REG-Capita PLC: Full Year Results 2020
17/03/2021 07:05
Capita plc
Full Year Results 2020
Summary
* Capita responded robustly to the challenges of 2020, including the Covid-19
crisis, delivering strong adjusted free cash flow and better than expected net
debt, as well as winning £3.1bn of contract value
* Capita is now a much better business than at the start of the
transformation, with materially improved client relationships and growth
prospects
* Next stage is to simplify further: two core divisions focused on distinct
growth markets and client needs * Capita Public Service will be one of
Government’s largest strategic suppliers and focused on six areas where we
already have strong positions
* Capita Experience will build on our significant share of the UK and European
customer experience markets with a blue-chip client base
* A third division comprising an expanded portfolio of non-core businesses
which will realise significant proceeds
* To support the balance sheet, our focus remains on efficient cash
management, realising non-core disposals of £700m and planning to put in
place a longer-term financing solution
* We are planning that Capita will return to organic revenue growth this year
and achieve sustainable cash generation in 2022
2020 Financial outcome
* Results in line with expectations set out at the half year
* Adjusted revenue(1,2) decrease mainly due to Covid-19 impact and 2019
contract losses
* Adjusted profit before tax(1,2) decline resulting from change in profit mix
from prior-year revenue losses and the net impact of Covid-19, partially
offset by cost savings
* Adjusted free cash flow(1) better due to higher cash conversion and improved
and sustainable cash collection
* Net debt better than expected. Gearing ratios well within covenants
Year ended 31 December 2020
Financial highlights - continuing operations Reported 2020 Reported 2019 Reported YOY change Adjusted (1)2020 Adjusted (1)2019 Adjusted (1) YOY change
Revenue £3,324.8m £3,678.6m (10%) £3,181.2m £3,501.0m (9%)
Operating (loss)/profit (£32.0m) £0.4m (8,100%) £111.0m £254.5m (56%)
(Loss)/profit before tax (£49.4m) (£62.6m) 21% £65.2m £197.7m (67%)
(Loss)/earnings per share (0.41)p (4.18)p 90% 4.19p 9.30p (55%)
Free cash flow £303.8m (£213.0m) 243% £238.6m (£23.2m) 1,128%
Net debt (£1,077.1m) (£1,353.2m) £276.1m (£1,077.1m) (£1,353.2m) £276.1m
Outlook
* Despite national lockdown through Q1 we are still targeting our first year
of organic revenue growth for six years
* Improving profitability and cash from trading operations, offset by reversal
of VAT savings, pension commitments and significant ongoing restructuring
charges
* Targeting disposal proceeds of £700m, with £500m in 2021
* New simpler structure supports inflection to sustainable cash generation in
2022
* Continue to build a more focused, client-centric and streamlined business,
delivering improving returns to investors
Jon Lewis, Chief Executive Officer said:
“I’m pleased with our robust response to the Covid-19 crisis and the
challenges of 2020, protecting our business, client services and – most
importantly – our people, whom I would like to thank for their hard work and
commitment.
“Despite the challenges, we have continued to make good progress, improving
client relationships and winning significant new contracts. Capita is a much
better business than it was three years ago when we began our transformation.
“We are now building on that stronger foundation to move onto the next phase
of our transformation by simplifying from six divisions to three. Two core
divisions will be focused on the needs of our government and blue-chip
customer experience clients, in growing markets where we know we can win. The
third will comprise a portfolio of non-core businesses from which we are
targeting significant disposal proceeds.
“We are planning a return to organic revenue growth this year and
sustainable cash generation in 2022, as we continue to build a more focused,
client-centric and streamlined Capita for the long term.”
Board Governance
As part of ensuring we follow best practice we look to regularly refresh our
Board to ensure that we have the relevant skills and experience to reflect our
transforming business. As previously announced, we have welcomed both David
Lowden and Neelam Dhawan to our Board as Senior Independent Director and
Non-executive Director, respectively. Andrew Williams, who has been a
Non-executive Director since January 2015, has decided that he will not put
himself forward for re-election at the forthcoming Annual General Meeting. The
Board would like to thank Andrew for his significant contribution and support
over the past 6 years.
Investor presentation
A presentation for institutional investors and analysts hosted by Jon Lewis,
CEO and Gordon Boyd, Interim CFO, will be held at 08:30am UK time, 17 March
2021. This will be a live audio webcast at www.capita.com/investors and will
subsequently be available on demand. The presentation slides will be published
on our website at 07:00am and a full transcript will be available the
following day.
Webcast link:
https://webcast.openbriefing.com/capita-fy20/
Participant Conference Call dial-in details:
United Kingdom 0800 640 6441
United Kingdom (Local) 020 3936 2999
All other locations +44 20 3936 2999
Access code 343918
For further information:
Capita
Stuart Morgan, Investor Relations Director T +44 (0) 7989 665 484
Capita press office T +44 (0) 20 7654 2399
Powerscourt
Victoria Palmer-Moore or James White T +44 (0) 20 7250 1446
LEI no. CMIGEWPLHL4M7ZV0IZ88.
1 Refer to alternative performance measures (APMs) in the Appendix.
2 Adjusted results for both 2020 and 2019 exclude Education Software Solutions
(ESS) as it is a business exit at 31 December 2020. ESS adjusted revenue and
adjusted profit before tax in 2020 were £90.6m and £51.3m respectively.
Covenant calculations adjust for ESS being excluded from EBITDA.
Chief Executive Officer's review
Summary
We started 2020 expecting to continue to strengthen the business operationally
and to deliver more evidence of improvement – to be reflected in modest
revenue growth and significant free cash flow generation.
We continued to make progress with many aspects of our transformation, but the
impact of Covid-19 set us back and increased some of the challenges we faced.
I am pleased with our operational response to the pandemic, prioritising our
colleagues and ensuring we could continue to deliver for our clients. The
majority of our revenue has been resilient and we took decisive cost and cash
action to manage the impact where it affected us. I do not believe we would
have achieved this without the progress made in strengthening Capita over the
preceding two years.
The fall in revenue and profit due to Covid-19 has put pressure on our balance
sheet. But our cash preservation initiatives ensured that we met our covenant
obligations, with net debt significantly better than at the end of 2019. We
also took the decision to accelerate strategic actions to provide further
financial support and dispose of non-core software assets, including Education
Software Solutions (ESS) which sold for initial proceeds of £299m.
Despite the challenges of 2020, Capita is a much better business than it was
at the start of the transformation, with stronger positions and improved
growth prospects. With a more solid operational foundation in place, we are
now moving onto the next phase of our transformation plan to ‘simplify,
strengthen and succeed’. We will be consolidating our current structure into
three divisions. This comprises two core divisions – Capita Public Service
and Capita Experience – focused on specific client needs and distinct
markets where we know we can win. We will also have a third, enlarged
portfolio of non-core businesses we intend to exit in due course; and a
smaller overhead, generating additional long-term cost savings.
With respect to the balance sheet, our focus in 2021 is to ensure that we meet
our upcoming debt maturities of £440m over the next two years, and put in
place a longer-term financing solution. We have therefore started the process
to extend our revolving credit facilities and we are targeting gross disposal
proceeds of at least £700m, comprising £200m from three non-core disposals
that are currently under way, ESS proceeds that we have now received of
£299m, with another £200m to come thereafter. Further support comes from
benefits of the planned new structure and lower 'below the line' cash costs.
We plan to issue longer term debt when market conditions allow.
Our simpler new structure will support our inflection to sustainable cash
generation in 2022 – as we continue to build a more focused, client-centric
and streamlined business.
Financial results
Our financial performance in 2020 was significantly affected by the impact of
Covid-19, despite the resilience of our operational response. To protect the
business we took action to save a further £122m and, as a result, we were
able to meet our covenant obligations at the year end and reduced net debt to
£1,077.1m.
Adjusted revenue(1,2) fell by 9% during the year to £3,181.2m (2019:
£3,501.0m) as a result of the impact of Covid-19, particularly on our
transactional businesses such as Capita Travel & Events and Pay360, as well as
due to prior-year contract losses in areas such as local government. This was
partially offset by encouraging contract renewals and wins, and Covid-related
work, mostly for the Government.
Adjusted profit before tax(1,2) decreased to £65.2m (2019: £197.7m),
reflecting the loss of high-margin Covid-impacted transactional revenue and
revenue from lost contracts, mitigated by a combination of £145.2m of planned
transformational cost savings and £122m of cost and cash preservation taken
in response to the pandemic. Including the impact of restructuring costs and
accounting adjustments, reported loss before tax was £49.4m (2019: £62.6m
loss). Reported earnings per share was (0.41)p (2019: (4.18)p).
Our strong cash performance in the year included strong working capital
management and other short-term measures taken to protect the business, with
around £50m expected to be sustainable. Adjusted free cash flow(1) increased
to £238.6m (2019: £23.2m outflow) as we improved cash from trading
operations, reduced capital expenditure significantly and from strong client
cash collection. The overall improvement in net debt was boosted by cash
preservation benefits such as the £118.8m VAT deferral, offsetting cash costs
of restructuring of £64.1m. Net debt at 31 December was £1,077.1m (2019:
£1,353.2m) and we were well within the covenants.
Response to Covid-19
Our priority throughout the Covid-19 crisis has been to protect the welfare
and safety of our colleagues and I would like to thank them all for their
dedication. In February 2020, we set up a pandemic planning team and, within a
few weeks, we had successfully mobilised 85% of our people to work from home,
while ensuring we had secure workplaces for key workers who needed them.
Reflecting the critical nature of many of the services we provide to our
clients, most of our revenue remained resilient. We delivered client services
on a remote basis, building software and digital platforms, managing IT
solutions and shifting to remote provision. However, we have been
significantly affected in areas such as our travel business or where our work
is transactional and therefore affected by lower economic activity.
Offsetting this impact, we secured c.£100m of Covid-related business in 2020,
including providing 1,200 contact-centre workers to a government department
and sending 11.2 million letters to the vulnerable on behalf of the NHS. We
won work in the private sector where our resilient delivery model and onshore
location meant we could offer services to key retail and telecoms clients that
some of our major competitors could not.
We implemented a range of cost-saving initiatives to mitigate the revenue
impact of the pandemic, sustaining these through the second half of the year
and into 2021. We achieved £122m of savings in total, including discretionary
expenditure of £64m, staff-related savings of £48m, and £10m mainly in
variable property costs as we temporarily closed 168 of our 294 properties at
the height of the first lockdown.
We have also participated in the Government’s VAT deferral scheme,
benefiting the Group by £118.8m, postponed £56.7m of scheduled additional
pension contributions, and entered into receivables financing arrangements. We
expect these temporary cash saving measures to be paid back over the next 12
months.
Our experience with Covid-19 has enabled us to take steps to sustain some of
the benefits and cost savings, mainly in travel and property.
Operationally, we have demonstrated to clients that remote working can be
secure and productive, while maintaining our service KPIs. This has given
fresh impetus to rationalising our property footprint. We have permanently
closed 11% of our floor space in 2020, including our head office in London. We
are now moving to a more flexible workspace model, allowing collaboration when
needed but also recognising that our people want to spend more time working at
home than before the pandemic. We plan to reduce office space by another 15%
in 2021.
Being a responsible business
Being a responsible business continues to be a fundamental part of Capita’s
strategy. Putting our purpose – to create better outcomes – at the centre
of all we do will benefit all of our stakeholders in the long term and has
helped improve our reputation sentiment with external stakeholders.
In 2020 we delivered on our commitment to pay our UK employees the real living
wage as a minimum. Our employee engagement continues to make progress,
although there is clearly much more to be achieved. The employee net promoter
score (eNPS) maintained its upward trajectory, increasing by seven points
during the year and up 21 points since 2018.
We value our relationships with our suppliers, spending £2bn in 2020 with
more than 24,540 direct suppliers in 87 countries. We pay 95% of our suppliers
in 60 days or less, in line with the Government’s prompt payment code. We
are now looking to strengthen relationships with smaller suppliers.
Throughout 2020 we maintained our focus on our environmental impact. We
reduced our carbon footprint by 40%, as we reduced travel and vacated offices.
We have published our first statement on climate-related financial disclosure
in our 2020 Responsible Business report and in February 2021 we were
accredited by the Science-based Target Initiative for our company carbon
reduction targets which will form the foundation of our commitment to get to
net zero.
Transformation: building for revenue growth
Our revenue each year comes from a combination of longer-term, committed
contracts that we report in our order book, framework contracts whose volumes
are variable (but usually reliable), and transactional revenue that is won
in-year.
While our target to grow revenue for the first time in many years was
significantly affected by the pandemic, our track record of winning business
showed tangible signs of improving during 2020, as we saw the first benefits
from our investment in our clients, our structure and our capabilities.
Total contract value (TCV) won in the year was £3.1bn, £233m more than in
2019, which included framework and transactional wins. This represented 8%
growth in TCV, or 11% in our core divisions (excluding Specialist Services).
Our contract renewal rate of 90%, based on further improved client
relationships, was a key driver. We have started 2021 strongly, with a £1bn
contract to train the Royal Navy for the next 12 years. As would be expected
we also lost some contracts that impacted the second half of 2020 and will
have a further impact in 2021.
The Group’s order book declined to £5.9bn in 2020 (2019 £6.7bn), with
£2.4bn recognised as revenue in the year and £1.6bn won in order
book-qualifying revenue. Book-to-bill has increased from 0.79x to 0.94x on a
Group basis and following the win of the Royal Navy training contract on 11
January this has now risen to 1.26x.
An increasing amount of Capita’s revenue comes from framework and
transactional revenue. Revenue won that was recognised in 2020 (in-year
revenue) was flat at £1.2bn, despite significant Covid-19 impact. Customer
Management and Government Services were particularly strong, increasing by 72%
and 92% respectively, benefiting from Covid-related work, extensions
(Transport for London, 'TfL') and big framework wins such as a renewal for a
European telecoms client.
Better structured with the right tools
As set out in 2018, our transformation growth strategy has been to win work
through improving the capability and discipline in our sales function. We are
now leveraging our new customer relationship management (CRM) platform better,
giving us more insight and capability to predict future revenue. During the
year we refined processes and the quality of our pipeline data, impacting
pipeline in Q1 2020. We are winning more of the right work through the
discipline of the Contract Review Committee (CRC). In 2020, we maintained an
average double-digit margin on the bids processed by the CRC, although with a
slightly lower-margin mix of work.
Focusing on the client
The way we sell and the way that clients want to engage has been changing. As
we have simplified and strengthened across Capita, we have moved from selling
one bespoke product to each client, to selling solutions based on standardised
platforms and which bring people and products together from across Capita. We
then use our sector and business insight to offer the right solution to a
client need.
As we have invested in operational improvement, as well as offering more
relevant and better propositions, we have seen strong support from our
clients. We have seen another significant improvement in our customer Net
Promoter Score, which increased by 17 points from +15 to +32. In our Top 20
accounts this focus translated into pipeline growth of 40%.
During 2020, we streamlined the portfolio to focus on high-value propositions,
as we build our understanding of what, to whom and where we should be selling.
As a result, during the year 80% of total contract value sold derived from 20
value proposals, out of a total portfolio of around 120.
With stronger client perception and better propositions to sell, account
management was a major part of our sales performance in 2020. 43% of our 2020
TCV was won from our top 20 client accounts. Notable wins during the year were
the TfL congestion charge and Ultra Low Emission Zone extension (£355m), the
RPP army recruitment extension (£140m), a European telecoms client’s new
framework extension (£114m), and the Teachers’ Pension extension (£60m).
Transition to consulting-led sales
A consulting-led business model remains a key part of our revenue growth
proposition, securing pull-through transformational and delivery work,
enabling us to move up the value chain, win more business and improve the
margin mix of Group revenue. Despite being hit hard by Covid-19, Consulting
revenue in 2020 focused on a highly specialised team with deep expertise in
government, financial services and critical infrastructure, alongside three
core practice areas: data and AI, transformation, and cloud.
A significant example of a consulting-led innovative and data-driven client
solution was for the Financial Services Compensation Scheme (FSCS). In the
face of a surge of claims to the FSCS, Capita and FSCS worked in partnership
to design a solution using data, AI and automation to allow them to process
regulated, highly complex claims more quickly and accurately, at around 30% of
normal cost and taking two years fewer than normal. Having built this
platform, we see opportunities to use it in other regulated industries.
Our markets are also gradually changing in nature, away from traditional
business process outsourcing (BPO) to higher value business process services
(BPS) and business process as a service (BPaaS). As a market leader in UK
Government BPS, where the solution is delivered through a combination of
people and a bespoke digital platform, we are now investing in BPaaS
capabilities, which is a standardised, process-specific solution deliverable
to many clients.
Consulting and transformation revenue comprised just over 15% of total Group
revenue won in 2020. We expect to improve both margins and cash generation by
increasing this type of revenue, as well as doing more BPS and BPaaS work.
Market positioning
Supporting the more client-focused approach, we are leveraging our strong
market positions to bring more insight into our specific markets than
competitors.
Capita is one of the biggest IT Services suppliers(3) to the UK Government
which spends around £1bn(4) each year with us. Through improved contractual
delivery, we now have a stronger relationship with the Government at a time
when they are increasingly targeting investment in digital services and IT
infrastructure. We also have a strong private sector position as the biggest
customer experience partner in the UK, with specific expertise in the
financial services, telecoms and utilities sectors. When we bring our
understanding of complex solutions together with specific digital capabilities
and combine them with our IT ecosystem partners such as Microsoft Azure, AWS
and Cisco, our competitive position is now very strong.
Our better service delivery, investment in digital and IT capabilities, and
more targeted marketing activities have all contributed to an improved market
reputation with existing and potential clients in our chosen markets.
Sales outlook
The outlook for 2021 is promising, with a strong unweighted pipeline of
£9.7bn (2019: £8.0bn), out of a total unweighted pipeline of £18.2bn (2019:
£16.9bn), including a big increase in Government Services. It also includes
contract bids that were delayed from 2020, such as the £925m Royal Navy
training contract which has now been won.
Transformation: reducing cost and targeting margin increases
We have continued to target and deliver significant, sustainable cost
reductions, through greater efficiency and structural ‘cost-out’
opportunities. In 2020, we secured a further £145.2m of transformation cost
savings (4% of the total cost base), taking the total across the last three
years to £305m of sustainable savings. This is in addition to the £122m of
Covid savings in 2020.
Operational excellence and improvement
Despite the pandemic, we maintained our high level of service KPIs at 90.3%
for 2020 (2019: 91.4%), including slightly better year-on-year performance in
Customer Management, Government Services and People Solutions. This
contributed to further improving our service credits, which reduced from £11m
in 2019 to £4m in 2020.
We also significantly reduced the cash drag from major contracts, in
particular in Government Services. The number of operationally and financially
challenged contracts have reduced during the past two years from 16 to two
(PCSE and Electronic Monitoring), where we expect to resolve key outstanding
issues in 2021 and deliver significant benefits in 2022.
We are now also better at delivering large transformation projects. On RPP we
delivered another year of high KPI achievement; and our performance on the new
Defence Fire and Rescue contract was exemplary, with all operational KPIs
delivered on target, good cost and cash performance, and with additional
revenue from contracts won to work at six additional MoD sites during the
year.
We saved £73m in 2020 simply by doing things better: including from the
benefits of operational maturity, process improvement, reducing our cost of
poor quality and reducing margin erosion through performance failures.
Structural optimisation
One of the major objectives of the transformation has been the simplification
of a highly complex and inefficient organisation. Leveraging data from our new
HR platform, we have optimised structures to align with our target operating
model, delivering efficiency and overhead savings of £25m in 2020 and we see
similar opportunity in 2021.
Technology
We are making significant technology savings through better governance, major
efficiencies driven by consolidation of resource from across the Group, and
through associated third-party procurement savings as we consolidated our
supplier base. These were £30m in 2020 and we have significant further
opportunity in 2021.
We are bringing all of our IT services together to be managed in one place,
giving clarity of management and more efficient use of resource, with lower
future maintenance and investment costs. We also made further progress in
consolidating our software development resource from across the divisions
under the umbrella of the digital development centre in the UK and India.
Group and overhead costs
We accelerated our property consolidation programme, closing 49 offices in
2020 and reducing the office footprint. This delivered savings of £11m in the
year, with an annualised run rate of £25m in 2021. Procurement savings also
generated £4m of cost savings during the year, focusing on scale benefits, in
particular as we consolidated previously fragmented third-party purchasing
behaviours.
Next phase of the transformation
Over the past three years we have improved governance, addressed inefficiency,
focused on historical underinvestment and focused on delivering better
outcomes for our clients. Capita is now a simpler business with a stronger
operational platform to underpin its future development than it was in 2018.
Last year we announced the disposal of our Specialist Services division, which
is delayed but ongoing, as well as announcing our intention to dispose of
non-core software products, starting with Eclipse and ESS. Structurally, our
core business is now more orientated to growth markets and focused on our
clients.
With this stronger foundation in place, we are now moving onto the next phase
of our transformation, consolidating down to three divisions: two core
divisions - Capita Public Service and Capita Experience – focused on
distinct market and client needs and a third Portfolio division. This will
comprise an enlarged portfolio of valuable but non-core businesses of which we
are not the best owner, which we intend to exit when appropriate, with
proforma revenue of around £700m.
We now have a clearer insight into where we can win, with most of our 2020
contract wins in clearly defined and focused areas – in specific parts of
the UK Government market and in our core Customer Management industries. Both
Public Service and Experience will adopt our ‘consult, transform, deliver’
business model with an increasing focus on digital transformation work. This
structure will in turn drive out complexity and require a smaller, leaner
Group overhead, from which we expect to save £50m on an annualised basis from
2022.
Public Service will integrate and simplify our offering to government,
currently spread across four divisions, to focus on addressing their need to
implement policy, transform productivity and improve citizen experience. The
UK Government market is currently worth around £69bn. The fastest-growing
parts of that, at around mid-single digit CAGR growth, are business process
and technology-enabled services. As the number one strategic supplier of IT
and Software Capita is already well positioned in this large and growing
market, with a 2021 unweighted pipeline of £3.5bn. The proforma revenue of
this division is expected to be around £1.2bn.
Experience will bring together our experts in designing, transforming and
delivering frictionless customer experiences for blue chip clients, including
our regulated businesses, and a number of assets from three of the existing
divisions. The Global market is worth around £56bn and expected to grow at
around 5% p.a. for the next three years. Currently one of the customer
experience market leaders in the UK and with a solid foothold in Germany and
Switzerland, Capita has an opportunity to leverage its sector expertise,
digital ecosystem and global delivery centre to become a pan-European leader.
The proforma revenue of this division is expected to be around £1.3bn.
We plan to complete this next phase of the transformation this year and will
provide more detail to the markets later this year.
Balance sheet
Our focus in 2021 is to address our upcoming debt maturities and put in place
a longer-term financing solution.
Our plan at the beginning of 2020 was that net debt would increase slightly,
before the disposal of the Specialist Services portfolio, in order to complete
key elements of the transformation; but thereafter sufficient sustainable free
cash flow would be generated to allow us to reduce headline net debt to EBITDA
to within our target range of 1x to 2x (pre-IFRS 16). We had also planned a
bond issue to extend our debt maturities. We were, however, unable to do
either of these in 2020.
Instead, we protected the balance sheet through successful cost and cash
preservation and the bringing forward of our plans to dispose of non-core
software products. We repaid £218.4m of maturing debt, remained well within
financial covenants at both the half year and full year, and reduced net debt
through a combination of good cash management, disposal proceeds and the
deferral of VAT and pension payments.
In the short term our priority is to lengthen our current debt maturity
profile as our free cash flow strengthens and to continue to be able to invest
in our business.
However, we face significant short-term loan note maturities, with £440m due
over the next two years. We plan to address this as follows:
* We recently received proceeds of £299m from the completion of the ESS
disposal, which provides around £220m of available liquidity, with a further
£45m contingent on CMA clearance of buyer Montagu’s subsequent transaction
with ParentPay.
* We expect to renew and extend the maturity of our revolving credit facility.
* We are continuing to dispose of non-core assets, with three processes
currently under way: namely our ‘blue light’ emergency services software,
our specialist insurance businesses in partnership with Artificial Labs, and
our Axelos joint venture with the UK Government, with combined expected
proceeds of at least £200m. We anticipate proceeds to come through in the
second half of the year. Further non-core disposals are expected to realise
around £200m, including from more off-the-shelf software assets as well as
Specialist Service businesses that will be sold once recovery from the Covid
crisis is well established.
We plan to put in place longer-term debt funding solutions, likely to be later
in the year and subject to market conditions.
Outlook
Despite national lockdown through Q1 we are still targeting our first year of
organic revenue growth for six years.
We plan to deliver improving profitability and cash from trading operations,
offset by reversal of VAT savings, pension commitments and significant ongoing
restructuring charges.
We are targeting disposal proceeds of £700m, with £500m in 2021.
Our new simpler structure supports inflection to sustainable cash generation
in 2022.
We are continuing to build a more focused, client-centric and streamlined
business, in order to deliver improving returns to investors.
(1) Refer to alternative performance measures (APMs) in the Appendix.
(2) Adjusted results for both 2020 and 2019 exclude Education Software
Solutions (ESS) as it is a business exit at 31 December 2020. ESS adjusted
revenue and adjusted profit before tax in 2020 were £90.6m and £51.3m
respectively. Covenant calculations adjust for ESS being excluded from EBITDA.
(3) Nelson Hall/Tech Market View
(4) Tussell March 2020
Divisional performance review
The following divisional financial performance is presented on an adjusted
revenue(1) and adjusted operating profit(1) 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
Software provides application software and other solutions to clients in the
local government, emergency services, healthcare, utilities and energy,
professional and financial services, and payments sectors.
Following a strategic review of our Software division, we decided to focus on
a portfolio of core software capabilities which are better aligned with and
support our consulting, transformation and digital business process
outsourcing (BPO) services, and the vertical markets of the rest of the Group.
We will retain our software assets that are catalysts for growing our other
services and plan to dispose of the standalone software products that have
little overlap or cross-sell with the rest of Capita.
Our markets and growth drivers
Our existing markets remain the focus. While the payments market is expected
to grow by double digits through to 2025, and our payments business is a
successful challenger in this high-growth market, the remaining markets are
expecting low to mid-single-digit growth in the next five years.
We are focusing on cross-selling opportunities in existing and adjacent
markets, and strategic expansion into new markets.
At a macro level, market growth continues to be driven by software’s
deepening role in every aspect of business and consumer life, which has been
further accelerated by the Covid-19 pandemic. The growth of cloud solutions
and software as a service (SaaS) continued during 2020 and our investment
reflected this shift, as we continued to replatform our core products ahead of
segment demand.
Our strategy
Software capability remains critical to Capita. Our vertical market domain
expertise and industry class software development capability ensures we are
the differentiating catalyst for Capita’s digitally enabled BPO services.
While we will continue to sell direct to market, we will increasingly create
microservices and other digital componentry as a powerful enabler of our BPO
services. We will also seek opportunities to embed our software and
microservices in other third-party software.
We see increasing benefits from our global digital development centre (DDC) in
India and the UK, which is now considered a top capability, as evidenced by
the Capability Maturity Model Integration Institute’s award of a ‘maturity
level 5’ for development and support – an accreditation shared by IBM,
Accenture and Deloitte.
We intend to leverage the DDC for the benefit of all of Capita and work is
underway to transition to a pan-Capita DDC model, which is expected to drive
Group cost savings in addition to the highest standards of software
development.
Financial performance
Divisional financial summary 2020 2019 % change
Adjusted revenue (1)(£m) 246.0 252.1 (2.4)%
Adjusted operating profit (1)(£m) 43.4 50.7 (14.4)%
Adjusted operating margin (1)(%) 17.6% 20.1%
Adjusted cash from trading operations (£m) 58.8 48.3 21.7%
Order book (2)(£m) 510.9 578.4 (11.7)%
2. Includes £92m for ESS, derecognised upon disposal completion in 2021
Adjusted revenue(1) in 2020 fell by 2.4% to £246.0m, with go-lives in Secure
Solutions and Services, US growth and increased volumes in AMT Sybex,
offsetting contracts ending. Covid-19 adversely impacted the volume-driven
payments business and delayed pipeline delivery.
Adjusted operating profit(1) decreased by 14.4% to £43.4m, due to an increase
in depreciation and amortisation, and increased costs of the DDC. The
Covid-related transactional decline also adversely impacted profit.
Adjusted cash from trading operations improved by 21.7% to £58.8m with the
reduction in profit more than offset by improvements in contractual working
capital, driven by advance billing and lower contract fulfilment asset (CFA)
additions in Secure Solutions and Services and AMT Sybex.
Cost and operational excellence
Swift action was taken to protect the business from the impact of Covid-19 and
we sustained delivery on 96% of our service-level agreements. Our rapid
response strengthened client relationships, with very positive feedback from
local government and ambulance services, and an increase in our customer NPS
of 26 points.
Our cost-saving initiatives helped to mitigate amortisation and inflationary
cost increases; key programmes included organisational restructure, technology
and procurement.
Our investment in standard software tools, developing best practice processes
and shortened development cycles allowed us, for example, to develop and embed
healthcare decision software within Microsoft’s ‘Azure Health Bot’,
allowing healthcare organisations around the world to build and deploy
large-scale AI-powered, compliant, conversational healthcare experiences. This
is an example of how by embedding software in third party software, we can
distribute at scale and low marginal cost, and we expect to see benefits
beginning in 2021.
Investing in growth
In 2020 we invested £15m in new product development, and reduced development
cycles, and increasingly focused on microservices and digital componentry as a
catalyst for pan-Capita digital services.
We also used products in new markets; for example, ResponsEye has been
assisting social housing organisations with the maintenance of properties.
At 31 December 2020, the total unweighted pipeline was £1,037m, an increase
of £252m from February 2020 (post divisional restructure), with £389m of
total contract value (TCV) won. The order book at the year end was £510.9m, a
decrease of £67.5m, from 31 December 2019. Our renewals rate across all
opportunities was 88%, and 98% on those that we bid for.
People Solutions
The People Solutions division provides expert human resources (HR) advisory
and digitally enabled services to large public and private sector
organisations. Areas of expertise include learning, resourcing, pensions and
HR outsourcing services.
We aim to refocus on the parts of these markets that are attractive and where
we have an ability to win. During 2020, we sold the sub-scale employee
benefits business, which provided flexible benefits and brokerage services, in
order to focus our investments on our pensions business, where we have a
leading UK market position.
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 HR outsourcing market in the UK is estimated to be worth £7bn
and is expected to grow at approximately 3% a year through to 2024.
The key market growth drivers are: (i) our clients’ needs for financial
sustainability for both themselves and their employees; (ii) a better employee
experience; and (iii) the need to have access to skills, whether they are
bought, borrowed or built internally, enabling them to be fit for a digital
future. Legislation such as IR35 or judgments, such as McCloud and guaranteed
minimum pension equalisation, offer continuous opportunities.
Our strategy
The core guiding principle of our divisional transformation journey is client
centricity. We aim to retain and grow our existing clients through strong
account management discipline. This involves working in partnership with our
clients, understanding their issues and needs, increasing service levels, and
providing digital solutions alongside data and insights.
Financial performance
Divisional financial summary 2020 2019 % change
Adjusted revenue (1)(£m) 472.0 535.0 (11.8)%
Adjusted operating profit (1)(£m) 52.5 68.9 (23.8)%
Adjusted operating margin (1)(%) 11.1% 12.9%
Adjusted cash from trading operations (£m) 64.0 70.2 (8.8)%
Order book (£m) 534.4 497.2 7.5%
Adjusted revenue(1) decreased in 2020 by 11.8% to £472.0m, due to contract
losses in learning services; the transition of historic pension contract
losses and volumes on frameworks in learning. Covid-19 significantly adversely
impacted learning and resourcing volumes.
Adjusted operating profit(1) declined by 23.8% to £52.5m, as revenue
decreases and increased investment in the pensions business adversely impacted
profit. Cost containment became the focus due to the higher fixed cost base of
learning and resourcing, with Covid-related declines partially offset by
savings.
Adjusted cash from trading operations fell by 8.8% to £64.0m, reflecting the
decline in profit, which was partially offset by improvements in contractual
working capital as a result of CFA balance unwinds and advanced receipts on
some contracts.
Cost and operational excellence
We delivered a fast and effective response to Covid-19. The division performs
critical processes for clients, including payroll and pension payments as well
as recruitment and assessment for the British Army (RPP). We maintained
continuity of these critical services by moving 91% of our colleagues to
homeworking and assigning key worker status to others.
In order to serve our clients better, operational excellence and digital
transformation are critical. During 2020, despite Covid, we invested in
operational excellence tools and processes across our portfolio. This helped
us manage a remote workforce while maintaining a resilient service for our
clients. Progressing along an ambitious digital roadmap remains a priority,
particularly in our pensions administration business.
We are improving our core products and platforms while working towards
standard management information tools across all businesses. We are also
strengthening our analytics capability and technological partnerships with key
enterprise resource planning providers.
The successful transformation of the RPP contract resulted in a two-year
contract extension worth £140m, starting in March 2022.
Investing in growth
We reorganised our business to align more closely with our clients so that we
not only execute on their contracts but also solve their ever-changing
challenges.
We invested in the development of our products, mainly the completion of
product development for: Security Watchdog and Onboarding; a digital platform
for learning; and a CRM system to improve employee experience in HR Solutions.
We are also investing in digital remote training capabilities as a result of
Covid, and we continued investment in the pensions member experience and the
development of Axelos products.
At 31 December 2020, the total unweighted pipeline was £2,039m, an increase
of £659m since February 2020, with £736m of TCV won. The order book at the
year end was £534.4m, an increase of £37.2m since 31 December 2019. In 2020,
client value retention and client renewals increased to 78% and 84%
respectively. Our renewals rate across all opportunities was 80%, and 81% on
those that we bid for.
Customer Management
Capita is a leading provider of multi-channel customer engagement services,
serving clients in financial services, retail and consumer goods, energy and
utilities, telecommunications and media, and government and transport sectors
from a mix of locations in Europe, India and South Africa. The division also
provides remediation, complaints management and collections services, and
serves both regulated and non-regulated customer needs.
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.
Our markets and growth drivers
According to NelsonHall, the UK market is estimated to be worth £4bn a year
and is expected to grow at approximately 3% a year through to 2024. We are
expecting several key segments to grow above this rate, with financial
services, telecommunications and retail expected to grow at 4%, 4% and 6%
respectively.
We are the largest provider of customer management services in the UK and
Ireland. Customer experience and digitisation are at the forefront of our
clients’ strategies, with the Covid-19 pandemic further accelerating these.
We are expecting the biggest impacts in markets such as online retail,
telecommunications and digital entertainment, and increasingly see these
setting the standard for both consumer and business-to-business expectations.
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.
Financial performance
Divisional financial summary 2020 2019 change %
Adjusted revenue (1)(£m) 1,139.7 1,150.6 (0.9)%
Adjusted operating profit (1)(£m) 105.9 119.8 (11.6)%
Adjusted operating margin (1)(%) 9.3% 10.4%
Adjusted cash from trading ops (£m) 73.0 41.1 77.6%
Order book (£m) 2,134.7 2,760.5 (22.7)%
Adjusted revenue(1) decreased in 2020 by 0.9% to £1,139.7m. Prior year
one-offs and contract losses, as well as reduced volumes on telecommunications
clients, were broadly offset by contract wins. While Covid adversely impacted
scope and volume on contracts with challenged end-markets, we secured a number
of Covid-related projects and the majority of revenue was resilient.
Adjusted operating profit(1) fell by 11.6% to £105.9m, due to the change in
revenue mix. Salary inflation, including the impact of the adoption of the
real living wage in the UK, and the impairment of contract assets on our
mobilcom-debitel contract, adversely impacted profit. The reversal of 2019 one
offs also led to the reduction in profit. This was partly offset by
Covid-related savings and the ongoing cost-efficiency programme.
Adjusted cash from trading operations improved by 77.6% to £73.0m, with the
decline in profit being partially offset by contractual working capital
improvements, driven by a reduction in net accrued and deferred income
outflows, predominantly due to agreed changes to timing of invoicing on a
telecoms contract and impact of asset impairments on CFA inflows.
Cost and operational excellence
Operational delivery was challenging for both clients and providers, due to
the significant change in operating model working practices and the effect of
local lockdowns on the global economy throughout 2020. We maintained a high
service level to clients throughout, remaining agile and focused on adjusting
to the local requirements through our pandemic planning approach. We
accelerated investment in computer equipment, customer experience and digital
platforms, such as collaboration tools, chatbots and cloud technologies, which
allowed more than 75% of the division to work from home at any one time,
including 95% of our employees in India.
We maintained a number of critical services, operating with key workers for
banks, telecommunications companies and utilities in a Covid-safe environment
throughout 2020. In addition, we set up new services for retailers,
governments and charities, including setting up a 1,000+ seat virtual contact
centre in 10 days.
Improvements in the sales process, and adoption of the project management tool
Evolve, allowed us to mobilise both large and targeted pieces of work, such as
in our Covid-related Department for Work and Pensions (DWP) and NHS support
work, in short timescales, and we have had no significant issues on recent
wins.
We delivered cost improvements in 2020, particularly from efficiency gains and
operating model initiatives, technology updates and procurement.
The transformation phase of our mobilcom–debitel contract is now complete,
and therefore reached the inflection point during the year. There are still a
number of opportunities yet to be delivered which remain key to the future
lifetime profitability.
Our closed-book life insurance administration business is in structural
decline, as books run off. Some customers, such as the recent partial Phoenix
exit, are switching to suppliers who can provide a single digital platform for
all their life books, and we are working with them to ensure a smooth
transition. We continue to focus on our regulated businesses and growth areas
in insurance, finance, pensions and mortgages.
Investing in growth
We continue to upgrade our infrastructure and tools, including in our
analytics capability which increasingly allows real-time monitoring of our
business and provides insights to our clients on their customers’ behaviours
and preferences.
At 31 December 2020, the total unweighted pipeline was £4,206m, a decrease of
£1,511m since February 2020, with £586m of TCV won. The decrease was driven
by pipeline opportunity refinement and when a consistent definition is applied
throughout the period, the pipeline has increased. The order book at the year
end was £2,134.7m, a decrease of £625.8m since 31 December 2019. Our
renewals rate across all opportunities was 82%, and 83% on those that we bid
for.
Government Services
Capita is the UK Government’s largest partner 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
According to NelsonHall, the UK Government market is expected to grow at
approximately 3% a year to 2024. We expect a significant increase in central
government spending over the next few years, particularly in infrastructure
and digital delivery, while local government is likely to need more
cost-effective service delivery, due to shortfalls in their sources of income.
Capita is the fifth largest strategic supplier to central and local government
in the UK according to Tussell, and the largest provider in the business
process and technology-enabled services segments, which leverage both skilled
people and technology. Within this, we have leading positions in several
focused sectors where we have deep, proven experience and expertise, including
education, health, transport, defence, justice, central and local government.
The UK Government has also introduced its outsourcing playbook, to provide a
greater degree of collaboration with its suppliers and fairer returns,
reshaping contracts at renewal, and is awarding new work under this framework.
Local government markets have seen significant reshaping of the landscape,
away from general outsourcing to targeted capabilities.
Our strategy
Our strategy is to: focus our business around core market sectors where we
have strong positions; offer a refined set of value propositions developed by
enabling our people with a defined stack of underlying, replicable digital
products and capabilities; invest in a full-lifecycle digital transformation
capability; and focus on excellence in our consulting, transformation and
operational service delivery performance.
Financial performance
Divisional financial summary 2020 2019 % change
Adjusted revenue (1)(£m) 723.8 793.4 (8.8)%
Adjusted operating profit (1)(£m) 11.1 51.8 (78.6)%
Adjusted operating margin (1)(%) 1.5% 6.5%
Adjusted cash from trading ops (£m) 5.3 (19.7) 126.9%
Order book (£m) 2,057.0 2,176.7 (5.5)%
Adjusted revenue(1) decreased in 2020 by 8.8% to £723.8m, mainly as a result
of prior-year contract losses in local government and defence infrastructure
organisation, partly offset by new business such as the Ministry of
Defence’s fire and rescue project (DFRP) contract. Covid-19 impacted
transactional and volume revenue; however, this was partly offset by
Covid-related projects in health and welfare.
Adjusted operating profit(1) fell by 78.6% to £11.1m due to the impact of
contract losses, and DFRP adversely impacted profit due to the one-off initial
loss. Transformation delays on contracts and bid costs relating to contract
wins further reduced profit. The impact of Covid-19 was offset by cash
preservation actions.
Adjusted cash from trading operations significantly improved to £5.3m as the
decline in profit relates predominantly to the 2019 contract handbacks that
were non cash-backed.
Operational excellence
We continued to execute on client delivery across government and received
positive feedback from clients in all verticals, despite the external,
Covid-driven challenges; including 70% of the division servicing the contracts
from home. Throughout the year, we successfully reduced the number of legacy
problem major programmes to two. The GP Payment and Pensions element of PCSE
and the Electronic Monitoring Service (EMS) contracts transformation have
incurred additional cost due to poor quality and delays exacerbated by Covid
but significant progress was made on both and we expect them to be
substantially complete in 2021. We expect the contracts to reach the
inflection point in 2021 and 2022 respectively. Inability to achieve key
milestones could lead to reduced contract profitability and a risk of
impairment of the associated contract assets. Since 2018, the major contracts
within the division have moved to an overall cash inflow from an overall cash
loss, demonstrating the progress made to date.
Operational excellence continues to be the driving force for savings in the
division, generating cost savings of £15m by taking out overhead costs and
improving the operating model. We continue to work towards a more agile
service structure based on leveraging best practice between our chosen
verticals.
While the legacy contract base caused some challenges, which were exacerbated
by Covid-19, recent contracts progressed well and in line with expectations.
DFRP’s strong start to service and programme delivery along with the
establishment of a truly collaborative relationship led to the transfer to
Capita of additional service delivery responsibilities. The Ultra Low
Emissions Zone contract (ULEZ) with Transport for London (TfL) is also
progressing well towards the scheme Go Live on 25th October 2021.
Investing in growth
We continue to innovate and launched two new digital business process as a
service (BPaaS) platforms, Grantis and Resolvis, which are successfully
delivering for their first customers in central and local government.
At 31 December 2020, the total unweighted pipeline was £8,516m (including the
£0.9bn Royal Navy Contract won in early 2021), an increase of £1,743m since
February 2020, with £838m of TCV won. Pipeline growth has been generated by
TCV increases on existing opportunities, such as from changes in contractual
arrangements, and a number of large FY21 onwards opportunities. The order book
at the year end was £2,057.0m, a decrease of £119.7m since 31 December 2019.
Our renewals rate across all opportunities was 100%, and 100% on those that we
bid for.
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. Technology Solutions is also responsible for the
delivery of IT services and support within the Capita Group.
Our markets and growth drivers
Technology Solutions operates in a broad and fast-changing market. The
division is targeting growth in its digital business solutions, platform and
cyber segments. These are the fastest growing verticals of the market at an
annual rate of approximately 15% from 2019 to 2023 (TechMarketView). Cloud,
cyber and automation demand have been further accelerated by the Covid-19
pandemic.
Capita is the UK’s largest software and IT services supplier by revenue.
Clients depend on our technology to provide high-value, mission-critical
services to their customers and users. We are a trusted partner to deliver
critical national infrastructure and IT transformation projects, with clients
increasingly relying on our technology to extract valuable insights from their
data and deliver outstanding customer experience.
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. Our areas of expertise include: technology consultancy; digital
business solutions; platform management; cyber security; digital workplace;
and digital connectivity.
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 to simplify technology operations, platforms, products
and suppliers to generate efficiency savings, strengthen our capabilities, and
ultimately deliver greater value to our clients.
Financial performance
Divisional financial summary 2020 2019 % change
Adjusted revenue (1)(£m) 385.0 449.9 (14.4)%
Adjusted operating profit (1)(£m) 34.9 58.0 (39.8)%
Adjusted operating margin (1)(%) 9.1% 12.9%
Adjusted cash from trading ops (£m) 72.0 51.3 40.4%
Order book (£m) 370.2 389.7 (5.0)%
Adjusted revenue(1) decreased by 14.4% to £385.0m, due to known contract
losses, including BAE Systems, and reduced volumes across a range of
contracts. The negative impact of Covid-19 on our transactional and
volume-based businesses was partly offset by Covid wins across IT services and
intelligent communications.
Adjusted operating profit(1) decreased by 39.8% to £34.9m, due to the above
contract losses and reduced volumes, which were only partially offset by cost
savings. Cost increases and additional depreciation from completed
infrastructure projects also adversely impacted profit. The effect of Covid-19
was almost offset by cash preservation actions.
Adjusted cash from trading operations improved by 40.4% to £72.0m with the
reduction in profit more than offset by improvements in contractual working
capital, driven by accrued and deferred income inflows from the phasing
variations and billing improvements, partially offset by an outflow from
increased CFAs largely on Networks.
Cost and operational excellence
Technology Solutions was at the forefront of Capita’s response to Covid-19.
It was responsible for the Group’s successful move to remote working with
provision of equipment and connectivity for 85% of colleagues, which was only
possible due to the investment to date as part of the transformation.
Covid-19 has accelerated the transformation of our working practices, with
more than 69% of the division working remotely with no detriment to our
operational KPIs. We provided an agile response to client demands and enabled
them to continue operating successfully, with very positive feedback from both
the private and public sector.
Cost savings were driven mainly by technology, although organisational
structure and operational improvement initiatives also generated benefits.
Our main strategic programme has the key purpose of improving the business
resilience of hosting, security posture, service quality and ultimately
customer experience. During 2020, the programme continued to build capability
and successfully migrate our clients from legacy systems to secure Azure or
Nuvem hybrid hosting. This helped remove complexity and the limitations of
legacy infrastructure, while generating growth opportunities by providing
Capita’s secure and accredited hosting solution for new digital growth, and
helping mitigate the risk of cyber attacks.
In recent Whitelane research, we received the highest percentage improvement
for customer satisfaction against UK end-user computing competitors. This
rewards a continuous, multiple-year improvement programme to deliver
high-quality and resilient solutions to our clients and customers.
Investing in growth
We invested in our ongoing data centre consolidation and cloud migration
programme. We are investing in the development of our fast, digital IT
propositions – in cloud, cyber security and automation. These core digital
offerings are increasingly in demand as the market adapts to new ways of
working.
We will continue to strengthen our partnerships with key technology providers,
combining our consulting and delivery expertise with their technologies. Our
partnerships with UiPath and Microsoft are working well, gaining a strong
reputation for delivering UiPath implementations, and we achieved the Azure
advanced specialisation accreditation in windows and SQL migration.
At 31 December 2020, the total unweighted pipeline was £2,027m, an increase
of £64m since February 2020, with £332m of TCV won. The order book at the
year end was £370.2m, a decrease of £19.5m since 31 December 2019. Our
renewals rate across all opportunities was 66%, and 75% on those that we bid
for.
Specialist Services
Specialist Services is a portfolio of businesses delivering a range of service
offerings: including travel, enforcement, insurance, real estate and
infrastructure.
The division is comprised of businesses which are not within Capita’s growth
markets. These 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.
We enjoy strong market positions in many of the verticals sectors, with strong
brands and positive client perception of our services.
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. The focus across the portfolio is on
adding new name business, operational excellence and cost optimisation.
The strategy remains to prepare earmarked businesses for disposal, although
the originally envisaged timetable has been impacted by Covid-19.
Financial performance
Divisional financial summary 2020 2019 % change
Adjusted revenue (1)(£m) 196.5 295.6 (33.5)%
Adjusted operating (loss)/profit (1)(£m) (4.4) 44.3 (109.9)%
Adjusted operating margin (1)(%) (2.2)% 15.0%
Adjusted cash from trading ops (£m) 9.3 43.5 (78.6)%
Order book (£m) 234.2 306.6 (23.6)%
In 2020, adjusted revenue(1) fell by 33.5% to £196.5m, due to contract
losses, as a result of a combination of conscious exits and projects coming to
an end, which were only partially offset by contract wins and new
transactional revenue streams. Covid severely affected end-markets such as
travel and enforcement. Due to the transactional nature of the divisions, with
the exception of insurance, Page One, and translation and interpretation, most
businesses saw a downturn in revenue.
Adjusted operating profit(1) became a loss of £4.4m as the contract losses
adversely impacted profit; these were partially offset by cost savings across
all work streams. The fall in transactional revenue caused by Covid was only
partially offset by furlough support and discretionary spend savings.
Adjusted cash from trading operations decreased by 78.6% to £9.3m. This was
due to a significant contractual working capital inflow, as a result of lower
operational volumes, this benefit will unwind when business recovers.
Cost and operational excellence
We rapidly responded to Covid-19 and maintained service levels where possible
throughout the pandemic, with around 77% of staff working from home. In those
businesses whose end markets were most affected by Covid-19 we reduced service
levels and, took decisive action to cut costs; however we were unable to cut
too deeply in order to ensure a timely recovery. Where possible, we
restructured and rationalised to achieve a long term reduction in our fixed
cost base, including reducing our physical property footprint by almost half.
We expect Covid-19 to have a prolonged impact on several of the division’s
businesses and we reviewed their long-term operating models to ensure they are
fit for the future. Additional savings were generated through automation,
procurement and technology.
We strengthened the existing partnership between our insurance business and
Artificial, which we established through the Capita Scaling Partner
relationship. By bringing together our extensive insurance industry knowledge,
compliance expertise and resource with best-in-class technology we are able to
offer clients in the Lloyd’s of London Market an end-to-end solution that
provides expertise and consultancy across the full insurance lifecycle. The
relationship was started in response to a market need for digital solutions to
augment existing processing capability for insurers. Covid has exacerbated
this need and, through our partnership, we are proactively addressing the
changing needs of our clients.
We also achieved major improvement in our customer NPS, mainly due to the
managing of relationships, even though the division was hardest hit by the
pandemic.
Investing in growth
During the year, investment was targeted to preserve cash during the pandemic,
with the focus of investment remaining on strengthening security and
compliance, as well as developing cloud capabilities.
Our translation and interpreting business applied innovation to strengthen
their technology platforms adding new features that enabled them to increase
their support to the NHS and police throughout the pandemic, for example
interpretation services via Zoom or MS Teams using their SmartMate and
LiveLINK platforms.
At 31 December 2020, the total unweighted pipeline was £389m, a decrease of
£255m since February 2020, with £182m of TCV won. The order book at the year
end was £234.2m, a decrease of £72.4m since 31 December 2019. Due to the
transactional nature of the division, the order book is not considered a
suitable metric for growth.
Despite the pandemic we have added a number of new names across the division
throughout the year including London Fire and NHS24 (Scotland), London Borough
of Hackney, M&S and Sopra Steria.
(1) Refer to the alternative performance measures (APMs) in the Appendix.
Financial review
This preliminary announcement is extracted from Capita's financial statements
for the year ended 31 December 2020 and the basis of its preparation can be
found in the notes to the statements in this announcement.
Overview
The onset of the Covid-19 crisis interrupted the pace of our ongoing
transformation at Capita, as well as planned disposals and refinancing plans.
A small decline in adjusted revenue(1) was expected in the first half of 2020
due to contract losses reported in 2019 and the first quarter of 2020 was
broadly in line with expectations. However, the economic impact of Covid-19
resulted in lower revenue in a number of businesses through the rest of the
year. The weaknesses in transactional revenue and volume-related framework
contracts related to businesses such as travel and events, resourcing,
face-to-face training, and the payment services software we use to collect the
London congestion charge. We continued to see resilient revenue performance in
the majority of our operations from long-term contracts with a stable
government and blue-chip customer base, and saw contract wins with the DWP and
the NHS.
Adjusted profit before tax(1) was impacted by new contract wins not yet
replacing profits from lost contracts, reduced transactional revenue, mostly
due to the pandemic and scope and volume reductions. These were partially
offset by cost savings from our ongoing transformation plan and cost saving
actions taken to offset the financial impact of Covid-19, particularly in
those businesses of a more transactional nature. There were, however, other
cost increases, including inflation, additional depreciation, amortisation and
running costs on completed transformation programmes, and an increased bad
debt provision. The Group participated in the job retention scheme made
available by the Government to help ease the impact Covid-19 otherwise would
have had, including potentially additional headcount reductions. The grant
income of £21.3m was recorded in the year and offset against the associated
payroll costs.
Cash from trading operations was improved by contractual working capital
movements more than offsetting the decline in adjusted operating profit(1).
Adjusted free cash flow(1) was underpinned by this improvement in cash from
trading operations, shorter public sector payment cycles as part of the
Covid-19 response, the impact of lower revenue, and better working capital
management, lower capital expenditure and lower spend on certain
transformation projects as the Group focused on managing cash in the face of
economic uncertainty.
As part of our drive for simplification, and strengthening the balance sheet,
we continue to seek to dispose of a number of non-core businesses. In June
2020, we completed the disposal of Eclipse Legal Services for net cash
proceeds of £50.0m, realising a gain of £43.3m; and in February 2021 we
received cash proceeds from the disposal of the Education Software Solutions
(ESS) business of £298.5m, of which £50.1m was payable to the Capita defined
benefit pension scheme to obtain legal title to the intellectual property
rights used by the ESS business. Proceeds from both of these disposals will
strengthen the Group's balance sheet by reducing net debt and pension
liabilities. The Board has approved a disposal programme and further disposals
will be considered in due course where there are opportunities to maximise the
value from exiting these non-core businesses.
Liquidity at 31 December 2020 was £708.6m, made up of £452.0m of our
committed revolving credit facility and £150.0m backstop liquidity facility
which expired on completion of the ESS disposal, none of which were drawn at
31 December, and £106.6m of unrestricted cash and cash equivalents net of
overdrafts. The Group was in compliance with its financial covenants at 31
December 2020.
Our priority for 2021 is to address the short-term debt maturities through
extending our committed credit facilities and issuing new long-term debt
instruments, while continuing to strengthen the balance sheet. We had planned
a bond issuance in 2020, to extend our debt maturities, however, due to market
appetite we were unable to do this.
The move to a new corporate structure in the second half of 2021, that is more
focused and client-centric, will also drive further cost savings from reduced
overheads.
Summary of financial performance
Financial highlights
Adjusted (1)results – continuing operations Reported results – continuing operations
Adjusted (1)2020 Adjusted (1)2019 Adjusted (1) YOY change Reported 2020 Reported 2019 Reported YOY change
Revenue £3,181.2m £3,501.0m (9)% £3,324.8m £3,678.6m (10)%
Operating profit/(loss) £111.0m £254.5m (56)% £(32.0)m £0.4m (8,100)%
Profit/(loss) before tax £65.2m £197.7m (67)% £(49.4)m £(62.6)m 21%
Earnings/(loss) per share 4.19p 9.30p (55)% (0.41)p (4.18)p 90%
Free cash flow £238.6m £(23.2)m 1,128% £303.8m £(213.0)m 243%
Net debt £(1,077.1)m £(1,353.2)m £276.1m £(1,077.1)m £(1,353.2)m £276.1m
Adjusted results
Capita reports results on an adjusted basis to aid understanding of business
performance. The Board has adopted a policy to disclose separately those items
that it considers are outside the underlying operating results for the
particular period 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 for users of the financial
statements to obtain a proper understanding of the financial information and
the underlying in-period performance of the business. Those items which relate
to the ordinary course of the Group’s operating profit remain within
adjusted profit.
In accordance with the above policy, the trading results of business exits,
along with the non-trading expenses and gain on disposals, were excluded from
adjusted results. To enable a like-for-like comparison of adjusted results,
the 2019 comparatives have been re-presented to exclude 2020 business exits.
Education Software Solutions was classified as a business exit and therefore
excluded from adjusted results in both 2020 and 2019.
In 2019, International Financial Reporting Standard 16 Leases (IFRS 16) was
adopted, and to aid comparison with 2018, the primary adjusted measures used
by the Board for evaluating performance were presented before the impact of
IFRS 16. For 2020, adjusted results are presented after the impact of IFRS 16
and 2019 has been re-presented on the same basis.
Reconciliations between adjusted and reported operating profit, profit before
tax and free cash flow are provided on the following pages and in the note to
the financial statements.
Adjusted revenue
Adjusted revenue (1)bridge by key driver £m
Year ended 31 December 2019 3,501.0
One-offs in 2019 (39.3)
Year ended 31 December 2019 rebased 3,461.7
Losses (212.1)
Scope and volume (51.8)
Transactional (1.1)
Wins 122.4
One-offs in 2020 14.7
Year ended 31 December 2020 - pre-Covid-19 3,333.8
Covid-19 - scope and volume (112.3)
Covid-19 - transactional (110.7)
Covid-19 - wins 70.4
Year ended 31 December 2020 3,181.2
Adjusted revenue(1) reduced year on year by around 9%. The adjusted revenue(1)
bridge details the movements:
* One-off benefits from contract termination payments and deferred income
releases
* Contract losses, mainly the impact of local government hand-backs in
Government Services, such as Birmingham and Southampton councils, and a number
of losses in Specialist Services.
* Contract wins which include the first year of revenue on the Ministry of
Defence’s fire and rescue project (DFRP) contract, a project performed in
Customer Management, and a number of smaller wins across all divisions.
* As happened in 2019, a number of one-offs arose from deferred income
releases associated with contract terminations and modifications (detailed
further below).
* Net reduction of £152.6m (5%) attributed to Covid-19, largely due to lower
transactional revenues in our businesses heavily impacted by the pandemic in
travel and events, enforcement, Government Services and People Solutions,
including a number of our framework agreements which are driven by volumes.
This was offset by additional revenue won, predominantly within Government
Services and Customer Management, to assist with the UK’s response to
Covid-19, including contracts with the DWP and various NHS schemes, with some
of these continuing into 2021.
Order book
The Group’s consolidated order book was £5,851m at 31 December 2020 (2019:
£6,720m) as additions from contract wins and extensions in 2020 (£1,573m),
including TfL congestion charge and Army recruitment extension, did not offset
the reduction from revenue recognised in the year (£2,365m) and contract
terminations and scope changes (£77m). In January 2021 the Group signed a
contract with the Royal Navy which represents a £0.9bn addition to the order
book which is not reflected in the December 2020 order book.
Adjusted profit before tax
Adjusted profit before tax (1)bridge by key driver £m
Year ended 31 December 2019 197.7
One-offs in 2019 – contract-related (28.2)
Year ended 31 December 2019 rebased 169.5
Contract losses (48.0)
Contract wins 37.0
Scope and volume (81.0)
Other costs (65.7)
Transformation cost savings 145.2
Transactional (67.9)
One-offs in 2020 – contract-related (23.9)
Year ended 31 December 2020 65.2
Adjusted profit before tax(1) declined in 2020. The adjusted profit before
tax(1) bridge breaks out the revenue and cost impacts on profit:
* One-off contract related items in 2019 relating to the release of deferred
income and write-off of contract assets arising from contract terminations,
settlements and modifications.
* The benefit from contract wins (which includes the initial loss on the DFRP
contract of £15m (refer to note 6)) are not yet replacing margin from lost
contracts.
* Scope and volume reductions described earlier, and other cost increases, are
partly mitigated by cost savings from the transformation cost competitiveness
programme (see below).
* Other cost increases, such as, inflation (including the commitment in the UK
to the real living wage), additional depreciation, amortisation and running
costs on completed transformation programmes, and an increase in bad debt
provision.
* Reduction in transactional revenue (mostly attributable to Covid-19) which
has a high initial margin impact due to fixed and semi-fixed cost base. This
could not be fully mitigated by cost reduction actions, for example the impact
of furloughing employees.
* Unplanned contractual one-offs, including the release of deferred income and
write-off of contract assets arising from contract terminations, settlements
and modifications, provisions recognised on onerous contracts and contract
related asset impairments (see further below).
The cost competitiveness programme delivered £145.2m of savings in 2020, and
cumulative savings since 2018 of £305m, which were used prior to 2020 to
increase investment in strengthening functions and build the platforms for
growth, as well as to partially offset the decline in revenue. The savings
continued to be generated through simplifying the organisation, reducing
management layers and rationalising the IT and property portfolios.
The adjusted revenue(1) and adjusted profit before tax(1) were impacted by a
number of material unplanned contractual one-off items, netting to a charge of
£23.9m. These items are not excluded from adjusted results as they are
considered to be normal course of business and not associated with the
transformation plan. These included:
* Net gain of £14.1m from the release of deferred income and contract
fulfilment asset utilisation from a contract termination in Customer
Management. Where a contract is terminated early, all deferred revenue is
recognised in the year of termination, which would otherwise 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.
* Contract related provisions of £17.3m, including an onerous contract
provision of £11.2m in Customer Management.
* Contract related asset impairments of £16.4m on challenging contracts in
Government Services and Customer Management.
Adjusted free cash flow
Adjusted operating profit to adjusted free cash flow (1) 2020 £m 2019 £m
Adjusted operating profit (1) 111.0 254.5
Add: depreciation/amortisation and impairment property, plant and equipment and intangible assets 182.0 184.9
Adjusted EBITDA 293.0 439.4
Contractual working capital movement (deferred income, contract fulfilment assets and accrued income) (42.5) (215.7)
Cash from trading operations* 250.5 223.7
Net capital expenditure (72.4) (172.9)
Other/working capital 60.5 (74.0)
Adjusted free cash flow (1) 238.6 (23.2)
* Cash from trading operations defined as adjusted EBITDA less contractual working capital movements.
Adjusted free cash flow(1) in 2020 was an inflow (£238.6m). This inflow was
due to improved contractual working capital movements and inflows from other
working capital more than offsetting the decline in adjusted operating
profit(1).
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 which have 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 rather than matched against costs as
they are incurred.
* 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 movements 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, and interest
and tax. 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 improved to £250.5m (2019: £223.7m) due to a
reduction in contractual working capital outflows, as previously expected.
Contractual working capital improved with an outflow of £42.5m (2019: outflow
£215.7m). This movement arises from:
* An increased accrued income inflow of £27m, driven by invoice phasing in
Technology Solutions and the impact of lower volumes across People Solutions
and Software.
* A reduced deferred income outflow of £154m, largely from advanced receipts
and higher activity levels on the DFRP contract where cash has been received
in 2020 in respect of transformation and invoice timing on a contract with a
telecom customer, compared to an outflow in 2019 which included the £78m
one-off impact of ending local government contracts, offset by:
* An increased contract fulfilment asset outflow of £8m, mostly from an
increase in additions on Government Services contracts, the most significant
being on the DFRP contract, offset by contract asset write-offs in Customer
Management and Government Services.
Other working capital related cash inflows reflected shorter public sector
payment cycles as part of the Covid-19 response, the impact of lower revenue,
and actions taken to improve working capital.
Net capital expenditure decreased in 2020 in line with previously planned
reductions as we drove focused investment and Group cash preservation methods
in response to the pandemic. This included reduced spend on finance
transformation and functional IT programmes, such as Workday, Salesforce and
SAP.
Reported results
The Board presents adjusted key measures of profit and cash, in addition to
reported measures, where items are significant in size and either they do not
form part of the trading activities of the Group or their separate
presentation enhances understanding of the underlying financial performance of
the Group. Given the wide-ranging scope of the transformation plan, including
for 2020 property portfolio management, the Board has again sought to provide
a clear understanding of the underlying and continuing performance of the
businesses. This has been achieved by separating and disclosing separately
significant adjusted items as set out in the following table. The Board will
continue to keep under review the presentation of alternative measures.
Adjusted operating profit(1) and adjusted profit before tax(1) exclude a
number of specific items, including significant restructuring costs of
£109.6m, the amortisation and impairment of acquired intangibles, including
goodwill, of £33.9m, and business exits of £9.1m, to aid understanding of
business performance.
Adjusted (1)to reported profit bridge Operating (loss) / profit (Loss)/profit before tax
2020 £m 2019 £m 2020 £m 2019 £m
Adjusted (1) 111.0 254.5 65.2 197.7
Amortisation and impairment of acquired intangibles (33.9) (49.9) (33.9) (49.9)
Impairment of goodwill — (41.4) — (41.4)
Business exit – trading 51.0 46.6 51.0 46.6
Business exit – non-trading expenses (41.9) (52.1) (41.9) (52.1)
Business exit – gain on business disposals — — 31.4 —
Business exit - on hold disposal costs (7.5) — (7.5) —
Significant restructuring (109.6) (159.4) (109.6) (159.4)
Other (1.1) 2.1 (4.1) (4.1)
Reported (32.0) 0.4 (49.4) (62.6)
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. At 31 December
2020 these comprised:
* The Eclipse business whose disposal completed on 30 June 2020.
* The Capita Workplace Technology business whose disposal completed on 1
August 2020.
* The Employee Benefits business whose disposal was completed on 30 November
2020.
* Two businesses, including the Education Software Solutions business, which
were in the process of being exited and which met the held-for-sale criteria.
Accordingly, these businesses were treated as disposal groups held-for-sale at
this date. The sale of both businesses completed subsequently, and
* The exit costs relating to further planned disposals, including professional
fees and separation planning costs.
In accordance with our policy, the trading results of these businesses, along
with the non-trading expenses and gain or loss on disposal, were included in
business exits and therefore excluded from adjusted results. To enable a
like-for-like comparison of adjusted results, the 2019 comparatives have been
re-presented to exclude 2020 business exits.
During the period, the Group was in the active process of disposing of a
number of businesses. However, due to the impact that the Covid-19 pandemic
had on the underlying trading of these businesses, the disposal process was
put on hold. The costs incurred in respect of these disposals are excluded
from the Group's adjusted results but disclosed separately to the continuing
business exits given their materiality. These costs included professional fees
in respect of legal and financial due diligence, and separation planning
costs.
Further disposals are planned as part of the Group’s simplification
strategy. As these disposals did not meet the definition of business exits or
assets held-for-sale at 31 December 2020, 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 has extended to
property rationalisation, procurement centralisation, transformation of
support functions, including investment in growth, and transformation of
finance, and operational excellence, including investment in automation. These
activities are designed to improve the cost competitiveness of the Group,
secure Capita’s position in the markets it serves, and strengthen governance
and control. In response to the varied impacts of Covid-19 we have had to
adapt and reassess our restructuring activities which will now extend into
2021.
The costs of the transformation plan, including redundancy costs, are excluded
from adjusted operating profit(1) as significant restructuring. We will keep
this presentation under review to ensure it remains appropriate.
Further detail of the specific items charged in arriving at reported operating
profit for 2020 is provided in note 4.
Adjusted to reported free cash flow 2020 £m 2019 £m
Adjusted (1) 238.6 (23.2)
Pension deficit contributions (29.5) (71.1)
Significant restructuring (64.1) (148.5)
Business exits 33.9 32.5
Business exits - on hold disposal costs (7.5) —
Non-recourse trade receivables financing 13.6 —
VAT deferral 118.8 —
Other — (2.7)
Reported 303.8 (213.0)
Reported free cash flow was an inflow in 2020 reflecting the inflow from
adjusted free cash flow explained above, the benefit from the Government VAT
deferral measures, the utilisation of a non-recourse trade receivables
financing facility, and cash from the trading of business exits and net
proceeds on the disposal of businesses in the period. These were offset by
spend on known commitments, including pension deficit contributions (which the
directors consider to be debt-like in nature), and restructuring costs.
A non-recourse trade receivables financing facility was put in place to
mitigate the risk of customer receipts slippage due to the Covid-19 pandemic.
This facility and the VAT deferral were both excluded from adjusted free cash
flow(1).
Impact on net debt
Net debt at 31 December 2020 was £1,077.1m (2019: £1,353.2m) reflecting the
cash inflow in the year. The reduction in net debt was largely from the
improved adjusted free cash flow(1), the deferral of VAT, and proceeds from
the Eclipse disposal.
Net debt 2020 £m 2019 £m
Opening net debt (1,353.2) (466.1)
Adoption of IFRS 16 — (643.9)
Opening net debt post adoption of IFRS 16 (1,353.2) (1,110.0)
Cash movement in net debt 344.1 (241.2)
Non-cash movements (68.0) (2.0)
Closing net debt (1,077.1) (1,353.2)
Remove closing IFRS 16 impact 508.1 562.6
Headline net debt (pre-IFRS 16) (569.0) (790.6)
Cash and cash equivalents net of overdrafts 141.1 122.8
Debt net of swaps (710.1) (913.4)
Headline net debt (pre-IFRS 16)/adjusted EBITDA (1) 2.4x 2.1x
Headline net debt (post-IFRS 16)/adjusted EBITDA (1) 3.1x 2.7x
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 2020,
the ratio exceeded the top of our range at 2.4 times (2019: 2.1 times) as a
result of the lower adjusted EBITDA, which as explained above, was due to the
impact of Covid-19.
The Board has not formally reviewed the target range, but taking account of
the adoption of IFRS 16, the range would increase arithmetically to be between
1.7 and 2.7 times headline net debt to adjusted EBITDA(1). At 31 December
2020, this ratio exceeded this range at 3.1 times (31 December 2019: 2.7
times) for the same reasons set out above.
We will keep our leverage target under review as the economic circumstances
develop and our balance sheet strengthens following asset disposals.
We were compliant with all debt covenants at 31 December 2020.
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
calculated based 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 2020, the US private placement loan notes ratio was
1.8 times.
Interest cover(1) covenant was 8.5 times for the US private placement loan
notes (2019: 11.2 times) and 7.8 times for other financing arrangements (2019:
10.8 times).
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 facilities, leases and overdrafts.
We have been very focused on conserving cash and maximising liquidity and this
has resulted in an improved liquidity since the end of 2019.
Liquidity 2020 £m 2019 £m
RCF 452.0 414.0
Backstop liquidity facilities 150.0 —
Less: drawing on facilities — —
Undrawn committed facilities 602.0 414.0
Net cash, cash equivalents net of overdrafts 141.1 122.8
Less: restricted cash (1) (34.5) (42.1)
Liquidity 708.6 494.7
The Group’s RCF of £452.0m at 31 December 2020 (31 December 2019: £414.0m)
provides flexible liquidity available to fund operations and a reasonable
liquidity buffer allowing for contingencies. The facility is available until
31 August 2022, extendable for a further year to 31 August 2023 with the
consent of the lenders by 31 August 2021. At 31 December 2020 the committed
RCF was undrawn (31 December 2019: undrawn).
Additionally, the Group secured a committed backstop liquidity facility of
£150.0m in February 2020. This reduced to £93.5m on 30 June 2020 with the
disposal of the Eclipse business. It was then supplemented by a second
backstop liquidity facility, bringing the combined value of the two facilities
back to £150.0m. Neither facility was drawn at 31 December 2020. Both
backstop liquidity facilities terminated on 1 February 2021 with the receipt
of proceeds from the disposal of the ESS business.
As part of the Group’s mitigation of the impact of Covid-19, in June 2020 a
non-recourse invoice discounting facility was executed. The value of invoices
sold under the facility at 31 December 2020 was £13.6m. The Group’s
intention is that the facility will be used only while Covid-19 continues to
impact the business.
At 31 December 2020, the Group had £141.1m of cash and cash equivalents net
of overdrafts, and £765.1m of private placement loan notes, fixed-rate bearer
notes, and Schuldschein loan. These debt instruments mature over the period to
2027, with repayments of £209.9m and £230.2m, in 2021 and 2022 respectively.
The Group intends to extend the average term to maturity of its debt, and
thereby reduce refinancing risk, by issuing new long-term debt instruments in
2021, market conditions permitting.
As noted previously, as part of our simplification drive, we also decided to
dispose of a number of non-core businesses in 2020. The anticipated disposal
proceeds will provide options to reduce the Group’s debt. We will continue
to pursue these in 2021.
Going concern assumption and viability statement
The Board closely monitors the Group’s funding position throughout the year,
including monitoring compliance with covenants and available facilities to
ensure it has sufficient headroom to fund operations. In addition, to support
the going concern assumption and viability statement the Board conducts a
robust assessment of the projections, considering also the committed
facilities available to the Group.
The Board has considered risks to the projections under a severe but plausible
downside. This includes adverse impacts arising from the execution risk
associated with the transformation plan and the unprecedented economic
uncertainties introduced by Covid-19.
To mitigate these the Board is focused on introducing significant new funds to
the Group via a continuation of the approved disposal programme, and
refinancing of the debt maturities. The Group is already engaged in
discussions with its RCF lenders regarding an extension to the existing
facility which matures in August 2022, targeting completion of a refinancing
during 2021, which it expects will include an RCF with a maturity at least a
year later.
Any refinancing and future disposals, should the severe but plausible downside
crystallise, will require third party agreements and approvals which represent
events that are outside the direct control of the Company. Accordingly, at the
time of signing these financial statements there remain material
uncertainties, as defined in auditing and accounting standards, related to
events or conditions that may cast significant doubt on the Group’s and
Parent Company’s ability to continue as a going concern.
The Group has a strong track record of executing major planned disposals and a
successful history of securing effective refinancing. Therefore, after careful
consideration and reflecting also the Board’s confidence in the
transformation plan, the Board has concluded that the Group and Parent Company
will continue to have adequate financial resources to realise their assets and
discharge their liabilities as they fall due over the going concern period to
31 August 2022. Consequently, these financial statements do not include any
adjustments which would be required if the going concern basis of preparation
is inappropriate.
The Board's assessment is set out in more detail in note 2.
Pensions
As a result of the last triennial valuation at 31 March 2017, deficit-repair
contributions totalling £176.0m, were agreed and these will be fully paid in
the first half of 2021. It was expected that the combination of the deficit
contributions and the scheme’s investment strategy would largely eliminate
the deficit identified in 2017. Looking to the valuation at March 2020, the
Trustees will need to take into account the impact of Covid-19 and the planned
delivery of the transformation of the Group. The impact being that we expect a
further deficit will be identified as a result of more prudent assumptions.
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. We expect to conclude the
triennial valuation in the first half of 2021, including agreement with the
Trustees with regards to repairing the deficit in the next three to six years.
Balance sheet
The consolidated net liabilities were £81.1m at 31 December 2020 (2019:
£64.0m). The increase in net liabilities is predominantly driven by the
actuarial loss on the Group’s defined benefit pension schemes.
Finance transformation
In 2018, the Board launched a multi-year transformation plan to support the
objectives of simplifying and strengthening Capita. The plan includes
transformation of finance 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 was required on the core processes and procedures before the system would
be effectively implemented. As such, we impaired £12.3m at 31 December 2019,
representing areas that we expected to redesign before going live. Several
interim activities were progressed during 2020 and the technical asset
including the IT infrastructure, software and codebase have been preserved and
remain ready to deploy. No impairment has been recorded in 2020 as we believe
the solution remains fit for purpose. The carrying value of the investment
remains unchanged at 31 December 2020 at £58.6m. The carrying value of the
asset will be kept under review through the next phase of the Group’s
transformation to assess for any triggers for impairment should there be a
material change to the Group’s operating model.
The Group has continued to invest in shared service centres and offshoring,
and in making improvements to the Group’s existing reporting systems,
processes and controls.
Contingent liabilities
In September 2020, the Group settled a liability relating to past services
received under supplier software licence agreements. The settlement requires a
cash payment of £5m (payable in USD) in January 2021, and with a commitment
to future purchases of £79m of which £6m (payable in USD) is over the period
to 31 December 2021 and £73m (payable in USD), is over the period to 30 June
2024.
In June 2020 the Group made a provision for the cash settlement at 31 December
2020 and excluded this from adjusted results. The future purchases will be at
the usual discounted prices available to the Group, and the Group has
forecasts that support the requirement for such products and services. These
products are important in supporting the delivery of future performance
obligations and digital solutions for our customers. Accordingly, there is no
provision to record as the committed future purchases will benefit the Group
and do not represent an economic outflow of resources. As the future purchases
are made, the cost if expensed will be recorded in adjusted results
Refer to note 4 for the ‘adjusted operating profit and adjusted profit
before tax’ disclosure note and note 16 for the ‘commitments’ disclosure
note.
Forward planning assumptions
The uncertainties created by the current and potential future impact of
Covid-19 on our business means that forecasting is inherently uncertain and so
guidance is not provided. However, our current planning assumptions are:
* Revenue: despite lockdown in the first quarter of 2021, targeting organic
revenue growth
* Adjusted profit before tax and cash from trading operations: underpinned by
net cost savings (further £50m savings in 2022 from future Capita)
* Restructuring: continuation of restructuring programme, broadly in line with
2020
* Pensions: triennial valuation agreement targeted for the first half of 2021,
deficit reduction programme expected over the next three - six years
* Net debt: broadly flat year on year - before disposals
(1) Refer to the alternative performance measures (APMs) 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 trading update save as would arise under English
law. Statements contained in this trading update are based on the knowledge
and information available to Capita’s Directors at the date it was prepared
and therefore facts stated and views expressed may change after that date.
This document and any materials distributed in connection with it may include
forward-looking statements, beliefs, opinions or statements concerning risks
and uncertainties, including statements with respect to Capita’s business,
financial condition and results of operations. Those statements and statements
which contain the words "anticipate", "believe", "intend", "estimate",
"expect" and words of similar meaning, reflect Capita’s Directors' beliefs
and expectations and involve risk and uncertainty because they relate to
events and depend on circumstances that will occur in the future and which may
cause results and developments to differ materially from those expressed or
implied by those statements and forecasts.
No representation is made that any of those statements or forecasts will come
to pass or that any forecast results will be achieved. You are cautioned not
to place any reliance on such statements or forecasts. Those forward-looking
and other statements speak only as at the date of this trading update. Capita
undertakes no obligation to release any update of, or revisions to, any
forward-looking statements, opinions (which are subject to change without
notice) or any other information or statement contained in this trading
update. Furthermore, past performance cannot be relied on as a guide to future
performance.
No statement in this document is intended as a profit forecast or a profit
estimate and no statement in this document should be interpreted to mean that
earnings per Capita share for the current or future financial years would
necessarily match or exceed the historical published earnings per Capita
share.
Nothing in this document is intended to constitute an invitation or inducement
to engage in investment activity. This document does not constitute or form
part of any offer for sale or subscription of, or any solicitation of any
offer to purchase or subscribe for, any securities nor shall it or any part of
it nor the fact of its distribution form the basis of, or be relied on in
connection with, any contract, commitment or investment decision in relation
thereto. This document does not constitute a recommendation regarding any
securities.
Consolidated income statement For the year ended 31 December 2020
Notes 2020 £m 2019 (1) £m
Continuing operations:
Revenue 7 3,324.8 3,678.6
Cost of sales (2,640.6) (2,756.4)
Gross profit 684.2 922.2
Administrative expenses (716.2) (921.8)
Operating (loss)/profit 7 (32.0) 0.4
Share of results in associates and investment gains 0.8 (0.6)
Net finance expense 8 (49.6) (62.4)
Gain on business disposal 5 31.4 —
Loss before tax (49.4) (62.6)
Income tax credit 47.6 3.5
Loss for the year from continuing operations (1.8) (59.1)
Discontinued operations:
Profit for the year 5 20.8 5.0
Total profit/(loss) for the year 19.0 (54.1)
Attributable to:
Owners of the Company 14.0 (64.2)
Non-controlling interests 5.0 10.1
19.0 (54.1)
Earnings/(loss) per share 9
Continuing: – basic (0.41)p (4.18)p
– diluted (0.41)p (4.18)p
Total operations: – basic 0.85p (3.89)p
– diluted 0.85p (3.89)p
Adjusted operating profit 4 111.0 254.5
Adjusted profit before tax 4 65.2 197.7
Adjusted earnings per share 9 4.19p 9.30p
Adjusted and diluted earnings per share 9 4.19p 9.30p
1. The 2019 comparatives have been re-presented to align with the current
year allocation of costs between cost of sales and administrative expenses.
This has resulted in an increase to cost of sales of £73.4m and an equivalent
reduction to administrative expenses.
Consolidated statement of comprehensive income
For the year ended 31 December 2020
2020 £m 2019 £m
Total profit/(loss) for the year 19.0 (54.1)
Other comprehensive expense
Items that will not be reclassified subsequently to the income statement
Actuarial loss on defined benefit pension schemes (32.1) (106.7)
Deferred tax effect on defined benefit pension schemes 10.9 18.1
Loss on fair value of investments (0.7) —
Items that will or may be reclassified subsequently to the income statement
Exchange differences on translation of foreign operations (9.0) (1.2)
(Loss)/gain on cash flow hedges (1.6) 1.0
Cash flow hedges recycled to the income statement (4.5) (2.6)
Income tax effect on cash flow hedges 1.1 0.3
Other comprehensive expense for the year net of tax (35.9) (91.1)
Total comprehensive expense for the year net of tax (16.9) (145.2)
Attributable to:
Owners of the Company (21.9) (155.3)
Non-controlling interests 5.0 10.1
(16.9) (145.2)
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated balance sheet At 31 December 2020
Notes 2020 £m 2019 £m
Non-current assets
Property, plant and equipment 10 157.2 194.3
Intangible assets 11 265.0 354.2
Goodwill 12 1,120.5 1,177.8
Right-of-use assets 342.1 480.9
Investments in associates and joint ventures 5.1 3.8
Contract fulfilment assets 13 294.8 275.8
Financial assets 117.0 82.2
Deferred tax assets 242.8 181.6
Trade and other receivables 22.1 26.4
2,566.6 2,777.0
Current assets
Financial assets 32.1 25.1
Disposal group assets held-for-sale 5 114.6 12.4
Trade and other receivables 551.0 748.4
Cash 460.9 409.1
Income tax receivable 2.9 4.5
1,161.5 1,199.5
Total assets 3,728.1 3,976.5
Current liabilities
Trade and other payables 635.0 619.8
Deferred income 822.2 884.5
Overdrafts 332.7 286.3
Lease liabilities 77.5 81.9
Disposal group liabilities held-for-sale 5 53.9 7.9
Finance liabilities 347.8 351.8
Provisions 14 107.0 71.3
2,376.1 2,303.5
Non-current liabilities
Trade and other payables 23.6 6.0
Deferred income 153.0 176.5
Lease liabilities 426.0 480.7
Financial liabilities 554.3 795.7
Deferred tax liabilities 6.7 16.3
Provisions 14 17.4 9.3
Employee benefits 252.1 252.5
1,433.1 1,737.0
Total liabilities 3,809.2 4,040.5
Net liabilities (81.1) (64.0)
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 (13.4) 0.6
Retained deficit (1,289.5) (1,295.8)
Deficit attributable to owners of the Company (134.5) (126.8)
Non-controlling interests 53.4 62.8
Total deficit (81.1) (64.0)
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated statement of changes in equity For the year ended 31 December 2020
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 (deficit)/equity £m
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, after 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 net of deferred tax effect — — — — 3.8 — 3.8 — 3.8
Shares purchased — — — — (0.7) — (0.7) — (0.7)
Dividends paid (3) — — — — — — — (14.4) (14.4)
Movement in put-options held by non-controlling interests — — — — 9.8 — 9.8 — 9.8
At 1 January 2020 34.5 1,143.3 (11.2) 1.8 (1,295.8) 0.6 (126.8) 62.8 (64.0)
Profit for the year — — — — 14.0 — 14.0 5.0 19.0
Other comprehensive expense — — — — (21.9) (14.0) (35.9) — (35.9)
Total comprehensive (expense)/income for the year — — — — (7.9) (14.0) (21.9) 5.0 (16.9)
Share based payment net of deferred tax effect — — — — 5.2 — 5.2 — 5.2
Dividends paid (3) — — — — — — — (14.4) (14.4)
Movement in put-options held by non-controlling interests — — — — 9.0 — 9.0 — 9.0
At 31 December 2020 34.5 1,143.3 (11.2) 1.8 (1,289.5) (13.4) (134.5) 53.4 (81.1)
1. The Group 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 Group 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.
3. Dividends paid and proposed: £14.4m (2019: £14.4m) relate to
dividends paid to non-controlling interests. No dividends were declared, paid
or proposed in 2020 or 2019 on the Parent Company’s ordinary shares.
Share capital – The balance classified as share capital is the nominal
proceeds on issue of the Parent Company’s equity share capital, comprising
2 1/15p ordinary shares.
Share premium – The amount paid to the Parent Company by shareholders, in
cash or other consideration, over and above the nominal value of shares issued
to them less issuance costs.
Employee benefit trust and treasury shares – Shares that have been bought
back by the Parent Company which are available for retirement or resale;
shares held in the employee benefit trust have no voting rights and no
entitlement to a dividend.
Capital redemption reserve – The Parent 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
deficit of £8.6m (2019: £0.4m surplus) and cash flow hedging reserve deficit
of £4.8m (2019: £0.2m surplus).
Non-controlling interests (NCI) – This represents the equity in subsidiaries
that is not attributable directly or indirectly to the Parent Company.
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated cash flow statement
For the year ended 31 December 2020
Notes 2020 £m 2019 £m
Cash generated from operations 15 434.2 32.8
Cash generated from discontinued operations 18.6 4.7
Income tax paid (8.8) (5.4)
Net interest paid (47.7) (58.4)
Net cash inflow/(outflow) from operating activities 396.3 (26.3)
Cash flows from investing activities
Purchase of property, plant and equipment 10 (40.8) (57.7)
Purchase of intangible assets 11 (46.6) (124.7)
Proceeds from sale of property, plant and equipment/intangible assets 10, 11 13.5 0.4
Additions to investments in associates (0.6) (0.6)
Additions to investments held at fair value (0.3) —
Disposals of investments held at fair value 3.9 —
Deferred consideration paid — (1.3)
Contingent consideration paid (4.9) (2.4)
Subsidiary partnership payment (9.4) (9.4)
Capital element of lease rental receipts 2.8 —
Net proceeds/(loss) on disposal of subsidiary undertakings 5 51.3 (8.9)
Cash disposed of with subsidiary undertakings 5 (3.2) —
Net cash outflow from investing activities (34.3) (204.6)
Cash flows from financing activities
Dividends paid to non-controlling interests (14.4) (14.4)
Purchase of shares — (0.7)
Capital element of lease rental payments (98.0) (93.7)
Repayment of private placement loan notes (242.9) (96.8)
Proceeds from cross-currency interest rate swaps 24.5 10.9
Repayment of term loan — (100.0)
Financing arrangement costs (0.5) (1.1)
Net cash outflow from financing activities (331.3) (295.8)
Increase/(decrease) in cash and cash equivalents 30.7 (526.7)
Cash and cash equivalents at the beginning of the period 119.3 642.7
Effect of exchange rates on cash and cash equivalents (8.9) 3.3
Cash and cash equivalents at 31 December 141.1 119.3
Cash and cash equivalents comprise:
Cash 460.9 409.1
Overdrafts (332.7) (286.3)
Cash, net of overdrafts, included in disposal group assets and liabilities held-for-sale 5 12.9 (3.5)
Total 141.1 119.3
Adjusted cash generated from operations 15 367.5 213.6
Adjusted free cash flows 15 238.6 (23.2)
The accompanying notes are an integral part of these consolidated financial
statements.
Notes to the consolidated financial statements
for the year ended 31 December 2020
1 Corporate information
Capita plc is a public limited company incorporated in England and Wales whose
shares are publicly traded.
These consolidated financial statements of Capita plc for the year ended
31 December 2020 were authorised for issue in accordance with a resolution of
the directors on 16 March 2021.
2 Basis of preparation, judgements and estimates and going concern
(a) Basis of preparation
The consolidated financial statements have been prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards (IFRSs)
adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European
Union.
The consolidated financial statements are presented in pounds sterling and all
values are rounded to the nearest tenth of a million (£m) except when
otherwise indicated.
(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 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 accordance 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.
The potential impact of Covid-19 on the Group has been considered in the
preparation of these consolidated financial statements, including
management’s evaluation of critical accounting estimates and judgements. The
impact on the Group has varied by business.
Covid-19 has introduced unprecedented economic uncertainties and has led to
increased judgement particularly in forecasting future financial performance.
There have also been direct impacts on revenue and costs arising from: new
contracts helping customers respond to the pandemic; costs of setting up
colleagues to work remotely; the release of the 2019 bonus accruals; and
utilisation of the Government’s furlough scheme. The Board has not reported
these items separately, but where there is an impact this is captured in the
divisional performance reviews.
The Board has continued with a policy to separately identify items such as
restructuring, where the plans have been advanced and adapted in response to
Covid-19. The Board has also considered the impact on the provisions recorded
at 31 December 2020, with no significant adjustments recorded, and the
valuation of the defined benefit pension scheme.
Given the level of judgement and estimation involved in assessing the future
profitability of contracts, it is reasonably possible 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. This risk is increased further by the uncertainly
Covid-19 brings to forecasting.
(d) Going concern
In determining the appropriate basis of preparation of the financial
statements for the year ended 31 December 2020, the directors are required to
consider whether the Group and Parent Company 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, key uncertainties and sensitivities, as
set out below, and that align with the viability statement of the Annual
Report and Accounts.
Accounting standards require that the foreseeable future covers a period of at
least 12 months from the date of approval of the financial statements,
although they do not specify how far beyond 12 months a Board should consider.
In the prior year, the Board considered an extended period out to 31 August
2022 (30 months) which aligned with the expiry of the revolving credit
facility (RCF). The Board continue to consider the period out to 31 August
2022 for the purpose of the going concern assessment, which reflects a period
of at least 18 months from the date of approval of these financial statements
(the going concern period). While this is a shorter period, it does align with
the expiry of the RCF which is a key consideration. The Board have also
considered any committed outflows beyond this period in forming their
assessment.
The base case projections prepared for the going concern assessment are
derived from the 2021–2023 business plans (BP) as approved by the Board in
February 2021. The BP captures the benefits that the transformation plan is
anticipated to deliver, and the costs to achieve these.
Covid-19 has introduced unprecedented economic uncertainties and has led to
increased judgement particularly in forecasting future financial performance.
Many parts of the Group have demonstrated resilience throughout 2020, adapting
to address the impact of Covid-19, but as discussed at the half year, the
pandemic has slowed the progress of the transformation plan. The impact has
been incorporated within the base case projections.
The going concern assessment considers the Group’s existing debt facilities,
committed funding and liquidity positions, and covenant compliance throughout
the period under review. The Group’s committed RCF (£452.0m at 31 December
2020) matures in August 2022 but the Group is targeting completion of its
refinancing agenda during 2021, which it expects will include a RCF with a
maturity at least a year later. There are scheduled debt repayments totalling
£277m over the period to August 2022, with a further repayment of c.£163m in
November 2022 on the private placement loan notes. Details of the covenant
requirements and definitions are set out in the Appendix.
Financial position at 31 December 2020
The Group had net debt of £1,077.1m at 31 December 2020 (2019: £1,353.2m)
and adjusted net debt of £616.4m (2019: £832.7m). Adjusted EBITDA was
£293.0m at 31 December 2020 (2019: £439.4m). The Group was in compliance
with all debt covenants at 31 December 2020 (see Appendix).
Board assessment
Base case scenario
Under the base case projections, the transformation plan will simplify and
strengthen the business and drive a reduced cost base to generate sustainable
revenue growth and cash flows.
This realises positive free cash flows, and when combined with available
committed facilities allows the Group to manage the scheduled debt repayments.
Under the base case there is liquidity headroom throughout the forecast period
to 31 August 2022, and compliance with all covenant measures.
The base case assumes the extension of the RCF as set out above, given the
improved financial position of the Group which benefits from the successful
delivery of the transformation plan. The key sensitivity to the base case is
the execution risk associated with delivering the revenue growth, exacerbated
should the pandemic continue to impact the Group’s activities.
Severe but plausible downside
In considering the severe but plausible downside scenarios the Board has
considered trading downside risks, which assumes the transformation plan is
not successful in delivering the anticipated revenue growth, together with
increased attrition, and further impacts of Covid-19. In addition, the
downside scenario includes potential adverse financial impacts that could
arise from unforeseen operational issues leading to contract losses and cash
outflows, and unexpected potential fines and losses linked to incidents such
as data breaches and/or cyber attacks.
There are mitigations, under the direct control of the Group, that the Board
can introduce to address these shortfalls. These include continued reductions
to variable pay rises, setting aside any bonus payments and limiting
discretionary spend. While these are available as possible short-term
mitigations and would be actioned if required to ensure compliance with debt
covenants, the Board is mindful that such restrictions may be detrimental to
the success of the transformation plan. In addition, such actions would not
address the liquidity requirements beyond the going concern period. Absent
these mitigating actions, on a downside scenario there is insufficient
headroom to ensure compliance with the debt covenants throughout the
measurement period to 31 August 2022, and insufficient liquidity taking into
account the facilities currently available, due to a combination of the
downside risks crystallising and scheduled debt repayments.
To address the resilience of the Group to such downside scenarios, the Board
has been exploring a refinancing of the debt maturities to reprofile the debt
repayments to align with the completion of the transformation programme while
also providing the financial support necessary to complete the required
investments. While refinancing was not completed in 2020, the Board did
successfully arrange backstop facilities in February and August 2020, is
already in discussion with lenders, and is targeting completion of a
refinancing in 2021.
In addition to refinancing, the Board has approved a continuation of the
previously announced disposal programme which covers businesses that do not
align with the longer-term strategy for the Group.
The Group has a strong track record of executing major planned disposals.
Examples include net cash proceeds from the disposal of the Asset Services
business in 2017 (c.£865m) and ParkingEye and Constructionline in 2018
(c.£390m). More recently the Group generated net cash proceeds of c.£50m
from the disposal of Eclipse Legal Services in June 2020 and c.£300m from the
disposal of the Education Software Solutions business in February 2021. The
Board is confident that the disposal programme can be delivered given the
strength of the underlying businesses and the value they deliver. The planned
disposals will introduce considerable net cash proceeds to the Group, albeit
with a corresponding removal of consolidated profits associated with these
businesses.
The net proceeds received during 2020 have been effective in reducing the
Group’s indebtedness from £1,353.2m at 31 December 2019 to £1,077.1m at 31
December 2020. The deferral of £118.8m of VAT under the Government’s
Covid-19 measures has also contributed to this reduction in net debt.
Material uncertainties
The Board recognises that any refinancing, should the severe downside play
out, would require third party agreements from lenders. Furthermore, the
disposal programme requires agreement from third parties, and major disposals
may be subject to shareholder and lender approval. Such agreements and
approvals are outside the direct control of the Company. Accordingly, these
events give rise to material uncertainties, as defined in auditing and
accounting standards, relating to events and circumstances which may cast
significant doubt about the Group’s and Parent’s ability to continue as a
going concern and, therefore, that the Group and Company may be unable to
realise their assets and discharge their liabilities in the normal course of
business.
Reflecting the Board’s confidence in the transformation programme, ability
to refinance, and execution of the approved disposal programme, the Company
continues to adopt the going concern basis in preparing the financial
statements. The Board has concluded that the Group and Parent Company will
continue to have adequate financial resources to realise their assets and
discharge their liabilities as they fall due over the period to 31 August
2022. Consequently, these financial statements do not include any adjustments
which would be required if the going concern basis of preparation is
inappropriate.
3 Preliminary announcement
A duly appointed and authorised committee of the Board of Directors approved
the preliminary announcement on 16 March 2021.
The financial information set out above does not constitute the Group's
consolidated financial statements for the years ended 31 December 2020 and
2019 but is derived from those accounts.
Statutory accounts for 2019 have been delivered to the Registrar of Companies
and those for 2020 will be delivered in due course. The auditor has reported
on those accounts.
Their report for the accounts of 2020 was (i) unqualified, (ii) contains a
material uncertainty in respect of going concern to which the auditor drew
attention by way of emphasis without modifying their report and (iii) did not
contain a statement under section 498(2) or (3) of the Companies Act 2006.
Their report for the accounts of 2019 was (i) unqualified, (ii) did not
include a reference of any matters to which the auditor drew attention by way
of emphasis without qualifying their report and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act 2006.
4 Adjusted operating profit and adjusted profit before tax
The items below are excluded from the adjusted results:
Operating (loss)/profit (Loss)/profit before tax
Notes 2020 £m 2019 £m 2020 £m 2019 £m
Reported (32.0) 0.4 (49.4) (62.6)
Amortisation and impairment of acquired intangibles 11 33.9 49.9 33.9 49.9
Impairment of goodwill 12 — 41.4 — 41.4
Impairment of loans and investments 0.4 — 0.4 —
Litigation and claims 0.7 (0.7) 0.7 (0.8)
Net finance costs 8 — — 3.0 6.3
Contingent consideration and acquisition cost movements — (1.4) — (1.4)
Business exit – trading 5 (51.0) (46.6) (51.0) (46.6)
Business exit – non-trading expenses 5 41.9 52.1 41.9 52.1
Business exit – gain on business disposals 5 — — (31.4) —
Business exit – on-hold disposal costs 7.5 — 7.5 —
Significant restructuring 109.6 159.4 109.6 159.4
Adjusted 111.0 254.5 65.2 197.7
1. Adjusted operating profit decreased by 56.4% (2019: 8.5%) and adjusted
profit before tax decreased by 67.0% (2019: 2.2%). Adjusted operating profit
of £111.0m (2019: £254.5m) was generated on adjusted revenue of £3,181.2m
(2019: £3,501.0m) resulting in an adjusted operating profit margin of 3.5%
(2019: 7.3%).
2. The tax credit on adjusted profit before tax is £13.6m (2019: charge of
£29.0m) resulting in adjusted profit after tax of £78.8m (2019: £168.7m)
3. The adjusted operating profit and adjusted profit before tax at 31
December 2019 have been restated for the impact of business exits in 2020, and
for the impact of IFRS 16. This has resulted in adjusted operating profit
decreasing from £306.1m to £254.5m and adjusted profit before tax decreasing
from £275.0m to £197.7m.
Amortisation and impairment of acquired intangible assets: the Group
recognised acquired intangible amortisation of £32.3m (2019: £50.3m) of
which £nil relates to business exits (2019: £0.4m) and impairment of £1.6m
(2019: £nil).
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: In September 2020 the Group agreed a liability relating
to past services received under supplier software licence agreements. In June
2020, the Group made a provision of £5.0m for the cash element of the
settlement, and in September 2020 booked a provision of £0.1m for related
professional fees. These are excluded from adjusted results because they
relate to services received in prior periods and are not reflective of current
year trading. Refer to note 14 for further details. This is partially offset
by a gain of £4.4m (2019: gain of £0.7m) from net movements in historical
provisions for litigation and claims which were excluded from adjusted profit
when originally recognised due to their age and size.
Net finance costs: net finance costs excluded from adjusted profits includes
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 business disposals, are excluded from
the Group's adjusted results. Refer to note 5 for further details.
Business exits - on-hold disposal cost: the costs incurred in respect of
business exit activities where the anticipated disposal was primarily put on
hold due to the impact of Covid-19 pandemic had on the underlying businesses,
are excluded from the Group’s adjusted results but disclosed separately from
other business exits given their materiality. These costs include professional
fees in respect of legal and financial due diligence, and separation planning
costs.
Significant restructuring: in January 2018, the Group announced a multi-year
transformation plan. In 2020 a charge of £109.6m (2019: £159.4m) 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
£66m (2019: £80m): 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 the
Group’s operations, reduce spans and layers, increasing the use of
off-shoring and automation, adopting lean methodologies and working smarter.
These costs also include rationalisation and increased utilisation of the
Group’s property estate in metro centres and regionally. As the Group
continues to rationalise its property estate, costs associated with onerous
property commitments and dilapidation liabilities, and impairment of property
right of use assets and fixtures and fittings, will be captured and presented
as part of the transformation adjustments.
• Professional fees £3m (2019: £26m): incurred to support reigniting sales
growth, increasing the proportion of centrally controlled spend, and
refinancing costs which had to be aborted due to the impact Covid-19 had on
the debt markets.
• Transformation of central Group functions £15m (2019: £53m): investment
in programmes to improve the Group’s central functions, including: finance;
sales; human resources; and information technology. All costs associated with
these programmes are recorded separately, and exclude any costs capitalised as
part of the investment and the ongoing depreciation and amortisation of such
assets.
• Cost of accelerating savings to mitigate the financial impact of Covid-19
£26m (2019: £nil): these are incremental to those planned to be incurred as
part of the transformation plan and include accelerated property estate
rationalisation and severance costs.
5 Business exits, assets held for sale and discontinued operations
Business exits
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 comparative financial information 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, non-trading expenses,
and any gain/loss on disposal, have been excluded from
adjusted results. To enable a like-for-like comparison of adjusted results,
the 2019 comparatives have been re-presented to exclude the
2020 business exits.
Assets held-for-sale
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.
2020 business exits
Business exits during the year ended 31 December 2020 comprised:
* the Eclipse Legal Services business whose disposal was completed on 30 June
2020;
* the Capita Workplace Technology business whose disposal was competed on
1 August 2020;
* the Employee Benefits business whose disposal was completed on 30 November
2020;
* two businesses in the process of being exited and which met the
held-for-sale criteria. Accordingly, these businesses were treated
as disposal groups held-for-sale at the reporting date. The sale of both
businesses completed subsequently; and
* the exit costs relating to further planned disposals, including professional
fees and separation planning costs.
Further disposals are planned as part of the simplification agenda. Since
these disposals did not met the definition of business exits or assets
held-for-sale at 31 December 2020, their trading results were included within
adjusted results.
Income statement impact Non-trading disposal 2020 Non-trading disposal 2019
Trading £m Cash £m Non-cash £m Total £m Total £m Trading £m Cash £m Non-cash £m Total £m Total £m
Revenue 143.6 — — — 143.6 177.6 — — — 177.6
Cost of sales (67.6) — — — (67.6) (80.8) — — — (80.8)
Gross profit 76.0 — — — 76.0 96.8 — — — 96.8
Administrative expenses (25.0) (17.2) (24.7) (41.9) (66.9) (50.2) — (52.1) (52.1) (102.3)
Operating profit/(loss) 51.0 (17.2) (24.7) (41.9) 9.1 46.6 — (52.1) (52.1) (5.5)
Gain on business disposal — 48.1 (16.7) 31.4 31.4 — — — — —
Profit/(loss) before tax 51.0 30.9 (41.4) (10.5) 40.5 46.6 — (52.1) (52.1) (5.5)
Taxation (9.6) 2.2 13.8 16.0 6.4 (8.8) 3.0 — 3.0 (5.8)
Profit/(loss) after tax 41.4 33.1 (27.6) 5.5 46.9 37.8 3.0 (52.1) (49.1) (11.3)
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 £60.3m (2019: £73.9m) and IT costs of
£26.3m (2019: £37.8m).
Non-trading administrative expenses primarily comprise closure costs of
£17.2m (2019: £nil), goodwill impairment of £2.8m (2019: £35.3m), accruals
of £8.8m (2019: £nil), held-for-sale asset impairments £8.9m including
£0.8m of contract fulfilment assets and £3.2m of property plant and
equipment, other asset impairments of £6.3m (2019: £14.7m) which is
partially offset by releases of provisions of £2.1m (2019: £2.8m).
2020 disposals
During the year, the Group disposed of three businesses: Eclipse Legal
Services; the Capita Workplace Technology business; and, the Employee Benefits
business.
In 2020 the gain arising on the disposal of these businesses of £31.4m
comprised the disposal of net assets of £17.3m for £58.1m consideration and
disposal costs of £9.4m. The net cash proceeds of £54.9m comprised the cash
purchase consideration of £58.1m less £3.2m of cash disposed of.
Gain on business disposals 2020
Cash £m Non-cash £m Total £m
Property, plant and equipment — 0.6 0.6
Intangible assets — 3.2 3.2
Goodwill — 12.1 12.1
Trade and other receivables — 2.3 2.3
Disposal group assets held-for-sale — 4.3 4.3
Trade and other payables — (6.5) (6.5)
Deferred income — (0.4) (0.4)
Disposal group liabilities held-for-sale — (1.2) (1.2)
Income tax payable — (0.3) (0.3)
Cash disposed of 3.2 — 3.2
Total net assets disposed of 3.2 14.1 17.3
Cash purchase consideration received 58.1 58.1
Costs of disposal – paid and accrued (6.8) (2.6) (9.4)
Proceeds, less costs, on disposal 51.3 (2.6) 48.7
Gain on business disposals 48.1 (16.7) 31.4
Disposal group assets and liabilities held-for-sale
2020 £m 2019 £m
Property, plant and equipment 0.1 0.2
Intangibles 44.4 0.1
Goodwill 45.3 2.8
Right-of-use assets 4.5 —
Income tax receivable and deferred tax asset 0.1 1.1
Contract fulfilment assets 3.1 —
Trade and other receivables 2.9 3.3
Accrued income 0.6 4.8
Prepayments 0.7 0.1
Cash and cash equivalents 12.9 —
Disposal group assets held-for-sale 114.6 12.4
Trade and other payables 1.5 0.9
Accruals 3.5 1.0
Lease liabilities 4.6 —
Other taxes and social security 0.1 0.1
Deferred income 40.3 1.0
Income tax payable and deferred tax liability 3.5 1.4
Provisions 0.4 —
Overdraft — 3.5
Disposal group liabilities held-for-sale 53.9 7.9
Business exit cash flows
Businesses exited and being exited generated net operating cash inflows of
£56.2m (2019: cash inflows of £39.7m).
Post balance sheet disposal
The disposal of the Education Software Solutions business completed on
1 February 2021. Refer to note 18 for further details.
Discontinued operations
Capita completed the disposal of its Asset Services businesses, including
Capita Financial Managers Limited (CFM), to the Link Group on 3 November
2017. The disposal met the definition of a discontinued operation as
stipulated by IFRS 5.
The credit of £20.8m (2019: £5.0m) relates to additional payments received
in connection with the sale of the Asset Services businesses
arising from the return of redress payments made to the Financial Conduct
Authority (FCA) regarding the Connaught Income Series 1 Fund (2019: £3.1m).
Cash flows generated from discontinuing operations of £18.6m (2019: £4.7m)
relate to the above return of redress payments made to the FCA less previously
accrued amounts paid in connection with the sale of the Asset Services
business.
The earnings per share impact from discontinued operations is 1.26p (2019:
0.29p) on basic earnings per share and 1.26p (2019: 0.29p) on diluted earnings
per share.
6 Contract accounting
At 31 December 2020, the Group had the following results and balance sheet
items related to long-term contracts:
Notes 2020 £m 2019 £m
Long-term contractual adjusted revenue 7 2,317.0 2,491.5
Non-current and current deferred income 975.2 1,061.0
Non-current contract fulfilment assets 13 294.8 275.8
Non-current and current onerous contract provision 16.5 6.1
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), being 73% of Group adjusted revenue in 2020 (2019:
71%).
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 and is
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 overtime
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 (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 stages are considered to have a higher level of
uncertainty because of:
* 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’s 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 reviews 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 £1.5billion (2019: £1.4billion) or 47%
(2019: 40%) of Group adjusted revenue. Non-current contract fulfilment assets
at 31 December 2020 were £294.8, of which £152.7m (2019: £80.7m) relates
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 were, in
aggregate, £44.5m at 31 December 2020 (2019: £52.4m). 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 £232.3m at 31 December 2020 (2019: £243.6m) and is
forecast to be recognised as performance obligations continue to be delivered
over the life of the respective contracts.
Following these reviews, as outlined in note 13, contract fulfilment asset
provisions of £17.5m (2019: £9.6m) were identified and recognised within
adjusted cost of sales, of which £2.0m (2019: £2.2m) relates to contract
fulfilment assets added during the period, net onerous contract provisions of
£10.4m (2019: £(1.3)m) were identified and recognised within adjusted cost
of sales.
Given the quantum of the relevant contract assets and liabilities, and the
nature of the estimates noted above, management has concluded that it is
reasonably possible, that outcomes within the next financial year may be
different from management’s current assumptions and could require a material
adjustment to the carrying amounts of contract assets and onerous contract
provisions. However, as noted above, £152.7m of non-current contract
fulfilment assets relates to major contracts with on-going transformational
activities and £44.5m 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
user of the financial statements. Due to commercial sensitivities, the Group
does not specifically disclose the amounts involved in any individual
contract.
Certain of the major contracts in transformation have key milestones during
the next 12 months and inability to meet these key milestones could lead to
reduced profitability and a risk of impairment of the associated contract
assets. These contracts include Primary Care Support England (PCSE) and
Electronic Monitoring Services (EMS).
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 of the Annual Report.
The tables below present revenue for the Group’s business segments for the
years 2020 and 2019. During 2020, there were a number of transfers of
businesses between the segments due to changes in the structure and how the
business performance is measured and monitored, relevant to the KPIs for the
segment. Comparative information has been re-presented accordingly. For
segmental reporting, Consulting is aggregated within the ‘Group trading and
central services’ segment.
Adjusted revenue, excluding results from businesses exited in both years
(adjusting items), was £3,181.2m (2019: £3,501.0m), an organic decline of
9.1% (2019: 4.4%).
Year ended 31 December 2020 Notes Software £m People Solutions £m Customer Management £m Government Services £m Technology Solutions £m Specialist Services £m Group trading and central services £m Total adjusted £m Adjusting items £m Total reported £m
Continuing operations
Long-term contractual 232.2 284.5 902.1 574.0 266.9 43.3 14.0 2,317.0 126.3 2,443.3
Short-term contractual 9.8 77.8 235.7 8.9 24.7 110.7 3.4 471.0 18.5 489.5
Transactional (point-in-time) 4.0 109.7 1.9 140.9 93.4 42.5 0.8 393.2 (1.2) 392.0
Total segment revenue 246.0 472.0 1,139.7 723.8 385.0 196.5 18.2 3,181.2 143.6 3,324.8
Trading revenue 298.6 584.0 1,294.0 751.2 608.5 209.4 61.3 3,807.0 — 3,807.0
Inter-segment revenue (52.6) (112.0) (154.3) (27.4) (223.5) (12.9) (43.1) (625.8) — (625.8)
Total adjusted segment revenue 246.0 472.0 1,139.7 723.8 385.0 196.5 18.2 3,181.2 — 3,181.2
Business exits – trading 5 97.8 10.4 30.3 — — 5.1 — — 143.6 143.6
Total segment revenue 343.8 482.4 1,170.0 723.8 385.0 201.6 18.2 — — 3,324.8
Year ended 31 December 2019
Continuing operations
Long-term contractual 234.5 310.6 900.8 647.8 317.5 61.4 18.9 2,491.5 147.4 2,638.9
Short-term contractual 12.7 82.3 248.1 19.0 41.7 142.0 2.4 548.2 15.4 563.6
Transactional (point-in-time) 4.9 142.1 1.7 126.6 90.7 92.2 3.1 461.3 14.8 476.1
Total segment revenue 252.1 535.0 1,150.6 793.4 449.9 295.6 24.4 3,501.0 177.6 3,678.6
Trading revenue 305.7 729.6 1,283.5 820.2 698.4 315.9 79.0 4,232.3 — 4,232.3
Inter-segment revenue (53.6) (194.6) (132.9) (26.8) (248.5) (20.3) (54.6) (731.3) — (731.3)
Total adjusted segment revenue 252.1 535.0 1,150.6 793.4 449.9 295.6 24.4 3,501.0 — 3,501.0
Business exits – trading 5 107.9 13.0 31.0 — — 25.7 — — 177.6 177.6
Total segment revenue 360.0 548.0 1,181.6 793.4 449.9 321.3 24.4 — — 3,678.6
Geographical location
The table below presents revenue by geographical location.
2020 2019
United Kingdom £m Other £m Total £m United Kingdom £m Other £m Total £m
Revenue 3,011.0 313.8 3,324.8 3,358.4 320.2 3,678.6
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 wholly or partially
unsatisfied. The current environment has contributed to the Group’s order
book declining with contract wins not offsetting revenue recognised in the
period, however, in January 2021 the Group signed a contract with the Royal
Navy which represents a £0.9 billion addition to the order book which is not
included below. Revenue expected to be recognised upon satisfaction of these
performance obligations is as follows:
Order book 31 December 2020 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 489.6 533.4 2,106.8 1,980.8 338.4 201.0 4.4 5,654.4
Short-term contractual 21.3 1.0 27.9 76.2 31.8 33.2 4.9 196.3
Total 510.9 534.4 2,134.7 2,057.0 370.2 234.2 9.3 5,850.7
Order book 31 December 2019 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 496.7 497.2 2,734.0 2,140.6 344.0 259.0 2.9 6,474.4
Short-term contractual 81.7 — 26.5 36.1 45.7 47.6 7.6 245.2
Total 578.4 497.2 2,760.5 2,176.7 389.7 306.6 10.5 6,719.6
The table below shows the expected timing of revenue to be recognised on
long-term contractual orders at 31 December 2020.
Time bands expected revenue recognition from long-term contractual orders 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
< 1 year 221.0 199.3 691.5 403.9 117.7 29.1 1.0 1,663.5
1–5 years 243.1 334.1 1,185.0 1,179.1 175.1 46.0 3.4 3,165.8
> 5 years 25.5 — 230.3 397.8 45.6 125.9 — 825.1
Total 489.6 533.4 2,106.8 1,980.8 338.4 201.0 4.4 5,654.4
The order book represents the consideration that the Group will be entitled to
receive from customers when the Group satisfies its remaining performance
obligations under 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 because they are not
contracted. In addition, revenue from contract extensions is also excluded
from the order book unless they are pre-priced extensions whereby the Group
has a legally 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 £800.7m (2019: £605.4m).
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 £5.7 billion (2019: £6.5 billion) revenue to be earned on long-term
contractual, £3.8 billion (2019: £4.4 billion) relates to major contracts.
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 anticipated to contribute an
additional £2.1 billion (2019: £1.8 billion) 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 £998.7m
(2019: £1,119.3m).
Movements in the deferred income balances were driven by transactions entered
into by the Group within the normal course of business in the year, other than
the accelerated revenue recognised of £17.5m relating to the partial
termination of a contract in Customer Management.
Segmental profit
The table below presents profit by segment.
Year ended 31 December 2020 Notes Software £m People Solutions £m Customer Management £m Government Services £m Technology Solutions £m Specialist Services £m Group trading and central services £m Total adjusted £m Adjusting items £m Total reported £m
Adjusted operating profit 4 43.4 52.5 105.9 11.1 34.9 (4.4) (132.4) 111.0 — 111.0
Restructuring 4 (1.5) (8.5) (6.2) (3.2) (9.2) (3.4) (77.6) — (109.6) (109.6)
Business exits – trading 5 53.2 (1.8) 2.1 — — (2.5) — — 51.0 51.0
Total trading result 95.1 42.2 101.8 7.9 25.7 (10.3) (210.0) 111.0 (58.6) 52.4
Non-trading items:
Business exits – non-trading 5 — (41.9) (41.9)
Other adjusting items 4 — (42.5) (42.5)
Operating profit/(loss) 111.0 (143.0) (32.0)
Year ended 31 December 2019 Notes
Adjusted operating profit 4 50.7 68.9 119.8 51.8 58.0 44.3 (139.0) 254.5 — 254.5
Restructuring 4 (5.4) (34.3) (10.8) (2.7) (15.2) (3.9) (87.1) — (159.4) (159.4)
Business exits – trading 5 57.0 (9.1) 3.6 — — (4.9) — — 46.6 46.6
Total trading result 102.3 25.5 112.6 49.1 42.8 35.5 (226.1) 254.5 (112.8) 141.7
Non-trading items:
Business exits – non-trading 5 — (52.1) (52.1)
Other adjusting items 4 — (89.2) (89.2)
Operating profit/(loss) 254.5 (254.1) 0.4
Geographical location
The table below presents the carrying amount of non-current assets (excluding
deferred tax and financial assets) by the geographical location of those
assets.
2020 2019
United Kingdom £m Other £m Total £m United Kingdom £m Other £m Total £m
Non-current assets 2,168.4 38.4 2,206.8 2,457.3 55.9 2,513.2
8 Net finance costs
The table below shows the composition of net finance costs, including those
excluded from adjusted profit:
2020 £m 2019 £m
Interest income
Interest on cash (1.6) (3.6)
Interest on finance lease assets (1.2) (0.6)
Total interest income (2.8) (4.2)
Interest expense
Private placement loan notes (1) 20.6 28.1
Cash flow hedges recycled to the income statement (4.5) (2.6)
Bank loans and overdrafts 5.0 4.2
Interest on finance lease liabilities 25.1 26.3
Net interest cost on defined benefit pension schemes 3.2 4.4
Total interest expense 49.4 60.4
Net finance expense included in adjusted profit 46.6 56.2
Other financial expenses
Discount unwind on public sector subsidiary partnership payment 1.1 1.3
Non-designated foreign exchange forward contracts – mark-to-market 0.9 2.1
Fair value hedge ineffectiveness (2) 1.0 2.8
Total other financial expenses not included in adjusted profit 3.0 6.2
Total net finance expense 49.6 62.4
1. Private placement loan notes comprise US private placement loan notes, euro
fixed rate bearer notes, and a Schuldschein loan.
2. Fair value hedge ineffectiveness arises from changes in currency basis, and
the movement in a provision for counterparty risk associated with the swaps.
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.
2020 2019
Continuing operations p Total operations p Continuing operations p Total operations p
Basic earnings/(loss) per share – adjusted 4.19 4.19 9.30 9.30
– reported (0.41) 0.85 (4.18) (3.89)
Diluted earnings/(loss) per share – adjusted 4.19 4.19 9.30 9.30
– reported (0.41) 0.85 (4.18) (3.89)
The following tables show the earnings and share data used in the basic and
diluted earnings/(loss) per share calculations:
2020 2019
Continuing operations £m Total operations £m Continuing operations £m Total operations £m
Adjusted profit before tax for the period 65.2 65.2 197.7 197.7
Income tax credit/(charge) 13.6 13.6 (29.0) (29.0)
Adjusted profit for the period 78.8 78.8 168.7 168.7
Less: Non-controlling interest (9.4) (9.4) (14.7) (14.7)
Adjusted profit attributable to shareholders 69.4 69.4 154.0 154.0
Reported loss before tax for the period (49.4) (28.6) (62.6) (57.6)
Income tax credit 47.6 47.6 3.5 3.5
Reported loss for the period (1.8) 19.0 (59.1) (54.1)
Less: Non-controlling interest (5.0) (5.0) (10.1) (10.1)
Total loss attributable to shareholders (6.8) 14.0 (69.2) (64.2)
2020 m 2019 m
Weighted average number of ordinary shares (excluding trust and treasury shares) for basic earnings per share 1,656.1 1,656.1
Dilutive potential ordinary shares:
Employee share options — —
Weighted average number of ordinary shares (excluding trust and treasury shares) adjusted for the effect of dilution 1,656.1 1,656.1
At 31 December 2020 27,447,210 (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 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 and
specific items 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 on which these
consolidated financial statements were authorized for issue.
10 Property, plant and equipment
2020 2019
Leasehold improvement, land and buildings £m Plant and machinery £m Total £m Leasehold improvements, land and buildings £m Plant and machinery £m Total £m
Cost
At 1 January 118.1 206.6 324.7 103.0 175.7 278.7
Additions 21.0 19.8 40.8 18.0 39.7 57.7
Disposal of business (0.7) (0.1) (0.8) — — —
Disposals – included in adjusted profit (5.3) (14.8) (20.1) (2.4) (4.6) (7.0)
Disposals – excluded from adjusted profit (19.9) (14.4) (34.3) — — —
Transfer to assets held-for-sale (1.0) (11.8) (12.8) (0.2) — (0.2)
Reclassifications (1.1) 7.8 6.7 — — —
Asset retirements (6.8) (1.4) (8.2) — — —
Exchange movement (1.0) 1.5 0.5 (0.3) (4.2) (4.5)
At 31 December 103.3 193.2 296.5 118.1 206.6 324.7
Depreciation and impairment
At 1 January 47.3 83.1 130.4 41.8 23.3 65.1
Depreciation charged during the year 9.0 41.9 50.9 9.6 50.7 60.3
Disposal of business (0.2) (0.1) (0.3) — — —
Disposals – included in adjusted profit (4.6) (12.3) (16.9) (2.2) (3.8) (6.0)
Disposals – excluded from adjusted profit (3.9) (14.3) (18.2) — — —
Impairment – included in adjusted profit 1.2 2.2 3.4 — — —
Impairment – excluded from adjusted profit — 6.9 6.9 — 14.7 14.7
Transfer to assets held-for-sale (0.7) (8.8) (9.5) — — —
Asset retirements (6.8) (1.4) (8.2) — — —
Exchange movement 0.3 0.5 0.8 (1.9) (1.8) (3.7)
At 31 December 41.6 97.7 139.3 47.3 83.1 130.4
Net book value
At 1 January 70.8 123.5 194.3 61.2 152.4 213.6
At 31 December 61.7 95.5 157.2 70.8 123.5 194.3
At 31 December 2020, amounts contracted for but not provided in the financial
statements for the acquisition of property, plant and equipment amounted to
£5.3m (2019: £6.7m), relating to building improvements on leased property.
In January 2020, the Group acquired a property from the lessor for £3.0m
which was subsequently sold and leased back in October 2020.
During the year, the Group exited a number of properties and their related
leasehold improvement assets were disposed of for £nil consideration. Since
these exits were part of the Group wide transformation, the related charge was
excluded from adjusted profit.
11 Intangible assets
2020 2019
Intangible assets acquired in business combinations £m Capitalised/ purchased intangible assets £m Total £m Intangible assets acquired in business combinations £m Capitalised/ purchased intangible assets £m Total £m
Cost
At 1 January 371.0 363.0 734.0 552.5 254.0 806.5
Business disposal — (3.5) (3.5) — — —
Additions — 46.6 46.6 — 124.7 124.7
Disposals – included in adjusted profit — (31.6) (31.6) — (2.7) (2.7)
Disposals – excluded from adjusted profit — (2.0) (2.0) — — —
Transfer to assets held-for-sale — (46.0) (46.0) — (0.1) (0.1)
Asset retirement (202.9) (13.9) (216.8) (179.2) (12.2) (191.4)
Exchange movement 6.2 1.6 7.8 (2.3) (0.7) (3.0)
At 31 December 174.3 314.2 488.5 371.0 363.0 734.0
Amortisation and impairment
At 1 January 296.9 82.9 379.8 425.8 52.0 477.8
Amortisation charged during the year 32.3 42.3 74.6 50.3 31.1 81.4
Impairment – included in adjusted profit — 0.1 0.1 — — —
Impairment – excluded from adjusted profit 1.6 0.9 2.5 — 13.8 13.8
Business disposal — (0.3) (0.3) — — —
Disposals – included in adjusted profit — (21.9) (21.9) — (1.5) (1.5)
Disposals – excluded from adjusted profit — (0.4) (0.4) — — —
Transfer to assets held-for-sale — (1.6) (1.6) — — —
Asset retirement (202.9) (13.9) (216.8) (179.2) (12.2) (191.4)
Exchange movement 7.5 — 7.5 — (0.3) (0.3)
At 31 December 135.4 88.1 223.5 296.9 82.9 379.8
Net book value
At 1 January 74.1 280.1 354.2 126.7 202.0 328.7
At 31 December 38.9 226.1 265.0 74.1 280.1 354.2
Intangible assets acquired in business combinations include brands (net book
value 2020: £2.6m, 2019: £8.8m), Intellectual Property software and licences
(net book value 2020: £20.9m, 2019: £28.7m), contracts and committed sales
(net book value 2020: £7.7m, 2019: £15.9m) and clients lists and
relationships (net book value 2020: £7.7m, 2019: £20.7m). Intangible assets
capitalised or purchased include capitalised software development (net book
value 2020: £184.0m, 2019: £237.0m) and other intangibles (net book value
2020: £42.1m, 2019: £43.1m).
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 be effectively implemented. As
such, we impaired £12.3m at 31 December 2019, representing areas that we
expected to redesign before going live. Several interim activities were
progressed during 2020 and the technical asset including the IT
infrastructure, software and codebase have been preserved through 2020 and
remain ready to deploy. No impairment has been recorded during 2020 because it
is believed that the solution is fit for purpose. The carrying value of the
investment at 31 December 2020 is £58.6m (31 December 2019: £58.6m). Further
impairment may arise should there be a material change to the Group’s
operating model. The Group has 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
2020 £m 2019 £m
Cost
At 1 January 2,016.1 2,020.6
Business disposal (52.4) —
Transfer to disposal group assets held-for-sale (45.3) (2.8)
Exchange movement 0.1 (1.7)
At 31 December 1,918.5 2,016.1
Accumulated impairment
At 1 January 838.3 761.6
Business disposal (40.3) —
Impairment – excluded from adjusted profit — 41.4
Impairment – business exit — 35.3
At 31 December 798.0 838.3
Net book value
At 1 January 1,177.8 1,259.0
At 31 December 1,120.5 1,177.8
Cash-generating units
Cash generating units reflect 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 five divisions (Software, People
Solutions, Technology Solutions, Consulting, and Specialist Services (see
below)), and at a sub-divisional level for the other two divisions (Government
Services and Customer Management (see below)). Goodwill is allocated to these
CGUs or groups of CGUs. At 31 December 2020, the Group has nine CGUs or
groups of CGUs for the purpose of impairment testing.
In line with our drive to simplify the Group, we have continued to review the
portfolio of businesses in each division. In early 2020 we decided a number of
businesses in Specialist Services would benefit from closer alignment with
core Capita and should be moved into other divisions (People Solutions,
Government Services, Customer Management and Technology Solutions), and that
some other businesses should be moved into Specialist Services (from
Government Services and Software). The relevant goodwill balances were
reallocated to reflect these transfers. Transfers made were the entire
goodwill balances relating to the underlying businesses moving between groups
of CGUs, with no individual goodwill balances needing to be apportioned out as
part of this process.
Capita’s Regulated Services business was transferred from Specialist
Services to Customer Management. For goodwill testing purposes the Regulated
Services business will continue to be treated as a separate CGUs, although as
there is no goodwill attributable to this group, it has been excluded from the
disclosures below. The remaining businesses in the Specialist Services
division will also continue to be treated as one group of CGUs, which now
encompasses the whole division.
In accordance with the divisional strategy to further align and consolidate
management and oversight of the Technology Solutions division, for impairment
testing the previously separate IT Services and Network Services groups of
CGUs were merged into one combined Technology Solutions group of CGUs during
the year.
The Board will continue to assess the level at which management exercise
oversight and monitors the Group’s performance to ensure the allocation of
goodwill to CGUs remains appropriate.
Carrying amount of goodwill allocated to groups of CGUs:
CGU Software £m People Solutions £m Customer Management £m Central Government Technology Solutions Specialist Services £m Consulting £m Total £m
£m £m
At 1 January 254.9 199.7 137.0 8.7 276.3 280.5 20.7 1,177.8
Restructuring transfers (19.6) 88.5 (12.6) 9.1 10.2 (75.6) — —
Business disposal (3.8) (8.3) — — — — — (12.1)
Transfer to assets held for sale (45.3) — — — — — — (45.3)
Exchange movement — — 0.1 — — — — 0.1
At 31 December 186.2 279.9 124.5 17.8 286.5 204.9 20.7 1,120.5
Capita Regulated Services and Local Government CGUs are not included in the
table above because their related goodwill was fully impaired in prior years.
Business exits
As set out in note 5, three businesses (within Software, People Solutions
and Specialist Services) were fully disposed of during the year, with goodwill
relating to them written off as part of business disposals.
Two businesses (within Software and Regulated Services) that the Group has or
intends to dispose of in 2021 meet the criteria to be treated as held-for-sale
at 31 December 2020, with goodwill relating to the Software business
reclassified to assets held-for-sale. There was no goodwill relating to the
businesses in Regulated Services at 31 December 2020.
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 its value in use. As the Group continues to
implement the Group-wide transformation plan, it has been determined that for
2020, 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. This
included comparison to the Group’s share price and market capitalisation.
The enterprise value of each CGU is dependent on the successful implementation
of the transformation plan. 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.
No impairment has arisen from the impairment test performed.
The key inputs to the calculations are described below, including changes in
market conditions.
Forecast cash flows
The cash flow projections prepared for the impairment test are derived from
the 2021-2023 business plans (BP) and 2024-2025 strategic plans, approved by
the Board in February 2021. The BP captures the benefits that the
transformation plan is anticipated to deliver, and the costs to achieve these.
Covid-19 has introduced unprecedented economic uncertainties and has led to
increased judgement particularly in forecasting future financial performance.
Many parts of the Group have demonstrated resilience throughout 2020, adapting
to address the impact of Covid-19, but the pandemic has slowed the progress of
the transformation plan. The impact has been incorporated within the BP
assumptions approved by the Board.
For the purpose of the impairment test, the strategic plan cash flow forecasts
for 2024-2025 have been further risk adjusted to reflect additional
uncertainty in outer year forecasts.
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.
The Board have considered an appropriate methodology to apply when allocating
central function costs, which is a key sensitivity. Forecast CGU EBITDA
measures for 2022 (2019: 2021) were used for this purpose because 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, and there is more certainty over the
impact of Covid-19 on the Group and the wider economy as a whole, 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 economic growth forecasts by recognised
bodies and this has been applied to forecast cash flows for the terminal
period. The 2020 long-term growth rate is 1.6% (2019: 1.6%).
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 Technology Solutions Specialist Services Consulting
2020 11.8% 11.2% 11% 10.5% 10.2% 10.9% 10.9%
2019 11.5% 10.9% 10.7% 10.2% 9.9% 10.6% 10.6%
As set out above, discount rates used in 2020 are 0.3% higher than those for
2019. The key drivers for this increase are changes in market assumptions for
market risk premiums and the levered beta of peer group comparators, offset by
decreases in UK corporate bond yields and risk-free rates.
To further risk-adjust discounted cash flows for the purposes of the
impairment test, the discount rate applied to years 2023 and onwards has been
increased by 3% compared to that used for 2021 and 2022 (2019: no additional
adjustment applied to outer year discount rates).
Sensitivity analysis
The impairment testing as described is reliant on the accuracy of
management’s forecasts and the assumptions that underlie them; and 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 were developed 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, by the severe but plausible downsides
applied to the base-case projections for assessing going concern and
viability, without mitigations, for both 2021 and 2022, and the long-term
growth rate (1.6%) applied to projected cash flows for 2023 to 2025 and the
terminal period. This downside scenario includes trading risks which assume
the transformation plan is not successful in delivering the anticipated
revenue growth. We have also considered the impact of all of the scenarios
together and disclosed the impact on impairment in the final column.
1% increase in discount rate £m Long-term growth rate decrease by 1% £m Severe but plausible downside £m Combination sensitivity £m 2020 goodwill impairment using combination scenario £m
Software (27.9) (19.4) (82.1) (116.4) —
People Solutions (38.5) (25.6) (90.4) (143.5) —
Customer Management (25.7) (18.1) (21.2) (65.4) —
Central Government (32.6) (24.1) (111.5) (150.1) —
Technology Solutions (48.1) (33.3) (160.1) (219.2) —
Specialist Services (24.3) (16.6) (124.9) (148.0) (74.1)
Consulting (4.1) (2.9) (43.7) (43.7) (20.7)
Total (201.2) (140.0) (633.9) (886.3) (94.8)
At 31 December 2020, no impairment of goodwill has arisen from the impairment
test performed. Under the combination sensitivity scenario, impairments have
been highlighted in relation to Specialist Services and Consulting, whereas
under the base case impairment test the recoverable amount exceeded the
carrying amount of assets (including goodwill) relating to these CGUs by
£74.0m for Specialist Services, and by £20.9m for Consulting. Under the
severe but plausible downside and combination sensitivity scenarios presented,
the enterprise value impact for Consulting has been capped at the enterprise
value for the CGU under the base case impairment test.
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, in addition to trading being
affected by the impact of Covid-19, there is a greater range of potential
future outcomes. A number of these downsides would give rise to an impairment.
13 Contract fulfilment assets
Movements in non-current contract fulfilment assets were as follows:
2020 £m 2019 £m
At 1 January 275.8 264.2
Additions 127.4 114.3
Transfer to assets held-for-sale (3.9) —
Impairment - excluded from adjusted profit (17.5) (9.6)
Derecognition (9.5) (2.0)
Utilised during the year (78.0) (90.7)
Exchange movement 0.5 (0.4)
At 31 December 294.8 275.8
Impairment: In 2020, the Group recognised an impairment of £17.5m (2019:
£9.6m) in adjusted cost of sales, of which, £2.0m (2019: £2.2m) relates to
contract fulfilment assets added during the year.
Derecognition: In 2020, £9.5m (2019: £2.0m) was derecognised in relation to
business exits and a contract in Customer Management where the scope of our
services changed due to the partial termination of the contract and the Group
had no further use for the assets. In the prior year, derecognition related
to business exits.
14 Provisions
Restructuring provision £m Business exit provision £m Claim and litigation provision £m Property provision £m Customer contract provision £m Other provisions £m Total £m
At 1 January 6.1 10.5 41.2 8.3 6.1 8.4 80.6
Provisions provided for in the year 31.1 11.6 13.1 2.5 36.8 3.3 98.4
Provisions released in the year (0.8) (3.2) (4.6) (2.0) (2.9) (1.9) (15.4)
Utilisation (22.9) (3.6) (8.0) (0.1) (1.9) (2.4) (38.9)
Transfer to disposal group liabilities held for sale — — — — — (0.4) (0.4)
Exchange movement — — — — — 0.1 0.1
At 31 December 13.5 15.3 41.7 8.7 38.1 7.1 124.4
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 and it is likely to unwind over a period of
one to two years. Additionally, it relates to unavoidable running costs of
leasehold properties, such as insurance and security, and dilapidation
provision, where properties are exited as a result of the transformation plan.
These provisions are likely to unwind over periods of up 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 one to five years.
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. £23.7m of claims provided for were settled in
early 2021. Due to the nature of the remaining claims, the Group cannot give
an estimate of the period over which this provision will unwind.
Property provision: The provision relates to unavoidable running costs, such
as insurance and security, of leasehold property where the space is vacant or
currently not planned to be used for ongoing operations, and for dilapidation
costs, as part of the ordinary course of business and not the group wide
transformation plan (where such costs are included in the restructuring
provision). The expectation is that this expenditure will be incurred over the
remaining periods of the leases which vary up to seven years.
Customer contract provision: The provision includes onerous contract
provisions in respect of customer contracts where the unavoidable costs of
meeting the obligations under the contracts exceeds the economic benefits
expected to be received under them, claims/obligations associated with missed
milestones in contractual obligations, and other potential exposures related
to contracts with customers. These provisions are forecast to unwind over
periods up to seven years.
During 2020, an onerous contract provision of £11.2m was recognised on a
contract in Customer Management. The contract has a clause such that the
customer can continue to extend the contract indefinitely. Accordingly,
judgement is required in assessing the remaining length of the contract to
determine the provision. Management considered previous discussions with the
customer regarding their intentions and experiences on other contracts, and
concluded the best estimate of the remaining contract term is the current
contractually committed period to 2023. However, the contract may end earlier
or be extended for longer, resulting in a material release or increase in the
provision in future reporting periods.
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 These are likely to unwind over periods of up to five years.
15 Cash flow information
2020 2019
Note Adjusted £m Reported £m Adjusted (1) £m Reported £m
Cash flows from operating activities:
Operating profit/(loss) 4 111.0 (32.0) 254.5 0.4
Adjustments for non-cash items:
Depreciation 137.5 139.1 154.9 159.5
Amortisation of intangible assets 11 41.0 74.6 30.0 81.4
Share based payment expense 6.4 6.4 3.0 3.0
Employee benefits 13.1 13.1 11.2 11.2
Loss on sale of property, plant and equipment / intangible assets 2.4 17.1 1.8 1.8
Contingent consideration 4 — — — (1.4)
Impairment of disposal group assets — 11.7 — —
Impairment of non-current assets 3.5 32.2 0.9 106.1
Other adjustments:
Movement in provisions 31.5 44.0 (3.3) (19.0)
Pension deficit contribution — (29.5) — (71.1)
Other contributions into pension schemes (19.5) (19.5) (17.0) (17.0)
Movements in working capital:
Trade and other receivables 162.9 172.7 (7.1) 2.4
Non-recourse trade receivables financing — 13.6 — —
Trade and other payables (62.0) (58.4) (8.6) (14.8)
VAT deferral — 118.8 — —
Deferred income (36.7) (46.8) (190.5) (198.1)
Contract fulfilment assets (non-current) (23.6) (22.9) (16.2) (11.6)
Cash generated by operations 367.5 434.2 213.6 32.8
Adjustments for free cash flows:
Income tax paid (8.8) (8.8) (5.4) (5.4)
Net interest paid (47.7) (47.7) (58.5) (58.4)
Purchase of property, plant and equipment 10 (40.2) (40.8) (48.7) (57.7)
Purchase of intangible assets 11 (42.7) (46.6) (124.6) (124.7)
Proceeds from sale of property, plant and equipment / intangible assets 10.5 13.5 0.4 0.4
Free cash flow 238.6 303.8 (23.2) (213.0)
1. The 2019 adjusted cash flow has been restated for business exits in 2020
and also for the inclusion of IFRS 16. This has resulted in adjusted cash
generated by operations increasing from £158.6m to £213.6m and adjusted free
cash outflow decreasing from £(61.3)m to £(23.2)m.
Adjusted free cash flow and cash generated from operations
Free cash flow Cash generated/(used) by operations
2020 £m 2019 £m 2020 £m 2019 £m
Reported 303.8 (213.0) 434.2 32.8
Pension deficit contributions 29.5 71.1 29.5 71.1
Significant restructuring 64.1 148.5 67.1 148.5
Business exits (33.9) (32.5) (38.4) (41.5)
Business exits - on hold disposal costs 7.5 — 7.5 —
Non-recourse trade receivables financing (13.6) — (13.6) —
VAT deferral (118.8) — (118.8) —
Other — 2.7 — 2.7
Adjusted 238.6 (23.2) 367.5 213.6
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 £29.5m was paid in 2020 (2019: £71.1m). These
payments have been excluded from adjusted cash flows since 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 2020, a cash outflow of
£64.1m (2019: £148.5m) 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 from disposals, are disclosed outside the
adjusted results. The 2019 results have been restated for those businesses
exited, or in the process of being exited during 2020 to enable comparability
of the adjusted results.
Business exits - on hold disposal costs: these are costs incurred in respect
of business exit activities where the anticipated disposal was put on hold due
to the impact that the Covid-19 pandemic had on the underlying businesses.
They are excluded from the Group's adjusted results but disclosed separately
given their materiality.
Non-recourse trade receivables financing: a non-recourse receivables financing
facility was put in place to mitigate the risk of customer receipts slippage
resulting from the impact of the Covid-19 pandemic.
VAT deferral: utilisation of the Government's VAT deferral scheme.
Other: includes the cash flows related to other items excluded from adjusted
profit.
Reconciliation of net cash flow to movement in net debt
Year ended 31 December 2020 Net debt at 1 January £m Cash flow movements £m Non-cash movement (2) £m Net debt at 31 December £m
Cash, cash equivalents and overdrafts 122.8 27.2 (8.9) 141.1
Other loan notes (0.3) — (2.0) (2.3)
Private placement loan notes (1) (990.7) 243.4 (17.8) (765.1)
Cross-currency interest rate swaps (1) 77.3 (24.5) 4.7 57.5
Interest rate swaps (1) 1.0 — (0.5) 0.5
Lease liabilities (562.6) 98.0 (43.5) (508.1)
Total net liabilities from financing activities (1,475.3) 316.9 (59.1) (1,217.5)
Deferred consideration (0.7) — — (0.7)
Net debt (1,353.2) 344.1 (68.0) (1,077.1)
1. The sum of these items equates to the fair value of the Group’s private
placement loan note’s debt of £707.1m (2019: £912.4m). Cash flow movement
in private placement loan notes includes both repayment of private placement
loan notes of £242.9m and finance arrangement costs of £0.5m.
2. Non-cash movement relates to: the effect of changes in foreign exchange on
cash; fair value changes on the swaps; amortisation of loan notes issue costs;
amortisation of the discount on the euro debt; and additions and terminations
and foreign exchange rate effects on the Group’s leases.
Year ended 31 December 2019 Net debt at 1 January £m Lease liability adjustment (1) £m Cash flow movements £m Non-cash movement £m Net debt at 31 December £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 (1,108.0) — 97.9 19.4 (990.7)
Cross-currency interest rate swaps 99.6 — (10.9) (11.4) 77.3
Interest rate swaps 1.9 — — (0.9) 1.0
Term loan (100.0) — 100.0 — —
Lease liabilities (1) — (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 Group first adopted 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.
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 £55.8m (2019: £58.1m).
In September 2020, the Group settled a liability relating to past services
received under supplier software licence agreements which had previously been
disclosed as a contingent liability. The settlement includes a commitment to
future purchases of £79m of which £6m is over the period to 31 December
2021 and £73m (payable in US dollars), is over the period to 30 June 2024.
The Group has forecasts that support the requirement for such products and
services. These products are important in supporting the delivery of future
performance obligations and digital solutions for our customers and will
benefit the Group.
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 of the discussions.
As outlined in note 14, a provision was recognised for an onerous contract in
Customer Management. The contract has a clause such that the customer can
continue to extend the contract indefinitely. Accordingly, judgement is
required in assessing the remaining length of the contract to determine the
provision. Management considered previous discussions with the client
regarding their intentions and experiences on other contracts, and concluded
the best estimate of the remaining contract term is the current contractually
committed period to 2023. However, the contract may end earlier or be extended
for longer, resulting in a material release or increase in the provision in
future accounting periods.
The Group completed the disposal of its Capita Asset Services businesses,
including Capita Financial Managers Limited, to the Link Group on 3 November
2017. Capita plc, as part of the sale of the Capita Asset Services businesses,
provided an indemnity against certain legacy claims.
The Group’s entities are parties to legal actions and claims which arise in
the normal course of business. The Group 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’s entities
heightens the risk that not all potential claims are known at any point in
time. Under the transformation plan, the central support functions including
commercial and legal are being strengthened and a Chief General Counsel has
been appointed. This enhances the processes to assess the likelihood of
historical claims arising.
17 Related-party transactions
Compensation of key management personnel
2020 £m 2019 £m
Short-term employment benefits 6.9 9.3
Pension — 0.2
Share-based payments 3.5 2.6
10.4 12.1
Gains on share options exercised in the year by Capita plc executive directors
were £49,569 (2019: £nil) and by key management personnel £38,050 (2019:
£104,960), totalling £87,619 (2019: £104,960).
During the year, the Group rendered administrative services to Smart DCC
Limited (DCC), a wholly-owned subsidiary which is not consolidated. The Group
received £113.1m (2019: £83.4m) of revenue for these services. The services
are procured by 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 DCC.
Capita Pension and Life Assurance Scheme is a related party of the Group.
At 31 December 2020, the Company had received notifications in accordance
with the DTRs that the following were interested in the Company’s shares:
Shareholder Number of shares % of voting rights at 31 December 2020 Number of shares direct Number of shares indirect
RWC Asset Management LLP 300,200,371 17.99 – 300,200,371
Schroders plc 249,517,951 14.95 – 249,517,951
Marathon Asset Management LLP 86,576,890 5.19 – 86,576,890
River and Mercantile Asset Management LLP 85,996,707 5.15 85,996,707 –
Veritas Asset Management LLP (1) 83,131,892 4.98 – 83,131,892
Ninety One UK Limited 76,779,117 4.60 – 76,779,117
BlackRock Inc. 74,230,358 4.45 – 74,230,358
Invesco Ltd 70,883,236 4.24 – 70,883,236
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
1 Includes the holding of Veritas Funds PLC.
On 11 March 2021, notification in accordance with the DTRs was received from
Schroders plc that it held indirectly 252,790,465 shares, being 15.146% of
voting rights. At 12 March 2021, no further notifications had been received
under the DTRs in relation to interests in the Company’s shares.
18 Post balance sheet events
The following events occurred after 31 December 2020, and before the approval
of these consolidated financial statements, but have not resulted in
adjustment to the 2020 financial results:
Disposal of Education Software Solutions (ESS)
The disposal of the ESS business to Tiger UK Bidco Limited, a newly formed
company established by funds advised by Montagu Private Equity (Montagu),
completed on 1 February 2021.
Cash proceeds of £298.5m were received, with net assets disposed of £51.8m,
and estimated disposal costs of £28.9m (of which £20.6m were recognised at
31 December 2020). Consequently, we expect to record a total gain on disposal
of approximately £217.8m.
Montagu has also agreed to invest in ParentPay (Holdings) Limited (ParentPay),
a provider of education technology. Following successful completion of both
investments, ESS will become part of ParentPay Group. An additional sum of
£45m will subsequently be payable to Capita once Montagu’s agreed
investment in ParentPay has achieved regulatory approval.
Royal Navy training contract
Capita signed a contract to provide training services to the Royal Navy and
Royal Marines in January 2021. Capita will transform and modernise the Royal
Navy’s shore-based training across 16 sites in the UK as the lead partner in
a consortium which includes Raytheon UK, Elbit Systems UK, Fujitsu and several
smaller British suppliers. The contract will be worth an estimated £1.0bn for
Capita over 12 years, with opportunities to deliver further training according
to the Royal Navy’s requirements. This is an addition of £0.9bn to the
Group’s order book in 2021.
Put option expiry
The Group has a 51% interest in AXELOS Limited. There was a put option in
place whereby the Group could be required to acquire the 49% non-controlling
interest. This option expired without being exercised on 28 February 2021,
and the related liability was derecognised.
19 Preliminary announcement
Copies of the announcement can be obtained from the Company's registered
office at 65 Gresham Street, London EC2V 7NQ, 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
https://www.capita.com/investors 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.
2020 2019 Source
Revenue – continuing operations
Reported revenue £3,324.8m £3,678.6m Line item in income statement
Deduct: business exit (£143.6m) (£177.6m) Line item in note 7
1. Adjusted revenue £3,181.2m £3,501.0m
Operating profit – continuing operations
Reported operating (loss)/profit (£32.0m) £0.4m Line item in income statement
Adjusting items in note 4 £143.0m £254.1m
2. Adjusted operating profit (1) £111.0m £254.5m
Adjusted operating profit margin 3.5% 7.3% Adjusted operating profit/adjusted revenue
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.
2020 2019 Source
ROCE
Adjusted operating profit (1) a £111.0m £254.5m Adjusted operating profit note 4
Adjusted tax rate (2) b 14.9% 14.7%
Tax c = a x b £16.5m £37.4m Adjusted operating profit multiplied by tax rate
Adjusted operating profit after tax d = a – c £94.5m £217.1m Adjusted operating profit less tax
Share capital e £34.5m £34.5m Line information in balance sheet
Share premium f £1,143.3m £1,143.3m Line information in balance sheet
Employee benefit trust and treasury shares g (£11.2m) (£11.2m) Line information in balance sheet
Capital redemption reserve h £1.8m £1.8m Line information in balance sheet
Total net liabilities from financing activities i £1,217.5m £1,475.3m Line information in note 15
Total capital employed j = e+f+g+h+i £2,385.9m £2,643.7m Used as current year capital employed balance in average capital employed 'm'
Prior year capital employed k £2,643.7m £2,919.1m Used as prior period capital employed balance in average employed ‘m’
Average capital employed l = (j+k)/2 £2,514.8m £2,781.4m
3. ROCE m = d/l 3.8% 7.8%
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. The effective tax rate for 31 December 2020 has been calculated after
excluding the one-off gains and resulted in a 20.9% overall effective tax
benefit on adjusted profits for the period.
Post IFRS 16 Pre IFRS 16
2020 2019 2020 2019
Headline gearing
Adjusted profit before tax (1) £65.2m £197.7m £71.6m £211.6m Line information in note 4
Add back: adjusted net finance costs £46.6m £56.2m £22.7m £30.5m Line information in note 8
Add back: adjusted depreciation and impairment on property, plant and equipment £52.7m £55.7m £52.7m £55.7m
Add back: depreciation on right of use assets £88.2m £99.2m £—m £—m
Add back: adjusted amortisation and impairment on intangibles £41.1m £30.0m £41.1m £30.0m
Remove: Share of results in associates and investment gains (£0.8m) £0.6m (£0.8m) £0.6m Line information in income statement
Adjusted EBITDA a £293.0m £439.4m £187.3m £328.4m
Impact of ESS business exit on adjusted EBITDA £53.0m £53.4m £52.8m £53.2m
Adjusted EBITDA including ESS exit b £346.0m £492.8m £240.1m £381.6m
Headline net debt £1,077.1m £1,353.2m £1,077.1m £1,353.2m
Remove: IFRS 16 impact £—m £—m £508.1m £562.6m
Net debt c £1,077.1m £1,353.2m £569.0m £790.6m Net debt excluding the impact of IFRS 16
4. Headline net debt to adjusted EBITDA ratio including ESS business exit c/b 3.1x 2.7x 2.4x 2.1x
1. Adjusted operating profit and adjusted profit before tax 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. See note 4.
2020 2019 Source
Covenants (3)
Adjusted operating profit (1) £111.0m £317.8m Line information in note 4
Add: business exit – trading £51.0m (£16.7m) Line information in note 5
Add: share of earnings in associates (£0.8m) (£0.6m)
Deduct: non-controlling interest (£12.6m) (£18.1m) Adjusted EBIT attributable to NCI
Add back: share-based payment charge £6.4m £3.0m Line information in note 15
Add back: non-current service pension charge £6.9m £4.2m
Add back: amortisation on purchased intangibles £42.3m £31.1m
Adjusted EBITA a1 £204.2m £320.7m
Less: IFRS 16 impact (£17.5m) (£11.7m)
Adjusted EBITA (excluding IFRS 16) a2 £186.7m £309.0m
Adjusted EBITA £204.2m £320.7m Line item above
Deduct: business exit – trading sold £2.5m £—m Trading (profit)/loss for businesses sold
Add back: adjusted depreciation and impairment on property, plant & equipment and right of use assets £140.9m £174.2m
Covenant calculation – adjusted EBITDA b1 £347.6m £494.9m
Less: IFRS 16 impact (£105.7m) (£110.9m)
Covenant calculation – adjusted EBITDA (excluding IFRS 16) b2 £241.9m £384.0m
Adjusted interest charge (£46.6m) (£56.2m) Line information in note 8
Interest cost attributable to pensions £3.2m £4.4m Line information in note 8
Cash flow hedges recycled to the income statement (£4.5m) (£2.6m) Line information in note 8
Borrowing costs c1 (£47.9m) (£54.4m)
Add: IFRS 16 impact £23.9m £25.7m
Borrowing costs (excluding IFRS 16) c2 (£24.0m) (£28.7m)
5.1 Interest cover (US PP covenant) a1/c2 8.5x 11.2x Adjusted EBITA/Borrowing costs with adjusted EBITDA including the impact of IFRS 16 and the borrowing costs excluding the impact of IFRS 16
5.2 Interest cover (other financing agreements) a2/c2 7.8x 10.8x Adjusted EBITA/Borrowing costs with both variables excluding IFRS 16
Net debt £1,077.1m £1,353.2m Line information in note 15
Lease liabilities included within disposal group liabilities held for sale (£4.6m) £—m
Cash, net of overdrafts, included in disposal group assets and liabilities held for sale £12.9m £—m
Restricted cash (2) £34.5m £42.1m Cash that may not be applied against net debt for covenant calculation purposes
Less: IFRS 16 impact (£503.5m) (£562.6m)
Adjusted net debt (excluding IFRS 16) d1 £616.4m £832.7m
6.1 Adjusted net debt to post IFRS 16 adjusted EBITDA ratio (US PP covenant) d1/b1 1.8x 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/b2 2.5x 2.2x 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. To enable the user of the financial statements to understand the covenant
information submitted to the Group's external lenders, the 31 December 2019
comparatives have not been restated.
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