and automated
services. Our investment in technology to date has provided the opportunity to
build new relationships where automation is the focus from the outset, and
further investment is expected in 2020 as we seek to build on our consulting
experience.
Strategic priorities 2018–2020:
• Invest in our infrastructure to ensure consistent, high-quality service
delivery, including facilities, core technology and tools.
• Build new digital platforms to support all channels and customers on
behalf of clients.
• Build enhanced data and analytical platforms and capabilities to enable
the business to drive insights from customer interactions into our client
engagements.
• Implement a stronger operating framework to standardise our operational
routines and transfer best practice across our operations, both on and
offshore.
• Invest in improved consultative selling capability to increase
origination, pipeline and order book.
• Standardise best practice, improve our infrastructure, invest in people,
increase our use of technology and offshoring.
• Diversify and accelerate growth in some of our secondary sectors, notably
financial services, and travel and leisure.
2019 progress against strategic priorities:
• Built omni-channel, data and analytical platforms and new automation
technologies.
• Invested in people and improved infrastructure.
• Increased our use of technology and offshoring through the global delivery
centre.
• New framework in place for digital customer experience value proposition.
Government Services
Capita is a strategic partner to government in the application of digital
transformation to improve the productivity of government operations and the
citizen experience of public services. We do this in a socially responsible
way to make public services better for citizens and government employees, and
to help our clients to release resources so that they can be deployed back
into frontline service priorities. We believe that quality public services,
innovatively designed and powered by technology, are critical to delivering
safer, greener and healthier communities that support everyone, including
society’s most vulnerable.
Our markets and growth drivers
Capita is one of the largest providers to government in the UK with an
estimated market share of 13%. Within this we have top-three leadership
positions in several focused sectors where we have deep, proven experience and
expertise, including education, health, transport, defence, central and local
government. Governments globally are under pressure to deliver a greater
quantity of services at better quality to citizens, driving counteracting
forces for the sector. On the downside, they have reset interactions with
traditional outsourcers – resulting in the disaggregation of services and
insourcing. Conversely, there continues to be strong demand for innovative
digital solutions that allow government to deliver their goals for improved
productivity and better citizen experience. Government departments are
actively engaging with the private sector to reflect this: reshaping contracts
at renewal, but also awarding new work and renewing existing relationships. In
particular local government markets have seen significant reshaping of the
landscape.
During 2019, Brexit substantially affected the volume of new initiatives. With
the election of a strong majority government, we are starting to see
indications of an acceleration of decision making and the potential for new
opportunities in support of emerging policies.
Our strategy
Our strategy is to focus our business around the aforementioned six core
market sectors where we have a leading position; offer a refined set of value
propositions developed on top of a defined and controlled stack of underlying
replicable digital products and capabilities; invest in a full-lifecycle
digital transformation capability; and focus on excellence in our
transformation and operational service delivery performance.
Financial performance
Divisional financial summary 2019 2018 % change
Adjusted revenue (£m) 777.9 780.5 (0.3)%
Adjusted operating profit (£m) 58.8 40.3 45.9%
Adjusted operating margin (%) 7.6% 5.2%
Order book (£m) 2,328.4 2,187.5 6.4%
Adjusted revenue was broadly flat in 2019 at £777.9m. Prior-year losses of
our contracts with the Home Office supporting the immigration sector and the
Defence Infrastructure Organisation, and a decline in local government, were
offset by growth in contracts such as smart metering and by increased scope in
our Transport for London (TfL) contract. Adjusted operating profit increased
significantly to £58.8m with the impact of contract losses being offset by
performance improvements on contracts such as Primary Care Support England
(PCSE), one-off contract-related items, and efficiency improvements.
Operational excellence
In 2019, we continued to devote resource to our service quality, which
improved with over 95% of key performance indicators green, while we also
returned to green strategic supplier rating with the Cabinet Office.
Operational service delivery on our PCSE contract with NHS England continues
to improve. A small proportion of the contract, which administered cervical
screening, was transferred back to the NHS in August 2019. We started the
rollout of our transformed solutions for ophthalmic payments, pharmacy market
entry and performer list at the end of the year, with positive feedback. We
continue to expect to reach the inflection point and break even on the
contract in 2020. Inability to achieve this key milestone could lead to
reduced contract profitability and a risk of impairment of the associated
contract assets. We successfully introduced the ultra-low emission zone (ULEZ)
for TfL, including vehicular image capture and processing, billing and a
mobile payments app, data management, enforcement and customer call centre
operations.
Investing in growth
2019 was a successful year when we managed to offset some major contract
losses with new business wins. These included: a £525m contract to modernise
and support improvement to the operational effectiveness of the Ministry of
Defence’s fire and rescue service (DFRP) with the mobilisation for this
contract going well; and a £145m extension of our contracts with the
Department for Work and Pensions (DWP), and the Department of Communities in
Northern Ireland, to deliver Personal Independence Payment (PIP) assessments.
Smaller contracts with Charnwood, Bexley, and the extension of the Ministry of
Justice Technology Transition Programme contract were also won.
Our growth model going forward focuses on understanding the problems of our
clients in government and helping them to transform their business with
scalable digital products and solutions. Growth will come from investment in
scalable and repeatable products and solutions. We have invested in robotic
process automation and artificial intelligence, and they will be used to drive
further productivity gains with the savings used to invest in our client value
propositions. We also expect a strong benefit from our colleagues in Capita
Consulting, who have deep knowledge of the industry verticals that we are
targeting, as well as the tools we use to deliver services.
Strategic priorities 2018–2020:
• Develop existing core service capabilities as repeatable product
propositions to drive growth.
• Continuous programme of operational excellence to improve service delivery
and create headroom for reinvestment.
• Transformation of business model to a consulting, transformation and
digital services company.
2019 progress against strategic priorities:
• Major contract wins in DFRP and PIP.
• Return to green supplier status with Cabinet Office.
• Continued improvement in performance of challenging contracts, including
PCSE.
• Successful implementation of ULEZ.
• Delivery of cost-out targets.
Technology Solutions
As part of our strategy to simplify and strengthen, we have renamed IT &
Networks as Technology Solutions. Capita is a top-10 service provider of
digital IT and connectivity solutions in the UK, focused on the mid-sized
enterprise market.
We consult, transform and deliver digital solutions to help businesses
improve, realise their digital strategies and provide better business
outcomes. We have strategic partnerships with leading global IT vendors, have
invested in our portfolio of hosted platforms and operate our own UK-wide
network and data centres.
Our markets and growth drivers
Technology Solutions operates in a broad and fast changing market. The market
in the UK was estimated to be worth £54bn in 2019 and is expected to grow at
a CAGR of 2.6%, according to Teknowlogy group. In 2019, the market reached an
inflection point where spending on the high-growth Fast/Digital IT segment,
such as cloud, cyber, artificial intelligence and data analytics, overtook
spending on legacy IT, such as traditional data centres, workplace and server
applications services.
Our strategy
Our strategy is to create innovative technology solutions, underpinned by a
comprehensive range of services which address the needs of our enterprise
clients; such as how to benefit from robotic process automation technologies.
Our new automation hub can provide consulting solutions that improve business
processes, whether they are human, digital or hybrid.
Growth, resilience and ‘Value for IT’ are our strategic objectives. We are
developing repeatable propositions to meet our clients’ needs, with a focus
on creating improved customer experience and expanding our client base. We
have already started to increase the standardisation, robustness and security
of the platforms and processes that underpin our products. We are also
continuing the simplification of technology operations, platforms, products
and suppliers to generate efficiency savings, strengthen our capabilities and
ultimately deliver greater value to our clients.
Our expertise in business process improvement – complemented by consulting
– allows us to address emerging opportunities. This combination of expertise
in technology with a robust and integrated product offering helps clients
extract value out of their legacy systems, while adopting and gaining benefit
from the latest digital, cloud-enabled technologies.
Financial performance
Divisional financial summary 2019 2018 % change
Adjusted revenue (£m) 429.3 439.7 (2.4)%
Adjusted operating profit (£m) 50.7 53.8 (5.8)%
Adjusted operating margin (%) 11.8% 12.2%
Order book (£m) 389.7 380.4 2.4%
Adjusted revenue decreased by 2.4% to £429.3m, with the benefit of new work
with Transport for London (TfL) offset by other contract losses and reduced
transactional business in LAN and voice networking solutions. Adjusted
operating profit decreased by 5.8% to £50.7m, as savings from simplifying the
division were offset by lower margins and increased costs in networking
solutions. These lower margins in networking solutions are caused by high
competition and market pressures, and while we continue to win new revenue,
albeit not at the expected level of growth, the margin pressure is expected to
continue until we move to provision of our digital transformation
propositions. Excluded from 2019 adjusted profit is a charge of £41.4m from
the impairment of goodwill (refer to note 12).
Cost and operational excellence
Cost improvements have been delivered across the division, with operational
effectiveness initiatives – such as common processes, consolidating service
desks and an increase in the use of offshoring – resulting in significant
savings. We have also turned around and stabilised several challenging
contracts, and increased our customer satisfaction. These outcomes have been
achieved through a combination of activities, such as: focusing on
strengthening relationships and delivering results for our customers; our
ongoing programme to modernise our infrastructure and automate workloads; our
enhanced operational efficiency measures; reskilling and training our
workforce; and our One-ITS programme to consolidate five businesses into one.
Investing in growth
We have invested significantly in the development of our Fast/Digital IT
propositions – in cloud, cyber security, software defined network
monitoring, internet of things and robotics process automation – to provide
new digital offerings to our clients. We have and will continue to strengthen
our partnerships with key technology providers, combining our consulting and
delivery expertise with their technologies.
In 2019, we saw strong performance in our TfL contract with additional large
project wins on the back of the core network contract. Our Northern Ireland
Education contract was also extended for a further two years. Other major wins
included long-term contract renewals with Liberata and Energia, and new
business supporting the outsourced Defence Fire Risk Management Organisation.
Strategic priorities 2018-2020:
• Consolidate multiple standalone IT businesses into a single, integrated
division.
• Upgrade and consolidate data centres to create an enhanced, resilient and
secure client infrastructure.
• Invest in key client propositions across networks, cloud, cyber and
digital.
• Develop our people.
2019 progress against strategic priorities:
• Successfully brought to market new client propositions to the market for
cloud, cyber, SD-WAN and digital.
• Consolidated five standalone IT businesses into a single, integrated unit
through our One-ITS programme.
• Completed phase one and two of our data centre consolidation and cloud
migration programme to create an enhanced, resilient and secure client
infrastructure.
• Invested and developed our people’s capabilities and work environment,
resulting in reduced attrition and increased employee satisfaction scores.
Specialist Services
Specialist Services comprises a portfolio of businesses and delivers a range
of service 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. The businesses are actively managed
on a portfolio basis in order to maximise value.
Our markets and growth drivers
Specialist Services includes a range of businesses serving public and private
clients across multiple vertical sectors, which are generally mature. Our
closed book 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.
Our strategy
Due to the varied nature of the activities in the division, each Specialist
Services business has its own strategy uniquely tailored to their service
offerings and the needs of their clients.
We enjoy strong market positions in many of the verticals sectors, with strong
brands and positive client perception of our services. This provides an
ongoing opportunity to make better use of Capita’s wider client base, and to
simplify and strengthen the portfolio. The focus across the portfolio is on
operational excellence and cost optimisation. In line with our drive to
simplify Capita, we have continued to review our portfolio – and decided in
early 2020 to reorganise our Specialist Services division. We have concluded
that a number of businesses in the division would benefit from closer
alignment with core Capita and should be moved into other divisions. Some of
the other businesses are earmarked for disposal, with the proceeds to be
recycled to strengthen the organisation.
Financial performance
Divisional financial summary 2019 2018 % change
Adjusted revenue (£m) 744.5 887.3 (16.1)%
Adjusted operating profit (£m) 141.7 128.6 10.2%
Adjusted operating margin (%) 19.0% 14.5%
Order book (£m) 1,191.7 1,226.4 (2.8)%
In 2019, adjusted revenue fell by 16.1% to £744.5m, reflecting the contract
losses in 2018 of Prudential UK (life) and Marsh (general insurance) and a
decline in the structurally challenged Life and Pensions business, this was
partly offset by one-off contract related items.
Adjusted operating profit increased by 10.2% to £141.7m as we offset the
revenue losses with cost savings and one-off contract related items, and by
winning profitable and cash-backed new business.
Cost and operational excellence
We made significant cost savings during the year mainly through IT
rationalisation and productivity gains across the division. We did this while
retaining clients and adding new business. In the Life and Pensions business,
in particular we have driven out IT efficiencies to mitigate the structural
decline in certain contracts.
We were particularly pleased with the new contract extension with The
Co-operative Bank where our more collaborative and values-based approach was
recognised by our client, as well as recognising Capita’s core competencies
in digital transformation.
Investing in growth
We have continued to invest in product development, IT infrastructure and
client portals, and in security and compliance to support existing contracts
and future revenue growth.
During the year the division invested in key products: for example, AXELOS’s
launch of its new qualification, ITIL 4 Foundation; a new digital platform in
Capita Travel and Events; a digital platform update at Optima; and IT and
cyber protection in our Life and Pensions business.
New sales wins in 2019 included:
• Real Estate and Infrastructure won two major contracts in the year – the
next stage of support to ‘Future Luton’, London Luton Airport owner’s
expansion plans with specialist aviation, planning and multi-disciplinary
design and management services. We were also appointed to be part of Network
Rail’s design services framework, securing several lots that enable us to
deliver consultancy services to support upgrade and maintenance projects for
control period 6.
• An extension to our current scope of business with Zurich UK to service a
new protection product. This will drive better customer outcomes, cost savings
and support Zurich UK’s growth, assisted by the introduction of digital
capabilities.
• A number of new contracts for Travel and Events with some well-known
clients such as the BBC.
Strategic priorities 2018–2020:
• Manage as a portfolio and focus on continuing value optimisation.
• Rationalise service lines, processes, properties and IT.
• Make use of cross-sell opportunities within portfolio and wider Capita.
2019 progress against strategic priorities
• Continued to manage the division as a portfolio of separate businesses,
focusing on value optimisation.
• Investment in a number of product/service enhancements.
• Delivered significant cost savings and cash generation.
Financial review
This preliminary announcement is extracted from Capita's financial statements
for the year ended 31 December 2019 and the basis of its preparation can be
found in the notes to the statements in this announcement.
Overview
2019 was the second year in Capita’s multi-year transformation and a lot has
been achieved. There are many signs of progress on our journey towards
becoming a simpler, stronger, more successful company generating free cash
flow in a sustainable, predictable manner. However, as these results show,
progress has been slower and more expensive than we had hoped, partly because
we have chosen to invest for the long term and partly because some of the
challenges could not have been fully scoped in early 2018.
Revenue and profits were in line with expectations, with cost reductions
offsetting investments, lost revenue and lower margins on some contract
renewals. Some of the benefits of the transformation work, such as profit
improvements on the three ‘challenging’ contracts are reflected in the
results. While our core businesses have largely shown growth in the second
half, it has been slower than we had hoped. As in 2018, the results have
benefited from some one-off items, as expected in a complex group in
transition. These included contract related items arising on contract
terminations, settlements and modifications, and other Group-wide items,
including lower bonuses compared to the prior year.
The cost and cash management controls and programmes implemented over the last
two years give us a better base and will continue to provide positive returns
in 2020. Interest has reduced following the deleveraging in 2018.
The balance sheet was significantly strengthened in 2018 but net debt is at
the top end of our range as a result of lower conversion of EBITDA to cash,
and more investment being required to fix contracts and lay the foundations
for growth. The group has the liquidity it needs to continue the
transformation journey. We expect this liquidity to further improve following
the introduction of new funds to replace the current debt that matures over
the next 18 months. As part of our drive for simplification, we decided
recently to seek to dispose of a number of non-core businesses, the proceeds
from which will be recycled to strengthen the Group.
However, as we said at the half year, securing returns on our investments in
the form of positive revenue growth and free cash flow generation is the
priority for 2020.
Summary of financial performance
Financial highlights
Adjusted (1)results – continuing operations Reported results – continuing operations
Adjusted (1)2019 Adjusted (1)2018 Adjusted (1) YOY change Reported 2019 Reported 2018 Reported YOY change
Revenue £3,647.4m £3,814.7m (4)% £3,678.6m £3,918.4m (6)%
Operating profit £306.1m £334.4m (8)% £0.4m £34.9m (99)%
Profit/(loss) before tax £275.0m £281.2m (2)% £(62.6)m £272.6m (123)%
Earnings/(loss) per share 13.09p 16.33p (20)% (4.18)p 17.99p (123)%
Free cash flow £(61.3)m £(78.8)m 22% £(213.0)m £(260.5)m 18%
Net debt* £790.6m £466.1m £1,353.2m £466.1m
* Net debt in respect of adjusted results is headline net debt (1)
Adjusted results
Capita reports results on an adjusted basis to aid understanding of business
performance. In 2019, International Financial Reporting Standard 16 Leases
(IFRS 16), which has a material impact, especially on net debt, has been
adopted. However, to aid comparison with the prior year, the primary adjusted
measures used by the Board for evaluating performance are before the impact of
IFRS 16. Reconciliations between adjusted and reported operating profit,
profit before tax and free cash flow are provided on the following pages.
Adjusted revenue (1)bridge by key driver £m
Year ended 31 December 2018 3,814.7
One-offs (48.0)
Year ended 31 December 2018 rebased 3,766.7
Contract losses (213.6)
Scope and volume changes (21.2)
Transactional (30.5)
Contract wins 106.7
One-offs 39.3
Year ended 31 December 2019 3,647.4
As expected, adjusted revenue(1) reduced year on year by around 4%. The
adjusted revenue(1) bridge details the movements, many of which we have
communicated previously:
• one-off gains in 2018 on the termination of the Prudential and Marsh
contracts;
• contract losses, which includes the flow through from contracts lost in
2018, of £105m, such as the Prudential, Marsh and Defence Infrastructure
Organisation contracts, and a further £109m of contract losses in 2019,
including in local government and in some other divisions. Delays in local
authorities taking back work meant that the impact of these losses were lower
than expected in 2019, but the majority of these have now come to an end;
• scope and volume change revenue has decreased due to high competition and
market pressures in Technology Solutions, and lower volumes in our Life and
Pensions contracts and Real Estate and Infrastructure business;
• lower transactional revenue, mainly in Specialist Services;
• contract wins which included £67m from the annualised impact of previous
wins and £40m of new contract wins in 2019. This however was not as much as
expected, particularly in the second half of the year, which explains the
emphasis we put on the importance of revenue growth in 2020; and
• as happened in 2018, a number of one-offs arose from termination payments
and deferred income releases associated with contract terminations and
modifications (detailed further below).
Adjusted profit before tax (1)bridge by key driver £m
Year ended 31 December 2018 281.2
One-offs (15.2)
Year ended 31 December 2018 rebased 266.0
Contract wins 14.0
Contract improvement 31.5
Net contract movements (97.2)
One-offs – contract related 28.2
Transformation cost savings 105.0
Cost change (40.2)
Investments (73.7)
One-offs – other Group cost items 41.4
Year ended 31 December 2019 275.0
Adjusted profit before tax(1) declined in 2019, in line with expectations. The
adjusted profit before tax(1) bridge breaks out the revenue and cost impacts
on profit. The margin from contract wins and the benefits from improved
performance on three ‘challenging contracts’ are offset by the combined
impact of contract losses and scope and volume reductions described earlier.
The cost savings were offset by cost inflation (mainly inflationary pay
increases focused on lower paid staff), and investment in strengthening
functions, such as growth. A range of other Group-wide actions, such as lower
bonus accruals, resulted in adjusted profit before tax(1) being in line with
expectations.
The cost competitiveness programme delivered £105.0m of savings in 2019, and
cumulative savings of £175m, which were used to increase investment in
strengthening functions and build the platforms for growth as well as to
partially offset the decline in revenue. The savings have been generated
through simplifying the organisation, reducing management layers and
rationalising the IT and property portfolios. As we leverage investments of
over £10m that we have made in automation and our existing offshore
capabilities, there is more to come.
The adjusted revenue(1) and adjusted profit before tax(1) declines were offset
by a number of one-off benefits. These items are not excluded from adjusted
results as they are normal course of business, not associated with the
transformation plan. These included:
• One-off contract related items (£28.2m) relating to release of deferred
income and write-off of contract assets arising on contract terminations,
settlements and modifications. Where a contract is terminated early, all
deferred revenue is recognised in the year of termination, which would have
been deferred over the expected life of the contract in line with the Group
IFRS 15 policy. Similarly, any associated contract assets are written off in
the year of termination, unless there are alternative uses on other contracts.
In addition, exit fees were paid to Capita on the termination of customer
contracts which contained provisions to compensate the Group for exit costs
and future profit in the event of early termination.
• Other Group-wide items benefiting profit (£41.4m) included lower bonuses
compared to the prior year (£24.4m) and other Group items.
Adjusted operating profit to adjusted free cash flow (1) 2019 2018 £m
£m
Adjusted operating profit (1) 306.1 334.4
Add: depreciation, amortisation of intangible assets, impairment of property, plant and equipment and share of earnings in associates 88.4 90.9
Adjusted EBITDA 394.5 425.3
Contractual working capital movement (deferred income, contract fulfilment assets and accrued income) (228.7) (217.0)
Cash from trading operations* 165.8 208.3
Other working capital and other movements (7.2) (26.4)
Cash generated by operations before non-recourse receivable financing 158.6 181.9
Non-recourse receivables financing cleared — (110.0)
Cash generated by operations 158.6 71.9
Interest (32.7) (39.0)
Taxation (5.4) 26.6
Net capital expenditure (181.8) (138.3)
Adjusted free cash flow (1) (61.3) (78.8)
* Cash from trading operations defined as adjusted EBITDA less contractual working capital movements.
Adjusted free cash flow(1) in 2019 was an outflow (£61.3m). This outflow was
affected by the decline in adjusted profit before tax(1) explained above.
There are also a number of items that can lead to significant differences
between profit and the generation of free cash flow, including:
• Timing of profits compared to the cash received. Typically, cash receipts
are aligned to costs incurred. Whereas, under IFRS 15, revenue is more evenly
distributed in the early years on the contract. This typically results in
lower profits in early years on contracts with significant restructuring costs
or higher operating costs prior to transformation. The cash received is
deferred and released as we deliver against our obligations to provide
services and solutions to our clients.
• Contract terminations and modifications, which can lead to major gains or
losses in the year of termination or modification, and where cash
inflows/outflows have occurred in prior years.
We have analysed working capital between ‘contractual’ – being those
balances which relate to contract unwinds of deferred income, accrued income
and contract fulfilment assets to derive cash from trading operations, and
‘other working capital’ – which represents routine normal working
capital items such as trade receivables, trade payables and prepayments. Cash
from trading operations is a more helpful way to think about these movements
rather than describing them as working capital outflows and provides a more
stable and consistent view of operating cash flows.
Cash from trading operations declined to £165.8m (2018: £208.3m) due to
reduction in adjusted EBITDA. Contractual working capital movement increased
with an outflow of £78m (2018: outflow £70m) relating to contracts which
were terminated or renegotiated in the year, which is not planned to reoccur
in 2020; and an outflow of £150m (2018: outflow £147m) relating to
continuing contracts expected to reduce in 2020 due to additional payments on
account (DFRP) and reduction in transformation spend. Other working capital
related cash reflected actions taken to improve working capital which will
continue in to 2020.
Taxation has moved from a cash inflow in 2018 to an outflow in 2019,
reflecting corporation tax repayments received in 2018 following the adoption
of IFRS 15.
As expected, net capital expenditure increased in 2019 in line with the
transformation objectives as the investment in property and IT infrastructure
increased, and investment in technology and growth ramped up.
Period-end cash management, including non-recourse receivables financing,
fully unwound in 2018.
Reported results
Adjusted operating profit(1) and adjusted profit before tax(1) excludes a
number of specific items, including significant restructuring of £159.4m, the
amortisation and impairment of acquired intangibles, including goodwill, of
£91.3m, business exits of £68.8m and the impact of IFRS 16, to aid
understanding of business performance.
Adjusted (1)to reported profit bridge Operating profit (Loss)/profit before tax
2019 £m 2018 £m 2019 £m 2018 £m
Adjusted (1) 306.1 334.4 275.0 281.2
Amortisation and impairment of acquired intangibles (49.9) (143.5) (49.9) (143.5)
Impairment of goodwill (41.4) (33.8) (41.4) (33.8)
Net finance costs — — (6.3) (18.8)
Contingent consideration movements 1.4 5.0 1.4 5.0
Business exit – trading (16.7) 17.7 (16.7) 17.7
Business exit – non-trading expenses (52.1) (29.7) (52.1) (29.7)
Business exit – (gain)/loss on disposals — — — 309.7
Significant restructuring (159.4) (110.0) (159.4) (110.0)
Impact of IFRS 16 11.7 — (14.0) —
Other 0.7 (5.2) 0.8 (5.2)
Reported 0.4 34.9 (62.6) 272.6
The Group has recognised an impairment of goodwill, of the Network Services
cash-generating unit (CGU) within the Technology Solutions division. As
detailed in the divisional strategy and performance section of the strategic
report, post the half-year results announcement and as the market continues to
change, forecast margins were impacted by high competition and market
pressures, which was then reflected in the 2020 business plan. While we
continue to win new revenue, albeit not at the expected level of growth, the
margin pressure is expected to continue until we move to provision of our
digital transformation propositions. As a consequence, the starting base from
which we expect this CGU to grow is lower than expected at 30 June 2019.
Business exits are businesses that have been disposed of or exited during the
year, or are in the process of being disposed of or exited. During 2019, the
Group took the decision to exit a business. The exit is in progress and
expected to complete in 2020. At 31 December 2019, the Group was also in an
active process to dispose of a business which met the held for sale criteria
and therefore treated as a disposal group held for sale. In accordance with
our policy, the trading result of the businesses were included in business
exits and therefore excluded from adjusted results. To enable a like-for-like
comparison of adjusted results, the 2018 comparatives have been restated to
exclude 2019 business exits. Further disposals are planned in 2020 as part of
the simplification agenda. As these disposals did not met the definition of
business exits or assets held for sale at 31 December 2019, their trading
results were included within adjusted results.
In 2018, the Board launched a multi-year transformation plan to support the
objectives of simplifying and strengthening Capita. The plan includes property
rationalisation, procurement centralisation, transformation of support
functions, including investment in growth, an organisation-wide customer
relationship management system, a new human resources system (Workday) and
transformation of finance, and operational excellence, including investment in
automation. These activities are designed to improve the cost competitiveness
of the Group and secure Capita’s position in the markets it serves and
strengthen governance and control. The costs of the transformation plan,
including redundancy costs, are excluded from adjusted operating profit(1) as
significant restructuring. Refer to note 4 for further analysis of the spend.
The aim of the finance transformation is to improve the Group’s financial
reporting systems, processes and controls, by increasing standardisation,
automation and the quality of available data. The new financial systems were
due to go live in the second half of 2019. While progress was made, we took
the decision to defer the go-live as more work is required on the core
processes and procedures before the system can effectively be implemented. We
have reviewed the costs capitalised and assessed that £12.3m is impaired,
representing areas that we expect to redesign before going live. The carrying
value of the investment at 31 December 2019, post impairment, is £58.6m.
Further impairment may arise should there be a material change to the
Group’s operating model ahead of any go-live. This impairment is included
within significant restructuring. We have continued to invest in shared
service centres and offshoring, and in making improvements to the Group’s
existing reporting systems, processes and controls.
The Group adopted IFRS 16 from 1 January 2019. The Group holds a significant
number of operating leases and therefore adopting IFRS 16 has had a material
impact to the Group’s financial statements. The accounting standard has
introduced a single lessee accounting model which requires assets and
liabilities to be recognised for leases (refer to note 19. Rental costs
previously recognised in operating profit have been replaced by depreciation
of the assets and net finance costs on the liability. The total cash outflow
for lease payments has not changed. However, payments related to the principal
liability have been presented as cash outflows from financing activities, as
opposed to cash outflow from operating activities under International
Accounting Standards 17 Leases in our reported results.
Further detail of the specific items charged in arriving at reported operating
profit for 2019 is provided in note 4.
Adjusted to reported free cash flow 2019 2018 £m
£m
Adjusted (1) (61.3) (78.8)
Pension deficit contributions (71.1) (46.9)
Significant restructuring (148.5) (100.8)
Business exits (19.4) (10.3)
Impact of IFRS 16 90.0 —
Other (2.7) (23.7)
Reported (213.0) (260.5)
Reported free cash flow was an outflow reflecting spend in relation to known
commitments, including pension deficit contributions (which the directors
consider to be debt-like in nature), restructuring costs, professional fees,
contingent and deferred consideration, litigation and other items. In 2019,
this was offset by the adoption of IFRS 16 as rental payments previously
included in free cash flow were reclassified as financing cash flows, being
repayment of the lease liability and interest.
Continued investment
Investment over three years outlined in the rights issue prospectus in April
2018 was split between targeted investments of £500m and £220m in respect of
the transformation plan, a total of £720m. The table below details the
cumulative investment to the end of 2019.
Cumulative investment * Operating costs Restructuring Capital expenditure Total
£m £m £m £m
Maintenance 22.0 70.2 158.7 250.9
Organisation 34.5 117.1 34.7 186.3
Technology 21.7 61.6 108.7 192.0
Other 1.9 0.4 18.0 20.3
Total 80.1 249.3 320.1 649.5
* Cumulative investment represents spend in 2018 and 2019
By the end of 2019, we had invested £649.5m through a mix of operating,
restructuring and capital expenditure. Looking forward to 2020, we expect to
continue to invest although as the mix of work changes, capital expenditure
will be a lower proportion. Overall this will result in investment nearer
£800m before including 2020 investment in operating costs. We will also make
the final payment in the agreed three year deficit reduction plan on our
pension scheme.
Impact on net debt
Net debt at 31 December 2019 was £1,353.2m (2018: £466.1m), reflecting the
above cash outflow in the year and the lease liabilities recognised on
adoption of IFRS 16 (31 December 2019: £562.6m; 1 January 2019: £643.9m).
Net debt 2019 2018 £m
£m
Opening net debt (466.1) (1,117.0)
Cash movement in net debt (241.2) 654.1
Non-cash movements (2.0) (3.2)
Adoption of IFRS 16 (643.9) —
Closing net debt (1,353.2) (466.1)
Remove closing IFRS 16 impact 562.6 —
Headline net debt (790.6) (466.1)
Cash and cash equivalents net of overdrafts 122.8 642.7
Debt net of swaps (913.4) (1,108.8)
Headline net debt/adjusted EBITDA (1) 2.0x 1.1x
The Board’s view is that the appropriate headline leverage ratio for Capita
over the medium term should be between 1.0 and 2.0 times headline net debt to
adjusted EBITDA(1) (prior to the adoption of IFRS 16). At 31 December 2019,
the ratio was at the top of our range at 2.0 times (2018: 1.1 times) as a
result of trading cash flows and higher investment.
The impact of IFRS 16 adoption on the Group’s adjusted net debt to adjusted
EBITDA(1) debt covenant ratio is neutral, as the Group covenants are on frozen
GAAP, with the exception of the US private placement loan notes. The US
private placement loan notes covenant test includes the income statement
impact of IFRS 16 but not the balance sheet impact, and therefore adoption of
IFRS 16 is favourable on this covenant measure. At 31 December 2019, the US
private placement loan notes ratio was 1.7 times.
Interest cover(1) covenant was 11.2 times for the US private placement loan
notes and 10.8 times for other financing arrangements (2018: 8.2 times).
As the comparatives have not been restated on the adoption of IFRS 16, the
December 2018 ratio is only comparable against the other financing
arrangements and therefore no comparatives are shown for the US private
placement loan notes.
Capital and financial risk management
Liquidity remains a key area of focus for the Group. Financial instruments
used to fund operations, including the transformation plan, and to manage
liquidity comprise US private placement loan notes, euro fixed-rate bearer
notes, a Schuldschein loan, a revolving credit facility (RCF), backstop
liquidity facility, leases and overdrafts.
The Group does not rely on sources of funding that are not contractually
committed. To mitigate the risk of needing to refinance in challenging
conditions, the Group is diversifying its sources of committed funding and is
planning to spread debt maturities to November 2027. In addition, the
Group’s RCF of £414.0m at 31 December 2019 (2018: £600.0m) provides
flexible liquidity available to fund operations and a reasonable liquidity
buffer allowing for contingencies. In December 2019, the facility was extended
to 31 August 2022, extendable for a further year to 31 August 2023 with the
consent of the lenders by 31 August 2021. The addition of a further bank to
the facility in February 2020 resulted in the facility increasing to £452.0m.
In addition to the RCF, in February 2020 the Group agreed a backstop liquidity
facility of £150.0m. The backstop liquidity facility has an initial maturity
in February 2021, and is extendable at the option of the Group to a final
maturity in August 2022.
At 31 December 2019, the Group had £122.8m of cash and cash equivalents net
of overdrafts, and £990.7m of private placement loan notes, fixed-rate bearer
notes, and Schuldschein loan. These debt instruments mature over the period to
2027, with repayment of £232.5m, £240.5m and £230.5m, net of currency
swaps, in 2020, 2021 and 2022 respectively. We are taking steps to extend the
average term to maturity of our debt, and thereby reduce refinancing risk, by
issuing new long-term debt instruments.
As noted earlier, as part of our simplification drive, we also decided
recently to dispose of a number of non-core businesses in 2020. The
anticipated disposal proceeds will provide additional liquidity headroom with
options available to fund future investments and reduce the Group’s debt.
My priority is to manage our cash to support the transformation of Capita to
the point when it is generating sustainable predictable adjusted free cash
flow.
Going concern and viability assessments
In determining the appropriate basis of preparation of the financial
statements for the year ended 31 December 2019, the directors are required to
consider whether the Group can continue in operational existence for the
foreseeable future. The Board has concluded that it is appropriate to adopt
the going concern basis, having undertaken a rigorous assessment of the
financial forecasts to 31 August 2022 being 29 months from the date of
approval of these financial statements and aligned with the expiry date of the
RCF and backstop liquidity facility. The Board’s assessment is set out in
more detail in note 2.
In addition, as is usual, in assessing viability the Board has taken into
consideration plans to introduce new funds to the Group to replace the current
debt that matures over the next 18 months, with an extended maturity profile
that supports the transformation programme, and disposals, both of which the
directors are confident will conclude successfully in 2020.
Pensions
The next triennial valuation of Capita’s main defined benefit pension scheme
is due as at 31 March 2020. The previous valuation as at 31 March 2017
included the payment of deficit repair contributions totalling £176.0m, which
will be fully paid by early 2021. In line with our expectations, it is
anticipated that these additional contributions, along with longer-term
investment returns, will eliminate the shortfall in the scheme as identified
by the Trustees during that valuation. Looking forwards to the 2020 valuation,
where we conclude, will be dependent upon the timely delivery of the
transformation of the Group. The Company and Trustees will continue their
commitment to an open dialogue between them, ensuring the financial health of
the scheme is maintained in a proportionate way with all other stakeholders.
Balance sheet
The reported loss for the year combined with the actuarial loss on the
Group’s defined benefit pension schemes and the adoption of IFRS 16, has
resulted in the Group recording consolidated net liabilities of £64.0m at the
31 December 2019 (2018: net assets £103.3m).
Contingent liabilities
The Group has been notified under a supplier contract of a potential liability
relating to past services received. The basis of any liability is currently
being discussed with the supplier, focusing currently on the method of any
settlement. The preferred approach is to settle the potential liability, if
any, via future committed spend with the supplier and accordingly the Group
has not made any provision at 31 December 2019 for a future outflow of funds
that might result. Refer to note 16 for the contingent liability disclosure
note.
Financial outlook
In the light of the investment that has been made in building platforms for
growth, we expect that revenue growth in our core businesses will translate
into modest organic revenue growth for the Group in 2020. Contractual
working capital outflows will reduce by more than £120m as a result of known
contract movements and our planned focus on the management of debtors and
creditors will generate further benefits. Capital expenditure as discussed
earlier will reduce significantly in 2020 and so adjusted free cash flow is
expected to be at least £160m. As a result of planned restructuring and
the last of three agreed payments towards our pension deficit, net debt
will rise modestly.
All of these items are before taking account of the impact of potential
disposals and the impact of IFRS 16.
1 Refer to alternative performance measures in the Appendix.
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 document save as would arise under English law.
Statements contained in this document 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 regarding Capita’s business, financial position
and results of operations, the current expectations, beliefs or opinions of
the management of Capita and/or statements concerning risks and uncertainties
relating to Capita’s business. Forward-looking statements may be identified
by the words "anticipate", "believe", "intend", "estimate", "expect",
“target” and words of similar meaning. Although Capita’s Directors
believe the expectations reflected in such forward-looking statements are
reasonable, those statements involve risk and uncertainty because they relate
to future events and depend on circumstances that may or may not occur and
which may cause actual results and developments to differ materially from
those expressed, projected or implied by those forward-looking statements and
forecasts.
No representation is made that any of the forward-looking 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
document. Capita undertakes no obligation to release any update of, or
revisions to, any forward-looking statement, forecast, opinion (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 2019
Notes 2019 2018 (1) £m
£m
Continuing operations:
Revenue 7 3,678.6 3,918.4
Cost of sales (2,683.0) (2,951.4)
Gross profit 995.6 967.0
Administrative expenses (995.2) (932.1)
Operating profit 0.4 34.9
Share of results in associates (0.6) —
Net finance costs 8 (62.4) (72.0)
Gain on business disposal 5 — 309.7
(Loss)/profit before tax (62.6) 272.6
Income tax credit 3.5 0.9
(Loss)/profit for the year from continuing operations (59.1) 273.5
Discontinued operations:
Profit for the year 5.0 5.6
Total (loss)/profit for the year (54.1) 279.1
Attributable to:
Owners of the Company (64.2) 269.0
Non-controlling interests 10.1 10.1
(54.1) 279.1
(Loss)/earnings per share 9
Continuing: – basic (4.18)p 17.99p
– diluted (4.18)p 17.77p
Total operations: – basic (3.88)p 18.37p
– diluted (3.88)p 18.15p
Adjusted operating profit 4 306.1 334.4
Adjusted profit before tax 4 275.0 281.2
Adjusted earnings per share 9 13.09p 16.33p
Adjusted and diluted earnings per share 9 13.09p 16.13p
Consolidated statement of comprehensive income
For the year ended 31 December 2019
2019 2018 (1) £m
£m
Total (loss)/profit for the year (54.1) 279.1
Other comprehensive (expense)/income
Items that will not be reclassified subsequently to the income statement
Actuarial (loss)/gain on defined benefit pension schemes (106.7) 134.9
Income tax effect 18.1 (22.9)
Items that will or may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations (1.2) 2.0
Gain on cash flow hedges 1.0 2.0
Cash flow hedges recycled to the income statement (2.6) (2.5)
Income tax effect 0.3 0.1
Other comprehensive (expense)/income for the year net of tax (91.1) 113.6
Total comprehensive (expense)/income for the year net of tax (145.2) 392.7
Attributable to:
Owners of the Company (155.3) 382.6
Non-controlling interests 10.1 10.1
(145.2) 392.7
1 The Group has initially applied IFRS16 at 1 January 2019, using the modified
retrospective approach. Under this approach, comparative information is not
restated and the cumulative effect of initially applying IFRS 16 is recognised
in retained earnings at the date of initial application. Refer to note 19 for
further details.
Consolidated balance sheet At 31 December 2019
Notes 2019 2018 (2) £m
£m
Non-current assets
Property, plant and equipment 10 194.3 213.6
Intangible assets (1) 11 354.2 328.7
Goodwill (1) 12 1,177.8 1,259.0
Right-of-use assets (2) 480.9 —
Investments in associates 3.8 —
Contract fulfilment assets 13 275.8 264.2
Financial assets (2) 82.2 109.1
Deferred taxation (2) 181.6 144.6
Trade and other receivables 26.4 26.2
2,777.0 2,345.4
Current assets
Financial assets (2) 25.1 18.2
Disposal group assets held for sale 5 12.4 —
Trade and other receivables (2) 748.4 771.7
Cash 409.1 957.5
Income tax receivable (3) 4.5 0.9
1,199.5 1,748.3
Total assets 3,976.5 4,093.7
Current liabilities
Trade and other payables (2,3) 619.8 668.7
Deferred income 884.5 980.3
Overdrafts 286.3 314.8
Lease liabilities (2) 81.9 —
Disposal group liabilities held for sale 5 7.9 —
Finance liabilities 351.8 303.1
Provisions (2) 14 71.3 96.8
2,303.5 2,363.7
Non-current liabilities
Trade and other payables 6.0 11.6
Deferred income 176.5 277.3
Lease liabilities (2) 480.7 —
Financial liabilities 795.7 1,084.2
Deferred taxation 16.3 15.2
Provisions (2) 14 9.3 19.4
Employee benefits 252.5 219.0
1,737.0 1,626.7
Total liabilities 4,040.5 3,990.4
Net (liabilities)/assets (64.0) 103.3
Capital and reserves
Share capital 34.5 34.5
Share premium 1,143.3 1,143.3
Employee benefit trust and treasury shares (11.2) (11.2)
Capital redemption reserve 1.8 1.8
Other reserves 0.6 3.1
Retained deficit (2,3) (1,295.8) (1,135.3)
(Deficit)/surplus attributable to owners of the Company (126.8) 36.2
Non-controlling interests 62.8 67.1
Total (deficit)/equity (64.0) 103.3
1. Goodwill has been presented separately from intangible assets on the face
of the balance sheet in line with our commitment to simplify the financial
statements.
2 The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 19 or further details.
3 The Group has initially applied IFRIC 23 Uncertainty over Income Tax
Treatments at 1 January 2019. The cumulative effect of initially applying
IFRIC 23 has been recognised in retained earnings at the date of initial
application. Comparative information is not restated.
Consolidated statement of changes in equity For the year ended 31 December 2019
Share capital £m Share premium £m Employee benefit trust and treasury shares £m Capital redemption reserve £m Retained deficit £m Other reserves £m Total attributable to the owners of the parent £m Non- controlling interests £m Total equity/ (deficit) £m
At 1 January 2018 13.8 501.3 (0.2) 1.8 (1,517.2) 1.5 (999.0) 69.2 (929.8)
Profit for the year — — — — 269.0 — 269.0 10.1 279.1
Other comprehensive income — — — — 112.0 1.6 113.6 — 113.6
Total comprehensive income for the year — — — — 381.0 1.6 382.6 10.1 392.7
Share based payment including deferred tax — — — — 3.8 — 3.8 — 3.8
Shares issues /(purchased) 20.7 642.0 (11.0) — — — 651.7 — 651.7
Equity dividends paid (3) — — — — — — — (12.2) (12.2)
Movement in put options held by non-controlling interests — — — — (2.9) — (2.9) — (2.9)
At 1 January 2019 34.5 1,143.3 (11.2) 1.8 (1,135.3) 3.1 36.2 67.1 103.3
Impact of change in accounting standards - IFRS 16 (1) — — — — (26.8) — (26.8) — (26.8)
Impact of change in accounting standards - IFRIC 23 (2) — — — — 6.2 — 6.2 — 6.2
At 1 January 2019, on adoption of IFRS 16 (1)and IFRC 23 (2) 34.5 1,143.3 (11.2) 1.8 (1,155.9) 3.1 15.6 67.1 82.7
(Loss)/profit for the year — — — — (64.2) — (64.2) 10.1 (54.1)
Other comprehensive expense — — — — (88.6) (2.5) (91.1) — (91.1)
Total comprehensive (expense)/income for the year — — — — (152.8) (2.5) (155.3) 10.1 (145.2)
Share based payment including deferred tax — — — — 3.8 — 3.8 — 3.8
Shares purchased — — — — (0.7) — (0.7) — (0.7)
Equity dividends paid (3) — — — — — — — (14.4) (14.4)
Movement in put options held by non-controlling interests — — — — 9.8 — 9.8 — 9.8
At 31 December 2019 34.5 1,143.3 (11.2) 1.8 (1,295.8) 0.6 (126.8) 62.8 (64.0)
1 The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 19 for further details.
2 The Group has initially applied IFRIC 23 Uncertainty over Income Tax
Treatments at 1 January 2019. The cumulative effect of initially applying
IFRIC 23 has been recognised in retained earnings at the date of initial
application. Comparative information is not restated.
3 Dividends paid and proposed: £14.4m (2018: £12.2m) relates to dividends
paid in relation to non-controlling interest. No dividends were declared or
paid in 2019 or 2018 on ordinary shares. No dividends are proposed on ordinary
shares in 2019 (2018: £nil).
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.
Retained deficit – Net (losses)/profits accumulated in the Group after
dividends are paid.
Other reserves – This consists of foreign currency translation reserve
surplus of £0.4m (2018: £1.6m surplus) and cash flow hedging reserve surplus
of £0.2m (2018: £1.5m surplus).
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 2019
Notes 2019 2018 (1) £m
£m
Cash generated/(used) by operations (1) 15 32.8 (75.7)
Cash generated/(used) by discontinued operations 4.7 (99.2)
Income tax (paid)/received (5.4) 25.3
Net interest paid (1) (58.4) (52.5)
Net cash outflow from operating activities (26.3) (202.1)
Cash flows from investing activities
Purchase of property, plant and equipment 10 (57.7) (89.4)
Purchase of intangible assets 11 (124.7) (70.1)
Proceeds from sale of property, plant and equipment/intangible assets 10, 11 0.4 1.9
Additions to investments in associates (0.6) —
Deferred consideration received — 5.2
Cancellation of put options — (6.8)
Deferred consideration paid (1.3) (11.1)
Contingent consideration paid (11.8) (19.8)
Purchase of financial assets — (0.9)
Net (loss)/proceeds on disposal of subsidiary undertakings (8.9) 407.8
Cash disposed of with subsidiary undertakings 5 — (11.2)
Net cash (outflow)/inflow from investing activities (204.6) 205.6
Cash flows from financing activities
Dividends paid to non-controlling interest (14.4) (12.2)
Purchase of shares (0.7) (11.0)
Capital element of lease rental payments (1) (93.7) (0.2)
Issue of share capital net of issue costs — 662.7
Repayment of loan notes (96.8) (577.2)
Proceeds from fixed rate swaps 10.9 103.6
Repayment of term loan (100.0) —
Financing arrangement costs (1.1) (3.7)
Net cash (outflow)/inflow from financing activities (295.8) 162.0
(Decrease)/increase in cash and cash equivalents (526.7) 165.5
Cash and cash equivalents at the beginning of the period 642.7 478.4
Movement in exchange rates 3.3 (1.2)
Cash and cash equivalents at 31 December 119.3 642.7
Cash and cash equivalents comprise:
Cash 409.1 957.5
Overdrafts (286.3) (314.8)
Overdrafts included in disposal group liabilities held for sale (3.5) —
Total 119.3 642.7
Adjusted cash generated from operations 15 158.6 71.9
Adjusted free cash flows 15 (61.3) (78.8)
1 The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 19 for further details.
Notes to the financial statements
for the year ended 31 December 2019
1 Corporate information
Capita plc is a public limited company incorporated in England and Wales whose
shares are publicly traded.
The consolidated financial statements of Capita plc for the year ended 31
December 2019 were authorised for issue in accordance with a resolution of the
Directors on 4 March 2020.
2 Basis of preparation, judgements and estimates and going concern
(a) Basis of preparation
The consolidated financial statements have been prepared in accordance with
IFRS as adopted by the European Union and as applied in accordance with the
provisions of the Companies Act 2006.
The consolidated financial statements are presented in pound sterling and all
values are rounded to the nearest tenth of a million (£m) except when
otherwise indicated.
(b) 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.
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. In the
Directors’ judgement, these 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 in-year performance of the business. Accordingly these items
are also excluded in the discussion of divisional performances. Those items
which relate to the ordinary course of the Group’s operating activities
remain within adjusted profit.
(c) Judgements and estimates
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.
(d) Going concern
In determining the appropriate basis of preparation of the financial
statements for the year ended 31 December 2019, the Directors are required to
consider whether the Group and Parent Company can continue in operational
existence for the foreseeable future.
Accounting standards require that an entity considers period of at least 12
months when assessing going concern, although do not specify how far beyond 12
months from the date of approval of the financial statements an entity should
consider. Given Capita’s transformation plan as described earlier in the
strategic report the Board has assessed a longer period and with risks and
mitigations that align with the viability assessment of the Annual Report and
Accounts.
The base-case projections prepared for the going concern are derived from the
2020-2022 business plans as approved by the Board. These capture the key
benefits that the transformation plan will deliver, and the costs to achieve
these. In recognition of the downside scenarios that the Board is obliged to
consider for assessing robustly going concern, the projections have been
adjusted to be necessarily more cautious in order to gauge the short to
medium term resilience of the Group and Parent Company to unexpected risks
arising.
The Board has applied a robust process to assess the resilience of the
forecast out-turns. This assessment included applying severe but plausible
downside risks as set out in the viability statement of the Annual Report and
Accounts. To address these risks the Board has considered mitigating factors
that could be employed that would address the impact and provide options to
the Group and Parent Company.
The assessment has taken into account the Group’s existing debt levels,
committed funding and available liquidity. In addition to the revolving credit
facility (RCF), in February 2020 the Group agreed a backstop liquidity
facility of £150m. The Group’s revolving credit facility matures in August
2022; and the Group’s backstop facility has an initial maturity in February
2021 and is extendable at the option of the Group to a final maturity in
August 2022.
The Group’s committed revolving credit facility, backstop liquidity
facility, and private placement loan notes are subject to compliance with
covenant requirements including maximum ratios of adjusted net debt to
adjusted EBITDA and interest cover. The covenants are tested semi-annually.
The Group had net debt of £1,353.2m at 31 December 2019 (2018: £466.1m) and
adjusted net debt of £832.7m at 31 December 2019 (2018: £494.7m). Net debt
increased in 2019 as a result of the adoption of IFRS 16 Leases (31 December
2019: £562.6m of lease liabilities). Net debt is reported in note 15. Cash
flow information and is used to calculate headline leverage (adjusted net debt
to adjusted EBITDA) and covenanted adjusted net debt to adjusted EBITDA ratio
(refer to the alternative performance measures in the Appendix).
The Group’s covenanted maximum adjusted net debt to adjusted EBITDA ratio is
3.0 times to 3.5 times depending on the debt instrument in question. The
impact of IFRS 16 adoption on the ratio is neutral, as the Group covenants are
calculated using GAAP applied before the adoption of IFRS 16, with the
exception of the US private placement loan notes. The US private placement
loan notes covenant test is favourably impacted by IFRS 16 adoption. The
Group’s calculation of covenanted adjusted net debt to adjusted EBITDA at 31
December 2019 was 2.2 times (2018: 1.2 times), and the US private placement
loan notes ratio was 1.7 times.
The Group’s minimum permitted interest cover level is 4.0 times. The
interest cover covenant was 11.2 times for the US private placement loan notes
and 10.8 times for other financing arrangements (2018: 8.2 times). As the
comparatives have not been restated on the adoption of IFRS 16, the December
2018 ratio only provides a meaningful comparison in the case of the other
financing arrangements and therefore no comparatives are shown for the US
private placement loan notes.
Based on the above robust assessment the Board believes that the Group and
Company will continue to have adequate financial resources to realise their
assets and discharge their liabilities as they fall due. Accordingly, the
Directors have formed the judgement that it is appropriate to prepare the
financial statements on the going concern basis. Therefore, the financial
statements do not include any adjustments which would be required if the going
concern basis of preparation were deemed inappropriate.
3 Preliminary announcement
A duly appointed and authorised committee of the Board of Directors approved
the preliminary announcement on 4 March 2019. The financial information set
out above does not constitute the Group's consolidated financial statements
for the years ended 31 December 2019 and 2018 but is derived from those
accounts. Statutory accounts for 2018 have been delivered to the Registrar of
Companies and those for 2019 will be delivered in due course. The auditor has
reported on those accounts. Their reports for the accounts of 2019 and 2018
were (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.
4 Adjusted operating profit and adjusted profit before tax
The items below are excluded from the adjusted results:
Operating profit (Loss)/profit before tax
Notes 2019 2018 £m 2019 2018 £m
£m £m
Reported 0.4 34.9 (62.6) 272.6
Amortisation and impairment of acquired intangibles 49.9 143.5 49.9 143.5
Impairment of goodwill 12 41.4 33.8 41.4 33.8
Impairment of loans and investments — 1.6 — 1.6
Litigation and claims (0.7) (1.8) (0.8) (1.8)
GMP and retirement age equalisation — 5.4 — 5.4
Net finance costs 8 — — 6.3 18.8
Contingent consideration movements (1.4) (5.0) (1.4) (5.0)
Business exit – trading 16.7 (17.7) 16.7 (17.7)
Business exit – non-trading expenses 52.1 29.7 52.1 29.7
Business exit – (gain)/loss on disposals — — — (309.7)
Significant restructuring 159.4 110.0 159.4 110.0
Impact of IFRS 16 19 (11.7) — 14.0 —
Adjusted 306.1 334.4 275.0 281.2
1. Adjusted operating profit decreased by 8.5% (2018: 26.0%) and adjusted
profit before tax decreased by 2.2% (2018: 26.4%). Adjusted operating profit
of £306.1m (2018: £334.4m) was generated on adjusted revenue of £3,647.4m
(2018: £3,814.7m) resulting in an adjusted operating profit margin of 8.4%
(2018: 8.8%).
2. The tax charge on adjusted profit before tax is £43.5m (2018: £27.2m)
resulting in adjusted profit after tax of £231.5m (2018: £254.0m).
3. The 2018 adjusted operating profit and adjusted profit before tax has been
restated for business exits in 2019. This has resulted in adjusted operating
profit decreasing from £335.3m to £334.4m and adjusted profit before tax
decreasing from £282.1m to £281.2m.
Amortisation and impairment of acquired intangible assets: the Group
recognised acquired intangible amortisation of £50.3m (2018: £86.7m) of
which £0.4m relates to business exits (2018: £4.9m) and impairment of £nil
(2018: £61.7m).
Impairment of goodwill: goodwill is subject to annual impairment testing and
any impairment charges are reported separately. Refer to note 12 for further
details.
Litigation and claims: the gain in 2019 is the net movement in historical
provisions for litigation and claims which were excluded from adjusted profit
when originally recognised due to their age and size.
The gain of £1.8m in 2018 arises from a release of £5.5m in respect of the
above provisions recognised in 2017, off-set by a loss from the derecognition
of an insurance asset of £3.7m. The original claim to which the asset related
was excluded from adjusted profit due to its nature and size.
Net finance costs: net finance costs excluded from adjusted profits includes
the movements in the mark to market valuation of certain financial
instruments.
Business exits: the trading result of businesses exited, or in the process of
being exited, and the gain or loss on disposals, are excluded from the Group's
adjusted results.
Significant restructuring: in January 2018, the Group announced a multi-year
transformation plan. In 2019 a charge of £159.4m (2018: £110.0m) was
recognised in relation to the cost of the transformation plan. The costs
include the following:
• Cost to realise cost savings and efficiencies from the transformation plan
£80m (2018: £55m): including significant reductions in overheads, the
elimination of duplicate roles and management layers, and the Group's
operational excellence programme which will improve the consistency of our
operations, reduce spans and layers, increasing the use of off-shoring and
automation, adopting lean methodologies and being smarter in terms of how we
work. 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 £26m (2018: £31m): incurred to support reigniting
sales growth and increasing the proportion of centrally controlled spend,
consolidating the supplier base and leveraging the Group’s scale.
• Transformation of central Group functions £53m (2018: £6m): investment
in programmes to improve the Group’s central functions, including finance,
sales, HR and IT. All costs associated with these programmes are recorded
separately, excluding any costs capitalised as part of the investment and the
ongoing depreciation and amortisation of such assets.
Impact of IFRS 16: the adoption of IFRS 16 has had a significant impact on the
Group’s financial statements and this has been excluded from adjusted profit
to enable comparability of adjusted results as the comparable figures have not
been restated. Details of the change in the Group’s accounting policy in
respect of lease accounting and an analysis of the impact of adopting IFRS 16
are set out in note 19.
5 Business exits and assets held for sale
Business exits are businesses that have been disposed of or exited during the
year, or are in the process of being disposed of or exited. 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. However,
the trading result of these businesses exits, and any gain or loss on
disposal, have been excluded from adjusted results and to enable a
like-for-like comparison of adjusted results, the 2018 comparatives have been
restated to exclude 2019 business exits.
The Group classifies a non-current asset (or disposal group) as held for sale
if its carrying amount will be recovered principally through a sale
transaction rather than continued use. For this to be the case, the asset (or
disposal group) must be available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such assets
(or disposal groups) and its sale must be highly probable. For the sale to be
highly probable, the appropriate level of management must be committed to a
plan to sell the asset (or disposal group), and an active programme to locate
a buyer and complete the plan must have been initiated. Further, the asset (or
disposal group) must be actively marketed for sale at a price that is
reasonable in relation to its current fair value. In addition, the sale should
be expected to qualify for recognition as a completed sale within one year
from the date of classification.
At 31 December 2019, the Group was in an active process to dispose of a
business which met the held for sale criteria. As such it was treated as a
disposal group held for sale at this date, and its results included within
business exits and therefore excluded from adjusted results.
During 2019, the Group took the decision to exit a business. The exit is in
progress and expected to complete in 2020. In accordance with our policy, the
trading result of the business was included in business exits and therefore
excluded from adjusted results.
Further disposals are planned in 2020 as part of the simplification agenda. As
these disposals did not met the definition of business exits assets for sale
at 31 December 2019, their trading results were included within adjusted
results.
In 2018, the Group disposed of five businesses and exited one business –
Capita Specialist Insurance Solutions, Projen, Medicals Direct Group, Supplier
Assessment Services (including Constructionline), ParkingEye and REI Health.
Income statement impact Non-trading disposal 2019 Non-trading disposal 2018
Trading Cash £m Non-cash £m Total Total Trading £m Cash £m Non-cash £m Total £m Total £m
£m £m £m
Revenue 31.2 — — — 31.2 103.7 — — — 103.7
Cost of sales (28.0) — — — (28.0) (54.2) — — — (54.2)
Gross profit 3.2 — — — 3.2 49.5 — — — 49.5
Administrative expenses (19.9) — (52.1) (52.1) (72.0) (31.8) (1.0) (28.7) (29.7) (61.5)
Operating (loss)/profit (16.7) — (52.1) (52.1) (68.8) 17.7 (1.0) (28.7) (29.7) (12.0)
Gain on business disposal — — — — — — 367.4 (57.7) 309.7 309.7
(Loss)/profit before tax (16.7) — (52.1) (52.1) (68.8) 17.7 366.4 (86.4) 280.0 297.7
Taxation 3.0 3.0 — 3.0 6.0 (3.3) (23.4) — (23.4) (26.7)
(Loss)/profit after tax (13.7) 3.0 (52.1) (49.1) (62.8) 14.4 343.0 (86.4) 256.6 271.0
Trading revenue and costs represent the current year trading performance of
those businesses up to the point of being disposed or exited. Trading expenses
primarily comprise of payroll costs of £19.8m (2018: £19.5m) and IT costs of
£17.3m (2018: £27.9m).
Non-trading administrative expenses primarily comprise of closure costs of
£nil (2018: £1.0m), goodwill impairment of £35.3m (2018: £24.3m), acquired
intangible amortisation of £nil (2018: £4.9m), impairment of property, plant
and equipment of £14.7m (2018: £nil) which is partially offset by releases
of provisions of £2.8m (2018: £0.5m).
Balance Sheet – disposal group
2019 £m
Property, plant and equipment 0.2
Deferred tax asset 0.1
Intangibles 2.9
Trade and other receivables 9.2
Assets held for sale 12.4
Trade and other payables (1) 4.4
Overdraft 3.5
Liabilities held for sale 7.9
1. Trade and other payables includes income tax payable of £0.4m.
Business exit cash flows
Business exited generated operating cash outflows of £19.2m (2018: cash
inflows of £9.0m).
2018 disposals
In 2018 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 2018
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
6 Contract accounting
At 31 December 2019, the Group had the following results and balance sheet
items related to long-term contracts:
Notes 2019 2018 £m
£m
Long-term contractual adjusted revenue 2,615.4 2,728.4
Deferred income 1,061.0 1,257.6
Contract fulfilment assets 13 275.8 264.2
Onerous contract provisions 14 6.1 7.4
Background
The Group operates a number of diverse businesses. The majority of the
Group’s revenue is from contracts greater than two years in duration
(long-term contractual), 72% of Group adjusted revenue in 2019 (2018: 72%).
These long-term contracts can be complex in nature given the breadth of
solutions the Group offers and the transformational activities involved.
Typically, Capita takes a customer’s process and transforms it into a more
efficient and effective solution which is then operated for the customer. The
outcome is a high quality solution that addresses a customer’s needs,
delivered consistently over the life of the contract.
The Group recognises revenue on long-term contracts as the value is delivered
to the customer, which is generally evenly over the contract term, regardless
of any restructuring and transformation activity. Capita will often incur
greater costs during the transformation phase with costs diminishing over time
as the target operating model is implemented and efficiencies realised. This
results in lower profits or losses in the early years of contracts and
potentially higher profits in later years as the transformation activities are
successfully completed and the target operating model fully implemented (the
business as usual, or BAU, phase). The inflection point is when the contract
becomes profitable.
Contract fulfilment assets are recognised for those costs qualifying for
capitalisation and the utilisation of these assets is recognised over the
contract term. The cash received from our customers reflects when the costs
are incurred to transform, restructure and run the service. This results in
income being deferred and released as the Group continues to deliver against
its obligation to provide services and solutions to its customers.
Assessing contract profitability
In assessing a contract’s future lifetime profitability, management must
estimate forecast revenue and costs to both transform and run the service over
the remaining contract term. The ability to accurately forecast the outcomes
involves estimates in respect of: costs to be incurred; cost savings to be
achieved; future performance against any contract-specific key performance
indicators (KPIs) that could trigger variable consideration or service
credits, and the outcome of any commercial negotiations.
The level of uncertainty in the estimated future profitability of a contract
is directly related to the stage of the life-cycle of the contract and the
complexity of the performance obligations. Contracts in the transformation
stage and pre-inflection, are considered to have a higher level of uncertainty
due to:
• the ability to accurately estimate the costs to deliver the transformed
process;
• the dependency on the customer to agree to the specifics of the
transformation, for example where they are involved in signing off that the
new process or the new technical solution designed by Capita meets their
specific requirements; and
• the assumptions made to forecast expected savings in the target operating
model.
Those contracts which are post-inflection and in BAU stage tend to have a much
lower level of uncertainty in estimating the contract future profitability.
Recoverability of contract fulfilment assets and completeness of onerous
contract provisions
Management first assesses whether the contract assets are impaired and then
further considers whether an onerous contract exists. The Audit and Risk
Committee specifically review the material judgements and estimates and the
overall approach in respect of the Group’s major contracts for each
reporting period, including comparison against previous forecasts. Major
contracts include those that are material in size or risk to the Group’s
results. Other contracts are reported to the Audit and Risk Committee as
deemed appropriate. These contracts are collectively referred to as “major
contracts” in the remainder of this note.
The major contracts contributed £1.4billion (2018: £1.3billion) or 39%
(2018: 35%) of Group adjusted revenue. Non-current contract fulfilment assets
as at 31 December 2019 were £275.8m, of which £80.7m (2018: £55.2m) related
to major contracts with on-going transformational activities. The remainder
relates to contracts post transformation and includes non-major contracts.
The major contracts, both pre and post transformation, are rated according to
their financial risk profile, which is linked to the level of uncertainty over
future assumptions. For those that are in the high and medium rated risk
categories the associated non-current contract fulfilment assets in aggregate
were £52.4m at 31 December 2019 (2018: £37.5m). The recoverability of these
assets is dependent on no significant adverse change in the key contract
assumptions arising in the next financial year. The deferred income associated
with these contracts was £243.6m at 31 December 2019 (2018: £336.3m) and is
forecast to be recognised as performance obligations continue to be delivered
over the life of the respective contracts.
Following these reviews, contract fulfilment asset provisions for impairment
of £9.6m (2018: £22.2m) were identified and recognised within adjusted cost
of sales, of which, £2.2m (2018: £22.2m) relates to contract fulfilment
assets added during the period. There were no material onerous contract
provisions recognised in the period.
Given the quantum of the relevant contract assets and liabilities management
has considered the nature of the estimates noted above and concluded that it
is reasonably possible, on the basis of existing knowledge, that outcomes
within the next financial year may be different from management’s
assumptions and could require a material adjustment to the carrying amounts of
contract assets and onerous contract provisions. However, as noted above,
£80.7m of non-current contract fulfilment assets relates to major contracts
with on-going transformational activities and £52.4m of non-contract
fulfilment assets relates to the highest and medium rated risk category. Due
to the level of uncertainty, combination of variables and timing across
numerous contracts, it is not practical to provide a quantitative analysis of
the aggregated judgements that are applied, and management do not believe that
disclosing a potential range of outcomes on a consolidated basis would provide
meaningful information to a reader of the accounts. Due to commercial
sensitivities, Capita does not specifically disclose the amounts involved on
any individual contract. Additional information, which does not form part of
the financial statements, on the results and performance of the underlying
divisions including the outlook on certain contracts is set out in the
divisional performance review.
7 Revenue including segmental revenue
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 20-31 of the Annual Report 2019.
The tables below present revenue for the Group’s business segments for the
years 2019 and 2018. As discussed in the strategic report of the Annual Report
2019, a new Consulting division was created in 2019. For segmental reporting,
Consulting is aggregated within the ‘Group trading and central services’
segment. The division was formed following the transfer of businesses from the
Software segment and the recruitment of additional resources. During 2019,
there were transfers of businesses between the Specialist Services and
Technology Solutions segments. Comparative information has been restated
accordingly.
Adjusted revenue, excluding results from businesses exited in both years
(adjusting items), was £3,647.4m (2018: £3,814.7m), an organic decline of
4.4% (2018: 6.7%).
Year ended 31 December 2019 Notes Software People Solutions Customer Management Government Services Technology Solutions Specialist Services Group trading and central services Total adjusted Adjusting items Total reported
£m £m £m £m £m £m £m £m £m £m
Continuing operations
Long-term contractual 331.8 313.3 552.6 673.7 297.1 432.2 14.7 2,615.4 23.5 2,638.9
Short-term contractual 37.9 34.8 248.1 14.6 41.5 183.9 2.4 563.2 0.4 563.6
Transactional (point in time) 5.7 152.4 1.7 89.6 90.7 128.4 0.3 468.8 7.3 476.1
Total segment revenue 375.4 500.5 802.4 777.9 429.3 744.5 17.4 3,647.4 31.2 3,678.6
Trading revenue 434.7 700.5 919.0 802.7 631.8 828.1 65.6 4,382.4 — 4,382.4
Inter-segment revenue (59.3) (200.0) (116.6) (24.8) (202.5) (83.6) (48.2) (735.0) — (735.0)
Total adjusted segment revenue 375.4 500.5 802.4 777.9 429.3 744.5 17.4 3,647.4 — 3,647.4
Business exits – trading 5 — 5.5 — — — 25.7 — — 31.2 31.2
Total segment revenue 375.4 506.0 802.4 777.9 429.3 770.2 17.4 — — 3,678.6
Year ended 31 December 2018
Continuing operations
Long-term contractual 337.4 296.4 571.2 657.9 298.5 540.4 26.6 2,728.4 45.3 2,773.7
Short-term contractual 34.7 38.0 229.5 29.2 55.2 200.5 — 587.1 47.7 634.8
Transactional (point in time) 7.8 160.2 1.9 93.4 86.0 146.4 3.5 499.2 10.7 509.9
Total segment revenue 379.9 494.6 802.6 780.5 439.7 887.3 30.1 3,814.7 103.7 3,918.4
Trading revenue 425.9 644.9 912.8 810.0 679.5 959.2 78.3 4,510.6 — 4,510.6
Inter-segment revenue (46.0) (150.3) (110.2) (29.5) (239.8) (71.9) (48.2) (695.9) — (695.9)
Total adjusted segment revenue 379.9 494.6 802.6 780.5 439.7 887.3 30.1 3,814.7 — 3,814.7
Business exits – trading 5 — 5.9 — — — 97.8 — — 103.7 103.7
Total segment revenue 379.9 500.5 802.6 780.5 439.7 985.1 30.1 — — 3,918.4
Geographical location
The table below presents revenue by geographical location.
2019 2018
United Kingdom Other Total United Kingdom £m Other £m Total £m
£m £m £m
Revenue 3,358.4 320.2 3,678.6 3,609.7 308.7 3,918.4
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. The Group’s order book has declined as contract wins
in the year have not offset revenue recognised in the year. Revenue expected
to be recognised upon satisfaction of these performance obligations is as
follows:
Order book Software People Solutions Customer Management Government Services Technology Solutions Specialist Services Group trading and central functions Total
31 December 2019 £m £m £m £m £m £m £m £m
Long-term contractual 496.7 497.2 1,697.2 2,328.4 344.0 1,108.0 2.9 6,474.4
Short-term contractual 81.7 — 26.5 — 45.7 83.7 7.6 245.2
Total 578.4 497.2 1,723.7 2,328.4 389.7 1,191.7 10.5 6,719.6
Order book 31 December 2018 Software £m People Solutions £m Customer Management £m Government Services £m Technology Solutions £m Specialist Services £m Group trading and central functions £m Total £m
Long-term contractual 554.9 715.3 2,012.2 2,187.5 380.4 1,224.1 19.7 7,093.7
Short-term contractual — — — — — 2.3 — 2.3
Total 554.9 715.3 2,012.2 2,187.5 380.4 1,226.4 19.7 7,096.0
The table below shows the time bands of the expected timing of revenue to be
recognised on long-term contractual at 31 December 2019:
Time bands of long-term contractual in order book Software People Solutions Customer Management Government Services Technology Solutions £m Specialist Services Group trading and central functions Total
£m £m £m £m £m £m £m
< 1 year 176.5 289.7 559.0 408.0 141.8 266.8 2.0 1,843.8
1–5 years 285.6 205.2 1,056.6 1,260.1 155.6 558.8 0.9 3,522.8
> 5 years 34.6 2.3 81.6 660.3 46.6 282.4 — 1,107.8
Total 496.7 497.2 1,697.2 2,328.4 344.0 1,108.0 2.9 6,474.4
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 £605.4m (2018: £508.0m). 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 £6.7billion (2018: £7.1billion) revenue to be earned on long-term
contractual, £4.4billion (2018: £4.1billion) relates to major 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
major contracts, which together are expected to contribute an additional
£1.8billion (2018: £2.1billion) of revenue to the Group over the life of
these contracts.
No single customer makes up more than 10% of the Group’s revenues.
Deferred Income
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 £1,119.3m
(2018: £1,220.8m).
Segmental Profit
The table below presents profit by segment.
Year ended Notes Software People Solutions Customer Management Government Services Technology Solutions Specialist Services Group trading and central services Total adjusted Adjusting items Total reported
31 December 2019 £m £m £m £m £m £m £m £m £m £m
Adjusted operating profit 4 102.9 34.9 54.9 58.8 50.7 141.7 (137.8) 306.1 — 306.1
Restructuring 4 (5.8) (34.2) (7.9) (2.6) (6.8) (7.2) (94.9) — (159.4) (159.4)
Business exits – trading 5 — (11.8) — — — (4.9) — — (16.7) (16.7)
Total trading result 97.1 (11.1) 47.0 56.2 43.9 129.6 (232.7) 306.1 (176.1) 130.0
Non-trading items:
Business exits – non-trading 5 — (52.1) (52.1)
Other adjusting items 4 — (77.5) (77.5)
Operating profit 306.1 (305.7) 0.4
Year ended 31 December 2018 Notes
Adjusted operating profit 4 109.6 45.0 41.7 40.3 53.8 128.6 (84.6) 334.4 334.4
Restructuring 4 (9.5) (12.5) (11.8) (6.3) (4.4) (14.4) (51.1) — (110.0) (110.0)
Business exits – trading 6 — (3.7) 0.3 — — 21.1 — — 17.7 17.7
Total trading result 100.1 28.8 30.2 34.0 49.4 135.3 (135.7) 334.4 (92.3) 242.1
Non-trading items:
Business exits – non-trading 6 — (29.7) (29.7)
Other adjusting items 4 — (177.5) (177.5)
Operating profit/(loss) 334.4 (299.5) 34.9
Geographical location
The table below presents revenue by geographical location, and carrying amount
of non-current assets by location of those assets.
2019 2018
United Kingdom Other Total United Kingdom £m Other £m Total £m
£m £m £m
Non-current assets 1,792.8 55.9 1,848.7 2,040.3 51.4 2,091.7
8 Net finance costs
The table below shows the composition of net finance costs, including a
reconciliation of net finance costs excluded from adjusted profit:
2019 2018 £m
£m
Interest receivable (3.6) (2.6)
Private placement loan notes 28.1 40.4
Cash flow hedges recycled to the income statement (2.6) (2.5)
Bank loans and overdrafts 4.2 8.5
Net interest cost on defined benefit pension schemes 4.4 9.4
Interest payable 34.1 55.8
Net finance costs included in adjusted profit 30.5 53.2
Discount unwind on public sector subsidiary partnership payment 1.3 1.7
Non-designated foreign exchange forward contracts – mark-to-market 2.1 5.1
Interest on lease liabilities (1) 25.7 —
Fair value hedge ineffectiveness (2) 2.8 (3.9)
Private placement loan notes prepayments costs (3) — 15.9
Net finance costs excluded from adjusted profit 31.9 18.8
Total net finance costs 62.4 72.0
1 The Group has initially applied IFRS 16 at 1 January 2019, using the
modified retrospective approach. Under this approach, comparative information
is not restated and the cumulative effect of initially applying IFRS 16 is
recognised in retained earnings at the date of initial application. Refer to
note 19 for further details.
2. Fair value hedge ineffectiveness includes 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. 2018 included early termination costs
paid to noteholders on early repayment of private placement loan notes.
3. Private placement loan notes prepayment costs includes make-whole costs
paid to noteholders on early repayment of principal in 2018.
9 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.
2019 2018
Continuing operations Total operations Continuing operations p Total operations p
p p
Basic earnings per share – adjusted 13.09 13.09 16.33 16.33
– reported (4.18) (3.88) 17.99 18.37
Diluted earnings per share – adjusted 13.09 13.09 16.13 16.13
– reported (4.18) (3.88) 17.77 18.15
The following reflects the earnings and share data used in the basic and
diluted earnings/(loss) per share computations:
2019 2018
Continuing operations Total Continuing operations £m Total operations £m
£m operations
£m
Adjusted profit for the period 231.5 231.5 254.0 254.0
Less: Non-controlling interest (14.7) (14.7) (14.9) (14.9)
Adjusted profit attributable to shareholders 216.8 216.8 239.1 239.1
Reported (loss)/profit for the period (59.1) (54.1) 273.5 279.1
Less: Non-controlling interest (10.1) (10.1) (10.1) (10.1)
Total (loss)/profit attributable to shareholders (69.2) (64.2) 263.4 269.0
2019 2018 m
m
Weighted average number of ordinary shares (excluding trust and treasury shares) for basic earnings per share 1,656.1 1,463.9
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 1,656.1 1,482.2
At 31 December 2019 25,313,414 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 current year from
continuing operation hence the diluted (loss)/profit per share for each
component of continuing operations needs to be the same amount as the basic
(loss)/profit per share.
The earnings per share figures are calculated based on earnings attributable
to ordinary equity holders of the parent company, and therefore excludes
non-controlling interest. The earnings per share is calculated on an adjusted
and total reported basis. The earnings per share for business exits, specific
items and the impact of IFRS 16 are bridging items to adjusted and total
reported earnings 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. To adjust for the dilutive impact of the rights issue in
2018, Capita granted an additional 1.639 share options for every share option
that an employee held to ensure that the fair value remained unchanged after
dilution.
10 Property, plant and equipment
2019 2018
Leasehold Plant and Total Leasehold improvements, land and buildings £m Plant and machinery £m Total £m
improvement, machinery £m
land and £m
buildings
£m
Cost
At 1 January 103.0 175.7 278.7 77.1 195.0 272.1
Additions 18.0 39.7 57.7 33.1 56.3 89.4
Disposal of business — — — — (22.8) (22.8)
Disposals – included in adjusted profit (2.4) (4.6) (7.0) (0.6) (19.7) (20.3)
Transfer to assets held for sale (0.2) — (0.2) — — —
Asset retirements — — — (5.9) (33.1) (39.0)
Exchange movement (0.3) (4.2) (4.5) (0.7) — (0.7)
At 31 December 118.1 206.6 324.7 103.0 175.7 278.7
Depreciation and impairment:
At 1 January 41.8 23.3 65.1 32.7 20.1 52.8
Depreciation charged during the year 9.6 50.7 60.3 9.7 50.4 60.1
Disposal of business — — — — (2.9) (2.9)
Disposals – included in adjusted profit (2.2) (3.8) (6.0) (0.6) (10.8) (11.4)
Impairment – included in adjusted profit — — — 6.1 — 6.1
Impairment – business exit — 14.7 14.7 — — —
Asset retirements — — — (5.9) (33.1) (39.0)
Exchange movement (1.9) (1.8) (3.7) (0.2) (0.4) (0.6)
At 31 December 47.3 83.1 130.4 41.8 23.3 65.1
Net book value
At 1 January 61.2 152.4 213.6 44.4 174.9 219.3
At 31 December 70.8 123.5 194.3 61.2 152.4 213.6
At 31 December 2019, amounts contracted for but not provided in the financial
statements for the acquisition of property, plant and equipment amounted to
£6.7m (2018: £10.7m), relating to building improvement on a leased property
and software upgrades.
11 Intangible assets
2019 2018
Intangible assets acquired in business combinations £m Capitalised/ purchased intangible assets Total Intangible assets acquired in business combinations £m Capitalised/ purchased intangible assets £m Total £m
£m £m
Cost
At 1 January 552.5 254.0 806.5 715.3 214.5 929.8
Subsidiaries acquired — — — 2.7 — 2.7
Business disposal — — — (48.7) (7.3) (56.0)
Additions — 124.7 124.7 — 70.1 70.1
Disposals – included in adjusted profit — (2.7) (2.7) — (5.1) (5.1)
Transfer to assets held for sale — (0.1) (0.1) — — —
Asset retirement (179.2) (12.2) (191.4) (123.3) (18.8) (142.1)
Exchange movement (2.3) (0.7) (3.0) 6.5 0.6 7.1
At 31 December 371.0 363.0 734.0 552.5 254.0 806.5
Amortisation and impairment
At 1 January 425.8 52.0 477.8 438.0 47.6 485.6
Amortisation charged during the year 50.3 31.1 81.4 86.7 27.9 114.6
Impairment – excluded from adjusted profit — 13.8 13.8 61.7 — 61.7
Business disposal — — — (41.3) (3.9) (45.2)
Disposals – included in adjusted profit — (1.5) (1.5) — (0.7) (0.7)
Asset retirement (179.2) (12.2) (191.4) (123.3) (18.8) (142.1)
Exchange movement — (0.3) (0.3) 4.0 (0.1) 3.9
At 31 December 296.9 82.9 379.8 425.8 52.0 477.8
Net book value (NBV)
At 1 January 126.7 202.0 328.7 277.3 166.9 444.2
At 31 December 74.1 280.1 354.2 126.7 202.0 328.7
Intangible assets acquired in business combinations include brands (NBV 2019:
£8.8m, 2018: £17.5m), IP software and licences (NBV 2019: £28.7m, 2018:
£38.7m), contracts and committed sales (NBV 2019: £15.9m, 2018: £21.6m) and
clients lists and relationships (NBV 2019: £20.7m, 2018: £48.9m).
Intangible assets capitalised or purchased include capitalised software
development (NBV 2019: £237.0m, 2018: £161.6m) and other intangibles (NBV
2019: £43.1m, 2018: £40.4m).
The aim of the finance transformation is to improve the Group’s financial
reporting systems, processes and controls, by increasing standardisation,
automation and the quality of available data. The new financial systems were
due to go live in the second half of 2019. While progress was made, we took
the decision to defer the go-live as more work is required on the core
processes and procedures before the system can effectively be implemented. We
have reviewed the costs capitalised and assessed that £12.3m is impaired,
representing areas that we expect to redesign before going live. The carrying
value of the investment at 31 December 2019, post impairment, is £58.6m.
Further impairment may arise should there be a material change to the
Group’s operating model. This impairment is included within significant
restructuring. We have continued to invest in shared service centres and
offshoring, and in making improvements to the Group’s existing reporting
systems, processes and controls.
12 Goodwill
2019 2018
Total Total £m
£m
Cost
At 1 January 2,020.6 2,071.2
Business disposal — (50.9)
Transfer to assets held for sale (2.8) —
Exchange movement (1.7) 0.3
At 31 December 2,016.1 2,020.6
Accumulated impairment
At 1 January 761.6 703.3
Impairment – excluded from adjusted profit 41.4 33.8
Impairment – business exit 35.3 24.3
Exchange movement — 0.2
At 31 December 838.3 761.6
Carrying amount
At 1 January 1,259.0 1,367.9
At 31 December 1,177.8 1,259.0
Cash-generating units
Reflecting the way management exercises oversight and monitors the Group’s
performance, the lowest level at which goodwill is monitored is at the
divisional level for four divisions (Software, People Solutions, Customer
Management and Consulting (see below)), and at a sub-divisional level for the
other three divisions (Government Services, Technology Solutions and
Specialist Services), and goodwill is allocated to these CGUs or groups of
CGUs. As at the 31 December 2019, the Group has 10 CGUs or groups of CGUs for
the purpose of impairment testing.
A new Consulting division was created in 2019 in line with the Group’s
strategy. This new division forms its own stand-alone CGU for goodwill
testing. The division was formed following the transfer of businesses from the
Software segment and the relevant goodwill has been reallocated to reflect
this transfer. Reallocations have also been made between Specialist Services
and IT Services to reflect a restructuring of certain businesses between the
two CGUs in 2019.
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 to CGUs remains appropriate.
Carrying amount of goodwill allocated to groups of CGUs:
CGU Software People Solutions Customer Management Central Government Technology Solutions Specialist Services Consulting £m Total
£m £m £m £m £m £m
IT Services Network Services
£m £m
1 January 2019 275.6 203.5 138.7 8.7 117.7 108.5 406.3 — 1,259.0
Restructures (20.7) — — — 91.5 — (91.5) 20.7 —
Transfer to assets held for sale — — — — — — (2.8) — (2.8)
Exchange movement — — (1.7) — — — — — (1.7)
Impairment - business exit — (3.8) — — — — (31.5) — (35.3)
Impairment — — — — — (41.4) — — (41.4)
31 December 2019 254.9 199.7 137.0 8.7 209.2 67.1 280.5 20.7 1,177.8
Specialist Regulated Services and Local Government CGUs are not included in
the table above as related goodwill was fully impaired in prior years.
Business exits
As set out in note 5, one business in Specialist Services that the Group
intends to dispose of in 2020 has met the criteria to be treated as held for
sale as at 31 December 2019. A portion of the goodwill relating to this
business has been reclassified to assets held for sale, and the remaining
amount impaired within business exits.
One business within People Solutions has met the criteria to be treated as a
business exit as at 31 December 2019. Goodwill relating to this business has
been impaired within business exits.
The impairment test
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, described earlier in the
strategic report, it has been determined that for 2019, fair value less costs
of disposal will generate the higher recoverable amount. The valuation of CGUs
under fair value less costs of disposal also assumes that a third party
acquirer would undertake a similar transformation plan to derive similar
benefits in the business going forward. 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 considered both
external and internal sources of information, and any observable indications
that may suggest that the carrying value of goodwill may be impaired.
The enterprise value of each CGU is dependent on the successful implementation
of the transformation plan. The objective of the new strategy announced in
April 2018 is to become a more focused and predictable business with improved
returns, stronger client relationships and sustainable free cash flow. If the
transformation plan fails to drive improved returns and sustainable free cash
flow in one or more of the CGUs, then this may give rise to an impairment of
goodwill in future periods.
As set out in the Chief Financial Officer’s review in the strategic report,
although 2019 adjusted operating profit was in line with expectations, one-off
gains offset a lower than planned level of growth in the second half of 2019,
meaning the Group entered 2020 at a lower level than expected and reliant on
an increased level of growth. In relation to Network Services, post the half
year results announcement and as the market continues to change, forecast
margins were impacted by high competition and market pressures, which was then
reflected in the 2020 business plan. Whilst we continue to win new revenue,
albeit not at the expected level of growth, the margin pressure is expected to
continue until we move to provision of our digital transformation
propositions. The impact of this was an impairment to the Network Services CGU
of £41.4m.
In 2018, the deterioration of the local government market for large BPO
contracts resulted in an impairment charge of Local Government goodwill and
acquired intangibles.
The key inputs to the calculations are described below, including changes in
market conditions.
Forecast cash flows
The bottom-up business planning process completed in early 2020 and the
resulting three year business plan for 2020, 2021 and 2022 was approved by the
Board. For the 2019 impairment test, the business plan for 2020-2022 was used
to derive the cash flow forecasts for the purpose of the impairment test.
Other than for movements in deferred income and contract fulfilment assets,
cash flows are adjusted to exclude working capital movements as the
corresponding balances are not included in the CGU carrying amount. The cash
flows include forecast capital expenditure and restructuring, as well as an
allocation of the costs of central functions. For the purpose of goodwill
impairment testing, the business plan cash flow forecasts have been further
risk adjusted using historical performance to reflect additional contingencies
relating to unsolutioned revenues, contract terminations, losses and renewal
forecasts, and additional contract specific contingencies.
The Board have considered an appropriate methodology to apply in allocating
the costs of the central functions, which is a key sensitivity. Forecast CGU
level 2021 EBITDA measures have been used for this purpose, as these are seen
to represent a steady state forecast for the Group and an appropriate
approximation of the attention and focus of the Group’s 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 long-term growth rate is based on inflation forecasts by recognised bodies
and this has been applied to forecast cash flows for years four and five (2023
and 2024) and for the terminal period. The 2019 long-term growth rate is 1.6%
(2018: 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.
Software People Solutions Customer Management Central Government Local Government IT Services Network Services Specialist Regulated Services Specialist Services Consulting
2019 11.5% 10.9% 10.7% 10.2% 15.6% 9.9% 9.9% 10.3% 10.6% 10.6%
2018 12.7% 12.1% 11.9% 11.4% 16.8% 11.1% 11.1% 11.5% 11.8% —
As set out above, discount rates used in 2019 are 1.2% lower than those for
2018. The key drivers for this decrease are changes in market assumptions for
UK corporate bond yields and risk-free rates, and a decrease in the levered
beta of peer group comparators.
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 a
decrease of 1% in the long-term growth rate (for the terminal period) for the
Group in total and each of the CGUs, or if the severe but plausible downsides
applied to the base-case projections for assessing going concern and
viability, without mitigations. These include trading downside risks which
assume the transformation plan is not successful in delivering the anticipated
revenue growth and assumes a downside that also incorporates revenue
attrition. The severe downside has incorporated potential adverse financial
impacts that could arise from incidents such as data breaches, cyber-attacks,
controls failures and an assessment of the potential fines and penalties for
any non-compliance with laws and regulations. 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 Long-term growth rate decrease by 1% £m Severe but plausible downside £m Combination sensitivity £m Increase in 2019 impairment using combination scenario £m
discount rate £m
Software (69.0) (51.8) (315.4) (379.3) (37.2)
People Solutions (46.4) (34.8) (266.3) (299.5) (129.0)
Customer Management (64.5) (50.1) (294.4) (353.1) —
Central Government (40.2) (33.1) (214.4) (243.8) —
IT Services (43.9) (33.7) (184.9) (224.2) (93.0)
Network Services (9.4) (7.4) (172.4) (158.5) (79.0)
Specialist Services (67.8) (50.6) (142.6) (229.5) —
Consulting (74.7) (56.1) (265.8) (339.9) —
Total (415.9) (317.6) (1,856.2) (2,227.8) (338.2)
Management continue to monitor closely the performance of all CGUs and
consider the impact of any changes to the key assumptions. Given the Group is
in the middle of a multi-year transformation there is a higher range of
potential future outcomes. A number of these downsides would give rise to a
larger impairment.
13 Contract fulfilment assets
Movements in non-current contract fulfilment assets were as follows:
2019 2018 £m
£m
At 1 January 264.2 252.5
Additions 114.3 113.8
Prior year reclassification from current contract fulfilment assets — 25.4
Impairment (9.6) (22.2)
Derecognition (2.0) (17.4)
Utilised during the year (90.7) (87.9)
Exchange movement (0.4) —
At 31 December 275.8 264.2
Impairment: In 2019, the Group recognised an impairment of £9.6m (2018:
£22.2m) within adjusted cost of sales, of which, £2.2m (2018: £22.2m)
relates to contract fulfilment assets added during the year.
Derecognition: In 2019, £2.0m (2018: £17.4m) was derecognised in relation to
in year business exits. In the prior year, derecognition related to the
Prudential and Marsh contracts which were terminated during 2018 and the Group
had no further use for the assets.
14 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
At 1 January 2019 12.0 17.5 3.0 46.4 19.9 17.4 116.2
IFRS 16 adoption reclassification to right-of-use assets (1) (3.5) — — — (11.7) — (15.2)
Provisions provided for in the year 22.5 2.1 — 21.6 3.7 8.2 58.1
Provisions released in the year (2.3) (5.6) — (11.7) (0.8) (3.9) (24.3)
Utilisation (22.6) (6.5) — (15.1) (2.8) (7.2) (54.2)
Reclassification between categories — 3.0 (3.0) — — — —
At 31 December 2019 6.1 10.5 — 41.2 8.3 14.5 80.6
1 On adoption of IFRS 16 (effective 1 January 2019), all leases within the
scope of the standard were recognised as right-of-use assets and lease
liabilities on the Group's balance sheet. This resulted in the
reclassification of restructuring and property provisions of £15.2m against
these right-of-use assets. Refer to note 19 for further details.
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.
Restructuring provision: The provision represents the cost of reducing role
count where communication to affected employees has crystallised a valid
expectation that roles are at risk, there are likely to unwind over a period
of 1 to 2 years. Additionally, it reflects the onerous nature leasehold
property costs where properties are exited as a result of the transformation
plan, these provisions are likely to unwind over a period of 1 to 25 years.
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.
These are likely to unwind over a period of 1 to 5 years.
Capita Asset Services indemnity provision: Capita completed the disposal of
its Asset Services businesses to the Link Group on 3 November 2017 and
provided an indemnity against certain legacy claims. The remaining £3.0m
provision has been transferred to business exit provisions. Due to the nature
of these claims, the Group cannot give an estimate of the period over which
this provision will unwind.
Claims and litigation provision: The Group is exposed to claims and litigation
proceedings arising in the ordinary course of business. These matters are
reassessed regularly and where obligations are probable and estimable,
provisions are made representing the Group’s best estimate of the
expenditure to be incurred. Due to the nature of these claims, the Group
cannot give an estimate of the period over which this provision will unwind.
Property provision: The property provisions remaining after the IFRS 16
adoption reclassification to right-of-use assets relate to unavoidable running
cost of leasehold property where the space is vacant or currently not planned
to be used for ongoing operations and for dilapidation costs. The expectation
is that this expenditure will be incurred over the remaining periods of the
leases which range from 1 to 26 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 of £6.1m (2018: £7.4m). These are likely to unwind over a period
of 1 to 10 years.
15 Cash flow information
2019 2018 (1)
Notes Adjusted Reported Adjusted (2) £m Reported £m
£m £m
Cash flows from operating activities:
Operating profit/(loss) (1) 4 306.1 0.4 334.4 34.9
Adjustments for non-cash items:
Depreciation (1) 58.1 159.5 57.5 60.1
Amortisation of intangible assets 11 30.9 81.4 27.3 114.6
Share based payment expense 3.0 3.0 3.4 3.4
Employee benefits 11.2 11.2 12.3 17.7
Loss on sale of property, plant and equipment/intangible assets 1.8 1.8 11.4 11.4
Contingent consideration — (1.4) — (5.4)
Impairment of property plant and equipment 10 — 14.7 6.1 6.1
Impairment of intangible assets 11 — 13.8 — 61.7
Impairment of goodwill 12 — 76.7 — 58.1
Impairment of loans and investments 4 — — — 1.6
Impairment of right-of-use assets — 0.9 — —
Other adjustments:
Movement in provisions (1) (6.0) (19.0) 2.8 (9.1)
Pension deficit contribution — (71.1) — (42.0)
Other contributions into pension schemes (17.0) (17.0) (16.1) (21.0)
Movements in working capital:
Trade and other receivables (1) (7.0) 2.4 97.4 89.3
Non-recourse receivables financing — — (110.0) (110.0)
Trade and other payables (1) (10.6) (14.8) (97.2) (91.7)
Deferred income (198.1) (198.1) (243.7) (243.7)
Contract fulfilment assets (non-current) (13.8) (11.6) (13.7) (11.7)
Cash generated/(used) by operations 158.6 32.8 71.9 (75.7)
Adjustments for free cash flows:
Income tax (paid)/received (5.4) (5.4) 26.6 25.3
Net interest paid (32.7) (58.4) (39.0) (52.5)
Purchase of property, plant and equipment (57.6) (57.7) (73.0) (89.4)
Purchase of intangible assets (124.6) (124.7) (67.2) (70.1)
Proceeds from sale of property, plant and equipment/intangible assets 0.4 0.4 1.9 1.9
Free cash flow (61.3) (213.0) (78.8) (260.5)
1 Capita has initially applied IFRS 16 at 1 January 2019, using the modified
retrospective approach. Under this approach, comparative information is not
restated and the cumulative effect of initially applying IFRS 16 is recognised
in retained earnings at the date of initial application.
2 The 2018 adjusted cash flow has been restated for business exits in 2019.
This has resulted in adjusted cash generated by operations increasing from
£69.8m to £71.9m and adjusted free cash outflow decreasing from £82.5m to
£78.8m.
Adjusted free cash flow and cash generated from operations
Free cash flow Cash generated from operations
2019 2018 £m 2019 2018 £m
£m £m
Reported (213.0) (260.5) 32.8 (75.7)
Pension deficit contributions 71.1 46.9 71.1 46.9
Significant restructuring 148.5 100.8 148.5 100.8
Business exits 19.4 10.3 19.2 (9.0)
Impact of IFRS 16 (90.0) — (115.7) —
Other 2.7 23.7 2.7 8.9
Adjusted (61.3) (78.8) 158.6 71.9
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 £176.0m, of which £71.1m was paid in 2019 (2018: £42.0m). In 2019, no
further contributions were made following closure of the Scheme in 2017 to
future accrual for the majority of members of the Scheme (2018: £4.5m). These
payments have been excluded from adjusted cash flows as the Group treats them
as a debt like item.
Significant restructuring: in April 2018, the Group announced a multi-year
transformation plan. In the period to 31 December 2019, a cash outflow of
£148.5m (2018: £100.8m) 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 2018 results have been restated for those businesses
exited, or in the process of being exited, in 2019 to enable comparability of
the adjusted results.
Impact of IFRS 16: at 1 January 2019 the Group has initially applied IFRS 16,
using the modified retrospective approach. This has resulted in a change in
the presentation of lease principal payments from cash flows from operations
to cash flows from financing activities. To improve the comparability of the
Group's cash flow statement, the impact of IFRS 16 has been excluded from 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 debt
Net debt at Lease liability adjustment (2) Cash flow Non-cash movement (3) Net debt at
1 January £m movements £m 31 December
2019 £m 2019
£m £m
Cash, cash equivalents and overdrafts 642.7 — (523.2) 3.3 122.8
Other loan notes (0.3) — — — (0.3)
Private placement loan notes (1) (1,108.0) — 97.9 19.4 (990.7)
Cross-currency interest rate swaps (1) 99.6 — (10.9) (11.4) 77.3
Interest rate swaps (1) 1.9 — — (0.9) 1.0
Term loan (100.0) — 100.0 — —
Lease liabilities (2) — (643.9) 93.7 (12.4) (562.6)
Total net liabilities from financing activities (1,106.8) (643.9) 280.7 (5.3) (1,475.3)
Deferred consideration (2.0) — 1.3 — (0.7)
Net debt (466.1) (643.9) (241.2) (2.0) (1,353.2)
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 £915.5m (2018:
£1,006.5m). Cash flow movement in private placement loan notes includes both
repayment of private placement notes of £96.8m and finance arrangement costs
of £1.1m.
2 Lease liabilities relates to amounts due by the Group where the Group is a
Lessee. Lease liability adjustment comprises the unwinding of the discounted
lease payments. Refer to note 19 for further details on the impact of IFRS 16
on the Group.
3 Non-cash movement relates to foreign exchange on cash, fair value changes on
the swaps, amortisation of loan notes issue costs, amortisation of the
discount on the Euro debt issue and the IFRS 16 modifications, additions and
terminations to our leases.
Net debt at 1 January 2018 £m Cash flow movements Non-cash movement £m Net debt at 31 December 2018 £m
Rights issue £m Cash flow movements £m
Cash, cash equivalents and overdrafts 478.4 671.1 (505.6) (1.2) 642.7
Other loan notes (0.3) — — — (0.3)
Private placement loan notes (1,664.0) — 580.9 (24.9) (1,108.0)
Cross-currency interest rate swaps 176.8 — (103.6) 26.4 99.6
Interest rate swaps 5.4 — — (3.5) 1.9
Term loan (100.0) — — — (100.0)
Finance leases (1) (0.2) — 0.2 — —
Total net liabilities from financing activities (1,582.3) — 477.5 (2.0) (1,106.8)
Deferred consideration (13.1) — 11.1 — (2.0)
Net debt (1,117.0) 671.1 (17.0) (3.2) (466.1)
1 Capita has initially applied IFRS 16 at 1 January 2019, using the modified
retrospective approach. Under this approach, comparative information is not
restated and the cumulative effect of initially applying IFRS 16 is recognised
in retained earnings at the date of initial application. Refer to note 19 for
further details.
16 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 £58.1m (2018: £84.0m).
The Group is in discussions with a number of its life insurance clients, the
outcomes and timings of which are uncertain but could result in the
continuation of contracts with amended terms or the termination of contracts.
If an operation is terminated, the Group may incur associated costs,
accelerate the recognition of deferred income or the impairment of contract
assets. 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 Group has been notified under a supplier contract of a potential liability
relating to past services received. The basis of any liability is currently
being discussed with the supplier, focusing currently on the method of any
settlement. The preferred approach is to settle the potential liability, if
any, via future committed spend with the supplier and accordingly the Group
has not made any provision at 31 December 2019 for a future outflow of funds
that might result. Additionally, there is currently no reliable estimate of
any eventual outcome, and to disclose a potential range would be prejudicial
given the early stage of the discussions with the supplier.
The 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.
17 Related-party transactions
Compensation of key management personnel
2019 2018 £m
£m
Short-term employment benefits 9.3 11.9
Pension 0.2 0.2
Share-based payments 2.6 —
12.1 12.1
Gains on share options exercised in the year by Capita plc Executive Directors
were £nil (2018: £nil) and by key management personnel £0.1m (2018: £nil),
totalling £0.1m (2018: £nil).
During the year, the Group rendered administrative services to Smart DCC Ltd,
a wholly-owned subsidiary which is not consolidated. The Group received
£83.4m (2018: £64.3m) 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.
At 31 December 2019, the Company had received notifications in accordance with
the Disclosure Guidance and Transparency Rules (DTRs) that the following were
interested in the Company’s shares:
Shareholder Number of % of voting rights at Number of Number of
shares 31 December 2019 shares direct shares indirect
Investec Asset Management Ltd 194,275,289 11.64 — 194,275,289
RWC Asset Management LLP (1) 186,951,093 11.20 — 186,951,093
Invesco Ltd 182,100,179 10.91 — 182,100,179
Veritas Asset Management LLP (2) 116,588,466 6.99 — 116,588,466
Schroders Investment Management Ltd 101,030,829 6.05 — 101,030,829
Coltrane Asset Management L.P. 83,888,589 5.02 5,140,000 78,748,589
BlackRock Inc. 74,230,358 4.45 — 74,230,358
Marathon Asset Management LLP 64,756,810 3.88 — 64,756,810
Veritas Funds PLC 55,009,900 3.30 — 55,009,900
Vanguard Group Inc. 54,711,874 3.28 54,711,874 —
Jupiter Asset Management Limited 53,573,060 3.21 — 53,573,060
Norges Bank Investment Management (3) 50,283,099 3.05 — 50,283,099
1 Includes 302,284 voting rights arising from the holding of certain financial
instruments.
2 Includes the holding of Veritas Funds PLC.
3 Includes 695,170 voting rights arising from the holding of certain financial
instruments.
On 14 February 2020, notification in accordance with the DTRs was received
from Invesco Ltd that it held indirectly 166,767,761 shares, being 9.99% of
voting rights. At 2 March 2020, no further notifications had been received
under the DTRs in relation to interests in the Company’s shares.
18 Post balance sheet events
On 8 January 2020, as part of the property rationalisation, under IFRS 16, the
Group extinguished a property lease liability (31 December 2019: £20.9m) and
acquired the freehold for £30.7m cash. This resulted in a derecognition of
£7.1m of the right of use asset, a £3.0m addition to freehold property, and
a charge to significant restructuring of £9.2m. There are no post balance
sheet events that have an adjusting effect on the financial statements.
19 Adoption of IFRS 16 Leases
Adoption method
On adoption of IFRS 16 (effective 1 January 2019) the Group has elected to
grandfather the assessment of which arrangements are leases. Contracts not
identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether
there is a lease under IFRS 16.
Under the transition rules, the Group has applied IFRS 16 using the modified
retrospective approach, with the cumulative effect of applying the standard
recognised in retained earnings on 1 January 2019. Comparative information
presented for 2018 has not been restated.
At transition
As a lessee, the Group previously classified leases as operating or finance
leases based on its assessment of whether the lease transferred significantly
all of the risks and rewards incidental to ownership of the underlying asset
to the Group. Under IFRS 16, the Group recognises right-of-use assets and
lease liabilities for all the leases on its balance sheet.
The Group used the following practical expedients when applying IFRS 16 to
leases previously classified as operating leases:
• applied the exemption not to recognise right-of-use assets and liabilities
for leases of low value or for which the lease term ends within 12 months of
the date of initial application, on a lease-by-lease basis
• relied on previous assessments on whether leases are onerous for
impairment of right-of-use assets
• excluded initial direct costs from the measurement of the right-of-use
asset at the date of initial application
• used hindsight when determining the lease term if the contract contains
options to extend or terminate the lease
• applied the exemption not to separate non-lease components such as service
charges from lease rental charges
Under transition rules for leases classified as operating leases, lease
liabilities were measured at the present value of the remaining lease
payments, discounted at the Group’s incremental borrowing rate at 1 January
2019.
Right-of-use assets are measured at cost, which comprised the initial amount
of the lease liability adjusted for any lease payments made at or before the
adoption date, less any lease incentives received at or before the adoption
date and less any onerous lease provisions (reclassified on the opening
balance sheet).
For a selection of material long-term leases, the Group has applied the
modified retrospective method one approach, as if IFRS 16 had always been
applied using the incremental borrowing rate at the date of initial
application. Under this method, the difference between the right-of-use asset
and lease liability was recorded in retained earnings.
At 1 January 2019 the Group had no lease commitments previously classified as
finance leases under IAS 17.
The Group is not required to make any adjustments on transition to IFRS 16 for
which it acts as a lessor, except for subleases. Under IFRS 16, the Group
assessed the classification of subleases with reference to the right-of-use
asset, not the underlying asset. This resulted in certain leases being
classified as finance leases under IFRS 16 and recognition of a finance lease
receivable (recorded within line item financial assets on the consolidated
balance sheet).
Impact of adopting IFRS 16
On adoption:
A summary of the impact on the Group of adopting IFRS 16 is as follows: Notes As reported 31 December 2018 £m IFRS 16 impact £m At adoption 1 January 2019 £m
Non-current assets
Property, plant and equipment 213.6 — 213.6
Goodwill 1,259.0 — 1,259.0
Intangible assets 328.7 — 328.7
Right-of-use assets a — 568.2 568.2
Contract fulfilment assets 264.2 — 264.2
Financial assets b 109.1 14.1 123.2
Deferred taxation c 144.6 5.4 150.0
Trade and other receivables 26.2 — 26.2
2,345.4 587.7 2,933.1
Current assets
Financial assets b 18.2 3.0 21.2
Trade and other receivables d 771.7 (14.9) 756.8
Cash 957.5 — 957.5
Income tax receivable 0.9 — 0.9
1,748.3 (11.9) 1,736.4
Total assets 4,093.7 575.8 4,669.5
Current liabilities
Trade and other payables d 668.7 (26.1) 642.6
Deferred income 980.3 — 980.3
Overdrafts 314.8 — 314.8
Lease liabilities e — 95.3 95.3
Financial liabilities 303.1 — 303.1
Provisions d 96.8 (6.4) 90.4
2,363.7 62.8 2,426.5
Non-current liabilities
Trade and other payables 11.6 — 11.6
Deferred income 277.3 — 277.3
Lease liabilities e — 548.6 548.6
Financial liabilities 1,084.2 — 1,084.2
Deferred taxation 15.2 — 15.2
Provisions d 19.4 (8.8) 10.6
Employee benefits 219.0 — 219.0
1,626.7 539.8 2,166.5
Total liabilities 3,990.4 602.6 4,593.0
Net assets/(liabilities) 103.3 (26.8) 76.5
Capital and reserves
Issued share capital 34.5 — 34.5
Share premium 1,143.3 — 1,143.3
Employee benefit trust and treasury shares (11.2) — (11.2)
Capital redemption reserve 1.8 — 1.8
Other reserves 3.1 — 3.1
Retained deficit f (1,135.3) (26.8) (1,162.1)
Surplus/(deficit) attributable to owners of the Company 36.2 (26.8) 9.4
Non-controlling interests 67.1 — 67.1
Total equity 103.3 (26.8) 76.5
a Right-of-use assets: non-current assets have been impacted due to
recognition of right-of-use assets on 1 January 2019. The right-of-use assets
are initially measured at cost, which comprises the initial amount of the
lease liability adjusted for any lease payments made at or before the adoption
date less any lease incentives received at or before the adoption date
(reclassified on the opening balance sheet).
b Finance lease receivable: Financial assets have been impacted by recognition
of finance lease receivables where the Group acts as an intermediate lessor
and has classified the sub lease as a finance lease because the sub-lease is
for a substantial amount of the remaining term of the head lease. The finance
lease receivables have been classified between current and non-current.
c Deferred tax asset: Under IFRS 16, a lease liability was recognised on the
balance sheet from 1 January 2019, which will be recognised through the income
statement in subsequent periods. Right-of-use assets were also recognised on
the balance sheet from 1 January 2019, which will be charged to the income
statement in subsequent periods. Under IAS 12, the tax base of the net
liability is the amount that will be deductible for tax purposes. A temporary
difference is therefore created in relation to the net liability.
The impact of these changes is recognised for tax purposes via a tax
adjustment which spreads over the weighted average lease period at 1 January
2019. Under the principles of IAS 12, a net movement of £5.4m is reflected as
a transitional adjustment, arising from an increase in deferred tax assets as
a result of the transition to IFRS 16.
d Reclassification of balance sheet items: As noted above in a, the
right-of-use asset is initially measured at cost plus lease payments made at
or before the adoption date (prepayments), less any lease incentives received
(rent free accruals) and less onerous provisions existing at the adoption
date. These balances have been reclassified to right-of-use asset on adoption.
e Lease liabilities: Financial liabilities have been impacted due to the
recognition of lease liabilities. This liability is initially measured at the
present value of the lease payments that are not paid at the adoption date,
discounted using the Group’s incremental borrowing rate. The lease payments
comprise fixed payments, including in-substance fixed payments such as service
charges and variable lease payments that depend on an index or a rate,
initially measured using the minimum index or rate at commencement date. The
lease liabilities have been classified between current and non-current.
f Retained deficit: For a selection of material long-term leases, the Group
applied the modified retrospective method one approach, where the right-of-use
asset is calculated from the lease inception and depreciated - resulting in a
charge to retained deficit representing the different between the right-of-use
asset and the finance lease liability.
In calculating the lease liability to be recognised on adoption, the Group
used a weighted average incremental borrowing rate at 1 January 2019 of 4.6%.
The below outlines the difference between the Group's operating lease
commitment at 31 December 2018 and the lease liability recognised on adoption:
Lease liabilities recognised 1 January 2019 £m
Operating lease commitment at 31 December 2018 as disclosed in the Group’s consolidated financial statements 736.0
Discounted using the incremental borrowing rate at 1 January 2019 (113.5)
Extension and termination options reasonably certain to be exercised 21.4
643.9
of which:
Current 95.3
Non-current 548.6
In the period:
The impact to the income statement for the period to 31 December 2019 is as
follows:
Consolidated income statement Expected adoption impact for the year ending 31 December 2019 £m Actual adoption impact for the year ending 31 December 2019
£m
EBITDA 112 - 117 110.9
Depreciation expense 99 - 104 (99.2)
Operating profit 12 - 14 11.7
Net finance costs on lease liabilities (26) - (28) (25.7)
Profit before tax (12) - (14) (14.0)
As a result of adopting IFRS 16, rental costs which were previously recognised
in operating profit have been replaced by right-of-use asset depreciation and
net finance costs on the finance lease liability. As the asset is depreciated
on a straight line basis over the lease term and the interest is accrued using
the effective interest rate method, while EBITDA has improved, profit is
reduced in the earlier years as a result of applying IFRS 16.
Although IFRS 16 has no impact on the Group's total cash flow, outflows from
financing activities increase while cash outflows from operating activities
decrease, as recognition of rental costs, previously recognised solely as cash
outflows from operations are now apportioned between finance charges and
reduction of the lease obligation.
Due to the Group transformation plan, which includes a rationalisation of
Capita’s properties, the Group’s lease portfolio is expected to change
over the next few years. Any changes to the lease portfolio will be accounted
for when transacted as required under IFRS 16 and our Group policy. Costs and
impairments on the right-of-use assets arising from the property programme
will be excluded from adjusted profit in line with the current Group policy.
20 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 2020. 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 alternative performance measures (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. This includes key
performance indicators (KPIs) such as return on capital employed, interest
cover and gearing ratios by which we monitor our performance.
2019 2018 Source
Revenue - continuing operations
Reported revenue £3,678.6m £3,918.4m Line item in income statement
Deduct: business exit (£31.2m) (£103.7m) Line item in note 5
1. Adjusted revenue £3,647.4m £3,814.7m
Operating profit - continuing operations
Reported operating profit £0.4m £34.9m Line item in income statement
Adjusting items in note 4 £305.7m £299.5m
2. Adjusted operating profit (1) £306.1m £334.4m
Adjusted operating profit margin 8.4% 8.8% Adjusted operating profit/adjusted revenue
2019 2018 Source
ROCE-Pre IFRS 16
Adjusted operating profit (1) a £306.1m £334.4m Note 4
Adjusted tax rate b 15.8% 9.7%
Tax c = a x b £48.4m £32.4m Adjusted operating profit multiplied by tax rate
Adjusted operating profit after tax d = a - c £257.7m £302.0m Adjusted operating profit less tax
Current year net (liabilities)/assets e (£23.2m) £103.3m Line information in balance sheet excluding the impact from adoption of IFRS 16
Current year net debt before IFRS 16 f £1,353.2m £464.1m Line item in note 15 – cash flow information, net debt excluding the impact of deferred consideration and finance leases that arose from the adoption of IFRS 16
Adjustments to capital employed g £1,262.0m £1,276.5m Includes post-tax impact of accumulated acquired intangible amortisation, fixed rate swaps, put options and pensions
m (1)= e+f+g £2,028.7m £1,843.9m Used in 2019 average capital employed
Less: acquisition spend in year h £—m £—m Consideration paid - cash acquired + debt acquired
Current year capital employed i = e+f+g+h £2,028.7m £1,843.9m
Prior year net liabilities j (£929.8m)
Prior year adjusted net debt k £1,103.9m
Comparative prior year adjustments l £1,359.7m Includes post-tax impact of accumulated acquired intangible amortisation, fixed rate swaps, put options and pensions
Prior year capital employed m (2)= j+k+l £1,533.8m Used in 2018 average capital employed
Average capital employed n = (i+m)/2 £1,936.3m £1,688.9m
3. ROCE KPI q = d/n 13.3% 17.9%
2019 2018 Source
Headline gearing
Adjusted profit before tax (1) £275.0m £281.2m Line information in note 4
Add back: adjusted net finance costs £30.5m £53.2m Line information in note 8
Add back: adjusted depreciation and impairment on property, plant and equipment £58.1m £63.6m Line information in note 15
Add back: adjusted amortisation £30.9m £27.3m Line information in note 15
Adjusted EBITDA a £394.5m £425.3m
Net Debt £1,353.2m £466.1m Line information in note 15
IFRS 16 impact (£562.6m) £—m Line information in note 15
Headline net debt b £790.6m £466.1m
4. Headline net debt to adjusted EBITDA ratio KPI b/a 2.0x 1.1x Headline 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 period under review and against which the Group’s performance is
assessed.
2019 2018 Source
Covenants (4)
Adjusted operating profit (1) £306.1m £335.3m Line information in note 4
Add: business exit – trading (£16.7m) £16.8m Line information in note 5
Add: share of earnings in associates (£0.6m) £—m Line information in income statement
Deduct: non-controlling interest (£18.1m) (£12.5m) Adjusted EBIT attributable to NCI
Add back: share-based payment charge £3.0m £3.4m Line information in note 15
Add back: non-current service pension charge £4.2m £9.5m
Add back: amortisation and impairment on purchased intangibles £31.1m £27.9m Line information in note 11
Adjusted EBITA a1 £309.0m £380.4m
Add: IFRS 16 impact £11.7m £—m Line information in note 4
Adjusted EBITA (including IFRS 16) a2 £320.7m £380.4m
Adjusted EBITA £309.0m £380.4m Line item above
Deduct business exit – trading sold £—m (£19.7m) Trading profit for businesses sold
Add back: depreciation and impairment on property, plant and equipment £75.0m £65.2m See note 10
Covenant calculation – adjusted EBITDA b1 £384.0m £425.9m
Add: IFRS 16 impact £110.9m £—m See note 19
Covenant calculation – adjusted EBITDA (including IFRS 16) b2 £494.9m £425.9m
Adjusted interest charge (£30.5m) (£53.2m) Line information in note 8
Interest cost attributable to pensions £4.4m £9.4m Line information in note 8
Cash flow hedges recycled to the income statement (£2.6m) (£2.5m) Line information in note 8
Borrowing costs c1 (£28.7m) (£46.3m)
5.1 Interest cover (US PP covenant) a2/c1 11.2x Adjusted EBITA/Borrowing costs with adjusted EBITA including the impact of IFRS 16 and borrowing costs excluding the impact of IFRS 16
5.2 Interest cover (other financing agreements) a1/c1 10.8x 8.2x Adjusted EBITA/Borrowing costs with both variables excluding IFRS 16
Net debt £1,353.2m £466.1m Line information in note 15
Restricted cash (2) £42.1m £28.6m Cash that may not be applied against net debt for covenant calculation purposes
Remove IFRS 16 impact (£562.6m) £—m Line information in note 15
Adjusted net debt (excluding IFRS 16) d1 £832.7m £494.7m
6.1 Adjusted net debt to post IFRS 16 adjusted EBITDA ratio (US PP covenant) (3) d1/b2 1.7x Adjusted net debt/adjusted EBITDA with adjusted net debt excluding the impact of IFRS 16 and adjusted EBITDA including the impact of IFRS 16
6.2 Adjusted net debt to adjusted EBITDA ratio KPI (other financing agreements) d1/b1 2.2x 1.2x Adjusted net debt/adjusted EBITDA with both variables excluding IFRS 16
1 Adjusted operating profit excludes items that are separately disclosed and
considered to be outside the underlying operating results for the particular
period under review and against which the Group’s performance is assessed.
2 Restricted cash includes cash required to be held under FCA regulations,
cash held in foreign bank accounts and cash represented by non-controlling
interests and joint ventures.
3 As noted in the Group's annual report 2018, 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.
4 To enable the reader to understand the covenant information we submit to our
external lenders the 2018 comparatives have not been restated.
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